<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, 2000
/ / 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 March 31, 2000, 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
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) - March 31, 2000 and
December 31, 1999
Consolidated Statements of Income (Unaudited) - Three Months
Ended March 31, 2000 and 1999
Consolidated Statements of Cash Flows (Unaudited) - Three
Months Ended March 31, 2000 and 1999
Notes to Consolidated Financial Statements (Unaudited) -
Three Months Ended March 31, 2000 and 1999
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, 2000 December 31, 1999
------------------------ -------------------------
RMB USD RMB USD
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash 90,539,406 10,908,362 106,052,616 12,777,424
Accounts and bills receivable, net 127,953,586 15,416,095 76,169,793 9,177,084
Inventories (Note 2) 55,323,473 6,665,479 73,241,948 8,824,331
Amounts due from related companies 27,686,257 3,335,694 24,646,810 2,969,495
Prepayments, deposits and other
receivables 31,082,630 3,744,895 35,992,390 4,336,433
----------- ----------- ----------- -----------
Total current assets 332,585,352 40,070,525 316,103,557 38,084,767
Interest in an associated company
(Note 4) 261,260,720 31,477,195 251,642,290 30,318,348
Property, plant and equipment, net 254,844,634 30,704,173 243,971,176 29,394,117
Non-current assets 8,062,690 971,408 10,750,253 1,295,212
----------- ----------- ----------- -----------
Total assets 856,753,396 103,223,301 822,467,276 99,092,444
=========== =========== =========== ===========
</TABLE>
(continued)
3
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
------------------------- -------------------------
RMB USD RMB USD
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings 121,359,938 14,621,679 115,390,788 13,902,505
Capital lease obligations 2,179,243 262,559 2,847,911 343,122
Accounts payable
and accrued liabilities 169,011,719 20,362,858 124,242,548 14,968,983
Amounts due to related companies 8,912,336 1,073,775 11,535,893 1,389,867
Amount due to an associated company 201,250,884 24,247,094 194,894,527 23,481,268
Income taxes payable 10,583,829 1,275,160 8,944,091 1,077,601
Sales taxes payable 16,546,408 1,993,544 19,219,699 2,315,626
----------- ----------- ----------- -----------
Total current liabilities 529,844,357 63,836,669 477,075,457 57,478,972
----------- ----------- ----------- -----------
Long-term liabilities:
Bank borrowings 10,000,000 1,204,819 10,000,000 1,204,819
----------- ----------- ----------- -----------
Total long-term liabilities 10,000,000 1,204,819 10,000,000 1,204,819
----------- ----------- ----------- -----------
Minority interests (Note 6) 70,736,921 8,522,521 72,117,416 8,688,845
----------- ----------- ----------- -----------
Shareholders' advances and shareholders' equity:
Advances from shareholders (Note 3) 14,687,680 1,769,600 36,719,200 4,424,000
----------- ----------- ----------- -----------
Common stock (Note 5)
-Class A, US$0.0001 par value,
90,000,000 shares authorized,
5,010,013 shares outstanding 4,273 515 4,273 515
-Class B, US$0.0001 par value,
10,000,000 shares authorized,
3,000,000 shares outstanding 2,559 308 2,559 308
Additional paid-in capital 107,361,842 12,935,162 107,187,393 12,914,144
General reserve and enterprise
development funds 14,074,390 1,695,710 14,074,390 1,695,710
Retained earnings 110,041,374 13,257,997 105,286,588 12,685,131
----------- ----------- ----------- -----------
Total shareholders' equity 231,484,438 27,889,692 226,555,203 27,295,808
----------- ----------- ----------- -----------
Total shareholders' advances and
shareholders' equity 246,172,118 29,659,292 263,274,403 31,719,808
----------- ----------- ----------- -----------
Total liabilities, shareholders'
advances and shareholders'
equity 856,753,396 103,223,301 822,467,276 99,092,444
=========== =========== =========== ===========
</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, 2000 March 31, 1999
--------------------------- -------------------
RMB USD RMB
------------ ------------ -------------------
<S> <C> <C> <C>
Sales, including sales to related
companies of RMB nil and RMB
nil for the three months
ended March 31, 2000 and 1999,
respectively 303,222,003 36,532,771 284,845,330
Sales taxes (6,243,169) (752,189) (5,232,782)
------------ ----------- ------------
Net sales 296,978,834 35,780,582 279,612,548
Cost of sales, including inventory
purchased from related companies of
RMB 142,444,622 and RMB 171,637,862
for the three months ended March 31,
2000 and 1999, respectively; and
royalty fee paid to a related
company of RMB 1,523,708 and
RMB 1,810,585 for the three months
ended March 31, 2000 and 1999,
