<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 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 June 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) -
June 30, 1999 and December 31, 1998
Consolidated Statements of Income (Unaudited) -
Three Months and Six Months Ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended June 30, 1999 and 1998
Notes to Consolidated Financial Statements (Unaudited) -
Six Months Ended June 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>
June 30, 1999 December 31, 1998
------------------------ -------------------------
RMB USD RMB USD
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash 117,982,382 14,214,745 86,508,742 10,422,740
Accounts and bills receivable, net 162,148,081 19,535,913 140,502,015 16,927,954
Inventories (Note 2) 78,951,975 9,512,286 66,602,633 8,024,414
Amounts due from related companies 22,902,421 2,759,328 18,068,927 2,176,979
Prepayments, deposits and other
receivables 27,574,282 3,322,203 27,603,518 3,325,725
----------- ----------- ----------- -----------
Total current assets 409,559,141 49,344,475 339,285,835 40,877,812
Interest in an associated company
(Note 4) 241,250,064 29,066,273 243,429,767 29,328,888
Property, plant and equipment, net 252,759,434 30,452,944 263,768,418 31,779,327
Non-current assets 11,971,153 1,442,307 23,942,307 2,884,615
----------- ----------- ----------- -----------
Total assets 915,539,792 110,305,999 870,426,327 104,870,642
=========== =========== =========== ===========
</TABLE>
(continued)
3
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------------------- -------------------------
RMB USD RMB USD
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings 112,104,000 13,506,506 119,554,000 14,404,096
Capital lease obligations 5,664,938 682,523 5,664,938 682,523
Accounts payable
and accrued liabilities 155,630,185 18,750,625 121,733,657 14,666,706
Amounts due to related companies
(Note 7) 6,625,903 3,207,940 31,136,095 3,751,337
Amount due to an associated company 236,977,441 28,551,498 218,717,800 26,351,542
Income taxes payable 8,366,670 1,008,033 4,166,884 502,034
Sales taxes payable 24,836,856 2,992,392 30,331,904 3,654,446
----------- ----------- ----------- -----------
Total current liabilities 570,205,993 68,699,517 531,305,278 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) 90,398,733 10,891,414 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 106,838,493 12,872,107 106,489,592 12,830,071
General reserve and enterprise
development funds 10,125,740 1,219,969 10,125,740 1,219,969
Retained earnings 100,779,959 12,142,164 85,580,136 10,310,860
----------- ----------- ----------- -----------
Total shareholders' equity 217,751,024 26,235,063 202,202,300 24,361,723
----------- ----------- ----------- -----------
Total shareholders' advances and
shareholders' equity 254,470,224 30,659,063 252,470,005 30,418,073
----------- ----------- ----------- -----------
Total liabilities, shareholders'
advances and shareholders'
equity 915,539,792 110,305,999 870,426,327 104,870,642
=========== =========== =========== ===========
</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 Ended Six Months Ended Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999 June 30, 1998 June 30, 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 six months
ended June 30, 1999, respectively,
and RMB 77,044 and RMB 573,401 for
the three months and six months
ended June 30, 1998, respectively 284,166,855 34,236,970 569,012,185 68,555,685 344,858,031 636,665,044
Sales taxes (5,919,229) (713,160) (11,152,011) (1,343,616) (6,430,312) (12,604,819)
------------ ------------ ------------ ------------ ------------ ------------
Net sales 278,247,626 33,523,810 557,860,174 67,212,069 338,427,719 624,060,225
Cost of sales, including inventory
purchased from related companies of
RMB 160,162,622 and RMB 331,800,484
for the three months and six months
ended June 30, 1999, respectively,
and RMB 222,304,793 and RMB
388,371,717 for the three months
and six months ended June 30, 1998,
respectively; and royalty fee paid
to a related company of RMB 1,966,066
and RMB 3,776,651 for the three
months and six months ended June 30,
1999, respectively, and RMB 2,295,010
and RMB 4,058,958 for the three
months and six months ended June 30,
1998, respectively (217,770,944) (26,237,463) (436,288,421) (52,564,870) (277,281,340) (512,580,386)
------------ ------------ ------------ ------------ ------------ ------------
Gross profit 60,476,682 7,286,347 121,571,753 14,647,199 61,146,379 111,479,839
Selling, general and administrative
expenses, including management
fee paid to a related company of
RMB nil and RMB nil for the three
months and six months ended June 30,
1999, respectively, and RMB 945,000
and RMB 1,890,000 for the three
months and six months ended June 30,
1998, respectively (57,908,015) (6,796,869) (112,264,019) (13,525,786) (60,592,594) (104,903,645)
Fair value of warrants, stock options
and common stock issued for services
rendered (Note 5) (174,449) (21,018) (348,901) (42,036) 158,659 (2,110,503)
