UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 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 June 30, 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 - June 30, 2003 (Unaudited) and
December 31, 2002
Consolidated Statements of Operations (Unaudited) - Three
Months and Six Months Ended June 30, 2003 and 2002
Consolidated Statements of Cash Flows (Unaudited) - Six
Months Ended June 30, 2003 and 2002
Notes to Consolidated Financial Statements (Unaudited) -
Three Months and Six Months Ended June 30, 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
2
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2003 December 31, 2002
------------------------- -----------------------
RMB USD RMB USD
------------ ----------- ----------- -----------
(Unaudited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents 84,150,204 10,138,579 117,075,072 14,105,430
Accounts receivable, net 61,600,905 7,421,796 114,641,020 13,812,171
Bills receivable 987,000 118,916 500,000 60,241
Inventories (Note 3) 45,256,048 5,452,536 54,180,017 6,527,713
Amounts due from related
companies (Note 4) 38,431,584 4,630,311 4,647,971 559,997
Income taxes receivable 1,927,759 232,260 1,927,759 232,260
Prepayments and deposits 8,755,625 1,054,896 9,212,093 1,109,891
Other receivables 32,272,449 3,888,247 11,109,615 1,338,508
------------ ----------- ----------- -----------
Total current assets 273,381,574 32,937,541 313,293,547 37,746,211
Interest in an associated company
(Note 5) 109,352,136 13,174,956 213,760,312 25,754,254
Property, plant and equipment, net
(Note 6) 690,475 83,190 64,186,910 7,733,362
------------ ----------- ----------- -----------
Total assets 383,424,185 46,195,687 591,240,769 71,233,827
============ =========== =========== ===========
3
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
June 30, 2003 December 31, 2002
-------------------------- ----------------------------
RMB USD RMB USD
------------- ------------ ------------- -------------
(Unaudited) (Unaudited)
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Bank borrowings (Note 7) 135,910,266 16,374,731 130,818,717 15,761,291
Accounts payable 16,646,855 2,005,645 18,182,253 2,190,633
Accrued advertising expenses 76,752,398 9,247,276 55,478,622 6,684,171
Accrued other liabilities 106,424,529 12,822,233 102,288,435 12,323,908
Amounts due to related companies
(Note 4) 1,560 188 1,560 188
Amount due to an associated company
(Note 8) 256,647,633 30,921,402 298,379,194 35,949,300
Sales taxes payable 30,500,967 3,674,815 27,693,120 3,336,520
------------- ------------ ------------- -------------
Total current liabilities 622,884,208 75,046,290 632,841,901 76,246,011
------------- ------------ ------------- -------------
Long-term liabilities:
Bank borrowings 155,260 18,706 155,260 18,706
------------- ------------ ------------- -------------
Total long-term liabilities 155,260 18,706 155,260 18,706
------------- ------------ ------------- -------------
Minority interests (Note 10) - - - -
------------- ------------ ------------- -------------
Contingencies (Note 1 and 6)
Common stock:
-Class A, with no par value
(2002: US$0.0001 par value),
90,000,000 shares authorized,
5,010,013 shares outstanding - - 4,273 515
-Class B, with no par value
(2002: US$0.0001 par value),
10,000,000 shares authorized,
3,000,000 shares outstanding - - 2,559 308
Additional paid-in capital 107,368,677 12,935,985 107,361,845 12,935,162
General reserve and enterprise
development funds 18,735,220 2,257,255 18,735,220 2,257,255
Accumulated deficit (365,719,180) (44,062,549) (167,860,289) (20,224,130)
------------- ----------- -------------- ------------
Net shareholders' deficiency (239,615,283) (25,795,258) (41,756,392) (5,030,890)
------------- ------------ ------------- -------------
Total liabilities and shareholders'
deficiency 383,424,185 46,195,687 591,240,769 71,233,827
============= ============ ============= =============
See accompanying notes to the consolidated financial statements.
4
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended Three Months Ended
June 30, 2003 June 30, 2003 June 30, 2002
RMB USD RMB USD RMB (1)(2)
------------ ----------- ------------- ------------ -------------------
Sales 113,431,393 13,666,432 193,962,679 23,368,997 160,506,634
Sales taxes (4,241,911) (511,073) (8,770,397) (1,056,674) (5,103,886)
Net sales 109,189,482 13,155,359 185,192,282 22,312,323 155,402,748
Cost of sales, including net
inventory transferred from an
associated company of RMB
14,058,274 and RMB 34,665,779
for the three months and six
months ended June 30, 2003,
respectively, and RMB 17,514,900
and RMB 28,254,886 for the three
months and six months ended
June 30, 2002, respectively;
inventory purchased from related
companies of RMB 34,009,525 and
RMB 69,761,706 for the three months
and six months ended June 30, 2003,
respectively, and RMB 71,309,618
and RMB 162,579,745 for the
three months and six months ended
June 30, 2002, respectively; and
royalty fee paid to a related
company of RMB 942,129 and RMB
1,456,444 for the three months
and six months ended June 30, 2003,
respectively, and RMB 961,837
and RMB 1,827,555 for the three
months and six months ended
June 30, 2002, respectively (Note 5) (58,758,734) (7,079,365) (114,347,590) (13,776,818) (108,693,349)
------------ ----------- ------------- ------------ -------------------
Gross profit 50,430,748 6,075,994 70,844,692 8,535,505 46,709,399
Selling, general and administrative
expenses (63,581,466) (7,660,418) (95,044,184) (11,451,107) (57,168,880)
Impairment of property, plant and
equipment (Note 6) - - (65,250,000) (7,861,446) (82,000,000)
------------ ----------- ------------- ------------ -------------------
Operating loss (13,150,718) (1,584,424) (89,449,492) (10,777,048) (92,459,481)
Interest income 59,485 7,166 161,820 19,496 122,913
Interest expense (2,082,958) (250,956) (4,163,043) (501,569) (2,025,098)
------------ ----------- ------------- ------------ -------------------
Loss before income taxes,
minority interests and equity
in loss of an associated
company (15,174,191) (1,828,214) (93,450,715) (11,259,121) (94,361,666)
Income taxes - - - - (325,894)
------------ ----------- ------------- ------------ -------------------
Loss before minority interests
and equity in loss of an
associated company (15,174,191) (1,828,214) (93,450,715) (11,259,121) (94,687,560)
Minority interests (Note 10) - - - - (18,553,467)
------------ ----------- ------------- ------------ -------------------
Loss before equity in loss
of an associated company (15,174,191) (1,828,214) (93,450,715) (11,259,121) (113,241,027)
Equity in loss of an
associated company (10,340,450) (1,245,837) (104,408,176) (12,579,298) (18,472,172)
------------ ----------- ------------- ------------ -------------------
Net loss for the period (25,514,641) (3,074,051) (197,858,891) (23,838,419) (131,713,199)
============ =========== ============= ============ ===================
Net loss per common share
- basic and diluted (Note 1) (3.19) (0.38) (24.70) (2.98) (16.44)
============ =========== ============= ============ ===================
Weighted average number of
common shares outstanding
- basic and diluted 8,010,013 8,010,013 8,010,013 8,010,013 8,010,013
============ =========== ============= ============ ===================
Six Months Ended
June 30, 2002
RMB (1)(2)
-----------------
Sales 344,409,111
Sales taxes (10,834,415)
Net sales 333,574,696
Cost of sales, including net
inventory transferred from an
associated company of RMB
14,058,274 and RMB 34,665,779
for the three months and six
months ended June 30, 2003,
respectively, and RMB 17,514,900
and RMB 28,254,886 for the three
months and six months ended
June 30, 2002, respectively;
inventory purchased from related
companies of RMB 34,009,525 and
RMB 69,761,706 for the three months
and six months ended June 30, 2003,
respectively, and RMB 71,309,618
and RMB 162,579,745 for the
three months and six months ended
