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 MARCH 31, 2003
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to ____________
Commission File Number: 33-26617A
CBR BREWING COMPANY, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
British Virgin Islands --
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
23/F., Hang Seng Causeway Bay Building
28 Yee Wo Street, Causeway Bay, Hong Kong
------------------------------------------------------------
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: 852-2866-2301
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [ ]
As of March 31, 2003, 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 - March 31, 2003 (Unaudited) and
December 31, 2002
Consolidated Statements of Operations (Unaudited) - Three
Months Ended March 31, 2003 and 2002
Consolidated Statements of Cash Flows (Unaudited) - Three
Months Ended March 31, 2003 and 2002
Notes to Consolidated Financial Statements (Unaudited) -
Three Months Ended March 31, 2003 and 2002
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
2
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2003 December 31, 2002
------------------------ -----------------
RMB USD RMB
------------ ---------- -----------
(Unaudited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents 71,321,312 8,592,929 117,075,072
Accounts receivable, net (Note 3) 74,991,866 9,035,165 114,641,020
Bills receivable 1,605,000 193,373 500,000
Inventories (Note 4) 49,752,546 5,994,283 54,180,017
Amounts due from related
companies (Note 5) 51,605,225 6,217,497 4,647,971
Income taxes receivable 1,927,759 232,260 1,927,759
Prepayments and deposits 14,672,542 1,767,777 9,212,093
Other receivables 18,120,287 2,183,167 11,109,615
----------- ----------- -----------
Total current assets 283,996,537 34,216,451 313,293,547
Loan receivable (Note 5) 7,086,358 853,778 -
Interest in an associated company
(Note 6) 119,692,586 14,420,793 213,760,312
Property, plant and equipment, net
(Note 7) 726,331 87,510 64,186,910
----------- ----------- -----------
Total assets 411,501,812 49,578,532 591,240,769
=========== =========== ===========
(continued)
3
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
March 31, 2003 December 31, 2002
------------------------- -----------------
RMB USD RMB
----------- ----------- -----------
(Unaudited) (Unaudited)
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Bank borrowings (Note 8) 137,766,319 16,598,352 130,818,717
Accounts payable 17,408,324 2,097,388 18,182,253
Accrued advertising expenses 57,011,256 6,868,826 55,478,622
Accrued other liabilities 100,495,760 12,107,923 102,288,435
Amounts due to related companies
(Note 5) 1,560 188 1,560
Amount due to an associated company
(Note 9) 285,271,416 34,370,050 298,379,194
Sales taxes payable 27,492,559 3,312,357 27,693,120
----------- ----------- ------------
Total current liabilities 625,447,194 75,355,084 632,841,901
----------- ----------- ------------
Long-term liabilities:
Bank borrowings 155,260 18,706 155,260
----------- ----------- ------------
Total long-term liabilities 155,260 18,706 155,260
----------- ----------- ------------
Minority interests (Note 11) - - -
----------- ----------- ------------
Contingencies (Note 12)
Common stock:
-Class A, with no par value
(2002: US$0.0001 par value),
90,000,000 shares authorized,
5,010,013 shares outstanding - - 4,273
-Class B, with no par value
(2002: US$0.0001 par value),
10,000,000 shares authorized,
3,000,000 shares outstanding - - 2,559
Additional paid-in capital 107,368,677 12,935,985 107,361,845
General reserve and enterprise
development funds 18,735,220 2,257,255 18,735,220
Accumulated deficit (340,204,539) (40,988,498) (167,860,289)
----------- ----------- ------------
Total shareholders' deficiency (214,100,642) (25,795,258) (41,756,392)
----------- ----------- ------------
Total liabilities and shareholders'
deficiency ) 411,501,812 49,578,532 591,240,769
=========== =========== ============
See accompanying notes to the consolidated financial statements.
4
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
--------------------------- --------------
RMB USD RMB (1)
------------- ------------ --------------
Sales 80,531,286 9,702,565 183,902,477
Sales taxes (4,528,486) (545,601) (5,730,529)
------------- ------------ --------------
Net sales 76,002,800 9,156,964 178,171,948
Cost of sales, including net inventory
transferred from related companies of
RMB 20,607,505 and RMB 10,739,986; beer
products purchased from associated
company for resale of RMB 35,752,181
and RMB 91,270,127; other beer products
purchased from associated company by
Zhaoqing Brewery of RMB 22,356,037 and
RMB 15,574,954; and royalty fee paid to
a related company of RMB 514,315 and
RMB 865,718, respectively
(Note 5(b) to (d)) (55,588,856) (6,697,453) (128,678,113)
------------- ------------ --------------
Gross profit 20,413,944 2,459,511 49,493,835
Selling, general and administrative
expenses (31,462,718) (3,790,689) (51,561,315)
Impairment of property, plant and
equipment (Note 7) (65,250,000) (7,861,446) -
------------- ------------ --------------
Operating loss (76,298,774) (9,192,624) (2,067,480)
Interest income 102,335 12,330 -
Interest expense (2,080,085) (250,613) (2,298,004)
------------- ------------ --------------
Loss before minority interests
and equity in (loss) earnings
of an associated company (78,276,524) (9,430,907) (4,365,484)
Minority interests (Note 11) - - -
------------- ------------ --------------
Loss before equity in loss (earnings)
of an associated company (78,276,524) (9,430,907) (4,365,484)
Equity in (loss) earnings of an
associated company (94,067,726) (11,333,461) 3,915,814
------------- ------------ --------------
Net loss (172,344,250) (20,764,368) (449,670)
------------- ------------ --------------
Net loss per common share (Note 2)
- basic and diluted (21.52) (2.59) (0.06)
============= ============ ==============
Weighted average number of common
shares outstanding
- basic and diluted 8,010,013 8,010,013 8,010,013
============= ============ ==============
(1) The provisions of Emerging Issues Task Force ("EITF") No. 01-9, "Accounting
for Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor's Products)", were adopted during 2002. The adoption of EITF No. 01-9
resulted in the reclassification of certain sales incentives previously
classified as selling expenses to a reduction from sales. Prior quarter amounts
have been reclassified to conform to the current quarter's presentation; this
reclassification had no effect on the Company's operating results. The amount of
sales incentives recorded as a deduction from sales in accordance with EITF No.
01-9 was RMB 7,433,616 for the three months ended March 31, 2002.
See accompanying notes to the consolidated financial statements.
5
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
--------------------------- -----------------
RMB USD RMB
------------ ------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (172,344,250) (20,764,368) (449,670)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Allowance for doubtful accounts 2,600,000 313,253 6,500,000
Depreciation and amortization 2,167,987 261,204 7,554,837
Impairment of property, plant and equipment 65,250,000 7,861,446 -
Equity in (loss) earnings of an
associated company 94,067,726 11,333,461 (3,915,814)
Changes in operating assets and liabilities:
(Increase) decrease in -
Accounts receivable 37,049,154 4,463,753 (1,116,709)
Bills receivable (1,105,000) (133,132) (9,592,000)
Inventories 4,427,471 533,430 47,404
Amounts due from related companies (16,631) (2,003) (5,062,35)
Income taxes receivable - - (1,624,580)
Prepayments and deposits (5,460,449) (657,886) 1,493,378
Other receivables (7,010,672) (844,659) (8,784,824)
Increase (decrease) in -
Accounts payable (773,929) (93,245) (6,722,340)
Accrued liabilities (2,660,041) (320,487) 16,660,126
Amount due to an associated company (13,107,778) (1,579,250) (11,051,238)
Sales taxes payable (200,561) (24,163) 1,251,622
------------ ------------- -----------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 2,883,027 347,354 (14,812,161)
------------ ------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advance to related party (46,940,623) (5,655,497) -
Loan receivable (7,086,358) (853,778) -
Purchases of property, plant and
equipment (1,557,408) (187,640) (737,432)
------------ ------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES (55,584,389) (6,696,915) (737,432)
------------ ------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
New bank borrowings 7,000,000 843,373 14,000,000
Repayment of bank borrowings (52,398) (6,313) (13,080,195)
Advance from related party - - 5,700,000
Increase in amounts due to related
companies - - 263,352
------------ ------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,947,602 837,060 6,883,157
------------ ------------- -----------------
Net decrease in cash and cash equivalents (45,753,760) (5,512,501) (8,666,436)
Cash and cash equivalents at beginning of period 117,075,072 14,105,430 71,366,480
------------ ------------- -----------------
Cash and cash equivalents at end of period 71,321,312 8,592,929 62,700,044
============ ============= =================
See accompanying notes to the consolidated financial statements.
6
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
CBR Brewing Company, Inc. ("CBR") was originally incorporated on April 20, 1988
under the laws of the State of Florida. At December 31, 2001, CBR's principal
shareholder was Shenzhen Huaqiang Holdings Limited ("Huaqiang"), incorporated in
the People's Republic of China (the "PRC" or "China"), which held indirectly
63.2% of the outstanding Class A common stock and 80% of the outstanding Class B
common stock. Effective January 10, 2002, Zhaoqing City Lan Wei Alcoholic
Beverage (Holdings) Limited ("Lan Wei") acquired from Huaqiang all of its equity
interest in CBR. Lan Wei is a company controlled by the City of Zhaoqing, which
is located in Guangdong Province, People's Republic of China.
In February 2002, Lan Wei acquired additional Class A common shares representing
an approximate 7.2% equity interest in CBR from a third party in a private
transaction. As part of this transaction, Lan Wei also acquired Huaqiang's 19.6%
equity interest in Noble China Inc., a Canadian public company.
Effective February 28, 2003, CBR reincorporated from the State of Florida in the
United States of America ("US") to the British Virgin Islands ("BVI") by merging
into its wholly-owned BVI subsidiary, High Worth Holdings Ltd ("Holdings"). This
off-shore reincorporation was for tax planning purposes, since all of CBR's
assets and operations are currently located in China and are expected to
continue to be located outside the US in the future. The reincorporation had no
effect on CBR's current business operations in China. On March 3, 2003, Holdings
changed its name to CBR Brewing Company Inc. (hereinafter referred to as the
"Company", which term shall include, when the context so requires, its
subsidiaries and affiliates).
