UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 33-26617A
CBR BREWING COMPANY, INC.
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(Exact name of registrant as specified in its charter)
Florida 65-0145422
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
23/F., Hang Seng Causeway Bay Building
28 Yee Wo Street, Causeway Bay, Hong Kong
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(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: 852-2866-2301
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 31, 2002, the Company had 5,010,013 shares of Class A common
stock and 3,000,000 shares of Class B common stock issued and outstanding.
As of March 31, 2002, the aggregate market value of the issuer's
outstanding Class A common stock held by non-affiliates on March 31, 2002,
computed by reference to the average of the closing bid and ask prices, was
US$447,003.
Documents incorporated by reference: None.
1
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Annual Report on Form 10-K for the fiscal year ended December 31, 2001
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 Annual Report on Form 10-K for the fiscal
year ended December 31, 2001 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.
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PART I.
ITEM 1. BUSINESS
OVERVIEW
CBR Brewing Company, Inc., a Florida corporation (the "Company", which
term shall include, when the context so requires, its subsidiaries and
affiliates), is the parent of High Worth Holdings Ltd., a British Virgin Islands
corporation ("Holdings"). Since November 1994, Holdings has owned a 60%
interest in Zhaoqing Blue Ribbon High Worth Brewery Ltd., a Sino-foreign joint
venture ("High Worth JV"), which, through its subsidiaries and affiliates, is
engaged in the production and sale of Pabst Blue Ribbon beer in the People's
Republic of China ("China" or the "PRC"). The other 40% interest in High Worth
JV is owned by Guangdong Blue Ribbon Group Co. Ltd. ("Guangdong Blue Ribbon"), a
related company (see "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS").
Substantially all of the beer currently sold by the Company is marketed under
the Pabst Blue Ribbon label, and is brewed under a sublicense agreement with
Guangdong Blue Ribbon, which, through an assignment and transfer, obtained its
license from Pabst Brewing Company ("Pabst US").
All of the Company's business operations are located in the PRC and
are conducted in Renminbi ("RMB"), which is the currency of China. During the
three years ended December 31, 1999, 2000 and 2001, the exchange rate has
remained stable at approximately US$1.00 to RMB 8.30.
DESCRIPTION OF BUSINESS
The Company is engaged in the business of brewing, distributing and
marketing Pabst Blue Ribbon beer in China. As of December 31, 2001, the Company
owned effective interests of 60%, 24% and 33% in three brewing facilities
currently producing Pabst Blue Ribbon beer in China, all of which are managed by
the Company. The Company is also presently responsible for the marketing and
sale in China of Pabst Blue Ribbon beer produced by the three brewing
facilities. In 2000, the Company owned an effective interest of 9% in a fourth
brewing facility. However during April 2001, as a result of continuing
operating losses and adverse market conditions, the Company conducted
discussions with its partner, resulting in an agreement to withdraw from the
fourth brewing facility. In 2000, the Company, through Holdings, also owned a
51% effective interest in a fifth brewing facility producing local brand beer,
but the production and operation of this brewery was formally terminated in
December 2000. The Company wrote off the investment in this brewery during
2001.
China is currently ranked as the second largest beer producer and
consumer in the world behind the United States. The management of the Company
believes that Pabst Blue Ribbon beer is one of the leading foreign labels sold
in China, both in number of units sold and total sales. Pabst Blue Ribbon is
considered a premium brand in China, along with such other labels as Tsingtao,
Carlsberg, Miller, Budweiser, Coors and San Miguel.
The Company produces Pabst Blue Ribbon beer in China to avoid import
tariffs that range as high as 120%. The majority of the production is mainly
concentrated in two breweries located at Zhaoqing City, which is approximately
100 miles from Hong Kong in the Guangdong Province of China. Pabst US provides
quality control assistance to the Company on a regular basis. The Company
markets Pabst Blue Ribbon beer in all major provinces in China. The Company
currently maintains offices in Beverly Hills, California, Hong Kong and the City
of Zhaoqing.
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High Worth JV holds certain licensing rights for Pabst Blue Ribbon
beer (see "PABST LICENSING ARRANGEMENTS AND TRADEMARKS") and also directly owns
100% of a Pabst Blue Ribbon brewing complex ("Zhaoqing Brewery"), and, through a
subsidiary, a 40% interest in Zhaoqing Blue Ribbon Brewery Noble Ltd., a
Sino-foreign joint venture ("Noble Brewery"). Noble Brewery owns a second Pabst
Blue Ribbon brewing complex that is also managed by Zhaoqing Brewery. A
subsidiary of Noble China, Inc., a company whose stock is traded on the Toronto
Stock Exchange, owns the other 60% interest in Noble Brewery (see "THE JOINT
VENTURE COMPANIES").
Noble China Inc. has publicly reported that in May 1999 it entered
into a license agreement with Pabst Brewing Company granting it the right to
utilize the Pabst Blue Ribbon trademarks in connection with the production,
promotion, distribution and sale of beer in China for 30 years commencing in
November 2003. In consideration for the license agreement, Noble China Inc.
reported that it had paid Pabst Brewing Company US$5,000,000 for the right to
use the Pabst Blue Ribbon trademarks and agreed to pay royalties based on gross
sales. Recently, Noble China Inc. has publicly reported that it was
experiencing certain financial difficulties, and that if such difficulties
continued into the first half of 2002, it would soon face insolvency and be
forced to consider several alternatives.
Management has consulted with legal counsel regarding the legitimacy
of the purported license and the Company's potential responses. In addition,
management has consulted with Guangdong Blue Ribbon, the owner of the Pabst Blue
Ribbon trademark in China, regarding potential responses, and has met with
representatives of Noble China Inc. in an attempt to explore a potential
settlement.
Management of the Company has requested that Guangdong Blue Ribbon
take appropriate action to protect its rights and its sub-licensees' rights to
utilize the Pabst Blue Ribbon trademark in China. The Company has been advised
that Guangdong Blue Ribbon is still evaluating the situation and has not yet
determined how it will respond to this matter. Once Guangdong Blue Ribbon has
responded, the Company expects to be in a position to evaluate and revise its
future business plan and strategy accordingly. The Company is currently unable
to predict the effect that this development may have on future operations.
However, the inability of the Company to obtain a sub-license from Noble China
Inc. or enter into some other form of strategic relationship under acceptable
terms and conditions to allow the Company to continue to produce and distribute
Pabst Blue Ribbon beer in China would have a material adverse effect on the
Company's future results of operations, financial position and cash flows.
High Worth JV also indirectly owns a 70% interest in Zhaoqing Blue
Ribbon Beer Marketing Company Limited, a PRC company (the "Marketing Company"),
which conducts the sales, advertising and promotional efforts for the Company's
production of Pabst Blue Ribbon beer in China. The remaining 30% interest in
the Marketing Company is directly owned by Guangdong Blue Ribbon. Through its
ownership in High Worth JV, Guangdong Blue Ribbon also has a 28% indirect
interest in the Marketing Company (see "MARKETING AND OPERATIONS - SUMMARY OF
OPERATIONS"), resulting in the Company owning a 42% net interest in the
Marketing Company.
In January 1998, the Company, through High Worth JV, established a
joint venture company, Zao Yang Blue Ribbon High Worth Brewery Limited ("Zao
Yang High Worth Brewery"), which is located in Hubei Province, is the third
Pabst Blue Ribbon brewing complex in China and is managed by Zhaoqing Brewery.
High Worth JV owns a 55% interest, equivalent to an effective interest of 33%.
Zao Yang Brewery, an unaffiliated company in Hubei Province, owns the other 45%
interest in Zao Yang High Worth Brewery (see "MARKETING AND OPERATIONS -
INVESTMENT IN NEW BREWERY" and "THE JOINT VENTURE COMPANIES").
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Pursuant to an Equity Transfer Agreement signed on January 19, 1999,
High Worth JV received a 15% consideration-free equity interest in Sichuan
Brewery, equivalent to an effective interest of 9%. Sichuan Brewery was formally
restructured into a new joint venture company and is the fourth Pabst Blue
Ribbon brewing complex in China. On June 5, 1999, a formal Joint Venture
Agreement was signed among Le Shan City E Mei Brewery, High Worth JV and Wai
Shun Investment Limited, an unaffiliated Hong Kong company, to form Sichuan Blue
Ribbon Brewery High Worth Ltd. ("Sichuan High Worth Brewery").
During April 2001, as result of continuing operating losses and
adverse market conditions, the Company conducted discussions with its partners
in Sichuan High Worth Brewery, resulting in an agreement to withdraw from
Sichuan High Worth Brewery. The Company agreed to give up its effective interest
of 9% in Sichuan High Worth Brewery, and was released from any liability for the
brewery's accumulated losses. As part of this agreement, Sichuan High Worth
Brewery's right to produce Pabst Blue Ribbon beer was terminated. The Company
expects that Sichuan High Worth Brewery will be dissolved pending the approval
of the local government authorities. This transaction is not expected to have
any impact on the Company's results of operations or financial position, since
the sales of Sichuan High Worth Brewery in the Sichuan region are being
reallocated between Zhaoqing Brewery and Noble Brewery as a result of the
interest in Sichuan High Worth Brewery being given up for no consideration.
On October 18, 1999, Holdings, through its wholly-owned subsidiary
incorporated in the British Virgin Islands, March International Group Limited
("March International"), signed a formal Joint Venture Agreement with Jilin
Province Jiutai City Brewery and Jilin Province Chuang Xiang Zhi Yie Ltd., both
of which are unaffiliated PRC companies, to form Jilin Lianli (CBR) Brewing
Company Ltd. ("Jilin Lianli Brewery"). March International received a 51%
effective interest in Jilin Lianli Brewery. The technical renovation of the
existing brewing equipment and the installation of the new packing line was
completed in April 2000 and formal operations commenced in May 2000. However,
due to weak market response and the inability of the Chinese local partners to
honor their working capital commitment, the Company decided to terminate the
production and operation of Jilin Lianli Brewery in December 2000, which had
been producing local brand beer since May 2000.
The operations of Jilin Lianli Brewery generated a loss during the
year ended December 31, 2000. The Company included its proportionate share of
the loss of RMB 4,209,460 in its consolidated results of operations for the year
ended December 31, 2000. In addition, the Company recorded a charge to
operations of RMB 6,000,000 and RMB 2,750,000 at December 31, 2000 and March 31,
2001, respectively, with respect to a provision for impairment of plant,
machinery and equipment at Jilin Lianli Brewery. The operations of Jilin Lianli
Brewery subsequent to December 31, 2000 consist primarily of nominal costs
related to the care and maintenance of the facility. Although the Company has
been in negotiations with certain interested parties in an effort to dispose of
its equity interest in Jilin Lianli Brewery, no formal agreement has been
reached. During the year ended December 31, 2001, the Company wrote-off its
remaining investment in Jilin Lianli Brewery of RMB 1,224,109. The Company has
written off a total RMB 13,788,500 with respect to this investment.
Noble China Inc. is a public company listed on the Toronto Stock
Exchange that is the 60% shareholder of Noble Brewery. During December 2000, the
Company and Noble China Inc. signed a memorandum pursuant to which a management
committee was established to evaluate the potential to coordinate and enhance
the operations of Zhaoqing Brewery, Noble Brewery and the Marketing Company.