June 30, 2002, respectively; and
royalty fee paid to a related
company of RMB 942,129 and RMB
1,456,444 for the three months
and six months ended June 30, 2003,
respectively, and RMB 961,837
and RMB 1,827,555 for the three
months and six months ended
June 30, 2002, respectively (Note 5) (237,371,462)
-----------------
Gross profit 96,203,234
Selling, general and administrative
expenses (108,862,554)
Impairment of property, plant and
equipment (Note 6) (82,000,000)
-----------------
Operating loss (94,659,320)
Interest income 255,272
Interest expense (4,323,102)
-----------------
Loss before income taxes,
minority interests and equity
in loss of an associated
company (98,727,150)
Income taxes (325,894)
-----------------
Loss before minority interests
and equity in loss of an
associated company (99,053,044)
Minority interests (Note 10) (18,553,467)
-----------------
Loss before equity in loss
of an associated company (117,606,511)
Equity in loss of an
associated company (14,556,358)
-----------------
Net loss for the period (132,162,869)
=================
Net loss per common share
- basic and diluted (Note 1) (16.50)
=================
Weighted average number of
common shares outstanding
- basic and diluted 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 in
2002. Prior period amounts have been reclassified to conform to the current
period 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 8,082,822 and RMB
15,516,438 for the three months and six months ended March 31, 2002,
respectively.
(2) In early 2003, the Company conducted a subsequent test and review of its
previous assumptions and calculations adopted with respect to the estimates
of those impairment charges recorded in its quarterly reports for the three
months ended June 30, 2002 and September 30, 2002. The Company determined
that some of the assumptions made in the calculations of those impairment
charges should be revised to include land use rights, buildings and
construction in progress. As a result, the provision for impairment for the
three months ended June 30, 2002 with respect to Zhaoqing Brewery should
have been RMB 82,000,000 instead of RMB 40,000,000. The provision
5
for impairment for the three months ended September 30, 2002 with respect
to Zao Yang High Worth Brewery should have been RMB 42,000,000 instead of
RMB 29,000,000. Accordingly, as a result of these revisions, the Company's
provision for impairment has been restated as RMB 82,000,000 and RMB
82,000,000 for the three months and six months ended June 30, 2002,
respectively; and as RMB 42,000,000 and RMB 124,000,000 for the three
months and nine months ended September 30, 2002, respectively.
See accompanying notes to the consolidated financial statements.
6
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002 (1)
------------------------------------ -----------------
RMB USD RMB
----------------- ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (197,858,891) (23,838,419) (132,162,869)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Allowance for doubtful accounts 3,600,000 433,735 13,280,883
Depreciation and amortization 2,203,843 265,523 14,297,155
Impairment of property, plant and equipment 65,250,000 7,861,446 82,000,000
Minority Interests - - 18,553,467
Equity in loss of an associated company 104,408,176 12,579,298 14,556,358
Changes in operating assets and liabilities:
(Increase) decrease in -
Accounts receivable 49,440,115 5,956,640 (498,169)
Bills receivable (487,000) (58,675) (18,824,512)
Inventories 8,923,969 1,075,177 (9,487,013)
Amounts due from related companies (6,842,990) (824,456) 147,301
Income taxes receivable - - (1,927,759)
Prepayments and deposits 456,468 54,995 (3,589,940)
Other receivables (21,162,834) (2,549,739) (22,351,575)
Increase (decrease) in -
Accounts payable (1,535,398) (184,988) (425,617)
Accrued liabilities 23,009,870 2,772,273 30,369,054
Amount due to an associated company (41,731,561) (5,027,898) 26,173,699
Sales taxes payable 2,807,847 338,295 (4,197,549)
----------------- ----------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (9,518,386) (1,146,793) 5,912,914
----------------- ----------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advance to related party (46,940,623) (5,655,497) -
Repayment of advance to related party 20,000,000 2,409,639 -
Purchases of property, plant and equipment (1,557,408) (187,640) (4,355,191)
----------------- ----------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (28,498,031) (3,433,498) (4,355,191)
CASH FLOWS FROM FINANCING ACTIVITIES:
New bank borrowings 63,250,000 7,620,482 49,000,000
Repayment of bank borrowings (58,158,451) (7,007,042) (49,597,863)
Advance from related party - - 11,000,000
Increase in amounts due to related companies - - 263,351
Dividend received from an associated company - - 30,204,416
Payment of cash dividend to minority interest - - (15,935,000)
----------------- ----------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,091,549 613,440 24,934,904
----------------- ----------------- -------------
Net increase (decrease) in cash and cash
equivalents (32,924,868) (3,966,851) 26,492,627
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 84,150,204 10,138,579 97,859,107
================= ================= =============
(1) Certain of the prior year's amounts have been revised to conform with the changes made in the
consolidated statements of operations.
See accompanying notes to the consolidated financial statements.
7
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 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"), 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
(the "PRC" or "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 a 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 the 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, a joint stock limited
company incorporated in the PRC, and Holdings hold 40% and 60% interests,
respectively.
8
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 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 obligated 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. 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 end of 2003.
9
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 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 a
sub-license granted by Guangdong Blue Ribbon. 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 (see Note 9).
On January 20, 1998, Zhaoqing Brewery and Goldjinsheng entered into an agreement
which calls for Goldjinsheng's interest 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.
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 4(a)).
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.
10
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
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 5). Noble China Inc. appealed the Shandong Court's decision to
the Supreme Court of the PRC, which was accepted on November 4, 2002, and a
hearing on this matter 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.
11
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
Pursuant to a press release dated May 1, 2003, Noble China Inc. announced that
discussions between holders of a majority of the Debentures and representatives
of the City of Zhaoqing regarding a reorganization of Noble China Inc. had
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 had 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 June 30, 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 approximately RMB 47,000,000 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 was to be invested in
businesses affiliated with Lan Wei that sell beverage containers to the Company
and approximately RMB 27,000,000 was to be used to facilitate the reorganization
or restructuring of Noble China Inc. (see Note 4(f)). Lan Wei agreed to repay
the RMB 20,000,000 loan by June 30, 2003. The RMB 27,000,000 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. Lan Wei
repaid the RMB 20,000,000 loan in June 2003.
