<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended MARCH 31, 1998
--------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to ____________
Commission File Number: 33-26617A
---------
CBR BREWING COMPANY, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 65-0145422
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
433 North Camden Drive, Suite 600
Beverly Hills, California 90210
------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (310) 274-5172
--------------
Not applicable
---------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of 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.
1
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
------------------------------------------
INDEX
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
March 31, 1998 and December 31, 1997
Condensed Consolidated Statements of Income (Unaudited) -
Three Months Ended March 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Three Months Ended March 31, 1998 and 1997
Notes to Condensed Consolidated Financial Statements
(Unaudited) - Three Months Ended March 31, 1998 and 1997
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
------------------------ ------------------------
RMB USD RMB USD
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash 36,232,579 4,365,371 76,092,954 9,167,826
Accounts and bills receivable, net 197,678,572 23,816,695 156,022,333 18,797,871
Inventories (Note 4) 75,589,080 9,107,118 89,583,442 10,793,186
Amounts due from related companies 6,772,351 815,946 29,667,015 3,574,339
Prepayments, deposits and other
receivables 66,803,996 8,048,674 24,017,911 2,893,724
----------- ----------- ----------- -----------
Total current assets 383,076,578 46,153,804 375,383,655 45,226,946
Interest in an associated company
(Note 6) 247,915,339 29,869,318 234,997,255 28,312,922
Property, plant and equipment, net 234,102,590 28,205,132 210,015,830 25,303,112
(Note 7)
Non-current assets 16,397,500 1,975,602 14,697,800 1,770,819
----------- ----------- ----------- -----------
Total assets 881,492,007 106,203,856 835,094,540 100,613,799
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
(continued)
3
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
------------------------ ------------------------
RMB USD RMB USD
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings 38,500,000 4,638,554 35,500,000 4,277,108
Capital lease obligations 7,349,698 885,506 7,349,698 885,506
Accounts payable
and accrued liabilities 128,341,249 15,462,801 97,815,003 11,784,940
Customer deposits - - 6,680,000 804,819
Amounts due to related companies 21,861,049 2,633,862 77,166,596 9,297,181
Amount due to an associated company 261,906,603 31,555,012 209,083,335 25,190,763
Income taxes payable 1,380,928 166,377 260,000 31,325
Sales taxes payable 34,793,919 4,192,038 39,841,282 4,800,154
Deferred tax liabilities 4,413,000 531,687 4,413,000 531,687
----------- ----------- ----------- -----------
Total current liabilities 498,546,446 60,065,837 478,108,914 57,603,483
----------- ----------- ----------- -----------
Long-term liabilities:
Bank borrowings 8,000,000 963,855 8,000,000 963,855
Capital lease obligations 5,065,265 610,273 8,512,851 1,025,645
----------- ----------- ----------- -----------
Total long-term liabilities 13,065,265 1,574,128 16,512,851 1,989,500
----------- ----------- ----------- -----------
Minority interests (Note 9) 108,567,181 13,080,383 88,503,839 10,663,113
----------- ----------- ----------- -----------
Shareholders' advances and
shareholders' equity:
Advances from shareholders (Note 5) 73,617,552 8,869,585 73,617,552 8,869,585
----------- ----------- ----------- -----------
Common stock (Note 8)
-Class A, US$0.0001 par value,
90,000,000 shares authorized,
5,010,013 shares and 5,000,013
shares outstanding at March 31,
1998 and December 31, 1997,
respectively 4,273 515 4,265 514
-Class B, US$0.0001 par value,
10,000,000 shares authorized,
3,000,000 shares outstanding 2,559 308 2,559 308
Additional paid-in capital 106,299,348 12,807,150 104,030,194 12,533,758
General reserve and enterprise
development funds 8,341,785 1,005,034 8,341,785 1,005,034
Retained earnings 73,047,598 8,800,916 65,972,581 7,948,504
----------- ----------- ----------- -----------
Total shareholders' equity 187,695,563 22,613,923 178,351,384 21,488,118
----------- ----------- ----------- -----------
Total shareholders' advances and
shareholders' equity 261,313,115 31,483,508 251,968,936 30,357,703
----------- ----------- ----------- -----------
Total liabilities, shareholders'
advances and shareholders'
equity 881,492,007 106,203,856 835,094,540 100,613,799
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
------------------------ -------------------
RMB USD RMB
----------- ----------- -------------------
<S> <C> <C> <C>
Sales, including sales to related companies
of RMB 496,357 and RMB 3,999,762 for
the three months ended March 31, 1998
and 1997, respectively 291,807,013 35,157,471 316,939,176
Sales taxes (6,174,507) (743,917) (6,043,660)
----------- ----------- -----------
Net sales 285,632,506 34,413,554 310,895,516
Cost of sales, including inventory
purchased from related companies of RMB
166,066,924 and RMB 176,898,774 for
the three months ended March 31, 1998
and 1997, respectively; and royalty fee
paid to a related company of RMB 1,763,948
and RMB 1,861,485 for the three
months ended March 31, 1998 and 1997,
respectively (235,299,046) (28,349,282) (256,173,915)
----------- ----------- -----------
Gross profit 50,333,460 6,064,272 54,721,601
Selling, general and administrative
expenses, including management fee paid
to a related company of RMB 945,000 for
the three months
ended March 31, 1998 and 1997 (44,311,051) (5,338,681) (48,543,678)
Fair value of warrants, stock options
and common stock issued for services
rendered (Note 8) (2,269,162) (273,393) -
----------- ----------- -----------
Operating income 3,753,247 452,198 6,177,923
Foreign exchange gains (losses) (329,565) (39,707) 78,138
Other expense:
Interest expense, including interest
paid to related companies of RMB 106,674
and RMB 1,687,808 for the three months
ended March 31, 1998 and 1997,
respectively (1,258,479) (151,624) (3,404,805)
----------- ----------- -----------
Income before income taxes 2,165,203 260,867 2,851,256
Income taxes (1,120,928) (135,051) (1,760,000)
----------- ----------- -----------
</TABLE>
(continued)
5
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)(CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
------------------------ -------------------
RMB USD RMB
----------- ----------- -------------------
<S> <C> <C> <C>
Income before equity in earnings of an
associated company 1,044,275 125,816 1,091,256
Equity in earnings of an associated company 12,918,084 1,556,396 15,029,824
----------- ----------- -----------
Income before minority interests 13,962,359 1,682,212 16,121,080
Minority interests (6,887,342) (829,800) (6,923,314)
----------- ----------- -----------
Net income for the period 7,075,017 852,412 9,197,766
----------- ----------- -----------
----------- ----------- -----------
Earnings per share - Basic and Diluted (Note 3) 0.88 0.11 1.15
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
6
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
------------------------ -------------------
RMB USD RMB
----------- ----------- -------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 7,075,017 852,412 9,197,766
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Fair value of warrants, stock options
and common stock issued for services
rendered 2,269,162 273,393 -
Allowance for doubtful accounts 1,976,191 238,095 4,110,000
Depreciation and amortization 5,094,426 613,786 8,499,434
Foreign exchange (gains) losses 329,565 39,707 (78,138)
Minority interests 6,887,342 829,800 6,923,314
Equity in earnings of an associated company (12,918,084) (1,556,396) (15,029,824)
Income taxes payable 1,120,928 135,052 1,760,000
Changes in operating assets and liabilities:
(Increase) decrease in -
Accounts and bills receivable (43,632,430) (5,256,919) (43,759,579)
Inventories 13,994,362 1,686,068 (7,499,272)
Amounts due from related companies 22,894,664 2,758,393 1,820,300
Prepayments, deposits and other receivables (42,786,085) (5,154,950) (7,967,202)
Increase (decrease) in -
Accounts payable and accrued liabilities 30,526,246 3,677,861 13,238,801
Customer deposits (6,680,000) (804,819) (54,443,600)
Amount due to an associated company 52,823,268 6,364,249 70,474,099
Sales taxes payable (5,047,363) (608,116) 352,468
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 33,927,209 4,087,616 (12,401,433)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures on non-current assets (1,699,700) (204,783) -
Purchases of property, plant and equipment (230,751) (27,802) (2,150,147)
Purchase of interest in brewery (16,104,000) (1,940,241) -
----------- ----------- -----------
NET CASH USED IN INVESTING
ACTIVITIES (18,034,451) (2,172,826) (2,150,147)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
New bank borrowings 3,000,000 361,446 -
Increase (decrease) in amounts due to
related companies (30,938,444) (3,727,523) 10,848,980
Repayment of capital lease obligations (3,447,586) (415,372) (1,830,083)
Payment of cash dividend to minority
interests (24,367,103) (2,935,796) -
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (55,753,133) (6,717,245) 9,018,897
----------- ----------- -----------
Net decrease in cash (39,860,375) (4,802,455) (5,532,683)
Cash at beginning of period 76,092,954 9,167,826 39,709,594
----------- ----------- -----------
Cash at end of period 36,232,579 4,365,371 34,176,911
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
7
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION - CBR Brewing Company, Inc. (the "Company", which term shall
include, when the context so requires, its subsidiaries and affiliates),
formerly known as Natural Fuels, Inc. and National Sweepstakes, Inc., was
originally incorporated as Video Promotions, Inc. on April 20, 1988 under the
laws of the State of Florida. The Company adopted its current name on March
15, 1995.
