-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, INymNdL3Q9Lmtn1RY8Ae9mDQR+ceQy1Sjobi+nEQ+xkGlmN7MbrH3Rsr3cwiJnhE QQoIL3RxMJEGMR+uX1D3OA== 0000898430-97-004750.txt : 19971114 0000898430-97-004750.hdr.sgml : 19971114 ACCESSION NUMBER: 0000898430-97-004750 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971112 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CBR BREWING CO INC CENTRAL INDEX KEY: 0000846012 STANDARD INDUSTRIAL CLASSIFICATION: MALT BEVERAGES [2082] IRS NUMBER: 650145422 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-26617-A FILM NUMBER: 97712605 BUSINESS ADDRESS: STREET 1: 433 N CAMDEN STREET 2: SUITE 1200 CITY: BEVERLY HILLS STATE: CA ZIP: 90210 BUSINESS PHONE: 3102745172 MAIL ADDRESS: STREET 1: 433 N CAMDEN STREET 2: SUITE 1200 CITY: BEVERLY HILLS STATE: CA ZIP: 90210 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL SWEEPSTAKES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: PETROVEST INC DATE OF NAME CHANGE: 19910925 FORMER COMPANY: FORMER CONFORMED NAME: VIDEO PROMOTIONS INC DATE OF NAME CHANGE: 19891213 10-Q 1 FORM 10-Q DATED 9/30/97 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1997 ------------------ [_] 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) 433 North Camden Drive, Suite 1200 Beverly Hills, California 90210 - ---------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 274-5172 -------------- 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, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ As of September 30, 1997, the Company had 5,000,013 shares of Class A Common Stock and 3,000,000 shares of Class B Common Stock issued and outstanding. Total sequentially numbered pages in this document: 26. 1 CBR BREWING COMPANY, INC. AND SUBSIDIARIES ------------------------------------------ INDEX ----- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets (unaudited) - September 30, 1997 and December 31, 1996 Condensed Consolidated Statements of Income (unaudited) - Three months and nine months ended September 30, 1997 and 1996 Condensed Consolidated Statements of Cash Flows (unaudited) - Nine months ended September 30, 1997 and 1996 Notes to Condensed Consolidated Financial Statements (unaudited) - Three months and nine months ended September 30, 1997 and 1996 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K SIGNATURES 2 CBR BREWING COMPANY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, 1997 December 31, 1996 ------------------------- ------------------------ RMB USD RMB USD ----------- ----------- ----------- ---------- ASSETS Current assets: Cash 73,212,975 8,799,636 39,709,594 4,772,788 Accounts and bills receivable, net Inventories 210,261,329 25,283,814 207,499,153 24,939,802 (Note 3) 98,518,366 11,841,150 87,549,836 10,522,817 Amounts due from related companies 27,847,494 3,347,055 33,089,333 3,977,083 Prepayments, deposits and other receivables 27,404,040 3,293,755 17,779,904 2,137,008 ----------- ----------- ----------- ---------- Total current assets 437,344,204 52,565,410 385,627,820 46,349,498 Interest in an associated company (Note 5) 218,764,729 26,293,838 216,984,220 26,079,834 Property, plant and equipment, net 208,636,289 25,076,477 223,890,108 26,909,869 ----------- ----------- ----------- ---------- Total assets 864,745,222 103,935,725 826,502,148 99,339,201 =========== =========== =========== ==========
(continued) 3 CBR BREWING COMPANY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
September 30, 1997 December 31, 1996 ------------------------- ------------------------ RMB USD RMB USD ----------- ----------- ----------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank borrowings 40,500,000 4,867,789 40,500,000 4,867,789 Capital lease obligations 7,461,958 896,870 9,034,742 1,085,907 Accounts payable and accrued liabilities 109,680,054 13,182,699 104,207,246 12,524,909 Customer deposits 4,400,000 528,846 59,003,600 7,091,779 Amounts due to related companies 33,705,824 4,051,182 21,357,655 2,567,026 Amounts due to an associated company 211,456,372 25,415,429 166,501,751 20,012,230 Income taxes payable 260,000 31,250 260,000 31,250 Sales taxes payable 57,558,998 6,918,149 63,904,235 7,680,798 Deferred tax liabilities 6,173,000 741,947 4,413,000 530,409 ----------- ----------- ----------- ---------- Total current liabilities 471,196,206 56,634,161 469,182,229 56,392,097 ----------- ----------- ----------- ---------- Long term liabilities: Capital lease obligations 10,108,179 1,214,925 15,862,549 1,906,556 ----------- ----------- ----------- ---------- Minority interests 137,200,018 16,490,388 120,073,940 14,431,964 ----------- ----------- ----------- ---------- Shareholders' advances and shareholders' equity: Advances from shareholders (Note 4) 73,794,948 8,869,585 73,794,948 8,869,585 ----------- ----------- ----------- ---------- Common stock -Class A, US$0.0001 par value, 90,000,000 shares authorized, 5,000,013 shares outstanding 4,265 513 4,265 513 -Class B, US$0.0001 par value, 10,000,000 shares authorized, 3,000,000 shares outstanding 2,559 307 2,559 307 Additional paid-in capital 104,030,194 12,503,629 104,030,194 12,503,629 General reserve and enterprise development funds 4,823,561 579,754 4,823,561 579,754 Retained earnings 63,585,292 7,642,463 38,727,903 4,654,796 ----------- ----------- ----------- ---------- Total shareholders' equity 172,445,871 20,726,666 147,588,482 17,738,999 ----------- ----------- ----------- ---------- Total shareholders' advances and shareholders' equity 246,240,819 29,596,251 221,383,430 26,608,584 ----------- ----------- ----------- ---------- Total liabilities and shareholders' equity 864,745,222 103,935,725 826,502,148 99,339,201 =========== =========== =========== ==========
The accompanying notes are an integral part of the condensed consolidated financial statements. 4 CBR BREWING COMPANY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Nine Months Ended Months Ended Three Months Ended Nine Months Ended September 30, September 30, September 30, 1997 September 30, 1997 1996 1996 ---------------------------------- ---------------------------- -------------- -------------- RMB USD RMB USD RMB RMB ------------------- ------------ ------------- ------------ -------------- -------------- Sales, including sales to related companies of RMB 2,174,552 and RMB 8,705,009 for the three months and nine months ended September 30, 1997, respectively, and nil and nil for the three months and nine months ended September 30, 1996, respectively 290,194,242 34,879,116 944,798,713 113,557,538 306,718,479 950,289,048 Sales taxes (5,206,871) (625,826) (17,770,567) (2,135,885) (5,812,980) (18,192,910) ------------------ ----------- ------------ ----------- ------------- ------------- Net sales 284,987,371 34,253,290 927,028,146 111,421,653 300,905,499 932,096,138 Cost of sales, including inventory purchased from related companies of RMB 147,129,339 and RMB 557,134,320 for the three months and nine months ended September 30, 1997, respectively, and RMB 202, 392,696 and RMB 605,179,405 for the three months and nine months ended September 30, 1996, respectively; and royalty fee paid to a related company of RMB 1,469,494 and RMB 5,653,213 for the three months and nine months ended September 30, 1997, respectively, and RMB 2,261,653 and RMB 6,395,214 for the three months and nine months ended September 30, 1996, respectively (242,867,703) (29,190,830) (766,623,846) (92,142,289) (255,919,347) (787,903,498) ------------- ------------ ------------- ------------ ------------- ------------ Gross profit 42,119,668 5,062,460 160,404,300 19,279,364 44,986,152 144,192,640 Selling, general and administrative expenses, including management fee paid to a related company of RMB 945,000 for the three months ended September 30, 1996 and 1997, respectively, and RMB 2,835,000 for the nine months ended September 30, 1996 and 1997, respectively (41,445,191) (4,981,393) (139,281,844) (16,740,606) (37,320,069) (119,096,142) ------------ ----------- ------------- ------------ ------------ ------------- Operating income 674,477 81,067 21,122,456 2,538,758 7,666,083 25,096,498 Foreign exchange gains (losses) (41,061) (4,935) (52,917) (6,360) 374,708 534,459 Other expense: Interest expense, including interest paid to related companies of RMB 1,873,841 and RMB 4,994,022 for the three months and nine months ended September 30, 1997, respectively, and RMB 2,778,908 and RMB 9,378,620 for the three months and nine months ended September 30, 1996, respectively (3,789,671) (455,489) (13,520,093) (1,625,011) (4,728,093) (17,553,745) ----------- ----------- ------------ ----------- ----------- ------------ Income (loss) before income taxes (3,156,255) (379,357) 7,549,446 907,387 3,312,698 8,077,212 Income taxes - - (1,760,000) (211,538) (473,587) (973,587) ----------- ----------- ------------ ----------- ----------- -----------
