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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 33-26617A
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CBR BREWING COMPANY, INC.
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(Exact name of registrant as specified in its charter)
FLORIDA 65-0145422
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
433 NORTH CAMDEN DRIVE, SUITE 1200
BEVERLY HILLS, CALIFORNIA 90210
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(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (310) 274-5172
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
As of March 31, 1998, the Company had 5,010,013 shares of Class A Common
Stock and 3,000,000 shares of Class B Common Stock issued and outstanding.
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The aggregate market value of the issuer's outstanding voting common
stock (Class A) held by non-affiliates on March 31, 1998, computed by
reference to the average closing bid and ask prices on March 31, 1998 of
$6.00 and $7.75, respectively, was $7,218,839.
Documents incorporated by reference: None.
The total number of sequential pages in this report is 168.
The exhibit index is located on pages 62.
2
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PART I.
Cautionary Statement Pursuant to Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995:
This Annual Report on Form 10-K for the year ended December 31,
1997 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 Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 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.
ITEM 1. BUSINESS
CBR Brewing Company, Inc., a Florida corporation (the "Company",
which term shall include, when the context so requires, its subsidiaries and
affiliates), is the parent of High Worth Holdings, Ltd., a British Virgin
Islands corporation ("Holdings"). Since November 1994, Holdings has owned a
60% interest in Zhaoqing Blue Ribbon High Worth Brewery Ltd., a Sino-foreign
joint venture ("High Worth JV"), which, through its subsidiaries and
affiliates, is engaged in the production and sale of Pabst Blue Ribbon beer
in the People's Republic of China ("China" or the "PRC"). The other 40%
interest in High Worth JV is owned by Guangdong Blue Ribbon Group Co. Ltd.
("Guangdong Blue Ribbon"). See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS". Substantially all of the beer currently sold by the Company
is marketed under the Pabst Blue Ribbon label, and is brewed under a
sublicense agreement with Guangdong Blue Ribbon, which, through a transfer,
obtained its license from Pabst Brewing Company ("Pabst US").
All of the Company's business operations are located in the PRC.
The Chinese currency is the Renminbi ("RMB"). The exchange rate was
U.S.$1.00 to RMB 8.32 at December 31, 1995, RMB 8.32 at December 31, 1996 and
RMB 8.30 at December 31, 1997.
DESCRIPTION OF BUSINESS
The Company is engaged in the business of brewing, distributing and
marketing Pabst Blue Ribbon beer in China. As of December 31, 1997, the
Company owned effective interests of 60% and 24% in two brewing facilities
currently producing Pabst Blue Ribbon beer in China, both of which are
managed by the Company. The Company is also presently responsible for the
marketing and sale in China of Pabst Blue Ribbon beer produced by the two
brewing facilities.
China is currently ranked as the second largest beer producer in the
world behind the United States. The management of the Company believes
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that Pabst Blue Ribbon beer is currently the leading foreign label sold in
China, both in number of units sold and total sales. Pabst Blue Ribbon is
considered a premium brand in China, along with such other labels as
Tsingtao, Carlsberg, Miller, Budweiser, Coors and Heileman.
The Company produces Pabst Blue Ribbon beer in China to avoid
import tariffs that range as high as 120%. Production is concentrated in
Zhaoqing City, which is approximately 100 miles from Hong Kong in the
Guangdong Province of China. Pabst US provides quality control assistance to
the Company on a regular basis. The Company markets Pabst Blue Ribbon beer
in every province in China. The Company currently maintains offices in
Beverly Hills, California, Hong Kong and Zhaoqing City.
High Worth JV holds certain licensing rights for Pabst Blue Ribbon
beer (See "PABST LICENSING ARRANGEMENTS AND TRADEMARKS") and also directly
owns 100% of a Pabst Blue Ribbon brewing complex ("Zhaoqing Brewery"). High
Worth JV also owns 100% of a PRC holding company ("Zhaoqing Brewery HC").
Zhaoqing Brewery HC owns a 40% interest in Zhaoqing Blue Ribbon Brewery Noble
Ltd., a Sino-foreign joint venture ("Noble Brewery"), which in turn owns a
second Pabst Blue Ribbon brewing complex that is also managed by Zhaoqing
Brewery. Goldjinsheng Holdings Ltd., a wholly owned subsidiary of Noble
China, Inc., an unaffiliated company, owns the other 60% interest in Noble
Brewery. See "THE JOINT VENTURE COMPANIES".
In addition, Zhaoqing Brewery HC owns a 70% interest in Zhaoqing
Blue Ribbon Beer Marketing Company Limited, a PRC company (the "Marketing
Company"), which presently conducts the sales, advertising and promotional
efforts for the Company's production of Pabst Blue Ribbon beer in China. The
remaining 30% interest in the Marketing Company is directly owned by
Guangdong Blue Ribbon. Through its ownership in High Worth JV, Guangdong Blue
Ribbon also has a 28% indirect interest in the Marketing Company (See
"MARKETING AND OPERATIONS -Summary of Operations"), resulting in the Company
owning a 42% net interest in the Marketing Company.
In January 1996, Zhaoqing Brewery HC transferred all of its
operating assets and liabilities to High Worth JV pursuant to the original
Joint Venture Agreement, the Asset Transfer Agreement signed in May 1994, and
the relevant government regulations. Subject to the completion of certain
legal procedures and documentation, the investments in Noble Brewery and the
Marketing Company currently held by Zhaoqing Brewery HC will be transferred
to High Worth JV. Zhaoqing Brewery HC is currently acting as the nominee for
High Worth JV with respect to the investments in Noble Brewery and the
Marketing Company. In the following text, "Zhaoqing Brewery" refers to the
brewing complex, which was transferred to High Worth JV in January 1996, and
"Zhaoqing Brewery HC" refers to the PRC entity that previously owned the
brewing complex from November 1994 through December 1995.
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%. See "ADDITION OF NEW BREWERY".
2
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Effective December 31, 1997, the Company, through High Worth JV,
entered into a Settlement Agreement that will allow it to acquire a 51%
interest in Sichuan Brewery, equivalent to an effective interest of 31%. See
"SICHUAN BREWERY".
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 (See "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS").
PROPERTY AND PRODUCTION FACILITIES
ZHAOQING BREWERY
Zhaoqing Brewery is situated on a site containing approximately
1,421,492 square feet and is three miles from Zhaoqing City, Guangdong
Province. Zhaoqing Brewery occupies the site pursuant to certificates of land
use rights issued by the local government. The certificates do not specify a
period for the use of the land, but normally it does not exceed 70 years.
The original facilities of Zhaoqing Brewery were constructed
between 1978 and 1980 with annual production capacity based on old brewing
technology of approximately 50,000 metric tons or 425,000 barrels of beer.
Prior to 1995, Zhaoqing Brewery had produced exclusively domestic brands
under the names Zhaoqing beer, Dinghu beer and Xile beer. In the middle of
1994, with the assistance of Pabst US, Zhaoqing Brewery commenced the
conversion and refinement of its original facilities and adopted a new
brewing technology in order to produce beer under the Pabst Blue Ribbon
label. In early 1995, the production of all domestic brands ceased, and
Zhaoqing Brewery is now producing substantially all of its beer production
under the Pabst Blue Ribbon label. With the implementation of the new brewing
technology and the purchase of additional equipment, Zhaoqing Brewery reached
an annual production capacity of 100,000 metric tons or 850,000 barrels by
the end of 1995.
Zhaoqing Brewery annually shuts down portions of the facility for a
short period of time during the low season, normally in December, to provide
regular and scheduled maintenance. Zhaoqing Brewery has access to
replacement parts that can be manufactured by several local toolmakers in
Zhaoqing city.
NOBLE BREWERY
Noble Brewery is situated on a site adjacent to Zhaoqing Brewery
containing approximately 1,453,000 square feet. Noble Brewery has land use
rights of 50 years ending in the year 2043.
3
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Noble Brewery consists of the original facilities constructed
between 1988 and 1990 by Pabst Blue Ribbon Brewery (Zhaoqing) Co. Ltd.
("Pabst Zhaoqing"), the operator of the facilities prior to the establishment
of Noble Brewery. These facilities had an annual production capacity of
approximately 80,000 metric tons or 680,000 barrels of beer per year. The
second phase of brewing facilities, which was completed in July 1994, has a
production capacity of approximately 120,000 metric tons or 1,020,000 barrels
of beer per year. Pabst US supplied the majority of the equipment in both the
first and second phase of the brewing facilities, in addition to offering
technical assistance in its installation and maintenance. On an annual
basis, Noble Brewery shuts down portions of the facility for a short period
of time during the low season, normally in December, to provide regular and
scheduled maintenance. Noble Brewery has access to replacement parts that
can be manufactured by several local toolmakers in Zhaoqing.
ZAO YANG HIGH WORTH 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 will be 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.
Subject to the approval by the Zao Yang City Government and upon
the issuance of a business registration certificate from the local Business
Registration Bureau, Zao Yang High Worth Brewery will initially commence
production of a locally branded beer under the name "Di Huang Quan". This
trademark will be transferred from Zao Yang Brewery to Zao Yang High Worth
Brewery once the joint venture commences operation. High Worth JV is
responsible for transferring the technical know-how and production technique
of brewing Pabst Blue Ribbon beer to Zao Yang High Worth Brewery, which may
take approximately six to nine months.
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 per annum.
High Worth JV, pursuant to the joint venture agreement, will assist
Zao Yang High Worth Brewery in modernizing its brewing technology and
renovating its existing equipment in order to convert the brewery into
another Pabst Blue Ribbon beer brewing complex.
4
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SICHUAN BREWERY
Sichuan Brewery is situated on a site containing approximately
1,089,000 square feet and is located within the vicinity of Le Shan City,
Sichuan Province, which is approximately 160 kilometers from Chengdu, the
provincial capital of Sichuan Province. The original facilities of Sichuan
Brewery were constructed in 1988 with annual production capacity, based on
old brewing technology of approximately 20,000 metric tons or 170,000 barrels
of beer. Prior to late 1996, the facilities were used exclusively to produce
beer under domestic local brand names. Guangdong Blue Ribbon acquired the
brewery as its branch and started to convert the facility into a Pabst Blue
Ribbon beer brewing complex in late 1996. In April 1997, Sichuan Brewery
commenced to produce beer under the Pabst Blue Ribbon label, which was sold
to the Marketing Company for resale.
MARKETING AND OPERATIONS
SUMMARY OF OPERATIONS
The Company's distribution and marketing operations are conducted
by the Marketing Company. The Marketing Company began purchasing the output
of beer from Noble Brewery in July 1995, Zhaoqing Brewery in April 1995 and
Sichuan Brewery in April 1997 (See "PABST LICENSING ARRANGEMENTS AND
TRADEMARKS") and is responsible for its distribution throughout China. The
Marketing Company is also responsible for the promotion and advertising of
the Company's production of Pabst Blue Ribbon beer in China.
Pursuant to the long term purchase contracts signed between the
Marketing Company, on the one hand, and Zhaoqing Brewery and Noble Brewery in
April 1995 and July 1995, respectively, on the other hand, the Marketing
Company is required to purchase all the Pabst Blue Ribbon beer produced by
Zhaoqing Brewery and Noble Brewery at mutually agreed ex-factory prices. The
Marketing Company also signed a long term purchase contract with Guangdong
Blue Ribbon in April 1995 pursuant to which the Marketing Company is required
to purchase all products labelled Blue Ribbon produced by Guangdong Blue
Ribbon including non-carbonated soft drinks and mineral water. The Marketing
Company is allowed to mark-up the prices of the Pabst Blue Ribbon beer
purchased or adjust the ex-factory prices as necessary in order to adequately
cover the selling, advertising, promotional, distribution and administrative
expenses incurred in selling these beer products to distributors.
PABST BLUE RIBBON BEER
Substantially all of the beer now produced by both Noble Brewery
and Zhaoqing Brewery is Pabst Blue Ribbon Beer. There are two products in
Pabst Blue Ribbon brand breweries' portfolio: 11-degree light processed beer
and draught beer. The 11-degree light processed beer is packaged in 946 ml.,
640 ml. and 355 ml. bottles and 500 ml. and 355 ml. cans and is the primary
product of the breweries. The draught beer is sold only in kegs.
5
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The 946 ml. glass bottle and 500 ml. can packages for Pabst Blue
Ribbon beer were introduced by Zhaoqing Brewery in 1996, and by Noble Brewery
in 1997.
Sales of the 11-degree light processed beer in 946 ml., 640 ml. and
355 ml. bottles and 500 ml. and 355 ml. cans accounted for approximately
7.2%, 59.9%, 0.9%, 0.5% and 29.5%, respectively, of the sales volume of the
Company in 1997.
Sales of the 11-degree light processed beer in 946 ml., 640 ml. and
355 ml. bottles and 500 ml. and 355 ml. cans accounted for approximately
7.1%, 60.0%, 1.8%, 0.1% and 28.7% respectively, of the sales volume of the
Company in 1996.
Sichuan Brewery during 1997 produced only 11-degree light processed
Pabst Blue Ribbon beer, which was only packed in 640 ml glass bottles. In
1997, the Marketing Company distributed 8,124 metric tons of Pabst Blue
Ribbon beer produced by Sichuan Brewery, which represented 3.6% of the
Company's total sales volume in 1997.
Pabst Blue Ribbon beer is marketed and sold as a premium beer in
establishments such as restaurants, bars, alcohol and tobacco companies and
retail stores, primarily in urban centers all over China. Management
anticipates that the breweries will continue to expand the distribution of
these products in new China markets, subject to the limitations of the
transportation network, the Company's ability to expand its market share in
these markets and the growth of the Chinese economy.
The specifications and characteristics of the beers produced by the
breweries are set out below:
TYPE OF BEER PACKAGE GENERAL DESCRIPTION
11-degree light processed Can (500 ml. & 355 ml.) 11-degree malt
beer Bottle (946 ml., 640 ml. content,
& 355 ml.) alcohol content 3.4%
(w/w)
Draught beer Keg (30 liters) 11-degree malt
content,
alcohol content 3.4%
(w/w)
Note: w/w refers to weight by weight (i.e., measurement of alcoholic content
of beer by weight of beer).
BRAND PERFORMANCE: The 11-degree light processed beer is the
biggest selling beer in the Company's Pabst Blue Ribbon beer portfolio,
accounting for approximately 98.0% of the Company's production in 1997 and
97.7% of the Company's production in 1996.
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The 11-degree light processed beer is a beverage that offers
Chinese consumers an attractive alternative to their traditional malt-based
beverage. This product was sold in 32 provinces in China in 1996 and 1997.
SALES: The Company's highest volume sales for Pabst Blue Ribbon
beer have been in the provinces of Guangdong, Fujian and Zhejiang. The
Company utilizes a network of non-exclusive regional distributors whose field
sales force maintains customer contact and satisfaction. Sales of Pabst Blue
Ribbon beer were 226,262 metric tons or approximately 1,923,227 barrels in
1997, a 1.4% decrease over 1996. The Company believes that the decrease was
attributable, in substantial part to widespread flooding in China in 1997
which affected the distribution of the Company's products. Sales of Pabst
Blue Ribbon beer were 229,540 metric tons or approximately 1,951,090 barrels
in 1996, a 22% increase over 1995.
DOMESTIC BRAND NAME BEER
Prior to the end of 1994, Zhaoqing Brewery produced beer
exclusively under domestic brand names, such as Zhaoqing beer, Dinghu beer
and Xile beer, all of which were non-premium beers which targeted customers
in the low to middle economic range. Sales of domestic brand beer were
approximately 33,000 metric tons or 280,500 barrels in 1994, almost the same
as in 1993. Production of these local brand beers was completely
discontinued in March 1995 when Zhaoqing Brewery commenced producing Pabst
Blue Ribbon beer on an exclusive basis. However, beer that does not meet
Pabst Blue Ribbon quality standards is generally packaged and distributed as
local brand beer.
Pabst Blue Ribbon beer is targeted to the premium beer market in
China while the domestic brand beer previously produced by Zhaoqing Brewery
was targeted to the non-premium market.
The following tables present information with respect to the sales
and volume of beer sold by Noble Brewery (which produces Pabst Blue Ribbon
beer exclusively) and by Zhaoqing Brewery in 1996 and 1997. In February
1995, the Marketing Company was established to conduct the distribution,
marketing and promotion of the Company's production of Pabst Blue Ribbon beer
throughout China.
<TABLE>
<CAPTION>
Net Sales
1996 Net Sales Volume Sold per Ton
---- --------- ----------- ---------
(RMB'000) (metric tons) (RMB'000)
<S> <C> <C> <C>
Noble Brewery 655,317 154,435 4.2
Zhaoqing Brewery
Local Brands 5,666 2,526 2.2
Pabst Blue Ribbon 367,213 80,913 4.5
Marketing Company
Pabst Blue Ribbon 1,173,060 229,540 5.1
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Non-alcoholic drinks 75,186 30,687 2.5
</TABLE>
<TABLE>
<CAPTION>
Net Sales
1997 Net Sales Volume Sold per Ton
---- --------- ----------- ---------
(RMB'000) (metric tons) (RMB'000)
<S> <C> <C> <C>
Noble Brewery 639,679 146,813 4.4
Zhaoqing Brewery
Local Brands 2,282 1,156 2.0
Pabst Blue Ribbon 358,080 73,060 4.9
Marketing Company
Pabst Blue Ribbon 1,181,273 226,262 5.2
Non-alcoholic drinks 1,990 901 2.2
</TABLE>
During 1997 the Marketing Company distributed 8,124 metric tons of
Pabst Blue Ribbon beer produced by Sichuan Brewery.
SEASONALITY
The beer industry in China is seasonal. The Company's sales are
usually at their lowest in the months of October and November and highest in
the months of March through September.
LOCATION
Noble Brewery and Zhaoqing Brewery are located adjacent to each
other in the City of Zhaoqing. The municipality of Zhaoqing is one of the
major municipal areas of Guangdong Province. It is strategically located at
the lower and middle reaches of the Zijiang River, 62 miles from Guangzhou,
the provincial capital, by road and 142 sea miles from Hong Kong by water.
The area enjoys a mild, sunny climate with an adequate amount of rainfall.
The climate and soil conditions provide an important base of agriculture and
forestry for Guangdong Province.
Guangdong Province is the fifth most populous province in China
with a population of approximately 65,000,000, of whom over 7,000,000 are
located in the metropolitan Guangdong area. The Municipality of Zhaoqing
covers a total area of 8,500 square miles and has a population of
approximately 5,700,000. The metropolitan City of Zhaoqing has a population
of approximately 400,000 and covers an area of 254 square miles. Zhaoqing
enjoys a well-developed infrastructure, including transportation facilities,
reliable power, communication and service infrastructure. The area contains
extensive agricultural activity and a large population base.
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Zao Yang High Worth Brewery is located in Hubei Province which is
situated in the center of China. Zao Yang High Worth Brewery has immediate
access to the provincial highway network and is strategically positioned to
serve the surrounding provinces.
Sichuan Brewery is located in the Le Shan City, which is
approximately 160 kilometers from Chengdu, the provincial capital of Sichuan
Province. Sichuan Province is in the western region of the PRC and is the
most populous province, with a population of approximately 110,000,000.
Sichuan Brewery has immediate access to the provincial highway network and is
strategically positioned to serve the surrounding cities in Sichuan Province.
QUALITY CONTROL
Rigorously applied quality control is critical to ensure a
consistently high quality standard for the products produced by the
breweries. In 1990, quality control experts were sent by Pabst US to Zhaoqing
to teach brewery personnel appropriate inspection techniques, quality control
measures and production procedures. In addition, Pabst US experts trained
the brewery's personnel in the specific brewing techniques required in order
to meet the standards set by Pabst US. An engineer from Pabst US is
stationed in Zhaoqing to test random production samples and perform quality
control on a continuing basis. In addition, the breweries send samples of
their beer on a regular basis to Pabst US in the United States for content
examination and testing to ensure that quality standards are adhered to on a
consistent basis. Pabst US participated in the conversion of the brewery
facilities of Zhaoqing Brewery to Pabst Blue Ribbon beer and provided
technical assistance and training.
RAW MATERIALS
The breweries use all-natural ingredients in their brewing process.
The primary raw materials utilized are mainly malt, husked rice, hops and
water. The aggregate cost of the primary raw materials represents
approximately 21% of the direct cost of production, excluding depreciation,
of Pabst Blue Ribbon beer and 22% of the domestic brand beers. Cost of
packaging represents approximately 61% of the total direct cost of
production, excluding depreciation, of Pabst Blue Ribbon beer and 52% of the
domestic brand beers.
MALT: Virtually all of the malt utilized for producing Pabst Blue
Ribbon beer is purchased from regional malt manufacturers, primarily
Guangzhou Malting Company, an unaffiliated company. Guangzhou Malting
Company imports the barley used in producing the malt from suppliers in
Australia, Canada and Europe. Malt for domestic brand beer was sourced from
other domestic suppliers. The cost of malt represented approximately 76% of
the primary raw material cost in the direct cost of production, excluding
depreciation and packaging, of Pabst Blue Ribbon beer and 68% for the
domestic brand beers.
HUSKED RICE: Husked rice is grown on irrigated farmland under
contractual agreements with a variety of local farmers in the Zhaoqing
region. Given the extensive agricultural activity in the region, management
believes
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that there is an abundant and reliable supply of rice to meet ongoing
production needs. The cost of husked rice represents approximately 17% of
the primary raw material cost in the direct cost of production, excluding
depreciation and packaging, of Pabst Blue Ribbon beer and 19% of the domestic
brand beers.
HOPS: The hops utilized for producing Pabst Blue Ribbon beer are
acquired primarily from one supplier in the United States through a local
importer. The cost of hops represents approximately 5% of the primary raw
material cost in the direct cost of production, excluding depreciation and
packaging, of Pabst Blue Ribbon beer and 6% of the domestic brand beers.
WATER: The breweries utilize naturally filtered water from deep
underground wells adjacent to the brewery facilities that tap the Beriling
Shan water source. The pristine water quality and composition were primary
factors in choosing this particular water source. Specifically, the Beriling
Shan water source contains a relatively low mineral content making it very
suitable for brewing the particular types of beers produced by the breweries.
The breweries intensively monitor the quality of the water used in the
brewing process for compliance with the Company's own stringent quality
standards. The breweries have recently expanded their water system to ensure
an adequate supply so as to meet all of their present requirements. However,
the breweries continue to add water reservoir capacity to provide for
long-term strategic growth plans and to sustain brewing operations in the
event of a prolonged drought.
CONTAINERS
Zhaoqing Brewery used six types of containers for its beer in 1997:
946 ml. bottles, 640 ml. bottles, 355 ml. bottles, 500 ml. and 355 ml.
aluminum cans and, for its draught beer, beer kegs. In 1997, approximately
36.2% of Zhaoqing Brewery's products were packaged in aluminum cans and 61.7%
were packaged in glass bottles. The remainder of the malt beverages sold in
1997, representing 2.1% of production, were packaged in stainless steel kegs.
In 1997, Zhaoqing Brewery's domestic brand beers were primarily packaged in
640 ml. bottles. The cost of aluminum and glass containers represents the
single largest cost element in the production and packaging of Zhaoqing
Brewery's beer.
Noble Brewery used five types of containers for its beer in 1997:
946 ml. bottles, 640 ml. bottles, 355 ml. bottles and 355 ml. aluminum cans
and, for its draught beer, beer kegs. In 1997, approximately 28.9% of Noble
Brewery's products were packaged in aluminum cans and 69.0% were packaged in
glass bottles. The remainder of the malt beverages sold in 1997,
representing 2.1% of production, were packaged in stainless steel kegs. The
cost of aluminum and glass containers represents the single largest cost
element in the production and packaging of Noble Brewery's beer.
To date, all of the beer bottles required by the Company have been
supplied by four unaffiliated regional glass manufacturers. Currently, there is
a recycling bottle program in place and the Company uses both new and recycled
bottles and new cans in packaging its beer. The primary supplier of
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glass bottles to the Company is Guangdong Glass Factory in Guangzhou, with
the balance of the bottle requirements being sourced from Zhaoqing Glass
Factory, Shenzhen Hua Jing Glass Ltd. and Zhanjiang Glass Factory, which are
located in an adjacent province. In addition, a variety of other bottle
manufacturers are located in the Guangdong Province and neighboring
provinces, and represent an easily available alternative source of supply of
bottles. As a result of both Zhaoqing Brewery and Noble Brewery maintaining
a bottle recycling program in 1996 and 1997, the containers represented a
much smaller proportion of the overall cost.
American National Can (Zhaoqing) Company Limited ("American
National Can") supplies approximately 90% of the aluminum cans used by the
breweries. American National Can utilizes an automatic easy-open production
line from Italy and current annual output is 360 million cans. American
National Can produces cans of high quality that meet the ISO standard. The
manufacturing facility for American National Can is located within the same
industrial complex as the breweries. American National Can supplies cans
pursuant to supply contracts with each of the breweries that have no fixed
expiration date. American National Can has agreed to meet the can supply
requirements of the breweries at a pre-negotiated price.
TRANSPORTATION/DISTRIBUTION
In view of the single location of Zhaoqing and Noble breweries and
the wide geographic market in China, the Company is constantly reviewing the
methods of distributing its malt beverages.
TRANSPORTATION: During 1997, 42% of the Company's products sold
were shipped by rail tank cars from Zhaoqing to distributors throughout the
Guangdong Province. The railcars assigned to the breweries by the shipping
railroads are specially built and insulated to maintain temperature control
en route.
The remaining 58% of the Company's volume is shipped by truck (51%)
and boat (7%) directly to distributors. Transportation vehicles are
insulated to keep malt beverage products at proper temperatures until they
are delivered to distributor locations.
Domestic brand beers made by Zhaoqing Brewery were primarily
transported by trucks and shipped within the regional markets.
The production of beer by Sichuan Brewery was primarily distributed
within the Sichuan regional market by trucks.
DISTRIBUTION: Delivery of Pabst Blue Ribbon beer to retail markets
in Guangdong Province and the rest of China is accomplished through a network
of non-exclusive regional distributors which sell to tobacco and alcohol
companies, bars, restaurants and retail stores. The Marketing Company has
over 400 distributors throughout China. During 1995 and 1996, the Marketing
Company generally required a 50% cash deposit from its customers as security,
based on the volume of their order flow. However, for those customers
located in Guangdong Province, the deposit policy had been replaced
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by cash-on-delivery or pre-approved credit terms. Commencing January 1,
1997, as a result of more intensive competition from the breweries in China,
the Marketing Company abolished the customer deposit requirement except for
certain new customers which are required to make a cash deposit as security.
Customers with material transaction volume are required to issue bills of
exchange from their respective banks to secure payment on the due date. As a
matter of policy, each regional distributor works on a non-exclusive basis.
The breweries typically appoint only one distributor in each region (except
for a large region in which more than one may be appointed) to ensure that
such distributor devotes adequate effort and resources to the development of
a broad based retail distribution network for Pabst Blue Ribbon beer in that
distributor's region. These distribution arrangements include the
flexibility for the breweries to replace distributors, or reach different
arrangements with existing distributors, if it is in their best interest. No
single distributor accounted for more than approximately 5% of 1997 barrel
sales.
In order to ensure the highest product quality, distributors must
maintain proper rotation of the products at retail accounts and are required
to replace the Company's malt beverage products at their own expense if sales
to consumers have not occurred within the prescribed time period.
In 1997, approximately RMB 63,000,000 was allocated to promotional
advertising for Pabst Blue Ribbon beer and approximately RMB 63,700,000 was
allocated to other specific promotional activities and incentives to
distributors. Advertising media include television, radio, billboards,
magazines and newspapers. In addition, the breweries provide their
distributors with promotional gift items, sales incentive bonuses and volume
discounts, and special lucky draw and specific promotional campaigns are held
during the year. Pabst Blue Ribbon beer has also been featured in beer
festivals organized by the National Beer Industry Cooperative District
Organizations in major, highly populated urban centers such as Beijing,
Shanghai and Guangzhou.
MARKETS AND COMPETITION
With the recent influx of foreign branded beer into the China
markets, the Company anticipates that competition among all premium beers
will grow and more marketing and advertising efforts will have to be utilized
in order to maintain its market leadership.
There is a considerable difference in the prices at which local or
regional beer is sold in China as compared to the price of foreign or premium
brands such as Pabst Blue Ribbon beer or the San Miguel, Foster's or
Carlsberg brands. Generally, a 640 ml. bottle of local beer typically sells
for 1-2 RMB ($0.12 U.S. to $0.24 U.S.), compared to premium beers which sells
for 4-6 RMB ($0.48 U.S. to $0.72 U.S.).
MARKETS: The beer market in China is experiencing tremendous
growth in rates of production and demand. However, the industry is largely
fragmented and highly regionalized. A key reason for the fragmented market
is the lack of an effective transportation system. China's system of
highways is in an early stage of development, and combined with heavy
traffic, makes it
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inefficient to distribute beer over long distances. Another reason for the
fragmented market is that local breweries are generally small in capacity and
lack the financial resources and capability to launch a national distribution
network and promotion program.
Approximately 850 breweries exist in China, over 90% of which are
small local breweries that produce non-premium beer for local or regional
consumption. However, certain Chinese taxes based on volume rather than
sales price favor the higher priced premium beer breweries.
To the extent the Chinese economy is constrained by the actions of
the central government of China to reduce inflation and slow growth rates,
the demand for the Company's premium beer products may be constrained.
Recent development of the beer market tends towards the lower priced beer
product, especially when restructured state owned enterprises have released
their surplus work force, which then has less disposable income for premium
beer consumption. The Company is taking steps to maintain its premium beer
market share and to develop a new range of lower-priced products to suit the
market's changing needs.
COMPETITION: Of the brands comprising the premium sector, Tsing
Tao and Pabst Blue Ribbon are the market leaders. Tsing Tao is the largest
brewer of beer in China, producing approximately 400,000 metric tons or
3,400,000 barrels of beer in 1997. Tsing Tao is one of the best selling
beers in China and the largest Chinese exported brand. It is sold in 32
countries and is China's largest exported beer to the United States.
However, the Company has been able to attract distributors from Tsing Tao due
to the faster growth rate of Pabst Blue Ribbon beer as well as by offering
higher margins. Other companies seeking market share in the Chinese market
include Carlsberg, Singha, San Miguel, Beck's, Lowenbrau, Anheuser-Busch,
Stroh's, Miller, Foster's, Coor's and Heileman. Sales for most of these
brands in China are substantially lower than sales of beer produced under the
Pabst Blue Ribbon and Tsing Tao labels.
CAPITAL EXPANSION
In 1994, the Company launched an expansion program to increase
brewing capacity to fulfill projected volume requirements for the foreseeable
future. Noble Brewery spent approximately RMB 216,300,000 in 1994 to
construct the second phase brewing facilities and RMB 5,000,000 to perform
routine maintenance in all plants and to make incremental capital upgrades to
all production facilities. Zhaoqing Brewery spent approximately RMB
30,800,000 in 1994 to convert the facilities to produce Pabst Blue Ribbon
beer and RMB 1,700,000 to perform routine maintenance. In order to expand
the annual production capacity from 50,000 metric tons to 100,000 metric
tons, Zhaoqing Brewery commenced its expansion program in early 1995 and had
completed all major equipment installation by the end of 1995. Zhaoqing
Brewery spent approximately RMB 139,800,000 in 1995 and early 1996 for this
expansion program.
In 1997, Noble Brewery spent approximately RMB 66,000,000 to
acquire new packaging equipment and machinery, and Zhaoqing Brewery spent
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approximately RMB 5,000,000 for acquiring new equipment and renovating the
existing machinery.
INVESTMENT IN NEW BREWERY
Pursuant to the joint venture agreement relating to Zao Yang High
Worth Brewery, High Worth JV will contribute a total of RMB 16,104,000 as its
capital contribution to Zao Yang High Worth Brewery, which will be payable in
four installments through October 1998 to obtain 55% of the assets previously
owned by Zao Yang Brewery. All the revalued assets and liabilities of Zao
Yang Brewery will be injected into Zao Yang High Worth Brewery upon
completion of approval procedures.
The Joint Venture Agreement also provides that loans of RMB
29,280,000 and RMB 16,000,000 from financial institutions will be arranged by
Zao Yang High Worth Brewery in order to meet the funding requirements for
equipment renovation and working capital, respectively. If Zao Yang High
Worth Brewery is unable to borrow the necessary amounts, High Worth JV and
Zao Yang Brewery are obligated to contribute additional funds to Zao Yang
High Worth Brewery in proportion to their respective interests.
On February 12, 1998, the Board of Directors of High Worth JV
agreed that, with the approval of Zao Yang Brewery, Zao Yang High Worth
Brewery may be changed into a joint stock company in which High Worth JV will
reduce its equity interest to 51%, Zao Yang Brewery to 24%, with the
remaining 25% to be allocated to the management and employees of Zao Yang
High Worth Brewery. This proposed change is subject to approval from the
local management.
RESEARCH AND DEVELOPMENT
The Company is continually engaging in research and development
programs and has developed various improvements in raw materials, processes
and packaging systems and in the development of innovative, quality products.
The Company's research and development expenditures are primarily
devoted to new product development, its brewing process and ingredients,
brewing equipment, improved manufacturing techniques for packaging supplies
and environmental improvements in the Company's operational processes. The
focus of these programs is to improve the quality and value of its malt
beverage products while reducing costs through more efficient processing
techniques, equipment design and improved varieties of raw materials.
ENERGY
The breweries use both heavy oil and electricity as primary sources
of energy. Heavy oil is used as the primary fuel in their steam generation
system and is supplied from regional sources.
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Electricity is supplied by the Zhaoqing City Electricity Bureau.
Since the breweries are one of the larger employers in the region, the
breweries are given priority in obtaining electricity. The breweries have
not experienced any energy supply problems to date. As an alternative source
of energy, the Company also has fuel oil and propane available. Management
of the Company does not anticipate any supply problems in the future with
respect to these natural resources.
EMPLOYEES
There are approximately 1,610 employees employed by Zhaoqing
Brewery, Noble Brewery and the Marketing Company, as of December 31, 1997,
categorized as follows:
<TABLE>
<CAPTION>
ZHAOQING NOBLE MARKETING
FUNCTION TOTAL BREWERY BREWERY COMPANY
-------- ----- -------- ------- ---------
<S> <C> <C> <C> <C>
(1) Production 859 351 508 --
(2) Engineering, Technology
and Quality Control 135 62 73 --
(3) Management and
Administration 199 43 70 86
(4) Warehouse 154 22 42 90
(5) Others 263 115 103 45
----- --- --- ---
1,610 593 796 221
----- --- --- ---
----- --- --- ---
</TABLE>
In 1997, labor costs (including the cost of benefits) accounted for
approximately 3.2% and 4.5% of the total costs of production for Noble
Brewery and Zhaoqing Brewery, respectively. The Company expects average wage
rates of the employees will increase by approximately 10% in 1998.
Each full time employee is a member of a local trade union. Labor
relations have remained positive and the breweries have not had any employee
strikes or major labor disputes. Unlike trade unions in the western
countries, trade unions in most parts of China are organizations mobilized by
the government and the management of the enterprises.
PABST LICENSING ARRANGEMENTS AND TRADEMARKS
PABST TRADEMARKS IN CHINA
The arrangements regarding the use of Pabst trademarks in China
were formalized in an agreement dated August 30, 1993 (the "License
Agreement") between Pabst US and Pabst Zhaoqing. Pabst Zhaoqing was
wholly-owned at that time by Zhaoqing Brewery, which in turn was owned by
Guangdong Blue Ribbon. The License Agreement was for a period of fifteen
years from November 7, 1988. Under the terms of the License Agreement, Pabst
Zhaoqing obtained the exclusive right to produce and market products under
Pabst trademarks in China, the non-exclusive right to market such Pabst
products in other Asian countries except Hong Kong, Macau, Japan and South
Korea, and the
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right to sublicense the use of the Pabst trademarks to any other enterprise
in China, subject to approval of Pabst US. Royalties are payable quarterly
to Pabst US based on the volume (units) of beer produced.
By an Assets Transferring Agreement dated May 20, 1994 between
Pabst Zhaoqing, Pabst US and Guangdong Blue Ribbon, all rights and duties of
the License Agreement were assigned and transferred from Pabst Zhaoqing to
Guangdong Blue Ribbon. Guangdong Blue Ribbon agreed to fulfill the
obligation as sublicensor under the License Agreement between Pabst Zhaoqing
as sublicensor, and Noble Brewery and High Worth JV as sublicensee,
respectively, which are described below.