REVERSE ACQUISITION - For a period of time prior to December 16, 1994, the
business of the Company was devoted to seeking potential acquisition or
merger opportunities. On December 16, 1994, the Company acquired all of
the outstanding shares of capital stock of High Worth Holdings, Ltd., a
British Virgin Islands corporation ("Holdings"), from Oriental Win Holdings
Ltd. ("Oriental Win") and Goldchamp Ltd. ("Goldchamp") in exchange for
3,960,000 shares and 240,000 shares of the Company's Class A Common Stock
issued to Oriental Win and Goldchamp, respectively, and 3,000,000 shares of
the Company's Class B Common Stock issued to Oriental Win. Subsequently,
on October 14, 1996, Oriental Win transferred the 3,960,000 shares of
Class A Common Stock and the 3,000,000 shares of Class B Common Stock
to its shareholders. As a result, West Coast Star Enterprises Ltd., as the
60% shareholder of Oriental Win, became the Company's controlling
shareholder. The shares of Class B Common Stock carry two votes per share
but are otherwise equivalent to the Class A Common Stock. In addition, the
Company issued an aggregate of 600,000 shares of Class A Common Stock to
various parties for consulting services in connection with the acquisition.
The shares of Class A and Class B Common Stock issued in conjunction with
the acquisition represented approximately 98.1% of the issued and outstanding
shares of the Company, after all shares were issued and a 1-for-22 reverse
stock split was effected on November 22, 1994.
8
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
The Company, through its subsidiaries and affiliates, is engaged in the
production and sale of Pabst Blue Ribbon beer in the People's Republic of
China ("China" or the "PRC"). Holdings is a holding company that was formed
solely to effect the acquisition of Zhaoqing Blue Ribbon High Worth Brewery,
Ltd., a Sino-foreign joint venture ("High Worth JV"), which was registered in
the PRC on July 2, 1994, in which Guangdong Blue Ribbon Group Co. Ltd.
("Guangdong Blue Ribbon") owns a 40% interest and Holdings owns a 60%
interest.
High Worth JV holds certain sublicensing rights for Pabst Blue Ribbon beer
and also directly owns 100% of a Pabst Blue Ribbon brewing complex ("Zhaoqing
Brewery"). High Worth JV also owns 100% of a PRC holding company ("Zhaoqing
Brewery HC"). Zhaoqing Brewery HC owns a 40% interest in Zhaoqing Blue Ribbon
Brewery Noble Ltd., a Sino-foreign joint venture ("Noble Brewery"), which
owns a second Pabst Blue Ribbon brewing complex that is also managed by
Zhaoqing Brewery.
Goldjinsheng Holdings Ltd., a wholly-owned subsidiary of Noble China Inc., an
unaffiliated company, owns the other 60% interest in Noble Brewery. In
addition, Zhaoqing Brewery HC owns a 70% interest in Zhaoqing Blue Ribbon
Beer Marketing Company Limited, a PRC company (the "Marketing Company"),
which was formed in February 1995 to conduct the distribution, marketing
and promotion throughout China of the Pabst Blue Ribbon beer produced by
Zhaoqing Brewery and Noble Brewery. Zhaoqing Brewery and Noble Brewery
commenced the distribution of their production of Pabst Blue Ribbon beer
through the Marketing Company during April 1995 and July 1995,
respectively. The remaining 30% interest in the Marketing Company is directly
owned by Guangdong Blue Ribbon. Through its ownership in High Worth JV,
Guangdong Blue Ribbon also has a 28% indirect interest in the Marketing
Company, resulting in the Company owning a 42% net interest in the Marketing
Company. The Company owns effective interests of 60% in Zhaoqing Brewery and
24% in Noble Brewery. The brewery operations of Zhaoqing Brewery and Noble
Brewery are located in Zhaoqing City, which is situated approximately 100
miles from Hong Kong in the Guangdong Province of China.
In January 1996, Zhaoqing Brewery HC transferred all of its operating
assets and liabilities to High Worth JV pursuant to the original Joint
Venture Agreement, the Asset Transfer Agreement signed in May 1994, and
the relevant government regulations. Subject to the completion of certain
legal procedures and documentation, the investments in Noble Brewery and the
Marketing Company currently held by Zhaoqing Brewery HC will be transferred
to High Worth JV. Zhaoqing Brewery HC is currently acting as the nominee for
High Worth JV with respect to the investments in Noble Brewery and the
Marketing Company. In the following text, "Zhaoqing Brewery" refers to the
brewing complex, which was transferred to High Worth JV in January 1996,
and "Zhaoqing Brewery HC" refers to the PRC entity that previously owned the
brewing complex from November 1994 through December 1995.
9
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
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%.
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%.
On January 20, 1998, Zhaoqing Brewery and Goldjinsheng entered into an
agreement which calls for the interest of Goldjinsheng in Noble Brewery to be
transferred to Linchpin Holdings Limited, a subsidiary of Noble China Inc.
Upon receipt of approval from and registration by the relevant PRC
authorities, Linchpin Holdings Limited and High Worth JV will own 60% and 40%
equity interests in Noble Brewery, respectively.
The Company conducts a substantial portion of its purchases through related
parties, and has additional significant continuing transactions with such
parties.
Apart from the investment in High Worth JV, which was partly financed by a
loan from Oriental Win, Holdings has no other significant assets or
liabilities. On October 31, 1994, prior to the reverse acquisition
effective December 16, 1994, High Worth JV acquired a 100% interest in
Zhaoqing Brewery HC, including Zhaoqing Brewery HC's 40% interest in Noble
Brewery, for approximately USD20,000,000. Prior to the acquisition of
Zhaoqing Brewery HC by High Worth JV, Zhaoqing Brewery HC was a wholly-owned
subsidiary of Guangdong Blue Ribbon.