The Agreement and Plan of Merger related to the reincorporation dated January
24, 2003 was approved by majority of shareholders of each class of common stock
outstanding as of December 31, 2002. Holdings was the surviving corporation
subsequent to the merger and possesses all of the rights, privileges, powers and
franchises and is subject to all the restrictions, disabilities and duties of
the dissolved Florida corporation. Each Class A share of the Florida corporation
was converted into one fully paid and non-assessable (with no par value) Class A
share of capital stock of the BVI corporation and each Class B share of the
Florida corporation was converted into one fully paid and non-assessable Class B
share of capital stock of the BVI corporation. The surviving BVI corporation
assumed and continued the reporting obligations of the dissolved Florida
corporation under new OTC Bulletin Board trading symbol "CBRAF" and the
consolidated operations of the Company continued without interruption.
The Company is a holding company and its principal subsidiaries are engaged in
the production and sale of beer in the PRC. Substantially all of the beer
currently sold by the Company is marketed under the Pabst Blue Ribbon label, and
is brewed under a sub-license 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.
Prior to the reincorporation, the Company's wholly-owned subsidiary, Holdings,
was a holding company that was formed solely to effect the acquisition of a 60%
interest in Zhaoqing Blue Ribbon High Worth Brewery Ltd. ("High Worth 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.
7
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
On October 31, 1994, High Worth JV acquired a 100% interest in Zhaoqing Brewery
("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 at that time, 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
sub-license agreement which also expires on November 7, 2003, 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.
Pursuant to the terms of a sub-license 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 sub-license agreement is valid until November 7, 2003. In
consideration for the sub-license 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.
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.
Upon the completion of the required procedures and documentation, all of the
assets and liabilities formerly controlled by Zhaoqing Brewery will then be
transferred to High Worth JV (in this context, Zhaoqing Brewery and High Worth
JV are used interchangeably to refer to the same entity). 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
2003.
8
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
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 RMB 29,280,000, allocated
55% to High Worth JV 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 June 1998. Commencing June 1998,
the Marketing Company also began purchasing Zao Yang High Worth Brewery's
production of Pabst Blue Ribbon beer for distribution.
In November 2002, High Worth JV and Zao Yang Brewery agreed to contribute
additional capital of RMB 24,444,500 into Zao Yang High Worth Brewery in
proportion to their respective equity interests of 55% and 45%. High Worth JV
has contributed RMB 13,444,500 through a deduction from its intercompany balance
due from Zao Yang High Worth Brewery and Zao Yang Brewery has made a cash
contribution of RMB 11,000,000 effective December 31, 2002.
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 Linchpin transfer was obtained. Linchpin and Zhaoqing
Brewery currently own 60% and 40% equity interests in Noble Brewery,
respectively.
NOBLE CHINA INC. - Noble China Inc., the 60% shareholder of Noble Brewery, 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.
As at March 31, 2003, the Company has not yet obtained a renewal of the Pabst
Blue Ribbon sub-license agreement. The inability of the Company to obtain a
sub-license from Noble China Inc. or to renew the Company's sub-license or enter
into some other form of strategic relationship under acceptable terms and
conditions to allow the Company to continue to produce and distribute Pabst Blue
Ribbon beer in China would have a material adverse effect on the Company's
future results of operations, financial position and cash flows.
During December 2000, the Company and Noble China Inc. signed a memorandum
pursuant to which a management committee was established 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 resources,
financial, production and marketing activities, greater efficiency and improved
operating profitability. Zhaoqing Brewery, Noble Brewery and the Marketing
Company each remain as legally distinct entities (see Note 5(a)).
9
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
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. Severance payments to these employees from Zhaoqing Brewery
and the Marketing Company totaled RMB 20,396,494 and RMB 1,912,742,
respectively. As a result, the Company recorded restructuring costs of RMB
22,309,236 for the year ended December 31, 2001. In addition, severance payments
to the employees of Noble Brewery were RMB 8,729,830, of which RMB 3,491,932 was
included in the equity in (loss) earnings of an associated company for the year
ended December 31, 2001.
During 2002, Noble China Inc. publicly reported that it was experiencing severe
financial difficulties, was unable to meet its financial commitments and was
insolvent, and was 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. appealed the Shandong Court's decision to
the Supreme Court of the PRC, which was accepted on November 4, 2002, a hearing
for which is still pending.
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
holders and the City of Zhaoqing, indirectly a major shareholder of Noble China
Inc., 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 could not reach a resolution on an appropriate restructuring plan that
the Board of Directors could support in the interest of all shareholders and
Debenture holders within 60 days, the Board of Directors would resign.
On September 3, 2002, Noble China Inc.'s report for the three months ended June
30, 2002 disclosed that although the major shareholder and the major Debenture
holder were continuing their discussions, no meaningful process had been noted
and the Directors planned to resign on September 20, 2002.
On September 24, 2002, a press release by Noble China Inc. announced that one of
its three directors had resigned on September 20, 2002, and that the remaining
two directors intended to resign. On November 12, 2002, Noble China Inc. held a
meeting of shareholders to elect a new Board of Directors to consist of three
members; three candidates nominated by Lan Wei, a company controlled by the City
of Zhaoqing, the major shareholder of the Company, were elected to the Board of
Directors.
10
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
Discussions between holders of a majority of the Debentures and representatives
of the City of Zhaoqing regarding a reorganization of Noble China Inc. resulted
in a preliminary agreement in principle with respect to settlement in full of
the outstanding Debentures. Discussions between representatives of the City of
Zhaoqing and Pabst Brewing Company regarding a reorganization of Noble China
Inc. and a restructuring of the master license agreement that becomes effective
on November 7, 2003 resulted in the execution of a non-binding term sheet in
March 2003. These agreements are both conditional on Noble China Inc. being able
to implement a formal reorganization of its debt and equity securities. The
successful reorganization of Noble China Inc. is subject to the preparation and
execution of definitive agreements and a plan of reorganization, compliance with
all applicable laws and regulations, and the funding, approval and consummation
of a court-approved reorganization plan of Noble China Inc. Accordingly, as a
result of the uncertainty with respect to these matters, there can be no
assurances that Noble China Inc. will be successfully reorganized or that the
Company and Noble Brewery will be able to retain the right to produce and
distribute Pabst Blue Ribbon beer in China subsequent to November 7, 2003.
As of March 31, 2003, the Company and Noble Brewery have not obtained a renewal
of their respective Pabst Blue Ribbon sub-license agreements, which expire on
November 7, 2003. The inability of the Company or Noble Brewery to obtain or
renew a sub-license from Noble China Inc. or enter into some other form of
strategic relationship under acceptable terms and conditions to allow the
Company and Noble Brewery 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.
On March 24, 2003, the Board of Directors of the Company and High Worth JV
approved a short-term loan of RMB 46,000,000 from High Worth JV to Lan Wei, a
company controlled by the City of Zhaoqing that is the controlling shareholder
of the Company. Of such amount, RMB 20,000,000 is to be invested in businesses
affiliated with Lan Wei and RMB 26,000,000 is to be used to facilitate the
reorganization or restructuring of Noble China Inc. (see Note 5(f)). Lan Wei has
agreed to repay the RMB 20,000,000 loan by June 30, 2003. The RMB 26,000,000 is
being held in a bank escrow account, and will be repaid to the Company if and
when it is determined that it is not possible to file a confirmable plan of
reorganization or implement an out-of-court restructuring of Noble China Inc.,
but in no event later than December 31, 2003. The loans bear interest at 3.9%
per annum.
During the past few years, Lan Wei has invested substantial capital in Noble
China Inc. and the Company, and has also used its relationships to arrange for
substantial bank financing for the Company, in order to facilitate the strategic
development of the Pabst Blue Ribbon beer business in China. Lan Wei believes
that a successful reorganization or restructuring of Noble China Inc. is in the
long-term interest of the Company and Blue Ribbon Noble, as it will assure such
entities the right to produce and distribute Pabst Blue Ribbon beer in China for
a period of thirty years from November 7, 2003.
11
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
If and when Noble China Inc. is successfully reorganized or restructured with
the assistance of Lan Wei, it is expected that the Company will receive a
sub-license or an assignment of the license to produce and distribute Pabst Blue
Ribbon in China, and that the Company will have the option to have the RMB
26,000,000 loan repaid in cash or by the transfer to the Company of any assets
that Lan Wei may acquire in conjunction with a reorganization or restructuring
of Noble China Inc. with a fair value equivalent to the loan amount.
The Company is currently unable to predict the effect that these 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. However, management has made certain assumptions with respect to
these uncertainties in order to evaluate the carrying value of its property,
plant and equipment, as well as its investment in an associated company (see
Notes 6 and 7).
During the three months ended March 31, 2003, as a result of an unexpected
substantial deceases in sales, continuing operating losses, a working capital
deficiency and the outbreak of severe acute respiratory syndrome ("SARS"), the
Company conducted a re-evaluation of the carrying value of its land use rights,
property and building, plant and equipment, office equipment and motor vehicles,
construction in progress, and the accrued capital commitment with respect to the
purchase of production assets, and the related expected future cash flows. As a
result of this evaluation, the Company recorded a provision for impairment of
RMB 50,400,000, RMB 8,050,000 and RMB 6,800,000 for the three months ended March
31, 2003, for Zhaoqing Brewery, the Marketing Company and Zao Yang High Worth
Brewery, respectively.
These impairment charges aggregating RMB 65,250,000 were based on certain
assumptions regarding the Company's future cash flows and other factors used to
determine the fair value of its land use rights, property and building, office
equipment and motor vehicles, plant and equipment, and construction in progress,
including the assumptions that some of the local brand beers developed and
produced by Zao Yang High Worth Brewery will be shifted to Zhaoqing Brewery and
Noble Brewery for production and distribution; and that, as a result of Lan
Wei's efforts, Zhaoqing Brewery has a 50% chance of being granted a renewal of
the Pabst sub-license jointly with Noble Brewery to produce Pabst Blue Ribbon
beer after the existing sub-license expires on November 7, 2003, with a
production ratio of 1 to 2. Included in the impairment charges were amounts
related to the purchase commitments for production equipment of RMB 2,400,000,
which have been recorded as an accrued expense. As a result of the persistent
decrease in sales and continuing operating losses, the related expected future
cash flows to be generated from the sales of Pabst Blue Ribbon beer at the
estimated reduced level of distribution are expected to be negative.
