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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 33-26617A
CBR BREWING COMPANY, INC.
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(Exact name of registrant as specified in its charter)
Florida 65-0145422
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
23/F., Hang Seng Causeway Bay Building
28 Yee Wo Street, Causeway Bay, Hong Kong
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(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: 852-2866-2301
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 31, 2001, the Company had 5,010,013 shares of Class A common
stock and 3,000,000 shares of Class B common stock issued and outstanding.
As of March 31, 2001, the aggregate market value of the issuer's
outstanding Class A common stock held by non-affiliates on March 31, 2001,
computed by reference to the average of the closing bid and ask prices, was
US$1,878,755.
Documents incorporated by reference: None.
1
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Annual Report on Form 10-K for the fiscal year ended December 31,
2000 contains "forward-looking" statements within the meaning of the Federal
securities laws. These forward-looking statements include, among others,
statements concerning the Company's expectations regarding sales trends, gross
margin trends, operating costs, the availability of funds to finance capital
expenditures and operations, facility expansion plans, and other statements of
expectations, beliefs, future plans and strategies, anticipated events or
trends, and similar expressions concerning matters that are not historical
facts. The forward-looking statements in this Annual Report on Form 10-K for
the fiscal year ended December 31, 2000 are subject to risks and uncertainties
that could cause actual results to differ materially from those results
expressed in or implied by the statements contained herein.
2
PART I.
ITEM 1. BUSINESS
OVERVIEW
CBR Brewing Company, Inc., a Florida corporation (the "Company", which
term shall include, when the context so requires, its subsidiaries and
affiliates), is the parent of High Worth Holdings Ltd., a British Virgin Islands
corporation ("Holdings"). Since November 1994, Holdings has owned a 60%
interest in Zhaoqing Blue Ribbon High Worth Brewery Ltd., a Sino-foreign joint
venture ("High Worth JV"), which, through its subsidiaries and affiliates, is
engaged in the production and sale of Pabst Blue Ribbon beer in the People's
Republic of China ("China" or the "PRC"). The other 40% interest in High Worth
JV is owned by Guangdong Blue Ribbon Group Co. Ltd. ("Guangdong Blue Ribbon"), a
related company (see "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS").
Substantially all of the beer currently sold by the Company is marketed under
the Pabst Blue Ribbon label, and is brewed under a sublicense agreement with
Guangdong Blue Ribbon, which, through an assignment and transfer, obtained its
license from Pabst Brewing Company ("Pabst US").
All of the Company's business operations are located in the PRC and
are conducted in Renminbi ("RMB"), which is the currency of China. During the
three years ended December 31, 1998, 1999 and 2000, the exchange rate has
remained stable at approximately US$1.00 to RMB 8.3.
DESCRIPTION OF BUSINESS
The Company is engaged in the business of brewing, distributing and
marketing Pabst Blue Ribbon beer in China. As of December 31, 2000, the Company
owned effective interests of 60%, 24%, 33% and 9% in four brewing facilities
currently producing Pabst Blue Ribbon beer in China, all of which are managed by
the Company. The Company is also presently responsible for the marketing and
sale in China of Pabst Blue Ribbon beer produced by the four brewing facilities.
The Company, through Holdings, also owns a 51% effective interest in a fifth
brewing facility producing local brand beer, but the production and operation
of this brewery was formally terminated in December 2000. The Company intends
to dispose of its equity interest in this brewery during 2001.
China is currently ranked as the second largest beer producer and
consumer in the world behind the United States. The management of the Company
believes that Pabst Blue Ribbon beer is currently one of the leading foreign
labels sold in China, both in number of units sold and total sales. Pabst Blue
Ribbon is considered a premium brand in China, along with such other labels as
Tsingtao, Carlsberg, Miller, Budweiser, Coors and San Miguel.
The Company produces Pabst Blue Ribbon beer in China to avoid import
tariffs that range as high as 120%. The majority of the production is mainly
concentrated in two breweries located at Zhaoqing City, which is approximately
100 miles from Hong Kong in the Guangdong Province of China. Pabst US provides
quality control assistance to the Company on a regular basis. The Company
markets Pabst Blue Ribbon beer in all major provinces in China. The Company
currently maintains offices in Beverly Hills, California, Las Vegas, Nevada,
Hong Kong and Zhaoqing City.
High Worth JV holds certain licensing rights for Pabst Blue Ribbon
beer (see "PABST LICENSING ARRANGEMENTS AND TRADEMARKS") and also directly owns
100% of a Pabst Blue Ribbon brewing complex ("Zhaoqing Brewery"), and, through a
subsidiary, a 40% interest in Zhaoqing Blue Ribbon Brewery Noble Ltd., a
Sino-foreign joint venture ("Noble Brewery"). Noble Brewery owns a second Pabst
Blue Ribbon brewing complex that is also managed by Zhaoqing Brewery. A
subsidiary of Noble China, Inc., an unaffiliated company whose stock is traded
on the Toronto Stock Exchange, owns the other 60% interest in Noble Brewery (see
"THE JOINT VENTURE COMPANIES").
3
In addition, High Worth JV indirectly owns a 70% interest in Zhaoqing
Blue Ribbon Beer Marketing Company Limited, a PRC company (the "Marketing
Company"), which presently conducts the sales, advertising and promotional
efforts for the Company's production of Pabst Blue Ribbon beer in China. The
remaining 30% interest in the Marketing Company is directly owned by Guangdong
Blue Ribbon. Through its ownership in High Worth JV, Guangdong Blue Ribbon also
has a 28% indirect interest in the Marketing Company (see "MARKETING AND
OPERATIONS - SUMMARY OF OPERATIONS"), resulting in the Company owning a 42% net
interest in the Marketing Company.
In January 1998, the Company, through High Worth JV, established a
joint venture company in Hubei Province, Zao Yang Blue Ribbon High Worth Brewery
Limited ("Zao Yang High Worth Brewery"), which operates a third Pabst Blue
Ribbon brewing complex in China and is managed by Zhaoqing Brewery. High Worth
JV owns a 55% interest, so that the Company has an effective interest of 33%.
Zao Yang Brewery, an unaffiliated company in Hubei Province, owns the other 45%
interest in Zao Yang High Worth Brewery (see "MARKETING AND OPERATIONS -
INVESTMENT IN NEW BREWERY" and "THE JOINT VENTURE COMPANIES").
Pursuant to an Equity Transfer Agreement signed on January 19, 1999,
High Worth JV received a 15% consideration-free equity interest in Sichuan
Brewery, equivalent to an effective interest of 9%. Sichuan Brewery was
formally restructured into a new joint venture company and is the fourth Pabst
Blue Ribbon brewing complex in China. High Worth JV was also granted a
three-year option to increase its equity interest to 51% at a fixed cost (see
"PABST LICENSING ARRANGEMENT AND TRADEMARKS - SICHUAN BREWERY").
On June 5, 1999, a formal Joint Venture Agreement was signed among Le
Shan City E Mei Brewery (46.62%), High Worth JV (15.00%) and Wai Shun Investment
Limited (38.38%), an unaffiliated Hong Kong company, to form Sichuan Blue
Ribbon Brewery High Worth Ltd. ("Sichuan High Worth Brewery"). The total
registered and paid-up capital of Sichuan High Worth Brewery is RMB 51,221,258.
High Worth JV's 15% equity interest is consideration-free but entitled to share
in the profits of Sichuan High Worth Brewery. The Joint Venture Agreement and
the relevant legal documents have been approved by the local government
authorities. Sichuan High Worth Brewery is currently producing Pabst Blue
Ribbon beer.
On October 18, 1999, Holdings, through its wholly-owned subsidiary
incorporated in the British Virgin Islands, March International Group Limited
("March International"), signed a formal Joint Venture Agreement with Jilin
Province Juetai City Brewery (40%) and Jilin Province Chuang Xiang Zhi Yie Ltd.
(9%), both of which are unaffiliated PRC companies, to form Jilin Lianli (CBR)
Brewing Company Ltd. ("Jilin Lianli Brewery"). The total registered and paid-up
capital of Jilin Lianli Brewery is RMB 25,000,000. March International
contributed one new packing line and the right to use the "Lianli" beer
trademark with a total value of RMB 12,750,000 as capital, and received a 51%
effective interest in Jilin Lianli Brewery. The technical renovation of the
existing brewing equipment and the installation of the new packaging line was
completed in April 2000. The Joint Venture Agreement was approved by the local
government and formal operations commenced in May 2000. However, due to weak
market response and the inability of the Chinese local partners to honor their
portion of the working capital commitment, the production and operation of Jilin
Lianli Brewery was formally terminated in December 2000. The Company is
currently in negotiations with certain interested parties in an effort to
dispose of its equity interest in the brewery during 2001.
4
The Company conducts a substantial portion of its purchases through
related parties, and has additional significant continuing transactions with
such parties (see "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS").
PROPERTY AND PRODUCTION FACILITIES
ZHAOQING BREWERY
Zhaoqing Brewery is situated on a site containing approximately
1,421,000 square feet and is three miles from Zhaoqing City, Guangdong Province.
Zhaoqing Brewery occupies the site pursuant to certificates of land use rights
issued by the local government. The land use rights certificates do not specify
a period for the use of the land, but normally it does not exceed 70 years.
The original facilities of Zhaoqing Brewery were constructed between
1978 and 1980 with annual production capacity based on old brewing technology of
approximately 50,000 metric tons or 425,000 barrels of beer. Prior to 1995,
Zhaoqing Brewery had produced domestic brands exclusively under various brand
names. In mid-1994, with the assistance of Pabst US, 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.
In early 1995, the production of all domestic brands ceased. Zhaoqing Brewery
is now producing substantially all of its beer production under the Pabst Blue
Ribbon label. 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 of beer by the end of 1995.
Zhaoqing Brewery annually shuts down portions of the facility for a
short period of time during the low season to provide regular scheduled
maintenance. Zhaoqing Brewery has access to replacement parts that can be
manufactured by several local toolmakers in Zhaoqing.
NOBLE BREWERY
Noble Brewery is situated on a site adjacent to Zhaoqing Brewery
containing approximately 1,453,000 square feet. Noble Brewery has land use
rights of 50 years ending in 2043.
Noble Brewery consists of the original facilities constructed between
1988 and 1990 by Pabst Blue Ribbon Brewery (Zhaoqing) Co. Ltd. ("Pabst
Zhaoqing"), the operator of the facilities prior to the establishment of Noble
Brewery. These facilities had an annual production capacity of approximately
80,000 metric tons or 680,000 barrels of beer. The second phase of brewing
facilities, which was completed in July 1994, has an annual production capacity
of approximately 120,000 metric tons or 1,020,000 barrels of beer. Pabst US
supplied the majority of the equipment for the development of both the first and
second phase of the brewing facilities, in addition to offering technical
assistance in its installation and maintenance. On an annual basis, Noble
Brewery shuts down portions of the facility for a short period of time during
the low season to provide regular scheduled maintenance. Noble Brewery has
access to replacement parts that can be manufactured by several local toolmakers
in Zhaoqing.
ZAO YANG HIGH WORTH BREWERY
The original facilities of Zao Yang High Worth Brewery were
constructed between 1980 and 1985 with annual production capacity based on old
brewing technology of approximately 40,000 metric tons or 340,000 barrels of
beer.
Zao Yang High Worth Brewery is situated on a site containing
approximately 753,000 square feet and is located within the vicinity of Zao Yang
City, Hubei Province. Zao Yang High Worth Brewery occupies the site pursuant to
a certificate of land use rights issued by the local government. The land use
rights are part of the assets acquired by Zao Yang High Worth Brewery from Zao
Yang Brewery.
5
High Worth JV was responsible for transferring the technical know-how
and production techniques to brew Pabst Blue Ribbon beer to Zao Yang High Worth
Brewery, as well as assisting in the renovation of existing equipment, in order
to convert the brewery into a Pabst Blue Ribbon brewing complex.
During April 1998, the technical renovation process to convert the old
brewing facilities of Zao Yang High Worth Brewery into a Pabst Blue Ribbon
brewing complex was completed. Zao Yang High Worth Brewery commenced the
production of Pabst Blue Ribbon beer in June 1998, and the Marketing Company
began purchasing Zao Yang High Worth Brewery's production of Pabst Blue Ribbon
beer for distribution. In addition, Zao Yang High Worth Brewery also produces
domestic brand beer under the brand name "Di Huang Quan", which it sells
directly to the nearby regions.
SICHUAN HIGH WORTH BREWERY
Sichuan High Worth Brewery is situated on a site containing
approximately 1,089,000 square feet and is located within the vicinity of Le
Shan City, Sichuan Province, which is approximately 160 kilometers from Chengdu,
the provincial capital of Sichuan Province. The original facilities of Sichuan
High Worth Brewery were constructed in 1988 with annual production capacity
based on old brewing technology of approximately 20,000 metric tons or 170,000
barrels of beer. Prior to late 1996, the facilities were used exclusively to
produce beer under domestic local brand names. Guangdong Blue Ribbon acquired
the brewery as its branch and started to convert the facility into a Pabst Blue
Ribbon brewing complex in late 1996. In April 1997, Sichuan High Worth Brewery
commenced production of beer under the Pabst Blue Ribbon label, which is sold to
the Marketing Company for resale (see "PABST LICENSING ARRANGEMENT AND
TRADEMARKS - SICHUAN HIGH WORTH BREWERY").
JILIN LIANLI BREWERY
The original facilities of Jilin Lianli Brewery were constructed
between 1980 and 1984 with annual production capacity based on old brewing
technology of approximately 20,000 metric tons or 170,000 barrels of beer.
Prior to the formation of the new joint venture company, the facilities were
used to produce domestic beer under the brand name "Tin Chi Quan".
Jilin Lianli Brewery is situated on a site containing approximately
330,000 square feet and is located within the vicinity of Juetai City, Jilin
Province. Jilin Lianli Brewery occupies the site pursuant to a certificate of
land use rights issued by the local government. The land use rights are part of
the assets acquired by Jilin Lianli Brewery from Jilin Province Juetai City
Brewery.
March International is responsible for transferring the technical
know-how and production techniques to brew high quality beer products to Jilin
Lianli Brewery, as well as assisting in the renovation of existing equipment, in
order to convert the brewery into a modern brewing complex. The technical
renovation process to convert the old brewing facilities of Jilin Lianli brewery
into a modern brewing complex was completed in April 2000, and operations
commenced in May 2000. However, due to weak market response and the inability
of the Chinese local partners to honor their portion of the working capital
commitment, the production and operation of Jilin Lianli Brewery was formally
terminated in December 2000. The Company is currently in negotiation with
certain interested parties to dispose of its equity interest in the brewery.
6
MARKETING AND OPERATIONS
SUMMARY OF OPERATIONS
Pursuant to the respective long-term purchase contracts signed with
all of the Pabst Blue Ribbon brewing complexes in China, the Marketing Company
began purchasing the output of beer from Noble Brewery in July 1995, Zhaoqing
Brewery in April 1995, Sichuan High Worth Brewery in April 1997 and Zao Yang
High Worth Brewery in June 1998 (see "PABST LICENSING ARRANGEMENTS AND
TRADEMARKS"). The Marketing Company is responsible for the distribution,
promotion and advertising of the Company's production of Pabst Blue Ribbon beer
in China. The Marketing Company is allowed to mark-up the prices of the Pabst
Blue Ribbon beer purchased or adjust the ex-factory prices as necessary in order
to adequately cover the selling, advertising, promotional, distribution and
administrative expenses incurred in selling these beer products to distributors
throughout China.
PABST BLUE RIBBON BEER
Substantially all of the beer currently produced by Noble Brewery,
Zhaoqing Brewery and Sichuan High Worth Brewery is Pabst Blue Ribbon beer. Zao
Yang High Worth Brewery currently produces Pabst Blue Ribbon beer as well as "Di
Huang Quan" beer.
There are three products in the portfolio of the Pabst Blue Ribbon
breweries: 11-degree light processed beer, 10-degree light processed beer, and
draught beer. The 11-degree light processed beer is the primary product of the
breweries, and is packaged in 946 ml., 640 ml. and 355 ml. bottles and 500 ml.
and 355 ml. cans. The 10-degree light processed beer is packaged in 640 ml.
bottles. The draught beer is sold only in kegs.
Sales of the 11-degree light processed beer in 946 ml., 640 ml. and
355 ml. bottles and 500 ml. and 355 ml. cans accounted for approximately 4.0%,
45.8%, 4.6%, 0.1% and 44.4%, respectively, of the sales volume of the Company in
2000.
Sales of the 11-degree light processed beer in 946 ml., 640 ml. and
355 ml. bottles and 500 ml. and 355 ml. cans accounted for approximately 4.6%,
52.1%, 2.1%, 0.1% and 39.7%, respectively, of the sales volume of the Company in
1999.
The 10-degree light processed beer packaged in 640 ml. bottles for
Pabst Blue Ribbon beer was introduced by the Company in 1998, and its sales
accounted for approximately 27.7% of the sales volume of the Company in 1998.
Although the sales volume of the 10-degree light processed Pabst Blue
Ribbon beer constituted a significant portion of total sales in 1998, its
contribution to overall operating profit was below management's expectations.
Accordingly, management decided to discontinue the 10-degree light processed
Pabst Blue Ribbon beer in 1999, as a result of a strategic reevaluation of the
Company's markets. Accordingly, the 10-degree light processed beer packaged in
640 ml. bottles for Pabst Blue Ribbon beer only accounted for approximately 0.1%
of the sales volume of the Company in both 1999 and 2000.
During 2000, Sichuan High Worth Brewery produced 11-degree light
processed Pabst Blue Ribbon beer, which was packaged in 640 ml. glass bottles
and 355 ml. cans. In 2000, the Marketing Company distributed 7,870 metric tons
of Pabst Blue Ribbon beer produced by Sichuan High Worth Brewery, which
represented 4.6% of the Company's total sales volume in 2000. In 1999, the
Marketing Company distributed 9,041 metric tons of Pabst Blue Ribbon beer
produced by Sichuan High Worth Brewery, which represented 4.7% of the Company's
total sales volume in 1999.
7
During 2000, Zao Yang High Worth Brewery produced 11-degree light
processed Pabst Blue Ribbon beer, which was packaged in 640 ml. glass bottles
and 355ml can. In 2000, the Marketing Company distributed 2,280 metric tons of
Pabst Blue Ribbon beer produced by Zao Yang High Worth Brewery, which
represented 1.3% of the Company's total sales volume in 2000. In 1999, the
Marketing Company distributed 4,716 metric tons of Pabst Blue Ribbon beer
produced by Zao Yang High Worth Brewery, which represented 2.5% of the Company's
total sales volume in 1999.
Pabst Blue Ribbon beer is marketed and sold as a premium beer in
establishments such as restaurants, bars, alcohol and tobacco companies and
retail stores. The Marketing Company will continue its efforts to consolidate
and expand the distribution of these products in existing and new markets in
China, subject to the limitations of the Company's ability to expand its market
share in these markets, the competitive marketing strategies of other brewers
and the growth of the Chinese economy.
The specifications and characteristics of the beers currently produced
by the breweries are set forth below:
TYPE OF BEER PACKAGE GENERAL DESCRIPTION
- ------------ ------- -------------------
11-degree light processed Can (500 ml. and 355 ml.) 11-degree malt
beer Bottle (946 ml., 640 ml. content,
and 355 ml.) alcohol content 3.4%
(w/w)
Draught beer Keg (30 liters) 11-degree malt
content,
alcohol content 3.4%
(w/w)
Note: w/w refers to weight by weight (i.e., measurement of alcoholic content of
beer by weight of beer).
The Company's highest volume sales for Pabst Blue Ribbon beer have
been in the provinces of Guangdong, Fujian and Zhejiang. The Company utilizes a
network of regional distributors whose field sales force maintains customer
contact and promotes customer satisfaction. Sales of Pabst Blue Ribbon beer
were 171,785 metric tons or approximately 1,460,000 barrels in 2000, a 9.8%
decrease over 1999. The Company believes that the decrease was attributable, in
substantial part, to a softening in demand for higher-priced foreign branded
premium beer in China, and the aggressive pricing and promotional strategies
adopted by some major state-owned breweries. Sales of Pabst Blue Ribbon beer
were 190,488 metric tons or approximately 1,619,000 barrels in 1999, a 17.9%
decrease from 1998.
DOMESTIC BRAND NAME BEER
Prior to the end of 1994, Zhaoqing Brewery produced beer exclusively
under domestic brand names, such as "Zhaoqing" beer, "Dinghu" beer and "Xile"
beer, all of which were non-premium beers which targeted customers in the low to
middle economic range. Production of these local brand beers was completely
discontinued in March 1995 when Zhaoqing Brewery commenced producing Pabst Blue
Ribbon beer on an exclusive basis. However, beer that does not meet Pabst Blue
Ribbon quality standards is generally packaged and distributed as local brand
beer.
Zao Yang High Worth Brewery also produces domestic brand beer under
the name "Di Huang Quan".
8
Prior to the suspension of operations at Jilin Lianli Brewery, it
produced and sold domestic beers under the brand name "Tin Chi Quan" and "Lianli
Beer". During its six month period of operations in 2000, total beer sales were
5,380 metric tons or approximately 45,700 barrels.
In late 2000, Noble Brewery launched a local brand beer, "Double V",
which is priced to suit lower to middle income consumer segments.
Pabst Blue Ribbon beer is targeted at the premium beer market in China
while the domestic brand beer produced by Noble Brewery, Zhaoqing Brewery and
Zao Yang High Worth Brewery is targeted at the non-premium market.
The following tables present information with respect to the
non-consolidated sales and volume of beer sold by Noble Brewery, Zhaoqing
Brewery, Zao Yang High Worth Brewery and Jilin Lianli Brewery in 1998, 1999 and
2000. All breweries producing Pabst Blue Ribbon beer sold their Blue Ribbon
beer products to the Marketing Company in 1998, 1999 and 2000 for resale.
Net Sales
Net Sales Volume Sold per Ton
--------- ----------- ---------
(RMB'000) (metric tons) (RMB'000)
1998:
Noble Brewery 584,470 143,236 4.1
Zhaoqing Brewery
Local Brands 3,608 1,635 2.2
Pabst Blue Ribbon 292,333 71,611 4.1
Zao Yang High Worth Brewery
Local Brands 3,184 2,083 1.5
Pabst Blue Ribbon 12,059 4,295 2.8
Marketing Company
Pabst Blue Ribbon 1,114,215 231,952 4.8
1999:
Noble Brewery 513,808 118,464 4.3
Zhaoqing Brewery
Local Brands 3,281 1,439 2.3
Pabst Blue Ribbon 253,330 59,212 4.3
Zao Yang High Worth Brewery
Local Brands 15,039 12,299 1.2
Pabst Blue Ribbon 16,677 4,716 3.5
9
Net Sales
Net Sales Volume Sold per Ton
--------- ----------- ---------
(RMB'000) (metric tons) (RMB'000)
Marketing Company
Pabst Blue Ribbon 968,139 190,488 5.1
2000:
Noble Brewery
Local Brands 654 213 3.1
Pabst Blue Ribbon 442,438 103,755 4.3
Zhaoqing Brewery
Local Brands 2,160 639 3.4
Pabst Blue Ribbon 224,760 53,169 4.2
Zao Yang High Worth Brewery
Local Brands 23,487 17,487 1.3
Pabst Blue Ribbon 3,617 1,023 3.5
Jilin Lianli Brewery
Local Brands 6,710 5,380 1.2
Marketing Company
Local Brands 824 219 3.8
Pabst Blue Ribbon 924,507 171,785 5.4
SEASONALITY
The beer industry in China is seasonal. The Company's sales are
usually lowest in the months of October and November and highest in the months
of March through September.
LOCATION
Noble Brewery and Zhaoqing Brewery are located adjacent to each other
in the City of Zhaoqing. The municipality of Zhaoqing is one of the major
municipal areas of Guangdong Province. It is strategically located at the lower
and middle reaches of the Zijiang River, 62 miles from Guangzhou, the provincial
capital, by road and 142 sea miles from Hong Kong by water. The area enjoys a
mild, sunny climate with an adequate amount of rainfall. The climate and soil
conditions provide an important base of agriculture and forestry for Guangdong
Province.
10
Guangdong Province is the fifth most populous province in China with a
population of approximately 65,000,000, of whom over 7,000,000 are located in
the metropolitan Guangdong area. The Municipality of Zhaoqing covers a total
area of 8,500 square miles and has a population of approximately 5,700,000. The
metropolitan City of Zhaoqing has a population of approximately 400,000 and
covers an area of 254 square miles. Zhaoqing enjoys a well-developed
infrastructure, including transportation facilities and a reliable power,
communication and service infrastructure. The area contains extensive
agricultural activity.
Zao Yang High Worth Brewery is located in Hubei Province, which is
situated in the center of China. Zao Yang High Worth Brewery has immediate
access to the provincial highway network and is strategically positioned to
serve the surrounding provinces.
Sichuan High Worth Brewery is located in Le Shan City, which is
approximately 160 kilometers from Chengdu, the provincial capital of Sichuan
Province. Sichuan Province is in the western region of China and is the most
populous province in China, with a population of approximately 110,000,000.
Sichuan High Worth Brewery has immediate access to the provincial highway
network and is strategically positioned to serve the surrounding cities.
Jilin Lianli Brewery is located in Juetai City, which is approximately
80 kilometers from Cheungchun, the provincial capital of Jilin Province. Jilin
Province is in the northern region of China with a population of approximately
27,000,000. Jilin Lianli has immediate access to the provincial highway network
and is strategically positioned to serve the northeastern provinces.
QUALITY CONTROL
Rigorously applied quality control is critical to ensure a
consistently high quality standard for the products produced by the breweries.
In 1990, quality control experts were sent by Pabst US to Zhaoqing to teach
brewery personnel appropriate inspection techniques, quality control measures
and production procedures. Pabst US experts trained the brewery's personnel in
the specific brewing techniques required in order to meet the standards set by
Pabst US. An engineer from Pabst US is stationed in China to test random
production samples and perform quality control on a continuing basis. In
addition, the breweries send samples of their beer on a regular basis to Pabst
US in the United States for content examination and testing to ensure that
quality standards are adhered to on a consistent basis. Pabst US participated
in the conversion of the brewery facilities of Zhaoqing Brewery, Zao Yang High
Worth Brewery and Sichuan Brewery into Pabst Blue Ribbon brewing facilities and
provided technical assistance and training.
RAW MATERIALS
The primary raw materials utilized in the brewing of beer are malt,
husked rice, hops and water. The aggregate cost of the primary raw materials
represents approximately 21% of the direct cost of production, excluding
depreciation, of Pabst Blue Ribbon beer and 20% of domestic brand beers. Cost
of packaging represents approximately 57% of the total direct cost of
production, excluding depreciation, of Pabst Blue Ribbon beer and 42% of
domestic brand beers.
MALT: Virtually all of the malt utilized for producing Pabst Blue
Ribbon beer is purchased from regional malt manufacturers. The cost of malt
represents approximately 67% of the primary raw material cost in the direct cost
of production, excluding depreciation and packaging, of Pabst Blue Ribbon beer
and 62% of domestic brand beers.
11
HUSKED RICE: Husked rice is sourced from local and regional
suppliers. Given the extensive agricultural activity in China, management
believes that there is an abundant and reliable supply of rice to meet ongoing
production needs. The cost of husked rice represents approximately 16% of the
primary raw material cost in the direct cost of production, excluding
depreciation and packaging, of Pabst Blue Ribbon beer and 15% of domestic brand
beers.
HOPS: The hops utilized for producing Pabst Blue Ribbon beer are
acquired primarily from overseas suppliers through local importers. The cost of
hops represents approximately 8% of the primary raw material cost in the direct
cost of production, excluding depreciation and packaging, of Pabst Blue Ribbon
beer and 8% of domestic brand beers.
WATER: The breweries utilize local water sources and intensively
monitor the quality of the water used in the brewing process for compliance with
the Company's own stringent quality standards.
CONTAINERS
All of the beer bottles required by the Company are supplied by
regional glass manufacturers. Currently, there is a recycling bottle program in
place and the Company uses both new and recycled bottles and new cans in
packaging its beer.
American National Can (Zhaoqing) Company Limited ("American National
Can") supplies approximately 95% of the aluminum cans used by the two breweries
in Zhaoqing. American National Can produces cans of high quality that meet the
ISO standard and has contracted to meet the can supply requirements of the
breweries at a pre-negotiated price. The manufacturing plant of American
National Can is located within the same industrial complex as the breweries.
American National Can supplies cans pursuant to supply contracts with each of
the breweries that have no fixed expiration date. Guangdong Blue Ribbon has an
equity interest in American National Can. The breweries, however, can and are
free to obtain alternative supplies of cans from other nearby cities at only
slightly higher cost.
TRANSPORTATION/DISTRIBUTION
In view of the wide geographic market in China, the Company is
constantly reviewing the methods for distributing its malt beverages.
TRANSPORTATION: During 2000, 18% of the Company's products sold were
shipped by rail tank cars from Zhaoqing to distributors throughout Guangdong
Province, and 76% were shipped from Zhaoqing by truck (63%) and by boat (13%)
directly to distributors throughout China. The remaining 6% of beer products
sold were produced by Zao Yang High Worth Brewery and Sichuan High Worth Brewery
and were primarily distributed within the Hubei and Sichuan regional markets by
truck.
Domestic brand beers made by Zhaoqing Brewery, Zao Yang High Worth
Brewery and Jilin Lianli Brewery were primarily transported by trucks and
shipped within the regional markets.
Transportation railcars and vehicles are insulated to keep malt
beverage products at proper temperatures until they are delivered to distributor
locations.
DISTRIBUTION: Delivery of Pabst Blue Ribbon beer to retail markets in
Guangdong Province and to the rest of China is accomplished through a network of
regional distributors which sell to tobacco and alcohol companies, bars,
restaurants and retail stores. The Marketing Company has over 400 distributors
and sub-distributors throughout China. Customers with material transaction
volume are required to issue bills of exchange from their respective banks to
secure payment on the due date. The Marketing Company typically appoints only
one distributor in each region (except for a large region in which more than one
12
may be appointed) to ensure that such distributor devotes adequate effort and
resources to the development of a broad-based retail distribution network for
Pabst Blue Ribbon beer in that distributor's region. These distribution
arrangements include flexibility for the Marketing Company to replace
distributors or modify its arrangements with existing distributors. No single
distributor accounted for more than approximately 5% of barrel sales in 2000.
During the year ended December 31, 2000, approximately RMB 110,951,003
was allocated to promotional advertising for Pabst Blue Ribbon beer and
approximately RMB 88,067,872 was allocated to other specific promotional
activities and incentives to distributors. In addition, approximately RMB
11,983,516 was allocated to advertising and promotional activities for other
local brand name beer in 2000. Advertising media includes television, radio,
billboards, magazines and newspapers. In addition, the Marketing Company
provides its distributors with promotional gift items, sales incentive bonuses
and volume discounts, and special lucky draw and specific promotional campaigns
are held during the year.
MARKETS AND COMPETITION
With the influx of foreign branded beer into the China market, as well
as the aggressive pricing and promotional strategies implemented by some major
state-owned breweries, the Company anticipates that competition in the Chinese
beer market will continue to be intense in 2001, and additional marketing and
advertising efforts will have to be implemented in order to maintain the market
leadership of Pabst Blue Ribbon beer.
There is a considerable difference in the prices at which local or
regional beer is sold in China as compared to the price of foreign or premium
brands such as Pabst Blue Ribbon, San Miguel, Foster's or Carlsberg. Generally,
a 640 ml. bottle of local beer typically sells for 1-2 RMB (US$0.12 to US$0.24),
as compared to premium beers which sell for 4-6 RMB (US$0.48 to US$0.72).
MARKETS: The beer market in China has experienced substantial growth
in rates of production and demand. However, the industry is largely fragmented
and highly regionalized. A key reason for the fragmented industry is the lack
of an effective transportation system and the regionalized market. Another
reason for the fragmented market is that local breweries are generally small in
capacity and lack the financial resources and capability to launch a national
distribution network and promotion program.
Approximately 750 breweries exist in China, of which over 90% are
small local breweries that produce non-premium beer for local or regional
consumption. Certain Chinese taxes based on volume rather than sales price also
favor the higher-priced premium beer breweries.
Although the influence of the economic turmoil in Asia has been
diminishing and China's economy has resumed its positive growth, the
aftereffects on the Chinese beer market are still affecting the spending pattern
of consumers. Management anticipates that the market demand for high-priced
foreign premium labels will continue to be stagnant as consumers shift to
lower-priced but improved quality local beer products. The competition among
major Chinese breweries to maintain market share under the current market
conditions is also expected to exert continuing pressure on the Company's
operating results during 2001. Management has responded to changing market
conditions by consolidating and rationalizing the production and operations of
the two major breweries in Zhaoqing through the pooling of management resources,
by broadening its product line and expanding its distribution efforts. The
Company is taking steps to maintain its premium beer market share and to develop
a new range of medium-priced products under separate labels to suit the market's
changing needs.
13
COMPETITION: Of the brands comprising the premium sector, Tsingtao
and Pabst Blue Ribbon are the major market leaders. Tsingtao is the largest
brewer of beer in China and is one of the best selling beers in China and the
largest brand exported from China. Other companies seeking market share in the
Chinese market include Carlsberg, San Miguel, Beck's, Lowenbrau, Heniken,
Anheuser-Busch, Stroh's, Miller, Foster's, Coor's and Heileman.
CAPITAL INVESTMENT
In 1998, Zao Yang High Worth Brewery spent approximately RMB
40,000,000 to convert and renovate the existing old brewing facilities into a
Pabst Blue Ribbon brewing complex.
In 1999, Zao Yang High Worth Brewery spent approximately RMB 2,000,000
to improve the production facilities of the existing brewing complex. Zhaoqing
Brewery and Noble Brewery each spent approximately RMB 5,000,000 during 1999 to
improve and renew the production facilities of the existing brewing complexes.
In 2000, Noble Brewery spent approximately RMB 12,000,000 to improve
and renovate production facilities of the existing brewing complex. Zhaoqing
Brewery, Zao Yang High Worth Brewery and the Marketing Company spent
approximately RMB 9,000,000, RMB 6,700,000 and RMB 2,170,000, respectively, for
acquiring new equipment, renovating the existing machinery, and the acquisition
of vehicles and office equipment.
PRODUCT DEVELOPMENT
The Company is continually engaged in product development programs,
and has developed various improvements in raw material selection, production
processes and packaging systems, as well as the development of innovative
quality products.
