UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2002
[ ] 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
- ------------------------------- ----------------------
(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
Not applicable
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of June 30, 2002, the Company had 5,010,013 shares of Class A Common Stock
and 3,000,000 shares of Class B Common Stock issued and outstanding.
Documents incorporated by reference: None
1
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2002 (Unaudited) and
December 31, 2001
Consolidated Statements of Operations (Unaudited) - Three
Months and Six Months Ended June 30, 2002 and 2001
Consolidated Statements of Cash Flows (Unaudited) - Six Months
Ended June 30, 2002 and 2001
Notes to Consolidated Financial Statements (Unaudited) - Three
Months and Six Months Ended June 30, 2002 and 2001
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2002 December 31, 2001
------------------------- -----------------------
RMB USD RMB USD
------------ ----------- ----------- ----------
(Unaudited) (Unaudited)
ASSETS
Current assets:
Cash 97,859,107 11,790,254 71,366,480 8,598,371
Accounts receivable, net (Note 3) 47,195,336 5,686,185 59,978,050 7,226,271
Bills receivable 23,289,512 2,805,965 4,465,000 537,952
Inventories (Note 4) 62,800,995 7,566,385 53,313,982 6,423,371
Amounts due from related
companies (Note 5) 922,298 111,120 1,069,599 128,867
Income taxes receivable 1,927,759 232,260 - -
Prepayments and deposits 18,417,325 2,218,955 14,827,385 1,786,432
Other receivables 33,812,086 4,073,745 11,460,511 1,380,784
------------ ----------- ----------- ----------
Total current assets 286,224,418 34,484,869 216,481,007 26,082,048
Interest in an associated company
(Note 6) 201,403,609 24,265,495 259,164,383 31,224,624
Property, plant and equipment, net
(Note 7) 167,726,140 20,207,969 217,668,104 26,225,073
------------ ----------- ----------- ----------
Total assets 655,354,167 78,958,333 693,313,494 83,531,745
============ =========== =========== ==========
(continued)
3
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
June 30, 2002 December 31, 2001
------------------------- -----------------------
RMB USD RMB USD
------------ ----------- ----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings 110,104,000 13,265,542 109,835,524 13,233,196
Accounts payable 21,273,804 2,563,109 21,699,421 2,614,388
Accrued liabilities 174,798,340 21,060,041 144,429,286 17,401,119
Amounts due to related companies
(Note 5) 5,317,395 640,650 2,435,577 293,443
Amount due to an associated company
(Note 8) 236,978,917 28,551,677 210,805,218 25,398,219
Sales taxes payable 18,963,264 2,284,731 23,160,813 2,790,459
------------ ----------- ----------- ----------
Total current liabilities 567,435,720 68,365,750 512,365,839 61,730,824
------------ ----------- ----------- ----------
Long-term liabilities:
Bank borrowings 11,533,872 1,389,623 12,400,211 1,494,001
Advance from a related company
(Note 9) 11,000,000 1,325,301 - -
------------ ----------- ----------- ----------
Total long-term liabilities 22,533,872 2,714,924 12,400,211 1,494,001
------------ ----------- ----------- ----------
Minority interests (Note 10) - - - -
Contingencies (Note 12)
Common stock:
-Class A, US$0.0001 par value,
90,000,000 shares authorized,
5,010,013 shares outstanding 4,273 515 4,273 515
------------ ----------- ----------- ----------
-Class B, US$0.0001 par value,
10,000,000 shares authorized,
3,000,000 shares outstanding 2,559 308 2,559 308
Additional paid-in capital 107,361,845 12,935,162 107,361,845 12,935,162
General reserve and enterprise
development funds 18,735,220 2,257,255 16,108,349 1,940,765
Retained earnings (loss) (60,719,322) (7,315,581) 45,070,418 5,430,170
------------ ----------- ----------- ----------
Total shareholders' equity 65,384,575 7,877,659 168,547,444 20,306,920
------------ ----------- ----------- ----------
Total liabilities and shareholders'
equity 655,354,167 78,958,333 693,313,494 83,531,745
============ =========== =========== ==========
See accompanying notes to the consolidated financial statements.
4
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Six Months
Three Months Ended Six Months Ended Ended Ended
June 30, 2002 June 30, 2002 June 30, 2001 June 30, 2001
--------------------------- --------------------------- ------------- -------------
RMB USD RMB USD RMB RMB
------------- ------------ ------------- ------------ ------------- -------------
Sales 168,589,456 20,311,983 359,925,549 43,364,524 192,837,639 409,960,259
Sales taxes (5,103,886) (614,926) (10,834,415) (1,305,351) (5,780,975) (10,436,084)
------------- ------------ ------------- ------------ ------------- -------------
Net sales 163,485,570 19,697,057 349,091,134 42,059,173 187,056,664 399,524,175
Cost of sales, including net inventory
transferred from an associated
company of RMB 17,514,900 and
RMB 28,254,886 for the three months
and six months ended June 30, 2002,
respectively, and RMB 18,240,342 and
RMB 29,545,589 for the three and six
months ended June 30, 2001,
respectively; inventory purchased from
related companies of RMB 71,309,618
and RMB 162,579,745 for the three
months and six months ended June 30,
2002, respectively, and
RMB 80,287,424 and RMB 185,969,421
for the three months and six months
ended June 30, 2001, respectively;
and royalty fee paid to a related
company of RMB 961,837 and
RMB 1,827,555 for the three months
and six months ended June 30, 2002,
respectively, and RMB 995,719 and
RMB 1,908,461 for the three months
and six months ended June 30, 2001,
respectively (Note 5) (108,693,349) (13,095,584) (237,371,462) (28,598,971) (144,716,268) (304,063,349)
------------- ------------ ------------- ------------ ------------- -------------
Gross profit 54,792,221 6,601,473 111,719,672 13,460,202 42,340,396 95,460,826
Selling, general and administrative
expenses (65,251,702) (7,861,651) (124,378,992) (14,985,421) (57,418,890) (127,072,619)
Impairment of property, plant and
equipment (Note 7) (40,000,000) (4,819,277) (40,000,000) (4,819,277) - (2,750,000)
Investment in subsidiary written off
(Note 7) - - - - (1,224,109) (1,224,109)
Restructuring costs (Note 11) - - - - (21,321,182) (21,321,182)
------------- ------------ ------------- ------------ ------------- -------------
Operating loss (50,459,481) (6,079,455) (52,659,320) (6,344,496) (37,623,785) (56,907,084)
Interest income 122,913 14,809 255,272 30,756 227,871 467,700
Interest expense (2,025,098) (243,990) (4,323,102) (520,857) (1,668,739) (4,120,729)
------------- ------------ ------------- ------------ ------------- -------------
Loss before income taxes, minority
interests and equity in (loss)
earnings of an associated company (52,361,666) (6,308,636) (56,727,150) (6,834,597) (39,064,653) (60,560,113)
Income taxes (325,894) (39,264) (325,894) (39,264) (929,248) (1,664,580)
------------- ------------ ------------- ------------ ------------- -------------
Loss before minority interests and
equity in (loss) earnings of an
associated company (52,687,560) (6,347,900) (57,053,044) (6,873,861) (39,993,901) (62,224,693)
Minority interests (Note 10) (18,553,467) (2,235,357) (18,553,467) (2,235,357) 10,333,776 18,669,258
------------- ------------ ------------- ------------ ------------- -------------
Loss before equity in (loss)
earnings of an associated company (71,241,027) (8,583,257) (75,606,511) (9,109,218) (29,660,125) (43,555,435)
Equity in (loss) earnings of an
associated company (31,472,172) (3,791,828) (27,556,358) (3,320,043) 2,584,021 8,066,242
------------- ------------ ------------- ------------ ------------- -------------
Net loss for the period (102,713,199) (12,375,085) (103,162,869) (12,429,261) (27,076,104) (35,489,193)
============= ============ ============= ============ ============= =============
Net loss per common share
(Note 1)
- basic and diluted (12.82) (1.54) (12.88) (1.55) (3.38) (4.43)
============= ============ ============= ============ ============= =============
Weighted average number of common
shares outstanding
- basic and diluted 8,010,013 8,010,013 8,010,013 8,010,013 8,010,013 8,010,013
============= ============ ============= ============ ============= =============
See accompanying notes to the consolidated financial statements.
5
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
--------------------------- -----------------
RMB USD RMB
------------- ------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (103,162,869) (12,429,261) (35,489,193)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Allowance for doubtful accounts 13,280,883 1,600,107 15,600,000
Depreciation and amortization 14,297,155 1,722,549 15,692,058
Impairment of property, plant and equipment 40,000,000 4,819,277 2,750,000
Write-off of investment in subsidiary - - 1,224,109
Minority interests 18,553,467 2,235,357 (18,669,258)
Equity in loss (earnings) of an
associated company 27,556,358 3,320,043 (8,066,242)
Changes in operating assets and liabilities:
(Increase) decrease in -
Accounts receivable (498,169) (60,021) (30,899,780)
Bills receivable (18,824,512) (2,268,013) 10,277,740
Inventories (9,487,013) (1,143,014) 17,758,195
Amounts due from related companies 147,301 17,747 (3,788,866)
Income taxes receivable (1,927,759) (232,260) -
Prepayments and deposits (3,589,940) (432,523) (16,226,415)
Other receivables (22,351,575) (2,692,961) (16,715,492)
Increase (decrease) in -
Accounts payable (425,617) (51,279) (206,282)
Accrued liabilities 30,369,054 3,658,922 31,214,482
Amount due to an associated company 26,173,699 3,153,458 64,964,147
Income taxes payable - - 108,069
Sales taxes payable (4,197,549) (505,728) (3,835,964)
------------- ------------ -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,912,914 712,400 25,691,308
------------- ------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (4,355,191) (524,722) (2,767,623)
------------- ------------ -----------------
NET CASH USED IN INVESTING ACTIVITIES (4,355,191) (524,722) (2,767,623)
------------- ------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
New bank borrowings 49,000,000 5,903,614 534,607
Repayment of bank borrowings (49,597,863) (5,975,646) (23,000,000)
Advance from a related company 11,000,000 1,325,301 -
Increase (decrease) in amounts due to
related companies 263,351 31,730 (7,700,159)
Dividend received from an associated company 30,204,416 3,639,086 -
Payment of cash dividend to minority interest (15,935,000) (1,919,880) -
------------- ------------ -----------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 24,934,904 3,004,205 (30,165,552)
------------- ------------ -----------------
Net increase (decrease) in cash 26,492,627 3,191,883 (7,241,867)
Cash at beginning of period 71,366,480 8,598,371 90,313,060
------------- ------------ -----------------
Cash at end of period 97,859,107 11,790,254 83,071,193
============= ============ =================
See accompanying notes to the consolidated financial statements.
6
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
CBR Brewing Company, Inc. (the "Company", which term shall include, when the
context so requires, subsidiaries and affiliates), 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.
At December 31, 2001, the Company's then principal shareholder was Shenzhen
Huaqiang Holdings Limited ("Huaqiang"), incorporated in the People's Republic of
China (the "PRC"), which owned indirectly 63.2% of the outstanding Class A
common stock and 80% of the outstanding Class B common stock. Huaqiang is a
company controlled by the Province of Guangdong. Effective January 10, 2002,
Zhaoqing City Lan Wei Alcoholic Beverage (Holdings) Limited ("Lan Wei") acquired
from Huaqiang all of its equity interest in the Company. The transaction has
been approved by the relevant PRC governmental authorities in April 2002. Lan
Wei is a company controlled by the City of Zhaoqing.