NOBLE BREWERY
By a Sublicense Agreement dated October 12, 1993 (the "Noble
Sublicense Agreement") between Pabst Zhaoqing and Noble Brewery and approved
by Pabst US, Pabst Zhaoqing granted to Noble Brewery a sublicense to use
beer-related Pabst trademarks, the non-exclusive right to produce beer in
accordance with its production capacity under the sublicensed Pabst
trademarks, and the non-exclusive right to market such Pabst products in
China and other Asian countries except Hong Kong, Macau, Japan and South
Korea. Royalties calculated on the same basis as those payable to Pabst US
are payable by Noble Brewery to Pabst Zhaoqing. Under the terms of the Noble
Sublicense Agreement, Pabst Zhaoqing agreed that, except with respect to the
enterprises of Guangdong Blue Ribbon, it would not grant further sublicenses
to any other enterprises in Guangdong Province to use the Pabst trademarks
thereby granted. At the time of the Noble Sublicense Agreement, Zhaoqing
Brewery was a member enterprise of Guangdong Blue Ribbon.
HIGH WORTH JV/ZHAOQING BREWERY
By a Sublicense Agreement dated May 6, 1994 (the "High Worth
Sublicense Agreement") between Pabst Zhaoqing and High Worth JV and approved
by Pabst US on September 18, 1994, Pabst Zhaoqing granted to High Worth JV a
sublicense to allow Zhaoqing Brewery to use Pabst trademarks to produce beer
in accordance with its production capacity under the sublicensed Pabst
trademarks and to market such Pabst products in China and other Asian
countries except Hong Kong, Macau, Japan and South Korea. With respect to
the production of Pabst Blue Ribbon beer in Guangdong Province, since
Zhaoqing Brewery was a member enterprise of Guangdong Blue Ribbon at the time
of the Noble Sublicense Agreement, Zhaoqing Brewery was entitled to produce
Pabst Blue Ribbon beer in Guangdong Province.
Under the terms of the High Worth Sublicense Agreement, High Worth
JV and/or its affiliates have the sole right to be granted further
sublicenses by Pabst Zhaoqing for the use of the Pabst trademarks to produce
beer in China provided that they are located outside Guangdong Province.
Further, Pabst Zhaoqing covenanted that it would not grant further
sublicenses with respect to the Pabst trademarks to produce beer to any other
enterprises except High Worth JV or its affiliates. Accordingly, High Worth
JV controls all future sublicensing for the production of Pabst Blue Ribbon
beer in China, which can be sold throughout China and other Asian countries,
excluding Hong Kong, Macau, Japan and South Korea.
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The term of the High Worth Sublicense Agreement is the same as the
License Agreement. Royalties are payable quarterly by High Worth JV to Pabst
Zhaoqing based on the volume (units) of beer produced.
SICHUAN BREWERY
In late 1996, Guangdong Blue Ribbon established a wholly-owned
subsidiary in Le Shang City, Sichuan Province, PRC, and started converting an
existing brewery with an annual production capacity of 20,000 metric tons
into a Pabst Blue Ribbon brewing complex ("Sichuan Brewery"). Production and
sale of Pabst Blue Ribbon beer commenced in April 1997.
In order to facilitate the efficient distribution and sale of Pabst
Blue Ribbon beer in China, the Company and Guangdong Blue Ribbon agreed at
that time to coordinate the sales of Pabst Blue Ribbon beer in an orderly
manner. In April 1997, the Marketing Company and Sichuan Brewery entered
into a Memorandum of Understanding which required Sichuan Brewery to sell all
of its production of Pabst Blue Ribbon beer to the Marketing Company at
mutually agreed ex-factory prices, and granted the Marketing Company the
right to regulate production of Pabst Blue Ribbon beer to reflect market
demand.
Since the Marketing Company is only allowed to mark-up the cost of
Pabst Blue Ribbon beer purchased in order to adequately cover the selling,
advertising, promotional, distribution and administrative expenses incurred
in selling to distributors, the sale of the Sichuan Brewery's production by
the Marketing Company did not have a material effect on the Company's
consolidated results of operations. In 1997, Sichuan Brewery's production
amounted to 13,430 metric tons, of which the Marketing Company distributed
8,124 metric tons, representing 3.6% of the Company's total 1997 sales volume.
In early October 1997, Sichuan Brewery advised the Marketing
Company that it intended to commence selling its production of Pabst Blue
Ribbon beer directly and that it would therefore cease selling its production
of Pabst Blue Ribbon beer to the Marketing Company, effective immediately.
In late October 1997, High Worth JV and the Marketing Company
instituted formal legal proceedings against Guangdong Blue Ribbon and Sichuan
Brewery. A Statement of Claims was filed with the High Court of Guangdong
Province in which Guangdong Blue Ribbon and Sichuan Brewery were named as the
first and second defendant, respectively. The Statement of Claims asserted
that the defendants violated the terms of the Sublicensing Agreement signed
between High Worth JV and Guangdong Blue Ribbon and breached the Long Term
Sales Contracts signed between Marketing Company and Guangdong Blue Ribbon.
With the liaison efforts of the Guangdong Provincial Government and
Zhaoqing City Government, High Worth JV, Marketing Company, Guangdong Blue
Ribbon and Sichuan Brewery reached an out-of-court settlement on December 30,
1997("Settlement Agreement"). The Settlement Agreement, signed by all
parties involved and witnessed by the High Court of Guangdong Province,
included the following terms and provisions:
(a) High Worth JV will serve as the core organization for managing the
production and operation of the Pabst Blue Ribbon beer business in the
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PRC. A Management Committee will be set up under the Board of Directors
of High Worth JV to liaise, coordinate and manage the procurement,
production, sale and future development of all Pabst Blue Ribbon beer
producing enterprises.
(b) The Marketing Company will act as the entity to unify and coordinate all
sales of Pabst Blue Ribbon beer in the PRC. All of the Pabst Blue
Ribbon beer products produced by High Worth JV, Noble Brewery and any
other new joint ventures set up by High Worth JV will be distributed by
the Marketing Company under the coordination of the Management Committee.
(c) The sales and marketing of Blue Ribbon mineral waters and non-carbonated
soft drinks will be handled by Guangdong Blue Ribbon upon confirmation
by the Board of Directors of the Marketing Company.
(d) Sichuan Brewery will be restructured and renamed Sichuan Blue Ribbon
High Worth Brewery E Mei Limited ("Sichuan High Worth Brewery"). High
Worth JV, Guangdong Blue Ribbon and E Mei Brewery will own equity
interests in Sichuan High Worth Brewery of 51%, 20% and 29%,
respectively. E Mei Brewery is the local brewery in Sichuan, which
leased its brewing facilities to Guangdong Blue Ribbon to form the
Sichuan Brewery. The existing assets in Sichuan Brewery will be
revalued to derive their fair market value prior to the completion of
the formal restructuring, which is expected to be completed by the
middle of 1998.
On February 12, 1998, the Board of Directors of High Worth JV resolved
that the new equity structure for Sichuan High Worth Brewery should be
revised to reflect 60% owned by High Worth JV and 40% owned by E Mei
Brewery. The Board of Directors further resolved that if agreed by the
respective parties, Sichuan High Worth Brewery may be converted into a
joint stock company in which the equity interests of High Worth JV and E
Mei Brewery will be reduced to 51% and 24%, respectively, with the
remaining 25% allocated to the management and employees of Sichuan High
Worth Brewery. All the above proposed changes will be subject to
approval by the local government.
(e) Guangdong Blue Ribbon committed to sublicense the right to use the Pabst
Blue Ribbon trademark to all new breweries to be established by High
Worth JV in the future. Any new brewery will pay a royalty fee at the
same rate as Pabst US charges Guangdong Blue Ribbon plus a surcharge of
RMB 25 per metric ton. All other terms and conditions will be the same
as the License Agreement.
(f) All legal costs incurred with regard to this proceeding will be equally
shared by the plaintiffs and defendants.
ZAO YANG HIGH WORTH BREWERY
Pursuant to the terms of the Settlement Agreement and the High Worth
Sublicense Agreement, Guangdong Blue Ribbon is committed to grant a sublicense
agreement to Zao Yang High Worth Brewery for the right to produce
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and sell beer products under the Pabst Blue Ribbon label. Zao Yang High
Worth Brewery is required to pay royalty fees at the same rate as Pabst US
charges Guangdong Blue Ribbon plus a surcharge of RMB 25 per metric ton. The
granting of this sublicense is subject to confirmation by Pabst US, and Zao
Yang High Worth Brewery meeting the required production standards for the
production of Pabst Blue Ribbon beer.
THE JOINT VENTURE COMPANIES
FORMATION OF THE JOINT VENTURE COMPANIES
In 1980, Zhaoqing Brewery was initially established as a
state-owned enterprise to manufacture beer and non-alcoholic beverages. In
1992, Zhaoqing Brewery became a member enterprise (affiliate) of Guangdong
Blue Ribbon. In June 1993, Zhaoqing Brewery entered into a Joint Venture
Agreement with Goldjinsheng Holdings Ltd. ("Goldjinsheng") to form Noble
Brewery (the "Noble Joint Venture Agreement"), pursuant to which Goldjinsheng
acquired a 60% interest and Zhaoqing Brewery acquired a 40% interest.
Goldjinsheng was a wholly-owned subsidiary of Noble China Inc., a company
listed on the Toronto Stock Exchange. Upon formation of the joint venture,
Noble Brewery consisted of the beer production facilities and assets of Pabst
Zhaoqing, the then subsidiary of Zhaoqing Brewery, which were utilized to
produce and distribute beer under the Pabst Blue Ribbon brand name. Zhaoqing
Brewery continued to produce beer under local brands in its separate facility.
In May 1994, Guangdong Blue Ribbon and Holdings entered into a
Joint Venture Agreement providing for the establishment of High Worth JV.
The term of the joint venture is 50 years, and is subject to extension by
agreement of the parties and approval from the government. Holdings
contributed 60% of the capital, which was used by High Worth JV to purchase
Zhaoqing Brewery from Guangdong Blue Ribbon, including its 40% interest in
Noble Brewery. Holdings and Guangdong Blue Ribbon then owned 60% and 40%
interests, respectively, in High Worth JV. All of the governmental approvals
for the ownership transfer of Zhaoqing Brewery to High Worth JV were
completed in November 1994. Zhaoqing Brewery produced and distributed beer
under local brands at the time of this transaction. Subsequently, in
December 1994, the Company acquired all of the shares of Holdings (See
"BUSINESS DEVELOPMENT").
OPERATION OF THE JOINT VENTURE COMPANIES
The establishment and activities of High Worth JV and Noble Brewery
are governed by the joint venture law and regulations of China and the
applicable joint venture agreements. Holdings' interest in the profits of
High Worth JV is in the same proportion (i.e., 60%) as its investment in High
Worth JV; Zhaoqing Brewery's interest in the profits of Noble Brewery is in
the same proportion (i.e., 40%) as its investment in Noble Brewery.
With regard to Noble Brewery, pursuant to the Noble Joint Venture
Agreement, the term of the joint venture is for 20 years, which may be
extended upon the agreement of the two joint venture partners and approval
from the applicable Chinese governmental agencies. Under the Noble Joint
Venture Agreement, Noble Brewery is governed by a board of directors
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consisting of five individuals, three of whom, including the Chairman, are
nominated by Goldjinsheng, with the remaining two, including the Vice
Chairman, by Zhaoqing Brewery. The operation and management of Noble Brewery
is the responsibility of Zhaoqing Brewery. Accordingly, Zhaoqing Brewery has
the decision making authority on substantially all aspects of the daily
operations of Noble Brewery such as purchasing, production, sales and
marketing, finance and human resources. Goldjinsheng may appoint staff to
participate in the accounting functions of Noble Brewery. All matters to be
approved by the Board of Directors require either unanimous vote or the vote
of four out of the five directors. Accordingly, no board decision can be
made without the approval of Zhaoqing Brewery's designee.
With regard to High Worth JV, pursuant to the High Worth JV Joint
Venture Agreement, High Worth JV is governed by a board of directors
consisting of seven individuals, four of whom are appointed by Holdings and
three of whom are appointed by Guangdong Blue Ribbon. The Board of Directors
controls the management and operation of High Worth JV. Generally, votes on
the board of directors are taken by majority vote, except for the following
matters relating to the existence and legal structure of the joint venture,
all of which require a unanimous vote: amendments to the articles of
association; termination or dissolution of the joint venture; increase in, or
transfer of, the registered capital of the joint venture; establishment of
subsidiaries or combination with other entities; and change in the share
structure. The general manager is appointed by the Board of Directors and is
responsible for carrying out the decisions of the Board as well as for the
day-to-day management of High Worth JV.
Zao Yang High Worth Brewery was formed as a Chinese limited company
with two joint venture owners. Pursuant to the Zao Yang High Worth Brewery
Joint Venture Agreement, Zao Yang High Worth Brewery is governed by a board
of directors consisting of five individuals, three of whom, including the
chairman, are nominated by High Worth JV, with the remaining two, including
the vice-chairman, by Zao Yang Brewery. Generally, votes on the board of
directors are taken by majority vote, except for the following matters
relating to the existence and legal structure of the joint venture, all of
which require a unanimous vote: amendment to the articles of association;
termination or dissolution of the joint venture; increase in, or transfer of,
the registered capital of the joint venture; establishment of subsidiaries or
combination with other entities; and change in the share structure. The
general manager is appointed by the Board of Directors and is responsible for
carrying out the decisions of the Board as well as for the day-to-day
management of Zao Yang High Worth Brewery.
Subsequent to the conclusion of the Sichuan Brewery Settlement
Agreement, a Management Committee has been set up under High Worth JV's Board
of Directors to serve as the central liaison and coordination body for the
Pabst Blue Ribbon beer business in China. Any future expansion and
development of the Pabst Blue Ribbon beer production will be monitored by
High Worth JV. The Company is seeking expansion and cooperation
opportunities to extend its brewing operation into other provinces with local
breweries outside of Guangdong Province.
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GOLDJINSHENG AGREEMENT
A provisional agreement, subject to the approval of the applicable
Chinese governmental agencies and the execution of separate definitive
agreements with respect to the various matters referred to below, was made
among Goldjinsheng the owner of the remaining 60% interest in Noble Brewery,
Zhaoqing Brewery, Noble Brewery, High Worth JV and Guangdong Blue Ribbon on
May 10, 1995 (the "Goldjinsheng Agreement") confirming that:
(a) High Worth JV was entitled to brew and sell beer under the Pabst Blue
Ribbon label produced in its brewing facilities up to a maximum
production capacity of 100,000 tons per annum.
(b) High Worth JV and/or companies in which High Worth JV has an interest
are entitled to be granted a sublicense from Guangdong Blue Ribbon with
the right to produce and sell beer under the Pabst Blue Ribbon label in
the Guangdong Province of the PRC ("Additional Facility") to a maximum
production capacity of 300,000 tons per annum.
In the event that High Worth JV desires to obtain a sublicense for any
Additional Facility, Goldjinsheng has the right to purchase up to a 40%
interest in such Additional Facility. The purchase price for such
interest will be the actual cost of such Additional Facility multiplied
by the percentage interest that Goldjinsheng elects to purchase.
(c) A marketing company, owned 8% by Guangdong Blue Ribbon, 52% by High
Worth JV and 40% by Goldjingsheng, will handle and organize the sales of
Pabst Blue Ribbon beer produced by High Worth JV and Noble Brewery.
High Worth JV and Noble Brewery will each create a separate distribution
company or division of their own. The distribution company of High
Worth JV will have the sole right to acquire 100% of the production of
High Worth JV and 40% of the production of Noble Brewery, while the
distribution company of Noble Brewery will have the sole right to
acquire 60% of the production of Noble Brewery. The respective
distribution companies will appoint the Marketing Company as their sole
and exclusive agent to market Pabst Blue Ribbon beer in the PRC. If the
provisions as to ownership are implemented, the respective interests of
Guangdong Blue Ribbon and the Company in the Marketing Company will be
adjusted (See "MARKETING AND OPERATIONS--Summary of Operations").
Subsequent to the signing of the Goldjinsheng Agreement, the
Company, Guangdong Blue Ribbon and Goldjinsheng have attempted to complete
the respective separate definitive agreements. In December 1996, Guangdong
Blue Ribbon and Goldjinsheng advised the Company that they intended to modify
some of the terms of the Goldjinsheng Agreement and to propose incorporating
those modifications in the respective separate definitive agreements.
Although the negotiation process was interrupted by the Sichuan Brewery
issue, the Company anticipates that these discussions will be resumed in 1998.
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OPERATING IN CHINA
Because the operations of the Company are based exclusively in
China, the Company is subject to rules and restrictions governing China's
legal and economic system as well as general economic and political
conditions in that country.
INFLATION/ECONOMIC POLICIES. General economic conditions in China
could have a significant impact on the Company. The economy of China differs
in certain material respects from that of the United States, including its
structure, levels of development and capital reinvestment, growth rate,
government involvement, resource allocation, rate of inflation and balance of
payments position. Although the majority of China's productive assets is
still owned by the state, the adoption of an economic reform policy since
1978 has resulted in the gradual reduction in the role of state economic
plans and the allocation of resources, pricing and management of such assets,
with increased emphasis on the utilization of market forces, and rapid growth
in the Chinese economy. The success of the Company depends in substantial
part on the continued economic growth in the Chinese economy.
In recent years, the Chinese economy has experienced periods of
rapid economic growth as well as high rates of inflation, which in turn, has
resulted in the adoption by the Chinese government from time to time of
various corrective measures designed to regulate growth and contain
inflation. Since 1993, the Chinese government has implemented an economic
program to control inflation which has resulted in the tightening of working
capital available to Chinese state-owned enterprises, and in the slowing of
the pace of economic growth and general market consumption.
CURRENCY MATTERS. The State Administration for Exchange Control
("SAEC"), under the authority of the People's Bank of China ("PBOC"),
controls the conversion of RMB into foreign currency. Prior to January 1,
1994, RMB could be converted into foreign currency through the Bank of China
or other authorized institutions at official rates fixed daily by the SAEC.
RMB could also be converted at swap centers ("Swap Centers") open to Chinese
enterprises and foreign-funded Chinese enterprises, subject to SAEC approval
of each foreign currency trade, at exchange rates negotiated by the parties
for each transaction. In the year ended December 31, 1993, as much as 80% by
value of all foreign exchange transactions in China took place through the
Swap Centers. The exchange rate quoted by the Bank of China differed
substantially from that available in the Swap Centers. Effective January 1,
1994, a unitary exchange rate system was introduced in China, replacing the
dual-rate system previously in effect. In connection with the creation of a
unitary exchange rate, the establishment of the China Foreign Exchange
Trading System inter-bank foreign exchange market and the phasing out of the
Swap Centers were announced. However, the Swap Centers were retained, and
foreign-funded enterprises have been permitted to satisfy foreign exchange
requirements through the Swap Centers.
Effective July 1, 1996, the government of China began to take steps
to make its currency fully convertible on a "current account" basis. This
will allow foreign-funded enterprises, whether wholly-owned or joint ventures
with Chinese parties, to buy and sell foreign exchange in banks for
22
<PAGE>
purposes of trade, services, debt repayment and profit repatriation. The
"current account" measures the flow of money into and out of a nation,
including the net balance on trade in goods and services, plus remittances.
LEGAL SYSTEM. Since 1979, many laws and regulations dealing with
economic matters in general and foreign investment in particular have been
promulgated in China. The Chinese constitution adopted in 1989 authorizes
foreign investment, and guaranties the "lawful rights and interests" of
foreign investors in China. The trend of legislation over the past twelve
years has significantly enhanced the protection afforded foreign investment
and allowed for more active control by foreign parties of foreign investment
enterprises in China. There can be no assurance, however, that the current
trend and economic legislation toward promoting market reforms and
experimentation will not be slowed, curtailed or reversed, especially in the
event of a change in leadership, social or political disruption, or
unforeseen circumstances affecting China's political, economic or social life.
Despite some progress in developing a legal system, China does not
have a comprehensive system of laws. The interpretation of Chinese laws may
be subject to policy changes reflecting domestic political factors.
Enforcement of existing laws may be uncertain and sporadic, and
implementation and interpretation may be inconsistent. The Chinese judiciary
is relatively inexperienced in enforcing the laws or terms of contracts,
leading to a higher than usual degree of uncertainty as to the outcome of
litigation. Even where adequate laws exist in China, it may be impossible to
obtain swift and equitable law enforcement, or to obtain enforcement of a
judgment by a court of another jurisdiction. As the Chinese legal system
develops, the promulgation of new laws, changes to existing laws, and the
preemption of local regulations by national laws may adversely affect foreign
investors, such as the Company.
The Company's activities in China may by law be subject, in some
cases, to administrative review and approval by various national, provincial
and local agencies of the Chinese government. While China has promulgated an
administrative procedural law permitting redress to the courts with respect
to certain administrative actions, this law appears to be largely untested.
TAX MATTERS. The Company's operations in China are subject to four
types of taxes: Income Tax, Value Added Tax ("VAT"), Consumption Tax and
other Sales Tax.
Noble Brewery and High Worth JV are governed by the Income Tax Law
of China concerning Foreign Investment Enterprises and Foreign Enterprises
(the "FIE Law"). Under the current FIE Law, Noble Brewery and High Worth JV
are exempt from payment of Income Tax for the first two taxation years in
which Noble Brewery and High Worth JV become profitable. The Income Tax rate
for the following three years is reduced by 50% and is thereafter calculated
at the full rate. The 100% tax exemption for High Worth JV and the 50% tax
exemption for Noble Brewery commenced on January 1, 1996. The current
official Income Tax rate on profits for Noble Brewery is 27% (33% less a 6%
temporary reduction provided as an economic incentive by the Chinese
government) and for High Worth JV is 33%, unless specifically exempted or
reduced by the local authorities.
23
<PAGE>
Zao Yang High Worth Brewery is established as a China joint venture
limited company and is subject to the Income Tax Law of China concerning a
Chinese limited company. The current official Income Tax rate on profits for
Zao Yang High Worth Brewery is 33%. However, local tax authorities may
specifically exempt or reduce the tax rate as an economic incentive.
In addition to the FIE Law, which is computed on profits, Noble
Brewery, Zhaoqing Brewery and Zao Yang High Worth Brewery are also subject to
two kinds of turnover taxes for their respective sales, the VAT and
Consumption Tax. The applicable VAT rate is 17% for brewery products sold in
China. The amount of VAT liability is determined by applying the applicable
tax rate to the invoiced amount less VAT paid on purchases made with the
relevant invoices in support. The Consumption Tax rate together with a
government surcharge for brewery products is RMB 220 per metric ton. The
Consumption Tax is determined on the volume of sales within China.
Currently, there are no withholding taxes imposed on dividends paid
by High Worth JV to Holdings.
DISTRIBUTION OF PROFITS. Applicable Chinese laws and regulations
require that, before a Sino-foreign joint venture enterprise (such as High
Worth JV and Noble Brewery) distributes profits to investors, it must (1)
satisfy all tax liabilities; (2) provide for losses in previous years; and
(3) make allocations in proportions determined at the sole discretion of the
Board of Directors to a general reserve fund, an enterprise development fund
and a staff welfare and employee bonus fund. Distribution of profits by the
joint ventures to the Company and their other equity investors are required
to be in proportion to each party's respective investment in the joint
venture.
REGULATIONS
Central, provincial and local laws and regulations govern the
operations of the breweries. The central government and all provinces in
which the Company's malt beverage products are distributed regulate trade
practices, advertising and marketing practices, relationships with
distributors and related matters. Governmental entities also levy various
taxes, license fees and other similar charges and may require bonds to ensure
compliance with applicable laws and regulations.
BUSINESS DEVELOPMENT
The Company was organized in the state of Florida as Video
Promotions, Inc. on April 20, 1988. The Company subsequently changed its
name to National Sweepstakes, Inc. and then to Natural Fuels, Inc. For a
period of time prior to December 16, 1994, the business of the Company was
devoted to seeking potential acquisition or merger opportunities.
On December 16, 1994, the Company acquired all of the outstanding
shares of Holdings from Oriental Win Holdings Ltd. ("Oriental Win") and
Goldchamp Ltd. ("Goldchamp") in exchange for 3,960,000 shares and 240,000
shares of the Company's Class A Common Stock issued to Oriental Win and
24
<PAGE>
Goldchamp, respectively, and 3,000,000 shares of the Company's Class B Common
Stock issued to Oriental Win. The Class B Common Stock carries two votes per
share but is otherwise equivalent to the Class A Common Stock. In addition,
the Company issued an aggregate of 600,000 shares of the Company's Class A
Common Stock to various parties for consulting services in connection with
the acquisition of Holdings. At the time of the acquisition, Holdings owned
a 60% interest in High Worth JV. This transaction was accounted for as a
recapitalization of Holdings with Holdings as the acquirer (reverse
acquisition).
On November 22, 1994, the Company effected a 1-for-22 reverse stock
split in anticipation of the transaction.
On March 15, 1995, the Company changed its name to CBR Brewing
Company, Inc.
ITEM 2. PROPERTIES
The Company's major facilities are set forth below:
FACILITY LOCATION PRODUCT
- -------- -------- -------
Noble Brewery City of Zhaoqing on a site Malt Beverages
containing approximately
135,000 square meters
Zhaoqing Brewery City of Zhaoqing on a site Malt Beverages
containing approximately
131,000 square meters
Zao Yang High Worth City of Zao Yang on a site Malt Beverages
Brewery (formed in containing approximately
1998) 70,000 square meters
Sichuan Brewery (to City of Le Shanon on a site Malt Beverages
be changed to Sichuan containing approximately
High Worth Brewery 100,000 square meters
in mid-1998)
The facilities of Noble Brewery and Zhaoqing Brewery are well
maintained and suitable for their respective operations. The facilities of
Zao Yang High Worth Brewery will be modernized and new equipment will be
added to convert it into another Pabst Blue Ribbon beer producing complex.
In 1997, the Company estimates that Zhaoqing Brewery and Noble
Brewery operated at approximately 74% and 73%, respectively, of their
theoretical brewing capacities. Annual production capacity can vary due to
product mix, packaging mix and seasonality.
25
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In late October 1997, High Worth JV and the Marketing Company
instituted formal legal proceedings against Guangdong Blue Ribbon and Sichuan
Brewery. A Statement of Claims was filed with the High Court of Guangdong
Province in which Guangdong Blue Ribbon and Sichuan Brewery were named as the
first and second defendant, respectively. The Statement of Claims asserted
that the defendants violated the terms of the Sublicensing Agreement signed
between High Worth JV and Guangdong Blue Ribbon and breached the Long Term
Sales Contract signed between Marketing Company and Guangdong Blue Ribbon. A
Settlement Agreement was entered into on December 30, 1997. See ITEM 1
"PABST LICENSING ARRANGEMENTS AND TRADEMARKS - Sichuan Brewery".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security
holders during the fourth quarter of the fiscal year ended December 31, 1997.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Class A Common Stock of CBR Brewing Company, Inc. is listed for
trading on the OTC Bulletin Board under the symbol CBRB. During 1995, 1996
and 1997, there was extremely limited trading activity.
The approximate number of security holders of record of the Class A
Common Stock at March 31, 1998 was 10.
The Company has never paid cash dividends on its Common Stock and
has no present intention of paying cash dividends in the foreseeable future.
It is the present policy of the Board of Directors to retain all earnings to
provide for the future growth of the Company.
The Company's ability to pay dividends to its shareholders is
dependent on the Company receiving distributions through Holdings from its
PRC subsidiaries and affiliates which generate all of the Company's earnings.
Pursuant to the relevant laws and regulations of Sino-foreign joint
venture enterprises, the profits of High Worth JV, calculated pursuant to
generally accepted accounting principles in the PRC ("PRC GAAP"), are
available for distribution in the form of cash dividends to each equity
investor, in proportion to each investor's interest in the joint venture,
after satisfaction of all tax liabilities, provision for any losses in
previous years, and appropriations to reserve funds, as determined at the
discretion of the board of directors in accordance with PRC accounting
standards and regulations. The principal adjustments necessary to conform
PRC GAAP financial statements to financial statements prepared in accordance
with generally accepted accounting principles in the United States ("US
GAAP") are the reclassification of certain expense items from income
appropriations to
26
<PAGE>
charges against income, adjustments for sales, other income and purchases
recognized on a cash basis, depreciation charges, deferred taxation and
revaluation of fixed assets.
In accordance with the relevant laws and regulations in the PRC,
the profits available for distribution are based on PRC GAAP financial
statements. If High Worth JV has foreign currency available after meeting the
operational needs of its PRC subsidiaries, it may make a profit distribution
to Holdings. Otherwise, it will be necessary to obtain approval and convert
such distributions at the exchange centers. At December 31, 1997, the
Company's distributable profits were approximately RMB 65,972,000.
On November 25, 1997, the Board of Directors of High Worth JV
declared the first dividend distribution in which Holdings was entitled, of
approximately RMB 83,000,000 which was based on PRC GAAP financial
statements. The dividend will be distributed in installments in order to
avoid any disruption to High Worth JV's normal operating cash flow position.
During the year ended December 31, 1997, Holdings received a total of RMB
10,000,000 as a partial dividend distribution.
ITEM 6. SELECTED FINANCIAL DATA
The following financial data has been derived from the audited
consolidated financial statements and should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in
this document. All amounts are in RMB. The exchange rate was US$1.00 to RMB
8.32 at December 31, 1995, RMB 8.32 at December 31, 1996 and RMB 8.30 at
December 31, 1997.
<TABLE>
<CAPTION>
CBR Brewing Company, Inc.
(in RMB) and Subsidiaries
------------------------
Years Ended December 31,
----------------------------------------------
1997 1996 1995
------------- ------------- -----------
<S> <C> <C> <C>
Consolidated Statement
of Income Data:
Sales, net of sales taxes 1,169,286,489 1,233,277.624 566,786,939
Gross profit 208,326,796 194,138,432 71,133,533
Operating income 11,214,860 25,325,483 6,458,405
Net income 30,762,902 20,211,809 19,625,968
Net income per common share 3.84 2.53 2.45
Cash dividends declared per
common share -0- -0- -0-
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------
1997 1996 1995
------------- ------------- -----------
<S> <C> <C> <C>
Consolidated Balance
Sheet Data:
Net working capital
(deficiency) (102,725,259) (83,554,409) (97,555,553)
Total assets 835,094,540 826,502,148 746,898,874
Long term liabilities 16,512,851 15,862,549 24,897,291
Advances from shareholders 73,617,552 73,794,948 73,794,948
Shareholders' equity 178,351,384 147,588,482 127,376,673
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Effective December 16, 1994, the Company acquired Holdings, which,
through its subsidiaries and affiliates, is engaged in the production and
sale of Pabst Blue Ribbon beer in China. Holdings is a holding company which
was formed solely to effect the acquisition of a 60% interest in High Worth
JV. On October 31, 1994, High Worth JV acquired a 100% interest in Zhaoqing
Brewery, including Zhaoqing Brewery's 40% interest in Noble Brewery.
The acquisition of Zhaoqing Brewery, including Zhaoqing Brewery's
40% interest in 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. Accordingly, the Company's post-acquisition consolidated
statements of income are presented for the years ended December 31, 1995,
1996 and 1997.
For accounting purposes, the acquisition of Holdings by the Company
has been treated as a recapitalization of Holdings with Holdings as the
acquirer (reverse acquisition).
During February 1995, the Marketing Company was established to
conduct the distribution, marketing and promotion throughout China of the
Pabst Blue Ribbon beer produced by Zhaoqing Brewery and Noble Brewery and the
mineral water and non-carbonated soft drinks produced by Guangdong Blue
Ribbon under the Blue Ribbon brand name. Zhaoqing Brewery HC owns a 70%
interest and Guangdong Blue Ribbon owns a direct 30% interest and an indirect
28% interest in the Marketing Company. As a result, the Company owns a 42%
net interest in the Marketing Company. Zhaoqing Brewery and Noble Brewery
commenced selling their production of Pabst Blue Ribbon beer through the
Marketing Company in April 1995 and July 1995, respectively. Sichuan Brewery
commenced selling its production of Pabst Blue Ribbon beer through the
Marketing Company in April 1997 (See ITEM 1. BUSINESS - SICHUAN BREWERY).
The consolidated financial statements include the results of operations of
the Marketing Company on a consolidated basis commencing from April 1, 1995.
The Company has a
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<PAGE>
controlling interest in the Marketing Company even though it has an effective
interest of only 42% because of the Company's 60% interest in High Worth JV
and 70% interest in the Marketing Company (through Zhaoqing Brewery HC), and
because the Company controls the majority of the votes on the board of
directors of the Marketing Company and Zhaoqing Brewery HC.
Prior to March 1995, Zhaoqing Brewery had produced exclusively
domestic brands of beer, and had an annual production capacity of 50,000
metric tons or 425,000 barrels of beer. In late 1994, Zhaoqing Brewery
commenced the conversion and refinement of its original facilities and
adopted a new brewing technology in order to produce beer under the Pabst
Blue Ribbon label. During March 1995, Zhaoqing Brewery discontinued the
production of all domestic brand beer and commenced exclusive production of
Pabst Blue Ribbon beer. However, less than 5% of beer production normally
does not meet Pabst Blue Ribbon quality standards and is packed and
distributed as lower priced, local brand beer. With the implementation of
the new brewing technology and the purchase of additional equipment during
1995, Zhaoqing Brewery reached its current full-scale annual production
capacity of 100,000 metric tons or 850,000 barrels of beer at the end of 1995.
Noble Brewery has produced Pabst Blue Ribbon beer exclusively since
it commenced operations. Prior to 1994, Noble Brewery had an annual
production capacity of 80,000 metric tons or 680,000 barrels of beer. With
the completion of a second brewing facility in July 1994, Noble Brewery
reached its full-scale annual production capacity of 200,000 metric tons or
1,700,000 barrels of beer in late 1994.
In January 1996, Zhaoqing Brewery HC transferred all of its
operating assets and liabilities to High Worth JV pursuant to the original
Joint Venture Agreement, the Asset Transfer Agreement signed in May 1994, and
the relevant government regulations. Subject to the completion of certain
legal procedures and documentation, the investments in Noble Brewery and the
Marketing Company will be transferred to High Worth JV. Zhaoqing Brewery HC
is currently acting as the nominee for High Worth JV with respect to the
investments in Noble Brewery and the Marketing Company.
Upon the completion of the required procedures and documentation,
all of the assets and liabilities formerly controlled by Zhaoqing Brewery
will have been transferred to High Worth JV. During 1996 and 1997, the
operating activities of Zhaoqing Brewery were part of High Worth JV. The
consensus and approval from the local tax authority was obtained during
January 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 late 1996, Guangdong Blue Ribbon established a wholly-owned
subsidiary in Le Shang City, Sichuan Province, PRC, and started converting an
existing brewery with an annual production capacity of 20,000 metric tons
into a Pabst Blue Ribbon brewing complex ("Sichuan Brewery"). Production and
sale of Pabst Blue Ribbon beer commenced in April 1997.
29
<PAGE>
In 1997, Sichuan Brewery's production amounted to 13,430 metric
tons and the Marketing Company has distributed 8,124 metric tons for Sichuan
Brewery in 1997, which represented 3.6% of the Company's total 1997 sales
volume.
In 1998, Zao Yang High Worth Brewery will commence production of
Pabst Blue Ribbon beer after the completion of converting the existing
facilities into a Pabst Blue Ribbon beer brewing facility. Pursuant to the
joint venture agreement, Zao Yang High Worth Brewery is committed to sell all
its beer products to the Marketing Company for resale.
CONSOLIDATED RESULTS OF OPERATIONS:
Zhaoqing Brewery and Noble Brewery commenced distribution of their
production of Pabst Blue Ribbon beer through the Marketing Company during
April 1995 and July 1995, respectively. The commencement of the Marketing
Company's operations, which are presented on a consolidated basis, resulted
in a significant change in the Company's operating structure and income
statement presentation during 1995. Accordingly, a comparison of results of
operations for the years ended December 31, 1996 and 1997 to results of
operations for the year ended December 31, 1995 is not necessarily meaningful.