The Company's product development expenditures are primarily devoted
to new product development, brand development, the brewing process and
ingredients, brewing equipment, improved manufacturing techniques for packaging
supplies and environmental improvements in the Company's operational processes.
The focus of these programs is to improve the quality and value of its malt
beverage products while reducing costs through more efficient processing
techniques, equipment design and improved varieties of raw materials.
ENERGY
The breweries in Zhaoqing use both heavy oil and electricity as
primary sources of energy. Heavy oil is used as the primary fuel in their steam
generation system and is supplied from regional sources. The breweries in
Sichuan, Zao Yang and Jilin use both coal and electricity as their major source
of energy.
Electricity is supplied by the local Electricity Bureau. The
breweries have not experienced any energy supply problems to date. As an
alternative source of energy, the Company also has fuel oil and propane
available. Management of the Company does not anticipate any supply problems in
the future with respect to these natural resources.
EMPLOYEES
As of December 31, 2000, there were approximately 2,370 employees
employed by Zhaoqing Brewery, Noble Brewery, the Marketing Company, Zao Yang
High Worth Brewery and Jilin Lianli Brewery, categorized as follows:
14
ZAO YANG JILIN
ZHAOQING NOBLE MARKETING HIGH WORTH LIANLI
FUNCTION TOTAL BREWERY BREWERY COMPANY BREWERY BREWERY
-------- ----- -------- ------- --------- ---------- -------
(1) Production 1,339 365 497 - 286 191
(2) Engineering, Technology
and Quality Control 179 42 55 - 61 21
(3) Management and
Administration 460 124 140 101 41 54
(4) Marketing 156 - - 120 - 36
(5) Warehouse 135 32 51 - 37 15
(6) Others 101 12 89 - - -
----- --- --- --- --- ---
Total 2,370 575 832 221 425 317
===== === === === === ===
In 2000, labor costs (including the cost of benefits) accounted for
approximately 4.2%, 4.4% and 5.7% of the total costs of production for Noble
Brewery, Zhaoqing Brewery and Zao Yang High Worth Brewery, respectively. The
Company expects average wage rates of its employees will continue at the same
level in 2001 as compared to 2000. Labor costs accounted for approximately
10.2% of the total costs of production for Jilin Lianli Brewery. Wages for most
of the employees in Jilin Lianli Brewery were terminated as of December 2000.
Each full-time employee is a member of a local trade union. Labor
relations have remained positive and the breweries have not had any employee
strikes or major labor disputes. Unlike trade unions in western countries,
trade unions in most parts of China are organizations mobilized jointly by the
government and the management of the enterprises.
PABST LICENSING ARRANGEMENTS AND TRADEMARKS
PABST TRADEMARKS IN CHINA
The arrangements regarding the use of Pabst trademarks in China were
formalized in an agreement dated August 30, 1993 (the "License Agreement")
between Pabst US and Pabst Zhaoqing. Pabst Zhaoqing was wholly-owned at that
time by Zhaoqing Brewery, which was owned by Guangdong Blue Ribbon. The License
Agreement was for a period of fifteen years, from November 7, 1988 through
November 6, 2003. Under the terms of the License Agreement, Pabst Zhaoqing
obtained the exclusive right to produce and market products under Pabst
trademarks in China, the non-exclusive right to market such Pabst products in
other Asian countries except Hong Kong, Macau, Japan and South Korea, and the
right to sublicense the use of the Pabst trademarks to any other enterprise in
China, subject to approval of Pabst US. Royalties are payable quarterly to
Pabst US based on the volume (units) of beer produced.
By an Assets Transferring Agreement dated May 20, 1994 among Pabst
Zhaoqing, Pabst US and Guangdong Blue Ribbon, all rights and duties under the
License Agreement were assigned and transferred from Pabst Zhaoqing to Guangdong
Blue Ribbon. Guangdong Blue Ribbon agreed to fulfill the obligation as
sublicensor under the License Agreement between Pabst Zhaoqing as sublicensor,
and Noble Brewery and High Worth JV as sublicensee, respectively, as described
below.
15
NOBLE BREWERY
By a Sublicense Agreement dated October 12, 1993 (the "Noble
Sublicense Agreement") between Pabst Zhaoqing and Noble Brewery and approved by
Pabst US, Pabst Zhaoqing granted to Noble Brewery a sublicense to use
beer-related Pabst trademarks, the non-exclusive right to produce beer in
accordance with its production capacity under the sublicensed Pabst trademarks,
and the non-exclusive right to market such Pabst products in China and other
Asian countries except Hong Kong, Macau, Japan and South Korea. Royalties
calculated on the same basis as those payable to Pabst US are payable by Noble
Brewery to Pabst Zhaoqing. Under the terms of the Noble Sublicense Agreement,
Pabst Zhaoqing agreed that, except with respect to the enterprises of Guangdong
Blue Ribbon, it would not grant further sublicenses to any other enterprises in
Guangdong Province to use the Pabst trademarks thereby granted. At the time of
the Noble Sublicense Agreement, Zhaoqing Brewery was a member enterprise of
Guangdong Blue Ribbon.
HIGH WORTH JV/ZHAOQING BREWERY
By a Sublicense Agreement dated May 6, 1994 (the "High Worth
Sublicense Agreement") between Pabst Zhaoqing and High Worth JV and approved by
Pabst US on September 18, 1994, Pabst Zhaoqing granted to High Worth JV a
sublicense to allow Zhaoqing Brewery to use Pabst trademarks to produce beer in
accordance with its production capacity under the sublicensed Pabst trademarks
and to market such Pabst products in China and other Asian countries except Hong
Kong, Macau, Japan and South Korea. With respect to the production of Pabst
Blue Ribbon beer in Guangdong Province, since Zhaoqing Brewery was a member
enterprise of Guangdong Blue Ribbon at the time of the Noble Sublicense
Agreement, Zhaoqing Brewery was entitled to produce Pabst Blue Ribbon beer in
Guangdong Province.
Under the terms of the High Worth Sublicense Agreement, High Worth JV
and/or its affiliates have the sole right to be granted further sublicenses by
Pabst Zhaoqing for the use of the Pabst trademarks to produce beer in China
provided that they are located outside Guangdong Province. Further, Pabst
Zhaoqing covenanted that it would not grant further sublicenses with respect to
the Pabst trademarks to produce beer to any other enterprises except High Worth
JV or its affiliates. Accordingly, it is the position of the Company that,
through November 6, 2003, High Worth JV controls all future sublicensing for the
production of Pabst Blue Ribbon beer in China, which can be sold throughout
China and other Asian countries, excluding Hong Kong, Macau, Japan and South
Korea.
Other terms of the High Worth Sublicense Agreement are the same as in
the License Agreement. Royalties are payable quarterly by High Worth JV to
Pabst Zhaoqing based on the volume (units) of beer produced.
SICHUAN HIGH WORTH BREWERY
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.
Effective December 31, 1997, the Company, through High Worth JV,
entered into a Settlement Agreement with Guangdong Blue Ribbon that allowed High
Worth JV to acquire a 51% interest in Sichuan Brewery, equivalent to an
effective interest of 31%. Pursuant to an Equity Transfer Agreement signed on
January 19, 1999, High Worth JV received a 15% consideration-free equity
interest in Sichuan Brewery, equivalent to an effective interest of 9%. Sichuan
Brewery was formally restructured into a new joint venture company and is the
fourth Pabst Blue Ribbon brewing complex in China. High Worth JV was also
granted a three-year option to increase its equity interest to 51% at a fixed
cost.
16
On June 5, 1999, a formal Joint Venture Agreement was signed among Le
Shan City E Mei Brewery (46.62%), High Worth JV (15.00%) and Wai Shun Investment
Limited (38.38%), an unaffiliated Hong Kong company, to form Sichuan Blue Ribbon
Brewery High Worth Ltd. ("Sichuan High Worth Brewery"). The total registered
and paid-up capital of Sichuan High Worth Brewery is RMB 51,221,258. High Worth
JV's 15% equity interest is consideration-free but entitled to share in the
profits of Sichuan High Worth Brewery. High Worth JV is also required to
contribute a total of RMB 26,122,842 as capital if and when it elects to
exercise the 51% option. The restructuring into Sichuan High Worth Brewery, the
new joint venture agreement, the new memorandum of association, and other
relevant legal documents were approved by the local government in 1999. Sichuan
High Worth Brewery is currently producing Pabst Blue Ribbon beer under a letter
of consent granted by Guangdong Blue Ribbon. A formal sublicensing agreement
will be prepared and signed between Sichuan High Worth Brewery and Guangdong
Blue Ribbon with a royalty fee to be negotiated.
ZAO YANG HIGH WORTH BREWERY
Pursuant to the terms of the Settlement Agreement and the High Worth
Sublicense Agreement, Guangdong Blue Ribbon granted a sublicense agreement to
Zao Yang High Worth Brewery on May 26, 1998 for the right to produce and sell
beer products under the Pabst Blue Ribbon label. Zao Yang High Worth Brewery is
required to pay royalty fees at the same rate as Pabst US charges Guangdong Blue
Ribbon plus a surcharge of RMB 25 per metric ton. Zao Yang High Worth Brewery
is obligated to meet the required quality standards for the production of Pabst
Blue Ribbon beer.
RECENT DEVELOPMENTS REGARDING PABST BLUE RIBBON TRADEMARK IN CHINA
Noble China Inc., a public company listed on the Toronto Stock
Exchange, issued a press release on May 27, 1999 to announce that it had
acquired from Pabst Brewing Company the exclusive rights to brew and distribute
Pabst Blue Ribbon beer throughout China for a period of 30 years from 2003 to
2033. Noble China Inc.'s 1999 Annual Report confirmed that Noble China Inc. had
entered into a license agreement with Pabst Brewing Company in May 1999 to
utilize the Pabst Blue Ribbon trademarks in connection with the production,
promotion, distribution and sale of beer in China for 30 years commencing in
November 2003, and that Noble China Inc. had paid Pabst Brewing Company
US$5,000,000 for the right to use the Pabst Blue Ribbon trademarks and had
agreed to pay royalties based on gross sales.
In addition, Noble China Inc.'s December 31, 1999 Annual Information
Form disclosed that under the existing License Agreement, Pabst Brewing Company
has the obligation to "negotiate friendly" the possible renewal of the existing
License Agreement on its expiration in November 2003. Noble China Inc. further
asserted that it assumed that obligation when it acquired the license rights to
the Pabst Blue Ribbon trademarks.
Management has consulted with legal counsel regarding the legitimacy
of the purported license and the Company's potential responses. In addition,
management has consulted with Guangdong Blue Ribbon, the owner of the Pabst Blue
Ribbon trademark in China, regarding potential responses, and has met with
representatives of Noble China Inc. in an attempt to explore a potential
settlement.
In August 2000, the Company and Noble China Inc. signed a memorandum
pursuant to which a management committee was established to evaluate the
potential to coordinate and enhance the operations of Zhaoqing Brewery, Noble
Brewery and the Marketing Company. In December 2000, management, marketing,
production and operations of Zhaoqing Brewery, Noble Brewery and the Marketing
Company were pooled together in order to achieve improved coordination of human,
17
financial, production and marketing activities, which is expected to achieve
greater efficiency and operating profitability. It is anticipated that certain
pooled costs will be allocated in proportion to each brewery's respective
production capacities. However, Zhaoqing Brewery, Noble Brewery and the
Marketing Company will each remain as legally distinct entities. Pursuant to the
August 2000 memorandum, after the pooled management structure has begun to
function smoothly, the management committee will commence a study to evaluate
the formation of a new unified company.
Management of the Company has requested that Guangdong Blue Ribbon take
appropriate action to protect its rights and its sub-licensees' rights to
utilize the Pabst Blue Ribbon trademark in China. The Company has been advised
that Guangdong Blue Ribbon is still evaluating the situation and has not yet
determined how it will respond to this matter. Once Guangdong Blue Ribbon has
responded, the Company expects to be in a position to evaluate and revise its
future business plan and strategy accordingly. The Company is currently unable
to predict the effect that this development may have on future operations.
However, the inability of the Company to obtain a sub-license from Noble China
Inc. or enter into some other form of strategic relationship under acceptable
terms and conditions to allow the Company to continue to produce and distribute
Pabst Blue Ribbon beer in China would have a material adverse effect on the
Company's future results of operations, financial position and cash flows.
THE JOINT VENTURE COMPANIES
FORMATION OF THE JOINT VENTURE COMPANIES
In 1980, Zhaoqing Brewery was initially established as a state-owned
enterprise to manufacture beer and non-alcoholic beverages. In 1992, Zhaoqing
Brewery became a member enterprise (affiliate) of Guangdong Blue Ribbon. In
June 1993, Zhaoqing Brewery entered into a Joint Venture Agreement with
Goldjinsheng Holdings Ltd. ("Goldjinsheng") to form Noble Brewery (the "Noble
Joint Venture Agreement"), pursuant to which Goldjinsheng acquired a 60%
interest and Zhaoqing Brewery acquired a 40% interest. Goldjinsheng was a
wholly-owned subsidiary of Noble China Inc., a company listed on the Toronto
Stock Exchange. Upon formation of the joint venture, Noble Brewery consisted of
the beer production facilities and assets of Pabst Zhaoqing, then a subsidiary
of Zhaoqing Brewery, which were utilized to produce and distribute beer under
the Pabst Blue Ribbon brand name. The term of the joint venture is for 20
years, which may be extended upon the agreement of the two joint venture
partners and approval from the applicable Chinese governmental agencies.
In May 1994, Guangdong Blue Ribbon and Holdings entered into a Joint
Venture Agreement providing for the establishment of High Worth JV. The term of
the joint venture is 50 years, and is subject to extension by agreement of the
parties and approval from the government. Holdings contributed 60% of the
capital, which was used by High Worth JV to purchase Zhaoqing Brewery from
Guangdong Blue Ribbon, including its 40% interest in Noble Brewery. Holdings
and Guangdong Blue Ribbon then owned 60% and 40% interests, respectively, in
High Worth JV. All of the governmental approvals for the ownership transfer of
Zhaoqing Brewery to High Worth JV were completed in November 1994.
Subsequently, in December 1994, the Company acquired all of the shares of
Holdings (see "HISTORY").
In January 1998, High Worth JV and Zao Yang Brewery entered into a
Joint Venture Agreement providing for the establishment of Zao Yang High Worth
Brewery. The term of the joint venture is 15 years, and is extendable by
agreement of the parties and approval from the government. Zao Yang High Worth
Brewery has a total authorized capital investment of RMB 29,280,000, allocated
55% to High Worth JV and 45% to Zao Yang Brewery. The RMB 16,104,000 of capital
contributed by High Worth JV in 1998 was used by Zao Yang High Worth Brewery to
18
purchase the existing production facilities from Zao Yang Brewery. High Worth
JV was responsible for transferring the technical know-how and production
techniques to brew Pabst Blue Ribbon beer to Zao Yang High Worth Brewery, as
well as assisting in the renovation of existing equipment, in order to convert
the brewery into a Pabst Blue Ribbon brewing complex. All of the governmental
approvals for the ownership transfer of Zao Yang High Worth Brewery were
completed in April 1998.
On October 18, 1999, Holdings, through its wholly-owned subsidiary
incorporated in the British Virgin Islands, March International, signed a formal
Joint Venture Agreement with Jilin Province Juetai City Brewery (40%) and Jilin
Province Chuang Xiang Zhi Yie Ltd. (9%), both of which are unaffiliated PRC
companies, to form Jilin Lianli Brewery. The total registered and paid-up
capital of Jilin Lianli Brewery is RMB 25,000,000. March International
contributed one new packing line and the right to use the "Lianli" beer
trademark with a total value of RMB 12,750,000 as capital, and received a 51%
effective interest in Jilin Lianli Brewery. The technical renovation of the
existing brewing equipment and the installation of the new packing line were
completed in April 2000. The Joint Venture Agreement was approved by the local
government and formal operations commenced in May 2000. However, due to weak
market response and the inability of the Chinese local partners to honor their
portion of the working capital commitment, the production and operation of Jilin
Lianli Brewery was formally terminated in December 2000. The Company is
currently in negotiation with certain interested parties to dispose of its
equity interest in the brewery.
OPERATION OF THE JOINT VENTURE COMPANIES
The establishment and activities of High Worth JV, Noble Brewery, Zao
Yang High Worth Brewery and Jilin Lianli Brewery are governed by the joint
venture laws and regulations of China and the applicable joint venture
agreements. Holdings' interest in the profits of High Worth JV is in the same
proportion (i.e., 60%) as its investment in High Worth JV; Zhaoqing Brewery's
interest in the profits of Noble Brewery is in the same proportion (i.e., 40%)
as its investment in Noble Brewery; High Worth JV's interest in the profits of
Zao Yang High Worth Brewery is in the same proportion (i.e., 55%) as its
investment in Zao Yang High Worth Brewery. March International's interest in
the profits of Jilin Lianli Brewery is in the same proportion (i.e., 51%) as its
investment in Jilin Lianli Brewery.
Under the Noble Joint Venture Agreement, Noble Brewery is governed by
a board of directors, consisting of five individuals, three of whom, including
the chairman, are nominated by Goldjinsheng, with the remaining two, including
the vice chairman, by Zhaoqing Brewery. The operation and management of Noble
Brewery is the responsibility of Zhaoqing Brewery. Accordingly, Zhaoqing
Brewery has the decision-making authority on substantially all aspects of the
daily operations of Noble Brewery such as purchasing, production, sales and
marketing, finance and human resources. Goldjinsheng has the right to appoint
staff to participate in the accounting functions of Noble Brewery. All matters
to be approved by the board of directors require either unanimous vote or the
vote of four out of the five directors. Accordingly, no decision of the board
can be made without the approval of Zhaoqing Brewery's designee.
Under the High Worth JV Joint Venture Agreement, High Worth JV is
governed by a board of directors consisting of seven individuals, four of whom
are appointed by Holdings and three of whom are appointed by Guangdong Blue
Ribbon. The board of directors controls the management and operation of High
Worth JV. Generally, votes on the board of directors are taken by majority
vote, except for the following matters relating to the existence and legal
structure of the joint venture, all of which require a unanimous vote:
amendments to the articles of association; termination or dissolution of the
joint venture; increase in, or transfer of, the registered capital of the joint
venture; establishment of subsidiaries or combination with other entities; and
change in the share structure. The general manager is appointed by the board of
directors and is responsible for carrying out the decisions of the board as well
as for the day-to-day management of High Worth JV.
19
Zao Yang High Worth Brewery was formed as a Chinese limited company
with two joint venture owners. Pursuant to the Zao Yang High Worth Brewery
Joint Venture Agreement, Zao Yang High Worth Brewery is governed by a board of
directors consisting of five individuals, three of whom, including the chairman,
are nominated by High Worth JV, with the remaining two, including the
vice-chairman, by Zao Yang Brewery. Generally, votes on the board of directors
are taken by majority vote, except for the following matters relating to the
existence and legal structure of the joint venture, all of which require a
unanimous vote: amendment to the articles of association; termination or
dissolution of the joint venture; increase in, or transfer of, the registered
capital of the joint venture; establishment of subsidiaries or combination with
other entities; and change in the share structure. The general manager is
appointed by the board of directors and is responsible for carrying out the
decisions of the board as well as for the day-to-day management of Zao Yang High
Worth Brewery.
Subsequent to the conclusion of the Settlement Agreement, a Management
Committee was formed under High Worth JV's board of directors to serve as the
central liaison and coordination body for the Pabst Blue Ribbon beer business in
China. Any future expansion and development of Pabst Blue Ribbon beer
production will be monitored by High Worth JV. The Company is seeking expansion
and cooperation opportunities to extend its brewing operation to local breweries
in other provinces outside of Guangdong Province.
Jilin Lianli Brewery was formed as a sino-foreign joint venture
company. Pursuant to the relevant Joint Venture Agreement, Jilin Lianli Brewery
is governed by a board of directors consisting of five individuals, three of
whom, including the chairman, are nominated by March International, with the
remaining two, including the vice-chairman, by Juetai City Brewery. The
remaining terms of the Joint Venture Agreement are similar to those of Zao Yang
High Worth Brewery, as previously described.
GOLDJINSHENG AGREEMENT
A provisional agreement, subject to the approval of the applicable
Chinese governmental agencies and the execution of separate definitive
agreements with respect to the various matters referred to below, was made among
Goldjinsheng, the owner of the remaining 60% interest in Noble Brewery, Zhaoqing
Brewery , Noble Brewery, High Worth JV and Guangdong Blue Ribbon on May 10,
1995 (the "Goldjinsheng Agreement") confirming that:
(a) High Worth JV was entitled to brew and sell beer under the Pabst Blue
Ribbon label produced in its brewing facilities up to a maximum annual
production capacity of 100,000 tons.
(b) High Worth JV and/or companies in which High Worth JV has an interest
are entitled to be granted a sublicense from Guangdong Blue Ribbon with
the right to produce and sell beer under the Pabst Blue Ribbon label in
the Guangdong Province of China (an "Additional Facility") up to a maximum
annual production capacity of 300,000 tons.
In the event that High Worth JV desires to obtain a sublicense for an
Additional Facility, Goldjinsheng has the right to purchase up to a 40%
interest in such Additional Facility. The purchase price for such
interest will be the actual cost of such Additional Facility multiplied
by the percentage interest that Goldjinsheng elects to purchase.
20
(c) A marketing company, owned 8% by Guangdong Blue Ribbon, 52% by High
Worth JV and 40% by Goldjinsheng, will organize and coordinate the sale of
Pabst Blue Ribbon beer produced by High Worth JV and Noble Brewery. High
Worth JV and Noble Brewery will each create their own distribution company
or division. The distribution company of High Worth JV will have the sole
right to acquire 100% of the production of High Worth JV and 40% of the
production of Noble Brewery, while the distribution company of Noble
Brewery will have the sole right to acquire 60% of the production of Noble
Brewery. The respective distribution companies will appoint the Marketing
Company as their sole and exclusive agent to market Pabst Blue Ribbon beer
in China. If the provisions as to ownership are implemented, the
respective interests of Guangdong Blue Ribbon and the Company in the
Marketing Company will be adjusted (see "MARKETING AND OPERATIONS --
SUMMARY OF OPERATIONS").
Subsequent to the signing of the Goldjinsheng Agreement, the Company,
Guangdong Blue Ribbon and Goldjinsheng have attempted to complete the respective
separate definitive agreements. In December 1996, Guangdong Blue Ribbon and
Goldjinsheng advised the Company that they intended to modify some of the terms
of the Goldjinsheng Agreement and to propose incorporating those modifications
in the respective separate definitive agreements. In addition, the negotiation
process was interrupted by the previously described Sichuan Brewery issue in
1997 and 1998 and the Pabst trademark issue in 1999. The Company believes that
the delays in completing the separate definitive agreements will not have a
material effect on the validity of the terms and provisions contained in the
Goldjinsheng Agreement.
OPERATING IN CHINA
Because the operations of the Company are based exclusively in China,
the Company is subject to rules and restrictions governing China's legal and
economic system as well as general economic and political conditions in that
country.
INFLATION/ECONOMIC POLICIES. General economic conditions in China
could have a significant impact on the Company. The economy of China differs in
certain material respects from that of the United States, including its
structure, levels of development and capital reinvestment, growth rate,
government involvement, resource allocation, rate of inflation and balance of
payments position. Although the majority of China's productive assets are still
owned by the state, the adoption of an economic reform policy since 1978 has
resulted in the gradual reduction in the role of state economic plans and the
allocation of resources, pricing and management of such assets, with increased
emphasis on the utilization of market forces, and rapid growth in the Chinese
economy. The success of the Company depends in substantial part on the
continued economic growth of the Chinese economy.
In the recent decade, the Chinese economy has experienced periods of
rapid economic growth as well as high rates of inflation, which in turn, has
resulted in the adoption by the Chinese government from time to time of various
corrective measures designed to regulate growth and contain inflation. Since
1993, the Chinese government has implemented an economic program to control
inflation, which has resulted in the tightening of working capital available to
Chinese state-owned enterprises, and in the slowing of the pace of economic
growth and general market consumption.
CURRENCY MATTERS. The State Administration for Exchange Control
("SAEC"), under the authority of the People's Bank of China ("PBOC"), controls
the conversion of RMB into foreign currency. Prior to January 1, 1994, RMB
could be converted into foreign currency through the Bank of China or other
authorized institutions at official rates fixed daily by the SAEC. RMB could
also be converted at swap centers ("Swap Centers") open to Chinese enterprises
and foreign-funded Chinese enterprises, subject to SAEC approval of each foreign
currency trade, at exchange rates negotiated by the parties for each
21
transaction. Effective January 1, 1994, a unitary exchange rate system was
introduced in China, replacing the dual-rate system previously in effect. In
connection with the creation of a unitary exchange rate, the establishment of
the China Foreign Exchange Trading System inter-bank foreign exchange market and
the phasing out of the Swap Centers were announced. All Swap Centers were
formally closed effective December 1, 1998, and foreign-funded enterprises must
satisfy their foreign exchange requirements through licensed banks and financial
institutions at the prevailing exchange rates quoted by the People's Bank of
China.
Effective July 1, 1996, the government of China began to take steps to
make its currency fully convertible on a "current account" basis. This will
allow foreign-funded enterprises, whether wholly-owned or joint ventures with
Chinese parties, to buy and sell foreign exchange in banks for purposes of
trade, services, debt repayment and profit repatriation. The "current account"
measures the flow of money into and out of a nation, including the net balance
on trade in goods and services, plus remittances.
As China is likely to be a member of the World Trade Organization,
the central government of China is expected to adopt a more rigorous approach
to partially deregulate the currency conversion restriction, which may in turn
increase the exchange rate fluctuation of the RMB. Should there be any major
change in the central government's currency policies, the Company does not
believe that such an action would have a detrimental effect on the Company's
operations, since the Company conducts virtually all of its business in China,
and the sale of its products is settled in RMB.
The Company has historically relied on dividend distributions,
converted from RMB into USD, to fund its activities outside of China. The
Company does not expect that the current foreign exchange controls will affect
the ability of High Worth JV to continue to distribute such dividends. However,
in the event of a substantial currency fluctuation, High Worth JV could elect to
distribute dividends in RMB, which would then be converted into other currencies
at the time when the prevailing market rates are stabilized.
LEGAL SYSTEM. Since 1979, many laws and regulations dealing with
economic matters in general and foreign investment in particular have been
promulgated in China. The Chinese constitution adopted in 1989 authorizes
foreign investment, and guarantees the "lawful rights and interests" of foreign
investors in China. The trend of legislation over the past twelve years has
significantly enhanced the protection afforded foreign investment and allowed
for more active control by foreign parties of foreign investment enterprises in
China. There can be no assurance, however, that the current trend and economic
legislation toward promoting market reforms and experimentation will not be
slowed, curtailed or reversed, especially in the event of a change in
leadership, social or political disruption, or unforeseen circumstances
affecting China's political, economic or social life.
Despite some progress in developing a legal system, China does not
have a comprehensive system of laws. The interpretation of Chinese laws may be
subject to policy changes reflecting domestic political factors. Enforcement of
existing laws may be uncertain and sporadic, and implementation and
interpretation may be inconsistent. The Chinese judiciary is relatively
inexperienced in enforcing the laws or terms of contracts, leading to a higher
than usual degree of uncertainty as to the outcome of litigation. Even where
adequate laws exist in China, it may be impossible to obtain swift and equitable
law enforcement, or to obtain enforcement of a judgment by a court of another
jurisdiction. As the Chinese legal system develops, the promulgation of new
laws, changes to existing laws, and the preemption of local regulations by
national laws may adversely affect foreign investors, such as the Company.
22
The Company's activities in China may by law be subject, in some
cases, to administrative review and approval by various national, provincial and
local agencies of the Chinese government. While China has promulgated an
administrative procedural law permitting redress to the courts with respect to
certain administrative actions, this law appears to be largely untested.
TAX MATTERS. The Company's operations in China are subject to four
types of taxes: Income Tax, Value Added Tax ("VAT"), Consumption Tax and other
Sales Tax.
Noble Brewery and High Worth JV are governed by the Income Tax Law of
China concerning Foreign Investment Enterprises and Foreign Enterprises (the
"FIE Law"). Under the current FIE Law, Noble Brewery and High Worth JV are
exempt from payment of Income Tax for the first two taxation years in which
Noble Brewery and High Worth JV each become profitable. The Income Tax rate for
the following three years is reduced by 50% and is thereafter calculated at the
full rate. The last year of 50% tax exemption for High Worth JV is the year of
2000 while Noble Brewery's full rate tax commenced on January 1, 1999. The
current official Income Tax rate on profits for Noble Brewery is 27% (33% less a
6% temporary reduction provided as an economic incentive by the Chinese
government) and for High Worth JV is 33%, unless specifically exempted or
reduced by the local authorities.
Zao Yang High Worth Brewery was established as a China joint venture
limited company and is subject to the Income Tax Law of China concerning a
Chinese limited company. The current official Income Tax rate on profits for
Zao Yang High Worth Brewery is 33%. However, local tax authorities may
specifically exempt or reduce the tax rate as an economic incentive.
In addition to the FIE Law, which is computed on profits, Noble
Brewery, Zhaoqing Brewery and Zao Yang High Worth Brewery are also subject to
two kinds of turnover taxes for their respective sales, the VAT and Consumption
Tax. The applicable VAT rate is 17% for brewery products sold in China. The
amount of VAT liability is determined by applying the applicable tax rate to the
invoiced amount less VAT paid on purchases made with the relevant supporting
invoices. The Consumption Tax rate together with a government surcharge for
brewery products is approximately RMB 220 per metric ton. The Consumption Tax
is determined on the volume of sales within China.
Currently, there are no withholding taxes imposed on dividends paid by
High Worth JV to Holdings.
DISTRIBUTION OF PROFITS. Applicable Chinese laws and regulations
require that, before a Sino-foreign joint venture enterprise (such as High Worth
JV and Noble Brewery) distributes profits to investors, it must (1) satisfy all
PRC tax liabilities; (2) provide for losses in previous years; and (3) make
allocations in proportions determined at the sole discretion of the Board of
Directors to a general reserve fund, an enterprise development fund and a staff
welfare and employee bonus fund. Distribution of profits by the joint ventures
to the Company and their other equity investors are required to be in proportion
to each party's respective investment in the joint venture.
REGULATIONS
Central, provincial and local laws and regulations govern the
operations of the breweries. The central government and all provinces in which
the Company's malt beverage products are distributed regulate trade practices,
advertising and marketing practices, relationships with distributors and related
matters. Governmental entities also levy various taxes, license fees and other
similar charges and may require bonds to ensure compliance with applicable laws
and regulations.
23
HISTORY
The Company was organized in the state of Florida as Video Promotions,
Inc. on April 20, 1988. The Company subsequently changed its name to National
Sweepstakes, Inc. and then to Natural Fuels, Inc. 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 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. The Class B common stock carries two votes per share but is
otherwise equivalent to the Class A common stock. In addition, the Company
issued an aggregate of 600,000 shares of the Company's Class A common stock to
various parties for consulting services in connection with the acquisition of
Holdings. At the time of the acquisition, Holdings owned a 60% interest in High
Worth JV. This transaction was accounted for as a recapitalization of Holdings
with Holdings as the acquirer (reverse acquisition).
On November 22, 1994, the Company effected a 1-for-22 reverse stock
split in anticipation of this transaction.
On March 15, 1995, the Company changed its name to CBR Brewing
Company, Inc.
ITEM 2. PROPERTIES
The Company's major facilities are as follows:
FACILITY LOCATION PRODUCT
- -------- -------- -------
Noble Brewery City of Zhaoqing on a site Malt Beverages
containing approximately
135,000 square meters
Zhaoqing Brewery City of Zhaoqing on a site Malt Beverages
containing approximately
131,000 square meters
Zao Yang High Worth City of Zao Yang on a site Malt Beverages
Brewery (formed in containing approximately
1998) 70,000 square meters
Sichuan High Worth City of Le Shan on a site Malt Beverages
Brewery (formed in containing approximately
mid-1999) 100,000 square meters
Jilin Lianli Brewery City of Juetai on a site Malt Beverages
(operation terminated containing approximately
in December 2000) 33,000 square meters
The facilities of Noble Brewery and Zhaoqing Brewery are well
maintained and suitable for their respective operations. The facilities of Zao
Yang High Worth Brewery and Sichuan High Worth Brewery have been modernized and
new equipment has been added to convert them into Pabst Blue Ribbon beer
production complexes.
24
In 2000, the Company estimates that Zhaoqing Brewery, Noble Brewery
and Zao Yang High Worth Brewery operated at approximately 53.8%, 52.0% and
46.3%, respectively, of their theoretical brewing capacities. Annual production
capacity can vary due to product mix, packaging mix, market demand and
seasonality.
ITEM 3. LEGAL PROCEEDINGS
There are no pending or threatened legal proceedings against the
Company or its subsidiaries, joint ventures or affiliates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security
holders during the fourth quarter of the fiscal year ended December 31, 2000.
25
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information
The Class A common stock of CBR Brewing Company, Inc. is traded on the
OTC Bulletin Board under symbol "CBRB". During 1999 and 2000, trading activity
in the Class A common stock was generally limited and sporadic, and should not
be deemed to constitute an "established public trading market". There is no
trading market for the Class B common stock.
The following table sets forth the range of closing prices of the
Company's Class A common stock as quoted during the periods indicated. Such
prices reflect prices between dealers in securities and do not include any
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions. The information set forth below was obtained from
America Online, Inc.
High Low
---- ---
Year Ended December 31, 2000:
Three Months Ended -
March 31, 2000 $0.56 $0.38
June 30, 2000 1.00 $0.50
September 30, 2000 0.88 $0.53
December 31, 2000 0.63 $0.38
Year Ended December 31, 1999:
Three Months Ended -
March 31, 1999 $0.88 $0.25
June 30, 1999 0.81 0.38
September 30, 1999 0.56 0.38
December 31, 1999 1.88 0.38
(b) Holders
As of March 31, 2001, the Company had 11 shareholders of record with
respect to its Class A common stock and three shareholders of record with
respect to its Class B common stock, excluding shares held in street name by
brokerage firms and other nominees who hold shares for multiple investors.
(c) Dividends
Holders of common stock are entitled to receive dividends if, as and
when declared by the Board of Directors out of funds legally available therefor.