(continued) 5 CBR BREWING COMPANY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (CONTINUED)
Three Nine Months Ended Months Ended Three Months Ended Nine Months Ended September 30, September 30, September 30, 1997 September 30, 1997 1996 1996 ----------------------------- -------------------------- -------------- -------------- RMB USD RMB USD RMB RMB ------------- ------------- ------------ ----------- -------------- -------------- Income (loss) before equity in earnings of an associated company (3,156,255) (379,357) 5,789,446 695,849 2,839,111 7,103,625 Equity in earnings of an associated company 13,542,701 1,627,729 36,194,021 4,350,243 6,567,324 15,058,854 ---------- --------- ----------- ---------- ---------- ---------- Income before minority interests 10,386,446 1,248,372 41,983,467 5,046,092 9,406,435 22,162,479 Minority interests (4,433,459) (532,869) (17,126,078) (2,058,425) (5,417,228) (9,500,878) ---------- --------- ----------- ---------- ---------- ---------- Net income for the period 5,952,987 715,503 24,857,389 2,987,667 3,989,207 12,661,601 ========== ========= =========== ========== ========== ========== Net income per common share 0.74 0.09 3.11 0.37 0.50 1.58 ========== ========= =========== ========== ========== ========== Weighted average shares of common stock 8,000,013 8,000,013 8,000,013 8,000,013 8,000,013 8,000,013 ========== ========= =========== ========== ========== ==========
The accompanying notes are an integral part of the condensed consolidated financial statements. 6 CBR BREWING COMPANY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended Nine Months Ended September 30, 1997 September 30, 1996 -------------------------- ------------------- RMB USD RMB ------------ ----------- ------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income 24,857,389 2,987,667 12,661,601 Adjustments to reconcile net income to net cash provided by operating activities: Allowance for doubtful accounts 11,958,000 1,437,260 2,131,251 Depreciation and amortization 24,551,961 2,950,957 20,582,444 Foreign exchange (gains) losses 52,917 6,360 (534,459) Minority interests 17,126,078 2,058,425 9,500,878 Equity in earnings of an associated company (36,194,021) (4,350,243) (15,058,854) Dividend received from an associated company 34,413,512 4,136,239 39,797,878 Income taxes payable 1,760,000 211,538 3,910,971 ----------- ---------- ----------- 78,525,836 9,438,203 72,991,710 Changes in operating assets and liabilities: (Increase) decrease in - Accounts and bills receivable (14,820,176) (1,781,271) 1,388,756 Inventories (10,968,530) (1,318,333) (71,932,578) Amounts due from related companies 5,241,839 630,029 25,588,630 Prepayments, deposits and other receivables (9,624,136) (1,156,747) (1,402,199) Increase (decrease) in - Accounts payable and accrued liabilities 5,472,808 657,789 64,817,290 Customer deposits (54,603,600) (6,562,933) (54,768,813) Amount due to an associated company 44,954,621 5,403,200 10,332,572 Sales taxes payable (6,345,237) (762,649) 19,402,816 ----------- ---------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 37,833,425 4,547,288 66,418,184 ----------- ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (9,351,059) (1,123,926) (70,112,223) ----------- ---------- ----------- NET CASH USED IN INVESTING ACTIVITIES (9,351,059) (1,123,926) (70,112,223) ----------- ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: New bank borrowings - - 13,500,000 Increase in amounts due to related companies 12,348,169 1,484,155 7,539,127 Repayment of capital lease obligations (7,327,154) (880,669) (2,834,883) ----------- ---------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 5,021,015 603,486 18,204,244 ----------- ---------- ----------- Net increase in cash 33,503,381 4,026,848 14,510,205 Cash at beginning of period 39,709,594 4,772,788 57,448,305 ----------- ---------- ----------- Cash at end of period 73,212,975 8,799,636 71,958,510 =========== ========== ===========
The accompanying notes are an integral part of the condensed consolidated financial statements. 7 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION Organization - CBR Brewing Company, Inc. (the "Company," which term shall - ------------ include, when the context so requires, its subsidiaries and affiliates), formerly known as Natural Fuels, Inc. and National Sweepstakes, Inc., was originally incorporated as Video Promotions, Inc. on April 20, 1988 under the laws of the State of Florida. The Company adopted its current name on March 15, 1995. Reverse Acquisition - For a period of time prior to December 16, 1994, the - ------------------- business of the Company was devoted to seeking potential acquisition or merger opportunities. On December 16, 1994, the Company acquired all of the outstanding shares of capital stock of High Worth Holdings, Ltd., a British Virgin Islands corporation ("Holdings"), from Oriental Win Holdings Ltd. ("Oriental Win") and Goldchamp Ltd. ("Goldchamp") in exchange for 3,960,000 shares and 240,000 shares of the Company's Class A Common Stock issued to Oriental Win and Goldchamp, respectively, and 3,000,000 shares of the Company's Class B Common Stock issued to Oriental Win. Subsequently, on October 14, 1996, Oriental Win transferred the 3,960,000 shares of Class A Common Stock and the 3,000,000 shares of Class B Common Stock to its shareholders. As a result, West Coast Star Enterprises Ltd., as the 60% shareholder of Oriental Win, became the Company's controlling shareholder. The shares of Class B Common Stock carry two votes per share but are otherwise equivalent to the Class A Common Stock. In addition, the Company issued an aggregate of 600,000 shares of Class A Common Stock to various parties for consulting services in connection with the acquisition. The shares of Class A and Class B Common Stock issued in conjunction with the acquisition represent approximately 98.1% of the issued and outstanding shares of the Company, after all shares were issued and a 1-for-22 reverse stock split which was effected on November 22, 1994. 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"). 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. Holdings owns a 60% interest in High Worth JV, a Sino-foreign joint venture. High Worth JV holds certain licensing rights for Pabst Blue Ribbon beer and also directly owns 100% of a Pabst Blue Ribbon brewing complex ("Zhaoqing Brewery"). High Worth JV also owns 100% of a PRC holding company ("Zhaoqing Brewery HC"). Zhaoqing Brewery HC owns a 40% interest in Zhaoqing Blue Ribbon Brewery Noble Ltd., a Sino-foreign joint venture ("Noble Brewery"), which owns a second Pabst Blue Ribbon brewing complex that is also managed by Zhaoqing Brewery. Goldjinsheng Holdings Ltd., a wholly-owned subsidiary of Noble China Inc., an unaffiliated company, owns the other 60% interest in Noble Brewery. In addition, Zhaoqing Brewery HC owns a 70% interest in Zhaoqing Blue Ribbon Beer Marketing Company Limited, a PRC company (the "Marketing Company"), which was formed in February 1995 to conduct the distribution, marketing and promotion throughout China of the Pabst Blue Ribbon beer produced by Zhaoqing Brewery and Noble Brewery. Zhaoqing Brewery and Noble Brewery commenced the distribution of their production of Pabst Blue Ribbon beer through the Marketing Company during April 1995 and July 1995, respectively. 