For accounting purposes, the acquisition of Holdings by the Company has been
treated as a recapitalization of Holdings with Holdings as the acquiror
(reverse acquisition). Accordingly, the historical financial statements prior
to December 16, 1994 are those of Holdings.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America ("US
GAAP"). The acquisition on October 31, 1994 of Zhaoqing Brewery HC,
including Zhaoqing Brewery HC's 40% interest in Noble Brewery, has been
accounted for under the purchase method of accounting. Since High Worth JV
had no operations prior to this acquisition, consolidated financial
statements have been prepared commencing October 31, 1994, to reflect the
post-acquisition consolidated results of operations of Zhaoqing Brewery and
Noble Brewery attributable to the Company. The consolidated financial
statements include the results of operations of Zhaoqing Brewery, the
Marketing Company and Zao Yang High Worth Brewery on a consolidated basis and
Noble Brewery under the equity method of accounting for investments. All
material intercompany accounts and transactions are eliminated on
consolidation. The consolidated financial statements have been prepared on a
going concern basis notwithstanding that the Company has a net current
liability position at December 31, 1997 and March 31, 1998. The Company
believes that its operating cash flow, combined with cash on hand, bank line
of credit and other external credit resources, and the credit facilities
provided by affiliates or related parties, are adequate to satisfy the
Company's working capital requirements for the foreseeable future.
10
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
Certain prior period amounts have been reclassified to conform with the
current year's presentation.
FOREIGN CURRENCY TRANSLATION - In preparing the consolidated financial
statements, the financial statements of the Company are measured using
Renminbi ("RMB") as the functional currency. All foreign currency
transactions are translated into RMB using the applicable rates of exchange,
as quoted by the People's Bank of China (the "unified exchange rate").
Monetary assets and liabilities denominated in foreign currencies have been
translated into RMB using the unified exchange rate prevailing at the balance
sheet dates. The resulting exchange gains or losses have been credited or
charged to the statements of income for the periods in which they occur.
The Company's share capital is denominated in United States dollars ("USD")
and the reporting currency is the RMB. For financial reporting purposes, the
USD share capital amounts have been translated into RMB at the applicable
rates prevailing on the transaction dates.
Translation of amounts from RMB into USD for the convenience of the reader
has been made at the rate of exchange as quoted by the People's Bank of China
on March 31, 1998, of USD1.00 = RMB8.30. No representation is made that
the RMB amounts could have been, or could be, converted into USD at that rate
or at any other certain rate.
11
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
NOTE 2. COMMENTS
The accompanying condensed consolidated financial statements are unaudited,
but in the opinion of the management of the Company, contain all adjustments
necessary to present fairly the financial position at March 31, 1998, the
results of operations for the three months ended March 31, 1998 and 1997,
and the cash flows for the three months ended March 31, 1998 and 1997.
These adjustments are of a normal recurring nature. The consolidated balance
sheet as of December 31, 1997 is derived from the Company's audited
financial statements. Certain information and footnote disclosures normally
included in financial statements that have been prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission, although management of the Company believes that the disclosures
contained in these financial statements are adequate to make the information
presented therein not misleading. For further information, refer to the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997, as
filed with the Securities and Exchange Commission.
The results of operations for the three months ended March 31, 1998 are
not necessary indicative of the results of operations to be expected for the
full fiscal year ending December 31, 1998.
NOTE 3. EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which
requires the presentation of basic and diluted earnings per share. Basic
earnings per share are calculated by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share are calculated by dividing net income by the basic shares
and all dilutive securities (stock options and warrants), but does not
include the impact of contingently issuable securities or potential common
shares which would be antidilutive. Net income per share for the three months
ended March 31, 1997 was not restated as a result of SFAS 128.
For the three months ended March 31, 1998 and 1997, net income per common
share is based on the weighted average number of shares of Class A and
Class B Common Stock issued and outstanding during each respective period.
12
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
NOTE 3. EARNINGS PER SHARE (continued)
The following table provides the components of basic and diluted earnings per
share computations:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1998 1997
-------------------- ---------
RMB USD RMB
--------- --------- ---------
<S> <C> <C> <C>
Basic Earnings Per
Share Computation
- ------------------
Net income 7,075,017 852,412 9,197,766
--------- --------- ---------
--------- --------- ---------
Weighted average
common shares
outstanding 8,003,346 8,003,346 8,000,013
--------- --------- ---------
--------- --------- ---------
Net income per
share - Basic .88 .11 1.15
--------- --------- ---------
--------- --------- ---------
Diluted Earnings Per
Share Computation
- ---------------------
Net income 7,075,017 852,412 9,197,766
--------- --------- ---------
--------- --------- ---------
Weighted average
common shares
outstanding 8,003,346 8,003,346 8,000,013
Stock options and warrants 42,881 42,881 -
--------- --------- ---------
Diluted common
shares outstanding 8,046,227 8,046,227 8,000,013
--------- --------- ---------
--------- --------- ---------
Net income per
share - Diluted .88 .11 1.15
--------- --------- ---------
--------- --------- ---------
</TABLE>
13
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
NOTE 4. INVENTORIES
Inventories consisted of the following at March 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
---------------------- ----------------------
RMB USD RMB USD
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Raw materials 18,876,972 2,274,334 26,189,345 3,155,343
Work in progress 8,277,675 997,310 7,164,153 863,151
Finished goods 48,434,433 5,835,474 56,229,944 6,774,692
---------- --------- ---------- ----------
75,589,080 9,107,118 89,583,442 10,793,186
---------- --------- ---------- ----------
---------- --------- ---------- ----------
</TABLE>
NOTE 5. ADVANCES FROM SHAREHOLDERS
In connection with the acquisition of High Worth JV, Oriental Win advanced
US$8,869,585 to Holdings during 1994. The rights to collect US$8,000,000 of
the advance were transferred from Oriental Win to its shareholders in
proportion to their respective shareholder interests in August 1996 (West
Coast Star Enterprises Ltd. - US$4,800,000; Mapesbury Limited - US$1,600,000;
Redcliffe Holdings Ltd. - US$1,600,000). The advances bear no interest and
are not repayable unless the Company obtains additional long-term debt or
equity financing. Repayments of the advances are at the discretion of the
Company and the shareholders have no right to demand repayment. The Company
has the option of offsetting or repaying the advance or part thereof by
allotment of shares at par value in Holdings. As of March 31, 1998 and
December 31, 1997, advances from such shareholders, West Coast Star
Enterprises Ltd., Top Link Development Limited (assigned by Mapesbury Limited
in February 1998), Redcliffe Holdings Ltd. and Oriental Win were
approximately RMB 39,800,000, RMB 13,300,000, RMB 13,300,000 and RMB
7,200,000, respectively. Mapesbury Limited also transferred its shares in the
Company to Top Link Development Limited.
14
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
NOTE 6. INTEREST IN AN ASSOCIATED COMPANY
The unlisted investment consists of the Company's 40% equity interest in Noble
Brewery held by a 60% owned subsidiary as follows:
<TABLE>
<CAPTION>
RMB
------------
<S> <C>
Unlisted investment, at cost,
October 31, 1994 209,361,595
The Company's share of earnings and
dividends of an associated company:
Earnings -
Two months ended December 31, 1994 7,812,392
For the year ended December 31, 1995 34,213,058
For the year ended December 31, 1996 34,039,622
For the year ended December 31, 1997 52,426,546
Three months ended March 31, 1998 12,918,084
Dividends -
Declared and paid during 1995 (28,644,569)
Declared and paid during 1996 (39,797,878)
Declared and paid during 1997 (34,413,511)
------------
Unlisted investment, March 31, 1998 247,915,339
------------
------------
</TABLE>
The condensed statements of operations of Noble Brewery for the three months
ended March 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
------------------------ ------------------
RMB USD RMB
----------- ---------- -----------
<S> <C> <C> <C>
Net sales 146,015,026 17,592,172 167,182,547
----------- ---------- -----------
----------- ---------- -----------
Net income 30,062,696 3,622,012 31,668,967
----------- ---------- -----------
----------- ---------- -----------
The Company's share
of net income after
adjustment of unrealised
intercompany profit 12,918,084 1,556,396 15,029,824
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
15
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
NOTE 7. ACQUISITION OF INTEREST IN BREWERY
On January 13, 1998, High Worth JV entered into a joint venture contract with
Zao Yang Brewery in Hubei Province to establish a new brewery with an initial
annual production capacity of 40,000 metric tons or 340,000 barrels of beer.
