<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 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
433 North Camden Drive, Suite 600
Beverly Hills, California 90210
--------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of March 31, 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) - March 31, 1999 and
December 31, 1998
Consolidated Statements of Income (Unaudited) - Three Months
Ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows (Unaudited) - Three
Months Ended March 31, 1999 and 1998
Notes to Consolidated Financial Statements (Unaudited) -
Three Months Ended March 31, 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>
March 31, 1999 December 31, 1998
------------------------ -------------------------
RMB USD RMB USD
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash 105,451,243 12,704,969 86,508,742 10,422,740
Accounts and bills receivable, net 158,745,969 19,126,020 140,502,015 16,927,954
Inventories (Note 2) 77,417,299 9,327,385 66,602,633 8,024,414
Amounts due from related companies 23,068,748 2,779,368 18,068,927 2,176,979
Prepayments, deposits and other
receivables 14,156,514 1,705,605 27,603,518 3,325,725
----------- ----------- ----------- -----------
Total current assets 378,839,773 45,643,347 339,285,835 40,877,812
Interest in an associated company
(Note 4) 253,114,315 30,495,701 243,429,767 29,328,888
Property, plant and equipment, net 258,504,888 31,145,167 263,768,418 31,779,327
Non-current assets 23,942,307 2,884,615 23,942,307 2,884,615
----------- ----------- ----------- -----------
Total assets 914,401,283 110,168,830 870,426,327 104,870,642
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
(continued)
3
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
------------------------- -------------------------
RMB USD RMB USD
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings 125,554,000 15,126,988 119,554,000 14,404,096
Capital lease obligations 5,664,938 682,523 5,664,938 682,523
Accounts payable
and accrued liabilities 157,766,033 19,007,956 121,733,657 14,666,706
Amounts due to related companies
(Note 7) 30,129,539 3,630,065 31,136,095 3,751,337
Amount due to an associated company 215,753,907 25,994,447 218,717,800 26,351,542
Income taxes payable 6,704,713 807,797 4,166,884 502,034
Sales taxes payable 24,305,247 2,928,342 30,331,904 3,654,446
----------- ----------- ----------- -----------
Total current liabilities 565,878,377 68,178,118 531,305,278 64,012,684
----------- ----------- ----------- -----------
Long-term liabilities:
Capital lease obligations 1,525,255 183,766 2,847,911 343,122
----------- ----------- ----------- -----------
Total long-term liabilities 1,525,255 183,766 2,847,911 343,122
----------- ----------- ----------- -----------
Minority interests (Note 6) 86,863,363 10,465,465 83,803,133 10,096,763
----------- ----------- ----------- -----------
Shareholders' advances and
shareholders' equity:
Advances from shareholders (Note 3) 50,267,705 6,056,350 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 106,664,044 12,851,090 106,489,592 12,830,071
General reserve and enterprise
development funds 10,125,740 1,219,969 10,125,740 1,219,969
Retained earnings 93,069,967 11,213,249 85,580,136 10,310,860
----------- ----------- ----------- -----------
Total shareholders' equity 209,866,583 25,285,131 202,202,300 24,361,723
----------- ----------- ----------- -----------
Total shareholders' advances and
shareholders' equity 260,134,288 31,341,481 252,470,005 30,418,073
----------- ----------- ----------- -----------
Total liabilities, shareholders'
advances and shareholders'
equity 914,401,283 110,168,830 870,426,327 104,870,642
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</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 Three Months Ended
March 31, 1999 March 31, 1998
--------------------------- -------------------
RMB USD RMB
------------ ------------ -------------------
<S> <C> <C> <C>
Sales, including sales to related
companies of RMB nil and RMB
496,357 for the three months
ended March 31, 1999 and 1998,
respectively 284,845,330 34,318,714 291,807,013
Sales taxes (5,232,782) (630,456) (6,174,507)
------------ ----------- ------------
Net sales 279,612,548 33,688,258 285,632,506
Cost of sales, including inventory
purchased from related companies of
RMB 171,637,862 and RMB 166,066,924
for the three months ended March 31,
1999 and 1998, respectively; and
royalty fee paid to a related
company of RMB 1,810,585 and
RMB 1,763,948 for the three months
ended March 31, 1999 and 1998,
respectively (218,517,477) (26,327,407) (235,299,046)
------------ ----------- ------------