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. The Company owns effective interests of 60% in Zhaoqing Brewery and 24% in 8 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) Noble Brewery. The brewery operations are located in Zhaoqing City, which is situated approximately 100 miles from Hong Kong in the Guangdong Province of China. In January 1996, Zhaoqing Brewery HC transferred all of its operating assets and liabilities to High Worth JV pursuant to the original Joint Venture Agreement, the Asset Transfer Agreement signed in May 1994, and the relevant government regulations. Subject to the completion of certain legal procedures and documentation, the investments in Noble Brewery and the Marketing Company currently held by Zhaoqing Brewery HC will be transferred to High Worth JV. Zhaoqing Brewery HC is currently acting as the nominee for High Worth JV with respect to the investments in Noble Brewery and the Marketing Company. In the following text, "Zhaoqing Brewery" refers to the brewing complex, which was transferred to High Worth JV in January 1996, and "Zhaoqing Brewery HC" refers to the PRC entity that previously owned the brewing complex from November 1994 through December 1995. The Company conducts a substantial portion of its purchases through related parties, and has additional significant continuing transactions with such parties. Apart from the investment in High Worth JV which was partly financed by a loan from Oriental Win, Holdings has no other significant assets or liabilities. On October 31, 1994, prior to the reverse acquisition effective December 16, 1994, High Worth JV acquired a 100% interest in Zhaoqing Brewery HC, including Zhaoqing Brewery HC's 40% interest in Noble Brewery, for approximately USD20,000,000. Prior to the acquisition of Zhaoqing Brewery HC by High Worth JV, Zhaoqing Brewery HC was a wholly-owned subsidiary of Guangdong Blue Ribbon. For accounting purposes, the acquisition of Holdings by the Company has been treated as a recapitalization of Holdings with Holdings as the acquiror (reverse acquisition). Accordingly, the historical financial statements prior to December 16, 1994 are those of Holdings. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). The acquisition on October 31, 1994 of Zhaoqing Brewery HC, including Zhaoqing Brewery HC's 40% interest in Noble Brewery, has been accounted for under the purchase method of accounting. Since High Worth JV had no operations prior to this acquisition, consolidated financial statements have been prepared commencing October 31, 1994, to reflect the post-acquisition consolidated results of the operations of Zhaoqing Brewery and Noble Brewery attributable to the Company. The consolidated financial statements include the results of operations of Zhaoqing Brewery on a consolidated basis and Noble Brewery under the equity method of accounting for investments. All material intercompany accounts and transactions are eliminated on consolidation. The consolidated financial statements have been prepared on a going concern basis notwithstanding that the Company has a net current liability position at December 31, 1996 and September 30, 1997. 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 foreseeable future. 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 9 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) transaction are translated into RMB using the applicable rates of exchange, 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 have been credited or charged to the statements 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 United States dollars ("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 September 30, 1997, of USD1.00 = RMB8.32. No representation is made that the RMB amounts could have been, or could be, converted into USD at that rate or at any other rate. NOTE 2 -- COMMENTS The accompanying condensed consolidated financial statements are unaudited but, in the opinion of the management of the Company, contain all adjustments necessary to present fairly the financial position at September 30, 1997, the results of operations for the three months and nine months ended September 30, 1997 and 1996, and the cash flows for the nine months ended September 30, 1997 and 1996. These adjustments are of a normal recurring nature. The consolidated balance sheet as of December 31, 1996 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, 1996, as filed with the Securities and Exchange Commission. The results of operations for the three months and nine months ended September 30, 1997 are not necessary indicative of the results of operations to be expected for the full fiscal year ending December 31, 1997. The calculation of net income per share is based on the weighted average number of shares of Class A and Class B Common Stock issued and outstanding during each respective period. 10 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 NOTE 3 -- INVENTORIES Inventories consisted of the following at September 30, 1997 and December 31, 1996:
September 30, 1997 December 31, 1996 ------------------ ----------------- RMB USD RMB USD --- --- --- --- Raw materials 32,135,380 3,862,425 30,935,530 3,718,213 Work in progress 6,441,597 774,230 6,224,036 748,081 Finished goods 59,941,389 7,204,495 50,390,270 6,056,523 ---------- ---------- ---------- ---------- 98,518,366 11,841,150 87,549,836 10,522,817 ========== ========== ========== ==========
NOTE 4 -- ADVANCES FROM SHAREHOLDERS 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. - US$4,800,000; Mapesbury Limited - US$1,600,000; Redcliffe Holdings Ltd. - US$1,600,000). The advances bear no interest and are not repayable unless the Company obtains additional long term debt or equity financing. Repayments of the advances are at the discretion of the Company and the shareholders have no right to demand repayment. The Company has the option of offsetting or repaying the advance or part thereof by allotment of shares at par value in Holdings. As of September 30, 1997 and December 31, 1996, advances from such shareholders, West Coast Star Enterprises Ltd., Mapesbury Limited, Redcliffe Holdings Ltd., and Oriental Win were approximately RMB 39,900,000, RMB 13,300,000, RMB 13,300,000 and RMB 7,300,000, respectively. 11 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 NOTE 5 -- 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 as follows:
RMB ----------- Unlisted investment, at cost, October 31, 1994 209,361,595 The Company's share of earnings and dividends of an associated company: Earnings - Two months ended December 31, 1994 7,812,392 For the year ended December 31, 1995 34,213,058 For the year ended December 31, 1996 34,039,622 Three months ended March 31, 1997 15,029,824 Three months ended June 30, 1997 7,621,496 Three months ended September 30, 1997 13,542,701 Dividends - Declared and paid during 1995 (28,644,569) Declared and paid during 1996 (39,797,878) Declared and paid during 1997 (34,413,512) ----------- Unlisted investment, September 30, 1997 218,764,729 ===========
The condensed statements of operations of Noble Brewery for the three months and nine months ended September 30, 1997 and 1996 are as follows:
Three Nine Months Ended Months Ended Three Months Ended Nine Months Ended September 30, September 30, September 30, 1997 September 30, 1997 1996 1996 --------------------------- ------------------------ ------------- ------------- RMB USD RMB USD RMB RMB ------------ ------------ ----------- ---------- ------------- ------------- Net sales 131,444,252 15,798,588 498,849,616 59,957,886 166,186,130 508,780,266 ============ ============ =========== ========== ============= ============= Net income 21,263,958 2,555,764 83,875,570 10,081,198 20,730,412 55,898,583 ============ ============ =========== ========== ============= ============= The Company's share of net income after adjustment of unrealised intercompany profit 13,542,701 1,627,729 36,194,021 4,350,243 6,567,324 15,058,854 ============ ============ =========== ========== ============= =============
12 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 NOTE 6 -- PRODUCTION AND SALE OF PABST BLUE RIBBON BEER BY GUANGDONG BLUE RIBBON In late 1996, Guangdong Blue Ribbon established a wholly-owned subsidiary in Le Shang City, Sichuan Province, PRC, and started converting an existing brewery with an annual production capacity of 20,000 metric tons into a Pabst Blue Ribbon brewing complex ("Sichuan Brewery"). Production and sale of Pabst Blue Ribbon beer commenced in April 1997. To the extent that total market demand or sales for Pabst Blue Ribbon beer is less than the aggregate production capacity of Zhaoqing Brewery and Noble Brewery, the Company would face competition from Guangdong Blue Ribbon in China. As a result, the value of the Company's sublicense rights and its ability to expand in provinces outside of Guangdong could be affected if the Company does not establish additional affiliated breweries in the near future. The Company currently estimates that the Sichuan Brewery will produce from 16,000 to 18,000 metric tons of Pabst Blue Ribbon beer in 1997. In April 1997, in order to facilitate the efficient distribution and sale of Pabst Blue Ribbon beer in China, the Marketing Company and the Sichuan Brewery entered into a Memorandum of Understanding. Pursuant to the Memorandum of Understanding, Sichuan Brewery will sell all of its production of Pabst Blue Ribbon