Xi’an Aleba Mineral Water

Company BusinessPlan
Table of Contents

1.0 Overall company plan .................................................................................................................1

1.1 Goals and targets ..................................................................................................................1
1.2 Summary of major initiatives...............................................................................................1
1.3 Background ..........................................................................................................................1
1.4 The Business System ...........................................................................................................2
1.5 Current position ...................................................................................................................3
1.6 Capability gaps.....................................................................................................................4
1.7 Initiatives to bridge gaps ......................................................................................................5
1.8 Schedule and milestones ......................................................................................................7
2.0 Sales plan .....................................................................................................................................10
2.1 Sales forecast ....................................................................................................................10
2.2 Current situation.................................................................................................................10
2.2.1 Revenue summary, March to August, 1999 .........................................................10
2.2.2 Current customers by segment ............................................................................12
2.2.3 Consumption rates by segment............................................................................12
2.2.4 Current sales by channel .....................................................................................12
2.2.5 Aleba price realization by segment and channel .................................................13
2.2.6 Estimated average price realization .....................................................................13
2.2.7 Profitability by channel........................................................................................14
2.3 Dispenser sales...................................................................................................................14
2.4 Sales strategy .....................................................................................................................15
2.5 Sales programs ...................................................................................................................15
2.5.1 Convert test market schools. ................................................................................15
2.5.2 Take over customers of under-performing retail shops. ......................................15
2.5.3 Start regular dispenser service program. .............................................................15
3.0 Marketing plan ............................................................................................................................16
3.1 Target markets ....................................................................................................................16
3.1.1 Family market ......................................................................................................16
3.1.2 Institutional market..............................................................................................16
3.1.3 School market ......................................................................................................18
3.2 Competition the Xi’an water market..................................................................................18
3.3 Past marketing programs....................................................................................................19
3.3.1 Newspaper public relations .................................................................................19
3.3.2 Newspaper advertising.........................................................................................19
3.3.3 Family promotion: free tickets ............................................................................19
3.3.4 Retail shop promotion: free tickets......................................................................19
3.3.5 School promotion program ..................................................................................19
3.3.6 Free water promotions .........................................................................................20
3.3.7 Sales promotional materials ................................................................................20
3.4 Buying decisions ................................................................................................................20
3.4.1 Family market buying characteristics ..................................................................20
3.4.2 Institutional market buying characteristics ..........................................................21
3.4.3 School market buying characteristics ..................................................................21
3.5 Growing health concerns over distilled water....................................................................21
3.6 Market positioning .............................................................................................................22
3.7 Marketing strategy for coming year...................................................................................22

September 17, 1999 1

 3.7.1 Components of the marketing strategy ................................................................22
3.7.2 Major target segments .........................................................................................22
3.8 Marketing programs ...........................................................................................................23
3.8.1 Expand school promotion program to between 20 to 30 schools........................23
3.8.2 Launch dispenser program to expand sales into institutional market..................23
3.8.3 Launch corporate identity program with logo, uniforms, vans. ..........................23
3.8.4 Upgrade promotional materials to support marketing and sales programs. ........23
3.8.5 Continue public relations program in local media. .............................................23
3.8.6 Continue free water promotions. .........................................................................23
3.8.7 Develop marketing office inside city walls..........................................................24
4.0 Manufacturing plan ....................................................................................................................25
4.1 Current situation.................................................................................................................25
4.1.1 Manufacturing costs ............................................................................................25
4.1.2 Manufacturing inventories
4.1.3 ...................................................................................25
Production history ...............................................................................................26
4.1.4 Bottle damage and losses.....................................................................................26
4.2 Production plan ..................................................................................................................26
4.3 Upgrade programs..............................................................................................................26
4.3.1 Upgrade quality assurance program. ...................................................................26
4.3.2 Install fixtures in pre-wash building. ...................................................................27
4.3.3 Reinforce factory ceiling. ....................................................................................27
4.3.4 Install filtered air moving equipment in clean room and laboratory....................27
5.0 Transportation plan ....................................................................................................................28
5.1 Current transportation system ............................................................................................28
5.2 Current transportation costs ...............................................................................................29
5.3 Current gaps in transportation............................................................................................30
5.4 Transportation initiatives to close gaps ..............................................................................31
5.4.1 Increase van fleet to make deliveries to expanded customer base. ......................31
5.4.2 Develop central dispatching system using pagers or local service cell phones...31
6.0 Administration plan ...................................................................................................................32
6.1 Current situation: logistics, cash controls, and accounting ................................................32
6.2 Current situation: major gaps .............................................................................................33
6.3 Initiatives to close gaps ......................................................................................................33
6.3.1 Move central administrative office to better location. .........................................33
6.3.2 Develop transportation department......................................................................33
6.3.3 Develop customer database; establish regular computer back-up routine...........33
6.3.4 Improve financial reporting to investors. .............................................................33
7.0 Major purchases and accounts payable ................................................................................34
7.1 Major purchases .................................................................................................................34
7.2 Accounts payable ...............................................................................................................34
8.0 People .................................................................................................................... 35
8.1 Current staffing ..................................................................................................................35
8.2 Current gaps .......................................................................................................................35
8.2.1 Financial and general management skills ............................................................35
8.2.2 Computer and database design skills...................................................................35
8.2.3 Graphic design skills and skills to develop promotional materials. ....................36
8.2.4 No bonus system..................................................................................................36
8.3 Initiatives to bridge people gaps ........................................................................................36

September 17, 1999 2

 8.3.1 Execute Memorandum of Agreement . ...............................................................36
8.3.2 Develop bonus plan for workers tied to financial targets. ...................................36
9.0 Special project: Small bottle line ...........................................................................................37
9.1 Overview ............................................................................................................................37
9.2 Investment, market and distribution analysis .....................................................................37
9.3 Preliminary time schedule..................................................................................................37
10.0 Organization of the Joint Venture ..........................................................................................38
11.0 Financial plan...............................................................................................................................39
11.1 Summary of March-August operations..............................................................................39
11.2 Summary of financial plan .................................................................................................39
11.3 Burn rate: Projected monthly operating expense ...............................................................41
11.4 Customers required for break-even ....................................................................................41
11.5 Projected cash balance .......................................................................................................43
11.6 Schedule of reports ............................................................................................................44
11.7 Useful benchmarks.............................................................................................................44
11.8 Key drivers of the business ................................................................................................44

September 17, 1999 3

List of Tables

TABLE 1. Schedule and milestones.............................................................................. 7

TABLE 2. Sales forecast ............................................................................................. 10
TABLE 3. Revenue summary, March to August, 1999 ............................................... 10
TABLE 4. Estimated customers by segment............................................................... 12
TABLE 5. Estimated consumption by segment .......................................................... 12
TABLE 6. Sales by channel in August, 1999 .............................................................. 12
TABLE 7. Customers by retail shop, August, 1999 .................................................... 13
TABLE 8. Price realization by segment and channel, August, 1999 .......................... 13
TABLE 9. Average price realization March to August, 1999 ..................................... 13
TABLE 10. Profitability by channel.............................................................................. 14
TABLE 11. Dispenser sales March to August, 1999..................................................... 14
TABLE 12. Dispenser selling prices and costs ............................................................. 15
TABLE 13. Overview of family market ........................................................................ 16
TABLE 14. Institutional customers of Marketing Department, August, 1999 ............. 17
TABLE 15. Potential school market ............................................................................. 18
TABLE 16. Preliminary segmentation of competition.................................................. 19
TABLE 17. Buying decisions in the family market ...................................................... 20
TABLE 18. Inventory of school promotional items as of August, 1999 ....................... 23
TABLE 19. Manufacturing costs in RMB .................................................................... 25
TABLE 20. Manufacturing supplies inventory as of September 12, 1999 ................... 25
TABLE 21. Production from March 1 to September 12, 1999 ..................................... 26
TABLE 22. Bottle losses from March 1 to September 12, 1999 .................................. 26
TABLE 23. Planned production schedule ..................................................................... 26
TABLE 24. Current transportation cost assumptions.................................................... 29
TABLE 25. Cost to transport one bottle........................................................................ 30
TABLE 26. Location of bottles as of September 12, 1999 ........................................... 32
TABLE 27. Major purchases planned RMB ................................................................. 34
TABLE 28. Accounts payable as of September 12, 1999 ............................................. 34
TABLE 29. Staffing and monthly salaries as of September 12, 1999........................... 35
TABLE 30. Management team for joint venture........................................................... 36
TABLE 31. Preliminary time schedule for small bottle project.................................... 37
TABLE 32. Investment overview of Joint Venture........................................................ 38
TABLE 33. Uses of Imagene investment ...................................................................... 39
TABLE 34. Schedule of major purchases ..................................................................... 40
TABLE 35. Projected monthly operating expenses ...................................................... 41
TABLE 36. Fixed costs for break even calculation....................................................... 41