The Company conducts a substantial portion of its purchases through
related parties, and has additional significant continuing transactions with
such parties (See "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS")
YEARS ENDED DECEMBER 31, 1997 AND 1996:
SALES:
For the year ended December 31, 1997, net sales, all of which were
conducted through the Marketing Company, were RMB 1,169,286,489, of which RMB
1,167,296,661 (99.8%) was from the sale of 227,418 metric tons of beer and
RMB 1,989,828 (0.2%) was from the sale of mineral water and non-carbonated
soft drinks. During the year ended December 31, 1997, the Marketing Company
purchased for resale RMB 675,247,962 and RMB 33,052,735 of beer products from
Noble Brewery and Sichuan Brewery, respectively, and nil of mineral water and
non-carbonated soft drinks from Guangdong Blue Ribbon. Approximately 99% of
total sales in 1997 were from products with the Pabst Blue Ribbon brand name.
For the year ended December 31, 1996, net sales, all of which were
conducted through the Marketing Company, were RMB 1,233,277,624 of which RMB
1,158,091,595 (93.9%) was from the sale of 232,066 metric tons of beer and
RMB 75,186,029 (6.1%) was from the sale of mineral water and non-carbonated
soft drinks. During the year ended December 31, 1996, the Marketing Company
purchased for resale RMB 695,150,225 of beer products from Noble Brewery and
RMB 69,166,604 of mineral water and non-carbonated soft drinks from Guangdong
Blue Ribbon. Approximately 99% of total sales in 1996 were from products
with the Pabst Blue Ribbon brand name.
Net sales decreased by RMB 63,991,135 or 5.2% in 1997 as compared to
1996, as a result of the Company's elimination of the sales of mineral
30
<PAGE>
water, non-carbonated soft drinks and red wine in 1997. During 1996, the
Company sold mineral water, non-carbonated soft drinks and red wine, which
were purchased from Guangdong Blue Ribbon. The Company discontinued the sale
of mineral water, non-carbonated soft drinks and red wine in late 1996.
During the year ended December 31, 1997, net sales of beer products increased
by RMB 9,205,066 or 0.8% to RMB 1,167,296,661, as compared to RMB
1,158,091,595 for the year ended December 31, 1996. The Company sold 227,418
metric tons of beer to distributors in 1997 as compared to 232,066 metric
tons of beer in 1996. The slight increase in net sales of beer products in
1997 as compared to 1996 was primarily attributable to a shift in the sales
mix to higher value products in 1997.
During the year ended December 31, 1997, Zhaoqing Brewery sold
74,216 metric tons of beer to the Marketing Company, of which 1,156 metric
tons (1.6%) were local brand beer and 73,060 metric tons (98.4%) were Pabst
Blue Ribbon beer. The 1,156 metric tons of local brand beer were produced
throughout 1997. During the year ended December 31, 1996, Zhaoqing Brewery
sold 83,439 metric tons of beer to the Marketing Company, of which 2,526
metric tons (3.0%) were local brand beer and 80,913 metric tons (97.0%) were
Pabst Blue Ribbon beer. Total beer sold by Zhaoqing Brewery to the Marketing
Company decreased by 9,223 metric tons or 11.1% from 1996 to 1997.
The Marketing Company regulates the production of Pabst Blue Ribbon
beer by Zhaoqing Brewery and Noble Brewery in accordance with their
respective production capacities in order to balance warehouse inventory
levels and accommodate projected market demand. As a result of heavy rains
in China during the three months ended September 30, 1997, which caused
widespread flooding and washed out many roads, the Company's ability to ship
its beer products to distributors was significantly impaired during this
period. In addition, the Company believes that the widespread flooding also
caused a temporary decrease in consumer's discretionary income available to
purchase the Company's products. In 1997, the production by Sichuan Brewery
also represented sales volume of 8,124 metric tons. As a result of these
factors, total beer sold by Zhaoqing Brewery and Noble Brewery to the
Marketing Company decreased during the year ended December 31, 1997 as
compared to the year ended December 31, 1996, as the Company reduced
production to correspond to lower demand in an effort to avoid excessive
finished goods inventory.
GROSS PROFIT:
For the year ended December 31, 1997, total gross profit was RMB
208,326,796 or 17.8% of total net sales, and consisted of gross profit from
beer sales of RMB 208,269,171 or 17.8% of net sales of beer and gross profit
from sales of mineral water and non-carbonated soft drinks of RMB 57,625 or
2.9% of net sales of mineral water and non-carbonated soft drinks. For the
year ended December 31, 1996, total gross profit was RMB 194,138,432 or 15.7%
of total net sales, and consisted of gross profit from beer sales of RMB
188,204,326 or 16.3% of net sales of beer and gross profit from sales of
mineral water, non-carbonated soft drinks and red wine of RMB 5,934,106 or
7.9% of net sales of mineral water, non-carbonated soft drinks and red wine.
31
<PAGE>
Gross margin from beer sales increased to 17.8% in 1997 as compared
to 16.3% in 1996 as a result of a shift in the sales mix to slightly higher
margin products in 1997 in response to changing market conditions, as well as
the effect of cost control measures.
The Company expects that it will experience pressure on its gross
profit margin in 1998 as a result of the following factors: a continuing
softening of consumer demand in China caused in substantial part by the
central government of China's regulatory controls and economic policies, and
increasing competition from foreign premium brand beers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
For the year ended December 31, 1997, selling, general and
administrative expenses were RMB 197,111,936 or 16.9% of net sales,
consisting of selling expenses of RMB 129,202,587 and general and
administrative expenses of RMB 67,909,349. Net of the allowance for doubtful
accounts of RMB 5,314,858 recorded during 1997, general and administrative
expenses were RMB 62,594,491.
For the year ended December 31, 1996, selling, general and
administrative expenses were RMB 168,812,949 or 13.7% of net sales,
consisting of selling expenses of RMB 103,460,671 and general and
administrative expenses of RMB 65,352,278. Net of the allowance for doubtful
accounts of RMB 9,914,114 recorded during 1996, general and administrative
expenses were RMB 55,438,164.
Selling expenses include costs relating to the advertising,
promotion, marketing and distribution of Pabst Blue Ribbon beer in China.
Selling expenses increased by RMB 25,741,916 or 24.9% in 1997 as compared to
1996, and as a percent of net sales, to 11.0% in 1997 from 8.4% in 1996.
Selling expenses increased in 1997 as compared to 1996, both on an absolute
basis and as a percentage of sales, as a result of the increase in selling
expenses in 1997 related to beer products exceeding the reduction in selling
expenses related to mineral water, non-carbonated soft drinks and red wine,
which products the Company sold in 1996 but is not selling in 1997. During
1997, the Company implemented a substantially expanded advertising and
promotional program to stimulate consumer demand, provide distributor
incentives and to maintain the market position of Pabst Blue Ribbon beer in
China as a result of softening consumer demand and increasing competition
from foreign premium brand beer.
General and administrative expenses include the costs associated
with the operation of the Company's management and executive offices and the
legal and accounting costs associated with the operation of a public company.
Excluding the allowance for doubtful accounts, general and administrative
expenses increased by RMB 7,156,327 or 12.9% in 1997 as compared to 1996, and
as a percentage of net sales, to 5.4% in 1997 from 4.5% in 1996. General and
administrative expenses increased in 1997 as compared in 1996 primarily as a
result of increased personnel and personnel related costs.
The allowance for doubtful accounts, which is calculated based
primarily on the age of outstanding accounts receivable, decreased to 0.5% of
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<PAGE>
net sales in 1997 as compared to 0.8% of net sales in 1996 as a result of a
reduction in the age of accounts receivable outstanding in 1997. However,
accounts receivable are typically outstanding for a longer period of time in
China than in the United States.
OPERATING INCOME:
For the year ended December 31, 1997, operating income was RMB
11,214,860 or 1.0% of net sales. For the year ended December 31, 1996,
operating income was RMB 25,325,483 or 2.1% of net sales. The decrease in
operating income is primarily attributable to the elimination of the sales of
mineral water, non-carbonated soft drinks and red wine, reduction in sales
tonnage and increased selling, general and administrative expenses. The
adjustment and regulation of production between Zhaoqing Brewery and Noble
Brewery by the Marketing Company also contributed to the decrease in
operating income in 1997 as compared to 1996. The Marketing Company
purchases Pabst Blue Ribbon beer at mutually agreed ex-factory prices, and is
only allowed to mark-up the cost of Pabst Blue Ribbon beer purchased in order
to adequately cover its selling, advertising, promotional, distribution and
administrative expenses incurred in selling to distributors. The Marketing
Company incurred certain excessive selling and advertising expenses in 1997
that were not fully compensated for in the Marketing Company's intra-company
pricing structure. Accordingly, the Marketing Company has reduced the price
that it pays for Pabst Blue Ribbon beer by 3% in 1998, which is expected to
benefit the Company's consolidated results of operations in 1998 and
subsequent periods.
INTEREST INCOME AND INTEREST EXPENSE:
For the year ended December 31, 1997, interest income was RMB
6,255,590 as compared to interest income of RMB 6,119,470 for the year ended
December 31, 1996. The increase in interest income in 1997 of RMB 136,120 or
2.2% as compared to 1996 was primarily the result of an increase of RMB
1,554,699 in interest earned on amounts due from Guangdong Blue Ribbon during
1997.
For the year ended December 31, 1997, interest expense, net of
amounts capitalized, was RMB 15,503,189, as compared to RMB 20,767,252 for
the year ended December 31, 1996. The decrease in interest expense in 1997
of RMB 5,264,063 or 25.3% as compared to 1996 was primarily the result of a
decrease in customer deposits, a decrease in capital lease obligations, a
decrease in interest rates on bank borrowings by Zhaoqing Brewery, and a
decrease of RMB 4,655,308 in interest paid on amounts due to Guangdong Blue
Ribbon and other related companies.
INCOME TAXES:
For the year ended December 31, 1997, no income tax expense was
provided, as Zhaoqing Brewery's operations in China were subject to a 100%
tax exemption in 1996 and 1997. With respect to the Company's estimated
United States Federal income tax liability for the distributed earnings of
High Worth JV, no income tax expense was provided due to the Company's
election in 1997 to treat High Worth JV as a partnership for United States
Federal income tax purposes.
33
<PAGE>
NET INCOME:
For the year ended December 31, 1997, net income increased to RMB
30,762,902 (RMB 3.84 per share) or 2.6% of net sales, as compared to net
income of RMB 20,211,809 (RMB 2.53 per share) or 1.6% of net sales for the
year ended December 31, 1996.
YEARS ENDED DECEMBER 31, 1996 AND 1995:
SALES:
For the year ended December 31, 1996, net sales, almost all of
which were conducted through the Marketing Company, were RMB 1,233,277,624,
of which RMB 1,158,091,595 (93.9%) was from the sale of 232,066 metric tons
of beer and RMB 75,186,029 (6.1%) was from the sale of mineral water and
non-carbonated soft drinks. During the year ended December 31, 1996, the
Marketing Company purchased for resale RMB 695,150,225 of beer products from
Noble Brewery and RMB 69,166,604 of mineral water and non-carbonated soft
drinks from Guangdong Blue Ribbon. Approximately 99% of total sales in 1996
were from products with the Pabst Blue Ribbon brand name.
For the year ended December 31, 1995, net sales, consisting of
sales both by Zhaoqing Brewery directly and through the Marketing Company,
were RMB 566,786,939, of which RMB 504,500,315 (89.0%) was from the sale of
107,015 metric tons of beer and RMB 62,286,624 (11.0%) was from the sale of
mineral water and non-carbonated soft drinks. During the year ended December
31, 1995, the Marketing Company purchased for resale RMB 327,805,406 of beer
product from Noble Brewery and RMB 61,708,086 of mineral water and
non-carbonated soft drinks from Guangdong Blue Ribbon. Approximately 95% of
total sales in 1995 were from products with the Pabst Blue Ribbon brand name.
For the year ended December 31, 1996, Zhaoqing Brewery sold 83,439
metric tons of beer, of which 2,526 metric tons (3.0%) were local brand beer
and 80,913 metric tons (97.0%) were Pabst Blue Ribbon beer. The 2,526 metric
tons of local brand beer were produced throughout 1996. During the year
ended December 31, 1995 Zhaoqing Brewery sold 45,708 metric tons of beer, of
which 11,388 metric tons (24.9%) were local brand beer and 34,320 metric tons
(75.1%) were Pabst Blue Ribbon beer. Total beer sold increased by 37,731
metric tons or 82.5% from 1995 to 1996 as a result of increase in production
capacity.
GROSS PROFIT:
For the year ended December 31, 1996, gross profit was RMB
194,138,432 or 15.7% of net sales, as compared to RMB 71,133,533 or 12.6% of
net sales for the year ended December 31, 1995. The increase in the gross
profit margin of 3.1% on an absolute basis or 24.6% in 1996 as compared to
1995 was a result of a change in the product mix, an increase in sales unit
volume, an increase in sales prices, the introduction of a bottle recycling
program during 1996, and production of Pabst Blue Ribbon beer throughout 1996.
34
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
For the year ended December 31, 1996, selling, general and
administrative expenses were RMB 168,812,949 (13.7% of net sales), consisting
of selling expenses of RMB 103,460,671 and general and administrative
expenses of RMB 65,352,278. For the year ended December 31, 1995, selling,
general and administrative expenses were RMB 64,675,128 (11.4% of net sales),
consisting of selling expenses of RMB 32,821,498 and general and
administrative expenses of RMB 31,853,630.
Selling expenses include costs relating to the advertising,
promotion, marketing and distribution of Pabst Blue Ribbon beer in China.
During 1995, the Marketing Company was established to market throughout China
the Pabst Blue Ribbon beer produced by Zhaoqing Brewery and Noble Brewery.
The Marketing Company assumed the responsibility for marketing the Pabst Blue
Ribbon beer produced by Zhaoqing Brewery and Noble Brewery during April 1995
and July 1995, respectively, and incurred most of the 1995 and almost all of
the 1996 selling expenses. General and administrative expenses include the
costs associated with the operation of the Company's executive offices, and
the legal and accounting costs associated with the operation of a public
company.
Selling expenses increased by RMB 70,639,173 or 215.2% in 1996 as
compared to 1995, and represented 8.4% of net sales in 1996 as compared to
5.8% of net sales in 1995, as a result of increased marketing and promotion
costs incurred during 1996 to support increased marketing efforts
necessitated by the increased production capacity of Zhaoqing Brewery and
Noble Brewery. General and administrative expenses increased by RMB
33,498,648 or 105.2% in 1996 as compared to 1995, and represented 5.3% of net
sales in 1996 as compared to 5.6% of net sales in 1995. During the year
ended December 31, 1996, the Company recorded an allowance for doubtful
accounts of RMB 9,914,114, as compared to an allowance for doubtful accounts
of RMB 5,600,000 for the year ended December 31, 1995.
OPERATING INCOME:
For the year ended December 31, 1995, operating income was RMB
25,325,483 or 2.1% of net sales, as compared to operating income of RMB
6,458,405 or 1.1% of net sales for the year ended December 31, 1995.
INTEREST INCOME AND INTEREST EXPENSE:
For the year ended December 31, 1996, interest income was RMB
6,119,470. There was no interest income for the year ended December 31,
1995. The increase in interest income in 1996 as compared to 1995 is
primarily the result of interest earned on amounts due from Guangdong Blue
Ribbon during 1996.
For the year ended December 31, 1996, interest expense, net of
amounts capitalized, was RMB 20,767,252, as compared to RMB 3,236,058 for the
year ended December 31, 1995. The increase in interest expense in 1996 as
compared to 1995 is primarily the result of amounts borrowed from Guangdong
Blue Ribbon, increased borrowings by Zhaoqing Brewery and the amounts
borrowed
35
<PAGE>
from related companies that are controlled by beneficial shareholders of the
Company.
INCOME TAXES:
For the year ended December 31, 1996, income tax expense was RMB
4,721,444. Although the Company's operations in China were subject to a 100%
tax exemption in 1995 and 1996, deferred income taxes of RMB 308,444 were
recorded with respect to the Company's operations in China, and RMB 4,413,000
were recorded with respect to the Company's estimated United States Federal
income tax liability resulting from earnings distributed as dividends by
Noble Brewery in 1997. For the year ended December 31, 1995, income tax
expense was RMB 1,000,000, which represented deferred income taxes as a
result of temporary timing differences with respect to accelerated
depreciation of property, plant and equipment.
NET INCOME:
For the year ended December 31, 1996, net income was RMB 20,211,809
(RMB 2.53 per share) or 1.6% of net sales, as compared to net income of RMB
19,625,968 (RMB 2.45 per share) or 3.5% of net sales for the year ended
December 31, 1995.
NOBLE BREWERY
Years Ended December 31, 1997 and 1996:
SALES:
For the year ended December 31, 1997, net sales were RMB
639,678,595, consisting of 146,148 metric tons of beer sold to the Marketing
Company for resale and 665 metric tons of beer sold to Guangdong Blue Ribbon.
For the year ended December 31, 1996, net sales were RMB 655,316,991,
consisting of 154,435 metric tons of beer sold to the Marketing Company for
resale.
During the year ended December 31, 1997, Noble Brewery sold 146,813
tmetric tons of beer, as compared to 154,435 metric tons of beer sold during
the year ended December 31, 1996. Total beer sold decreased by 7,622 metric
tons or 4.9% from 1996 to 1997 as a result of the regulation of sales by the
Marketing Company, which purchases beer from the two breweries in accordance
with their respective production capacities, reduction in sales tonnage, and
the production by Sichuan Brewery in 1997.
GROSS PROFIT:
For the year ended December 31, 1997, gross profit was RMB
179,062,125 or 28.0% of net sales, as compared to gross profit of RMB
145,150,002 or 22.1% of net sales for the year ended December 31, 1996. The
increase in the gross profit margin of 5.9% on an absolute basis or 26.7% in
1997 as compared to 1996 was a result of a change in the product mix, the
decrease in cost of raw materials, cost control measures, and the Marketing
36
<PAGE>
Company handling the distribution of all of the Company's production of Pabst
Blue Ribbon beer throughout 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
For the year ended December 31, 1997, selling, general and
administrative expenses were RMB 36,193,085 (5.7% of net sales), consisting
of selling expenses of RMB 3,692,522 and general and administrative expenses
of RMB 32,500,563. For the year ended December 31, 1996, selling, general
and administrative expenses were RMB 38,937,354 (5.9% of net sales),
consisting of selling expenses of RMB 6,057,013 and general and
administrative expenses of RMB 32,880,341. Selling expenses consist of
warehousing, storage and freight costs.
During 1995, the Marketing Company was established to market
throughout China the Pabst Blue Ribbon beer produced by Zhaoqing Brewery and
Noble Brewery. The Marketing Company assumed the responsibility for
marketing the Pabst Blue Ribbon beer produced by Noble Brewery during July
1995, and incurred most of the 1995 and almost all of the 1996 and 1997
selling expenses.
Selling expenses decreased by RMB 2,364,491 or 39.0% in 1997 as
compared to 1996, and represented 0.6% of net sales in 1997 as compared to
0.9% of net sales in 1996, as a result of effective cost controls and the
establishment of the Marketing Company to be responsible for all the
advertising and promotional activities. General and administrative expenses
decreased by RMB 379,778 or 1.2% in 1997 as compared to 1996, and represented
5.1% of net sales in 1997 as compared to 5.0% of net sales in 1996. During
the year ended December 31, 1997, Noble Brewery credited allowance for
doubtful accounts of RMB 1,207,252, as compared to providing an allowance for
doubtful accounts of RMB 1,459,963 for the year ended December 31, 1996.
OPERATING INCOME:
For the year ended December 31, 1997, operating income was RMB
142,869,040 or 22.3% of net sales, as compared to operating income of RMB
106,212,648 or 16.2% of net sales for the year ended December 31, 1996.
INTEREST INCOME AND INTEREST EXPENSE:
For the year ended December 31, 1997, interest income was RMB
2,078,006, as compared to interest income of RMB 3,901,929 for the year ended
December 31, 1996, due mainly to the fact that the amount of the average
monthly bank balance was lower in 1997. Also, starting from the last quarter
of 1997, the Marketing Company commenced to assign and endorse short term
bills receivable to Noble Brewery and High Worth JV in order to facilitate
the two breweries to arrange their own financing, resulting in lower interest
income from bank deposits in 1997 for Noble Brewery.
For the year ended December 31, 1997, interest expense was RMB
1,458,454, as compared to interest expense of RMB 3,450,585 for the year
ended December 31, 1996, as a result of lower borrowings.
37
<PAGE>
INCOME TAXES:
For the year ended December 31, 1997, income tax expense was RMB
21,331,616, which consisted of RMB 18,131,616 for PRC income taxes and RMB
3,200,000 for deferred income taxes as a result of temporary timing
differences with respect to accelerated depreciation of property, plant and
equipment. For the year ended December 31, 1996, income tax expense was RMB
16,535,421, which consisted of RMB 13,053,421 for PRC income taxes and RMB
3,500,000 for deferred income taxes as a result of temporary timing
differences with respect to accelerated depreciation of property, plant and
equipment. The two-year income tax holiday for Noble Brewery expired on
December 31, 1995. Commencing in 1996, Noble Brewery is required to pay
local income tax at half the normal rate of 33% on its profit as determined
in accordance with PRC accounting standing standards applicable to Noble
Brewery.
NET INCOME:
For the year ended December 31, 1997, net income was RMB
122,156,976 or 19.1% of net sales, as compared to RMB 90,128,571 or 13.8% of
net sales for the year ended December 31, 1996.
Years Ended December 31, 1996 and 1995:
SALES:
During the year ended December 31, 1996, Noble Brewery sold 154,435
metric tons of beer, as compared to 161,200 metric tons of beer sold during
the year ended December 31, 1995. Total beer sold decreased by 6,765 metric
tons or 4.2% from 1995 to 1996 as a result of the regulation of sales by the
Marketing Company, which purchases beer from the two breweries in accordance
with their respective production capacities.
For the year ended December 31, 1996, net sales were RMB
655,316,991, consisting of 154,435 metric tons of beer sold to the Marketing
Company for resale. For the year ended December 31, 1995, net sales were RMB
681,724,168, consisting of 161,200 metric tons of beer sold, including RMB
327,805,406 of beer sold to the Marketing Company for resale.
GROSS PROFIT:
For the year ended December 31, 1996, gross profit was RMB
145,150,002 or 22.1% of net sales, as compared to gross profit of RMB
155,864,163 or 22.9% of net sales for the year ended December 31, 1995. The
decrease in the gross profit margin of 0.8% on an absolute basis or 3.4% in
1996 as compared to 1995 was a result of a change in the product mix, the
increase in cost of raw materials, and the Marketing Company handling the
distribution of all of the Company's production of Pabst Blue Ribbon beer
throughout 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
For the year ended December 31, 1996, selling, general and
administrative expenses were RMB 38,937,354 (5.9% of net sales), consisting
of
38
<PAGE>
selling expenses of RMB 6,057,013 and general and administrative expenses of
RMB 32,880,341. For the year ended December 31, 1995, selling, general and
administrative expenses were RMB 60,819,562 (8.9% of net sales), consisting
of selling expenses of RMB 31,794,779 and general and administrative expenses
of RMB 29,024,783. Selling expense consists of warehousing, storage and
freight costs, and, in 1995, also included advertising, promotion, marketing
and distribution costs prior to the Marketing Company commencing the
distribution of Noble Brewery's production in July 1995.
During 1995, the Marketing Company was established to market
throughout China the Pabst Blue Ribbon beer produced by Zhaoqing Brewery and
Noble Brewery. The Marketing Company assumed the responsibility for
marketing the Pabst Blue Ribbon beer produced by Noble Brewery during July
1995, and incurred most of the 1995 and almost all of the 1996 selling
expenses.
Selling expenses decreased by RMB 25,737,766 or 80.9% in 1996 as
compared to 1995, and represented to 0.9% of net sales in 1996 as compared to
4.7% of net sales in 1995, as a result of the establishment of the Marketing
Company in 1995. General and administrative expenses increased by RMB
3,855,558 or 13.3% in 1996 as compared to 1995, and represented 5.0% of net
sales in 1996 as compared to 4.2% of net sales in 1995. During the year
ended December 31, 1996, Noble Brewery recorded an allowance for doubtful
accounts of RMB 1,459,963, as compared to an allowance for doubtful accounts
of RMB 786,740 for the year ended December 31, 1995.
OPERATING INCOME:
For the year ended December 31, 1996, operating income was RMB
106,212,648 or 16.2% of net sales, as compared to operating income of RMB
95,044,601 or 13.9% of net sales for the year ended December 31, 1995.
INTEREST INCOME AND INTEREST EXPENSE:
For the year ended December 31, 1996, interest income was RMB
3,901,929, as compared to interest income of RMB 3,846,001 for the year ended
December 31, 1995.
For the year ended December 31, 1996, interest expense was RMB
3,450,585, as compared to interest expense of RMB 2,240,015 for the year
ended December 31, 1995, as a result of higher borrowings.
INCOME TAXES:
For the year ended December 31, 1996, income tax expense was RMB
16,535,421, which consisted of RMB 13,053,421 for PRC income taxes and RMB
3,500,000 for deferred income taxes as a result of temporary timing
differences with respect to accelerated depreciation of property, plant and
equipment. For the year ended December 31, 1995, income tax expense was RMB
2,200,000, which represented the deferred income taxes as a result of
temporary timing differences with respect to accelerated depreciation of
property, plant and equipment. During 1996 and 1995, Noble Brewery was
subject to a 50% and 100% tax exemption, respectively.
39
<PAGE>
NET INCOME:
For the year ended December 31, 1996, net income was RMB 90,128,571
or 13.8% of net sales, as compared to RMB 94,450,587 or 13.9% of net sales
for the year ended December 31, 1995.
CONSOLIDATED FINANCIAL CONDITION - DECEMBER 31, 1997:
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1997, the Company's operations
provided cash resources of RMB 65,015,789. The major components of the cash
provided from operations in 1997 were the decrease of RMB 43,063,703 in
accounts receivable, the dividends received from an associated company of RMB
34,413,511, and the increase of RMB 42,581,584 in amount due to an associated
company. The Company's cash balance increased by RMB 36,383,360 to RMB
76,092,954 at December 31, 1997, as compared to RMB 39,709,594 at December
31, 1996. The Company's net working capital deficit increased by RMB
19,170,850 to 102,725,259 at December 31, 1997, as compared to RMB 83,554,409
at December 31, 1996. As a result, the Company's current ratio decreased
slightly to 0.79:1 at December 31, 1997 as compared 0.82:1 at December 31,
1996.
Net of an allowance for doubtful accounts of RMB 5,314,858 for the
year ended December 31, 1997, accounts receivable decreased by RMB 43,063,703
or 22.5% to RMB 120,466,933 at December 31, 1997, as compared to RMB
168,845,494 at December 31, 1996, as a result of a change in credit policy by
the Marketing Company implemented in 1997. Commencing January 1, 1997, as a
result of more intensive competition from other premium 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 Marketing Company has implemented tighter credit control
aiming at reducing the total balance of accounts receivable. At December 31,
1997, bills receivable had decreased by RMB 3,098,259 or 8.0% to RMB
35,555,400, as compared to RMB 38,653,659 at December 31, 1996.
The amounts due from related companies mainly represented
receivable balances from Guangdong Blue Ribbon and its affiliated companies.
The amounts due from related companies decreased by RMB 3,422,318 or 10.3% to
RMB 29,667,015 at December 31, 1997, as compared to RMB 33,089,333 at
December 31, 1996. The decrease was primarily due to the increase in
payments by Guangdong Blue Ribbon and the increase in transaction volume with
other related companies under normal operating levels during the year. The
amounts due from Guangdong Blue Ribbon and its affiliates were short term in
nature and are expected to be paid in 1998.
The Company's accounts payable decreased by RMB 9,448,385 or 31.7% and
accrued liabilities increased by RMB 3,056,142 or 4.1% to an aggregate of RMB
97,815,003 at December 31, 1997 as compared to RMB 104,207,246 at December 31,
1996. The decrease in accounts payable was primarily due to the increase
40
<PAGE>
in payments to suppliers in 1997, and the increase in accrued expenses was a
result of the expansion of production and operating activities.
Customer deposits decreased by RMB 52,323,600 or 88.7% to RMB
6,680,000 at December 31, 1997, as compared to RMB 59,003,600 at December 31,
1996, as a result of the change in credit policy implemented by the Marketing
Company in 1997 in response to the changing market environment. Since the
Company pays interest on customer deposits, the decrease in customer deposits
outstanding during 1997 has also contributed to a decrease in interest
expense in 1997 as compared to 1996.
The amount due to an associated company increased by RMB 42,581,584
or 25.6% to RMB 209,083,335 at December 31, 1997 as compared to RMB
166,501,751 at December 31, 1996, and represents the amounts due to Noble
Brewery from its sale of Pabst Blue Ribbon beer to the Marketing Company.
The balance due to Noble Brewery increased as a result of the extended credit
terms provided by the Marketing Company to certain distributors, which in
turn caused a commensurate increase in the amount due to Noble Brewery,
reflecting the lengthened collection cycle.
The amounts due to related companies increased by RMB 15,433,346 or
72.3% to RMB 36,791,001 at December 31, 1997, as compared to RMB 21,357,655
at December 31, 1996, and consist primarily of payable balances resulting
from increases in purchases of packaging materials.
During the year ended December 31, 1997, the Company's secured bank
loans increased by RMB 3,000,000. The bank loans bear interest at rates
ranging from 11.1% to 12.1%, and are repayable within the next three years.
A substantial portion of the bank loans have been utilized to fund the
expansion and working capital requirements of Zhaoqing Brewery.
During 1997, Noble Brewery declared and paid a dividend relating to
earnings for the year ended December 31, 1996, resulting in a dividend to
Zhaoqing Brewery HC of RMB 34,413,511.
On November 25, 1997, the Board of Directors of High Worth JV
declared the first dividend distribution, in which Holdings was entitled, of
approximately RMB 83,000,000. The dividend will be distributed by
installments 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.
In connection with the acquisition of High Worth JV, Oriental Win
advanced US$8,869,585 to Holdings during 1994. The rights to collect
US$8,000,000 of the advance were transferred from Oriental Win to its
shareholders in proportion to their respective shareholdings interests in
August 1996 (West Coast Star Enterprises Ltd. - US$4,800,000; Mapesbury
Limited -US$1,600,000; Redcliffe Holdings Ltd. - US$1,600,000). The
advances bear no interest and are not repayable unless the Company obtains
additional long term debt or equity financing. Repayments of the advances
are at the discretion of the Company and the shareholders have no right to
demand repayment. The Company has the option of offsetting or repaying the
advance
41
<PAGE>
or part thereof by allotment of shares at par value in Holdings. As of
December 31, 1997, advances from such shareholders, West Coast Star
Enterprises Ltd., Mapesbury Limited, 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.
In February 1998, Mapesbury Limited advised the Company that the
right to collect its right to RMB 13,300,000 advance was assigned to Top Link
Development Limited. Mapesbury Limited also transferred its shares in the
Company to Top Link Development Limited.
During the year ended December 31, 1997, Guangdong Blue Ribbon and
its affiliated companies provided the Company with raw materials financing
aggregating RMB 19,500,000, which obligations are unsecured, interest free
and repayable on demand. In addition, during the year ended December 31,
1997, companies beneficially owned by Guangdong Blue Ribbon and directors of
the Company provided loans in the form of advances to the Company aggregating
RMB 17,300,000, which obligations are unsecured, bear interest at 12% per
annum and are repayable on demand.
For the year ended December 31, 1997, additions to property, plant
and equipment aggregated RMB 10,089,937. The Company anticipates that
additional capital expenditures in connection with the continuing expansion
and improvement of production facilities at Zhaoqing Brewery during the year
1998 will be approximately RMB 20,000,000, a portion of which is expected to
be funded by lease financing.
Guangdong Blue Ribbon had previously provided and committed to
provide Zhaoqing Brewery with a line of credit, or to otherwise arrange
financing, sufficient to finance the purchase of new machinery and equipment
in connection with the planned expansion of Zhaoqing Brewery to an annual
production capacity of 100,000 metric tons of beer. Because of the
previously described activities of Guangdong Blue Ribbon with respect to the
Sichuan Brewery, and since the expansion of Zhaoqing Brewery was completed
during early part of 1997, the Company does not anticipate that Guangdong
Blue Ribbon will provide or need to provide any additional funds or advances
to finance the continuing development of Zhaoqing Brewery in the near future.
The Company believes that it will be able to fund expected capital
expenditures with respect to the continuing development of its brewery
operations through internal cash flow and external resources.
The Company anticipates that its operating cash flow, combined with
cash on hand, bank lines of credit, and other external credit sources, and
the credit facilities provided by affiliates or related parties, are adequate
to satisfy the Company's working capital requirements for the fiscal year
ending December 31, 1998. In order to finance the continuing capital
requirements of the Company, the Company has begun negotiations to arrange
additional 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 borrowing or equity financing by
the Company.
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<PAGE>
INFLATION AND CURRENCY MATTERS:
In recent years, the Chinese economy has experienced periods of
rapid economic growth as well as relatively high rates of inflation, which in
turn has resulted in the periodic adoption by the Chinese government of
various corrective designed to regulate growth and contain inflation. Since
1993, the Chinese government has implemented an economic program designed to
control inflation, which has resulted in the tightening of working capital to
Chinese business enterprises. The success of the Company depends in
substantial part on the continued growth and development of the Chinese
economy.
Foreign operations are subject to certain risks inherent in
conducting business abroad, including price and currency exchange controls,
and fluctuations in the relative value of currencies. Changes in the
relative values of currencies occur periodically and may, in certain
instances, materially affect the Company's results of operations.
Zhaoqing Brewery and Noble Brewery conduct virtually all of their
business in China and, accordingly, the sale of their products are settled
primarily in RMB. As a result, devaluation of the RMB against the USD would
adversely affect their financial performance when measured in USD, and could
have material adverse effects upon the results of operations and financial
condition. In addition, a significant portion of revenues will need to be
converted into USD on a continuing basis to meet foreign currency
obligations. Although prior to 1994 the RMB experienced significant
devaluation against the USD, the RMB has remained fairly stable during 1995,
1996 and 1997. The exchange rate quoted by Bank of China was US$1.00 to RMB
8.32 at December 31, 1995, RMB 8.32 at December 31, 1996, and RMB 8.30 at
December 31, 1997.
ENVIRONMENTAL MATTERS:
Management believes that the Company complies with all national and
local environmental protection laws and regulations of the PRC. In 1997,
compliance with the provisions of all national and local environmental laws
and regulations did not have a material effect upon earnings, capital
expenditures or the competitive position of the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and exhibits are listed at ITEM 14.
"EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K".
Selected 1996 and 1997 Quarterly Financial Information, in RMB
(unaudited):
<TABLE>
<CAPTION>
1997 1996
----------- -----------
THREE MONTHS ENDED MARCH 31:
<S> <C> <C>
Sales, net of sales taxes 310,895,516 277,531,766
Gross profit 54,721,601 43,507,222
43
<PAGE>
Operating income 6,177,923 6,953,738
Net income 9,197,766 3,671,837
Net income per common share 1.14 .46
THREE MONTHS ENDED JUNE 30:
Sales, net of sales taxes 331,145,259 353,658,873
Gross profit 63,563,031 55,699,266
Operating income 14,270,056 10,476,677
Net income 9,706,636 5,000,557
Net income per common share 1.21 .63
THREE MONTHS ENDED SEPTEMBER 30:
Sales, net of sales taxes 284,987,371 300,905,499
Gross profit 42,119,668 44,986,152
Operating income 674,477 7,666,083
Net income 5,952,987 3,989,207
Net income per common share 0.74 .50
THREE MONTHS ENDED DECEMBER 31:
Sales, net of sales taxes 242,258,343 301,181,486
Gross profit 47,922,496 49,945,792
Operating income (loss) (9,907,596) 228,985
Net income 5,905,513 7,550,208
Net income per common share 0.75 .94
YEAR ENDED DECEMBER 31:
Sales, net of sales taxes 1,169,286,489 1,233,277,624
Gross profit 208,326,796 194,138,432
Operating income 11,214,860 25,325,483
Net income 30,762,902 20,211,809
Net income per common share 3.84 2.53
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective November 22, 1996, the Company dismissed Ernst & Young as
the Company's independent accountants, and engaged Deloitte Touche Tohmatsu
as the Company's new independent accountants. Prior to the engagement of
Deloitte Touche Tohmatsu, the Company did not consult with that firm
regarding the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company's financial statements. Deloitte Touche
Tohmatsu were the independent accountants for Noble Brewery.
