<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1999
[ ] 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)
23/F., Hang Seng Causeway Bay Building
28 Yee Wo Street, Causeway Bay, Hong Kong
------------------------------------------------------------
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: 852-2866-2301
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 September 30, 1999, 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.
Documents incorporated by reference: None
1
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) -
September 30, 1999 and December 31, 1998
Consolidated Statements of Income (Unaudited) -
Three Months and Nine Months Ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows (Unaudited) - Nine
Months Ended September 30, 1999 and 1998
Notes to Consolidated Financial Statements (Unaudited) -
Nine Months Ended September 30, 1999 and 1998
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
-------------------------- ----------------------------
RMB USD RMB USD
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash 89,633,896 10,799,265 86,508,742 10,422,740
Accounts and bills receivable, net 178,536,701 21,510,446 140,502,015 16,927,954
Inventories (Note 2) 90,856,656 10,946,585 66,602,633 8,024,414
Amounts due from related companies 26,478,775 3,190,214 18,068,927 2,176,979
Prepayments, deposits and other
receivables 18,616,014 2,242,893 27,603,518 3,325,725
----------- ----------- ----------- ------------
Total current assets 404,122,042 48,689,403 339,285,835 40,877,812
Interest in an associated company
(Note 4) 232,961,764 28,067,682 243,429,767 29,328,888
Property, plant and equipment, net 247,050,048 29,765,066 263,768,418 31,779,327
Non-current assets 11,971,153 1,442,308 23,942,307 2,884,615
----------- ----------- ----------- ------------
Total assets 896,105,007 107,964,459 870,426,327 104,870,642
=========== =========== =========== ============
</TABLE>
(continued)
3
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)(CONTINUED)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
-------------------------------- ------------------------------
RMB USD RMB USD
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings 114,044,000 13,740,241 119,554,000 14,404,096
Capital lease obligations 5,664,938 682,523 5,664,938 682,523
Accounts payable
and accrued liabilities 156,704,350 18,880,042 121,733,657 14,666,706
Amounts due to related companies
(Note 7) 9,785,270 1,178,948 31,136,095 3,751,337
Amount due to an associated company 250,159,367 30,139,683 218,717,800 26,351,542
Income taxes payable 9,849,808 1,186,724 4,166,884 502,034
Sales taxes payable 19,407,384 2,338,239 30,331,904 3,654,446
----------- ----------- ----------- -----------
Total current liabilities 565,615,117 68,146,400 531,305,278 64,012,684
----------- ----------- ----------- -----------
Long-term liabilities:
Capital lease obligations 464,842 56,005 2,847,911 343,122
----------- ----------- ----------- -----------
Total long-term liabilities 464,842 56,005 2,847,911 343,122
----------- ----------- ----------- -----------
Minority interests (Note 6) 71,193,075 8,577,479 83,803,133 10,096,763
----------- ----------- ----------- -----------
Shareholders' advances and shareholders' equity:
Advances from shareholders (Note 3) 36,719,200 4,424,000 50,267,705 6,056,350
----------- ----------- ----------- -----------
Common stock (Note 5)
-Class A, US$0.0001 par value,
90,000,000 shares authorized,
5,010,013 shares outstanding 4,273 515 4,273 515
-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 107,012,942 12,893,125 106,489,592 12,830,071
General reserve and enterprise
development funds 10,125,740 1,219,969 10,125,740 1,219,969
Retained earnings 104,967,259 12,646,658 85,580,136 10,310,860
----------- ----------- ----------- -----------
Total shareholders' equity 222,112,773 26,760,575 202,202,300 24,361,723
----------- ----------- ----------- -----------
Total shareholders' advances and
shareholders' equity 258,831,973 31,184,575 252,470,005 30,418,073
----------- ----------- ----------- -----------
Total liabilities, shareholders'
advances and shareholders'
equity 896,105,007 107,964,459 870,426,327 104,870,642
=========== =========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
Three Months Ended Nine Months Ended September 30, September 30,
September 30, 1999 September 30, 1999 1998 1998
-------------------------- -------------------------- ------------ ------------
RMB USD RMB USD RMB RMB
------------ ----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales, including sales to related
companies of RMB nil and RMB nil
for the three months and nine
months ended September 30, 1999,
respectively, and RMB nil and RMB
573,401 for the three months and
nine months ended September 30,
1998, respectively 257,061,465 30,971,261 826,073,650 99,526,946 266,425,164 903,090,208
Sales taxes (6,295,899) (758,542) (17,447,910) (2,102,158) (5,880,100) (18,484,919)
------------ ----------- ------------ ----------- ------------ ------------
Net sales 250,765,566 30,212,719 808,625,740 97,424,788 260,545,064 884,605,289
Cost of sales, including inventory
purchased from related companies of
RMB 159,493,543 and RMB 491,294,027
for the three months and nine months
ended September 30, 1999,
respectively, and RMB 160,725,559
and RMB 549,097,276 for the three
months and nine months ended
September 30, 1998, respectively;
and royalty fee paid to a related
company of RMB 1,808,137 and RMB
5,584,788 for the three months and
nine months ended September 30, 1999,
respectively, and RMB 1,770,900
and RMB 5,829,858 for the three
months and nine months ended
September 30, 1998, respectively (192,610,269) (23,206,057) (628,898,690) (75,770,927) (218,951,393) (731,531,779)
------------ ----------- ------------ ----------- ------------ ------------
Gross profit 58,155,297 7,006,662 179,727,050 21,653,861 41,593,671 153,073,510
Selling, general and administrative
expenses, including management
fee paid to a related company of
RMB nil and RMB nil for the three
months and nine months ended
September 30, 1999, respectively,
and RMB 945,000 and RMB 2,835,000
for the three months and nine months
ended September 30, 1998, respectively (56,628,268) (6,822,683) (168,892,287) (20,348,468) (45,789,244) (150,692,889)
Fair value of warrants, stock options
and common stock issued for services
rendered (Note 5) (174,449) (21,018) (523,350) (63,054) (174,445) (2,284,948)
------------ ----------- ------------ ----------- ------------ ------------
Operating income (loss) 1,352,580 162,961 10,311,413 1,242,339 (4,370,018) 95,673
Foreign exchange losses - - - - - (329,565)
Other expense:
Interest expense, including interest
paid to related companies of
RMB 297,615 and RMB 1,007,751
for the three months and nine
months ended September 30, 1999,
respectively, and RMB nil and RMB
106,674 for the three months and
nine months ended September 30,
1998, respectively (2,769,104) (333,627) (8,258,618) (995,014) (1,236,672) (4,143,690)
------------ ----------- ------------ ----------- ------------ ------------
Income (loss) before income taxes (1,416,524) (170,666) 2,052,795 247,325 (5,606,690) (4,377,582)
Income taxes (1,483,138) (178,691) (5,682,925) (684,690) (1,064,933) (4,479,069)
------------ ----------- ------------ ----------- ------------ ------------
</TABLE>
(continued)
5
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)(CONTINUED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
Three Months Ended Nine Months Ended September 30, September 30,
September 30, 1999 September 30, 1999 1998 1998
-------------------------- -------------------------- ------------ ------------
RMB USD RMB USD RMB RMB
------------ ----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Loss before equity in earnings
of an associated company (2,899,662) (349,357) (3,630,130) (437,365) (6,671,623) (8,856,651)
Equity in earnings of an associated
company 8,519,990 1,026,505 31,045,881 3,740,468 10,582,697 39,152,070
------------ ----------- ----------- ---------- ------------ ------------
Income before minority interests 5,620,328 677,148 27,415,751 3,303,103 3,911,074 30,295,419
Minority interests (1,433,028) (172,654) (8,028,628) (967,305) (609,301) (11,308,321)
------------ ----------- ----------- ---------- ------------ ------------
Net income for the period 4,187,300 504,494 19,387,123 2,335,798 3,301,773 18,987,098
============ =========== =========== ========== ============ ============
Net income per common share (Note 1)
- Basic 0.52 0.06 2.42 0.29 0.41 2.37
============ =========== =========== ========== ============ ============