September 17, 1999 1

TABLE 37. Contribution per bottle and per customer .................................................. 41
TABLE 38. Cash projection, October 1999 to September, 2000 .................................. 43
TABLE 39. Useful benchmarks to measure progress ................................................... 44

September 17, 1999 2

List of Figures

FIGURE 1. Xi’an Aleba Water Business System ........................................................... 3

FIGURE 2. Ticket revenue, March to August, 1999..................................................... 11
FIGURE 3. Distribution of dispensers in institutional accounts, August, 1999 ........... 17
FIGURE 4. A drawing of the current delivery system. ................................................ 28
FIGURE 5. Joint Venture Organization ....................................................................... 38
FIGURE 6. Summary of Operations, March-August, 1999 ......................................... 39
FIGURE 7. Calculation of customers required for break-even..................................... 42
FIGURE 8. Projected cash balance, October, 1999 to September, 2000 ...................... 44

September 17, 1999 1

 Xi’an Aleba Mineral Water Company
Business Plan: October, 1999 to September, 2000

1.0 Overall company plan

This business plan outlines the basis of continued growth for the Company. It sets forth goals
and targets for the coming year. The plan then sets forth the initiatives required by each
department of the Company to reach these goals. As the Aleba business system develops, certain
gaps in the Company’s capabilities will arise between where the Company stands and our goals.
The initia- tives are designed to fill these “capability gaps”.

1.1 Goals and targets

1. By September, 2000 have 5,000 customers.
2. Maintain average realized price of 8 RMB per bottle.
3. No customer quality complaints.

1.2 Summary of major initiatives

To reach these goals, the Company will pursue three major initiatives in the coming year:
1. Launch a dispenser promotion program to increase market penetration in the institu-
tion segment through network marketing.
2. Continue school promotion and direct selling program to convert schools to regular
customers.
3. Create transportation department with expanded van fleet to support larger customer
base.

1.3 Background
The JV began operations in March, 1999 based on a business plan completed in November,
1998. That business plan called for establishing a strong market position in the school market. In
March,
Wang Huirecognized that the school market would be more difficult to penetrate, and he devised
a new plan to sell water to the family market through retail water shops.1

Since we did not have the capital to establish our own retail shops, Wang Hui established a net-
work of independently owned shops and a system of water tickets to control sales and cash.
Since we also did not have a marketing budget geared to a consumer market,
Wang Hui used low cost
promotions. Approximately 50% of the production from the factory has been used for promotion

1. The November, 1998 plan called for one prototype water shop to explore the family market.

Xi’an Aleba Mineral Water Company September 17, 1999 1

purposes. Based on a national trade publication based in Beijing, Aleba, by July, 1999, was one
of three most recognized mineral water companies in the Xi’an market.1

In June, 1999 we conducted a market test with ten primary schools. The school promotion pro-
vided each school with free water for a week, as well as pens, volley balls and soccer balls. The
school promotions stimulated family sales, as parents and teachers purchased Aleba for home
consumption.

In June, manufacturing quality problems arose from disintegrating paper filters. This problem
was resolved with adjustments to the line pressure and changes in equipment cleaning
procedures.

In July, Wang Hui began a program to take over the family accounts of the retail shops. Eventu-
ally, our plan is to control the customers of all the retail shops. Through the ticket system, Aleba
has all the names, addresses and telephone numbers of the retail shops. As Aleba builds its trans-
portation capacity with more vans, we will take over deliveries to the retail shop accounts.

In August, Aleba confronted an operating cash shortage. Available operating cash declined
to about 10,000 RMB. The shortage is attributable to a variety of factors.
• The family market has a lower productivity than the school market, our initial target. Each
school has an average of fifty classrooms, and water consumption averages one bottle per
day. In contrast, each family has one dispenser and consumes a bottle of water in seven to ten
days.
• The November, 1998 business plan assumed that Aleba would collect deposits on bottles.
Competition from the market has limited our ability to collect deposits. Only about 30% of the
central office accounts have paid deposits. Retail shops have collected deposits on only about
20% of their accounts. Aleba has not yet collected the retail shop deposits.
• Part of the cash shortage is also attributable to the currency hedge loans. These loans reduce
the amount of available investment by as much as 20%, and they further impose a monthly
interest expense. Interest income from Aleba’s dollar deposits is not payable until our deposit
contract matures.

In September, Aleba completed a customer survey to determine the factors that influenced cus-
tomers to buy Aleba water. The survey revealed that 80% based their decision to buy on the
advice of a friend. Only 20% purchased on the basis of newspaper articles or advertising.

1.4 The Business System

The current business system includes the following components:
• A well, factory and warehouse located 25 km from Xi’an. Equipped with Felce five gallon
fill- ing equipment with one shift capacity of 1,000 bottles.
• Contract trucking that moves 400 bottles per load to a central office/warehouse in Xi’an.

1. “Xi’an Mineral Water Industry”, an article appearing in a national China food industry newspaper July 14, 1999
and translated by Ye Liu. From the article: “The well-known local mineral water products are Zhang Ba Long
Quan, Da Li and Aleba.”
Xi’an Aleba Mineral Water Company September 17, 1999 2
• A central office staff that manages logistics of bottle delivery from factory and empty returns.
• A central office staff that manages a system of tickets for retail purchases to control cash.
• A central office sales staff with 3 minivans to schedule and make deliveries to central office
customers, including retail shops.1 Sales staff also provides after sales service of dispensers.
• A network of eight retail shops to sell and distribute water primarily to the family market.
• A central administration staff, including the general manager, to develop and manage collec-
tions, billing, management controls, and financial reporting.

FIGURE 1. Xi’an Aleba Water Business System

Customer
Delivery Empty
Bottling Marketing Ticket
Outbound Logistics Bottle
Operations and sales system and
Logistics Return
and QC Service Retail Shop Logistics collections
Management

Administration

1.5 Current position

• Distribution network of central office/warehouse and eight retail shops now serves 1,600
cus- tomers.
(In Aleba’s terminology, a “customer” represents a water dispenser. For example, a bank
might have six Aleba water dispensers. The bank represents six customers. This approach
allows uni- formity across market segments.)
• Need more bottles and minivans. Future growth constrained by current bottle inventory and
our limited capacity to deliver to new customers.
• Internal management procedures control an inventory of 6,000 bottles or 3.75 bottles per cus-
tomer.
• Continuing school promotion program. One school has converted to regular deliveries from
the school promotion program.
• Developing weekly, bi-weekly, and monthly reporting schedule for investors.
• Developing “relationship marketing” programs for institutional and family markets.
• Completed plan for first phase of Imagene investment.
• Current “burn rate” for the JV is 49,300 RMB per month. Of the total, 17,500 RMB is interest.