The decision to change accountants was approved by the Company's
Board of Directors.
44
<PAGE>
None of the reports by Ernst & Young on such financial statements
contained an adverse opinion or a disclaimer of opinion, or were qualified or
modified as to uncertainty, audit scope or accounting principles.
During the ten months ended October 31, 1994, the two months ended
December 31, 1994, the year ended December 31, 1995 and the period from
January 1, 1996 through November 22, 1996, there were no disagreements with
Ernst & Young on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Ernst & Young would have caused Ernst &
Young to make reference to the subject matter of the disagreements in
connection with the firm's reports on the Company's financial statements.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following tables and text sets forth the names and ages of all
directors and executive officers of the Company as of March 31, 1998, and
their positions and offices with the Company. The Board of Directors of the
Company is comprised of only one class. All of the directors will serve
until the next annual meeting of shareholders and until their successors are
elected and qualified, or until their earlier death, retirement, resignation
or removal. Executive officers serve at the discretion of the Board of
Directors, and are appointed to serve until the first Board of Directors'
meeting following the annual meeting of shareholders. There are no family
relationships among directors and executive officers. Also provided is a
brief description of the business experience of each director and executive
officer during the past five years and an indication of directorships held by
each director in other companies subject to the reporting requirements under
the Federal securities laws.
In conjunction with the reorganization of the Company in 1994,
Oriental Win acquired a controlling interest in the Company, and received the
right to appoint a majority of the members of the Board of Directors for so
long as it held its shares. As a result of the distribution by Oriental Win
to its shareholders during August 1996 of all of the shares of Common Stock
of the Company that it owned, West Coast Star Enterprises Ltd. became the
controlling shareholder of the Company and acquired the right to appoint a
majority of the members of the Board of Directors for so long as it holds its
shares.
45
<PAGE>
DIRECTORS
<TABLE>
<CAPTION>
Date Elected
Name Age as Director
- ---- --- ------------
<S> <C> <C>
John Zhao Li 43 November 1994
Lee Tak Wong 41 September 1995
Jin-qiang Zhang 56 July 1997
Zi-shou Chen 57 July 1997
Deng-chen Yin 57 July 1997
Guang Wei Liang 35 March 1998
</TABLE>
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS
Date Elected
Name Age Position(s) as Officer
- ---- --- ----------- ------------
<S> <C> <C> <C>
Jin-qiang Zhang 56 Chairman August 1997
Zi-shou Chen 57 President August 1997
John Zhao Li 43 Vice President November 1994
Casey K.C. Chen 47 Vice President December 1996
Gary C.K. Lui 37 Chief Financial April 1996
Officer
</TABLE>
BIOGRAPHIES OF DIRECTORS AND EXECUTIVE OFFICERS
JIN-QIANG ZHANG
Mr. Zhang, Chairman and a director of the Company, has over 30
years experience in manufacturing. Since the early 1980's, Mr. Zhang has
held senior management positions in several manufacturing enterprises in
China which were engaged principally in the electronics industry. During the
last past five years, he has participated extensively in syndication
financing, property development and project investment in China. He is
currently also the Managing Director of Shenzhen Huaqiang Holdings Limited.
ZI-SHOU CHEN
Mr. Chen, President and a director of the Company, has over 30
years experience in the Chinese manufacturing sector. Since the early
1980's, Mr. Chen has held senior management positions in several
manufacturing enterprises in China which were mainly engaged in the
electronics industry.
46
<PAGE>
During the past five years, he has participated extensively in syndication
financing, property development and project investment in China. He is
currently a Director and Vice-General Manager of Shenzhen Huaqiang Holdings
Limited.
JOHN ZHAO LI
Mr. Li, Vice President and a director of the Company, held a senior
management position with an international investment company in the United
States from 1992 to 1994. During this period, he was actively involved in
consulting for Pabst Zhaoqing with respect to the project management for the
development of the first and second phases of Noble Brewery. Mr. Li was
President of the Company from 1994 until July 31, 1997.
GUANG WEI LIANG
Mr. Liang, a director of the Company, has over eight years
experience in the Chinese manufacturing sector. Mr. Liang received his
Master Degree in Law from Wuhan University in China. Since 1980, he has held
senior management positions in several Chinese manufacturing enterprises
which were mainly engaged in the electronic industry. During the past two
years, he has participated extensively in syndication financing, project
financing and project investment in China. He is currently a Director and
Vice-General Manager of Shenzhen Huaqiang Holdings Limited.
LEE TAK WONG
Mr. Wong, a Director of the Company, is a member of senior
management engaged in the investment planning and syndication business.
During the last five years, he has participated in brewery and soft drink
investment projects in China. He is currently a Director of Guang Yin
International (Holdings) Limited.
DENG-CHEN YIN
Mr. Yin, a director of the Company, has over 30 years experience in
manufacturing. Since the 1970's, Mr. Yin has held senior management
positions in several manufacturing enterprises in China which were engaged in
the plastics and electronics industry. During the past five years, he has
participated in many project investments in China. He is currently the
Secretary of Shenzhen Huaqiang Holdings Limited.
CASEY KAI CHENG CHEN
Mr. Chen, Vice President of the Company, received his Master's
Degree majoring in Corporate Accounting from the Research Institute of Fiscal
Science in Beijing, China, and a Master's Degree in Business Administration
majoring in Finance from the University of Rochester, New York. Mr. Chen has
been an auditor and financial consultant in both the United States and China.
He practiced as a CPA in China and was Vice President of China Consultants
of Accounting and Financial Management, Inc., a leading accounting firm in
China.
47
<PAGE>
GARY CHUN KIN LUI
Mr. Lui, Chief Financial Officer of the Company, graduated from the
University of Hong Kong with a degree of Bachelor of Social Sciences in 1987.
After graduation, he worked in the Hong Kong office of the Corporate Recovery
Division of Arthur Andersen & Co. for three years. In 1990, he joined a ship
building company listed in Hong Kong as the Group Assistant Financial
Controller and was the Financial Controller of the Group's major ship yard in
Singapore. From 1992 to 1994, Mr. Lui was the General Manager of a private
investment company with extensive joint venture projects in Northeastern
China. Prior to joining the Company in 1995, Mr. Lui was the Project
Controller of a Hong Kong listed investment company with major investments in
Eastern China.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE:
During the year ended December 31, 1997, the Company did not have
any class of equity securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended, and accordingly, was not subject
to the reporting requirements of Section 16 of the Securities Exchange Act of
1934, as amended.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company
during the last three fiscal years.
SUMMARY COMPENSATION TABLE (US$)
<TABLE>
<CAPTION>
Name and Other
Principal Annual
Position Year Salary Bonus Compensation
- -------- ---- -------- ------- ------------
<S> <C> <C> <C> <C>
John Zhao Li(1) 1997 $118,000 $40,600 $6,000
President/Vice 1996 $140,000 $27,644 $6,000
President 1995 $101,266 $ 6,010 $6,000
Lee Tak Wong(2) 1997 $ 56,000 $31,100 $6,000
Vice President 1996 $135,951 $27,644 $6,000
1995 -- $ 6,010 $2,000
</TABLE>
- ----------------------
(1) Mr. Li was President of the Company until July 31, 1997. Mr Li
continues an officer and director of the Company.
(2) Mr. Wong was a Vice President of the Company until July 31, 1997. Mr.
Wong continues as a director of the Company.
48
<PAGE>
COMPENSATION AGREEMENTS:
The Company has not entered into any long-term employment or
consulting agreements with its officers or directors.
BOARD OF DIRECTORS:
During the year ended December 31, 1997, nine meetings of the Board
of Directors were held. All directors receive compensation of US$500 per
month for serving on the Board of Directors, which aggregated $36,000 during
the year ended December 31, 1997. All directors are reimbursed for any
out-of-pocket expenses incurred in attending board meetings. The Company had
no audit, nominating, or compensation committees, or committees performing
similar functions, during the year ended December 31, 1997. On January 2,
1998, a Compensation Committee was set up with Zhang Jin-qiang and Wong Lee
Tak as the committee members.
STOCK OPTION PLAN:
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 on
January 2, 1998. The Plan is administered by the Compensation Committee and
contains the following major provisions:
(a) The Plan provides for the issuance of incentive stock options ("ISOs")
and nonqualified stock options ("NSOs") to purchase the stock of the
Company. The Plan is intended to provide a means whereby employees may
be given an opportunity to purchase shares of stock of the Company
pursuant to (i) options which may qualify as ISOs under Section 422 of
the Inland Revenue Code of 1986, as amended, or (ii) NSOs which may not
so qualify.
(b) Options may be granted under the Plan from time to time to eligible
persons to purchase an aggregate of up 800,000 shares of Class A Common
Stock, and no more than 80,000 options may be granted to any one
participant in any year.
(c) All ISOs will have option exercise prices per option share equal to the
fair market value of a share of Common stock on the date the option is
granted, except that in the case of ISOs granted to any person
possessing more than 10% of the total combined voting power of all
classes of stock of the Company or any affiliate, the price will be not
less than 110% of such fair market value. The option exercise prices
per option for NSO's shall be as determined by the Compensation
Committee.
49
<PAGE>
Details of the options granted on January 2, 1998 to the existing
directors, officers and employees of the Company are as follows:
<TABLE>
<CAPTION>
Annual Earliest
Options Exercise Vesting Exercise Expiration
Participant Granted Price Percentage Date Date
- ----------- ------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Zhang Jin-qiang 40,000 US$4.26 50%/25%/25% 4/1/98 12/31/01
Yin Deng Chen 30,000 US$4.26 50%/25%/25% 4/1/98 12/31/01
Chen Zi-shou 30,000 US$3.87 60%/20%/20% 4/1/98 12/31/05
Liang Guang Wei 30,000 US$3.87 60%/20%/20% 4/1/98 12/31/05
John Li Zhao 30,000 US$3.87 60%/20%/20% 4/1/98 12/31/05
Wong Lee Tak 30,000 US$3.87 60%/20%/20% 4/1/98 12/31/05
Chen Kai Cheng 21,000 US$3.87 70%/15%/15% 4/1/98 12/31/05
Wong Yong 21,000 US$3.87 70%/15%/15% 4/1/98 12/31/05
Gary Lui 21,000 US$3.87 70%/15%/15% 4/1/98 12/31/05
Clarence Yip 18,000 US$3.87 70%/15%/15% 4/1/98 12/31/05
Cilly Yeung 9,000 US$3.87 70%/15%/15% 4/1/98 12/31/05
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As used in this section, the term beneficial ownership with respect
to a security is defined by Rule 13d-3 under the Securities Exchange Act of
1934, as amended, as consisting of sole or shared voting power (including the
power to vote or direct the vote) and/or sole or shared investment power
(including the power to dispose of or direct the disposition of) with respect
to the security through any contract, arrangement, understanding,
relationship or otherwise, subject to community property laws where
applicable.
As of March 31, 1998, the Company had a total of 8,010,013 shares
of Common Stock issued and outstanding, consisting of 5,010,013 shares of
Class A Common Stock ($.0001 par value) and 3,000,000 shares of Class B
Common Stock ($.0001 par value). The Class A Common Stock and Class B Common
Stock are identical, except that the Class A Common Stock has one vote per
share and the Class B Common Stock has two votes per share. Each share of
Class B Common Stock is convertible into one share of Class A Common Stock at
the option of the holder. All common share amounts reflect the 1-for-22
reverse stock split effective November 22, 1994. There are no other classes
of equity securities outstanding.
The following table sets forth, as of March 31, 1998: (a) the
names and addresses of each beneficial owner of more than five percent (5%)
of the Company's Common Stock known to the Company, the number of shares of
Common Stock beneficially owned by each such person, and the percent of the
Company's Common Stock so owned; and (b) the number of shares of Common Stock
of the Company beneficially owned, and the percentage of the Company's Common
Stock so owned, by each director, and by all directors and officers of the
Company as a group. Each such person has sole voting and investment power
50
<PAGE>
with respect to the shares of Common Stock, except as otherwise indicated.
Beneficial ownership consists of a direct interest in the shares of Common
Stock, except as otherwise indicated.
<TABLE>
<CAPTION>
Percent of
Name and Address Amount and Nature of Resale Shares
of Beneficial Owner Beneficial Ownership of Common Stock
- ------------------- -------------------- ---------------
<S> <C> <C>
West Coast Star 4,176,000(1)(2) 52.1%
Enterprises Ltd.
c/o Room 2302, Chinachem
Hollywood Centre
No. 1 Hollywood Road
Central, Hong Kong
Top Link Development Limited 1,392,000(1)(3) 17.4%
c/o Room 2302, Chinachem
Hollywood Centre
No. 1 Hollywood Road
Central, Hong Kong
Redcliffe Holdings Ltd. 1,392,000(1)(4) 17.4%
25/F., Wyndham Place
40-44 Wyndham Street
Central, Hong Kong
Shenzhen Huaqiang 5,568,000(5) 69.5%
Holdings Limited
Shennan Zhong Road
Shenzhen City
The People's Republic of China
Jin-qiang Zhang 0(6) --
Zi-shou Chen 0(7) --
John Zhao Li 0(8) --
Lee Tak Wong 0(9) --
Deng-chen Yin 0(10) --
Long-sheng Zhu 0(11) --
All Directors and 0(12) --
Executive Officers
as a Group
(18 persons)
</TABLE>
- -------------------
(1) On October 14, 1996, Oriental Win distributed to its shareholders a
total of 6,960,000 shares of the Company's Common Stock, consisting of
51
<PAGE>
3,960,000 shares of Class A Common Stock and 3,000,000 shares of Class B
Common Stock, which represented Oriental Win's entire 87% interest in
the Company. The shareholders of Oriental Win received such shares in
proportion to their respective shareholder interests in Oriental Win
(West Coast Star Enterprises Ltd. - 60%; Mapesbury Limited - 20%;
Redcliffe Holdings Ltd. -20%). In conjunction with the distribution of
such shares by Oriental Win, the shareholders' agreement among Oriental
Win, West Coast Star Enterprises Ltd. ("West Coast"), Mapesbury Limited
and Redcliffe Holdings Ltd. was terminated. In February 1998, Mapesbury
Limited transferred its shares to Top Link Development Limited.("Top
Link")
(2) Consists of 2,376,000 shares of Class A Common Stock and 1,800,000
shares of Class B Common Stock.
(3) Consists of 792,000 shares of Class A Common Stock and 600,000 shares of
Class B Common Stock. Top Link is beneficially owned by Shenzhen
Huaqiang Holdings Limited ("SHHL"), which is a state-owned enterprise in
China.
(4) Consists of 792,000 shares of Class A Common Stock and 600,000 shares of
Class B Common Stock. Victor Choi, a former Director, is the beneficial
owner of Silvercliff Venture Inc., which owns 50% of the capital stock
of Redcliffe Holdings Ltd.
(5) Consists of 4,176,000 shares owned by West Coast Star Enterprises Ltd.
and 1,392,000 shares owned by Top Link Development Limited, each of
which is controlled by SHHL.
(6) Mr. Zhang owns 35% of the capital stock of West Coast on behalf of SHHL
and disclaims any beneficial ownership of such shares.
(7) Mr. Chen owns 15% of the capital stock of West Coast on behalf of SHHL
and disclaims any beneficial ownership of such shares.
(8) Mr. Li is a minority shareholder of West Coast, but disclaims any
beneficial ownership of such shares. Mr. Li owns 5% of the capital
stock of West Coast.
(9) Mr. Wong is a minority shareholder of West Coast, but disclaims any
beneficial ownership of such shares. Mr. Wong owns 5% of the capital
stock of West Coast.
(10) Mr. Yin owns 20% of the capital stock of West Coast on behalf of SHHL
and disclaims any beneficial ownership of such shares.
(11) Mr. Zhu, a former Director, owns 10% of the capital stock of West Coast
on behalf of SHHL and disclaims any beneficial ownership of such shares.
(12) See footnotes (6) through (11)
52
<PAGE>
CHANGES IN CONTROL:
The Company is unaware of any contract or other arrangement, the
operation of which may at a subsequent date result in a change in control of
the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SHAREHOLDER LOANS
In connection with the acquisition of High Worth JV, Oriental Win
advanced US$8,869,585 to Holdings during 1994. The right to collect
US$8,000,000 of the advance was transferred from Oriental Win to its
shareholders in proportion to their respective shareholdings interests in
August 1996 (West Coast Star Enterprises Ltd. - US$4,800,000; Mapesbury
Limited - US$1,600,000; Redcliffe Holdings Ltd. - US$1,600,000). The
advances bear no interest and are not repayable unless the Company obtains
additional long term debt or equity financing. Repayments of the advances
are at the discretion of the Company and the shareholders have no right to
demand repayment. The Company has the option of offsetting or repaying the
advance or part thereof by the issuance of shares at par value in Holdings.
As of December 31, 1997, advances from such shareholders, West Coast Star
Enterprises Ltd., Mapesbury Limited, 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.
In February 1998, Mapesbury Limited advised the Company that the right
to collect the RMB 13,300,000 advances from shareholders was assigned to Top
Link Development Limited. Mapesbury Limited also transferred its shares in the
Company to Top Link Development Limited.
NOBLE BREWERY
During the years ended December 31, 1996 and 1997, the Company
purchased for resale beer products from Noble Brewery aggregating RMB
695,150,225 and RMB 675,247,962, respectively. As of December 31, 1996 and
1997, RMB 166,501,751 and RMB 209,083,335, respectively, was due to Noble
Brewery for the purchase of beer products, and was unsecured, interest free
and repayable on demand.
GUANGDONG BLUE RIBBON
Until July 31, 1997, Liu Yun Zhong and Niu Zi Hang were directors
and executive officers of the Company. Messrs. Liu and Niu are the General
Manager and Deputy General Manager, respectively, of Guangdong Blue Ribbon.
Guangdong Blue Ribbon owns 40% of High Worth JV.
During the years ended December 31, 1996 and 1997, the Company
purchased packaging materials from Guangdong Blue Ribbon and its affiliated
companies aggregating RMB 44,778,187 and RMB 42,081,917, respectively.
53
<PAGE>
During the years ended December 31, 1996 and 1997, the Company sold
beer products to Guangdong Blue Ribbon aggregating RMB 6,169,170 and RMB
8,773,809, respectively.
During the years ended December 31, 1996 and 1997, the Company
purchased for resale mineral water and non-carbonated soft drinks from
Guangdong Blue Ribbon and its affiliated companies aggregating RMB 69,166,604
and nil, respectively.
During the year ended December 31, 1997, the Company also purchased
for resale beer products from Sichuan Brewery, an affiliate of Guangdong Blue
Ribbon, aggregating RMB 33,052,735.
During the years ended December 31, 1996 and 1997, the Company paid
RMB 7,945,874 and RMB 7,086,075, respectively, equivalent to US$11.70 per ton
of beer production, to Guangdong Blue Ribbon as a royalty fee for the right
to use the Pabst Blue Ribbon trademarks in the Guangdong Province of China.
During the years ended December 31, 1996 and 1997, the Company paid
Guangdong Blue Ribbon a management fee of RMB 3,780,000 and RMB 3,780,000,
respectively, pursuant to a three year agreement commenced on January 1, 1996.
As of December 31, 1996 and 1997, the amount due from related
companies aggregated RMB 33,089,333 and RMB 29,667,015, respectively, and
consisted of amounts due from Guangdong Blue Ribbon and its affiliated
companies for trade deposits received on behalf of the Company and expenses
paid on behalf of Guangdong Blue Ribbon and its affiliated companies.
Included in the net amounts due from related companies at December 31, 1996
and 1997 is RMB 27,500,000 and RMB 16,600,000, respectively, which bore
interest at 15% and 20% per annum during 1996 and 1997, respectively, and RMB
38,200,000 and RMB 42,900,000, respectively, which bore interest at 10% and
20% per annum during 1996 and 1997, respectively, due from Guangdong Blue
Ribbon. The remaining amounts due from Guangdong Blue Ribbon and its
affiliated companies are unsecured, interest-free and repayable on demand.
As of December 31, 1996 and 1997, the Company owed an aggregate of
RMB 21,400,000 and RMB 77,100,000, respectively, to related parties as
follows:
(a) RMB 11,400,000 and RMB 19,500,000, respectively, was due to
companies affiliated with Guangdong Blue Ribbon for the purchase of raw
materials, and was unsecured, interest free and repayable on demand;
(b) RMB 3,100,000 and RMB 3,600,000, respectively, was due to
Wealth Guide Development Limited, a company affiliated with Guangdong Blue
Ribbon, as an advance, and was unsecured, bears interest at 12% per annum,
and is repayable on demand.
For the year ended December 31, 1997, interest expense with respect
to the above obligations relating to Guangdong Blue Ribbon and its affiliated
companies was RMB 3,859,087 and to the other related parties was
54
<PAGE>
RMB 1,717,133. For the year ended December 31, 1997, interest income from
Guangdong Blue Ribbon was RMB 5,535,977.
For the year ended December 31, 1996, interest expense with respect
to the above obligations relating to Guangdong Blue Ribbon and its affiliated
companies was RMB 9,282,985 and to the other related parties was RMB 948,543.
As of December 31, 1997, RMB 40,300,000 was due to Guangdong Blue
Ribbon, representing a dividend payable by High Worth JV.
OTHER TRANSACTIONS
As of December 31, 1996 and 1997, RMB 5,700,000 and RMB 7,100,000,
respectively, was due to Evermoni Trading Limited, a company beneficially
owned by Wong Lee Tak, a director of the Company, as an advance, and was
unsecured, bears interest at 12% per annum, and is repayable on demand.
As of December 31, 1996 and 1997, RMB 1,200,000 and RMB 1,400,000,
respectively, was due to Trade Link Investment Limited, a company
beneficially owned by Victor Choi, a former director of the Company, as an
advance, and was unsecured, bears interest at 12% per annum, and is repayable
on demand.
As of December 31, 1996 and 1997, RMB nil and RMB 2,300,000,
respectively, was due to Champers Investment Limited, a company beneficially
owned by Wong Lee Tak, a director of the Company, as an advance, and was
unsecured, non-interest bearing, and is repayable on demand.
As of December 31, 1996 and 1997, RMB Nil and RMB 2,900,000,
respectively, was due to Bilibest Industries Limited, a company controlled by
the Company's shareholders, as an advance, and was unsecured, bears interest
at 12% per annum, and is repayable on demand.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following financial statements and exhibits are filed with and
as a part of this document.
(1) Financial Statements Page No. (s)
------------
CBR BREWING COMPANY, INC. 63
Report of Independent Auditors 65
Deloitte Touche Tohmatsu
Ernst & Young
Consolidated Balance Sheets 67
- As of December 31, 1996 and 1997
Consolidated Statements of Income 70
- Years ended December 31, 1995, 1996 and 1997
55
<PAGE>
Consolidated Statements of Shareholders' Equity 72
- Years ended December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows 73
- Years ended December 31, 1995, 1996 and 1997
Notes to Consolidated Financial Statements 75
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD. 111
Report of Independent Auditors 113
Deloitte Touche Tohmatsu
Ernst & Young
Balance Sheets 115
- As of December 31, 1996 and 1997
Statements of Income 117
- Years ended December 31, 1995, 1996 and 1997
Statements of Equity 118
- From January 1, 1995 through December 31, 1997
Statements of Cash Flows 119
- Years ended December 31, 1995, 1996 and 1997
Notes to Financial Statements 120
(2) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Document
- ----------- -----------------------
<S> <C>
2.1 (P) Share Exchange Agreement, dated November 1994, with Amendment
among the Company, Oriental Win and Holdings(1).
3(I).1 (P) Articles of Incorporation and Amendments(2).
3(I).2 (P) Certificate of Amendment of Articles of Incorporation(3).
3(ii) (P) Bylaws(2).
10.1 (P) Joint Venture Agreement dated June 10, 1993 between Zhaoqing
Brewery and Goldjinsheng regarding Noble Brewery with amendments,
with English translation(3).
10.2 (P) Joint Venture Agreement dated May 6, 1994 between Guangdong Blue
Ribbon and Holdings, as supplemented by Supplementary Joint
Venture Agreement dated September 5, 1994 among Holdings,
Guangdong Blue Ribbon and Star Quality Ltd. regarding Zhaoqing
High Worth, with English translation(3).
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Document
- ----------- -----------------------
<S> <C>
10.3 (P) Assets Transferring Agreement dated September 6, 1994 among
Guangdong Blue Ribbon, Zhaoqing Brewery and High Worth JV
regarding High Worth JV, with English translation(3).
10.4 (P) Agreement on License of Transferring and Using the registered
trademarks of Pabst Blue Ribbon dated August 30, 1993, between
Pabst Zhaoqing and Pabst US, with English translation(3).
10.5 (P) Agreement on Quality of Pabst Beer dated August 30, 1993 between
Pabst Zhaoqing and Pabst US, with English translation(3).
10.6 (P) Power of Attorney between Pabst US and Pabst Zhaoqing, dated
August 30, 1993(3).
10.7 (P) Sublicense Agreement on Using the Registered Trademarks of Pabst
Blue Ribbon dated October 12, 1993 between Pabst Zhaoqing and
Noble Brewery, with English translation(3).
10.8 (P) Sublicense on Using the Registered Trademarks of Pabst Blue
Ribbon dated May 6, 1994 between Pabst Zhaoqing and High Worth
JV, with English translation(3).
10.9 (P) Transferring Agreement dated May 20, 1994 among Pabst
Zhaoqing, Pabst US and Guangdong Blue Ribbon, with English
translation(3).
10.10 (P) Deed dated December 5, 1994 between Oriental Win and Holdings
regarding the Shareholder Loan, with supplementary
documentation(3).
10.11 Long Term Purchase Agreement dated April 1, 1995 between the
Marketing Company and Zhaoqing Brewery (English
Translation).(4)
10.12 Long Term Purchase Agreement dated July 11, 1995 between the
Marketing Company and Noble Brewery (English Translation).(4)
10.13 1998 Stock Option Plan.
10.14 Joint Venture Agreement dated January 13, 1998 between High
Worth JV and Zao Yang Brewery regarding Zao Yang High Worth
Brewery (English Translation).
21 Subsidiaries of the Company.
27 Financial Data Schedule (electronic filing only)
</TABLE>
(1) Filed as an Exhibit to the Company's Current Report on Form 8-K filed on
December 30, 1994 and incorporated herein by reference.
57
<PAGE>
(2) Filed as Exhibits to the Company's Registration Statement No. 33-26617A
on Form S-18 filed January 19, 1989 and incorporated herein by reference.
(3) Filed as Exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, and incorporated herein by
reference.
(4) Filed as Exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, and incorporated herein by
reference.
(P) Indicates that document was originally filed with the Securities and
Exchange Commission in paper form and that there have been no changes or
amendments to the document which would require filing of the document
electronically with this Form 10-K.
(b) No Reports on Form 8-K were filed during or related to the three months
ended December 31, 1997.
58
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CBR BREWING COMPANY, INC.
------------------------------------
(Registrant)
Date: April 10, 1998 By: /s/ Zi-shou Chen
---------------------------------
Zi-shou Chen
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: April 10, 1998 By: /s/ Zi-shou Chen
---------------------------------
Zi-shou Chen
President and Director
Date: April 10, 1998 By: /s/ John Zhao Li
---------------------------------
John Zhao Li
Vice President and Director
Date: April 10, 1998 By: /s/ Gary C. K. Lui
---------------------------------
Gary C. K. Lui
Chief Financial Officer
Date: April 10, 1998 By: /s/ Lee-tak Wong
---------------------------------
Lee-tak Wong
Director
Date: April 10, 1998 By: /s/ Jin-qiang Zhang
---------------------------------
Jin-qiang Zhang
Director
Date: April 10, 1998 By: /s/ Guang-wei Liang
---------------------------------
Guang-wei Liang
Director
Date: April 10, 1998 By: /s/ Deng-chen Yin
---------------------------------
Deng-chen Yin
Director
59
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description Sequential
Number of Document Page Numbers
- ------ ----------- ------------
<S> <C> <C>
10.13 1998 Stock Option Plan. 135
10.14 Joint Venture Agreement dated 145
January 13, 1998 between High Worth JV
and Zao Yang Brewery regarding Zao Yang
High Worth Brewery (English Translation).
21 Subsidiaries of the Company. 167
27 Financial Data Schedule 168
(electronic filing only)
</TABLE>
<PAGE>
CBR BREWING COMPANY, INC.
Reports and Financial Statements
For the year ended December 31, 1997
<PAGE>
CBR BREWING COMPANY, INC.
REPORTS AND FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
CONTENTS PAGE(S)
- -------- -------
<S> <C>
REPORT OF INDEPENDENT AUDITORS .................................. F - 1
REPORT OF PREDECESSOR AUDITORS .................................. F - 2
CONSOLIDATED BALANCE SHEETS ..................................... F - 3
CONSOLIDATED STATEMENTS OF INCOME ............................... F - 5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ................. F - 7
CONSOLIDATED STATEMENTS OF CASH FLOWS ........................... F - 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...................... F - 10
</TABLE>
2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
CBR BREWING COMPANY, INC.
We have audited the accompanying consolidated balance sheets of CBR
Brewing Company, Inc. and its subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholders'
equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly,
in all material respects, the financial position of CBR Brewing
Company, Inc. and its subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted
in the United States of America.
We draw your attention to notes 14 and 21 to the consolidated financial
statements which state that the Company is exposed to foreign currency
exchange risk and other risks through its operations in the People's
Republic of China.
/s/ Deloitte Touche Tohmatsu
Hong Kong
March 31, 1998
F - 1
<PAGE>
REPORT OF PREDECESSOR AUDITORS
To the shareholders of
CBR Brewing Company, Inc.
We have audited the accompanying consolidated balance sheet of CBR
Brewing Company, Inc. and its subsidiaries as of December 31, 1995, the
related consolidated statement of income, changes in shareholders'
equity and cash flows for the year then ended. These financial
statements are the responsibility of CBR Brewing Company, Inc.'s
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of CBR Brewing Company, Inc. and its subsidiaries as of
December 31, 1995 and the consolidated result of their operations and
their cash flows for the year then ended in conformity with generally
accepted accounting principles in the United States of America.
/s/ Ernst & Young
Hong Kong
March 28, 1996
F - 2
<PAGE>
CBR BREWING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------
1996 1997 1997
---- ---- ----
RMB RMB US$
(Note 3)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................... 39,709,594 76,092,954 9,167,826
Accounts receivable, net of allowance for doubtful
accounts of RMB14,921,542 and RMB20,232,169
for 1996 and 1997, respectively (note 4).................. 168,845,494 120,466,933 14,514,088
Bills receivable (note 5)................................... 38,653,659 35,555,400 4,283,783
Inventories (note 6)........................................ 87,549,836 89,583,442 10,793,186
Amounts due from related companies (note 18)................ 33,089,333 29,667,015 3,574,339
Prepayments, deposits and other receivables................. 17,779,904 24,017,911 2,893,724
----------- ----------- -----------
Total current assets........................................ 385,627,820 375,383,655 45,226,946
Interest in an associated company (note 7).................... 216,984,220 234,997,255 28,312,922
Property, plant and equipment, net of accumulated
depreciation and amortization of RMB26,410,498
and RMB47,874,221 for 1996 and 1997,
respectively (note 8)....................................... 223,890,108 210,015,830 25,303,112
Other non-current assets...................................... - 14,697,800 1,770,819
----------- ----------- -----------
Total assets.................................................. 826,502,148 835,094,540 100,613,799
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings (note 9).................................... 40,500,000 35,500,000 4,277,108
Capital lease obligations (note 10)......................... 9,034,742 7,349,698 885,506
Accounts payable............................................ 29,791,878 20,343,493 2,451,023
Accrued liabilities......................................... 74,415,368 77,471,510 9,333,917
Customer deposits........................................... 59,003,600 6,680,000 804,819
Amounts due to related companies (note 18).................. 21,357,655 77,166,596 9,297,181
Amount due to an associated company (note 7)................ 166,501,751 209,083,335 25,190,763
Income taxes payable (note 11).............................. 260,000 260,000 31,325
Sales taxes payable (note 12)............................... 63,904,235 39,841,282 4,800,154
Deferred tax liabilities (note 11).......................... 4,413,000 4,413,000 531,687
----------- ----------- -----------
Total current liabilities..................................... 469,182,229 478,108,914 57,603,483
----------- ----------- -----------
Long-term liabilities:
Bank borrowings (note 9).................................... - 8,000,000 963,855
Capital lease obligations (note 10)......................... 15,862,549 8,512,851 1,025,645
----------- ----------- -----------
Total long-term liabilities................................... 15,862,549 16,512,851 1,989,500
----------- ----------- -----------
Minority interests............................................ 120,073,940 88,503,839 10,663,113
----------- ----------- -----------
Commitments and contingencies (notes 14, 21 and 23)
Shareholders' advances and shareholders' equity:
Advances from shareholders (note 13)........................ 73,794,948 73,617,552 8,869,585
----------- ----------- -----------
Common stock
- Class A, US$0.0001 par value, 90,000,000 shares
authorized, 5,000,013 shares outstanding................ 4,265 4,265 514
- Class B, US$0.0001 par value, 10,000,000 shares
authorized, 3,000,000 shares outstanding................ 2,559 2,559 308
Additional paid-in capital.................................. 104,030,194 104,030,194 12,533,758
General reserve and enterprise development funds............ 4,823,561 8,341,785 1,005,034
Retained earnings........................................... 38,727,903 65,972,581 7,948,504
----------- ----------- -----------
Total shareholders' equity.................................... 147,588,482 178,351,384 21,488,118
----------- ---------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
CBR BREWING COMPANY, INC.