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.
12
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 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
27,000,000 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 5 and 6).
During the three months ended June 30, 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. Since
a majority of the property, plant and equipment of Zhaoqing Brewery, the
Marketing Company and Zao Yang High Worth Brewery had previously been
substantially impaired, no further impairment provision was made for these three
entities during the three months ended June 30, 2003. For the six months ended
June 30, 2003, the Company recorded a provision for impairment of RMB
50,400,000, RMB 8,050,000 and RMB 6,800,000 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, 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 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 purchase commitments
for production equipment of RMB 2,400,000, which have been recorded as 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 on the Company
of not being able to obtain a sub-license for the production and distribution of
Pabst Blue Ribbon beer in China subsequent to November 7, 2003 may not have a
material impact on the recoverability of those impaired assets. As a result of
the aforementioned factors, a provision for impairment was provided for a
majority of the assets of Zhaoqing Brewery, the Marketing Company and Zao Yang
High Worth Brewery, and no further impairment charges were recorded at June 30,
2003.
13
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 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 June 30, 2003, its results of operations for the three
months and six months ended June 30, 2003 and 2002, and its cash flows for the
six months ended June 30, 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.
The results of operations for the three months and six months ended June 30,
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 years, incurred
significant losses during the three months and six months ended June 30, 2003,
has a net working capital deficiency of RMB 356,588,992 as of June 30, 2003, and
may not receive a 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 other uncertainties which may impact the operations
of Noble Brewery and the Company's ability to obtain a sub-license to continue
to produce and distribute Pabst Blue Ribbon in China. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's predecessor 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.
14
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 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. However, in view of the current financial difficulties of Noble China
Inc., management is currently uncertain whether 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.
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 allow its sales force to more effectively
attempt to arrest the decline in sales volume. However, the operating results
for the three months ended March 31, 2003 reflected a substantial decline in
sales. In May 2003, the Deputy Vice President of Marketing resigned. Commencing
in July 2003, employee compensation at Zhaoqing Brewery, Noble Brewery and the
Marketing Company was revised to correlate with sales targets. Performance below
the sales target will cause a salary reduction for all staff to a maximum of
approximately 30%. The Company will consider more severe restructuring
alternatives if it is unable to reduce its losses 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.
15
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 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
6,052,532 and RMB 11,537,901 for the three months and six months ended June 30,
2003, respectively; and RMB 8,082,822 and RMB 15,516,438 for the three months
and six months ended June 30, 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 and six months ended June 30, 2003 and
2002.
16
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 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 June 30, 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 June 30, 2002, potentially dilutive securities representing 200,000
shares of common stock were outstanding, consisting of stock options to purchase
60,000 shares exercisable at $3.87 per share, and 140,000 shares exercisable at
$0.72 per share. For the three months ended June 30, 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 August 2001, the FASB issued SFAS No. 143,
"Accounting for Asset Retirement Obligations". 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 adopted SFAS No. 143 effective January 1, 2003. The adoption of SFAS No.
143 did not have a significant effect on the Company's financial statement
presentation or disclosures.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145 rescinds the provisions of SFAS No. 4 that requires companies to
classify certain gains and losses from debt extinguishments as extraordinary
items, eliminates the provisions of SFAS No. 44 regarding transition to the
Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require
that certain lease modifications be treated as sale leaseback transactions. The
provisions of SFAS No. 145 related to classification of debt extinguishments are
effective for fiscal years beginning after May 15, 2002. Earlier application is
encouraged. The adoption of SFAS No. 145 did not have a significant effect on
the Company's financial statement presentation or disclosures.
In June 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
SFAS No. 146 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 EITF No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. The adoption of SFAS No. 146 did not have a significant effect on the
Company's financial statement presentation or disclosures.
17
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Acquisitions of Financial Institutions, Except Transactions Between or
More Mutual Enterprises". The Company does not expect that SFAS No. 147 will
have any effect on its financial statement presentation or disclosures.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for fiscal years beginning after December 15,
2002. The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. The adoption of SFAS No. 148 did not have a significant effect on the
Company's financial statement presentation or disclosures.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies under what circumstances a contract with an initial net investment
meets the characteristics of a derivative and when a derivative contains a
financing component. The clarification provisions of SFAS No. 149 require that
contracts with comparable characteristics be accounted for similarly. SFAS No.
149 is effective for contracts entered into or modified after June 30, 2003. The
Company does not expect that the adoption of SFAS No. 149 will have a
significant effect on the Company's financial statement presentation or
disclosures.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances) because that financial instrument embodies an obligation of
the issuer. SFAS No. 150 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 is to be
implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance date of SFAS No.
150 and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. The Company does not expect that the adoption of
SFAS No. 150 will have a significant effect on the Company's financial statement
presentation or disclosures.
18
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair market
value of the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company implemented
the disclosure provisions of FIN 45 in its December 31, 2002 consolidated
financial statements, and the measurement and recording provisions of FIN No. 45
effective January 1, 2003.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities (and Interpretation of ARB No. 51)" ("FIN 46"). FIN
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 FIN 46 are required to be
implemented for any variable interest entity created on or after January 31,
2003. In addition, FIN 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. The implementation of the provisions of FIN 46 effective January 31,
2003 did not have any effect on the Company's consolidated financial statement
presentation or disclosures.
19
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
June 30, 2003 December 31, 2002
------------------------ ----------------------
RMB USD RMB USD
----------- ----------- ---------- ----------
(Unaudited) (Unaudited)
Raw materials 25,447,757 3,065,995 28,130,712 3,389,243
Work in progress 4,530,910 545,893 4,169,690 502,372
Finished goods 15,277,381 1,840,648 21,879,615 2,636,098
----------- ----------- ---------- ----------
45,256,048 5,452,536 54,180,017 6,527,713
=========== =========== ========== ==========
4. 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.
20
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
4. RELATED PARTIES TRANSACTIONS AND ARRANGEMENTS (continued)
(b) Sales of raw materials
The Company sold raw materials, packaging materials and beer products of RMB
4,006,192 and RMB 12,973,714 to Noble Brewery during the six months ended June
30, 2003 and 2002, respectively. These transactions were carried out at cost
between the parties.
(c) Purchases of beer products
During the six months ended June 30, 2003 and 2002, the Company purchased beer
products for resale from Noble Brewery amounting to RMB 69,761,706 and RMB
162,579,745, respectively, and received an allocation of sales incentives (as
defined in EITF No. 01-9) from Noble Brewery of RMB nil and RMB 1,098,312,
respectively. The transactions were carried out at agreed terms between the
parties.