Gross profit 61,095,071 7,360,851 50,333,460
Selling, general and administrative
expenses, including management
fee paid to a related company of
RMB nil and RMB 945,000 for the
three months ended March 31, 1999
and 1998, respectively (54,356,004) (6,548,916) (44,311,051)
Fair value of warrants, stock options
and common stock issued for services
rendered (Note 5) (174,452) (21,018) (2,269,162)
------------ ---------- ------------
Operating income 6,564,615 790,917 3,753,247
Foreign exchange losses - - (329,565)
Interest expense, including interest
paid to related companies of
RMB 355,068 and RMB 106,674 for
the three months ended March 31,
1999 and 1998, respectively (3,161,273) (380,876) (1,258,479)
------------ ----------- ------------
Income before income taxes 3,403,342 410,041 2,165,203
Income taxes (2,537,829) (305,763) (1,120,928)
------------ ----------- ------------
</TABLE>
(continued)
5
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)(CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
-------------------------- ------------------
RMB USD RMB
------------ ----------- ------------------
<S> <C> <C> <C>
Income before equity in earnings of
an associated company 865,513 104,278 1,044,275
Equity in earnings of an associated
company 9,684,548 1,166,813 12,918,084
------------ ----------- ------------
Income before minority interests 10,550,061 1,271,091 13,962,359
Minority interests (3,060,230) (368,702) (6,887,342)
------------ ----------- ------------
Net income 7,489,831 902,389 7,075,017
------------ ----------- ------------
------------ ----------- ------------
Net income per common share (Note 1)
- Basic 0.94 0.11 0.88
------------ ----------- ------------
------------ ----------- ------------
- Diluted 0.94 0.11 0.88
------------ ----------- ------------
------------ ----------- ------------
Weighted average number of common
shares outstanding
- Basic 8,010,013 8,010,013 8,003,346
------------ ----------- ------------
------------ ----------- ------------
- Diluted 8,010,013 8,010,013 8,046,227
------------ ----------- ------------
------------ ----------- ------------
</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>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
-------------------------- ------------------
RMB USD RMB
------------ ----------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 7,489,831 902,389 7,075,017
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 174,452 21,018 2,269,162
Allowance for doubtful accounts 3,005,580 362,119 1,976,191
Depreciation and amortization 7,106,757 856,236 5,094,426
Foreign exchange losses - - 329,565
Minority interests 3,060,230 368,702 6,887,342
Equity in earnings of an associated company (9,684,548) (1,166,813) (12,918,084)
Income taxes payable 2,537,829 305,763 1,120,928
Changes in operating assets and liabilities:
(Increase) decrease in -
Accounts and bills receivable (21,249,534) (2,560,185) (43,632,430)
Inventories (10,814,666) (1,302,972) 13,994,362
Amounts due from related companies (4,999,821) (602,388) 22,894,664
Prepayments, deposits and other receivables 13,447,004 1,620,121 (42,786,085)
Increase (decrease) in -
Accounts payable and accrued liabilities 36,032,376 4,341,250 30,526,246
Customer deposits - - (6,680,000)
Amount due to an associated company (2,963,893) (357,096) 52,823,268
Sales taxes payable (6,026,657) (726,103) (5,047,363)
----------- ---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 17,114,940 2,062,041 33,927,209
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures on non-current assets - - (1,699,700)
Purchases of property, plant and equipment (1,843,227) (222,076) (230,751)
Purchase of interest in brewery - - (16,104,000)
----------- ---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,843,227) (222,076) (18,034,451)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
New bank borrowings 6,000,000 722,892 3,000,000
Increase (decrease) in amounts due to related
companies 14,632,129 1,762,907 (30,938,444)
Repayment of capital lease obligations (1,322,656) (159,356) (3,447,586)
Payment of cash dividend to minority interests (15,638,685) (1,884,179) (24,367,103)
----------- ---------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,670,788 442,264 (55,753,133)
----------- ---------- -----------
Net increase (decrease) in cash 18,942,501 2,282,229 (39,860,375)
Cash at beginning of period 86,508,742 10,422,740 76,092,954
----------- ---------- -----------
Cash at end of period 105,451,243 12,704,969 36,232,579
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
See accompanying notes to the consolidated financial statements.