1. A fourth minivan has been lent to Retail Shop 4 to assist in deliveries.

Xi’an Aleba Mineral Water Company September 17, 1999 3

1.6 Capability gaps
Sales and service
• Need more mini-vans to support deliveries to expanding customer base.
• Stronger promotional materials and corporate identity to build the Aleba brand.
• Need to develop service program to clean existing dispensers on a regular basis.

Marketing
• Sales promotion program needs continued development to convert school prospects to regular
customers.
• Need to develop network marketing programs, including supporting marketing materials, to
replace print and broadcast advertising for family and institution markets.
• Need stronger corporate identity program and customer database to support shift away from
advertising and toward relationship/network marketing strategy.

Manufacturing
• Quality program needs improved equipment and procedures.
• New pre-wash building requires additional plumbing and fixtures.
• Compressor provides inadequate pressure for capping.
• Factory ceiling needs reinforcement.
• Factory requires air conditioning in clean room and laboratory.

Transportation
• Not enough vans to deliver to expanding customer base.
• Need to develop more responsive, rationalized delivery system with central management of
routing.
• Central warehouse has inadequate parking to accommodate expanded minivan fleet.

Administration
• Computer data is not regularly backed-up. Computer equipment may need upgrading.
• Current office space inadequate to conduct meetings.
• Financial reporting to investors needs to be concise, consistent, timely, and easy to administer.
• Need expanded customer database and computer capabilities to support network marketing.

People
• Stronger capability to conduct financial forecasting.
• Management development plan to assist Wang Hui.
• Additional sales and delivery people.

Xi’an Aleba Mineral Water Company September 17, 1999 4

• Lack of clear incentive program for key management people.

Special project: Small bottle line

• Absence of a small bottle product may be hindering sales to the family market.

1.7 Initiatives to bridge gaps

Sales
• Convert test market schools to regular customers through extended direct selling effort.
• Take over customers of under-performing retail shops and outlying customers of other shops.
• Start regular dispenser service program.

Marketing
• Expand school promotion program to between 20 to 30 schools.
• Launch dispenser program to expand sales into institutional market.
• Launch corporate identity program with logo, uniforms, vans.
• Upgrade promotional materials to support marketing and sales programs.
• Continue public relations program in local media.
• Continue free water promotions.
• Develop marketing office inside city

walls. Manufacturing
• Upgrade quality assurance program.
• Install fixtures in pre-wash building.
• Reinforce factory ceiling.
• Install filtered air moving equipment in clean room and

laboratory. Transportation
• Increase van fleet to make deliveries to expanded customer base.
• Develop central dispatching system using pagers or local service cell phones.

Administration
• Establish regular computer back-up routine.
• Develop detailed customer database.
• Move central office to better location.
• Improve financial reporting to investors.

Xi’an Aleba Mineral Water Company September 17, 1999 5

Major purchases
• 4 mini-vans for deliveries.
• 1,000 dispensers for marketing program.
• Pagers/cell phones for drivers.
• Air filtration and conditioning equipment for factory.
• Factory ceiling repair.
• Larger compressor for capping.
• Uniforms and vehicle painting for corporate image program.

People
• Execute Memorandum of Agreement among Imagene, ATCO, Aleba Management (Louisiana)
and Aleba Management (Oregon) to develop stronger management team to assist Wang Hui.
• Develop bonus system for workers.

Special project: Small bottle line

• Evaluate installation of small bottle line as next phase of Imagene investment.

Xi’an Aleba Mineral Water Company September 17, 1999 6

1.8 Schedule and milestones

TABLE 1. Schedule and milestones

Department and
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
programs

Sales
Convert test market
schools to regular cus-
tomers through On- End
going
extended direct sell-
ing effort.

Take over customers

of under-performing
retail shops and outly- On-
going
ing customers of other
shops.

Start regular dis-

penser service pro- Start
gram.

Marketing
Expand school promo-
tion program to Start On-
between 20 to 30 going

schools.

Launch dispenser pro-

gram to expand sales Start
into institutional mar-
ket.

Launch corporate
identity program with Start
uniforms, vans.

Upgrade promotional
materials to support Start
marketing and sales
programs.

Continue public rela-

on-
tions program in local going
media.

Continue free water on-

going
promotions

Xi’an Aleba Mineral Water Company September 17, 1999 7

 Department and
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
programs

Develop marketing
On-
office inside city walls going

Manufacturing
Upgrade quality assur-
Start
ance program.

Install fixtures in pre-

Start
wash building.

Reinforce factory ceil-

Start
ing.

Install filtered air

moving equipment in Start
clean room and labo-
ratory.

Transportation
Increase van fleet to
make deliveries to Start
expanded customer
base.

Develop central dis-

patching system using Start
pagers or local service
cell phones.

Administration
Establish routine to
Start
back-up computer data

Develop detailed cus-

Start
tomer database.

Move central office to

Start
better location.

Improve financial
Start
reporting to investors.

Major purchases
4 mini-vans for deliv-
X
eries.

1,000 dispensers for

X
marketing program.

Pagers/cell phones for

X
drivers.

Xi’an Aleba Mineral Water Company September 17, 1999 8

 Department and
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
programs

Air filtration and con-

X
ditioning equipment
for factory.

Factory ceiling repair. X

Larger compressor for

X
capping.

Uniforms and vehicle

X
painting.

People
Execute Memorandum
X
of Agreement among
Imagene, ATCO,
Aleba Management
(Louisiana) and Aleba
Management (Oregon)

Develop bonus sys-

Start
tem for workers.

Special project:
small bottle
Evaluate installation
Start
of small bottle line.

Xi’an Aleba Mineral Water Company September 17, 1999 9

2.0 Sales plan

2.1 Sales forecast

TABLE 2. Sales forecast
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

Begin cus- 1,600 1,800 2,000 2,200 2,400 2,700 3,000 3,300 3,700 4,100 4,500 5,000
tomers
Add net 200 200 200 200 300 300 300 400 400 400 500 --
new cus-
tomers
Bottles per 3 3 3 3 3 3 3 3 3 3 3 3
month
Total bot- 4,800 5,400 6,000 6,600 7,200 8,100 9,000 9,900 11,100 12,300 13,500 15,000
tles
Average 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75
price per
bottle
Revenue 37,200 41,850 46,500 51,150 55,800 62,775 69,750 76,725 86,025 95,325 104,625 116,250

• Target of 5,000 customer accounts by September.

• Assumption on bottles per customer per month: 3.
• Assumption of average price realized: 7.75.

2.2 Current situation

2.2.1 Revenue summary, March to August, 1999

TABLE 3. Revenue summary, March to August, 1999

Bottles Number of Dispenser

Delivered Ticket revenue dispensers revenue
March 180 1,698 29 4,915
April 147 1,771 11 2,985
May 925 8,839 192 28,713
June 4,555 37,241 48 9,631
July 1,497 12,383 57 18,218
Aug 3,411 26,429 61 17,152
Total 10,693 88,364 398 81,617

Xi’an Aleba Mineral Water Company September 17, 1999 10

 FIGURE 2. Ticket revenue, March to August, 1999
RMB March April May June July Aug
40,000
37,241
35,000

30,000
26,429
25,000

20,000

15,000
12,383
10,000
8,839
5,000
1,698 1,771
0
March April May June July Aug

• Impact of school promotion program clearly shows in June.

• Fall off in July sales due in part to selling tickets in books of ten. In July, people are
consuming water with tickets they purchased in June.

Xi’an Aleba Mineral Water Company September 17, 1999 11

2.2.2 Current customers by segment
TABLE 4. Estimated customers by segment

Aleba marketing
Retail shops department Total
Percent Number Percent Number Percent Number
Family customers (%) 90% 1,152 67%a 240 82% 1,392
Institution customers (%) 10%b 128 33% 119 15% 248

School customers (%)c --% 1 --% 1 --% 1

Total 100% 1,281 100% 361 1,641
a. Central marketing office has taken over the accounts of retail shop 6 and is continuing to take over the
outlying accounts of other retail shops.
b. The percentage of institutional accounts for retail shops represent an estimate based on review of one
retail shop customer list.
c. One school customer with fifty classrooms began as a regular customer in September. Aleba shares
this account with retail shop #7.