Effective January 1, 2001, the management, marketing, production and operations
of Zhaoqing Brewery, Noble Brewery and the Marketing Company were pooled
together under a newly-created management entity named "Blue Ribbon Enterprises"
5
in order to achieve improved coordination of human, financial, production and
marketing activities. This pooled management structure is expected to achieve
greater efficiency and improved operating profitability. Although certain pooled
costs will be allocated in proportion to each brewery's respective production
capacities, Zhaoqing Brewery, Noble Brewery and the Marketing Company will each
remain as legally distinct entities. The management committee will also commence
a study to evaluate the formation of a new unified company.
Under the new management team, the Company implemented a restructuring
program that eliminated the positions of a total of 538 employees, of which 313
were from Zhaoqing Brewery, 177 were from Noble Brewery and 48 were from the
Marketing Company. Restructuring payments to these employees totaled RMB
20,396,494 by Zhaoqing Brewery, RMB 8,729,830 by Noble Brewery and RMB 1,912,742
by the Marketing Company. The Company recorded restructuring costs of RMB
22,309,236 for the year ended December 31, 2001.
During the year ended December 31, 2001, the Company's controlling
shareholder, Shenzhen Huaqiang Holdings Limited ("Huaqiang"), announced that it
had acquired a 19.6% equity interest in Noble China Inc. Huaqiang is a company
controlled by the Province of Guangdong.
Effective January 10, 2002, Zhaoqing City Lan Wei Alcoholic Beverage
(Holdings) Limited ("Lan Wei") acquired from Huaqiang all of its equity interest
in the Company. Combined with Lan Wei's prior common stock holdings in the
Company, Lan Wei has an approximately 64.3% equity interest in the Company. The
transaction has been submitted to PRC governmental authorities for official
approval. Lan Wei is company controlled by the City of Zhaoqing.
Lan Wei expects to further acquire common shares representing an
additional approximatly 7.2% equity interest in the Company from a third party
in a private transaction in the near future. Management and the board of
directors of the Company were changed on January 22, 2002. As part of the
transaction, Lan Wei also acquired Huaqiang's 19.6% equity interest in Noble
China Inc.
The Company conducts a substantial portion of its purchases through
related parties, and has additional significant continuing transactions with
such parties (see "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS").
PROPERTY AND PRODUCTION FACILITIES
ZHAOQING BREWERY
Zhaoqing Brewery is situated on a site containing approximately
1,421,000 square feet and is three miles from Zhaoqing City, Guangdong Province.
Zhaoqing Brewery occupies the site pursuant to certificates of land use rights
issued by the local government. The land use rights certificates do not specify
a period for the use of the land, but normally it does not exceed 70 years.
The original facilities of Zhaoqing Brewery were constructed between
1978 and 1980 with annual production capacity based on old brewing technology of
approximately 50,000 metric tons or 425,000 barrels of beer. Prior to 1995,
Zhaoqing Brewery had produced domestic brands exclusively under various brand
names. In mid-1994, with the assistance of Pabst US, Zhaoqing Brewery commenced
the conversion and refinement of its original facilities and adopted a new
brewing technology in order to produce beer under the Pabst Blue Ribbon label.
In early 1995, the production of all domestic brands ceased. Zhaoqing Brewery
is now producing substantially all of its beer production under the Pabst Blue
Ribbon label. With the implementation of the new brewing technology and the
6
purchase of additional equipment, Zhaoqing Brewery reached an annual production
capacity of 100,000 metric tons or 850,000 barrels of beer by the end of 1995.
Zhaoqing Brewery annually shuts down portions of the facility for a
short period of time during the low season to provide regular scheduled
maintenance. Zhaoqing Brewery has access to replacement parts that can be
manufactured by several local toolmakers in Zhaoqing.
NOBLE BREWERY
Noble Brewery is situated on a site adjacent to Zhaoqing Brewery
containing approximately 1,453,000 square feet. Noble Brewery has land use
rights of 50 years ending in 2043.
Noble Brewery consists of the original facilities constructed between
1988 and 1990 by Pabst Blue Ribbon Brewery (Zhaoqing) Co. Ltd. ("Pabst
Zhaoqing"), the operator of the facilities prior to the establishment of Noble
Brewery. These facilities had an annual production capacity of approximately
80,000 metric tons or 680,000 barrels of beer. The second phase of brewing
facilities, which was completed in July 1994, has an annual production capacity
of approximately 120,000 metric tons or 1,020,000 barrels of beer. Pabst US
supplied the majority of the equipment for the development of both the first and
second phase of the brewing facilities, in addition to offering technical
assistance in its installation and maintenance. On an annual basis, Noble
Brewery shuts down portions of the facility for a short period of time during
the low season to provide regular scheduled maintenance. Noble Brewery has
access to replacement parts that can be manufactured by several local toolmakers
in Zhaoqing.
ZAO YANG HIGH WORTH BREWERY
The original facilities of Zao Yang High Worth Brewery were
constructed between 1980 and 1985 with annual production capacity based on old
brewing technology of approximately 40,000 metric tons or 340,000 barrels of
beer.
Zao Yang High Worth Brewery is situated on a site containing
approximately 753,000 square feet and is located within the vicinity of Zao Yang
City, Hubei Province. Zao Yang High Worth Brewery occupies the site pursuant to
a certificate of land use rights issued by the local government. The land use
rights are part of the assets acquired by Zao Yang High Worth Brewery from Zao
Yang Brewery.
High Worth JV was responsible for transferring the technical know-how
and production techniques to brew Pabst Blue Ribbon beer to Zao Yang High Worth
Brewery, as well as assisting in the renovation of existing equipment, in order
to convert the brewery into a Pabst Blue Ribbon brewing complex.
During April 1998, the technical renovation process to convert the old
brewing facilities of Zao Yang High Worth Brewery into a Pabst Blue Ribbon
brewing complex was completed. Zao Yang High Worth Brewery commenced the
production of Pabst Blue Ribbon beer in June 1998, and the Marketing Company
began purchasing Zao Yang High Worth Brewery's production of Pabst Blue Ribbon
beer for distribution. In addition, Zao Yang High Worth Brewery also produces
domestic brand beer under the brand name "Di Huang Quan", which it sells
directly to the nearby regions.
SICHUAN HIGH WORTH BREWERY
Sichuan High Worth Brewery is situated on a site containing
approximately 1,089,000 square feet and is located within the vicinity of Le
Shan City, Sichuan Province, which is approximately 160 kilometers from Chengdu,
7
the provincial capital of Sichuan Province. In April 1997, Sichuan High Worth
Brewery commenced production of beer under the Pabst Blue Ribbon label, which is
sold to the Marketing Company for resale. During April 2001, as result of
continuing operating losses and adverse market conditions the Company conducted
discussions with its partners in Sichuan High Worth Brewery, resulting in an
agreement to withdraw from Sichuan High Worth Brewery (see "PABST LICENSING
ARRANGEMENT AND TRADEMARKS - SICHUAN HIGH WORTH BREWERY").
JILIN LIANLI BREWERY
Jilin Lianli Brewery is situated on a site containing approximately
330,000 square feet and is located within the vicinity of Jiutai City, Jilin
Province. The technical renovation process to convert the old brewing
facilities of Jilin Lianli brewery into a modern brewing complex was completed
in April 2000, and operations commenced in May 2000. However, due to weak
market response and the inability of the Chinese local partners to honor their
working capital commitment, the production and operation of Jilin Lianli Brewery
was formally terminated in December 2000.
MARKETING AND OPERATIONS
SUMMARY OF OPERATIONS
Pursuant to the respective long-term purchase contracts signed with
all of the Pabst Blue Ribbon brewing complexes in China, the Marketing Company
began purchasing the output of beer from Noble Brewery in July 1995, Zhaoqing
Brewery in April 1995, Sichuan High Worth Brewery in April 1997 and Zao Yang
High Worth Brewery in June 1998 (see "PABST LICENSING ARRANGEMENTS AND
TRADEMARKS"). The Marketing Company is responsible for the distribution,
promotion and advertising of the Company's production of Pabst Blue Ribbon beer
in China. The Marketing Company is allowed to mark-up the prices of the Pabst
Blue Ribbon beer purchased or adjust the ex-factory prices as necessary in order
to adequately cover the selling, advertising, promotional, distribution and
administrative expenses incurred in selling these beer products to distributors
throughout China.
PABST BLUE RIBBON BEER
Substantially all of the beer currently produced by Noble Brewery and
Zhaoqing Brewery is Pabst Blue Ribbon beer. Zao Yang High Worth Brewery
currently produces Pabst Blue Ribbon beer as well as "Di Huang Quan" beer.
There are two products in the portfolio of the Pabst Blue Ribbon
breweries: 11-degree light processed beer and draught beer. The 11-degree
light processed beer is the primary product of the breweries, and is packaged in
946 ml., 640 ml. and 355 ml. bottles and 500 ml. and 355 ml. cans. The draught
beer is sold only in kegs.
Sales of the 11-degree light processed beer in 946 ml., 640 ml. and
355 ml. bottles and 500 ml. and 355 ml. cans accounted for approximately 3.0%,
52.8%, 6.5%, nil% and 35.0%, respectively, of the sales volume of the Company in
2001.
Sales of the 11-degree light processed beer in 946 ml., 640 ml. and
355 ml. bottles and 500 ml. and 355 ml. cans accounted for approximately 4.0%,
45.8%, 4.6%, 0.1% and 44.4%, respectively, of the sales volume of the Company in
2000.
During April 2001 the Company conducted discussions with its partners
in Sichuan High Worth Brewery, resulting in an agreement to withdraw from
Sichuan High Worth Brewery. In 2001, the Marketing Company distributed 3,224
metric tons of Pabst Blue Ribbon beer produced by Sichuan High Worth Brewery,
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which represented 2.1% of the Company's total sales volume in 2001. In 2000,
the Marketing Company distributed 7,870 metric tons of Pabst Blue Ribbon beer
produced by Sichuan High Worth Brewery, which represented 4.6% of the Company's
total sales volume in 2000.
In 2001, the Marketing Company distributed 10,871 metric tons of Pabst
Blue Ribbon beer produced by Zao Yang High Worth Brewery, which represented 7.1%
of the Company's total sales volume in 2001. In 2000, the Marketing Company
distributed 2,280 metric tons of Pabst Blue Ribbon beer produced by Zao Yang
High Worth Brewery, which represented 1.3% of the Company's total sales volume
in 2000.
Pabst Blue Ribbon beer is marketed and sold as a premium beer in
establishments such as restaurants, bars, alcohol and tobacco companies and
retail stores. The Marketing Company will continue its efforts to consolidate
and expand the distribution of these products in existing and new markets in
China, subject to the limitations of the Company's ability to expand its market
share in these markets, the competitive marketing strategies of other brewers
and the growth of the Chinese economy.
The specifications and characteristics of the beers currently produced
by the breweries are set forth below:
TYPE OF BEER PACKAGE GENERAL DESCRIPTION
- ------------ ------- -------------------
11-degree light processed Can (500 ml. and 355 ml.) 11-degree malt
beer Bottle (946 ml., 640 ml. content,
and 355 ml.) alcohol content 3.4%
(w/w)
Draught beer Keg (30 liters) 11-degree malt
content,
alcohol content 3.4%
(w/w)
Note: w/w refers to weight by weight (i.e., measurement of alcoholic content of
beer by weight of beer).
The Company's highest volume sales for Pabst Blue Ribbon beer have
been in the provinces of Guangdong, Fujian and Zhejiang. The Company utilizes a
network of regional distributors whose field sales force maintains customer
contact and promotes customer satisfaction. Sales of Pabst Blue Ribbon beer
were 131,924 metric tons or approximately 1,120,000 barrels in 2001, a 23.4%
decrease as compared to 2000. The Company believes that the decrease was
attributable, in substantial part, to a softening in demand for higher-priced
foreign branded premium beer in China, and the aggressive pricing and
promotional strategies adopted by some major state-owned breweries. Sales of
Pabst Blue Ribbon beer were 171,785 metric tons or approximately 1,460,000
barrels in 2000, a 9.8% decrease as compared to 1999.
