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, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 33-26617A
CBR BREWING COMPANY, INC.
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(Exact name of registrant as specified in its charter)
British Virgin Islands --
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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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [ ]
As of March 31, 2003, the Company had 5,010,013 shares of Class A common
stock and 3,000,000 shares of Class B common stock issued and outstanding.
As of March 31, 2003, the aggregate market value of the issuer's
outstanding Class A common stock held by non-affiliates, computed by reference
to the average of the closing bid and ask prices, was US$176,752.
Documents incorporated by reference: None.
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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, 2002
contains "forward-looking" statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, including statements that include the words
"believes", "expects", "anticipates", or similar expressions. These
forward-looking statements include, among others, statements concerning the
Company's expectations regarding sales trends, gross margin trends, operating
costs, the availability of funds to finance capital expenditures and operations,
facility expansion plans, competition, and other statements of expectations,
beliefs, future plans and strategies, anticipated events or trends, and similar
expressions concerning matters that are not historical facts. The
forward-looking statements in this Annual Report on Form 10-K for the fiscal
year ended December 31, 2002 involve known and unknown risks, uncertainties and
other factors that could the cause actual results, performance or achievements
of the Company to differ materially from those expressed in or implied by the
forward-looking statements contained herein.
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PART I.
ITEM 1. BUSINESS
OVERVIEW
Effective February 28, 2003, CBR Brewing Company, Inc. reincorporated
from the State of Florida in the United States to the British Virgin Islands
("BVI") by merging into its wholly-owned BVI subsidiary, High Worth Holdings
Ltd. ("Holdings"). This off-shore reincorporation was accomplished for tax
planning purposes, since all of the Company's assets and operations are
currently located in China and are expected to continue to be located outside
the United States in the future. The reincorporation had no effect on the
Company's current business operations in China. On March 3, 2003, Holdings
changed its name to CBR Brewing Company Inc. (hereinafter referred to as the
"Company", which term shall include, when the context so requires, its
subsidiaries and affiliates) and members of the Board of Directors were replaced
by the Board members of the Florida corporation.
The Agreement and Plan of Merger dated January 24, 2003 was approved
by majority of shareholders of each class of common stock outstanding as of
December 31, 2002. Holdings was the surviving corporation subsequent to the
merger and possesses all of the rights, privileges, powers and franchises and is
subject to all the restrictions, disabilities and duties of the dissolved
Florida corporation. Each Class A share of the Florida corporation was
converted into one fully paid and non-assessable (with no par value) Class A
share of capital stock of the BVI corporation and each Class B share of the
Florida corporation was converted into one fully paid and non-assessable (with
no par value) Class B share of capital stock of the BVI corporation. The
surviving BVI corporation assumed and continued the public reporting obligations
of the dissolved Florida corporation under new OTC Bulletin Board trading symbol
("CBRAF"), and the consolidated operating results of the Company continued
without interruption.
Since November 1994, the Company 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 sub-license agreement with
Guangdong Blue Ribbon, which, through an assignment and transfer, obtained its
license from Pabst Brewing Company ("Pabst US"). The sub-license agreement
expires on November 7, 2003.
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
year ended December 31, 2002, the exchange rate has remained stable at
approximately US$1.00 to RMB 8.30.
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").
DESCRIPTION OF BUSINESS
The Company is engaged in the business of brewing, distributing and
marketing Pabst Blue Ribbon beer and other local beer in China. As of December
31, 2002, the Company owned effective interests of 60%, 24% and 33% in three
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brewing facilities mainly 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 its 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 Company produces Pabst Blue
Ribbon beer in China under a sub-license expiring on November 7, 2003. The
majority of the beer production is concentrated in two breweries located in the
City of Zhaoqing, 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.
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 Canadian public company, 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 US granting it the right to utilize the
Pabst Blue Ribbon trademarks in connection with the production, promotion,
distribution and sale of beer in China for 30 years commencing in November 2003.
In consideration for the license agreement, Noble China Inc. reported that it
had paid Pabst US US$5,000,000 for the right to use the Pabst Blue Ribbon
trademarks and agreed to pay royalties based on gross sales. Noble China Inc.
has also recently publicly reported that it was experiencing severe financial
difficulties, was unable to meet its financial commitments and was insolvent,
and was considering various courses of action.