<S> <C> <C> <C>
Total shareholders' advances and shareholders'
equity...................................................... 221,383,430 251,968,936 30,357,703
----------- ----------- -----------
Total liabilities, shareholders' advances and
shareholders' equity...................................... 826,502,148 835,094,540 100,613,799
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to the consolidated financial statements
F - 3
<PAGE>
CBR BREWING COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1995 1996 1997 1997
---- ---- ---- ----
RMB RMB RMB US$
(Note 3)
<S> <C> <C> <C> <C>
Sales, including sales to related companies of
RMB6,169,170 and RMB8,773,809 in 1996 and 1997,
respectively (note 18a)............................ 580,260,386 1,255,940,985 1,188,963,804 143,248,651
Sales taxes (note 12)................................ 13,473,447 22,663,361 19,677,315 2,370,761
----------- ------------- ------------- -----------
Net sales............................................ 566,786,939 1,233,277,624 1,169,286,489 140,877,890
Cost of sales, including inventory purchased
from related companies of RMB417,171,460,
RMB809,095,016 and RMB750,382,614 in
1995, 1996 and 1997, respectively; and
royalty fee paid to a related company
of RMB3,454,067 , RMB7,945,874 and
RMB7,086,075 in 1995, 1996 and 1997,
respectively
(note 18b to e).................................... 495,653,406 1,039,139,192 960,959,693 115,778,276
----------- ------------- ------------- -----------
Gross profit......................................... 71,133,533 194,138,432 208,326,796 25,099,614
Selling, general and administrative expenses,
including management fee paid to a related
company of RMB3,780,000 in 1996 and 1997
(note 18f)......................................... 64,675,128 168,812,949 197,111,936 23,748,426
----------- ------------- ------------- -----------
Operating income..................................... 6,458,405 25,325,483 11,214,860 1,351,188
----------- ------------- ------------- -----------
Other income:
Interest income, including interest income from
a related company of RMB3,981,278 and
RMB5,535,977 in 1996 and 1997, respectively
(note 18g)....................................... - 6,119,470 6,255,590 753,686
Foreign exchange gains............................. 1,614,652 119,907 177,396 21,373
Others............................................. - 695,244 1,239,362 149,321
----------- ------------- ------------- -----------
Total other income................................. 1,614,652 6,934,621 7,672,348 924,380
----------- ------------- ------------- -----------
Other expenses:
Interest expense, including interest paid to related
companies of RMB3,419,571, RMB10,231,528 and
RMB5,576,220 in 1995, 1996 and 1997, respectively
(note 18h)...................................... 3,236,058 20,767,252 15,503,189 1,867,854
Loss on disposal of property, plant and
equipment........................................ 1,001,788 - 743,788 89,613
Others............................................. - - 498,381 60,046
----------- ------------- ------------- -----------
Total other expenses............................... 4,237,846 20,767,252 16,745,358 2,017,513
----------- ------------- ------------- -----------
Income before income taxes........................... 3,835,211 11,492,852 2,141,850 258,055
Income taxes (note 11)............................... 1,000,000 4,721,444 - -
----------- ------------- ------------- -----------
Income before equity in earnings of an associated
company............................................ 2,835,211 6,771,408 2,141,850 258,055
Equity in earnings of an associated company.......... 34,213,058 34,039,622 52,426,546 6,316,451
----------- ------------- ------------- -----------
</TABLE>
F - 4
<PAGE>
CBR BREWING COMPANY, INC.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Income before minority interests..................... 37,048,269 40,811,030 54,568,396 6,574,506
Minority interests................................... 17,422,301 20,599,221 23,805,494 2,868,132
----------- ------------- ------------- -----------
Net income for the year.............................. 19,625,968 20,211,809 30,762,902 3,706,374
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
Net income per share................................. 2.45 2.53 3.84 0.46
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
Average number of shares outstanding................. 8,000,013 8,000,013 8,000,013 8,000,013
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
</TABLE>
See accompanying notes to the consolidated financial statements
F - 5
<PAGE>
CBR BREWING COMPANY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------
SHARES AMOUNT
OUTSTANDING PAR VALUE OF US$0.0001 EACH ADDITIONAL
------------------- --------------------------- PAID-IN RESERVE RETAINED
CLASS A CLASS B CLASS A CLASS B CAPITAL FUNDS EARNINGS
------- ------- ------- ------- ------- ----- --------
RMB RMB RMB RMB RMB
(Note 15) (Note 15)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995............ 5,000,013 3,000,000 4,265 2,559 104,030,194 219,062 3,494,625
Net income............................ - - - - - - 19,625,968
Appropriation......................... - - - - - 1,940,551 (1,940,551)
--------- --------- ------ ------ ------------ ---------- -----------
Balance at December 31, 1995.......... 5,000,013 3,000,000 4,265 2,559 104,030,194 2,159,613 21,180,042
Net income............................ - - - - - - 20,211,809
Appropriation......................... - - - - - 2,663,948 (2,663,948)
--------- --------- ------ ------ ------------ ---------- -----------
Balance at December 31, 1996.......... 5,000,013 3,000,000 4,265 2,559 104,030,194 4,823,561 38,727,903
Net income............................ - - - - - - 30,762,902
Appropriation......................... - - - - - 3,518,224 (3,518,224)
--------- --------- ------ ------ ------------ ---------- -----------
Balance at December 31, 1997.......... 5,000,013 3,000,000 4,265 2,559 104,030,194 8,341,785 65,972,581
--------- --------- ------ ------ ------------ ---------- -----------
--------- --------- ------ ------ ------------ ---------- -----------
Converted to US$
Balance at December 31, 1997 (note 3). 5,000,013 3,000,000 US$514 US$308 US$12,533,758 US$1,005,034 US$7,948,504
--------- --------- ------ ------ ------------- ------------ ------------
--------- --------- ------ ------ ------------ ---------- -----------
</TABLE>
Holders of Class A common stock are entitled to one vote per share. Holders of
Class B common stock are entitled to two votes per share. Each share of Class B
common stock is convertible into one share of Class A common stock at the option
of the holders.
On March 31, 1995, the Company changed the authorized share capital of Class A
common stock from 95,000,000 shares to 90,000,000 shares and Class B common
stock from 5,000,000 shares to 10,000,000 shares.
See accompanying notes to the consolidated financial statements
F - 6
<PAGE>
CBR BREWING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1995 1996 1997 1997
---- ---- ---- ----
RMB RMB RMB US$
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... 19,625,968 20,211,809 30,762,902 3,706,374
Adjustments to reconcile net income to net cash
provided by operating activities:
Allowance for doubtful accounts.................. 5,600,000 9,914,114 5,314,858 640,344
Depreciation and amortization.................... 9,459,519 18,703,203 21,463,723 2,585,991
Foreign exchange gains........................... (1,737,759) (119,907) (177,396) (21,373)
Loss on disposal of property, plant and equipment. 1,001,788 - 743,788 89,613
Minority interests............................... 17,422,301 20,599,221 23,805,494 2,868,132
Equity in earnings of an associated company...... (34,213,058) (34,039,622) (52,426,546) (6,316,451)
Dividend received from an associated company..... 28,644,569 39,797,878 34,413,511 4,146,206
Deferred income taxes............................ 1,000,000 4,461,444 - -
Income taxes payable............................. - 260,000 - -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable......... (163,350,396) (20,081,964) 43,063,703 5,188,398
(Increase) decrease in bills receivable............ - (38,653,659) 3,098,259 373,284
Increase in inventories............................ (40,728,195) (30,711,035) (2,033,606) (245,012)
(Increase) decrease in amounts due from related
companies........................................ (46,411,779) 13,322,446 3,422,318 412,327
Increase in prepayments, deposits and other
receivables...................................... (5,297,981) (10,356,743) (6,238,007) (751,567)
Increase (decrease) in customer deposits........... 119,863,548 (64,814,026) (52,323,600) (6,304,048)
Increase (decrease) in accounts payable and accrued
liabilities...................................... 27,746,442 47,928,065 (6,392,243) (770,149)
Increase in amount due to an associated company.... 154,185,606 12,316,145 42,581,584 5,130,311
Increase(decrease) in sales taxes payable.......... 14,414,744 30,670,338 (24,062,953) (2,899,151)
------------ ----------- ----------- ----------
Net cash provided by operating activities............ 107,225,317 19,407,707 65,015,789 7,833,227
------------ ----------- ----------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment......... (89,365,441) (46,786,402) (10,089,937) (1,215,655)
Proceeds from disposal of property, plant and
equipment........................................ 413,679 1,501,355 1,756,704 211,651
Expenditure on non-current assets.................. - - (14,697,800) (1,770,819)
------------ ----------- ----------- ----------
Net cash used in investing activities.............. (88,951,762) (45,285,047) (23,031,033) (2,774,823)
------------ ----------- ----------- ----------
Cash flows from financing activities:
New bank borrowings................................ 22,574,400 48,500,000 28,500,000 3,433,735
New loans for leased assets........................ 21,250,000 - - -
Contribution by minority interests................. - 3,000,000 - -
Increase in amounts due to related companies....... 13,199,030 2,727,970 15,433,346 1,859,439
Repayment of bank borrowings....................... (16,595,000) (40,574,400) (25,500,000) (3,072,289)
Repayment of other borrowings...................... (5,000,000) - - -
Payment of capital lease obligations............... (3,651,607) (5,514,941) (9,034,742) (1,088,523)
Payment of cash dividend to minority interests..... - - (15,000,000) (1,807,229)
------------ ----------- ------------ ---------
Net cash provided by (used in) financing activities. 31,776,823 8,138,629 (5,601,396) (674,867)
------------ ----------- ------------ ----------
</TABLE>
F - 7
<PAGE>
CBR BREWING COMPANY, INC.
<TABLE>
<S> <C> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents. 50,050,378 (17,738,711) 36,383,360 4,383,537
Cash and cash equivalents at beginning of the year... 7,397,927 57,448,305 39,709,594 4,784,289
---------- ----------- ------------ -----------
Cash and cash equivalents at end of the year......... 57,448,305 39,709,594 76,092,954 9,167,826
---------- ----------- ------------ -----------
---------- ----------- ------------ -----------
</TABLE>
See accompanying notes to the consolidated financial statements
F - 8
<PAGE>
CBR BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
CBR Brewing Company, Inc. (the "Company"), formerly Natural Fuels,
Inc. and National Sweepstakes, Inc., was originally incorporated as
Video Promotions, Inc. on April 20, 1988 under the laws of the State
of Florida. The Company and its subsidiaries are collectively referred
to as the "Group".
The Company is a holding company and its principal subsidiaries are
engaged in the production and sale of beer products in the People's
Republic of China ("PRC").
On December 16, 1994, the Company issued 3,960,000 shares of Class A
common stock and 3,000,000 shares of Class B common stock to Oriental
Win Holdings Ltd. ("Oriental Win") and 240,000 shares of Class A common
stock to Goldchamp Limited ("Goldchamp"), both of these companies and
their shareholders were unrelated to the Company prior to becoming
shareholders, in consideration for the entire issued share capital of
High Worth Holdings Limited ("High Worth Holdings"). Upon completion of
the share exchange on December 16, 1994, High Worth Holdings became a
wholly-owned subsidiary of the Company.
This transaction has been treated as a recapitalization of High Worth
Holdings with High Worth Holdings as the acquirer (reverse
acquisition). The historical financial statements prior to December 16,
1994 are those of High Worth Holdings.
High Worth Holdings is a holding company formed solely to effect the
acquisition of a 60% interest in Zhaoqing Blue Ribbon High Worth
Brewery Ltd. ("High Worth Brewery"). High Worth Brewery is a
Sino-foreign equity joint venture enterprise registered in the PRC on
July 2, 1994 in which Star Quality Limited ("Star Quality"), Guangdong
Blue Ribbon Group Co., Ltd. ("Blue Ribbon Group"), a joint stock
limited company incorporated in the PRC and High Worth Holdings held
38%, 2% and 60% interests, respectively. Star Quality and Blue Ribbon
Group are not connected with the Group. During the year ended December
31, 1995, Star Quality transferred its 38% interest to Blue Ribbon
Group. Accordingly, Blue Ribbon Group and High Worth Holdings hold 40%
and 60% interests, respectively. Apart from the investment in High
Worth Brewery which was partly financed by a long-term, interest free
advance from Oriental Win (see note 13), High Worth Holdings has no
other significant assets and liabilities. The following is a summary of
the acquisition undertaken by High Worth Holdings, through its
subsidiary, High Worth Brewery, during the period ended December 31,
1994.
On October 31, 1994, High Worth Brewery acquired a 100% interest in
Zhaoqing Brewery, including Zhaoqing Brewery's 40% interest in Zhaoqing
Blue Ribbon Brewery Noble Ltd. ("Blue Ribbon Noble"). The consideration
for the acquisition of an effective 60% interest in Zhaoqing Brewery by
High Worth Holdings through High Worth Brewery was approximately US$20
million. Prior to the acquisition of the entire interest in Zhaoqing
Brewery by High Worth Brewery, Zhaoqing Brewery was the wholly-owned
subsidiary of Blue Ribbon Group. Blue Ribbon Noble is a Sino-foreign
equity joint venture enterprise registered in the PRC on October 8,
1993 in which Goldjinsheng Holding Limited ("Goldjinsheng"), an
unrelated party, and Zhaoqing
F - 10
<PAGE>
CBR BREWING COMPANY, INC.
Brewery hold 60% and 40% interests, respectively. Zhaoqing Brewery and
Blue Ribbon Noble are both engaged in the production and sale of beer
products in the PRC.
F - 11
<PAGE>
CBR BREWING COMPANY, INC.
1. ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
In April 1995, Zhaoqing Brewery ceased the production of Zhaoqing beer
and started to produce Blue Ribbon beer. Pursuant to the terms of the
sublicense agreement, Zhaoqing Brewery was granted by Blue Ribbon Group
the right for the production and distribution of Blue Ribbon beer under
Pabst trademarks in the PRC at a royalty fee of US$11.70 for each ton
produced.
Blue Ribbon Noble's principal line of product is Blue Ribbon beer under
Pabst trademarks which were granted by Blue Ribbon Group. Pursuant to
the terms of the sublicense agreement, Blue Ribbon Noble was granted by
Blue Ribbon Group the right in the PRC to use the two specific Pabst
trademarks for the production, promotion, distribution and sale of beer
under such trademarks. The production right of Blue Ribbon Noble
however is confined exclusively to the Guangdong Province only and it
does not preclude High Worth Brewery's production right in Guangdong as
described in notes 23(a) and 23(b). The sublicense agreement is valid
until November 7, 2003. In consideration for the sublicense granted,
Blue Ribbon Noble is committed to pay Blue Ribbon Group a royalty fee
of US$0.10 for each carton of bottled or canned beer produced.
On February 19, 1995, Zhaoqing Blue Ribbon Beer Marketing Company
Limited ("Blue Ribbon Marketing") was registered as a limited company
in the PRC and owned as to 70% by Zhaoqing Brewery and 30% by Blue
Ribbon Group. Blue Ribbon Marketing was appointed as the sole
distributor to conduct the distribution, marketing and promotion of all
Pabst Blue Ribbon beer products produced by Zhaoqing Brewery and Blue
Ribbon Noble. Blue Ribbon Marketing started to purchase beer products
from Zhaoqing Brewery and Blue Ribbon Noble in April 1995 and July
1995, respectively. Its principal trading product is Blue Ribbon beer
which constitutes approximately 99% of the Group's sales. Prior to
October 1996, Blue Ribbon Marketing was also engaged in the trading of
mineral water and non-carbonated soft drinks purchased from Blue Ribbon
Group and its group of companies.
On April 5, 1995, CBR Finance (BVI) Ltd. ("Finance Company"), which is
wholly owned by the Company, was incorporated in the British Virgin
Islands ("BVI"). The Finance Company has remained dormant since
incorporation.
In January 1996, Zhaoqing Brewery transferred all of its operating
assets and liabilities to High Worth Brewery pursuant to the original
Joint Venture Agreement, the Asset Transfer Agreement signed in May
1994, and the relevant government regulations. Subject to the
completion of certain legal procedures and documentation, investments
in Blue Ribbon Noble and the Blue Ribbon Marketing will be transferred
to High Worth Brewery. Zhaoqing Brewery is currently acting as the
nominee for High Worth Brewery with respect to the investments in the
Blue Ribbon Noble and the Blue Ribbon Marketing.
Upon the completion of the required procedures and documentation, all
of the assets and liabilities formerly controlled by Zhaoqing Brewery
will then be transferred to High Worth Brewery. During 1996 and 1997,
the operating activities of Zhaoqing Brewery were part of High Worth
F - 12
<PAGE>
CBR BREWING COMPANY, INC.
Brewery. The consensus and approval from the local tax authority
with respect to this transfer were obtained in 1996.
F - 13
<PAGE>
CBR BREWING COMPANY, INC.
2. BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of
America ("US GAAP"). This basis of accounting differs from that used in
the preparation of the statutory financial statements of each relevant
PRC subsidiary which are prepared in accordance with the accounting
principles and relevant financial regulations established by the
Ministry of Finance of the PRC.
The major adjustments made to the relevant PRC statutory financial
statements to conform with US GAAP include the following:
The reclassification of certain expense items from income
appropriations to charges against income;
Adjustment for sales, other income and purchases recognized on a cash
basis;
Adjustment for depreciation charges;
Adjustment for deferred taxation; and
Adjustment for revaluation of fixed assets.
The consolidated financial statements have been prepared on a going
concern basis notwithstanding that the Group has a net current
liability position as of December 31, 1996 and 1997. 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 in the foreseeable
future.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the financial statements of the Company and its subsidiaries in
which the Company has an effective controlling interest including High
Worth Holdings, High Worth Brewery, Zhaoqing Brewery, Finance Company
and Blue Ribbon Marketing. All material intercompany balances and
transactions have been eliminated on consolidation. Investments in
affiliates over which the Company exercises significant influence but
does not have effective control and owns less than a 50% but greater
than a 20% voting interest, including the 40% investment in Blue Ribbon
Noble, are accounted for using the equity method.
REVENUE RECOGNITION - Sales represent the invoiced value of goods sold,
net of returns and discounts. Sales and sales discounts are recognized
upon delivery of goods to customers. Sales returns are recognized upon
receipt of goods returned from customers.
F - 14
<PAGE>
CBR BREWING COMPANY, INC.
INVENTORIES - Inventories are stated at the lower of cost or market
value. Cost, which comprises direct materials, direct labor costs and
overheads associated with the manufacturing processes, is calculated
using the first-in, first-out method.
F - 15
<PAGE>
CBR BREWING COMPANY, INC.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is stated
at cost less an allowance for depreciation and amortization.
Depreciation and amortization are provided on the straight line method
based on the estimated useful lives of the assets as follows:
Land use rights ................... 50 years
Buildings ......................... 50 years
Plant, machinery and equipment .... 5 - 15 years
Motor vehicles .................... 5 - 10 years
According to the laws of the PRC, the title to all PRC land is retained
by the PRC government. The land use rights, which represent the cost
for the rights to use the land for premises granted by the State Land
Administration Bureau, have no definite term of use. The land use
rights are stated at cost and are amortized over 50 years on the same
basis as the buildings.
Construction in progress is stated at cost which comprises the direct
costs of buildings, plant under construction and deposits and
prepayments made on machinery pending installation. Cost comprises the
direct cost of construction and finance expenses arising from
borrowings used to finance the construction of buildings, plant and
machinery until the construction, installation and testing are
complete. The amount of finance expenses capitalized is the interest
cost which could theoretically have been avoided if the expenditure on
the qualifying asset had not been made. No depreciation is provided
until the relevant assets have been put into commercial use.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company regularly reviews its
long-lived assets for impairment whenever events or changes in the
circumstances indicate that the carrying amount of an asset may not be
recoverable based upon undiscounted cash flows expected to be produced
by such assets over their expected useful lives.
LEASED ASSETS - Leases that transfer substantially all the rewards and
risks of ownership of assets to the Group are accounted for as capital
leases. At the inception of a capital lease, the cost of the leased
asset is capitalized at the present value of the minimum lease payments
and recorded together with the obligation, excluding the interest
element, to reflect the purchase and financing. Assets held under
capital leases are included in property, plant and equipment and are
depreciated over their estimated useful lives.
ADVERTISING EXPENSES - Advertising expenses are charged to expense in
the consolidated statements of income as incurred.
INCOME TAXES - Income taxes are determined under the liability method
in accordance with Statement of Financial Accounting Standards No.109,
"Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires deferred
taxes be adjusted to reflect the tax rates at which future taxable
amounts will be settled or recognized. The effects of tax rate changes
on future deferred tax liabilities and deferred tax benefits, as well
as other changes in income tax laws, are recognized in net earnings in
the period when such changes are enacted.
F - 16
<PAGE>
CBR BREWING COMPANY, INC.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on
hand, cash accounts, interest bearing saving accounts, and short-term
bank deposits with original maturities of three months or less.
F - 17
<PAGE>
CBR BREWING COMPANY, INC.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
FOREIGN CURRENCY TRANSLATION - The financial records and the statutory
financial statements of the Company's subsidiaries and associated
company in the PRC are maintained in Renminbi. In preparing the
financial statements, all foreign currency transactions are translated
into Renminbi using the applicable rates of exchange, quoted by the
Zhaoqing Foreign Exchange Adjustment Center (the "swap center") for the
respective periods. Monetary assets and liabilities denominated in
foreign currencies have been translated into Renminbi using the rate of
exchange quoted by the swap center prevailing at the balance sheet
date. The resulting exchange gains or losses have been credited or
charged to the consolidated statements of income in the period for
which they occur.
The Company's share capital is denominated in United States dollars
("US$") and for reporting purposes, the US$ share capital amounts have
been translated into Renminbi ("RMB") at the applicable rates
prevailing on the transaction dates.
Translation of amounts from RMB into US$ is for the convenience of the
reader only and has been made at the swap center rate as quoted by the
People's Bank of China on December 31, 1997 of US$1.00 = RMB8.3. No
representation is made that the Renminbi amounts could have been, or
could be, converted into United States dollars at that rate or at any
other rate.
EARNINGS PER SHARE - Earnings per share is based on the net income and
the average number of shares of common stock issued and outstanding
during each of the years.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
4. ACCOUNTS RECEIVABLE
Accounts receivable comprise:
<TABLE>
<CAPTION>
1996 1997
---- ----
RMB RMB
<S> <C> <C>
Accounts receivable -- trade................. 183,767,036 140,699,102
Less: Allowance for doubtful accounts........ (14,921,542) (20,232,169)
----------- -----------
168,845,494 120,466,933
----------- -----------
----------- -----------
</TABLE>
F - 18
<PAGE>
CBR BREWING COMPANY, INC.
Movement of allowance for doubtful accounts:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
RMB RMB RMB
<S> <C> <C> <C>
Balance as at January 1................. - 5,600,000 14,921,542
Provided during the year................ 5,600,000 9,914,114 5,314,858
Written off during the year............. - (592,572) (4,231)
--------- ---------- ----------
Balance as at December 31............... 5,600,000 14,921,542 20,232,169
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
F - 19
<PAGE>
CBR BREWING COMPANY, INC.
5. BILLS RECEIVABLE
Bills receivable represent accounts receivable in the form of bills of
exchange whose acceptances and settlements are handled by banks.
6. INVENTORIES
<TABLE>
<CAPTION>
1996 1997
---- ----
RMB RMB
<S> <C> <C>
Inventories comprise:
Raw materials............................... 30,935,530 26,189,345
Work in progress............................ 6,224,036 7,164,153
Finished goods.............................. 50,390,270 56,229,944
---------- ----------
87,549,836 89,583,442
---------- ----------
---------- ----------
</TABLE>
7. INTEREST IN AN ASSOCIATED COMPANY
<TABLE>
<CAPTION>
1996 1997
---- ----
RMB RMB
<S> <C> <C>
Unlisted investment, at cost.............................. 209,361,595 209,361,595
The Group's share of undistributed post acquisition
earnings of an associated company....................... 7,622,625 25,635,660
----------- -----------
216,984,220 234,997,255
----------- -----------
----------- -----------
</TABLE>
The unlisted investment represents the Group's 40% equity interest in
Blue Ribbon Noble held by a 60% owned subsidiary. Please refer to note
1 for a description of its principal activities.
Upon the acquisition of Blue Ribbon Noble by the Group on October 31,
1994, the Group's share of the underlying net assets of the associated
company of RMB229 million exceeded the Group's investment of RMB209
million by approximately RMB20 million. This difference is being
amortized to income over 20 years.
Amount due to an associated company principally represented the balance
arising from the purchases of beer products for resale. The balance is
unsecured, interest-free and repayable on demand.
F - 20
<PAGE>
CBR BREWING COMPANY, INC.
7. INTEREST IN AN ASSOCIATED COMPANY - continued
The summarized information of Blue Ribbon Noble is presented below:
<TABLE>
<CAPTION>
1996 1997
---- ----
RMB RMB
<S> <C> <C>
BALANCE SHEETS
Current assets......................................... 388,296,705 415,031,288
Property, plant and equipment.......................... 433,480,695 464,699,723
----------- -----------
Total assets........................................... 821,777,400 879,731,011
----------- -----------
----------- -----------
Current liabilities.................................... 205,848,080 224,478,494
Deferred income taxes.................................. 9,000,000 12,200,000
Equity................................................. 606,929,320 643,052,517
----------- -----------
Total liabilities and equity........................... 821,777,400 879,731,011
----------- -----------
----------- -----------
STATEMENTS OF INCOME
Sales, net of sales taxes.............................. 655,316,991 639,678,595
----------- -----------
----------- -----------
Gross profit........................................... 145,150,002 179,062,125
----------- -----------
----------- -----------
Net income............................................. 90,128,571 122,156,976
----------- -----------
----------- -----------
The Group's share of net income after the
deduction of unrealized intercompany profit.......... 34,039,622 52,426,546
----------- -----------
----------- -----------
</TABLE>
F - 21
<PAGE>
CBR BREWING COMPANY, INC.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprise the following:
<TABLE>
<CAPTION>
1996 1997
---- ----
RMB RMB
<S> <C> <C>
At cost:
Land use rights and buildings........................................ 74,276,962 79,256,063
Plant, machinery and equipment....................................... 166,921,345 167,032,181
Motor vehicles....................................................... 5,213,923 8,795,547
Construction in progress............................................. 3,888,376 2,806,260
----------- -----------
Total.............................................................. 250,300,606 257,890,051
Less: Accumulated depreciation and amortization...................... (26,410,498) (47,874,221)
----------- -----------
223,890,108 210,015,830
----------- -----------
----------- -----------
</TABLE>
Depreciation and amortization charges in respect of property, plant and
equipment for the years ended December 31, 1995, 1996 and 1997 were
RMB9,459,519, RMB18,703,203 and RMB21,463,723, respectively.
Interest capitalized in construction in progress for the year ended
December 31, 1995 was RMB7,595,604.
Included in property, plant and equipment are assets acquired under
capital leases with the following net book values:
<TABLE>
<CAPTION>
1996 1997
---- ----
RMB RMB
<S> <C> <C>
At cost:
Plant, machinery and equipment....................................... 33,747,792 33,747,792
Less: Accumulated depreciation and amortization...................... (5,570,016) (8,944,795)
---------- ----------
28,177,776 24,802,997
---------- ----------
---------- ----------
</TABLE>
Depreciation and amortization charges in respect of property, plant and
equipment held under capital leases for the years ended December 31,
1995, 1996 and 1997 were RMB2,065,532, RMB3,374,779 and RMB3,374,779,
respectively.
F - 22
<PAGE>
CBR BREWING COMPANY, INC.
9. BANK BORROWINGS
<TABLE>
<CAPTION>
1996 1997
---- ----
RMB RMB
<S> <C> <C>
Bank borrowings comprise:
Secured bank borrowings................................................ 40,500,000 43,500,000
Less: Current portion.................................................. (40,500,000) (35,500,000)
---------- ----------
Long-term portion - 8,000,000
---------- ----------
---------- ----------
</TABLE>
The weighted average interest rates as of December 31, 1996 and 1997
was 11.3% and 10.1% per annum, respectively, for the secured bank
loans.
There are no significant covenants or financial restrictions relating
to the Company's short-term debt. Details of assets pledged by the
Company are described in note 22.
10. CAPITAL LEASE OBLIGATIONS
The capital lease obligations maturing during each of the years in the
three year period subsequent to the balance sheet date are:
<TABLE>
<CAPTION>
1997
----
RMB
<S> <C>
Year ending December 31,
1998.............................................................................. 8,450,307
1999.............................................................................. 6,222,914
2000.............................................................................. 2,928,458
----------
Total minimum lease payments........................................................ 17,601,679
Less: Amount representing interest.................................................. (1,739,130)
----------
Present value of minimum lease payments............................................. 15,862,549
Less: Current portion............................................................... (7,349,698)
----------
Long-term portion................................................................... 8,512,851
----------
----------
</TABLE>
F - 23
<PAGE>
CBR BREWING COMPANY, INC.
11. INCOME TAXES
The components of income before income taxes, equity in earnings of an
associated company and minority interests are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
---- ---- ----
RMB RMB RMB
<S> <C> <C> <C>
United States of America............................. - (7,420,000) (10,665,803)
PRC.................................................. 3,835,211 18,912,852 12,807,653
--------- ----------- ------------
3,835,211 11,492,852 2,141,850
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
United States of America
The Company is subject to taxes in the United States of America. In
January 1997, the Internal Revenue Service enacted the entity
classification regulations effective from January 1, 1997. Under the
new tax regulations, the Company's PRC subsidiaries and associated
company can elect to be treated as partnerships for US tax purposes, in
contrast with the corporation entity treatment prior to January 1,
1997. The Company elected to treat its PRC subsidiaries and associated
company as partnerships in 1997. For US tax purposes, a partnership is
a flow-through entity (i.e. the partnership's income, deductions, gains
or losses flow through to the partners in the partnership), High Worth
Holdings is the ultimate partner in these partnerships. The Company
will be taxed when taxable distributions are received from High Worth
Holdings. High Worth Holdings has no present intention to make any
income distributions in the foreseeable future.
The determination of unrecognized deferred tax liability for temporary
differences related to investments in foreign subsidiaries and foreign
associated company is not practicable.
PRC
The Company's subsidiaries registered in the PRC are subject to Chinese
income taxes at the applicable tax rate (currently 33%) on the taxable
income as reported in their Chinese statutory financial statements in
accordance with the relevant income tax laws applicable to foreign
enterprises. Pursuant to the same income tax laws, the subsidiary, High
Worth Brewery, and the associated company, Blue Ribbon Noble, are fully
exempt from Chinese income tax for two years starting from the first
profit making year, followed by a 50% exemption for the next three
years. The 50% exemption for Blue Ribbon Noble and the tax holiday for
High Worth Brewery commenced on January 1, 1996.
Had these tax holidays and concessions not been available, the tax
charge would have been higher by approximately RMB6,300,000,
RMB14,080,000 and RMB20,800,000 representing RMB0.79, RMB1.76 and
RMB2.60 per share before minority interests, for the years ended
December 31, 1995, 1996 and 1997, respectively.
F - 24
<PAGE>
CBR BREWING COMPANY, INC.
British Virgin Islands
The Company's subsidiaries incorporated in the British Virgin Islands
("BVI") are not taxed in BVI. Under current BVI laws, dividends and
capital gains arising from the BVI subsidiary's investments are not
subject to income taxes, and no withholding tax is imposed on payments
of dividends by the BVI subsidiaries to the Company.
F - 25
<PAGE>
CBR BREWING COMPANY, INC.
11. INCOME TAXES - continued
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
---- ---- ----
RMB RMB RMB
<S> <C> <C> <C>
Current
- PRC.............................................. - 260,000 -
--------- --------- ---------
Deferred
- United States of America......................... - 4,413,000 -
- PRC.............................................. 1,000,000 48,444 -
--------- --------- ---------
1,000,000 4,461,444 -
--------- --------- ---------
1,000,000 4,721,444 -
--------- --------- ---------
--------- --------- ---------
</TABLE>
The reconciliation of effective income tax rates of the Group to the
statutory income tax rate in the PRC is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate................................... 33% 33% 33%
Tax holiday.......................................... (33%) (30%) (33%)
Accelerated depreciation allowances
during the tax exemption period.................... 26% - -
Tax on dividend declared by an
associated company................................. - 36% -
Reversal of deferred tax asset arising
from the revaluation of property,
plant and equipment................................ - 1% -
Difference in tax rate............................... - 1% -
---- ---- ----
26% 41% -
---- ---- ----
---- ---- ----
</TABLE>
Deferred income taxes are based on the liability method prescribed by
Statement of Financial Accounting Standards No. 109. The Group's
deferred tax liabilities for the year ended December 31, 1996
represented the temporary differences with respect of the time when
dividends are declared by the Company's subsidiaries and associated
company are received by the Company. The Group's share of dividends
declared by the Company's associated company from its retained earnings
at December 31, 1996 in January 1997 amounted to approximately
RMB20,648,000.
F - 26
<PAGE>
CBR BREWING COMPANY, INC.
12. SALES TAXES
The Group is subject to three kinds of sales taxes, being value added
tax ("VAT"), consumption tax and other sales taxes. The applicable VAT
tax rate is 17% for beverage products sold in the PRC and nil for
exported goods. The amount of VAT liability is determined by applying
the applicable tax rate to the invoiced amount of goods sold less VAT
paid on purchases made with the relevant supporting invoices. VAT is
collected from customers by the Group on behalf of the PRC tax
authorities and is therefore not charged to the consolidated statements
of income. The applicable consumption tax rate in respect of brewery
products sold by a brewing company is RMB220 per ton. No consumption
tax is levied on wholesale trading of brewery products, on exported
goods or on non-alcoholic beverage products. The other sales taxes are
assessed as a percentage of consumption tax and VAT payable.
13. ADVANCES FROM SHAREHOLDERS
In connection with the acquisition of High Worth Brewery, Oriental Win
advanced US$8,869,585 to the High Worth Holdings during 1994. The
rights to collect US$8,000,000 of the advance were transferred from
Oriental Win to its shareholders in proportion to their respective
shareholdings interests in August 1996 (West Coast Star Enterprises
Ltd.: US$4,800,000; Mapesbury Limited: US$1,600,000; Redcliffe Holdings
Ltd.: US$1,600,000). During 1997, the advance of US$1,600,000 and the
shareholding interests of Mapesbury Limited were assigned to Top Link
Development Limited. The advances bear no interest and are not
repayable unless the Company obtains additional long-term debt or
equity financing. Repayments of the advances are at the discretion of
the Company and the shareholders have no right to demand repayment. The
Company has the option of offsetting or repaying the advance or part
thereof by allotment of shares at par value in High Worth Holdings.
As of December 31, 1997, advances from the respective shareholders,
namely Top Link Development Limited, Redcliffe Holdings Ltd., West
Coast Star Enterprises Ltd., and Oriental Win were approximately
RMB13,300,000 (US$1,600,000), RMB13,300,000 (US$1,600,000),
RMB39,800,000 (US$4,800,000) and RMB7,200,000 (US$900,000),
respectively.
F - 27
<PAGE>
CBR BREWING COMPANY, INC.
14. FOREIGN CURRENCY EXCHANGE
The Renminbi is not freely convertible into foreign currencies. Prior
to January 1, 1994, all foreign exchange transactions involving
Renminbi in the PRC took place either through the Bank of China or
other institutions authorized to buy and sell foreign currencies, or at
the approved swap centers in the PRC. The swap centers are institutions
which are administered by the State Administration of Foreign Exchange
and its branches. The exchange rates used for transactions through the
Bank of China and other authorized institutions were set by the PRC
government, through the State Administration of Foreign Exchange, from
time to time. The exchange rates available at a swap center are
determined largely by supply and demand based on foreign currency and
Renminbi requirements of enterprises operating or doing businesses in
the PRC.
On January 1, 1994, the PRC government abolished the dual exchange rate
system, comprising the official rates and swap center rates, and
introduced a single rate of exchange as quoted by the People's Bank of
China. The unified exchange rate is quoted at levels similar to those
quoted by the swap centers. However, the unification of exchange rates
does not imply full convertibility of Renminbi into United States
dollars or other foreign currencies. All foreign exchange transactions
continue to take place either through the Bank of China or other
institutions authorized to buy and sell foreign currencies or the swap
centers at the exchange rates quoted by the People's Bank of China. In
April 1994, the National Foreign Exchange Trading Center in Shanghai
(the "exchange center") commenced operations. Enterprises operating in
the PRC can enter into exchange transactions at the exchange center
through the Bank of China or other authorized institutions. Payments
for imported materials and remittances of earnings outside the PRC are
subject to the availability of foreign currency which are dependent on
the foreign currency denominated earnings of each relevant PRC company
within the Group or must be arranged through the exchange center.
Approval for exchange at the exchange center is granted to enterprises
in the PRC for valid reasons such as purchases of imported materials
and remittances of earnings. While conversion of Renminbi into United
States dollars or other foreign currencies can generally be effected at
the exchange center, there is no guarantee that it can be effected at
all times.
Effectively July 1, 1996, the PRC government began to take steps to
make its currency fully convertible on a "current account" basis. This
will allow foreign-funded enterprises, whether wholly owned or joint
ventures with Chinese, to buy and sell foreign exchange in banks for
purposes of trade, services, debt repayment and profit repatriation.
The "current account" measures the flow of money into and out of a
nation, including the net balance on trade in goods and services, plus
remittances.
The unified exchange rate of the RMB equivalent of US$1.00 as of
December 31, 1995, 1996 and 1997 was RMB8.32, RMB8.32 and RMB8.30,
respectively.
F - 28
<PAGE>
CBR BREWING COMPANY, INC.
15. DISTRIBUTION OF PROFITS
The Company's ability to pay dividends is primarily dependent on the
Company receiving distributions from its PRC subsidiaries through High
Worth Holdings.
Pursuant to the relevant laws and regulations of Sino-foreign joint
venture enterprises, the profits of High Worth Brewery, which are
based on their statutory financial statements, are available for
distribution in the form of cash dividends after the PRC companies
satisfy all tax liabilities, provide for losses in previous years,
and make appropriations to reserve funds, as determined at the
discretion of the board of directors in accordance with the PRC
accounting standards and regulations.
As stipulated by the relevant laws and regulations for enterprises
operating in the PRC, Zhaoqing Brewery and Blue Ribbon Marketing are
required to make annual appropriations to two reserve funds consisting
of the statutory surplus and collective welfare funds. In accordance
with the relevant PRC regulations and the companies' articles of
association, the companies are required to allocate a certain
percentage of their profits after taxation, as determined in accordance
with the PRC accounting standards applicable to the companies, to the
statutory surplus reserve until such reserve reaches 50% of the
registered capital of the companies. Based on the business licences,
the registered capital of Zhaoqing Brewery and Blue Ribbon Marketing is
RMB33,670,000 and RMB10,000,000, respectively. Subject to certain
restrictions as set out in the relevant PRC regulations and the
companies' articles of association, the statutory surplus reserve may
be distributed to equity holders in the form of bonus issues and/or
dividends when such reserve exceeds 25% of the registered capital of
the companies.