- Diluted 0.52 0.06 2.42 0.29 0.41 2.37
============ =========== =========== ========== ============ ============
Weighted average number of common
shares outstanding
- Basic 8,010,013 8,010,013 8,010,013 8,010,013 8,010,013 8,007,791
============ =========== =========== ========== ============ ============
- Diluted 8,010,013 8,010,013 8,010,013 8,010,013 8,010,013 8,007,791
============ =========== =========== ========== ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
6
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months
Ended
Nine Months Ended September 30,
September 30, 1999 1998
----------------------------------- ------------
RMB USD RMB
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 19,387,123 2,335,798 18,987,098
Adjustments to reconcile net income to net
cash provided by operating activities:
Fair value of warrants, stock options
and common stock issued for services
rendered 523,350 63,054 2,284,948
Allowance for doubtful accounts 12,682,785 1,528,046 5,554,517
Depreciation and amortization 21,269,727 2,562,618 18,522,060
Foreign exchange losses - - 329,565
Minority interests 8,028,628 967,305 11,308,321
Equity in earnings of an associated company (31,045,881) (3,740,468) (39,152,070)
Income taxes payable 5,682,924 684,690 4,396,782
Dividends received from an associated company 41,513,884 5,001,673 39,221,726
Changes in operating assets and liabilities:
(Increase) decrease in -
Accounts and bills receivable (50,717,471) (6,110,539) (35,354,127)
Inventories (24,254,023) (2,922,171) (2,781,428)
Amounts due from related companies (8,409,848) (1,013,235) 7,190,123
Prepayments, deposits and other receivables 8,987,504 1,082,831 (62,036,860)
Increase (decrease) in -
Accounts payable and accrued liabilities 34,970,693 4,213,337 101,328,793
Customer deposits - - (6,680,000)
Amount due to an associated company 31,441,567 3,788,141 60,348,255
Sales taxes payable (10,924,520) (1,316,207) (20,888,142)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 59,136,442 7,124,873 102,579,561
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in non-current assets 11,971,154 1,442,308 (1,699,700)
Purchases of property, plant and equipment (4,551,357) (548,357) (46,265,978)
Purchase of interest in brewery - - (16,104,000)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 7,419,797 893,951 (64,069,678)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
New bank borrowings - - 67,172,800
Repayment of bank borrowings (5,510,000) (663,855) -
Decrease in amounts due to related
companies (5,712,141) (688,210) (22,874,634)
Repayment of capital lease obligations (2,383,069) (287,117) (6,912,922)
Repayment of advances from shareholders (13,548,505) (1,632,350) -
Payment of cash dividend to minority interest (36,277,370) (4,370,767) (40,375,595)
------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (63,431,085) (7,642,299) (2,990,351)
------------ ------------ ------------
Net increase in cash 3,125,154 376,525 35,519,532
Cash at beginning of period 86,508,742 10,422,740 76,092,954
------------ ------------ ------------
Cash at end of period 89,633,896 10,799,265 111,612,486
============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
7
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1. ORGANIZATION AND BASIS OF PRESENTATION
BUSINESS - CBR Brewing Company, Inc., a Florida corporation ("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"). The Company owns all of the capital stock of High Worth Holdings,
Ltd., a British Virgin Islands corporation ("Holdings"), which owns a 60%
interest in Zhaoqing Blue Ribbon High Worth Brewery, Ltd., a Sino-foreign
joint venture ("High Worth JV"). The remaining 40% interest is owned by
Guangdong Blue Ribbon Group Co. Ltd. ("Guangdong Blue Ribbon").
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"), and, through a subsidiary, owns a 40% interest in Zhaoqing Blue
Ribbon Brewery Noble Ltd., a Sino-foreign joint venture ("Noble Brewery").
Noble Brewery owns a second Pabst Blue Ribbon brewing complex that is also
managed by Zhaoqing Brewery. A subsidiary of Noble China Inc., an
unaffiliated company, owns the other 60% interest in Noble Brewery.
In addition, High Worth JV indirectly 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, resulting
in the Company owning a 42% net interest in the Marketing Company.
In January 1998, the Company, through High Worth JV, established a joint
venture company in Hubei Province, Zao Yang Blue Ribbon High Worth Brewery
Ltd. ("Zao Yang High Worth Brewery"), which is the third Pabst Blue Ribbon
brewing complex in China and is managed by Zhaoqing Brewery. High Worth JV
owns a 55% interest, equivalent to an effective interest of 33%. Zao Yang
Brewery, an unaffiliated company in Hubei Province, owns the other 45%
interest in Zao Yang High Worth Brewery.
Effective December 31, 1997, the Company, through High Worth JV, entered into
a Settlement Agreement with Guangdong Blue Ribbon that will allow it to
acquire a 51% interest in Sichuan Brewery, equivalent to an effective
interest of 31%. Pursuant to an Equity Transfer Agreement signed on January
19, 1999, High Worth JV received a 15% consideration-free equity interest in
Sichuan Brewery, equivalent to an effective interest of 9%. Sichuan Brewery
will be formally restructured into a new joint venture company and will serve
as the fourth Pabst Blue Ribbon beer brewing complex in China. High Worth JV
was also granted a three-year option to increase its equity interest to 51%
at a fixed cost.
On June 5, 1999, a formal Joint Venture Agreement was signed among Le Shan
City E Mei Brewery (46.62%), High Worth JV (15.00%) and Wai Shun Investment
Limited (38.38%), an unaffiliated Hong Kong company, to form Sichuan Blue
Ribbon Brewery High Worth Ltd. ("Sichuan High Worth Brewery"). The total
registered and paid up capital of Sichuan High Worth Brewery was RMB
51,221,258. High Worth JV's 15% equity interest is consideration-free but
entitled to share in the profits of Sichuan High Worth Brewery. The Joint
Venture Agreement is subject to the local government's approval. Sichuan High
Worth Brewery is currently producing Pabst Blue Ribbon beer.
8
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
The Company conducts a substantial portion of its purchases through related
parties, and has additional significant continuing transactions with such
parties.
BASIS OF PRESENTATION - The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States. 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, 1998 and
September 30, 1999. 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 fiscal year ending December 31, 1999.
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 are recorded in the
statement 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 exchange rate as quoted by the People's Bank of China on
September 30, 1999 of USD1.00 = RMB8.3. No representation is made that the
RMB amounts could have been, or could be, converted into USD at that rate or
at any other certain rate.
COMMENTS - The accompanying consolidated financial statements are unaudited,
but in the opinion of management of the Company, contain all adjustments,
which include normal recurring adjustments, necessary to present fairly the
financial position at September 30, 1999, the results of operations for the
three months and nine months ended September 30, 1999 and 1998, and the cash
flows for the nine months ended September 30, 1999 and 1998. The consolidated
balance sheet as of December 31, 1998 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, 1998, as
filed with the Securities and Exchange Commission.
9
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
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, disclosure 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.
The results of operations for the three months and nine months ended
September 30, 1999 are not necessary indicative of the results of operations
to be expected for the full fiscal year ending December 31, 1999.
OTHER COMPREHENSIVE INCOME - The Company has no items of other comprehensive
income. Accordingly, a statement of comprehensive income is not presented.
EARNINGS PER SHARE - Basic earnings per share excludes the dilutive effects
of options and convertible securities, if any, and is computed by dividing
net income (loss) available to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share is computed assuming the exercise or conversion of common equivalent
shares, if dilutive, consisting of unissued shares pursuant to stock options,
warrants and debt instruments.