The Company has never paid cash dividends on its common stock and has no present
intention of paying cash dividends in the foreseeable future. It is the present
policy of the Board of Directors to retain all earnings to provide for the
future growth and development of the Company. However, such policy is subject
to change based on current industry and market conditions, as well as other
factors beyond the control of the Company.
26
The Company's ability to pay dividends to its shareholders is
dependent on the Company receiving distributions through Holdings from its PRC
subsidiaries and affiliates, which generate all of the Company's earnings and
cash flows.
Pursuant to the relevant laws and regulations of Sino-foreign joint
venture enterprises, the profits of High Worth JV, calculated pursuant to
generally accepted accounting principles in the PRC ("PRC GAAP"), are available
for distribution in the form of cash dividends to each equity investor, in
proportion to each investor's interest in the joint venture, after satisfaction
of all PRC tax liabilities, provision for any losses in previous years, and
appropriations to reserve funds, as determined at the discretion of the board of
directors in accordance with PRC accounting standards and regulations. The
principal adjustments necessary to conform PRC GAAP financial statements to
financial statements prepared in accordance with generally accepted accounting
principles in the United States ("US GAAP") are the reclassification of certain
expense items from income appropriations to charges against income, adjustments
for sales, other income and purchases recognized on a cash basis, depreciation
charges, deferred taxation and revaluation of fixed assets.
In accordance with the relevant laws and regulations in the PRC, the
profits available for distribution are based on PRC GAAP financial statements.
If High Worth JV has foreign currency available after meeting the operational
needs of its PRC subsidiaries, it may elect to make a profit distribution to
Holdings. Otherwise, it will be necessary to obtain approval from the State
Administration for Exchange Control and convert such distributions at licensed
banks and financial institutions.
(d) Sales of Unregistered Securities
On May 16, 2000, options to purchase 375,000 shares of Class A common
stock at an exercise price of US$0.72 per share were granted to four directors
and five employees, and options to purchase 145,000 shares of Class A common
stock at an exercise price of $0.79 per share were granted to two directors,
each of whom posses indirectly more than 10% of the total combined voting power
of all classes of common stock of the Company. Such stock options vest 50% on
July 1, 2000, 25% on July 1, 2001 and the remaining 25% on July 1, 2002. The
stock options expire on December 31, 2004. The exercise price of all such stock
options was not less than fair market value on the date of grant. The options
were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended,
based on the representations of the recipients.
27
ITEM 6. SELECTED FINANCIAL DATA
The following financial data has been derived from the audited
consolidated financial statements and should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
document. All amounts are in RMB. The exchange rate was approximately US$1.00
to RMB 8.3 at December 31, 1998, 1999 and 2000.
CBR Brewing Company, Inc.
(in RMB) and Subsidiaries
------------------------
Years Ended December 31,
-----------------------------------------------
2000 1999 1998
------------- ------------- -------------
Consolidated Statement
of Income Data:
Sales, net of sales taxes 941,147,545 986,458,832 1,121,007,111
Gross profit 205,979,387 218,202,956 193,523,991
Operating loss (94,288,604) (412,431) (24,260,273)
Net income (loss) (28,905,192) 23,655,102 21,391,510
Net income (loss) per common
share (3.61) 2.95 2.67
Cash dividends declared per
common share -0- -0- -0-
As of December 31,
-----------------------------------------------
2000 1999 1998
------------- ------------- ------------
Consolidated Balance
Sheet Data:
Net working capital
deficiency (274,731,879) (160,971,900) (192,019,443)
Total assets 782,793,235 822,467,276 870,426,327
Long-term liabilities 16,699,543 10,000,000 2,847,911
Advances from shareholders - 36,719,200 50,267,705
Shareholders' equity 197,824,463 226,555,203 202,202,300
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW AND MAJOR DEVELOPMENTS:
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,
including its 40% interest in Noble Brewery.
28
The acquisition of Zhaoqing Brewery, including its 40% interest in
Noble Brewery, was 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. For
accounting purposes, the acquisition of Holdings by the Company has been treated
as a recapitalization of Holdings with Holdings as the acquirer (reverse
acquisition).
Through a Sublicense Agreement dated May 6, 1994 between Pabst
Zhaoqing and High Worth JV, High Worth JV acquired a sublicense to utilize Pabst
trademarks in conjunction with the production and marketing of beer in China and
other Asian countries except Hong Kong, Macau, Japan and South Korea. The
sublicense is subject to a prior License Agreement between Pabst US and Pabst
Zhaoqing, and a subsequent Assets Transferring Agreement among Pabst Zhaoqing,
Pabst US and Guangdong Blue Ribbon (see "ITEM 1. BUSINESS - PABST LICENSING
ARRANGEMENTS AND TRADEMARKS"). The License Agreement expires on November 6,
2003.
Noble China Inc., a public company listed on the Toronto Stock
Exchange, issued a press release on May 27, 1999 to announce that it had
acquired from Pabst Brewing Company the exclusive rights to brew and distribute
Pabst Blue Ribbon beer throughout China for a period of 30 years from 2003 to
2033. Noble China Inc.'s 1999 Annual Report confirmed that Noble China Inc. had
entered into a license agreement with Pabst Brewing Company in May 1999 to
utilize the Pabst Blue Ribbon trademarks in connection with the production,
promotion, distribution and sale of beer in China for 30 years commencing in
November 2003, and that Noble China Inc. had paid Pabst Brewing Company
US$5,000,000 for the right to use the Pabst Blue Ribbon trademarks and had
agreed to pay royalties based on gross sales.
In addition, Noble China Inc.'s December 31, 1999 Annual Information
Form disclosed that under the existing License Agreement, Pabst Brewing Company
has the obligation to "negotiate friendly" the possible renewal of the existing
License Agreement on its expiration in November 2003. Noble China Inc. further
asserted that it assumed that obligation when it acquired the license rights to
the Pabst Blue Ribbon trademarks.
Management has consulted with legal counsel regarding the legitimacy
of the purported license and the Company's potential responses. In addition,
management has consulted with Guangdong Blue Ribbon, the owner of the Pabst Blue
Ribbon trademark in China, regarding potential responses, and has met with
representatives of Noble China Inc. in an attempt to explore a potential
settlement.
In August 2000, the Company and Noble China Inc. signed a memorandum
pursuant to which a management committee was established to evaluate the
potential to coordinate and enhance the operations of Zhaoqing Brewery and Noble
Brewery and the Marketing Company. In December 2000, management, marketing,
production and operations of Zhaoqing Brewery, Noble Brewery and the Marketing
Company were pooled together in order to achieve improved coordination of human,
financial, production and marketing activities, which is expected to achieve
greater efficiency and operating profitability. It is anticipated that certain
pooled costs will be allocated in proportion to each brewery's respective
production capacities. However, Zhaoqing Brewery, Noble Brewery and the
Marketing Company will each remain as legally distinct entities. Pursuant to the
August 2000 memorandum, after the pooled management structure has begun to
function smoothly, the management committee will commence a study to evaluate
the formation of a new unified company.
Management of the Company has requested that Guangdong Blue Ribbon take
appropriate action to protect its rights and its sub-licensees' rights to
utilize the Pabst Blue Ribbon trademark in China. The Company has been advised
that Guangdong Blue Ribbon is still evaluating the situation and has not yet
determined how it will respond to this matter. Once Guangdong Blue Ribbon has
responded, the Company expects to be in a position to evaluate and revise its
29
future business plan and strategy accordingly. The Company is currently unable
to predict the effect that this development may have on future operations.
However, the inability of the Company to obtain a sub-license from Noble China
Inc. or enter into some other form of strategic relationship under acceptable
terms and conditions to allow the Company to continue to produce and distribute
Pabst Blue Ribbon beer in China would have a material adverse effect on the
Company's future results of operations, financial position and cash flows.
During February 1995, the Marketing Company was established to conduct
the distribution, marketing and promotion throughout China of the Pabst Blue
Ribbon beer produced by Zhaoqing Brewery and Noble Brewery. The Company owns a
42% net interest in the Marketing Company. Zhaoqing Brewery and Noble Brewery
commenced selling their production of Pabst Blue Ribbon beer through the
Marketing Company in April 1995 and July 1995, respectively. Subsequently,
Sichuan High Worth Brewery and Zao Yang High Worth Brewery commenced selling
their production of Pabst Blue Ribbon beer through the Marketing Company in
April 1997 and June 1998, respectively. The consolidated financial statements
include the results of operations of the Marketing Company on a consolidated
basis commencing from April 1, 1995. The Company has a controlling interest in
the Marketing Company even though it has an effective interest of only 42%
because of the Company's 60% interest in High Worth JV and 70% interest in the
Marketing Company (through a subsidiary), and because the Company controls the
majority of the votes on the board of directors of the Marketing Company and the
subsidiary.
In January 1998, the Company, through High Worth JV, established a
brewery in Hubei Province pursuant to a joint venture agreement in which the
Company acquired an effective interest of 33%. Zao Yang High Worth Brewery
commenced the production of Pabst Blue Ribbon beer in June 1998, at which time
the Marketing Company also began purchasing Zao Yang High Worth Brewery's
production of Pabst Blue Ribbon beer for distribution. The consolidated
financial statements include the results of operations of Zao Yang High Worth
Brewery on a consolidated basis commencing from January 13, 1998. The Company
has a controlling interest in Zao Yang High Worth Brewery even though it has an
effective interest of only 33% because of the Company's 60% interest in High
Worth JV and 55% interest in Zao Yang High Worth Brewery (through High Worth
JV), and because the Company controls the majority of the votes on the board of
directors of High Worth JV and Zao Yang High Worth Brewery.
Prior to March 1995, Zhaoqing Brewery had produced exclusively
domestic brands of beer, and had an annual production capacity of 50,000 metric
tons or 425,000 barrels of beer. In late 1994, 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 the production of all domestic brand
beer and commenced exclusive production of Pabst Blue Ribbon beer. However,
less than 5% of beer production normally does not meet Pabst Blue Ribbon quality
standards and is packed and distributed as lower priced, local brand beer. With
the implementation of the new brewing technology and the purchase of additional
equipment during 1995, Zhaoqing Brewery reached its current full-scale annual
production capacity of 100,000 metric tons or 850,000 barrels of beer in late
1995.
Noble Brewery has produced Pabst Blue Ribbon beer exclusively since it
commenced operations. Prior to 1994, Noble Brewery had an annual production
capacity of 80,000 metric tons or 680,000 barrels of beer. With the completion
of a second brewing facility in July 1994, Noble Brewery reached its full-scale
annual production capacity of 200,000 metric tons or 1,700,000 barrels of beer
in late 1994.
30
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.
Effective December 31, 1997, the Company, through High Worth JV,
entered into a Settlement Agreement with Guangdong Blue Ribbon that allowed it
to acquire a 51% interest in Sichuan Brewery, equivalent to an effective
interest of 31%. Pursuant to an Equity Transfer Agreement signed on January 19,
1999, High Worth JV received a 15% consideration-free equity interest in Sichuan
Brewery, so that the Company has an effective interest of 9%. Sichuan Brewery
was formally restructured into a new joint venture company and is the fourth
Pabst Blue Ribbon brewing complex in China. High Worth JV was also granted a
three-year option to increase its equity interest to 51% at a fixed cost.
On June 5, 1999, a formal Joint Venture Agreement was signed among Le
Shan City E Mei Brewery (46.62%), High Worth JV (15.00%) and Wai Shun Investment
Limited (38.38%), an unaffiliated Hong Kong company, to form Sichuan Blue Ribbon
Brewery High Worth Ltd. ("Sichuan High Worth Brewery"). The total registered
and paid-up capital of Sichuan High Worth Brewery was RMB 51,221,258. High
Worth JV's 15% equity interest is consideration-free but entitled to share in
the profits of Sichuan High Worth Brewery. The Joint Venture Agreement and the
relevant legal documents have been approved by the local government authorities.
Although Sichuan High Worth Brewery is currently producing Pabst Blue Ribbon
beer, the operating results of Sichuan High Worth Brewery are not included in
the Company's financial statements, except for any dividend income that the
Company receives.
In June 1998, Zao Yang High Worth Brewery commenced the production of
Pabst Blue Ribbon beer after completing conversion of the existing facilities
into a Pabst Blue Ribbon brewing facility. Pursuant to the joint venture
agreement, Zao Yang High Worth Brewery is required to sell all of its beer
production to the Marketing Company for resale.
On October 18, 1999, Holdings, through its wholly-owned subsidiary
incorporated in the British Virgin Islands, March International, signed a formal
Joint Venture Agreement with Jilin Province Juetai City Brewery (40%) and Jilin
Province Chuang Xiang Zhi Yie Ltd. (9%), both of which are unaffiliated PRC
companies, to form Jilin Lianli Brewery. The total registered and paid-up
capital of Jilin Lianli Brewery was RMB 25,000,000. March International
contributed one new packing line and the right to use the "Lianli" beer
trademark with a total value of RMB 12,750,000 as capital, and received a 51%
effective interest in Jilin Lianli Brewery. The technical renovation of the
existing brewing equipment and the installation of the new packaging line was
completed in April 2000. The Joint Venture Agreement was approved by the local
government and formal operations commenced in May 2000. However, due to weak
market response and the inability of the Chinese local partners to honor their
portion of the working capital commitment, the production and operation of Jilin
Lianli Brewery was formally terminated in December 2000. The Company is
currently in negotiation with certain interested parties to dispose of its
equity interest in the brewery.
The Company conducts a substantial portion of its purchases through
related parties, and has additional significant continuing transactions with
such parties (see "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS").
31
CONSOLIDATED RESULTS OF OPERATIONS:
YEARS ENDED DECEMBER 31, 2000 AND 1999:
SALES:
For the year ended December 31, 2000, net sales were RMB 941,147,545,
as compared to net sale of RMB 986,458,832 for the year ended December 31, 1999.
Approximately 97% of total sales in both 2000 and 1999 were from the sale of
products with the Pabst Blue Ribbon brand name.
During the year ended December 31, 2000, net sales of beer products
decreased by RMB 45,311,287 or 4.6% to RMB 941,147,545, as compared to RMB
986,458,832 for the year ended December 31, 1999. The Company sold 195,510
metric tons of beer to distributors in 2000 as compared to 204,226 metric tons
of beer in 1999, a decrease of 4.3%. The decrease in net sales of beer products
during the year ended December 31, 2000 as compared to the year ended December
31, 1999 was primarily attributable to the decrease in volume of beer sold,
which was a result of a weakening in consumer demand for foreign branded premium
beers in China and the intense competition among all breweries in China.
In response to changing market conditions and competitive pressures,
the Company introduced two new Pabst Blue Ribbon beer products during March
1998. The new products cost less to produce as a result of containing less malt
and having a lower alcoholic content, and were sold in newly-designed packaging.
Although the sale volume of these 10-degree light processed Pabst Blue Ribbon
beers constituted a significant portion of total sales in 1998, their
contribution to overall operating profit was below management's expectations.
Accordingly, as a result of a strategic reevaluation of the Company's markets,
management decided to discontinue the 10-degree beer in 1999, and attempted to
replace such sales with sales of the 11-degree light processed beer.
During the year ended December 31, 2000, Zhaoqing Brewery sold 53,808
metric tons of beer, of which 53,169 metric tons (98.8%) were Pabst Blue Ribbon
beer and 639 metric tons (1.2%) were local brand beer. In 2000, Zhaoqing
Brewery sold all the Pabst Blue Ribbon beer produced to the Marketing Company
for resale, and sold the local brand beer to the distributors directly. During
the year ended December 31, 1999, Zhaoqing Brewery sold 60,651 metric tons of
beer to the Marketing Company, of which 59,212 metric tons (97.6%) were Pabst
Blue Ribbon beer and 1,439 metric tons (2.4%) were local brand beer. Total beer
sold by Zhaoqing Brewery decreased by 6,843 metric tons or 11.3% in 2000 as
compared to 1999.
During the years ended December 31, 2000 and 1999, Sichuan Brewery
sold 7,870 metric tons and 9,041 metric tons of beer, respectively, to the
Marketing Company, all of which was Pabst Blue Ribbon beer.
During the year ended December 31, 2000, Zao Yang High Worth Brewery
sold 18,510 metric tons of beer, of which 1,023 metric tons (5.5%) were Pabst
Blue Ribbon beer and 17,487 metric tons (94.5%) were local brand beer. During
the year ended December 31, 2000, Zao Yang High Worth Brewery sold all the Pabst
Blue Ribbon beer produced to the Marketing Company for resale, and sold the
local brand beer to the distributors directly. During the year ended December
31, 1999, Zao Yang High Worth Brewery sold 17,015 metric tons of beer, of which
4,716 metric tons (27.7%) were Pabst Blue Ribbon beer and 12,299 metric tons
(72.3%) were local brand beer.
The Marketing Company regulated the production of Pabst Blue Ribbon
beer by Zhaoqing Brewery, Noble Brewery, Sichuan Brewery and Zao Yang High Worth
Brewery during 2000 and 1999 in accordance with their respective production
capacities in order to balance warehouse inventory levels and accommodate
projected market demand.
GROSS PROFIT:
For the year ended December 31, 2000, total gross profit was RMB
205,979,387 or 21.9% of total net sales, as compared to total gross profit of
RMB 218,202,956 or 22.1% of total net sales for the year ended December 31,
1999. Gross profit decreased by RMB 12,223,569 to RMB 205,979,387 in 2000 as
compared to RMB 218,202,956 in 1999 as a result of the decrease in sales and
gross margin.
32
Gross margin from beer sales decreased to 21.9% in 2000 as compared to
22.1% in 1999 as a result of a shift in the sales mix to slightly lower margin
Blue Ribbon beer products and the increase in the sales of lower margin local
brand beers.
The Company expects that it will experience pressure on its gross
profit margin in 2001 as a result of a continuing softness in consumer demand
for foreign premium beer in China, which the Company believes is attributable to
a change in the consumption pattern in China caused in part by the aftereffects
of the Asian financial crisis, and increasing competition from foreign and local
premium brand beers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
For the year ended December 31, 2000, selling, general and
administrative expenses were RMB 294,071,585 or 31.2% of net sales, consisting
of selling expenses of RMB 211,002,391 and general and administrative expenses
of RMB 83,069,194. Net of the allowance for doubtful accounts of RMB 21,818,226
recorded during 2000, general and administrative expenses were RMB 61,250,968.
For the year ended December 31, 1999, selling, general and
administrative expenses were RMB 217,915,167 or 22.1% of net sales, consisting
of selling expenses of RMB 138,497,167 and general and administrative expenses
of RMB 79,418,000. Net of the allowance for doubtful accounts of RMB 24,235,137
recorded during 1999, general and administrative expenses were RMB 55,182,863.
Selling expenses include costs relating to the advertising, promotion,
marketing and distribution of Pabst Blue Ribbon beer and other local brand name
beers in China. Selling expenses increased by RMB 72,505,224 or 52.4% in 2000
as compared to 1999, and increased as a percent of net sales, to 22.4% in 2000
from 14.0% in 1999. Selling expenses increased in 2000 as compared to 1999,
both on an absolute basis and as a percentage of sales, as a result of the
Company continuing its expanded advertising and promotional programs to
stimulate consumer demand in order to maintain the market position of Pabst Blue
Ribbon beer in China, and to implement new advertising and promotional campaigns
with respect to the Company's local brand name beers.
Selling expenses are recognized through the consolidation of the
operations of the Marketing Company. The Marketing Company incurs such expenses
on behalf of all of the Pabst Blue Ribbon brewing facilities in China, even
though not all of such facilities' results of operations are reflected in the
Company's operating income. Although the Marketing Company is budgeted annually
to operate at break-even levels, based on agreed upon ex-factory prices that the
Marketing Company pays to the respective breweries to purchase their production
of Pabst Blue Ribbon beer, actual profitability, particularly on an interim
basis, is subject to substantial variability. As a result of these factors,
during the years ended December 31, 2000 and 1999, the Marketing Company
incurred an operating loss of RMB 73,587,560 and RMB 41,639,000, respectively,
which reduced consolidated operating income accordingly.
General and administrative expenses consist of the management office
operating costs of Zhaoqing Brewery, the Marketing Company, Zao Yang High Worth
Brewery and Jilin Lianli Brewery, the costs associated with the operation of the
Company's executive offices, and the legal and accounting costs associated with
the operation of a public company. Excluding the allowance for doubtful
accounts, general and administrative expenses increased by RMB 6,068,105 or
10.8% in 2000 as compared to 1999, and as a percentage of net sales, to 6.5% in
2000 from 5.6% in 1999. General and administrative expenses increased in 2000
as compared to 1999 as a result of an increase in personnel-related costs and
the costs associated with the administration of the Company's breweries in
China.
33
The allowance for doubtful accounts, which is calculated based
primarily on the age of outstanding accounts receivable, decreased slightly to
2.3% of net sales in 2000 as compared to 2.5% of net sales in 1999 as a result
of the implementation of tighter credit control and enhanced debt recovery
efforts. However, accounts receivable are typically outstanding for a longer
period of time in China than in the United States.
FAIR VALUE OF WARRANTS, STOCK OPTIONS AND COMMON STOCK ISSUED FOR SERVICES
RENDERED:
On January 2, 1998, options to purchase 210,000 shares of Class A
Common Stock at an exercise price of US$3.87 per share were granted to four
directors and five employees, and options to purchase 70,000 shares of Class A
Common Stock at an exercise price of US$4.26 were granted to two directors, each
of whom possesses indirectly more than 10% of the total combined voting power of
all classes of common stock of the Company. From 50% to 70% of such stock
options vested on April 1, 1998, and the remaining portion of the stock options
vest in varying amounts through April 1, 2000. The stock options expire on
dates ranging from December 31, 2001 through December 31, 2005.
On May 16, 2000, options to purchase 375,000 shares of Class A Common
Stock at an exercise price of US$0.72 per share were granted to four directors
and five employees, and options to purchase 145,000 shares of Class A Common
Stock at an exercise price of US$0.79 per share were granted to two directors,
each of whom possesses indirectly more than 10% of the total combined voting
power of all classes of common stock of the Company. Such stock options vest 50%
on July 1, 2000, 25% on July 1, 2001, and the remaining 25% on July 1, 2002. The
stock options expire on December 31, 2004.
The exercise price of all stock options was not less than fair market
value on the grant date . The stock options were accounted for pursuant to
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Under SFAS 123, the fair value of stock options
issued to non-employees (including non-employee directors in 1998) is calculated
according to the Black-Scholes option pricing model and amortized to expense
over the vesting period. As a result, the Company recognized RMB 174,452 and RMB
697,801 of compensation expense in 2000 and 1999, respectively.
IMPAIRMENTS RELATED TO PROPERTY, PLANT AND EQUIPMENT:
During December 2000, the production and operation of Jilin Lianli
Brewery was formally terminated, as a result of which the Company recorded a
provision for impairment of plant, machinery and equipment of RMB 6,000,000 at
December 31, 2000. The Company is currently in negotiation with certain
interest parties to dispose of its equity interest in the brewery.
OPERATING INCOME (LOSS):
For the year ended December 31, 2000, the operating loss was RMB
94,288,604, as compared to an operating loss of RMB 412,431 for the year ended
December 31, 1999. The increase in operating loss is primarily attributable to
the decrease in volume of beer sold and the increase in selling, advertising and
promotional expenses.
The Marketing Company purchases Pabst Blue Ribbon beer at mutually
agreed ex-factory prices, and is only allowed to mark-up the cost of Pabst Blue
Ribbon beer purchased in order to adequately cover its selling, advertising,
promotional, distribution and administrative expenses incurred in selling to
distributors. The Marketing Company incurred certain non-budgeted selling and
34
advertising expenses in 2000 and 1999 that were not fully compensated for in the
Marketing Company's intra-company pricing structure, resulting in the Marketing
Company incurring an operating loss of RMB 73,587,560 and RMB 41,639,000,
respectively, which reduced consolidated operating income accordingly.
INTEREST INCOME AND INTEREST EXPENSE:
For the year ended December 31, 2000, interest income was RMB
1,799,932, as compared to interest income of RMB 3,090,081 for the year ended
December 31, 1999. The decrease in interest income in 2000 of RMB 1,290,149 or
41.8% as compared to 1999 was primarily the result of a decrease in average bank
balances during 2000.
For the year ended December 31, 2000, interest expense, net of amounts
capitalized, was RMB 10,728,115, as compared to RMB 14,689,647 for the year
ended December 31, 1999. The decrease in interest expense in 2000 of RMB
3,961,532 or 27.0% as compared to 1999 was primarily the result of a general
decrease in bank interest rates and a decrease in the outstanding balance of
capital lease obligations during 2000.
INCOME TAXES:
The two-year income tax holiday for High Worth JV expired on December
31, 1997. During the three year period from 1998 to 2000, High Worth JV is
required to pay local income tax at half of the normal rate of 33% on its profit
as determined in accordance with PRC accounting standards applicable to High
Worth JV. Accordingly, for the year ended December 31, 2000, income tax expense
was RMB 4,140,152. For the year ended December 31, 1999, income tax expense
was RMB 5,444,091. Deferred income taxes are based on the liability method
prescribed by SFAS No. 109.
The Company recorded deferred tax liabilities of RMB 4,413,000 for the
year ended December 31, 1996, which represented the temporary differences
between the time when dividends are declared by the Company's subsidiaries and
associated company and are received by the Company. As the Company had elected
to treat its subsidiaries and associated company as partnerships in 1997, High
Worth Holdings is the ultimate partner in these partnerships. The Company will
only be taxed when taxable distributions are received from High Worth Holdings.
High Worth Holdings has no current intention of making any income distributions,
and accordingly, the deferred tax liability of RMB 4,413,000 was reversed and
recorded as a reduction to income tax expense for the year ended December 31,
1998.
NET INCOME (LOSS):
For the year ended December 31, 2000, net loss was RMB 28,905,192 (RMB
3.61 per share), as compared to net income of RMB 23,655,102 (RMB 2.95 per
share) for the year ended December 31, 1999.
YEARS ENDED DECEMBER 31, 1999 AND 1998:
SALES:
For the year ended December 31, 1999, net sales were RMB 986,458,832,
as compared to net sale of RMB 1,121,007,111 for the year ended December 31,
1998. Approximately 98% and 99% of total sales in 1999 and 1998, respectively,
were from the sale of products with the Pabst Blue Ribbon brand name.
During the year ended December 31, 1999, net sales of beer products
decreased by RMB 134,548,279 or 12.0% to RMB 986,458,832, as compared to RMB
1,121,007,111 for the year ended December 31, 1998. The Company sold 204,226
metric tons of beer to distributors in 1999 as compared to 235,670 metric tons
of beer in 1998, a decrease of 13.3%. The decrease in net sales of beer
products during the year ended December 31, 1999 as compared to the year ended
December 31, 1998 was primarily attributable to the decrease in volume of beer
sold, which was a result of a weakening in consumer demand for foreign branded
premium beer in China and the elimination of a low margin product line as
discussed below.
In response to changing market conditions and competitive pressures,
the Company introduced two new Pabst Blue Ribbon beer products during March
1998. The new products cost less to produce as a result of containing less malt
and having a lower alcoholic content, and were sold in newly-designed packaging.
Although the sale volume of these 10-degree light processed Pabst Blue Ribbon
35
beers constituted a significant portion of total sales in 1998, their
contribution to overall operating profit was below management's expectations.
Accordingly, as a result of a strategic reevaluation of the Company's markets,
management decided to discontinue the 10-degree beer in 1999, and attempted to
replace such sales with sales of the 11-degree light processed beer.
During the year ended December 31, 1999, Zhaoqing Brewery sold 60,651
metric tons of beer, of which 59,212 metric tons (97.6%) were Pabst Blue Ribbon
beer and 1,439 metric tons (2.4%) were local brand beer. In 1999, Zhaoqing
Brewery sold all the Pabst Blue Ribbon beer produced to the Marketing Company
for resale, and sold the local brand beer to the distributors directly. During
the year ended December 31, 1998, Zhaoqing Brewery sold 73,246 metric tons of
beer to the Marketing Company, of which 71,611 metric tons (97.8%) were Pabst
Blue Ribbon beer and 1,635 metric tons (2.2%) were local brand beer. Total beer
sold by Zhaoqing Brewery decreased by 12,595 metric tons or 17.2% in 1999 as
compared to 1998.
During the years ended December 31, 1999 and 1998, Sichuan Brewery
sold 9,041 metric tons and 12,525 metric tons of beer, respectively, to the
Marketing Company, all of which was Pabst Blue Ribbon beer.
During the year ended December 31, 1999, Zao Yang High Worth Brewery
sold 17,015 metric tons of beer, of which 4,716 metric tons (27.7%) were Pabst
Blue Ribbon beer and 12,299 metric tons (72.3%) were local brand beer. In 1999,
Zao Yang High Worth Brewery sold all the Pabst Blue Ribbon beer produced to the
Marketing Company for resale, and sold the local brand beer to the distributors
directly. During the year ended December 31, 1998, Zao Yang High Worth Brewery
sold 6,378 metric tons of beer to the Marketing Company, of which 4,295 metric
tons (67.3%) were Pabst Blue Ribbon beer and 2,083 metric tons (32.7%) were
local brand beer.
The Marketing Company regulated the production of Pabst Blue Ribbon
beer by Zhaoqing Brewery, Noble Brewery, Sichuan Brewery and Zao Yang High Worth
Brewery during 1998 and 1999 in accordance with their respective production
capacities in order to balance warehouse inventory levels and accommodate
projected market demand.
GROSS PROFIT:
For the year ended December 31, 1999, total gross profit was RMB
218,202,956 or 22.1% of total net sales, as compared to total gross profit of
RMB 193,523,991 or 17.3% of total net sales for the year ended December 31,
1998. Despite the decrease in sales, gross profit increased by RMB 24,678,965
to RMB 218,202,956 in 1999 as compared to RMB 193,523,991 in 1998 as a result of
the increase in gross margin.
Gross margin from beer sales increased to 22.1% in 1999 as compared to
17.3% in 1998 as a result of a shift in the sales mix to higher margin products
and effective cost control measures.
36
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
For the year ended December 31, 1999, selling, general and
administrative expenses were RMB 217,915,167 or 22.1% of net sales, consisting
of selling expenses of RMB 138,497,167 and general and administrative expenses
of RMB 79,418,000. Net of the allowance for doubtful accounts of RMB 24,235,137
recorded during 1999, general and administrative expenses were RMB 55,182,863.
For the year ended December 31, 1998, selling, general and
administrative expenses were RMB 215,134,986 or 19.2% of net sales, consisting
of selling expenses of RMB 148,046,684 and general and administrative expenses
of RMB 67,088,302. Net of the allowance for doubtful accounts of RMB 15,367,012
recorded during 1998, general and administrative expenses were RMB 51,721,290.
Selling expenses include costs relating to the advertising, promotion,
marketing and distribution of Pabst Blue Ribbon beer in China. Selling expenses
decreased by RMB 9,549,517 or 6.5% in 1999 as compared to 1998, but increased as
a percent of net sales, to 14.0% in 1999 from 13.2% in 1998. Selling expenses
decreased on an absolute basis in 1999 as compared to 1998 as a result of the
Company's implementation of effective cost control measures with respect to
advertising and promotional programs. Selling expenses increased as a percent
of net sales in 1999 as compared to 1998 as a result of a decrease in net sales.
Selling expenses are recognized through the consolidation of the
operations of the Marketing Company. The Marketing Company incurs such expenses
on behalf of all of the Pabst Blue Ribbon brewing facilities in China, even
though not all of such facilities' results of operations are reflected in the
Company's operating income. Although the Marketing Company is budgeted annually
to operate at break-even levels, based on agreed upon ex-factory prices that the
Marketing Company pays to the respective breweries to purchase their production
of Pabst Blue Ribbon beer, actual profitability, particularly on an interim
basis, is subject to substantial variability. As a result of these factors,
during the years ended December 31, 1999 and 1998, the Marketing Company
incurred an operating loss of RMB 41,639,000 and RMB 61,120,361, respectively,
which reduced consolidated operating income accordingly.
General and administrative expenses consist of the management office
operating costs of Zhaoqing Brewery, the Marketing Company and Zao Yang High
Worth Brewery, the costs associated with the operation of the Company's
executive offices, and the legal and accounting costs associated with the
operation of a public company. Excluding the allowance for doubtful accounts,
general and administrative expenses increased by RMB 3,461,573 or 6.7% in 1999
as compared to 1998, and as a percentage of net sales, to 5.6% in 1999 from 4.6%
in 1998. General and administrative expenses increased in 1999 as compared to
1998 as a result of an increase in personnel-related costs and the costs
associated with the administration of the Company's breweries in China.
The allowance for doubtful accounts, which is calculated based
primarily on the age of outstanding accounts receivable, increased to 2.5% of
net sales in 1999 as compared to 1.4% of net sales in 1998 as a result of an
increase in the age of accounts receivable outstanding in 1999. However,
accounts receivable are typically outstanding for a longer period of time in
China than in the United States.
FAIR VALUE OF WARRANTS, STOCK OPTIONS AND COMMON STOCK ISSUED FOR SERVICES
RENDERED:
On January 2, 1998, options to purchase 210,000 shares of Class A
common stock at an exercise price of US$3.87 per share were granted to four
directors and five employees, and options to purchase 70,000 shares of Class A
common stock at an exercise price of US$4.26 were granted to two directors, each
of whom possesses indirectly more than 10% of the total combined voting power of
all classes of common stock of the Company. From 50% to 70% of such stock
options vested on April 1, 1998, and the remaining portion of the stock options
vest in varying amounts through April 1, 2000. The stock options expire on
37
dates ranging from December 31, 2001 through December 31, 2005. The stock
options issued to non-employee directors were accounted for pursuant to
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Under SFAS 123, the fair value of stock options
issued to non-employees is calculated according to the Black-Scholes option
pricing model and is amortized to expense over the vesting period. As a result,
the Company recognized RMB 2,218,706 and RMB 697,801 of compensation expense in
1998 and 1999, respectively.
On March 2, 1998, the Company entered into a contract with Worldwide
Corporate Finance, a corporate financial consulting company, to provide
financial and business consulting services to the Company. The Company paid an
initial non-refundable retainer by issuing 10,000 shares of Class A common
stock, which was recorded as a charge to operations for the year ended December
31, 1998 at their estimated fair market value of RMB 240,700 (US$29,000). The
contract expired on August 18, 1998 without any additional compensation being
paid or owed to Worldwide Corporate Finance.