As of December 31, 2002, the Company has not yet obtained a renewal of
the Pabst Blue Ribbon sub-license agreement. The inability of the Company to
obtain a sub-license from Noble China Inc. or to renew the Company's sub-license
or enter into some other form of strategic relationship under acceptable terms
and conditions to allow the Company to continue to produce and distribute Pabst
Blue Ribbon beer in China would have a material adverse effect on the Company's
future results of operations, financial position and cash flows (see "NOBLE
CHINA INC.").
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, resulting in the Company owning a
42% net interest in the Marketing Company. 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").
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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").
In November 2002, High Worth JV and Zao Yang Brewery agreed to
contribute additional capital of RMB 24,444,500 to Zao Yang High Worth Brewery
in proportion to their respective equity interests of 55% and 45%. High Worth
JV contributed RMB13,444,500 through a deduction from its intercompany balance
due from Zao Yang High Worth Brewery and Zao Yang Brewery made a cash
contribution of RMB 11,000,000 effective December 31, 2002.
Effective December 31, 1997, the Company, through High Worth JV,
entered into a Settlement Agreement with Guangdong Blue Ribbon to acquire a 51%
interest in Sichuan Brewery, equivalent to an effective interest of 31%. Prior
to the completion of the 51% interest acquisition, pursuant to an Equity
Transfer Agreement signed on January 19, 1999, High Worth JV received a 15%
consideration-free equity interest in Sichuan Brewery, equivalent to an
effective interest of 9%.
On June 5, 1999, 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") and the business of Sichuan Brewery was
transferred to Sichuan High Worth Brewery. The total registered and paid-up
capital of Sichuan High Worth Brewery was RMB 51,221,258. High Worth JV's 15%
equity interest is consideration-free but is entitled to share in the profits of
Sichuan High Worth Brewery.
During April 2001, as a result of continuing operating losses and
adverse market conditions, the Company conducted discussions with its partners
in Sichuan High Worth Brewery, resulting in an agreement to withdraw from
Sichuan High Worth Brewery. The Company agreed to give up its effective
interest of 9% in Sichuan High Worth Brewery, and was released from any
liability for the brewery's accumulated losses. As part of this agreement,
Sichuan High Worth Brewery's right to produce Pabst Blue Ribbon beer was
terminated. This transaction did not have any impact on the Company's results
of operations or financial position, since the sales of Sichuan High Worth
Brewery in the Sichuan region have been reallocated between Zhaoqing Brewery and
Noble Brewery and the interest in Sichuan High Worth Brewery was originally
acquired for no consideration.
On October 18, 1999, Holdings, through its wholly-owned subsidiary,
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"). Jilin
Province Jiutai City Brewery and Jilin Province Chuang Xiang Zhi Yie Ltd.
received equity interests in Jilin Lianli Brewery of 40% and 9%, respectively.
Subsequent to the improvement of the brewing equipment and the installation of a
new packing line, Jilin Lianli Brewery commenced operations in May 2000.
However, due to weak market response and the inability of the Chinese local
partners to honor their portion of the working capital commitment, the
production and operation of Jilin Lianli Brewery was formally terminated in
December 2000. As of December 31, 2001, the Company has written off a total of
RMB 13,788,500 with respect to this investment. On July 9, 2002, March
International was formally dissolved.
NOBLE CHINA INC.
Noble China Inc. is a Canadian public company formerly listed on the
Toronto Stock Exchange which is the 60% shareholder of Noble Brewery. During
December 2000, the Company and Noble China Inc. signed a memorandum pursuant to
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which a management committee was established to evaluate the potential to
coordinate and enhance the operations of Zhaoqing Brewery, Noble Brewery and the
Marketing Company. Effective January 1, 2001, the management, marketing,
production and operations of Zhaoqing Brewery, Noble Brewery and the Marketing
Company were pooled together under a newly-created management entity named "Blue
Ribbon Enterprises" in order to achieve improved coordination of human,
financial, production and marketing activities. Under this arrangement:
(a) Certain administrative expenses of the Marketing Company, Zhaoqing
Brewery and Noble Brewery, as well as the total production volume of
Zhaoqing Brewery and Noble Brewery and the related direct variable
costs incurred for beer production of the two breweries, were pooled
and re-allocated among Zhaoqing Brewery and Noble Brewery at a 1 to 2
ratio, respectively, in proportion to each brewery's respective
production capacities. In order to maximize production efficiencies at
the present reduced levels of sales volume, Noble Brewery is currently
producing all of the beer sold by both Zhaoqing Brewery and Noble
Brewery.