The new brewery 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. Zao
Yang High Worth Brewery will initially commence production of a locally
branded beer until it is capable of producing Pabst Blue Ribbon beer. High
Worth JV is responsible for transferring the technical know-how and
production techniques to brew Pabst Blue Ribbon beer to Zao Yang High Worth
Brewery, as well as assisting in the renovation of existing equipment, in
order to convert the brewery into another Pabst Blue Ribbon brewing complex.
It is currently estimated that Zao Yang High Worth Brewery will commence
production of Pabst Blue Ribbon beer in June 1998.
During the three months ended March 31, 1998, High Worth JV paid RMB
16,104,000, representing its 55% capital investment in the joint venture, and
recorded such transaction under the purchase method of accounting as follows:
<TABLE>
<CAPTION>
RMB
------------
<S> <C>
Property, plant and equipment 29,280,000
Minority interests (13,176,000)
------------
16,104,000
------------
------------
</TABLE>
No pro forma results of operations have been presented for the three months
ended March 31, 1997, as the results of operations of Zao Yang High Worth
Brewery for such period would not have had a material effect on the Company's
consolidated results of operations.
NOTE 8. SHAREHOLDERS' EQUITY
Stock Option Plan -
On January 2, 1998, the 1998 Stock Option Plan (the "Plan") was adopted by
the majority of the shareholders of the Company and approved by the Board of
Directors. The Plan provides for the granting of stock options from time to
time to eligible persons to purchase an aggregate of up to 800,000 shares of
Class A Common Stock, as either incentive stock options ("ISOs") or
nonqualified stock options ("NSOs"). The exercise price of all ISOs will be
equal to the fair market value of a share of common stock on the date the
option is granted, except that in the case of ISOs granted to any person
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or any affiliate, the price will be not less than 110%
of such fair market value.
16
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS ENDED MARCH 31, 1998 AND 1998
NOTE 8. SHAREHOLDERS' EQUITY (continued)
On January 2, 1998, options to purchase 210,000 shares of Class A Common
Stock at an exercise price of US$3.87 per share were granted to four
directors and five employees, and options to purchase 70,000 shares of Class
A Common Stock at an exercise price of US$4.26 per share were granted to two
directors, each of whom possesses indirectly more than 10% of the total
combined voting power of all classes of common stock of the Company. From 50%
to 70% of such stock options vested on April 1, 1998, and the remaining
portion of the stock options vest in varying amounts through April 1, 2000.
The stock options expire on December 31, 2001 through December 31, 2005.
The stock options issued to non-employee directors were accounted for
pursuant to Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). Under SFAS 123, the fair value of
stock options is calculated according to the Black-Scholes pricing model and
amortized to expense over the vesting period. As a result, the Company
recognized RMB 1,695,358 of compensation expense during the three months
ended March 31, 1998.
Consulting Contract -
On March 2, 1998, the Company entered into a contract with Worldwide
Corporate Finance, a corporate financial consulting company, to provide
financial and business consulting services to the Company. The Company paid
an initial retainer by issuing 10,000 shares of restricted Class A Common
Stock, which were recorded as a charge to operations at their estimated fair
market value of RMB 240,700. A total of 40,000 shares of the Company's Class
A Common Stock and warrants to purchase 150,000 shares of Class A Common
Stock are issuable based on the consulting company completing certain
pre-defined objectives (the "Contingent Securities"). The initial term of the
contract is through June 17, 1998, but will be extended to March 2, 1999 if
the defined objectives are reached by June 17, 1998. The warrants to purchase
150,000 shares of Class A Common Stock will be exercisable for a period of
2.5 years from the date the objectives are reached, and will consist of
50,000 warrants exercisable at US$3.50 per share, 50,000 warrants exercisable
at US$4.50 per share and 50,000 warrants exercisable at US$5.50 per share. As
of March 31, 1998, none of the objectives that would require the issuance of
any portion of the Contingent Securities had been completed. The Company
accounts for warrants granted to non-employees in accordance with SFAS 123,
which requires non-cash compensation expense be recognized over the expected
period of benefit. The Company has calculated the fair value of such warrants
according to the Black-Scholes pricing model and is amortizing the aggregate
value of RMB 2,776,350 to expense over the period March 1998 through December
1998. The Contingent Securities were not included in the calculation of
earnings per share for the three months ended March 31, 1998.
17
<PAGE>
CBR BREWING COMPANY, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STAEMENTS (UNAUDITED)
(Continued)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
NOTE 9. DIVIDEND TO MINORITY INTERESTS
On November 25, 1997, the Board of Directors of High Worth JV declared the
first dividend distribution, in which Holdings was entitled, 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. During the three months ended March 31, 1998, partial dividends
of RMB 24,367,103 and RMB 34,302,994 were distributed to Guangdong Blue
Ribbon and Holdings, respectively.
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income", which is effective for financial
statements issued for fiscal years beginning after December 15, 1997. This
statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income refers to revenues,
expenses, gains and losses that under generally accepted accounting
principles are included in comprehensive income but are excluded from net
income. Adoption of this statement is not expected to have an impact on the
Company's current disclosures and presentation.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information",
which is effective for financial statements issued for fiscal years beginning
after December 15, 1997. This statement requires that public companies report
certain information about their major customers, operating segments, products
and services, and the geographic areas in which they operate. Adoption of
this statement is not expected to have an impact on the Company's current
disclosures and presentation.
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits", which is effective for financial statements issued for fiscal
years beginning after December 15, 1997. This statement revises employers'
disclosures about pension and other postretirement benefit plans. Adoption of
this statement is not expected to have an impact on the Company's current
disclosures and presentation.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Quarterly Report on Form 10-Q for the three months ended March 31,
1998 contains "forward-looking" statements within the meaning of the Federal
securities laws. These forward-looking statements include, among others,
statements concerning the Company's expectations regarding sales trends,
gross margin trends, operating costs, the availability of funds to finance
capital expenditures and operations, facility expansion plans, and other
statements of expectations, beliefs, future plans and strategies, anticipated
events or trends, and similar expressions concerning matters that are not
historical facts. The forward-looking statements in this Quarterly Report on
Form 10-Q for the three months ended March 31, 1998 are subject to risks and
uncertainties that could cause actual results to differ materially from those
results expressed in or implied by the statements contained herein.
Overview:
Effective December 16, 1994, the Company acquired Holdings, which,
through its subsidiaries and affiliates, is engaged in the production and
sale of Pabst Blue Ribbon beer in China. Holdings is a holding company which
was formed solely to effect the acquisition of a 60% interest in High Worth
JV. On October 31, 1994, High Worth JV acquired a 100% interest in Zhaoqing
Brewery HC, including Zhaoqing Brewery HC's 40% interest in Noble Brewery.
The acquisition of Zhaoqing Brewery HC, including Zhaoqing Brewery HC's
40% interest in Noble Brewery, has been accounted for under the purchase
method of accounting. The consolidated financial statements include the
results of operations of Zhaoqing Brewery on a consolidated basis and Noble
Brewery under the equity method of accounting for investments, commencing
October 31, 1994, to reflect the post-acquisition consolidated results of
operations of Zhaoqing Brewery and Noble Brewery attributable to the Company.
For accounting purposes, the acquisition of Holdings by the Company has
been treated as a recapitalization of Holdings with Holdings as the acquiror
(reverse acquisition). Accordingly, the historical financial statements prior
to December 16, 1994 are those of Holdings.
During February 1995, the Marketing Company was established to conduct
the distribution, marketing and promotion of Pabst Blue Ribbon beer in China.