respectively (230,172,128) (27,731,581) (218,517,477)
------------ ----------- ------------
Gross profit 66,806,706 8,049,001 61,095,071
Selling, general and administrative
expenses, including management
fee paid to a related company of
RMB nil and RMB nil for the
three months ended March 31, 2000
and 1999, respectively (66,855,710) (8,054,905) (54,356,004)
Fair value of warrants, stock options
and common stock issued for services
rendered (Note 5) (174,449) (21,018) (174,452)
------------ ---------- ------------
Operating income (loss) (223,453) (26,922) 6,564,615
Foreign exchange losses - - -
Interest expense, including interest
paid to related companies of
RMB nil and RMB 355,068 for
the three months ended March 31,
2000 and 1999, respectively (3,033,469) (365,478) (3,161,273)
------------ ----------- ------------
Income (loss) before income taxes (3,256,922) (392,400) 3,403,342
Income taxes (1,639,738) (197,559) (2,537,829)
------------ ----------- ------------
</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, 2000 March 31, 1999
-------------------------- ------------------
RMB USD RMB
------------ ----------- ------------------
<S> <C> <C> <C>
Income (loss) before equity in earnings
of an associated company (4,896,660) (589,959) 865,513
Equity in earnings of an associated
company 9,618,430 1,158,847 9,684,548
------------ ----------- ------------
Income before minority interests 4,721,770 568,888 10,550,061
Minority interests 33,016 3,978 (3,060,230)
------------ ----------- ------------
Net income 4,754,786 572,866 7,489,831
============ =========== ============
Net income per common share (Note 1)
- Basic 0.59 0.07 0.94
============ =========== ============
- Diluted 0.59 0.07 0.94
============ =========== ============
Weighted average number of common
shares outstanding
- Basic 8,010,013 8,010,013 8,010,013
============ =========== ============
- Diluted 8,010,013 8,010,013 8,010,013
============ =========== ============
</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, 2000 March 31, 1999
-------------------------- ------------------
RMB USD RMB
------------ ----------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 4,754,786 572,866 7,489,831
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 174,449 21,018 174,452
Allowance for doubtful accounts 5,013,272 604,009 3,005,580
Depreciation and amortization 9,236,797 1,112,867 7,106,757
Minority interests (33,016) (3,978) 3,060,230
Equity in earnings of an associated company (9,618,430) (1,158,847) (9,684,548)
Changes in operating assets and liabilities:
(Increase) decrease in -
Accounts and bills receivable (56,797,065) (6,843,020) (21,249,534)
Inventories 17,918,475 2,158,852 (10,814,666)
Amounts due from related companies (3,039,447) (366,198) (4,999,821)
Prepayments, deposits and other receivables 4,909,760 591,537 13,447,004
Increase (decrease) in -
Accounts payable and accrued liabilities 44,769,171 5,393,876 36,032,376
Amount due to an associated company 6,356,357 765,826 (2,963,893)
Income taxes payable 1,639,738 197,559 2,537,829
Sales taxes payable (2,673,291) (322,083) (6,026,657)
----------- ---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 22,611,556 2,724,284 17,114,940
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (7,770,171) (936,165) (1,843,227)
----------- ---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (7,770,171) (936,165) (1,843,227)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
New bank borrowings 5,969,150 719,175 6,000,000
Repayment of advances from shareholders (22,031,520) (2,654,400) -
Increase (decrease) in amounts due to related
companies (2,623,557) (316,092) 14,632,129
Repayment of capital lease obligations (668,668) (80,562) (1,322,656)
Payment of cash dividend to minority interests (11,000,000) (1,325,302) (15,638,685)
----------- ---------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (30,354,595) (3,657,181) 3,670,788
----------- ---------- -----------
Net increase (decrease) in cash (15,513,210) (1,869,062) 18,942,501
Cash at beginning of period 106,052,616 12,777,424 86,508,742
----------- ---------- -----------
Cash at end of period 90,539,406 10,908,362 105,451,243
=========== ========== ===========
</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, 2000 AND 1999
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"). High Worth Holdings Ltd., a British Virgin Islands corporation
("Holdings"), is a holding company that was formed solely to effect the
acquisition of Zhaoqing Blue Ribbon High Worth Brewery, Ltd., a Sino-foreign
joint venture ("High Worth JV"), which was registered in the PRC on July 2,
1994, in which Guangdong Blue Ribbon Group Co. Ltd. ("Guangdong Blue Ribbon")
owns a 40% interest and Holdings owns a 60% interest.