OPERATING INCOME (LOSS):
For the year ended December 31, 1999, the operating loss was RMB
412,431, as compared to an operating loss of RMB 24,260,273 for the year ended
December 31, 1998. The decrease in operating loss is primarily attributable to
the shift in the sales mix to higher margin products and the Company's
implementation of effective cost control measures with respect to selling,
general and administrative expenses. Although sales decreased in 1999 as
compared to 1998, the shift in sales mix to higher margin products resulted in
an increase in gross profit margin, which resulted in a decrease in operating
loss in 1999 as compared to 1998.
The Marketing Company purchases Pabst Blue Ribbon beer at mutually
agreed ex-factory prices, and is only allowed to mark-up the cost of Pabst Blue
Ribbon beer purchased in order to adequately cover its selling, advertising,
promotional, distribution and administrative expenses incurred in selling to
distributors. The Marketing Company incurred certain non-budgeted selling and
advertising expenses in 1998 and 1999 that were not fully compensated for in the
Marketing Company's intra-company pricing structure, resulting in the Marketing
Company incurring an operating loss of RMB 61,120,361 and RMB 41,639,000,
respectively, which reduced consolidated operating income accordingly.
INTEREST INCOME AND INTEREST EXPENSE:
For the year ended December 31, 1999, interest income was RMB
3,090,081 as compared to interest income of RMB 2,687,218 for the year ended
December 31, 1998. The increase in interest income in 1999 of RMB 402,863 or
15.0% as compared to 1998 was primarily the result of higher average bank
balances during 1999.
For the year ended December 31, 1999, interest expense, net of amounts
capitalized, was RMB 14,689,647, as compared to RMB 9,507,873 for the year ended
December 31, 1998. The increase in interest expense in 1999 of RMB 5,181,774 or
54.5% as compared to 1998 was primarily the result of an increase in average
bank borrowings during 1999.
INCOME TAXES:
The two-year income tax holiday for High Worth JV expired on December
31, 1997. During the three year period from 1998 to 2000, High Worth JV is
required to pay local income tax at half of the normal rate of 33% on its profit
as determined in accordance with PRC accounting standards applicable to High
38
Worth JV. Accordingly, for the year ended December 31, 1999, income tax expense
was RMB 5,444,091. For the year ended December 31, 1998, income tax expense was
RMB 4,739,172. Deferred income taxes are based on the liability method
prescribed by SFAS No. 109.
The Company recorded deferred tax liabilities of RMB 4,413,000 for the
year ended December 31, 1996, which represented the temporary differences
between the time when dividends are declared by the Company's subsidiaries and
associated company and are received by the Company. As the Company had elected
to treat its subsidiaries and associated company as partnerships in 1997, High
Worth Holdings is the ultimate partner in these partnerships. The Company will
only be taxed when taxable distributions are received from High Worth Holdings.
High Worth Holdings has no current intention of making any income distributions,
and accordingly, the deferred tax liability of RMB 4,413,000 was reversed and
recorded as a reduction to income tax expense for the year ended December 31,
1998.
NET INCOME:
For the year ended December 31, 1999, net income increased to RMB
23,655,102 (RMB 2.95 per share), as compared to net income of RMB 21,391,510
(RMB 2.67 per share) for the year ended December 31, 1998.
NOBLE BREWERY:
YEARS ENDED DECEMBER 31, 2000 AND 1999:
SALES:
For the year ended December 31, 2000, net sales were RMB 443,092,393,
as compared to net sales of RMB 513,807,992 for the year ended December 31,1999.
During the year ended December 31, 2000, Noble Brewery sold 103,968
metric tons of beer, almost all to the Marketing Company. During the year ended
December 31, 1999, Noble Brewery sold 118,464 metric tons of beer, almost all to
the Marketing Company. Total beer sold decreased by 14,496 metric tons or 12.2%
from 1999 to 2000, primarily as a result of the general softening of demand in
the beer market in China. In addition, as a result of the regulation of sales
by the Marketing Company, which purchases beer from the breweries in accordance
with their respective production capacities, the beer produced by Sichuan
Brewery and Zao Yang High Worth Brewery in 2000 had the effect of reducing Noble
Brewery's beer sales in 2000.
GROSS PROFIT:
For the year ended December 31, 2000, gross profit was RMB 152,008,267
or 34.3% of net sales, as compared to gross profit of RMB 197,370,369 or 38.4%
of net sales for the year ended December 31, 1999. The decrease in the gross
profit margin of 4.1% in 2000 as compared to 1999 was a result of a shift in
sales mix to lower margin products in 2000 in response to changing market
conditions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
For the year ended December 31, 2000, selling, general and
administrative expenses were RMB 171,174,772 (38.6% of net sales), consisting of
selling expenses of RMB 2,293,311 and general and administrative expenses of RMB
168,881,461. Net of an allowance for doubtful accounts of RMB 137,000,000 for
the year ended December 31, 2000, general and administrative expenses were RMB
31,881,461. For the year ended December 31, 1999, selling, general and
administrative expenses were RMB 32,232,488 (6.3% of net sales), consisting of
selling expenses of RMB 4,395,587 and general and administrative expenses of RMB
27,836,901. Net of a write-back of allowance for doubtful accounts of RMB
6,080,775 for the year ended December 31, 1999, general and administrative
expenses were RMB 33,917,676. Selling expenses consist of warehousing, storage
and freight costs.
39
As of December 31, 2000, Noble Brewery recorded an allowance for
doubtful accounts of RMB 137,000,000 related to amounts due from the Marketing
Company. This allowance for doubtful accounts was eliminated in the Company's
consolidated financial statements, and had no effect on the Company's
consolidated results of operations for the year ended December 31, 2000.
During 1995, the Marketing Company was established to market
throughout China the Pabst Blue Ribbon beer produced by Zhaoqing Brewery and
Noble Brewery. The Marketing Company assumed the responsibility for marketing
the Pabst Blue Ribbon beer produced by Noble Brewery during July 1995, and
incurred almost all of the 1999 and 2000 selling expenses.
Selling expenses decreased by RMB 2,102,276 or 47.8% in 2000 as
compared to 1999, and represented 0.5% of net sales in 2000 as compared to 0.9%
of net sales in 1999, as a result of a decrease in warehousing and
transportation costs. General and administrative expenses increased by RMB
141,044,560 or 506.7% in 2000 as compared to 1999, and represented 38.1% of net
sales in 2000 as compared to 5.4% of net sales in 1999. Excluding the allowance
for doubtful accounts, general and administrative expenses decreased by RMB
2,036,215 or 6.0% in 2000 as compared to 1999. General and administrative
expenses decreased in 2000 as compared in 1999 primarily as a result of
effective cost control measures.
OPERATING INCOME (LOSS):
For the year ended December 31, 2000, operating loss was RMB
19,166,505, as compared to operating income of RMB 165,137,881 for the year
ended December 31, 1999.
INTEREST INCOME AND INTEREST EXPENSE:
For the year ended December 31, 2000, interest income was RMB
1,141,976, as compared to interest income of RMB 1,650,372 for the year ended
December 31, 1999, due primarily to average bank balances and bank deposit
interest rates being lower in 2000.
For the year ended December 31, 2000, interest expense was RMB 16,724,
as compared to interest expense of RMB 51,926 for the year ended December 31,
1999, as a result of lower average bank interest rates for discounting bills
receivable in 2000.
INCOME TAXES:
For the year ended December 31, 2000, income tax expense was RMB
31,479,185, which consisted of RMB 28,479,185 for PRC income taxes and RMB
3,000,000 for deferred income taxes as a result of temporary timing differences
with respect to accelerated depreciation of property, plant and equipment. For
the year ended December 31, 1999, income tax expense was RMB 42,887,055, which
consisted of RMB 40,587,055 for PRC income taxes and RMB 2,300,000 for deferred
income taxes as a result of temporary timing differences with respect to
accelerated depreciation of property, plant and equipment. The two year 100%
income tax holiday and the three year 50% income tax reduction period for Noble
Brewery expired on December 31, 1995 and December 31, 1998, respectively.
Commencing in 1999, Noble Brewery was required to pay local income tax at the
full normal rate of 33% on its profit as determined in accordance with PRC
accounting standards applicable to Noble Brewery.
40
NET INCOME (LOSS):
For the year ended December 31, 2000, net loss was RMB 46,022,668, as
compared to net income of RMB 128,417,934 for the year ended December 31, 1999.
YEARS ENDED DECEMBER 31, 1999 AND 1998:
SALES:
For the year ended December 31, 1999, net sales were RMB 513,807,992,
as compared to net sales of RMB 584,469,720 for the year ended December 31,1998.
During the year ended December 31, 1999, Noble Brewery sold 118,464
metric tons of beer, almost all to the Marketing Company. During the year ended
December 31, 1998, Noble Brewery sold 143,236 metric tons of beer, almost all to
the Marketing Company. Total beer sold decreased by 24,772 metric tons or 17.3%
from 1998 to 1999, primarily as a result of the general softening of demand in
the beer market in China. In addition, as a result of the regulation of sales
by the Marketing Company, which purchases beer from the breweries in accordance
with their respective production capacities, the beer produced by Sichuan
Brewery and Zao Yang High Worth Brewery in 1999 had the effect of reducing Noble
Brewery's beer sales in 1999.
GROSS PROFIT:
For the year ended December 31, 1999, gross profit was RMB 197,370,369
or 38.4% of net sales, as compared to gross profit of RMB 177,258,447 or 30.3%
of net sales for the year ended December 31, 1998. The increase in the gross
profit margin of 8.1% in 1999 as compared to 1998 was a result of a decrease in
the cost of raw materials, effective cost control measures, and the shift in
sales mix to higher margin products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
For the year ended December 31, 1999, selling, general and
administrative expenses were RMB 32,232,488 (6.3% of net sales), consisting of
selling expenses of RMB 4,395,587 and general and administrative expenses of RMB
27,836,901. Net of a write-back of allowance for doubtful accounts of RMB
6,080,775 for the year ended December 31, 1999, general and administrative
expenses were RMB 33,917,676. For the year ended December 31, 1998, selling,
general and administrative expenses were RMB 47,955,747 (8.2% of net sales),
consisting of selling expenses of RMB 3,707,837 and general and administrative
expenses of RMB 44,247,910. Net of an allowance for doubtful accounts of RMB
7,178,852 for the year ended December 31, 1998, general and administrative
expenses were RMB 37,069,058. Selling expenses consist of warehousing, storage
and freight costs.
During 1995, the Marketing Company was established to market
throughout China the Pabst Blue Ribbon beer produced by Zhaoqing Brewery and
Noble Brewery. The Marketing Company assumed the responsibility for marketing
the Pabst Blue Ribbon beer produced by Noble Brewery during July 1995, and
incurred almost all of the 1998 and 1999 selling expenses.
Selling expenses increased by RMB 687,750 or 18.5% in 1999 as compared
to 1998, and represented 0.9% of net sales in 1999 as compared to 0.6% of net
sales in 1998, as a result of an increase in warehousing and transportation
costs. General and administrative expenses decreased by RMB 16,411,009 or 37.1%
in 1999 as compared to 1998, and represented 5.4% of net sales in 1999 as
compared to 7.6% of net sales in 1998. Excluding the allowance for doubtful
accounts, general and administrative expenses decreased by RMB 3,151,382 or 8.5%
in 1999 as compared to 1998. General and administrative expenses decreased in
1999 as compared in 1998 primarily as a result of effective cost control
measures.
41
OPERATING INCOME:
For the year ended December 31, 1999, operating income was RMB
165,137,881 or 32.1% of net sales, as compared to operating income of RMB
129,302,700 or 22.1% of net sales for the year ended December 31, 1998.
INTEREST INCOME AND INTEREST EXPENSE:
For the year ended December 31, 1999, interest income was RMB
1,650,372, as compared to interest income of RMB 2,406,192 for the year ended
December 31, 1998, due primarily to average bank balances and average bank
deposit interest rates being lower in 1999.
For the year ended December 31, 1999, interest expense was RMB 51,926,
as compared to interest expense of RMB 73,506 for the year ended December 31,
1998, as a result of lower average bank interest rates for discounting bills
receivable in 1999.
INCOME TAXES:
For the year ended December 31, 1999, income tax expense was RMB
42,887,055, which consisted of RMB 40,587,055 for PRC income taxes and RMB
2,300,000 for deferred income taxes as a result of temporary timing differences
with respect to accelerated depreciation of property, plant and equipment. For
the year ended December 31, 1998, income tax expense was RMB 8,226,523, which
consisted of RMB 15,726,523 recorded for PRC income taxes and RMB 7,500,000
credited for deferred income taxes as a result of the reversal of the temporary
timing differences with respect to accelerated depreciation of property, plant
and equipment. The two year 100% income tax holiday and the three year 50%
income tax reduction period for Noble Brewery expired on December 31, 1995 and
December 31, 1998, respectively. Commencing in 1999, Noble Brewery was required
to pay local income tax at the full normal rate of 33% on its profit as
determined in accordance with PRC accounting standards applicable to Noble
Brewery.
NET INCOME:
For the year ended December 31, 1999, net income was RMB 128,417,934
or 25.0% of net sales, as compared to RMB 126,228,058 or 21.6% of net sales for
the year ended December 31, 1998.
CONSOLIDATED FINANCIAL CONDITION - DECEMBER 31, 2000:
LIQUIDITY AND CAPITAL RESOURCES:
Operating. For the year ended December 31, 2000, the Company's operations
provided cash resources of RMB 60,222,966, as compared to RMB 81,062,020 for the
year ended December 31, 1999, primarily as a result of reduced cash flows from
accounts receivable, offset in part by an increase in cash flows from
inventories, amounts due from related companies, prepayments, deposits and other
receivables, accounts payable and accrued liabilities, and amount due to an
associated company. The Company's cash balance decreased by RMB 15,739,556 to
RMB 90,313,060 at December 31, 2000, as compared to RMB 106,052,616 at December
31, 1999. The Company's net working capital deficit increased by RMB
113,759,979 to RMB 274,731,879 at December 31, 2000, as compared to RMB
160,971,900 at December 31, 1999, resulting in a current ratio at December 31,
2000 of 0.49:1, as compared to 0.66:1 at December 31, 1999.
42
The Company recorded a provision for doubtful accounts of RMB
21,818,226 for the year ended December 31, 2000, as compared to RMB 24,287,267
for the year ended December 31, 1999. As of December 31, 2000 and 1999, the
allowance for doubtful accounts was RMB 81,652,544 and RMB 59,834,318,
respectively. As a percent of total accounts receivable, the allowance for
doubtful accounts was 52.9% and 55.1% at December 31, 2000 and 1999,
respectively. Accounts receivable increased by RMB 45,653,273 or 42.0% to RMB
154,323,734 at December 31, 2000, as compared to RMB 108,670,461 at December 31,
1999, as a result of a slowdown in payments from customers and extended credit
terms offered to certain distributors.
The Company's inventories decreased by RMB 22,659,971 or 30.9% to RMB
50,581,977 at December 31, 2000, as compared to RMB 73,241,948 at December 31,
1999. The decrease in inventories was mainly due to the Company's efforts to
reduce the level of finished goods.
The Company's accounts payable and accrued liabilities increased by
RMB 48,431,851 or 39.0% to RMB 172,674,399 at December 31, 2000, as compared to
RMB 96,661,317 at December 31, 1999. The increase in accounts payable and
accrued liabilities was mainly due to increase in accrued advertising and
promotion expenses incurred by the Marketing Company.
The amounts due from related companies represented receivable balances
from Guangdong Blue Ribbon and its affiliated companies. The amounts due from
related companies decreased by RMB 24,023,012 or 97.5% to RMB 623,798 at
December 31, 2000 as compared to RMB 24,646,810 at December 31, 1999, as a
result of the settlement of amounts due from related companies.
The amounts due to related companies, net of RMB 12,250,000 of
excessive fixed assets contributed by the minority shareholders of Jilin Lianli
Brewery, increased by RMB 4,210,473 or 26.7% to RMB 15,746,366 at December 31,
2000, as compared to RMB 11,535,893 at December 31, 1999, and consisted
primarily of payable balances resulting from the purchase of packaging materials
and expenses paid by Guangdong Blue Ribbon on behalf of the Company.
Investing. For the year ended December 31, 2000, additions to
property, plant and equipment aggregated RMB 30,531,758, which included
approximately RMB 6,700,000 and RMB 9,000,000 for acquiring new equipment and
renovation of existing machinery by Zao Yang High Worth Brewery and Zhaoqing
Brewery, respectively, approximately RMB 2,170,000 for the acquisition of
vehicles and office equipment by the Marketing Company, and approximately RMB
12,660,000 for the technical renovation of old brewing equipment and the
installation of a new packaging line at Jilin Lianli Brewery.
The Company anticipates that additional capital expenditures in
connection with the improvement of production facilities at Zhaoqing Brewery and
Zao Yang High Worth Brewery during 2001 will be approximately RMB 8,000,000 and
RMB 6,000,000, respectively, a portion of which is expected to be financed
through capital leases and new bank borrowings. The Company believes that it
will be able to fund expected capital expenditures with respect to the
continuing development of its brewery operations through internal cash flow and
external resources.
Financing. During the year ended December 31, 2000, the Company's
secured bank loans decreased by RMB 689,660, reflecting new borrowings of RMB
108,771,703 and repayments of RMB 109,461,363. The bank loans bear interest at
fixed rates ranging from 8.4% to 11.6%, and are repayable within the next three
years. A substantial portion of the bank loans have been utilized to fund the
expansion and working capital requirements of Zhaoqing Brewery and Zao Yang High
Worth Brewery.
43
During 2000, Noble Brewery declared and paid a dividend relating to
earnings for the year ended December 31, 1999, resulting in a dividend to High
Worth JV of RMB 40,796,520.
On March 20, 2000, the Board of Directors of High Worth JV declared a
fourth dividend distribution of RMB 47,518,778, resulting in RMB 28,511,267
payable to Holdings. The minority interest's 40% portion of the dividend is
recorded as a liability at the declaration date and is included in amounts due
to related companies. Such dividends are distributed by installments in order
to avoid any disruption to the normal operating cash flow position of High Worth
JV. During the years ended December 31, 2000 and 1999, High Worth JV recorded
aggregate dividends to the 40% minority interest holder, Guangdong Blue Ribbon,
of RMB 19,007,510 and RMB 20,638,685, respectively.
In connection with the acquisition of High Worth JV, Oriental Win
Holdings Ltd. ("Oriental Win") advanced US$8,869,585 to Holdings during 1994.
The rights to collect US$8,000,000 of the advance were transferred from Oriental
Win to its shareholders in proportion to their respective shareholder interests
in August 1996 (West Coast Star Enterprises Ltd. - 60%; Mapesbury Limited - 20%;
Redcliffe Holdings Ltd. - 20%). The advances bore no interest and were
repayable at the discretion of the Company, with the shareholders having no
right to demand repayment. The Company had the option of offsetting or repaying
the advances or any part thereof by allotment of shares at par value in
Holdings. Mapesbury limited assigned its advances and shares in the Company to
Top Link Development Limited in February 1998. On September 8, 1998, the
remaining rights to collect US$848,000 of the advances were transferred from
Oriental Win to its shareholders in proportion to their respective shareholder
interests, less US$21,585 repaid by Holdings on behalf of Oriental Win, and
Oriental Win was formally dissolved by its shareholders on December 22, 1998.
On November 26, 1998, Holdings partially repaid approximately 31.5% of the
advances from shareholders, amounting to US$2,791,650. In May 1999, Holdings
partially repaid approximately 18.5% of the advances from shareholders,
amounting to US$1,632,350. In March 2000, Holdings partially repaid
approximately 30% of the advances from shareholders amounting to US$2,654,400.
In August 2000, Holdings repaid the remaining balance of the advances from
shareholders, amounting to US$1,769,600.
During the year ended December 31, 2000, Guangdong Blue Ribbon and its
affiliated companies provided the Company with raw materials financing
aggregating approximately RMB 9,600,000, which obligations are unsecured,
interest-free and repayable on demand.
The year ended December 31, 2000 was a difficult and disappointing year
for the Company, with decreased sales, increased costs, a net loss for the first
time in several years, reduced cash flows, diminished working capital, and
intense competition. The Company expects that these pressures will continue in
2001, resulting in a net loss for at least the three months ending March 31,
2001. Accordingly, the Company has commenced an overhaul of its operations and
marketing programs through the newly established management committee and the
recruitment of an experienced chief operations manager who joined the Company in
February 2001. With the pooling of the resources of Zhaoqing Brewery, Noble
Brewery and the Marketing Company, as well as the continuing financial support
from its principal shareholder and affiliates, the Company believes it has the
requisite operating and financial resources to return to profitability in the
near future. However, there can be no assurances that the Company will be able
to return to profitability in the near future. Should the Company not return to
profitability in the near future, the Company will have to consider more severe
restructuring alternatives.
The Company anticipates that its operating cash flow, combined with
cash on hand, bank lines of credit, and other external credit sources, and the
credit facilities provided by affiliates or related parties, are adequate to
satisfy the Company's working capital requirements for the fiscal year ending
December 31, 2001. In order to finance the continuing capital requirements of
the Company, the Company may also utilize additional long-term bank loans or
lease financing.
44
INFLATION AND CURRENCY MATTERS:
In the most recent decade, the Chinese economy has experienced periods
of rapid economic growth as well as relatively high rates of inflation, which in
turn has resulted in the periodic adoption by the Chinese government of various
corrective measures designed to regulate growth and contain inflation. Since
1993, the Chinese government has implemented an economic program designed to
control inflation, which has resulted in the tightening of working capital to
Chinese business enterprises. The Company believes that the aftereffects of the
Asian financial crisis has resulted in a change of consumer spending patterns,
and a general tightening of credit, throughout China. The success of the
Company depends in substantial part on the continued growth and development of
the Chinese economy.
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies. The Company conducts
virtually all of its business in China and, accordingly, the sale of its
products is settled primarily in RMB. As a result, devaluation or currency
fluctuation of the RMB against the USD would adversely affect the Company's
financial performance when measured in USD. Although prior to 1994 the RMB
experienced significant devaluation against the USD, the RMB has remained fairly
stable since then. In addition, the RMB is not freely convertible into foreign
currencies, and the ability to convert the RMB is subject to the availability of
foreign currencies. Effective December 1, 1998, all foreign exchange
transactions involving the RMB must take place through authorized banks or
financial institutions in China at the prevailing exchange rates quoted by the
People's Bank of China.
As China is likely to be a member of the World Trade Organization, the
central government of China is expected to adopt a more rigorous approach to
partially deregulate the currency conversion restriction, which may in turn
increase the exchange rate fluctuation of the RMB. Should there be any major
change in the central government's currency policies, the Company does not
believe that such an action would have a detrimental effect on the Company's
operations, since the Company conducts virtually all of its business in China,
and the sale of its products is settled in RMB.
The Company has historically relied on dividend distributions,
converted from RMB into USD, to fund its activities outside of China. The
Company does not expect that any future currency fluctuation in RMB will affect
the ability of High Worth JV to continue to distribute such dividends. However,
in the event of a fluctuation, High Worth JV could elect to distribute dividends
in RMB, which would then be converted into other currencies when the later
prevailing market rates stabilized.
Although prior to 1994 the RMB experienced significant devaluation
against the USD, the RMB has remained fairly stable since then. The exchange
was approximately US$1.00 to RMB 8.3 at December 31, 1998, 1999 and 2000.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
The Company does not have any market risk with respect to such factors
as commodity prices, equity prices, and other market changes that affect market
risk sensitive investments.
45
With respect to foreign currency exchange rates, the Company does not
believe that a devaluation or fluctuation of the RMB against the USD would have
a detrimental effect on the Company's operations, since the Company conducts
virtually all of its business in China, and the sale of its products and the
purchase of raw materials and services is settled in RMB. The effect of a
devaluation or fluctuation of the RMB against the USD would affect the Company's
results of operations, financial position and cash flows, when presented in USD
(based on a current exchange rate) as compared to RMB.
The Company does not have any interest rate risk, as the Company's debt
obligations are primarily short-term in nature, with fixed interest rates.
ENVIRONMENTAL MATTERS:
Management believes that the Company complies with all national and
local environmental protection laws and regulations of the PRC. In 1998, 1999
and 2000, compliance with the provisions of all national and local environmental
laws and regulations did not have a material effect upon earnings, capital
expenditures or the competitive position of the Company.
NEW ACCOUNTING PRONOUNCEMENT:
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), which is effective for financial statements for
all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No.
133 standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. SFAS No. 133 also addresses the
accounting for hedging activities. The Company will adopt SFAS No. 133 for its
fiscal year beginning January 1, 2001. The Company does not anticipate that the
adoption of SFAS No. 133 will have any impact on its financial statement
presentation or disclosures.
46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and exhibits are listed at "ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K".
Selected unaudited 2000 and 1999 quarterly financial information, in
RMB, is as follows:
2000 1999
-------------- -----------
THREE MONTHS ENDED MARCH 31:
Sales, net of sales taxes 296,978,834 279,612,548
Gross profit 66,806,706 61,095,071
Operating income (loss) (223,453) 6,564,615
Net income 4,754,786 7,489,831
Net income per common share 0.59 0.94
THREE MONTHS ENDED JUNE 30:
Sales, net of sales taxes 280,826,872 278,247,626
Gross profit 63,560,800 60,476,682
Operating income 775,469 2,394,218
Net income 4,481,052 7,709,992
Net income per common share 0.56 0.96
THREE MONTHS ENDED SEPTEMBER 30:
Sales, net of sales taxes 191,292,909 250,765,566
Gross profit 43,304,551 58,155,297
Operating income (loss) (27,358,620) 1,352,580
Net income (loss) (7,838,502) 4,187,300
Net income (loss) per common share (0.98) 0.52
THREE MONTHS ENDED DECEMBER 31:
Sales, net of sales taxes 172,048,930 177,833,092
Gross profit 32,307,330 38,475,906
Operating loss (67,482,000) (10,723,844)
Net income (loss) (30,302,528) 4,267,979
Net income (loss) per common share (3.78) 0.53
YEAR ENDED DECEMBER 31:
Sales, net of sales taxes 941,147,545 986,458,832
Gross profit 205,979,387 218,202,956
Operating loss (94,288,604) (412,431)
Net income (loss) (28,905,192) 23,655,102
Net income (loss) per common share (3.61) 2.95
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
47
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following tables and text sets forth the names and ages of all
directors and executive officers of the Company as of March 31, 2001, and their
positions and offices with the Company. The Board of Directors of the Company
is comprised of only one class. All of the directors will serve until the next
annual meeting of shareholders and until their successors are elected and
qualified, or until their earlier death, retirement, resignation or removal.
Executive officers serve at the discretion of the Board of Directors, and are
appointed to serve until the first Board of Directors meeting following the
annual meeting of shareholders. There are no family relationships among
directors and executive officers. Also provided is a brief description of the
business experience of each director and executive officer during the past five
years and an indication of directorships held by each director in other
companies subject to the reporting requirements under the Federal securities
laws.
In conjunction with the reorganization of the Company in 1994,
Oriental Win acquired a controlling interest in the Company, and received the
right to appoint a majority of the members of the Board of Directors for so long
as it held its shares. As a result of the distribution by Oriental Win to its
shareholders during August 1996 of all of the shares of common stock of the
Company that it owned, West Coast Star Enterprises Ltd. became the controlling
shareholder of the Company and acquired the right to appoint a majority of the
members of the Board of Directors for so long as it holds its shares.
DIRECTORS
Date Elected
Name Age as Director
- ---- --- ------------
John Zhao Li 46 November 1994
Lee Tak Wong 44 September 1995
Jin-qiang Zhang 59 July 1997
Zi-shou Chen 60 July 1997
Deng-chen Yin 60 July 1997
Guang Wei Liang 38 March 1998
EXECUTIVE OFFICERS
Date Elected
Name Age Position as Officer
- ---- --- -------- ------------
Jin-qiang Zhang 59 Chairman and August 1997
Chief Executive
Officer
Guang-wei Liang 38 President March 2001
John Zhao Li 46 Vice President November 1994
Gary C.K. Lui 40 Vice President and April 1996
Chief Financial
Officer
48
BIOGRAPHIES OF DIRECTORS AND EXECUTIVE OFFICERS:
JIN-QIANG ZHANG
Mr. Zhang, Chairman, Chief Executive Officer and a director of the
Company, has over 30 years experience in manufacturing. Since the early 1980's,
Mr. Zhang has held senior management positions in several manufacturing
enterprises in China which were engaged principally in the electronics industry.
During the last past five years, he has participated extensively in syndication
financing, property development and project investment in China. He is
currently also the Chairman of Shenzhen Huaqiang Holdings Limited. Mr. Zhang is
a director of Shenzhen Huaqiang Enterprise Stock Company Limited, a PRC public
company listed on the Shenzhen Stock Exchange of China.
ZI-SHOU CHEN
Mr. Chen, a director of the Company, has over 30 years experience in
the Chinese manufacturing sector. Since the early 1980's, Mr. Chen has held
senior management positions in several manufacturing enterprises in China which
were mainly engaged in the electronics industry. During the past five years, he
has participated extensively in syndication financing, property development and
project investment in China. Mr. Chen was President of the Company from August
1, 1997 until February 28, 2001.
JOHN ZHAO LI
Mr. Li, Vice President and a director of the Company, held a senior
management position with an international investment company in the United
States from 1992 to 1994. During this period, he was actively involved in
consulting for Pabst Zhaoqing with respect to the project management for the
development of the first and second phases of Noble Brewery. Mr. Li was
President of the Company from 1994 until July 31, 1997.
GUANG WEI LIANG
Mr. Liang, President and a director of the Company, has over eight
years experience in the Chinese manufacturing sector. Mr. Liang received his
Masters Degree in Law from Wuhan University in China. Since 1980, he has held
senior management positions in several Chinese manufacturing enterprises which
were mainly engaged in the electronic industry. During the past two years, he
has participated extensively in syndication financing, project financing and
project investment in China. He is currently a Director and General Manager of
Shenzhen Huaqiang Holdings Limited.
LEE TAK WONG
Mr. Wong, a director of the Company, is a member of senior management
engaged in the investment planning and syndication business. During the past
five years, he has participated in brewery and property projects in
China. He is currently a Director of Guang Yin International (Holdings)
Limited.
DENG-CHEN YIN
Mr. Yin, a director of the Company, has over 30 years experience in
manufacturing. Since the 1970's, Mr. Yin has held senior management positions
in several manufacturing enterprises in China which were engaged in the plastics
and electronics industry. During the past five years, he has participated in
many project investments in China.
49
GARY C.K. LUI
Mr. Lui, Vice-President and Chief Financial Officer of the Company,
graduated from the University of Hong Kong with Bachelor of Social Sciences
Degree in 1987. After graduation, he worked in the Hong Kong office of the
Corporate Recovery Division of Arthur Andersen & Co. for three years. In 1990,
he joined a ship building company listed in Hong Kong as the Group Assistant
Financial Controller and was the Financial Controller of the Group's major
shipyard in Singapore. From 1992 to 1994, Mr. Lui was the General Manager of a
private investment company with extensive joint venture projects in Northeastern
China. Prior to joining the Company in 1995, Mr. Lui was the Project Controller
of a Hong Kong-listed investment company with major investments in Eastern
China. Mr. Lui is currently a member of the Association of Chartered Certified
Accountants and the Hong Kong Society of Accountants.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE:
During the year ended December 31, 2000, the Company did not have any
class of equity securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended, and accordingly, was not subject to the
reporting requirements of Section 16 of the Securities Exchange Act of 1934, as
amended.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to
its Chairman, President and to its three other most highly compensated executive
officers during the last three fiscal years.
SUMMARY COMPENSATION TABLE (US$)
Name and Other
Principal Annual
Position Year Salary Bonus Compensation
- -------- ---- -------- ------- ------------
Jin-Qiang Zhang(1) 2000 $153,600 $12,800 $15,600
Chairman and Chief 1999 nil 97,067 12,000
Executive Officer 1998 nil nil 9,000
Zi-Shou Chen(2) 2000 $128,400 $10,700 $15,600
1999 139,100 90,964 12,000
1998 134,900 74,819 9,000
John Zhao Li(3) 2000 $103,200 $ 8,600 $15,600
Vice President 1999 111,800 63,253 12,000
1998 108,200 51,928 9,000
Gary C.K. Lui(4) 2000 $105,840 $ 8,820 $ nil
Vice-President and 1999 98,154 8,179 nil
Chief Financial 1998 95,877 8,200 nil
Officer
- ------------------
(1) Mr. Zhang was elected as Chief Executive Officer of the Company on May 29,
1999. Mr. Zhang has continued as the Chairman and a director of the Company
subsequent to that date.
(2) Mr. Chen was the President of the Company until February 28, 2001. Mr. Chen
has continued as an executive director of the Company subsequent to that
date.
50
(3) Mr. Li was President of the Company until July 31, 1997. Mr. Li has
continued as an officer and director of the Company subsequent to that
date.
(4) Mr. Lui was elected as Vice-President of the Company on January 2, 2001, in
addition to his position as Chief Financial Officer.
COMPENSATION AGREEMENTS:
The Company has not entered into any long-term employment or
consulting agreements with its officers or directors.
BOARD OF DIRECTORS:
During the year ended December 31, 2000, four meetings of the Board of
Directors were held. All directors attended at least 75% of all board meetings
for which they were eligible to attend. All directors receive compensation of
US$1,300 per month for serving on the Board of Directors, which aggregated
$93,600 during the year ended December 31, 2000. All directors are reimbursed
for any out-of-pocket expenses incurred in attending board meetings.
On January 2, 1998 and September 30, 1999, the Board of Directors
established a Compensation Committee and an Audit Committee, respectively. As
of December 31, 2000, members of the Compensation Committee and Audit Committee
consisted of Deng-chen Yin and Lee-Tak Wong.
STOCK OPTION PLAN:
The 1998 Stock Option Plan (the "Plan") was adopted by the majority of
the shareholders of the Company and approved by the Board of Directors on
January 2, 1998. The Plan is administered by the Compensation Committee and
contains the following major provisions:
(a) The Plan provides for the issuance of incentive stock options ("ISOs") and
nonqualified stock options ("NSOs") to purchase the Class A common stock of
the Company. The Plan is intended to provide a means whereby employees may
be given an opportunity to purchase shares of Class A common stock of the
Company pursuant to (i) options which may qualify as ISOs under Section 422
of the Internal Revenue Code of 1986, as amended, or (ii) NSOs which may
not so qualify.
(b) Options may be granted under the Plan from time to time to eligible
persons to purchase an aggregate of up 800,000 shares of Class A common
stock, and no more than 80,000 options may be granted to any one
participant in any year.