In February 2002, Lan Wei acquired common shares representing an additional
approximately 7.2% equity interest in the Company from a third party in a
private transaction. Management and the board of directors of the Company were
changed on January 22, 2002. As part of the transaction, Lan Wei also acquired
Huaqiang's 19.6% equity interest in Noble China. Inc., a public company traded
on the Toronto Stock Exchange.
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 Group Co., Ltd. ("Guangdong Blue Ribbon"), which, through
an assignment and transfer, obtained its license from Pabst Brewing Company
("Pabst US"). The term of this sub-license will expire on November 7, 2003.
The Company is a holding company and its principal subsidiaries are engaged in
the production and sale of beer in the PRC. The Company's wholly-owned
subsidiary, High Worth Holdings Limited ("Holdings"), is a holding company that
was formed to effect the acquisition of a 60% interest in Zhaoqing Blue Ribbon
High Worth Brewery Ltd. ("High Worth JV"). High Worth JV is a Sino-foreign
equity joint venture enterprise that was registered in the PRC on July 2, 1994
in which Guangdong Blue Ribbon, an unrelated joint stock limited company
incorporated in the PRC, and Holdings hold 40% and 60% interests, respectively.
On October 31, 1994, High Worth JV acquired a 100% interest in Zhaoqing Brewery,
including Zhaoqing Brewery's 40% interest in Zhaoqing Blue Ribbon Brewery Noble
Ltd. ("Noble Brewery"). Prior to the acquisition of the entire interest in
Zhaoqing Brewery by High Worth JV, Zhaoqing Brewery was a wholly-owned
subsidiary of Guangdong Blue Ribbon. Noble Brewery is a Sino-foreign equity
joint venture enterprise which was 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
Noble Brewery are both engaged in the production and sale of beer products in
the PRC.
In April 1995, Zhaoqing Brewery ceased the production of Zhaoqing beer and
commenced the production of Pabst Blue Ribbon beer. Pursuant to the terms of a
sublicense agreement, Guangdong Blue Ribbon granted Zhaoqing Brewery the right
to produce and distribute Pabst Blue Ribbon beer under Pabst trademarks in the
PRC at a royalty fee of US$11.70 for each metric ton produced.
Noble Brewery's principal product line is Pabst Blue Ribbon beer under the Pabst
trademarks which were also granted by Guangdong Blue Ribbon. Pursuant to the
terms of a sublicense agreement, Guangdong Blue Ribbon granted Noble Brewery 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 Noble Brewery is confined exclusively to the Guangdong
Province and it does not preclude High Worth JV's production right in Guangdong.
The sublicense agreement is valid until November 7, 2003. In consideration for
the sublicense
7
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
granted, Noble Brewery is committed to pay Guangdong Blue Ribbon 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 (the
"Marketing Company") was registered as a limited company in the PRC and owned
70% by Zhaoqing Brewery and 30% by Guangdong Blue Ribbon. The Marketing Company
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 Noble Brewery. The Marketing Company started to purchase beer products from
Zhaoqing Brewery and Noble Brewery in April 1995 and July 1995, respectively.
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 JV pursuant to the original Joint Venture Agreement,
the Asset Transfer Agreement signed in May 1994, and the relevant government
regulations. Subject to the completion of certain legal procedures and
documentation, investments in Noble Brewery and the Marketing Company will be
transferred to High Worth JV. Zhaoqing Brewery is currently acting as the
nominee for High Worth JV with respect to the investments in Noble Brewery and
the Marketing Company. Accordingly, when the following context so requires,
Zhaoqing Brewery and High Worth JV are used interchangeably to refer to the same
entity.
Upon the completion of the required procedures and documentation, all of the
assets and liabilities formerly controlled by Zhaoqing Brewery would then be
transferred to High Worth JV. Since January 1996, the operating activities of
Zhaoqing Brewery have been part of High Worth JV. The Company is expecting the
completion of the approval procedures by the end of 2002.
On January 13, 1998, High Worth JV entered into a joint venture contract with
Zao Yang Brewery in Hubei Province to establish a new brewery. The new brewery
was designated Zao Yang Blue Ribbon High Worth Brewery Limited ("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. Zao Yang High Worth Brewery
commenced the production of Pabst Blue Ribbon beer in June 1998 based on the
sub-license granted by Guangdong Blue Ribbon in May 1998. Commencing June 1998,
the Marketing Company 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 Noble Brewery to be transferred
to Linchpin Holdings Limited ("Linchpin"), a wholly-owned subsidiary of Noble
China Inc. In March 1999, approval from the relevant PRC authorities for the
registration of the aforesaid transfer for Linchpin was obtained. Linchpin and
Zhaoqing Brewery currently own 60% and 40% equity interests in Noble Brewery,
respectively.
Effective December 31, 1997, the Company, through High Worth JV, entered into a
Settlement Agreement with Guangdong Blue Ribbon to acquire a 51% interest in
Sichuan Brewery, equivalent to an effective interest of 31%. Prior to the
completion of the 51% interest acquisition, 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%.
On June 5, 1999, 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 RMB 51,221,258. High Worth JV's 15% equity interest is
consideration-free but is entitled to share in the profits of Sichuan High Worth
Brewery.
8
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
During April 2001, as a result of continuing operating losses and adverse market
conditions, the Company conducted discussions with its partners in Sichuan High
Worth Brewery, resulting in an agreement to withdraw from Sichuan High Worth
Brewery. The Company agreed to give up its effective interest of 9% in Sichuan
High Worth Brewery, and was released from any liability for the brewery's
accumulated losses. As part of this agreement, Sichuan High Worth Brewery's
right to produce Pabst Blue Ribbon beer was terminated. This transaction did not
have any impact on the Company's results of operations or financial position,
since the sales of Sichuan High Worth Brewery in the Sichuan region have been
reallocated between Zhaoqing Brewery and Noble Brewery and the interest in
Sichuan High Worth Brewery was acquired for no consideration.
On October 18, 1999, Holdings, through its newly incorporated wholly-owned
subsidiary, March International Group Limited ("March International"), signed a
formal Joint Venture Agreement with Jilin Province Jiutai 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"). 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. As of December 31, 2001, the Company has written off a total of
RMB13,788,500 with respect to this investment. On July 9, 2002, March
International was formerly dissolved.
NOBLE CHINA INC. - Noble China Inc. has publicly reported that in May 1999 it
entered into a license agreement with Pabst US granting it the right 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.
In consideration for the license agreement, Noble China Inc. reported that it
had paid Pabst US US$5,000,000 for the right to use the Pabst Blue Ribbon
trademarks and agreed to pay royalties based on gross sales.
Management has met with representatives of Noble China Inc. in an attempt to
explore a potential settlement. 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 to
renew the Company's sub-license which expires on November 6, 2003 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. In view of the
uncertainty regarding the sub-license and combined with reduced sales and
continuing operating losses, the Company has made a reassessment of the fair
value of the property, plant and equipment. This reassessment resulted in the
recording of an impairment loss of RMB 40,000,000 during the three months ended
June 30, 2002. This impairment charge was based on certain assumptions regarding
the Company's future cash flows and other factors used to determine the fair
value of its property, plant and equipment. If these estimates or the related
assumptions change adversely in the future, the Company may be required to
record an additional impairment charge.
During December 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. Effective January 1, 2001, the management,
marketing, production and operations of Zhaoqing Brewery, Noble Brewery and the
Marketing Company were pooled together under a newly-created management entity
named "Blue Ribbon Enterprises" in order to achieve improved coordination of
human, financial, production and marketing activities. Under this arrangement:
(a) Certain administrative expenses of the Marketing Company, Zhaoqing
Brewery and Noble Brewery, as well as the total production volume of
Zhaoqing Brewery and Noble Brewery and the related direct variable
costs incurred for beer production of the two breweries, were pooled
and re-allocated among Zhaoqing Brewery and Noble Brewery at a 1 to 2
ratio, respectively, in proportion to each brewery's respective
production capacities. In order to maximize production efficiencies at
the current reduced levels of sales volume, Noble Brewery is currently
producing all of the beer sold by both Zhaoqing Brewery and Noble
Brewery.
9
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
(b) Certain direct selling expenses and advertising expenses incurred by
the Marketing Company relating to the sale of beer products from the
two breweries are allocated among Zhaoqing Brewery and Noble Brewery
at a 1 to 2 ratio, respectively, either through intercompany transfer
pricing adjustment or direct absorption.
The administrative, direct selling and advertising expenses of the Marketing
Company and the direct variable costs incurred for beer production of the two
breweries were allocated at cost. This pooled management structure is expected
to achieve greater efficiency and improved operating profitability. However,
Zhaoqing Brewery, Noble Brewery and the Marketing Company each remain as legally
distinct entities. The management committee is also responsible for commencing a
study to evaluate the formation of a new unified company.
Under the new management team, the Company implemented a restructuring program
that eliminated the positions of a total of 538 employees, of which 313 were
from Zhaoqing Brewery, 177 were from Noble Brewery and 48 were from the
Marketing Company. Restructuring payments to these employees totaled RMB
20,396,494 by Zhaoqing Brewery, RMB 8,729,830 by Noble Brewery and RMB 1,912,742
by the Marketing Company. The Company recorded restructuring costs of RMB
22,309,236 for the year ended December 31, 2001.
Noble China Inc. has recently publicly reported that it was experiencing severe
financial difficulties, was unable to meet its financial commitments and is
insolvent, and is considering various courses of action.
On July 19, 2002, Noble China Inc. announced that the Shandong Court ruled
against it and ordered it to pay claims of US$3,999,988 and RMB 20,000,000 plus
legal costs of RMB 541,210, and interest from June 21, 2001 within one month of
the judgment. The litigation was related to a claim by China Coastal Development
Ltd. (see Note 6). Noble China Inc. announced that it would appeal the Shandong
Court's decision to the Supreme Court of the PRC.
On July 22, 2002, Noble China Inc. held its Annual and General Meeting of
Shareholders. A Special Meeting of Shareholders and a Meeting of Debenture
holders were also held on July 22, 2002 to seek approval for certain amendments
to the 9% Convertible Subordinated Debentures and to the Trust Indenture
governing the Debentures. Noble China Inc. has CN$30,000,000 of outstanding
Debentures. As a result of ongoing discussions between the major Debenture
holder and indirectly a major shareholder of Noble China Inc., the City of
Zhaoqing, regarding a possible restructuring of Noble China Inc., the amendments
to the Debentures and to the Trust Indenture were not presented for a vote at
the Special Meeting of Shareholders and at the Meeting of Debenture holders;
both such meetings were instead adjourned to times and places to be determined.
The Board of Directors of Noble China Inc. was re-elected and confirmed its
short-term assistance to facilitate the negotiations between the major
shareholder of Noble China Inc. and the major Debenture holder. The Directors of
Noble China Inc. indicated that if the major shareholder and major Debenture
holder cannot reach a resolution on an appropriate restructuring plan that the
Board of Directors can support in the interest of all shareholders and Debenture
holders within 60 days, the Board would resign.
The Company is currently unable to predict the effect that these recent
developments may have on future operations, including any effect on the
Company's ability to obtain a sub-license to produce and distribute Pabst Blue
Ribbon beer in China effective from November 7, 2003, or the impact on Noble
Brewery, the Company's affiliate (See Note 6)
10
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The unaudited consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The unaudited consolidated financial statements
include the results of operations of Zhaoqing Brewery, the Marketing Company and
Zao Yang High Worth Brewery on a consolidated basis and Noble Brewery under the
equity method of accounting for investments. Commencing April 1, 2001, the
operations of Jilin Lianli Brewery have been excluded from the Company's
consolidated financial statements. The unaudited consolidated financial
statements include the Marketing Company, as the Company has effective control
of the Marketing Company through its board of directors.