High Worth JV holds certain sublicensing rights for Pabst Blue Ribbon beer and
also directly owns 100% of a Pabst Blue Ribbon brewing complex ("Zhaoqing
Brewery"), 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.
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 is RMB 51,221,258. High Worth JV's 15%
equity interest is consideration-free but entitled to share in the profits of
Sichuan High Worth Brewery. The Joint Venture Agreement and the relevant legal
documents have been approved by the local government authorities. Sichuan High
Worth Brewery is currently producing Pabst Blue Ribbon beer.
On October 18, 1999, Holdings, through its wholly-owned subsidiary incorporated
in the British Virgin Islands, March International Group Limited ("March
8
<PAGE>
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
International"), signed a formal Joint Venture Agreement with Jilin Province
Juetai City Brewery (40%) and Jilin Province Chuang Xiang Zhi Yie Ltd. (9%),
both of which are unaffiliated PRC companies, to form Jilin Lianli (CBR) Brewing
Company Ltd. ("Jilin Lianli Brewery"). The total registered and paid up capital
of Jilin Lianli Brewery is RMB 25,000,000. March International will contribute
one new packaging line and the right to use the "Lianli" beer trademark with a
total value of RMB 12,750,000 as capital, and will receive a 51% effective
interest in Jilin Lianli Brewery. The technical renovation of the existing
brewing equipment and the installation of the new packaging line were completed
in April 2000. The Joint Venture Agreement is subject to approval by the local
government, which is expected to be received when formal operations commence in
May 2000.
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, Zao Yang High Worth Brewery and
Jilin Lianli Brewery on a consolidated basis and Noble Brewery under the equity
method of accounting for investments. The consolidated financial statements
include the Marketing Company, as the Company has effective control of the
Marketing Company's board of directors. All material intercompany accounts and
transactions are eliminated on consolidation. Although Sichuan High Worth
Brewery is currently producing Pabst Blue Ribbon beer, the operating results of
Sichuan High Worth Brewery are not included in the Company's consolidated
financial statements, except for any dividend income that the Company receives.
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, 1999 and March 31, 2000. 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, 2000.
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.
9
<PAGE>
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
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, 2000 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 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, 2000, the results of operations for the three months ended
March 31, 2000 and 1999, and the cash flows for the three months ended March 31,
2000 and 1999. The consolidated balance sheet as of December 31, 1999 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,
1999, 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, 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 ended March 31, 2000 are not
necessary indicative of the results of operations to be expected for the full
fiscal year ending December 31, 2000.
OTHER COMPREHENSIVE INCOME - the Company has no items of other comprehensive
income. Accordingly, a statement of comprehensive income is not presented.
EARNINGS PER SHARE - Basic earnings per share excludes the dilutive effects of
options and convertible securities, if any, and is computed by dividing net
income (loss) available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed assuming the exercise or conversion of common equivalent shares, if
dilutive, consisting of unissued shares pursuant to stock options, warrants and
debt instruments.
10
<PAGE>
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
At March 31, 2000, potentially dilutive securities representing 238,000 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 ended March 31, 2000) to purchase
238,000 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 2000 since the exercise prices exceeded the average fair
market value of the common stock.
2. INVENTORIES
Inventories consisted of the following at March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
----------------------- -----------------------
RMB USD RMB USD
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Raw materials 29,770,525 3,586,810 27,586,428 3,323,666
Work in progress 9,631,829 1,160,461 8,972,212 1,080,989
Finished goods 15,921,119 1,918,208 36,683,308 4,419,676
---------- --------- ---------- ----------
55,323,473 6,665,479 73,241,948 8,824,331
========== ========= ========== ==========
</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 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 advance 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 advance were also
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. In March 2000, Holdings partially repaid
approximately 30% of the advances from shareholders, amounting to US$2,654,400.
