<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 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 June 30, 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) - June 30, 2000 and
December 31, 1999
Consolidated Statements of Income (Unaudited) - Three Months
and Six Months Ended June 30, 2000 and 1999
Consolidated Statements of Cash Flows (Unaudited) - Six Months
Ended June 30, 2000 and 1999
Notes to Consolidated Financial Statements (Unaudited) -
Six Months Ended June 30, 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
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------------------ -------------------------
RMB USD RMB USD
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash 101,313,739 12,206,475 106,052,616 12,777,424
Accounts and bills receivable, net 173,847,846 20,945,523 76,169,793 9,177,084
Inventories (Note 2) 44,791,357 5,396,549 73,241,948 8,824,331
Amounts due from related companies 31,699,000 3,819,157 24,646,810 2,969,495
Prepayments, deposits and other
receivables 33,710,195 4,061,469 35,992,390 4,336,433
----------- ----------- ----------- -----------
Total current assets 385,362,137 46,429,173 316,103,557 38,084,767
Interest in an associated company
(Note 4) 260,282,682 31,359,359 251,642,290 30,318,348
Property, plant and equipment, net 263,536,374 31,751,370 243,971,176 29,394,117
Non-current assets 5,375,127 647,606 10,750,253 1,295,212
----------- ----------- ----------- -----------
Total assets 914,556,320 110,187,508 822,467,276 99,092,444
=========== =========== =========== ===========
</TABLE>
(continued)
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------------------- -------------------------
RMB USD RMB USD
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings 125,513,090 15,122,059 115,390,788 13,902,505
Capital lease obligations 2,179,243 262,559 2,847,911 343,122
Accounts payable and accrued
liabilities 193,205,949 23,277,825 124,242,548 14,968,983
Amounts due to related companies 9,292,687 1,119,601 11,535,893 1,389,867
Amount due to an associated company 226,268,421 27,261,256 194,894,527 23,481,268
Income taxes payable 11,900,422 1,433,786 8,944,091 1,077,601
Sales taxes payable 21,424,498 2,581,265 19,219,699 2,315,626
----------- ----------- ----------- -----------
Total current liabilities 589,784,310 71,058,351 477,075,457 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) 64,118,840 7,725,161 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 12,935,161 107,187,393 12,914,144
General reserve and enterprise
development funds 14,074,390 1,695,710 14,074,390 1,695,710
Retained earnings 114,522,426 13,797,883 105,286,588 12,685,131
----------- ----------- ----------- -----------
Total shareholders' equity 235,965,490 28,429,577 226,555,203 27,295,808
----------- ----------- ----------- -----------
Total shareholders' advances and
shareholders' equity 250,653,170 30,199,177 263,274,403 31,719,808
----------- ----------- ----------- -----------
Total liabilities, shareholders'
advances and shareholders'
equity 914,556,320 110,187,508 822,467,276 99,092,444
=========== =========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Three Months Ended Six Months Ended
June 30, 2000 June 30, 2000 June 30, 1999 June 30, 1999
--------------------------- --------------------------- ------------ ------------
RMB USD RMB USD RMB RMB
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales, inclcuding sales to related
companies of RMB nil and RMB nil
for the three months and six months
ended June 30, 2000, respectively,
and RMB nil and RMB nil for the
three months and six months ended
June 30, 1999, respectively 287,673,874 34,659,503 590,895,877 71,192,274 284,166,855 569,012,185
Sales taxes (6,847,002) (824,940) (13,090,171) (1,577,129) (5,919,229) (11,152,011)
----------- ---------- ----------- ---------- ----------- ------------
Net sales 280,826,872 33,834,563 577,805,706 69,615,145 278,247,626 557,860,174
Cost of sales, including inventory
purchased from related companies of
RMB 142,479,554 and RMB 284,924,176
for the three months and six months
ended June 30, 2000, respectively,
and RMB 160,162,622 and RMB
331,800,484 for the three months
and six months ended June 30, 1999,
respectively; and royalty fee paid
to a related company of RMB
3,182,161 and RMB 1,658,453 for the
three months and six months ended
June 30, 2000, respectively, and
RMB 1,966,066 and RMB 3,776,651 for
the three months and six months
ended June 30, 1999, respectively (217,266,072) (26,176,635) (447,438,200) (53,908,217) (217,770,944) (436,288,421)
----------- ---------- ----------- ---------- ----------- ------------
Gross profit 63,560,800 7,657,928 130,367,506 15,706,928 60,476,682 121,571,753
Selling, general and administrative
expenses, including management fee
paid to a related company of RMB
nil and RMB nil for the three
months and six months ended June
30, 2000, respectively, and RMB nil
and RMB nil for the three months
and six months ended June 30, 1999,
respectively (62,785,331) (7,564,498) (129,641,041) (15,619,403) (57,908,015) (112,264,019)
Fair value of warrants, stock options
and common stock issued for services
rendered (Note 5) - - (174,449) (21,018) (174,449) (348,901)
----------- ---------- ----------- ---------- ----------- ------------
Operating income 775,469 93,430 552,016 66,507 2,394,218 8,958,833
Foreign exchange losses - - - - - -
Other expense:
Interest expense, including
interest paid to related companies
of RMB nil and RMB nil for the
three months and six months ended
June 30, 2000, respectively, and
RMB 355,068 and RMB 710,136 for
the three months and six months
ended ended June 30, 1999,
respectively (2,899,406) (349,326) (5,932,875) (714,804) (2,328,241) (5,489,514)
----------- ---------- ----------- ---------- ----------- ------------
Income (loss) before income taxes (2,123,937) (255,896) (5,380,859) (648,297) 65,977 3,469,319
Income taxes (1,316,593) (158,626) (2,956,331) (356,184) (1,661,958) (4,199,787)
----------- ---------- ----------- ---------- ----------- ------------
</TABLE>
(continued)
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)(CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Three Months Ended Six Months Ended
June 30, 2000 June 30, 2000 June 30, 1999 June 30, 1999
---------------------- ------------------- ------------------ ----------------
RMB USD RMB USD RMB RMB
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Loss before equity in earnings
of an associated company (3,440,530) (414,522) (8,337,190) (1,004,481) (1,595,981) (730,468)
Equity in earnings of an associated
company 9,221,092 1,110,975 18,839,522 2,269,822 12,841,343 22,525,891
------------ ------------ ------------ ------------ ------------ ------------
Income before minority interests 5,780,562 696,453 10,502,332 1,265,341 11,245,362 21,795,423
Minority interests (1,299,510) (156,567) (1,266,494) (152,590) (3,535,370) (6,595,600)
----------- ------------ ------------ ------------ ------------ ------------
Net income for the period 4,481,052 539,886 9,235,838 1,112,751 7,709,992 15,199,823
=========== ============ ============ ============ ============ ============
Net income per common share (Note 1)
- Basic 0.56 0.07 1.15 0.14 0.96 1.90
=========== ============ ============ ============ ============ ============
- Diluted 0.56 0.07 1.15 0.14 0.96 1.90
=========== ============ ============ ============ ============ ============
Weighted average number of common
shares outstanding
- Basic 8,010,013 8,010,013 8,010,013 8,010,013 8,010,013 8,010,013
=========== ============ ============ ============ ============ ============
- Diluted 8,010,013 8,010,013 8,010,013 8,010,013 8,010,013 8,010,013
=========== ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
-------------------------- ------------------
RMB USD RMB
------------ ----------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 9,235,838 1,112,752 15,199,823
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 21,018 348,901
Allowance for doubtful accounts 10,465,094 1,260,855 6,105,580
Depreciation and amortization 15,350,068 1,849,406 26,175,521
Minority interests 1,266,494 152,590 6,595,600
Equity in earnings of an associated company (18,839,522) (2,269,822) (22,525,891)
Dividend received from an associated company 10,199,130 1,228,811 24,705,594
Changes in operating assets and liabilities:
(Increase) decrease in -
Accounts and bills receivable (108,143,147) (13,029,295) (27,751,646)
Inventories 28,450,591 3,427,782 (12,349,342)
Amounts due from related companies (7,052,190) (849,661) (4,833,494)
Prepayments, deposits and other receivables 2,282,195 274,963 29,236
Increase (decrease) in -
Accounts payable and accrued liabilities 68,963,401 8,308,843 33,896,528
Amount due to an associated company 31,373,894 3,779,987 18,259,641
Income taxes payable 2,956,331 356,184 4,199,786
Sales taxes payable 2,204,799 265,639 (5,495,048)
----------- ---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 48,887,425 5,890,052 62,560,789
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (19,797,700) (2,385,266) (3,195,383)
----------- ---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (19,797,700) (2,385,266) (3,195,383)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
New bank borrowings 10,122,302 1,219,554 -
Repayment of bank borrowings - - (7,450,000)
Repayment of advances from shareholders (22,031,520) (2,654,400) (13,548,505)
Increase (decrease) in amounts due to related
companies (2,243,206) (270,266) 11,128,493
Repayment of capital lease obligations (668,668) (80,562) (2,383,069)
Payment of cash dividend to minority interests (19,007,510) (2,290,061) (15,638,685)
----------- ---------- -----------
NET CASH USED IN FINANCING ACTIVITIES (33,828,602) (4,075,735) (27,891,766)
----------- ---------- -----------
Net increase (decrease) in cash (4,738,877) (570,949) 31,473,640
Cash at beginning of period 106,052,616 12,777,424 86,508,742
----------- ---------- -----------
Cash at end of period 101,313,739 12,206,475 117,982,382
=========== ========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 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
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 contributed 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 received a 51% effective interest in
Jilin Lianli Brewery. The technical renovation of the old brewing equipment and
the installation of the new packaging line were completed in April 2000. The
Joint Venture Agreement was approved by the local government, and formal
<PAGE>
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
operations were commenced 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 through its 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 June 30, 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.