2.2.3 Consumption rates by segment

TABLE 5. Estimated consumption by segment

Bottles per
Days per bottle month
Family 7-10 3
Institution office 5-7 5
School classroom 1 20

2.2.4 Current sales by channel

TABLE 6. Sales by channel in August, 1999

Total
customers Percent
Retail shop channel 1,276 78%
Direct channel Aleba Marketing Department 360 22%
Total 1,636 100%

Xi’an Aleba Mineral Water Company September 17, 1999 12

2.2.5 Aleba price realization by segment and channel
TABLE 7. Customers by retail shop, August, 1999

Retail shop Customers Comment

1 280 Slowed taking new customers, unable to expand delivery.
2 220
3 140 Taken over by Marketing Department. Location has
become new office for Aleba.
4 200 Slowed taking new accounts. Delivery constraint.
5 70
6 -- Taken over by Marketing Department
7 196
Xi’an Yang 10
Lantian 160
Total 1,276

TABLE 8. Price realization by segment and channel, August, 1999

Through
retail
Segment Direct shops
Family 10 7.27a
Institution 8-10 7.27
School 10.0 8.0b
a. JV provides one free ticket for every ten purchased. Effective discount off selling
price of 8 RMB per ticket. (80 RMB/11 tickets = 7.27 per ticket.)
b. Sale to first school is arranged through Retail Shop 7. Most future sales to schools
will be direct.

2.2.6 Estimated average price realization

TABLE 9. Average price realization March to August, 1999

Revenue bottles delivereda 10,693

Ticket revenue 88,364
Average revenue per bottle RMBb 8.24

a. Revenue bottles are distinguished from promotional bottles

b. The average price per bottle is subject to distortions from timing differ-
ences between when tickets are sold and when bottles are delivered. This
estimate does not adjust for tickets that have been sold and are currently
held by customers. For example, if 10% of the total tickets for the period
are still outstanding, the average price realization would be 10% lower.

Xi’an Aleba Mineral Water Company September 17, 1999 13

2.2.7 Profitability by channel
TABLE 10. Profitability by channel

Retail channel Direct channel

Realized price 7.27 10.00
Less:
Manufacturing cost 2.11 2.11
Transport to Xi’an 1.45 1.45
Transport to retail shop 1.10
Transport to customer 2.27
Equals: Net to Aleba 2.61 4.17

• Calculating profitability by channel requires including transportation costs.

• Transport from factory to Xi’an by large contract trucks. See Section 5.0 Transportation Plan.
• Transport to customer in retail channel is responsibility of retail shop.
• Transport to customer in direct channel from Aleba central warehouse is with minivans.

2.3 Dispenser sales

• The Company has sold dispensers to 24% of its customers.
TABLE 11. Dispenser sales March to August, 1999

Average
Units sold Revenue price Memo
March 29 4,915 169
April 11 2,986 271
May 192 28,713 150
June 48 9,632 201
July 57 18,219 320
August 61 17,153 281
Total 398 81,617 205
Total customers 1,636
Percent of customers purchasing dispensers from Aleba 24%

Xi’an Aleba Mineral Water Company September 17, 1999 14

• Dispensers come in three models: table top, hot only and hot/cold.
TABLE 12. Dispenser selling prices and costs

Cost Selling price Margin Margin

Model RMB RMB RMB %
Table top 120 180 60 33%
Hot only 500 650-800 150-300 23%-38%
Hot/cold 840 1,250 410 33%

2.4 Sales strategy

• Build up direct channel to control customers and generate higher returns.
• Focus on school and institutional markets where consumption rates are higher and delivery
costs are lower.

2.5 Sales programs

2.5.1 Convert test market schools to regular customers through extended direct selling
effort.
• Major leverage available from the school market: high price realization, high consumption,
rel- atively low transportation costs.
• Complex purchase decision with many actors to influence the decision.
• Major obstacle 1: Parents objecting to school fees.
• Major obstacle 2: School administrators’ concerns over food safety.
• Success in first school indicates the market is still viable, but selling effort will take time.
• Focus on personal selling by Wang Hui of school officials.

2.5.2 Take over customers of under-performing retail shops and outlying customers of
other shops.
• Begin to expand direct selling channel by “pruning” accounts from existing retail shops.
• Next candidates for take over: Retail shops 3 and 4.

2.5.3 Start regular dispenser service program.

• Dispensers require regular cleaning.
• Use service program as opportunity for customer research.
• Feed information into customer database.

Xi’an Aleba Mineral Water Company September 17, 1999 15

3.0 Marketing plan

3.1 Target markets

3.1.1 Family market

• Relatively high income, two professional families.
• Focus of retail channel.
• Most customers switching from distilled water.
• Primary market in number of customers.
• Not as price sensitive. Retail price of 10 RMB.
• Competitive pressure appears primarily in bottle deposits, not price competition. Retail shops
collecting only 20% to 30% of family bottle deposits. (Part of this problem comes from weak
incentives for retail dealers to collect bottle deposits that they turn over to Aleba.)
TABLE 13. Overview of family market

Xi’an population 5.4 million

Average family size 5
Number of families 1.08 million
Families with sufficient income to buy water (%) 25%
Families with sufficient income to buy water 270,000
Families within geographic market of Aleba retail shops 10%
Target families within geographic market of Aleba retail
shops 27,000
Monthly consumption per family (bottles) 3
Total target family market (monthly bottles) 81,000
Estimated family accounts: See table 3 1,392
Estimated penetration of target family market 3%

3.1.2 Institutional market

• Larger government-owned organizations, such as banks and companies.
• Primary focus of Aleba marketing department
• Relatively weak penetration of this market. Most early efforts directed toward building and
supporting retail channel.
• Accounts for 30% of marketing department customers

Xi’an Aleba Mineral Water Company September 17, 1999 16

Relatively few high volume institutional accounts. Average dispensers per account: 3.6
TABLE 14. Institutional customers of Marketing Department, August, 1999

Average
Number of number of
institutional Number of dispensers
accounts dispensers per account
33 120 3.6

FIGURE 3. Distribution of dispensers in institutional accounts, August, 1999

umber of dispensers
25 25

20 20

15 15

10 10

5 5

0 0
27 2 3 17 5 6 15 8 22 10 23 12 13 18 29 21 28 25 7 9 26 20 16 11 32 14 30 1 24 31 33 4
19
Institutional Account

Xi’an Aleba Mineral Water Company September 17, 1999 17

3.1.3 School market
TABLE 15. Potential school market

Number of schools
Xi’an 150
Xianyang 30
Total 180
a 15
Average classrooms per school
Total classrooms 2,700
Current sales to schools (classrooms) 50
Current market penetration of school class-
rooms 2%
a. School size varies from ten to sixty classrooms.

• High consumption market: 1 bottle per classroom (customer) per day.

• Low price sensitivity. Selling direct should net average realized price of 10RMB.
• Distilled water not competitive due to health concerns.
• Major promotion opportunity. June tests revealed that teachers will buy water and that
students will influence their families to purchase water.

3.2 Competition the Xi’an water market

The following market report on the Xi’an water market appeared in a Beijing-based food
industry newspaper on July 14, 1999:1

In 1999, in the Xi’an market there are over 20 brands of distilled and mineral
water from southern China. Compared to Xi’an local water products, southern
water has much bigger sale networks and aggressive advertising through all
kind of media. For the small bottle water or 5 gallon family size water, south-
ern products own more than 80% of market share in Xi’an. In fact most fami-
lies are buying distilled water from the southern producers. (EFM Note:
analysis of the local market appearing in a Xi’an newspaper estimates that
70% of water sales are distilled.)