As of March 31, 2000, the remaining advances from such shareholders, West Coast
Star Enterprises Ltd., Top Link Development Limited (assigned by Mapesbury
Limited in February 1998), and Redcliffe
11
<PAGE>
3. ADVANCES FROM SHAREHOLDERS (continued)
Holdings Ltd. were approximately US$1,061,760, US$353,920 and US$353,920,
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 unaudited statements of
operations of Noble Brewery for the three months ended March 31, 2000 and 1999
are as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------------ ------------------
RMB USD RMB
----------- ---------- ------------------
<S> <C> <C> <C>
Net sales 134,027,511 16,147,893 154,165,432
=========== ========== ===========
Net income 23,421,076 2,821,816 26,418,505
=========== ========== ===========
The Company's share
of net income after
adjustment of unrealized
intercompany profit
and other intercompany
adjustments 9,618,430 1,158,847 9,684,548
=========== ========== ===========
</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
12
<PAGE>
5. SHAREHOLDERS' EQUITY (continued)
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
vested in varying amounts through April 1, 2000. The stock options expire on
dates ranging from December 31, 2001 through December 31, 2005. In 1999, options
to purchase 42,000 shares of Class A Common Stock were cancelled when two
employees terminated their services with the Company.
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 174,452 of compensation expense during the three months ended
March 31, 2000 and 1999, respectively.
6. DIVIDEND TO MINORITY INTERESTS
On November 23, 1998 and July 28, 1999, the Board of Directors of High Worth JV
declared separate dividend distributions of RMB 51,596,713. The minority
interest's 40% portion of the dividend is recorded as a liability at the
declaration date and is included in amounts due to related companies. The
dividends were distributed by installments in order to avoid any disruption to
the normal operating cash flow of High Worth JV. During the three months ended
March 31, 1999, High Worth JV paid aggregate dividends to Guangdong Blue Ribbon
of RMB 15,638,685.
On March 20, 2000, the Board of Directors of High Worth JV declared the fourth
dividend distribution entitling Holdings to approximately RMB 28,511,267. The
minority interest's 40% portion of the dividend is recorded as a liability at
the declaration date and is included in amounts due to related companies. The
dividend will be distributed by installments in order to avoid any disruption to
the normal operating cash flow of High Worth JV. During the three months ended
March 31, 2000, partial dividends of RMB 11,000,000 were distributed to
Guangdong Blue Ribbon.
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. The loan was unsecured, with interest at 7.5% per annum, and was
fully repaid during the three months ended September 30, 1999.
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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 quarterly period ended March 31,
2000 contains "forward-looking" statements within the meaning of the Federal
securities laws. These forward-looking statements include, among others,
statements concerning the Company 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 March 31, 2000 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:
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 is RMB 51,221,258. High Worth JV's
15% equity interest is consideration-free but entitled to share in the profits
of Sichuan High Worth Brewery. The Joint Venture Agreement and the relevant
legal documents have been approved by the local government authorities. Sichuan
High Worth Brewery is currently producing Pabst Blue Ribbon beer.
On October 18, 1999, Holdings, through its wholly-owned subsidiary
incorporated in the British Virgin Islands, March International Group Limited
("March International"), signed a formal Joint Venture Agreement with Jilin
Province Juetai City Brewery (40%) and Jilin Province Chuang Xiang Zhi Yie Ltd.
(9%), both of which are unaffiliated PRC companies, to form Jilin Lianli (CBR)
Brewing Company Ltd. ("Jilin Lianli Brewery"). The total registered and paid up
capital of Jilin Lianli Brewery is RMB 25,000,000. March International will
contribute one new packaging line and the right to use the "Lianli" beer
trademark with a total value of RMB 12,750,000 as capital, and will receive a
51% effective interest in Jilin Lianli Brewery. The technical renovation of the
existing brewing equipment and the installation of the new packaging line were
completed in April 2000. The Joint Venture Agreement is subject to approval by
the local government, which is expected to be received when formal operations
commence in May 2000.
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
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Pabst Brewing Company the exclusive rights to brew and distribute Pabst Blue
Ribbon beer throughout China for a period of 30 years from 2003 to 2033. Noble
China Inc. has issued subsequent press releases reiterating this information.
Although the Company to date 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, the Company believes that some form of
a license was granted to Noble China Inc. by Pabst Brewing Company. Management
has consulted with legal counsel regarding the legitimacy of the purported
license and the Company's potential responses. In addition, management has
consulted with Guangdong Blue Ribbon, the owner of the Pabst Blue Ribbon
trademark in China, regarding potential responses, and has met with
representatives of Noble China Inc. in an attempt to explore a potential
settlement.
Management of the Company has requested that Guangdong Blue Ribbon take
appropriate action to protect its rights and its sub-licensees' rights to
utilize the Pabst Blue Ribbon trademark in China. The Company has been advised
that Guangdong Blue Ribbon is still evaluating the situation and has not yet
determined how it will respond to this matter. Once Guangdong Blue Ribbon has
responded, 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.