(c) All ISOs will have option exercise prices per option share equal to the
fair market value of a share of Class A common stock on the date the option
is granted, except that in the case of ISOs granted to any person
possessing more than 10% of the total combined voting power of all
classes of stock of the Company or any affiliate, the price will be not
less than 110% of such fair market value. The option exercise prices
per option for NSO's shall be as determined by the Compensation
Committee.
A summary of all stock options granted pursuant to the Plan to
directors, officers and employees of the Company during the years ended
December 31, 1998 and 2000 are shown below(no options were granted during the
year ended December 31, 1999). No options were exercised in 1998, 1999 or 2000.
The exercise price of all stock options was not less than fair market value on
the grant date.
51
Options Exercise Annual
Granted Price Vesting Expiration
(In'000) (In US$) Percentage Date
Participant 1998 2000 1998 2000 1998 2000 1998 2000
---- ---- ---- ---- ----------- ---------- --------- -------
Jin-qiang Zhang 40 80 4.26 0.79 50%/25%/25% 50%/25%/25% 12/31/01 12/31/04
Deng-chen Yin 30 65 4.26 0.79 50%/25%/25% 50%/25%/25% 12/31/01 12/31/04
Zi-shou Chen 30 65 3.87 0.72 60%/20%/20% 50%/25%/25% 12/31/05 12/31/04
Guang-wei Liang 30 65 3.87 0.72 60%/20%/20% 50%/25%/25% 12/31/05 12/31/04
John Zhao Li 30 65 3.87 0.72 60%/20%/20% 50%/25%/25% 12/31/05 12/31/04
Lee-tak Wong 30 65 3.87 0.72 60%/20%/20% 50%/25%/25% 12/31/05 12/31/04
Chen Kai Cheng (1) 21 - 3.87 -- 70%/15%/15% 50%/25%/25% 12/31/05 12/31/04
Wong Yong (1) 21 - 3.87 -- 70%/15%/15% 50%/25%/25% 12/31/05 12/31/04
Gary C.K. Lui 21 55 3.87 0.72 70%/15%/15% 50%/25%/25% 12/31/05 12/31/04
Clarence Yip (2) 18 40 3.87 0.72 70%/15%/15% 50%/25%/25% 12/31/05 12/31/04
Cilly Yeung 9 20 3.87 0.72 70%/15%/15% 50%/25%/25% 12/31/05 12/31/04
--- ---
280 520
=== ===
- -------------------
(1) Chen Kai Cheng and Wong Yong resigned as officers of the Company on January
31, 1999 and March 31, 1999, respectively, and pursuant to the Plan, the
stock options previously granted to them were cancelled.
(2) Clarence Yip resigned as employee of the Company on January 31, 2001, and
pursuant to the Plan, the stock options previously granted to him were
cancelled.
The stock options issued to non-employee directors in 1998were
accounted for pursuant to Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). Under SFAS 123, the
fair value of stock options issued to non-employees is calculated according to
the Black-Scholes option pricing model and is amortized to expense over the
vesting period. As a result, the Company recognized RMB 174,452, RMB 697,801
and RMB 2,218,706 of compensation expense in 2000, 1999 and 1998, respectively.
During the years ended December 31, 1998 and 2000, the Company granted
stock options to officers of the Company as follows (no options were granted
during the year ended December 31, 1999):
Number of Percent of Options Weighted
Options Granted to Total Exercise
Granted Options Granted Price
(In'000) ----------------- ------------------
Recipient 1998 2000 1998 2000 1998 2000
- --------- ---- ---- ------- ------- -------- --------
Jin-qiang Zhang -- 80 -- 15.0% -- US$0.79
Zi-shou Chen 30 65 10.7% 12.5% US$3.87 US$0.72
John Zhao Li 30 65 10.7% 12.5% US$3.87 US$0.72
Chen Kai Cheng (1) 21 -- 7.5% -- US$3.87 --
Wong Yong (1) 21 -- 7.5% -- US$3.87 --
Gary C.K. Lui 21 55 7.5% 10.6% US$3.87 US$0.72
--- --- ----- -----
Total 123 265 43.9% 50.6%
=== === ===== =====
- --------------------
(1) Chen Kai Cheng and Wong Yong resigned as officers of the Company on
January 31, 1999 and March 31, 1999, respectively, and pursuant to the
Plan, the stock options previously granted to them were cancelled.
52
A summary of stock options granted to the Company's officers as of
December 31, 2000 is shown below. No options were exercised during the years
ended December 31, 1998, 1999 and 2000.
Number of Value of
Shares of Unexercised
Common Stock in-the-Money
Underlying Options at
Stock Options Weighted Fiscal Year-End (1)
------------------ Exercise -------------------
Recipient Unvested Vested Price Unvested Vested
- --------- -------- ------ -------- -------- ------
Jin-qiang Zhang 40,000 80,000 US$2.52 US$ nil US$ nil
Guang-wei Liang 32,500 62,500 US$2.29 US$ nil US$ nil
Zi-shou Chen 32,500 62,500 US$2.29 US$ nil US$ nil
John Zhao Li 32,500 62,500 US$2.29 US$ nil US$ nil
Gary C.K. Lui 27,500 48,500 US$2.29 US$ nil US$ nil
------ ------ ------- -------
Total 165,000 316,000 US$ nil US$ nil
======= ======= ======= =======
- -----------------------
(1) The dollar values are calculated by determining the difference between the
weighted average exercise price of the stock options and the market price
for the Class A common stock of $.38 per share on December 31, 2000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS:
The current members of the Compensation Committee and Audit Committee
are Deng-chen Yin and Lee-tak Wong. Jin-qiang Zhang, Zi-shou Chen, Guang-wei
Liang and Deng-chen Yin are directors of the Company. Jin-qiang Zhang and
Guang-wei Liang are also officers and/or directors of Shenzhen Huaqiang Holdings
Limited (see "ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT").
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION - YEAR ENDED
DECEMBER 31, 2000:
The Company's compensation program for its executive officers is
administrated and reviewed by the Compensation Committee of the Board of
Directors. Historically, executive compensation consists of a combination of
base salary and discretionary bonuses. Individual compensation levels are
designed to reflect individual responsibilities, performance and experience, as
well as Company performance. The determination of discretionary bonuses is
based on various factors, including implementation of the Company's business
plan, acquisition of assets, development of corporate opportunities and
completion of financing.
The Compensation Committee also believes that executives should have a
substantial equity ownership, both through direct share ownership and through
stock options, to provide long-term incentives which link executive compensation
to the Company's long-term performance and return to its shareholders. The
Company also believes that non-employee directors should have an equity interest
in the Company. In that regard, the Company has adopted the 1998 Stock Option
Plan.
53
Effective July 1, 1998, the Compensation Committee increased the base
salary for all officers and employees of the Company by 6.0%. The compensation
for directors in relation to their office as a director has also been increased
from US$500 per month to US$1,000 per month. Effective June 1, 1998, the
Committee also approved an Occupational Retirement Pension Scheme for all the
officers and employees located in the Hong Kong office, in which the Company
contributes 7.0% of the total salary of those officers and employees to a
pension policy administered by an insurance consulting firm. Effective January
1, 2000, the Compensation Committee increased the base salary for all
non-director officers and employees of the Company by 7.8%. The compensation
for directors in relation to their office as a director has also been increased
from US$1,000 per month to US$1,300 per month. Effective January 1, 2001, the
Compensation Committee increased the base salary for all non-director officers
and employees of the Company by 25% to 38% as a result of revised
responsibilities and duties.
COMPARATIVE SHAREHOLDER RETURN PERFORMANCE GRAPH:
The graph below compares the cumulative total shareholder return on
the Company's Class A common stock against the cumulative total shareholder
return on the S & P Corporate - 500 Stock Index, the Nasdaq Composite Index and
the shareholder return on the stock of Tsingtao Brewery LDT ("TSGTF"), assuming
that US$100 was invested on January 1, 1996 in the Company's Class A common
stock and in the stocks comprising the S & P Corporate - 500 Index, the Nasdaq
Composite Index and the stock of TSGTF, respectively, and also assuming the
reinvestment of all dividends. Tsingtao Brewery LDT is the largest producer of
premium brand beer in China, and its stock is traded in Hong Kong, China and on
the OTC BulletinBoard in the United States. The Company considers Tsingtao
Brewery LDT as its peer group, as it is the only other comparable
publicly-traded beer company in China, considering various factors such as
industry profile, geographic market, revenues and production capacity. The
historical stock price performance of the Company's common stock is not
necessarily indicative of future price performance.
Fiscal S & P
Year Corporate Nasdaq Tsingtao
Ended - 500 Composite Brewery The
December Stock Stock LDT Company
31, Index Index ("TSGTF") ("CBRB")
- -------- --------- --------- --------- --------
1996 100 100 100 100
1997 131 122 60 38
1998 166 170 40 33
1999 193 306 63 17
2000 175 182 56 13
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As used in this section, the term beneficial ownership with respect to
a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934,
as amended, as consisting of sole or shared voting power (including the power to
vote or direct the vote) and/or sole or shared investment power (including the
power to dispose of or direct the disposition of) with respect to the security
through any contract, arrangement, understanding, relationship or otherwise,
subject to community property laws where applicable.
54
As of March 31, 2001, the Company had a total of 8,010,013 shares of
common stock issued and outstanding, consisting of 5,010,013 shares of Class A
common stock ($.0001 par value) and 3,000,000 shares of Class B common stock
($.0001 par value). The Class A common stock and Class B common stock are
identical, except that the Class A common stock has one vote per share and the
Class B common stock has two votes per share. Each share of Class B common
stock is convertible into one share of Class A common stock at the option of the
holder. All common share amounts reflect the 1-for-22 reverse stock split
effective November 22, 1994. There are no other classes of equity securities
outstanding.
The following table sets forth, as of March 31, 2001: (a) the names
and addresses of each beneficial owner of more than five percent (5%) of the
Company's common stock known to the Company, the number of shares of common
stock beneficially owned by each such person, and the percent of the Company's
common stock so owned; and (b) the names and addresses of each director and
executive officer, the number of shares of common stock of the Company
beneficially owned, and the percent of the Company's common stock so owned, by
each such person, and by all directors and executive officers of the Company as
a group. Each such person has sole voting and investment power with respect to
the shares of common stock, except as otherwise indicated. Beneficial ownership
consists of a direct interest in the shares of common stock, except as otherwise
indicated.
Percent of
Shares of
Name and Address Amount and Nature of Common Stock
of Beneficial Owner Beneficial Ownership Outstanding
- ------------------- -------------------- --------------
Shenzhen Huaqiang 5,568,000(1) 69.5
Holdings Limited
Shennan Zhong Road
Shenzhen City
People's Republic of China
Redcliffe Holdings Ltd. 1,392,000(1)(2) 17.4
c/o Suite 2002, Fairmont House
8 Cotton Tree Drive
Hong Kong
Jin-qiang Zhang (4) 80,000(3) 1.0
Zi-shou Chen (4) 62,500(3) .8
John Zhao Li (4) 62,500(3) .8
Lee-tak Wong (4) 62,500(3) .8
Deng-chen Yin (4) 62,500(3) .8
Guang-wei Liang (4) 62,500(3) .8
Gary C.K. Lui (4) 48,500(3) .6
All Directors and 441,000(3) 5.6
Executive Officers
as a Group (7 persons)
55
- ----------------------
(1) Consists of 4,176,000 shares owned by West Coast Star Enterprises Ltd.
("West Coast") and 1,392,000 shares owned by Top Link Development Limited
(including 3,168,000 shares of Class A common stock and 2,400,000 shares of
Class B common stock), each of which is controlled by Shenzhen Huaqiang
Holdings Limited ("SHHL"). On October 14, 1996, Oriental Win distributed to
its shareholders a total of 6,960,000 shares of the Company's common stock,
consisting of 3,960,000 shares of Class A common stock and 3,000,000 shares
of Class B common stock, which represented Oriental Win's entire equity
interest in the Company. The shareholders of Oriental Win received such
shares in proportion to their respective shareholder interests in Oriental
Win (West Coast - 60%; Mapesbury Limited - 20%; Redcliffe Holdings Ltd. -
20%). In conjunction with the distribution of such shares by Oriental Win,
the shareholders' agreement among Oriental Win, West Coast, Mapesbury
Limited and Redcliffe Holdings Ltd. was terminated. In February 1998,
Mapesbury Limited transferred its shares to Top Link Development Limited
("Top Link"). In December 1998, Oriental Win was formally dissolved by its
shareholders. West Coast and Top Link are beneficially owned 80% and 100%,
respectively, by SHHL, which is a state-owned enterprise in China.
(2) Consists of 792,000 shares of Class A common stock and 600,000 shares of
Class B common stock. Victor Choi, a former Director, is the beneficial
owner of Silvercliff Venture Inc., which owns 50% of the capital stock of
Redcliffe Holdings Ltd.
(3) Consists solely of immediately exercisable stock options.
(4) The address of each such person is c/o the Company, 23/F., Hang Seng
Causeway Bay Building, 28 Yee Wo Street, Causeway Bay, Hong Kong.
CHANGES IN CONTROL:
The Company is unaware of any contract or other arrangement, the
operation of which may at a subsequent date result in a change in control of the
Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SHAREHOLDER LOANS
In connection with the acquisition of High Worth JV, Oriental Win
Holdings Ltd. ("Oriental Win") advanced US$8,869,585 to Holdings during 1994.
The rights to collect US$8,000,000 of the advance were transferred from Oriental
Win to its shareholders in proportion to their respective shareholder interests
in August 1996 (West Coast Star Enterprises Ltd. - 60%; Mapesbury Limited - 20%;
Redcliffe Holdings Ltd. - 20%). The advances bore no interest and were
repayable at the discretion of the Company, with the shareholders having no
right to demand repayment. The Company had the option of offsetting or repaying
the advances or any part thereof by allotment of shares at par value in
Holdings. Mapesbury Limited assigned its advances and shares in the Company to
Top Link Development Limited in February 1998. On September 8, 1998, the
remaining rights to collect US$848,000 of the advances were transferred from
Oriental Win to its shareholders in proportion to their respective shareholder
interests, less US$21,585 repaid by Holdings on behalf of Oriental Win, and
Oriental Win was formally dissolved by its shareholders on December 22, 1998.
On November 26, 1998, Holdings partially repaid approximately 31.5% of the
advances from shareholders, amounting to US$2,791,650. In May 1999, Holdings
partially repaid approximately 18.5% of the advances from shareholders,
amounting to US$1,632,350. In March 2000, Holdings partially repaid
approximately 30% of the advance from shareholders, amounting to US$2,654,400.
In August 2000, Holdings repaid the remaining balances of the advances from
shareholders, amounting to US$1,769,600.
56
NOBLE BREWERY
During the years ended December 31, 2000 and 1999, the Company
purchased for resale beer products from Noble Brewery aggregating RMB
466,532,300 and RMB 537,010,133, respectively. As of December 31, 2000 and
1999, RMB 203,942,896 and RMB 194,894,527, respectively, was due to Noble
Brewery for the purchase of beer products, and was unsecured, interest-free and
repayable on demand.
GUANGDONG BLUE RIBBON
Until July 31, 1997, Liu Yun Zhong and Niu Zi Hang were directors and
executive officers of the Company. Mr. Liu and Mr. Niu are the General Manager
and Deputy General Manager, respectively, of Guangdong Blue Ribbon. Guangdong
Blue Ribbon owns 40% of High Worth JV.
During the years ended December 31, 2000 and 1999, the Company
purchased packaging materials from Guangdong Blue Ribbon and its affiliated
companies aggregating RMB 40,681,947 and RMB 29,840,747, respectively.
During the years ended December 31, 2000 and 1999, the Company also
purchased for resale beer products from Sichuan High Worth Brewery aggregating
RMB 42,906,772 and RMB 21,458,166, respectively.
During the years ended December 31, 2000 and 1999, the Company paid
RMB 5,059,063 and RMB 6,568,634, respectively, equivalent to US$11.70 per ton of
beer production, to Guangdong Blue Ribbon as a royalty fee for the right to use
the Pabst Blue Ribbon trademarks in China.
RELATED COMPANIES
As of December 31, 2000 and 1999, the amount due from related
companies aggregated RMB 623,798 and RMB 24,646,810, respectively, and consisted
of amounts due from Guangdong Blue Ribbon and its affiliated companies for trade
deposits received on behalf of the Company and expenses paid on behalf of
Guangdong Blue Ribbon and its affiliated companies.
As of December 31, 2000 and 1999, the Company owed an aggregate of RMB
28,000,000 and RMB 11,500,000, respectively, to related parties as follows:
(a) approximately RMB 6,600,000 and RMB 7,000,000, respectively, was
due to companies affiliated with Guangdong Blue Ribbon for the
purchase of raw materials, and was unsecured, interest-free and
repayable on demand;
(b) approximately RMB 3,100,000 and RMB 4,500,000, respectively, was
due to Sichuan High Worth Brewery for the purchase of beer
products, and was unsecured, interest-free and repayable on
demand; and
(c) approximately RMB 12,200,000 and nil, respectively, was due to
the minority shareholders of Jilin Lianli Brewery representing
their excessive contribution of property, plant and equipment to
Jilin Lianli Brewery. The balances were classified as current
liabilities as the Company intends to dispose of the investment
in Jilin Lianli Brewery in 2001.
57
OTHER TRANSACTIONS
On December 15, 1998, Holdings granted a one-year loan to Top Link
Development Limited of RMB 3,567,805 (US$429,856), with interest at 5% per
annum, which was settled in 1999.
During 1999, the Company borrowed RMB 24,000,000 from its principal
shareholder, Shenzhen Huaqiang Holdings Limited. The loan was unsecured, with
interest at 7.5% per annum, and was fully repaid during 1999.
58
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following financial statements and exhibits are filed with
and as a part of this report.
Financial Statements
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
Report of Independent Auditors
- Deloitte Touche Tohmatsu
Consolidated Balance Sheets
- As of December 31, 1999 and 2000
Consolidated Statements of Operations
- Years ended December 31, 1998, 1999 and 2000
Consolidated Statements of Shareholders' Equity
- Years ended December 31, 1998, 1999 and 2000
Consolidated Statements of Cash Flows
- Years ended December 31, 1998, 1999 and 2000
Notes to Consolidated Financial Statements
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
Report of Independent Auditors
- Deloitte Touche Tohmatsu
Balance Sheets
- As of December 31, 1999 and 2000
Statements of Operations
- Years ended December 31, 1998, 1999 and 2000
Statements of Shareholders' Equity
- Years ended December 31, 1998, 1999 and 2000
Statements of Cash Flows
- Years ended December 31, 1998, 1999 and 2000
Notes to Financial Statements
(a) (2) Financial Statement Schedules
Schedules have been omitted because they are not required or are not
applicable or the information required to be set forth therein either
is not material or is included in the consolidated financial
statements or the notes thereto.
(a) (3) Exhibits
A list of exhibits required to be filed as part of this report is set
forth in the Index to Exhibits, which immediately precedes such
exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K: The Company did not file any Current Reports on
Form 8-K during or related to the three months ended December 31, 2000.
59
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CBR BREWING COMPANY, INC.
---------------------------------
(Registrant)
Date: April 10, 2001 By: /s/ Guang-wei Liang
---------------------------------
Guang-wei Liang
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: April 10, 2001 By: /s/ Guang-wei Liang
---------------------------------
Guang-wei Liang
President and Director
Date: April 10, 2001 By: /s/ Jin-qiang Zhang
---------------------------------
Jin-qiang Zhang
Chief Executive Officer and
Director
Date: April 10, 2001 By: /s/ Zi-shou Chen
---------------------------------
Zi-shou Chen
Director
Date: April 10, 2001 By: /s/ John Zhao Li
---------------------------------
John Zhao Li
Vice President and Director
Date: April 10, 2001 By: /s/ Gary C. K. Lui
---------------------------------
Gary C. K. Lui
Vice President and
Chief Financial Officer
Date: April 10, 2001 By: /s/ Lee-tak Wong
---------------------------------
Lee-tak Wong
Director
Date: April 10, 2001 By: /s/ Deng-chen Yin
---------------------------------
Deng-chen Yin
Director
60
CBR BREWING COMPANY, INC.
----------------------------
Report and Financial Statements
For the year ended December 31, 2000
CBR BREWING COMPANY, INC.
- ----------------------------
REPORT AND FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2000
- ------------------------------------
CONTENTS PAGE(S)
- -------- -------
REPORT OF INDEPENDENT AUDITORS. . . . . . . . . . . . . . F - 1
CONSOLIDATED BALANCE SHEETS . . . . . . . . . . . . . . . F - 2
CONSOLIDATED STATEMENTS OF OPERATIONS . . . . . . . . . . F - 3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY . . . . . F - 4
CONSOLIDATED STATEMENTS OF CASH FLOWS . . . . . . . . . . F - 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . F - 6 - F - 31
REPORT OF INDEPENDENT AUDITORS
- ---------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
CBR BREWING COMPANY, INC.
- ---------------------------------------------
We have audited the accompanying consolidated balance sheets of CBR Brewing
Company, Inc. and its subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of CBR Brewing Company, Inc. and its
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.
As discussed in notes 20 and 21 to the consolidated financial statements, the
Company is exposed to certain risks through its operations in the People's
Republic of China and the risk of uncertain renewal of its license to produce
and distribute Pabst Blue Ribbon Beer in the People's Republic of China, which
is due to expire on November 6, 2003.
Deloitte Touche Tohmatsu
Hong Kong
April 10, 2001
F - 1
CBR BREWING COMPANY, INC.
-------------------------
CONSOLIDATED BALANCE SHEETS
As of December 31,
-------------------------------------
2000 2000 1999
----------- ----------- -----------
US$ RMB RMB
(Note 3)
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . 10,881,092 90,313,060 106,052,616
Accounts receivable, net of allowance for doubtful
accounts of RMB81,652,544 and RMB59,834,318
for 2000 and 1999, respectively (note 4) . . . . . 8,755,565 72,671,190 48,836,143
Bills receivable (note 5). . . . . . . . . . . . . . 3,089,157 25,640,000 27,333,650
Inventories (note 6) . . . . . . . . . . . . . . . . 6,094,214 50,581,977 73,241,948
Amounts due from related companies (note 16g). . . . 75,156 623,798 24,646,810
Prepayments, deposits and other receivables. . . . . 3,232,825 26,832,451 35,992,390
----------- ----------- -----------
Total current assets . . . . . . . . . . . . . . . . . 32,128,009 266,662,476 316,103,557
Interest in an associated company (note 7) . . . . . . 30,157,925 250,310,776 251,642,290
Property, plant and equipment, net (note 8). . . . . . 31,871,354 264,532,236 243,971,176
Other non-current assets . . . . . . . . . . . . . . . 155,150 1,287,747 10,750,253
----------- ----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . 94,312,438 782,793,235 822,467,276
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings (note 9) . . . . . . . . . . . . . . 13,012,239 108,001,585 115,390,788
Capital lease obligations. . . . . . . . . . . . . . - - 2,847,911
Accounts payable . . . . . . . . . . . . . . . . . . 4,135,677 34,326,119 39,117,124
Accrued liabilities. . . . . . . . . . . . . . . . . 16,668,468 138,348,280 85,125,424
Amounts due to related companies (note 16h). . . . . 3,373,057 27,996,366 11,535,893
Amount due to an associated company (note 7) . . . . 24,571,433 203,942,896 194,894,527
Income taxes payable (note 10) . . . . . . . . . . . 681,526 5,656,663 8,944,091
Sales taxes payable (note 11). . . . . . . . . . . . 2,785,837 23,122,446 19,219,699
----------- ----------- -----------
Total current liabilities. . . . . . . . . . . . . . . 65,228,237 541,394,355 477,075,457
----------- ----------- -----------
Long-term liabilities:
Bank borrowings (note 9) . . . . . . . . . . . . . . 2,011,993 16,699,543 10,000,000
----------- ----------- -----------
Minority interests . . . . . . . . . . . . . . . . . . 3,237,936 26,874,874 72,117,416
----------- ----------- -----------
Commitments and contingencies (note 21)
Shareholders' advances and shareholders' equity:
Advances from shareholders (note 12) . . . . . . . . - - 36,719,200
----------- ----------- -----------
Shareholders' Equity:
Common stock
- Class A, US$0.0001 par value, 90,000,000 shares
authorized, 5,010,013 shares outstanding . . . 515 4,273 4,273
- Class B, US$0.0001 par value, 10,000,000 shares
authorized, 3,000,000 shares outstanding . . . 308 2,559 2,559
Additional paid-in capital . . . . . . . . . . . . 12,935,162 107,361,845 107,187,393
General reserve and enterprise development funds . 1,886,548 15,658,349 14,074,390
Retained earnings. . . . . . . . . . . . . . . . . 9,011,739 74,797,437 105,286,588
----------- ----------- -----------
Total shareholders' equity . . . . . . . . . . . . . . 23,834,272 197,824,463 226,555,203
----------- ----------- -----------
Total shareholders' advances and shareholders'
equity . . . . . . . . . . . . . . . . . . . . . . . 23,834,272 197,824,463 263,274,403
----------- ----------- -----------
Total liabilities, shareholders' advances and
shareholders' equity . . . . . . . . . . . . . . . 94,312,438 782,793,235 822,467,276
=========== =========== ===========
See accompanying notes to consolidated financial statements
F - 2
CBR BREWING COMPANY, INC.
-------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
------------------------------------------------------------
2000 2000 1999 1998
------------- ------------- -------------- --------------
US$ RMB RMB RMB
(Note 3)
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,956,953 962,442,710 1,007,674,051 1,145,636,256
Sales taxes (note 11) . . . . . . . . . . . . . . . . . . . . 2,565,683 21,295,165 21,215,219 24,629,145
------------- ------------- -------------- --------------
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . 113,391,270 941,147,545 986,458,832 1,121,007,111
Cost of sales, including inventory purchased from related
companies of RMB550,121,019, RMB588,309,046 and
RMB694,084,566 in 2000, 1999 and 1998, respectively;
and royalty fee paid to a related company of RMB5,059,063,
RMB6,568,634, and RMB6,886,720 in 2000, 1999 and
1998, respectively (note 16a to c). . . . . . . . . . . . . 88,574,477 735,168,158 768,255,876 927,483,120
------------- ------------- -------------- --------------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . 24,816,793 205,979,387 218,202,956 193,523,991
Selling, general and administrative expenses, including
management fee paid to a related company of nil,
nil and RMB3,780,000 in 2000, 1999 and 1998, respectively
(note 16d). . . . . . . . . . . . . . . . . . . . . . . . . 35,430,311 294,071,585 217,915,167 215,134,986
Fair value of warrants, stock options and common stock
issued for services rendered (note 17). . . . . . . . . . . 21,018 174,452 697,801 2,459,406
Impairments related to property, plant and equipment
(note 8). . . . . . . . . . . . . . . . . . . . . . . . . . 722,892 6,000,000 - -
Loss on disposal of property, plant and equipment including
gain from a related company of RMB4,110, nil and nil
in 2000, 1999 and 1998, respectively (note 16f). . . . . . 2,645 21,954 10,419 189,872
------------- ------------- -------------- --------------
Operating loss. . . . . . . . . . . . . . . . . . . . . . . . (11,360,073) (94,288,604) (412,431) (24,260,273)
------------- ------------- -------------- --------------
Other income:
Interest income . . . . . . . . . . . . . . . . . . . . . . 216,859 1,799,932 3,090,081 2,687,218
Foreign exchange gains. . . . . . . . . . . . . . . . . . . - - - 2,841
Others. . . . . . . . . . . . . . . . . . . . . . . . . . . 71,050 589,713 443,753 1,606,516
------------- ------------- -------------- --------------
Total other income. . . . . . . . . . . . . . . . . . . . . . 287,909 2,389,645 3,533,834 4,296,575
------------- ------------- -------------- --------------
Other expense:
Interest expense, including interest paid to related
companies of RMB115,855, nil and nil in 2000, 1999
and 1998, respectively (note 16e) . . . . . . . . . . . . 1,292,544 10,728,115 14,689,647 9,507,873
Others. . . . . . . . . . . . . . . . . . . . . . . . . . . 10,603 88,004 98,001 1,209,458
------------- ------------- -------------- --------------
Total other expenses. . . . . . . . . . . . . . . . . . . . . 1,303,147 10,816,119 14,787,648 10,717,331
------------- ------------- -------------- --------------
Loss before income taxes. . . . . . . . . . . . . . . . . . . (12,375,311) (102,715,078) (11,674,245) (30,681,029)
Income taxes (note 10). . . . . . . . . . . . . . . . . . . . 498,813 4,140,152 5,444,091 326,172
------------- ------------- -------------- --------------
Loss before equity in earnings of an associated company . . . (12,874,124) (106,855,230) (17,118,336) (31,007,201)
Equity in earnings of an associated company . . . . . . . . . 4,754,820 39,465,006 49,726,406 55,160,690
------------- ------------- -------------- --------------
(Loss) income before minority interests . . . . . . . . . . . (8,119,304) (67,390,224) 32,608,070 24,153,489
Minority interests. . . . . . . . . . . . . . . . . . . . . . (4,636,751) (38,485,032) 8,952,968 2,761,979
------------- ------------- -------------- --------------
Net (loss) income for the year. . . . . . . . . . . . . . . . (3,482,553) (28,905,192) 23,655,102 21,391,510
============= ============= ============== ==============
Net (loss) income per share - basic and diluted . . . . . . . (0.43) (3.61) 2.95 2.67
============= ============= ============== ==============
Weighted average number of shares of common stock
outstanding
- basic and diluted . . . . . . . . . . . . . . . . . . . 8,010,103 8,010,013 8,010,013 8,008,342
============= ============= ============== ==============
See accompanying notes to consolidated financial statements
F - 3
CBR BREWING COMPANY, INC.
-------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common stock
----------------------------------------------------------------------
Shares Amount
outstanding par value of US$0.0001 each Additional
-------------------------------------------------------- paid-in
Class A Class B Class A Class B capital
---------- -------------- ------------- ------------- -------------
RMB RMB RMB
Balance at January 1, 1998. . . . . . . . . . . . 5,000,013 3,000,000 4,265 2,559 104,030,194
Net income. . . . . . . . . . . . . . . . . . . . - - - - -
Appropriation . . . . . . . . . . . . . . . . . . - - - - -
Fair value of warrants, stock options and common
stock issued for services rendered. . . . . . . 10,000 - 8 - 2,459,398
---------- -------------- ------------- ------------- -------------
Balance at December 31, 1998. . . . . . . . . . . 5,010,013 3,000,000 4,273 2,559 106,489,592
Net income. . . . . . . . . . . . . . . . . . . . - - - - -
Appropriation . . . . . . . . . . . . . . . . . . - - - - -
Fair value of warrants, stock options and common
stock issued for services rendered (note 17). . - - - - 697,801
---------- -------------- ------------- ------------- -------------
Balance at December 31, 1999. . . . . . . . . . . 5,010,013 3,000,000 4,273 2,559 107,187,393
Net loss. . . . . . . . . . . . . . . . . . . . . - - - - -
Appropriation . . . . . . . . . . . . . . . . . . - - - - -
Fair value of warrants, stock options and common
stock issued for services rendered (note 17). . - - - - 174,452
---------- -------------- ------------- ------------- -------------
Balance at December 31, 2000. . . . . . . . . . . 5,010,013 3,000,000 4,273 2,559 107,361,845
========== ============== ============= ============= =============
Converted to US$
Balance at December 31, 2000. . . . . . . . . . . US$515 US$308 US$12,935,162
============= ============= =============
Total
Reserve Retained shareholders'
funds earnings equity
------------- -------------- -------------
RMB RMB RMB
(Note 14) (Note 14)
Balance at January 1, 1998. . . . . . . . . . . . 8,341,785 65,972,581 178,351,384
Net income. . . . . . . . . . . . . . . . . . . . - 21,391,510 21,391,510
Appropriation . . . . . . . . . . . . . . . . . . 1,783,955 (1,783,955) -
Fair value of warrants, stock options and common
stock issued for services rendered. . . . . . . - - 2,459,406
------------- -------------- -------------
Balance at December 31, 1998. . . . . . . . . . . 10,125,740 85,580,136 202,202,300
Net income. . . . . . . . . . . . . . . . . . . . - 23,655,102 23,655,102
Appropriation . . . . . . . . . . . . . . . . . . 3,948,650 (3,948,650) -
Fair value of warrants, stock options and common
stock issued for services rendered (note 17). . - - 697,801
------------- -------------- -------------
Balance at December 31, 1999. . . . . . . . . . . 14,074,390 105,286,588 226,555,203
Net loss. . . . . . . . . . . . . . . . . . . . . - (28,905,192) (28,905,192)
Appropriation . . . . . . . . . . . . . . . . . . 1,583,959 (1,583,959) -
Fair value of warrants, stock options and common
stock issued for services rendered (note 17). . - - 174,452
------------- -------------- -------------
Balance at December 31, 2000. . . . . . . . . . . 15,658,349 74,797,437 197,824,463
============= ============== =============
Converted to US$
Balance at December 31, 2000. . . . . . . . . . . US$1,886,548 US$9,011,739 US$23,834,272
============= ============== =============
Holders of Class A common stock are entitled to one vote per share. Holders of
Class B common stock are entitled to two votes per share. At the option of the
holder, each share of Class B common stock is convertible into one share of
Class A common stock.
See accompanying notes to consolidated financial statements
F - 4
CBR BREWING COMPANY, INC.