beer to the Marketing Company at mutually agreed ex-factory prices, and will grant the Marketing Company the right to regulate production to reflect market demand. Since the Marketing Company is only allowed to mark-up the cost of Pabst Blue Ribbon beer purchased in order to adequately cover the selling, advertising, promotional, distribution and administrative expenses incurred in selling to distributors, the sale of the Sichuan Brewery's production by the Marketing Company is not expected to have a material effect on consolidated results of operations. However, to the extent that the production of Pabst Blue Ribbon beer by the Sichuan Brewery causes a commensurate reduction in beer production and sales by Zhaoqing Brewery and/or Noble Brewery, the Company's consolidated results of operations could be adversely affected. The Company currently estimates that the Sichuan Brewery's 1997 production will represent approximately 6% of the Company's total 1997 sales volume. For the six month period from April 1, 1997 to September 30, 1997, the Marketing Company purchased an aggregate of 6,963 tons of Pabst Blue Ribbon beer produced by the Sichuan Brewery, which represents 3.9% of the Company's total sales volume for the nine months ended September 30, 1997. As the Company and Guangdong Blue Ribbon are the only entities that can produce Pabst Blue Ribbon beer in China outside of Guangdong Province, the Company is now seeking expansion and cooperation opportunities to extend its brewing operation into other provinces either with Guangdong Blue Ribbon or with other local strategic brewers. In early October 1997, the Sichuan Brewery advised the Marketing Company that it intends to commence selling its production of Pabst Blue Ribbon beer directly and that it will therefore cease selling its production of Pabst Blue Ribbon beer to the Marketing Company, effective immediately. The Company is currently in discussions with Guangdong Blue Ribbon and the Sichuan Brewery with regard to the termination of the Memorandum of Understanding between the Sichuan Brewery and the Marketing Company. The Company is also reviewing its legal options in the PRC with respect to the termination of the Memorandum of Understanding, but is currently unable to predict the ultimate resolution of this matter. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview: Effective December 16, 1994, the Company acquired Holdings, which, through its subsidiaries and affiliates, is engaged in the production and sale of Pabst Blue Ribbon beer in China. Holdings is a holding company which was formed solely to effect the acquisition of a 60% interest in High Worth JV. On October 31, 1994, High Worth JV acquired a 100% interest in Zhaoqing Brewery HC, including Zhaoqing Brewery HC's 40% interest in Noble Brewery. The acquisition of Zhaoqing Brewery HC, including Zhaoqing Brewery HC's 40% interest in Noble Brewery, has been accounted for under the purchase method of accounting. The consolidated financial statements include the results of operations of Zhaoqing Brewery on a consolidated basis and Noble Brewery under the equity method of accounting for investments, commencing October 31, 1994, to reflect the post-acquisition consolidated results of operations of Zhaoqing Brewery and Noble Brewery attributable to the Company. For accounting purposes, the acquisition of Holdings by the Company has been treated as a recapitalization of Holdings with Holdings as the acquiror (reverse acquisition). Accordingly, the historical financial statements prior to December 16, 1994 are those of Holdings. During February 1995, the Marketing Company was established to conduct the distribution, marketing and promotion of Pabst Blue Ribbon beer in China. Prior to November 1996, the Marketing Company also sold mineral water, non-carbonated soft drinks and red wine produced by Guangdong Blue Ribbon and bearing the Blue Ribbon label. Zhaoqing Brewery HC owns a 70% interest and Guangdong Blue Ribbon directly owns a 30% interest in the Marketing Company. 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. Zhaoqing Brewery and Noble Brewery commenced the distribution of their production of Pabst Blue Ribbon beer through the Marketing Company during April 1995 and July 1995, respectively. Commencing April 1997, the Marketing Company also began purchasing the Sichuan Brewery's production of Pabst Blue Ribbon beer for distribution. The consolidated financial statements include the results of operations of the Marketing Company on a consolidated basis. In January 1996, Zhaoqing Brewery HC transferred all of its operating assets and liabilities to High Worth JV pursuant to the original Joint Venture Agreement, the Asset Transfer Agreement signed in May 1994, and the relevant government regulations. Subject to the completion of certain legal procedures and documentation, the investments in Noble Brewery and the Marketing Company currently held by Zhaoqing Brewery HC will be transferred to High Worth JV. Zhaoqing Brewery HC is currently acting as the nominee for High Worth JV with respect to the investments in Noble Brewery and the Marketing Company. Upon the completion of the required procedures and documentation, all of the assets and liabilities formerly controlled by Zhaoqing Brewery will have been transferred to High Worth JV. During 1996, the operating activities of Zhaoqing Brewery were part of High Worth JV. The consensus and approval from the local tax authority was recently obtained. In the following text, "Zhaoqing Brewery" refers to the brewing complex, which was transferred to High Worth JV in January 1996, and "Zhaoqing Brewery HC" refers to the PRC entity that previously owned the brewing complex from November 1994 through December 1995. In late 1996, Guangdong Blue Ribbon established a wholly-owned subsidiary in Le Shang City, Sichuan Province, PRC, and started converting an existing brewery with an annual production capacity of 20,000 metric tons into a Pabst Blue Ribbon brewing complex ("Sichuan Brewery"). Production and sale of Pabst Blue Ribbon beer commenced in April 1997. 14 To the extent that total market demand or sales for Pabst Blue Ribbon beer is less than the aggregate production capacity of Zhaoqing Brewery and Noble Brewery, the Company would face competition from Guangdong Blue Ribbon in China. As a result, the value of the Company's sublicense rights and its ability to expand in provinces outside of Guangdong could be affected if the Company does not establish additional affiliated breweries in the near future. The Company currently estimates that the Sichuan Brewery will produce from 16,000 to 18,000 metric tons of Pabst Blue Ribbon beer in 1997. In April 1997, in order to facilitate the efficient distribution and sale of Pabst Blue Ribbon beer in China, the Marketing Company and the Sichuan Brewery entered into a Memorandum of Understanding. Pursuant to the Memorandum of Understanding, Sichuan Brewery will sell all of its production of Pabst Blue Ribbon beer to the Marketing Company at mutually agreed ex-factory prices, and will grant the Marketing Company the right to regulate production to reflect market demand. Since the Marketing Company is only allowed to mark-up the cost of Pabst Blue Ribbon beer purchased in order to adequately cover the selling, advertising, promotional, distribution and administrative expenses incurred in selling to distributors, the sale of the Sichuan Brewery's production by the Marketing Company is not expected to have a material effect on consolidated results of operations. However, to the extent that the production of Pabst Blue Ribbon beer by the Sichuan Brewery causes a commensurate reduction in beer production and sales by Zhaoqing Brewery and/or Noble Brewery, the Company's consolidated results of operations could be adversely affected. The Company currently estimates that the Sichuan Brewery's 1997 production will represent approximately 6% of the Company's total 1997 sales volume. For the six month period from April 1, 1997 to September 30, 1997, the Marketing Company purchased an aggregate of 6,963 tons of Pabst Blue Ribbon beer produced by the Sichuan Brewery, which represents 3.9% of the Company's total sales volume for the nine months ended September 30, 1997. As the Company and Guangdong Blue Ribbon are the only entities that can produce Pabst Blue Ribbon beer in China outside of Guangdong Province, the Company is now seeking expansion and cooperation opportunities to extend its brewing operation into other provinces either with Guangdong