7
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 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 was given 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.
The Company conducts a substantial portion of its purchases through related
parties, and has additional significant continuing transactions with such
parties.
8
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
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 March 31, 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 rate of exchange as quoted by the People's Bank of China on
March 31, 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.
9
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
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 March 31, 1999, the results of operations for
the three months ended March 31, 1999 and 1998, and the cash flows for the three
months ended March 31, 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
affects the reported amounts of 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 ended March 31, 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 under stock options, warrants and debt
instruments.
At March 31, 1999, potentially dilutive securities representing 280,000 shares
of common stock were outstanding, consisting of stock options exercisable at
price ranging from $3.87 to $4.26 per share (which was in excess of average fair
market value during the three months ended March 31, 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.
10
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
2. INVENTORIES
Inventories consisted of the following at March 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
----------------------- -----------------------
RMB USD RMB USD
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Raw materials 30,078,600 3,623,928 24,853,642 2,994,415
Work in progress 6,110,915 736,255 5,436,138 654,956
Finished goods 41,227,784 4,967,202 36,312,853 4,375,043
---------- --------- ---------- ----------
77,417,299 9,327,385 66,602,633 8,024,414
---------- --------- ---------- ----------
---------- --------- ---------- ----------
</TABLE>
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 advances 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 not repayable unless
the Company obtains additional long-term debt or equity financing. Repayments of
the advances are at the discretion of the Company and the shareholders have no
right to demand repayment. The Company has the option of offsetting or repaying
the advances or any part thereof by allotment of shares at par value in
Holdings. 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. As of March 31, 1999 and December 31, 1998, 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 30,160,000, RMB 10,054,000 and RMB 10,054,000,
respectively. 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.
11
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
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 ended March 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
------------------------ ------------------
RMB USD RMB
----------- ---------- ------------------
<S> <C> <C> <C>
Net sales 154,165,432 18,574,148 146,015,026
----------- ---------- -----------
----------- ---------- -----------
Net income 26,418,505 3,182,952 30,062,696
----------- ---------- -----------
----------- ---------- -----------
The Company's share
of net income after
adjustment of unrealized
intercompany profit
and other intercompany
adjustments 9,684,548 1,166,813 12,918,084
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
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.
12
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
5. SHAREHOLDERS' EQUITY (continued)
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
174,452 and RMB 1,695,358 of compensation expense during the three months ended
March 31, 1999 and 1998, respectively.
Consulting Contract -
On March 2, 1998, the Company entered into a contract with Worldwide Corporate
Finance, a corporate financial consulting company, to provide financial and
business consulting services to the Company. The Company paid an initial
non-refundable retainer by issuing 10,000 shares of Class A Common Stock, which
were recorded as a charge to operations 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.
6. DIVIDEND TO MINORITY INTERESTS
On November 23, 1998, the Board of Directors of High Worth JV declared the
second dividend distribution, entitling Holdings 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 three months ended March 31,
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 ended March 31, 1999, the Company borrowed RMB
24,000,000 from Shenzhen Huaqiang Holdings Limited, the Company's major
shareholder, with interest at 7.5% per annum, due December 31, 1999.
13
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CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
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.
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.
14
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CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
8. RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
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, 1999. 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 adopted SFAS No. 133 for its fiscal year beginning
January 1, 1999. Adoption of SFAS No. 133 did not have a material effect on the
Company's financial statement presentation and disclosures.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Quarterly Report on Form 10-Q for the three months ended March 31, 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 three months ended March 31, 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 from 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 was given 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 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.