------------ ------------ ------------ ------------ ------------ ------------
Operating income 2,394,218 288,460 8,958,833 1,079,377 712,444 4,465,691
Foreign exchange losses - - - - - (329,565)
Other expense:
Interest expense, including interest
paid to related companies of
RMB 355,068 and RMB 710,136
for the three months and six months
ended June 30, 1999, respectively,
and RMB nil and RMB 106,674 for the
three months and six months ended
ended June 30, 1998, respectively (2,328,241) (280,511) (5,489,514) (661,387) (1,648,539) (2,907,018)
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes 65,977 7,949 3,469,319 417,990 (936,095) 1,229,108
Income taxes (1,661,958) (200,236) (4,199,787) (505,998) (2,293,208) (3,414,136)
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
(continued)
5
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)(CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999 June 30, 1998 June 30, 1998
--------------------------- --------------------------- ------------------ ----------------
RMB USD RMB USD RMB RMB
------------- ------------ ------------- ------------ ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Loss before equity in earnings
of an associated company (1,595,981) (192,287) (730,468) (88,008) (3,229,303) (2,185,028)
Equity in earnings of an associated
company 12,841,343 1,547,150 22,525,891 2,713,963 15,651,289 28,569,373
----------- ----------- ----------- ----------- ----------- -----------
Income before minority interests 11,245,362 1,354,863 21,795,423 2,625,955 12,421,986 26,384,345
Minority interests (3,535,370) (425,948) (6,595,600) (794,651) (3,811,678) (10,699,020)
----------- ----------- ----------- ----------- ----------- -----------
Net income for the period 7,709,992 928,915 15,199,823 1,831,304 8,610,308 15,685,325
=========== =========== =========== =========== =========== ===========
Net income per common share (Note 1)
- Basic 0.96 0.12 1.90 0.23 1.07 1.96
=========== =========== =========== =========== =========== ===========
- Diluted 0.96 0.12 1.90 0.23 1.07 1.95
=========== =========== =========== =========== =========== ===========
Weighted average number of common
shares outstanding
- Basic 8,010,013 8,010,013 8,010,013 8,010,013 8,010,013 8,006,680
=========== =========== =========== =========== =========== ===========
- Diluted 8,010,013 8,010,013 8,010,013 8,010,013 8,067,833 8,057,273
=========== =========== =========== =========== =========== ===========
</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>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
-------------------------- ------------------
RMB USD RMB
------------ ------------ ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 15,199,823 1,831,304 15,685,325
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 348,901 42,036 2,110,503
Allowance for doubtful accounts 6,105,580 735,612 4,122,870
Depreciation and amortization 14,204,367 1,711,370 12,887,373
Foreign exchange losses - - 329,565
Minority interests 6,595,600 794,651 10,699,020
Equity in earnings of an associated company (22,525,891) (2,713,963) (28,569,373)
Income taxes payable 4,199,786 505,998 3,331,849
Dividend received from an associated company 24,705,594 2,976,578 31,377,381
Changes in operating assets and liabilities:
(Increase) decrease in -
Accounts and bills receivable (27,751,646) (3,343,572) (103,016,744)
Inventories (12,349,342) (1,487,873) (3,902,882)
Amounts due from related companies (4,833,494) (582,349) 8,433,524
Prepayments, deposits and other receivables 29,236 3,522 (43,029,135)
Increase (decrease) in -
Accounts payable and accrued liabilities 33,896,528 4,083,919 116,010,449
Customer deposits - - (6,680,000)
Amount due to an associated company 18,259,641 2,199,957 94,257,322
Sales taxes payable (5,495,048) (662,054) (7,379,121)
------------ ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 50,589,635 6,095,136 106,667,926
------------ ----------- -----------
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 (3,195,383) (384,986) (40,384,655)
Purchase of interest in brewery - - (16,104,000)
------------ ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 8,775,771 1,057,322 (58,188,355)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
New bank borrowings - - 34,672,800
Repayment of bank borrowings (7,450,000) (897,590) -
Increase (decrease) in amounts due to related
companies 11,128,493 1,340,783 (19,447,942)
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 interests (15,638,685) (1,884,179) (40,375,595)
------------ ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (27,891,766) (3,360,453) (32,063,659)
------------ ----------- -----------
Net increase in cash 31,473,640 3,792,005 16,415,912
Cash at beginning of period 86,508,742 10,422,740 76,092,954
------------ ----------- -----------
Cash at end of period 117,982,382 14,214,745 92,508,866
============ =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
7
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 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.