At September 30, 1999, potentially dilutive securities representing 280,000
shares of common stock were outstanding, consisting of stock options
exercisable at prices ranging from $3.87 to $4.26 per share (which was in
excess of average fair market value during the three months and nine months
ended September 30, 1999) to purchase 280,000 shares of common stock (Note
5). The common shares issuable upon exercise of the stock options were
excluded from the calculation of diluted net income per share for 1999 since
the exercise price exceeded the average fair market value of the common stock.
2. INVENTORIES
Inventories consisted of the following at September 30, 1999 and December 31,
1998:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
----------------------- -----------------------
RMB USD RMB USD
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Raw materials 24,768,296 2,984,132 24,853,642 2,994,415
Work in progress 7,290,988 878,432 5,436,138 654,956
Finished goods 58,797,372 7,084,021 36,312,853 4,375,043
---------- ---------- ---------- -----------
90,856,656 10,946,585 66,602,633 8,024,414
========== ========== ========== ===========
</TABLE>
10
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
3. ADVANCES FROM SHAREHOLDERS
In connection with the acquisition of High Worth JV, Oriental Win Holdings
Ltd. ("Oriental Win") advanced US$8,869,585 to Holdings during 1994. The
rights to collect US$8,000,000 of the advance were transferred from Oriental
Win to its shareholders in proportion to their respective shareholder
interests in August 1996 (West Coast Star Enterprises Ltd. - 60%; Mapesbury
Limited - 20%; Redcliffe Holdings Ltd. - 20%). The advances bear no interest
and are repayable at the discretion of the Company, with the shareholders
having no right to demand repayment. The Company has the option of offsetting
or repaying the advances or any part thereof by allotment of shares at par
value in Holdings. On September 8, 1998, the remaining rights to collect
US$848,000 of the advances were transferred from Oriental Win to its
shareholders in proportion to their respective shareholder interests, less
US$21,585 paid by Holdings on behalf of Oriental Win. On November 26, 1998,
Holdings partially repaid approximately 31.5% of the advances from
shareholders, amounting to US$2,791,650. In May 1999, Holdings partially
repaid approximately 18.5% of the advances from shareholders, amounting to
US$1,632,350. As of September 30, 1999, the remaining advances from such
shareholders, West Coast Star Enterprises Ltd., Top Link Development Limited
(assigned by Mapesbury Limited in February 1998), and Redcliffe Holdings
Ltd., were approximately RMB 22,031,000, RMB 7,344,000 and RMB 7,344,000,
respectively. In conjunction with the assignment of the advances to Top Link
Development Limited, Mapesbury Limited also transferred its shares in the
Company to Top Link Development Limited. On December 22, 1998, Oriental Win
was formally dissolved by its shareholders.
4. 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. The condensed statements of
operations of Noble Brewery for the three months and nine months ended
September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999 September 30, 1998 September 30, 1998
------------------------- ------------------------ ------------------ ------------------
RMB USD RMB USD RMB RMB
----------- ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales 143,809,038 17,326,390 446,584,578 53,805,370 137,942,379 476,053,877
=========== ========== =========== ========== =========== ===========
Net income 24,297,118 2,927,364 83,279,354 10,033,657 24,680,600 97,079,501
=========== ========== =========== ========== =========== ===========
The Company's share
of net income after
adjustment of unrealized
intercompany profit
and other intercompany
adjustments 8,519,990 1,026,505 31,045,881 3,740,468 10,582,697 39,152,070
=========== ========== =========== ========== =========== ===========
</TABLE>
11
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
5. SHAREHOLDERS' EQUITY
Stock Option Plan -
On January 2, 1998, the 1998 Stock Option Plan (the "Plan") was adopted by
the majority of the shareholders of the Company and approved by the Board of
Directors. The Plan provides for the granting of stock options from time to
time to eligible persons to purchase an aggregate of up to 800,000 shares of
Class A Common Stock, as either incentive stock options ("ISOs") or
nonqualified stock options ("NSOs"). The exercise price of all ISOs will be
equal to the fair market value of a share of common stock on the date the
option is granted, except that in the case of ISOs granted to any person
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or any affiliate, the price will be not less than 110%
of such fair market value.
On January 2, 1998, options to purchase 210,000 shares of Class A Common
Stock at an exercise price of US$3.87 per share were granted to four
directors and five employees, and options to purchase 70,000 shares of Class
A Common Stock at an exercise price of US$4.26 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 dates ranging from December 31, 2001 through
December 31, 2005.
The stock options issued to non-employee directors were accounted for
pursuant to Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). Under SFAS 123, the fair value of
stock options is calculated according to the Black-Scholes pricing model and
amortized to expense over the vesting period. As a result, the Company
recognized RMB 174,449 and RMB 523,350 of compensation expense during the
three months and nine months ended September 30, 1999, respectively. During
the three months and nine months ended September 30, 1998, the Company
recognized RMB 174,445 and RMB 2,044,248 of compensation expense,
respectively.
Consulting Contract -
On March 2, 1998, the Company entered into a contract with Worldwide
Corporate Finance, a corporate financial consulting company, to provide
financial and business consulting services to the Company. The Company paid
an initial non-refundable retainer by issuing 10,000 shares of Class A Common
Stock, which were recorded as a charge to operations at their estimated fair
market value of RMB 240,700 (US$29,000). A total of 40,000 shares of the
Company's Class A Common Stock and warrants to purchase 150,000 shares of
Class A Common Stock were issuable based on the consulting company completing
certain pre-defined objectives.
The Company accounts for warrants granted to non-employees in accordance with
SFAS 123, which requires non-cash compensation expense be recognized over the
expected period of benefit. The Company recorded non-cash compensation
expense related to such warrants of RMB 333,104 during the three months ended
March 31, 1998. However, as a result of the subsequent expiration of the
contract on August 18, 1998 with none of the objectives having been
completed, the Company reversed such expense during the three months ended
June 30, 1998 in order to reflect the change in estimate.
12
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
6. DIVIDENDS TO MINORITY INTEREST
On November 23, 1998 and July 28, 1999, the Board of Directors of High Worth
JV declared separate dividend distributions of RMB 51,596,713. The minority
interest's 40% portion of the dividend is recorded as a liability at the
declaration date and is included in amounts due to related companies. The
dividends are distributed in installments in order to avoid any disruption to
the normal operating cash flow position of High Worth JV. During the nine
months ended September 30, 1999 and 1998, High Worth JV paid aggregate
dividends to Guangdong Blue Ribbon of RMB 36,277,370 and RMB 40,375,595,
respectively.
7. AMOUNTS DUE TO RELATED COMPANIES
During the six months ended June 30, 1999, the Company borrowed RMB
24,000,000 from Shenzhen Huaqiang Holdings Limited, the Company's major
shareholder. The loan was unsecured, with interest at 7.5% per annum, and was
fully repaid during the three months ended September 30, 1999.
13
<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 quarterly period ended
September 30, 1999 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 quarterly period ended September 30, 1999 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.
Recent Developments:
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 an effective interest of 33%. Zao Yang High Worth Brewery
commenced the production of Pabst Blue Ribbon beer in June 1998, at which
time the Marketing Company also began purchasing Zao Yang High Worth
Brewery's production of Pabst Blue Ribbon beer for distribution. The
consolidated financial statements include the results of operations of Zao
Yang High Worth Brewery on a consolidated basis commencing January 13, 1998.