Accordingly, the effect of the Company successfully obtaining a renewal of a
sub-license is expected to have little impact on the recoverability of the
assets. As a result, a provision for impairment was provided for a majority of
the assets of Zhaoqing Brewery, the Marketing Company and Zao Yang High Worth
Brewery.
12
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
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. 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 March 31, 2003, its results of operations for the three
months ended March 31, 2003 and 2002, and its cash flows for the three months
ended March 31, 2003 and 2002. The consolidated balance sheet as of December 31,
2002 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 accounting principles
generally accepted in the United State of America 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 herein
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, 2002, 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,
2002.
The results of operations for the three months ended March 31, 2003 are not
necessary indicative of the results of operations to be expected for the full
fiscal year ending December 31, 2003.
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
experienced decreased sales and a net loss for the past three consecutive years,
incurred significant losses during the three months ended March 31, 2003, has a
net working capital deficiency of RMB 341,450,657 as of March 31, 2003, and may
not receive an extension of its sub-license to produce and distribute Pabst Blue
Ribbon beer, which expires on November 7, 2003. In addition, Noble China Inc.,
the majority shareholder of the Company's associated company, is experiencing
severe financial difficulties and management and other uncertainties which may
impact the operations of Noble Brewery and its ability to renew its sub-license
to continue to produce and distribute Pabst Blue Ribbon in China. These factors
raise substantial doubt as to the Company's ability to continue as a going
concern. 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, 2002, have reported that there is substantial
doubt about the Company's ability to continue as a going concern.
13
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
During 2002, the Company experienced reduced net sales as a result of intense
competition, reduced cash flows and diminished working capital. The Company
expects that these pressures will continue for the remainder of 2003 and into
2004, resulting in continued 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 restructuring and
internal consolidation programs will continue if it is unable to regain
profitability in the near future.
In 2002, the Company implemented a series of new sales programs to launch
various newly developed or modified local brand beers into the market, including
brands such as "Lanli", "Lancheng", "Lanshi", "Xile" and "Zhaopi". Together with
the local brand beer "Di Huang Quan" produced by Zao Yang High Worth Brewery,
the Company intends to increase its marketing efforts with respect to these new
local brands. If the Company is unable to obtain a new sub-license to produce
Pabst Blue Ribbon beer in China after November 7, 2003, these new local brands
would be expected to become the main product lines and the major source of
revenues for High Worth JV and Zao Yang High Worth Brewery. However, pursuant to
the joint venture agreement of Noble Brewery, the Company will continue to
manage the daily operations of Noble Brewery until the expiration of the joint
venture on June 10, 2013. In May 1999, Noble China Inc. 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 the PRC for 30 years commencing in November
2003. Accordingly, management currently believes that Noble Brewery will be able
to obtain a sub-license from Noble China Inc., the 60% shareholder of Noble
Brewery, to continue to produce and sell Pabst Blue Ribbon beer in China after
November 7, 2003, although there can be no assurances in this regard.
In January 2003, the Company reorganized its marketing teams by reducing the
number of branch offices from 15 to 6. Management believes that the reduction in
branch offices will enhance the implementation of its marketing strategies
through clearer responsibilities and can allow its sales force to more
effectively attempt to arrest the decline in sales volume. However, there can be
no assurances that the Company will become profitable in the near future. The
Company may consider more severe restructuring alternatives if it is unable to
operate profitably in the near future.
The Company anticipates that its operating cash flows, 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 through December 31, 2003. However,
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 operations at current levels and continue as a going concern.
14
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
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,
including those related to interest in an associated company, allowance for
doubtful accounts, impairment of assets and income taxes, 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.
Prior to the reincorporation, in 2002, the Company's share capital was
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. Effective March 1, 2003,
the Company transferred its share capital to additional paid-in capital and
recorded no par value for both of the Company's common stock in Class A and
Class B subsequent to the reincorporation.
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.
REVENUE RECOGNITION - Sales represent the invoiced value of goods sold, net of
discounts. Sales and sales discounts are recognized when goods are delivered to
customers, the sales amount is determinable and collectibility is reasonably
assured.
The provisions of Emerging Issues Task Force (EITF) No. 01-9 "Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor's Products)", were adopted during 2002. The adoption of EITF No. 01-9
resulted in the reclassification of certain sales incentives previously
classified as selling expenses to reductions from sales. Prior year amounts have
been reclassified to conform to the current year's presentation. These changes
had no effect on the Company's operating results. The amount of sales incentives
included as a deduction from sales in accordance with EITF No. 01-9 was RMB
7,006,485 and RMB 7,433,616 for the three months ended March 31, 2003 and 2002,
respectively.
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 income (loss)
equaled the net loss for the three months ended March 31, 2003 and 2002.
15
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
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 March 31, 2003, potentially dilutive securities representing 105,000 shares
of common stock were outstanding, consisting of stock options to purchase 30,000
shares exercisable at $3.87 per share and 75,000 shares exercisable at $0.72 per
share. At March 31, 2002, potentially dilutive securities representing 165,000
shares of common stock were outstanding, consisting of stock options to purchase
60,000 shares exercisable at $3.87 per share, and 105,000 shares exercisable at
$0.72 per share. For the three months ended March 31, 2003 and 2002, 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.
RECENT ACCOUNTING PRONOUNCEMENTS - In April 2003, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." ("SFAS No.149), which is effective for any new derivative
instruments the Company enters into after June 30, 2003. SFAS No.149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The clarification provisions of SFAS No. 149 require
that contracts with comparable characteristics be accounted for similarly. The
adoption of SFAS No. 149 is not anticipated to have a significant impact on the
Company's financial position and results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS
No.150"), which is effective for financial instruments entered into or modified
after May 31, 2003 and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. SFAS No.150 establishes standards
for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability. Many of
those instruments were previously classified as equity. The adoption of SFAS
No.150 is not anticipated to have a significant impact on the Company's
financial position and results of operations.
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 has adopted SFAS
No. 143 effective January 1, 2003. The adoption of SFAS No. 143 did not have a
significant impact on the Company's financial position and results of
operations.
16
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
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 was applied prospectively to exit or disposal activities initiated after
December 31, 2002. The adoption of SFAS No. 146 did not have a significant
impact on the Company's financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN No. 45 clarifies disclosures
that are required to be made for certain guarantees and establishes a
requirement to record a liability at fair value for certain guarantees at the
time of the guarantee's issuance. The disclosure requirements of FIN No. 45 had
been applied in the Company's 2002 financial statements. The requirement to
record a liability applied to guarantees issued or modified after December 31,
2002. The Company has adopted the measurement and recording provisions of FIN
No. 45 in 2003 prospectively.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB 51". FIN No. 46 requires that the primary
beneficiary in a variable interest entity consolidate the entity even if the
primary beneficiary does not have a majority voting interest. The consolidation
requirements of this Interpretation are required to be implemented for any
variable interest entity created on or after January 31, 2003. In addition, FIN
No. 46 requires disclosure of information regarding guarantees or exposures to
loss relating to any variable interest entity existing prior to January 31, 2003
in financial statements issued after January 31, 2003. FIN No. 46 was effective
for the Company on January 31, 2003, and did not have a material impact on the
Company's financial position and results of operations.
17
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
3. ACCOUNTS RECEIVABLE
The balance of accounts receivable is presented in the accompanying consolidated
financial statements net of the allowance for doubtful accounts. The Company
provided an allowance for doubtful accounts of RMB 2,600,000 and RMB 6,500,000
for the three months ended March 31, 2003 and 2002, respectively. Changes in the
allowance for doubtful accounts for the three months ended March 31, 2003 and
for the year ended December 31, 2002 were as follow:
March 31, 2003 December 31, 2002
----------------------------- -----------------
RMB USD RMB
(Unaudited) (Unaudited) (Audited)
------------- -------------- -----------------
Balance at beginning of period 90,991,024 10,962,774 104,632,067
Provision for doubtful accounts:
- for the three months
ended March 31, 2,600,000 313,253
- during the year 2002 - - 18,411,931
Accounts written off:
- during the three months
ended March 31, (2,639,460) (318,007) -
- during the year 2002 (32,052,974)
------------- -------------- -----------------
Balance at end of period 90,951,564 10,958,020 90,991,024
============= ============== =================
4. INVENTORIES
Inventories consisted of the following at March 31, 2003 and December 31, 2002:
March 31, 2003 December 31, 2002
------------------------ -----------------
RMB USD RMB
----------- ----------- ----------
(Unaudited) (Unaudited)
Raw materials 27,861,538 3,356,812 28,130,712
Work in progress 4,355,367 524,743 4,169,690
Finished goods 17,535,641 2,112,728 21,879,615
----------- ----------- ----------
49,752,546 5,994,283 54,180,017
=========== =========== ==========
18
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
5. RELATED PARTIES TRANSACTIONS AND ARRANGEMENTS
(a) Management arrangement
During December 2000, the Company and Noble China signed a memorandum
pursuant to which a management committee was established 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 improve coordination of human resources, financial,
production and marketing activities. Under this arrangement:
- 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 present reduced levels of sales volume, Noble Brewery is currently
producing all of the beer sold by both Zhaoqing Brewery and Noble
Brewery.
- 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.
(b) Sales of raw materials
The Company sold raw materials including packaging materials and beer products
of RMB 1,748,532 and RMB 4,834,968 to Noble Brewery during the three months
ended March 31, 2003 and 2002, respectively. These transactions were carried out
at cost between the parties.