The percentage of annual appropriations to statutory surplus and
collective welfare funds of Zhaoqing Brewery for 1994 were 10% and 5%,
respectively, on the profits reported in its statutory financial
statements. No appropriations to these reserve funds were made by
Zhaoqing Brewery and Blue Ribbon Marketing for 1995, 1996 and 1997 as
Zhaoqing Brewery was acting as a nominee of High Worth Brewery from
October 31, 1994 onwards and Blue Ribbon Marketing made losses in those
financial years.
High Worth Brewery and Blue Ribbon Noble are also required to make
appropriations to a general reserve fund, an enterprise development
fund and an employee welfare and incentive fund, in which the
percentage of annual appropriations are subject to the joint venture
agreement. The employee welfare and incentive fund is charged to the
statement of income. The other appropriations are accounted for as
reserve funds in the balance sheet and are not available for
distribution as dividends to the joint venture partners of the
companies. Under the joint venture agreement, the board of directors
shall determine the appropriations regarding to the economic situation
of the companies. The percentage of annual appropriations to a general
reserve fund, an enterprise development fund and an employee welfare
and incentive fund of Blue Ribbon Noble for 1997 has been determined by
the board of directors and the appropriation has been reported in its
statutory financial statements.
Respective appropriations in High Worth Brewery for 1997 have not yet
been determined by its board of directors and were not reported in its
statutory financial statements.
F - 29
<PAGE>
CBR BREWING COMPANY, INC.
15. DISTRIBUTION OF PROFITS - continued
As described in note 2 to the consolidated financial statements, the
net income as reported in the US GAAP financial statements differs from
that as reported in the statutory financial statements. In accordance
with the relevant laws and regulations in the PRC, the profits
available for distribution are based on the statutory financial
statements. If the Group has foreign currency available after meeting
its operational needs, the Group may make its profit distributions in
foreign currency to the extent it is available. Otherwise, it will be
necessary to obtain approval and convert such distributions at the
exchange centers. At December 31, 1995, 1996 and 1997, the Group's
distributable profits amounted to approximately RMB21,180,000,
RMB38,727,000 and RMB65,972,000, respectively.
On November 25, 1997, the Board of Directors of High Worth Brewery
declared the first dividend distribution under which High Worth
Holdings was entitled to a dividend of approximately RMB83,000,000,
which was based on PRC GAAP financial statements. The dividend will be
distributed by installments in order to avoid any disruption to High
Worth Brewery's normal operating cash flow position. During the year
ended December 31, 1997, High Worth Holdings received a total of
RMB10,000,000 as the partial dividend distribution.
16. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(a) Interest paid, net of capitalized interest, during the years
ended December 31, 1995, 1996 and 1997, was RMB6,886,576,
RMB20,767,252 and RMB15,503,189, respectively.
(b) Dividends totalling RMB55,375,595 were declared by High Worth
Brewery and payable to Blue Ribbon Group, of which
RMB15,000,000 was paid out during the year. Included in
amounts due to related companies, as set out in note 18(j), is
the remaining dividend payable to Blue Ribbon Group as at
December 31, 1997.
17. ADVERTISING EXPENSES
The Group incurred advertising expenses of RMB18,793,663, RMB65,475,345
and RMB63,185,906 for the years ended December 31, 1995, 1996 and 1997,
respectively.
F - 30
<PAGE>
CBR BREWING COMPANY, INC.
18. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
(a) Sales of beer products
During the years ended December 31, 1996 and 1997, sales to
Blue Ribbon Group and its group of companies amounted to
RMB6,169,170 and RMB8,773,809, respectively.
(b) Purchases of packing materials
During the years ended December 31, 1995, 1996 and 1997, the
Group purchased packing materials from Blue Ribbon Group and
its group of companies amounting to RMB27,657,968,
RMB44,778,187 and RMB42,081,917, respectively.
(c) Purchases of non-alcoholic beverage
During the years ended December 31, 1995 and 1996, the Group
purchased non-alcoholic beverage from Blue Ribbon Group and
its group of companies amounting to RMB61,708,086 and
RMB69,166,604, respectively, for resale.
(d) Purchases of beer products
During the years ended December 31, 1995, 1996 and 1997, the
Group purchased beer products from Blue Ribbon Noble amounting
to RMB327,805,406, RMB695,150,225 and RMB675,247,962,
respectively, for resale.
During the year ended December 31, 1997, the Group purchased
beer products from Blue Ribbon Group Sichuan Er Mei Shan
Brewery ("Sichuan Brewery") amounting to RMB33,052,735 for
resale.
(e) Royalty fee
During the years ended December 31, 1995, 1996 and 1997, the
royalty fee of RMB3,454,067, RMB7,945,874 and RMB7,086,075,
respectively, was payable to Blue Ribbon Group in respect of
the right to use Pabst trademarks in the Guangdong Province of
the PRC.
(f) Management fee
Management fee paid to Blue Ribbon Group for the years ended
December 1996 and 1997 was RMB3,780,000 for each year.
F - 31
<PAGE>
CBR BREWING COMPANY, INC.
(g) Interest income
Interest income from the Blue Ribbon Group for the years ended
December 31, 1996 and 1997 was RMB3,981,278 and RMB5,535,977,
respectively.
F - 32
<PAGE>
CBR BREWING COMPANY, INC.
18. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS - continued
(h) Interest expense
Interest expense for the years ended December 31, 1995, 1996
and 1997 included RMB3,091,364, RMB9,282,985 and RMB3,859,087,
respectively, payable to Blue Ribbon Group and RMB328,207,
RMB948,543 and RMB1,717,133, respectively, payable to other
related companies, related to the advances which are more
fully disclosed in (i) and (j) below.
(i) Amounts due from related companies
The amounts due from related companies mainly represented
receivable balances from Blue Ribbon Group and its group of
companies.
The balances with Blue Ribbon Group and its group of companies
principally represented trade deposits received on behalf of
the Group and expenses paid on their behalf. Included in the
net amounts due from Blue Ribbon Group at December 31, 1996
and 1997 are RMB27,500,000 and RMB16,600,000, respectively,
payable to the Group, which bore interest of 15% per annum for
the year 1996 and at 20% per annum during 1997, but were
interest free as at December 31, 1997. Amounts also include an
amount due from the Blue Ribbon Group as at December 31, 1996
and 1997 of RMB38,200,000 and RMB42,900,000, respectively,
which bore interest at 10% per annum for the year 1996 and at
20% per annum during 1997, but was interest free as at
December 31, 1997. Save as aforementioned, the remaining
balances with the group companies of the Blue Ribbon Group are
unsecured, interest-free and repayable on demand.
F - 33
<PAGE>
CBR BREWING COMPANY, INC.
18. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS - continued
(j) Amounts due to related companies
As of December 31, 1997, the amounts due to related companies
consist of payable balances to the following companies:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1996 1997
---- ----
RMB RMB
(in million) (in million)
<S> <C> <C>
American National Can (Zhaoqing) Co., Ltd.
("American National Can") 4.8 10.5
Blue Ribbon Beverage Co., Ltd. ("Beverage") 1.8 1.8
Blue Ribbon Group - 40.3
Blue Ribbon Mineral Water Factory ("Mineral Water") 4.2 -
Sichuan Brewery - 4.9
Champers Investment Limited ("Champers") - 2.3
Evermoni Trading Limited ("Evermoni") 5.7 7.1
Bilibest Industries Limited ("Bilibest") - 2.9
Trade Link Investment Limited ("Trade Link") 1.2 1.4
Wealth Guide Development Limited ("Wealth Guide") 3.1 3.6
Other subsidiaries and associated companies
of Blue Ribbon Group 0.6 2.4
---- ----
21.4 77.2
---- ----
---- ----
</TABLE>
American National Can, Beverage, Mineral Water, and Sichuan
Brewery are companies in which Blue Ribbon Group has equity
interests.
Evermoni and Champers are beneficially owned by Wong Lee Tak
who is a director of the Company. Bilibest is controlled by
the shareholders of West Coast Star Enterprises Limited. Trade
Link is beneficially owned by Victor Choi who is a former
director of the Company. Wealth Guide is beneficially owned by
Blue Ribbon Group.
The balances with group companies of Blue Ribbon Group, except
Wealth Guide, represented the balances arising from the
purchases of raw materials from them. The balances are
unsecured, interest-free and repayable on demand.
The balance with Blue Ribbon Group amounted to RMB40,300,000
being the dividend payable by High Worth Brewery.
The balances with Champers, Evermoni, Bilibest, Trade Link and
Wealth Guide are advances in nature. The amounts due to such
related companies are unsecured, bear interest at 12% per
annum, as of December 31, 1996 and 1997 and are repayable on
demand.
F - 34
<PAGE>
CBR BREWING COMPANY, INC.
(k) Advances from shareholders
Reference is made to note 13.
F - 35
<PAGE>
CBR BREWING COMPANY, INC.
19. RETIREMENT PLAN
The Company, High Worth Holdings and the Finance Company do not have
any retirement plans in operation. High Worth Brewery did not have any
retirement plans in operation until December 31, 1995, the date when
transfer of the legal ownership of the brewery facilities and all
assets and liabilities held by Zhaoqing Brewery to High Worth Brewery
was approved by the PRC Government. The application to the PRC
Government for the legal title transfer of a 70% interest in Blue
Ribbon Marketing and a 40% interest in Blue Ribbon Noble is still in
progress.
As stipulated by the PRC government regulations, High Worth Brewery,
Zhaoqing Brewery and Blue Ribbon Marketing have defined contribution
retirement plans for all their permanent staff. Zhaoqing Brewery and
its staff are required to contribute to PRC insurance companies
organized by the PRC government which are responsible for the payments
of pension benefits to retired staff. During the year ended December
31, 1997, the monthly contributions of both High Worth Brewery and Blue
Ribbon Marketing for permanent staff were calculated at 14.6% and 2%,
respectively, of the basic salary of the permanent staff. The pension
costs expensed by the Group during the years ended December 31, 1995,
1996 and 1997 amounted to RMB706,566, RMB3,236,633 and RMB3,125,419,
respectively.
20. FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets at December 31,
1996 and 1997 for current assets and current liabilities, except for
bank loans, qualifying as financial instruments approximate their fair
values because of the short maturity of such instruments. Cash
denominated in foreign currency has been translated at the applicable
unified exchange rate.
The carrying values and estimated fair values of bank loans, based on
the borrowing rates for borrowings with similar terms and average
maturities are RMB40,500,000 and RMB40,500,000, respectively, at
December 31, 1996, and RMB43,500,000 and RMB43,500,000, respectively,
at December 31, 1997. The fair value of the shareholders' advances is
not able to be determined because no comparable borrowing terms are
currently available.
F - 36
<PAGE>
CBR BREWING COMPANY, INC.
21. CONCENTRATION OF RISKS
The Group's operating assets and primary source of income and cash
flows are its interest in subsidiaries and associated company in the
PRC. The PRC economy has, for many years, been a centrally-planned
economy, operating on the basis of annual, five-year and ten-year state
plans adopted by central PRC governmental authorities which set out
national production and development targets. The PRC government has
been pursuing economic reforms since it first adopted its "open-door"
policy in 1978. There is no assurance that the PRC government will
continue to pursue economic reforms or that there will not be any
significant change in its economic or other policies, particularly in
the event of any change in the political leadership of, or the
political, economic or social conditions in, the PRC. There is also no
assurance that the Group will not be adversely affected by any such
change in governmental policies or any unfavorable change in the
political, economic or social conditions, the laws or regulations or
the rate or method of taxation in the PRC.
As many of the economic reforms which have been or are being
implemented by the PRC government are unprecedented or experimental,
they may be subject to adjustment or refinement which may have adverse
effects on the Group. Further, through state plans and other economic
and fiscal measures, it remains possible for the PRC government to
exert significant influence on the PRC economy.
The sale and distribution of products under the "Pabst Blue Ribbon"
brandname in 1996 and 1997 accounted for 94% and 99%, respectively of
the Group's turnover. The Group purchases Pabst Blue Ribbon beer from
Blue Ribbon Noble and is heavily dependent on Blue Ribbon Noble.
Stoppages of production and/or supply from Blue Ribbon Noble for
reasons within or outside their control could affect the Group's
operation, although so far the Group has never encountered any problems
in securing adequate supplies from Blue Ribbon Noble.
The Group currently uses foreign currency to pay for imported raw
materials. In addition, the Group obtained foreign currency loans from
shareholders to acquire the subsidiaries in the PRC and obtained
foreign currency loans for working capital purposes. For the risks
relating to foreign currency, please refer to note 14.
The Group's financial instruments that are exposed to concentration of
credit risk consist primarily of cash and accounts receivable from
customers. Cash is maintained with major banks in the PRC. The Group's
business activity is with customers in the PRC. The Group periodically
performs credit analysis and monitors the financial condition of its
clients in order to minimize credit risk.
22. PLEDGE OF ASSETS
Certain assets of High Worth Brewery were collaterialized under
floating charge to secure bank borrowings. The net book value of the
property, plant and equipment and the carrying amounts of the other
assets pledged to banks as of December 31, 1997 amounted to
RMB181,560,188 and
F - 37
<PAGE>
CBR BREWING COMPANY, INC.
RMB203,209,679, respectively. The net book value of property, plant and
equipment and the carrying amounts of the other assets pledged to banks
as of December 31, 1996 amounted to RMB193,594,443 and RMB203,209,679,
respectively.
F - 38
<PAGE>
CBR BREWING COMPANY, INC.
23. COMMITMENTS AND CONTINGENCIES
As of December 31, 1997, the Group was committed to capital
expenditures of RMB1,142,304. The Group had no capital commitments as
of December 31, 1996.
Blue Ribbon Group entered into licensing arrangements with Pabst
Brewery Company whereby Blue Ribbon Group was granted the exclusive
right to produce and market products under four specific Pabst
trademarks in the PRC, the non-exclusive right to market products in
other Asian countries except Hong Kong, Macau, Japan and South Korea,
and the right to sublicense the use of the trademarks to any other
enterprise in the PRC. Pursuant to the terms of the sublicense
agreement, High Worth Brewery was granted by Blue Ribbon Group the
right in the Guangdong Province of the PRC to use two specific Pabst
trademarks in its production, promotion, distribution and sale of beer
under such trademarks. In addition, Blue Ribbon Group also granted the
right to use two specific Pabst trademarks for the production,
promotion, distribution and sale of beer to High Worth Brewery or those
enterprises owned by High Worth Brewery which are located outside
Guangdong Province in the PRC. The sublicense agreement is valid until
November 7, 2003. In consideration for the sublicense granted, High
Worth Brewery is committed to pay Blue Ribbon Group a royalty fee of
US$11.70 for each ton produced.
A provisional agreement, subject to governmental approval, was made
among CBR Brewing Company, Inc. and its subsidiary, the group companies
of Noble China Inc., a company incorporated in Canada, and Blue Ribbon
Group on May 10, 1995 to the effect that:
(a) High Worth Brewery was entitled to be granted from Blue Ribbon
Group the right to brew and sell beer under the Pabst Blue
Ribbon label produced in its brewing facilities up to a
maximum production capacity of 100,000 tons per annum.
(b) High Worth Brewery and/or companies that High Worth Brewery
has an interest in are entitled to be granted a sublicense
from Blue Ribbon Group with the right to produce and sell beer
under the Pabst Blue Ribbon label in the Guangdong Province of
the PRC ("Additional Facility") to a maximum production
capacity of 300,000 tons per annum.
In the event that High Worth Brewery desires to obtain a
sublicense for any Additional Facility, Goldjinsheng has the
right to purchase up to a 40% interest in such Additional
Facility. The purchase price for such interest shall be the
actual cost of such Additional Facility multiplied by the
percentage interest that Goldjinsheng elects to purchase.
(c) A proposed new marketing company ("New Marketing Company"),
owned as to 8% by Blue Ribbon Group, 52% by High Worth Brewery
and 40% by Goldjinsheng, shall be formed to handle and
organize the sales of Pabst Blue Ribbon beer produced by
Zhaoqing Brewery and Blue Ribbon Noble. Each of Zhaoqing
Brewery and Blue Ribbon Noble will create a separate
distribution company or division of their own. The respective
distribution companies will appoint the New Marketing Company
as their sole and exclusive agent to market Pabst Blue Ribbon
beer in the PRC.
F - 39
<PAGE>
CBR BREWING COMPANY, INC.
23. COMMITMENTS AND CONTINGENCIES - continued
Another agreement was made among Goldjinsheng, Blue Ribbon Group and
Blue Ribbon Noble on May 10, 1995 to the effect that Blue Ribbon Noble
agreed to pay Blue Ribbon Group a management fee of RMB2,035,000 per
annum for a period of five years.
As of December 31, 1997, the Group was committed to pay an operating
leases in respect of rental expenses of RMB942,370. As of December 31,
1996, the Group had no operating lease commitments.
An agreement was made between Blue Ribbon Group and High Worth Brewery
on December 31, 1995 to the effect that High Worth Brewery agreed to
pay Blue Ribbon Group a management fee of RMB3,780,000 per annum for a
period of three years commencing on January 1, 1996 (see note 18(f)).
In November, 1996, Blue Ribbon Group advised the Company that it
believed it had the right to brew Pabst Blue Ribbon beer in the PRC
either by itself or through one or more of its affiliates. Blue Ribbon
Group therefore established a wholly-owned subsidiary, Sichuan Brewery
in Er Mei Shan, Le Shang City, Sichuan Province of the PRC for the
production of Pabst Blue Ribbon beer in 1997.
In April 1997, the Sichuan Brewery commenced the production and sale of
Pabst Blue Ribbon beer. In the same month, in order to facilitate the
efficient distribution and sale of Pabst Blue Ribbon beer in the PRC,
the Blue Ribbon Marketing and the Sichuan Brewery entered into a
Memorandum of Understanding. The Memorandum of Understanding requires
the Sichuan Brewery to sell all of its production of Pabst Blue Ribbon
beer to the Blue Ribbon Marketing at mutually agreed ex-factory prices,
and grants Blue Ribbon Marketing the right to regulate production to
reflect market demand. In signing the Memorandum of Understanding, the
Company does not consent to, or waives any rights with respect to, Blue
Ribbon Group's assertion that Blue Ribbon Group has the right to brew
Pabst Blue Ribbon beer in the PRC either by itself or through one or
more of its affiliates.
In early October 1997, the Sichuan Brewery advised Blue Ribbon
Marketing it intends to commence selling its production of Pabst Blue
Ribbon beer directly and that it will cease selling its production of
Pabst Blue Ribbon beer to Blue Ribbon Marketing.
In late October 1997, High Worth Brewery and Blue Ribbon Marketing
instituted formal legal proceedings against Blue Ribbon Group and
Sichuan Brewery. A Statement of Claims was filed with the High Court of
Guangdong Province in which Blue Ribbon Group and Sichuan Brewery were
named as the first and second defendant respectively. Both defendants
were accused of the violation of the Sublicensing Agreement signed
between High Worth Brewery and Blue Ribbon Group and the breach of
Sales Contracts signed between Blue Ribbon Marketing and Blue Ribbon
Group.
With the liaison efforts of the Provincial Government and Zhaoqing
City, High Worth Brewery, Blue Ribbon Marketing, Blue Ribbon Group and
Sichuan Brewery reached an out of court settlement on December 30, 1997
("Settlement Agreement"). The Settlement Agreement, signed by all
parties involved and witnessed by the High Court of Guangdong Province,
confirmed that:
F - 40
<PAGE>
CBR BREWING COMPANY, INC.
(i) All parties agreed that High Worth Brewery will serve as the
core organization for managing the production and operation of
the Pabst Blue Ribbon beer business in the PRC. A management
committee will be set up under the Board of Directors of High
Worth Brewery to coordinate and manage the procurement,
production, sales and future development of all Pabst Blue
Ribbon beer producing enterprises in the PRC.
F - 41
<PAGE>
CBR BREWING COMPANY, INC.
23. COMMITMENTS AND CONTINGENCIES - continued
(ii) Blue Ribbon Marketing should act as the single entity to unify
and coordinate all the sales of Pabst Blue Ribbon beer in the
PRC. All of the Pabst Blue Ribbon beer products produced by
High Worth Brewery, Blue Ribbon Noble and any other new joint
ventures set up by High Worth Brewery should be marketed by
Blue Ribbon Marketing according to the arrangement of the
management committee.
(iii) The sales and marketing of Blue Ribbon mineral waters and
non-carbonated soft drinks will be handled by Blue Ribbon
Group upon confirmation by the Board of Directors of Blue
Ribbon Marketing.
(iv) Sichuan Brewery will be restructured and renamed as Sichuan
Blue Ribbon High Worth Brewery E Mei Limited ("Sichuan High
Worth"). High Worth Brewery, Blue Ribbon Group and E Mei
Brewery will own 51%, 20% and 29%, respectively of the equity
in Sichuan High Worth. The existing assets in Sichuan Brewery
are to be revalued to determine the fair market value prior to
the formal transfer of share equity.
(v) Blue Ribbon Group committed to sublicense the right to use the
Pabst Blue Ribbon trademarks to all new breweries to be
established by High Worth Brewery in the future. The new
brewery will pay royalty fee at the same rate as Pabst US
charges Guangdong Blue Ribbon plus a surcharge of RMB25 per
metric ton. All other terms and conditions will be the same as
in the License Agreement.
All legal costs incurred in respect of this proceeding will be shared
equally by the plaintiffs and defendants.
24. POST BALANCE SHEET EVENTS
(a) On January 13, 1998, High Worth Brewery entered a joint
venture contract with Zao Yang Brewery to establish a new
brewery in Hubei Province with an initial annual production
capacity of 40,000 metric tons of beer. The new brewery, with
a total capital investment of RMB29,280,000, will be named
"Zao Yang Blue Ribbon High Worth Brewery Ltd." ("Zao Yang High
Worth"), which will be owned 55% by High Worth Brewery with
the remaining 45% owned by Zao Yang Brewery.
Pursuant to the joint venture agreement, High Worth Brewery
will contribute a total of RMB16,104,000 as its capital
contribution to Zao Yang High Worth. The sum will be paid in
four instalments to obtain 55% of the assets of Zao Yang
Brewery which will be injected into Zao Yang High Worth upon
completion of approval procedures. Zao Yang Brewery will
contribute the remaining 45% of the assets as their capital
contribution.
The joint venture agreement also provides that external loans
of RMB29,280,000 and RMB16,000,000 from financial institutions
should be solicitated by Zao Yang High Worth
F - 42
<PAGE>
CBR BREWING COMPANY, INC.
in order to meet the funding requirements for equipment
renovation and working capital, respectively. If Zao Yang High
Worth is unable to borrow such amount, High Worth Brewery and
Zao Yang Brewery shall contribute additional funds to Zao Yang
High Worth in proportion to their respective interests.
F - 43
<PAGE>
CBR BREWING COMPANY, INC.
24. POST BALANCE SHEET EVENTS - continued
Subject to the approval by the Zao Yang City Government and
upon the issuance of the business registration certificate by
the local Business Registration Bureau, Zao Yang High Worth
will initially commence production of a locally branded beer -
"Di Huang Quan". This trademark will be transferred from Zao
Yang Brewery to Zao Yang High Worth once the joint venture
commences operations. High Worth Brewery is responsible for
the transfer of the technical know-how and production
technique of brewing Pabst Blue Ribbon beer to Zao Yang High
Worth, which is expected to take approximately six to nine
months.
(b) On February 12, 1998, the Board of Directors of High Worth
Brewery resolved that if agreed by Zao Yang Brewery, Zao Yang
High Worth may be changed into a joint stock company in which
High Worth Brewery will reduce its equity interest to 51%, Zao
Yang Brewery to 24% and the remaining 25% will be taken up by
the management and employee of Zao Yang High Worth. The above
proposed change is subject to approval from the local
management.
(c) On February 12, 1998, the Board of Directors of High Worth
Brewery further resolved that the new shareholding structure
for Sichuan High Worth should be revised to 60% owned by High
Worth Brewery and 40% owned by E Mei Brewery. The Board also
resolved that if agreed by the parties concerned, Sichuan High
Worth may also be changed into a joint stock company in which
High Worth Brewery will reduce its equity interest to 51%,
E Mei Brewery to 24% and the remaining 25% will be taken up
by the management and employees of Sichuan High Worth. All
the above proposed changes are subject to approval from the
local government.
(d) On January 2, 1998, the Shareholders voted to adopt the 1998
Stock Option Plan ("the Plan") and granted options to purchase
210,000 shares of Class A common stock at an exercise price of
US$3.87 per share to four directors and five employees and
70,000 shares of Class A common stock at US$4.26 per share 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.
(e) On January 20, 1998, Goldjinsheng and Zhaoqing Brewery has
entered into an agreement which stipulated that their
respective interests in the Blue Ribbon Noble will be
transferred to Linchpin Holdings Limited, another wholly-owned
subsidiary of Noble China Inc., and High Worth Brewery
respectively. Upon receipt of approval from and registration
by the relevant authorities, Linchpin Holdings Limited and
High Worth Brewery will own 60% and 40% equity interests of
the Blue Ribbon Noble respectively.
(f) On March 2, 1998, the Company entered a contract with a
corporate financial consulting company which will provide
financial and business consulting services to the Company. The
remuneration is in the form of non-cash compensation. A total
of 50,000 shares of the Company's Class A common stock will be
issued to the financial consulting company based on the
pre-defined scope of services performed. In addition, warrants
to purchase in aggregate a total of 150,000 shares of Class A
common stock will also be issued, which
F - 44
<PAGE>
CBR BREWING COMPANY, INC.
will be divided into three equal portions with exercise prices
of US$3.50, US$4.50 and US$5.50 per share, respectively.
F - 45
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
(Registered in the People's Republic of China)
Reports and Financial Statements
For the year ended December 31, 1997
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
(Registered in the People's Republic of China)
REPORTS AND FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
- ------------------------------------
<TABLE>
<CAPTION>
CONTENTS PAGES
- -------- -----
<S> <C>
REPORT OF INDEPENDENT AUDITORS ............................... F - 1
REPORT OF PREDECESSOR AUDITORS ............................... F - 2
BALANCE SHEETS ............................................... F - 3
STATEMENTS OF INCOME ......................................... F - 5
STATEMENTS OF EQUITY ......................................... F - 6
STATEMENTS OF CASH FLOWS ..................................... F - 7
NOTES TO FINANCIAL STATEMENTS ................................ F - 8
</TABLE>
2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
CBR BREWING COMPANY, INC.
-------------------------
We have audited the accompanying balance sheets of Zhaoqing Blue Ribbon
Brewery Noble Ltd. as of December 31, 1997 and 1996, and the related
statements of income, equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all
material respects, the financial position of Zhaoqing Blue Ribbon
Brewery Noble Ltd. as of December 31, 1997 and 1996, and the results of
its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles in the United
States of America.
We draw your attention to notes 12 and 20 to the financial statements
which state that the Company is exposed to foreign exchange risk and
other risks through its operations in the People's Republic of China.
/s/ Deloitte Touche Tohmatsu
Hong Kong
March 31, 1998
F - 1
<PAGE>
REPORT OF PREDECESSOR AUDITORS
To the shareholders of
CBR Brewing Company, Inc.
We have audited the accompanying balance sheet of Zhaoqing Blue Ribbon
Brewery Noble Ltd. as of December 31, 1995 and the related statement of
income, equity and cash flows for the year then ended. The financial
statements are the responsibility of Zhaoqing Blue Ribbon Brewery Noble
Ltd.'s management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United State of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Zhaoqing
Blue Ribbon Brewery Noble Ltd. as of December 31, 1995 and the result
of its operation and its cash flows for the year then ended in
conformity with generally accepted accounting principles in the United
States of America.
/s/ Ernst & Young
Hong Kong
March 28, 1996
F - 2
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1996 1997 1997
---- ---- ----
RMB RMB US$
(Note 3)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. 123,938,892 122,312,674 14,736,467
Accounts receivable, net of allowance for
doubtful accounts of RMB2,246,703 and
RMB1,039,451 for 1996 and 1997,
respectively (note 4)................................... 7,223,259 2,356,248 283,885
Bills receivable (note 5)................................. - 24,750,000 2,981,928
Inventories (note 6)...................................... 40,577,951 35,856,998 4,320,120
Prepayments and deposits.................................. 40,205,803 12,675,847 1,527,210
Amounts due from related companies (note 17a)............. 176,350,800 217,079,521 26,154,159
---------------- ---------------- -------------
Total current assets........................................ 388,296,705 415,031,288 50,003,769
Property, plant and equipment, net of accumulated
depreciation and amortization of RMB89,983,400
and RMB124,593,046 for 1996 and 1997,
respectively (notes 7 and 21)............................. 433,480,695 464,699,723 55,987,919
---------------- ---------------- ----------------
Total assets................................................ 821,777,400 879,731,011 105,991,688
---------------- ---------------- ----------------
---------------- ---------------- ----------------
LIABILITIES AND EQUITY
Current liabilities:
Bank loans (note 8)....................................... 13,500,000 1,500,000 180,723
Accounts payable.......................................... 58,293,169 45,976,545 5,539,342
Accrued liabilities....................................... 34,972,066 43,900,756 5,289,248
Employee welfare and incentive fund....................... 6,217,309 11,908,240 1,434,728
Amounts due to related companies (note 17b)............... 29,286,818 48,703,390 5,867,878
Sales taxes payable (note 10)............................. 50,543,297 61,575,962 7,418,791
Income taxes payable (note 9)............................. 13,035,421 10,913,601 1,314,892
---------------- ---------------- ----------------
Total current liabilities................................... 205,848,080 224,478,494 27,045,602
---------------- ---------------- ----------------
Long term liabilities:
Deferred income taxes (note 9)............................ 9,000,000 12,200,000 1,469,880
---------------- ---------------- ----------------
Commitments and contingencies
(notes 12, 20 and 22)
Equity:
Contributed capital......................................... 475,940,000 475,940,000 57,342,169
General reserve and enterprise development funds
(note 13)................................................. 14,506,926 21,043,879 2,535,407
Retained earnings (note 14)................................. 116,482,394 146,068,638 17,598,630
</TABLE>
F - 3
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
<TABLE>
<CAPTION>
---------------- ---------------- ----------------
<S> <C> <C> <C>
Total equity................................................ 606,929,320 643,052,517 77,476,206
---------------- ---------------- ----------------
Total liabilities and equity................................ 821,777,400 879,731,011 105,991,688
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
See accompanying notes to the financial statements
F - 4
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997 1997
---- ---- ---- ----
RMB RMB RMB US$
<S> <C> <C> <C> <C>
(Note 3)
Sales, including sales to related companies of
RMB327,805,406, RMB695,150,225 and
RMB677,910,031 in 1995, 1996 and 1997,
respectively (note 17c)...................... 724,233,282 695,150,225 677,910,031 81,675,907
Sales taxes (note 10).......................... (42,509,114) (39,833,234) (38,231,436) (4,606,197)
----------- ----------- ----------- -----------
Net sales...................................... 681,724,168 655,316,991 639,678,595 77,069,710
Cost of sales, including inventory purchased
from related companies of RMB91,355,485,
RMB117,344,580 and RMB92,468,404 in 1995,
1996 and 1997, respectively, and royalty
fee paid to a related company of
RMB15,434,144, RMB15,106,029 and
RMB14,317,306 in 1995,
1996 and 1997, respectively (note 17c)....... (525,860,005) (510,166,989) (460,616,470) (55,495,960)
----------- ----------- ----------- -----------
Gross profit................................... 155,864,163 145,150,002 179,062,125 21,573,750
Selling, general and administrative expenses,
including management fee paid to a related
company of RMB2,035,000 in 1995, 1996 and
1997 (note 17c).............................. (60,819,562) (38,937,354) (36,193,085) (4,360,613)
----------- ----------- ----------- -----------
Operating income............................... 95,044,601 106,212,648 142,869,040 17,213,137
Interest income................................ 3,846,001 3,901,929 2,078,006 250,362
Interest expense............................... (2,240,015) (3,450,585) (1,458,454) (175,717)
----------- ----------- ----------- -----------
Income before income taxes..................... 96,650,587 106,663,992 143,488,592 17,287,782
Income taxes (note 9).......................... (2,200,000) (16,535,421) (21,331,616) (2,570,074)
----------- ----------- ----------- -----------
Net income..................................... 94,450,587 90,128,571 122,156,976 14,717,708
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to the financial statements
F - 5
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
(Registered in the People's Republic of China)
STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
General
reserve and
enterprise
Contributed development Retained
Capital Funds Earnings Equity
------------- ------------ ------------- -------------
RMB RMB RMB RMB
(Note 11) (Note 13) (Note 14)
<S> <C> <C> <C>
Balance at January 1, 1995................... 475,940,000 4,199,788 113,381,337 593,521,125
Net income for the year ..................... - - 94,450,587 94,450,587
Appropriation of:
Reserve.................................... - 5,527,483 (5,527,483) -
Dividend................................... - - (71,611,420) (71,611,420)
------------- ------------ ------------- -------------
Balance at December 31, 1995................. 475,940,000 9,727,271 130,693,021 616,360,292
Net income for the year...................... - - 90,128,571 90,128,571
Appropriation of:
Reserve.................................... - 4,779,655 (4,779,655) -
Dividend................................... - - (99,559,543) (99,559,543)
------------- ------------ ------------- -------------
Balance at December 31, 1996................. 475,940,000 14,506,926 116,482,394 606,929,320
Net income for the year...................... - - 122,156,976 122,156,976
Appropriation of:
Reserve.................................... - 6,536,953 (6,536,953) -
Dividend................................... - - (86,033,779) (86,033,779)
------------- ------------ ------------- -------------
Balance at December 31, 1997................. 475,940,000 21,043,879 146,068,638 643,052,517
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Converted to US$
Balance at December 31, 1997
(note 3)................................... US$57,342,169 US$2,535,407 US$17,598,630 US$77,476,206
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to the financial statements
F-6
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997 1997
---- ---- ---- ----
RMB RMB RMB US$
(Note 3)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income....................................... 94,450,587 90,128,571 122,156,976 14,717,708
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 30,115,484 36,630,493 34,609,646 4,169,837
Deferred income taxes............................ 2,200,000 3,500,000 3,200,000 385,542
Allowance for doubtful accounts.................. 786,740 1,459,963 (1,207,252) (145,452)
Changes in operating assets and liabilities:
Accounts receivable.............................. 97,194,303 (7,626,399) 6,074,263 731,839
Bills receivable................................. - - (24,750,000) (2,981,928)
Inventories...................................... 20,043,860 (7,552,072) 4,720,953 568,790
Prepayments and deposits......................... (11,461,759) (11,363,578) 27,529,956 3,316,862
Amounts due from related companies............... (77,218,250) (7,725,219) (40,728,721) (4,907,075)
Accounts payable and accrued liabilities......... 7,276,109 32,685,096 (3,387,934) (408,185)
Employee welfare and incentive fund.............. 5,527,483 (3,509,962) 5,690,931 685,654
Deposits received from customers................. (61,464,582) - - -
Amounts due to related companies................. 9,504,527 2,288,496 19,416,572 2,339,346
Sales taxes payable.............................. 39,759,438 (28,473,956) 11,032,665 1,329,237
Income taxes payable............................. - 13,035,421 (2,121,820) (255,640)
----------- ----------- ----------- ----------
Net cash provided by operating activities........ 156,713,940 113,476,854 162,236,235 19,546,535
----------- ----------- ----------- ----------
Cash flows from investing activities
Purchases of property, plant and equipment....... (31,927,658) (8,089,333) (65,828,674) (7,931,166)
Proceeds from disposals of property,
plant and equipment............................ 1,749,823 - - -
----------- ----------- ----------- ----------
Net cash used in investing activities............ (30,177,835) (8,089,333) (65,828,674) (7,931,166)
----------- ----------- ----------- ----------
Cash flows from financing activities
New bank loans................................... 13,500,000 - - -
Repayment of bank loans.......................... (17,200,000) - (12,000,000) (1,445,783)
Dividend paid.................................... (71,611,420) (99,494,695) (86,033,779) (10,365,516)
----------- ----------- ----------- ----------
Net cash used in financing activities............ (75,311,420) (99,494,695) (98,033,779) (11,811,299)
----------- ----------- ----------- ----------
Net increase (decrease) in cash and cash
quivalents..................................... 51,224,685 5,892,826 (1,626,218) (195,930)
Cash and cash equivalents at beginning of year.. 66,821,381 118,046,066 123,938,892 14,932,397
----------- ----------- ----------- ----------
Cash and cash equivalents at end of year......... 118,046,066 123,938,892 122,312,674 14,736,467
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
See accompanying notes to the financial statements
F - 7
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
(Registered in the People's Republic of China)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL ACTIVITY
Zhaoqing Blue Ribbon Brewery Noble Ltd. (the "Company") is a
Sino-foreign equity joint venture enterprise registered in the People's
Republic of China ("PRC") in October 1993 in which Goldjinsheng Holding
Limited ("Goldjinsheng") and Zhaoqing Brewery hold 60% and 40%
interests, respectively. The venture term of the Company is twenty
years which term may be extended upon mutual agreement of the joint
venture parties and approval from the relevant PRC government
authorities.