Effective December 31, 1997, the Company, through High Worth JV, entered
into a Settlement Agreement with Guangdong Blue Ribbon that will allow it to
acquire a 51% interest in Sichuan Brewery, equivalent to an effective
interest of 31%. Pursuant to an Equity Transfer Agreement signed on January
19, 1999, High Worth JV received a 15% consideration-free equity interest in
Sichuan Brewery, equivalent to an effective interest of 9%. Sichuan Brewery
will be formally restructured into a new joint venture company and will serve
as the fourth Pabst Blue Ribbon beer brewing complex in China. High Worth JV
was also granted a three-year option to increase its equity interest to 51%
at a fixed cost.
On June 5, 1999, a formal Joint Venture Agreement was signed among Le Shan
City E Mei Brewery (46.62%), High Worth JV (15.00%) and Wai Shun Investment
Limited (38.38%), an unaffiliated Hong Kong company, to form Sichuan Blue
Ribbon Brewery High Worth Ltd. ("Sichuan High Worth Brewery"). The total
registered and paid up capital of Sichuan High Worth Brewery was RMB
51,221,258. High Worth JV's 15% equity interest is consideration-free but
entitled to share in the profits of Sichuan High Worth Brewery. The Joint
Venture Agreement is subject to the local government's approval. Sichuan High
Worth Brewery is currently producing Pabst Blue Ribbon beer.
Through a Sublicense Agreement dated May 6, 1994 between Pabst Zhaoqing
and High Worth JV, High Worth JV acquired a sublicense to utilize Pabst
trademarks in conjunction with the production and marketing of beer in China
and other Asian countries except Hong Kong, Macau, Japan and South Korea. The
sublicense is subject to a prior License Agreement between Pabst Brewing
Company and Pabst Zhaoqing, and a subsequent Assets Transferring Agreement
among Pabst Zhaoqing, Pabst Brewing Company and Guangdong Blue Ribbon. The
License Agreement expires on November 6, 2003.
Noble China Inc., a public company listed on the Toronto Stock Exchange,
issued a press release on May 27, 1999 to announce that it had acquired from
Pabst Brewing Company the exclusive rights to brew and distribute Pabst Blue
Ribbon beer
14
<PAGE>
throughout China for a period of 30 years from 2003 to 2033. To date, the
Company has been unable to verify whether such a license has in fact been
granted to Noble China Inc., the terms of any such license, and whether it is
subject to any conditions. However, the Company believes that some form of a
license has been granted to Noble China Inc by Pabst Brewing Company.
Management of the Company is in the process of obtaining information on the
announced new license, at which time the Company expects to be in a position
to evaluate and revise its future business plan and strategy accordingly. The
Company is currently unable to predict the effect that this development may
have on future operations. If Noble China Inc. has reached agreement for a
license extension, management of the Company plans to enter into discussions
with Noble China Inc. regarding licensing arrangements subsequent to November
6, 2003. However, there can be no assurances that the discussions will be
successful or what the terms and conditions of any sublicense may be. The
inability of the Company to obtain a sublicense on acceptable terms and
conditions would have a material adverse effect on the Company's future
results of operations, financial position and cash flows.
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 been hindered by the recent Asian
financial turmoil and a general softening in demand for premium 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 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 1999.
Management has responded to changing market conditions by broadening its
product line and expanding distribution.
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
15
<PAGE>
since it commenced operations.
ZAO YANG HIGH WORTH BREWERY: Zao Yang High Worth Brewery is situated on a
site containing approximately 753,000 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 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.
During April 1998, the technical renovation process to convert the old
brewing facilities of Zao Yang High Worth Brewery into a Pabst Blue Ribbon
brewing complex was completed. Zao Yang High Worth Brewery commenced the
production of Pabst Blue Ribbon beer in June 1998, and the Marketing Company
began purchasing Zao Yang High Worth Brewery's production of Pabst Blue
Ribbon beer for distribution.
SICHUAN HIGH WORTH BREWERY: Sichuan High Worth 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 High Worth 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 began to convert the facility into a Pabst Blue Ribbon brewing complex in
late 1996. In April 1997, Sichuan High Worth Brewery commenced the production
of beer under the Pabst Blue Ribbon label, which was sold to the Marketing
Company for resale.
Consolidated Results of Operations:
Three Months Ended September 30, 1999 and 1998 -
Sales: During the three months ended September 30, 1999, net sales of beer
products decreased by RMB 9,779,498 or 3.8% to RMB 250,765,566, as compared
to RMB 260,545,064 for the three months ended September 30, 1998. The Company
sold 50,721 metric tons of beer to distributors in 1999 as compared to 57,035
metric tons of beer in 1998, a decrease of 11.1%. The decrease in net sales
of beer products during the three months ended September 30, 1999 as compared
to the three months ended September 30, 1998 was primarily attributable to
the decrease in volume of beer sold as a result of the weakening in customer
demand for foreign branded premium beer in China and the elimination of a low
margin product line as discussed below. Beer sales consisted almost entirely
of products sold under the Pabst Blue Ribbon brand name through the Marketing
Company.
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 alcohol content, and were sold in newly designed packaging.
Although the sales volume of these 10-degree light processed Pabst Blue
Ribbon beers constituted a significant portion of total sales in 1998, the
contribution to overall operating profit was below management's expectations.
Accordingly, management decided to discontinue the 10-degree beer in 1999, as
a result of a strategic revaluation of
16
<PAGE>
the Company's markets, and will attempt to replace such sales by the
11-degree light processed beer.
During the three months ended September 30, 1999 and 1998, Zhaoqing
Brewery sold 17,643 metric tons and 18,668 metric tons of beer, respectively,
to the Marketing Company, almost all of which were Pabst Blue Ribbon beer.
Total beer sold by Zhaoqing Brewery to the Marketing Company decreased by
1,025 metric tons or 5.5% from 1998 to 1999.
During the three months ended September 30, 1999 and 1998, Sichuan High
Worth Brewery sold 2,322 metric tons and 3,737 metric tons of beer,
respectively, to the Marketing Company, all of which were Pabst Blue Ribbon
beer.
During the three months ended September 30, 1999, Zao Yang High Worth
Brewery sold 7,649 metric tons of beer to the Marketing Company, of which
1,737 metric tons (22.7%) was Pabst Blue Ribbon beer and 5,912 metric tons
(77.3%) was local brand beer. During the three months ended September 30,
1998, Zao Yang High Worth Brewery sold 428 metric tons of beer to the
Marketing Company, all of which was Pabst Blue Ribbon.
The Marketing Company regulated the production of Pabst Blue Ribbon beer
by Zhaoqing Brewery, Noble Brewery, Zao Yang High Worth Brewery and Sichuan
High Worth Brewery during 1998 and 1999 in accordance with their respective
production capacities in order to balance warehouse inventory levels and
accommodate projected market demand.
Gross Profit: For the three months ended September 30, 1999, total gross
profit was RMB 58,155,297 or 23.2% of total net sales. For the three months
ended September 30, 1998, total gross profit was RMB 41,593,671 or 16.0% of
total net sales. Gross profit from beer sales increased by RMB 16,561,626 to
RMB 58,155,297 in 1999 as compared to RMB 41,593,671 in 1998 as a result of
the increase in gross margin. Gross margin from beer sales increased to 23.2%
in 1999 as compared to 16.0% in 1998 as a result of the shift in sales mix to
higher margin products and effective cost control measures.
Selling, General and Administrative Expenses: For the three months ended
September 30, 1999, selling, general and administrative expenses were RMB
56,628,268 or 22.6% of net sales, consisting of selling expenses of RMB
35,320,353 and general and administrative expenses of RMB 21,307,915. Net of
an allowance for doubtful accounts of RMB 6,577,205 for the three months
ended September 30, 1999, general and administrative expenses were RMB
14,730,710. For the three months ended September 30, 1998, selling, general
and administrative expenses were RMB 45,789,244 or 17.6% of net sales,
consisting of selling expenses of RMB 25,985,659 and general and
administrative expenses of RMB 19,803,585. Net of an allowance for doubtful
accounts of RMB 1,431,647 for the three months ended September 30, 1998,
general and administrative expenses were RMB 18,371,938.