COMMENTS - The accompanying consolidated financial statements are unaudited, but
in the opinion of the management of the Company, contain all adjustments, which
include normal recurring adjustments, necessary to present fairly the Company's
financial position at June 30, 2002, its results of operations for the three
months and six months ended June 30, 2002 and 2001, and its cash flows for the
six months ended June 30, 2002 and 2001. The consolidated balance sheet as of
December 31, 2001 is derived from the Company's audited financial statements.
Certain information and footnote disclosures normally included in financial
statements that have been prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission, although management of
the Company believes that the disclosures contained in these financial
statements are adequate to make the information presented therein not
misleading. These unaudited interim consolidated financial statements should be
read in conjunction with the audited consolidated financial statements included
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2001, as filed with the Securities and Exchange Commission. A summary of the
Company's significant accounting policies is included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2001.
The results of operations for the three months and six months ended June 30,
2002 are not necessary indicative of the results of operations to be expected
for the full fiscal year ending December 31, 2002.
GOING CONCERN - The accompanying unaudited consolidated financial statements
have been prepared assuming that the Company will continue as a going concern,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The carrying amounts of assets and liabilities
presented in the accompanying unaudited consolidated financial statements do not
purport to represent the realizable or settlement values. The Company has
suffered recurring operating losses and had a working capital deficit at
December 31, 2001 and June 30, 2002. The Company's independent certified public
accountants, in their independent auditors' report on the consolidated financial
statements as of and for the year ended December 31, 2001, have expressed
substantial doubt about the Company's ability to continue as a going concern.
During 2001, the Company experienced decreased sales and a net loss for the
second successive year, reduced cash flows, diminished working capital, and
intense competition. These pressures continued during the three months and six
months ended June 30, 2002, and are expected to continue for the remainder of
2002, resulting in continuing net losses. The Company has implemented an
overhaul of its operations and marketing programs through the efforts of the
management committee. With the pooling of the resources of Zhaoqing Brewery,
Noble Brewery and the Marketing Company, the Company implemented a large scale
restructuring plan in 2001 in which almost one-third of the work force was
eliminated. Although effective control of the Company changed on January 22,
2002 and a new management team was appointed to operate the Company in 2002, the
Company anticipates that the consolidation plan will continue. The Company
believes that it has the
11
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
requisite operating and financial resources to continue its operations during
2002. However, there can be no assurances that the Company will be able to
re-establish sales volume growth and to return to profitability in the near
term. Should the Company not return to profitability in the near future, the
Company may 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 remainder of 2002. However,
due to declining sales and diminishing working capital resources during 2002,
the Company has revised its capital expenditures plan. Approximately 25% of the
2002 annual repair and maintenance budget scheduled for Zhaoqing Brewery and
Noble Brewery has been deferred until 2003.
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,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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, the functional currency and the currency of the PRC. 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. Foreign currency exchange gains or losses
are included in the unaudited consolidated statements of operations.
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.
COMPREHENSIVE INCOME - The Company reports comprehensive income in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". Comprehensive income is defined to include all changes in
equity during a period from non-owner sources. Comprehensive loss equaled net
loss for the three months and six months ended June 30, 2002 and 2001.
NET INCOME (LOSS) PER COMMON SHARE ("EPS") - Basic EPS excludes the dilutive
effects of stock 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 reflects the potential dilution that would occur if securities or other
contracts to issue common stock, such as convertible preferred stock, warrants
to purchase common stock and common stock options, were exercised or converted
into common stock.
At June 30, 2002, potentially dilutive securities representing 200,000 shares of
common stock were outstanding, consisting of stock options to purchase 60,000
shares exercisable at $3.87 per share and 140,000 shares exercisable at $0.72
per share. At June 30, 2001, potentially dilutive securities representing
580,000 shares of common stock were outstanding, consisting of stock options to
purchase 220,000 shares at prices ranging from $3.87 to $4.26 per share, and
360,000 shares at prices ranging from $0.72 to $0.79 per share.
12
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
For the three months ended June 30, 2002 and 2001, 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 for all periods presented, and thus would have been
anti-dilutive. Accordingly, basic and diluted EPS are the same for all periods
presented.
NEW ACCOUNTING PRONOUNCEMENTS - In June 2001, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"), which is effective
January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance
of goodwill amortization. In addition, SFAS No. 142 includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of the existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS No. 142 also requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption. The
adoption of SFAS No. 142 did not have a significant impact on the Company's
financial statement presentation and disclosures.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"). SFAS No. 143 addresses the diverse accounting
practices for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Company will be required
to adopt SFAS No. 143 effective January 1, 2003. The Company is reviewing SFAS
No. 143 to determine what effect, if any, its adoption will have on the
Company's financial statement presentation and disclosures.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"), which is effective January 1,
2002. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lives Assets to Be Disposed Of", and a portion of
APB Opinion No. 30, "Reporting the Results of Operations". SFAS No. 144 provides
a single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value or and the carrying amount. SFAS No. 144 also requires expected
future operating losses from discontinued operations to be displayed in the
period(s) in which the losses are incurred, rather than as of the measurement
date as presently required. The adoption of SFAS No. 144 did not have a
significant impact on the Company's financial statement presentation and
disclosures.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. Such costs covered by
the standard include lease termination costs and certain employee severance
costs that are associated with a restructuring, discontinued operation, plant
closing, or other exit or disposal activity. SFAS No. 146 replaces the previous
accounting guidance provided by the Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002 and the Company does not anticipate that the statement
will have a material impact on the Company's financial statements or results of
operations.
3. ACCOUNTS RECEIVABLE
The balance of accounts receivable is net of the amount provided for doubtful
accounts. Allowance for doubtful accounts provided during the three months and
six months ended June 30, 2002 was RMB 6,780,885 and RMB 13,280,885,
respectively, as compared to RMB 9,300,000 and RMB 15,600,000 for the three
months and six months ended June 30, 2001, respectively. The movement of
allowance for doubtful accounts is as follow:
13
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
3. ACCOUNTS RECEIVABLE (continued)
2002 2001
------------------------- ------------------------
RMB USD RMB USD
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ----------- ----------- -----------
Balance as at January 1, 104,632,067 12,606,273 81,652,544 9,837,656
Doubtful debts provision made
March 31, 6,500,000 783,133 6,300,000 759,036
------------ ----------- ----------- -----------
Balance as at March 31, 111,132,067 13,389,406 87,952,544 10,596,692
Doubtful debts provision made
June 30, 6,780,883 816,974 9,300,000 1,120,482
Written off during the period (32,052,974) (3,861,804) - -
------------ ----------- ----------- -----------
Balance as at June 30, 85,859,976 10,344,576 97,252,544 11,717,174
============ =========== =========== ===========
4. INVENTORIES
Inventories consisted of the following at June 30, 2002 and December 31, 2001:
June 30, 2002 December 31, 2001
------------------------- ------------------------
RMB USD RMB USD
------------ ----------- ----------- -----------
(Unaudited) (Unaudited)
Raw materials 27,595,688 3,324,782 24,120,013 2,906,026
Work in progress 5,886,258 709,188 5,802,324 699,075
Finished goods 29,319,049 3,532,415 23,391,645 2,818,270
------------ ----------- ----------- -----------
62,800,995 7,566,385 53,313,982 6,423,371
============ =========== =========== ===========
5. RELATED PARTIES TRANSACTIONS AND ARRANGEMENTS
(a) Sales of raw materials
The Company sold raw materials of RMB 12,973,714 and RMB 16,489,701 to Noble
Brewery during the six months ended June 30, 2002 and 2001, respectively.
(b) Purchases of beer products
During the six months ended June 30, 2002 and 2001, the Group purchased beer
products for resale from Noble Brewery amounting to RMB 162,579,745 and RMB
175,486,864, respectively, and the Group purchased beer products from Sichuan
High Worth Brewery for resale amounting to RMB nil and RMB 10,482,557,
respectively. The transactions were carried out on agreed terms between the
parties.
During the six months ended June 30, 2002 and 2001, the Group purchased RMB
41,228,600 and RMB 46,035,290 of beer products from Noble Brewery. This amount
represents the direct variable cost of producing these beer products.
(c) Royalty fee
During the six months ended June 30, 2002 and 2001, a royalty fee of RMB
1,827,555 and RMB 1,908,461, respectively, was payable to Guangdong Blue Ribbon
for the right to use Pabst trademarks in the PRC.
14
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
5. RELATED PARTIES TRANSACTIONS AND ARRANGEMENTS (continued)
(d) Amounts due from related companies
The amounts due from related companies primarily represented receivable balances
from Guangdong Blue Ribbon and its group of companies. The amounts are
unsecured, interest-free and repayable on demand.
(e) Amounts due to related companies
As of June 30, 2002 and December 31, 2001, the amounts due to related companies
consisted of payable balances to the following companies:
June 30, 2002 December 31, 2001
------------------------- ------------------------
RMB USD RMB USD
------------ ----------- ----------- -----------
(Unaudited) (Unaudited)
Guangdong Blue Ribbon 5,300,000 638,554 2,400,000 289,157
============ =========== =========== ===========
The balances in 2001 with group companies of Guangdong Blue Ribbon arose from
the purchases of raw materials. The amounts in 2002 with Guangdong Blue Ribbon
mainly consist of the balances of dividends payable and royalty fees.
The balances are unsecured, interest-free and repayable on demand.
(f) Loans to related companies
During the three months and six months ended June 30, 2002, Zao Yang High Worth
Brewery advanced RMB nil and RMB 5,500,000, respectively, to Guangdong Blue
Ribbon. The advance was unsecured, with no agreed-upon interest and no fixed
date of repayment. During the three months ended June 30, 2002, Guangdong Blue
Ribbon repaid in full the loans to Zao Yang High Worth Brewery.
As for other management arrangement, see Note 1 - NOBLE CHINA INC.
6. INTEREST IN AN ASSOCIATED COMPANY
The unlisted investment represents the Company's 40% equity interest in Noble
Brewery held by a 60% owned subsidiary. The condensed unaudited statements of
operations of Noble Brewery for the three months and six months ended June 30,
2002 and 2001 are presented below.