8
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
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 the profit 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.
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
June 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.
9
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
Foreign Currency Translation - In preparing the consolidated financial
statements, the financial statements of the Company are measured using
Renminbi ("RMB") as the functional currency. All foreign currency
transactions are translated into RMB using the applicable rates of exchange,
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 rate of exchange as quoted by the People's Bank of China
on June 30, 1999 of USD1.00 = RMB 8.3. 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 condensed consolidated financial statements are
unaudited, but in the opinion of the management of the Company, contain all
adjustments, which include normal recurring adjustments, necessary to present
fairly the financial position at June 30, 1999, the results of operations for
the three months and six months ended June 30, 1999 and 1998, and the cash
flows for the six months ended June 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.
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 six months ended June 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.
10
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
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 under stock options,
warrants and debt instruments.
At June 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 six months ended June 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 June 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
----------------------- -----------------------
RMB USD RMB USD
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Raw materials 29,116,143 3,507,969 24,853,642 2,994,415
Work in progress 5,251,351 632,693 5,436,138 654,956
Finished goods 44,584,481 5,371,624 36,312,853 4,375,043
---------- --------- ---------- ----------
78,951,975 9,512,286 66,602,633 8,024,414
========== ========= ========== ==========
</TABLE>
11
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
SIX MONTHS ENDED JUNE 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 June 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 six months ended June
30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999 June 30, 1998 June 30, 1998
------------------------ ------------------------- ------------------ ----------------
RMB USD RMB USD RMB RMB
----------- ---------- ---------- ----------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Net sales 148,610,108 17,904,832 302,775,540 36,478,980 192,096,472 338,111,498
=========== =========== =========== =========== =========== ===========
Net income 32,563,731 3,923,341 58,982,236 7,106,293 42,336,205 72,398,901
=========== =========== =========== =========== =========== ===========
The Company's share
of net income after
adjustment of unrealized
intercompany profit
and other intercompany
adjustments 12,841,343 1,547,150 22,525,891 2,713,963 15,651,289 28,569,373
=========== =========== =========== =========== =========== ===========
</TABLE>
12
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
SIX MONTHS ENDED JUNE 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 348,901 of compensation expense during the
three months and six months ended June 30, 1999, respectively. During the
three months and six months ended June 30, 1998, the Company recognized RMB
174,445 and RMB 1,869,803 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.
13
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
6. DIVIDEND TO MINORITY INTERESTS
On November 23, 1998, the Board of Directors of High Worth JV declared the
second dividend distribution, of which Holdings was entitled to approximately
RMB 31,000,000. 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, 1998, partial dividends of RMB 5,000,000
were distributed to Guangdong Blue Ribbon. During the six months ended June
30, 1999, partial dividends of RMB 15,638,685 and RMB 19,499,530 were
distributed to Guangdong Blue Ribbon and Holdings, respectively.