During the six months ended June 30, 2003 and 2002, the Company purchased RMB
38,671,971 and RMB 41,228,600 of beer products from Noble Brewery, respectively,
pursuant to the management arrangement re-allocating the total production volume
at a 1 to 2 ratio among Zhaoqing Brewery and Noble Brewery (see Note 4(a)). This
amount represents the direct variable cost of producing these beer products.
(d) Royalty fee
For the six months ended June 30, 2003 and 2002, a royalty fee of RMB 1,456,444
and RMB 1,827,555, respectively, was payable to Guangdong Blue Ribbon for the
right to use the Pabst trademarks in the PRC.
(e) Amounts due from related companies
Net of the advance to related party (see Note 4(f)), 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, approximately RMB 7,086,000 due from Guangdong Blue Ribbon was
converted into a short-term loan due and payable in one year, with interest at
5.6% per annum.
(f) Advance to related party and loan receivable
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 approximately RMB 47,000,000 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 was to be invested in
businesses affiliated with Lan Wei that sell beverage containers to the Company
and approximately RMB 27,000,000 was to be used to facilitate the reorganization
or restructuring of Noble China, Inc. Lan Wei agreed to repay the RMB 20,000,000
loan by June 30, 2003.
21
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
4. RELATED PARTIES TRANSACTIONS AND ARRANGEMENTS (continued)
The RMB 27,000,000 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. Lan Wei repaid the RMB 20,000,000 loan in June 2003.
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 27,000,000 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 June 30, 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.
22
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
5. 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 and six months ended June 30,
2003 and 2002 are as follows:
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
June 30, 2003 June 30, 2003 June 30, 2002 June 30, 2002
------------------------- -------------------------- --------------- --------------
RMB USD RMB USD RMB (1) RMB (1)
------------ ----------- ------------- ------------ -------------- --------------
Net sales 29,377,944 3,539,511 61,615,963 7,423,610 63,482,676 150,417,186
============ =========== ============= ============ ============== ==============
Net loss (27,413,759) (3,302,863) (265,371,335) (31,972,448) (82,805,430) (77,640,896)
============ =========== ============= ============ ============== ==============
The Company's share
of net income (loss)
after adjustment of
unrealized intercompany
profit and other
intercompany
adjustments (2)(3) (10,340,450) (1,245,837) (104,408,176) (12,579,298) (18,472,172) (14,556,358)
============ =========== ============= ============ ============== ==============
(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
period amounts have been reclassified to conform to the current period
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 549,525 and RMB
1,098,312 for the three months and six months ended June 30, 2002,
respectively.
(2) As at June 30, 2003 and 2002, the balance of the amounts due to Noble
Brewery was RMB 256,647,633 and RMB 236,978,917, respectively. During the
six months ended June 30, 2003 and 2002, Noble Brewery recorded an
allowance for doubtful accounts of RMB 2,400,000 and RMB 7,500,000,
respectively, with respect to amounts receivable from the Company. The
provision for doubtful accounts was eliminated, together with the
unrealized profit on inventory of the Company, as intercompany adjustments
when the Company recorded its equity in the results of operations of Noble
Brewery based on the equity method of accounting.
(3) During the three months and six months ended June 30, 2003, the Company's
share of net loss of an associated company of RMB 10,340,450 and RMB
104,408,176 included RMB nil and RMB 87,840,000, respectively, with respect
to impairment charges recorded by the associated company.
The following is summarized balance sheet information of Noble Brewery:
June 30, 2003 December 31, 2002
------------------------- ------------------------
RMB USD RMB USD
------------ ----------- ----------- -----------
(Unaudited) (Unaudited)
Current assets (1) 220,986,067 26,624,827 251,868,373 30,345,587
Property, plant and equipment 3,003,214 361,833 226,776,229 27,322,437
Restricted bank deposits 36,032,396 4,341,253 36,032,396 4,341,253
------------ ----------- ----------- -----------
Total assets 260,021,677 31,327,913 514,676,998 62,009,277
============ ========== =========== ===========
Current liabilities 147,817,507 17,809,339 137,101,494 16,518,252
Equity 112,204,170 13,518,574 377,575,504 45,491,025
------------ ----------- ----------- -----------
Total liabilities and equity 260,021,677 31,327,913 514,676,998 62,009,277
============ ========== =========== ===========
(1) Net of allowances on amounts receivable from the Company of RMB 165,875,000 and
RMB 163,475,000 as of June 30, 2003 and December 31, 2002, respectively.
23
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
5. INTEREST IN AN ASSOCIATED COMPANY (continued)
During the three months ended March 31, 2003, as a result of an 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 was 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 purchase commitments for production equipment, which have been
recorded as accrued expense and a reduction of prepaid amounts of RMB 2,600,000.
Due to the continued decrease in sales and 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 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 the assets of
Noble Brewery were fully written down. Accordingly, during the three months
ended June 30, 2003, no further provision for impairment was recorded.
On April 3, 2002, Noble Brewery was served with a 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
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 and six months
ended June 30, 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 June
30, 2003, High Worth JV and the Marketing Company did not hold any cash in trust
for Noble Brewery.
24
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
5. 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
that they 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 an additional 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 June 30, 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 at that time.
25
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
6. 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, for the three months ended March 31, 2003, the
Company recorded a provision for impairment charges of RMB 50,400,000, RMB
8,050,000 and RMB 6,800,000 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, 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 purchase commitments for production equipment of RMB 2,400,000, which
have been recorded as 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 on the Company of not being able to obtain a
sub-license for the production and distribution of Pabst Blue Ribbon beer in
China subsequent to November 7, 2003 may not have a material impact on the
recoverability of the assets. As a result of the aforementioned factors, a
provision for impairment was provided for a majority of the assets of Zhaoqing
Brewery, the Marketing Company and Zao Yang High Worth Brewery, and no further
impairment charges were recorded at June 30, 2003.
7. 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 and is payable on demand.
8. 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 June 30, 2003 and December 31, 2002, the
amount due to an associated company was RMB 256,647,633 and RMB 298,379,194,
respectively, which was unsecured, interest-free and repayable on demand.
26
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
9. ADVANCE FROM RELATED PARTY
During the three months and six months ended June 30, 2002, Zao Yang High Worth
Brewery received an advance of RMB 5,300,000 and RMB 11,000,000, respectively,
from its local partner, Zao Yang Brewery, which is the 45% shareholder of Zao
Yang High Worth Brewery. The 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).
10. MINORITY INTERESTS
As a result of the substantial operating losses incurred by the Company during
the year ended December 31, 2002 and the six months ended June 30, 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 June 30, 2003 reflected a debit balance of RMB 80,617,599.
Since the minority interest parties have no legal obligation to fund these
obligations to the Company, the debit balance of RMB 80,617,599 was charged to
operations during the six months ended June 30, 2003. The Company expects to
continue to charge to operations any future debit balances of the minority
interest parties.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Quarterly Report on Form 10-Q for the quarterly period ended June 30,
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 June 30, 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
28
purchasing Zao Yang High Worth Brewery's production of Pabst Blue Ribbon beer
for distribution. In addition, Zao Yang High Worth Brewery also produces
domestic brand beer under the brand name "Di Huang Quan" and sells directly to
distributors in nearby regions.