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 US and Pabst Zhaoqing, and
a subsequent Assets Transferring Agreement among Pabst Zhaoqing, Pabst US and
Guangdong Blue Ribbon. The License Agreement expires on November 6, 2003. The
Company has begun exploratory discussions regarding the possible extension or
restructuring of the License Agreement with Pabst US. However, there can be no
assurances that the discussions will be successful or what the terms and
conditions of any extension or restructuring may be. The inability of the
Company to obtain an extension or restructuring of the License Agreement with
Pabst US under acceptable terms and conditions would have a material adverse
effect on the Company's consolidated results of operations, financial position
and cash flows.
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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 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.
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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 BREWERY: Sichuan Brewery is situated on a site containing
approximately 1,089,000 square feet and is located within the vicinity of Le
Shan City, Sichuan Province, which is approximately 160 kilometers from Chengdu,
the provincial capital of Sichuan Province. The original facilities of Sichuan
Brewery were constructed in 1988 with annual production capacity, based on old
brewing technology, of approximately 20,000 metric tons or 170,000 barrels of
beer. Prior to late 1996, the facilities were used exclusively to produce beer
under domestic local brand names. Guangdong Blue Ribbon acquired the brewery as
its branch and began to convert the facility into a Pabst Blue Ribbon brewing
complex in late 1996. In April 1997, Sichuan Brewery commenced the production of
beer under the Pabst Blue Ribbon label, which was sold to the Marketing Company
for resale.
Consolidated Results of Operations:
Three Months Ended March 31, 1999 and 1998 -
Sales: For the three months ended March 31, 1999, net sales, all conducted
through the Marketing Company, were RMB 279,612,548, from the sale of 52,563
metric tons of beer. Approximately 99.3% of total beer sales during the three
months ended March 31, 1999 were provided from products under the Pabst Blue
Ribbon brand name.
For the three months ended March 31, 1998, net sales, all conducted through
the Marketing Company, were RMB 285,632,506, from the sale of 55,979 metric tons
of beer. Approximately 99.3% of total beer sales during the three months ended
March 31, 1998 were provided from products under the Pabst Blue Ribbon brand
name.
During the three months ended March 31, 1999, net sales of beer products
decreased by RMB 6,019,958 or 2.1%. The Company sold 52,563 metric tons of beer
to distributors in 1999 as compared to 55,979 metric tons of beer in 1998, a
decrease of 6.1%. The decrease in net sales of beer products during the three
months ended March 31, 1999 as compared to the three months ended March 31, 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
In response to changing market conditions and competitive pressures, the
Company introduced two new Pabst Blue Ribbon beer products during March 1998.
The new products cost less to produce as a result of containing less malt and
having a lower alcoholic content, and were sold in newly designed packaging.
Although the sale 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.
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<PAGE>
Accordingly, management decided to discontinue the 10-degree beer in 1999, as
a result of a strategic re-evaluation of the Company's markets, and will
attempt to replace such sales with sales of the 11-degree light processed
beer.
During the three months ended March 31, 1999, Zhaoqing Brewery sold 18,324
metric tons of beer to the Marketing Company, of which 831 metric tons (4.5%)
were local brand beer and 17,493 metric tons (95.5%) were Pabst Blue Ribbon
beer. During the three months ended March 31, 1998, Zhaoqing Brewery sold 18,901
metric tons to the Marketing Company, of which 810 metric tons (4.3%) were local
brand beer and 18,091 metric tons (95.7%) were Pabst Blue Ribbon beer. Total
beer sold by Zhaoqing Brewery to the Marketing Company decreased by 577 metric
tons or 3.1% from 1998 to 1999.
During the three months ended March 31, 1999 and 1998, Sichuan Brewery sold
2,401 metric tons and 2,798 metric tons of beer, respectively, to the Marketing
Company, all of which was Pabst Blue Ribbon beer.
During the three months ended March 31, 1999, Zao Yang High Worth Brewery
sold 3,291 metric tons of beer to the Marketing Company, of which 1,036 metric
tons (31.5%) was Pabst Blue Ribbon beer and 2,255 metric tons (68.5%) was local
brand beer. Zao Yang High Worth Brewery did not commence the production of Pabst
Blue Ribbon beer until June 1998.