Selling expenses include costs relating to the advertising, promotion,
marketing and distribution of Pabst Blue Ribbon beer in China. Selling
expenses increased by RMB 9,334,694 or 35.9% in 1999 as compared to 1998, and
as a percent of net sales, to 14.1% in 1999 from 10.0% in 1998. Selling
expenses increased in 1999 as compared to 1998, both on an absolute basis and
as a percentage of sales, as a result of the Company continuing its
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 and local premium brand beer.
Selling expenses are recognized through the consolidation of the
operations of the Marketing Company. The Marketing Company incurs such
expenses on behalf of all of the Pabst Blue Ribbon brewing facilities in
China, even though not all of such facilities' results of operations are
reflected in the Company's operating income.
17
<PAGE>
Although the Marketing Company is budgeted annually to operate at break-even
levels, based on agreed upon ex-factory prices that the Marketing Company
pays to the breweries to purchase their production of Pabst Blue Ribbon beer,
actual profitability, particularly on an interim basis, is subject to
substantial variability. As a result of these factors, during the three
months ended September 30, 1999 and 1998, the Marketing Company incurred an
operating loss of RMB 7,480,000 and RMB 10,932,000, respectively, which
reduced consolidated operating income accordingly.
General and administrative expenses consist of the management office
operating costs of Zhaoqing Brewery, the Marketing Company and Zao Yang High
Worth Brewery, the costs associated with the operation of the Company's
executive offices, and the legal and accounting and other costs associated
with the operation of a public company. Excluding the allowance for doubtful
accounts, general and administrative expenses decreased by RMB 3,641,228 or
19.8% in 1999 as compared to 1998, and as a percentage of net sales, to 5.9%
in 1999 from 7.1% in 1998. General and administrative expenses decreased in
1999 as compared in 1998 primarily as a result of effective cost control
measures.
The allowance for doubtful accounts increased to RMB 6,577,205 in 1999 or
2.6% of net sales, as compared to RMB 1,431,647 in 1998 or 0.5% of net sales,
as a result of reduced consumer spending resulting from the continuing effect
of the Asian financial crisis, which has impaired the ability of certain of
the Company's distributors to pay their obligations to the Company. The
allowance for doubtful accounts is calculated based primarily on the age of
outstanding accounts receivable, which are typically outstanding for a longer
period of time in China than in the United States. The Company is
implementing revised credit acceptance procedures in an attempt to reduce
future losses from uncollectible accounts receivable.
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 174,449 and RMB 174,445 of compensation expense during the
three months ended September 30, 1999 and 1998, respectively.
On March 2, 1998, the Company entered into a contract with Worldwide
Corporate Finance, a corporate financial consulting company, to provide
financial and business consulting services to the Company. The Company paid
an initial non-refundable retainer by issuing 10,000 shares of Class A Common
Stock, which were recorded as a charge to operations at their estimated fair
market value of RMB 240,700 (US$29,000). A total of 40,000 shares of the
Company's Class A Common Stock and warrants to purchase 150,000 shares of
Class A Common Stock were issuable based on the consulting company completing
certain pre-defined objectives.
The Company accounts for warrants granted to non-employees in accordance
with SFAS 123, which requires non-cash compensation expense be recognized
over the expected period of benefit. The Company recorded non-cash
compensation expense related to such warrants of RMB 333,104 during the three
months ended March 31, 1998. However, as a result of the subsequent
expiration of the contract on August 18, 1998 with none of the objectives
having been completed, the Company reversed
18
<PAGE>
such expense during the three months ended June 30, 1998 in order to reflect
the change in estimate.
Operating Income (Loss): For the three months ended September 30, 1999,
operating income was RMB 1,352,580 or 0.5% of net sales. For the three months
ended September 30, 1998, operating loss was (RMB 4,370,018) or (1.7%) of net
sales. Although sales decreased in 1999 as compared to 1998, the shift in sales
mix to higher margin products resulted in an increase in gross profit margin.
The effect from the increase in gross profit margin resulted in an increase in
operating income in 1999 as compared to 1998.
Interest Expense: For the three months ended September 30, 1999, interest
expense increased by RMB 1,532,432 or 123.9% to RMB 2,769,104, as compared to
RMB 1,236,672 for the three months ended September 30, 1998. Interest expense
increased in 1999 as compared to 1998 as a result of the increase in the
average outstanding balance on bank borrowings and the increase in
interest-bearing borrowings from related companies.
Income Taxes: The two year income tax holiday for Zhaoqing Brewery expired
on December 31, 1997. During the three year period from 1998 to 2000,
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 September 30, 1999, income tax expense was RMB 1,483,138, as compared
to RMB 1,064,933 for the three months ended September 30, 1998.
Net Income: Net income increased to RMB 4,187,300 for the three months
ended September 30, 1999, as compared to RMB 3,301,773 for the three months
ended September 30, 1998.
Nine Months Ended September 30, 1999 and 1998 -
Sales: During the nine months ended September 30, 1999, net sales of beer
products decreased by RMB 75,979,549 or 8.6% to RMB 808,625,740, as compared
to RMB 884,605,289 for the nine months ended September 30, 1998. The Company
sold 159,114 metric tons of beer to distributors in 1999 as compared to
184,746 metric tons of beer in 1998, a decrease of 13.9%. The decrease in net
sales of beer products during the nine months ended September 30, 1999 as
compared to the nine months ended September 30, 1998 was primarily
attributable to the decrease in volume of beer sold as a result of the
weakening in customer demand for foreign branded premium beer in China and
the elimination of a low margin product line as discussed below. Beer sales
consisted almost entirely of products sold under the Pabst Blue Ribbon brand
name through the Marketing Company.
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 alcohol content, and were sold in newly designed packaging.
Although the sales volume of these 10-degree light processed Pabst Blue
Ribbon beers constituted a significant portion of total sales in 1998, the
contribution to overall operating profit was below management's expectations.
Accordingly, management decided to discontinue the 10-degree beer in 1999, as
a result of a strategic revaluation of the Company's markets, and will
attempt to replace such sales by the 11-degree light processed beer.
During the nine months ended September 30, 1999 and 1998, Zhaoqing Brewery
sold 52,637 metric tons and 59,908 metric tons of beer, respectively, to the
Marketing Company, almost all of which were Pabst Blue Ribbon beer. Total
beer sold by Zhaoqing Brewery to the Marketing Company decreased by 7,271
metric tons or 12.1% from 1998 to 1999.
19
<PAGE>
During the nine months ended September 30, 1999 and 1998, Sichuan High
Worth Brewery sold 6,431 metric tons and 10,972 metric tons of beer,
respectively, to the Marketing Company, all of which were Pabst Blue Ribbon
beer.
During the nine months ended September 30, 1999, Zao Yang High Worth
Brewery sold 15,083 metric tons of beer to the Marketing Company, of which
3,640 metric tons (24.1%) was Pabst Blue Ribbon beer and 11,443 metric tons
(75.9%) was local brand beer. During the nine months ended September 30,
1998, Zao Yang High Worth Brewery sold 982 metric tons of beer to the
Marketing Company, all of which was Pabst Blue Ribbon beer.
The Marketing Company regulated the production of Pabst Blue Ribbon beer
by Zhaoqing Brewery, Noble Brewery, Zao Yang High Worth Brewery and Sichuan
Brewery during 1998 and 1999 in accordance with their respective production
capacities in order to balance warehouse inventory levels and accommodate
projected market demand.