The Company's share capital is denominated in United States dollars ("USD") and
the reporting currency is the RMB. For financial reporting purposes, the USD
share capital amounts have been translated into RMB at the applicable rates
prevailing on the transaction dates.
Translation of amounts from RMB into USD for the convenience of the reader has
been made at the rate of exchange as quoted by the People's Bank of China on
June 30, 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 June 30, 2000, the results of operations for the three months and
six months ended June 30, 2000 and 1999, and the cash flows for the six months
ended June 30, 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
<PAGE>
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
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 and six months ended June 30,
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.
At June 30, 2000, potentially dilutive securities representing 498,000 shares of
common stock were outstanding, consisting of stock options exercisable at
prices ranging from $3.87 to $4.26 per share, and from $0.72 to $0.79 per shares
(which were all in excess of average fair market value during the three months
and six months ended June 30, 2000) to purchase 238,000 shares and 260,000
shares of common stock, respectively (Note 5). The common shares issuable upon
exercise of the stock options were excluded from the calculation of diluted net
income per share for the three months and six months ended June 30, 2000 since
the exercise prices exceeded the average fair market value of the common stock
during such periods.
2. INVENTORIES
Inventories consisted of the following at June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
----------------------- -----------------------
RMB USD RMB USD
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Raw materials 24,103,010 2,903,977 27,586,428 3,323,666
Work in progress 7,798,185 939,540 8,972,212 1,080,989
Finished goods 12,890,162 1,553,032 36,683,308 4,419,676
---------- --------- ---------- ----------
44,791,357 5,396,549 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
<PAGE>
3. ADVANCES FROM SHAREHOLDERS (continued)
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 June 30, 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. 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 and six months ended June 30,
2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Three Months Ended Six Months Ended
June 30, 2000 June 30, 2000 June 30, 1999 June 30, 1999
------------------------- ------------------------- ------------------ ----------------
RMB USD RMB USD RMB RMB
----------- ----------- ----------- ----------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Net sales 130,056,395 15,669,445 264,083,906 31,817,338 148,610,108 302,775,540
=========== =========== =========== =========== =========== ===========
Net income 22,427,730 2,702,136 45,848,806 5,523,953 32,563,731 58,982,236
=========== =========== =========== =========== =========== ===========
The Company's
share of net
income after
adjustment of
unrealized
intercompany
profit and
other
intercompany
adjustments 9,221,092 1,110,975 18,839,522 2,269,822 12,841,343 22,525,891
=========== =========== =========== =========== =========== ===========
</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.
<PAGE>
5. SHAREHOLDERS' EQUITY (continued)
On January 2, 1998, options to purchase 210,000 shares of Class A Common Stock
at an exercise price of US$3.87 per share were granted to four directors and
five employees, and options to purchase 70,000 shares of Class A Common Stock at
an exercise price of US$4.26 per share were granted to two directors, each of
whom possesses indirectly more than 10% of the total combined voting power of
all classes of common stock of the Company. From 50% to 70% of such stock
options vested on April 1, 1998, and the remaining portion of the stock options
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.
On May 16, 2000, options to purchase 375,000 shares of Class A Common Stock at
an exercise price of US$0.72 per share were granted to four directors and five
employees, and options to purchase 145,000 shares of Class A Common Stock at an
exercise price of US$0.79 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. Such stock options vest 50% on July 1,
2000, 25% on July 1, 2001, and the remaining 25% on July 1, 2002. The stock
options expire on December 31, 2004.
All stock options were issued at not less than fair market value on the date of
issuance. The stock options 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
issued to non-employees (including non-employee directors in 1998) is calculated
according to the Black-Scholes pricing model and is amortized to expense over
the vesting period. As a result, the Company recognized RMB 474,760 and RMB
649,209 of compensation expense during the three months and six months ended
June 30, 2000, respectively, and during the three months and six months ended
June 30, 1999, the Company recognized RMB 174,449 and RMB 348,901 of
compensation expense, 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 six months ended
June 30, 1999, High Worth JV paid aggregate dividends to Guangdong Blue Ribbon
and Holdings of RMB 15,638,685 and RMB 19,499,530, respectively.