15
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
6. INTEREST IN AN ASSOCIATED COMPANY (continued)
Three Months Ended Six Months Ended Three Months Ended Six Months Ended
June 30, 2002 June 30, 2002 June 30, 2001 June 30, 2001
------------------------- ------------------------- ------------------- -----------------
RMB USD RMB USD RMB RMB
------------ ----------- ------------ ----------- ------------------- -----------------
Net sales 64,032,201 7,714,723 151,515,498 18,254,879 74,818,863 165,142,399
============ =========== ============ =========== =================== =================
Net loss (82,805,430) (9,976,558) (77,640,896) (9,354,325) (19,027,420) (5,946,867)
============ =========== ============ =========== =================== =================
The Company's
share of net
income (loss)
after adjustment
of unrealized
intercompany
profit and other
intercompany
adjustments (31,472,172) (3,791,828) (27,556,358) (3,320,043) 2,584,021 8,066,242
============ =========== ============ =========== =================== =================
The following is summarized financial information of Noble Brewery:
June 30, 2002 December 31, 2001
------------------------- -----------------------
RMB USD RMB USD
------------ ----------- ----------- ----------
(Unaudited) (Unaudited)
Current assets 219,440,983 26,438,672 261,423,849 31,496,850
Property, plant and equipment 277,216,443 33,399,572 360,162,062 43,393,020
Restricted bank deposits 35,700,000 4,301,205 35,700,000 4,301,205
------------ ----------- ----------- ----------
Total assets 532,357,426 64,139,449 657,285,911 79,191,075
============ =========== =========== ==========
Current liabilities 135,842,664 16,872,014 107,619,213 12,966,172
Deferred income taxes 13,218,000 1,592,530 13,218,000 1,592,530
Equity 383,296,762 45,674,905 536,448,698 64,632,373
------------ ----------- ----------- ----------
Total liabilities and equity 532,357,426 64,139,449 657,285,911 79,191,075
============ =========== =========== ==========
During the three months ended June 30, 2002, as a result of reduced sales and
continuing operating losses, Noble Brewery conducted an evaluation of the
carrying value of its property, plant and equipment, as well as the related
estimated future cash flows. As a result of this evaluation, Noble Brewery
recorded a provision for impairment of plant, machinery and equipment of RMB
65,000,000 at June 30, 2002. However, as discussed in note 1, Noble China Inc.,
the majority shareholder of Noble Brewery, is experiencing certain financial
difficulties. The Company is currently unable to predict the effect of Noble
China Inc.'s financial difficulties on Noble Brewery, including Noble China
Inc.'s ability to grant a sublicense to Noble Brewery to produce Pabst Blue
Ribbon beer.
On April 3, 2002, Noble Brewery was served with an preservation order from the
High Court of Shandong Province freezing a portion of its bank accounts with
aggregate balances of approximately RMB 35,700,000, in connection with
litigation between Noble China Inc., Shandong Noble Brewery Ltd. and China Coast
Property Development Ltd, with respect to Noble China Inc.'s 1994 investment in
Shandong Shouguang Brewery Co. Ltd. China Coast Property Development Ltd. is
asserting a total claim against Noble China Inc. of approximately RMB
53,100,000. Noble China Inc., through its wholly-owned subsidiary, Linchpin,
owns a 60% interest in Noble Brewery.
The court order specified that a total of RMB 53,100,000 was to be retained by
Noble Brewery pending resolution of the litigation. Accordingly, in addition to
the RMB 35,700,000 of funds frozen, Noble Brewery will also be obligated to
withhold potential dividend distributions or equity interests due to Linchpin
Holdings Limited of RMB 17,400,000.
16
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
6. INTEREST IN AN ASSOCIATED COMPANY (continued)
Noble Brewery has engaged legal counsel in the PRC to file a challenge to the
court order, but there can be no assurances that this effort will be successful.
As a consequence of the preservation order, the remaining cash not affected by
such court order has been transferred either to High Worth JV or the Marketing
Company in trust and is being held on behalf of Noble Brewery for the purpose of
funding the operations of Noble Brewery. As at June 30, 2002, High Worth JV and
the Marketing Company hold RMB nil and RMB 13,000,000, respectively, for the
account of Noble Brewery. The amount is included in cash and amount due to an
associated company in the accompanying unaudited balance sheet as of June 30,
2002.
Management of Noble Brewery believes that Noble Brewery's operations will not be
impaired as a result of the court order freezing a portion of its bank accounts,
and that Noble Brewery has adequate working capital resources to fund its
current operating requirements.
In May 2002, Noble Brewery declared a dividend distribution of RMB 75,511,040,
of which RMB 30,204,416 has been paid to High Worth JV, while the dividend
payable to Linchpin amounting to RMB 45,306,624 can only be remitted to Linchpin
when the preservation order is released and approval from the Foreign Exchange
Bureau is obtained.
On July 19, 2002, Noble China Inc. announced that the Shandong Court ruled
against it and ordered it to pay the amount of claims in the sum of US$3,999,988
and RMB 20,000,000 plus legal costs of RMB 541,210, and interest from June 21,
2001 within one month of the judgment. Noble China Inc. announced that it would
appeal the Shandong Court's decision to the Supreme Court of the PRC.
7. IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT AND WRITE-OFF OF INVESTMENT
IN SUBSIDIARY
During December 2000, the Company decided to terminate the production and
operation of Jilin Lianli Brewery, 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. During the three months ended March 31, 2001, the Company
recorded a further provision for impairment of plant, machinery and equipment at
Jilin Lianli Brewery of RMB 2,750,000. During the three months ended June 30,
2001, the Company wrote off its remaining investment in Jilin Lianli Brewery of
RMB 1,224,109. As of December 31, 2001, the Company has written off a total of
RMB 13,788,500 with respect to its investment in this subsidiary.
During the three months ended June 30, 2002, as a result of reduced sales,
continuing operating losses and various legal and business issues, the Company
conducted an evaluation of the carrying value of its property, plant and
equipment, as well as the related expected future cash flows. As a result of
this evaluation, the Company recorded a provision for impairment of plant,
machinery and equipment of RMB 40,000,000 at June 30, 2002. This impairment
charge was based on certain assumptions regarding the Company's future cash
flows and other factors used to determine the fair value of its property, plant
and equipment. If these estimates or the related assumptions change adversely in
the future, the Company may be required to record an additional impairment
charge.
8. AMOUNT DUE TO AN ASSOCIATED COMPANY
The amount due to an associated company represents amounts payable to Noble
Brewery. In 2001, these obligations resulted from the sale of beer products by
Noble Brewery to the Marketing Company, as well as from the sale of raw
materials and other beer products to Zhaoqing Brewery by Noble Brewery and other
recurring intercompany transactions. Subsequent to the Preservation Order (see
Note 6), Noble Brewery transferred the remaining cash not affected by the court
order either to High Worth JV or the Marketing Company in trust. This cash is
being held on behalf of
17
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
8. AMOUNT DUE TO AN ASSOCIATED COMPANY (continued)
Noble Brewery for the purpose of funding its operations. As at June 30, 2002,
High Worth JV and the Marketing Company hold RMB nil and RMB 13,000,000,
respectively, for the account of Noble Brewery. As of June 30, 2002 and December
31, 2001, the total amount due to an associated company was RMB 236,978,917 and
RMB 210,805,218, respectively, which was unsecured, interest-free and repayable
on demand.
9. ADVANCE FROM A RELATED COMPANY
During the three months and six months ended June 30, 2002, Zao Yang High Worth
Brewery received an advance of RMB 5,300,000 and RMB 11,000,000, respectively,
from its local partner, Zao Yang Brewery, which is the 45% shareholder of Zao
Yang High Worth Brewery. The advance due to Zao Yang Brewery was unsecured,
interest-free and had no fixed term of repayment. This advance has been utilized
to fund the working capital requirements of Zao Yang High Worth Brewery.
10. DIVIDEND TO MINORITY INTEREST AND MINORITY INTERESTS
During the three months ended June 30, 2002, the Board of Directors of High
Worth JV declared the 7th to 10th dividend distributions, entitling Holdings and
Guangdong Blue Ribbon to a total of approximately RMB 27,830,199 and RMB
18,553,467, respectively. 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. During the three months ended June 30, 2002, dividends of
RMB 27,830,199 and RMB 15,935,000 were distributed to Holdings and Guangdong
Blue Ribbon, respectively.
As a result of the substantial operating losses incurred by the Company during
the year ended December 31, 2001 and the six months ended June 30, 2002, and the
cumulative effect of paying dividends based on distributable earnings calculated
in accordance with PRC accounting standards, which were higher than the
distributable earnings determined under United States accounting standards, the
minority interests at June 30, 2002 reflected an aggregate debit balance of RMB
54,396,401. Since the minority interest parties have no legal obligation to fund
these obligations to the Company, the debit balance of RMB 54,396,401 was
charged to operations during the six months ended June 30, 2002. The Company
expects to continue to charge to operations any future debit balances of the
minority interest parties.
11. RESTRUCTURING COSTS
During May 2001, the Company implemented a restructuring program that eliminated
the position of a total of 504 employees, of which 310 were from Zhaoqing
Brewery, 170 were from Noble Brewery and 24 were from the Marketing Company.
Restructuring and termination payments to these employees totaled RMB 20,087,339
by Zhaoqing Brewery, RMB 8,319,588 by Noble Brewery and RMB 1,233,843 by the
Marketing Company. The Company recorded restructuring costs of RMB 21,321,182
for the three months and six months ended June 30, 2001. No such restructuring
costs were recorded for the three months and six months ended June 30, 2002.
12. CONTINGENCIES
Licensing - See Note 1 "Organization And Principal Activities - NOBLE CHINA
INC." for detailed discussion.
Legal Matters - See Note 6 "INTEREST IN AN ASSOCIATED COMPANY" for detailed
discussion.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2002 contains "forward-looking" statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, including statements that include the
words "believes", "expects", "anticipates", or similar expressions. 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, competition, and other statements of expectations,
beliefs, future plans and strategies, anticipated events or trends, and similar
expressions concerning matters that are not historical facts. The
forward-looking statements in this Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002 involve known and unknown risks,
uncertainties and other factors that could the cause actual results, performance
or achievements of the Company to differ materially from those expressed in or
implied by the forward-looking statements contained herein.
Summary of Business Operations and Corporate Structure:
The Company produces principally Pabst Blue Ribbon beer for distribution
throughout China. In general, the beer market in China is experiencing a steady
overall growth rate, although the growth in the Company's beer sales has been
hindered by the general softening in demand for premium beers and the intense
competitive environment in the Chinese beer market.
The Company's brewing facilities and primary operating entities are as
follows:
ZHAOQING BREWERY: The original facilities of Zhaoqing Brewery were
constructed between 1978 and 1980 with annual production capacity based on old
brewing technology of 50,000 metric tons or 425,000 barrels of beer. With the
implementation of the new brewing technology and the purchase of additional
equipment, Zhaoqing Brewery reached an annual production capacity of 100,000
metric tons or 850,000 barrels by the end of 1995. During March 1995, Zhaoqing
Brewery discontinued production of all domestic brands and commenced exclusive
production of Pabst Blue Ribbon beer on a full-scale basis. However, beer that
does not meet Pabst Blue Ribbon quality standards is generally packaged and
distributed as local brand beer.
NOBLE BREWERY: The original facilities of Noble Brewery were constructed
between 1988 and 1990 with annual production capacity of approximately 80,000
metric tons or 680,000 barrels of beer. During July 1994, a second brewing
facility was completed, which increased annual production capacity by an
additional 120,000 metric tons or 1,020,000 barrels of beer. The second brewing
facility commenced full-scale production during late 1994. Noble Brewery has
produced Pabst Blue beer exclusively since it commenced operations.
ZAO YANG HIGH WORTH BREWERY: 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 commenced the production of Pabst
Blue Ribbon beer in June 1998, and the Marketing Company began purchasing Zao
Yang High Worth Brewery's production of Pabst Blue Ribbon beer for distribution.
In addition, Zao Yang High Worth Brewery also produces domestic brand beer under
the brand name "Di Huang Quan" and sells directly to distributors in nearby
regions.
MARKETING COMPANY: During February 1995, the Marketing Company was
established to conduct the distribution, marketing and promotion throughout
China of the Pabst Blue Ribbon beer produced by the Company's breweries. The
Company owns a 42% net interest in the Marketing Company. The consolidated
financial statements include the results of operations of the Marketing Company
on a consolidated basis, as the Company has effective control of the board of
directors of the Marketing Company.