Gross Profit: For the nine months ended September 30, 1999, total gross
profit was RMB 179,727,050 or 22.2% of total net sales. For the nine months
ended September 30, 1998, total gross profit was RMB 153,073,510 or 17.3% of
total net sales. Gross profit from beer sales increased by RMB 26,653,540 to
RMB 179,727,050 in 1999 as compared to RMB 153,073,510 in 1998 as a result of
the increase in gross margin. Gross margin from beer sales increased to 22.2%
in 1999 as compared to 17.3% in 1998 as a result of the shift in sales mix to
higher margin products and effective cost control measures.
Selling, General and Administrative Expenses: For the nine months ended
September 30, 1999, selling, general and administrative expenses were RMB
168,892,287 or 20.9% of net sales, consisting of selling expenses of RMB
109,415,140 and general and administrative expenses of RMB 59,477,147. Net of
an allowance for doubtful accounts of RMB 12,682,785 for the nine months
ended September 30, 1999, general and administrative expenses were RMB
46,794,362. For the nine months ended September 30, 1998, selling, general
and administrative expenses were RMB 150,692,889 or 17.0% of net sales,
consisting of selling expenses of RMB 91,132,707 and general and
administrative expenses of RMB 59,560,182. Net of an allowance for doubtful
accounts of RMB 5,554,517 for the nine months ended September 30, 1998,
general and administrative expenses were RMB 54,005,665.
Selling expenses include costs relating to the advertising, promotion,
marketing and distribution of Pabst Blue Ribbon beer in China. Selling
expenses increased by RMB 18,282,433 or 20.1% in 1999 as compared to 1998,
and as a percent of net sales, to 13.5% in 1999 from 10.3% in 1998. Selling
expenses increased in 1999 as compared to 1998, both on an absolute basis and
as a percentage of sales, as a result of the Company continuing its
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 and local premium brand beer.
Selling expenses are recognized through the consolidation of the
operations of the Marketing Company. The Marketing Company incurs such
expenses on behalf of all of the Pabst Blue Ribbon brewing facilities in
China, even though not all of such facilities' results of operations are
reflected in the Company's operating income. Although the Marketing Company
is budgeted annually to operate at break-even levels, based on agreed upon
ex-factory prices that the Marketing Company pays to the breweries to
purchase their production of Pabst Blue Ribbon beer, actual profitability,
particularly on an interim basis, is subject to substantial variability. As a
result of these factors, during the nine months ended September 30, 1999 and
1998, the Marketing Company incurred an operating loss of RMB 27,950,000 and
RMB 30,275,000, respectively, which reduced consolidated operating income
accordingly.
General and administrative expenses consist of the management office
operating
20
<PAGE>
costs of Zhaoqing Brewery, the Marketing Company and Zao Yang High
Worth Brewery, the costs associated with the operation of the Company's
executive offices, and the legal and accounting and other costs associated with
the operation of a public company. Excluding the allowance for doubtful
accounts, general and administrative expenses decreased by RMB 7,211,303 or
13.4% in 1999 as compared to 1998, and as a percentage of net sales, from 6.1%
in 1998 to 5.8% in 1999. General and administrative expenses decreased in 1999
as compared in 1998 primarily as a result of effective cost control measures.
The allowance for doubtful accounts increased to RMB 12,682,785 in 1999 or
1.6% of net sales, as compared to RMB 5,554,517 in 1998 or 0.6% of net sales, as
a result of reduced consumer spending resulting from the continuing effect of
the Asian financial crisis, which has impaired the ability of certain of the
Company's distributors to pay their obligations to the Company. The allowance
for doubtful accounts is calculated based primarily on the age of outstanding
accounts receivable, which are typically outstanding for a longer period of time
in China than in the United States. The Company is implementing revised credit
acceptance procedures in an attempt to reduce future losses from uncollectible
accounts receivable.
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 523,350 and RMB 2,044,248 of
compensation expense during the nine months ended September 30, 1999 and 1998,
respectively.
Operating Income: For the nine months ended September 30, 1999, operating
income was RMB 10,311,413 or 1.3% of net sales. For the nine months ended
September 30, 1998, operating income was RMB 95,673 or 0.1% of net sales.
Although sales decreased in 1999 as compared to 1998, the shift in sales mix to
higher margin products resulted in an increase in gross profit margin. The
effect from the increase in gross profit margin, resulted in an increase in
operating income in 1999 as compared to 1998.
Interest Expense: For the nine months ended September 30, 1999, interest
expense increased by RMB 4,114,928 or 99.3% to RMB 8,258,618, as compared to RMB
4,143,690 for the nine months ended September 30, 1998. Interest expense
increased in 1999 as compared to 1998 as a result of the increase in the average
outstanding balance on bank borrowings and the increase in interest-bearing
borrowings from related companies.
Income Taxes: The two year income tax holiday for Zhaoqing Brewery expired on
December 31, 1997. During the three year period from 1998 to 2000, 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 nine months ended September 30, 1999,
income tax expense was RMB 5,682,925, as compared to RMB 4,479,069 for the nine
months ended September 30, 1998.
Net Income: Net income increased to RMB 19,387,123 for the nine months ended
September 30, 1999, as compared to RMB 18,987,098 for the nine months ended
21
<PAGE>
September 30, 1998.
Noble Brewery:
Three Months Ended September 30, 1999 and 1998 -
Sales: For the three months ended September 30, 1999 and 1998, net sales were
RMB 143,809,038 and RMB 137,942,379, respectively.
During the three months ended September 30, 1999, Noble Brewery sold 35,135
metric tons of beer to the Marketing Company, as compared to 35,679 metric tons
of beer sold to the Marketing Company during the three months ended September
30, 1998. Total beer sold by Noble Brewery to the Marketing Company decreased by
544 metric tons or 1.5% from 1998 to 1999, primarily as a result of the general
softening of demand in the beer market in China. In addition, as a result of the
regulation of sales by the Marketing Company, which purchases beer from the
breweries in accordance with their respective production capacities, the beer
produced by Sichuan High Worth Brewery and Zao Yang High Worth Brewery in 1999
had the effect of reducing Noble Brewery's beer sales in 1999.
Gross Profit: For the three months ended September 30, 1999 and 1998, gross
profit was RMB 49,071,489 or 34.1% of net sales and RMB 36,509,602 or 26.5% of
net sales, respectively. The increase in the gross profit margin of 7.6% in 1999
as compared to 1998 was a result of effective cost control measures and the
shift in sales mix to higher margin products.
Selling, General and Administrative Expenses: For the three months ended
September 30, 1999, selling, general and administrative expenses totaled RMB
15,849,352 or 11.0% of net sales, consisting of selling expenses of RMB
2,601,326 and general and administrative expenses of RMB 13,248,026. For the
three months ended September 30, 1998, selling, general and administrative
expenses totaled RMB 7,563,599 or 5.5% of net sales, consisting of selling
expenses of RMB 139,846 and general and administrative expenses of RMB
7,423,753. Selling expenses consist of warehousing, storage and freight costs.
Operating Income: For the three months ended September 30, 1999 and 1998,
operating income was RMB 33,222,137 or 23.1% of net sales and RMB 28,946,003 or
21.0% of net sales, respectively.
Income Taxes: The two year 100% income tax holiday and the three year 50%
income tax reduction period for Noble Brewery expired on December 31, 1995 and
December 31, 1998, respectively. Commencing in 1999, Noble Brewery is required
to pay local income tax at the full normal rate of 33% on its profit as
determined in accordance with PRC accounting standards applicable to Noble
Brewery. Accordingly, for the three months ended September 30, 1999, income tax
expense was RMB 8,925,019 as compared to RMB 4,265,403 for the three months
ended September 30, 1998.
Net Income: Net income decreased to RMB 24,297,118 or 16.9% of net sales for
the three months ended September 30, 1999, as compared to RMB 24,680,600 or
17.9% of net sales for the three months ended September 30, 1998.