MARKETING COMPANY: During February 1995, the Marketing Company was
established to conduct the distribution, marketing and promotion throughout
China of the Pabst Blue Ribbon beer produced by the Company's breweries. The
Company owns a 42% net interest in the Marketing Company. The consolidated
financial statements include the results of operations of the Marketing Company
on a consolidated basis, as the Company has effective control of the board of
directors of the Marketing Company.
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 allow its sales force to more
effectively attempt to arrest the decline in sales volume. However, the
operating results for the three months ended March 31, 2003 reflected a
substantial decline in sales. In May 2003, the Deputy Vice President of
Marketing resigned. Commencing in July 2003, employee compensation at Zhaoqing
Brewery, Noble Brewery and the Marketing Company was revised to correlate with
sales targets. Performance below the sales target will cause a salary reduction
for all staff to a maximum of approximately 30%. The Company will consider more
severe restructuring alternatives if it is unable to reduce its losses in the
near future.
29
The accompanying unaudited consolidated financial statements have been
prepared assuming that the Company will continue as a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The carrying amounts of assets and liabilities
presented in the accompanying unaudited consolidated financial statements do not
purport to represent the realizable or settlement values. The Company has
suffered recurring operating losses and had a working capital deficit at
December 31, 2002 and June 30, 2003. The Company's predecessor 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, for the three months ended March 31, 2003, the
Company recorded a provision for impairment charges of RMB 50,400,000, RMB
8,050,000 and RMB 6,800,000 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, 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 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 on the Company of not being able to obtain a
sub-license for the production and distribution of Pabst Blue Ribbon beer in
China subsequent to November 7, 2003 may not have a material impact on the
recoverability of the assets. As a result of the aforementioned factors, a
provision for impairment was provided for a majority of the assets of Zhaoqing
Brewery, the Marketing Company and Zao Yang High Worth Brewery, and no further
impairment charges were recorded at June 30, 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 of RMB 2,600,000. Due to the continued
decrease in sales and 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 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.
30
Accordingly, during the three months ended June 30, 2003, no further
provision for impairment was recorded for Zhaoqing Brewery, Noble Brewery, Zao
Yang High Worth Brewery and the Marketing Company.
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 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 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
31
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.
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.
Pursuant to the press release dated May 1, 2003, Noble China Inc. announced
that discussions between holders of a majority of the Debentures and
representatives of the City of Zhaoqing regarding a reorganization of Noble
China Inc. had 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 also 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 June 30, 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 approximately RMB 47,000,000 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 was to be invested
in businesses affiliated with Lan Wei that sell beverage containers to the
Company and approximately RMB 27,000,000 was to be used to facilitate the
reorganization or restructuring of Noble China Inc. Lan Wei agreed to repay the
RMB 20,000,000 loan by June 30, 2003. The RMB 27,000,000 is being held in a
32
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. Lan
Wei repaid the RMB 20,000,000 loan in June 2003.
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
27,000,000 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 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 June 30, 2003, the total value of the Company's
interest in Noble Brewery was RMB 109,352,136, representing 28.5% 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 six months ended
June 30, 2003 decreased by RMB 88,801,223 or 59.0% to RMB 61,615,963, as
compared to RMB 150,417,186 for the six months ended June 30, 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
33
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.
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 June 30,
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 690,475, 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 six months ended June 30, 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, 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, for the six months ended June 30, 2003, the Company
recorded a provision for impairment charges of RMB 50,400,000, RMB 8,050,000 and
RMB 6,800,000 for Zhaoqing Brewery, the Marketing Company and Zao Yang High
Worth Brewery, respectively.
In addition, during the six months June 30, 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 and the related expected future cash flows.
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.
34
Consolidated Results of Operations:
Three Months Ended June 30, 2003 and 2002 -
Sales: During the three months ended June 30, 2003, net sales of beer
products decreased by RMB 46,213,266 or 29.7% to RMB 109,189,482, as compared to
RMB 155,402,748 for the three months ended June 30, 2002. The Company sold
34,458 metric tons of beer to distributors in 2003 as compared to 40,816 metric
tons of beer in 2002, a decrease of 15.6%. The decrease in net sales of beer
products during the three months ended June 30, 2003 as compared to the three
months ended June 30, 2002 was primarily due to the decrease in volume of beer
sold, which was attributable to the impact caused by the reorganization of the
marketing teams and a change in marketing strategies including the reduction in
sales branch offices; the outbreak of severe acute respiratory syndrome in
China; and in general, reduced demand for Pabst Blue Ribbon beer as a result of
increasing competition from foreign and local premium brands; as well as the
lowering of the selling price for some of the Pabst Blue Ribbon beer products in
order to encourage distributors to enhance their respective promotional
activities. In addition, the decrease in net sales was also attributable to an
increased proportion of local brand beers, which are sold at lower prices.
During the three months ended June 30, 2003 and 2002, approximately 83.8% and
92.1% of net sales, respectively, were generated by the sale of products under
the Pabst Blue Ribbon brand name.
Gross Profit: For the three months ended June 30, 2003, gross profit was
RMB 50,430,748 or 46.2% of total net sales, as compared to gross profit of RMB
46,709,399 or 30.1% of total net sales for the three months ended June 30, 2002.
Gross margin from beer sales increased to 46.2% in 2003 as compared to 30.1% in
2002 primarily due to a reduction in production costs related to fixed
depreciation charges resulting from the previously recorded impairment charges
relating to production assets.
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 demand for Pabst Blue Ribbon beer in China caused by the
increasing competition from other foreign premium brand beers and other major
local brewers.
Selling, General and Administrative Expenses: For the three months ended
June 30, 2003, selling, general and administrative expenses were RMB 63,581,466
or 58.2% of net sales, consisting of selling expenses of RMB 53,511,389 and
general and administrative expenses of RMB 10,070,077. Net of an allowance for
doubtful accounts of RMB 1,000,000 for the three months ended June 30, 2003,
general and administrative expenses were RMB 9,070,077.
For the three months ended June 30, 2002, selling, general and
administrative expenses were RMB 57,168,880 or 36.8% of net sales, consisting of
selling expenses of RMB 44,168,243 and general and administrative expenses of
RMB 13,000,637. Net of an allowance for doubtful accounts of RMB 6,780,885 for
the three months ended June 30, 2002, general and administrative expenses were
RMB 6,219,752.