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The Marketing Company regulated the production of Pabst Blue Ribbon beer by
the Company's Pabst Blue Ribbon brewing facilities in 2002 and 2001 in
accordance with their respective production capacities in order to balance
warehouse inventory levels and accommodate projected market demand.
The Company conducts a substantial portion of its purchases through related
parties, and has additional significant continuing transactions with such
parties.
Overview:
The year ended December 31, 2001 was another difficult and disappointing
year for the Company, with decreased sales, increased costs, a net loss for the
second successive year, reduced cash flows, diminished working capital, and
intense competition. These pressures continued during the six months ended June
30, 2002, and the Company expects these pressures to further continue over the
near-term. As a result of the strong competition from foreign premium beer and
the aggressive pricing strategies of some major local breweries, management
anticipates that the market demand for high priced foreign premium labels will
be stagnant in 2002 as consumers continue to shift to lower priced beers. The
competition among major Chinese breweries to maintain market share is also
expected to place continuing pressure on the Company's operating results during
2002 and beyond.
The Company has implemented an overhaul of its operations and marketing
programs through the efforts of the management committee. With the pooling of
the resources of Zhaoqing Brewery, Noble Brewery and the Marketing Company, the
Company implemented a large scale restructuring plan in 2001 in which almost
one-third of the work force was eliminated. Although effective control of the
Company changed on January 22, 2002 and a new management team has been appointed
to operate the Company in 2002, the Company anticipates that the consolidation
plan will continue. In addition, the Company will continue to broaden its
product line through the introduction of new local brand beers and to
consolidate its distribution network.
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 continue its operations in 2002. However,
there can be no assurances that the Company will be able to re-establish sales
volume growth and to return to profitability in the near term. Should the
Company not return to profitability in the near future, the Company may consider
more severe restructuring alternatives.
The accompanying unaudited consolidated financial statements have been
prepared assuming that the Company will continue as a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The carrying amounts of assets and liabilities
presented in the accompanying unaudited consolidated financial statements do not
purport to represent the realizable or settlement values. The Company has
suffered recurring operating losses and had a working capital deficit at
December 31, 2001 and June 30, 2002. The Company's independent certified public
accountants, in their independent auditors' report on the consolidated financial
statements as of and for the year ended December 31, 2001, have expressed
substantial doubt about the Company's ability to continue as a going concern.
The Company anticipates that its operating cash flow, combined with cash on
hand, bank lines of credit, and other external credit sources, and the credit
facilities provided by affiliates or related parties, are adequate to satisfy
the Company's working capital requirements for the remainder of 2002. However,
due to declining sales and diminishing working capital resources, the Company
has revised its capital expenditures plan. Approximately 25% of the 2002 annual
repair and maintenance budget scheduled for Zhaoqing Brewery and Noble Brewery
has been deferred until 2003. If the foregoing assumptions prove to be
inaccurate, the Company's cash flow may be adversely affected, which would
negatively impact the ability of the Company to conduct operation at current
level.
20
During the three months ended June 30, 2002, as a result of reduced sales,
continuing operating losses and various legal and business issues, the Company
conducted an evaluation of the carrying value of its property, plant and
equipment, as well as the related expected future cash flows. As a result of
this evaluation, the Company recorded a provision for impairment of plant,
machinery and equipment of RMB 40,000,000 at June 30, 2002. In addition, during
the three months ended June 30, 2002, Noble Brewery also recorded a provision
for impairment of plant, machinery and equipment of RMB 65,000,000 as a result
of its reassessment of the fair value of its property, plant and equipment and
the related expected cash flow.
Licensing Arrangements and Relationship with Noble China Inc.:
Through a Sublicense Agreement dated May 6, 1994 between Pabst Zhaoqing,
the then subsidiary of Guangdong Blue Ribbon, 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.
The License Agreement expires on November 6, 2003.
Noble China Inc. is the 60% shareholder of Noble Brewery. Noble China Inc.
has publicly reported that in May 1999 it entered into a license agreement with
Pabst Brewing Company granting it the right 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. In consideration for
the license agreement, Noble China Inc. reported that it had paid Pabst Brewing
Company US$5,000,000 for the right to use the Pabst Blue Ribbon trademarks and
agreed to pay royalties based on gross sales.
Management has met with representatives of Noble China Inc. in an attempt
to explore a potential settlement. 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 to
renew the Company's sub-license which expires on November 6, 2003 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. In view of the
uncertainty regarding the sub-license and combined with reduced sales and
continuing operating losses, the Company has made a reassessment of the fair
value of the property, plant and equipment. This reassessment resulted in the
recording of an impairment loss of RMB 40,000,000 during the three months ended
June 30, 2002. This impairment charge was based on certain assumptions regarding
the Company's future cash flows and other factors used to determine the fair
value of its property, plant and equipment. If these estimates or the related
assumptions change adversely in the future, the Company may be required to
record an additional impairment charge.
During December 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. Effective January 1, 2001, the management,
marketing, production and operations of Zhaoqing Brewery, Noble Brewery and the
Marketing Company were pooled together under a newly-created management entity
named "Blue Ribbon Enterprises" to achieve improved coordination of human,
financial, production and marketing activities. Under this arrangement:
(a) Certain administrative expenses of the Marketing Company, Zhaoqing Brewery
and Noble Brewery, as well as the total production volume of Zhaoqing
Brewery and Noble Brewery and the related direct variable costs incurred
for beer production of the two breweries, were pooled and re-allocated
among Zhaoqing Brewery and Noble Brewery at a 1 to 2 ratio, respectively,
in proportion to each brewery's respective production capacities. In order
to maximize production efficiencies at the current reduced levels of sales
volume, Noble Brewery is currently producing all of the beer sold by both
Zhaoqing Brewery and Noble Brewery.
(b) Certain direct selling expenses and advertising expenses incurred by the
Marketing Company relating to the sale of beer products from the two
breweries are allocated among Zhaoqing Brewery and Noble Brewery at a 1 to
2 ratio, respectively, either through intercompany transfer pricing
adjustment or direct absorption.
The administrative, direct selling and advertising expenses of the
Marketing Company and the direct variable costs incurred for beer production of
the two breweries were allocated at cost. This pooled management structure is
expected to achieve greater efficiency and improved operating profitability.
However, Zhaoqing Brewery, Noble Brewery and the Marketing Company each remain
as legally distinct entities. The management committee is also responsible for
commencing a study to evaluate the formation of a new unified company.
21
The Company's controlling shareholder, Lan Wei, owns a 19.6% equity
interest in Noble China Inc., which it acquired in January 2002 as part of the
transaction in which it acquired a controlling interest in the Company. The
Company's prior controlling shareholder, Huaqiang, acquired this 19.6% equity
interest in Noble China Inc. during 2001.
Noble China Inc. has also recently publicly reported that it was
experiencing severe financial difficulties, was unable to meet its financial
commitments and is insolvent, and is considering various courses of action.
On July 19, 2002, Noble China Inc. announced that the Shandong Court ruled
against it and ordered it to pay claims of US$3,999,988 and RMB 20,000,000 plus
legal costs of RMB 541,210, and interest from June 21, 2001 within one month of
the judgment. Noble China Inc. announced that it would appeal the Shandong
Court's decision to the Supreme Court of the PRC.
On July 22, 2002, Noble China Inc. held its Annual and General Meeting of
Shareholders. A Special Meeting of Shareholders and a Meeting of Debenture
holders were also held on July 22, 2002 to seek approval for certain amendments
to the 9% Convertible Subordinated Debentures and to the Trust Indenture
governing the Debentures. Noble China Inc. has CN$30,000,000 of outstanding
Debentures. As a result of ongoing discussions between the major Debenture
holder and indirectly a major shareholder of Noble China Inc., the City of
Zhaoqing, regarding a possible restructuring of Noble China Inc., the amendments
to the Debentures and to the Trust Indenture were not presented for a vote at
the Special Meeting of Shareholders and at the Meeting of Debenture holders;
both such meetings were instead adjourned to times and places to be determined.
The Board of Directors of Noble China Inc. was re-elected and confirmed its
short-term assistance to facilitate the negotiations between the major
shareholder of Noble China Inc. and the major Debenture holder. The Directors of
Noble China Inc. indicated that if the major shareholder and major Debenture
holder cannot reach a resolution on an appropriate restructuring plan that the
Board of Directors can support in the interest of all shareholders and Debenture
holders within 60 days, the Board would resign.
The Company is currently unable to predict the effect that this development
may have on future operations, including any effect on the Company's ability to
obtain a sub-license to produce and distribute Pabst Blue Ribbon beer in China
effective from November 7, 2003, or the impact on Noble Brewery, the Company's
affiliate (See Note 6)
Critical Accounting Policies:
The Company prepares its consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Management periodically evaluates the estimates and judgments made,
including those related to interest in an associated company, bad debts and
income taxes. Management bases their estimates and judgments on historical
experience and on various factors that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates as a result of
different assumptions or conditions.
The following critical accounting policies affect the more significant
judgments and estimates used in the preparation of the Company's consolidated
financial statements.
Interest in an Associated Company:
The Company accounts for its 40% interest in Noble Brewery using the equity
method of accounting. At June 30, 2002, the total value of the Company's
interest in Noble Brewery was RMB 201,403,609, representing 30.7% of the
Company's total assets. At December 31, 2001, the total value of the Company's
interest in Noble Brewery was RMB 259,164,383, representing 37.4% of the
Company's total assets. The net sales of Noble Brewery for the six months ended
June 30, 2002 decreased by RMB 13,626,901 or 8.3% to RMB 151,515,498, as
compared to RMB 165,142,399 for the six months ended June 30, 2001. During the
22
three months ended June 30, 2002, as a result of reduced sales and continuing
operating losses, Noble Brewery conducted an evaluation of the carrying value of
its property, plant and equipment, as well as the related estimated future cash
flows, as a result of which Noble Brewery recorded a provision for impairment of
plant, machinery and equipment of RMB 65,000,000. As a result of these factors,
the Company's share of net loss from Noble Brewery for the six months ended June
30, 2002 increased by RMB 35,622,600 or 441.6% to RMB 27,556,358, as compared to
net income of RMB 8,066,242 for the six months ended June 30, 2001. In assessing
the impairment of its interest in an associated company, the Company uses
assumptions regarding the estimated future cash flows and other factors to
determine the fair value of its investment. If these estimates or the related
assumptions change in the future, the Company may be required to record
impairment charges for this investment. In addition, as discussed in note 1,
Noble China Inc., the majority shareholder of Noble Brewery, is experiencing
certain financial difficulties. The Company is currently unable to predict the
effect of Noble China Inc.'s financial difficulties on Noble Brewery, including
Noble China Inc.'s ability to grant a sublicense to Noble Brewery to produce
Pabst Blue Ribbon beer.
Income Taxes:
The Company records a valuation allowance to reduce its deferred tax assets
to the amount that is more likely than not to be realized. In the event the
Company was to determine that it would be able to realize its deferred tax
assets in the future in excess of its recorded amount, an adjustment to the
deferred tax asset would be credited to operations in the period such
determination was made. Likewise, should the Company determine that it would not
be able to realize all or part of its deferred tax asset in the future, an
adjustment to the deferred tax asset would be charged to operations in the
period such determination was made.