(c) Purchases of beer products
During the three months ended March 31, 2003 and 2002, the Company purchased
beer products for resale from Noble Brewery amounting to RMB 35,752,181 and RMB
91,270,127, respectively, and received an allocation of sales incentives (as
defined in EITF No.01-9) from Noble Brewery of RMB nil and RMB 548,787,
respectively. The transactions were carried out at agreed terms between the
parties.
During the three months ended March 31, 2003 and 2002, the Company purchased RMB
22,356,037 and RMB 15,574,954 of beer products from Noble Brewery, respectively,
pursuant to the management arrangement of re-allocating the total production
volume at a 1 to 2 ratio among Zhaoqing Brewery and Noble Brewery (see Note
5(a)). This amount represents the direct variable cost of producing these beer
products.
19
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
5. RELATED PARTIES TRANSACTIONS AND ARRANGEMENTS (continued)
(d) Royalty fee
For the three months ended March 31, 2003 and 2002, a royalty fee of RMB 514,315
and RMB 865,718, respectively, was payable to Guangdong Blue Ribbon for the
right to use the Pabst trademarks in the PRC.
(e) Amounts due from related companies and loan receivable
The amounts due from related companies primarily represent receivable balances
from Guangdong Blue Ribbon and its group of companies resulting from routine
inter-company business transactions. The amounts are unsecured, interest-free
and repayable on demand. On May 10, 2003, out of the amounts due from Guangdong
Blue Ribbon, approximately RMB 7,090,000 was converted into a short-term loan
due to be payable in one year bearing an interest rate of 5.6% per annum, which
was reclassified to non-current assets in the accompanying consolidated
financial statements.
(f) Loans to related companies
During the three months ended March 31, 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 was repayable on December 31, 2002. During the three months ended
March 31, 2002, Zao Yang High Worth Brewery advanced RMB 5,500,000 to Guangdong
Blue Ribbon. The advance to Guangdong Blue Ribbon was unsecured, with no
agreed-upon interest and no fixed date of repayment. During the three months
ended June 30, 2002, both of these loans were repaid in full.
On March 24, 2003, the Board of Directors of the Company and High Worth JV
approved a short-term loan of RMB 46,000,000 from High Worth JV to Lan Wei, a
company controlled by the City of Zhaoqing that is the controlling shareholder
of the Company. Of such amount, RMB 20,000,000 is to be invested in businesses
affiliated with Lan Wei and RMB 26,000,000 is to be used to facilitate the
reorganization or restructuring of Noble China, Inc. Lan Wei has agreed to repay
the RMB 20,000,000 loan by June 30, 2003. The RMB 26,000,000 is being held in a
bank escrow account, and will be repaid to the Company if and when it is
determined that it is not possible to file a confirmable plan of reorganization
or implement an out-of-court restructuring of Noble China, Inc., but in no event
later than December 31, 2003. The loans bear interest at 3.9% per annum.
Pursuant to the loan memorandum, if and when Noble China, Inc. is successfully
reorganized or restructured with the assistance of Lan Wei, it is expected that
the Company will receive a sub-license or an assignment of the license to
produce and distribute Pabst Blue Ribbon in China, and that the Company will
have the option to have the RMB 26,000,000 loan repaid in cash or by the
transfer to the Company of any assets that Lan Wei may acquire in conjunction
with a reorganization or restructuring of Noble China, Inc. with a fair value
equivalent to the loan amount.
(g) Amounts due to related companies
As of March 31, 2003 and December 31, 2002, the amounts due to related companies
consist of amounts payable to Guangdong Blue Ribbon and its group of companies
of RMB 1,560 and RMB 1,560, respectively.
The amounts payable to group companies of Guangdong Blue Ribbon arose from the
purchases of raw materials. The amounts are unsecured, interest-free and
repayable on demand.
20
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
6. INTEREST IN AN ASSOCIATED COMPANY
The investment consists of the Company's 40% equity interest in Noble Brewery,
which is held by a 60% owned subsidiary. The condensed unaudited statements of
operations of Noble Brewery for the three months ended March 31, 2003 and 2002
are as follows:
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
--------------------------- ------------------
RMB USD RMB (1)
------------- ------------ ------------------
Net sales 32,238,019 3,884,099 86,934,510
============= ============ ==================
Net (loss) income (237,957,576) (28,669,585) 5,164,534
============= ============ ==================
The Company's share of net (loss)
income after adjustment
of intercompany profit
unrealized and other
intercompany adjustments (2)(3) (94,067,726) (11,333,461) 3,915,814
============= ============ ==================
(1) The provisions of Emerging Issues Task Force ("EITF") No. 01-9, "Accounting
for Consideration Given by a Vendor to a Customer (Including a Reseller of
the Vendor's Products)", were adopted during 2002. The adoption of EITF No.
01-9 resulted in the reclassification of certain sales incentives
previously classified as selling expenses to a reduction from sales. Prior
quarter amounts have been reclassified to conform to the current quarter's
presentation; this reclassification had no effect on the Company's
operating results. The amount of sales incentives recorded as a deduction
from sales in accordance with EITF No. 01-9 was RMB 548,787 for the three
months ended March 31, 2002.
(2) As at March 31, 2003 and 2002, the balance of the amounts due to Noble
Brewery was RMB 285,271,416 and RMB 199,753,980, respectively. During the
three months ended March 31, 2003 and 2002, Noble Brewery recorded an
allowance for doubtful accounts of RMB 1,700,000 and RMB 4,000,000,
respectively, on amounts receivable from the Company. The provision for
doubtful accounts were eliminated, together with the unrealized profit on
stock of the Company, as intercompany adjustments when the Company recorded
its equity in the results of operations of Noble Brewery based on the
equity accounting method.
(3) During the three months ended March 31, 2003, the Company's share of net
(loss) income of an associated company of RMB 94,067,726 includes RMB
87,840,000 with respect to the impairment charges recorded by the
associated company.
The following is summarized balance sheet information of Noble Brewery:
March 31, 2003 December 31, 2002
------------------------- -----------------
RMB USD RMB
------------ ----------- -----------
(Unaudited) (Unaudited)
Current assets (1) 271,697,980 32,734,698 251,868,373
Property, plant and equipment 3,068,316 369,677 226,776,229
------------ ----------- -----------
Restricted bank deposits 36,032,396 4,341,253 36,032,396
============ =========== ===========
Total assets 310,798,692 37,445,628 514,676,998
Current liabilities 171,180,763 20,624,188 137,101,494
Deferred income taxes - - -
Equity 139,617,929 16,821,440 377,575,504
------------ ----------- -----------
Total liabilities and equity 310,798,692 37,445,628 514,676,998
============ =========== ===========
(1) Net of allowances on amounts receivable from the Company of RMB 165,175,000
and RMB 163,475,000 as of March 31, 2003 and December 31, 2002, respectively.
21
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
6. INTEREST IN AN ASSOCIATED COMPANY (continued)
During the three months ended March 31, 2003, as a result of unexpected
substantial decrease in sales, continuing operating losses and the outbreak of
SARS in China, Noble Brewery conducted an evaluation of the carrying value of
its land use right, property and building, plant and equipment and construction
in progress, as well as the related estimated future cash flows, which included
the assumption that there is a probability of (1) 40%;(2) 40%; and (3) 20% that
Noble Brewery will: (1) continue to produce Pabst Blue Ribbon beer after
November 7, 2003 exclusively; (2) continue to produce Pabst Blue Ribbon beer
after November 7, 2003 jointly with Zhaoqing Brewery in a 2:1 ratio; and (3) not
be able to renew its sub-license agreement and switch to produce local brand
beer. As a result of this evaluation, Noble Brewery recorded a provision for
impairment of its land use right, property and building, plant and equipment,
office equipment and construction in progress of RMB 219,600,000 for the three
months ended March 31, 2003. Included in the impairment charges were amounts
related to the purchase commitments for production equipment, which have been
recorded as an accrued expense and a reduction of prepaid amounts totaling RMB
2,600,000 and RMB 2,600,000, respectively. Accordingly, the effect of Noble
Brewery successfully obtaining a renewal of the sub-license is expected to have
little impact on the recoverability of the assets. As a result of these
impairment charges, the majority of assets of Noble Brewery have been fully
written down.
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. 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. During the three months ended March 31,
2003, High Worth JV and the Marketing Company have utilized all the cash held in
trust for Noble Brewery for the purchase of raw materials and settlement of the
expenses on behalf of Noble Brewery. As a result, as of March 31, 2003, High
Worth JV and the Marketing Company did not hold any cash in trust for Noble
Brewery.
22
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
6. INTEREST IN AN ASSOCIATED COMPANY (continued)
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
operating requirements in the near term. If the foregoing assumptions prove to
be inaccurate, Noble Brewery's cash flow may be adversely affected, which would
negatively impact the ability of Noble Brewery to conduct operations at current
levels and continue as a going concern.
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. appealed the Shandong
Court's decision to the Supreme Court of the PRC, which was accepted by the
Supreme Court on November 4, 2002, a hearing for which is still pending.
On September 29, 2002, the Shandong Court issued a new preservation order to
those banks where Noble Brewery kept its previously frozen funds, requesting
them to extend the period of preservation for an additional six months until
March 23, 2003.
On March 21, 2003, the Shandong Court further extended its Preservation Order
for another six months to September 23, 2003.
The Company is currently unable to predict the effect of Noble China Inc.'s
financial difficulties and management uncertainty on Noble Brewery, including
Noble China Inc.'s ability to grant a sub-license to Noble Brewery to produce
Pabst Blue Ribbon beer after the existing sub-license expires on November 7,
2003. If Noble China Inc. is unable to renew the Pabst sub-license with Noble
Brewery, or if other related estimates and assumptions change adversely in the
future, Noble Brewery may be required to record an additional impairment charge.
As of March 31, 2003, given the various issues discussed above, the Company has
conducted an evaluation on the carrying value of its investment in Noble Brewery
taking into consideration the related amounts due to Noble Brewery and the net
working capital of Noble Brewery and determined an immediate write down of the
investment is not necessary. However, if the circumstances related to the
recoverability of the investment change adversely in the future, the Company may
be required to write down its value.