DOMESTIC BRAND NAME BEER
Prior to the end of 1994, Zhaoqing Brewery produced beer exclusively
under domestic brand names, such as "Zhaoqing" beer, "Dinghu" beer and "Xile"
beer, all of which were non-premium beers which targeted customers in the low to
middle economic range. Production of these local brand beers was completely
discontinued in March 1995 when Zhaoqing Brewery commenced producing Pabst Blue
Ribbon beer on an exclusive basis. However, beer that does not meet Pabst Blue
Ribbon quality standards is generally packaged and distributed as local brand
beer.
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Zao Yang High Worth Brewery also produces domestic brand beer under
the name "Di Huang Quan".
In late 2000, Noble Brewery launched a local brand beer, "Double V",
which is priced to suit lower to middle consumer segments.
Pabst Blue Ribbon beer is targeted at the premium beer market in China
while the domestic brand beer produced by Noble Brewery, Zhaoqing Brewery and
Zao Yang High Worth Brewery is targeted at the non-premium market.
The following tables present information with respect to the
non-consolidated sales and volume of beer sold by Noble Brewery, Zhaoqing
Brewery, Zao Yang High Worth Brewery and Jilin Lianli Brewery in 1999, 2000 and
2001. All breweries producing Pabst Blue Ribbon beer sold their Blue Ribbon
beer products to the Marketing Company for resale in 1999, 2000 and 2001.
Net Sales
Net Sales Volume Sold per Ton
--------- ----------- ---------
(RMB'000) (metric tons) (RMB'000)
1999:
Noble Brewery 513,808 118,464 4.3
Zhaoqing Brewery
Local Brands 3,281 1,439 2.3
Pabst Blue Ribbon 253,330 59,212 4.3
Zao Yang High Worth Brewery
Local Brands 15,039 12,299 1.2
Pabst Blue Ribbon 16,677 4,716 3.5
Marketing Company
Pabst Blue Ribbon 968,139 190,488 5.1
2000:
Noble Brewery
Local Brands 654 213 3.1
Pabst Blue Ribbon 442,438 103,755 4.3
Zhaoqing Brewery
Local Brands 2,160 639 3.4
Pabst Blue Ribbon 224,760 53,169 4.2
Zao Yang High Worth Brewery
Local Brands 23,487 17,487 1.3
Pabst Blue Ribbon 3,617 1,023 3.5
Jilin Lianli Brewery
Local Brands 6,710 5,380 1.2
Marketing Company
Local Brands 824 219 3.8
Pabst Blue Ribbon 924,507 171,785 5.4
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Net Sales
Net Sales Volume Sold per Ton
--------- ----------- ---------
(RMB'000) (metric tons) (RMB'000)
2001:
Noble Brewery
Local Brands 5,540 3,541 1.6
Pabst Blue Ribbon 314,712 81,291 3.9
Zhaoqing Brewery
Local Brands 2,784 1,770 1.6
Pabst Blue Ribbon 154,889 40,275 3.9
Zao Yang High Worth Brewery
Local Brands 28,402 15,935 1.8
Pabst Blue Ribbon 42,307 10,871 3.9
Marketing Company
Local Brands 14,753 5,108 2.9
Pabst Blue Ribbon 683,431 131,924 5.2
SEASONALITY
The beer industry in China is seasonal. The Company's sales are
usually lowest in the months of October and November and highest in the months
of March through September.
LOCATION
Noble Brewery and Zhaoqing Brewery are located adjacent to each other
in the City of Zhaoqing. The municipality of Zhaoqing is one of the major
municipal areas of Guangdong Province. Zhaoqing enjoys a well-developed
infrastructure, including transportation facilities and a reliable power,
communication and service infrastructure. The area contains extensive
agricultural activity.
Zao Yang High Worth Brewery is located in Hubei Province, which is
situated in the center of China. Zao Yang High Worth Brewery has immediate
access to the provincial highway network and is strategically positioned to
serve the surrounding provinces.
QUALITY CONTROL
Rigorously applied quality control is critical to ensure a
consistently high quality standard for the products produced by the breweries.
In 1990, quality control experts were sent by Pabst US to Zhaoqing to teach
brewery personnel appropriate inspection techniques, quality control measures
11
and production procedures. Pabst US experts trained the brewery's personnel in
the specific brewing techniques required in order to meet the standards set by
Pabst US. An engineer from Pabst US is stationed in China to test random
production samples and perform quality control on a continuing basis.
RAW MATERIALS
The primary raw materials utilized in the brewing of beer are malt,
husked rice, hops and water. The aggregate cost of the primary raw materials
represents approximately 24% of the direct cost of production, excluding
depreciation, of Pabst Blue Ribbon beer and 22% of domestic brand beers. Cost
of packaging represents approximately 55% of the total direct cost of
production, excluding depreciation, of Pabst Blue Ribbon beer and 40% of
domestic brand beers.
MALT: Virtually all of the malt utilized for producing Pabst Blue
Ribbon beer is purchased from regional malt manufacturers.
HUSKED RICE: Husked rice is sourced from local and regional
suppliers. Given the extensive agricultural activity in China, management
believes that there is an abundant and reliable supply of rice to meet ongoing
production needs.
HOPS: The hops utilized for producing Pabst Blue Ribbon beer are
acquired primarily from overseas suppliers through local importers.
WATER: The breweries utilize local water sources and intensively
monitor the quality of the water used in the brewing process for compliance with
the Company's own stringent quality standards.
CONTAINERS
All of the beer bottles and cans required by the Company are supplied
by local or regional glass and can manufacturers. Currently, there is a
recycling bottle program in place and the Company uses both new and recycled
bottles and new cans in packaging its beer.
TRANSPORTATION/DISTRIBUTION
In view of the wide geographic market in China, the Company is
constantly reviewing the methods for distributing its malt beverages.
TRANSPORTATION: During 2001, 8% of the Company's products sold were
shipped by rail tank cars from Zhaoqing to distributors throughout Guangdong
Province, and 77% were shipped from Zhaoqing by truck (65%) and by boat (12%)
directly to distributors throughout China. The remaining 15% of beer products
sold were produced by Zao Yang High Worth Brewery and Sichuan High Worth Brewery
and were primarily distributed within the Hubei and Sichuan regional markets by
truck.
Domestic brand beers made by Zhaoqing Brewery and Zao Yang High Worth
Brewery were primarily transported by trucks and shipped within the regional
markets.
DISTRIBUTION: Delivery of Pabst Blue Ribbon beer to retail markets in
Guangdong Province and to the rest of China is accomplished through a network of
regional distributors which sell to tobacco and alcohol companies, bars,
restaurants and retail stores. The Marketing Company has over 400 distributors
and sub-distributors throughout China. Customers with material transaction
volume are required to issue bills of exchange from their respective banks to
secure payment on the due date. The Marketing Company typically appoints only
12
one distributor in each region (except for a large region in which more than one
may be appointed) to ensure that such distributor devotes adequate effort and
resources to the development of a broad-based retail distribution network for
Pabst Blue Ribbon beer in that distributor's region. These distribution
arrangements include flexibility for the Marketing Company to replace
distributors or modify its arrangements with existing distributors. No single
distributor accounted for more than approximately 5% of barrel sales in 2001.
During the year ended December 31, 2001, approximately RMB 97,116,320
was allocated to promotional advertising for Pabst Blue Ribbon beer and
approximately RMB 68,132,817 was allocated to other specific promotional
activities and incentives to distributors. In addition, approximately RMB
7,073,395 was allocated to advertising and promotional activities for other
local brand name beer in 2001. Advertising media includes television, radio,
billboards, magazines and newspapers. In addition, the Marketing Company
provides its distributors with promotional gift items, sales incentive bonuses
and volume discounts, and special lucky draw and specific promotional campaigns
are held during the year.
MARKETS AND COMPETITION
With the influx of foreign branded beer into the China market, as well
as the aggressive pricing and promotional strategies implemented by some major
state-owned breweries, the Company anticipates that competition in the Chinese
beer market will continue to be intense in 2002, and additional marketing and
advertising efforts will have to be implemented in order to maintain the market
leadership of Pabst Blue Ribbon beer.
MARKETS: The beer market in China has experienced substantial growth
in rates of production and demand. However, the industry is largely fragmented
and highly regionalized. A key reason for the fragmented industry is the lack
of an effective distribution system and the regionalized market. Another reason
for the fragmented market is that local breweries are generally small in
capacity and lack the financial resources and capability to launch a national
distribution network and promotion program.
Approximately 750 breweries exist in China, of which over 90% are
small local breweries that produce non-premium beer for local or regional
consumption. Certain Chinese taxes based on volume rather than sales price
favor the higher-priced premium beer breweries.
Management anticipates that the market demand for high-priced foreign
premium labels will continue to be stagnant as consumers shift to lower-priced
but improved quality local beer products. The competition among major Chinese
breweries to maintain market share under the current market conditions is also
expected to exert continuing pressure on the Company's operating results during
2002. Management has responded to changing market conditions by consolidating
and rationalizing the production and operations of the two major breweries in
Zhaoqing through the pooling of management resources, by broadening its product
line and expanding its distribution efforts. The Company is taking steps to
maintain its premium beer market share and to develop a new range of
medium-priced products under separate labels to suit the market's changing
needs.
COMPETITION: Of the brands comprising the premium sector, Tsingtao,
Budweiser and Pabst Blue Ribbon are the major market leaders. Tsingtao is the
largest brewer of beer in China and is one of the best selling beers in China
and the largest brand exported from China. Other companies seeking to develop
market share in the Chinese market include Carlsberg, San Miguel, Beck's,
Lowenbrau, Heniken, Stroh's, Miller, Foster's, Coor's and Heileman.
CAPITAL INVESTMENT
13
In 1999, Zao Yang High Worth Brewery spent approximately RMB 2,000,000
to improve the production facilities of the existing brewing complex. Zhaoqing
Brewery and Noble Brewery each spent approximately RMB 5,000,000 during 1999 to
improve and renew the production facilities of the existing brewing complexes.
In 2000, Noble Brewery spent approximately RMB 12,000,000 to improve
and renovate production facilities of the existing brewing complex. Zhaoqing
Brewery, Zao Yang High Worth Brewery and the Marketing Company spent
approximately RMB 9,000,000, RMB 6,700,000 and RMB 2,170,000, respectively, for
acquiring new equipment, renovating the existing machinery, and the acquisition
of vehicles and office equipment.
In 2001, Zao Yang High Worth Brewery and Zhaoqing Brewery spent
approximately RMB 8,400,000 and RMB 2,900,000, respectively, for renovating and
improving the existing machinery.
PRODUCT DEVELOPMENT
The Company is continually engaged in product development programs,
and has developed various improvements in raw material selection, production
processes and packaging systems, as well as the development of innovative
quality products.
The Company's product development expenditures are primarily devoted
to new product development, brand development, the brewing process and
ingredients, brewing equipment, improved manufacturing techniques for packaging
supplies and environmental improvements in the Company's operational processes.
The focus of these programs is to improve the quality and value of its malt
beverage products while reducing costs through more efficient processing
techniques, equipment design and improved varieties of raw materials.