However, if Noble China Inc. has obtained the exclusive right to brew and
distribute Pabst Blue Ribbon beer in China beginning in 2003, the inability of
the Company to obtain a sub-license from Noble China Inc. on acceptable terms
and conditions that would allow the Company to continue to produce and
distribute Pabst Blue Ribbon beer in China 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 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.
As a result of the strong competition from foreign premium beer and the
aggressive pricing strategies of some major local breweries, management
anticipates that the market demand for high priced foreign premium labels will
be stagnant as consumers shift to lower priced beers. The competition among
major Chinese breweries to maintain market share is also expected to place
continuing pressure on the Company's operating results during 2000. 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,
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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.
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. In addition, Zao Yang High Worth Brewery also produces
domestic brand beer under the brand name "Di Huang Quan" and sells directly to
the distributors in nearby regions.
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 is sold to the Marketing Company for resale.
Jilin Lianli Brewery: The original facilities of Jilin Lialin Brewery were
constructed between 1980 and 1984 with annual production capacity based on old
brewing technology of approximately 20,000 metric tons or 170,000 barrels of
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beer. Prior to the formation of the new joint venture company, the facilities
were used to produce domestic beer under the brand name "Tin Chi Quan".
Jilin Lianli Brewery is situated on a site containing approximately 330,000
square feet and is located within the vicinity of Juetai City, Jilin Province.
Jilin Lianli Brewery occupies the site pursuant to a certificate of land use
rights issued by the local government. The land use rights are part of the
assets acquired by Jilin Lianli Brewery from Jilin Province Juetai City Brewery.
March International is responsible for transferring the technical know-how
and production techniques to brew high quality beer products to Jilin Lianli
Brewery, as well as assisting in the renovation of existing equipment, in order
to convert the brewery into a modern brewing complex. The technical renovation
process to convert the old brewing facilities of Jilin Lianli brewery into a
modern brewing complex was completed in April 2000, and operations are expected
to commence in May 2000.
During February 1995, the Marketing Company was established to conduct the
distribution, marketing and promotion throughout China of the Pabst Blue Ribbon
beer produced by the Company's breweries. The Company owns a 42% net interest in
the Marketing Company. The consolidated financial statements include the results
of operations of the Marketing Company on a consolidated basis, as the Company
has effective control of the board of directors of the Marketing Company.
The Company conducts a substantial portion of its purchases through related
parties, and has additional significant continuing transactions with such
parties.
Consolidated Results of Operations:
Three Months Ended March 31, 2000 and 1999 -
Sales: During the three months ended March 31, 2000, net sales of beer
products increased by RMB 17,366,286 or 6.2% to RMB 296,978,834, as compared to
RMB 279,612,548 for the three months ended March 31, 1999. The Company sold
58,394 metric tons of beer to distributors in 2000 as compared to 52,563 metric
tons of beer in 1999, an increase of 11.1%. The increase in net sales of beer
products during the three months ended March 31, 2000 as compared to the three
months ended March 31, 1999 was primarily attributable to the increase in volume
of domestic brand beer sold as a result of the weakening in customer demand for
foreign branded premium beer in China.
Approximately 90.5% and 100% of total sales during the three months ended
March 31, 2000 and 1999, respectively were from the sale of products under the
Pabst Blue Ribbon brand name.
During the three months ended March 31, 2000 and 1999, Zhaoqing Brewery sold
15,058 metric tons and 18,324 metric tons of beer, respectively, to the
Marketing Company, almost all of which were Pabst Blue Ribbon beer. Total beer
sold by Zhaoqing Brewery to the Marketing Company decreased by 3,266 metric tons
or 17.8% from 1999 to 2000.
During the three months ended March 31, 2000 and 1999, Sichuan Brewery sold
466 metric tons and 2,401 metric tons of beer, respectively, to the Marketing
Company, all of which were Pabst Blue Ribbon beer.
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During the three months ended March 31, 2000, Zao Yang High Worth Brewing
sold 4,546 metric tons of beer, of which 270 metric tons (5.9%) was Pabst Blue
Ribbon beer sold to the Marketing Company and 4,276 metric tons (94.1%) was
local brand beer sold directly to distributors.
During the three months ended March 31, 1999, Zao Yang High Worth Brewery
sold 3,291 metric tons of beer, of which 1,036 metric tons (31.5%) was Pabst
Blue Ribbon beer sold to the Marketing Company and 2,255 metric tons (68.5%) was
local brand beer sold directly to distributors.