Selling expenses include costs relating to the advertising, promotion,
marketing and distribution of Pabst Blue Ribbon beer and other local brand name
beers in China. Selling expenses increased by RMB 9,343,146 or 21.2% in 2003 as
compared to 2002, and increased as a percent of net sales, to 49.0% in 2003 from
28.4% in 2002. Selling expenses increased in 2003 as compared to 2002, as a
result of a change in the Company's marketing strategy to enhance its
advertising and promotional programs and to stimulate consumer demand for both
Pabst Blue Ribbon beer as well as other local brand beers during the forthcoming
summer season. A portion of the increase in selling expenses was used to
support new advertising and promotional campaigns for the Company's new line of
Pabst Blue Ribbon beers, which were launched during the three months ended June
30, 2003.
35
For the three months ended June 30, 2003 and 2002, certain promotional and
sales incentives provided to distributors for their specific promotional
activities amounting to RMB 6,988,367 and RMB 8,082,822, 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 June 30, 2003, the Marketing Company incurred operating
income of RMB 601,716 (caused by reduced depreciation expense resulting from the
fully written down fixed assets), as compared to an operating loss of RMB
5,881,364 for the three months ended June 30, 2002, 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 2,850,325 or
45.8% in 2003 as compared to 2002, and as a percentage of net sales, increased
to 8.3% in 2003 from 4.0% 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, decreased to 0.9% of net sales in
2003 as compared to 4.4% 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: As majority of the assets of
Zhaoqing Brewery, the Marketing Company and Zao Yang High Worth Brewery were
fully written down during the three months ended March 31, 2003, no further
provision for impairment was recorded during the three months ended June 30,
2003.
During the three months ended June 30, 2002, as a result of the uncertainty
regarding sub-license, reduced sales, continuing operating losses and various
legal and business issues, the Company conducted an evaluation of the carrying
value of its property, plant and equipment, as well as the related expected
future cash flows. As a result of this evaluation, the Company recorded a
provision for impairment of plant, machinery and equipment of RMB 40,000,000 at
June 30, 2002. However, in early 2003, the Company conducted a subsequent test
and review of its previous assumptions and calculation adopted with respect to
the estimates of those impairment charges recorded for the three months ended
June 30, 2002. The Company determined that certain of the assumptions made in
the calculations of these impairment estimations should be revised to include
land use rights, buildings and construction in progress. As a result, the
provision for impairment for the three months ended June 30, 2002 with respect
to Zhaoqing Brewery should have been recorded as RMB 82,000,000, instead of RMB
36
40,000,000. Accordingly, as a result of these revisions, the Company's
provision for impairment has been restated as RMB 82,000,000 for the three
months ended June 30, 2002.
Operating Loss: For the three months ended June 30, 2003, operating loss
was RMB 13,150,718 or 12.0 % of net sales. For the three months ended June 30,
2002, operating loss was RMB 92,459,481 or 59.5% of net sales. The decrease in
operating loss in 2003 as compared to 2002 is primarily attributable to the
absence of a provision for impairment of property, plant and equipment in 2003.
Interest Expense: For the three months ended June 30, 2003, interest
expense slightly increased by RMB 57,860 or 2.9% to RMB 2,082,958, as compared
to RMB 2,025,098 for the three months ended June 30, 2002
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 June 30, 2003 and 2002 was RMB nil and RMB
325,894, respectively.
Net Loss: Net loss was RMB 25,514,641 for the three months ended June 30,
2003, as compared to net loss RMB 131,713,199 for the three months ended June
30, 2002.
Six Months Ended June 30, 2003 and 2002 -
Sales: During the six months ended June 30, 2003, net sales of beer
products decreased by RMB 148,382,414 or 44.5% to RMB 185,192,282, as compared
to RMB 333,574,696 for the six months ended June 30, 2002. The Company sold
59,429 metric tons of beer to distributors in 2003 as compared to 80,530 metric
tons of beer in 2002, a decrease of 26.2%. The decrease in net sales of beer
products during the six months ended June 30, 2003 as compared to the six months
ended June 30, 2002 was primarily due to the decrease in volume of beer sold,
which was attributable to the impact caused by the reorganization of the
marketing teams and a change in marketing strategies including the reduction in
sales branch offices; the outbreak of severe acute respiratory syndrome in
China; and in general, reduced demand for Pabst Blue Ribbon beer as a result of
increasing competition from foreign and local premium brands; as well as the
lowering of the selling price for some of the Pabst Blue Ribbon beer products in
order to encourage distributors to enhance their respective promotional
activities. In addition, the decrease in net sales was also attributable to an
increased proportion of local brand beers, which are sold at lower prices.
During the six months ended June 30, 2003 and 2002, approximately 82.5% and
93.9% of net sales, respectively, were generated by the sale of products under
the Pabst Blue Ribbon brand name.
Gross Profit: For the six months ended June 30, 2003, gross profit was RMB
70,844,692 or 38.3% of total net sales, as compared to gross profit of RMB
96,203,234 or 28.8% of total net sales for the six months ended June 30, 2002.
Gross margin from beer sales increased to 38.3% in 2003 as compared to 28.8% in
2002 primarily due to the reduction in production costs in relation to the fixed
depreciation charges resulting from the full written down and impairment of
production assets during the first quarter of 2003.
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 demand for Pabst Blue Ribbon beer in China caused by the
increasing competition from other foreign premium brand beers and other major
local brewers.
Selling, General and Administrative Expenses: For the six months ended
June 30, 2003, selling, general and administrative expenses were RMB 95,044,184
or 51.3% of net sales, consisting of selling expenses of RMB 72,032,927 and
general and administrative expenses of RMB 23,011,257. Net of an allowance for
37
doubtful accounts of RMB 3,600,000 for the six months ended June 30, 2003,
general and administrative expenses were RMB 19,411,257.
For the six months ended June 30, 2002, selling, general and administrative
expenses were RMB 108,862,554 or 32.6% of net sales, consisting of selling
expenses of RMB 80,913,112 and general and administrative expenses of RMB
27,949,442. Net of an allowance for doubtful accounts of RMB 13,280,885 for the
six months ended June 30, 2002, general and administrative expenses were RMB
14,668,557.
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 8,880,185 or 11.0% in 2003 as
compared to 2002, but increased as a percent of net sales, to 38.9% in 2003 from
24.3% in 2002. Selling expenses decreased in absolute terms but increased as a
percent of net sales in 2003 as compared to 2002 due primarily to the
substantial decrease in net sales as well as the lowering of the selling price
for some of the 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.
For the six months ended June 30, 2003 and 2002, certain promotional and
sales incentives provided to distributors for their specific promotional
activities amounting to RMB 13,994,852 and RMB 15,516,438, 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 June 30, 2003 and 2002, the Marketing Company incurred
operating losses of RMB 10,101,384 (including an impairment charge of RMB
8,050,000) and RMB 13,187,666, 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 4,742,700 or
32.3% in 2003 as compared to 2002, and as a percentage of net sales, increased
to 10.5% in 2003 from 4.4% 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, decreased to 1.9% of net sales in
38
2003 as compared to 4.0% 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 six months ended
June 30, 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 as well as 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, for the six months ended June 30, 2003, the Company recorded a
provision for impairment charges of RMB 50,400,000, RMB 8,050,000 and RMB
6,800,000, 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 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 not being able to obtain a sub-license
for the production and distribution of Pabst Blue ribbon beer in China
subsequent to November 7, 2003 may not have a material impact on the
recoverability of those impaired assets. As a result of the aforementioned
factors, a provision for impairment was provided for a majority of the assets of
Zhaoqing Brewery, the Marketing Company and Zao Yang High Worth Brewery, and no
further impairment charges were recorded at June 30, 2003.