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 six months ended
June 30, 2000, partial dividends of RMB 19,007,510 and RMB 18,305,373 were
distributed to Guangdong Blue Ribbon and Holdings, respectively.
7. AMOUNTS DUE TO RELATED COMPANIES
During the three months and six months ended June 30, 1999, the Company borrowed
RMB 24,000,000 from Shenzhen Huaqiang Holdings Limited, the Company's major
shareholder. The loan was unsecured, with interest at 7.5% per annum, and was
fully repaid during the three months ended September 30, 1999.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Quarterly Report on Form 10-Q for the quarterly period ended June 30,
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 June 30, 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
contributed 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 received a 51%
effective interest in Jilin Lianli Brewery. The technical renovation of the old
brewing equipment and the installation of the new packaging line were completed
in April 2000. The Joint Venture Agreement was approved by the local government,
and formal operations were commenced 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
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.'s 1999 Annual Report confirmed that Noble China Inc. had entered into
a license agreement with Pabst Brewing Company in May 1999 to utilize the Pabst
Blue Ribbon trademarks in connection with the production, promotion,
distribution and sale of beer in China for 30 years commencing in November 2003.
Noble China Inc. paid Pabst Brewing Company US$5,000,000 for the right to use
<PAGE>
the Pabst Blue Ribbon trademarks and agreed to pay royalties based on gross
sales.
In addition, Noble China Inc.'s December 31, 1999 Annual Information Form
disclosed that under the existing License Agreement, Pabst Brewing Company has
the obligation to "negotiate friendly" the possible renewal of the existing
License Agreement on its expiration in November 2003. Noble China Inc. further
asserted that it assumed that obligation when it acquired the license rights to
the Pabst Blue Ribbon trademarks.
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, 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 such 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
attempting to expand distribution, but it is uncertain whether such initiatives
will be successful in the near-term. Accordingly, as a result of softening sales
and substantial marketing, advertising and promotional expenditures, the Company
expects a continuing deterioration in net income during the remainder of 2000 as
compared to 1999.
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-
<PAGE>
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
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
<PAGE>
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 formal operations were
commenced 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 Marketing Company through its board of directors.
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 June 30, 2000 and 1999 -
Sales: During the three months ended June 30, 2000, net sales of beer
products increased by RMB 2,579,246 or 0.9% to RMB 280,826,872, as compared to
RMB 278,247,626 for the three months ended June 30, 1999. The Company sold
56,625 metric tons of beer to distributors in 2000 as compared to 55,830 metric
tons of beer in 1999, an increase of 1.4%. The increase in net sales of beer
products during the three months ended June 30, 2000 as compared to the three
months ended June 30, 1999 was primarily attributable to the increase in the
volume of domestic brand beer sold, which was a result of the weakening in
customer demand for foreign branded premium beer in China.
Approximately 97.0% and 99.0% of total sales during the three months ended
June 30, 2000 and 1999, respectively, were from the sale of products under the
Pabst Blue Ribbon brand name.
During the three months ended June 30, 2000 and 1999, Zhaoqing Brewery
sold 17,369 metric tons and 16,670 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 increased by 699 metric tons
or 4.2% from 1999 to 2000.
During the three months ended June 30, 2000 and 1999, Sichuan Brewery sold
975 metric tons and 1,708 metric tons of beer, respectively, to the Marketing
Company, all of which were Pabst Blue Ribbon beer.
During the three months ended June 30, 2000, Zao Yang High Worth Brewing
sold 6,299 metric tons of beer, of which 683 metric tons (10.8%) were Pabst Blue
Ribbon beer sold to the Marketing Company and 5,616 metric tons (89.2%) were
local brand beer sold directly to distributors. During the three months ended
June 30, 1999, Zao Yang High Worth Brewery sold 4,143 metric tons of beer, of
which 867 metric tons (20.9%) were Pabst Blue Ribbon beer sold to the Marketing
Company and 3,276 metric tons (79.1%) were 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
<PAGE>
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 June 30, 2000, total gross profit
was RMB 63,560,800 or 22.6% of total net sales, as compared to total gross
profit of RMB 60,476,682 or 21.7% of total net sales for the three months ended
June 30, 1999. Gross profit from beer sales increased by RMB 3,084,118 in 2000
as compared to 1999 primarily as a result of the increase in gross profit
margin.