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 1999 and 2000 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, 2000, total gross profit
was RMB 66,806,706 or 22.5% of total net sales, as compared to total gross
profit of RMB 61,095,071 or 21.8% of total net sales for the three months ended
March 31, 1999. Gross profit from beer sales increased by RMB 5,711,635 in 2000
as compared to 1999 as a result of the increase in the volume of beer sold.
The Company expects that it will experience pressure on its gross profit
margin in 2000 due to a continuing softening of consumer demand in China as a
result of increasing competition from foreign premium brand beers and other
major local brewers.
Selling, General and Administrative Expenses: For the three months ended
March 31, 2000, selling, general and administrative expenses were RMB 66,855,710
or 22.5% of net sales, consisting of selling expenses of RMB 45,807,801 and
general and administrative expenses of RMB 21,047,909. Net of an allowance for
doubtful accounts of RMB 5,013,272 for the three months ended March 31, 2000,
general and administrative expenses were RMB 16,034,637.
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.
Selling expenses include costs relating to the advertising, promotion,
marketing and distribution of Pabst Blue Ribbon beer in China. Selling expenses
increased by RMB 10,239,020 or 28.8% in 2000 as compared to 1999, and as a
percent of net sales, to 15.4% in 2000 from 12.7% in 1999. Selling expenses
increased in 2000 as compared to 1999, both on an absolute basis and as a
percentage of sales, as a result of the Company continuing its aggressive
advertising and promotional program to maintain and stimulate consumer demand in
order to maintain the market position of Pabst Blue Ribbon beer in China, and to
implement new advertising and promotional campaigns with respect to the local
brand name beers.
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
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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, 2000 and 1999, the Marketing Company incurred an operating loss
of RMB 12,429,650 and RMB 10,174,805, respectively, which reduced consolidated
operating income accordingly.
General and administrative expenses consist of the management office
operating costs of Zhaoqing Brewery, the Marketing Company, Zao Yang High
Worth Brewery and Jilin Lianli 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 increased by RMB 252,994
or 1.6% in 2000 as compared to 1999, and as a percentage of net sales, decreased
to 5.4% in 2000 from 5.6% in 1999.
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 vested 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 174,452 of
compensation expense during the three months ended March 31, 2000 and 1999,
respectively.
Operating Income (Loss): For the three months ended March 31, 2000, operating
loss was RMB 223,453 or 0.1% of net sales. For the three months ended March 31,
1999, operating income was RMB 6,564,615 or 2.3% of net sales. The decrease in
operating income is primarily attributable to the substantial increase in
selling, advertising and promotional expenses.
The Marketing Company purchases Pabst Blue Ribbon beer at mutually agreed
ex-factory prices, and is only allowed to mark-up the cost of Pabst Blue Ribbon
beer purchased in order to adequately cover its selling, advertising,
promotional, distribution and administrative expenses incurred in selling to
distributors. The Marketing Company incurred certain excessive selling and
advertising expenses for the three months ended March 31, 2000 and 1999 that
were not fully compensated for in the Marketing Company's intra-company pricing
structure, resulting in the Marketing Company incurring an operating loss of RMB
12,429,650 and RMB 10,174,805, respectively, which reduced consolidated
operating income accordingly.
Interest Expense: For the three months ended March 31, 2000, interest expense
decreased by RMB 127,804 or 4.0% to RMB 3,033,469, as compared to RMB 3,161,273
for the three months ended March 31, 1999. Interest expense decreased in 2000 as
compared to 1999 as a result of a slight decrease in the average interest rate
on bank borrowings.
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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 March 31, 2000,
income tax expense was RMB 1,639,738, as compared to RMB 2,537,829 for the three
months ended March 31, 1999.
Net Income: Net income decreased to RMB 4,754,786 for the three months ended
March 31, 2000, as compared to RMB 7,489,831 for the three months ended March
31, 1999.
Noble Brewery:
Three Months Ended March 31, 2000 and 1999 -
Sales: For the three months ended March 31, 2000 and 1999, net sales were RMB
134,027,511 and RMB 154,165,432, respectively.
During the three months ended March 31, 2000, Noble Brewery sold 29,813
metric tons of beer to the Marketing Company, as compared to 32,860 metric tons
of beer sold to the Marketing Company during the three months ended March 31,
1999. Total beer sold by Noble Brewery to the Marketing Company decreased by
3,047 metric tons or 9.3% in 2000 as compared 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 2000 had the effect of reducing Noble Brewery's beer sales in 2000.