ENERGY
The breweries in Zhaoqing use both heavy oil and electricity as
primary sources of energy. Heavy oil is used as the primary fuel in their steam
generation system and is supplied from regional sources. Electricity is
supplied by the local Electricity Bureau. The breweries have not experienced
any energy supply problems to date. As an alternative source of energy, the
Company also has fuel oil and propane available. Management of the Company does
not anticipate any supply problems in the future with respect to these natural
resources.
EMPLOYEES
During May and July 2001, 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. As of December 31, 2001, there were approximately 1,536
employees employed by Zhaoqing Brewery, Noble Brewery, the Marketing Company and
Zao Yang High Worth Brewery, categorized as follows:
ZAO YANG
ZHAOQING NOBLE MARKETING HIGH WORTH
FUNCTION TOTAL BREWERY BREWERY COMPANY BREWERY
-------- ----- -------- ------- --------- ----------
(1) Production 865 170 460 - 235
(2) Engineering, Technology
and Quality Control 107 10 44 - 53
(3) Management and
Administration 163 34 37 21 71
(4) Marketing 176 - - 143 33
(5) Warehouse 102 17 50 - 35
(6) Others 123 26 59 17 21
----- -------- ------- --------- ----------
Total 1,536 257 650 181 448
===== ======== ======= ========= ==========
14
In 2001, labor costs (including the cost of benefits) accounted for
approximately 7.3%, 6.9% and 7.1% of the total costs of production for Noble
Brewery, Zhaoqing Brewery and Zao Yang High Worth Brewery, respectively. The
Company expects average wage rates of its employees will continue at the same
level in 2002 as compared to 2001.
Each full-time employee is a member of a local trade union. Labor
relations have remained positive and the breweries have not had any employee
strikes or major labor disputes. Unlike trade unions in western countries,
trade unions in most parts of China are organizations mobilized jointly by the
government and the management of the enterprises.
PABST LICENSING ARRANGEMENTS AND TRADEMARKS
PABST TRADEMARKS IN CHINA
The arrangements regarding the use of Pabst trademarks in China were
formalized in an agreement dated August 30, 1993 (the "License Agreement")
between Pabst US and Pabst Zhaoqing. Pabst Zhaoqing was wholly-owned at that
time by Zhaoqing Brewery, which was owned by Guangdong Blue Ribbon. The License
Agreement was for a period of fifteen years, from November 7, 1988 through
November 6, 2003. Under the terms of the License Agreement, Pabst Zhaoqing
obtained the exclusive right to produce and market products under Pabst
trademarks in China, the non-exclusive right to market such Pabst products in
other Asian countries except Hong Kong, Macau, Japan and South Korea, and the
right to sublicense the use of the Pabst trademarks to any other enterprise in
China, subject to approval of Pabst US. Royalties are payable quarterly to
Pabst US based on the volume (units) of beer produced.
By an Assets Transferring Agreement dated May 20, 1994 among Pabst
Zhaoqing, Pabst US and Guangdong Blue Ribbon, all rights and duties under the
License Agreement were assigned and transferred from Pabst Zhaoqing to Guangdong
Blue Ribbon. Guangdong Blue Ribbon agreed to fulfill the obligation as
sublicensor under the License Agreement between Pabst Zhaoqing as sublicensor,
and Noble Brewery and High Worth JV as sublicensee, respectively, as described
below.
NOBLE BREWERY
By a Sublicense Agreement dated October 12, 1993 (the "Noble
Sublicense Agreement") between Pabst Zhaoqing and Noble Brewery and approved by
Pabst US, Pabst Zhaoqing granted to Noble Brewery a sublicense to use
beer-related Pabst trademarks, the non-exclusive right to produce beer in
accordance with its production capacity under the sublicensed Pabst trademarks,
and the non-exclusive right to market such Pabst products in China and other
Asian countries except Hong Kong, Macau, Japan and South Korea. Royalties
calculated on the same basis as those payable to Pabst US are payable by Noble
Brewery to Pabst Zhaoqing. Under the terms of the Noble Sublicense Agreement,
Pabst Zhaoqing agreed that, except with respect to the enterprises of Guangdong
Blue Ribbon, it would not grant further sublicenses to any other enterprises in
Guangdong Province to use the Pabst trademarks thereby granted. At the time of
the Noble Sublicense Agreement, Zhaoqing Brewery was a member enterprise of
Guangdong Blue Ribbon.
15
HIGH WORTH JV/ZHAOQING BREWERY
By a Sublicense Agreement dated May 6, 1994 (the "High Worth
Sublicense Agreement") between Pabst Zhaoqing and High Worth JV and approved by
Pabst US on September 18, 1994, Pabst Zhaoqing granted to High Worth JV a
sublicense to allow Zhaoqing Brewery to use Pabst trademarks to produce beer in
accordance with its production capacity under the sublicensed Pabst trademarks
and to market such Pabst products in China and other Asian countries except Hong
Kong, Macau, Japan and South Korea. With respect to the production of Pabst
Blue Ribbon beer in Guangdong Province, since Zhaoqing Brewery was a member
enterprise of Guangdong Blue Ribbon at the time of the Noble Sublicense
Agreement, Zhaoqing Brewery was entitled to produce Pabst Blue Ribbon beer in
Guangdong Province.
Under the terms of the High Worth Sublicense Agreement, High Worth JV
and/or its affiliates have the sole right to be granted further sublicenses by
Pabst Zhaoqing for the use of the Pabst trademarks to produce beer in China
provided that they are located outside Guangdong Province. Further, Pabst
Zhaoqing covenanted that it would not grant further sublicenses with respect to
the Pabst trademarks to produce beer to any other enterprises except High Worth
JV or its affiliates. Accordingly, it is the position of the Company that,
through November 6, 2003, High Worth JV controls all future sublicensing for the
production of Pabst Blue Ribbon beer in China, which can be sold throughout
China and other Asian countries, excluding Hong Kong, Macau, Japan and South
Korea.
Other terms of the High Worth Sublicense Agreement are the same as in
the License Agreement. Royalties are payable quarterly by High Worth JV to
Pabst Zhaoqing based on the volume (units) of beer produced.
SICHUAN HIGH WORTH BREWERY
Effective December 31, 1997, the Company, through High Worth JV,
entered into a Settlement Agreement with Guangdong Blue Ribbon that allowed High
Worth JV to acquire a 51% interest in Sichuan Brewery, equivalent to an
effective interest of 31%. Prior to the completion of the acquisition of the
51% interest, pursuant to an Equity Transfer Agreement signed on January 19,
1999, High Worth JV received a 15% consideration-free equity interest in Sichuan
Brewery, equivalent to an effective interest of 9%. Sichuan Brewery was
formally restructured into a new joint venture company and is the fourth Pabst
Blue Ribbon brewing complex in China. High Worth JV was also granted a
three-year option to increase its equity interest to 51% at a fixed cost. The
restructuring into Sichuan High Worth Brewery, the new joint venture agreement,
the new memorandum of association, and other relevant legal documents were
approved by the local government in 1999.
During April 2001, as result of continuing operating losses and
adverse market conditions, the Company conducted discussions with its partners
in Sichuan High Worth Brewery, resulting in an agreement to withdraw from
Sichuan High Worth Brewery. The Company agreed to give up its effective
interest of 9% in Sichuan High Worth Brewery, and was released from any
liability for the brewery's accumulated losses. As part of this agreement,
Sichuan High Worth Brewery's right to produce Pabst Blue Ribbon beer was
terminated. The Company expects that Sichuan High Worth Brewery will be
dissolved pending the approval of the local government authorities. This
transaction is not expected to have any impact on the Company's results of
operations or financial position, since the sales of Sichuan High Worth Brewery
in the Sichuan region are being reallocated between Zhaoqing Brewery and Noble
Brewery as a result of the interest in Sichuan High Worth Brewery being given up
for no consideration.
16
ZAO YANG HIGH WORTH BREWERY
Pursuant to the terms of the Settlement Agreement and the High Worth
Sublicense Agreement, Guangdong Blue Ribbon granted a sublicense agreement to
Zao Yang High Worth Brewery on May 26, 1998 for the right to produce and sell
beer products under the Pabst Blue Ribbon label. Zao Yang High Worth Brewery is
required to pay royalty fees at the same rate as Pabst US charges Guangdong Blue
Ribbon plus a surcharge of RMB 25 per metric ton. Zao Yang High Worth Brewery
is obligated to meet the required quality standards for the production of Pabst
Blue Ribbon beer.
RECENT DEVELOPMENTS REGARDING PABST BLUE RIBBON TRADEMARK IN CHINA
Noble China Inc. is a public company listed on the Toronto Stock
Exchange that is the 60% shareholder of Noble Brewery. Noble China Inc. has
publicly reported that in May 1999 it entered into a license agreement with
Pabst Brewing Company granting it the right to utilize the Pabst Blue Ribbon
trademarks in connection with the production, promotion, distribution and sale
of beer in China for 30 years commencing in November 2003. In consideration for
the license agreement, Noble China Inc. reported that it had paid Pabst Brewing
Company US$5,000,000 for the right to use the Pabst Blue Ribbon trademarks and
agreed to pay royalties based on gross sales. Recently, Noble China Inc. has
publicly reported that it was experiencing certain financial difficulties, and
that if such difficulties continued into the first half of 2002, it would soon
face insolvency and be forced to consider several alternatives.
Management has consulted with legal counsel regarding the legitimacy
of the purported license and the Company's potential responses. In addition,
management has consulted with Guangdong Blue Ribbon, the owner of the Pabst Blue
Ribbon trademark in China, regarding potential responses, and has met with
representatives of Noble China Inc. in an attempt to explore a potential
settlement.
Management of the Company has requested that Guangdong Blue Ribbon
take appropriate action to protect its rights and its sub-licensees' rights to
utilize the Pabst Blue Ribbon trademark in China. The Company has been advised
that Guangdong Blue Ribbon is still evaluating the situation and has not yet
determined how it will respond to this matter. Once Guangdong Blue Ribbon has
responded, the Company expects to be in a position to evaluate and revise its
future business plan and strategy accordingly. The Company is currently unable
to predict the effect that this development may have on future operations.
However, the inability of the Company to obtain a sub-license from Noble China
Inc. or enter into some other form of strategic relationship under acceptable
terms and conditions to allow the Company to continue to produce and distribute
Pabst Blue Ribbon beer in China would have a material adverse effect on the
Company's future results of operations, financial position and cash flows.
During December 2000, the Company and Noble China Inc. signed a
memorandum pursuant to which a management committee was established to evaluate
the potential to coordinate and enhance the operations of Zhaoqing Brewery,
Noble Brewery and the Marketing Company. Effective January 1, 2001, the
management, marketing, production and operations of Zhaoqing Brewery, Noble
Brewery and the Marketing Company were pooled together under a newly-created
management entity named "Blue Ribbon Enterprises" in order to achieve improved
coordination of human, financial, production and marketing activities. This
pooled management structure is expected to achieve greater efficiency and
improved operating profitability. Although it is anticipated that certain
pooled costs will be allocated in proportion to each brewery's respective
production capacities, Zhaoqing Brewery, Noble Brewery and the Marketing Company
will each remain as legally distinct entities. The management committee will
also commence a study to evaluate the formation of a new unified company.
17
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.
THE JOINT VENTURE COMPANIES
FORMATION OF THE JOINT VENTURE COMPANIES
In 1992, Zhaoqing Brewery became a member enterprise (affiliate) of
Guangdong Blue Ribbon. In June 1993, Zhaoqing Brewery entered into a Joint
Venture Agreement with Goldjinsheng Holdings Ltd. ("Goldjinsheng") to form Noble
Brewery (the "Noble Joint Venture Agreement"), pursuant to which Goldjinsheng
acquired a 60% interest and Zhaoqing Brewery acquired a 40% interest.