-------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-------------------------------------------------------
2000 2000 1999 1998
------------ ------------- ------------ ------------
US$ RMB RMB RMB
Cash flows from operating activities:
Net (loss) income . . . . . . . . . . . . . . . . . . . . (3,482,553) (28,905,192) 23,655,102 21,391,510
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Allowance for doubtful accounts . . . . . . . . . . . . 2,628,702 21,818,226 24,287,267 15,367,012
Depreciation and amortization . . . . . . . . . . . . . 3,408,218 28,288,206 37,881,481 25,153,217
Impairments related to property, plant and equipment. . 722,891 6,000,000 - -
Fair value of warrants, stocks options and common stock
issued for services rendered. . . . . . . . . . . . . 21,018 174,452 697,801 2,459,406
Minority interests. . . . . . . . . . . . . . . . . . . (4,636,751) (38,485,032) 8,952,968 2,761,979
Equity in earnings of an associated company . . . . . . (4,754,820) (39,465,006) (49,726,406) (55,160,690)
Dividend received from an associated company. . . . . . 4,915,243 40,796,520 41,513,883 46,728,178
Deferred income taxes . . . . . . . . . . . . . . . . . - - - (4,413,000)
Other, net. . . . . . . . . . . . . . . . . . . . . . . 2,645 21,954 10,419 10,720
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable. . . . . . . . (5,500,394) (45,653,273) 40,824,405 (8,847,894)
Decrease (increase) in bills receivable . . . . . . . . . 204,054 1,693,650 (779,450) 9,001,200
Decrease (increase) in inventories. . . . . . . . . . . . 2,730,117 22,659,971 (6,639,315) 22,980,809
Decrease (increase) in amounts due from related
companies . . . . . . . . . . . . . . . . . . . . . . . 2,894,339 24,023,012 (6,577,883) 11,598,088
Decrease (increase) in prepayments, deposits and other
receivables . . . . . . . . . . . . . . . . . . . . . . 1,103,607 9,159,939 (8,388,872) (3,585,607)
Decrease in customer deposits . . . . . . . . . . . . . . - - - (6,680,000)
Increase in accounts payable and accrued liabilities. . . 5,835,163 48,431,851 2,508,891 23,918,654
Increase (decrease) in amount due to an associated
company . . . . . . . . . . . . . . . . . . . . . . . . 1,090,165 9,048,369 (23,823,273) 9,634,465
(Decrease) increase in income taxes payable . . . . . . . (396,076) (3,287,428) 4,777,207 3,906,884
Increase (decrease) in sales taxes payable. . . . . . . . 470,211 3,902,747 (11,112,205) (9,509,378)
------------ ------------- ------------ ------------
Net cash provided by operating activities . . . . . . . . . 7,255,779 60,222,966 81,062,020 106,715,553
------------ ------------- ------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment. . . . . . . . (3,678,525) (30,531,758) (7,902,604) (66,414,497)
Proceeds from disposal of property, plant and
equipment . . . . . . . . . . . . . . . . . . . . . . . 19,342 160,538 - 494,820
Decrease (increase) in expenditure on non-current assets. 1,140,061 9,462,506 - (9,244,507)
------------ ------------- ------------ ------------
Net cash used in investing activities . . . . . . . . . . . (2,519,122) (20,908,714) (7,902,604) (75,164,184)
------------ ------------- ------------ ------------
Cash flows from financing activities:
New bank borrowings . . . . . . . . . . . . . . . . . . . 13,105,024 108,771,703 68,350,000 114,554,000
Repayment of bank borrowings. . . . . . . . . . . . . . . (13,188,116) (109,461,363) (62,513,212) (38,500,000)
Increase (decrease) in amounts due to related companies . 507,286 4,210,473 (19,600,202) (21,293,591)
Repayment of advances from shareholders . . . . . . . . . (4,424,000) (36,719,200) (13,548,505) (23,170,695)
Payment of capital lease obligations. . . . . . . . . . . (343,122) (2,847,911) (5,664,938) (7,349,700)
Payment of cash dividend to minority interests. . . . . . (2,290,061) (19,007,510) (20,638,685) (45,375,595)
------------ ------------- ------------ ------------
Net cash used in financing activities . . . . . . . . . . . (6,632,989) (55,053,808) (53,615,542) (21,135,581)
------------ ------------- ------------ ------------
Net (decrease) increase in cash and cash equivalents. . . . (1,896,332) (15,739,556) 19,543,874 10,415,788
Cash and cash equivalents at beginning of the year. . . . . 12,777,424 106,052,616 86,508,742 76,092,954
------------ ------------- ------------ ------------
Cash and cash equivalents at end of the year. . . . . . . . 10,881,092 90,313,060 106,052,616 86,508,742
============ ============= ============ ============
See accompanying notes to consolidated financial statements
F - 5
CBR BREWING COMPANY, INC.
- ----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
CBR Brewing Company, Inc. (the "Company"), formerly 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 and its subsidiaries are collectively referred to as the
"Group". At December 31, 2000, the Company's principal shareholder is
Shenzhen Huaqiang Holdings Limited, incorporated in the People's Republic
of China (the "PRC"), which holds indirectly 63.2% of the outstanding Class
A common stock and 80% of the outstanding Class B common stock.
The Company is a holding company and its principal subsidiaries are engaged
in the production and sale of beer products in the PRC.
On December 16, 1994, the Company issued 3,960,000 shares of Class A common
stock and 3,000,000 shares of Class B common stock to Oriental Win Holdings
Ltd. ("Oriental Win") and 240,000 shares of Class A common stock to
Goldchamp Limited ("Goldchamp"), in consideration for the entire issued
share capital of High Worth Holdings Limited ("High Worth Holdings"). Both
Oriental Win and Goldchamp and their respective shareholders were unrelated
to the Company prior to becoming shareholders of the Company. Upon
completion of the share exchange on December 16, 1994, High Worth Holdings
became a wholly-owned subsidiary of the Company.
This transaction was treated as a recapitalization of High Worth Holdings
with High Worth Holdings as the acquirer (reverse acquisition).
High Worth Holdings is a holding company that was formed solely to effect
the acquisition of a 60% interest in Zhaoqing Blue Ribbon High Worth
Brewery Ltd. ("High Worth Brewery"). High Worth Brewery is a Sino-foreign
equity joint venture enterprise that was registered in the PRC on July 2,
1994 in which Guangdong Blue Ribbon Group Co., Ltd. ("Blue Ribbon Group"),
an unrelated joint stock limited company incorporated in the PRC, and High
Worth Holdings hold 40% and 60% interests, respectively. The investment in
High Worth Brewery was partly financed by long-term, interest free advances
from the shareholders (see note 12). The following is a summary of the
acquisition undertaken by High Worth Holdings, through its subsidiary, High
Worth Brewery, during the period ended December 31, 1994.
On October 31, 1994, High Worth Brewery acquired a 100% interest in
Zhaoqing Brewery, including Zhaoqing Brewery's 40% interest in Zhaoqing
Blue Ribbon Brewery Noble Ltd. ("Blue Ribbon Noble"). The consideration for
the acquisition of an effective 60% interest in Zhaoqing Brewery by High
Worth Holdings through High Worth Brewery was approximately US$20 million.
Prior to the acquisition of the entire interest in Zhaoqing Brewery by High
Worth Brewery, Zhaoqing Brewery was a wholly-owned subsidiary of Blue
Ribbon Group. Blue Ribbon Noble is a Sino-foreign equity joint venture
enterprise registered in the PRC on October 8, 1993, in which Goldjinsheng
Holding Limited ("Goldjinsheng"), an unrelated party, and Zhaoqing Brewery
hold 60% and 40% interests, respectively. Zhaoqing Brewery and Blue Ribbon
Noble are both engaged in the production and sale of beer products in the
PRC.
F - 6
CBR BREWING COMPANY, INC.
- ----------------------------
1. ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
In April 1995, Zhaoqing Brewery ceased the production of Zhaoqing beer and
commenced the production of Blue Ribbon beer. Pursuant to the terms of the
sublicense agreement, the Blue Ribbon Group granted Zhaoqing Brewery the
right to produce and distribute Blue Ribbon beer under Pabst trademarks in
the PRC at a royalty fee of US$11.70 for each ton produced.
Blue Ribbon Noble's principal product line is Blue Ribbon beer under the
Pabst trademarks which were granted by Blue Ribbon Group. Pursuant to the
terms of the sublicense agreement, the Blue Ribbon Group granted Blue
Ribbon Noble the right in the PRC to use two specific Pabst trademarks for
the production, promotion, distribution and sale of beer under such
trademarks. However, the production right of Blue Ribbon Noble is confined
exclusively to Guangdong Province and it does not preclude High Worth
Brewery's production right in Guangdong as described in notes 21(a) and
21(b). The sublicense agreement is valid until November 7, 2003. In
consideration for the sublicense granted, Blue Ribbon Noble is committed to
pay Blue Ribbon Group a royalty fee of US$0.10 for each carton of bottled
or canned beer produced.
On February 19, 1995, Zhaoqing Blue Ribbon Beer Marketing Company Limited
("Blue Ribbon Marketing") was registered as a limited company in the PRC
and owned 70% by Zhaoqing Brewery and 30% by Blue Ribbon Group. Blue Ribbon
Marketing was appointed as the sole distributor to conduct the
distribution, marketing and promotion of all Pabst Blue Ribbon beer
products produced by Zhaoqing Brewery and Blue Ribbon Noble. Blue Ribbon
Marketing started to purchase beer products from Zhaoqing Brewery and Blue
Ribbon Noble in April 1995 and July 1995, respectively. Its principal
trading product is Blue Ribbon beer, which constitutes approximately 98% of
the Group's sales. Prior to October 1997, Blue Ribbon Marketing was also
engaged in the trading of mineral water and non-carbonated soft drinks
purchased from Blue Ribbon Group and its group of companies.
On April 5, 1995, CBR Finance (BVI) Ltd. (the "Finance Company"), which is
wholly-owned by the Company, was incorporated in the British Virgin Islands
("BVI"). The Finance Company has remained dormant since incorporation.
In January 1996, Zhaoqing Brewery transferred all of its operating assets
and liabilities to High Worth Brewery 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, investments in Blue Ribbon Noble and Blue
Ribbon Marketing will be transferred to High Worth Brewery. Zhaoqing
Brewery is currently acting as the nominee for High Worth Brewery with
respect to the investments in Blue Ribbon Noble and Blue Ribbon Marketing.
Upon the completion of the required procedures and documentation, all of
the assets and liabilities formerly controlled by Zhaoqing Brewery will
then be transferred to High Worth Brewery. During the three years ended
December 31, 2000, the operating activities of Zhaoqing Brewery were part
of High Worth Brewery. The consensus and approval from the local tax
authority for this transfer was obtained in 1996.
F - 7
CBR BREWING COMPANY, INC.
- ----------------------------
1. ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
On January 13, 1998, High Worth Brewery entered into a joint venture
contract with Zao Yang Brewery in Hubei Province to establish a new
brewery. The new brewery is designated Zao Yang High Worth Brewery, with a
total capital investment of RMB29,280,000, allocated 55% to High Worth
Brewery and 45% to Zao Yang Brewery. High Worth Brewery is responsible for
transferring the technical know-how and production techniques to brew Pabst
Blue Ribbon beer to Zao Yang High Worth Brewery, as well as assisting in
the renovation of existing equipment, in order to convert the brewery into
another Pabst Blue Ribbon brewing complex. Zao Yang High Worth Brewery
commenced the production of Pabst Blue Ribbon beer in June 1998. Commencing
June 1998, Blue Ribbon Marketing also began purchasing Zao Yang High Worth
Brewery's production of Pabst Blue Ribbon beer for distribution.
On January 20, 1998, Zhaoqing Brewery and Goldjinsheng entered into an
agreement which calls for the interest of Goldjinsheng in Blue Ribbon Noble
to be transferred to Linchpin Holdings Limited ("Linchpin"), a subsidiary
of Noble China Inc., a company listed on the Toronto Stock Exchange. In
March 1999, approval from the relevant PRC authorities for the registration
of the aforesaid transfer for Linchpin was obtained. Linchpin and Zhaoqing
Brewery own 60% and 40% equity interests in Blue Ribbon Noble,
respectively.
Effective December 31, 1997, the Company, through High Worth Brewery,
entered into a Settlement Agreement with Blue Ribbon Group to acquire a 51%
interest in Sichuan Brewery, equivalent to an effective interest of 31%.
Pursuant to an Equity Transfer Agreement signed on January 19, 1999, High
Worth Brewery received a 15% consideration-free equity interest in Sichuan
Brewery, equivalent to an effective interest of 9%. Sichuan Brewery will be
formally restructured into a new joint venture company and will serve as
the fourth Pabst Blue Ribbon beer brewing complex in the PRC. High Worth
Brewery was also granted a three-year option to increase its equity
interest to 51% at a fixed cost of RMB32,007,600.
On June 5, 1999, a formal Joint Venture Agreement was signed among E Mei
Brewery, High Worth Brewery and Wai Shun Investment Limited ("Wai Shun"),
an unaffiliated Hong Kong company, to form Sichuan Blue Ribbon Brewery High
Worth Ltd. ("Sichuan High Worth Brewery"). The business of Sichuan Brewery
was transferred to Sichuan High Worth Brewery. The total registered and
paid-up capital of Sichuan high Worth Brewery was RMB51,221,258. High Worth
Brewery's 15% equity interest is consideration-free but is entitled to
share in the profits of Sichuan High Worth Brewery. The Joint Venture
Agreement and the relevant legal documents have been approved by the local
government authorities. Sichuan High Worth Brewery is currently producing
Pabst Blue Ribbon beer.
F - 8
CBR BREWING COMPANY, INC.
- ----------------------------
1. ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
On October 18, 1999, High Worth Holdings, through its newly incorporated
wholly owned subsidiary, March International Group Limited ("March
International"), signed a formal Joint Venture Agreement with Jilin
Province Juetai City Brewery (40%) and Jilin Province Chuang Xiang Zhi Yie
Ltd. (9%), both of which are unaffiliated PRC companies, to form Jilin
Lianli (CBR) Brewing Company Ltd. ("Jilin Lianli Brewery"). The total
registered and paid-up capital of Jilin Lianli Brewery was RMB25,000,000.
March International contributed one new packing line and the right to use
the "Lianli" beer trademark with a total value equivalent to RMB12,750,000
as capital, representing a 51% interest in Jilin Lianli Brewery, which is
equivalent to an effective interest of 51%. The Joint Venture Agreement was
formally approved by the local government in April 2000. March
International was responsible for transferring the technical know-how and
production techniques to brew high quality beer products to Jilin Lianli
Brewery, as well as assisting in the renovation of existing equipment, in
order to convert the brewery into a modern brewing complex. Subsequent to
the improvement of the brewing equipment and the installation of the new
packing line, Jilin Lianli Brewery commenced operation in May 2000.
However, due to weak market response and the inability of the Chinese local
partners to honor their portion of the working capital commitment, the
production and operation of Jilin Lianli Brewery was formally terminated in
December 2000. The Company is currently in negotiation with certain
interested parties to dispose of its equity interest in the brewery.
2. BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("US GAAP"). This basis of accounting differs from that used in the
preparation of the statutory financial statements of each relevant PRC
subsidiary, which are prepared in accordance with the accounting principles
and relevant financial regulations established by the Ministry of Finance
of the PRC.
The major adjustments made to the relevant PRC statutory financial
statements to conform with US GAAP consist of the reclassification of
certain expense items from income appropriations to charge against income,
adjustments for sales, other income and purchases recognized on a cash
basis, and adjustments for depreciation charges, deferred taxation and
revaluation of property, plant and equipment.
The consolidated financial statements have been prepared on a going concern
basis notwithstanding that the Group has a net current liability position
as of December 31, 2000 and 1999. The directors of the Company believe that
the Group's operating cash flow, combined with cash on hand, existing bank
borrowings and other external credit sources, and the credit facilities
provided by affiliates or related parties, are adequate to satisfy the
Group's working capital requirements for the foreseeable future.
F - 9
CBR BREWING COMPANY, INC.
- ----------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the financial statements of the Company and its subsidiaries in which the
Company has an effective controlling interest, including High Worth
Holdings, High Worth Brewery, Zhaoqing Brewery, the Finance Company, March
International, Blue Ribbon Marketing, Zao Yang High Worth Brewery and Jilin
Lianli Brewery. All material intercompany balances and transactions have
been eliminated on consolidation. Investments in affiliates over which the
Company exercises significant influence but does not have effective control
and owns less than a 50% but greater than a 20% voting interest, including
the 40% investment in Blue Ribbon Noble, are accounted for using the equity
method.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand,
cash accounts, interest-bearing saving accounts, and short-term bank
deposits with original maturities of three months or less.
INVENTORIES - Inventories are stated at the lower of cost or market value.
Cost, which comprises direct materials, direct labor costs and overhead
associated with the manufacturing processes, is calculated using the
first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is stated at
cost less an allowance for depreciation and amortization. Depreciation and
amortization are provided on the straight line method based on the
estimated useful lives of the assets as follows:
Land use rights. . . . . . . . . . . . . . . 50 years
Buildings. . . . . . . . . . . . . . . . . . 50 years
Plant, machinery and equipment . . . . . . . 5 - 15 years
Motor vehicles . . . . . . . . . . . . . . . 5 - 10 years
According to the laws of the PRC, the title to all PRC land is retained by
the PRC government. The land use rights, which represent the cost for the
rights to use the land for premises granted by the State Land
Administration Bureau, have no definite term of use. The land use rights
are stated at cost and are amortized over 50 years on the same basis as the
buildings.
Construction in progress is stated at cost, which comprises the direct
costs of buildings, plant under construction and deposits and prepayments
made on machinery pending installation. Cost comprises the direct cost of
construction and finance expenses arising from borrowings used to finance
the construction of buildings, plant and machinery until the construction,
installation and testing are complete. No depreciation is provided until
the relevant assets are available for commercial use.
LEASED ASSETS - Leases that transfer substantially all the rewards and
risks of ownership of assets to the Group are accounted for as capital
leases. At the inception of a capital lease, the cost of the leased asset
is capitalized at the present value of the minimum lease payments and
recorded together with the obligation, excluding the interest element, to
reflect the purchase and financing. Assets held under capital leases are
included in property, plant and equipment and are depreciated over their
estimated useful lives.
F - 10
CBR BREWING COMPANY, INC.
- ----------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
IMPAIRMENT OF LONG-LIVED ASSETS - The Company regularly reviews its
long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable based upon undiscounted cash flows expected to be produced by
such assets over their expected useful lives.
INCOME TAXES - Income taxes are determined under the asset and liability
method in accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". SFAS No. 109 requires
deferred taxes to be adjusted to reflect the tax rates at which future
taxable amounts will be settled or recognized. The effects of tax rate
changes on future deferred tax liabilities and deferred tax benefits, as
well as other changes in income tax laws, are recognized in the
consolidated statement of operations in the period when such changes are
enacted.
REVENUE RECOGNITION - Sales represent the invoiced value of goods sold, net
of discounts. Sales and sales discounts are recognized upon delivery of
goods to customers.
ADVERTISING EXPENSES - Advertising expenses are charged to expense in the
consolidated statements of operations as incurred. Advertising expenses
were RMB113,721,112, RMB74,716,635 and RMB68,082,791 for the years ended
December 31, 2000, 1999 and 1998, respectively.
FOREIGN CURRENCY TRANSLATION - The financial records and the statutory
financial statements of the Company's subsidiaries and associated company
in the PRC are maintained in Renminbi. In preparing the financial
statements, all foreign currency transactions are translated into Renminbi
using the applicable rates of exchange for the respective periods. Monetary
assets and liabilities denominated in foreign currencies have been
translated into Renminbi using the rate of exchange prevailing at the
balance sheet date. The resulting exchange gains or losses have been
credited or charged to the consolidated statements of operations in the
period in which they occur.
The Company's share capital is denominated in United States dollars ("US$")
and for reporting purposes, the US$ share capital amounts have been
translated into Renminbi ("RMB") at the applicable rates prevailing on the
transaction dates.
Translation of amounts from RMB into US$ is for the convenience of the
reader only and has been made at US$1.00 = RMB8.30. No representation is
made that the Renminbi amounts could have been, or could be, converted into
United States dollars at that rate or at any other rate.
STOCK OPTION PLAN - The Company accounts for stock options issued to
consultants using the fair value method in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation". Under the fair value method,
compensation cost is measured at the grant date based on the value of the
award and is recognized over the service period. The Company continues to
follow Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees", in accounting for stock options issued to
employees and non-employee directors, and pro forma disclosures of the
effect on net income (loss) and net income (loss) per share as if the
Company had accounted for such stock options under the fair value method
prescribed by SFAS No. 123 are shown in note 17.
F - 11
CBR BREWING COMPANY, INC.
- ----------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
EARNINGS PER SHARE ("EPS") - EPS is determined in accordance with SFAS No.
128, "Earnings Per Share". Basic EPS excludes the dilutive effects of
options, warrants and convertible securities, if any, and is computed by
dividing net income (loss) available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted EPS
is computed assuming the exercise or conversion of common equivalent
shares, if dilutive, consisting of unissued shares under stock options,
warrants and convertible debt instruments.
The common shares issuable upon exercise of outstanding stock options were
excluded from the calculation of diluted EPS since the exercise prices
exceeded the average fair market value of the common stock during 2000,
1999 and 1998. Accordingly, basic and diluted EPS were the same for all
periods presented.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
EFFECTS OF RECENT ACCOUNTING STANDARDS - In 1998, the Financial Accounting
Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities". SFAS No. 133 establishes standards for derivative
instruments embedded in other contracts, and for hedging activities, and
requires that all derivatives be recognized as either assets and
liabilities in the statement of financial position and be measured at fair
value. SFAS 133 will be effective for the Company's year ending December
31, 2001. The Company does not anticipate that the adoption of SFAS No. 133
will have any impact on its financial statement presentation on
disclosures.
4. ACCOUNTS RECEIVABLE
Accounts receivable comprise:
2000 1999
------------ ------------
RMB RMB
Accounts receivable - trade. . . . . . . . . 154,323,734 108,670,461
Less: Allowance for doubtful accounts. . . . (81,652,544) (59,834,318)
------------ ------------
72,671,190 48,836,143
============ ============
Movement of allowance for doubtful accounts:
2000 1999 1998
------------ ------------ ----------
RMB RMB RMB
Balance as at January 1. . . . . . . . . . . 59,834,318 35,599,181 20,232,169
Provided during the year . . . . . . . . . . 21,869,566 24,287,267 15,367,012
Written off during the year. . . . . . . . . (51,340) (52,130) -
------------ ------------ ----------
Balance as at December 31. . . . . . . . . . 81,652,544 59,834,318 35,599,181
============ ============ ==========
F - 12
CBR BREWING COMPANY, INC.
- ----------------------------
5. BILLS RECEIVABLE
Bills receivable represent accounts receivable in the form of bills of
exchange whose acceptances and settlements are handled by banks.
6. INVENTORIES
2000 1999
----------- -----------
RMB RMB
Inventories comprise:
Raw materials . . . . . . . . . . . . . . . . . . . . 27,082,563 27,586,428
Work in progress. . . . . . . . . . . . . . . . . . . 7,977,375 8,972,212
Finished goods. . . . . . . . . . . . . . . . . . . . 15,522,039 36,683,308
----------- -----------
50,581,977 73,241,948
=========== ===========
7. INTEREST IN AN ASSOCIATED COMPANY
2000 1999
----------- -----------
RMB RMB
Unlisted investment, at cost. . . . . . . . . . . . . 209,361,595 209,361,595
The Company's share of undistributed post acquisition
earnings of an associated company . . . . . . . . . 40,949,181 42,280,695
----------- -----------
250,310,776 251,642,290
=========== ===========
The unlisted investment represents the Company's 40% equity interest in
Blue Ribbon Noble held by a 60% owned subsidiary. A description of the
principal activities of Blue Ribbon Noble is described at note 1.
Amount due to an associated company principally represents the balance
arising from the purchases of beer products for resale. The balance is
unsecured, interest-free and repayable on demand.
F - 13
CBR BREWING COMPANY, INC.
- ----------------------------
7. INTEREST IN AN ASSOCIATED COMPANY - continued
The following is summarized financial information of Blue Ribbon Noble:
2000 1999
------------- -------------
RMB RMB
Balance sheets
--------------
Current assets . . . . . . . . . . . . . . . . . . . . . 292,914,968 413,158,436
Property, plant and equipment. . . . . . . . . . . . . . 396,457,375 424,893,664
------------- -------------
Total assets . . . . . . . . . . . . . . . . . . . . . . 689,372,343 838,052,100
============= =============
Current liabilities. . . . . . . . . . . . . . . . . . . 150,292,950 153,958,740
Deferred income taxes. . . . . . . . . . . . . . . . . . 10,000,000 7,000,000
Equity . . . . . . . . . . . . . . . . . . . . . . . . . 529,079,393 677,093,360
------------- -------------
Total liabilities and equity . . . . . . . . . . . . . . 689,372,343 838,052,100
============= =============
Statements of income
--------------------
Sales, net of sales taxes. . . . . . . . . . . . . . . . 443,092,393 513,807,992
============= =============
Gross profit . . . . . . . . . . . . . . . . . . . . . . 152,008,267 197,370,369
============= =============
Net (loss) income. . . . . . . . . . . . . . . . . . . . (46,022,668) 128,417,934
============= =============
The Company's share of net income after the
deduction of unrealized intercompany profit
and other intercompany adjustments . . . . . . . . . . 39,465,006 49,726,406
============= =============
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprises the following:
2000 1999
------------- -------------
RMB RMB
At cost:
Land use rights and buildings. . . . . . . . . . . . . 116,583,593 103,223,679
Plant, machinery and equipment . . . . . . . . . . . . 258,376,491 226,906,842
Motor vehicles . . . . . . . . . . . . . . . . . . . . 15,792,216 13,033,404
Construction in progress . . . . . . . . . . . . . . . 8,219,566 1,063,783
------------- -------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . 398,971,866 344,227,708
Less: Accumulated depreciation and amortization. . . . (128,439,630) (100,256,532)
Impairment of plant, machinery and equipment . . (6,000,000) -
------------- -------------
264,532,236 243,971,176
============= =============
F - 14
CBR BREWING COMPANY, INC.
- ----------------------------
8. PROPERTY, PLANT AND EQUIPMENT - continued
During the year ended December 31, 2000, the Company made a provision for
impairment of RMB6,000,000 for plant, machinery and equipment of Jilin
Lianli Brewery. The Group intends to dispose of its equity interest in
Jilin Lianli Brewery during 2001.
Included in property, plant and equipment are assets acquired under capital
leases with the following net book values:
2000 1999
---------- ------------
RMB RMB
At cost:
Plant, machinery and equipment. . . . . . . . . - 33,747,792
Less: Accumulated depreciation and amortization - (15,694,353)
---------- ------------
- 18,053,439
========== ============
Depreciation and amortization charges for property, plant and equipment
held under capital leases for the years ended December 31, 2000, 1999 and
1998 were nil, RMB3,374,779 and RMB3,374,779, respectively.
9. BANK BORROWINGS
2000 1999
------------- -------------
RMB RMB
Bank borrowings comprise:
Secured bank borrowings . . . . . . . . 124,701,128 125,390,788
Less: Current portion . . . . . . . . . (108,001,585) (115,390,788)
------------- -------------
Long-term portion, repayable after 2001. 16,699,543 10,000,000
============= =============
Certain assets of High Worth Brewery and Zaoyang Brewery were
collateralized under a floating charge to secure bank borrowings. The net
book value of property, plant and equipment pledged to banks as of December
31, 2000 and 1999 amounted to RMB217,331,927 and RMB230,847,986,
respectively. There are no significant covenants or financial restrictions
relating to the Company's short-term and long-term debts. The Company has
no other lines of credit.
The weighted average interest rates as of December 31, 2000 and 1999 were
10.9% and 12.5% per annum, respectively.
F - 15
CBR BREWING COMPANY, INC.
- ----------------------------
10. INCOME TAXES
The components of loss before income taxes, equity in earnings of an
associated company and minority interests are as follows:
Year ended December 31,
-----------------------------------------
2000 1999 1998
------------- ------------ ------------
RMB RMB RMB
United States of America (6,267,491) (2,306,612) (8,479,076)
British Virgin Islands . (12,089,369) (6,215,272) (4,854,533)
PRC. . . . . . . . . . . (84,358,218) (3,152,361) (17,347,420)
------------- ------------ ------------
(102,715,078) (11,674,245) (30,681,029)
============= ============ ============
United States of America
The Company is subject to taxes in the United States of America ("US"). In
January 1997, the Internal Revenue Service enacted the entity
classification regulations effective from January 1, 1997. Under the new
tax regulations, the Company's PRC subsidiaries and associated company can
elect to be treated as partnerships for US tax purposes, in contrast with
the corporation entity treatment prior to January 1, 1997. The Company
elected to treat its PRC subsidiaries and associated company as
partnerships in 1997. For US tax purposes, a partnership is a flow-through
entity (i.e., the partnership's income, deductions, gains or losses flow
through to the partners in the partnership). High Worth Holdings is the
ultimate partner in these partnerships. The Company will be taxed when
income is recognized. As at December 31, 2000, the estimated tax loss of
the Company available for carryforward in the US is approximately
RMB809,994. The net operating loss carryforward will expire in 2013 to
2014.
The determination of the unrecognized deferred tax liability for temporary
differences related to investments in foreign subsidiaries and foreign
associated company is not practicable.
PRC
The Company's subsidiaries registered in the PRC are subject to Chinese
income taxes at the applicable tax rate (currently 33%) on the taxable
income as reported in their Chinese statutory financial statements in
accordance with the relevant income tax laws applicable to foreign
enterprises. Pursuant to the same income tax laws, the subsidiary, High
Worth Brewery, and the associated company, Blue Ribbon Noble, are fully
exempt from Chinese income tax for two years starting from the first profit
making year, followed by a 50% exemption for the next three years. The 50%
exemption for Blue Ribbon Noble and the tax holiday for High Worth Brewery
commenced on January 1, 1996.
Had these tax holidays and concessions not been available, the tax charge
would have been higher by approximately RMB7,245,000, RMB9,527,000 and
RMB8,605,000, representing RMB0.90, RMB1.19 and RMB1.07 per share, for the
years ended December 31, 2000, 1999 and 1998, respectively.
F - 16
CBR BREWING COMPANY, INC.
- ----------------------------
10. INCOME TAXES - continued
PRC - continued
These losses relate mainly to Blue Ribbon Marketing, which is allowed to
mark-up the purchase cost of the Pabst Blue Ribbon beer or adjust the
ex-factory prices as necessary in order to adequately cover the selling,
advertising, promotional, distribution and administrative expenses
incurred. Blue Ribbon Marketing is not intended to contribute profits to
the Group. At December 31, 2000, tax losses available for carryforward in
the PRC were RMB32,064,684 which can be carried forward for 5 years.
British Virgin Islands
The Company's subsidiaries incorporated in the British Virgin Islands
("BVI") are not taxed in BVI. Under current BVI laws, dividends and capital
gains arising from investments by the BVI subsidiaries are not subject to
income taxes, and no withholding tax is imposed on payments of dividends by
the BVI subsidiaries to the Company.
The provision for income taxes consists of the following:
Year ended December 31,
---------------------------------
2000 1999 1998
--------- --------- -----------
RMB RMB RMB
Current
- PRC. . . . . . . . . . . 4,140,152 5,444,091 4,739,172
Deferred
- United States of America - - (4,413,000)
--------- --------- -----------
4,140,152 5,444,091 326,172
========= ========= ===========
The reconciliation of effective income tax rates of the Group to the
statutory income tax rate in the PRC is as follows:
Year ended December 31,
-----------------------
2000 1999 1998
----- ----- -----
Statutory tax rate . . . . . . . . . . . . 33% 33% 33%
Tax holidays and concessions . . . . . . . 7% 82% 19%
Losses in foreign jurisdiction exempt from
from tax . . . . . . . . . . . . . . . . (6%) (25%) (14%)
Other expenses not deductible for
tax purposes . . . . . . . . . . . . . . (17%) (58%) (13%)
Change in valuation allowance. . . . . . . (21%) (79%) (40%)
Reversal of tax on dividend declared by
an associated company. . . . . . . . . . - - 14%
----- ----- -----
(4%) (47%) (1%)
===== ===== =====
F - 17
CBR BREWING COMPANY, INC.
- ----------------------------
10. INCOME TAXES - continued
Deferred tax assets (liabilities) comprise the following:
2000 1999
------------ ------------
RMB RMB
Deferred tax assets:
Tax loss carryforward. . . 32,874,678 14,179,479
Accruals . . . . . . . . . 28,115,143 24,772,882
------------ ------------
60,989,821 38,952,361
Valuation allowance. . . . . (60,989,821) (38,952,361)
------------ ------------
Net deferred tax assets. . . - -
============ ============
Realization of the future tax benefits related to the deferred tax assets
is dependent on many factors, including the Company's ability to generate
taxable income within the net operating loss carryforward period.
Management has considered these factors in reaching its conclusion as to
the valuation allowance for financial reporting purposes. At December 31,
2000 and 1999, valuation allowances have been established for the full
amount of the tax loss carryforward, as it is more likely than not that the
tax losses will not be realized.
11. SALES TAXES
The Group is subject to three kinds of sales taxes: value added tax
("VAT"), consumption tax and other sales taxes. The applicable VAT tax rate
is 17% for beverage products sold in the PRC and nil for exported goods.
The amount of VAT liability is determined by applying the applicable tax
rate to the invoiced amount of goods sold less VAT paid on purchases made
with the relevant supporting invoices. VAT is collected from customers by
the Group on behalf of the PRC tax authorities and is therefore not charged
to the consolidated statements of operations. The applicable consumption
tax rate in respect of brewery products sold by a brewing company is RMB220
per ton. No consumption tax is levied on wholesale trading of brewery
products, on exported goods or on non-alcoholic beverage products. The
other sales taxes are assessed as a percentage of consumption tax and VAT
payable.
F - 18
CBR BREWING COMPANY, INC.
- ----------------------------
12. ADVANCES FROM SHAREHOLDERS
The advances, which were made in 1994 in connection with the acquisition of
High Worth Brewery bore no interest and were not repayable unless the
Company obtained additional long-term debt or equity financing. Repayments
of the advances were at the discretion of the Company and the shareholders
had no right to demand repayment. The Company had the option of offsetting
or repaying the advances or part thereof by allotment of shares at par
value in High Worth Holdings. During the year ended December 31, 2000, all
outstanding advances were settled.
The advances from the shareholders comprise:
2000 1999
---------- ----------
RMB RMB
Top Link Development Limited (2000: Nil; 1999:
US$884,800). . . . . . . . . . . . . . . . . . - 7,344,000
Redcliffe Holdings Limited (2000: Nil; 1999:
US$884,800). . . . . . . . . . . . . . . . . . - 7,344,000
West Coast Star Enterprises Limited (2000: Nil;
1999: US$2,654,400). . . . . . . . . . . . . . - 22,031,000
---------- ----------
- 36,719,000
========== ==========
13. FOREIGN CURRENCY EXCHANGE
The People's Bank of China ("PBOC") and the State Exchange Administration
Bureau jointly pronounced a new policy on foreign exchange transactions in
the PRC. Commencing from December 1, 1998, foreign currency exchanges
adjustment services for foreign invested enterprises ("FIE"), which were
previously provided by the SWAP centers within the PRC, were cancelled.