7. AMOUNTS DUE TO RELATED COMPANIES
During the three months and 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 is unsecured, with interest at 7.5% per
annum, and is due on December 31, 1999.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"), which is effective
for financial statements issued for fiscal years beginning after December 15,
1997. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income, its components and accumulated balances in a full set
of general purpose financial statements. SFAS No. 130 defines comprehensive
income to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS No. 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be
reported in a financial statement that is presented with the same prominence
as other financial statements. The Company adopted SFAS No. 130 for its
fiscal year beginning January 1, 1998. Adoption of SFAS No. 130 did not have
a material effect on the Company's financial statement presentation and
disclosures.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related information"
("SFAS No. 131"), which supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise", and which is effective for financial
statements issued for fiscal years beginning after December 15, 1997. SFAS
No. 131 establishes standards for the way that public companies report
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in
interim financial statements issued to the public. SFAS No. 131 also
establishes standards for disclosures by public companies regarding
information about their major customers, operating segments, products and
services, and the geographic areas in which they operate. SFAS No. 131
defines operating segments as components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and
in assessing performance. SFAS No. 131 requires comparative information for
earlier years to be restated. The Company adopted SFAS No. 131 for its fiscal
year beginning January 1, 1998. Adoption of SFAS No. 131 did not have a
material effect on the Company's financial statement presentation and
disclosures.
14
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
8. RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS No. 132"), which is effective for financial statements
issued for fiscal years beginning after December 15, 1997. SFAS No. 132
revises employers' disclosures about pension and other postretirement benefit
plans. SFAS No. 132 requires comparative information for earlier years to be
restated. The Company adopted SFAS No. 132 for its fiscal year beginning
January 1, 1998. Adoption of SFAS No. 132 did not have a material effect on
the Company's financial statement presentation and disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"), which is effective for financial statements for all fiscal
quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an
entity recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value. SFAS No. 133 also
addresses the accounting for hedging activities. The Company will adopt SFAS
No. 133 for its fiscal year beginning January 1, 2001, and does not
anticipate that adoption of SFAS No. 133 will have a material effect on the
Company's financial statement presentation and disclosures.
15
<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 June 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 June 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 the profit 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
16
<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. 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 Ribbon beer exclusively since it commenced
operations.
17
<PAGE>
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 June 30, 1999 and 1998 -
Sales: During the three months ended June 30, 1999, net sales of beer
products decreased by RMB 60,180,093 or 17.8% to RMB 278,247,626, as compared
to RMB 338,427,719 for the three months ended June 30, 1998. The Company sold
55,830 metric tons of beer to distributors in 1999 as compared to 71,732
metric tons of beer in 1998, a decrease of 22.2%. The decrease in net sales
of beer products during the three months ended June 30, 1999 as compared to
the three months ended June 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
18
<PAGE>
Company's markets, and will attempt to replace such sales by the 11-degree
light processed beer.
During the three months ended June 30, 1999 and 1998, Zhaoqing Brewery
sold 16,670 metric tons and 22,339 metric tons of beer, respectively, to the
Marketing Company, all of which was Pabst Blue Ribbon beer. Total beer sold
by Zhaoqing Brewery to the Marketing Company decreased by 5,669 metric tons
or 25.4% from 1998 to 1999.
During the three months ended June 30, 1999 and 1998, Sichuan High Worth
Brewery sold 1,708 metric tons and 4,437 metric tons of beer, respectively,
to the Marketing Company, all of which were Pabst Blue Ribbon beer.
During the three months ended June 30, 1999, Zao Yang High Worth Brewery
sold 4,143 metric tons of beer to the Marketing Company, of which 867 metric
tons (20.9%) was Pabst Blue Ribbon beer and 3,276 metric tons (79.1%) was
local brand beer. During the three months ended June 30, 1998, Zao Yang High
Worth Brewery sold 554 metric tons of beer to the Marketing Company, all of
which was Pabst Blue Ribbon.
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 June 30, 1999, total gross profit
was RMB 60,476,682 or 21.7% of total net sales. For the three months ended
June 30, 1998, total gross profit was RMB 61,146,379 or 18.1% of total net
sales. Gross profit from beer sales decreased by RMB 669,697 to RMB
60,476,682 in 1999 as compared to RMB 61,146,379 in 1998 as a result of the
decrease in volume of beer sold due to the weakening in customer demand for
foreign branded premium beer in China. Gross margin from beer sales increased
to 21.7% in 1999 as compared to 18.1% in 1998 as a result of the shift in
sales mix to higher margin products and effective cost control measures.
The Company expects that it will experience pressure on its gross profit
margin in 1999 as a result of the following factors: a continuing softening
of consumer demand in China caused in substantial part by the continuing
effect of the Asian financial, and increasing competition from foreign and
local premium brand beers.