Pursuant to the joint venture agreements and with the approval of the
relevant PRC government authorities, the property, plant, equipment and
the business of Pabst Blue Ribbon Brewery (Zhaoqing) Co. Ltd. ("Pabst
Blue Ribbon"), an unrelated PRC owned enterprise, were disposed of to
Zhaoqing Brewery and then to the Company as capital contribution. Pabst
Blue Ribbon is a subsidiary of the Blue Ribbon Group.
Since commencement of business on November 6, 1993, the Company has
principally been engaged in the production and sale of beer products in
the PRC. The Company's principal product is Blue Ribbon beer produced
and sold under non-exclusive Pabst trademarks which were granted by
Guangdong Blue Ribbon Group Co., Ltd. ("Blue Ribbon Group") (see note
22), an unrelated PRC owned enterprise. Malt, rice, hops, water and
packing materials are the major raw materials in the production of Blue
Ribbon beer. Effective from July 1, 1995, all beer products produced by
the Company were sold to Zhaoqing Blue Ribbon Beer Marketing Company
Limited ("Blue Ribbon Marketing"), which was formed to promote and
distribute beer products. Blue Ribbon Marketing is 70% owned by
Zhaoqing Brewery, which acts as a nominee on behalf of Zhaoqing Blue
Ribbon High Worth Brewery Ltd. ("High Worth Brewery") and 30% directly
by Blue Ribbon Group. The Blue Ribbon Group also owns indirectly 28% of
Blue Ribbon Marketing.
Goldjinsheng is a wholly-owned subsidiary of Noble China Inc., a
company listed in the Toronto Stock Exchange.
Zhaoqing Brewery is a wholly-owned subsidiary of High Worth Brewery, a
Sino-foreign equity joint venture enterprise registered in the PRC in
which Blue Ribbon Group and High Worth Holdings Limited, a wholly owned
subsidiary of CBR Brewing Company, Inc. ("CBR"), hold 40% and 60%
interests, respectively.
F - 8
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
(Registered in the People's Republic of China)
2. BASIS OF PRESENTATION
The financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of
America ("US GAAP"). This basis of accounting differs from that used in
the preparation of the statutory financial statements of the Company
which are prepared in accordance with the accounting principles and
relevant financial regulations established by the Ministry of Finance
of the PRC.
The major adjustments made to the PRC statutory financial statements to
conform with the accrual basis under US GAAP include the adjustments
for sales, interest income and purchases recognized on a cash basis,
depreciation and deferred taxation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION - Sales represent the invoiced value of goods sold,
net of returns and discounts. Sales and sales discounts are recognized
upon delivery of goods to customers. Sales returns are recognized upon
receipt of goods returned from customers.
INVENTORIES - Inventories are stated at the lower of cost or market
value. Cost, which comprises direct materials, direct labor costs and
overheads associated with the manufacturing processes, is calculated
using the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is stated
at cost less an allowance for depreciation and amortization. Cost
includes the fair value of property, plant and equipment transferred
from Pabst Blue Ribbon.
Depreciation and amortization are provided using the straight-line
method to write off the cost of property, plant and equipment over
their estimated useful lives as follows:
<TABLE>
<S> <C>
Land use rights ................... 20 years
Buildings ......................... 20 years
Plant, machinery and equipment .... 15 years
Motor vehicles .................... 10 years
</TABLE>
F - 9
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
(Registered in the People's Republic of China)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
According to the laws of the PRC, the title to all PRC land is retained
by the PRC government. The land use rights represent the cost for the
rights to use the land for premises granted by the State Land
Administration Bureau. The land use rights are stated at cost and are
amortized over the shorter of the venture term of the Company or the
term of the land use right.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company regularly reviews its
property, plant and equipment for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not
be recoverable based upon undiscounted cash flows expected to be
produced by such assets over their expected useful lives.
ADVERTISING EXPENSES - Advertising expenses are charged to expense in
the statements of income as incurred.
INCOME TAXES - Income taxes are determined under the liability method
in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires deferred
taxes be adjusted to reflect the tax rates at which future taxable
amounts will be settled or recognized. The effects of tax rate changes
on future deferred tax liabilities and deferred tax benefits, as well
as other changes in income tax laws, are recognized in net earnings in
the period when such changes are enacted.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on
hand, cash accounts, interest bearing saving accounts, and short-term
bank deposits with original maturities of three months or less.
FOREIGN CURRENCY TRANSLATION - The financial records and the statutory
financial statements of the Company are maintained in Renminbi. In
preparing the financial statements, all foreign currency transactions
are translated into Renminbi using the applicable rates of exchange,
quoted by the Zhaoqing Foreign Exchange Adjustment Center (the "swap
center") for the respective periods. Monetary assets and liabilities
denominated in foreign currencies have been translated into Renminbi
using the rate of exchange quoted by the swap center prevailing at the
balance sheet date. The resulting exchange gains or losses have been
credited or charged to the statement of income in the period for which
they occur.
Translation of amounts from Renminbi ("RMB") into United States dollars
("US$") is for the convenience of the reader only and has been made at
the swap center rate as quoted by the People's Bank of China on
December 31, 1997 of US$1.00 = RMB8.30. No representation is made that
the Renminbi amounts could have been, or could be, converted into
United States dollars at that rate or at any other rate.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F - 10
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
(Registered in the People's Republic of China)
4. ACCOUNTS RECEIVABLE
Accounts receivable comprise:
<TABLE>
<CAPTION>
1996 1997
---- ----
RMB RMB
<S> <C> <C>
Accounts receivables - trade............................................... 9,469,962 3,395,699
Less: Allowance for doubtful accounts...................................... (2,246,703) (1,039,451)
----------- -----------
7,223,259 2,356,248
----------- -----------
----------- -----------
</TABLE>
Movement of allowance for doubtful accounts:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
RMB RMB RMB
<S> <C> <C> <C>
Balance as at January 1..................................... - 786,740 2,246,703
Provided (written back) during the year..................... 786,740 1,459,963 (1,207,252)
----------- ------------- -------------
Balance as at December 31................................... 786,740 2,246,703 1,039,451
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
5. BILLS RECEIVABLE
Bills receivable represent accounts receivable in the form of bills of
exchange whose acceptances and settlements are handled by banks.
6. INVENTORIES
<TABLE>
<CAPTION>
1996 1997
---- ----
RMB RMB
<S> <C> <C>
Inventories comprise:
Raw materials.............................................................. 30,136,756 24,305,088
Work in progress........................................................... 8,247,938 9,036,356
Finished goods............................................................. 2,193,257 2,515,554
-------------- --------------
40,577,951 35,856,998
-------------- --------------
-------------- --------------
</TABLE>
F - 11
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
(Registered in the People's Republic of China)
7. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1997
---- ----
RMB RMB
<S> <C> <C>
At cost:
Land use rights and buildings............................................ 162,700,681 179,287,307
Plant, machinery and equipment........................................... 354,772,134 403,042,842
Motor vehicles........................................................... 5,991,280 6,962,620
-------------- -------------
Total.................................................................... 523,464,095 589,292,769
Less: Accumulated depreciation and amortization.......................... (89,983,400) (124,593,046)
-------------- -------------
433,480,695 464,699,723
-------------- -------------
-------------- -------------
</TABLE>
8. BANK LOANS
The short-term bank loan as at December 31, 1997 was collaterized by
certain property, plant and equipment of the Company, bore fixed
interest rates of 12.3% in 1996 and 11.1% in 1997 and is wholly
repayable in 1998. The weighted average interest rates as of December
31, 1996 and 1997 are 12.3% and 11.1% per annum, respectively.
There are no significant covenants or financial restrictions relating
to the Company's short-term bank borrowings. Details of assets pledged
by the Company are described in note 21.
9. INCOME TAXES
The Company is governed by the Income Tax Laws of the PRC concerning
Foreign Investment Enterprises and Foreign Enterprises and various
rules and regulations (the "Income Tax Laws"). Pursuant to the Income
Tax Laws, foreign investment enterprises engaging in a production
business located in Zhaoqing are subject to income tax at the rate of
27% on income as reported in its statutory financial statements.
Pursuant to the Income Tax Laws, if the investor of a foreign
investment enterprise reinvests its share of distributable profits from
the enterprise, the investor is entitled to receive a tax refund of the
income tax paid on the reinvested amount.
With a tax concession obtained from the PRC tax authority, the Company
is exempt from income taxes for the two financial years commencing with
its first profitable year of operations, and thereafter with a 50%
reduction for the next three financial years. Based on its local
statutory financial statements, the Company has attained its first
profitable year of operations for the financial year ended December 31,
1993. As the Company only earned profits for two months in 1993, the
Company has applied for an extension of the tax holiday period to 1995
which was approved by the PRC tax authority. Accordingly, no current
income taxes were provided by the Company for the years ended December
31, 1994 and 1995. For the years ended December 31, 1996 and 1997,
current income taxes based on the 50% reduction rule were provided.
F - 12
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
(Registered in the People's Republic of China)
The aggregate income tax benefit from the tax exemption and reduction
status for the years ended December 31, 1995, 1996 and 1997 amounted to
approximately RMB26,100,000, RMB16,000,000 and RMB22,300,000,
respectively.
F - 13
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
(Registered in the People's Republic of China)
9. INCOME TAXES - continued
The reconciliation of the effective income tax rate of the Company to
the relevant statutory income tax rate in the PRC is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate................................... 27% 27% 27%
Tax holiday.......................................... (27%) (15%) (15%)
Accelerated depreciation allowances.................. 3% 4% 3%
Change in tax rate................................... (1%) - -
--------- --------- ---------
Effective tax rate................................... 2% 16% 15%
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
---- ---- ----
RMB RMB RMB
<S> <C> <C> <C>
Current.............................................. - 13,035,421 18,131,616
Deferred............................................. 2,200,000 3,500,000 3,200,000
------------- -------------- --------------
2,200,000 16,535,421 21,331,616
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
The provision for deferred income taxes is based on the liability
method prescribed by Statement of Financial Accounting Standards No.
109. The Company's temporary differences mainly represented the
accelerated depreciation allowances provided on property, plant and
equipment.
10. SALES TAXES
Effective from January 1, 1994, the Company is subject to three kinds
of sales taxes, being value added tax ("VAT"), consumption tax and
other sales taxes. The applicable VAT rate is 17% for brewery products
sold in the PRC and nil for exported goods. The amount of VAT liability
is determined by applying the applicable VAT tax rate to the invoiced
amount of goods sold less VAT paid on purchases made with the relevant
invoices in support. VAT is collected from customers by the Company on
behalf of the PRC tax authorities and is therefore not charged to the
statement of income. The applicable consumption tax rate in respect of
brewery products is RMB220 per ton. The consumption tax expensed to the
statement of income is determined based on the volume of sales within
the PRC vicinity. Exported goods are exempted. The other sales taxes
are assessed as a percentage of consumption tax and VAT payable.
F - 14
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
(Registered in the People's Republic of China)
11. CONTRIBUTED CAPITAL
The Company was registered with a capital of US$50,000,000. At the
balance sheet date, a total of RMB475,940,000 was contributed by the
joint venture parties.
F - 15
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
(Registered in the People's Republic of China)
12. FOREIGN CURRENCY EXCHANGE
The Renminbi is not freely convertible into foreign currencies. Prior
to January 1, 1994, all foreign exchange transactions involving
Renminbi in the PRC took place either through the Bank of China or
other institutions authorized to buy and sell foreign currencies, or at
the approved swap centers in the PRC. The swap centers are institutions
which are administered by the State Administration of Foreign Exchange
and its branches. The exchange rates used for transactions through the
Bank of China and other authorized institutions were set by the PRC
government, through the State Administration of Foreign Exchange, from
time to time. The exchange rates available at a swap center are
determined largely by supply and demand based on foreign currency and
Renminbi requirements of enterprises operating or doing businesses in
the PRC.
On January 1, 1994, the PRC government abolished the dual exchange rate
system, comprising the official rates and the swap center rates, and
introduced a single rate of exchange as quoted by the People's Bank of
China. The unified exchange rate is quoted at levels similar to those
quoted by the swap centers. However, the unification of exchange rates
does not imply full convertibility of Renminbi into United States
dollars or other foreign currencies. All foreign exchange transactions
continue to take place either through the Bank of China or other
institutions authorized to buy and sell foreign currencies or the swap
centers at the exchange rates quoted by the People's Bank of China. In
April 1994, the National Foreign Exchange Trading Center in Shanghai
(the "exchange center") commenced operations. Enterprises operating in
the PRC can enter into exchange transactions at the exchange center
through the Bank of China or other authorized institutions. Payments
for imported materials and remittances of earnings outside the PRC are
subject to the availability of foreign currency which are dependent on
the foreign currency denominated earnings of the Company or must be
arranged through the exchange center. Approval for exchange at the
exchange center is granted to enterprises in the PRC for valid reasons
such as purchases of imported materials and remittances of earnings.
While conversion of Renminbi into United States dollars or other
foreign currencies can generally be effected at an exchange center,
there is no guarantee that it can be effected at all times.
Effective July 1, 1996, the PRC government began to take steps to make
its currency fully convertible on a "current account" basis. This will
allow foreign-funded enterprises, whether wholly owned or joint
ventures with Chinese, to buy and sell foreign currencies in banks for
purposes of trade, services, debt repayment and profit repatriation.
The "current account" measures the flow of money into and out of a
nation, including the net balance on trade in goods and services, plus
remittances.
The unified exchange rates of the RMB equivalent of US$1.00 as of
December 31, 1995, 1996 and 1997 were RMB8.32, RMB8.32 and RMB8.30,
respectively.
F - 16
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
(Registered in the People's Republic of China)
13. GENERAL RESERVE AND ENTERPRISE DEVELOPMENT FUNDS
As stipulated by the relevant laws and regulations for foreign
investment enterprises, the Company is required to make appropriations
to a general reserve fund, an enterprise development fund and an
employee welfare and incentive fund, in which the percentages of annual
appropriations are subject to the joint venture agreement. The employee
welfare and incentive fund is charged to the statement of income. The
other appropriations are accounted for as reserve funds in the balance
sheet and are not available for distribution as dividends to the joint
venture partners of the Company. Under the joint venture agreement, the
board of directors shall determine the appropriations with regard to
the economic situation of the Company. The percentages of annual
appropriations to a general reserve fund, an enterprise development
fund and an employee welfare and incentive fund for 1997 have already
been determined by the board of directors and the appropriations have
been reported in the statutory financial statements.
14. RETAINED EARNINGS
As described in note 2, the net income as reported in the US GAAP
financial statements differs from that as reported in the PRC statutory
financial statements. In accordance with the relevant laws and
regulations for Sino-foreign equity joint venture enterprises, the
profits available for distribution are based on the statutory financial
statements. If the Company has foreign currency available after meeting
its operational needs, the Company may make profit distributions in
foreign currency to the extent it is available. Otherwise, it will be
necessary to convert such distributions at an exchange center. As of
December 31, 1996 and 1997, the retained earnings available for
distribution amounted to approximately RMB86,034,000 and
RMB117,665,000, respectively.
15. ADVERTISING EXPENSES
The Company incurred advertising expenses of RMB25,517,797,
RMB3,298,054 and RMB1,112,611 for the years ended December 31, 1995,
1996 and 1997, respectively.
16. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Interest paid during the years ended December 31, 1995, 1996 and 1997
was RMB2,240,015, RMB3,450,585 and RMB1,458,454, respectively. Income
tax paid for the year ended December 31, 1997 was RMB20,253,436. No
income tax was paid during 1995 and 1996.
F - 17
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
(Registered in the People's Republic of China)
17. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
(a) Amounts due from related companies
The amounts receivable from related companies mainly
represented the receivable balances from companies of the Blue
Ribbon Group, High Worth Brewery, Goldjinsheng and Blue Ribbon
Marketing amounting to approximately RMB9,100,000, RMB200,000,
RMB100,000 and RMB167,000,000, respectively, for 1996 and
RMB6,900,000, nil, RMB500,000 and RMB209,600,000,
respectively, for 1997.
The balances with Blue Ribbon Group, High Worth Brewery and
Goldjinsheng principally represented expenses paid by the
Company on their behalf.
The balance with Blue Ribbon Marketing was operating in nature
and principally represented accounts receivable from sales of
finished goods.
The amounts receivable from related companies are unsecured,
interest-free and repayable on demand.
(b) Amounts due to related companies
As of December 31, 1996 and 1997, the amounts due to related
companies principally represented balances arising from the
purchases of raw materials from American National Can
(Zhaoqing) Co., Ltd. and Zhaoqing Blue Ribbon Carton
Manufacturing Co. in which Blue Ribbon Group has equity
interests.
The balances are unsecured, interest-free and repayable on
demand.
F - 18
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
(Registered in the People's Republic of China)
17. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS - continued
(c) Related party transactions
The Company had transactions with companies in which Blue
Ribbon Group or High Worth Brewery have equity interests. The
significant transactions are summarised below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Sales of beer products to
Blue Ribbon Marketing................... 327,805,406 695,150,225 675,247,962
Sales of beer products to
Blue Ribbon Group....................... - - 2,662,069
Purchases of raw materials
from American National
Can (Zhaoqing) Co., Ltd................. 78,818,909 94,037,194 71,436,977
Purchases of raw materials
from Zhaoqing Blue
Ribbon Carton
Manufacturing Co........................ 12,536,576 23,307,386 21,031,427
Royalty fee paid to Blue
Ribbon Group............................ 15,434,144 15,106,029 14,317,306
Management fee paid to
Blue Ribbon Group....................... 2,035,000 2,035,000 2,035,000
</TABLE>
18. RETIREMENT PLAN
As stipulated by the PRC government regulations, the Company has
defined contribution retirement plans for all its permanent staff. The
Company and its staff are required to contribute to the PRC insurance
companies organized by the PRC government which are responsible for the
payment of pension benefits to retired staff. Prior to June 30, 1994,
the monthly contribution of the Company was calculated at 9.3% of the
basic salary of the permanent staff and the monthly contribution of
each permanent staff was RMB2. Effective from July 1, 1994, the monthly
contributions of the Company and the permanent staff were calculated at
14.6% and 2%, respectively, of the basic salary of the permanent staff.
The pension costs expensed by the Company for the years ended December
31, 1995, 1996 and 1997 amounted to RMB472,371, RMB337,760 and
RMB847,516, respectively.
F - 19
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
(Registered in the People's Republic of China)
19. FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for current assets
and current liabilities qualifying as financial instruments approximate
their fair values because of the short maturity of such instruments.
20. CONCENTRATION OF RISKS
The Company's operating assets and primary source of income and cash
flows are in the PRC. The PRC economy has, for many years, been a
centrally-planned economy, operating on the basis of annual, five-year
and ten-year state plans adopted by central PRC governmental
authorities which set out national production and development targets.
The PRC government has been pursuing economic reforms since it first
adopted its "open-door" policy in 1978. There is no assurance that the
PRC government will continue to pursue economic reforms or that there
will not be any significant changes in its economic or other policies,
particularly in the event of any change in the political leadership of,
or the political, economic or social conditions in, the PRC. There is
also no assurance that the Company will not be adversely affected by
any such change in government policies or any unfavorable change in the
political, economic or social conditions, the laws or regulations or
the rate or method of taxation in the PRC.
As many of the economic reforms which have been or are being
implemented by the PRC government are unprecedented or experimental,
they may be subject to adjustment or refinement which may have adverse
effects on the Company. Further, through state plans and other economic
and fiscal measures, it remains possible for the PRC government to
exert significant influence on the PRC economy.
All the Company's revenues are wholly derived from the sale of Pabst
Blue Ribbon beer.
The Company sold almost 100% of its products to Blue Ribbon Marketing
in 1996 and 1997, respectively, and is heavily dependent on the sales
to the related company.
The Company currently uses foreign currency to pay for imported raw
materials and dividend payments. For details of foreign currency risks,
please refer to note 12.
The financial instruments that are exposed to concentration of credit
risk consist primarily of cash and accounts receivable from related
companies. Cash is maintained with major banks in the PRC. The
Company's business activity is with related companies in the PRC. The
Company periodically performs credit analysis and monitors the
financial condition of its customers and related companies in order to
minimize credit risk.
F - 20
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
(Registered in the People's Republic of China)
21. PLEDGE OF ASSETS
Land use rights and buildings and certain plant, machinery and
equipment of the Company with an aggregate net book value amounting to
RMB138,497,516 and RMB4,963,826 as at December 31, 1996 and 1997,
respectively, were collateralized to secure bank borrowings of
RMB13,500,000 and RMB1,500,000, respectively.
22. COMMITMENTS AND CONTINGENCIES
Blue Ribbon Group entered into licensing arrangements with Pabst
Brewing Company whereby Blue Ribbon Group was granted the exclusive
right to produce and market products under four specific Pabst
trademarks in the PRC, the non-exclusive right to market such products
in other Asian countries except Hong Kong, Macau, Japan and South
Korea, and the right to sublicense the use of the trademarks to any
other enterprise in the PRC.
Pursuant to the terms of the sublicense agreement, the Company was
granted by Blue Ribbon Group the right to use the two specific Pabst
trademarks for the production, promotion, distribution and sale of beer
under such trademarks. The production right of the Company however is
confined exclusively for the Guangdong Province only and it does not
preclude High Worth Brewery's production rights in Guangdong as
described in (a) and (b) below.
The sublicense agreement is valid until November 7, 2003. In
consideration for the sublicense granted, the Company is committed to
pay Blue Ribbon Group a royalty fee of US$0.10 for each carton of
bottled or canned beer produced.
A provisional agreement, subject to governmental approval, was made
among CBR and its subsidiary, the group companies of Noble China Inc.,
and Blue Ribbon Group on May 10, 1995 to the effect that:
(a) High Worth Brewery was entitled to be granted from Blue Ribbon
Group the right to brew and sell beer under the Pabst Blue
Ribbon label produced in its brewing facilities up to a
maximum production capacity of 100,000 tons per annum.
(b) High Worth Brewery and/or companies that High Worth Brewery
has an interest in are entitled to be granted a sublicense
from Blue Ribbon Group with the right to produce and sell beer
under the Pabst Blue Ribbon label in the Guangdong Province of
the PRC ("Additional Facility") to a maximum production
capacity of 300,000 tons per annum.
In the event that High Worth Brewery desires to obtain a
sublicense for any Additional Facility, Goldjinsheng has the
right to purchase up to a 40% interest in such Additional
Facility. The purchase price for such interest shall be the
actual cost of such Additional Facility multiplied by the
percentage interest that Goldjinsheng elects to purchase.
F - 21
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
(Registered in the People's Republic of China)
22. COMMITMENTS AND CONTINGENCIES - continued
(c) A proposed new marketing company ("New Marketing Company"),
owned as to 8% by Blue Ribbon Group, 52% by High Worth Brewery
and 40% by Goldjinsheng, shall be formed to handle and
organize the sales of Pabst Blue Ribbon beer produced by
Zhaoqing Brewery and the Company. Each of Zhaoqing Brewery and
the Company will create a separate distribution company or
division of their own. The respective distribution companies
will appoint the New Marketing Company as their sole and
exclusive agent to market Pabst Blue Ribbon beer in the PRC.
Another agreement was made among Goldjinsheng, Blue Ribbon Group and
the Company on May 10, 1996 to the effect that the Company agreed to
pay Blue Ribbon Group management fees of RMB2,035,000 per annum for a
period of five years commencing January 1, 1995 (see note 17(c).
The Company had commitments of approximately RMB32,010,000 and
RMB5,700,000 for capital expenditure in respect of property, plant and
equipment at December 31, 1996 and 1997, respectively.
During the year, certain allegations were raised against the Company by
the former chairman and CEO of Noble China Inc. concerning
irregularities on the financial statements of the Company in previous
years. As the allegations were not further substantiated despite the
request of the Company, the directors of the Company are of the opinion
that the allegations were of no substance and, accordingly, have not
resulted and will not result in any material adverse effect to the
Company.
For contingencies relates to foreign currency exchange risk and
concentration of risks, see notes 12 and 20.
23. POST BALANCE SHEET EVENT
On January 20, 1998, Goldjinsheng and Zhaoqing Brewery has entered into
an agreement which stipulated that their respective interests in the
Company will be transferred to Linchpin Holdings Limited, another
wholly-owned subsidiary of Noble China Inc., and High Worth Brewery
respectively. Upon receipt of approval from and registration by the
relevant authorities, Linchpin Holdings Limited and High Worth Brewery
will own 60% and 40% equity interests of the Company respectively.
F - 22
<PAGE>
CBR BREWING COMPANY, INC.
1998 STOCK OPTION PLAN
1. ESTABLISHMENT, PURPOSE AND DEFINITIONS.
a. The 1998 Stock Option Plan (the "Plan") of CBR Brewing
Company, Inc., a Florida corporation (the "Company"), is hereby adopted. The
Plan shall provide for the issuance of incentive stock options ("ISOs") and
nonqualified stock options ("NSOs") to purchase the Stock of the Company.
b. The purpose of this Plan is to promote the long-term success
of the Company by attracting, motivating and retaining directors, officers and
key employees and consultants of the Company and its Affiliates (the
"Participants") through the use of competitive long-term incentives which are
tied to shareholder value. The Plan seeks to balance Participants' and
shareholder interests by providing incentives to the Participants in the form of
stock options which offer rewards for achieving the long-term strategic and
financial objectives of the Company.
c. The Plan is intended to provide a means whereby Participants
may be given an opportunity to purchase shares of Stock of the Company pursuant
to (i) options which may qualify as ISOs under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Internal Revenue Code"), or (ii) NSOs
which may not so qualify.
d. The term "Affiliates" as used in this Plan means, in the
case of an ISO, parent or subsidiary corporations, as defined in Section 424(e)
and (f) of the Code (but substituting "the Company" for "employer corporation"),
including parents or subsidiaries which become such after adoption of the Plan,
and in all other cases, any entity which is controlled by or which controls the
Company.
2. ADMINISTRATION OF THE PLAN.
a. The Plan shall be administered by the Compensation Committee
of the Board of Directors (the "Board") or such other committee appointed by the
Board to administer the Plan (the "Committee").
b. The Committee may from time to time determine which
Participants (each an "option holder") shall be granted options under the Plan,
the terms thereof (including without limitation determining whether the option
is an ISO and the times at which the options shall become exercisable), and the
number of shares of Common Stock for which an option or options may be granted.
EXHIBIT 10-13
<PAGE>
c. If rights of the Company to repurchase Stock are imposed,
the Board or the Committee may, in its sole discretion, accelerate, in whole or
in part, the time for lapsing of any rights of the Company to repurchase shares
of such Stock or forfeiture restrictions.
d. If rights of the Company to repurchase Stock are imposed,
the certificates evidencing such shares of Stock awarded hereunder, although
issued in the name of the option holder concerned, shall be held by the Company
or a third party designated by the Committee in escrow subject to delivery to
the option holder or to the Company at such times and in such amounts as shall
be directed by the Board under the terms of this Plan. Share certificates
representing Stock which is subject to repurchase rights shall have imprinted or
typed thereon a legend or legends summarizing or referring to the repurchase
rights.
e. The Board or the Committee shall have the sale authority, in
its absolute discretion, to adopt, amend and rescind such rules and regulations,
consistent with the provisions of the Plan, as, in its opinion, may be advisable
in the administration of the Plan, to construe and interpret the Plan, the rules
and regulations, and the instruments evidencing options granted under the Plan
and to make all other determinations deemed necessary or advisable for the
administration of the Plan. All decisions, determinations and interpretations
of the Committee shall be binding on all option holders under the Plan.
3. STOCK SUBJECT TO THE PLAN.
a. "Stock" shall mean the Class A Common Stock of the Company
or such stock as may be changed as contemplated by Section 3(c) below. Stock
shall include shares drawn from either the Company's authorized but unissued
shares of Common Stock or from reacquired shares of Common Stock, including
without limitation shares repurchased by the Company in the open market.
b. Options may be granted under the Plan from time to time to
eligible persons to purchase an aggregate of up to 800,000 shares of Stock, and
no more than 80,000 options may be granted to any one Participant in any year.
Stock options awarded pursuant to the Plan which are forfeited, terminated,
surrendered or cancelled for any reason prior to exercise shall again become
available for grants under the Plan (including any option cancelled in
accordance with the cancellation regrant provisions of Section 6(f) herein).
c. If there shall be any change in the Stock subject to the
Plan, including Stock subject to any option granted hereunder, through merger,
reorganization, reincorporation, stock split, reverse stock split, stock
dividend, combination or reclassification of the Company's Stock or other
similar events, an
2
<PAGE>
appropriate adjustment shall be made by the Committee in the number of shares
and/or the option price with respect to any unexercised shares of Stock.
Consistent with the foregoing, in the event that the outstanding Stock is
changed into another class or series of capital stock of the Company,
outstanding options to purchase Stock granted under the Plan shall become
options to purchase such other class or series and the provisions of this
Section 3(c) shall apply to such new class or series.
d. The Company may grant options under the Plan in substitution
for options held by employees of another company who become employees of the
Company as a result of merger or consolidation. The Company may direct that
substitute options be granted on such terms and conditions as deemed appropriate
by the Board or the Committee.
e. The aggregate number of shares of Stock approved by the Plan
may not be exceeded without amending the Plan and obtaining shareholder approval
within twelve months of such amendment.
4. ELIGIBILITY.
Persons who shall be eligible to receive stock options granted under
the Plan shall be those Participants referred to in Section l(b) above;
provided, however, that(i) ISOs may only be granted to employees of the
Company and its Affiliates and (ii)any person holding capital stock
possessing more than 10% of the total combined voting power of all classes of
capital stock of the Company or any Affiliate shall not be eligible to
receive ISOs unless the exercise price per share of Stock is at least 1 110%
of the fair market value of the Stock on the date the option is granted.
5. EXERCISE PRICE FOR OPTIONS GRANTED UNDER THE PLAN.
a. All ISOs will have option exercise prices per option share
equal to the fair market value of a share of the 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 shall be not less than 110% of such fair
market value. The option exercise prices per option for NSO's shall be as
determined by the Committee. The price of ISOs or NSOs granted under the Plan
shall be subject to adjustment to the extent provided in Section 3(c) above.
b. The fair market value on the date of grant shall be
determined based upon the closing price on an exchange on that day or, if the
Stock is not listed on an exchange, on the average of the closing bid and asked
prices in the Over the Counter Market on that day.
3
<PAGE>
6. TERMS AND CONDITIONS OF OPTIONS.
a. Each option granted pursuant to the Plan shall be evidenced
by a written stock option agreement (the "Option Agreement") executed by the
Company and the person to whom such option is granted. The Option Agreement
shall designate whether the option is an ISO or an NSO.
b. The term of each ISO and NSO shall be no more than 10 years,
except that the term of each ISO issued to any person possessing more than 10%
of the voting power of all classes of stock of the Company or any Affiliate
shall be no more than 5 years.
c. In the case of ISOs, the aggregate fair market value
(determined as of the time such option is granted) of the Stock to which ISOs
are exercisable for the first time by any individual during any calendar year
(under this Plan and any other plans of the Company or its Affiliates if any)
shall not exceed the amount specified in Section 422(d) of the Internal Revenue
Code, or any successor provision in effect at the time an ISO becomes
exercisable.
d. The Option Agreement may contain such other terms,
provisions and conditions regarding vesting, repurchase or other similar
provisions as may be determined by the Committee and not inconsistent with this
Plan. If an option, or any part thereof, is intended to qualify as an ISO, the
Option Agreement shall contain those terms and conditions which the Committee
determine are necessary to so qualify under Section 422 of the Internal Revenue
Code.
e. The Committee shall have full power and authority to extend
the period of time for which any option granted under the 1997 Option Plan is to
remain exercisable following the option holder's cessation of service as an
employee or consultant, including without limitation cessation as a result of
death or disability; provided, however, that in no event shall such option be
exercisable after the specified expiration date of the option term.
f. The Committee shall have full power and authority to effect
at any time and from time to time, with the consent of the affected option
holders, the cancellation of any or all outstanding options under the Plan and
to grant in substitution new options under the Plan covering the same or
different numbers of shares of Stock with the same or different exercise prices.
g. As a condition to option grants under the Plan, the option
holder agrees to grant the Company the repurchase rights as Company may at its
option require and as may be set forth in the Option Agreement or a separate
repurchase agreement.
4
<PAGE>
h. Any option granted under the Plan may be subject to a
vesting schedule as provided in the Option Agreement and, except as provided in
this Section 6 herein, only the vested portion of such option may be exercised
at any time during the Option Period. All rights to exercise any option shall
lapse and be of no further effect whatsoever immediately if the option holder's
service as an employee is terminated for "Cause" (as hereinafter defined) or if
the option holder voluntarily terminates the option holder's service as an
employee. The unvested portion of the option will lapse and be of no further
effect immediately upon any termination of employment of the option holder for
any reason. In the remaining cases where the option holder's service as an
employee is terminated or due to death, permanent disability, or is terminated
by the Company (or its Affiliates) without Cause at any time, the vested portion
of the option will extend for a period of three (3) months following the
termination of employment and shall lapse and be of no further force or effect
whatsoever only if it is not exercised before the end of such three (3) month
period. There shall be "Cause" for termination as set forth in any applicable
employment or consulting agreement or, in the absence of such agreement if (i)
the option holder is convicted of a felony, (ii) the option holder engages in
any fraudulent or other dishonest act to the detriment of the Company, (iii) the
option holder fails to report for work on a regular basis, except for periods of
authorized absence or bona fide illness, (iv) the option holder misappropriates
trade secrets, customer lists or other proprietary information belonging to the
Company for the option holder's own benefit or for the benefit of a competitor,
(v) the option holder engages in any willful misconduct designed to hone the
Company or its shareholders, or (vi) the option holder fails to perform properly
assigned duties with a failure to cure after 20 days notice.
i. No fractional shares of Stock shall be issued under the
Plan, whether by initial grants or any adjustments to the Plan.
7. USE OF PROCEEDS.
Cash proceeds realized from the sale of Stack under the Plan
shall constitute general funds of the Company.
8. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN.
a. The Board may at any time suspend or terminate the Plan, and
may amend it from time to time in such respects as the Board may deem advisable
provided that (i) such amendment, suspension or termination complies with all
applicable state and federal requirements and requirements of any stock exchange
on which the Stock is then listed, including any applicable requirement that the
Plan or an amendment to the Plan be approved by the shareholders. The Plan
shall
5
<PAGE>
terminate on the earlier of (i) ten (10) years from December 1, 1997 or (ii)
the date on which no additional shares of Stock are available for issuance
under the Plan.
b. No option may be granted during any suspension or after the
termination of the Plan, and no amendment, suspension or termination of the Plan
shall without the option holder's consent, alter or impair any rights or
obligations under any option granted under the plan.
c. The Committee, with the consent of affected option holders,
shall have the authority to cancel any or all outstanding options under the Plan
and grant new options having an exercise price which may be higher or lower than
the exercise price of cancelled options.
9. ASSIGNABILITY OF OPTIONS AND RIGHTS.
a. Subject to Subparagraph (a), no Option issued under the Plan
shall be assignable or transferable by an option holder other than by will or
the laws of descent and distribution. An Option awarded to an option holder
during such option holder's lifetime shall be exercisable only by an option
holder or his or her guardian or legal representation.
b. Notwithstanding Subparagraph (a), in the case of an , an
option holder shall be permitted to transfer the Option to the option holder's
spouse, adult lineal descendants, adult spouses of adult lineal descendants and
trusts for the benefit of the option holder's minor or adult lineal descendants
(a'Related Transferee") if the Option Agreement under which the Option is
granted so specifies. If the Option is transferred to a Related Transferee
pursuant to the preceding sentence, the Related Transferee shall, upon exercise
of the Option, hold the Stock subject to all the provisions of the transferor's
Option Agreement in the same manner as the transferor and shall execute and
deliver to the Company such instruments as the Company shall require to evidence
the same.