During the six months ended June 30, 2002, as a result of the uncertainty
regarding sub-license, reduced sales, continuing operating losses and various
legal and business issues, the Company conducted an evaluation of the carrying
value of its property, plant and equipment, as well as the related expected
future cash flows. As a result of this evaluation, the Company recorded a
provision for impairment of plant, machinery and equipment of RMB 40,000,000 at
June 30, 2002. However, in December 2002, the Company conducted a subsequent
test and review of its previous assumptions and calculation adopted with respect
to the estimates of those impairment charges recorded for the six months ended
June 30, 2002. The Company determined that some of the assumptions made in the
calculations of these impairment estimations should be revised to include land
use rights, buildings and construction in progress. As a result, the provision
for impairment for the six months ended June 30, 2002 with respect to Zhaoqing
Brewery should have been recorded as RMB 82,000,000, instead of RMB 40,000,000.
Accordingly, as a result of these revisions, the Company's provision for
impairment has been restated as RMB 82,000,000 for the six months ended June 30,
2002.
Operating Loss: For the six months ended June 30, 2003, operating loss was
RMB 89,449,492 or 48.3% of net sales. For the six months ended June 30, 2002,
operating loss was RMB 94,659,320 or 28.4% of net sales. Operating loss
decreased in absolute term but increased as a percentage to net sales in 2003 as
compared to 2002, as a result of the decrease in the provision for impairment of
property, plant and equipment as well as the substantial reduction in net sales
in 2003.
39
Interest Expense: For the six months ended June 30, 2003, interest expense
decreased slightly by RMB 160,059 or 3.7% to RMB 4,163,043, as compared to RMB
4,323,102 for the six months ended June 30, 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 six months ended June 30, 2003 and 2002 was RMB nil and RMB
325,894, respectively.
Net Loss: Net loss was RMB 197,858,891 for the six months ended June 30,
2003, as compared to net loss RMB 132,162,869 for the six months ended June 30,
2002.
Noble Brewery:
Three Months Ended June 30, 2003 and 2002 -
Sales: For the three months ended June 30, 2003 and 2002, net sales were
RMB 29,377,944 and RMB 63,482,676, respectively. The decrease in net sales by
RMB 34,104,732 or 53.7% in 2003 as compared to 2002 was primarily attributable
to the share of significant loss of the Marketing Company due to the
reallocation of these unbudgeted selling and advertising expenses during the
three months ended June 30, 2003.
During the three months ended June 30, 2003, Noble Brewery sold 18,526
metric tons of beer to the Marketing Company, as compared to 22,336 metric tons
of beer sold to the Marketing Company during the three months ended June 30,
2002. Total beer sold by Noble Brewery to the Marketing Company decreased by
3,810 metric tons or 17.1% in 2003 as compared to 2002.
Gross Profit: For the three months ended June 30, 2003, gross loss was RMB
13,160,767 or 44.8% of net sales, as compared to gross profit of RMB 9,206,842
or 14.5% of net sales for the three months ended June 30, 2002. The increase in
gross profit in 2003 as compared to 2002 was primarily attributable to the
reduction in production in relation to the fixed depreciation expenses as a
result of the full written down and impairment of production assets in 2003.
Selling, General and Administrative Expenses: For the three months ended
June 30, 2003, selling, general and administrative expenses totaled RMB
13,917,164 or 47.4% of net sales, consisting of selling expenses of RMB
6,425,830 and general and administrative expenses of RMB 7,491,334. Net of an
allowance for doubtful accounts of RMB 700,000 for the three months ended June
30, 2003, general and administrative expenses were RMB 6,791,334. For the three
months ended June 30, 2002, selling, general and administrative expenses totaled
RMB 26,679,078 or 42.0% of net sales, consisting of selling expenses of RMB
17,436,646 and general and administrative expenses of RMB 9,242,432. Selling
expenses consist of warehousing, storage and freight costs. Net of an allowance
for doubtful accounts of RMB 3,500,000 for the three months ended June 30, 2002,
general and administrative expenses were RMB 5,742,432.
For the three months ended June 30, 2003 and 2002, certain promotional and
sales incentives provided to distributors for their specific promotional
activities amounting to RMB nil and RMB 549,525, 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: As the majority of the assets
of Noble Brewery have been fully written down during the three months ended
40
March 31, 2003, no further provision for impairment was recorded during the
three months ended June 30, 2003.
During the three months ended June 30, 2002, as a result of reduced sales
and continuing operating losses, Noble Brewery conducted an evaluation of the
carrying value of its property, plant and equipment, as well as the related
estimated future cash flows. As a result of this evaluation, Noble Brewery
recorded a provision for impairment of plant, machinery and equipment of RMB
65,000,000 at June 30, 2002.
Operating Loss: For the three months ended June 30, 2003, operating loss was
RMB 27,077,931 or 92.2% of net sales. For the three months ended June 30, 2002,
operating loss was RMB 82,472,236 or 129.9% 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 June 30, 2003, income tax expense was RMB nil, as compared to
RMB 333,194 for the three months ended June 30, 2002.
Net Loss: Net loss was RMB 27,413,759 for the three months ended June 30,
2003, as compared to net loss of RMB 82,805,430 for the three months ended June
30, 2002.
Six Months Ended June 30, 2003 and 2002 -
Sales: For the six months ended June 30, 2003 and 2002, net sales were RMB
61,615,963 and RMB 150,417,186, respectively. The decrease in net sales by RMB
88,801,223 or 59.0% in 2003 as compared to 2002 was primarily attributable to
the share of significant loss of the Marketing Company due to the reallocation
of these unbudgeted selling and advertising expenses as well as the decrease in
volume of beer sold.
During the six months ended June 30, 2003, Noble Brewery sold 32,583 metric
tons of beer to the Marketing Company, as compared to 44,642 metric tons of beer
sold to the Marketing Company during the three months ended June 30, 2002.
Total beer sold by Noble Brewery to the Marketing Company decreased by 12,059
metric tons or 27.0% in 2003 as compared to 2002.
Gross Profit: For the six months ended June 30, 2003, gross loss was RMB
15,061,858 or 24.4% of net sales, as compared to gross profit of RMB 34,441,510
or 22.9% of net sales for the six months ended June 30, 2002. The decrease in
gross profit in 2003 as compared to 2002 was attributable to the share of
significant loss of Marketing Company and the substantial decrease in sales
which was below the critical break-even marginal sales volume, partially offset
by the reduction in production costs due to the decrease in fixed depreciation
expenses resulting from the full written down of fixed assets.