Prior to November 1996, the Marketing Company also sold mineral water,
non-carbonated soft drinks and red wine produced by Guangdong Blue Ribbon and
bearing the Blue Ribbon label. Zhaoqing Brewery HC owns a 70% interest and
Guangdong Blue Ribbon directly owns a 30% interest in the Marketing Company.
Through its ownership in High Worth JV, Guangdong Blue Ribbon also has a 28%
indirect interest in the Marketing Company, resulting in the Company owning a
42% net interest in the Marketing Company. Zhaoqing Brewery and Noble Brewery
commenced the distribution of their production of Pabst Blue Ribbon beer
through the Marketing Company during April 1995 and July 1995, respectively.
Commencing April 1997, the Marketing Company also began purchasing Sichuan
Brewery's production of Pabst Blue Ribbon beer for distribution. The
consolidated financial statements include the results of operations of the
Marketing Company on a consolidated basis.
In January 1996, Zhaoqing Brewery HC transferred all of its operating
assets and liabilities to High Worth JV pursuant to the original Joint
Venture Agreement, the Asset Transfer Agreement signed in May 1994, and the
relevant
19
<PAGE>
government regulations. Subject to the completion of certain legal procedures
and documentation, the investments in Noble Brewery and the Marketing Company
currently held by Zhaoqing Brewery HC will be transferred to High Worth JV.
Zhaoqing Brewery HC is currently acting as the nominee for High Worth JV with
respect to the investments in Noble Brewery and the Marketing Company.
Upon the completion of the required procedures and documentation, all of
the assets and liabilities formerly controlled by Zhaoqing Brewery will have
been transferred to High Worth JV. During the year ended December 31, 1997
and the three months ended March 31, 1998, the operating activities of
Zhaoqing Brewery were part of High Worth JV. The consensus and approval from
the local tax authority were obtained in 1996. In the following text,
"Zhaoqing Brewery" refers to the brewing complex, which was transferred to
High Worth JV in January 1996, and "Zhaoqing Brewery HC" refers to the PRC
entity that previously owned the brewing complex from November 1994 through
December 1995.
In January 1998, the Company, through High Worth JV, established a
brewery in Hubei Province pursuant to a joint venture agreement in which High
Worth JV acquired a 55% interest in Zao Yang Blue Ribbon High Worth Brewery
Ltd. ("Zao Yang High Worth Brewery"), equivalent to an effective interest of
33%. For the three months ended March 31, 1998, there were no operating
results for Zao Yang High Worth Brewery, as the brewery has not commenced
production. Zao Yang High Worth Brewery is not expected to commence
production of Pabst Blue Ribbon beer until June 1998. The consolidated
financial statements include the accounts of Zao Yang High Worth Brewery on a
consolidated basis.
Effective December 31, 1997, the Company, through High Worth JV, entered
into a Settlement Agreement that will allow it to acquire a 51% interest in
Sichuan Brewery, equivalent to an effective interest of 31%. Sichuan Brewery
will be restructured and renamed Sichuan Blue Ribbon High Worth Brewery E Mei
Limited ("Sichuan High Worth 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 January 20, 1998, Zhaoqing Brewery and Goldjinsheng entered into an
agreement which calls for the interest of Goldjinsheng in Noble Brewery to be
transferred to Linchpin Holdings Limited, a subsidiary of Noble China Inc.
Upon receipt of approval from and registration by the relevant PRC
authorities, Linchpin Holdings Limited and High Worth JV will own 60% and 40%
equity interests in Noble Brewery, respectively.
Business:
The Company produces Pabst Blue Ribbon beer for distribution throughout
China. In general, the beer market in China is experiencing a steady overall
growth rate, although the growth has recently shifted from premium beers to
lower priced beers. There is a substantial difference in the price at which
local or regional brands of beer are sold in China as compared to the price
of foreign or premium brands of beer. Generally, a 640 ml. bottle of local or
regional beer would typically sell for 1 - 2 RMB, as compared to a foreign or
premium beer, which would sell for 4 - 6 RMB.
Due in part to the recent economic turmoil in Asia, the growth in China's
economy has recently begun to decline. As a result, demand for goods and
services by Chinese consumers has been weakening, causing a softening of the
premium beer market in China. Management anticipates that the market demand
for high priced foreign premium labels will be stagnant as consumers shift to
lower priced beer products. The competition among major
20
<PAGE>
Chinese breweries to maintain market share under the current economic
conditions is also expected to place continuing pressure on the Company's
operating results during 1998. Management has responded to changing market
conditions by expanding its product line, expanding distribution and acquiring
new breweries.
The Company's brewing facilities consist of the following:
ZHAOQING BREWERY: The original facilities of Zhaoqing Brewery were
constructed between 1978 and 1980 with annual production capacity based on
old brewing technology of 50,000 metric tons or 425,000 barrels of beer. With
the implementation of the new brewing technology and the purchase of
additional equipment, Zhaoqing Brewery reached an annual production capacity
of 100,000 metric tons or 850,000 barrels by the end of 1995. Prior to March
1995, Zhaoqing Brewery had produced exclusively domestic brands of beer. In
mid-1994, with the assistance of Pabst Brewing Company, Zhaoqing Brewery
commenced the conversion and refinement of its original facilities and
adopted a new brewing technology in order to produce beer under the Pabst
Blue Ribbon label. During March 1995, Zhaoqing Brewery discontinued
production of all domestic brands and commenced exclusive production of Pabst
Blue Ribbon beer on a full-scale basis. However, beer that does not meet
Pabst Blue Ribbon quality standards is generally packaged and distributed as
local brand beer.
NOBLE BREWERY: The original facilities of Noble Brewery were constructed
between 1988 and 1990 with annual production capacity of approximately 80,000
metric tons or 680,000 barrels of beer. During July 1994, a second brewing
facility was completed, which increased annual production capacity by an
additional 120,000 metric tons or 1,020,000 barrels of beer. The second
brewing facility commenced full-scale production during late 1994. Noble
Brewery has produced Pabst Blue beer exclusively since it commenced
operations.
ZAO YANG HIGH WORTH BREWERY: Zao Yang High Worth Brewery is situated on a
site containing approximately 752,688 square feet and is located within the
vicinity of Zao Yang City, Hubei Province. Zao Yang High Worth Brewery
occupies the site pursuant to a certificate of land use rights issued by the
local government. The land use right is part of the assets acquired by Zao
Yang High Worth Brewery from Zao Yang Brewery.
The original facilities of Zao Yang High Worth Brewery were constructed
between 1980 and 1985 with annual production capacity based on old brewing
technology of approximately 40,000 metric tons or 340,000 barrels of beer.
High Worth JV, pursuant to the joint venture agreement, 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.
By the end of April 1998, the technical renovation process to convert the
old brewing facilities of Zao Yang High Worth Brewery into a Pabst Blue
Ribbon beer brewing complex had been substantially completed. Management
estimates that production of Pabst Blue Ribbon beer will commence in June
1998.
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
Cehngdu, 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
21
<PAGE>
the brewery as its branch and began to convert the facility into a Pabst Blue
Ribbon beer brewing complex in late 1996. In April 1997, Sichuan Brewery
commenced the production of beer under the Pabst Blue Ribbon label, which was
sold to the Marketing Company for resale. For the three months ended March
31, 1998, the Marketing Company has distributed 2,798 metric tons of Pabst
Blue Ribbon beer produced by Sichuan Brewery.
Consolidated Results of Operations:
Three Months Ended March 31, 1998 and 1997 -
Sales: For the three months ended March 31, 1998, net sales were RMB
285,632,506. During the three months ended March 31, 1998, the Marketing
Company purchased RMB 154,965,086 and RMB 11,101,838 of beer products from
Noble Brewery and Sichuan Brewery, respectively, for resale. Approximately
99.3% of total beer sales during the three months ended March 31, 1998 were
provided from the sale and distribution of beer products under the Pabst Blue
Ribbon brand name. For the three months ended March 31, 1997, net sales were
RMB 310,895,516. During the three months ended March 31, 1997, the Marketing
Company purchased RMB 176,898,774 of beer products from Noble Brewery for
resale. Approximately 99.7% of total beer sales during the three months ended
March 31, 1997 were provided from the sale and distribution of beer products
under the Pabst Blue Ribbon brand name. All sales during the three months
ended March 31, 1998 and 1997 were conducted through the Marketing Company
and were attributable to beer sales.