Blue Ribbon or with other local strategic brewers. In early October 1997, the Sichuan Brewery advised the Marketing Company that it intends to commence selling its production of Pabst Blue Ribbon beer directly and that it will therefore cease selling its production of Pabst Blue Ribbon beer to the Marketing Company, effective immediately. The Company is currently in discussions with Guangdong Blue Ribbon and the Sichuan Brewery with regard to the termination of the Memorandum of Understanding between the Sichuan Brewery and the Marketing Company. The Company is also reviewing its legal options in the PRC with respect to the termination of the Memorandum of Understanding, but is currently unable to predict the ultimate resolution of this matter. Business: Pabst Blue Ribbon beer is distributed and sold throughout China. In general, the beer market in China is still undergoing a rapid growth stage. There is a substantial difference in the price at which local or regional beer is 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. The beer industry in China is seasonal, with sales at their lowest in the months of October and November, and at their highest in the months of March through September. The Company's brewing facilities consist of the following: 15 Zhaoqing Brewery: The original facilities of Zhaoqing Brewery were ---------------- constructed between 1978 and 1980 with annual production capacity based on old brewing technology of 50,000 metric tons or 425,000 barrels of beer. With the implementation of the new brewing technology and the purchase of additional equipment, Zhaoqing Brewery reached an annual production capacity of 100,000 metric tons or 850,000 barrels by the end of 1995. Prior to March 1995, Zhaoqing Brewery had produced exclusively domestic brands of beer. In mid- 1994, with the assistance of Pabst Brewing Company, Zhaoqing Brewery commenced the conversion and refinement of its original facilities and adopted a new brewing technology in order to produce beer under the Pabst Blue Ribbon label. During March 1995, Zhaoqing Brewery discontinued production of all domestic brands and commenced exclusive production of Pabst Blue Ribbon beer on a full- scale basis. However, beer that does not meet Pabst Blue Ribbon quality standards is generally packaged and distributed as local brand beer. Noble Brewery: The original facilities of Noble Brewery were constructed ------------- between 1988 and 1990 with annual production capacity of approximately 80,000 metric tons or 680,000 barrels of beer. During July 1994, a second brewing facility was completed, which increased annual production capacity by an additional 120,000 metric tons or 1,020,000 barrels of beer. The second brewing facility commenced full-scale production during late 1994. Noble Brewery has produced Pabst Blue beer exclusively since it commenced operations. Consolidated Results of Operations: Three Months Ended September 30, 1997 and 1996 - Sales: For the three months ended September 30, 1997, net sales, all of which were conducted through the Marketing Company, were RMB 284,987,371, all of which were attributable to beer sales. During the three months ended September 30, 1997, the Marketing Company purchased RMB 139,504,962 and RMB 7,624,377 of beer products from Noble Brewery and Sichuan Brewery, respectively, for resale. Approximately 99.7% of total beer sales during the three months ended September 30, 1997 were provided from the sale and distribution of beer products under the Pabst Blue Ribbon brand name. For the three months ended September 30, 1996, net sales, all of which were conducted through the Marketing Company, were RMB 300,905,499, of which RMB 273,815,456 (91.0%) were attributable to beer sales and RMB 27,090,043 (9.0%) were attributable to the sales of mineral water, non- carbonated soft drinks and red wine. Net sales decreased by RMB 15,918,128 or 5.3% in 1997 as compared to 1996, as a result of the Company's elimination of the sales of mineral water, non- carbonated soft drinks and red wine in 1997. During 1996, the Company sold mineral water, non-carbonated soft drinks and red wine, which were purchased from Guangdong Blue Ribbon. The Company discontinued the sale of mineral water, non-carbonated soft drinks and red wine in late 1996. During the three months ended September 30, 1997, net sales of beer products increased by RMB 11,171,915 or 4.1% to RMB 284,987,371, as compared to RMB 273,815,456 for the three months ended September 30, 1996. The Company sold 58,400 metric tons of beer to distributors in 1997 as compared to 57,475 metric tons of beer in 1996. The increase in net sales of beer products in 1997 as compared to 1996 was primarily attributable to a shift in the sales mix to higher value products in 1997. During the three months ended September 30, 1997, Zhaoqing Brewery sold 15,505 metric tons of beer to the Marketing Company, of which 499 metric tons (3.2%) were local brand beer and 15,006 metric tons (96.8%) were Pabst Blue Ribbon beer. During the three months ended September 30, 1996, Zhaoqing Brewery sold 23,412 metric tons of beer to the Marketing Company, of which 504 metric tons (2.2%) were local brand beer and 22,908 metric tons (97.8%) were Pabst Blue Ribbon beer. Total beer sold by Zhaoqing Brewery to the Marketing Company decreased by 7,907 metric tons or 33.8% from 1996 to 1997. The Marketing Company regulates the production of Pabst Blue Ribbon beer by Zhaoqing Brewery and Noble Brewery in accordance with their respective production capacities in order to balance warehouse inventory levels and accommodate projected market demand. As a result of heavy rains in China during the 16 three months ended September 30, 1997, which caused widespread flooding and washed out many roads, the Company's ability to ship its beer products to distributors was significantly impaired during this period. In addition, the Company believes that the widespread flooding also caused a temporary decrease in consumer's discretionary income available to purchase the Company's products. As a result of these factors, total beer sold by Zhaoqing Brewery and Noble Brewery to the Marketing Company decreased during the three months ended September 30, 1997 as compared to the three months ended September 30, 1996, as the Company reduced production to correspond to lower demand in an effort to avoid excessive finished goods inventory. Gross Profit: For the three months ended September 30, 1997, total gross profit was RMB 42,119,668 or 14.8% of total net sales, all of which consisted of gross profit from beer sales. For the three months ended September 30, 1996, total gross profit was RMB 44,986,152 or 15.0% of total net sales, and consisted of gross profit from beer sales of RMB 43,076,486 or 15.7% of net sales of beer and gross profit from sales of mineral water, non-carbonated soft drinks and red wine of RMB 1,909,666 or 7.0% of net sales of mineral water, non-carbonated soft drinks and red wine. Gross margin from beer sales decreased to 14.8% in 1997 as compared to 15.7% in 1996 as a result of a shift in the sales mix to slightly lower margin products in 1997 in response to changing market conditions. The Company expects that it will experience pressure on its gross profit margin during 1997 as a result of the following factors: a general softening of consumer demand in China, caused in substantial part by the central government of China's regulatory controls and economic policies; increasing competition from foreign premium brand beers; an increase in raw material and packaging costs estimated to be in excess of 8% during 1997, which the Company may not be able to pass on to its customers in full; and potential competition from the Sichuan Brewery. Selling, General and Administrative Expenses: For the three months ended September 30, 1997, selling, general and administrative expenses were RMB 41,445,191 or 14.5% of net sales, consisting of selling expenses of RMB 29,985,061 and general and administrative expenses of RMB 11,460,130. The Company did not record an allowance for doubtful accounts for the three months ended September 30, 1997, as the Company recovered some previously written-off accounts receivable during the period. For the three months ended September 30, 1996, selling, general and administrative expenses were RMB 37,320,069 or 12.4% of net sales, consisting of selling expenses of RMB 29,142,163 and general and administrative expenses of RMB 8,177,906. Net of an allowance for doubtful accounts of RMB 801,251, general and