Impairment of Assets:
The Company's long-lived assets include property, plant and equipment. At
June 30, 2002, the net value of property, plant and equipment was RMB
167,726,140, which accounted for 25.6% of the Company's total assets. At
December 31, 2001, the net value of property, plant and equipment was RMB
217,668,104, which accounted for 31.4% of the Company's total assets. In
assessing the impairment of property, plant and equipment, the Company makes
assumptions regarding the estimated future cash flows and other factors to
determine the fair value of the respective assets. For the six months ended June
30, 2001, an impairment charge of RMB 2,750,000 was recorded with respect to
property, plant and equipment. During the three months ended June 30, 2002, as a
result of the uncertainty regarding sub-license, reduced sales, continuing
operating losses and various legal and business issues, the Company conducted an
evaluation of the carrying value of its property, plant and equipment, as well
as the related expected future cash flows. As a result of this evaluation, the
Company recorded a provision for impairment of plant, machinery and equipment of
RMB 40,000,000 at June 30, 2002. This impairment charge was based on certain
assumptions regarding the Company's future cash flows and other factors used to
determine the fair value of its property, plant and equipment. If these
estimates or the related assumptions change adversely in the future, the Company
may be required to record an additional impairment charge.
Allowance for Doubtful Accounts:
The Company uses the allowance method to account for uncollectible accounts
receivable. The Company periodically adjusts the allowance for doubtful accounts
based on management's continuing review of accounts receivable. This analysis by
management is based on prior years' experience, as well as an analysis of
current economic and business trends. Management expects to continue to update
the allowance for doubtful accounting during 2002.
The Company records a full allowance for accounts receivable that have been
outstanding in excess of 365 days. For accounts receivable that have been
outstanding for 365 days or less, the Company reviews and determines an
appropriate amount of allowance for doubtful accounts basing on the circumstance
of each individual case.
Consolidated Results of Operations:
Three Months Ended June 30, 2002 and 2001 -
Sales: During the three months ended June 30, 2002, net sales of beer
products decreased by RMB 23,571,094 or 12.6% to RMB 163,485,570, as compared to
RMB 187,056,664 for the three months ended June 30, 2001. The Company sold
40,816 metric tons of beer to distributors during the three months ended June
30, 2002, as compared to 42,885 metric tons of beer sold during the three months
ended June 30, 2001, a decrease of 2,069 metric tons or 4.8%. The decrease in
net sales of beer products during the three months ended June 30, 2002 as
compared to the three months ended June 30, 2001 was primarily attributable to
the decrease in volume of beer sold, which was a result of the weakening in
customer demand for Pabst Blue Ribbon beer and increasing competition from local
brands.
23
During the three months ended June 30, 2002 and 2001, approximately 92.5%
and 93.2% of net sales, respectively, were generated by the sale of products
under the Pabst Blue Ribbon brand name.
Gross Profit: For the three months ended June 30, 2002, gross profit was
RMB 54,792,221 or 33.5% of total net sales, as compared to gross profit of RMB
42,340,396 or 22.6% of total net sales for the three months ended June 30, 2001.
Gross margin from beer sales increased to 33.5% in 2002 as compared to 22.6% in
2001 as a result a reduction in the sales price charged by Noble Brewery. The
sales price was reduced effective July 1, 2001 in order to compensate the
Marketing Company for a portion of budgeted selling and advertising expenses not
realized due to the decrease in sales in 2002. A reduction in raw material costs
and production labor costs also contributed to the improvement in gross profit
and gross margin in 2002.
The Company expects that it will continue to experience pressure on its
gross profit in 2002 due to a continuing softness in consumer demand for Pabst
Blue Ribbon beer in China, which the Company believes is attributable to a
change in the consumption pattern in China caused by the increasing competition
from other foreign premium brand beers and other major local brewers.
Selling, General and Administrative Expenses: For the three months ended
June 30, 2002, selling, general and administrative expenses were RMB 65,251,702
or 39.9% of net sales, consisting of selling expenses of RMB 52,251,065 and
general and administrative expenses of RMB 13,000,637. Net of an allowance for
doubtful accounts of RMB 6,780,885 for the three months ended June 30, 2002,
general and administrative expenses were RMB 6,219,752.
For the three months ended June 30, 2001, selling, general and
administrative expenses were RMB 57,418,890 or 30.7% of net sales, consisting of
selling expenses of RMB 38,096,440 and general and administrative expenses of
RMB 19,322,450. Net of an allowance for doubtful accounts of RMB 9,300,000 for
the three months ended June 30, 2001, general and administrative expenses were
RMB 10,022,450.
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 14,154,625 or 37.2% in 2002 as
compared to 2001, and as a percent of net sales, to 32.0% in 2002 from 20.4% in
2001. Selling expenses increased in 2002 as compared to 2001, 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 sales of Pabst Blue Ribbon beer in
China, and to implement new advertising and promotional campaigns to support the
Company's local brand name beers. In addition, selling expenses increased as a
result of a change in the method, effective July 1, 2001, by which the Company
calculates the reimbursement by Zhaoqing Brewery and Noble Brewery of selling
expenses incurred by the Marketing Company through beer pricing and direct
charges. However, since the operations of Noble Brewery are not consolidated
with the Company's operations, the reallocation of such costs can have a
distortive effect on the Company's consolidated operating expenses and operating
ratios. To the extent Company's working capital resources are sufficient, the
Company intends to continue its advertising and promotional program in an
attempt to support and maintain the sales of Pabst Blue Ribbon beer and other
local brand name beers.
Effective April 2001, the Zhaoqing City tax authority informed the
Marketing Company that it was implementing new tax rules that regulate the
maximum allowable expenses involved in advertising and promotional activities
conducted through the public media by PRC enterprises. The maximum allowable
advertising and promotional expenses cannot exceed 2.0% and 0.5% of total gross
sales, respectively. Any amounts exceeding these limits are not tax deductible.
As a result, beginning in May 2001, an adjustment was made to the ex-factory
price charged by the breweries to the Marketing Company and the method by which
advertising and promotional activities are allocated by the Marketing Company,
in order that a portion of the advertising and promotional expenses are absorbed
24
by the breweries, which are not subject to the new rule. Prior to this change,
all of the advertising and promotional expenses were incurred by the Marketing
Company. For the three months ended June 30, 2002, advertising and promotional
expenses totaling approximately RMB 25,719,144 were reallocated from the
Marketing Company to Zhaoqing Brewery and Noble Brewery, with one-third being
allocated to Zhaoqing Brewery and two-thirds being allocated to Noble Brewery,
either through the adjustment of ex-factory prices or direct absorption.
Selling expenses are recognized through the consolidation of the operations
of the Marketing Company. The Marketing Company incurs such expenses on behalf
of all of the Pabst Blue Ribbon brewing facilities in China, even though not all
of the results of operations of such facilities are reflected in the Company's
operations. Although the Marketing Company is budgeted annually to operate at
break-even levels, based on agreed upon ex-factory prices that the Marketing
Company pays to the breweries to purchase their production of Pabst Blue Ribbon
beer, actual profitability, particularly on an interim basis, is subject to
substantial variability. Under the pooled management arrangement, operating
losses arising from unbudgeted selling and advertising expenses incurred by the
Marketing Company are being reallocated back to Zhaoqing Brewery and Noble
Brewery in proportion to their respective production capacities commencing July
1, 2001. The Company expects that the reallocation of these unbudgeted selling
and advertising expenses will allow the Marketing Company to operate at
approximately breakeven levels during 2002, excluding the allowance for doubtful
accounts. These reallocated costs are reflected in the operating results of
Zhaoqing Brewery and Noble Brewery. As a result of these factors, during the
three months ended June 30, 2002 and 2001, the Marketing Company incurred
operating losses of RMB 5,881,364 and RMB 23,802,572, respectively, which
reduced consolidated operating results 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 and other costs associated with
the operation of a public company. Excluding the allowance for doubtful
accounts, general and administrative expenses decreased by RMB 3,802,698 or
37.9% in 2002 as compared to 2001, and as a percentage of net sales, decreased
to 3.8% in 2002 from 5.4% in 2001, respectively, as a result of implementation
of cost reduction measures made possible through the pooling of the management
office function among Zhaoqing Brewery, Noble Brewery and the Marketing Company
and the reduction of employees through the restructuring program.
The allowance for doubtful accounts, which is calculated based primarily on
the age of outstanding accounts receivable, decreased to 4.1% of net sales in
2002, as compared to 5.0% of net sales in 2001, as a result of the
implementation of effective credit controls during 2002. However, accounts
receivable are typically outstanding for a longer period of time in China than
in the United States.
Impairment of Property, Plant and Equipment: During December 2000, the
Company decided to terminate the production and operation of Jilin Lianli
Brewery, 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. During the
three months ended March 31, 2001, the Company recorded a further provision for
impairment of plant, machinery and equipment of RMB 2,750,000. During the three
months ended June 30, 2001, the Company wrote off its remaining investment in
Jilin Lianli Brewery of RMB 1,224,109. As of December 31, 2001, the Company has
written off a total of RMB 13,788,500 with respect to its investment in this
subsidiary.
During the three months ended June 30, 2002, as a result of the uncertainty
regarding sub-license, reduced sales, continuing operating losses and various
legal and business issues, the Company conducted an evaluation of the carrying
value of its property, plant and equipment, as well as the related expected
future cash flows. As a result of this evaluation, the Company recorded a
provision for impairment of plant, machinery and equipment of RMB 40,000,000 at
June 30, 2002.
Restructuring Costs: During May 2001, the Company implemented a
restructuring program that eliminated the position of a total of 504 employees,
of which 310 were from Zhaoqing Brewery, 170 were from Noble Brewery and 24 were
from the Marketing Company. Restructuring and termination payments to these
employees totaled RMB 20,087,339 by Zhaoqing Brewery, RMB 8,319,588 by Noble
Brewery and RMB 1,233,843 by the Marketing Company. The Company recorded
restructuring costs of RMB 21,321,182 for the three months ended June 30, 2001.
No such restructuring costs were recorded for the three months ended June 30,
2002.
25
Operating Loss: For the three months ended June 30, 2002, the operating
loss was RMB 50,459,481 or 30.9% of net sales. For the three months ended June
30, 2001, the operating loss was RMB 37,623,785 or 20.1% of net sales. The
increase in operating loss in 2002 as compared to 2001 was primarily
attributable to the provision for impairment of plant, machinery and equipment
of RMB 40,000,000 in 2002.
Interest Expense: For the three months ended June 30, 2002, interest
expense increased by RMB 356,359 or 21.4% to RMB 2,025,098, as compared to RMB
1,668,739 for the three months ended June 30, 2001. Interest expense increased
in 2002 as compared to 2001 as a result of an increase in the average balance of
bank borrowings outstanding.
Income Taxes: Commencing in 2001, the Company is required to pay local
income tax at the full normal rate of 33% on its profit as determined in
accordance with PRC accounting standards applicable to the Company's operations
in the PRC. Accordingly, for the three months ended June 30, 2002, income tax
expense was RMB 325,894, as compared to RMB 929,248 for the three months ended
June 30, 2001, which were based on the breweries' taxable income as determined
from their PRC statutory financial statements.
Net Loss: Net loss was RMB 102,713,199 for the three months ended June 30,
2002, as compared to net loss of RMB 27,076,104 for the three months ended June
30, 2001.
Six Months Ended June 30, 2002 and 2001 -
Sales: During the six months ended June 30, 2002, net sales of beer
products decreased by RMB 50,433,041 or 12.6% to RMB 349,091,134, as compared to
RMB 399,524,175 for the six months ended June 30, 2001. The Company sold 80,530
metric tons of beer to distributors during the six months ended June 30, 2002,
as compared to 85,829 metric tons of beer sold during the six months ended June
30, 2001, a decrease of 5,299 metric tons or 6.2%. The decrease in net sales of
beer products during the six months ended June 30, 2002 as compared to the six
months ended June 30, 2001 was primarily attributable to the decrease in volume
of beer sold, which was a result of the weakening in customer demand for Pabst
Blue Ribbon beer and increasing competition from local brands.