During the three months ended March 31, 1998, net sales of beer products
decreased by RMB 25,263,010 or 8.1% to RMB 285,632,506, as compared to RMB
310,895,516 for the three months ended March 31, 1997. The Company sold
55,979 metric tons of beer to distributors in 1998 as compared to 58,537
metric tons of beer in 1997, a decrease of 4.4%. The decrease in net sales of
beer products during the three months ended March 31, 1998 as compared to the
three months ended March 31, 1998 was primarily attributable to a shift in
consumer demand to lower priced beer products. As a result, during the three
months ended March 31, 1998 as compared to the three months ended March 31,
1997, although the Company incurred a 4.4% decrease in the volume of beer
sold, it incurred a decrease of 8.1% in sales, reflecting a lower average
sales price per metric ton of beer.
In response to changing market conditions and competitive pressures, the
Company introduced two new Pabst Blue Ribbon beer products during March 1998.
The new products cost less to produce as a result of containing less malt and
having a lower alcoholic content, and are sold in newly designed packaging.
The Company believes that these new products will not have a significant
effect on demand for the Company's premium brand beer, but will appeal to a
different market segment that is seeking a premium brand beer at a lower
price, and will allow the Company to maintain and expand its market share in
China.
During the three months ended March 31, 1998, Zhaoqing Brewery sold
18,901 metric tons of beer to the Marketing Company, of which 810 metric tons
(4.3%) were local brand beer and 18,091 metric tons (95.7%) were Pabst Blue
Ribbon beer. During the three months ended March 31, 1997, Zhaoqing Brewery
sold 18,865 metric tons to the Marketing Company, of which 361 metric tons
(1.9%) were local brand beer and 18,504 metric tons (98.1%) were Pabst Blue
Ribbon beer. Total beer sold by Zhaoqing Brewery to the Marketing Company
increased by 36 metric tons or 0.2% from 1997 to 1998.
The Marketing Company regulates the production of Pabst Blue Ribbon beer
of Zhaoqing Brewery, Noble Brewery and Sichuan Brewery in accordance with
their
22
<PAGE>
respective production capacities in order to balance warehouse inventory
levels and accommodate projected market demand.
Gross Profit: For the three months ended March 31, 1998, total gross
profit was RMB 50,333,460 or 17.6% of total net sales. For the three months
ended March 31, 1997, total gross profit was RMB 54,721,601 or 17.6% of total
net sales. Gross profit from beer sales decreased by RMB 4,388,141 to RMB
50,333,460 in 1998 as compared to RMB 54,721,601 in 1997 as a result of the
decrease in sales.
The Company expects that it will experience pressure on its gross profit
margin during 1998 as a result of a general softening of consumer demand in
China, caused in part by the economic turmoil in Asia, continued competition
from major breweries in China seeking to protect their market share, and a
slight increase in raw material and packaging costs, which the Company may
not be able to completely pass on to its customers.
Selling, General and Administrative Expenses: For the three months ended
March 31, 1998, selling, general and administrative expenses were RMB
44,311,051 or 15.5% of net sales, consisting of selling expenses of RMB
27,290,241 and general and administrative expenses of RMB 17,020,810. Net of
an allowance for doubtful accounts of RMB 1,976,191 for the three months
ended March 31, 1998, general and administrative expenses were RMB
15,044,619. For the three months ended March 31, 1997, selling, general and
administrative expenses were RMB 48,543,678 or 15.6% of net sales, consisting
of selling expenses of RMB 31,444,893 and general and administrative expenses
of RMB 17,098,785. Net of an allowance for doubtful accounts of RMB 4,110,000
for the three months ended March 31, 1997, general and administrative
expenses were RMB 12,988,785.
Selling expenses include costs relating to the advertising, promotion,
marketing and distribution of Pabst Blue Ribbon beer in China. Selling
expenses decreased by RMB 4,154,652 or 13.2% in 1998 as compared to 1997, and
as a percent of net sales, to 9.6% in 1998 from 10.1% in 1997. Selling
expenses decreased in 1998 as compared to 1997, both on an absolute basis and
as a percentage of sales, as a result of the Company deferring certain costs
during the three months ended March 31, 1998, to strategically concentrate
its advertising and promotional programs during the peak season (April
through September). During 1998, the Company intends to continue its
substantially expanded advertising and promotional program to maintain and
stimulate consumer demand and maintain the market position of Pabst Blue
Ribbon beer in China, in an attempt to counteract softening consumer demand
and increasing competition from foreign premium brand beers.
General and administrative expenses include the costs associated with the
operation of the Company's executive offices, and the legal and accounting
costs associated with the operation of a public company. Excluding the
allowance for doubtful accounts, general and administrative expenses
increased by RMB 2,055,834 or 15.8% in 1998 as compared to 1997, and as a
percentage of net sales, to 5.3% in 1998 from 4.2% in 1997. General and
administrative expenses increased in 1998 as compared in 1997 primarily as a
result of increased personnel and personnel related costs.
On January 2, 1998, options to purchase 210,000 shares of Class A Common
Stock at an exercise price of US$3.87 per share were granted to four
directors and five employees, and options to purchase 70,000 shares of Class
A Common Stock at an exercise price of US$4.26 per share were granted to two
directors, each of whom possesses indirectly more than 10% of the total
combined voting power of all classes of common stock of the Company. From 50%
to 70% of such stock options vested on April 1, 1998, and the remaining
portion of the stock
23
<PAGE>
options vest in varying amounts through April 1, 2000. The stock options expire
on December 31, 2001 through December 31, 2005. The stock options issued to
non-employee directors were accounted for pursuant to Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). Under SFAS 123, the fair value of stock options is calculated according
to the Black-Scholes pricing model and amortized to expense over the vesting
period. As a result, the Company recognized RMB 1,695,358 of compensation
expense during the three months ended March 31, 1998.
On March 2, 1998, the Company entered into a contract with Worldwide
Corporate Finance, a corporate financial consulting company, to provide
financial and business consulting services to the Company. The Company paid
an initial retainer by issuing 10,000 shares of restricted Class A Common
Stock, which were recorded as a charge to operations at their estimated fair
market value of RMB 240,700. A total of 40,000 shares of the Company's Class
A Common Stock and warrants to purchase 150,000 shares of Class A Common
Stock are issuable based on the consulting company completing certain
pre-defined objectives (the "Contingent Securities"). The initial term of the
contract is through June 17, 1998, but will be extended to March 2, 1999 if
the defined objectives are reached by June 17, 1998. The warrants to purchase
150,000 shares of Class A Common Stock will be exercisable for a period of
2.5 years from the date the objectives are reached, and will consist of
50,000 warrants exercisable at US$3.50 per share, 50,000 warrants exercisable
at US$4.50 per share and 50,000 warrants exercisable at US$5.50 per share. As
of March 31, 1998, none of the objectives that would require the issuance of
any portion of the Contingent Securities had been completed. The Company
accounts for warrants granted to non-employees in accordance with SFAS 123,
which requires non-cash compensation expense be recognized over the expected
period of benefit. The Company has calculated the fair value of such warrants
according to the Black-Scholes pricing model and is amortizing the aggregate
value of RMB 2,776,350 to expense over the period March 1998 through December
1998.