administrative expenses were RMB 7,376,655. Selling expenses include costs relating to the advertising, promotion, marketing and distribution of Pabst Blue Ribbon beer in China. Selling expenses increased by RMB 842,898 or 2.9% in 1997 as compared to 1996, and as a percent of net sales, to 10.5% in 1997 from 9.7% in 1996. Selling expenses increased in 1997 as compared to 1996, both on an absolute basis and as a percentage of sales, as a result of the increase in selling expenses in 1997 related to beer products exceeding the reduction in selling expenses related to mineral water, non-carbonated soft drinks and red wine, which products the Company sold in 1996 but is not selling in 1997. During 1997, the Company implemented a substantially expanded advertising and promotional program to stimulate consumer demand and maintain the market position of Pabst Blue Ribbon beer in China, as a result of softening consumer demand and increasing competition from foreign premium brand beer. General and administrative expenses include the costs associated with the operation of the Company's executive offices, and the legal and accounting costs associated with the operation of a public company. Excluding the allowance for doubtful accounts, general and administrative expenses increased by RMB 4,083,475 or 55.4% in 1997 as compared to 1996, and as a percentage of net sales, to 4.0% in 1997 from 2.5% in 1996. General and administrative expenses increased in 1997 as compared in 1996 primarily as a result of increased personnel and personnel related costs. 17 Operating Income: For the three months ended September 30, 1997, operating income was RMB 674,477 or 0.2% of net sales. For the three months ended September 30, 1996, operating income was RMB 7,666,083 or 2.5% of net sales. The decrease in operating income is primarily attributable to the elimination of the sales of mineral water, non-carbonated soft drinks and red wine and increased selling, general and administrative expenses. The adjustment and regulation of production between Zhaoqing Brewery and Noble Brewery by the Marketing Company also contributed to the decrease in operating income. Interest Expense: For the three months ended September 30, 1997, interest expense decreased by RMB 938,422 or 19.8% to RMB 3,789,671, as compared to RMB 4,728,093 for the three months ended September 30, 1996. Interest expense decreased in 1997 as compared to 1996 as a result of the decrease in customer deposits and capital lease obligations. Income Taxes: For the three months ended September 30, 1997, no income tax expense was provided, as Zhaoqing Brewery's operations in China were subject to a 100% tax exemption in 1997. For the three months ended September 30, 1996, deferred income tax expense of RMB 473,587 was recorded. Net Income: Net income increased to RMB 5,952,987 (RMB 0.74 per share) for the three months ended September 30, 1997, as compared to RMB 3,989,207 (RMB 0.50 per share) for the three months ended September 30, 1996. Nine Months Ended September 30, 1997 and 1996 - Sales: For the nine months ended September 30, 1997, net sales, all of which were conducted through the Marketing Company, were RMB 927,028,146, all of which were attributable to beer sales. During the nine months ended September 30, 1997, the Marketing Company purchased RMB 529,114,902 and RMB 28,019,418 of beer products from Noble Brewery and Sichuan Brewery, respectively, for resale. Approximately 99.8% of total beer sales during the nine months ended September 30, 1997 were provided from the sale and distribution of beer products under the Pabst Blue Ribbon brand name. For the nine months ended September 30, 1996, net sales, all of which were conducted through the Marketing Company, were RMB 932,096,138, of which RMB 861,982,510 (92.5%) were attributable to beer sales and RMB 70,113,628 (7.5%) were attributable to the sales of mineral water, non- carbonated soft drinks and red wine. Net sales decreased by RMB 5,067,992 or 0.5% in 1997 as compared to 1996, as a result of the Company's elimination of the sales of mineral water, non- carbonated soft drinks and red wine in 1997. During 1996, the Company sold mineral water, non-carbonated soft drinks and red wine, which were purchased from Guangdong Blue Ribbon. The Company discontinued the sale of mineral water, non-carbonated soft drinks and red wine in late 1996. During the nine months ended September 30, 1997, net sales of beer products increased by RMB 65,045,636 or 7.5% to RMB 927,028,146, as compared to RMB 861,982,510 for the nine months ended September 30, 1996. The Company sold 181,973 metric tons of beer to distributors in 1997 as compared to 174,198 metric tons of beer in 1996. The increase in net sales of beer products in 1997 as compared to 1996 was primarily attributable to a shift in the sales mix to higher value products in 1997. During the nine months ended September 30, 1997, Zhaoqing Brewery sold 59,016 metric tons of beer to the Marketing Company, of which 1,156 metric tons (2.0%) were local brand beer and 57,860 metric tons (98.0%) were Pabst Blue Ribbon beer. During the nine months ended September 30, 1996, Zhaoqing Brewery sold 66,432 metric tons of beer to the Marketing Company, of which 1,526 metric tons (2.3%) were local brand beer and 64,906 metric tons (97.7%) were Pabst Blue Ribbon beer. Total beer sold by Zhaoqing Brewery to the Marketing Company decreased by 7,416 metric tons or 11.2% from 1996 to 1997. The Marketing Company regulates the production of Pabst Blue Ribbon beer by Zhaoqing Brewery and Noble Brewery in accordance with their respective production capacities in order to balance warehouse inventory levels and accommodate projected market demand. As a result of heavy rains in China during the 18 three months ended September 30, 1997, which caused widespread flooding and washed out many roads, the Company's ability to ship its beer products to distributors was significantly impaired during this period. In addition, the Company believes that the widespread flooding also caused a temporary decrease in consumer's discretionary income available to purchase the Company's products. As a result of these factors, total beer sold by Zhaoqing Brewery and Noble Brewery to the Marketing Company decreased during the nine months ended September 30, 1997 as compared to the nine months ended September 30, 1996, as the Company reduced production to correspond to lower demand in an effort to avoid excessive finished goods inventory. Gross Profit: For the nine months ended September 30, 1997, total gross profit was RMB 160,404,300 or 17.3% of total net sales, all of which consisted of gross profit from beer sales. For the nine months ended September 30, 1996, total gross profit was RMB 144,192,640 or 15.5% of total net sales, and consisted of gross profit from beer sales of RMB 139,020,181 or 16.1% of net sales of beer and gross profit from sales of mineral water, non-carbonated soft drinks and red wine of RMB 5,172,459 or 7.4% of net sales of mineral water, non- carbonated soft drinks and red wine. Gross margin from beer sales increased to 17.3% in 1997 as compared to 16.1% in 1996 as a result a shift in the sales mix to higher margin products in 1997 in response to changing market conditions. The Company expects that it will experience pressure on its gross profit margin during 1997 as a result of the following factors: a general softening of consumer demand in China, caused in substantial part by the central government of China's regulatory controls and economic policies; increasing competition from foreign premium brand beers; an expected increase in raw material and packaging costs in excess of 8% during 1997, which the Company may not be able to pass on to its customers in full; and potential competition from the Sichuan Brewery. Selling, General and Administrative Expenses: For the nine months ended September 30, 1997, selling, general and administrative expenses were RMB 139,281,844 or 15.0% of net sales, consisting of selling expenses of RMB 86,708,573 and general and administrative expenses of RMB 52,573,271. Net of an allowance for doubtful accounts of RMB 11,958,000, general and administrative expenses were RMB 40,615,271. For the nine months ended September 30, 1996, selling, general and administrative expenses were RMB 119,096,142 or 12.8% of net sales, consisting of selling expenses of RMB 84,158,443 and general and administrative expenses of RMB 34,937,699. Net of an allowance for doubtful accounts of RMB 2,131,251, general and administrative