Nine Months Ended September 30, 1999 and 1998 -
Sales: For the nine months ended September 30, 1999 and 1998, net sales were
RMB 446,584,578 and RMB 476,053,877, respectively.
During the nine months ended September 30, 1999, Noble Brewery sold 102,078
metric tons of beer to the Marketing Company, as compared to 116,611 metric tons
of beer sold to the Marketing Company during the nine months ended September 30,
1998. Total beer sold by Noble Brewery to the Marketing Company decreased by
14,533 metric tons or 12.5% from 1998 to 1999, primarily as a result of the
general softening of
22
<PAGE>
demand in the beer market in China. In addition, as a result of the
regulation of sales by the Marketing Company, which purchases beer from the
breweries in accordance with their respective production capacities, the beer
produced by Sichuan High Worth Brewery and Zao Yang High Worth Brewery in
1999 had the effect of reducing Noble Brewery's beer sales in 1999.
Gross Profit: For the nine months ended September 30, 1999 and 1998, gross
profit was RMB 161,367,203 or 36.1% of net sales and RMB 143,757,961 or 30.2% of
net sales, respectively. The increase in the gross profit margin of 5.9% in 1999
as compared to 1998 was a result of effective cost control measures and the
shift in sales mix to higher margin products.
Selling, General and Administrative Expenses: For the nine months ended
September 30, 1999, selling, general and administrative expenses totaled RMB
45,804,614 or 10.3% of net sales, consisting of selling expenses of RMB
8,552,534 and general and administrative expenses of RMB 37,252,080. For the
nine months ended September 30, 1998, selling, general and administrative
expenses totaled RMB 31,470,248 or 6.6% of net sales, consisting of selling
expenses of RMB 3,255,002 and general and administrative expenses of RMB
29,612,392. Selling expenses consist of warehousing, storage and freight costs.
Operating Income: For the nine months ended September 30, 1999 and 1998,
operating income was RMB 115,562,589 or 25.9% of net sales and RMB 112,287,713
or 23.6% of net sales, respectively.
Income Taxes: The two year 100% income tax holiday and the three year 50%
income tax reduction period for Noble Brewery expired on December 31, 1995 and
December 31, 1998, respectively. Commencing in 1999, Noble Brewery is required
to pay local income tax at the full normal rate of 33% on its profit as
determined in accordance with PRC accounting standards applicable to Noble
Brewery. Accordingly, for the nine months ended September 30, 1999, income tax
expense was RMB 32,522,828 as compared to RMB 15,395,133 for the nine months
ended September 30, 1998.
Net Income: Net income decreased to RMB 83,279,354 or 18.6% of net sales for
the nine months ended September 30, 1999, as compared to RMB 97,079,501 or 20.4%
of net sales for the nine months ended September 30, 1998.
Consolidated Financial Condition - September 30, 1999:
Liquidity and Capital Resources - For the nine months ended September 30,
1999, the Company's operations provided cash resources of RMB 59,136,442, as
compared to RMB 102,579,561 for the nine months ended September 30, 1998,
primarily as a result of reduced cash flows with respect to accounts payable and
accrued liabilities, amounts due from related companies and due to an associated
company, and prepaids, deposits and other receivables. Despite reduced cash
flows from operations, the Company's cash balance increased by RMB 3,125,154 to
RMB 89,633,896 at September 30, 1999, as compared to RMB 86,508,742 at December
31, 1998. In addition, the Company's net working capital deficit decreased by
RMB 30,526,368 to RMB 161,493,075 at September 30, 1999, as compared to RMB
192,019,443 at December 31, 1998, resulting in a current ratio at September 30,
1999 of 0.71:1, as compared to 0.64:1 at December 31, 1998.
Net of an allowance for doubtful accounts of RMB 12,682,785 for the nine
months ended September 30, 1999, accounts and bills receivable increased by RMB
50,717,471 or 36.1% to RMB 178,536,701 at September 30, 1999, as compared to RMB
140,502,015 at December 31, 1998, as a result of a general slowdown in receipts
and collections. The allowance for doubtful accounts was RMB 48,281,966 at
September 30, 1999, as compared to RMB 35,599,181 at December 31, 1998.
The Company's inventories increased by RMB 24,254,023 or 36.4% to RMB
90,856,656 at September 30, 1999, as compared to RMB 66,602,633 at December 31,
1998. The
23
<PAGE>
increase in inventories was mainly due to increased purchases of raw
materials and packing materials to support estimated future short-term sales
and production requirements.
The Company's accounts payable and accrued liabilities increased by RMB
34,970,693 or 28.7% to RMB 156,704,350 at September 30, 1999, as compared to RMB
121,733,657 at December 31, 1998. The increase in accounts payable was mainly
due to the increase in purchases of raw materials and packing materials during
the peak season sales and production period, and a slow-down in payments to
suppliers.
The amount due to an associated company increased by RMB 31,441,567 or 14.4%
to RMB 250,159,367 at September 30, 1999, as compared to RMB 218,717,800 at
December 31, 1998, and represents the amounts due to Noble Brewery from its sale
of Pabst Blue Ribbon beer to the Marketing Company. 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.
During the nine months ended September 30, 1999, the Company's secured bank
loans decreased by RMB 5,510,000, reflecting total borrowings of RMB
114,044,000. The bank loans bear interest at fixed rates ranging from 8.4% to
9.6%, and are repayable within the next three years. A substantial portion of
the bank loans have been utilized to fund the continuous development and working
capital requirements of Zhaoqing Brewery and Zao Yang High Worth Brewery.
On November 23, 1998 and July 28, 1999, the Board of Directors of High Worth
JV declared separate dividend distributions of RMB 51,596,713. The minority
interest's 40% portion of the dividend is recorded as a liability at the
declaration date and is included in amounts due to related companies. The
dividends are distributed by installments in order to avoid any disruption to
the normal operating cash flow position of High Worth JV. During the nine months
ended September 30, 1999 and 1998, High Worth JV paid aggregate dividends to
Guangdong Blue Ribbon of RMB 36,277,370 and RMB 40,375,595, respectively.
Net of the cash dividend of RMB 15,638,685 paid to Guangdong Blue Ribbon by
High Worth JV, which represents the portion of the 1999 dividend paid through
September 30, 1999, the amounts due to related companies decreased by RMB
5,712,141 or 18.3% to RMB 9,785,270 at September 30, 1999, as compared to RMB
31,136,095 at December 31, 1998. During the six months ended June 30, 1999, the
Company borrowed RMB 24,000,000 from Shenzhen Huaqiang Holdings Limited, the
Company's major shareholder. The loan was unsecured, with interest at 7.5% per
annum, and was fully repaid during the three months ended September 30, 1999.
Since the Company pays interest on advances from related companies, the increase
in average outstanding amounts due to related companies during the nine months
ended September 30, 1999 has also contributed to an increase in interest expense
during the nine months ended September 30, 1999 as compared to the nine months
ended September 30, 1998.
On January 13, 1998, High Worth JV entered into a joint venture contract with
Zao Yang Brewery in Hubei Province to establish a new brewery with an initial
annual production capacity of 40,000 metric tons or 340,000 barrels of beer. The
new brewery is designated Zao Yang Blue Ribbon High Worth Brewery Ltd. ("Zao
Yang High Worth Brewery"), with a total capital investment of RMB 29,280,000,
allocated 55% to High Worth JV and 45% to Zao Yang Brewery. High Worth JV is
responsible for transferring the technical know-how and production techniques of
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. Zao Yang High Worth Brewery
commenced the production of Pabst Blue Ribbon beer in June 1998. During the nine
months ended September 30, 1998, High Worth JV paid RMB 16,104,000, representing
its 55% capital investment in the joint venture.