The Company expects that it will experience pressure on its gross profit
margin in 2000 due to a continuing softening of consumer demand for Pabst Blue
Ribbon beer 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
June 30, 2000, selling, general and administrative expenses were RMB 62,785,331
or 22.4% of net sales, consisting of selling expenses of RMB 40,903,353 and
general and administrative expenses of RMB 21,881,978. Net of an allowance for
doubtful accounts of RMB 5,451,822 for the three months ended June 30, 2000,
general and administrative expenses were RMB 16,430,156.
For the three months ended June 30, 1999, selling, general and
administrative expenses were RMB 57,908,015 or 20.8% of net sales, consisting of
selling expenses of RMB 38,526,006 and general and administrative expenses of
RMB 19,382,009. Net of an allowance for doubtful accounts of RMB 3,100,000 for
the three months ended June 30, 1999, general and administrative expenses were
RMB 16,282,009.
Selling expenses include costs relating to the advertising, promotion,
marketing and distribution of Pabst Blue Ribbon beer in China. Selling expenses
increased by RMB 2,377,347 or 6.2% in 2000 as compared to 1999, and as a percent
of net sales, to 14.6% in 2000 from 13.8% 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 the results of operations of such facilities are reflected in
the Company's operating income. Although the Marketing Company is budgeted
annually to operate at break-even levels, based on agreed upon ex-factory prices
that the Marketing Company pays to the breweries to purchase their production of
Pabst Blue Ribbon beer, actual profitability, particularly on an interim basis,
is subject to substantial variability. As a result of these factors, during the
three months ended June 30, 2000 and 1999, the Marketing Company incurred an
operating loss of RMB 5,831,907 and RMB 10,299,941, 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 slightly, by RMB 148,147 or 0.9% in 2000 as compared to 1999, but
remained constant as a percentage of net sales, at 5.9% in both 2000 and 1999.
On January 2, 1998, options to purchase 210,000 shares of Class A Common
<PAGE>
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.
On May 16, 2000, options to purchase 375,000 shares of Class A Common
Stock at an exercise price of US$0.72 per share were granted to four directors
and five employees, and options to purchase 145,000 shares of Class A Common
Stock at an exercise price of US$0.79 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. Such stock options vest 50%
on July 1, 2000, 25% on July 1, 2001, and the remaining 25% on July 1, 2002. The
stock options expire on December 31, 2004.
All stock options were issued at not less than fair market value on the
date of issuance. The stock options 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
issued to non-employees (including non-employee directors in 1998) is calculated
according to the Black-Scholes pricing model and amortized to expense over the
vesting period. As a result, the Company recognized RMB nil and RMB 174,449 of
compensation expense during the three months ended June 30, 2000 and 1999,
respectively.
Operating Income: For the three months ended June 30, 2000, operating
income was RMB 775,469 or 0.3% of net sales. For the three months ended June 30,
1999, operating income was RMB 2,394,218 or 0.9% of net sales. The decrease in
operating income is primarily attributable to the 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 June 30, 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
5,831,907 and RMB 10,299,941, respectively, which reduced consolidated operating
income accordingly.
Interest Expense: For the three months ended June 30, 2000, interest
expense increased by RMB 571,165 or 24.5% to RMB 2,899,406, as compared to RMB
2,328,241 for the three months ended June 30, 1999. Interest expense increased
in 2000 as compared to 1999 as a result of an increase in the average balance of
bank borrowings.
Income Taxes: The two year income tax holiday for Zhaoqing Brewery expired
on December 31, 1997. During the three year period from 1998 to 2000, Zhaoqing
Brewery is required to pay local income tax at half of the normal rate of 33% on
its profit as determined in accordance with PRC accounting standards applicable
to Zhaoqing Brewery. Accordingly, for the three months ended June 30, 2000,
income tax expense was RMB 1,316,593, as compared to RMB 1,661,958 for the three
months ended June 30, 1999.
Net Income: Net income decreased to RMB 4,481,052 for the three months
ended June 30, 2000, as compared to RMB 7,709,992 for the three months ended
March 31, 1999.
Six months Ended June 30, 2000 and 1999 -
<PAGE>
Sales: During the six months ended June 30, 2000, net sales of beer
products increased by RMB 19,945,532 or 3.6% to RMB 577,805,706, as compared to
RMB 557,860,174 for the six months ended June 30, 1999. The Company sold 115,019
metric tons of beer to distributors in 2000 as compared to 108,393 metric tons
of beer in 1999, an increase of 6.1%. The increase in net sales of beer products
during the six months ended June 30, 2000 as compared to the six months ended
June 30, 1999 was primarily attributable to the increase in the volume of
domestic brand beer sold, which was a result of the weakening in customer demand
for foreign branded premium beer in China.