23
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
7. IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT
During the three months ended March 31, 2003, as a result of an unexpected
substantial decreases in sales, continuing operating losses, the outbreak of
SARS in China, working capital deficiency and various business issues, the
Company conducted an evaluation of the carrying value of its land use right,
property and building, plant and equipment, office equipment and motor vehicles
and construction in progress, the accrued capital commitment with respect to the
purchase of production assets, and the related expected future cash flows. As a
result of this evaluation, the Company recorded a provision for impairment
charges of RMB 50,400,000, RMB 8,050,000 and RMB 6,800,000 for the three months
ended March 31, 2003 for Zhaoqing Brewery, the Marketing Company and Zao Yang
High Worth Brewery, respectively.
These impairment charges aggregating RMB 65,250,000 were based on certain
assumptions regarding the Company's future cash flows and other factors used to
determine the fair value of its land use rights, property and building, office
equipment and motor vehicles, plant and equipment, and construction in progress,
including the assumptions that some of the local brand beers developed and
produced by Zao Yang High Worth Brewery will be shifted to Zhaoqing Brewery and
Noble Brewery for production and distribution; and that, as a result of Lan
Wei's efforts, Zhaoqing Brewery has a 50% chance of being granted a renewal of
the Pabst sub-license jointly with Noble Brewery to produce Pabst Blue Ribbon
beer after the existing sub-license expires on November 7, 2003, with a
production ratio of 1 to 2. Included in the impairment charges were amounts
related to the purchase commitments for production equipment of RMB 2,400,000,
which have been recorded as an accrued expense. As a result of the persistent
decrease in sales and continuing operating losses, the related expected future
cash flows to be generated from the sales of Pabst Blue Ribbon beer at the
estimated reduced level of distribution are expected to be negative.
Accordingly, the effect of the Company successfully obtaining a renewal of a
sub-license is expected to have little impact on the recoverability of the
assets. As a result, a provision for impairment was provided for a majority of
the assets of Zhaoqing Brewery, the Marketing Company and Zao Yang High Worth
Brewery.
8. BANK BORROWINGS
As at December 31, 2002, a bank loan of RMB 30,104,000 granted to Zao Yang High
Worth Brewery, which expired on September 30, 2002, was pending for completion
of the official loan renewal agreement. Zao Yang High Worth Brewery has
continued to pay the interest that is accruing on the loan, and the bank has not
made a demand for repayment. The renewal agreement, without a specific date of
repayment and guaranteed by High Worth JV, had been approved and signed by the
relevant bank and was returned to Zao Yang High Worth Brewery in May 2003. The
loan has been recorded as a current liability at March 31, 2003 and is payable
on demand.
9. AMOUNT DUE TO AN ASSOCIATED COMPANY
The amount due to an associated company represents amounts payable to Noble
Brewery. Commencing 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 to Zhaoqing Brewery by Noble Brewery and other recurring
intercompany transactions. As of March 31, 2003 and December 31, 2002, the
amount due to an associated company was RMB 285,271,416 and RMB 298,379,194,
respectively, which was unsecured, interest-free and repayable on demand.
24
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
10. ADVANCE FROM RELATED PARTY
During the three months ended March 31, 2002, Zao Yang High Worth Brewery
received an advance of RMB 5,700,000 from its local partner, Zao Yang Brewery,
which is the 45% shareholder of Zao Yang High Worth Brewery. The loan was
unsecured, without interest and had no fixed term of repayment. This advance has
been utilized to fund the working capital requirements of Zao Yang High Worth
Brewery. This advance was subsequently converted into additional capital of Zao
Yang High Worth Brewery in 2002 (see Note 1).
11. MINORITY INTERESTS
As a result of the substantial operating losses incurred by the Company during
the year ended December 31, 2002 and the three months ended March 31, 2003, 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 March 31, 2003 reflected a debit balance of RMB
71,707,225. Since the minority interest parties have no legal obligation to fund
these obligations to the Company, the debit balance of RMB 71,707,225 was
charged to operations during the three months ended March 31, 2003. The Company
expects to continue to charge to operations any future debit balances of the
minority interest parties.
12. CONTINGENCIES
For information with respect to licensing and legal matters related to Noble
China Inc., see "NOBLE CHINA INC." at Note 1 and Note 6, respectively.
25
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 March 31,
2003 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 March 31, 2003 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 its premium beers and the keen
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. In anticipation of the possible non-renewal of
Zhaoqing Brewery's sub-license to produce Pabst Blue Ribbon beer, Zhaoqing
Brewery has commenced the production of various newly developed or modified
local brand beers in order to meet the needs of the lower to medium market
segment.
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. In 2002,
Noble Brewery also commenced production of various newly developed local brand
beers in order to meet the needs of the lower to medium market segment.
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
26
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.
The Company conducts a substantial portion of its purchases through related
parties, and has additional significant continuing transactions with such
parties.
Overview:
During 2002 the Company experienced decreased net sales and a net loss for
the third successive year, diminished working capital, and intense competition.
The Company expects that these pressures will continue in 2003, resulting in net
losses for the short-term. 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 2002, the Company implemented a series of new sales programs to launch
various newly developed or modified local brand beers into the market, including
brands such as "Lanli", "Lancheng", "Lanshi", "Xile" and "Zhaopi". Together with
the local brand beer "Di Huang Quan" produced by Zao Yang High Worth Brewery,
the Company intends to increase its marketing efforts with respect to these new
local brands. If the Company is unable to obtain a new sub-license to produce
Pabst Blue Ribbon beer in China after November 7, 2003, these new local brands
would be expected to become the main product lines and the major source of
revenues for High Worth Brewery and Zao Yang High Worth Brewery after the
expiration of the Pabst sub-license on November 7, 2003. However, pursuant to
the joint venture agreement of Blue Ribbon Noble, the Company will continue to
manage the daily operations of Blue Ribbon Noble until the expiration of the
joint venture on June 10, 2013. In May 1999, Noble China Inc. 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 the PRC for 30 years commencing in November
2003. Accordingly, management currently believes that Noble Brewery will be able
to obtain a sub-license from Noble China Inc., the 60% shareholder of Noble
Brewery, to continue to produce and sell Pabst Blue Ribbon beer in China after
November 7, 2003, although there can be no assurances in this regard.
In January 2003, the Company reorganized its marketing teams by reducing
the number of branch offices from 15 to 6. Management believes that the
reduction in branch offices will enhance the implementation of its marketing
strategies through clearer responsibilities and can allow its sales force to
more effectively attempt to arrest the decline in sales volume. However, there
can be no assurances that the Company will become profitable in the near future.
The Company may consider more severe restructuring alternatives if it is unable
to operate profitably in the near future.
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
27
the realizable or settlement values. The Company has suffered recurring
operating losses and had a working capital deficit at December 31, 2002 and
March 31, 2003. 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, 2002, have expressed substantial doubt about the
Company's ability to continue as a going concern.
During the three months ended March 31, 2003, as a result of an unexpected
substantial deceases in sales, continuing operating losses, the outbreak of SARS
in China, working capital deficiency and various business issues, the Company
conducted a re-evaluation of the carrying value of its land use right, property
and building, office equipment and motor vehicles, plant and equipment,
construction in progress, and the accrued capital commitment with respect to the
purchase of production assets and the related expected future cash flows. As a
result of this evaluation, the Company recorded a provision for impairment
charges of RMB 50,400,000, RMB 8,050,000 and RMB 6,800,000 for the three months
ended March 31, 2003, for Zhaoqing Brewery, the Marketing Company and Zao Yang
High Worth Brewery, respectively.
These impairment charges aggregating RMB 65,250,000 were based on certain
assumptions regarding the Company's future cash flows and other factors used to
determine the fair value of its land use rights, property and building, office
equipment and motor vehicles, plant and equipment, and construction in progress,
including the assumptions that some of the local brand beers developed and
produced by Zao Yang High Worth Brewery will be shifted to Zhaoqing Brewery and
Noble Brewery for production and distribution; and that, as a result of Lan
Wei's efforts, Zhaoqing Brewery has a 50% chance of being granted a renewal of
the Pabst sub-license jointly with Noble Brewery to produce Pabst Blue Ribbon
beer after the existing sub-license expires on November 7, 2003, with a
production ratio of 1 to 2. Included in the impairment charges were amounts
related to the purchase commitments for production equipment of RMB 2,400,000,
which have been recorded as an accrued expense. As a result of the persistent
decrease in sales and continuing operating losses, the related expected future
cash flows to be generated from the sales of Pabst Blue Ribbon beer at the
estimated reduced level of distribution are expected to be negative.
Accordingly, the effect of the Company successfully obtaining a renewal of a
sub-license is expected to have little impact on the recoverability of the
assets. As a result, a provision for impairment was provided for a majority of
the assets of Zhaoqing Brewery, the Marketing Company and Zao Yang High Worth
Brewery. This estimate represents a change from prior estimates based on the
events which have transpired during the three months ended March 31, 2003.
In addition, during the three months March 31, 2003, Noble Brewery also
recorded a provision for impairment of land use right, property and building,
office equipment, plant and equipment and construction in progress of RMB
219,600,000, as a result of its reassessment of the fair value of its property,
plant and equipment based on the related expected cash flows. Included in the
impairment charges were amounts related to the purchase commitments for
production equipment, which have been recorded as an accrued expense and a
reduction of prepaid amounts totaling RMB 2,600,000 and RMB 2,600,000,
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 through December 31, 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 operations at current levels and continue as a going concern.
Licensing Arrangements and Relationship with Noble China Inc.:
Through a Sub-license Agreement dated May 6, 1994 between Pabst Zhaoqing,
the then subsidiary of Guangdong Blue Ribbon, and High Worth JV, High Worth JV
acquired a sub-license to utilize Pabst trademarks in conjunction with the
production and
28
marketing of beer in China and other Asian countries except Hong Kong, Macau,
Japan and South Korea. The sub-license 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 7, 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.
During December 2000, the Company and Noble China Inc. signed a memorandum
pursuant to which a management committee was established 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. Zhaoqing Brewery, Noble Brewery and the
Marketing Company each remain as legally distinct entities.