(b) Certain direct selling expenses and advertising expenses incurred by
the Marketing Company relating to the sale of beer products from the
two breweries are allocated among Zhaoqing Brewery and Noble Brewery
at a 1 to 2 ratio, respectively, either through intercompany transfer
pricing adjustment or direct absorption.
The administrative, direct selling and advertising expenses of the
Marketing Company and the direct variable costs incurred for beer production of
the two breweries were allocated at cost. This pooled management structure is
expected to achieve greater efficiency and improved operating profitability.
However, Zhaoqing Brewery, Noble Brewery and the Marketing Company each remain
as legally distinct entities. The management committee is also responsible for
commencing a study to evaluate the formation of a new unified company.
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 approved by the relevant PRC governmental authorities in April
2002. Lan Wei is a company controlled by the City of Zhaoqing.
In February 2002, Lan Wei acquired common shares representing an
additional approximately 7.2% equity interest in the Company from a third party
in a private transaction. As a result of this transaction, management and the
board of directors of the Company were changed on January 22, 2002. As part of
the previously described transaction, Lan Wei also acquired Huaqiang's 19.6%
equity interest in Noble China Inc.
On April 3, 2002, Noble Brewery was served with a preservation order
from the High Court of Shandong Province freezing a portion of its bank accounts
with aggregate balances of approximately RMB35,700,000, in connection with
litigation between Noble China Inc., Shandong Noble Brewery Ltd. and China Coast
6
Property Development Ltd., with respect to Noble China Inc.'s 1994 investment in
Shandong Shouguang Brewery Co. Ltd. China Coast Property Development Ltd. is
asserting a total claim against Noble China Inc. of approximately RMB53,100,000.
Noble China Inc., through its wholly-owned subsidiary, Linchpin, owns a 60%
interest in Noble Brewery.
The court order specified that a total of RMB53,100,000 was to be
retained by Noble Brewery pending resolution of the litigation. Accordingly, in
addition to the RMB35,700,000 of funds frozen, Noble Brewery will also be
obligated to withhold potential dividend distributions or equity interests due
to Linchpin of RMB17,400,000. Noble Brewery has engaged legal.counsel in the PRC
to file a challenge to the court order, but there can be no assurances that this
effort will be successful.
Management of Noble Brewery believes that Noble Brewery's operations
will not be impaired as a result of the court order freezing a portion of its
bank accounts, and that Noble Brewery has adequate working capital resources to
fund its current operating requirements.
In May 2002, Noble Brewery declared a dividend distribution of
RMB75,511,040, of which RMB30,204,416 has been paid to High Worth Brewery, while
the dividend payable to Linchpin amounting to RMB45,306,624 can only be remitted
to Linchpin when the preservation order is released and approval from the
Foreign Exchange Bureau is obtained.
On July 19, 2002, Noble China Inc. announced that the Shandong Court
ruled against it and ordered it to pay the amount of claims in the sum of
US$3,999,988 and RMB20,000,000 plus legal costs of RMB541,210, and interest from
June 21, 2001 within one month of the judgment. Noble China Inc. announced that
it would appeal the Shandong Court's decision to the Supreme Court of the PRC.
On September 23, 2002, the Shandong Court issued a new preservation
order to those banks where Noble Brewery kept its previously frozen funds,
requiring them to extend the period of preservation for an additional six months
until March 23, 2003.
On March 21, 2003, the Shandong Court further extended its
Preservation Order for another six months to September 23, 2003.
On July 22, 2002, Noble China Inc. held its Annual and General Meeting
of Shareholders. A Special Meeting of Shareholders and a Meeting of Debenture
holders were also held on July 22, 2002 to seek approval for certain amendments
to the 9% Convertible Subordinated Debentures and to the Trust Indenture
governing the Debentures. Noble China Inc. has CN$30,000,000 of outstanding
Debentures. As a result of ongoing discussions between the major Debenture
holders and the City of Zhaoqing, which is indirectly a major shareholder of
Noble China Inc., regarding a possible restructuring of Noble China Inc., the
amendments to the Debentures and to the Trust Indenture were not presented for a
vote at the Special Meeting of Shareholders and at the Meeting of Debenture
holders; both such meetings were instead adjourned to times and places to be
determined. The Board of Directors of Noble China Inc. was re-elected and
confirmed its short-term assistance to facilitate the negotiations between the
major shareholder of Noble China Inc. and the major Debenture holders. The
Directors of Noble China Inc. indicated that if the major shareholder and major
Debenture holders could not reach a resolution on an appropriate restructuring
plan that the Board of Directors could support in the interest of all
shareholders and Debenture holders within 60 days, the Board of Directors would
resign.