Approximately 94.0% and 99.0% of total sales during the six months ended
June 30, 2000 and 1999, respectively, were from the sale of products under the
Pabst Blue Ribbon brand name.
During the six months ended June 30, 2000 and 1999, Zhaoqing Brewery sold
32,427 metric tons and 34,994 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 2,567 metric tons
or 7.3% from 1999 to 2000.
During the six months ended June 30, 2000 and 1999, Sichuan Brewery sold
1,441 metric tons and 4,109 metric tons of beer, respectively, to the Marketing
Company, all of which were Pabst Blue Ribbon beer.
During the six months ended June 30, 2000, Zao Yang High Worth Brewing
sold 10,845 metric tons of beer, of which 953 metric tons (8.8%) were Pabst Blue
Ribbon beer sold to the Marketing Company and 9,892 metric tons (91.2%) were
local brand beer sold directly to distributors.
During the six months ended June 30, 1999, Zao Yang High Worth Brewery
sold 7,434 metric tons of beer, of which 1,903 metric tons (25.6%) were Pabst
Blue Ribbon beer sold to the Marketing Company and 5,531 metric tons (74.4%)
were 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 six months ended June 30, 2000, total gross profit
was RMB 130,367,506 or 22.6% of total net sales, as compared to total gross
profit of RMB 121,571,753 or 21.8% of total net sales for the six months ended
June 30, 1999. Gross profit from beer sales increased by RMB 8,795,753 in 2000
as compared to 1999 primarily as a result of the increase in the gross profit
margin.
The Company expects that it will experience pressure on its gross profit
margin in 2000 due to a continuing softening of consumer demand for Pabst Blue
Ribbon beer 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 six months ended
June 30, 2000, selling, general and administrative expenses were RMB 129,641,041
or 22.4% of net sales, consisting of selling expenses of RMB 86,711,154 and
general and administrative expenses of RMB 42,929,887. Net of an allowance for
doubtful accounts of RMB 10,465,094 for the six months ended June 30, 2000,
general and administrative expenses were RMB 32,464,793.
For the six months ended June 30, 1999, selling, general and
administrative expenses were RMB 112,264,019 or 20.1% of net sales, consisting
of selling expenses of RMB 74,094,787 and general and administrative expenses of
RMB 38,169,232. Net of an allowance for doubtful accounts of RMB 6,105,580 for
the
<PAGE>
six months ended June 30, 1999, general and administrative expenses were RMB
32,063,652.
Selling expenses include costs relating to the advertising, promotion,
marketing and distribution of Pabst Blue Ribbon beer in China. Selling expenses
increased by RMB 12,616,367 or 17.0% in 2000 as compared to 1999, and as a
percent of net sales, to 15.0% in 2000 from 13.3% 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 the results of operations of such facilities are reflected in
the Company's operating income. Although the Marketing Company is budgeted
annually to operate at break-even levels, based on agreed upon ex-factory prices
that the Marketing Company pays to the breweries to purchase their production of
Pabst Blue Ribbon beer, actual profitability, particularly on an interim basis,
is subject to substantial variability. As a result of these factors, during the
six months ended June 30, 2000 and 1999, the Marketing Company incurred an
operating loss of RMB 18,261,557 and RMB 20,474,746, 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 slightly, by
RMB 401,141 or 1.3% in 2000 as compared to 1999, and decreased slightly as a
percentage of net sales, to 5.6% in 2000 from 5.7% 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.
On May 16, 2000, options to purchase 375,000 shares of Class A Common
Stock at an exercise price of US$0.72 per share were granted to four directors
and five employees, and options to purchase 145,000 shares of Class A Common
Stock at an exercise price of US$0.79 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. Such stock options vest 50%
on July 1, 2000, 25% on July 1, 2001, and the remaining 25% on July 1, 2002. The
stock options expire on December 31, 2004.
All stock options were issued at not less than fair market value on the
date of issuance. The stock options 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
issued to non-employees (including non-employee directors in 1998) is calculated
according to the Black-Scholes pricing model and amortized to expense over the
vesting period. As a result, the Company recognized RMB 174,449 and RMB 348,901
of compensation expense during the six months ended June 30, 2000 and 1999,
respectively.
<PAGE>
Operating Income: For the six months ended June 30, 2000, operating income
was RMB 552,016 or 0.1% of net sales. For the six months ended June 30, 1999,
operating income was RMB 8,958,833 or 1.6% 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 six months ended June 30, 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
18,261,557 and RMB 20,474,746, respectively, which reduced consolidated
operating income accordingly.