Today's situation reminds me that several years ago in Xi’an's juice market,
all of the juice products came from southern manufactures. Today, Ru-Shi,
Xi’an local juice manufacture has earned the biggest market share in the
Xi’an juice market. Local consumers have been educated that Shaanxi apples
are better than southern apple and realized that the quality of local juice is the
best. (from

1. Translated by Ye Liu.

Xi’an Aleba Mineral Water Company September 17, 1999 18

 Ye: The concentrated apple juice that Ru-Shi used is from Fu-An
Company, one of Aleba's business partners in Xi’an)

In order to change the Xi’an mineral water market situation, the local consum-
ers must be educated that Xi’an has the best mineral water resources
anywhere. The advertising for local products must be more aggressive and
attractive. The packaging of the products must be improved.
TABLE 16. Preliminary segmentation of competition

Distilled water Mineral water Tot l

Southern producers 80%

Local producers 20%

Total 70% 30% 100%

3.3 Past marketing programs

3.3.1 Newspaper public relations

• Focused on telling the Aleba story.
• Focus on high quality, international investment team.
• Articles featuring Dr. Bradley, Mr. Tani, Jim Ray.

3.3.2 Newspaper advertising

• Early advertising focused on small ads providing contact information.
• Later, larger ads using trade-outs to build Aleba image as quality mineral water.

3.3.3 Family promotion: free tickets

• Aleba provides one free ticket in every book of ten tickets.
• 11 for price of 10 reduces effective price realization in this segment from 8 to 7.27 RMB per
bottle.

3.3.4 Retail shop promotion: free tickets

• To stimulate the quick development of accounts, Aleba provides five free tickets to the
retail shop for every new account.

3.3.5 School promotion program

• Provided free water for a week to ten test primary schools in June, 1999.
• Also provided soccer balls, basketballs, pens, wall calendar and booklets to each school.
• Focused on primary schools where children influence over parents is likely to be highest.

Xi’an Aleba Mineral Water Company September 17, 1999 19

• Focused on schools in high income neighborhoods.

3.3.6 Free water promotions

• Approximately half of factory production from March to August has been used for free water
promotions.
• Three principal uses:
1. Gain local publicity and build networks by providing water for “public” purposes,
e.g., for construction workers renovating old city wall;
2. Gain access to large potential accounts, such as schools;
3. Gain exposure at important public events that attract large numbers of people and offi-
cials, e.g., Xi’an trade and investment fair.

3.3.7 Sales promotional materials

• Developed sales promotion materials from xerox copies of newspaper articles.
• Stapled in a package for the institutional market.
• Some individual pieces professionally done by graphic artist, but no design continuity or cor-
porate identify.

3.4 Buying decisions

3.4.1 Family market buying characteristics

• Conducted telephone survey of 200 customers in August.1
• 80% purchased Aleba water based on word of mouth; 20% on basis of advertising.
• Segment this market between families switching from distilled water and families new to buy-
ing water.
TABLE 17. Buying decisions in the family market

Family segment Characteristics of buying decision

Switching from distilled Focus on health factors
Familiar with “system” for dispensers and bottle returns.
Resistant to paying bottle deposits
New to market Concern about family budget: new expenditure.
Detailed explanation often required of “system” for dis-
pensers and bottle returns.

1. This survey also polices the retail accounts to make certain they do not submit fake customer names to get their
five free tickets.

Xi’an Aleba Mineral Water Company September 17, 1999 20

• Price seems less of a factor than family well-being.1
• For two income family with each parent earning 500 RMB per month, three bottles of water
represent an expenditure of 30 RMB per month or 3% of income.

3.4.2 Institutional market buying characteristics

• Price sensitive. More difficult bargaining over price. Sophisticated buyers.
• Very low likelihood of getting deposits on bottles.
• Separation of purchaser and user. Single purchaser will make decision over installation of
mul- tiple dispensers. 2
• Buyer making the decision to provide water to employees as a benefit. Less influenced
by health issues of mineral v. distilled. More focused on bottled v. boiled water.
• Institutional customers often lead to family customers as employees learn the quality of the
water.

3.4.3 School market buying characteristics

• Complex buying decision. Many parties influence a “committee” decision.
• School administration sensitive to pressure from parents over fees.
• Also worried about food purity. Boiled water is known and acceptable. Bottled water repre-
sents risky innovation in routine.
• School administrators more willing to put bottles into faculty rooms.
• Less sensitive to price.
• Strongly influenced by health arguments in favor of mineral water.
• Not a market in which distilled water will be able to compete effectively. Administrators
are aware of the health risks to children of distilled water. (Shanghai recently banned the
sale of distilled water in schools.)
• School promotion appears to have broken down some of these barriers, but additional direct
selling effort will be required to convert schools to regular customers.

3.5 Growing health concerns over distilled water

• Increasing public attention in news media to the health impacts of drinking distilled water.
• News impacts schools most directly. Shanghai schools have prohibited distilled water sales.

1. Only about 2% to 3% of our customers have complained about price, as distilled water companies have dropped
their price to as low as 6 RMB per bottle.
2. Creates quality problem: the job of keeping dispensers with filled bottles usually falls to low level office
employee.
They are less concerned over removing label before installing bottle on dispenser. Pieces of the paper label then
become stuck on the inside of the bottle, creating a cleaning problem.

Xi’an Aleba Mineral Water Company September 17, 1999 21

• News also has impacts on family consumers drinking distilled water.
• Least impact on buying decisions in the institutional market.

3.6 Market positioning

• Focus on three attributes:
1. Highest quality mineral water for your health.
2. Local source deep in the mountains of Lantian.
3. Highest quality production with Japanese expertise.

3.7 Marketing strategy for coming year

3.7.1 Components of the marketing strategy

Build marketing programs around the following components:

• Expand institutional sales and use institutional customers to introduce Aleba to employees
(family market).
• Continue school promotions and direct selling to higher income primary schools. Focus on
the children to introduce Aleba to both school and family markets.
• Use dispenser network marketing program to bring three to five customers for each new dis-
penser.
• Encourage distilled water users in family market to switch through continued public relations
program and network marketing program to encourage word of mouth referrals.
• Use part-time marketing people paid on commission to expand our sales force.

3.7.2 Major target segments

1. Institutional accounts
Institutional networks developed by Wang Hui and local partners.
2. Schools
10 test market schools and between 20 to 30 primary schools in higher income neighborhoods.
3. Families switching from distilled water
Difficult to reach except through on-going public relations and promotion program.

Xi’an Aleba Mineral Water Company September 17, 1999 22

3.8 Marketing programs

3.8.1 Expand school promotion program to between 20 to 30 schools.

• Begin October. Follow pattern of June tests.
• Focus on primary schools.
TABLE 18. Inventory of school promotional items
as of August, 1999

Used in
Initial June Available Inventory
Item Order promotions on hand Unit price value
Balls 2,000 900 1,100 30 33,000
Pens 50,000 25,000 25,000 0.89 24,475
Notebooks 100,000 32,500 67,500 0.80 54,000

3.8.2 Launch dispenser program to expand sales into institutional market.

• Provide free dispenser (property of Aleba Water) to institutional buyers willing to sign
long term supply agreement and refer new potential customers.
• Details of the program will develop as Wang Hui experiments with different approaches.
• Initial test will involve 100 dispensers.

3.8.3 Launch corporate identity program with logo, uniforms, vans.

• Develop corporate image design regulations.
• Implement in uniforms, vans, promotional materials.

3.8.4 Upgrade promotional materials to support marketing and sales programs.

• Develop new promotional materials that reflect higher quality, professional look.
• Consider customer newsletter on health topics.