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 was insolvent, and was 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. Noble China Inc. appealed the Shandong Court's decision to the Supreme
Court of the PRC, which was accepted on November 4, 2002, a hearing for which is
still pending.
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 could not reach a resolution on an appropriate restructuring plan that
the Board of Directors could support in the interest of all shareholders and
Debenture holders within 60 days, the Board of Directors would resign.
On September 3, 2002, Noble China Inc.'s report for the three months ended
June 30, 2002 disclosed that although the major shareholder and the major
Debenture holder were continuing their discussions, no meaningful process had
been noted and the Directors planned to resign on September 20, 2002.
29
On September 24, 2002, a press release by Noble China Inc. announced that
one of its three directors had resigned on September 20, 2002, and that the
remaining two directors intended to resign. On November 12, 2002, Noble China
Inc. held a meeting of shareholders to elect a new Board of Directors to consist
of three members; three candidates nominated by Lan Wei, the major shareholder
of the Company, were elected to the Board of Directors.
Discussions between holders of a majority of the Debentures and
representatives of the City of Zhaoqing regarding a reorganization of Noble
China Inc. resulted in a preliminary agreement in principle with respect to
settlement in full of the outstanding Debentures. Discussions between
representatives of the City of Zhaoqing and Pabst Brewing Company regarding a
reorganization of Noble China Inc. and a restructuring of the master license
agreement that becomes effective on November 7, 2003 resulted in the execution
of a non-binding term sheet in March 2003. These agreements are both conditional
on Noble China Inc. being able to implement a formal reorganization of its debt
and equity securities. The successful reorganization of Noble China Inc. is
subject to the preparation and execution of definitive agreements and a plan of
reorganization, compliance with all applicable laws and regulations, and the
funding, approval and consummation of a court-approved reorganization plan of
Noble China Inc. Accordingly, as a result of the uncertainty with respect to
these matters, there can be no assurances that Noble China Inc. will be
successfully reorganized or that the Company and Blue Ribbon Noble will be able
to retain the right to produce and distribute Pabst Blue Ribbon beer in China
subsequent to November 7, 2003.
As of March 31, 2003, the Company has not yet obtained a renewal of the
Pabst Blue Ribbon sub-license agreement. The inability of the Company to obtain
a sub-license from Noble China Inc. or to renew the Company's sub-license 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 potential adverse effect on the Company's
future business development, including the possible formation of strategic
alliance with other brewing group in China.
On March 24, 2003, the Board of Directors of the Company and High Worth JV
approved a short-term loan of RMB 46,000,000 from High Worth JV to Lan Wei, a
company controlled by the City of Zhaoqing that is the controlling shareholder
of the Company. Of such amount, RMB 20,000,000 is to be invested in businesses
affiliated with Lan Wei and RMB 26,000,000 is to be used to facilitate the
reorganization or restructuring of Noble China Inc. Lan Wei has agreed to repay
the RMB 20,000,000 loan by June 30, 2003. The RMB 26,000,000 is being held in a
bank escrow account, and will be repaid to the Company if and when it is
determined that it is not possible to file a confirmable plan of reorganization
or implement an out-of-court restructuring of Noble China Inc., but in no event
later than December 31, 2003. The loans bear interest at 3.9% per annum.
During the past few years, Lan Wei has invested substantial capital in
Noble China Inc. and the Company, and has also used its relationships to arrange
for substantial bank financing for the Company, in order to facilitate the
strategic development of the Pabst Blue Ribbon beer business in China. Lan Wei
believes that a successful reorganization or restructuring of Noble China Inc.
is in the long-term interest of the Company and Blue Ribbon Noble, as it will
assure such entities the right to produce and distribute Pabst Blue Ribbon beer
in China for a period of thirty years from November 7, 2003.
If and when Noble China Inc. is successfully reorganized or restructured
with the assistance of Lan Wei, it is expected that the Company will receive a
sub-license or an assignment of the license to produce and distribute Pabst Blue
Ribbon in China, and that the Company will have the option to have the RMB
26,000,000 loan repaid in cash or by the transfer to the Company of any assets
that Lan Wei may acquire in
30
conjunction with a reorganization or restructuring of Noble China Inc. with a
fair value equivalent to the loan amount.
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.
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, income taxes,
impairment of assets and allowance for doubtful accounts. 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 March 31, 2003, the total value of the Company's
interest in Noble Brewery was RMB 119,692,586, representing 29.1% of the
Company's total assets. At December 31, 2002, the total value of the Company's
interest in Noble Brewery was RMB 213,760,312, representing 36.2% of the
Company's total assets. The net sales of Noble Brewery for the three months
ended March 31, 2003 decreased by RMB 54,696,491 or 62.9% to RMB 32,238,019, as
compared to RMB 86,934,510 for the three months ended March 31, 2002. During the
three months ended March 31, 2003, because of unexpected substantial reduction
in sales and continued operating losses, Noble Brewery conducted an evaluation
of the carrying value of its land use right, property and building, office
equipment, plant and equipment and construction in progress, based on the
related estimated future cash flows. As a result of this calculation, Noble
Brewery recorded a provision for impairment of land use right, property and
building, office equipment, plant and equipment and construction in progress of
RMB 219,600,000. Included in the impairment charges were amounts related to the
purchase commitments for production equipment, which have been recorded as an
accrued expense and a reduction of prepaid amounts totaling RMB 2,600,000 and
RMB 2,600,000, respectively. As a result of these factors, the Company's share
of the net loss from Noble Brewery for the three months ended March 31, 2003 was
RMB 94,067,726, as compared to net income of RMB 3,915,814 for the three months
ended March 31, 2002. As of March 31, 2003, given the various issues discussed
above, the Company has conducted an evaluation on the carrying value of its
investment in Noble Brewery taking into consideration the related amounts due to
Noble Brewery and the net working capital of Noble Brewery and determined an
immediate write down of the investment is not necessary. However, if the
circumstances related to the recoverability of the investment change adversely
in the future, the Company may be required to write down its value. In addition,
Noble China Inc., the majority shareholder of Noble Brewery, is experiencing
certain financial difficulties and management uncertainty. The Company is
currently unable to predict the effect of Noble China Inc.'s financial
difficulties and management uncertainties on Noble Brewery, including Noble
China Inc.'s ability to grant a sub-license to Noble Brewery to produce Pabst
Blue Ribbon beer.
31
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 a land use right, property and
building, plant and equipment as well as construction in progress. At March 31,
2003, the net residual value of the land use right, property and building,
office equipment and motor vehicles, plant and equipment and construction in
progress was RMB 726,331, which accounted for 0.2% of the Company's total
assets. At December 31, 2002, the net value of property, plant and equipment was
RMB 64,186,910, which accounted for 10.9% of the Company's total assets. In
assessing the impairment of the land use right, property and building, plant and
equipment and construction in progress, the Company makes assumptions regarding
the estimated future cash flows and other factors to determine the fair value of
the respective assets.
During the three months ended March 31, 2003, as a result of an unexpected
substantial deceases in sales, continuing operating losses, the outbreak of SARS
in China, working capital deficiency, and various business issues, the Company
conducted an re-evaluation of the carrying value of its land use right, property
and building, office equipment and motor vehicles, plant and equipment,
construction in progress, the accrued capital commitment with respect to the
purchase of production assets, and the related expected future cash flows. As a
result of this evaluation, the Company recorded a provision for impairment
charges of RMB 50,400,000, RMB 8,050,000 and RMB 6,800,000 for the three months
ended March 31, 2003, for Zhaoqing Brewery, the Marketing Company and Zao Yang
High Worth Brewery, respectively.
These impairment charges aggregating RMB 65,250,000 were based on certain
assumptions regarding the Company's future cash flows and other factors used to
determine the fair value of its land use rights, property and building, office
equipment and motor vehicles, plant and equipment, and construction in progress,
including the assumptions that some of the local brand beers developed and
produced by Zao Yang High Worth Brewery will be shifted to Zhaoqing Brewery and
Noble Brewery for production and distribution; and that, as a result of Lan
Wei's efforts, Zhaoqing Brewery has a 50% chance of being granted a renewal of
the Pabst sub-license jointly with Noble Brewery to produce Pabst Blue Ribbon
beer after the existing sub-license expires on November 7, 2003, with a
production ratio of 1 to 2. Included in the impairment charges were amounts
related to the purchase commitments for production equipment of RMB 2,400,000,
which have been recorded as an accrued expense. As a result of the persistent
decrease in sales and continuing operating losses, the related expected future
cash flows to be generated from the sales of Pabst Blue Ribbon beer at the
estimated reduced level of distribution are expected to be negative.
Accordingly, the effect of the Company successfully obtaining a renewal of a
sub-license is expected to have little impact on the recoverability of the
assets. As a result, a provision for impairment was provided for a majority of
the assets of Zhaoqing Brewery, the Marketing Company and Zao Yang High Worth
Brewery. This estimate represents a change from prior estimates based on the
events which have transpired during the three months ended March 31, 2003.
In addition, during the three months March 31, 2003, Noble Brewery also
recorded a provision for impairment of land use right, property and building,
office equipment, plant and equipment and construction in progress of RMB
219,600,000, as a result of
32
its reassessment of the fair value of its property, plant and equipment and the
related expected future cash flow. Included in the impairment charges were
amounts related to the purchase commitments for production equipment, which have
been recorded as an accrued expense and a reduction of prepaid amounts totaling
RMB 2,600,000 and RMB 2,600,000, respectively.
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 accounts during 2003.
The Company records 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 determines an appropriate
allowance based on individual circumstances.