Interest Expense: For the six months ended June 30, 2000, interest expense
increased by RMB 443,361 or 8.1% to RMB 5,932,875, as compared to RMB 5,489,514
for the six months ended June 30, 1999. Interest expense increased in 2000 as
compared to 1999 as a result of an increase in the average balance of bank
borrowings.
Income Taxes: The two year income tax holiday for Zhaoqing Brewery expired
on December 31, 1997. During the three-year period from 1998 to 2000, Zhaoqing
Brewery is required to pay local income tax at half of the normal rate of 33% on
its profit as determined in accordance with PRC accounting standards applicable
to Zhaoqing Brewery. Accordingly, for the six months ended June 30, 2000, income
tax expense was RMB 2,956,331, as compared to RMB 4,199,787 for the six months
ended June 30, 1999.
Net Income: Net income decreased to RMB 9,235,838 for the six months ended
June 30, 2000, as compared to RMB 15,199,823 for the six months ended June 30,
1999.
Noble Brewery:
Three Months Ended June 30, 2000 and 1999 -
Sales: For the three months ended June 30, 2000 and 1999, net sales were
RMB 130,056,395 and RMB 148,610,108, respectively.
During the three months ended June 30, 2000, Noble Brewery sold 30,757
metric tons of beer to the Marketing Company, as compared to 34,083 metric tons
of beer sold to the Marketing Company during the three months ended June 30,
1999. Total beer sold by Noble Brewery to the Marketing Company decreased by
3,326 metric tons or 9.8% in 2000 as compared to 1999, primarily as a result of
the general softening of demand for Pabst Blue Ribbon beer 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 June 30, 2000 and 1999, gross
profit was RMB 40,858,943 or 31.4% of net sales and RMB 57,219,501 or 38.5% of
net sales, respectively. The decrease in gross profit in 2000 as compared to
1999 was a result of the decrease in the volume of beer sold.
Selling, General and Administrative Expenses: For the three months ended
June 30, 2000, selling, general and administrative expenses totaled RMB
10,214,668 or 7.9% of net sales, consisting of selling expenses of RMB 726,648
<PAGE>
and general and administrative expenses of RMB 9,488,020. For the three months
ended June 30, 1999, selling, general and administrative expenses totaled RMB
11,883,349 or 8.0% of net sales, consisting of selling expenses of RMB 1,843,417
and general and administrative expenses of RMB 10,039,932. Selling expenses
consist of warehousing, storage and freight costs.
Operating Income: For the three months ended June 30, 2000 and 1999,
operating income was RMB 30,644,275 or 23.6% of net sales and RMB 45,336,152 or
30.5% of net sales, respectively.
Income Taxes: The two year 100% income tax holiday and the three year 50%
income tax reduction period for Noble Brewery expired on December 31, 1995 and
December 31, 1998, respectively. Commencing in 1999, Noble Brewery is required
to pay local income tax at the full normal rate of 33% on its profit as
determined in accordance with PRC accounting standards applicable to Noble
Brewery. Accordingly, for the three months ended June 30, 2000, income tax
expense was RMB 8,216,545, as compared to RMB 12,772,421 for the three months
ended June 30, 1999.
Net Income: Net income decreased to RMB 22,427,730 or 17.2% of net sales
for the three months ended June 30, 2000, as compared to RMB 32,563,731 or 21.9%
of net sales for the three months ended June 30, 1999.
Six months Ended June 30, 2000 and 1999 -
Sales: For the six months ended June 30, 2000 and 1999, net sales were RMB
264,083,906 and RMB 302,775,540, respectively.
During the six months ended June 30, 2000, Noble Brewery sold 60,570
metric tons of beer to the Marketing Company, as compared to 66,943 metric tons
of beer sold to the Marketing Company during the six months ended June 30, 1999.
Total beer sold by Noble Brewery to the Marketing Company decreased by 6,373
metric tons or 9.5% in 2000 as compared to 1999, primarily as a result of the
general softening of demand for Pabst Blue Ribbon beer 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 six months ended June 30, 2000 and 1999, gross
profit was RMB 87,782,241 or 33.2% of net sales and RMB 112,295,714 or 37.1% of
net sales, respectively. The decrease in gross profit in 2000 as compared to
1999 was a result of the decrease in the volume of beer sold.
Selling, General and Administrative Expenses: For the six months ended
June 30, 2000, selling, general and administrative expenses totaled RMB
25,135,992 or 9.5% of net sales, consisting of selling expenses of RMB 1,160,778
and general and administrative expenses of RMB 23,975,214. For the six months
ended June 30, 1999, selling, general and administrative expenses totaled RMB
29,955,262 or 9.9% of net sales, consisting of selling expenses of RMB 5,951,208
and general and administrative expenses of RMB 24,004,054. Selling expenses
consist of warehousing, storage and freight costs.