3.8.5 Continue public relations program in local media.

• Use Shinzawa to promote tie to Imagene in local media.
• Use Tatsuo Ohbabra, Toshi Tanaka, Ron Bradley, Jim Ray and Ed Morrison to give local
inter- views during their visits to Xi’an.

3.8.6 Continue free water promotions.

• Continue water promotions as appropriate, as determined by General Manager.
• Not to exceed 4,000 bottles per month.

Xi’an Aleba Mineral Water Company September 17, 1999 23

3.8.7 Develop marketing office inside city walls.
• Expand marketing program inside city walls by locating a marketing office (similar to a retail
shop)
• Increase visibility for Aleba and access to family and institutional accounts.

Xi’an Aleba Mineral Water Company September 17, 1999 24

4.0 Manufacturing plan

4.1 Current situation

4.1.1 Manufacturing costs

TABLE 19. Manufacturing costs in RMB

Daily production in bottles 400 800 1,000

Percent of one shift capacitya 38% 76% 100%
Materials
bottleb 0.70 0.70 0.70
cap 0.35 0.35 0.35
label 0.11 0.11 0.11
bag 0.03 0.03 0.03
Subtotal material 1.19 1.19 1.19
Utilities c 0.19 0.09 0.08

Labord 0.73 0.36 0.29

Total manufacturing costs 2.11 1.64 1.56

a. Production runs at 130 bottles per hour or 1,066 bottles per 8 hour shift.
b. Bottle costs 35 RMB and is depreciated over 50 trips.
c. Utilities based on monthly production of 20 days and monthly cost of 1,500 RMB.
d. Labor based on manufacturing headcount shown in Section 8.0 People below.
Total
monthly manufacturing wages equal 5,800 RMB.

4.1.2 Manufacturing inventories

TABLE 20. Manufacturing supplies inventory as of September 12, 1999

Value of
Months Unit Price inventory
Units supply RMB RMB
Bottles 6,000 N.A. 35.0 105,000
Caps 30,000 3 0.35 10,500
Plastic bags 180,000 18 0.11 20,000
Labels 480,000 48 0.03 14,000
Total 149,500

Xi’an Aleba Mineral Water Company September 17, 1999 25

4.1.3 Production history
TABLE 21. Production from March 1 to September 12, 1999

Bottles Percent
Total bottles produced 22,104 100%
Total bottles sold 12,012 54%
Bottles used for promotion 10,092 46%

4.1.4 Bottle damage and losses

TABLE 22. Bottle losses from March 1 to September 12, 1999

Percent of total bottle

Bottles inventory
Broken bottles 20 0.3
Dirty, scratched 32 0.5
Lost 7 0.1
Total 59 1.0%

4.2 Production plan

TABLE 23. Planned production schedule
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

Sales 4,800 5,400 6,000 6,600 7,200 8,100 9,000 9,900 11,100 12,300 13,500 15,000
Promo- 4,000 4,000 4,000 4,000 4,000 4,000 4,000 4,000 4,000 4,000 4,000 4,000
a
tion
Total 8,800 9,400 10,000 10,600 11,200 12,100 13,000 13,900 15,100 16,300 17,500 19,000
Promo-
tion as% 45 43 40 38 36 33 31 29 28 25 23 21
of total
One shift 41 44 47 50 53 57 61 65 71 76 82 89
capacity
(%)b

a. From Section 2.0 Sales Plan.

b. Assumes average of 20 production days per month.

4.3 Upgrade programs

4.3.1 Upgrade quality assurance program.

• Testing kits for biological contamination meets Chinese standards but are not up to
Western standards.
• Testing kit required for ozone levels. High ozone levels impart bad taste to the water.

Xi’an Aleba Mineral Water Company September 17, 1999 26

• Bottling machine goes through four cycle cleaning. Last cycle involves chlorine rinse. Impor-
tant to maintain proper concentration of chlorine.

4.3.2 Install fixtures in pre-wash building.

• Four cycle cleaning does not solve all cleaning problems.
• Important to add pre-wash station. New building has been constructed to accommodate this
station.

4.3.3 Reinforce factory ceiling.

• Differential air pressure has put pressure on ceiling panels. Some have come loose.
• Reinforcement required.

4.3.4 Install filtered air moving equipment in clean room and laboratory.
• Required in laboratory and clean room during summer months.
• Sanitation bureau regulations require filtration and positive pressure in clean room.

Xi’an Aleba Mineral Water Company September 17, 1999 27

5.0 Transportation plan

5.1 Current transportation system

FIGURE 4. A drawing of the current delivery system.

Xi’an Aleba Mineral Water Company September 17, 1999 28

5.2 Current transportation costs

TABLE 24. Current transportation cost assumptions

Assumptions Unit Amount

3 wheeled bike:
Cost per vehicle RMB 400
Average daily deliveries bottles 20
Daily deliveries (high) bottles 40
Labor cost per day RMB 22
Annual license fee RMB
Useful life of bicycle years 2

Small minivan:
Cost per vehicle RMB 45,000
Useful life for depreciation years 5
Headcount per vehicle people 1
Average daily deliveries bottles 40
Customers per minivan customers 200
Distance traveled per day km 100
Gas consumed per 100 km liters 10
Price of gas per liter RMB 2
Daily cost of gas RMB 20
Daily wage rate for driver RMB 30

Contract trucking:
Bottles per truck bottles 400
Contract rate per truck: direct deliv- RMB 420
ery to Aleba central office and retail
shops
Contract rate per truck: city RMB 450
delivery, multiple stops for
institutional accounts
Additional contract labor per truck people 4
Rate per trip per contract labor head RMB 40
Total contract labor per trip RMB 160

Xi’an Aleba Mineral Water Company September 17, 1999 29

 TABLE 25. Cost to transport one bottle

Route Unit Cost

Contract trucking from Aleba factory to Aleba central

office or retail shops
Contract fee RMB per bottle 1.05
Labor RMB per bottle 0.40
Total RMB per bottle 1.45

Contract trucking from Aleba factory to institutional

accounts in Xi'an
Contract fee RMB per bottle 1.13
Labor RMB per bottle 0.40
Total RMB per bottle 1.53

Minivan delivery from Aleba central warehouse or retail

shops to customer
Labor RMB per bottle 0.75
Gas RMB per bottle 0.50
Depreciation RMB per bottle 1.02
Total 2.27

Bike delivery from retail shop to account

Labor RMB per bottle 1.10
Depreciation RMB per bottle 0.05
Total 1.15

5.3 Current gaps in transportation

• Inadequate capacity to support customer base of 5,000.
• Growth in retail delivery system has led to “irrational” delivery patterns for outlying accounts.
• No system developed to provide fast response to customer delivery requirements. Drivers
must return to central office for delivery instructions.
• May be incurring cost penalties on contract trucking from Lantian to Xi’an over a self-oper-
ated vehicle.

Xi’an Aleba Mineral Water Company September 17, 1999 30

5.4 Transportation initiatives to close gaps

5.4.1 Increase van fleet to make deliveries to expanded customer base.

• Increase minivan fleet to four.

5.4.2 Develop central dispatching system using pagers or local service cell phones.
• Use pagers or local cell phones to dispatch drivers.

Xi’an Aleba Mineral Water Company September 17, 1999 31

6.0 Administration plan

6.1 Current situation: logistics, cash controls, and accounting

• The Company has developed a manual management control system that enables us to know
where all bottles are in the system.