During the six months ended June 30, 2002 and 2001, approximately 94.1% and
92.9% of net sales, respectively, were generated by the sale of products under
the Pabst Blue Ribbon brand name.
Gross Profit: For the six months ended June 30, 2002, gross profit was RMB
111,719,672 or 32.0% of total net sales, as compared to gross profit of RMB
95,460,826 or 23.9% of total net sales for the six months ended June 30, 2001.
Gross margin from beer sales increased to 32.0% in 2002 as compared to 23.9% in
2001 as a result a reduction in the sales price charged by Noble Brewery. The
sales price was reduced effective July 1, 2001 in order to compensate the
Marketing Company for a portion of budgeted selling and advertising expenses not
realized due to the decrease in sales in 2002. A reduction in raw material costs
and production labor costs also contributed to the improvement in gross profit
and gross margin.
The Company expects that it will continue to experience pressure on its
gross profit in 2002 due to a continuing softness in consumer demand for Pabst
Blue Ribbon beer in China, which the Company believes is attributable to a
change in the consumption pattern in China caused by the increasing competition
from other foreign premium brand beers and other major local brewers.
Selling, General and Administrative Expenses: For the six months ended June
30, 2002, selling, general and administrative expenses were RMB 124,378,992 or
35.6% of net sales, consisting of selling expenses of RMB 96,429,550 and general
and administrative expenses of RMB 27,949,442. Net of an allowance for doubtful
accounts of RMB 13,280,885 for the six months ended June 30, 2002, general and
administrative expenses were RMB 14,668,557.
26
For the six months ended June 30, 2001, selling, general and administrative
expenses were RMB 127,072,619 or 31.8% of net sales, consisting of selling
expenses of RMB 89,031,026 and general and administrative expenses of RMB
38,041,593. Net of an allowance for doubtful accounts of RMB 15,600,000 for the
six months ended June 30, 2001, general and administrative expenses were RMB
22,441,593.
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 7,398,524 or 8.3% in 2002 as
compared to 2001, and as a percent of net sales, to 27.6% in 2002 from 22.3% in
2001. Selling expenses increased in 2002 as compared to 2001, 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 sales of Pabst Blue Ribbon beer in
China, and to implement new advertising and promotional campaigns to support the
Company's local brand name beers. In addition, selling expenses increased as a
result of a change in the method, effective July 1, 2001, by which the Company
calculates the reimbursement by Zhaoqing Brewery and Noble Brewery of selling
expenses incurred by the Marketing Company through beer pricing and direct
charges. However, since the operations of Noble Brewery are not consolidated
with the Company's operations, the reallocation of such costs can have a
distortive effect on the Company's consolidated operating expenses and operating
ratios. To the extent that the Company's working capital resources are
sufficient, the Company intends to continue its advertising and promotional
program in an attempt to support and maintain the sales of Pabst Blue Ribbon
beer and other local brand name beers.
Effective April 2001, the Zhaoqing City tax authority informed the
Marketing Company that it was implementing new tax rules that regulate the
maximum allowable expenses involved in advertising and promotional activities
conducted through the public media by PRC enterprises. The maximum allowable
advertising and promotional expenses cannot exceed 2.0% and 0.5% of total gross
sales, respectively. Any amounts exceeding these limits are not tax deductible.
As result, beginning in May 2001, an adjustment was made to the ex-factory price
charged by the breweries to the Marketing Company and the method by which
advertising and promotional activities are allocated by the Marketing Company,
in order that a portion of the advertising and promotional expenses are absorbed
by the breweries, which are not subject to the new rule. Prior to this change,
all of the advertising and promotional expenses were incurred by the Marketing
Company. For the six months ended June 30, 2002, advertising and promotional
expenses totaling approximately RMB 37,050,261 were reallocated from the
Marketing Company to Zhaoqing Brewery and Noble Brewery, with one-third being
allocated to Zhaoqing Brewery and two-thirds being allocated to Noble Brewery,
either through the adjustment of ex-factory prices or direct absorption.
Selling expenses are recognized through the consolidation of the operations
of the Marketing Company. The Marketing Company incurs such expenses on behalf
of all of the Pabst Blue Ribbon brewing facilities in China, even though not all
of the results of operations of such facilities are reflected in the Company's
operations. Although the Marketing Company is budgeted annually to operate at
break-even levels, based on agreed upon ex-factory prices that the Marketing
Company pays to the breweries to purchase their production of Pabst Blue Ribbon
beer, actual profitability, particularly on an interim basis, is subject to
substantial variability. Under the pooled management arrangement, operating
losses arising from unbudgeted selling and advertising expenses incurred by the
Marketing Company are being reallocated back to Zhaoqing Brewery and Noble
Brewery in proportion to their respective production capacities commencing July
1, 2001. The Company expects that the reallocation of these unbudgeted selling
and advertising expenses will allow the Marketing Company to operate at
approximately breakeven levels during 2002, excluding the allowance for doubtful
accounts. These reallocated costs are reflected in the operating results of
Zhaoqing Brewery and Noble Brewery. As a result of these factors, during the six
months ended June 30, 2002 and 2001, the Marketing Company incurred operating
losses of RMB 13,187,666 and RMB 43,197,677, respectively, which reduced
consolidated operating results accordingly.
27
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 and other costs associated with
the operation of a public company. Excluding the allowance for doubtful
accounts, general and administrative expenses decreased by RMB 7,773,036 or
34.6% in 2002 as compared to 2001, and as a percentage of net sales, decreased
to 4.2% in 2002 from 5.6% in 2001, respectively, primarily as a result of
implementation of cost reduction measures made possible through the pooling of
the management office function among Zhaoqing Brewery, Noble Brewery and the
Marketing Company and the reduction of employees through the restructuring
program.
The allowance for doubtful accounts, which is calculated based primarily on
the age of outstanding accounts receivable, decreased to 3.8% of net sales in
2002, as compared to 3.9% of net sales in 2001, as a result of the
implementation of effective credit controls during 2002. However, accounts
receivable are typically outstanding for a longer period of time in China than
in the United States.
Impairment of Property, Plant and Equipment: During December 2000, the
Company decided to terminate the production and operation of Jilin Lianli
Brewery, 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. During the
three months ended March 31, 2001, the Company recorded a further provision for
impairment of plant, machinery and equipment of RMB 2,750,000. During the three
months ended June 30, 2001, the Company wrote off its remaining investment in
Jilin Lianli Brewery of RMB 1,224,109. As of December 31, 2001, the Company has
written off a total of RMB 13,788,500 with respect to its investment in this
subsidiary.
During the six months ended June 30, 2002, as a result of the uncertainty
regarding sub-license, reduced sales, continuing operating losses and various
legal and business issues, the Company conducted an evaluation of the carrying
value of its property, plant and equipment, as well as the related expected
future cash flows. As a result of this evaluation, the Company recorded a
provision for impairment of plant, machinery and equipment of RMB 40,000,000 at
June 30, 2002.
Restructuring Costs: During May 2001, the Company implemented a
restructuring program that eliminated the position of a total of 504 employees,
of which 310 were from Zhaoqing Brewery, 170 were from Noble Brewery and 24 were
from the Marketing Company. Restructuring and termination payments to these
employees totaled RMB 20,087,339 by Zhaoqing Brewery, RMB 8,319,588 by Noble
Brewery and RMB 1,233,843 by the Marketing Company. The Company recorded
restructuring costs of RMB 21,321,182 for the six months ended June 30, 2001. No
such restructuring costs were recorded for the six months ended June 30, 2002.
Operating Loss: For the six months ended June 30, 2002, the operating loss
was RMB 52,659,320 or 15.1% of net sales. For the six months ended June 30,
2001, the operating loss was RMB 56,907,084 or 14.2% of net sales. The decrease
in operating loss in 2002 as compared to 2001 was primarily attributable to
improved operating results attributable to the change in method by which the
Company calculated the reimbursement by Zhaoqing Brewery and Noble Brewery of
selling expenses incurred by the Marketing Company through beer pricing and
direct charges.
Interest Expense: For the six months ended June 30, 2002, interest expense
increased by RMB 202,373 or 4.9% to RMB 4,323,102, as compared to RMB 4,120,729
for the six months ended June 30, 2001. Interest expense increased in 2002 as
compared to 2001 as a result of an increase in the average balance of bank
borrowings outstanding.
Income Taxes: Commencing in 2001, the Company is required to pay local
income tax at the full normal rate of 33% on its profit as determined in
accordance with PRC accounting standards applicable to the Company's operations
in the PRC. Accordingly, for the six months ended June 30, 2002, income tax
expense was RMB 325,894, as compared to RMB 1,664,580 for the six months ended
June 30, 2001, which were based on the breweries' taxable income as determined
from their PRC statutory financial statements.
28
Net Loss: Net loss was RMB 103,162,869 for the six months ended June 30,
2002, as compared to net loss of RMB 35,489,193 for the six months ended June
30, 2001.
Noble Brewery:
Three Months Ended June 30, 2002 and 2001 -
Sales: For the three months ended June 30, 2002 and 2001, net sales were
RMB 64,032,201 and RMB 74,818,863, respectively, a decrease of RMB 10,786,662 or
14.4%.
During the three months ended June 30, 2002, Noble Brewery sold 22,336
metric tons of beer to the Marketing Company, as compared to 21,923 metric tons
of beer sold to the Marketing Company during the three months ended June 30,
2001. Total beer sold by Noble Brewery to the Marketing Company increased by 413
metric tons or 1.9% for the three months ended June 30, 2002, as compared to the
three months ended June 30, 2001.
Gross Profit: For the three months ended June 30, 2002, gross profit was
RMB 9,756,367 or 15.2% of net sales, as compared to gross profit of RMB
17,394,149 or 23.2% of net sales for the three months ended June 30, 2001.
Although the volume of beer sold increased during the three months ended June
30, 2002, gross profit decreased significantly as a result of the reallocation
of unbudgeted selling and advertising expenses incurred by the Marketing Company
through the adjustment of ex-factory prices.
Selling, General and Administrative Expenses: For the three months ended
June 30, 2002, selling, general and administrative expenses totaled RMB
27,228,603 or 42.5% of net sales, consisting of selling expenses of RMB
17,986,171 and general and administrative expenses of RMB 9,242,432. Net of an
allowance for doubtful accounts of RMB 3,500,000 for the three months ended June
30, 2002, general and administrative expenses were RMB 5,742,432. For the three
months ended June 30, 2001, selling, general and administrative expenses totaled
RMB 24,302,154 or 32.5% of net sales, consisting of selling expenses of RMB
9,385,153 and general and administrative expenses of RMB 14,917,001. Net of an
allowance for doubtful accounts of RMB 7,862,472 for the three months ended June
30, 2001, general and administrative expenses were RMB 7,054,529. Selling
expenses consist of warehousing, storage and freight costs.
Impairment of Property, Plant and Equipment: During the three months ended
June 30, 2002, as a result of reduced sales and continuing operating losses,
Noble Brewery conducted an evaluation of the carrying value of its property,
plant and equipment, as well as the related estimated future cash flows. As a
result of this evaluation, Noble Brewery recorded a provision for impairment of
plant, machinery and equipment of RMB 65,000,000 at June 30, 2002.
Restructuring Costs: In May 2001, Noble Brewery implemented a restructuring
program and eliminated the positions of 170 employees. For the three months
ended June 30, 2001, restructuring and termination expenses were RMB 8,319,588.