Goldjinsheng was a wholly-owned subsidiary of Noble China Inc. The term of the
joint venture is for 20 years, which may be extended upon the agreement of the
two joint venture partners and approval from the applicable Chinese governmental
agencies.
In May 1994, Guangdong Blue Ribbon and Holdings entered into a Joint
Venture Agreement providing for the establishment of High Worth JV. The term of
the joint venture is 50 years, and is subject to extension by agreement of the
parties and approval from the government. Holdings and Guangdong Blue Ribbon
acquired 60% and 40% interests, respectively, in High Worth JV.
In January 1998, High Worth JV and Zao Yang Brewery entered into a
Joint Venture Agreement providing for the establishment of Zao Yang High Worth
Brewery. The term of the joint venture is 15 years, and is extendable by
agreement of the parties and approval from the government.
On October 18, 1999, Holdings, through its wholly-owned subsidiary
incorporated in the British Virgin Islands, March International, signed a formal
Joint Venture Agreement with Jilin Province Jiutai City Brewery and Jilin
Province Chuang Xiang Zhi Yie Ltd., both of which are unaffiliated PRC
companies, to form Jilin Lianli Brewery. March International received a 51%
effective interest in Jilin Lianli Brewery. The Joint Venture Agreement was
approved by the local government and formal operations commenced in May 2000.
However, due to weak market response and the inability of the Chinese local
partners to honor their working capital commitment, the production and operation
of Jilin Lianli Brewery was formally terminated in December 2000.
The operations of Jilin Lianli Brewery generated a loss during the
year ended December 31, 2000. The Company included its proportionate share of
the loss of RMB 4,209,460 in its consolidated results of operations for the year
ended December 31, 2000. In addition, the Company recorded a charge to
operations of RMB 6,000,000 and RMB 2,750,000 at December 31, 2000 and March 31,
2001, respectively, with respect to a provision for impairment of plant,
machinery and equipment at Jilin Lianli Brewery. The operations of Jilin Lianli
Brewery subsequent to December 31, 2000 consist primarily of nominal costs
related to the care and maintenance of the facility. Although the Company has
been in negotiations with certain interested parties in an effort to dispose of
its equity interest in Jilin Lianli Brewery, no formal agreement has been
reached. During the year ended December 31, 2001, the Company wrote-off its
remaining investment in Jilin Lianli Brewery of RMB 1,224,109. The Company has
written off a total of RMB 13,788,500 with respect to this investment.
OPERATION OF THE JOINT VENTURE COMPANIES
The establishment and activities of High Worth JV, Noble Brewery and
Zao Yang High Worth Brewery are governed by the joint venture laws and
regulations of China and the applicable joint venture agreements. Holdings
interest in the profits of High Worth JV is in the same proportion (i.e., 60%)
18
as its investment in High Worth JV; Zhaoqing Brewery's interest in the profits
of Noble Brewery is in the same proportion (i.e., 40%) as its investment in
Noble Brewery; High Worth JV's interest in the profits of Zao Yang High Worth
Brewery is in the same proportion (i.e., 55%) as its investment in Zao Yang High
Worth Brewery.
Under the Noble Joint Venture Agreement, Noble Brewery is governed by
a board of directors, consisting of five individuals, three of whom, including
the chairman, are nominated by Goldjinsheng, with the remaining two, including
the vice chairman, by Zhaoqing Brewery. The operation and management of Noble
Brewery is the responsibility of Zhaoqing Brewery. Accordingly, Zhaoqing
Brewery has the decision-making authority on substantially all aspects of the
daily operations of Noble Brewery such as purchasing, production, sales and
marketing, finance and human resources. Goldjinsheng has the right to appoint
staff to participate in the accounting functions of Noble Brewery. All matters
to be approved by the board of directors require either unanimous vote or the
vote of four out of the five directors. Accordingly, no decision of the board
can be made without the approval of Zhaoqing Brewery's designee.
Under the High Worth JV Joint Venture Agreement, High Worth JV is
governed by a board of directors consisting of seven individuals, four of whom
are appointed by Holdings and three of whom are appointed by Guangdong Blue
Ribbon. The board of directors controls the management and operation of High
Worth JV. Generally, votes on the board of directors are taken by majority
vote, except for the following matters relating to the existence and legal
structure of the joint venture, all of which require a unanimous vote:
amendments to the articles of association; termination or dissolution of the
joint venture; increase in, or transfer of, the registered capital of the joint
venture; establishment of subsidiaries or combination with other entities; and
change in the share structure. The general manager is appointed by the board of
directors and is responsible for carrying out the decisions of the board as well
as for the day-to-day management of High Worth JV.
Zao Yang High Worth Brewery was formed as a Chinese limited company
with two joint venture owners. Pursuant to the Zao Yang High Worth Brewery
Joint Venture Agreement, Zao Yang High Worth Brewery is governed by a board of
directors consisting of five individuals, three of whom, including the chairman,
are nominated by High Worth JV, with the remaining two, including the
vice-chairman, by Zao Yang Brewery. Generally, votes on the board of directors
are taken by majority vote, except for the following matters relating to the
existence and legal structure of the joint venture, all of which require a
unanimous vote: amendment to the articles of association; termination or
dissolution of the joint venture; increase in, or transfer of, the registered
capital of the joint venture; establishment of subsidiaries or combination with
other entities; and change in the share structure. The general manager is
appointed by the board of directors and is responsible for carrying out the
decisions of the board as well as for the day-to-day management of Zao Yang High
Worth Brewery.
GOLDJINSHENG AGREEMENT
A provisional agreement, subject to the approval of the applicable
Chinese governmental agencies and the execution of separate definitive
agreements with respect to the various matters referred to below, was made among
Goldjinsheng, the owner of the remaining 60% interest in Noble Brewery, Zhaoqing
Brewery, Noble Brewery, High Worth JV and Guangdong Blue Ribbon on May 10,
1995 (the "Goldjinsheng Agreement") confirming that:
(a) High Worth JV was entitled to brew and sell beer under the Pabst Blue
Ribbon label produced in its brewing facilities up to a maximum annual
production capacity of 100,000 tons.
19
(b) High Worth JV and/or companies in which High Worth JV has an interest
are entitled to be granted a sublicense from Guangdong Blue Ribbon with
the right to produce and sell beer under the Pabst Blue Ribbon label in
the Guangdong Province of China (an "Additional Facility") up to a maximum
annual production capacity of 300,000 tons.
In the event that High Worth JV desires to obtain a sublicense for an
Additional Facility, Goldjinsheng has the right to purchase up to a 40%
interest in such Additional Facility. The purchase price for such interest
will be the actual cost of such Additional Facility multiplied by the
percentage interest that Goldjinsheng elects to purchase.
(c) A marketing company, owned 8% by Guangdong Blue Ribbon, 52% by High
Worth JV and 40% by Goldjinsheng, will organize and coordinate the sale of
Pabst Blue Ribbon beer produced by High Worth JV and Noble Brewery. High
Worth JV and Noble Brewery will each create their own distribution company
or division. The distribution company of High Worth JV will have the sole
right to acquire 100% of the production of High Worth JV and 40% of the
production of Noble Brewery, while the distribution company of Noble
Brewery will have the sole right to acquire 60% of the production of Noble
Brewery. The respective distribution companies will appoint the Marketing
Company as their sole and exclusive agent to market Pabst Blue Ribbon beer
in China. If the provisions as to ownership are implemented, the
respective interests of Guangdong Blue Ribbon and the Company in the
Marketing Company will be adjusted (see "MARKETING AND OPERATIONS --
SUMMARY OF OPERATIONS").
Subsequent to the signing of the Goldjinsheng Agreement, the Company,
Guangdong Blue Ribbon and Goldjinsheng have attempted to complete the respective
separate definitive agreements. In December 1996, Guangdong Blue Ribbon and
Goldjinsheng advised the Company that they intended to modify some of the terms
of the Goldjinsheng Agreement and to propose incorporating those modifications
in the respective separate definitive agreements. In addition, the negotiation
process was interrupted by the previously described Sichuan Brewery issue in
1997 and 1998 and the Pabst trademark issue in 1999. The Company believes that
the delays in completing the separate definitive agreements will not have a
material effect on the validity of the terms and provisions contained in the
Goldjinsheng Agreement.
OPERATING IN CHINA
Because the operations of the Company are based exclusively in China,
the Company is subject to rules and restrictions governing China's legal and
economic system as well as general economic and political conditions in that
country.
INFLATION/ECONOMIC POLICIES. General economic conditions in China
could have a significant impact on the Company. The economy of China differs in
certain material respects from that of the United States, including its
structure, levels of development and capital reinvestment, growth rate,
government involvement, resource allocation, rate of inflation and balance of
payments position. Although the majority of China's productive assets are still
owned by the state, the adoption of an economic reform policy since 1978 has
resulted in the gradual reduction in the role of state economic plans and the
allocation of resources, pricing and management of such assets, with increased
emphasis on the utilization of market forces, and rapid growth in the Chinese
economy. The success of the Company depends in substantial part on the
continued economic growth of the Chinese economy.
20
In the recent decade, the Chinese economy has experienced periods of
rapid economic growth as well as high rates of inflation, which in turn, has
resulted in the adoption by the Chinese government from time to time of various
corrective measures designed to regulate growth and contain inflation. Since
1993, the Chinese government has implemented an economic program to control
inflation, which has resulted in the tightening of working capital available to
Chinese state-owned enterprises, and in the slowing of the pace of economic
growth and general market consumption.
CURRENCY MATTERS. The State Administration for Exchange Control
("SAEC"), under the authority of the People's Bank of China ("PBOC"), controls
the conversion of RMB into foreign currency. Prior to January 1, 1994, RMB
could be converted into foreign currency through the Bank of China or other
authorized institutions at official rates fixed daily by the SAEC. RMB could
also be converted at swap centers ("Swap Centers") open to Chinese enterprises
and foreign-funded Chinese enterprises, subject to SAEC approval of each foreign
currency trade, at exchange rates negotiated by the parties for each
transaction. Effective January 1, 1994, a unitary exchange rate system was
introduced in China, replacing the dual-rate system previously in effect. In
connection with the creation of a unitary exchange rate, the establishment of
the China Foreign Exchange Trading System inter-bank foreign exchange market and
the phasing out of the Swap Centers were announced. All Swap Centers were
formally closed effective December 1, 1998, and foreign-funded enterprises must
satisfy their foreign exchange requirements through licensed banks and financial
institutions at the prevailing exchange rates quoted by the People's Bank of
China.
Effective July 1, 1996, the government of China began to take steps to
make its currency fully convertible on a "current account" basis. This will
allow foreign-funded enterprises, whether wholly-owned or joint ventures with
Chinese parties, to buy and sell foreign exchange in banks for purposes of
trade, services, debt repayment and profit repatriation. The "current account"
measures the flow of money into and out of a nation, including the net balance
on trade in goods and services, plus remittances.
As China was recently admitted as a member of the World Trade
Organization, the central government of China is expected to adopt a more
rigorous approach to partially deregulate the currency conversion restriction,
which may in turn increase the exchange rate fluctuation of the RMB. Should
there be any major change in the central government's currency policies, the
Company does not believe that such an action would have a detrimental effect on
the Company's operations, since the Company conducts virtually all of its
business in China, and the sale of its products is settled in RMB.