TABLE 26. Location of bottles as of September 12, 1999

Factory warehouse empty 318 Retail shop 1 372

Factory warehouse full 1,043 Retail shop 2 514
Factory use 13 Retail shop 3 487
QC samples 52 Retail shop 4 754
Office 3 Retail shop 5 85
Broken, scratched, dirty 52 Retail shop 6 85
Fu An (JV partner) 1 Retail shop 7 374
Lantian nuclear company 8 Economic zone 156
Lantian development zone 16 Radio Shaanxi 44
Lantian government office 8 Xi’an Yang retail shop 50
Xi’an Yang customer 10 Xi’an Yang retail shop 16
Lantian customer 3 School 58
Lantian customer 1 Central marketing dept. 288
Lantian customer 8 Lost 7
Lantian customer 2 Sold 8
Lantian customer 1 Customer 2
Shinzawa apartment 1 Xi’an warehouse 542
Lantian retail shop 293 Receipt no deposit 280
Lantian County government 20 Sanitation bureau 8
Marketing department 5

Subtotal (Lantian) 1,853 Subtotal Xi’an 4,135

Total 5,987

• The Company has developed a system of tickets to manage cash. This system centralizes cash
collection in the central office. Periodic changes in the tickets enables the central office to
detect counterfeit tickets.
• The Company uses a manual accounting system set to Chinese accounting standards. No
effort has been made to automate the system or conform the system to U.S. GAAP.

Xi’an Aleba Mineral Water Company September 17, 1999 32

6.2 Current situation: major gaps
• Inadequate office space to conduct negotiations with institutional accounts and inadequate
parking for expanded fleet of minivans.
• Quicker response system needed for minivan deliveries.
• Inadequate customer database to conduct extensive relational marketing programs;
inadequate back-up of computer.
• Weak financial reporting to investors.

6.3 Initiatives to close gaps

6.3.1 Move central administrative office to better location.

• Move planned for October 1999 to office building owned by Post Office.
• Location in Southwest section of the city, our strongest market area.

6.3.2 Develop transportation department

• Develop separate transportation department for regular accounts.
• Maintain one minivan at direction of administration department.
• Minivans dispatched through pagers or local cell phones.

6.3.3 Develop detailed customer database; establish regular computer back-up routine.
• Develop customer database on Access, a relational database program, instead of Excel.
• Purchase equipment required for regular computer back-up and train staff in necessary tasks.

6.3.4 Improve financial reporting to investors.

• Develop schedule of weekly, 2 week and monthly reports.
• Consult with KPMG to determine if evaluation of the current accounting system is
appropriate.

Xi’an Aleba Mineral Water Company September 17, 1999 33

7.0 Major purchases and accounts payable

7.1 Major purchases

TABLE 27. Major purchases planned RMB

Unit
Item Quantity Price Total Investment

Dispensers 1,000 130 130,000

Minivans 4 30,000 120,000
Bottles 3,000 35 105,000
Factory air conditioning units 3 8,000
Cell phones 4 1,500 6,000
Paint vans 8 500 4,000
Aleba uniforms 50 60 3,000
Factory ceiling reinforcement 2,000
Larger compressor for filling machine 1 2,000 2,000
Total 380,000

According to the Company’s financial model additional investments will be required, if sales
pro- jections are met. The financial model appears in the Appendix:
• Cap purchases will likely be required in December, March and May.
• Bottle purchases will be required in February, May and July.
• An additional four will be required by May of next year.

These investments are contingent on whether the Company meets its sales projections.

7.2 Accounts payable

TABLE 28. Accounts payable as of September 12, 1999

Amount
Payee Reason (RMB)
Construction company Construction of pre- 100,000
wash building
Construction company Rock sign at factory 20,000
Lantian hotel Shinzawa, Ray stay 5,000
Other 75,000
Total 200,000

Xi’an Aleba Mineral Water Company September 17, 1999 34

8.0 People

8.1 Current staffing

TABLE 29. Staffing and monthly salaries as of September 12, 1999

Xi’an Office RMB Lantian Factory RMB

General manager 1,500 Production manager 700
Assistant manager 1,000 Chief technician 700
Accountant 900 Administrator 600
Transportation manager 800 Assistant production manager 600
Cashier 600 Quality control technician 450
Warehouse keeper 600 Cashier, warehouse keeper 550
Chief administration department 800 Guard 500
Secretary 400 Worker 500
Marketing manager 800 Worker 400
Assistant marketing manager 700 Worker 400
Driver 600 Secretary 400
Driver 500
Delivery 400a
Delivery 400
Delivery 400

Total Xi’an Office 9,300 Total Lantian Factory 5,800

Total salaries 15,100
Total headcount 26
a. Delivery workers will be increased in October to 500 from 400 currently.

8.2 Current gaps

8.2.1 Financial and general management skills

• Wang Hui needs assistance in financial management to prepare cash forecasts.
• Wang Hui has inadequate management assistance to complete the projects scheduled for the
coming year.
• No financial arrangement in place to support Wang Hui.

8.2.2 Computer and database design skills

• Need database design for customer database.

Xi’an Aleba Mineral Water Company September 17, 1999 35

8.2.3 Graphic design skills and skills to develop promotional materials.
• The Company does not have professionally designed sales and promotion materials.
• Need outside assistance to develop corporate image program.
• Wang Hui needs assistance in developing promotional materials, such as a customer newslet-
ter.

8.2.4 No bonus system

• No bonus system in place to reward key employees for hitting targets.

8.3 Initiatives to bridge people gaps

8.3.1 Execute Memorandum of Agreement among Imagene, ATCO, Aleba

Management (Louisiana) and Aleba Management (Oregon) to develop stronger
management team to assist Wang Hui.
TABLE 30. Management team for joint venture

Responsibilities Paid by
Wang Hui General management ATCO, Imagene
Ed Morrison Business planning ATCO
Financial reporting to ATCO
Imagene
Jim Ray Financial reporting to Imagene
Evaluation Phase 2 Imagene investment JV
Ron Bradley Technical consulting Aleba Oregon
Ye Liu Financial analysis and translation
Marketing and promotional materials Imagene
Shinzawa Marketing and promotion in Xi’an
Evaluation Phase 2 Imagene investment

8.3.2 Develop bonus plan for workers tied to financial targets.

Xi’an Aleba Mineral Water Company September 17, 1999 36

9.0 Special project: Small bottle line

9.1 Overview
Small bottle line includes:
• injection molding equipment to manufacture preforms from PET;
• blow molding equipment to manufacture bottles;
• filling and capping line to produce 600 ml bottles of water.

9.2 Investment, market and distribution analysis

• Need to conduct investment, market and distribution analysis by November, 1999 if
production is to be complete by Summer 2000.
• Different business than five gallon:
1. Production economics: Selling plastic, not water.
2. Distribution system: Different distribution system to small retail shops.
• Aleba project started as small bottle project. Wang Hui has experience in this market.

9.3 Preliminary time schedule

TABLE 31. Preliminary time schedule for small bottle project

Month Year
Feasibility analysis complete November 1999
Investment decision December
Start building constructiona December
End building construction March 2000
Equipment installation March
Test production April
Sanitation bureau approvals May
Begin production June
a. Weather in Xi’an is a factor in building construction. The weather has to be warm
enough to pour a building foundation.

Xi’an Aleba Mineral Water Company September 17, 1999 37

10.0 Organization of the Joint Venture

TABLE 32. Investment overview of Joint Venture

Investment
a Form of Investment
Party (RMB millions) Percent
Xi’an Aleba Soya Land, buildings 1.6 24.62%
Aleba Water Company Cash, equipment 4.9 75.38%
Total 6.5 100.00%
a. In the corporate documents, Xi’an Aleba Soya is Party A and Aleba Water Company is
Party B.

FIGURE 5. Joint Venture Organization

Aleba Aleba
Fu An Eagle Capital Imagene Management Management
Louisiana Oregon

Xi'an Aleba Soya Aleba Water

Company
Company U.S.

24.62% 75.38%

Xi'an Aleba
Mineral Water
Company

Xi’an Aleba Mineral Water Company September 17, 1999 38

11.0 Financial plan

11.1 Summary of March-August operations

Detail on first six months of operation are presented in the Appendix. Before allowance for
depre- ciation and amortization, the Company lost 338,000 RMB during its first six months of
opera- tions.