Gross Profit: For the three months ended March 31, 2000 and 1999, gross
profit was RMB 46,923,298 or 35.0% of net sales and RMB 55,076,213 or 35.7% of
net sales, respectively. The decrease in gross profit in 2000 as compared to
1999 was a result of decrease in volume of beer sold.
Selling, General and Administrative Expenses: For the three months ended
March 31, 2000, selling, general and administrative expenses totalled RMB
14,921,324 or 11.1% of net sales, consisting of selling expenses of RMB 434,130
and general and administrative expenses of RMB 14,487,194. 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. Selling
expenses consist of warehousing, storage and freight costs.
Operating Income: For the three months ended March 31, 2000 and 1999,
operating income was RMB 32,001,974 or 23.9% of net sales and RMB 37,004,300 or
24.0% of net sales, respectively.
Income Taxes: The two year 100% income tax holiday and the three year 50%
income tax reduction period for Noble Brewery expired on December 31, 1995 and
December 31, 1998, respectively. Commencing in 1999, Noble Brewery is required
to pay local income tax at the full normal rate of 33% on its profit as
determined in accordance with PRC accounting standards applicable to Noble
Brewery. Accordingly, for the three months ended March 31, 2000, income tax
expense was RMB 8,580,898, as compared to RMB 10,825,388 for the three months
ended March 31, 1999.
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Net Income: Net income decreased to RMB 23,421,076 or 17.5% of net sales for
the three months ended March 31, 2000, as compared to RMB 26,418,505 or 17.1% of
net sales for the three months ended March 31, 1999.
Consolidated Financial Condition - March 31, 2000:
Liquidity and Capital Resources:
For the three months ended March 31, 2000, the Company's operations provided
cash resources of RMB 22,611,556, as compared to RMB 17,114,940 for the three
months ended March 31, 1999, primarily as a result of increased cash flows with
respect to inventories, accounts payable and accrued liabilities and amount due
to an associated company, offset in part by a decrease in cash flows from
accounts receivable. The Company's cash balance decreased by RMB 15,513,210 to
RMB 90,539,406 at March 31, 2000, as compared to RMB 106,052,616 at December 31,
1999. The Company's net working capital deficit increased by RMB 36,287,105 to
RMB 197,259,005 at March 31, 2000, as compared to RMB 160,971,900 at December
31, 1999, resulting in a current ratio at March 31, 2000 of 0.63:1, as compared
to 0.66:1 at December 31, 1999.
Net of an allowance for doubtful accounts of RMB 5,013,272 for the three
months ended March 31, 2000, accounts and bills receivable increased by RMB
56,797,065 or 74.6% to RMB 127,953,586 at March 31, 2000, as compared to RMB
76,169,793 at December 31, 1999, as a result of a considerable improvement in
sales during the three months ended March 31, 2000 and the timing of the Chinese
New Year, during which time a general slowdown in receipts and payments
typically occurs.
The Company's inventories decreased by RMB 17,918,475 or 24.5% to RMB
55,323,473 at March 31, 2000, as compared to RMB 73,241,948 at December 31,
1999. The decrease in inventories was mainly due to the Company's efforts to
reduce the level of finished goods.
The Company prepayments, deposits and other receivables decreased by RMB
4,909,760 or 13.6% to RMB 31,082,630 at March 31, 2000, as compared to RMB
35,992,390 at December 31, 1999. 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, 2000, the Company's secured bank
loans increased by RMB 5,969,150, reflecting total borrowings of RMB
131,359,938. 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
44,769,171 or 36.0% to RMB 169,011,719 at March 31, 2000, as compared to RMB
124,242,548 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 sales and production, and a slow-down in payments to suppliers.
The amount due to an associated company increased by RMB 6,356,357 or 3.3%
to RMB 201,250,884 at March 31, 2000, as compared to RMB 194,894,527 at December
31, 1999, 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
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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.
On March 20, 2000, the Board of Directors of High Worth JV declared the
fourth dividend distribution, entitling Holdings to approximately RMB
28,511,267. The dividend will be distributed by installments in order to avoid
any disruption to the normal operating cash flow of High Worth JV. During the
three months ended March 31, 2000, partial dividends of RMB 11,000,000 were
distributed to Guangdong Blue Ribbon.