On September 3, 2002, Noble China Inc.'s report for the three months
ended June 30, 2002 disclosed that although the major shareholder and the major
Debenture holders were continuing their discussions, no meaningful process had
been noted and the Directors planned to resign on September 20, 2002.
7
On September 24, 2002, a press release by Noble China Inc. announced
that one of its three directors had resigned on September 20, 2002, and that the
remaining two directors intended to resign. On November 12, 2002, Noble China
Inc. held a meeting of shareholders to elect a new Board of Directors to consist
of three members; three candidates nominated by Lan Wei, a company controlled by
the City of Zhaoqing, were elected to the Board of Directors.
On February 13, 2003, Noble China Inc. announced that it had requested
and had been granted permission to voluntarily delist its common shares from the
Toronto Stock Exchange effective February 14, 2003.
Discussions between holders of a majority of the Debentures and
representatives of the City of Zhaoqing regarding a reorganization of Noble
China, Inc. resulted in a preliminary agreement in principle with respect to
settlement in full of the outstanding Debentures. Discussions between
representatives of the City of Zhaoqing and Pabst Brewing Company regarding a
reorganization of Noble China, Inc. and a restructuring of the master license
agreement that becomes effective on November 7, 2003 resulted in the execution
of a non-binding term sheet in March 2003. These agreements are both
conditional on Noble China, Inc. being able to implement a formal reorganization
of its debt and equity securities. The successful reorganization of Noble
China, Inc. is subject to the preparation and execution of definitive agreements
and a plan of reorganization, compliance with all applicable laws and
regulations, and the funding, approval and consummation of a court-approved
reorganization plan of Noble China, Inc. Accordingly, as a result of the
uncertainty with respect to these matters, there can be no assurances that Noble
China, Inc. will be successfully reorganized or that the Company and Noble
Brewery will be able to retain the right to produce and distribute Pabst Blue
Ribbon beer in China subsequent to November 7, 2003.
As of December 31, 2002, the Company and Noble Brewery have not
obtained a renewal of their respective Pabst Blue Ribbon sub-license agreements,
which expire on November 7, 2003. The inability of the Company or Noble Brewery
to obtain or renew a sub-license from Noble China Inc. or enter into some other
form of strategic relationship under acceptable terms and conditions to allow
the Company and Noble Brewery to continue to produce and distribute Pabst Blue
Ribbon beer in China would have a material adverse effect on the Company's
future results of operations, financial position and cash flows.
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 the City of Zhaoqing, Guangdong
Province, PRC. 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.
During March 1995, Zhaoqing Brewery discontinued production of all domestic
brands and commenced exclusive production of Pabst Blue Ribbon beer on a
full-scale basis. However, beer that does not meet Pabst Blue Ribbon quality
standards is generally packaged and distributed as local brand beer. With the
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implementation of the new brewing technology and the purchase of additional
equipment, Zhaoqing Brewery reached an annual production capacity of 100,000
metric tons or 850,000 barrels of beer by the end of 1995.
Zhaoqing Brewery annually shuts down portions of the facility for a
short period of time during the low season to provide regular scheduled
maintenance. Zhaoqing Brewery has access to replacement parts that can be
manufactured by several local toolmakers in Zhaoqing. Beginning in 2000, in
order to maximize production efficiencies at the reduced levels of sales volume,
Noble Brewery produced all of the beer sold by both Zhaoqing Brewery and Noble
Brewery.
In 2002, in anticipation of the possible non-renewal of Zhaoqing
Brewery's sub-license to produce Pabst Blue Ribbon beer, Zhaoqing Brewery has
commenced the production of various newly developed or modified local brand
beers in order to secure a source of revenues after the expiration of the Pabst
sub-license on November 7, 2003.
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. Noble Brewery has produced Pabst
Blue Ribbon beer since it commenced operations.
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.
Beginning in 2000, in order to maximize production efficiencies at the
reduced levels of sales volume, Noble Brewery produced all of the beer sold by
both Zhaoqing Brewery and Noble Brewery. Noble Brewery also commenced
production of various newly developed local brand beers in order to meet the
needs of the lower to medium market segment.