24
<PAGE>
For the nine months ended September 30, 1999, additions to property, plant
and equipment aggregated RMB 4,551,357, which include approximately RMB
1,900,000 spent on renovation and continuous improvement of Zao Yang High
Worth Brewery. The Company anticipates that additional capital expenditures
in connection with the continuing improvement of production facilities at
Zhaoqing Brewery during the remainder of 1999 will be approximately RMB
1,000,000. The Company anticipates that additional capital expenditures in
connection with the continuous technical renovation process in converting the
old brewing facilities of Zao Yang High Worth Brewery into a Pabst Blue
Ribbon brewing complex during the remainder of 1999 will be approximately RMB
2,000,000, a portion of which is expected to be financed by new bank
borrowings.
In connection with the acquisition of High Worth JV, Oriental Win Holdings
Ltd. ("Oriental Win") advanced US$8,869,585 to Holdings during 1994. The
rights to collect US$8,000,000 of the advance were transferred from Oriental
Win to its shareholders in proportion to their respective shareholder
interests in August 1996 (West Coast Star Enterprises Ltd. - 60%; Mapesbury
Limited - 20%; Redcliffe Holdings Ltd. - 20%). The advances bear no interest
and are repayable at the discretion of the Company, with the shareholders
having no right to demand repayment. The Company has the option of offsetting
or repaying the advances or any part thereof by allotment of shares at par
value in Holdings. On September 8, 1998, the remaining rights to collect
US$848,000 of the advances were transferred from Oriental Win to its
shareholders in proportion to their respective shareholder interests, less
US$21,585 paid by Holdings on behalf of Oriental Win. On November 26, 1998,
Holdings partially repaid approximately 31.5% of the advances from
shareholders, amounting to US$2,791,650. In May 1999, Holdings partially
repaid approximately 18.5% of the advances from shareholders, amounting to
US$1,632,350. As of September 30, 1999, the remaining advances from such
shareholders, West Coast Star Enterprises Ltd., Top Link Development Limited
(assigned by Mapesbury Limited in February 1998), and Redcliffe Holdings
Ltd., were approximately RMB 22,031,000, RMB 7,344,000 and RMB 7,344,000,
respectively. In conjunction with the assignment of the advances to Top Link
Development Limited, Mapesbury Limited also transferred its shares in the
Company to Top Link Development Limited. On December 22, 1998, Oriental Win
was formally dissolved by its shareholders.
The Company believes that it will be able to fund expected capital
expenditures during the remainder of 1999 for 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, 1999. In order to finance the continuing capital requirements of the
Company, the Company has been in 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 borrowings or equity financing by the Company.
Inflation and Currency Matters:
In the most recent decade, 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 to
Chinese business enterprises. The recent Asian financial crisis has resulted in
a general reduction in domestic production and sales, and a general tightening
of credit, throughout China. The success of the Company depends in substantial
part on the continued growth and
25
<PAGE>
development of the Chinese economy.
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies. The Company conducts
virtually all of its business in China and, accordingly, the sale of its
products is settled primarily in RMB. As a result, devaluation of the RMB
against the USD would adversely affect the Company's financial performance
when measured in USD. Although prior to 1994 the RMB experienced significant
devaluation against the USD, the RMB has remained fairly stable since then.
In addition, the RMB is not freely convertible into foreign currencies, and
the ability to convert the RMB is subject to the availability of foreign
currencies. Effective December 1, 1998, all foreign exchange transactions
involving the RMB must take place through authorized banks or financial
institutions in China at the prevailing exchange rates quoted by the People's
Bank of China.
The continuing Asian financial crisis has inhibited the growth and general
level of activity of the Chinese economy, thus reducing consumer demand in
China, which has had a negative impact on the Company's results of operations,
financial condition and cash flows. In addition, as a result of the Asian
financial crisis, China has tightened its foreign exchange controls. Although
the central government of China has repeatedly indicated that it does not intend
to devalue its currency in the near future, recent announcements by the central
government of China indicate that devaluation is an increasing possibility.
Should the central government of China decide to devalue its currency, the
Company does not believe that such an action would have a detrimental effect on
the Company's operations, since the Company conducts virtually all of its
business in China, and the sale of its products is settled in RMB. As of
September 30, 1999, the Company's only significant USD-denominated obligation,
which would be more expensive to repay in the event of a devaluation, is the
advances from shareholders of RMB 36,719,200.
The Company has historically relied on dividend distributions, converted from
RMB into USD, to fund its activities outside of China. The Company does not
expect that the recently tightened foreign exchange controls will affect the
ability of High Worth JV to continue to distribute such dividends. However, in
the event of a devaluation, High Worth JV could elect to distribute dividends in
RMB, which would then be converted into other currencies at the then prevailing
market rates.
Year 2000 Issue:
The Year 2000 Issue results from the fact that certain computer programs have
been written using two digits rather than four digits to designate the
applicable year. Computer programs that have sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities. Based on a recent
internal assessment, the Company does not believe that the cost to modify its
existing software and/or convert to new software will be significant.
Due to the number of distributors and suppliers that the Company conducts
business with on a continuing basis, and their varying levels of sophistication
with respect to utilization of computer systems, the Company is currently unable
to determine if such parties have fully addressed the Year 2000 Issue as it
relates to their respective operating systems. However, the Company does not
believe that a Year 2000 system failure by any of such parties will, in the
aggregate, have a material adverse effect on the Company's consolidated results
of operations, financial position or cash flows.
26
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any market risk with respect to such factors as
commodity prices, equity prices, and other market changes that affect market
risk sensitive instruments.
With respect to foreign currency exchange rates, the Company does not believe
that a devaluation of the RMB against the USD would have a detrimental effect on
the Company's operations, since the Company conducts virtually all of its
business in China, and the sale of its products and the purchase of raw
materials and services is settled in RMB. The effect of a devaluation of the RMB
against the USD would be to reduce the Company's results of operations,
financial position and cash flows, when presented in USD (based on a current
exchange rate) as compared to RMB. Advances from shareholders, the Company's
only significant USD-denominated obligation, would also be more expensive to
repay in the event of a devaluation.
The Company does not have any interest rate risk, as the Company's debt
obligations are primarily short-term in nature, with fixed interest rates.
27
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K -
Three Months Ended September 30, 1999: None.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CBR BREWING COMPANY, INC.
-------------------------
(Registrant)
Date: November 4, 1999 By: /s/ ZI-SHOU CHEN
-------------------------
Zi-shou Chen
President and Director
(Duly authorized officer)
Date: November 4, 1999 By: /s/ GARY C.K. LUI
-------------------------
Gary C.K. Lui
Chief Financial Officer
(Principal financial
officer)
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 10,799,265
<SECURITIES> 0
<RECEIVABLES> 27,327,550
<ALLOWANCES> 5,817,104
<INVENTORY> 10,946,585
<CURRENT-ASSETS> 48,689,403
<PP&E> 29,765,066
<DEPRECIATION> 0
<TOTAL-ASSETS> 107,964,459
<CURRENT-LIABILITIES> 68,146,400
<BONDS> 56,005
0
0
<COMMON> 515
<OTHER-SE> 26,760,060
<TOTAL-LIABILITY-AND-EQUITY> 107,964,459
<SALES> 97,424,788
<TOTAL-REVENUES> 97,424,788
<CGS> 75,770,927
<TOTAL-COSTS> 75,770,927
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,528,046
<INTEREST-EXPENSE> 995,014
<INCOME-PRETAX> 247,325
<INCOME-TAX> 684,690
<INCOME-CONTINUING> 2,335,798
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,335,798
<EPS-BASIC> 0.29
<EPS-DILUTED> 0.29
</TABLE>