From this date onwards, FIEs can only transact foreign currency deals
through those authorized banks in the PRC at the prevailing exchange rates
quoted by the PBOC and, accordingly, all the SWAP centers presently
established in the PRC were closed.
The current SWAP center business was started by the PRC government in 1980.
FIEs could buy or sell foreign currencies at the SWAP center at the market
rates quoted by such centers. From December 1, 1998, FIEs can only buy or
sell foreign currencies through the banks operated in the PRC at the
prevailing exchange rates quoted by the PBOC. All these foreign currency
transactions will then pass through the centralized banking system in the
PRC. The exchange rates quoted by the banks will be the middle price of the
bid price and ask price on the previous transaction date.
The exchange rate of the RMB equivalent of US$1.00 as of December 31, 2000,
1999 and 1998 was approximately RMB8.3.
F - 19
CBR BREWING COMPANY, INC.
- ----------------------------
14. DISTRIBUTION OF PROFITS
The Company's ability to pay dividends is primarily dependent on the
Company receiving distributions from its PRC subsidiaries through High
Worth Holdings.
Pursuant to the relevant laws and regulations of Sino-foreign joint venture
enterprises, the profits of High Worth Brewery, which are based on its
statutory financial statements, are available for distribution in the form
of cash dividends after it has satisfied all PRC tax liabilities, provided
for losses in previous years, and made appropriations to reserve funds, as
determined at the discretion of the board of directors in accordance with
the PRC accounting standards and regulations.
As stipulated by the relevant laws and regulations for enterprises
operating in the PRC, Zhaoqing Brewery and Blue Ribbon Marketing are
required to make annual appropriations to two reserve funds, consisting of
the statutory surplus and collective welfare funds. In accordance with the
relevant PRC regulations and the respective companies' articles of
association, the companies are required to allocate a certain percentage of
their profits after taxation, as determined in accordance with the PRC
accounting standards applicable to the companies, to the statutory surplus
reserve until such reserve reaches 50% of the registered capital of the
companies. Based on the business licenses, the registered capital of
Zhaoqing Brewery and Blue Ribbon Marketing is RMB33,670,000 and
RMB10,000,000, respectively. Subject to certain restrictions as set out in
the relevant PRC regulations and the respective companies' articles of
association, the statutory surplus reserve may be distributed to equity
holders in the form of bonus issues and/or dividends when such reserve
exceeds 25% of the registered capital of the companies.
No appropriations to these reserve funds were made by Zhaoqing Brewery and
Blue Ribbon Marketing for 2000, 1999 and 1998 as Zhaoqing Brewery was
acting as nominee for High Worth Brewery from October 31, 1994 onwards and
Blue Ribbon Marketing incurred losses in those years.
High Worth Brewery and Blue Ribbon Noble are also required to make
appropriations to a general reserve fund, an enterprise development fund
and an employee welfare and incentive fund, in which the percentage of
annual appropriations are subject to the joint venture agreement. The
employee welfare and incentive fund is charged to the statement of
operations. The other appropriations are accounted for as reserve funds in
the balance sheet and are not available for distribution as dividends to
the joint venture partners of the companies. Under the joint venture
agreement, the board of directors shall determine the appropriations with
regard to the economic situation of the companies. The percentage of annual
appropriations to the general reserve fund, the enterprise development fund
and the employee welfare and incentive fund of Blue Ribbon Noble for 2000
has been determined by the board of directors and the appropriation has
been reported in its statutory financial statements.
As described in note 2 to the consolidated financial statements, the net
income (loss) as reported in the US GAAP financial statements differs from
that as reported in the statutory financial statements. In accordance with
the relevant laws and regulations in the PRC, the profits available for
distribution are based on the statutory financial statements. If the
Company has foreign currency available after meeting its operational needs,
the Company may make its profit distributions in foreign currency to the
extent foreign currency is available. Otherwise, it will be necessary to
obtain approval and convert such distributions at the exchange centers.
F - 20
CBR BREWING COMPANY, INC.
- ----------------------------
14. DISTRIBUTION OF PROFITS - continued
When dividends are declared by the Board of Directors of High Worth
Brewery, Blue Ribbon Group's 40% portion is recorded as a liability at the
declaration date and is included in amounts due to related companies. Such
dividends are distributed by installments in order to avoid any disruption
to the normal operating cash flow of High Worth Brewery.
On November 25, 1997, the Board of Directors of High Worth Brewery declared
a first dividend of RMB138,438,987, resulting in RMB55,375,595 payable to
Blue Ribbon Group, of which RMB15,000,000 was paid during 1997 and the
remaining RMB40,375,595 was paid during 1998.
On November 23, 1998, the Board of Directors of High Worth Brewery declared
a second dividend of RMB51,596,713, resulting in RMB20,638,685 payable to
Blue Ribbon Group, of which RMB5,000,000 was paid during 1998 and the
remaining RMB15,638,685 was paid during 1999.
On July 28, 1999, the Board of Directors of High Worth Brewery declared a
third dividend distribution of RMB51,596,713, resulting in RMB20,638,685
payable to Blue Ribbon Group, of which RMB5,000,000 was paid during 1999
and the remaining RMB15,638,685 was paid during 1999 through intercompany
settlement.
On March 20, 2000, the Board of Directors of High Worth Brewery declared a
fourth dividend distribution of RMB47,518,776, resulting in RMB19,007,511
payable to Blue Ribbon Group, which was paid during 2000.
15. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(a) During the years ended December 31, 2000, 1999 and 1998, interest paid
was RMB10,728,115, RMB14,689,647 and RMB9,507,873, respectively.
(b) During the years ended December 31, 2000, 1999 and 1998, income tax
paid was RMB3,500,000, RMB666,884 and nil, respectively.
16. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
(a) Purchases of packing materials
During the years ended December 31, 2000, 1999 and 1998, the Group
purchased packing materials from Blue Ribbon Group and its group of
companies amounting to RMB40,681,947, RMB29,840,747 and RMB37,631,444,
respectively.
(b) Purchases of beer products
During the years ended December 31, 2000, 1999 and 1998, the Group
purchased beer products for resale from Blue Ribbon Noble amounting to
RMB466,532,300, RMB537,010,133 and RMB621,380,760, respectively.
During the years ended December 31, 2000, 1999 and 1998, the Group
purchased beer products from Sichuan High Worth Brewery for resale
amounting to RMB42,906,772, RMB21,458,166 and RMB35,072,362,
respectively.
F - 21
CBR BREWING COMPANY, INC.
- ----------------------------
16. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS - continued
(c) Royalty fee
During the years ended December 31, 2000, 1999 and 1998, a royalty fee
of RMB5,059,063, RMB6,568,634 and RMB6,886,720, respectively, was
payable to Blue Ribbon Group for the right to use Pabst trademarks in
the PRC.
(d) Management fee
For the years ended December 2000, 1999 and 1998, a management fee was
paid to Blue Ribbon Group of nil, nil and RMB3,780,000, respectively.
(e) Interest expense
For the year ended December 31, 2000, interest expense included
RMB115,855 payable to Blue Ribbon Group. No similar amounts were
payable to Blue Ribbon Group in 1999 or 1998.
(f) (Gain) loss on disposal of property, plant and equipment
For the year ended December 31, 2000, (gain) loss on disposal of
property, plant and equipment included a gain of RMB4,110 from Blue
Ribbon Noble. There was no similar gain (loss) in 1999 or 1998.
(g) Amounts due from related companies
The amounts due from related companies primarily represented
receivable balances from Blue Ribbon Group and its group of companies.
The balances with Blue Ribbon Group and its group of companies
principally represented expenses paid on their behalf. From December
31, 1998 onwards, the balances with related companies are unsecured,
interest-free and repayable on demand.
(h) Amounts due to related companies
As of December 31, 2000 and 1999, the amounts due to related companies
consist of payable balances to the following companies:
As of December 31,
2000 1999
------------- -------------
RMB RMB
(in millions) (in millions)
American National Can (Zhaoqing) Co., Ltd.
("American National Can"). . . . . . . . . 6.4 6.5
Blue Ribbon Group. . . . . . . . . . . . . . 6.1 -
Jilin Chuangxiang Zhiyu Co., Ltd.. . . . . . 2.2 -
Jilin Jiutai Beer Co., Ltd.. . . . . . . . . 10.0 -
Sichuan High Worth Brewery . . . . . . . . . 3.1 4.5
Other subsidiaries and associated companies
of Blue Ribbon Group . . . . . . . . . . . 0.2 0.5
------------ --------------
28.0 11.5
============ ==============
F - 22
CBR BREWING COMPANY, INC.
- ----------------------------
16 RELATED PARTY TRANSACTIONS AND ARRANGEMENTS - continued
(h) Amounts due to related companies - continued
American National Can and Beverage are companies in which Blue Ribbon
Group has equity interests.
Sichuan High Worth Brewery is a company in which the Company has a 9%
effective interest.
Jilin Chuangxiang Zhiyu Co., Ltd. and Jilin Jintai Beer Co., Ltd. are
minority shareholders of Jilin Lianli Brewery. The balances represent
excess fixed assets contributed to Jilin Lianli Brewery by the
minority shareholders. The Group intends to dispose of its equity
interest in Jilin Lianli Brewery during 2001.
The balances with group companies of Blue Ribbon Group arose from the
purchases of raw materials. The balances are unsecured, interest-free
and repayable on demand.
During 1999, the Company borrowed RMB24,000,000 from its principal
shareholder Shenzhen Huaqiang Holdings Limited. The loan was
unsecured, with interest at 7.5% per annum, and was fully repaid
during 1999.
(i) Advances from shareholders
Information with respect to advances from shareholders is provided in
note 12.
17. STOCK OPTION PLAN AND COMMON STOCK CHANGES
Stock Option Plan -
On January 2, 1998, the 1998 Stock Option Plan (the "Plan") was adopted by
the majority of the shareholders of the Company and approved by the Board
of Directors. The Plan provides for the granting of stock options from time
to time to eligible persons to purchase an aggregate of up to 800,000
shares of Class A common stock, as either incentive stock options ("ISOs")
or nonqualified stock options ("NSOs"). The exercise price of all ISOs will
be equal to the fair market value of a share of common stock on the date
the option is granted, except that in the case of ISOs granted to any
person possessing more than 10% of the total combined voting power of all
classes of stock of the Company or any affiliate, the price will be not
less than 110% of such fair market value.
On January 2, 1998, options to purchase 210,000 shares of Class A common
stock at an exercise price of US$3.87 per share were granted to four
directors and five employees, and options to purchase 70,000 shares of
Class A common stock at an exercise price of US$4.26 were granted to two
directors, each of whom possesses indirectly more than 10% of the total
combined voting power of all classes of common stock of the Company.
Amounts varying from 50% to 70% of such stock options vested on April 1,
1998, with the remaining stock options vesting in varying amounts through
April 1, 2000. The stock options expire on dates ranging from December 31,
2001 through December 31, 2005. The exercise price of all such stock
options was not less than fair market value on the grant date.
F - 23
CBR BREWING COMPANY, INC.
- ----------------------------
17. STOCK OPTION PLAN AND COMMON STOCK CHANGES - continued
On May 16, 2000, options to purchase 375,000 shares of Class A common stock
at an exercise price of US$0.72 per share were granted to four directors
and five employees, and options to purchase 145,000 shares of Class A
common stock at an exercise price of US$0.79 per share were granted to two
directors, each of whom possesses indirectly more than 10% of the total
combined voting power of all classes of common stock of the Company. Such
stock options vest 50% on July 1, 2000, 25% on July 1, 2001, and the
remaining 25% on July 1, 2002. The stock options expire on December 31,
2004. The exercise price of all such stock options was not less than fair
market value on the grant date.
Option activity under the Plan is summarized as follows:
Outstanding options
-------------------------------
Weighted
average
Number exercise price
of shares per share
--------------- --------------
Outstanding at January 1, 1999 . 280,000 US$3.97
Cancelled. . . . . . . . . . . . (42,000) 3.87
--------------- --------------
Outstanding at December 31, 1999 238,000 US$3.98
Issued . . . . . . . . . . . . . 375,000 US$0.72
Issued . . . . . . . . . . . . . 145,000 US$0.79
--------------- --------------
Outstanding at December 31, 2000 758,000 US$1.76
=============== ==============
Additional information on options outstanding at December 31, 2000 is as
follows:
Options
exercisable as
Options outstanding of December 31,
as of December 31, 2000 2000
---------------------------- --------------
Weighted
average
remaining
Number contractual
Exercise prices outstanding life (years)
- --------------- ------------ ----------- ---------------
US$4.26 . . . . . . . 70,000 1 70,000
US$3.87 . . . . . . . 168,000 5 168,000
US$0.79 . . . . . . . 145,000 4 72,500
US$0.72 . . . . . . . 375,000 4 187,500
------------ ----------- ---------------
758,000 3.94 498,000
============ =========== ===============
At December 31, 2000 and 1999, 42,000 and 562,000 options, respectively,
were available for future grant under the Plan.
F - 24
CBR BREWING COMPANY, INC.
- ----------------------------
17. STOCK OPTION PLAN AND COMMON STOCK CHANGES - continued
Stock options issued to non-employees (including non-employee directors in
1998) were accounted for pursuant to SFAS No. 123, "Accounting for
Stock-Based Compensation". Under SFAS No. 123, the fair value of stock
options is calculated according to the Black-Scholes option pricing model
with the following assumptions:
Expected life of options. . . . . . . . . . . . . . . . 3 - 5 years
Risk-free interest rate . . . . . . . . . . . . . . . . 6.75%
Expected volatility of underlying stock . . . . . . . . 100%
Expected dividends. . . . . . . . . . . . . . . . . . . 0%
The total compensation expense for such stock options recognized in the
consolidated statements of operations for the years ended December 31, 2000
and 1999 was RMB174,452 and RMB697,801, respectively. The Black-Scholes
option pricing model requires the input of highly subjective assumptions,
including the expected volatility of the Company's stock price. Because
changes in subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the existing model does not
necessarily provide a reliable single measure of the fair value of the
stock options.
The Company continues to follow APB No. 25 "Accounting for Stock Issued to
Employees", in accounting for stock options issued to officers and
employees (including non-employee directors in 2000). The fair value of the
options granted was estimated on the date of grant using the Black-Scholes
option pricing model with the assumptions listed above. Had compensation
cost for the grants been determined under SFAS No. 123, the Company would
have recorded RMB159,267 and RMB637,067 as additional compensation expense
for the years ended December 31, 2000 and 1999, respectively, resulting in
the pro forma net (loss) income of (RMB29,064,459) and RMB23,018,035 and
net (loss) income per share (basic and diluted) of (RMB3.63) and RMB2.87,
respectively.
Consulting Contract
On March 2, 1998, the Company entered into a contract with Worldwide
Corporate Finance, a corporate financial consulting company, to provide
financial and business consulting services to the Company. The Company paid
an initial non-refundable retainer by issuing 10,000 shares of Class A
common stock, which were recorded as a charge to operations at the
estimated fair market value of RMB240,700. The contract expired on August
18, 1998 without any further compensation being paid to Worldwide Corporate
Finance.
F - 25
CBR BREWING COMPANY, INC.
- ----------------------------
18. RETIREMENT PLAN
As stipulated by the PRC government regulations, High Worth Brewery and
Blue Ribbon Marketing have defined contribution retirement plans for all
their full-time staff. During the years ended December 31, 2000, 1999 and
1998, the monthly contributions of High Worth Brewery were calculated at
17.8%, 14.6% and 14.6%, respectively, and the monthly contribution of Blue
Ribbon Marketing were calculated at, 5.0%, 2.0% and 2.0%, respectively, of
the basic salaries of the full-time employees. The pension costs charged to
operations by the PRC group companies during the years ended December 31,
2000, 1999 and 1998 amounted to RMB2,098,414, RMB2,507,459 and
RMB3,437,961, respectively.
The Company did not have any retirement plan in operation until June 1,
1998. The monthly contribution of the Company for full-time staff is 7.0%
of the basic salary. The pension costs charged to operations by the Company
were RMB177,487 and RMB177,919 in 2000 and 1999, respectively.
19. FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets at December 31, 2000
and 1999 for current assets and current liabilities qualifying as financial
instruments approximate their fair values because of the short maturity of
such instruments. Cash denominated in foreign currency has been translated
at the applicable unified exchange rate.
The fair value of the shareholders' advances was not able to be determined
because no comparable borrowing terms are currently available.
20. CONCENTRATION OF RISKS
The Company's operating assets and primary source of income and cash flows
are its interest in subsidiaries and associated company in the PRC. The PRC
economy has, for many years, been a centrally-planned economy, operating on
the basis of annual, five-year and ten-year state plans adopted by central
PRC governmental authorities, which set out national production and
development targets. The PRC government has been pursuing economic reforms
since it first adopted its "open-door" policy in 1978. There is no
assurance that the PRC government will continue to pursue economic reforms
or that there will not be any significant change in its economic or other
policies, particularly in the event of any change in the political
leadership of, or the political, economic or social conditions in, the PRC.
There is also no assurance that the Group will not be adversely affected by
any such change in governmental policies or any unfavorable change in the
political, economic or social conditions, the laws or regulations or the
rate or method of taxation in the PRC.
As many of the economic reforms which have been or are being implemented by
the PRC government are unprecedented or experimental, they may be subject
to adjustment or refinement, which may have adverse effects on the Group.
Further, through state plans and other economic and fiscal measures, it
remains possible for the PRC government to exert significant influence on
the PRC economy.
F - 26
CBR BREWING COMPANY, INC.
- ----------------------------
20. CONCENTRATION OF RISKS - continued
The sale and distribution of products under the "Pabst Blue Ribbon" brand
in 2000, 1999 and 1998 accounted for 98%, 98% and 99% of the Group's
revenues, respectively. The Group purchases Pabst Blue Ribbon beer from
Blue Ribbon Noble and is heavily dependent on Blue Ribbon Noble. Stoppages
of production and/or supply from Blue Ribbon Noble for reasons inside or
outside the Group's control could affect the Group's operation, although so
far the Group has never encountered any problems in securing adequate
supplies from Blue Ribbon Noble.
The Group currently uses foreign currency to pay for imported raw
materials. In addition, the Group obtained foreign currency loans from
shareholders to acquire the subsidiaries in the PRC and obtained foreign
currency loans for working capital purposes.
The Group's financial instruments that are exposed to concentration of
credit risk consist primarily of cash and accounts receivable from
customers. Cash is maintained with major banks in the PRC. The Group's
business activity is with customers in the PRC. The Group periodically
performs credit analysis and monitors the financial condition of its
clients in order to minimize credit risk.
21. COMMITMENTS AND CONTINGENCIES
LICENSING AND RELATED MATTERS
Blue Ribbon Group entered into licensing arrangements with Pabst Brewing
Company whereby Blue Ribbon Group was granted the exclusive right to
produce and market products under four specific Pabst trademarks in the
PRC, the non-exclusive right to market products in other Asian countries
except Hong Kong, Macau, Japan and South Korea, and the right to sublicense
the use of the trademarks to any other enterprise in the PRC. Pursuant to
the terms of the sublicense agreement, Blue Ribbon Group granted High Worth
Brewery the right in Guangdong Province of the PRC to use two specific
Pabst trademarks in its production, promotion, distribution and sale of
beer under such trademarks. In addition, Blue Ribbon Group also granted the
right to use two specific Pabst trademarks for the production, promotion,
distribution and sale of beer to High Worth Brewery or those enterprises
owned by High Worth Brewery which are located outside Guangdong Province in
the PRC. The sublicense agreement is valid until November 7, 2003. In
consideration for the sublicense granted, High Worth Brewery is obligated
to pay Blue Ribbon Group a royalty fee of US$11.70 for each ton produced.
A provisional agreement, subject to governmental approval, was made on May
10, 1995 among the Company and a subsidiary, the group companies of Noble
China Inc., and Blue Ribbon Group to the effect that:
(a) High Worth Brewery was entitled to be granted from Blue Ribbon Group
the right to brew and sell beer under the Pabst Blue Ribbon label
produced in its brewing facilities up to a maximum production capacity
of 100,000 tons per annum.
F - 27
CBR BREWING COMPANY, INC.
- ----------------------------
21. COMMITMENTS AND CONTINGENCIES - continued
LICENSING AND RELATED MATTERS - continued
(b) High Worth Brewery and/or companies that High Worth Brewery has an
interest in are entitled to be granted a sublicense from Blue Ribbon
Group with the right to produce and sell beer under the Pabst Blue
Ribbon label in Guangdong Province of the PRC (an "Additional
Facility") to a maximum production capacity of 300,000 tons per annum.
In the event that High Worth Brewery desires to obtain a sublicense
for an Additional Facility, Goldjinsheng has the right to purchase up
to a 40% interest in such Additional Facility. The purchase price for
such interest shall be the actual cost of such Additional Facility
multiplied by the percentage interest that Goldjinsheng elects to
purchase.
(c) A proposed new marketing company (the "New Marketing Company"), owned
8% by Blue Ribbon Group, 52% by High Worth Brewery and 40% by
Goldjinsheng, shall be formed to handle and organize the sales of
Pabst Blue Ribbon beer produced by Zhaoqing Brewery and Blue Ribbon
Noble. Zhaoqing Brewery and Blue Ribbon Noble will each create a
separate distribution company or division of their own. The respective
distribution companies will each appoint the New Marketing Company as
their sole and exclusive agent to market Pabst Blue Ribbon beer in the
PRC.
Subsequent to the signing of the provisional agreement, the Company, Blue
Ribbon Group and Goldjinsheng have attempted to complete the respective
separate definitive agreements. In December 1996, Blue Ribbon Group and
Goldjinsheng advised the Company that they intended to modify some of the
terms of the provisional agreement and to propose incorporating those
modifications in the respective separate definitive agreements. In
addition, the negotiation process was interrupted by the previously
described Sichuan Brewery issue in 1997 and 1998 and the Pabst trademark
issue in 1999. The Company believes that the delays in completing the
separate definitive agreements will not have a material effect on the
validity of the terms and provisions contained in the provisional
agreement.
Another agreement was made among Goldjinsheng, Blue Ribbon Group and Blue
Ribbon Noble on May 10, 1995, to the effect that Blue Ribbon Noble agreed
to pay Blue Ribbon Group a management fee of RMB2,035,000 per annum for a
period of five years commencing January 1, 1995.
An agreement was made between Blue Ribbon Group and High Worth Brewery on
December 31, 1995, to the effect that High Worth Brewery agreed to pay Blue
Ribbon Group a management fee of RMB3,780,000 per annum for a period of
three years commencing on January 1, 1996 (see note 16(d)).
In November 1997, Blue Ribbon Group advised the Company that it believed it
had the right to brew Pabst Blue Ribbon beer in the PRC, either by itself
or through one or more of its affiliates. Blue Ribbon Group thereupon
established a wholly-owned subsidiary, Sichuan Brewery, in E Mei Shan, Le
Shang City, Sichuan Province of the PRC, for the production of Pabst Blue
Ribbon beer commencing in 1998.
F - 28
CBR BREWING COMPANY, INC.
- ----------------------------
21. COMMITMENTS AND CONTINGENCIES - continued
LICENSING AND RELATED MATTERS - continued
On December 30, 1997, High Worth Brewery, Blue Ribbon Marketing, Blue
Ribbon Group and Sichuan Brewery reached an out of court settlement (the
"Settlement Agreement"). The Settlement Agreement, signed by all parties
involved and witnessed by the High Court of Guangdong Province, confirmed
that:
(i) All parties agreed that High Worth Brewery will serve as the core
organization for managing the production and operation of the Pabst
Blue Ribbon beer business in the PRC. A management committee will be
set up under the Board of Directors of High Worth Brewery to
coordinate and manage the procurement, production, sales and future
development of all Pabst Blue Ribbon beer production enterprises in
the PRC.
(ii) Blue Ribbon Marketing will act as the single entity to unify and
coordinate all of the sales of Pabst Blue Ribbon beer in the PRC. All
of the Pabst Blue Ribbon beer products produced by High Worth Brewery,
Blue Ribbon Noble and any other new joint ventures set up by High
Worth Brewery will be marketed by Blue Ribbon Marketing under the
auspices of the management committee.
(iii) Sichuan Brewery will be restructured and renamed as Sichuan Blue
Ribbon High Worth Brewery E Mei Limited ("Sichuan High Worth"). High
Worth Brewery, Blue Ribbon Group and E Mei Brewery will own 51%, 20%
and 29%, respectively, of the equity in Sichuan High Worth. The
existing assets in Sichuan Brewery will be revalued to determine the
fair market value prior to the formal transfer of share equity.
On December 31, 1998, Blue Ribbon Group transferred all of its equity
interest in Sichuan Brewery to E Mei Brewery and Wai Shun, respectively.
Wai Shun is an unaffiliated Hong Kong company.
On January 19, 1999, an Equity Transfer Agreement was signed by High Worth
Brewery, E Mei Brewery and Wai Shun with the following major terms and
provisions:
(i) High Worth Brewery has been granted, without payment of any
consideration, a 15% equity interest in Sichuan Brewery. The 15%
interest is non-transferable unless High Worth Brewery pays a
subscription of RMB9,414,000 or subsequently exercises its option
referred to in (ii) below. The remaining 55% and 30% interests in
Sichuan Brewery are owned by E Mei Brewery and Wai Shun, respectively.
(ii) High Worth Brewery was granted a three-year option to increase its
equity to 51% at a fixed cost.
F - 29
CBR BREWING COMPANY, INC.
- ----------------------------
21. COMMITMENTS AND CONTINGENCIES - continued
LICENSING AND RELATED MATTERS - continued
On June 5, 1999, a formal Joint Venture Agreement was signed among E Mei
Brewery, High Worth Brewery and Wai Shun to form Sichuan Blue Ribbon
Brewery High Worth Ltd. ("Sichuan High Worth Brewery"). The business of
Sichuan Brewery was transferred to Sichuan High Worth Brewery. The total
registered and paid-up capital of Sichuan High Worth Brewery was
RMB51,221,258. High Worth Brewery's 15% equity interest is
consideration-free but is entitled to share in the profits of Sichuan High
Worth Brewery. The Joint Venture Agreement and the relevant legal documents
have been approved by local government authorities. Sichuan High Worth
Brewery is currently producing Pabst Blue Ribbon beer.
Noble China Inc., a public company listed on the Toronto Stock Exchange,
issued a press release on May 27, 1999 to announce that it had acquired
from Pabst Brewing Company the exclusive rights to brew and distribute
Pabst Blue Ribbon beer throughout the PRC for a period of 30 years from
2003 to 2033. Noble China Inc.'s 1999 Annual Report confirmed that Noble
China Inc. had entered into a license agreement with Pabst Brewing Company
in May 1999 to utilize the Pabst Blue Ribbon trademarks in connection with
the production, promotion, distribution and sale of beer in China for 30
years commencing in November 2003, and that Noble China Inc. had paid Pabst
Brewing Company US$5,000,000 for the right to use the Pabst Blue Ribbon
trademarks and had agreed to pay royalties based on gross sales. In
addition, Noble China Inc.'s December 31, 1999 Annual Information Form
disclosed that under the existing License Agreement, Pabst Brewing Company
has the obligation to "negotiate friendly" the possible renewal of the
existing License Agreement on its expiration in November 2003. Noble China
Inc. further asserted that it assumed that obligation when it acquired the
license rights to the Pabst Blue Ribbon trademarks.
Management has consulted with legal counsel regarding the legitimacy of the
purported license agreement and the Company's potential responses. In
addition, management has consulted with Blue Ribbon Group, the owner of the
Pabst Blue Ribbon trademark in China, regarding potential responses, and
has met with representatives of Noble China Inc. in an attempt to explore a
potential settlement.
In August 2000, the Company and Noble China Inc. signed a memorandum
pursuant to which a management committee was established to evaluate the
potential to coordinate and enhance the operations of Zhaoqing Brewery and
Noble Brewery and the Marketing Company. In December 2000, management,
marketing, production and operations of Zhaoqing Brewery, Noble Brewery and
the Marketing Company were pooled together in order to achieve improved
coordination of human, financial, production and marketing activities,
which is expected to achieve greater efficiency and operating
profitability. However, Zhaoqing Brewery, Noble Brewery and the Marketing
Company each retain their respective independence. Pursuant to the August
2000 memorandum, after the pooled management structure has begun to
function smoothly, the management committee will commence a study to
evaluate the formation of a new unified company.
F - 30
CBR BREWING COMPANY, INC.
- ----------------------------
21. COMMITMENTS AND CONTINGENCIES - continued
LICENSING AND RELATED MATTERS - continued
Management of the Company has requested that Blue Ribbon Group take
appropriate action to protect its rights and its sub-licensees' rights to
utilize the Pabst Blue Ribbon trademark in China. The Company has been
advised that Blue Ribbon is still evaluating the situation and has not yet
determined how it will respond to this matter. Once Blue Ribbon Group has
responded, the Company expects to be in a position to evaluate and revise
its future business plan and strategy accordingly. The Company is currently
unable to predict the effect that this development may have on future
operations. However, the inability of the Company to obtain a sub-license
from Noble China Inc. or enter into some other form of strategic
relationship under acceptable terms and conditions that would allow the
Company to continue to produce and distribute Pabst Blue Ribbon beer in
China would have a material adverse effect on the Company's future results
of operations, financial position and cash flows.
OPERATING LEASE COMMITMENTS
The Group leases premises under various operating leases which do not
contain any renewal or escalation clauses. Rental expense under operating
leases was RMB2,304,004, RMB1,851,307 and RMB374,138 during the years ended
December 31, 2000, 1999 and 1998, respectively.
As of December 31, 2000, the Company was obligated under operating leases
requiring minimum rentals as follows:
RMB
Year ending December 31,
2001 . . . . . . . . . . . . 927,610
2002 . . . . . . . . . . . . 533,401
2003 . . . . . . . . . . . . 561,813
2004 . . . . . . . . . . . . 511,813
2005 . . . . . . . . . . . . 552,758
After 2005 . . . . . . . . . 1,149,735
---------
4,237,130
=========
CAPITAL COMMITMENTS
As of December 31, 2000, the Group had the following capital expenditure
commitments, which had not been provided for in the financial statements:
RMB
Purchase of property, plant and machinery 2,033,026
=========
F - 31
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
--------------------------------------------
(Registered in the People's Republic of China)
Report and Financial Statements
For the year ended December 31, 2000
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
- --------------------------------------------
(Registered in the People's Republic of China)
REPORT AND FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2000
- ------------------------------------
CONTENTS PAGE(S)
- -------- ---------
REPORT OF INDEPENDENT AUDITORS . . . . . . . . . . . . . . F - 1
BALANCE SHEETS . . . . . . . . . . . . . . . . . . . . . . F - 2
STATEMENTS OF OPERATIONS . . . . . . . . . . . . . . . . . F - 3
STATEMENTS OF SHAREHOLDERS' EQUITY . . . . . . . . . . . . F - 4
STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . . . . . F - 5
NOTES TO FINANCIAL STATEMENTS . . . . . . . . . . . . F - 6 to F - 17
REPORT OF INDEPENDENT AUDITORS
- ----------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
CBR BREWING COMPANY, INC.
- ----------------------------------------------------
We have audited the accompanying balance sheets of Zhaoqing Blue Ribbon Brewery
Noble Ltd. (the "Company") as of December 31, 2000 and 1999, and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of Zhaoqing Blue Ribbon Brewery Noble Ltd. as
of December 31, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000 in
conformity with generally accepted accounting principles in the United States of
America.
As discussed in note 18 to the financial statements, the Company is exposed to
certain risks through its operations in the People's Republic of China.