The Company has historically relied on dividend distributions,
converted from RMB into USD, to fund its activities outside of China. The
Company does not expect that the current foreign exchange controls will affect
the ability of High Worth JV to continue to distribute such dividends. However,
in the event of a substantial currency fluctuation, High Worth JV could elect to
distribute dividends in RMB, which would then be converted into other currencies
at the time when the prevailing market rates are stabilized.
LEGAL SYSTEM. Since 1979, many laws and regulations dealing with
economic matters in general and foreign investment in particular have been
promulgated in China. The Chinese constitution adopted in 1989 authorizes
foreign investment, and guarantees the "lawful rights and interests" of foreign
investors in China. The trend of legislation over the past twelve years has
significantly enhanced the protection afforded foreign investment and allowed
for more active control by foreign parties of foreign investment enterprises in
China. There can be no assurance, however, that the current trend and economic
legislation toward promoting market reforms and experimentation will not be
slowed, curtailed or reversed, especially in the event of a change in
leadership, social or political disruption, or unforeseen circumstances
affecting China's political, economic or social life.
21
Despite some progress in developing a legal system, China does not
have a comprehensive system of laws. The interpretation of Chinese laws may be
subject to policy changes reflecting domestic political factors. Enforcement of
existing laws may be uncertain and sporadic, and implementation and
interpretation may be inconsistent. The Chinese judiciary is relatively
inexperienced in enforcing the laws or terms of contracts, leading to a higher
than usual degree of uncertainty as to the outcome of litigation. Even where
adequate laws exist in China, it may be impossible to obtain swift and equitable
law enforcement, or to obtain enforcement of a judgment by a court of another
jurisdiction. As the Chinese legal system develops, the promulgation of new
laws, changes to existing laws, and the preemption of local regulations by
national laws may adversely affect foreign investors, such as the Company.
The Company's activities in China may by law be subject, in some
cases, to administrative review and approval by various national, provincial and
local agencies of the Chinese government. While China has promulgated an
administrative procedural law permitting redress to the courts with respect to
certain administrative actions, this law is largely untested.
TAX MATTERS. The Company's operations in China are subject to four
types of taxes: Income Tax, Value Added Tax ("VAT"), Consumption Tax and other
Sales Tax.
Noble Brewery and High Worth JV are governed by the Income Tax Law of
China concerning Foreign Investment Enterprises and Foreign Enterprises (the
"FIE Law"). Under the current FIE Law, Noble Brewery and High Worth JV were
exempt from payment of Income Tax for the first two taxation years in which
Noble Brewery and High Worth JV each became profitable. The Income Tax rate for
the following three years is reduced by 50% and is thereafter calculated at the
full rate. The last year of 50% tax exemption for Noble Brewery was 1998 and
for High Worth JV was 2000. The current official Income Tax rate on profits for
Noble Brewery is 27% (33% less a 6% temporary reduction provided as an economic
incentive by the Chinese government) and for High Worth JV is 33%, unless
specifically exempted or reduced by the local authorities.
Zao Yang High Worth Brewery was established as a China joint venture
limited company and is subject to the Income Tax Law of China concerning a
Chinese limited company. The current official Income Tax rate on profits for
Zao Yang High Worth Brewery is 33%. However, local tax authorities may
specifically exempt or reduce the tax rate as an economic incentive.
In addition to the FIE Law, which is computed on profits, Noble
Brewery, Zhaoqing Brewery and Zao Yang High Worth Brewery are also subject to
two kinds of turnover taxes for their respective sales, the VAT and Consumption
Tax. The applicable VAT rate is 17% for brewery products sold in China. The
amount of VAT liability is determined by applying the applicable tax rate to the
invoiced amount less VAT paid on purchases made with the relevant supporting
invoices. The Consumption Tax rate together with a government surcharge for
brewery products was approximately RMB 220 per metric ton. Beginning May 1,
2001, consumption taxes were increased for beers selling in excess of RMB 3,000
per metric ton, to RMB 250 per metric ton. The Consumption Tax is determined on
the volume of sales within China. No Consumption Tax is levied on wholesale
trading of brewery products, on exported goods or on non-alcoholic beverage
products.
Currently, there are no withholding taxes imposed on dividends paid by
High Worth JV to Holdings.
22
DISTRIBUTION OF PROFITS. Applicable Chinese laws and regulations
require that, before a Sino-foreign joint venture enterprise (such as High Worth
JV and Noble Brewery) distributes profits to investors, it must (1) satisfy all
PRC tax liabilities; (2) provide for losses in previous years; and (3) make
allocations in proportions determined at the sole discretion of the Board of
Directors to a general reserve fund, an enterprise development fund and a staff
welfare and employee bonus fund. Distribution of profits by the joint ventures
to the Company and their other equity investors are required to be in proportion
to each party's respective investment in the joint venture.
REGULATIONS
Central, provincial and local laws and regulations govern the
operations of the breweries. The central government and all provinces in which
the Company's malt beverage products are distributed regulate trade practices,
advertising and marketing practices, relationships with distributors and related
matters. Governmental entities also levy various taxes, license fees and other
similar charges and may require bonds to ensure compliance with applicable laws
and regulations.
HISTORY
The Company was organized in the state of Florida as Video Promotions,
Inc. on April 20, 1988. The Company subsequently changed its name to National
Sweepstakes, Inc. and then to Natural Fuels, Inc. For a period of time prior to
December 16, 1994, the business of the Company was devoted to seeking potential
acquisition or merger opportunities.
On December 16, 1994, the Company acquired all of the outstanding
shares of Holdings from Oriental Win Holdings Ltd. ("Oriental Win") and
Goldchamp Ltd. ("Goldchamp") in exchange for 3,960,000 shares and 240,000 shares
of the Company's Class A common stock issued to Oriental Win and Goldchamp,
respectively, and 3,000,000 shares of the Company's Class B common stock issued
to Oriental Win. The Class B common stock carries two votes per share but is
otherwise equivalent to the Class A common stock. In addition, the Company
issued an aggregate of 600,000 shares of the Company's Class A common stock to
various parties for consulting services in connection with the acquisition of
Holdings. At the time of the acquisition, Holdings owned a 60% interest in High
Worth JV. This transaction was accounted for as a recapitalization of Holdings
with Holdings as the acquirer (reverse acquisition).
On November 22, 1994, the Company effected a 1-for-22 reverse stock
split in anticipation of this transaction.
On March 15, 1995, the Company changed its name to CBR Brewing
Company, Inc.
23
ITEM 2. PROPERTIES
The Company's major facilities are as follows:
FACILITY LOCATION PRODUCT
- -------- -------- -------
Noble Brewery City of Zhaoqing on a site Malt Beverages
containing approximately
135,000 square meters
Zhaoqing Brewery City of Zhaoqing on a site Malt Beverages
containing approximately
131,000 square meters
Zao Yang High Worth City of Zao Yang on a site Malt Beverages
Brewery containing approximately
70,000 square meters
The facilities of Noble Brewery and Zhaoqing Brewery are well
maintained and suitable for their respective operations. The facilities of Zao
Yang High Worth Brewery have been modernized and new equipment has been added to
convert them into Pabst Blue Ribbon beer production complexes.
The Company estimates that Zhaoqing Brewery, Noble Brewery and Zao
Yang High Worth Brewery operated at approximately 42.0%, 42.4% and 67.0%,
respectively, of their theoretical brewing capacities during the year ended
December 31, 2001. Annual production capacity can vary due to product mix,
packaging mix, market demand and seasonality.
ITEM 3. LEGAL PROCEEDINGS
There are no pending or threatened legal proceedings against the
Company or its subsidiaries, joint ventures or affiliates, except as described
below.
On April 3, 2002, Noble Brewery was served with an order from the High
Court of Shandong Province freezing a portion of its bank accounts with
aggregate balances of approximately RMB 35,700,000. The court order is related
to 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 owned by the brother of Lei Kat Chong, the former chairman
of Noble China Inc., and is asserting a total claim against Noble China Inc. of
approximately RMB 53,100,000. Noble China Inc., through its wholly-owned
subsidiary, Linchpin Holdings Limited, owns a 60% interest in Noble Brewery.
The court order specified that a total of RMB 53,100,000 was to be
retained by Noble Brewery pending resolution of the litigation. Accordingly, in
addition to the RMB 35,700,000 of funds frozen, Noble Brewery will also be
obligated to withhold potential dividend distributions or equity interests due
to Linchpin Holdings Limited of RMB 17,400,000.
24
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.
The RMB 35,700,000 of funds frozen by court order will be designated
by Noble Brewery as a portion of future dividend distributions payable to
Linchpin Holdings Limited. As of December 31, 2001, Linchpin Holdings Limited
was entitled to total dividend distributions from the retained earnings of Noble
Brewery of RMB 50,300,000.
Management of Noble Brewery believes that Noble Brewery's operations
will not be impaired as a result of the court order freezing a portion of its
bank accounts, and that Noble Brewery has adequate working capital resources to
fund its current operating requirements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security
holders during the fourth quarter of the fiscal year ended December 31, 2001.
25
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information
The Class A common stock of CBR Brewing Company, Inc. is traded on the
OTC Bulletin Board under symbol "CBRB". During 2001 and 2000, trading activity
in the Class A common stock was generally limited and sporadic, and should not
be deemed to constitute an "established public trading market". There is no
trading market for the Class B common stock.
The following table sets forth the range of closing prices of the
Company's Class A common stock as quoted during the periods indicated. Such
prices reflect prices between dealers in securities and do not include any
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions. The information set forth below was obtained from America Online,
Inc.
High Low
------ -----
Year Ended December 31, 2001:
Three Months Ended -
March 31, 2001 $0.55 $0.20
June 30, 2001 0.60 0.18
September 30, 2001 0.45 0.18
December 31, 2001 0.40 0.10
Year Ended December 31, 2000:
Three Months Ended -
March 31, 2000 $0.56 $0.38
June 30, 2000 1.00 0.50
September 30, 2000 0.88 0.53
December 31, 2000 0.63 0.38
(b) Holders
As of March 31, 2002, the Company had 14 shareholders of record with
respect to its Class A common stock and three shareholders of record with
respect to its Class B common stock, excluding shares held in street name by
brokerage firms and other nominees who hold shares for multiple investors.
(c) Dividends
Holders of common stock are entitled to receive dividends if, as and
when declared by the Board of Directors out of funds legally available therefor.
The Company has never paid cash dividends on its common stock and has no present
intention of paying cash dividends in the foreseeable future. It is the present
policy of the Board of Directors to retain all earnings to provide for the
future growth and development of the Company. However, such policy is subject to
change based on current industry and market conditions, as well as other factors
beyond the control of the Company.
26
The Company's ability to pay dividends to its shareholders is
dependent on the Company receiving distributions through Holdings from its PRC
subsidiaries and affiliates, which generate all of the Company's earnings and
cash flows.
Pursuant to the relevant laws and regulations of Sino-foreign joint
venture enterprises, the profits of High Worth JV, calculated pursuant to
generally accepted accounting principles in the PRC ("PRC GAAP"), are available
for distribution in the form of cash dividends to each equity investor, in
proportion to each investor's interest in the joint venture, after satisfaction
of all PRC tax liabilities, provision for any losses in previous years, and
appropriations to reserve funds, as determined at the discretion of the board of
directors in accordance with PRC accounting standards and regulations. The
principal adjustments necessary to conform PRC GAAP financial statements to
financial statements prepared in accordance with generally accepted accounting
principles in the United States ("US GAAP") are the reclassification of certain
expense items from income appropriations to charges against income, adjustments
for sales, other income and purchases recognized on a cash basis, depreciation
charges, deferred taxation and revaluation of fixed assets.