Operating Income: For the three months ended March 31, 1998, operating
income was RMB 3,753,247 or 1.3% of net sales. For the three months ended
March 31, 1997, operating income was RMB 6,177,923 or 2.0% of net sales. The
decrease in operating income is primarily attributable to the shift in sales
mix to lower margin products and increased selling, general and
administrative expenses. The adjustment and regulation of production between
Zhaoqing Brewery, Noble Brewery and Sichuan Brewery by the Marketing Company
also contributed to the decrease in operating income.
Interest Expense: For the three months ended March 31, 1998, interest
expense decreased by RMB 2,146,326 or 63.0% to RMB 1,258,479, as compared to
RMB 3,404,805 for the three months ended March 31, 1997. Interest expense
decreased in 1998 as compared to 1997 as a result of the decrease in customer
deposits, decrease in capital lease obligations and decrease in amounts due
to related companies.
Income Taxes: The two-year income tax holiday for Zhaoqing Brewery
expired on December 31, 1997. Commencing in 1998, Zhaoqing Brewery is
required to pay local income tax at half of the normal rate of 33% on its
profit as determined in accordance with PRC accounting standards applicable
to Zhaoqing Brewery. Accordingly, for the three months ended March 31, 1998,
income tax expense of RMB 1,120,928 was recorded. For the three months ended
March 31, 1997, deferred income tax expense of RMB 1,176,000 was recorded.
Net Income: Net income decreased to RMB 7,075,017 for the three months
ended March 31, 1998, as compared to RMB 9,197,766 for the three months ended
March 31, 1997.
24
<PAGE>
Noble Brewery:
Three Months Ended March 31, 1998 and 1997 -
Sales: For the three months ended March 31, 1998 and 1997, net sales
were RMB 146,015,026 and RMB 167,182,547, respectively.
During the three months ended March 31, 1998, Noble Brewery sold 34,226
metric tons of beer to the Marketing Company, as compared to 36,492 metric
tons of beer sold to the Marketing Company during the three months ended
March 31, 1997. Total beer sold by Noble Brewery to the Marketing Company
decreased by 2,266 metric tons or 6.2% from 1997 to 1998.
Gross Profit: For the three months ended March 31, 1998 and 1997, gross
profit was RMB 44,619,063 or 30.6% of net sales and RMB 48,389,456 or 28.9%
of net sales, respectively.
Selling, General and Administrative Expenses: For the three months ended
March 31, 1998, selling, general and administrative expenses totalled RMB
10,466,738 or 7.2% of net sales, consisting of selling expenses of RMB
1,790,234 and general and administrative expenses of RMB 8,676,504. For the
three months ended March 31, 1997, selling, general and administrative
expenses totalled RMB 11,522,876 or 6.9% of net sales, consisting of selling
expenses of RMB 1,201,071 and general and administrative expenses of RMB
10,321,805. Selling expenses consist of warehousing, storage and freight
costs.
Operating Income: For the three months ended March 31, 1998 and 1997,
operating income was RMB 34,152,325 or 23.4% of net sales and RMB 36,866,580
or 22.1% of net sales, respectively.
Income Taxes: The two-year income tax holiday for Noble Brewery expired
on December 31, 1995. Commencing in 1996, Noble Brewery is required to pay
local income tax at half the normal rate of 33% on its profit as determined
in accordance with PRC accounting standards applicable to Noble Brewery.
Accordingly, for the three months ended March 31, 1998, income tax expense of
RMB 4,276,550 was recorded. For the three months ended March 31, 1997, income
tax expense of RMB 5,772,026 was recorded.
Net Income: Net income decreased to RMB 30,062,696 or 20.6% of net sales
for the three months ended March 31, 1998, as compared to RMB 31,668,967 or
18.9% of net sales for the three months ended March 31, 1997.
Consolidated Financial Condition - March 31, 1998:
Liquidity and Capital Resources - For the three months ended March 31,
1998, the Company's operations provided cash resources of RMB 33,927,209. The
Company's cash balance decreased by RMB 39,860,375 to RMB 36,232,579 at March
31, 1998, as compared to RMB 76,092,954 at December 31, 1997. The Company's
net working capital deficit increased by RMB 12,744,609 to RMB 115,469,868 at
March 31, 1998, as compared to RMB 102,725,259 at December 31, 1997, and the
Company's current ratio at March 31, 1998 was 0.77:1, as compared to 0.79:1
at December 31, 1997.
Net of an allowance for doubtful accounts of RMB 1,976,191 for the three
months ended March 31, 1998, accounts and bills receivable increased by RMB
43,632,430 or 28.0% to RMB 197,678,572 at March 31, 1998, as compared to RMB
156,022,333 at December 31, 1997, as a result of the seasonal nature of the
business and the timing of the Chinese New Year, during which time a general
slowdown in receipts and payments typically occurs. Commencing January 1,
25
<PAGE>
1997, as a result of more intense competition from other premium brand beers
in China, the Marketing Company abolished the customer deposit requirement
except for certain new customers which are required to make a cash deposit as
security for their purchases. Customers with material transaction volume are
required to issue bills of exchange from their respective banks to secure
part or all of the payment on the due date. The Marketing Company has also
provided extended credit terms to certain distributors that meet minimum
financial criteria. At March 31, 1998, bills receivable had decreased to RMB
35,478,170 or 17.9% of total accounts and bills receivable, as compared to
RMB 35,555,400 or 22.8% of total accounts and bills receivable at December
31, 1997.
The Company's inventories decreased by RMB 13,994,362 or 15.6% to RMB
75,589,080 at March 31, 1998, as compared to RMB 89,583,442 at December 31,
1997.
The Company's prepayments, deposits and other receivables increased by
RMB 42,786,085 or 178.1% to RMB 66,803,996 at March 31, 1998, as compared to
RMB 24,017,911 at December 31, 1997. The increase in prepayments, deposits
and other receivables was primarily due to an increase in prepayments related
to expanded advertising and promotional programs scheduled for the remainder
of 1998.
The Company's accounts payable and accrued liabilities increased by RMB
30,526,246 or 31.2% to RMB 128,341,249 at March 31, 1998, as compared to RMB
97,815,003 at December 31, 1997. The increase in accounts payable was
primarily due to the increase in purchases of raw materials and packing
materials to support peak season (April through September) sales and
production, and the increase in accrued liabilities was related to the
expansion of operating activities.
Customer deposits decreased by RMB 6,680,000 or 100.0% to RMB nil at
March 31, 1998, as compared to RMB 6,680,000 at December 31, 1997, as a
result of the change in credit policy implemented by the Marketing Company in
1997 in response to the changing market environment. Since the Company pays
interest on customer deposits, the decrease in customer deposits during 1998
has also contributed to a decrease in interest expense in 1998 as compared to
1997.
The amount due to an associated company increased by RMB 52,823,268 or
25.3% to RMB 261,906,603 at March 31, 1998, as compared to RMB 209,083,335 at
December 31, 1997, and represents the amounts due to Noble Brewery from its
sale of Pabst Blue Ribbon beer to the Marketing Company. Contributing to the
increase was the seasonal nature of the business and the timing of the
Chinese New Year. As a result of the extended credit terms provided by the
Marketing Company to certain distributors, accounts and bills receivable
increased, which caused a commensurate increase in the amount due to an
associated company, reflecting the lengthened collection cycle.
Net of the cash dividend of RMB 24,367,103 paid to Guangdong Blue Ribbon
by High Worth JV, the amounts due to related companies decreased by RMB
30,938,444 or 40.1% to RMB 21,861,049 at March 31, 1998, as compared to RMB
77,166,596 at December 31, 1997. The decrease in amounts due to related
companies reflected the repayment by the Company of most of the advances from
related companies during the three months ended March 31, 1998. Since the
Company pays interest on advances from related companies, the decrease in
outstanding amounts due to related companies at March 31, 1998 has also
contributed to a decrease in interest expense during the three months ended
March 31, 1998 as compared to the three months ended March 31, 1997.