Operating Income: For the six months ended June 30, 2000 and 1999,
operating income was RMB 62,646,249 or 23.7% of net sales and RMB 82,340,452 or
27.2% of net sales, respectively.
Income Taxes: The two year 100% income tax holiday and the three year 50%
income tax reduction period for Noble Brewery expired on December 31, 1995 and
December 31, 1998, respectively. Commencing in 1999, Noble Brewery is required
to pay local income tax at the full normal rate of 33% on its profit as
determined in accordance with PRC accounting standards applicable to Noble
Brewery. Accordingly, for the six months ended June 30, 2000, income tax
<PAGE>
expense was RMB 16,797,443, as compared to RMB 23,597,809 for the six months
ended June 30, 1999.
Net Income: Net income decreased to RMB 45,848,806 or 17.4% of net sales
for the six months ended June 30, 2000, as compared to RMB 58,982,236 or 19.5%
of net sales for the six months ended June 30, 1999.
Consolidated Financial Condition - June 30, 2000:
Liquidity and Capital Resources:
For the six months ended June 30, 2000, the Company's operations provided
cash resources of RMB 48,887,425, as compared to RMB 62,560,789 for the six
months ended June 30, 1999, primarily as a result of reduced cash flows from
accounts receivable, offset in part by an increase in cash flows from
inventories, accounts payable and accrued liabilities, and amount due to an
associated company. The increase in accounts receivable is primarily due to the
seasonal increase in sales during the month of June. The Company's cash balance
decreased by RMB 4,738,877 to RMB 101,313,739 at June 30, 2000, as compared to
RMB 106,052,616 at December 31, 1999. The Company's net working capital deficit
increased by RMB 43,450,273 to RMB 204,422,173 at June 30, 2000, as compared to
RMB 160,971,900 at December 31, 1999, resulting in a current ratio at June 30,
2000 of 0.65:1, as compared to 0.66:1 at December 31, 1999.
Net of an allowance for doubtful accounts of RMB 10,465,094 for the six
months ended June 30, 2000, accounts and bills receivable increased by RMB
108,143,147 or 142.0% to RMB 173,847,846 at June 30, 2000, as compared to RMB
76,169,793 at December 31, 1999, as a result of a seasonal increase in sales
during the three months ended June 30, 2000, and extended credit terms offered
to certain distributors.
The Company's inventories decreased by RMB 28,405,591 or 38.8% to RMB
44,791,537 at June 30, 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's accounts payable and accrued liabilities increased by RMB
68,963,401 or 55.5% to RMB 193,205,949 at June 30, 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 the seasonal increase in sales and production.
The amount due to an associated company increased by RMB 31,373,894 or
16.1% to RMB 226,268,421 at June 30, 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 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
six months ended June 30, 2000, partial dividends of RMB 19,007,510 and RMB
18,305,373 were distributed to Guangdong Blue Ribbon and Holdings, respectively.
For the six months ended June 30, 2000, additions to property, plant
and equipment aggregated RMB 19,797,700, which includes approximately RMB
6,700,000 for renovation and continuous improvement of Zao Yang High Worth
Brewery. For the six months ended June 30, 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
<PAGE>
Xiang Zhi Yie Ltd. to Lianli Brewery as their share of capital contributions.
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 8,000,000, 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 of Zao Yang High Worth Brewery 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.
During the six months ended June 30, 2000, the Company's secured bank
loans increased by RMB 10,122,302, reflecting total borrowings of RMB
135,513,090. 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.
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 June 30, 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.
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
<PAGE>
control inflation, which has resulted in the tightening of working capital to
Chinese business enterprises. The success of the Company depends in substantial
part on the continued growth and development of the Chinese economy.
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies. 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.
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 June 30, 2000, 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 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 for the three months and six
months ended June 30, 2000.
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, that the
adoption of SFAS No. 133 will have on its financial position, results of
operations or cash flows.
<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.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K -
Three Months Ended June 30, 2000: None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CBR BREWING COMPANY, INC.
-------------------------
(Registrant)
Date: August 8, 2000 By: /s/ ZI-SHOU CHEN
-----------------------------
Zi-shou Chen
President and Director
(Duly authorized officer)
Date: August 8, 2000 By: /s/ GARY C.K. LUI
-----------------------------
Gary C.K. Lui
Chief Financial Officer
(Principal financial officer)