Selling, General and Administrative Expenses: For the three months ended
June 30, 1999, selling, general and administrative expenses were RMB
57,908,015 or 20.8% of net sales, consisting of selling expenses of RMB
38,526,006 and general and administrative expenses of RMB 19,382,009. Net of
an allowance for doubtful accounts of RMB 3,100,000 for the three months
ended June 30, 1999, general and administrative expenses were RMB 16,282,009.
For the three months ended June 30, 1998, selling, general and administrative
expenses were RMB 60,592,594 or 17.9% of net sales, consisting of selling
expenses of RMB 37,856,807 and general and administrative expenses of RMB
22,735,787. Net of an allowance for doubtful accounts of RMB 2,146,679 for
the three months ended June 30, 1998, general and administrative expenses
were RMB 20,589,108.
Selling expenses include costs relating to the advertising, promotion,
marketing and distribution of Pabst Blue Ribbon beer in China. Selling
expenses increased by RMB 669,199 or 1.8% in 1999 as compared to 1998, and as
a percent of net sales, to 13.8% in 1999 from 11.2% 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.
19
<PAGE>
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 three months ended June 30, 1999 and
1998, the Marketing Company incurred an operating loss of RMB 10,299,941 and
RMB 14,024,000, 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 4,307,099 or
20.9% in 1999 as compared to 1998, and as a percentage of net sales, to 5.9%
in 1999 from 6.1% 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, which is calculated based primarily
on the age of outstanding accounts receivable, increased to 1.1% of net sales
in 1999 as compared to 0.6% of net sales in 1998 as a result of an increase
in the age of accounts receivable outstanding in 1999. However, accounts
receivable are typically outstanding for a longer period of time in China
than in the United States.
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 June 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
20
<PAGE>
such expense during the three months ended June 30, 1998 in order to reflect
the change in estimate.
Operating Income: For the three months ended June 30, 1999, operating
income was RMB 2,394,218 or 0.9% of net sales. For the three months ended
June 30, 1998, operating income was RMB 712,444 or 0.2% 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, combined with the decrease
in selling, general and administrative expenses, resulted in an increase in
operating income in 1999 as compared to 1998.
Interest Expense: For the three months ended June 30, 1999, interest
expense increased by RMB 679,702 or 41.2% to RMB 2,328,241, as compared to
RMB 1,648,539 for the three months ended June 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 June 30, 1999, income tax expense was RMB 1,661,958, as compared to RMB
2,293,208 for the three months ended June 30, 1998.
Net Income: Net income decreased to RMB 7,709,992 for the three months
ended June 30, 1999, as compared to RMB 8,610,308 for the three months ended
June 30, 1998.
Six Months Ended June 30, 1999 and 1998 -
Sales: During the six months ended June 30, 1999, net sales of beer
products decreased by RMB 66,200,051 or 10.6% to RMB 557,860,174, as compared
to RMB 624,060,225 for the six months ended June 30, 1998. The Company sold
108,393 metric tons of beer to distributors in 1999 as compared to 127,711
metric tons of beer in 1998, a decrease of 15.1%. The decrease in net sales
of beer products during the six months ended June 30, 1999 as compared to the
six months ended June 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 six months ended June 30, 1999 and 1998, Zhaoqing Brewery sold
34,994 metric tons and 41,240 metric tons of beer, respectively, to the
Marketing Company, almost all of which was Pabst Blue Ribbon beer. Total beer
sold by Zhaoqing Brewery to the Marketing Company decreased by 6,246 metric
tons or 15.1% from 1998 to 1999.
21
<PAGE>
During the six months ended June 30, 1999 and 1998, Sichuan High Worth
Brewery sold 4,109 metric tons and 7,235 metric tons of beer, respectively,
to the Marketing Company, all of which were Pabst Blue Ribbon beer.
During the six months ended June 30, 1999, Zao Yang High Worth Brewery
sold 7,434 metric tons of beer to the Marketing Company, of which 1,903
metric tons (25.6%) was Pabst Blue Ribbon beer and 5,531 metric tons (74.4%)
was local brand beer. During the six months ended June 30, 1998, Zao Yang
High Worth Brewery sold 554 metric tons of beer to the Marketing Company, all
of which was Pabst Blue Ribbon beer.