ZAO YANG HIGH WORTH BREWERY
The original facilities of Zao Yang High Worth Brewery were
constructed between 1980 and 1985 with annual production capacity based on old
brewing technology of approximately 40,000 metric tons or 340,000 barrels of
beer.
Zao Yang High Worth Brewery is situated on a site containing
approximately 753,000 square feet and is located within the vicinity of the City
of Zao Yang, 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.
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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.
In November 2002, High Worth JV and Zao Yang Brewery agreed to
contribute additional capital of RMB 24,444,500 to Zao Yang High Worth Brewery
in proportion to their respective equity interests of 55% and 45%. High Worth
JV contributed RMB 13,444,500 through a deduction from its intercompany balance
due from Zao Yang High Worth Brewery and Zao Yang Brewery made a cash
contribution of RMB 11,000,000 effective December 31, 2002.
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 the
City of Le Shan, Sichuan Province, which is approximately 160 kilometers from
Chengdu, 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
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 (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 the City of Jiutai,
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.
10
PABST BLUE RIBBON BEER
The majority of the beer currently produced by Noble Brewery and
Zhaoqing Brewery is Pabst Blue Ribbon beer. Zao Yang High Worth Brewery
produces some Pabst Blue Ribbon beer as well as other local beer such as "Di
Huang Quan" beer.
In 2002, 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 products of the breweries, and is
mainly packaged in 946 ml., 640 ml., 500 ml. and 355 ml. bottles 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., 500
ml. and 355 ml. bottles and 355 ml. cans accounted for approximately 1.5%,
38.8%, 1.6%, 4.9% and 29.9%, respectively, of the sales volume of the Company in
2002.
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.
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,
which represented 2.1% of the Company's total sales volume in 2001.
In 2002, the Marketing Company distributed 17,071 metric tons of Pabst
Blue Ribbon beer produced by Zao Yang High Worth Brewery, which represented
13.9% of the Company's total sales volume in 2002. 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.
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,
500 ml. and 355 ml.) alcohol content 3.4%
(w/w)
Draught beer Keg (30 liters) 11-degree malt
content,
alcohol content 3.4%
(w/w)
11
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 province of Guangdong. 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 131,035 metric tons
or approximately 1,114,000 barrels in 2002, a 0.1% decrease as compared to 2001.
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 131,924 metric tons
or approximately 1,120,000 barrels in 2001, a 23.4% decrease as compared to
2000.
DOMESTIC BRAND NAME BEER
Prior to the end of 1994, Zhaoqing Brewery produced beer exclusively
under domestic brand names, such as "Zhaoqing" beer, "Dinghu" beer and "Xile"
beer, all of which were non-premium beers which targeted customers in the low to
middle economic range. Production of these local brand beers was completely
discontinued in March 1995 when Zhaoqing Brewery commenced producing Pabst Blue
Ribbon beer on an exclusive basis. However, beer that does not meet Pabst Blue
Ribbon quality standards is generally packaged and distributed as local brand
beer.
Zao Yang High Worth Brewery also produces domestic brand beer under
the name "Di Huang Quan".
In late 2000, Noble Brewery launched a local brand beer under the
name "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 low to middle (i.e.,
non-premium) market.
During 2002, the Company implemented a series of new sales programs to
launch various newly developed or modified local brand beers into the market,
including brands such as "Lanli", "Lancheng", "Lanshi", "Xile" and "Zhaopi".
Together with the local brand beer "Di Huang Quan" produced by Zao Yang High
Worth Brewery, the Company intends to increase its marketing efforts with
respect to these new local brands. If the Company is unable to obtain a new
sub-license to produce Pabst Blue Ribbon beer in China after November 7, 2003,
these new local brands would be expected to become the main product lines and
the major source of revenues for High Worth JV and Zao Yang High Worth Brewery
after the expiration of the Pabst sub-license on November 7, 2003. However,
pursuant to the joint venture agreement of Noble Brewery, the Company will
continue to manage the daily operations of Noble Brewery until the expiration of
the joint venture on June 10, 2013. In May 1999, Noble China Inc. entered into
a license agreement with Pabst Brewing Company granting it the right to utilize
the Pabst Blue Ribbon trademarks in connection with the production, promotion,
distribution and sale of beer in the PRC for 30 years commencing in November
2003. Accordingly, management currently believes that Noble Brewery will be
able to obtain a sub-license from Noble China Inc., the 60% shareholder of Noble
Brewery, to continue to produce and sell Pabst Blue Ribbon beer in China after
November 7, 2003, although there can be no assurances in this regard.