During the three months ended March 31, 1998, the Company's secured bank
loans increased by RMB 3,000,000. The bank loans bear interest at rates
26
<PAGE>
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.
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. During the three months
ended March 31, 1998, partial dividends of RMB 24,367,103 and RMB 34,302,994
were distributed to Guangdong Blue Ribbon and Holdings, respectively.
On January 13, 1998, High Worth JV entered into a joint venture contract
with Zao Yang Brewery in Hubei Province to establish a new brewery with an
initial annual production capacity of 40,000 metric tons or 340,000 barrels
of 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. Zao Yang High Worth Brewery will initially commence production of a
locally branded beer until it is capable of producing Pabst Blue Ribbon beer.
High Worth JV is responsible for transferring the technical know-how and
production techniques to brew Pabst Blue Ribbon beer to Zao Yang High Worth
Brewery, as well as assisting in the renovation of existing equipment, in
order to convert the brewery into another Pabst Blue Ribbon beer brewing
complex. It is currently estimated that Zao Yang High Worth Brewery will
commence production of Pabst Blue Ribbon beer in June 1998. During the three
months ended March 31, 1998, High Worth JV paid RMB 16,104,000, representing
its 55% capital investment in the joint venture.
For the three months ended March 31, 1998, additions to property, plant
and equipment aggregated RMB 230,751. The Company anticipates that additional
capital expenditures in connection with the continuing improvement of
production facilities at Zhaoqing Brewery during the remainder of 1998 will
be approximately RMB 20,000,000, a portion of which is expected to be funded
by lease financing. In addition, the Company anticipates that additional
capital expenditures in connection with the technical renovation process to
convert the old brewing facilities of Zao Yang High Worth Brewery into a
Pabst Blue Ribbon brewing complex during the remainder of 1998 will be
approximately RMB 40,000,000, a portion of which is expected to be funded by
new bank borrowings.
In connection with the acquisition of High Worth JV, Oriental Win
advanced US$8,869,585 to Holdings during 1994. The rights to collect
US$8,000,000 of the advance were transferred from Oriental Win to its
shareholders in proportion to their respective shareholder interests in
August 1996 (West Coast Star Enterprises Ltd. - US$4,800,000; Mapesbury
Limited - US$1,600,000; Redcliffe Holdings Ltd. - US$1,600,000). The advances
bear no interest and are not repayable unless the Company obtains additional
long-term debt or equity financing. Repayments of the advances are at the
discretion of the Company and the shareholders have no right to demand
repayment. The Company has the option of offsetting or repaying the advance
or part thereof by allotment of shares at par value in Holdings. As of March
31, 1998 and December 31, 1997, advances from such shareholders, West Coast
Star Enterprises Ltd., Top Link Development Limited (assigned by Mapesbury
Limited in February 1998), Redcliffe Holdings Ltd. and Oriental Win were
approximately RMB 39,800,000, RMB 13,300,000, RMB 13,300,000 and RMB
7,200,00, respectively. Mapesbury Limited also transferred its shares in the
Company to Top Link Development Limited.
The Company anticipates that its operating cash flow, combined with cash
on
27
<PAGE>
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 for long-term bank
loans and lease financing. In addition, accelerated development or
acquisition of additional brewing facilities or other support facilities may
require the use of long-term borrowing or equity financing by the Company.
Inflation and Currency Matters - In recent years, the Chinese economy
has experienced periods of rapid economic growth as well as relatively high
rates of inflation, which in turn has resulted in the periodic adoption by
the Chinese government of various corrective measures designed to regulate
growth and contain inflation. Since 1993, the Chinese government has
implemented an economic program designed to control inflation, which has
resulted in the tightening of working capital available to Chinese business
enterprises. The success of the Company depends in substantial part on the
continued growth and development of the Chinese economy.
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies. Changes in the relative
value of currencies occur periodically and may, in certain instances,
materially affect the Company's results of operations.
The Company conducts virtually all of its business in China and,
accordingly, the sale of its products are settled primarily in RMB. As a
result, devaluation of the RMB against the USD would adversely affect the
Company's financial performance when measured in USD, and could have material
adverse effects upon its 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 since then.
Year 2000 Issue:
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year.
Computer programs that have sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities. Based on a
recent internal assessment, the Company does not anticipate that the cost of
any needed modifications will have a material effect on results of operations.
28
<PAGE>
PART II. OTHER INFORMATION
--------------------------
ITEM 2. CHANGES IN SECURITIES
(c) Equity securities of the registrant sold by the registrant during the
three months ended March 31, 1998 that were not registered under the
Securities Act of 1933, as amended, other than unregistered sales made in
reliance on Regulation S, were as follows:
Issuance of Stock Options -
On January 2, 1998, pursuant to the 1998 Stock Option Plan, options to
purchase 210,000 shares of Class A Common Stock at an exercise price of
US$3.87 per share were granted to four directors and five employees, and
options to purchase 70,000 shares of Class A Common Stock at an exercise
price of US$4.26 per share were granted to two directors, each of whom
possesses indirectly more than 10% of the total combined voting power of all
classes of common stock of the Company. From 50% to 70% of such stock options
vested on April 1, 1998, and the remaining portion of the stock options vest
in varying amounts through April 1, 2000. The stock options expire from
December 31, 2001 through December 31, 2005.
Consulting Contract -
On March 2, 1998, the Company entered into a contract with Worldwide
Corporate Finance, a corporate financial consulting company, to provide
financial and business consulting services to the Company. The Company paid
an initial retainer by issuing 10,000 shares of restricted Class A Common
Stock, which were recorded as a charge to operations at their estimated fair
market value of RMB 240,700. A total of 40,000 shares of the Company's Class
A Common Stock and warrants to purchase 150,000 shares of Class A Common
Stock are issuable based on the consulting company completing certain
pre-defined objectives (the "Contingent Securities"). The initial term of the
contract is through June 17, 1998, but will be extended to March 2, 1999 if
the defined objectives are reached by June 17, 1998. The warrants to purchase
150,000 shares of Class A Common Stock will be exercisable for a period of
2.5 years from the date the objectives are reached, and will consist of
50,000 warrants exercisable at US$3.50 per share, 50,000 warrants exercisable
at US$4.50 per share and 50,000 warrants exercisable at US$5.50 per share. As
of March 31, 1998, none of the objectives that would require the issuance of
any portion of the Contingent Securities had been completed. The previously
described securities were issued pursuant to Section 4(2) of the Securities
Act of 1933, as amended, based on the representations of Worldwide Corporate
Finance.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K -
Three Months Ended March 31, 1998: None.
29
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CBR BREWING COMPANY, INC.
-------------------------
(Registrant)
Date: May 13, 1998 By: /s/ ZI-SHOU CHEN
------------------------
Zi-shou Chen
President
(Duly Authorized Officer)
Date: May 13, 1998 By: /s/ GARY C.K. LUI
------------------------
Gary C.K. Lui
Chief Financial Officer
(Principal Financial
Officer)
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 4365371
<SECURITIES> 0
<RECEIVABLES> 23816695
<ALLOWANCES> 0
<INVENTORY> 9107118
<CURRENT-ASSETS> 46153804
<PP&E> 28205132
<DEPRECIATION> 0
<TOTAL-ASSETS> 106203856
<CURRENT-LIABILITIES> 60065837
<BONDS> 1574128
0
0
<COMMON> 823
<OTHER-SE> 22613408
<TOTAL-LIABILITY-AND-EQUITY> 106203856
<SALES> 34413554
<TOTAL-REVENUES> 34413554
<CGS> 28349282
<TOTAL-COSTS> 28349282
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 238095
<INTEREST-EXPENSE> 151624
<INCOME-PRETAX> 260867
<INCOME-TAX> 135051
<INCOME-CONTINUING> 852412
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 852412
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