The Marketing Company regulates 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 three months ended March 31, 1999, total gross profit
was RMB 61,095,071 or 21.8% of total net sales. For the three months ended March
31, 1998, total gross profit was RMB 50,333,460 or 17.6% of total net sales.
Gross profit from beer sales increased by RMB 10,761,611 in 1999 as a result of
the increase in gross margin. Gross margin from beer sales increased to 21.8% in
1999 as compared to 17.6% 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 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 premium brand beers.
Selling, General and Administrative Expenses: For the three months ended
March 31, 1999, selling, general and administrative expenses were RMB 54,356,004
or 19.4% of net sales, consisting of selling expenses of RMB 35,568,781 and
general and administrative expenses of RMB 18,787,223. Net of an allowance for
doubtful accounts of RMB 3,005,580 for the three months ended March 31, 1999,
general and administrative expenses were RMB 15,781,643. For the three months
ended March 31, 1998, selling, general and administrative expenses were RMB
44,311,051 or 15.5% of net sales, consisting of selling expenses of RMB
27,290,241 and general and administrative expenses of RMB 17,020,810. Net of an
allowance for doubtful accounts of RMB 1,976,191 for the three months ended
March 31, 1998, general and administrative expenses were RMB 15,044,619.
Selling expenses include costs relating to the advertising, promotion,
marketing and distribution of Pabst Blue Ribbon beer in China. Selling expenses
increased by RMB 8,278,540 or 30.3% in 1999 as compared to 1998, and
19
<PAGE>
as a percent of net sales, to 12.7% in 1999 from 9.6% 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's intention to continue
its substantially expanded advertising and promotional program to maintain
and stimulate consumer demand and maintain the market position of Pabst Blue
Ribbon beer in China, in an attempt to counteract softening consumer demand
and increasing competition from foreign premium brand 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 three months
ended March 31, 1999, the Marketing Company incurred an operating loss of RMB
10,174,805, 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, accounting and other costs associated with the
operation of a public company. Excluding the allowance for doubtful accounts,
general and administrative expenses increased by RMB 737,024 or 4.9% in 1999 as
compared to 1998, and as a percentage of net sales, to 5.6% in 1999 from 5.3% in
1998. General and administrative expenses increased in 1999 as compared in 1998
primarily as a result of increased personnel and personnel related costs.
The allowance for doubtful accounts, which is calculated based primarily on
the age of outstanding accounts receivable, 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 174,452 and RMB 1,695,358 of
compensation expense during the three months ended March 31, 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
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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.
Operating Income: For the three months ended March 31, 1999, operating
income was RMB 6,564,615 or 2.3% of net sales. For the three months ended March
31, 1998, operating income was RMB 3,753,247 or 1.3% of net sales. The increase
in operating income is primarily attributable to the shift in sales mix to
higher margin products and the decrease in costs related to the fair value of
warrants, stock options and common stock issued for services rendered.
Interest Expense: For the three months ended March 31, 1999, interest expense
increased by RMB 1,902,794 or 151.2% to RMB 3,161,273, as compared to RMB
1,258,479 for the three months ended March 31, 1998. Interest expense increased
in 1999 as compared to 1998 as a result of the increase in the average
outstanding balance on bank borrowings.
Income Taxes: The two year income tax holiday for Zhaoqing Brewery expired on
December 31, 1997. Commencing in 1998, Zhaoqing Brewery is required to pay local
income tax at half of the normal rate of 33% on its profit as determined in
accordance with PRC accounting standards applicable to Zhaoqing Brewery.
Accordingly, for the three months ended March 31, 1999, income tax expense was
RMB 2,537,829, as compared to RMB 1,120,928 for the three months ended March 31,
1998.
Net Income: Net income increased to RMB 7,489,831 for the three months ended
March 31, 1999, as compared to RMB 7,075,017 for the three months ended March
31, 1998.
Noble Brewery:
Three Months Ended March 31, 1999 and 1998 -
Sales: For the three months ended March 31, 1999 and 1998, net sales were RMB
154,165,432 and RMB 146,015,026, respectively.