Consolidated Results of Operations:
Three Months Ended March 31, 2003 and 2002 -
Sales: During the three months ended March 31, 2003, net sales of beer
products decreased by RMB 102,169,148 or 57.3% to RMB 76,002,800, as compared to
RMB 178,171,948 for the three months ended March 31, 2002. The Company sold
24,971 metric tons of beer to distributors in 2003 as compared to 39,714 metric
tons of beer in 2002, a decrease of 37.1%. The decrease in net sales of beer
products during the three months ended March 31, 2003 as compared to the three
months ended March 31, 2002 was primarily attributable to the decrease in volume
of beer sold particularly, which was attributable to the reorganization of its
marketing teams and marketing strategies, the reduction in sales branch offices,
the outbreak of severe acute respiratory syndrome in China and in general,
reduced demand for Pabst beer as well as increasing competition from local
brands. The decrease in net sales was also attributable to the increased
proportion of local brand beers which were sold at lower sales prices.
During the three months ended March 31, 2003 and 2002, approximately 80.6%
and 95.4% 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 March 31, 2003, gross profit was
RMB 20,413,944 or 26.9% of total net sales, as compared to gross profit of RMB
49,493,835 or 27.8% of total net sales for the three months ended March 31,
2002. Gross margin from beer sales decreased to 26.9% in 2003 as compared to
27.8% in 2002 as a result of the lowering of the selling price for some of the
Pabst Blue Ribbon beer products, the decrease in sales volume as well as the
increase in sales volume of lower profit margin local brand beers, which was
partially offset by the slightly lower production costs associated with the
local brand beers.
The Company expects that it will continue to experience pressure on its
gross profit in the near term 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
March 31, 2003, selling, general and administrative expenses were RMB 31,462,718
or 41.4% of net sales, consisting of selling expenses of RMB 18,521,538 and
general and administrative expenses of RMB 12,941,180. Net of an allowance for
doubtful accounts
33
of RMB 2,600,000 for the three months ended March 31, 2003, general and
administrative expenses were RMB 10,341,180.
For the three months ended March 31, 2002, selling, general and
administrative expenses were RMB 51,561,315 or 28.9% of net sales, consisting of
selling expenses of RMB 36,744,869 and general and administrative expenses of
RMB 14,816,446. Net of an allowance for doubtful accounts of RMB 6,500,000 for
the three months ended March 31, 2002, general and administrative expenses were
RMB 8,316,446.
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 decreased by RMB 18,223,331 or 49.6% in 2003 as
compared to 2002, and increased as a percent of net sales, to 24.4% in 2003 from
20.6% in 2002. Selling expenses decreased in 2003 as compared to 2002, as a
result of a change in the Company's marketing strategy to lower the selling
price for some of its Pabst Blue Ribbon beer products to encourage distributors
to enhance their respective promotional activities in different geographical
sales regions. By lowering the selling price, the Company was able to reduce
amounts expended for selling expenses. A portion of the reduction in selling
expenses was used to support new advertising and promotional campaigns for the
Company's local brand name beers, which can be implemented with smaller budgets.
For the three months ended March 31, 2003 and 2002, certain promotional and
sales incentives provided to distributors for their specific promotional
activities amounting to RMB 7,006,485 and RMB 7,433,616, respectively, have been
accounted for as a reduction in net sales, pursuant to EITF 01-9, "Accounting
for Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor's Products)".
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 2003, 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 March 31, 2003 and 2002, the Marketing Company incurred
operating losses of RMB 10,703,100 (including an impairment charge of RMB
8,050,000) and RMB 7,306,302, 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 increased by RMB 2,024,734 or
24.3% in 2003 as compared to 2002, and as a percentage of net sales, increased
to 13.6% in 2003 from 4.7% in 2002, respectively, primarily as a result of the
legal and professional fees incurred for the reincorporation of the Company to
BVI and the increase in other personnel expenditures.
The allowance for doubtful accounts, which is calculated based primarily on
the age of outstanding accounts receivable, slightly decreased to 3.4% of net
sales in
34
2003 as compared to 3.6% of net sales in 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 the three months ended
March 31, 2003, as a result of an unexpected substantial deceases in sales,
continuing operating losses, the outbreak of SARS in China, working capital
deficiency and various business issues, the Company conducted an re-evaluation
of the carrying value of its land use right, property and building, office
equipment and motor vehicles, plant and equipment, construction in progress, the
accrued capital commitment with respect to the purchase of production assets,
and the related expected future cash flows. As a result of this evaluation, the
Company recorded a provision for impairment charges of RMB 50,400,000, RMB
8,050,000 and RMB 6,800,000 for the three months ended March 31, 2003, for
Zhaoqing Brewery, the Marketing Company and Zao Yang High Worth Brewery,
respectively.
These impairment charges aggregating RMB 65,250,000 were based on certain
assumptions regarding the Company's future cash flows and other factors used to
determine the fair value of its land use rights, property and building, office
equipment and motor vehicles, plant and equipment, and construction in progress,
including the assumptions that some of the local brand beers developed and
produced by Zao Yang High Worth Brewery will be shifted to Zhaoqing Brewery and
Noble Brewery for production and distribution; and that, as a result of Lan
Wei's efforts, Zhaoqing Brewery has a 50% chance of being granted a renewal of
the Pabst sub-license jointly with Noble Brewery to produce Pabst Blue Ribbon
beer after the existing sub-license expires on November 7, 2003, with a
production ratio of 1 to 2. Included in the impairment charges were amounts
related to the purchase commitments for production equipment of RMB 2,400,000,
which have been recorded as an accrued expense. As a result of the persistent
decrease in sales and continuing operating losses, the related expected future
cash flows to be generated from the sales of Pabst Blue Ribbon beer at the
estimated reduced level of distribution are expected to be negative.
Accordingly, the effect of the Company successfully obtaining a renewal of a
sub-license is expected to have little impact on the recoverability of the
assets. As a result, a provision for impairment was provided for a majority of
the assets of Zhaoqing Brewery, the Marketing Company and Zao Yang High Worth
Brewery.
Operating Loss: For the three months ended March 31, 2003, operating loss
was RMB 76,298,774 or 100.4% of net sales. For the three months ended March 31,
2002, operating loss was RMB 2,067,480 or 1.2% of net sales. The increase in
operating loss in 2003 as compared to 2002 is primarily attributable to the
increase in provision for impairment of property, plant and equipment and the
substantial reduction in net sales.
Interest Expense: For the three months ended March 31, 2003, interest
expense decreased by RMB 217,919 or 9.5% to RMB 2,080,085, as compared to RMB
2,298,004 for the three months ended March 31, 2002. Interest expense decreased
in 2003 as compared to 2002 as a result of a decrease in the average interest
rate on bank borrowings.
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. Income tax
expenses for the three months ended March 31, 2003 and 2002 was RMB nil.
Net Loss: Net loss was RMB 172,344,250 for the three months ended March 31,
2003, as compared to net loss RMB 449,670 for the three months ended March 31,
2002.
Noble Brewery:
Three Months Ended March 31, 2003 and 2002 -
35
Sales: For the three months ended March 31, 2003 and 2002, net sales were
RMB 32,238,019 and RMB 86,934,510, respectively.
During the three months ended March 31, 2003, Noble Brewery sold 14,057
metric tons of beer to the Marketing Company, as compared to 22,306 metric tons
of beer sold to the Marketing Company during the three months ended March 31,
2002. Total beer sold by Noble Brewery to the Marketing Company decreased by
8,249 metric tons or 36.7% in 2003 as compared to 2002.
Gross Profit: For the three months ended March 31, 2003, gross loss was RMB
1,901,091 or 5.9% of net sales, as compared to gross profit of RMB 25,234,668 or
29.0% of net sales for the three months ended March 31, 2002. The decrease in
gross profit in 2003 as compared to 2002 was attributable to the unexpected
substantial decrease in sales which was below the critical break-even marginal
sales volume
Selling, General and Administrative Expenses: For the three months ended
March 31, 2003, selling, general and administrative expenses totaled RMB
14,155,772 or 43.9% of net sales, consisting of selling expenses of RMB
6,657,770 and general and administrative expenses of RMB 7,498,002. Net of an
allowance for doubtful accounts of RMB 1,700,000 for the three months ended
March 31, 2003, general and administrative expenses were RMB 5,798,002. For the
three months ended March 31, 2002, selling, general and administrative expenses
totaled RMB 18,608,033 or 21.4% of net sales, consisting of selling expenses of
RMB 8,255,059 and general and administrative expenses of RMB 10,352,974. Selling
expenses consist of warehousing, storage and freight costs. Net of an allowance
for doubtful accounts of RMB 4,000,000 for the three months ended March 31,
2002, general and administrative expenses were RMB 6,352,974.
For the three months ended March 31, 2003 and 2002, certain promotional and
sales incentives provided to distributors for their specific promotional
activities amounting to RMB nil and RMB 548,787, respectively, have been
accounted for as a reduction in net sales, pursuant to EITF 01-9, "Accounting
for Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor's Products)".
Impairment of Property, Plant and Equipment: During the three months ended
March 31, 2003, as a result of an unexpected substantial decrease in sales and
continuing operating losses and the outbreak of SARS in China, Noble Brewery
conducted an evaluation of the carrying value of its land use right, property
and building, office equipment, plant and equipment and construction in
progress, and the related estimated future cash flows, which included the
assumption that there is a probability of (1) 40%;(2) 40%; and (3) 20% that
Noble Brewery will: (1) continue to produce Pabst Blue Ribbon beer after
November 7, 2003 exclusively; (2) continue to produce Pabst Blue Ribbon beer
after November 7, 2003 jointly with Zhaoqing Brewery in a 2:1 ratio; and (3) not
be able to renew its sub-license agreement and switch to produce local brand
beer. As a result of this evaluation, Noble Brewery recorded a provision for
impairment of its property, plant and equipment of RMB 219,600,000 for the three
months ended March 31, 2003. Included in the impairment charges were amounts
related to the purchase commitments for production equipment which have been
recorded as an accrued expense and a reduction of prepaid amounts totaling RMB
2,600,000 and RMB 2,600,000, respectively. Accordingly, the effect of Noble
Brewery successfully obtaining a renewal of the sub-license is expected to have
little impact on the recoverability of the assets. As a result of these
impairment charges, the majority of assets of Noble Brewery have been fully
written down. Noble China Inc., the majority shareholder of Noble Brewery, is
experiencing certain financial difficulties and management uncertainty.