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 six months ended June 30, 1999, total gross profit
was RMB 121,571,753 or 21.8% of total net sales. For the six months ended
June 30, 1998, total gross profit was RMB 111,479,839 or 17.9% of total net
sales. Gross profit from beer sales increased by RMB 10,091,914 to RMB
121,571,753 in 1999 as compared to RMB 111,479,839 in 1998 as a result of the
increase in gross margin. Gross margin from beer sales increased to 21.8% in
1999 as compared to 17.9% in 1998 as a result of the shift in sales mix to
higher margin products and effective cost control measures.
The Company expects that it will experience pressure on its gross profit
margin in 1999 as a result of the following factors: a continuing softening
of consumer demand in China caused in substantial part by the continuing
effect of the Asian financial, and increasing competition from foreign and
local premium brand beers.
Selling, General and Administrative Expenses: For the six months ended
June 30, 1999, selling, general and administrative expenses were RMB
112,264,019 or 20.1% of net sales, consisting of selling expenses of RMB
74,094,787 and general and administrative expenses of RMB 38,169,232. Net of
an allowance for doubtful accounts of RMB 6,105,580 for the six months ended
June 30, 1999, general and administrative expenses were RMB 32,063,652. For
the six months ended June 30, 1998, selling, general and administrative
expenses were RMB 104,903,645 or 16.8% of net sales, consisting of selling
expenses of RMB 65,147,048 and general and administrative expenses of RMB
39,756,597. Net of an allowance for doubtful accounts of RMB 4,122,870 for
the six months ended June 30, 1998, general and administrative expenses were
RMB 35,633,727.
Selling expenses include costs relating to the advertising, promotion,
marketing and distribution of Pabst Blue Ribbon beer in China. Selling
expenses increased by RMB 8,947,739 or 13.7% in 1999 as compared to 1998, and
as a percent of net sales, to 13.3% in 1999 from 10.4% 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 six months ended June 30, 1999 and 1998,
the Marketing Company incurred an operating loss of RMB 20,474,746
22
<PAGE>
and RMB 19,343,000, 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 3,570,075 or
10.0% in 1999 as compared to 1998, and as a percentage of net sales, remained
constant at 5.7% in 1999 and 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, which is calculated based primarily
on the age of outstanding accounts receivable, increased to 1.1% of net sales
in 1999 as compared to 0.7% of net sales in 1998 as a result of an increase
in the age of accounts receivable outstanding in 1999. However, accounts
receivable are typically outstanding for a longer period of time in China
than in the United States.
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 348,901 and RMB 1,869,803 of compensation expense during the
six months ended June 30, 1999 and 1998, respectively.
Operating Income: For the six months ended June 30, 1999, operating income
was RMB 8,958,833 or 1.6% of net sales. For the six months ended June 30,
1998, operating income was RMB 4,465,691 or 0.7% 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, combined with the decrease in
selling, general and administrative expenses, resulted in an increase in
operating income in 1999 as compared to 1998.
Interest Expense: For the six months ended June 30, 1999, interest expense
increased by RMB 2,582,496 or 88.8% to RMB 5,489,514, as compared to RMB
2,907,018 for the six months ended June 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 six months
ended June 30, 1999, income tax expense was RMB 4,199,787, as compared to RMB
3,414,136 for the six months ended June 30, 1998.
Net Income: Net income decreased to RMB 15,199,823 for the six months
ended June 30, 1999, as compared to RMB 15,685,325 for the six months ended
June 30, 1998.
23
<PAGE>
Noble Brewery:
Three Months Ended June 30, 1999 and 1998 -
Sales: For the three months ended June 30, 1999 and 1998, net sales were
RMB 148,610,108 and RMB 192,096,472, respectively.