Deloitte Touche Tohmatsu
Hong Kong
April 10, 2001
F - 1
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
BALANCE SHEETS
As of December 31,
-------------------------------------
2000 2000 1999
----------- ----------- -----------
US$ RMB RMB
(Note 3)
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . 11,056,211 91,766,555 88,419,292
Accounts receivable, net of allowance for
doubtful accounts of RMB2,137,528 and
RMB2,137,528 for 2000 and 1999,
respectively (note 4). . . . . . . . . . . . . . . - - -
Bills receivable (note 5). . . . . . . . . . . . . . 8,046,181 66,783,300 68,465,000
Inventories (note 6) . . . . . . . . . . . . . . . . 5,986,774 49,690,224 56,196,361
Prepayments and deposits . . . . . . . . . . . . . . 967,270 8,028,342 1,673,213
Amounts due from related companies, net of
allowance for doubtful accounts of RMB137,000,000
and Nil for 2000 and 1999, respectively (note 15a) 9,234,524 76,646,547 198,404,570
----------- ----------- -----------
Total current assets . . . . . . . . . . . . . . . . . 35,290,960 292,914,968 413,158,436
Property, plant and equipment, net (note 7). . . . . . 47,765,949 396,457,375 424,893,664
----------- ----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . 83,056,909 689,372,343 838,052,100
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . 1,193,146 9,903,111 13,792,141
Accrued liabilities. . . . . . . . . . . . . . . . . 615,841 5,111,484 34,893,148
Dividend payable . . . . . . . . . . . . . . . . . . 5,529,649 45,896,084 -
Employee welfare and incentive fund. . . . . . . . . 3,659,595 30,374,634 28,375,711
Amounts due to related companies (note 15b). . . . . 412,579 3,424,405 7,566,108
Sales taxes payable (note 9) . . . . . . . . . . . . 1,194,218 9,912,015 13,984,644
Income taxes payable (note 8). . . . . . . . . . . . 5,502,556 45,671,217 55,346,988
----------- ----------- -----------
Total current liabilities. . . . . . . . . . . . . . . 18,107,584 150,292,950 153,958,740
----------- ----------- -----------
Long-term liabilities:
Deferred income taxes (note 8) . . . . . . . . . . . 1,204,820 10,000,000 7,000,000
----------- ----------- -----------
Commitments and contingencies (note 19)
Shareholders' Equity:
Contributed capital (note 10). . . . . . . . . . . . . 57,342,169 475,940,000 475,940,000
General reserve and enterprise development funds
(note 12). . . . . . . . . . . . . . . . . . . . . . 3,907,102 32,428,949 32,428,949
Retained earnings (note 13). . . . . . . . . . . . . . 2,495,234 20,710,444 168,724,411
----------- ----------- -----------
Total equity . . . . . . . . . . . . . . . . . . . . . 63,744,505 529,079,393 677,093,360
----------- ----------- -----------
Total liabilities and equity . . . . . . . . . . . . . 83,056,909 689,372,343 838,052,100
=========== =========== ===========
See accompanying notes to the financial statements
F - 2
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
STATEMENTS OF OPERATIONS
Year ended December 31,
---------------------------------------------------------
2000 2000 1999 1998
------------ ------------- ------------- -------------
US$ RMB RMB RMB
(Note 3)
Sales:
Related parties (note 15c). . . . . . . . . . 56,217,659 466,606,571 537,044,558 621,662,823
Unrelated parties . . . . . . . . . . . . . . 1,008 8,363 62,589 39,574
------------ ------------- ------------- -------------
. . . . . . . . . . . . . . . . . . . . . . . 56,218,667 466,614,934 537,107,147 621,702,397
Sales taxes (note 9). . . . . . . . . . . . . . (2,834,041) (23,522,541) (23,299,155) (37,232,677)
------------ ------------- ------------- -------------
Net sales . . . . . . . . . . . . . . . . . . . 53,384,626 443,092,393 513,807,992 584,469,720
Cost of sales, including inventory purchased
from related companies of RMB67,422,970,
RMB86,716,508, and RMB87,441,651 in 2000,
1999 and 1998, respectively, and royalty fee
paid to a related company of RMB10,112,856,
RMB12,033,486 and RMB13,882,131 in 2000,
1999 and 1998, respectively (note 15c). . . . (35,070,377) (291,084,126) (316,437,623) (407,211,273)
------------ ------------- ------------- -------------
Gross profit. . . . . . . . . . . . . . . . . . 18,314,249 152,008,267 197,370,369 177,258,447
Selling, general and administrative expenses,
including management fee paid to a related
company of nil, RMB2,035,000 and
RMB2,035,000 in 2000, 1999 and 1998,
respectively (note 15c), and allowance for
doubtful account receivable from a related
company of RMB137,000,000, nil and nil in
2000, 1999 and 1998, respectively (note 15a). (20,623,466) (171,174,772) (32,232,488) (47,955,747)
------------ ------------- ------------- -------------
Operating (loss) income . . . . . . . . . . . . (2,309,217) (19,166,505) 165,137,881 129,302,700
Interest income . . . . . . . . . . . . . . . . 137,587 1,141,976 1,650,372 2,406,192
Other income, including rental income received
from a related company of RMB1,367,408,
RMB2,120,012 and RMB1,568,864 in 2000,
1999 and 1998 respectively (note 15c). . . . 421,418 3,497,770 4,568,662 2,819,195
Interest expense. . . . . . . . . . . . . . . . (2,015) (16,724) (51,926) (73,506)
------------ ------------- ------------- -------------
(Loss) income before income taxes. . . . . . . (1,752,227) (14,543,483) 171,304,989 134,454,581
Income taxes (note 8) . . . . . . . . . . . . . (3,792,672) (31,479,185) (42,887,055) (8,226,523)
------------ ------------- ------------- -------------
Net (loss) income . . . . . . . . . . . . . . . (5,544,900) (46,022,668) 128,417,934 126,228,058
============ ============= ============= =============
See accompanying notes to the financial statements
F - 3
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
STATEMENTS OF SHAREHOLDERS' EQUITY
General
reserve and
enterprise
Contributed development Retained
capital funds earnings Equity
------------ ------------ ------------- -------------
RMB RMB RMB RMB
(Note 10) (Note 12) (Note 13)
Balance at January 1, 1998. . 475,940,000 21,043,879 146,068,638 643,052,517
Net income for the year . . . - - 126,228,058 126,228,058
Appropriation of:
Reserve . . . . . . . . . . - 5,718,887 (5,718,887) -
Dividend. . . . . . . . . . - - (117,665,180) (117,665,180)
------------ ------------ ------------- -------------
Balance at December 31, 1998. 475,940,000 26,762,766 148,912,629 651,615,395
Net income for the year . . . - - 128,417,934 128,417,934
Appropriation of:
Reserve . . . . . . . . . . - 5,666,183 (5,666,183) -
Dividend. . . . . . . . . . - - (102,939,969) (102,939,969)
------------ ------------ ------------- -------------
Balance at December 31, 1999. 475,940,000 32,428,949 168,724,411 677,093,360
Net loss for the year . . . . - - (46,022,668) (46,022,668)
Appropriation of:
Dividend. . . . . . . . . . - - (101,991,299) (101,991,299)
------------ ------------ ------------- -------------
Balance at December 31, 2000. 475,940,000 32,428,949 20,710,444 529,079,393
============ ============ ============= =============
Translated to US$
Balance at December 31, 2000
(note 3). . . . . . . . . . 57,342,169 3,907,102 2,495,234 63,744,505
============ ============ ============= =============
See accompanying notes to the financial statements
F - 4
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
STATEMENTS OF CASH FLOWS
Year ended December 31,
--------------------------------------------------------
2000 2000 1999 1998
US$ RMB RMB RMB
(Note 3)
Cash flows from operating activities:
Net (loss) income . . . . . . . . . . . . . . . . . . (5,544,900) (46,022,668) 128,417,934 126,228,058
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . 4,834,224 40,124,063 35,158,936 38,035,235
Deferred income taxes . . . . . . . . . . . . . . . . 361,446 3,000,000 2,300,000 (7,500,000)
Allowance (write back) for doubtful accounts. . . . . 16,506,024 137,000,000 (6,080,775) 7,178,852
Loss on disposal of fixed assets. . . . . . . . . . . 275 2,284 - -
Changes in operating assets and liabilities:
Decrease in accounts receivable . . . . . . . . . . . - - 266,729 991,442
Decrease (increase) in bills receivable . . . . . . . 202,614 1,681,700 (27,102,000) (16,613,000)
Decrease (increase) in inventories. . . . . . . . . . 783,872 6,506,137 (21,064,178) 724,815
(Increase) decrease in prepayments and
deposits. . . . . . . . . . . . . . . . . . . . . . (765,678) (6,355,129) 194,227 10,808,407
(Increase) decrease in amounts due from
related companies . . . . . . . . . . . . . . . . . (1,836,383) (15,241,977) 26,324,018 (7,649,067)
Decrease in accounts payable and
accrued liabilities . . . . . . . . . . . . . . . . (4,056,710) (33,670,694) (28,498,015) (13,538,730)
Increase in employee welfare and
incentive fund. . . . . . . . . . . . . . . . . . . 240,834 1,998,923 12,909,453 3,558,018
Decrease in amounts due to related companies. . . . . (499,000) (4,141,703) (5,925,719) (35,211,563)
Decrease in sales taxes payable . . . . . . . . . . . (490,678) (4,072,629) (43,690,770) (3,900,548)
(Decrease) increase in income taxes payable . . . . . (1,165,756) (9,675,771) 34,150,465 10,282,922
------------ ------------ ------------- -------------
Net cash provided by operating activities . . . . . . . 8,570,185 71,132,536 107,360,305 113,394,841
------------ ------------ ------------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment. . . . . . (1,480,441) (11,690,058) (9,850,985) (23,537,127)
------------ ------------ ------------- -------------
Cash flows from financing activities:
Repayment of bank loans . . . . . . . . . . . . . . . - - - (1,500,000)
Dividend paid . . . . . . . . . . . . . . . . . . . . (6,758,460) (56,095,215) (102,939,969) (116,820,447)
------------ ------------ ------------- -------------
Net cash used in financing activities . . . . . . . . . (6,758,460) (56,095,215) (102,939,969) (118,320,447)
------------ ------------ ------------- -------------
Net increase (decrease) in cash and cash equivalents. . 403,284 3,347,263 (5,430,649) (28,462,733)
Cash and cash equivalents at beginning of year. . . . . 10,652,927 88,419,292 93,849,941 122,312,674
------------ ------------ ------------- -------------
Cash and cash equivalents at end of year. . . . . . . . 11,056,211 91,766,555 88,419,292 93,849,941
============ ============ ============= =============
See accompanying notes to the financial statements
F - 5
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL ACTIVITY
Zhaoqing Blue Ribbon Brewery Noble Ltd. (the "Company") is a Sino-foreign
equity joint venture enterprise registered in the People's Republic of
China (the "PRC") in October 1993 in which Goldjinsheng Holding Limited
("Goldjinsheng") and Zhaoqing Brewery hold 60% and 40% interests,
respectively. The venture term of the Company is twenty years which term
may be extended upon mutual agreement of the joint venture parties and
approval from the relevant PRC government authorities.
Pursuant to the joint venture agreements and with the approval of the
relevant PRC government authorities, the property, plant, equipment and the
business of Pabst Blue Ribbon Brewery (Zhaoqing) Co. Ltd. ("Pabst Blue
Ribbon"), an unrelated PRC owned enterprise, were disposed of to Zhaoqing
Brewery and then to the Company as a capital contribution. Pabst Blue
Ribbon is a subsidiary of the Guangdong Blue Ribbon Group Co., Ltd. ("Blue
Ribbon Group").
Since commencement of business on November 6, 1993, the Company has
principally been engaged in the production and sale of beer products in the
PRC. The Company's principal product is Blue Ribbon beer produced and sold
under non-exclusive Pabst trademarks which were granted by Blue Ribbon
Group (see note 19), an unrelated PRC owned enterprise. Malt, rice, hops,
water and packing materials are the major raw materials involved in the
production of Blue Ribbon beer. Effective July 1, 1995, all beer products
produced by the Company were sold to Zhaoqing Blue Ribbon Beer Marketing
Company Limited ("Blue Ribbon Marketing"), which was formed to promote and
distribute beer products. Blue Ribbon Marketing is 70% owned by Zhaoqing
Brewery, which acts as a nominee on behalf of Zhaoqing Blue Ribbon High
Worth Brewery Ltd. ("High Worth Brewery") and 30% owned directly by Blue
Ribbon Group. The Blue Ribbon Group also owns indirectly 28% of Blue Ribbon
Marketing.
Goldjinsheng is a wholly-owned subsidiary of Noble China Inc., a company
listed on the Toronto Stock Exchange.
Zhaoqing Brewery is a wholly-owned subsidiary of High Worth Brewery, a
Sino-foreign equity joint venture enterprise registered in the PRC in which
Blue Ribbon Group and High Worth Holdings Limited, a wholly-owned
subsidiary of CBR Brewing Company, Inc. ("CBR"), hold 40% and 60%
interests, respectively.
On January 20, 1998, Goldjinsheng and Zhaoqing Brewery entered into an
agreement which stipulated that their respective interests in the Company
will be transferred to Linchpin Holdings Limited ("Linchpin"), another
wholly-owned subsidiary of Noble China Inc., and High Worth Brewery,
respectively. In March 1999, approval from the relevant PRC authorities for
the registration of the aforesaid transfer for Linchpin was obtained.
Linchpin and Zhaoqing Brewery own 60% and 40% equity interests in the
Company, respectively.
F - 6
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
2. BASIS OF PRESENTATION
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America ("US GAAP").
This basis of accounting differs from that used in the preparation of the
statutory financial statements of the Company which are prepared in
accordance with the accounting principles and relevant financial
regulations established by the Ministry of Finance of the PRC.
The major adjustments made to the PRC statutory financial statements to
conform with the accrual basis under US GAAP include the adjustments for
sales, interest income and purchases recognized on a cash basis,
depreciation and deferred taxation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand,
cash accounts, interest bearing saving accounts, and short-term bank
deposits with original maturities of three months or less.
INVENTORIES - Inventories are stated at the lower of cost or market value.
Cost, which comprises direct materials, direct labor costs and overhead
associated with the manufacturing processes, is calculated using the
first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is stated at
cost less an allowance for depreciation and amortization. Cost includes the
fair value of property, plant and equipment transferred from Pabst Blue
Ribbon.
Depreciation and amortization are provided using the straight-line method
to write off the cost of property, plant and equipment over the estimated
useful lives as follows:
Land use rights. . . . . . . . . . . . . . . . 20 years
Buildings. . . . . . . . . . . . . . . . . . . 20 years
Plant, machinery and equipment . . . . . . . . 15 years
Motor vehicles . . . . . . . . . . . . . . . . 10 years
Leasehold improvement. . . . . . . . . . . . . 5 years
Construction in progress is stated at cost which comprises the direct costs
of buildings, plant under construction and deposits and prepayments made on
machinery pending installation. Cost comprises the direct cost of
construction and finance expenses arising from borrowings used to finance
the construction of buildings, plant and machinery until the construction,
installation and testing are complete. No depreciation is provided until
the relevant assets are available for commercial use.
According to the laws of the PRC, the title to all PRC land is retained by
the PRC government. The land use rights represent the cost for the rights
to use the land for premises granted by the State Land Administration
Bureau. The land use rights are stated at cost and are amortized over the
shorter of the venture term of the Company or the term of the land use
right.
F - 7
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
IMPAIRMENT OF LONG-LIVED ASSETS - The Company regularly reviews its
property, plant and equipment for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable based upon undiscounted cash flows expected to be produced by
such assets over their expected useful lives.
INCOME TAXES - Income taxes are determined under the asset and liability
method in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires
deferred taxes to be adjusted to reflect the tax rates at which future
taxable amounts will be settled or recognized. The effects of tax rate
changes on future deferred tax liabilities and deferred tax benefits, as
well as other changes in income tax laws, are recognized in the statement
of operations in the period when such changes are enacted.
REVENUE RECOGNITION - Sales represent the invoiced value of goods sold, net
of returns and discounts. Sales and sales discounts are recognized upon
delivery of goods to customers.
ADVERTISING EXPENSES - Advertising expenses are charged to expense in the
statements of operations as incurred. Advertising expense was RMB54,300,
RMB701,505 and RMB809,660, for the years ended December 31, 2000, 1999 and
1998, respectively.
FOREIGN CURRENCY TRANSLATION - The financial records and the statutory
financial statements of the Company are maintained in Renminbi. In
preparing the financial statements, all foreign currency transactions are
translated into Renminbi using the applicable rates of exchange for the
respective periods. Monetary assets and liabilities denominated in foreign
currencies have been translated into Renminbi using the rate of exchange
prevailing at the balance sheet date. The resulting exchange gains or
losses have been credited or charged to the statement of operations in the
period in which they occur.
Translation of amounts from Renminbi ("RMB") into United States dollars
("US$") is for the convenience of the reader only and has been made at
US$1.00 = RMB8.3 (see note 11). No representation is made that the Renminbi
amounts could have been, or could be, converted into United States dollars
at that rate or at any other rate.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
F - 8
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
EFFECTS OF RECENT ACCOUNTING STANDARDS - In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities"("SFAS No. 133"). SFAS No. 133 establishes standards for
derivative instruments embedded in other contracts, and for hedging
activities, and requires that all derivatives be recognized as either
assets or liabilities in the statement of financial position and be
measured at fair value. SFAS 133 will be effective for the Company's year
ending December 31, 2001. The Company does not anticipate that the adoption
of SFAS No. 133 will have any effect on its financial statements
presentation on disclosures.
4. ACCOUNTS RECEIVABLE
Accounts receivable comprise:
2000 1999
----------- -----------
RMB RMB
Accounts receivables - trade. . . . . 2,137,528 2,137,528
Less: Allowance for doubtful accounts (2,137,528) (2,137,528)
----------- -----------
- -
=========== ===========
Movement of allowance for doubtful accounts:
2000 1999 1998
--------- ---------- ---------
RMB RMB RMB
Balance as at January 1 . . . . . . . . 2,137,528 2,218,303 1,039,451
(Written back) provided during the year - (80,775) 1,178,852
--------- ---------- ---------
Balance as at December 31 . . . . . . . 2,137,528 2,137,528 2,218,303
========= ========== =========
No amounts have been written off during the years presented.
5. BILLS RECEIVABLE
Bills receivable represent accounts receivable in the form of bills of
exchange whose acceptances and settlements are handled by banks.
F - 9
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
6. INVENTORIES
2000 1999
------------- -------------
RMB RMB
Inventories comprise:
Raw materials . . . . . . . . . . . . . . . . . . 23,507,834 28,880,574
Work in progress. . . . . . . . . . . . . . . . . 5,681,546 9,341,109
Finished goods. . . . . . . . . . . . . . . . . . 20,500,844 17,974,678
------------- -------------
49,690,224 56,196,361
============= =============
7. PROPERTY, PLANT AND EQUIPMENT
2000 1999
------------- -------------
RMB RMB
At cost:
Land use rights and buildings . . . . . . . . . 182,265,093 180,674,140
Plant, machinery and equipment. . . . . . . . . 432,916,405 429,487,508
Motor vehicles. . . . . . . . . . . . . . . . . 9,181,771 7,400,665
Leasehold improvements. . . . . . . . . . . . . 5,642,216 5,118,568
Construction in progress. . . . . . . . . . . . 4,342,610 -
------------- -------------
Total . . . . . . . . . . . . . . . . . . . . . 634,348,095 622,680,881
Less: Accumulated depreciation and amortization (237,890,720) (197,787,217)
------------- -------------
396,457,375 424,893,664
============= =============
8. INCOME TAXES
The Company is governed by the Income Tax Laws of the PRC concerning
Foreign Investment Enterprises and Foreign Enterprises and various rules
and regulations (the "Income Tax Laws"). Pursuant to the Income Tax Laws,
foreign investment enterprises engaging in a production business located in
Zhaoqing are subject to income tax at the rate of 27% on net income as
reported in their statutory financial statements.
Pursuant to the Income Tax Laws, if the investor in a foreign investment
enterprise reinvests its share of distributable profits from the
enterprise, the investor is entitled to receive a refund of the income tax
paid on the reinvested amount.
Under a tax concession obtained from the PRC tax authority, the Company is
exempt from income taxes for the two financial years commencing with its
first profitable year of operations, and thereafter received a 50%
reduction for the next three financial years. For the years ended December
31, 1998 and 1997, current income taxes based on the 50% reduction rule
were provided. For 1999 and 2000, current income taxes were fully provided
at the statutory rate as the tax concession period had expired.
F - 10
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
8. INCOME TAXES - continued
The aggregate income tax benefit resulting from the tax exemption and
reduction status for the year ended December 31, 1998 amounted to
approximately RMB19,500,000.
The reconciliation of the effective income tax rate of the Company to the
relevant statutory income tax rate in the PRC is as follows:
Year ended December 31,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
Statutory tax rate. . . . . . . . . . . . . . . . . . . . 27% 27% 27%
Tax holiday . . . . . . . . . . . . . . . . . . . . . . . - - (15%)
Resolution of estimated tax adjustments . . . . . . . . . - - (6%)
Income exempted by tax authority. . . . . . . . . . . . . (1%) (1%) -
----------- ----------- -----------
Effective tax rate. . . . . . . . . . . . . . . . . . . . 26% 26% 6%
=========== =========== ===========
The provision for income taxes consists of the following:
Year ended December 31,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
RMB RMB RMB
Current . . . . . . . . . . . . . . . . . . . . . . . . . 28,479,185 40,587,055 15,726,523
Deferred. . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 2,300,000 (7,500,000)
----------- ----------- -----------
31,479,185 42,887,055 8,226,523
=========== =========== ===========
The deferred income tax liability relates to property, plant and equipment.
9. SALES TAXES
The Company is subject to three kinds of sales taxes: value added tax
("VAT"), consumption tax and other sales taxes. The applicable VAT rate is
17% for brewery products sold in the PRC and nil for exported goods. The
amount of VAT liability is determined by applying the applicable VAT tax
rate to the invoiced amount of goods sold less VAT paid on purchases made
with the relevant invoices in support. VAT is collected from customers by
the Company on behalf of the PRC tax authorities and is therefore not
charged to the statement of operations. The applicable consumption tax rate
in respect of brewery products is RMB220 per ton. The consumption tax
charged to the statement of operations is determined based on the volume of
sales within the PRC territory. Exported goods are exempted. The other
sales taxes are assessed as a percentage of consumption tax and VAT
payable.
F - 11
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
10. CONTRIBUTED CAPITAL
The Company was registered with a capital of US$50,000,000. At the balance
sheet date, a total of RMB475,940,000 was contributed by the joint venture
parties.
11. FOREIGN CURRENCY EXCHANGE
The People's Bank of China ("PBOC") and the State Exchange Administration
Bureau jointly pronounced a new policy on foreign currency exchange
transactions in the PRC. Commencing from December 1, 1998, foreign currency
exchange adjustment services for the foreign invested enterprises ("FIE"),
which were previously provided by the SWAP centers within the PRC, were
cancelled. From this date onwards, FIEs can only transact foreign currency
deals though those authorized banks in the PRC at the prevailing exchange
rates quoted by the PBOC and, accordingly, all the SWAP centers presently
established in the PRC were to be closed.
The current SWAP center business was started by the PRC government in 1980.
FIEs could buy or sell foreign currencies at the SWAP center at the market
rates quoted by such centers. From December 1, 1998, FIEs can only buy or
sell foreign currencies through the banks operated in the PRC at the
prevailing exchange rates quoted by the PBOC. All these foreign currency
transactions then pass through the centralized banking system in the PRC.
The exchange rates quoted by the banks are the middle price of the bid
price and ask price on the previous transaction date.
The exchange rates of the RMB equivalent to US$1.00 as of December 31,
2000, 1999 and 1998 were approximately RMB8.30.
12. GENERAL RESERVE AND ENTERPRISE DEVELOPMENT FUNDS
As stipulated by the relevant laws and regulations for foreign investment
enterprises, the Company is required to make appropriations to a general
reserve fund, an enterprise development fund and an employee welfare and
incentive fund, in which the percentages of annual appropriations are
subject to the joint venture agreement. The employee welfare and incentive
fund is charged to the statement of operations. The other appropriations
are accounted for as reserve funds in the balance sheet and are not
available for distribution as dividends to the joint venture partners of
the Company. Under the joint venture agreement, the board of directors
shall determine the appropriations with regard to the economic situation of
the Company. The percentages of annual appropriations to a general reserve
fund, an enterprise development fund and an employee welfare and incentive
fund for 2000 have already been determined by the board of directors, and
the appropriations have been reported in the statutory financial
statements.
F - 12
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
13. RETAINED EARNINGS
As described in note 2, net income (loss) as reported in the US GAAP
financial statements differs from that as reported in the PRC statutory
financial statements. In accordance with the relevant laws and regulations
for Sino-foreign equity joint venture enterprises, the profits available
for distribution are based on the statutory financial statements. If the
Company has foreign currency available after meeting its operational needs,
the Company may make profit distributions in foreign currency to the extent
it is available. Otherwise, it will be necessary to convert such
distributions at an exchange center. As of December 31, 2000 and 1999, the
retained earnings calculated according to PRC GAAP available for
distribution amounted to approximately RMB75,511,000 and RMB101,991,000,
respectively.
14. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid during the years ended December 31, 2000, 1999 and 1998 was
RMB16,724, RMB51,921 and RMB73,506, respectively. Income tax paid for the
years ended December 31, 2000, 1999 and 1998 was RMB38,154,956,
RMB6,436,590 and RMB5,443,601, respectively.
15. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
(a) Amounts due from related companies
The amounts receivable from related companies mainly represented the
receivable balances from companies of the Blue Ribbon Group (including
subsidiaries), Goldjinsheng, Blue Ribbon Marketing, HK Kellogy and
Blue Po amounting to approximately RMB3,188,000, nil, RMB71,862,000,
RMB1,201,000 and RMB396,000 respectively, for 2000 and RMB3,196,000,
RMB38,000, RMB195,171,000, nil and nil, respectively, for 1999.
The balances with Blue Ribbon Group, Goldjinsheng, HK Kellogy and Blue
Po principally represented expenses paid by the Company on their
behalf.
The balance with Blue Ribbon Marketing was operating in nature and
principally represented accounts receivable from sales of finished
goods. An allowance for doubtful accounts amounting to RMB137,000,000
and Nil was recorded in 2000 and 1999 respectively.
The amounts receivable from related companies are unsecured,
interest-free and repayable on demand.
(b) Amounts due to related companies
As of December 31, 2000 and 1999, the amounts due to related companies
principally represented balances arising from the purchases of raw
materials from American National Can (Zhaoqing) Co., Ltd., in which
Blue Ribbon Group has equity interests and Blue Ribbon Group's
subsidiaries.
The balances are unsecured, interest-free and repayable on demand.
F - 13
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
15. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS - continued
(c) Related party transactions
The Company had transactions with companies in which Blue Ribbon Group
or High Worth Brewery have equity interests. The significant
transactions are summarized below:
Year ended December 31,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
RMB RMB RMB
Sales of beer products to
Blue Ribbon Marketing. . . . . . . 466,532,300 537,010,133 621,380,760
Blue Ribbon Group. . . . . . . . . 29,424 3,014 282,063
American National Can (Zhaoqing)
Co., Ltd . . . . . . . . . . . . 32,262 31,411 -
Blue Ribbon Mineral Water. . . . . 12,584 - -
Purchases of raw materials from
American National
Can (Zhaoqing) Co., Ltd. . . . . 67,325,141 77,642,936 65,363,737
Zhaoqing Blue
Ribbon Carton Manufacturing Co. - 9,034,659 17,196,043
Blue Ribbon Marketing. . . . . . . - - 4,720,679
High Worth Brewery . . . . . . . . 97,829 38,913 161,192
Royalty fee paid to Blue
Ribbon Group . . . . . . . . . . . 10,112,856 12,033,486 13,882,131
Management fee paid to
Blue Ribbon Group. . . . . . . . . - 2,035,000 2,035,000
Rental income received from
Blue Ribbon Marketing. . . . . . . 1,367,408 2,120,012 1,568,864
Motor vehicle purchase consideration
to Blue Ribbon Marketing . . . . . 52,517 - -
----------- ----------- -----------
16. RETIREMENT PLAN
As stipulated by PRC government regulations, the Company has defined
contribution retirement plans for all its full-time employees. The Company
and its employees are required to contribute to the PRC insurance companies
organized by the PRC government, which are responsible for the payment of
pension benefits to retired employees. The monthly contributions of the
Company and the full-time employees were calculated at 17.8% and 5.0%,
respectively, of the basic salaries of the full-time employees. The pension
costs charged to operations by the Company for the years ended December 31,
2000, 1999 and 1998 amounted to RMB1,260,128, RMB1,076,919 and RMB936,232,
respectively.
F - 14
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
17. FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for current assets and
current liabilities qualifying as financial instruments approximate their
fair values because of the short maturity of such instruments.
18. CONCENTRATION OF RISKS
The Company's operating assets and primary source of income and cash flows
are in the PRC. The PRC economy has, for many years, been a
centrally-planned economy, operating on the basis of annual, five-year and
ten-year state plans adopted by central PRC governmental authorities, which
set out national production and development targets. The PRC government has
been pursuing economic reforms since it first adopted its "open-door"
policy in 1978. There is no assurance that the PRC government will continue
to pursue economic reforms or that there will not be any significant
changes in its economic or other policies, particularly in the event of any
change in the political leadership of, or the political, economic or social
conditions in, the PRC. There is also no assurance that the Company will
not be adversely affected by any such change in government policies or any
unfavorable change in the political, economic or social conditions, the
laws or regulations or the rate or method of taxation in the PRC.
As many of the economic reforms which have been or are being implemented by
the PRC government are unprecedented or experimental, they may be subject
to adjustment or refinement, which may have adverse effects on the Company.
Further, through state plans and other economic and fiscal measures, it
remains possible for the PRC government to exert significant influence on
the PRC economy.
All the Company's revenues are wholly derived from the sale of Pabst Blue
Ribbon beer.
The Company sold almost 100% of its products to Blue Ribbon Marketing in
2000, 1999 and 1998, respectively, and is heavily dependent on the sales to
the related company.
The financial instruments that are exposed to concentration of credit risk
consist primarily of cash and accounts receivable from related companies.
Cash is maintained with major banks in the PRC. The Company's business
activity is with related companies in the PRC.
F - 15
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
19. COMMITMENTS AND CONTINGENCIES
Blue Ribbon Group entered into licensing arrangements with Pabst Brewing
Company whereby Blue Ribbon Group was granted the exclusive right to
produce and market products under four specific Pabst trademarks in the
PRC, the non-exclusive right to market such products in other Asian
countries except Hong Kong, Macau, Japan and South Korea, and the right to
sublicense the use of the trademarks to any other enterprise in the PRC.
Pursuant to the terms of the sublicense agreement, Blue Ribbon Group
granted the Company the right to use two specific Pabst trademarks for the
production, promotion, distribution and sale of beer under such trademarks.
The production right of the Company is confined exclusively to Guangdong
Province only and it does not preclude High Worth Brewery's production
rights in Guangdong as described in (a) and (b) below.
The sublicense agreement is valid until November 7, 2003. In consideration
for the sublicense granted, the Company is obligated to pay Blue Ribbon
Group a royalty fee of US$0.10 for each carton of bottled or canned beer
produced (see note 15c).
A provisional agreement, subject to governmental approval, was made on May
10, 1995 among CBR and a subsidiary, the group companies of Noble China
Inc., and Blue Ribbon Group to the effect that:
(a) High Worth Brewery was entitled to be granted from Blue Ribbon Group
the right to brew and sell beer under the Pabst Blue Ribbon label
produced in its brewing facilities up to a maximum production capacity
of 100,000 tons per annum.
(b) High Worth Brewery and/or companies that High Worth Brewery has an
interest in are entitled to be granted a sublicense from Blue Ribbon
Group with the right to produce and sell beer under the Pabst Blue
Ribbon label in the Guangdong Province of the PRC (an "Additional
Facility") to a maximum production capacity of 300,000 tons per annum.
In the event that High Worth Brewery desires to obtain a sublicense
for an Additional Facility, Goldjinsheng has the right to purchase up
to a 40% interest in such Additional Facility. The purchase price for
such interest shall be the actual cost of such Additional Facility
multiplied by the percentage interest that Goldjinsheng elects to
purchase.
F - 16
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
19. COMMITMENTS AND CONTINGENCIES - continued
(c) A proposed new marketing company (the "New Marketing Company"), owned
8% by Blue Ribbon Group, 52% by High Worth Brewery and 40% by
Goldjinsheng, shall be formed to handle and organize the sales of
Pabst Blue Ribbon beer produced by Zhaoqing Brewery and the Company.
Zhaoqing Brewery and the Company will each create a separate
distribution company or division of their own. The respective
distribution companies will appoint the New Marketing Company as their
sole and exclusive agent to market Pabst Blue Ribbon beer in the PRC.
Another agreement was made on May 10, 1995 among Goldjinsheng, Blue Ribbon
Group and the Company to the effect that the Company agreed to pay Blue
Ribbon Group management fees of RMB2,035,000 per annum for a period of five
years commencing January 1, 1995 (see note 15c).
Contingencies related to concentration of risks are discussed in note 18.
F - 17
INDEX TO EXHIBITS
Exhibit
Number Description of Document
- ------- ------------------------
2.1 (P) Share Exchange Agreement, dated November 1994, with Amendment
among the Company, Oriental Win and Holdings.(1)
3(i).1 (P) Articles of Incorporation and Amendments.(2)
3(i).2 (P) Certificate of Amendment of Articles of Incorporation.(3)
3(ii) (P) Bylaws.(2)
10.1 (P) Joint Venture Agreement dated June 10, 1993 between Zhaoqing
Brewery and Goldjinsheng regarding Noble Brewery with amendments,
with English translation.(3)
10.2 (P) Joint Venture Agreement dated May 6, 1994 between Guangdong
Blue Ribbon and Holdings, as supplemented by Supplementary Joint
Venture Agreement dated September 5, 1994 among Holdings,
Guangdong Blue Ribbon and Star Quality Ltd. regarding Zhaoqing
High Worth, with English translation.(3)
10.3 (P) Assets Transferring Agreement dated September 6, 1994 among
Guangdong Blue Ribbon, Zhaoqing Brewery and High Worth JV
regarding High Worth JV, with English translation.(3)
10.4 (P) Agreement on License of Transferring and Using the registered
trademarks of Pabst Blue Ribbon dated August 30, 1993, between
Pabst Zhaoqing and Pabst US, with English translation.(3)
10.5 (P) Agreement on Quality of Pabst Beer dated August 30, 1993
between Pabst Zhaoqing and Pabst US, with English translation.(3)
10.6 (P) Power of Attorney between Pabst US and Pabst Zhaoqing, dated
August 30, 1993.(3)
10.7 (P) Sublicense Agreement on Using the Registered Trademarks of
Pabst Blue Ribbon dated October 12, 1993 between Pabst Zhaoqing
and Noble Brewery, with English translation.(3)
10.8 (P) Sublicense on Using the Registered Trademarks of Pabst Blue
Ribbon dated May 6, 1994 between Pabst Zhaoqing and High Worth
JV, with English translation.(3)
10.9 (P) Transferring Agreement dated May 20, 1994 among Pabst Zhaoqing,
Pabst US and Guangdong Blue Ribbon, with English Translation.(3)
INDEX TO EXHIBITS (CONTINUED)
Exhibit
Number Description of Document
- -------- ------------------------
10.10 (P) Deed dated December 5, 1994 between Oriental Win and Holdings
regarding the Shareholder Loan, with supplementary
documentation.(3)
10.11 Long Term Purchase Agreement dated April 1, 1995 between the
Marketing Company and Zhaoqing Brewery (English Translation).(4)
10.12 Long Term Purchase Agreement dated July 11, 1995 between the
Marketing Company and Noble Brewery (English Translation).(4)
10.13 (C) 1998 Stock Option Plan.(5)
10.14 Joint Venture Agreement dated January 13, 1998 between High
Worth JV and Zao Yang Brewery regarding Zao Yang High Worth
Brewery (English Translation).(5)
10.15 Joint Venture Agreement dated October 18, 1999 between March
International Group Limited, Jilin Province Juetai City Brewery
and Jilin Province Chuang Xiang Zhi Yie Ltd. regarding Jilin
Lianli Brewery (English Translation).(6)
21 Subsidiaries of the Company.(6)
23 Consent of Independent Auditors.(6)
- --------------------
(1) Filed as an Exhibit to the Company's Current Report on Form 8-K filed on
December 30, 1994, and incorporated herein by reference.
(2) Filed as Exhibits to the Company's Registration Statement No. 33- 26617A on
Form S-18 dated January 19, 1989, and incorporated herein by reference.
(3) Filed as Exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, and incorporated herein by reference.
(4) Filed as Exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, and incorporated herein by reference.
(5) Filed as Exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, and incorporated herein by reference.
(6) Filed herein.
(P) Indicates that the document was originally filed with the Securities and
Exchange Commission in paper form and that there have been no changes or
amendments to the document which would require filing of the document
electronically with this Annual Report on Form 10-K.
(C) Indicates compensatory plan, agreement or arrangement.