In accordance with the relevant laws and regulations in the PRC, the
profits available for distribution are based on PRC GAAP financial statements.
If High Worth JV has foreign currency available after meeting the operational
needs of its PRC subsidiaries, it may elect to make a profit distribution to
Holdings. Otherwise, it will be necessary to obtain approval from the State
Administration for Exchange Control and convert such distributions at licensed
banks and financial institutions.
(d) Sales of Unregistered Securities
The Company did not sell any unregistered securities during the years ended
December 31, 1999, 2000 and 2001.
ITEM 6. SELECTED FINANCIAL DATA
The following financial data has been derived from the audited
consolidated financial statements and should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
document. All amounts are in RMB. The exchange rate was approximately US$1.00
to RMB 8.30 at December 31, 1997, 1998, 1999, 2000 and 2001.
CBR Brewing Company, Inc.
(in RMB) and Subsidiaries
------------------------
Years Ended December 31,
-----------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- ----------- ------------ ------------- --------------
Consolidated Statement
of Operations Data:
Sales, net of sales taxes 713,794,599 941,147,545 986,458,832 1,121,007,111 1,169,286,489
Gross profit 214,858,338 205,979,387 218,202,956 193,523,991 208,326,796
Operating income (loss) (47,055,065) (94,288,604) (412,431) (24,070,401) 11,214,860
Net income (loss) (29,277,019) (28,905,192) 23,655,102 21,391,510 30,762,902
Net income (loss)
per common share (3.66) (3.61) 2.95 2.67 3.84
Cash dividends declared per
common share -0- -0- -0- -0- -0-
As of December 31,
--------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
Consolidated Balance
Sheet Data:
Net working capital
deficiency (295,884,832) (274,731,879) (160,971,900) (192,019,443) (102,725,259)
Total assets 693,313,494 782,793,235 822,467,276 870,426,327 835,094,540
Long-term liabilities 12,400,211 16,699,543 10,000,000 2,847,911 16,512,851
Advances from shareholders - - 36,719,200 50,267,705 73,617,552
Shareholders' equity 168,547,444 197,824,463 226,555,203 202,202,300 178,351,384
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW AND MAJOR DEVELOPMENTS:
Effective December 16, 1994, the Company acquired Holdings, which,
through its subsidiaries and affiliates, is engaged in the production and sale
of Pabst Blue Ribbon beer in China. Holdings is a holding company which was
formed solely to effect the acquisition of a 60% interest in High Worth JV. On
October 31, 1994, High Worth JV acquired a 100% interest in Zhaoqing Brewery,
including its 40% interest in Noble Brewery.
The acquisition of Zhaoqing Brewery, including its 40% interest in
Noble Brewery, was accounted for under the purchase method of accounting. The
consolidated financial statements include the results of operations of Zhaoqing
Brewery on a consolidated basis and Noble Brewery under the equity method of
accounting for investments commencing October 31, 1994. For accounting
purposes, the acquisition of Holdings by the Company was treated as a
recapitalization of Holdings with Holdings as the acquirer (reverse
acquisition).
Through a Sublicense Agreement dated May 6, 1994 between Pabst
Zhaoqing and High Worth JV, High Worth JV acquired a sublicense to utilize Pabst
trademarks in conjunction with the production and marketing of beer in China and
other Asian countries except Hong Kong, Macau, Japan and South Korea. The
sublicense is subject to a prior License Agreement between Pabst US and Pabst
Zhaoqing, and a subsequent Assets Transferring Agreement among Pabst Zhaoqing,
Pabst US and Guangdong Blue Ribbon (see "ITEM 1. BUSINESS - PABST LICENSING
ARRANGEMENTS AND TRADEMARKS"). The License Agreement expires on November 6,
2003.
Noble China Inc. is a public company listed on the Toronto Stock
Exchange that is the 60% shareholder of Noble Brewery. Noble China Inc. has
publicly reported that in May 1999 it entered into a license agreement with
Pabst Brewing Company granting it the right to utilize the Pabst Blue Ribbon
trademarks in connection with the production, promotion, distribution and sale
of beer in China for 30 years commencing in November 2003. In consideration for
the license agreement, Noble China Inc. reported that it had paid Pabst Brewing
Company US$5,000,000 for the right to use the Pabst Blue Ribbon trademarks and
agreed to pay royalties based on gross sales. Noble China Inc. has publicly
reported that it was experiencing certain financial difficulties, and that if
such difficulties continued into the first half of 2002, it would soon face
insolvency and be forced to consider several alternatives.
Management has consulted with legal counsel regarding the legitimacy
of the purported license and the Company's potential responses. In addition,
management has consulted with Guangdong Blue Ribbon, the owner of the Pabst Blue
Ribbon trademark in China, regarding potential responses, and has met with
representatives of Noble China Inc. in an attempt to explore a potential
settlement.
28
Management of the Company has requested that Guangdong Blue Ribbon take
appropriate action to protect its rights and its sub-licensees' rights to
utilize the Pabst Blue Ribbon trademark in China. The Company has been advised
that Guangdong Blue Ribbon is still evaluating the situation and has not yet
determined how it will respond to this matter. Once Guangdong Blue Ribbon has
responded, the Company expects to be in a position to evaluate and revise its
future business plan and strategy accordingly. The Company is currently unable
to predict the effect that this development may have on future operations.
However, the inability of the Company to obtain a sub-license from Noble China
Inc. or enter into some other form of strategic relationship under acceptable
terms and conditions to allow the Company to continue to produce and distribute
Pabst Blue Ribbon beer in China would have a material adverse effect on the
Company's future results of operations, financial position and cash flows.
During December 2000, the Company and Noble China Inc. signed a
memorandum pursuant to which a management committee was established to evaluate
the potential to coordinate and enhance the operations of Zhaoqing Brewery,
Noble Brewery and the Marketing Company. Effective January 1, 2001, the
management, marketing, production and operations of Zhaoqing Brewery, Noble
Brewery and the Marketing Company were pooled together under a newly-created
management entity named "Blue Ribbon Enterprises" in order to achieve improved
coordination of human, financial, production and marketing activities. This
pooled management structure is expected to achieve greater efficiency and
improved operating profitability. Although it is anticipated that certain pooled
costs will be allocated in proportion to each brewery's respective production
capacities, Zhaoqing Brewery, Noble Brewery and the Marketing Company will each
remain as legally distinct entities. The management committee will also commence
a study to evaluate the formation of a new unified company.
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.
During February 1995, the Marketing Company was established to conduct
the distribution, marketing and promotion throughout China of the Pabst Blue
Ribbon beer produced by Zhaoqing Brewery and Noble Brewery. The Company owns a
42% net interest in the Marketing Company. Zhaoqing Brewery and Noble Brewery
commenced selling their production of Pabst Blue Ribbon beer through the
Marketing Company in April 1995 and July 1995, respectively. Subsequently,
Sichuan High Worth Brewery and Zao Yang High Worth Brewery commenced selling
their production of Pabst Blue Ribbon beer through the Marketing Company in
April 1997 and June 1998, respectively. The consolidated financial statements
include the results of operations of the Marketing Company on a consolidated
basis commencing from April 1, 1995. The Company has a controlling interest in
the Marketing Company even though it has an effective interest of only 42%
because of the Company's 60% interest in High Worth JV and 70% interest in the
Marketing Company (through a subsidiary), and because the Company controls the
majority of the votes on the board of directors of the Marketing Company and the
subsidiary.
In January 1998, the Company, through High Worth JV, established a
brewery in Hubei Province pursuant to a joint venture agreement in which the
Company acquired an effective interest of 33%. Zao Yang High Worth Brewery
commenced the production of Pabst Blue Ribbon beer in June 1998, at which time
the Marketing Company also began purchasing Zao Yang High Worth Brewery's
production of Pabst Blue Ribbon beer for distribution. The consolidated
29
financial statements include the results of operations of Zao Yang High Worth
Brewery on a consolidated basis commencing from January 13, 1998. The Company
has a controlling interest in Zao Yang High Worth Brewery even though it has an
effective interest of only 33% because of the Company's 60% interest in High
Worth JV and 55% interest in Zao Yang High Worth Brewery (through High Worth
JV), and because the Company controls the majority of the votes on the board of
directors of High Worth JV and Zao Yang High Worth Brewery.
Effective December 31, 1997, the Company, through High Worth JV,
entered into a Settlement Agreement with Guangdong Blue Ribbon that allowed it
to acquire a 51% interest in Sichuan Brewery, equivalent to an effective
interest of 31%. Prior to the completion of the acquisition of the 51%
interest, pursuant to an Equity Transfer Agreement signed on January 19, 1999,
High Worth JV received a 15% consideration-free equity interest in Sichuan
Brewery, so that the Company had an effective interest of 9%. Sichuan Brewery
was formally restructured into a new joint venture company and was the fourth
Pabst Blue Ribbon brewing complex in China. High Worth JV was also granted a
three-year option to increase its equity interest to 51% at a fixed cost.
During April 2001, as a result of continuing operating losses and
adverse market conditions, the Company conducted discussions with its partners
in Sichuan High Worth Brewery, resulting in an agreement to withdraw from
Sichuan High Worth Brewery. The Company agreed to give up its effective
interest of 9% in Sichuan High Worth Brewery, and was released from any
liability for the brewery's accumulated losses. As part of this agreement,
Sichuan High Worth Brewery's right to produce Pabst Blue Ribbon beer was
terminated. The Company expects that Sichuan High Worth Brewery will be
dissolved pending the approval of the local government authorities. This
transaction is not expected to have any impact on the Company's results of
operations or financial position, since the sales of Sichuan High Worth Brewery
in the Sichuan region are being reallocated between Zhaoqing Brewery and Noble
Brewery as a result of the interest in Sichuan High Worth Brewery being given up
for no consideration.
On October 18, 1999, Holdings, through its wholly-owned subsidiary
incorporated in the British Virgin Islands, March International, signed a formal
Joint Venture Agreement with Jilin Province Jiutai City Brewery and Jilin
Province Chuang Xiang Zhi Yie Ltd., both of which are unaffiliated PRC
companies, to form Jilin Lianli Brewery. The total registered and paid-up
capital of Jilin Lianli Brewery was RMB 25,000,000. The technical renovation of
the existing brewing equipment and the installation of the new packing line was
completed in April 2000 and formal operations commenced in May 2000. However,
due to weak market response and the inability of the Chinese local partners to
honor their portion of the working capital commitment, the Company decided to
terminate the production and operation of Jilin Lianli Brewery in December 2000,
which had been producing local brand beer since May 2000.
The operations of Jilin Lianli Brewery generated a loss during the
year ended December 31, 2000. The Company included its proportionate share of
the loss of RMB 4,209,460 in its consolidated results of operations for the year
ended December 31, 2000. In addition, the Company recorded a charge to
operations of RMB 6,000,000 and RMB 2,750,000 at December 31, 2000 and March 31,
2001, respectively, with respect to a provision for impairment of plant,
machinery and equipment at Jilin Lianli Brewery. The operations of Jilin Lianli
Brewery subsequent to December 31, 2000 consist primarily of nominal costs
related to the care and maintenance of the facility. Although the Company has
been in negotiations with certain interested parties in an effort to dispose of
its equity interest in Jilin Lianli Brewery, no formal agreement has been
reached. In June 2001, the Company wrote-off its remaining investment in Jilin
Lianli Brewery of RMB 1,224,109. The Company has written off a total of RMB
13,788,500 with respect to this investment.
30
The Company conducts a substantial portion of its purchases through
related parties, and has additional significant continuing transactions with
such parties (see "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS").