expenses were RMB 32,806,448. Selling expenses include costs relating to the advertising, promotion, marketing and distribution of Pabst Blue Ribbon beer in China. Selling expenses increased by RMB 2,550,130 or 3.0% in 1997 as compared to 1996, and increased as a percent of net sales, to 9.4% in 1997 from 9.0% in 1996. Selling expenses increased in 1997 as compared to 1996, both on an absolute basis and as a percentage of net sales, as a result of the increase in selling expenses in 1997 related to beer products exceeding the reduction in selling expenses related to mineral water, non-carbonated soft drinks and red wine, which products the Company sold in 1996 but is not selling in 1997. During 1997, the Company implemented a substantially expanded advertising and promotional program to stimulate consumer demand and maintain the market position of Pabst Blue Ribbon beer in China, as a result of softening consumer demand and increasing competition from foreign premium brand beer. General and administrative expenses include the costs associated with the operation of the Company's executive offices, and the legal and accounting costs associated with the operation of a public company. Excluding the allowance for doubtful accounts, general and administrative expenses increased by RMB 7,808,823 or 23.8% in 1997 as compared to 1996, and as a percentage of net sales, to 4.4% in 1997 from 3.5% in 1996. General and administrative expenses increased in 1997 as compared to 1996 primarily as a result of increased personnel and personnel related costs. 19 The allowance for doubtful accounts, which is calculated based primarily on the age of outstanding accounts receivable, increased to 1.3% of net sales in 1997 as compared to 0.2% in 1996, as a result of the increased age of accounts receivable outstanding in 1997. Accounts receivable are typically outstanding for a longer period of time in China than in the United States. Operating Income: For the nine months ended September 30, 1997, operating income was RMB 21,122,456 or 2.3% of net sales. For the nine months ended September 30, 1996, operating income was RMB 25,096,498 or 2.7% of net sales. The decrease in operating income is primarily attributable to the elimination of the sale of mineral water, non-carbonated soft drinks and red wine and increased selling, general and administrative expenses. The adjustment and regulation of production between the two breweries Zhaoqing Brewery and Noble Brewery by the Marketing Company also contributed to the decrease in operating income. Interest Expense: For the nine months ended September 30, 1997, interest expense decreased by RMB 4,033,652 or 23.0% to RMB 13,520,093, as compared to RMB 17,553,745 for the nine months ended September 30, 1996. Interest expense decreased in 1997 as compared to 1996 as a result of the decrease in customer deposits and capital lease obligations. Income Taxes: For the nine months ended September 30, 1997, income tax expense was RMB 1,760,000. Although Zhaoqing Brewery's operations in China were subject to a 100% tax exemption in 1997, deferred income taxes were recorded for the nine months ended September 30, 1997 primarily as a result of a potential United States Federal tax liability resulting from dividends paid by Noble Brewery to Zhaoqing Brewery HC. For the nine months ended September 30, 1996, deferred income tax expense of RMB 973,587 was recorded. Net Income: Net income increased to RMB 24,857,389 (RMB 3.11 per share) for the nine months ended September 30, 1997, as compared to RMB 12,661,601 (RMB 1.58 per share) for the nine months ended September 30, 1996. Noble Brewery: - ------------- Three Months Ended September 30, 1997 and 1996 - Sales: For the three months ended September 30, 1997 and 1996, net sales were RMB 131,444,252 and RMB 166,186,130, respectively. During the three months ended September 30, 1997, Noble Brewery sold 31,214 metric tons of beer to the Marketing Company, as compared to 42,587 metric tons of beer during the three months ended September 30, 1996. Total beer sold by Noble Brewery to the Marketing Company decreased by 11,373 metric tons or 26.7% from 1996 to 1997. Gross Profit: For the three months ended September 30, 1997 and 1996, gross profit was RMB 30,887,795 or 23.5% of net sales and RMB 36,443,517 or 21.9% of net sales, respectively. Selling, General and Administrative Expenses: For the three months ended September 30, 1997, selling, general and administrative expenses totalled RMB 5,706,367 or 4.3% of net sales, consisting of selling expenses of RMB 1,522,315 and general and administrative expenses of RMB 4,184,052. For the three months ended September 30, 1996, selling, general and administrative expenses totalled RMB 11,753,658 or 7.1% of net sales, consisting of selling expenses of RMB 5,290,666 and general and administrative expenses of RMB 6,462,992. Selling expenses consist of warehousing, storage and freight costs. 20 Operating Income: For the three months ended September 30, 1997 and 1996, operating income was RMB 25,181,428 or 19.2% of net sales and RMB 24,689,859 or 14.9% of net sales, respectively. Income Taxes: The two-year income tax holiday for Noble Brewery expired on December 31, 1995. Commencing in 1996, Noble Brewery is required to pay local income tax at half the normal rate of 33% on its profit as determined in accordance with PRC accounting standards applicable to Noble Brewery. Accordingly, RMB 3,565,846 has been recorded as income tax expense for the three months ended September 30, 1997. For the three months ended September 30, 1996, income tax expense of RMB 4,477,400 was recorded. Net Income: Net income increased to RMB 21,263,958 or 16.2% of net sales for the three months ended September 30, 1997, as compared to RMB 20,730,412 or 12.5% of net sales for the three months ended September 30, 1996. Nine Months Ended September 30, 1997 and 1996 - Sales: For the nine months ended September 30, 1997 and 1996, net sales were RMB 498,849,616 and RMB 508,780,266, respectively. During the nine months ended September 30, 1997, Noble Brewery sold 116,369 metric tons of beer to the Marketing Company, as compared to 121,633 metric tons of beer during the nine months ended September 30, 1996. Total beer sold by Noble Brewery to the Marketing Company decreased by 5,264 metric tons or 4.3% from 1996 to 1997. Gross Profit: For the nine months ended September 30, 1997 and 1996, gross profit was RMB 131,976,860 or 26.5% of net sales and RMB 106,325,230 or 20.9% of net sales, respectively. Selling, General and Administrative Expenses: For the nine months ended September 30, 1997, selling, general and administrative expenses totalled RMB 32,867,394 or 6.6% of net sales, consisting of selling expenses of RMB 3,255,002 and general and administrative expenses of RMB 29,612,392. For the nine months ended September 30, 1996, selling, general and administrative expenses totalled RMB 36,212,574 or 7.1% of net sales, consisting of selling expenses of RMB 12,535,121 and general and administrative expenses of RMB 23,677,453. Selling expenses consist of warehousing, storage and freight costs. Operating Income: For the nine months ended September 30, 1997 and 1996, operating income was RMB 99,109,466 or 19.9% of net sales and RMB 70,112,656 or 13.8% of net sales, respectively. Income Taxes: The two-year income tax holiday for Noble Brewery expired on December 31, 1995. Commencing in 1996, Noble Brewery is required to pay local income tax at half the normal rate of 33% on its profit as determined in accordance with PRC accounting standards applicable to Noble Brewery. Accordingly, RMB 15,099,465 has been recorded as income tax expense for the nine months ended September 30, 1997. For the nine months ended September 30, 1996, income tax expense of RMB 14,251,007 was recorded. Net Income: Net income increased to RMB 83,875,570 or 16.8% of net sales for the nine months ended September 30, 1997, as compared to RMB 55,898,583 or 11.0% of net sales for the nine months ended September 30, 1996. Consolidated Financial Condition - September 30, 1997: Liquidity and Capital Resources - For the nine months ended September 30, 1997, the Company's operations provided cash resources of RMB 37,833,425. The Company's cash balance increased by RMB 33,503,381 to RMB 73,212,975 at September 30, 1997, as compared to RMB 39,709,594 at December 31, 1996. The Company's net working capital deficit decreased by RMB 49,702,407 to RMB 33,852,002 at 21 September 30, 1997, as compared to RMB 83,554,409 at December 