FIGURE 6. Summary of Operations, March-August, 1999

RMB (000)
200 200
163

100 114 100

0 0

-100 -100
-127
-200 -200

-300 -272 -300

-338
-400 -400
Sales Manufacturing Marketing Administrative Financing costs

11.2 Summary of financial plan

• Use Imagene investment to expand delivery capability, bottle inventory, and customer
base through dispenser program.
• Major purchases will be phased to maintain flexibility.
TABLE 33. Uses of Imagene investment

RMB %
Sources:
Imagene investment 1,203,500
Uses:
Investments in major purchases 1,042,000 87%
Working capital 161,500 13%
Total uses 1,203,000 100%

Xi’an Aleba Mineral Water Company September 17, 1999 39

 TABLE 34. Schedule of major purchases

Cumulative percent
Major purchases % of Imagene funds of Imagene funds
RMB invested invested
Oct 331,000 28% 28%
Nov 189,000 16% 43%
Dec 52,000 4% 48%
Jan 0 - 48%
Feb 105,000 9% 56%
Mar 0 - 56%
Apr 0 - 56%
May 225,000 19% 75%
Jun 0 - 75%
Jul 140,000 12% 87%
Aug 0 - 87%
Sep 0 - 87%

Xi’an Aleba Mineral Water Company September 17, 1999 40

11.3 Burn rate: Projected monthly operating expense
For the coming year, the Company can operate with an operating budget of 49,300 RMB per
month.
TABLE 35. Projected monthly operating expenses

RMB
Salaries 16,000
Electricity 1,500
Telephone 2,600
Gasoline 3,000
Contract truck transportation 4,200
Office expenses 500
Travel 1,000
Entertainment 1,000
Q.C. Testing 500
Repairs 500
Contingency 1,000
Subtotal 31,800
Loan Interest 17,500
Total monthly operating expenses 49,300

11.4 Customers required for break-even

TABLE 36. Fixed costs for break even calculation

Monthly Annual
Operating expenses 49,300 591,600
Marketing programs 5,000 60,000
Total fixed 59,300 651,600

TABLE 37. Contribution per bottle and per customer

RMB
Revenue per bottle 8.50
Less:
Manufacturing costs (1.64)
Transport to Xi’an (1.45)
Transport to customer (2.27)
Equals: Contribution per bottle 3.14

Xi’an Aleba Mineral Water Company September 17, 1999 41

 TABLE 37. Contribution per bottle and per customer

RMB
Average bottle consumption per 3.75
customer per month
Average consumption per year 45
Contribution per customer per year 141.34

FIGURE 7. Calculation of customers required for break-even

RMB in millions
3.5
Fixed Costs
Contribution
3.0

2.5

2.0

1.5

1.0

0.5

0.0
2 4 6 8 10 12 14 16 18 20
Thousands of customers

Xi’an Aleba Mineral Water Company September 17, 1999 42

11.5 Projected cash balance
• Cash balances, after the Imagene investment should decline to 706,000 RMB in May, 2000.
After July, the Company should begin accumulating cash from operations.
TABLE 38. Cash projection, October 1999 to September, 2000

Cash in Cash out Balances

Opera- Invest- Total Opera- Total Net Cash
tions ment tions Monthly Balance
cash in Purchases cash out
Cash
Oct 43,850 1,203,500 1,247,350 49,300 331,000 10,000 867,050 877,050
Nov 56,450 - 56,450 49,300 189,000 877,050 -181,850 695,200
Dec 61,700 - 61,700 49,300 52,000 695,200 -39,600 655,600
Jan 66,950 - 66,950 49,300 0 655,600 17,650 673,250
Feb 77,325 - 77,325 49,300 105,000 673,250 -76,975 596,275
Mar 84,675 - 84,675 49,300 0 596,275 35,375 631,650
Apr 92,550 - 92,550 49,300 0 631,650 43,250 674,900
May 105,550 - 105,550 49,300 225,000 674,900 -168,750 506,150
Jun 115,525 - 115,525 49,300 0 506,150 66,225 572,375
Jul 126,025 - 126,025 49,300 140,000 572,375 -63,275 509,100
Aug 141,650 - 141,650 49,300 0 509,100 92,350 601,450
Sep 128,625 - 128,625 49,300 0 601,450 79,325 680,775

FIGURE 8. Projected cash balance, October, 1999 to September, 2000

RMB
900,000 900,000

800,000 800,000

700,000 700,000

600,000 600,000

500,000 500,000

400,000 400,000

300,000 300,000

200,000 200,000

100,000 100,000

0 0

-100,000 -100,000
January

May

September
March

July

August
June
April
October

November

December

February

Cash Balance
Net Operating Cash

Xi’an Aleba Mineral Water Company September 17, 1999 43

The summary of operations in presented in the Company’s financial model in the Appendix.

11.6 Schedule of reports

TABLE 39. Schedule of Reports

Report Frequency
Production and dellivery Weekly
Marketing Every 2 weeks
Financial Monthly

11.7 Useful benchmarks

TABLE 40. Useful benchmarks to measure progress

Report
Data Benchmark Frequency Comment
Production and deliveries to Xi’an Increasing Weekly Deliveries include revenue and
promotional bottles.
Daily deliveries to customers 300 Weekly Deliveries 7 days per week. 300
represents about break-even
volumes.
New customers per month 200-300 Monthly Budget projection.
Bottles per customer 4-6 Monthly Below 4 and deliveries degrade;
above 6 and inefficiencies arise.
Revenue per bottle 8 Monthly Below 8 indicates too deep dis-
counting on price.
Promotional bottles per month 4,000 Monthly Above 4,000 exceeds budget.
Accounts receivable retail shops Monthly Increases in A/R should track
increases in customers. Inidca-
tor of financial condition of
retail shops.
Cash balance 500,000 RMB Monthly Should not go below 500,000
RMB

11.8 Key drivers of the business

1. Number of customers
2. Transportation efficiency
3. Price realization

Xi’an Aleba Mineral Water Company September 17, 1999 44

Index
A
Accounting 32 Manufacturing plan 25
Accounts payable 34 Manufacturing upgrade programs 26
Administration plan 32 Market positioning 22
Administrative gaps 33 Marketing plan 16
Administrative initiatives 33 Marketing programs 19, 23
Marketing strategy 22
B Memorandum of Agreement 36
Background 1
Benchmarks 44 P
Bonus plan 36 People 35
Bottle damage and losses 26 People gaps 35
Bottle locations 32 Price realization 13
Break-even analysis 41 Price realization, segment and channel 13
Burn rate 41 Production plan 26
Business System 2 Production, 1999 26
Buying decisions 20 Profitability by channel 14

C R
Capability gaps 4 Revenue summary, 1999 10
Cash balance, projected 43
Cash controls 32 S
Company plan 1 Sales by channel 12
Competition 18 Sales forecast 10
Consumption rates by segment 12 Sales plan 10
Contribution 41 Sales programs 15
Current position 3 Sales strategy 15
Customers by segment 12 Sales, current situation 10
Schedule and milestones 7
D School market 18
Dispenser sales 14 Small bottle line 37
Dispensers in institutional accounts 17 Staffing 35
Summary of Operations, 1999 39
F
Family market 16 T
Financial plan 39 Target markets 16
Ticket revenue, 1999 11
G Transport costs for one bottle 30
Goals and targets 1 Transportation costs 29
Transportation gaps 30
H Transportation initiatives 31
Health concerns over distilled water 21 Transportation plan 28
Transportation system 28
I
Imagene investment, uses 39
Initiatives, overview 5
Initiatives, summary 1
Institutional market 16

J
Joint venture organization 38

L
Logistics 32

M
Major purchases 34
Major purchases, schedule 40
Management team 36
Manufacturing costs 25
Manufacturing inventories 25

September 17, 1999 1