For the three months ended March 31, 2000, additions to property, plant and
equipment aggregated RMB 7,770,171, which includes approximately RMB 4,000,000
for renovation and continuous improvement of Zao Yang High Worth Brewery. For
the three months ended March 31, 2000, additions to property, plant and
equipment also included approximately RMB 12,250,000 for property, plant and
equipment contributed by Jilin Province Juetai City Brewery and Jilin Province
Chuang Xiang Zhi Yie Ltd. to Lianli Brewery as their share of capital
contributions. The Company expects to incur additional capital expenditures of
approximately RMB 10,000,000 during the remainder of 2000 as its capital
contribution to Lianli Brewery. The Company anticipates that additional capital
expenditures in connection with the continuing improvement of production
facilities at Zhaoqing Brewery during the remainder of 2000 will be
approximately RMB 13,000,000, 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 2000 will be
approximately RMB 2,000,000, a portion of which is expected to be financed by
new bank borrowings.
In connection with the acquisition of High Worth JV, Oriental Win 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 advance 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 advance were also 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. In March 2000, Holdings partially repaid approximately 30% of the
advances from shareholders amounting to US$2,654,400. As of March 31, 2000, the
remaining advances from such shareholders, West Coast Star Enterprises Ltd., Top
Link Development Limited (assigned by Mapesbury Limited in February 1998), and
Redcliffe Holdings Ltd. were approximately US$ 1,061,760, US$ 353,920 and US$
353,920, 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.
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The Company expects that it will be able to fund expected capital
expenditures during the remainder of 2000 with respect to the continuing
development of its brewery operations through internal cash flow and external
resources.
The Company anticipates that its operating cash flow, combined with cash on
hand, bank lines of credit, and other external credit sources, and the credit
facilities provided by affiliates or related parties, are adequate to
satisfy the Company's working capital requirements for the remainder of 2000. 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 Asian financial crisis inhibited the growth and general level of activity
of the Chinese economy, thus reducing consumer demand in China, which 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 is settled in RMB. As of March 31, 2000, the Company's only
significant USD-denominated obligation, which would be more expensive to repay
in the event of a
23
<PAGE>
devaluation, is the advances from shareholders of USD 1,769,600, which are
repayable at the discretion of the Company.
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.
Although prior to 1994 the RMB experienced significant devaluation against
the USD, the RMB has remained fairly stable since then. The exchange rate was
approximately US$1.00 to RMB 8.3 during 1999 and the three months ended March
31, 2000.
Year 2000 Issue:
As of December 31, 1999, the Company had completed any required modifications
to its software to ensure that its software systems were Year 2000 compliant.
The cost of such modifications was not significant.
Since the date rollover on January 1, 2000, the Company has not experienced
any material adverse effect from the Year 2000 Issue. While the primary risk to
the Company with respect to the Year 2000 Issue continues to be the ability of
third parties to provide goods and services in a timely and accurate manner, the
Company has not experienced any such disruption to date. The Company does not
expect any remaining risks with respect to the Year 2000 Issue to have a
material adverse effect on the Company.
New Accounting Pronouncement:
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. The Company has not yet determined the impact, if any, on its
financial position, results of operations or cash flows.
24
<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.
25
<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, 2000: None.
26
<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 5, 2000 By: /s/ ZI-SHOU CHEN
-----------------------------
Zi-shou Chen
President and Director
(Duly authorized officer)
Date: May 5, 2000 By: /s/ GARY C.K. LUI
-----------------------------
Gary C.K. Lui
Chief Financial Officer
(Principal financial officer)
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31,
2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CURRENCY> CHINESE RENMINBI
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> .12048
<CASH> 90,539,406
<SECURITIES> 0
<RECEIVABLES> 127,953,586
<ALLOWANCES> 0
<INVENTORY> 55,323,473
<CURRENT-ASSETS> 332,585,352
<PP&E> 254,844,634
<DEPRECIATION> 0
<TOTAL-ASSETS> 856,753,396
<CURRENT-LIABILITIES> 529,844,357
<BONDS> 10,000,000
0
0
<COMMON> 6,832
<OTHER-SE> 231,477,606
<TOTAL-LIABILITY-AND-EQUITY> 856,753,396
<SALES> 296,978,834
<TOTAL-REVENUES> 296,978,834
<CGS> 230,172,128
<TOTAL-COSTS> 230,172,128
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,013,272
<INTEREST-EXPENSE> 3,033,469
<INCOME-PRETAX> (3,256,922)
<INCOME-TAX> 1,639,738
<INCOME-CONTINUING> 4,754,786
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,754,786
<EPS-BASIC> .59
<EPS-DILUTED> .59
</TABLE>