During the three months ended June 30, 1999, Noble Brewery sold 34,083
metric tons of beer to the Marketing Company, as compared to 46,706 metric
tons of beer sold to the Marketing Company during the three months ended June
30, 1998. Total beer sold by Noble Brewery to the Marketing Company decreased
by 12,623 metric tons or 27.0% 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 June 30, 1999 and 1998, gross
profit was RMB 57,219,501 or 38.5% of net sales and RMB 62,629,296 or 32.6%
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 three months ended
June 30, 1999, selling, general and administrative expenses totalled RMB
11,883,349 or 8.0% of net sales, consisting of selling expenses of RMB
1,843,417 and general and administrative expenses of RMB 10,039,932. For the
three months ended June 30, 1998, selling, general and administrative
expenses totalled RMB 13,439,911 or 7.0% of net sales, consisting of selling
expenses of RMB 1,172,920 and general and administrative expenses of RMB
12,266,991. Selling expenses consist of warehousing, storage and freight
costs.
Operating Income: For the three months ended June 30, 1999 and 1998,
operating income was RMB 45,336,152 or 30.5% of net sales and RMB 49,189,385
or 25.6% 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 three months ended June 30, 1999, income tax
expense was RMB 12,772,421 as compared to RMB 6,853,180 for the three months
ended June 30, 1998.
Net Income: Net income decreased to RMB 32,563,731 or 21.9% of net sales
for the three months ended June 30, 1999, as compared to RMB 42,336,205 or
22.0% of net sales for the three months ended June 30, 1998.
Six Months Ended June 30, 1999 and 1998 -
Sales: For the six months ended June 30, 1999 and 1998, net sales were
RMB 302,775,540 and RMB 338,111,498, respectively.
During the six months ended June 30, 1999, Noble Brewery sold 66,943
metric tons of beer to the Marketing Company, as compared to 80,932 metric
tons of beer sold to the Marketing Company during the six months ended June
30, 1998. Total beer sold by Noble Brewery to the Marketing Company decreased
by 13,989 metric tons or 17.3% 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
24
<PAGE>
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 six months ended June 30, 1999 and 1998, gross
profit was RMB 112,295,714 or 37.1% of net sales and RMB 107,248,359 or 31.7%
of net sales, respectively. The increase in the gross profit margin of 5.4%
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 six months ended
June 30, 1999, selling, general and administrative expenses totalled RMB
29,955,262 or 9.9% of net sales, consisting of selling expenses of RMB
5,951,208 and general and administrative expenses of RMB 24,004,054. For the
six months ended June 30, 1998, selling, general and administrative expenses
totalled RMB 23,906,649 or 7.1% of net sales, consisting of selling expenses
of RMB 2,963,154 and general and administrative expenses of RMB 20,943,495.
Selling expenses consist of warehousing, storage and freight costs.
Operating Income: For the six months ended June 30, 1999 and 1998,
operating income was RMB 82,340,452 or 27.2% of net sales and RMB 83,341,710
or 24.6% 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 six months ended June 30, 1999, income tax
expense was RMB 23,597,809 as compared to RMB 11,129,730 for the six months
ended June 30, 1998.
Net Income: Net income decreased to RMB 58,982,236 or 19.5% of net sales
for the six months ended June 30, 1999, as compared to RMB 72,398,901 or
21.4% of net sales for the six months ended June 30, 1998.
Consolidated Financial Condition - June 30, 1999:
Liquidity and Capital Resources - For the six months ended June 30, 1999,
the Company's operations provided cash resources of RMB 50,589,635, as
compared to RMB 106,667,926 for the six months ended June 30, 1998, primarily
as a result of reduced cash flows with respect to accounts payable and amount
due to an associated company. Despite reduced cash flows from operations, the
Company's cash balance increased by RMB 31,473,640 to RMB 117,982,382 at June
30, 1999, as compared to RMB 86,508,742 at December 31, 1998. The Company's
net working capital deficit decreased by RMB 31,372,591 to RMB 160,646,852 at
June 30, 1999, as compared to RMB 192,019,443 at December 31, 1998, resulting
in a current ratio at June 30, 1999 of 0.72:1, as compared to 0.64:1 at
December 31, 1998.
Net of an allowance for doubtful accounts of RMB 6,105,580 for the six
months ended June 30, 1999, accounts and bills receivable increased by RMB
27,751,646 or 19.8% to RMB 162,148,081 at June 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 Company's inventories increased by RMB 12,349,342 or 18.5% to RMB
78,951,975 at June 30, 1999, as compared to RMB 66,602,633 at December 31,
1998. The increase in inventories was mainly due to the increase in purchases
of raw materials and packing materials to support expected peak season sales
and production (from July to September).