10. PAYMENT UPON EXERCISE.
Payment of the purchase price upon exercise of any option or
right to purchase Stock granted under this Plan shall be made by giving the
Company written notice of such exercise, specifying the number of such shares of
Stack as to which the option is exercised. Such notice shall be accompanied by
payment of an amount equal to the Option Price of such shares of Stock. Such
payment may be (i) cash, (ii) by check drawn against sufficient funds, (iii) by
delivery to the Company of the option holder's promissory note, (iv) such other
consideration as the Committee, in its sole discretion, determines and is
consistent with the Plan's purpose and applicable law, or (v) any combination of
the foregoing. Any Stock used to exercise
6
<PAGE>
options to purchase Stock (including Stock withheld upon the exercise of an
option to pay the purchase price of the shares of Stock as to which the
option is exercised) shall be valued in accordance with procedures
established by the Committee. Any promissory note used to exercise options
to purchase Stock shall be a full recourse, interest-bearing obligation
secured by Stock in the Company being purchased and containing such terms as
the Committee shall determine. If a promissory note is used to exercise
options the option holder agrees to execute such further documents as the
Company may deem necessary or appropriate in connection with issuing the
promissory note, perfecting a security interest in the stock purchased with
the promissory note and any related terms the Company may propose. Such
further documents may include, without limitation, a security agreement and
an assignment separate from certificate. If accepted by the Committee in its
discretion, such consideration also may be paid through a broker-dealer sale
and remittance procedure pursuant to which the option holder (I) shall
provide irrevocable written instructions to a designated brokerage firm to
effect the immediate sale of the purchased Stock and remit to the Company,
out of the sale proceeds available on the settlement date, sufficient funds
to cover the aggregate option price payable for the purchased Stock plus all
applicable Federal and State income and employment taxes required to be
withheld by the Company in connection with such purchase and (II) shall
provide written directives to the Company to deliver the certificates for the
purchased Stock directly to such brokerage firm in order to complete the sale
transaction.
11. WITHHOLDING TAXES.
a. Shares of Stock issued hereunder shall be delivered to an
option holder only upon payment by such person to the Company of the amount of
any withholding tax required by applicable federal, state, local or foreign law.
The Company shall not be required to issue any Stock to an option holder until
such obligations are satisfied.
b. The Committee may, under such terms and conditions as it
deems appropriate, authorize an option holder to satisfy withholding tax
obligations under this Section 11 by surrendering a portion of any Stock
previously issued to the option holder or by electing to have the Company
withhold shares of Stock from the Stock to be issued to the option holder, in
each case having a fair market value equal to the a-mount of the withholding tax
required to be withheld.
12. CORPORATE TRANSACTION.
a. For the purpose of this Section 12, a "Corporate
Transaction" shall include any of the following shareholder-approved
transactions to which the Company is a party:
7
<PAGE>
(i) a merger or consolidation in which the Company is not
the surviving entity, except for a transaction the principal purpose of which is
to change the State of the Company's incorporation; or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company in liquidation or dissolution of
the Company.
b. Upon the occurrence of a Corporate Transaction, if the
surviving corporation or the purchaser, as the case may be, does not assume the
obligations of the Company under the Plan, then irrespective of the vesting
provisions contained in individual option agreements, all outstanding options
shall become immediately exercisable in full and each option holder will be
afforded an opportunity to exercise their options prior to the consummation of
the merger or sale transaction so that they can participate on a pro rata basis
in the transaction based upon the number of shares of Stock purchased by them on
exercise of options if they so desire. To the extent that the Plan is
unaffected and assumed by the successor corporation or its parent company a
Corporate Transaction will have no effect on outstanding options and the options
shall continue in effect according to their terms.
c. Each outstanding option under this Plan which is assumed in
connection with the Corporate Transaction or is otherwise to continue in effect
shall be appropriately adjusted, immediately after such Corporate Transaction,
to apply and pertain to the number and class of securities which would have been
issued to the option holder in connection with the consummation of such
Corporate Transaction had such person exercised the option immediately prior to
such Corporate Transaction. Appropriate adjustments shall also be made to the
option price payable per share, provided the aggregate option price payable for
such securities shall remain the same. In addition, the class and number of
securities available for issuance under this Plan following the consummation of
the Corporate Transaction shall be appropriately adjusted.
d. The grant of options under this Plan shall in no way affect
the right of the Company to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
13. LOANS OR GUARANTEE OF LOANS.
a. The Committee may, in its discretion, assist any option
holder in the exercise of options granted under this Plan, including the
satisfaction of any income and employment tax obligations arising therefrom by
(i) authorizing the extension of a loan from the Company to such option holder,
(ii) permitting the option
8
<PAGE>
holder to pay the exercise price for the Stock in installments over a period
of years or (iii) authorizing a guarantee by the Company of a third party
loan to the option holder. The terms of any loan, installment method of
payment or guarantee (including the interest rate and terms of repayment)
will be upon such terms as the Committee specifies in the applicable option
or issuance agreement or otherwise deems appropriate under the circumstances.
Loans, installment payments and guarantees may be granted with or without
security or collateral (other than to option holders who are not employees,
in which event the loan must be adequately secured by collateral other than
the purchased Stock). However, the maximum credit available to the option
holder may not exceed the exercise or purchase price of the acquired shares
of Stock plus any Federal and State income and employment tax liability
incurred by the option holder in connection with the acquisition of such
shares of Stock.
b. The Committee may, in its absolute discretion, determine
that one or more loans extended under this financial assistance program shall be
subject to forgiveness by the Company in whole or in part upon such terms and
conditions as the Committee may deem appropriate.
14. REGULATORY APPROVALS.
The obligation of the Company with respect to Stock issued under
the Plan shall be subject to all applicable laws, rules and regulations and such
approvals by any governmental agencies or stock exchanges as may be required.
The Company reserves the right to restrict, in whole or in part, the delivery of
Stock under the Plan until such time as any legal requirements or regulations
have been met relating to the issuance of Stock, to their registration or
qualification under the Securities Exchange Act of 1934, if applicable, or any
applicable state securities laws, or to their listing on any stock exchange at
which time such listing may be applicable.
15. NO EMPLOYMENT/SERVICE RIGHTS.
Neither the action of the Company in establishing this Plan, nor any
action taken by the Board or the Committee hereunder, nor any provision of this
Plan shall be construed so as to grant any individual the right to remain in the
employ or service of the Company (or any parent, subsidiary or affiliated
corporation) for any period of specific duration, and the Company (or any
parent, subsidiary or affiliated corporation retaining the services of such
individual) may terminate or change the terms of such individual's employment or
service at any time and for any reason, with or without cause.
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16. MISCELLANEOUS PROVISIONS.
a. The provisions of this Plan shall be governed by the laws of
the State of Florida, as such laws are applied to contracts entered into and
performed in such State, without regard to its rules concerning conflicts of
law.
b. The provisions of this Plan shall inure to the benefit of,
and be binding upon, the Company and its successors or assigns, whether by
Corporate Transaction or otherwise, and the option holders, the legal
representatives of their respective estates, their respective heirs or legatees
and their permitted assignees.
c. The option holders shall have no divided rights, voting
rights or any other rights as a shareholder with respect to any options under
the Plan prior to the issuance of a stock certificate for such Stock.
d. With respect to grants to non-U.S. residents, options may be
granted hereunder which may vary from the terms of the Plan but which are
consistent with the terms hereof to the extent necessary or appropriate to
comply with foreign laws including but not limited to tax laws.
Approved by Board of Directors on January 1998.
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EXHIBIT 10.14
JOINT VENTURE AGREEMENT
HUBEI BLUE RIBBON HIGH WORTH BREWERY LTD.
CHAPTER 1 GENERAL
Whereas in accordance with "The Companies Law of the People's Republic
of China" and other relevant legislations and regulations of China and having
regard to international rules and practices, on the basis of equality and
procuring mutual benefits, friendly co-operation and mutual development, it
was agreed to establish "Hubei Blue Ribbon High Worth Brewery Ltd." and do
hereby make this Agreement.
CHAPTER 2 PARTIES TO THE JOINT VENTURE
Party A: Zhaoqing Blue Ribbon High Worth Brewery Ltd.
Registered Address: Ba Lu, Duanzhou, Zhaoqing, Guangdong, China
Legal Representative: Chen Zi Shou
Position: President
Party B: Zao Yang Brewery
Registered Address: No. 27, Min Zu Lu, Zao Yang City, Hubei, China
Legal Representative: Fu Guang Huan
Position: General Manager
CHAPTER 3 ESTABLISHMENT OF JOINT VENTURE COMPANY
1. Party A and Party B have agreed to establish "Hubei Blue Ribbon High Worth
Brewery Ltd., (hereinafter referred to as "the Company") in accordance with
the Companies Law and other relevant rules and regulations prevailing in
the People's Republic of China (the"PRC"). The registered address of the
Company is No. 27, Min Zu Lu, Zao Yang City, Hubei, China.
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2. Party A and Party B assume liabilities up to the limit of their respective
capital contributions (i.e. registered capital). All liabilities incurred
by Party B prior to the effective date of this Agreement are not to be
assumed to the Company. In case of any disputes being unsettled prior to
the establishment of the Company, and subsequently cause the Company to
suffer from any economic losses, Party B shall be responsible for such
indemnity. All activities of the Company shall comply with the
legislations, regulations, orders and relevant rules of the PRC.
3. The Company is a company with limited liability. Parties to the joint
venture shall assume liability up to the limit of their respective capital
contributions. Both Parties shall share the profit and loss and undertake
the risk according to the ratio of their respective capital contribution to
the registered capital.
4. The Company shall be formally established on the date when the Industrial
and Commercial Management Bureau of Zao Yang City issues the Business
Registration Certificate.
CHAPTER 4 OBJECTIVE, SCALE AND SCOPE OF BUSINESS
1. The objectives of the Company are to fulfill the wishes of both investors
in respect of the strengthening of economic co-operation through the joint
venture Company. By using advanced technologies and equipment, the Company
will become a technically advanced brewing enterprise within the country.
The Company should adopt suitable technologies and scientific management
method to achieve economic and social benefits for both investors, as well
as to promote economic and technological development for the local society.
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2. The business of the Company shall be the production and sale of beer
products, malt beverage products and other beverage related products,
having regard to the actual situation, and to explore other related
businesses which are permitted by the rules and regulations prevailing in
the PRC.
3. The production scale of the Company shall be 40,000 tonnes of beer products
per annum and after the technological renovation, the Company shall, if
possible, increase the annual production capacity to 100,000 tonnes as soon
as possible.
CHAPTER 5 TOTAL INVESTMENT, INVESTMENT RATIO AND REGISTERED CAPITAL
Both Parties agreed that the total capital investment to the Company should
be RMB 38,000,000 while the registered capital of the Company is RMB 29,280,000.
1. Party A and Party B agreed that the net assets value of the land use
rights, factory premises, plant and machineries and other auxiliary
facilities formerly owned by Party B is RMB 29,280,000, whereas such value
has been assessed by an independent professional valuer in the PRC and has
been verified by the State Assets Administration Bureau. Party A agreed to
purchase 55% of the net assets at a consideration of RMB 16,104,000, and
will injects all these assets into the Company. Party B agrees to inject
the residual net assets amounted RMB 13,176,000 into the Company as its
portion of capital contribution. The total contributed registered capital
of both Party A and Party B is RMB 29,280,000, in which, Party A then owns
55% and Party B owns the remaining 45%.
The transferrance of the revalued net asset value from Party B to Party A
and subsequently injected into the Company shall be consented by all
existing creditors of
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Party B in writing, and all these written consents shall be submitted to
the Company prior to the issuance of the business registration certificate.
All the assets transferred from Party B to Party A must be clean,
non-collateral and do not have any liabilities nor unsettled obligations
attached. If any legal procedures in connection with the assets
transferred have not been completed, and subsequently cause any losses or
damages, Party B shall be wholly responsible for such indemnities.
The total purchase consideration of the net assets acquired by Party A
from Party B is RMB 16,104,000, and payable in 4 installments. The
first installment of RMB 3,000,000 shall be paid within one week after
the conclusion of this Agreement. The second installment of RMB
3,441,600 shall be paid within one month after the Company obtained the
business registration certificate. The third and fourth installments of
each RMB 4,831,200 shall be paid in May and October 1998, respectively.
2. The fund used for technological renovation shall be confirmed and approved
by the Board of Directors of the Company. The Company should then borrow
RMB 29,280,000 from local banks, in which such borrowings shall be secured
by the assets of the Company. For any further shortage of fund, the amount
shall be advanced by Party A and Party B in accordance with the 55% and 45%
ratio. In case of any party fails to contribute the required fund and
causes any economic losses to the Company, such party shall be responsible
for any indemnity.
3. The Company may require RMB 16,000,000 as working capital. Such amount
shall be borrowed from local financial institutions by the Company, and
Party A should provide letter of guarantee for such loans. The interest
expenses of such borrowings will be borne by the Company. Party B must
complete the transferrance of the net assets with the total
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value of RMB 29,280,000 (including the land use rights, factory
premises, plant and machineries and other auxiliary facilities in which
the assets valuation report referred to) to the Company within one month
after the issuance of the business registration certificate. Party B
shall guarantee that the transferrance of these assets are completed and
the Company is able to own the assets unconditionally. All the costs
and expenses related to the assets transfer shall be borne by Party B.
4. The Company shall appoint qualified accountant to verify the capital
contributions of both Parties and shall prepare the capital verification
report. The Company shall rely on such report and issue Certificate of
Capital Contribution to both Parties.
5. The pre-incorporation expenses and all the other working capital
contribution and technological renovation expenses incurred by Party B
after October 1997 shall be repaid to Party B subsequent to the audit by
Party A and approved by the Board of Directors.
CHAPTER 6 RESPONSIBILITIES OF THE PARTIES TO THE JOINT VENTURE
1. Responsibilities of Party A:
a. to pay its capital contribution in accordance with the provisions
of this Agreement;
b. to assign to the Company the required technical experts, assist the
Company to formulate the technological renovation strategy, and to
participate in the installation, testing and trial runs during the
renovation processes;
c. to assist the Company in selecting and training the technical
staff, to assign management staff and technicians in which the
Company will be responsible for all the training costs;
d. to assist the Company in recruiting management staff, technicians
and other staff;
e. to be responsible for the procurement of the necessary equipment
and complete the necessary import custom formalities;
f. to provide information regarding the models, specifications,
qualities and other technical specification of the required
equipment to the Company for selection,
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and to provide the types, specification, qualities and other
information of the required raw materials;
g. to provide local and international marketing information and
product information;
h. to be responsible for the unified sales of the Company's products;
i. to be responsible for other matters required by the Company.
2. Responsibilities of Party B:
a. to pay its capital contribution in accordance with the provisions
of this Agreement, and to be responsible for all the formalities in
connection with the assets transfer;
b. to assign the required technicians, and co-operate with Party A to
formulate the technological renovation strategy;
c. to provide the existing management staff, technicians and other
staff of Party B, and to recruit the necessary management staff,
technicians and other staff;
d. to apply the business registration certificate, tax registration
certificate and complete all the necessary documentation and
formalities, and to resolve all the problems in connection with the
supplies of water, electricity, telecommunication and environmental
protection;
e. to assist the Company in obtaining all the governmental
preferential treatments, and to obtain the tax preferential
treatment or other tax benefits from the local tax authority;
f. to be responsible for obtaining the bank loans for technological
renovation in pursuant to Clause 2 of Chapter 5 of this Agreement;
g. to be responsible for other affairs requested by Company.
CHAPTER 7 TRADE MARK AND TECHNOLOGY
1. Party A shall be responsible to obtain the rights for using the Pabst Blue
Ribbon trademark, and enable the Company to produce the Pabst Blue Ribbon
beer product within the capacity specified by this Agreement.
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2. The Company shall pay the license fee (including technical service fee) at
US$ 18.43 per metric ton. The duration of using the trademark is the same
as the duration available to Party A. Afterwards, the license fee and
terms will be revised through mutual negotiation.
3. The Company shall not transfer the right of using the Pabst Blue Ribbon
trademark to any other parties without the written consensus of Party A.
4. Party A provides the following technical guarantees:
(a) To provide the Company reliable and complete brewing technique,
manufacturing procedures, quality control and inspection
standards.
To provide the Company all the blue-prints, technological
specification and other relevant technical information.
5. The Company shall keep all the technical information provided by Party A as
confidential and shall not disclose to other parties without the permission
of Party A.
Within the contractual period of this Agreement, Party A and Party B
guarantee the products produced by the Company will meet the quality
standards in the PRC and other foreign countries. The Company shall
continuously improve the technical standard and quality of products with
the assistance of Party A.
7. Party B agrees to transfer the "Di Huang Quan" trademark to the Company
permanently. The transfer price of the "Di Huang Quan" trademark is RMB
600,000. Within 30 days after the establishment of the Company, Party B
shall complete the trademark transfer agreement with the Company in order
to transfer the trademark under the Company's title.
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During the existence period of the Company, Party B shall not use or let
other parties to use the "Di Huang Quan" trademark.
CHAPTER 8 PRODUCT DISTRIBUTION
1. All products produced by the Company shall be co-ordinated and distributed
by the Zhaoqing Blue Ribbon Beer Marketing Company Ltd. According to the
regional distribution principle, the products shall be sold in Hu Bei
province, He Nan province and central region of China, or other regions as
agreed by Party A.
The prices of the Company's products distributed in the PRC shall be
unified and regulated by Party A.
CHAPTER 9 PROFIT DISTRIBUTION
1. Each year, the profit earned by the Company after paying all the taxes as
specified by the tax bureau and after the approval by the Board of
Directors, the net profit after taxation can be distributed to the equity
owners in accordance with their capital contribution ratio. The dividend
distributed by the Company shall be transferred to the respective bank
accounts of both investors.
2. The profits can be distributed only after deducting all the losses brought
forwards from prior fiscal years. The retained profits earned in prior
fiscal years can be carried forward to subsequent fiscal years for
distribution.
3. Subject to the consensus of the Board of Directors and the approval from
the relevant governmental departments, the profit earned by the Company can
be utilized to increase the capital of the Company for expansion purposes.
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4. In case of the Company incurred any losses, such losses shall be borne by
both Parties in accordance with their capital contribution.
CHAPTER 10 BOARD OF DIRECTORS
1. The Board of Directors should be established on the same date as the
registration of the Company.
2. The Board of Director is composed of five directors. Three of them are
appointed by Party A and the other two by Party B. The chairman of the
board should be assigned by Party A and the vice-chairman is assigned by
Party B. The tenure of office of the directors, chairman and the
vice-chairman is four years. The period of the tenure of office can be
extended by re-appointment of the respective parties. Any vacancies in
the Board of Directors will be filled by the respective parties which is
entitled to appoint. The parties have the right to change any directors
before the tenure of office has ended.
3. The chairman is stipulated by laws to be the legal representative of the
company. If the chairman or any directors in the Board of Directors cannot
carry out his duty, the chairman has the responsibility to assign other
directors as replacement.
4. The Board of Directors is the highest management authority. It has the
authority to discuss and decide any important affairs related to the
Company. The board has to meet as least twice a year. The meeting is
expected to the held at the registered office. The quorum of meeting
should consist of four directors. The board can also vote through fax to
decide on any proposals but written consent should have the agreement of
all directors. If there are three or more directors requesting for a
meeting, the chairman should co-ordinate with the vice-chairman and hold
the temporary board meeting as requested.
5. The Chairman has to provide notice to all the directors 15 days before the
meeting is held in order to notify them of the date, time, place and agenda
of the meeting.
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6. A Director who is unable to attend a meeting should appoint and authorize
an alternate or substitute Director in writing. However, a director who is
unable to attend a meeting and do not appoint any person to represent him
will be regarded as giving up the vote. Any decision or resolution passed
in the meeting will still be valid.
7. The following major decisions should be passed with the agreement of all
directors on the Board of Directors (either in person or by
representative):
Amendment on the Company's Articles of Association, Joint Venture Contract
and other related important decisions;
The increase or transfer of the share capital and adjustment of the
percentage of share holding of each party;
(c) The amalgamation of the Company with other company or the
establishment of any affiliated company; and
(d) The closure, dismissal and liquidation of the Company.
8. The following decisions should be passed with simple majority of
the directors who present the meeting:
Any affairs concerning about corporate guarantee, loan agreement or
leasing;
To approve the financial budget of the year;
The distribution of the profit;
Decisions about statutory surplus fund, bonus and welfare fund and the
discretionary surplus fund and the expansion of those fund, and the
decisions about the cumulation and the utilization of those funds;
(a) Any changes in the administration structure;
To employ any independent auditors;
Decisions on the production plan, the marketing of the products, the
financial budget and the management account;
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To obtain the land use right;
To acquire major machinery;
To sell or dispose major machinery;
Any contract to obtain technology and know-how from third party;
To employ or dismiss any administration officers and to fix their
remuneration;
Decisions on the utilization of the foreign exchange; and
All other affairs that need to be decided by the Board of Directors.
9. All meeting should be documented and signed by all directors who attend the
meeting (either in person of by representatives). The document should be
written in Chinese and reported to the headquarter of the Company.
10. The Company shall set up an audit committee, Party A, Party B and the
employees of the Company each elects one representative into the Committee.
The Committee should perform its duties in accordance with the relevant
Companies Law.
CHAPTER 11 MANAGEMENT
1. The Board of Directors has to establish a management team to handle the
daily affairs of the company. The management team consists of a general
manager and a deputy general manager. Party A is responsible to appoint
the general manager and the deputy general manager is to be appointed by
Party B. The general and deputy general manager are to be confirmed by the
Board of Directors. The tenure of office is two years. They can continue
their tenure of office if they are re-appointed by the respective party and
confirmed by the Board of Directors. If there is any need to change
general manager or deputy general manager due to the laying off or
resignation, the respective party has the right to re-appoint an alternate
to fill the vacancy.
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2. The management team also consists of several assistant general managers.
The general manager should select the assistant general managers from the
existing management team of Party B and report to the Board of Directors
for confirmation of employment.
3. The management team should consist of one financial controller and one
technical controller. Both positions should be appointed by the Board of
Directors. The tenure of office should be two years and can be
re-appointed upon expiry. Board of Directors reserve the right to remove
both controllers.
4. The duties of the General Manager shall include implementation of the
decisions of the Board and organizing and directing the day-to-day
management of the Company. The Deputy General Manager and Assistant
General Managers shall assist and be answerable to the General Manager.
The actual powers and duties of the Assistant General Managers and
Technical Controller shall be elucidated in the relevant parts of the
Article of Association of the Company. The actual powers and duties of the
Assistant General Managers and Technical Controller shall be determined by
the General Manager. Under special circumstance, the Board can remove the
General manager or Deputy General Manager from their office by simple
majority resolution.
5. The Company should set up different functional departments in accordance
with the need of the operation. Departmental Managers shall carry out the
work designated by the General Manager and shall report to him. General
Manager should recruit and appoint departmental managers.
6. The Board of Directors should assess and evaluate the work performed by the
general manager during his tenure of office in order to ensure that the
predefined targets set by the board are met.
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7. Any officer, who abuses his rights for personal benefit, corrupt, committed
fatal mistake due to carelessness or do not carry out his duty, will be
removed by the Board of Directors. Without the permission of the Board of
Directors, no officer can take up other appointment in other economic
entities.
CHAPTER 12 YEARLY PLANNING AND BUDGET
1. The general manager and all other officers have to prepare the yearly plan
and budget. The yearly plan and budget of each year (including profit and
loss statement, balance sheet and the cash flow forecast) should be
forwarded to the Board of Directors for approval one month before the
commencement of a new financial year. The plan should include the
followings:
The acquisition of other company and other asset;
The capital funding and spending plan (both in RMB and foreign currency);
The production and marketing plan;
The repair and maintenance schedule for fixed asset and machineries;
The operational and financial forecast;
Staff training plan;
The raw materials, fuel, water, electricity and other external materials
consumption plan;
The sales plan for the year.
2. The General Manager should be responsible to submit the operation plan and
financial forecast for a new financial year at the end of a current year to
the Board of Directors for approval. The approved plan should be delegated
and communicated to all departments concerned and to be implemented by the
General Manager.
CHAPTER 13 THE SITE
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1. The site of production has an area of 70,000 square meters. The details
about the use of the site is attached to this Agreement.
2. Party B hereby declare and confirmed that it has the sole right to use the
site as mentioned in clause 1. above, and will transfer all its exclusive
right to the Company upon effectiveness of this Agreement. During the
joint venture period, Party B should not transfer the land use right to any
other companies or use the site by itself without the written permission of
the Board of Directors.
3. Upon effectiveness of this Agreement, the site arrangement, design,
operation, factory set up and other buildings structure should comply with
the relevant regulations in relation to land control, environmental
protection, irrigation, construction standard, prevention of fire and
safety. Any expenses incurred due to the incompliance of regulations
should be borne by Party B. However, the expenses arised from subsequent
changes made within the period of joint venture should be paid by the
Company.
4. The Company should use the site for production and should be able to revise
the land use purpose of the site for alternative related business. With
the approval of the relevant authorities, the site can be used for purposes
that are related to beer production.
5. Party B has to supply detailed map of the site location with scale. This
map should be consistent with the site location as mentioned in clause 1.
above.
CHAPTER 14 PURCHASE OF MATERIALS AND SERVICES
1. Both parties agreed that all the production materials needed by the Company
should be procured within the country unless the domestic supplies fail to
meet the quality and technical specification. The General Manager should
include the procurement plan in his annual plan. All materials should be
bought at best quality and price.
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2. Party B should assist the Company to obtain permit, quota and approval
related to the import of all necessary materials and equipment.
CHAPTER 15 LABOUR ADMINISTRATION
1. Matters related to employee including recruitment, termination of
employment, labour insurance, staff welfare and remuneration will be
implemented in accordance with the relevant regulations and rules set by
the State Labour Bureau. The General Manager will be conferred with the
necessary authorities to carryout any employee programme approved by the
Board of Directors.
2. The Company should have the right to choose 400 staff from the existing
work force of Party B to meet the operation manning requirement. For all
those remaining staff not selected, Party B should be responsible for
providing alternative solution. They should have no right to demand any
form of conpensation from the Company.
3. All affairs concerning about the recruitment and termination of employment
or about labour insurance, welfare, bonus and others will be dealt with
according to the relevant Employment Laws and regulations in the PRC.
4. After the establishment of the Company, Party B must provide suitable
workers to the Company. The Company should choose 400 workers who is
eligible for the post in Company. If some workers are not suitable, Party
B should be responsible to arrange alternate employment for those persons
by itself.
5. The Company can establish its salary standard and determine the amounts of
bonus and allowances provided, and to decide the staffing schedules to meet
the production requirements. The remuneration of the management staff
shall be determined by the Board of Directors.
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6. The Company has the authority to hire and dismiss the management staff,
technicians and other employees. The hiring and dismissal of employees by
the Company shall comply with all the employment rules and regulations in
the PRC.
7. Under the same terms and quality of services, the Company shall first use
the auxiliary facilities and other transportation facilities provided by
Party B. And under the conditions that do not affect the operations of the
Company, the Company shall supply auxiliary materials and other resources
to Party B at fair market prices. Upon completion of the expansion
program, the Company shall give priority to employ Party B's surplus staff.
CHAPTER 16 TAXATION, FINANCIAL AND AUDIT
1. Company should pay tax according to the law of the PRC and should be
eligible to obtain benefits in customs duty and tax concession.
2. All staff and workers of the Company should pay tax according to the tax
laws of the PRC.
3. The financial year of the Company is from 1st January to 31st December.
The first financial year of the company begins from the issuance of the
business registration certificate to 31st December of the same year. The
last financial year will be from the 1st January to the last day of the
business.
4. The Company should adopt the international accrual accounting standards and
double entries bookkeeping system. Company should documented accounting
records, receipts
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ledger and statements in Chinese. The Company uses RMB
as the functional currency. The annually, quarterly and monthly financial
report should be approved and signed by the general manager and the
accounting manager and the reports should be documented in Chinese.
5. According to the regulations set by the Financial Department of China, the
Company should submit the related financial reports and operation status to
the supervisors of the relevant financial and taxation departments for
approval and records.
6. The Company should engaged Chinese Certified Public Accountant to audit the
accounts of the Company and submit the audit report to the Board of
Directors.
CHAPTER 18 SHARE TRANSFER
1. Both parties has the rights to acquire the share from the other party and
continue the operations of the Company.
2. When one party wish to dispose part of or all of its share in the Company,
it should notify the other party who has the first right of refusal to
acquire the relevant shares in the Company. If the share in the Company is
sold to other third party, the consideration should be higher than the
offer made by the existing other party.
3. The suggested disposal plan involving sales to third party must be
forwarded to the existing other party by registered mail. The plan must
provide detail of all the terms and conditions regarding the share
transfer, the associated rights, conditions of payment and the identity of
the third party. Share transfer and payment must be completed within 2
weeks after the submitting of the plan and conclusion of sales contract.
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4. If the existing other party does not exercise the purchase right, it must
agree to the sales of share to other third party. This transfer should be
regarded as valid according to domestic and international laws and
practice.
5. Payment from and share transfer to the third party must be completed in a
definite period unless its delay is due to the delay in obtaining approval
from the Government. The purchase price should be the same or higher than
the price offered by the remaining partner. If the purchase consideration
is not received within the definite period, the seller should not transfer
the share to the third party.
6. During the transfer, the fair market value of the disposed share should be
decided, confirmed and verified by a PRC qualified Accounting Firm. The
appointment of the Accounting Firm should be agreed and approved by both
parties rather than engaged by any one party unilaterally.
7. The seller should provide a copy of contract signed with the buyer to the
existing other party. The contract should explicitly require the new buyer
to be abided by the rights and responsibility as stipulated in this
Agreement.
8. The Company's business, this joint venture agreement and any other
contracts or agreements signed by the Company should not be interrupted by
the selling or transferring of share.
9. All the transfer must be submitted to the related authorities for approval.
The amendments should be reported to the Business Administration Department
after approval.
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CHAPTER 19 TERMINATION & LIQUIDATION
1. Company will be dissolved under the following conditions.
(a) Period of co-operation expire;
(b) The business of the Company cannot be operated due to substantial
loss;
(c) Business cannot be carried on due to the failure of one party to
fulfill its contractual responsibility;
(d) If any party violate the regulations of this Agreement and transfer
its investment in Company to other third party;
(e) If a large part or all the assets of the Company were under
imposition;
(f) When the relevant government department with juridical authorities
enforce new rules and regulations that will create substantial
adverse legal or political consequence to any party or the Company,
and both parties are unable to carry on their respective
contractual duties to run the Company;
(g) The Company suffer substantial losses due to force majure.
2. If the Company close with any reasons mentioned above, the Company's assets
should be valued according to the relevant laws and then liquidate. During
the asset valuation and liquidation, Liquidation Committee should try their
best to obtain the highest disposal price. After the settlement of the
outstanding liabilities and tax, and confirmed by qualified PRC accountant,
the residual amount will be distributed to both parties according to their
respective shareholding proportion in the company.
CHAPTER 20 BREACH OF CONTRACT AND RESPONSIBILITY
If any parties breach the contract, it should compensate the other party or
the Company any losses arised. If both parties violate the contract, both party
should be responsibility for the respective consequences.
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CHAPTER 21 APPLICATION OF LAW
The implementation, effectiveness, interpretation, compliance and disputes
of this agreement should be governed by the PRC laws. If any disputes arised is
not covered by the PRC laws, reference should by made to the established
international practice. Both parties should have the responsibility to inform
the Company and the other party of any new rules and regulations applicable to
the Company that comes to their knowledge.
CHAPTER 22 FORCE MAJURE
1. Force majure events include events that are:
(a) uncontrollable by the Company or both parties;
(b) unforeseeable or foreseeable but unavoidable ;
(c) causing any party or the Company not able to carry out part of or
all of this Agreement, those events includes (but not limited to)
flooding, fire, drought, typhoon, earth quake or other natural
disasters, transportation accident and wars.
2. If any parties cannot carry out this Agreement due to force majure events,
the time limit for the relevant party to carry out this Agreement should be
extended for a period equals to the duration of the force majure events.
3. Party affected by force majure events must inform the other party by fax or
telex as soon as possible. A certificate issued by local authority of the
affected party confirming the force majure events should be forwarded to
the other party by registered mail within 30 days of the events.
4. If the force majure event lasts for more than six months, both parties
should try to resolve the problem through a friendly negotiation in order
to continue the execution of this Agreement.
20
<PAGE>
CHAPTER 23 INSURANCE
All insurance related to the Company should be insured with PRC
underwriters and handled by the Company.
CHAPTER 24 THE ADJUSTMENT AND CORRECTIONS OF AGREEMENT
Any changes or adjustments to this Agreement should be approved and signed
on the relevant amendments by both parties. All these changes will be valid
only with the approval of the relevant Government.
CHAPTER 25 THE RESOLUTION OF DISPUTES
1. If both parties are not able to resolve any disputes arised out of the
execution of this agreement, either party can forward the case to the China
International Economic and Trading Arbitration Committee in Shenzhen, or
the Shenzhen Arbitration Committee for arbitration. The decision by the
Arbitration Committee should be final and binding to both parties.
2. Apart from the issues under arbitration processes, both parties should
continue to fulfill their contractual obligation as required by this
agreement.
CHAPTER 26 LANGUAGE
This contract (including any attachments) is written in Chinese. The
Chinese version is the official copy.
CHAPTER 27 OTHER RULES AND REGULATIONS
1. The attachment to this Agreement (the Asset Valuation Report) should form
an indispensable part of this Agreement and should be read in conjunction
of this Agreement.
21
<PAGE>
Any issues not included in this Agreement should be negotiated by both
parties and Supplementary Agreement should be added to this Agreement.
2. This Agreement together with its attachments should be approved by the
relevant government department and is effective upon the issuance of
business registration certificate.
3. All correspondence between the parties should be written in Chinese and
forwarded to the other party either by telex, telegram or fax, and a
registered mail should follow to confirm the correspondence. The
registered address of both parties as listed in this Agreement will be
their official address.
4. This Agreement has six original copies and eight photo copies and was
signed on the 13th of January, 1998, in Zhaoqing by representatives of both
parties.
Party A: Zhaoqing Blue Ribbon High Party B: Zaoyang Brewery
Worth Brewery Ltd.
Signed Signed
- ---------------------- ----------------------
Chen Zi Shou Fu Guang Huan
22
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
State or Other
Jurisdiction of
Percentage Incorporation or
Name of Subsidiary Owned Organization
- ------------------ ----- ------------
<S> <C> <C>
High Worth Holdings Ltd. 100% British Virgin Islands
CBR Finance (B.V.I.) Ltd. 100% British Virgin Islands
Zhaoqing Blue Ribbon 60% (effective interest) People's Republic of
High Worth Brewery, Ltd. China
(Sino-foreign joint venture)
Zhaoqing Brewery 60% (effective interest) People's Republic of
China
Zhaoqing Blue Ribbon 24% (effective interest) People's Republic of
Brewery Noble, Ltd. China
(Sino-foreign joint venture)
Zhaoqing Blue Ribbon 42% (effective interest) People's Republic of
Beer Marketing Company China
Limited
Zao Yang Blue Ribbon 33% (effective interest) People's Republic of
High Worth Brewery China
Limited
Sichuan Blue Ribbon 31% (effective interest) People's Republic of
High Worth E Mei Limited China
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S ANNUAL
REPORT AND FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,167,826
<SECURITIES> 0
<RECEIVABLES> 21,235,482
<ALLOWANCES> 2,437,611
<INVENTORY> 10,793,186
<CURRENT-ASSETS> 45,226,946
<PP&E> 31,071,090
<DEPRECIATION> 5,767,978
<TOTAL-ASSETS> 100,613,799
<CURRENT-LIABILITIES> 57,603,483
<BONDS> 1,989,500
0
0
<COMMON> 822
<OTHER-SE> 21,487,296
<TOTAL-LIABILITY-AND-EQUITY> 100,613,799
<SALES> 140,877,890
<TOTAL-REVENUES> 140,877,890
<CGS> 115,778,276
<TOTAL-COSTS> 115,778,276
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 640,344
<INTEREST-EXPENSE> 1,867,854
<INCOME-PRETAX> 258,055
<INCOME-TAX> 0
<INCOME-CONTINUING> 258,055
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,706,374
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
</TABLE>