There was no such expense incurred for the three months ended June 30, 2002.
Operating Loss: For the three months ended June 30, 2002, the operating
loss was RMB 82,472,236 or 128.8% of net sales. For the three months ended June
30, 2001, the operating loss was RMB 15,310,387 or 20.5% of net sales.
Income Taxes: Commencing in 1999, Noble Brewery is required to pay local
income tax at the full normal rate of 33% on its profit as determined in
accordance with PRC accounting standards applicable to Noble Brewery.
Accordingly, for the three months ended June 30, 2002, income tax expense was
RMB 333,194, as compared to RMB 4,053,316 for the three months ended June 30,
2001.
Net Loss: Net loss was RMB 82,805,430 or 129.3% of net sales for the three
months ended June 30, 2002, as compared to net loss of RMB 19,027,420 or 25.4%
of net sales for the three months ended June 30, 2001.
29
Six Months Ended June 30, 2002 and 2001 -
Sales: For the six months ended June 30, 2002 and 2001, net sales were RMB
151,515,498 and RMB 165,142,399, respectively, a decrease of RMB 13,626,901 or
8.3%.
During the six months ended June 30, 2002, Noble Brewery sold 44,642 metric
tons of beer to the Marketing Company, as compared to 43,431 metric tons of beer
sold to the Marketing Company during the six months ended June 30, 2001. Total
beer sold by Noble Brewery to the Marketing Company increased by 1,211 metric
tons or 2.8% for the six months ended June 30, 2002, as compared to the six
months ended June 30, 2001.
Gross Profit: For the six months ended June 30, 2002, gross profit was RMB
35,539,822 or 23.5% of net sales, as compared to gross profit of RMB 41,799,692
or 25.3% of net sales for the six months ended June 30, 2001. Although the
volume of beer sold increased during the six months ended June 30, 2002, gross
profit decreased as a result of the reallocation of unbudgeted selling and
advertising expenses incurred by the Marketing Company through the adjustment of
ex-factory prices.
Selling, General and Administrative Expenses: For the six months ended June
30, 2002, selling, general and administrative expenses totaled RMB 46,385,423 or
30.6% of net sales, consisting of selling expenses of RMB 26,790,017 and general
and administrative expenses of RMB 19,595,406. Net of an allowance for doubtful
accounts of RMB 7,500,000 for the six months ended June 30, 2002, general and
administrative expenses were RMB 12,095,406. For the six months ended June 30,
2001, selling, general and administrative expenses totaled RMB 31,749,193 or
19.2% of net sales, consisting of selling expenses of RMB 9,829,440 and general
and administrative expenses of RMB 21,919,753. Net of an allowance for doubtful
accounts of RMB 7,862,472 for the six months ended June 30, 2001, general and
administrative expenses were RMB 14,057,281. Selling expenses consist of
warehousing, storage and freight costs.
Impairment of property, Plant and Equipment: During the six months ended
June 30, 2002, as a result of reduced sales and continuing operating losses,
Noble Brewery conducted an evaluation of the carrying value of its property,
plant and equipment, as well as the related estimated future cash flows. As a
result of this evaluation, Noble Brewery recorded a provision for impairment of
plant, machinery and equipment of RMB 65,000,000 at June 30, 2002.
Restructuring Costs: In May 2001, Noble Brewery implemented a restructuring
program and eliminated the positions of 170 employees. For the six months ended
June 30, 2001, restructuring and termination expenses were RMB 8,319,588. There
was no such expense incurred for the six months ended June 30, 2002.
Operating Income (Loss): For the six months ended June 30, 2002, the
operating loss was RMB 75,845,601 or 50.1% of net sales. For the six months
ended June 30, 2001, operating income was RMB 1,648,117 or 1.0% of net sales.
Income Taxes: Commencing in 1999, Noble Brewery is required to pay local
income tax at the full normal rate of 33% on its profit as determined in
accordance with PRC accounting standards applicable to Noble Brewery.
Accordingly, for the six months ended June 30, 2002, income tax expense was RMB
1,795,295, as compared to RMB 8,198,660 for the six months ended June 30, 2001.
Net Loss: Net loss was RMB 77,640,896 or 51.2% of net sales for the six
months ended June 30, 2002, as compared to net loss of RMB 5,946,867 or 3.6% of
net sales for the six months ended June 30, 2001.
Consolidated Financial Condition - June 30, 2002:
Liquidity and Capital Resources -
Operating. For the six months ended June 30, 2002, the Company's operations
provided cash resources of RMB 5,912,914, as compared to RMB 25,691,308 for the
six months ended June 30, 2001. The Company's operations provided reduced cash
resources in 2002 as compared to 2001 primarily as a result of a reduction in
cash generated by changes in operating assets and liabilities. The Company's
30
cash balance increased by RMB 26,492,627 to RMB 97,859,107 at June 30, 2002, as
compared to RMB 71,366,480 at December 31, 2001. Including RMB 13,000,000 of
cash held by the Marketing Company for the account of Noble Brewery, the net
working capital deficit decreased by RMB 14,673,530 to RMB 281,211,302 at June
30, 2002, as compared to RMB 295,884,832 at December 31, 2001, resulting in a
current ratio at June 30, 2002 of 0.50:1, as compared to 0.42:1 at December 31,
2001.
Bill receivables increased by RMB 18,824,512 or 421.6% to RMB 23,289,512 at
June 30, 2002, as compared to RMB 4,465,000 at December 31, 2001. The increase
in bill receivables was primarily due to a reduction in the use of endorsed
bills receivable for settlement of payment obligations.
Net of an allowance for doubtful accounts of RMB 13,280,883 for the six
months ended June 30, 2002, accounts receivable increased by RMB 498,169 or 0.8%
to RMB 47,195,336 at June 30, 2002, as compared to RMB 59,978,050 at December
31, 2001.
Inventories increased by RMB 9,487,013 or 17.8% to RMB 62,800,995 at June
30, 2002, as compared to RMB 53,313,982 at December 31, 2001. The increase in
inventories was primarily due to an unbudgeted slowdown in sales.
Other receivables increased by RMB 22,351,575 or 195.0% to RMB 33,812,086
at June 30, 2002, as compared to RMB 11,460,511 at December 31, 2001. The
increase in other receivables was primarily due to an increase in prepayments
related to advertising and promotional programs scheduled by the Marketing
Company for later in the year.
Accrued liabilities increased by RMB 30,369,054 or 21.0% to RMB 174,798,340
at June 30, 2002, as compared to RMB 144,429,286 at December 31, 2001. The
increase in accrued liabilities was mainly due to the increase in accrued
expenses related to advertising and promotional programs.
The amount due to an associated company increased by RMB 26,173,699 or
12.4% to RMB 236,978,917 at June 30, 2002, as compared to RMB 210,805,218 at
December 31, 2001, and represents the amounts due to Noble Brewery from its sale
of Pabst Blue Ribbon beer to the Marketing Company and from its sale of raw
materials (which were purchased under the new pooled management structure) to
Zhaoqing Brewery, as well as other balances arising from recurring intercompany
transactions. These obligations are unsecured, interest-free and repayable on
demand. The repayment schedule for these obligations generally reflects the
collection period for accounts receivable generated by beer sales and normal
trade credit terms for raw material purchases.
Investing. For the six months ended June 30, 2002, additions to property,
plant and equipment aggregated RMB 4,355,191, which includes approximately RMB
3,800,000 and RMB 550,000 for major replacement of the production equipment in
Zao Yang High Worth Brewery and Zhaoqing Brewery, respectively. Net of the
effect of the write off of property, plant and equipment for the six months
ended June 30, 2001, additions to property, plant and equipment aggregated RMB
2,767,623, which includes approximately RMB 1,200,000 and RMB 1,500,000 for
major replacement of the production equipment in Zao Yang High Worth Brewery and
Zhaoqing Brewery, respectively.
The Company anticipates that additional capital expenditures in connection
with the continuing critical replacement of the production facilities at
Zhaoqing Brewery during the remainder of 2002 will total approximately RMB
2,000,000. The Company believes that it will be able to fund the expected
capital expenditures through internal cash flow and external resources. However,
due to declining sales and diminishing working capital resources during 2002,
the Company has revised its capital expenditures plan. Approximately 25% of the
2002 annual repair and maintenance budget scheduled for Zhaoqing Brewery and
Noble Brewery has been deferred until 2003.
Financing. During the six months ended June 30, 2002, the Company's secured
bank loans decreased by RMB 597,863, reflecting new borrowings of RMB 49,000,000
and repayments of RMB 49,597,863. During the six months ended June 30, 2001, the
Company repaid RMB 23,000,000 of secured bank loans. The bank loans bear
interest at fixed rates ranging from 5.9% to 7.7%, and are repayable within the
next three years. A substantial portion of the bank loans have been utilized to
fund the working capital requirements of Zhaoqing Brewery and Zao Yang High
Worth Brewery.
31
During the six months ended June 30, 2002, Zao Yang High Worth Brewery
received an advance of RMB 11,000,000 from its local partner, Zao Yang Brewery,
which is the 45% shareholder of Zao Yang High Worth Brewery. The advance was
unsecured, interest-free and had no fixed term of repayment. This advance has
been utilized to fund the working capital requirements of Zao Yang High Worth
Brewery.
During the six months ended June 30, 2002, the Company loaned RMB 5,500,000
to Zao Yang High Worth Brewery. The loan was unsecured, with interest at 3.6%
per annum and is repayable on December 31, 2002. During the six months ended
June 30, 2002, Zao Yang High Worth Brewery advanced RMB 5,500,000 to Guangdong
Blue Ribbon. The advance was unsecured, with no agreed-upon interest and no
fixed date of repayment. During the three months ended June 30, 2002, Zao Yang
High Worth Brewery and Guangdong Blue Ribbon fully repaid the advances to the
Company and Zao Yang High Worth Brewery, respectively.
During the three months ended June 30, 2002, the Board of Directors of High
Worth JV declared the 7th to 10th dividend distributions, entitling Holdings and
Guangdong Blue Ribbon to a total of approximately RMB 27,830,199 and RMB
18,553,467, respectively. The minority interest's 40% portion of dividend is
recorded as a liability at the declaration date and is included in amounts due
to related companies. During the three months ended June 30, 2002, dividends of
RMB 27,830,199 and RMB 15,935,000 were distributed to Holdings and Guangdong
Blue Ribbon, respectively.
The Company anticipates that its operating cash flow, combined with cash on
hand, bank lines of credit, and other external credit sources, and the credit
facilities provided by affiliates or related parties, are adequate to satisfy
the Company's working capital requirements for the remainder of 2002. If the
foregoing assumptions prove to be inaccurate, the Company's cash flow may be
adversely affected, which would negatively impact the ability of the Company to
conduct operation at current level.
32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any market risk with respect to such factors as
commodity prices, equity prices, and other market changes that affect market
risk sensitive investments.
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.
33
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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:
Three Months Ended June 30, 2002 - None
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CBR BREWING COMPANY, INC.
-------------------------
(Registrant)
Date: August 16, 2002 By: /s/ FO-QING LU
-----------------------------
Fo-qing Lu
President and Director
(Duly authorized officer)
Date: August 16, 2002 By: /s/ GARY C.K. LUI
-----------------------------
Gary C.K. Lui
Vice President and
Chief Financial Officer
(Principal financial officer)
35
INDEX TO EXHIBITS
Exhibit
Number Description of Document
- ------ -----------------------
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
36