Selling, General and Administrative Expenses: For the six months ended
June 30, 2003, selling, general and administrative expenses totaled RMB
28,072,936 or 45.6% of net sales, consisting of selling expenses of RMB
13,083,600 and general and administrative expenses of RMB 14,989,336. Net of an
allowance for doubtful accounts of RMB 2,400,000 for the six months ended June
30, 2003, general and administrative expenses were RMB 12,589,336. For the six
months ended June 30, 2002, selling, general and administrative expenses totaled
RMB 45,287,111 or 30.1% of net sales, consisting of selling expenses of RMB
25,691,705 and general and administrative expenses of RMB 19,595,406. Selling
expenses consist of warehousing, storage and freight costs. Net of an allowance
for doubtful accounts of RMB 7,500,000 for the six months ended June 30, 2002,
general and administrative expenses were RMB 12,095,406.
For the six months ended June 30, 2003 and 2002, certain promotional and
sales incentives provided to distributors for their specific promotional
activities amounting to RMB nil and RMB 1,098,312, respectively, have been
41
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 six months ended
June 30, 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 was a probability of (1) 40%; (2) 40%; (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 six months ended June
30, 2003. Included in the impairment charges were amounts related to the
purchase commitments for production equipment, which have been recorded as
accrued expense and a reduction of prepaid amounts of RMB 2,600,000. Due to the
continued decrease in sales and 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 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.
During the six months ended June 30, 2002, as a result of reduced sales
and continuing operating losses, Noble Brewery conducted an evaluation of the
carrying value of its property, plant and equipment, as well as the related
estimated future cash flows. As a result of this evaluation, Noble Brewery
recorded a provision for impairment of plant, machinery and equipment of RMB
65,000,000 at June 30, 2002.
Operating Loss: For the six months ended June 30, 2003, operating loss
was RMB 262,734,794 or 426.4% of net sales. For the six months ended June 30,
2002, operating loss was RMB 75,845,601 or 50.4% 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 six
months ended June 30, 2003, income tax expense was RMB 1,479,103, as compared to
RMB 1,795,295 for the six months ended June 30, 2002.
Net Loss: Net loss was RMB 265,371,335 for the six months ended June 30,
2003, as compared to net loss of RMB 77,640,896 for the six months ended June
30, 2002.
Consolidated Financial Condition - June 30, 2003:
Liquidity and Capital Resources:
Operating. For the six months ended June 30, 2003, the Company's
operations utilized cash resources of RMB 9,518,386. For the six months ended
June 30, 2002, the Company's operations provided cash resources of RMB
42
5,912,914. The Company's operations utilized cash resources in 2003 as
compared to generating cash resources in 2002 primarily as a result of a
reduction in cash generated by changes in operating assets and liabilities. The
Company's cash balance decreased by RMB 32,924,868 to RMB 84,150,204 at June 30,
2003, as compared to RMB 117,075,072 at December 31, 2002. The Company's net
working capital deficit increased by RMB 29,954,280 to RMB 349,502,634 at June
30, 2003, as compared to RMB 319,548,354 at December 31, 2002, resulting in a
current ratio at June 30, 2003 of 0.44:1, as compared to 0.50:1 at December 31,
2002.
Net of an allowance for doubtful accounts of RMB 3,600,000 for the six
months ended June 30, 2003, accounts receivable decreased by RMB 49,440,115 or
43.1% to RMB 61,600,905 at June 30, 2003, as compared to RMB 114,641,020 at
December 31, 2002, which was attributable to the substantial decrease in net
sales resulting in reduced level of accounts receivable.
The amount due from related companies increased by RMB 33,783,613 to RMB
38,431,584 at June 30, 2003, as compared to RMB 4,647,971 at December 31, 2002,
primarily as a result of the RMB 26,940,623 advanced to Lan Wei as described
below. Amounts due from Guangdong Blue Ribbon and its group of companies
generally arise from routine intercompany business transactions, which are
unsecured, interest-free and repayable on demand. On May 10, 2003,
approximately RMB 7,086,000 due from Guangdong Blue Ribbon was converted into a
short-term loan due and payable in one year, with interest at 5.6% per annum.
The Company's other receivables increased by RMB 21,162,834 or 190.5% to
RMB 32,272,449 at June 30, 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.
The amount due to an associated company decreased by RMB 41,731,561 or
14.0% to RMB 256,647,633 at June 30, 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 six months ended June 30, 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 2,000,000. 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 was
to be invested in businesses affiliated with Lan Wei that sell beverage
containers to the Company and RMB 26,940,623 was to be used to facilitate the
reorganization or restructuring of Noble China, Inc. The RMB 26,940,623 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. Lan Wei repaid the RMB 20,000,000 loan in June 2003.
43
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
26,940,623 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.
Financing. During the six months ended June 30, 2003, the Company's
secured bank loans increased by RMB 5,091,549, reflecting new borrowings of RMB
63,250,000 and repayments of RMB 58,158,451. The bank loans bear interest at
fixed rates ranging from 5.6% to 6.2%, and are repayable within the next two
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.
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 and is payable on demand.
During the six months ended June 30, 2002, Zao Yang High Worth Brewery
received an advance of RMB 11,000,000 from its local partner, Zao Yang Brewery,
which is the 45% shareholder of Zao Yang High Worth Brewery. The advance was
unsecured, 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 six months ended June 30, 2002, the Company loaned RMB 5,500,000
to Zao Yang High Worth Brewery. The loan was unsecured, with interest at 3.6%
per annum and repayable on December 31, 2002. During the six months ended June
30, 2002, Zao Yang High Worth Brewery advanced RMB 5,500,000 to Guangdong Blue
Ribbon. The advance was unsecured, 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.
44
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 the Company's management, including its principal executive and
financial officers, as appropriate, to allow timely decisions regarding required
disclosure.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including its principal executive and
financial officers, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the fiscal
quarter. Based upon and as of the date of that evaluation, the Company's
principal executive and financial officers 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.
45
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of exhibits required to be filed as part of this report is set
forth in the Index to Exhibits, which immediately precedes such
exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K
Three Months Ended June 30, 2003: None
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CBR BREWING COMPANY, INC.
-------------------------
(Registrant)
Date: August 18, 2003 By: /s/ DA-QING ZHENG
-------------------------
Da-qing Zheng
Chairman of the Board and
Chief Executive Officer
(Duly authorized officer)
Date: August 18, 2003 By: /s/ GARY C.K. LUI
-------------------------
Gary C.K. Lui
Vice President and Chief
Financial Officer
(Principal financial officer)
47
INDEX TO EXHIBITS
Exhibit
Number Description of Document
- ------ -----------------------
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 - Da-qing Zheng
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 - Gary C.K. Lui
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
48