25
<PAGE>
The Company's accounts payable and accrued liabilities increased by RMB
33,896,528 or 21.8% to RMB 155,630,185 at June 30, 1999, as compared to RMB
121,733,657 at December 31, 1999. The increase in accounts payable was mainly
due to the increase in purchases of raw materials and packing materials to
support expected peak season sales and production (from July to September),
and a slow-down in payments to suppliers.
The amount due to an associated company increased by RMB 18,259,641 or
8.3% to RMB 236,977,441 at June 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 six months ended June 30, 1999, the Company's secured bank
loans decreased by RMB 7,450,000, reflecting total borrowings of RMB
112,104,000. 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 expansion and
working capital requirements of Zhaoqing Brewery and Zao Yang High Worth
Brewery.
Net of the cash dividend of RMB 15,638,685 paid to Guangdong Blue Ribbon
by High Worth JV, the amounts due to related companies increased by RMB
11,128,493 or 41.8% to RMB 26,625,903 at June 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 is unsecured, with interest at 7.5%
per annum, and is due on December 31, 1999. Such amount is included in
amounts due to related companies at June 30, 1999. Since the Company pays
interest on advances from related companies, the increase in outstanding
amounts due to related companies at June 30, 1999 has also contributed to a
increase in interest expense during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998.
On November 23, 1998, the Board of Directors of High Worth JV declared the
second dividend distribution, of which Holdings was entitled to approximately
RMB 31,000,000. 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, 1998, partial dividends of RMB 5,000,000
were distributed to Guangdong Blue Ribbon. During the six months ended June
30, 1999, partial dividends of RMB 15,638,685 and RMB 19,499,530 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 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 six months ended June 30, 1998, High
Worth JV paid RMB 16,104,000, representing its 55% capital investment in the
joint venture.
For the six months ended June 30, 1999, additions to property, plant and
equipment aggregated RMB 3,195,383, which include approximately RMB 1,340,000
spent on renovation and continuous improvement of Zao Yang High Worth
Brewery. The Company anticipates that additional capital expenditures in
connection with the
26
<PAGE>
continuing improvement of production facilities at Zhaoqing Brewery during
the remainder of 1999 will be approximately RMB 15,000,000, a portion of
which is expected to be financed through capital leases. The Company
anticipates that additional capital expenditures in connection with the
continuous technical renovation process in converting the old brewing
facilities of Zao Yang High Worth Brewery into a Pabst Blue Ribbon brewing
complex during the remainder of 1999 will be approximately RMB 3,000,000, 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 June 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
development of the Chinese economy.
27
<PAGE>
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 June 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 and cash
flows.
28
<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.
29
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K -
Three Months Ended June 30, 1999: None.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CBR BREWING COMPANY, INC.
-------------------------
(Registrant)
Date: August 4, 1999 By: /s/ ZI-SHOU CHEN
-------------------------
Zi-shou Chen
President and Director
(Duly authorized officer)
Date: August 4, 1999 By: /s/ GARY C.K. LUI
-------------------------
Gary C.K. Lui
Chief Financial Officer
(Principal financial
officer)
31
<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 JUNE 30, 1999,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 14,214,745
<SECURITIES> 0
<RECEIVABLES> 19,535,913
<ALLOWANCES> 0
<INVENTORY> 9,512,286
<CURRENT-ASSETS> 49,344,475
<PP&E> 30,452,944
<DEPRECIATION> 0
<TOTAL-ASSETS> 110,305,999
<CURRENT-LIABILITIES> 68,699,517
<BONDS> 56,005
0
0
<COMMON> 823
<OTHER-SE> 26,234,240
<TOTAL-LIABILITY-AND-EQUITY> 110,305,999
<SALES> 67,212,069
<TOTAL-REVENUES> 67,212,069
<CGS> 52,564,870
<TOTAL-COSTS> 52,564,870
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 735,612
<INTEREST-EXPENSE> 661,387
<INCOME-PRETAX> 417,990
<INCOME-TAX> 505,998
<INCOME-CONTINUING> 1,831,304
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,831,304
<EPS-BASIC> .23
<EPS-DILUTED> .23
</TABLE>