GOING CONCERN:
The accompanying 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 consolidated financial statements do not purport to represent
the realizable or settlement values. The Company has suffered recurring
operating losses and had a working capital deficit at December 31, 2001. As a
result of these factors, which are more fully discussed below, the Company's
independent auditors have expressed substantial doubt about the Company's
ability to continue as a going concern.
During 2001 the Company experienced decreased sales and a net loss for
the second successive year, reduced cash flows, diminished working capital, and
intense competition. The Company expects that these pressures will continue in
2002, 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. The
Company believes that it has the requisite operating and financial resources to
return to profitability in the near future, but there can be no assurances that
the Company will be able to do so. Should the Company not return to
profitability in the near future, the Company may consider more severe
restructuring alternatives.
The Company anticipates that its operating cash flow, combined with
cash on hand, bank lines of credit, and other external credit sources, and the
credit facilities provided by affiliates or related parties, are adequate to
satisfy the Company's working capital requirements for the fiscal year ending
December 31, 2002. In order to finance the continuing capital requirements of
the Company, the Company may also utilize additional long-term bank loans or
lease financing.
CRITICAL ACCOUNTING POLICIES:
The Company prepared the consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires the use of
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amount of revenues and expenses
during the reporting period. Management periodically evaluates the estimates
and judgments made, including those related to interest in an associated
company, bad debts and income taxes. Management bases their estimates and
judgments on historical experience and on various factors that are believed to
be reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
31
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. As at December 31, 2001, the total value of the
Company's interest in Noble Brewery was approximately RMB 259,000,000,
representing 37.4% of the Company's total assets. The net sales of Noble
Brewery in 2001 decreased by approximately RMB 123,000,000 or 27.8% to RMB
320,000,000 as compared to 2000. The Company's share of net income from Noble
Brewery also decreased by approximately RMB 31,000,000 or 77.5% to RMB 9,000,000
as compared to 2000. At December 31, 2001, the net cost of property, plant and
equipment of Noble Brewery was approximately RMB 360,000,000, which accounted
for 54.8% of the Company's total assets. In assessing the impairment of the
property, plant and equipment, Noble Brewery uses assumptions regarding the
estimated future cash flows and other factors to determine the fair value of the
respective assets. If these estimates or the related assumptions change in the
future, the Company may be required to record impairment charges for these
assets. For the year ended December 31, 2001, no impairment charge was recorded
with respect to Noble Brewery's property, plant and equipment.
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 net deferred
tax asset 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 net deferred tax asset in the future,
an adjustment to the deferred tax asset would be charged to operations in the
period such determination was made.
IMPAIRMENT OF ASSETS
The Company's long-lived assets include property, plant and equipment.
At December 31, 2001, the net value of property, plant and equipment was RMB
218,000,000, which accounted for 31.5% of the Company's total assets. In
assessing the impairment of property, plant and equipment, the Company has to
make assumptions regarding the estimated future cash flows and other factors to
determine the fair value of the respective assets. If these estimates or the
related assumptions change in the future, the Company may be required to record
impairment charges for these assets. For the year ended December 31, 2001, an
impairment charge of RMB2,750,000 was recorded with respect to property, plant
and equipment and a write-off of RMB1,224,109 for the Company's remaining
investment in Jilian Lianli Brewery.
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 2002.
32
As of December 31, 2001 and 2000, the Company provided an allowance
for doubtful accounts as follows:
Percent of accounts
receivable included
in allowance for
doubtful accounts
Accounts Receivable -------------------
- - Days Outstanding 2001 2000
- ------------------ ---- ----
1 - 180 days 12% 0%
181 - 360 days 100% 63%
Greater than 360 days 100% 100%
CONSOLIDATED RESULTS OF OPERATIONS:
YEARS ENDED DECEMBER 31, 2001 AND 2000:
SALES:
For the year ended December 31, 2001, net sales were RMB 713,794,599,
as compared to net sale of RMB 941,147,545 for the year ended December 31, 2000.
Approximately 94% and 97% of total sales in 2001 and 2000, respectively, were
from the sale of products with the Pabst Blue Ribbon brand name. Approximately
30% of net sales in 2001 were in the form of bills receivable, which are bills
of exchange whose acceptances and settlements are handled by banks, with the
remaining 70% of net sales in the form of open accounts receivable.
During the year ended December 31, 2001, net sales of beer products
decreased by RMB 227,352,946 or 24.2% to RMB 713,794,599, as compared to RMB
941,147,545 for the year ended December 31, 2000. The Company sold 152,967
metric tons of beer to distributors in 2001 as compared to 195,510 metric tons
of beer in 2000, a decrease of 21.8%. The decrease in net sales of beer
products during the year ended December 31, 2001 as compared to the year ended
December 31, 2000 was primarily attributable to the decrease in volume of beer
sold, which was a result of a weakening in consumer demand for foreign branded
premium beers such as Pabst Blue Ribbon beer and increasing competition from
other local and foreign premium brands. In addition, beginning May 1, 2001,
consumption taxes, which are included in sales taxes, and are charged on the
basis of the volume of beer produced, were increased for beers selling in excess
of RMB 3,000 per metric ton, from RMB 220 per metric ton to RMB 250 per metric
ton, an increase of 13.6%, which has also contributed to the decline in net
sales.
During the year ended December 31, 2001, Zhaoqing Brewery sold 42,045
metric tons of beer, of which 40,275 metric tons (95.8%) were Pabst Blue Ribbon
beer and 1,770 metric tons (4.2%) were local brand beer. In 2001, Zhaoqing
Brewery sold all the Pabst Blue Ribbon beer produced to the Marketing Company
for resale. During the year ended December 31, 2000, Zhaoqing Brewery sold
53,808 metric tons of beer to the Marketing Company, of which 53,169 metric tons
(98.8%) were Pabst Blue Ribbon beer and 639 metric tons (1.2%) were local brand
beer. Total beer sold by Zhaoqing Brewery decreased by 11,763 metric tons or
21.9% in 2001 as compared to 2000.
During the years ended December 31, 2001 and 2000, Sichuan Brewery
sold 3,224 metric tons and 7,870 metric tons of beer, respectively, to the
Marketing Company, all of which was Pabst Blue Ribbon beer.
During the year ended December 31, 2001, Zao Yang High Worth Brewery
sold 26,806 metric tons of beer, of which 10,871 metric tons (40.6%) were Pabst
Blue Ribbon beer and 15,935 metric tons (59.4%) were local brand beer. During
the year ended December 31, 2001, Zao Yang High Worth Brewery sold all the Pabst
Blue Ribbon beer produced to the Marketing Company for resale, and sold the
local brand beer to the distributors directly. During the year ended December
31, 2000, Zao Yang High Worth Brewery sold 18,510 metric tons of beer, of which
1,023 metric tons (5.5%) were Pabst Blue Ribbon beer and 17,487 metric tons
(94.5%) were local brand beer.
33
The Marketing Company regulated the production of Pabst Blue Ribbon
beer by Zhaoqing Brewery, Noble Brewery, Sichuan Brewery and Zao Yang High Worth
Brewery during 2001 and 2000 in accordance with their respective production
capacities in order to balance warehouse inventory levels and accommodate
projected market demand.
GROSS PROFIT:
For the year ended December 31, 2001, total gross profit was RMB
214,858,338 or 30.1% of total net sales, as compared to total gross profit of
RMB 205,979,387 or 21.9% of total net sales for the year ended December 31,
2000. Although sales decreased, gross profit and gross margin increased as a
result of a reduction in the sales price charged by Noble Brewery. The sales
price was reduced effective July 1, 2001 in order to compensate the Marketing
Company for a portion of budgeted selling and advertising expenses not realized
due to the decrease in sales in 2001. Reduced raw material costs and production
labor costs, the elimination of Jilin Brewery, and an improvement in the gross
margin obtained by Zao Yang High Worth Brewery also contributed to the
improvement in gross profit and gross margin.
The Company expects that it will experience pressure on its gross
profit margin in 2002 as a result of a continuing softness in consumer demand
for foreign premium beer in China, which the Company believes is attributable to
a change in the consumption pattern in China, and increasing competition from
foreign and local premium brand beers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
For the year ended December 31, 2001, selling, general and
administrative expenses were RMB 233,274,005 or 32.7% of net sales, consisting
of selling expenses of RMB 172,322,532 and general and administrative expenses
of RMB 60,951,473. Net of the allowance for doubtful accounts of RMB 22,979,523
recorded during 2001, general and administrative expenses were RMB 37,971,950.
For the year ended December 31, 2000, selling, general and
administrative expenses were RMB 294,071,585 or 31.2% of net sales, consisting
of selling expenses of RMB 211,002,391 and general and administrative expenses
of RMB 83,069,194. Net of the allowance for doubtful accounts of RMB 21,818,226
recorded during 2000, general and administrative expenses were RMB 61,250,968.
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 38,679,859 or 18.3% in 2001
as compared to 2000, and increased as a percent of net sales, to 24.1% in 2001
from 22.4% in 2000. Selling expenses decreased in 2001 as compared to 2000,
both on an absolute basis and as a percentage of sales, as a result of a change
in the method, effective July 1, 2001, by which the Company calculates the
reimbursement by Zhaoqing Brewery and Noble Brewery of selling expenses incurred
by the Marketing Company through beer pricing and direct charges. However,
since the operations of Noble Brewery are not consolidated with the Company's
operations, the reallocation of such costs can have a distortive effect on the
Company's consolidated operating expenses and operating ratios. The Company
intends to continue its advertising and promotional programs in an attempt to
support and stimulate consumer demand in order to maintain the market position
of Pabst Blue Ribbon beer in China, and to implement new advertising and
promotional campaigns to support the Company's local brand name beers.
34
Effective April 2001, the Zhaoqing City tax authority informed the
Marketing Company that it was implementing new tax rules that regulate the
maximum allowable expenses involved in advertising and promotional activities
conducted through the public media by PRC enterprises. The maximum allowable
advertising and promotional expenses cannot exceed 2.0% and 0.5% of total gross
sales, respectively. Any amounts exceeding these limits are not tax deductible.
As result, beginning in May 2001, adjustment was made to the ex-factory price
charged by the breweries to the Marketing Company and the method by which
advertising and promotional activities are allocated by the Marketing Company,
in order that a portion of the advertising and promotional expenses are absorbed
by the breweries, which are not subject to the new rule. Prior to this change,
all of the advertising and promotional expenses were incurred by the Marketing
Company. For the year ended December 31, 2001, advertising and promotional
expenses totaling approximately RMB 56,268,475 were reallocated from the
Marketing Company to Zhaoqing Brewery and Noble Brewery, with one-third being
allocated to Zhaoqing Brewery and two-thirds being allocated to Noble Brewery,
either through the adjustment of ex-factory prices or direct absorption.
Selling expenses are recognized through the consolidation of the
operations of the Marketing Company. The Marketing Company incurs such expenses
on behalf of all of the Pabst Blue Ribbon brewing facilities in China, even
though not all of the results of operations of such facilities are reflected in
the Company's operations. Although the Marketing Company is budgeted annually
to operate at break-even levels, based on agreed upon ex-factory prices that the
Marketing Company pays to the breweries to purchase their production of Pabst
Blue Ribbon beer, actual profitability, particularly on an interim basis, is
subject to substantial variability. Under the pooled management arrangement,
operating losses arising from unbudgeted selling and advertising expenses
incurred by the Marketing Company are being reallocated back to Zhaoqing Brewery
and Noble Brewery in proportion to their respective production capacities