During the three months ended March 31, 1999, Noble Brewery sold 32,860
metric tons of beer to the Marketing Company, as compared to 34,226 metric tons
of beer sold to the Marketing Company during the three months ended March 31,
1998. Total beer sold by Noble Brewery to the Marketing Company decreased by
1,366 metric tons or 4.0% 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
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capacities, the beer produced by Sichuan 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 March 31, 1999 and 1998, gross
profit was RMB 55,076,213 or 35.7% of net sales and RMB 44,619,063 or 30.6% of
net sales, respectively. The increase in the gross profit margin of 5.1% in 1999
as compared to 1998 was a result of a decrease in the cost of raw materials,
effective cost control measures, and the shift in sales mix to higher margin
products.
Selling, General and Administrative Expenses: For the three months ended
March 31, 1999, selling, general and administrative expenses totalled RMB
18,071,913 or 11.7% of net sales, consisting of selling expenses of RMB
4,107,791 and general and administrative expenses of RMB 13,964,122. For the
three months ended March 31, 1998, selling, general and administrative expenses
totalled RMB 10,466,738 or 7.2% of net sales, consisting of selling expenses of
RMB 1,790,234 and general and administrative expenses of RMB 8,676,504. Selling
expenses consist of warehousing, storage and freight costs.
Operating Income: For the three months ended March 31, 1999 and 1998,
operating income was RMB 37,004,300 or 24.0% of net sales and RMB 34,152,325 or
23.4% 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 March 31, 1999, income tax
expense was RMB 10,825,388 as compared to RMB 4,276,550 for the three months
ended March 31, 1998.
Net Income: Net income decreased to RMB 26,418,505 or 17.1% of net sales for
the three months ended March 31, 1999, as compared to RMB 30,062,696 or 20.6% of
net sales for the three months ended March 31, 1998.
Consolidated Financial Condition - March 31, 1999:
Liquidity and Capital Resources:
For the three months ended March 31, 1999, the Company's operations provided
cash resources of RMB 17,114,940, as compared to RMB 33,927,209 for the three
months ended March 31, 1998, primarily as a result of reduced cash flows from
related parties. The Company's cash balance increased by RMB 18,942,501 to RMB
105,451,243 at March 31, 1999, as compared to RMB 86,508,742 at December 31,
1998. The Company's net working capital deficit decreased by RMB 4,980,839 to
RMB 187,038,604 at March 31, 1999, as compared to RMB 192,019,443 at December
31, 1998, resulting in a current ratio at March 31, 1999 of 0.67:1, as compared
to 0.64:1 at December 31, 1998.
Net of an allowance for doubtful accounts of RMB 3,005,580 for the three
months ended March 31, 1999, accounts and bills receivable increased by RMB
21,249,534 or 15.1% to RMB 158,745,969 at March 31, 1999, as compared to RMB
140,502,015 at December 31, 1998, as a result of the seasonal nature of the
business and the timing of the Chinese New Year, during which time a general
slowdown in receipts and payments typically occurs.
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The Company's inventories increased by RMB 10,814,666 or 16.2% to RMB
77,417,299 at March 31, 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 peak season (April to September)
sales and production.
The Company's prepayments, deposits and other receivables decreased by RMB
13,447,004 or 48.7% to RMB 14,156,514 at March 31, 1999, as compared to RMB
27,603,518 at December 31, 1998. The decrease in prepayments, deposits and other
receivables was primarily due to an decrease in prepayments related to
advertising and promotional programs.
During the three months ended March 31, 1999, the Company's secured bank
loans increased by RMB 6,000,000, reflecting total borrowings of RMB
125,554,000. 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.
The Company's accounts payable and accrued liabilities increased by RMB
36,032,376 or 29.6% to RMB 157,766,033 at March 31, 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 peak season (April to September) sales and production, and a slow-down
in payments to suppliers.
The amount due to an associated company decreased by RMB 2,963,893 or 1.4%
to RMB 215,753,907 at March 31, 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. Contributing to the slight decrease
was the seasonal nature of the business and the timing of the Chinese New Year.