Management is currently unable to predict the effect of Noble China Inc.'s
financial difficulties and management uncertainty on Noble Brewery, including
Noble China Inc.'s ability to grant a sub-license to Noble Brewery to produce
Pabst Blue Ribbon beer after the existing sub-license expires on November 7,
2003.
36
Operating Income (Loss): For the three months ended March 31, 2003,
operating loss was RMB 235,656,863 or 731.0% of net sales. For the three months
ended March 31, 2002, operating income was RMB 6,626,635 or 7.6% of net sales.
Income Taxes: Commencing in 1999, Noble Brewery is required to pay local
income tax at the full normal rate of 33% (less a special temporary reduction of
6% granted by the Tax Authority) on its profit as determined in accordance with
PRC accounting standards applicable to Noble Brewery. Accordingly, for the three
months ended March 31, 2003, income tax expense was RMB 1,479,103, as compared
to RMB nil for the three months ended March 31, 2002.
Net Income (Loss): Net loss was RMB 237,957,576 for the three months ended
March 31, 2003, as compared to net income of RMB 5,164,534 for the three months
ended March 31, 2002.
Consolidated Financial Condition - March 31, 2003:
Liquidity and Capital Resources:
Operating. For the three months ended March 31, 2003, the Company's
operations generated cash resources of RMB 2,883,027, as compared to utilizing
cash resources of RMB 14,812,161 for the three months ended March 31, 2002. The
Company's operations generated cash resources during the three months ended
March 31, 2003 primarily as a result of a decrease in cash utilized to support
accounts receivable. The Company's cash balance decreased by RMB 45,753,760 to
RMB 71,321,312 at March 31, 2003, as compared to RMB 117,075,072 at December 31,
2002. The Company's net working capital deficit increased by RMB 21,902,303 to
RMB 341,450,657 at March 31, 2003, as compared to RMB 319,548,354 at December
31, 2002, resulting in a current ratio at March 31, 2003 of 0.45:1, as compared
to 0.50:1 at December 31, 2002.
Net of an allowance for doubtful accounts of RMB 2,600,000 for the three
months ended March 31, 2003, accounts receivable decreased by RMB 37,049,154 or
32.3% to RMB 74,991,866 at March 31, 2003, as compared to RMB 114,641,020 at
December 31, 2002, which was attributable to the substantial decrease in net
sales, which reduced the level of accounts receivable.
The Company's prepayments and deposits increased by RMB 5,460,449 or 59.2%
to RMB 14,672,542 at March 31, 2003, as compared to RMB 9,212,093 at December
31, 2002. The increase in prepayments and deposits was primarily due to an
increase in prepayments of general and administrative expenses including prepaid
insurance premiums.
Net of the short-term loan of approximately RMB 46,940,623 advanced to Lan
Wei, the amount due from related companies increased by RMB 2,455,018 or 52.8%
to RMB 7,102,989 at March 31, 2003, as compared to RMB 4,647,971 at December 31,
2002, which consist of amounts due from Guangdong Blue Ribbon and its group of
companies arising from routine intercompany business transactions, which are
unsecured, interest-free and repayable on demand. On May 10, 2003, of the
amounts due from Guangdong Blue Ribbon, approximately RMB 7,090,000 was
converted into a short-term loan payable in one year bearing an interest rate of
5.6% per annum. Accordingly, the loan to Guangdong Blue Ribbon of approximately
RMB 7,090,000 was classified as loan receivable in the consolidated financial
statements at March 31, 2003.
The Company's other receivables increased by RMB 7,010,672 or 63.1% to RMB
18,120,287 at March 31, 2003, as compared to RMB 11,109,615 at December 31,
2002. 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 subsequent periods.
37
The amount due to an associated company decreased by RMB 13,107,778 or 4.4%
to RMB 285,271,416 at March 31, 2003, as compared to RMB 298,379,194 at December
31, 2002, 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 three months ended March 31, 2002, additions to
property, plant and equipment aggregated RMB 1,557,408, which includes
approximately RMB 700,000 and RMB 850,000 for renovation and continuous
improvement of Zao Yang High Worth Brewery and Zhaoqing Brewery, respectively.
The Company anticipates that additional capital expenditures in connection with
the continuing improvement of production facilities at Zao Yang High Worth
Brewery and Zhaoqing Brewery during the remainder of 2003 will be approximately
RMB 3,500,000. The Company believes that it will be able to fund the expected
capital expenditures through internal cash flow and external resources.
On March 24, 2003, a short-term loan of RMB 46,940,623 was granted from
High Worth JV to Lan Wei, a company controlled by the City of Zhaoqing that is
the controlling shareholder of the Company. Of such amount, RMB 20,000,000 is to
be invested in businesses affiliated with Lan Wei and RMB 26,000,000 is to be
used to facilitate the reorganization or restructuring of Noble China, Inc. Lan
Wei has agreed to repay the RMB 20,000,000 loan by June 30, 2003. The RMB
26,000,000 is being held in a bank escrow account, and will be repaid to the
Company if and when it is determined that it is not possible to file a
confirmable plan of reorganization or implement an out-of-court restructuring of
Noble China, Inc., but in no event later than December 31, 2003. The loans bear
interest at 3.9% per annum.
During the past few years, Lan Wei has invested substantial capital in
Noble China, Inc. and the Company, and has also used its relationships to
arrange for substantial bank financing for the Company, in order to facilitate
the strategic development of the Pabst Blue Ribbon beer business in China. Lan
Wei believes that a successful reorganization or restructuring of Noble China,
Inc. is in the long-term interest of the Company and Noble Brewery, as it will
assure such entities the right to produce and distribute Pabst Blue Ribbon beer
in China for a period of thirty years from November 7, 2003.
If and when Noble China, Inc. is successfully reorganized or restructured
with the assistance of Lan Wei, it is expected that the Company will receive a
sub-license or an assignment of the license to produce and distribute Pabst Blue
Ribbon in China, and that the Company will have the option to have the RMB
26,000,000 loan repaid in cash or by the transfer to the Company of any assets
that Lan Wei may acquire in conjunction with a reorganization or restructuring
of Noble China, Inc. with a fair value equivalent to the loan amount.
On May 10, 2003, out of the amounts due from Guangdong Blue Ribbon,
approximately RMB 7,090,000 was converted into a short-term loan payable in one
year bearing an interest rate of 5.6% per annum. Accordingly, the loan to
Guangdong Blue Ribbon of approximately RMB 7,090,000 was classified as loan
receivable in the consolidated financial statements at March 31, 2003.
Financing. During the three months ended March 31, 2003, the Company's
secured bank loans increased by RMB 6,947,602, reflecting new borrowings of RMB
7,000,000 and repayments of RMB 52,398. The bank loans bear interest at fixed
rates ranging from 5.6% to 6.2%, 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.
38
As at December 31, 2002, a bank loan of RMB 30,104,000 granted to Zao Yang
High Worth Brewery, which expired on September 30, 2002, was pending for
completion of the official loan renewal agreement. Zao Yang High Worth Brewery
has continued to pay the interest that is accruing on the loan, and the bank has
not made a demand for repayment. The renewal agreement, without a specific date
of repayment and guaranteed by High Worth JV, had been approved and signed by
the relevant bank and was returned to Zao Yang High Worth Brewery in May 2003.
The loan has been recorded as a current liability at March 31, 2003 and is
payable on demand.
During the three months ended March 31, 2002, Zao Yang High Worth Brewery
received an advance of RMB 5,700,000 from its local partner, Zao Yang Brewery,
which is the 45% shareholder of Zao Yang High Worth Brewery. The advance was
unsecured, without interest and had no fixed term of repayment. This advance has
been utilized to fund the working capital requirements of Zao Yang High Worth
Brewery. This advance was subsequently converted into additional capital of Zao
Yang High Worth Brewery in 2002.
During the three months ended March 31, 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 repayable on December 31, 2002. During the three months
ended March 31, 2002, Zao Yang High Worth Brewery advanced RMB 5,500,000 to
Guangdong Blue Ribbon. The advance was unsecured, without interest and had no
fixed date of repayment. Both of these loans were repaid in full in 2002.
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 its principal shareholder and affiliates or related
parties, are adequate to satisfy the Company's working capital requirements
through December 31, 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 operations at current levels and continue
as a going concern.
39
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. A 10 point basis change in the Company's average
debt interest rate would not have a material effect on the Company's results of
operations.
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.
As the Company's debt obligations are primarily short-term in nature, with
fixed interest rates, the Company does not have any risk from an increase in
interest rate. However, to the extent that the Company arranges new borrowings
in the future, an increase in interest rates would cause a commensurate increase
in the interest expense related to such borrowings.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in the reports filed under the Exchange Act of 1934 is accumulated and
communicated to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Within the 90 days prior to the filing of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based upon and as of the date of
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed in the reports the Company
files and submits under the Exchange Act of 1934 is recorded, processed,
summarized and reported as and when required.
(b) Changes in Internal Controls
There were no changes in the Company's internal controls or in other
factors that could have significantly affected those controls subsequent to the
date of the Company's most recent evaluation.
40
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 March 31, 2003: None
41
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: June 9, 2003 By: /s/ DA-QING ZHENG
-------------------------------
Da-qing Zheng
Chairman of the Board and
Chief Executive Officer
(Duly authorized officer)
Date: June 9, 2003 By: /s/ GARY C.K. LUI
-------------------------------
Gary C.K. Lui
Vice President and Chief
Financial Officer
(Principal financial officer)
42
CERTIFICATIONS
I, Da-qing Zheng, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CBR Brewing Company,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ DA-QING ZHENG
June 9, 2003 By: _________________________
Da-qing Zheng
Chairman of the Board and
Chief Executive Officer
43
CERTIFICATIONS
I, Gary C.K. Lui, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CBR Brewing Company,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ GARY C.K. LUI
June 9, 2003 By: _________________________
Gary C.K. Lui
Vice President and Chief
Financial Officer
44
INDEX TO EXHIBITS
Exhibit
Number Description of Document
- ------ -------------------------
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
45