31, 1996, and the Company's current ratio at September 30, 1997 was 0.93:1, as compared to 0.82:1 at December 31, 1996. Net of an allowance for doubtful accounts of RMB 11,958,000 for the nine months ended September 30, 1997, accounts and bills receivable increased by RMB 2,862,176 or 1.4% to RMB 210,361,329 at September 30, 1997, as compared to RMB 207,499,153 at December 31, 1996, as a result of the seasonal nature of the business, and as a result of a change in credit policy by the Marketing Company implemented in 1997. Commencing January 1, 1997, as a result of more intensive competition from other premium band beers in China, the Marketing Company abolished the customer deposit requirement except for certain new customers which are required to make a cash deposit as security for their purchases. Customers with material transaction volume are required to issue bills of exchange from their respective banks to secure part or all of the payment on the due date. The Marketing Company has also provided extended credit terms to certain distributors that meet minimum financial criteria. At September 30, 1997, bills receivable had increased to RMB 62,689,815 or 29.8% of total accounts and bills receivable, as compared to RMB 38,653,659 or 18.6% of total accounts and bills receivable at December 31, 1996. The Company's inventories increased by RMB 10,968,530 or 12.5% to RMB 98,518,366 at September 30, 1997, as compared to RMB 87,549,836 at December 31, 1996, as a result of weaker than normal demand during the three months ended September 30, 1997 as previously discussed, and consisted primarily of an increase in finished goods. The Company's accounts payable and accrued liabilities increased by RMB 5,472,808 or 5.3% to RMB 109,680,054 at September 30, 1997, as compared to RMB 104,207,246 at December 31, 1996. The increase in accounts payable was mainly due to the increase in purchases of raw materials and packing materials for the peak season sales and production which runs from July to September, and the increase in accrued liabilities was a result of the expansion of production and operating activities. Customer deposits decreased by RMB 54,603,600 or 92.5% to RMB 4,400,000 at September 30, 1997, as compared to RMB 59,003,600 at December 31, 1996, as a result of the change in credit policy implemented by the Marketing Company in 1997 in response to the changing market environment. Since the Company pays interest on customer deposits, the decrease in customer deposits outstanding during 1997 has also contributed to a decrease in interest expenses in 1997 as compared to 1996. The amount due to an associated company increased by RMB 44,954,621 or 27.0% to RMB 211,456,372 at September 30, 1997, as compared to RMB 166,501,751 at December 31, 1996, and represents the amounts due to Noble Brewery from its sale of Pabst Blue Ribbon beer to the Marketing Company. Contributing to the increase were the seasonal nature of the business, and, 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. The amounts due to related companies increased by RMB 12,348,169 or 57.8% to RMB 33,705,824 at September 30, 1997, as compared to RMB 21,357,655 at December 31, 1996, and consist primarily of payable balances resulting from seasonal increases in purchases of packaging materials. For the nine months ended September 30, 1997, additions to property, plant and equipment aggregated RMB 9,351,059. The Company anticipates that additional capital expenditures in connection with the continuing expansion and improvement of production facilities at Zhaoqing Brewery during the remainder of 1997 will be approximately RMB 20,000,000, a portion of which is expected to be funded by lease financing. Guangdong Blue Ribbon had previously provided and committed to provide Zhaoqing Brewery with a line of credit, or to otherwise arrange financing, sufficient to finance the purchase of new machinery and 22 equipment in connection with the planned expansion of Zhaoqing Brewery to an annual production capacity of 100,000 metric tons of beer. Because of the previously described activities of Guangdong Blue Ribbon with respect to the Sichuan Brewery, and since the expansion of Zhaoqing Brewery was substantially completed during early part of 1997, the Company does not anticipate that Guangdong Blue Ribbon will provide or need to provide any additional funds or advances to finance the continuing development of Zhaoqing Brewery in the near future. The Company believes that it will be able to fund expected capital expenditures with respect to the continuing development and any future expansion of Zhaoqing Brewery through internal cash flow and external resources. During the nine months ended September 30, 1997, Noble Brewery declared and paid a dividend relating to earnings for the year ended December 31, 1996, resulting in a dividend to Zhaoqing Brewery HC of RMB 34,413,512. 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. - US$4,800,000; Mapesbury Limited -US$1,600,000; Redcliffe Holdings Ltd. -US$1,600,000). The advances bear no interest and are not repayable unless the Company obtains additional long term debt or equity financing. Repayments of the advances are at the discretion of the Company and the shareholders have no right to demand repayment. The Company has the option of offsetting or repaying the advance or part thereof by allotment of shares at par value in Holdings. As of September 30, 1997 and December 31, 1996, advances from such shareholders, West Coast Star Enterprises Ltd., Mapesbury Limited, Redcliffe Holdings Ltd. and Oriental Win were approximately RMB 39,900,000, RMB 13,300,000, RMB 13,300,000 and RMB 7,300,00, respectively. The Company anticipates that its operating cash flow, combined with cash on hand, bank lines of credit and other external credit sources, and the line of credit and other 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, 1997. In order to finance the continuing capital requirements of the Company subsequent to the completion of the Zhaoqing Brewery expansion, the Company has begun negotiations to arrange for long term bank or lease financing. In addition, any additional expansion of Zhaoqing Brewery or the accelerated development or acquisition of additional brewing facilities or other support facilities may require the use of debt or equity financings by the Company. Inflation and Currency Matters - In recent years, 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 available 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. Changes in the relative value of currencies occur periodically and may, in certain instances, materially affect the Company's results of operations. Zhaoqing Brewery and Noble Brewery conduct virtually all of their business in China and, accordingly, the sale of their products are settled primarily in RMB. As a result, devaluation of the RMB against the USD would adversely affect their financial performance when measured in USD, and could have material adverse effects upon the results of operations and financial condition of the Company. In addition, a significant portion of revenues will need to be converted into USD on a continuing basis to meet foreign currency obligations. Although prior to 1994 the RMB experienced significant devaluation against the USD, the RMB has remained 23 fairly stable from 1994 to present. The unified exchange rate was US$1.00 to RMB8.65 at December 31, 1993, RMB8.45 at December 31, 1994, RMB8.32 at December 31, 1995, RMB 8.32 at December 31, 1996, and RMB 8.32 at September 30, 1997. 24 PART II. OTHER INFORMATION --------------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - 27 Financial Data Schedule (electronic filing only) (b) Reports on Form 8-K - Three Months Ended September 30, 1997: None. 25 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CBR BREWING COMPANY, INC. ------------------------- (Registrant) Date: November 10, 1997 By: /s/ ZI-SHOU CHEN ------------------ Zi-shou Chen President and Director (Duly authorized officer) Date: November 10, 1997 By: /s/ GARY C.K. LUI ------------------- Gary C.K. Lui Chief Financial Officer (Chief financial officer) 26 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997. 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 8,799,636 0 25,283,814 0 11,841,150 52,565,410 25,076,477 0 103,935,725 56,634,161 1,214,925 0 0 820 20,725,846 103,935,725 111,421,653 111,421,653 92,142,289 92,142,289 0 1,437,260 1,625,011 907,387 211,538 2,981,667 0 0 0 2,987,667 .37 0
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