As a result of the extended credit terms provided by the Marketing Company to
certain distributors, accounts and bills receivable increased, which caused a
commensurate increase in the amount due to an associated company, reflecting the
lengthened collection cycle.
Net of the cash dividend of RMB 15,638,685 paid to Guangdong Blue Ribbon by
High Worth JV, the amounts due to related companies increased aggregately by RMB
14,632,129 or 47.0% to RMB 30,129,539 at March 31, 1999, as compared to RMB
31,136,095 at December 31, 1998. The increase in amounts due to related
companies was primarily attributable to a short-term loan from Shenzhen Huaqiang
Holdings Limited, the Company's major shareholder, of RMB 24,000,000, due
December 31, 1999, with interest at 7.5% per annum. Since the Company pays
interest on advances from related companies, the increase in outstanding amounts
due to related companies at March 31, 1999 has also contributed to a increase in
interest expense during the three months ended March 31, 1999 as compared to the
three months ended March 31, 1998.
On November 23, 1998, the Board of Directors of High Worth JV declared the
second dividend distribution, entitling Holdings 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 three months ended March 31,
1999, partial dividends of RMB 15,638,685 and RMB 19,499,530 were distributed to
Guangdong Blue Ribbon and Holdings, respectively.
23
<PAGE>
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 brewing complex. Zao Yang High Worth Brewery commenced
the production of Pabst Blue Ribbon beer in June 1998. During the three months
ended March 31, 1998, High Worth JV paid RMB 16,104,000, representing its 55%
capital investment in the joint venture.
For the three months ended March 31, 1999, additions to property, plant and
equipment aggregated RMB 1,843,227, which include approximately RMB 560,000
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 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 4,500,000, a portion of which is expected to be
financed by new bank borrowings.
In connection with the acquisition of High Worth JV, Oriental Win advanced
US$8,869,585 to Holdings during 1994. The rights to collect US$8,000,000 of the
advances 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 not repayable unless the Company obtains
additional long-term debt or equity financing. Repayments of the advances are at
the discretion of the Company and the shareholders have no right to demand
repayment. The Company has the option of offsetting or repaying the advances or
any part thereof by allotment of shares at par value in Holdings. 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. As of March
31, 1999 and December 31, 1998, 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 30,160,000, RMB 10,054,000 and RMB 10,054,000, respectively.
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 with respect to the continuing
development of its brewery operations through internal cash flow and external
resources.
The Company anticipates that its operating cash flow, combined with cash on
hand, bank lines of credit, and other external credit sources, and the credit
facilities provided by affiliates or related parties, are adequate to
24
<PAGE>
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.
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, devaluation still remains a
possibility. Should the central government of China decide to devalue its
currency, the Company does not believe that such an action would have a
detrimental effect on the Company's operations, since the Company conducts
virtually all of its business in China, and the sale of its products and the
purchase of raw materials and services is settled in RMB. As of March 31, 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 50,267,705, which is not currently scheduled for repayment.
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
25
<PAGE>
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, but such
obligation is not currently scheduled for repayment.
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 March 31, 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: May 11, 1999 By: /s/ ZI-SHOU CHEN
-----------------------------
Zi-shou Chen
President and Director
(Duly authorized officer)
Date: May 11, 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 CONSOLIDATED
FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 12,704,969
<SECURITIES> 0
<RECEIVABLES> 19,126,020
<ALLOWANCES> 0
<INVENTORY> 9,327,385
<CURRENT-ASSETS> 45,643,347
<PP&E> 31,145,167
<DEPRECIATION> 0
<TOTAL-ASSETS> 110,168,830
<CURRENT-LIABILITIES> 68,178,118
<BONDS> 183,766
0
0
<COMMON> 823
<OTHER-SE> 25,284,308
<TOTAL-LIABILITY-AND-EQUITY> 110,168,830
<SALES> 33,688,258
<TOTAL-REVENUES> 33,688,258
<CGS> 26,327,407
<TOTAL-COSTS> 26,327,407
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 362,119
<INTEREST-EXPENSE> 380,876
<INCOME-PRETAX> 410,041
<INCOME-TAX> 305,763
<INCOME-CONTINUING> 902,389
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 902,389
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