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 2000, 2001 and
2002. All breweries producing Pabst Blue Ribbon beer sold their Blue Ribbon
beer products to the Marketing Company for resale in 2000, 2001 and 2002.
12
As
Previously As Adjusted
Reported Adjusted(1) Net Sales
Net Sales Net Sales Volume Sold per Ton
----------- ----------- ------------- ----------
2000: (RMB'000) (RMB'000) (metric tons) (RMB'000)
Noble Brewery
Local Brands 654 654 213 3.1
Pabst Blue Ribbon 442,438 442,438 103,755 4.3
Zhaoqing Brewery
Local Brands 2,160 2,160 639 3.4
Pabst Blue Ribbon 224,760 224,760 53,169 4.2
Zao Yang High Worth Brewery
Local Brands 23,487 18,958 17,487 1.1
Pabst Blue Ribbon 3,617 3,353 1,023 3.3
Jilin Lianli Brewery
Local Brands 6,710 6,710 5,380 1.2
Marketing Company
Local Brands 824 824 219 3.8
Pabst Blue Ribbon 924,507 910,179 171,785 5.3
2001:
Noble Brewery
Local Brands 5,540 5,540 3,541 1.6
Pabst Blue Ribbon 314,712 292,273 81,291 3.6
Zhaoqing Brewery
Local Brands 2,784 2,784 1,770 1.6
Pabst Blue Ribbon 154,889 143,670 40,275 3.6
Zao Yang High Worth Brewery
Local Brands 28,402 27,207 15,935 1.7
Pabst Blue Ribbon 42,307 41,491 10,871 3.8
Marketing Company
Local Brands 14,753 14,753 5,108 2.9
Pabst Blue Ribbon 683,431 649,915 131,924 4.9
2002:
Noble Brewery
Local Brands 35,919 35,919 17,454 2.1
Pabst Blue Ribbon 294,952 292,506 81,973 3.6
Zhaoqing Brewery
Local Brands 18,004 18,004 8,725 2.1
Pabst Blue Ribbon 147,468 146,245 40,983 3.6
Zao Yang High Worth Brewery
Local Brands 14,881 13,589 13,979 1.0
Pabst Blue Ribbon 53,369 54,467 17,071 3.2
Marketing Company
Local Brands 71,582 71,582 25,164 2.8
Pabst Blue Ribbon 584,275 559,022 125,646 4.4
(1) The provisions of Emerging Issues Task Force ("EITF") No. 01-9, "Accounting
for Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor's Products)", were adopted during 2002. The adoption of EITF No. 01-9
13
resulted in the reclassification of certain sales incentives previously
classified as selling expenses to a reduction from sales. Prior year amounts
have been reclassified to conform to the current year's presentation; this
reclassification had no effect on the Company's operating results. The amount
of sales incentives recorded as a deduction from sales in accordance with EITF
No. 01-9 was RMB 31,669,780, RMB 46,745,947 and RMB 19,121,816 for the years
ended December 31, 2002, 2001 and 2000, respectively.
SEASONALITY
The beer industry in China is seasonal. The Company's sales are
usually lowest in the months of February through May and highest in the months
of June 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.
Quality control experts were sent by Pabst US to Zhaoqing to teach brewery
personnel appropriate inspection techniques, quality control measures and
production procedures. Pabst US experts trained the brewery's personnel in the
specific brewing techniques required in order to meet the standards set by Pabst
US. An engineer from Pabst US is stationed in China to test random production
samples and perform quality control on a continuing basis.
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 23% of the direct cost of production, excluding
depreciation, of Pabst Blue Ribbon beer and 21% of domestic brand beers. Cost
of packaging represents approximately 61% of the total direct cost of
production, excluding depreciation, of Pabst Blue Ribbon beer and 44% 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.
14
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 broad geographic market in China, the Company is
constantly reviewing the methods for distributing its malt beverages.
TRANSPORTATION: During 2002, 6% of the Company's products sold were
shipped by rail tank cars from Zhaoqing to distributors throughout Guangdong
Province, and 80% were shipped from Zhaoqing by truck (65%) and by boat (15%)
directly to distributors throughout China. The remaining 14% of beer products
sold were produced by Zao Yang High Worth Brewery and were primarily distributed
within the Hubei 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. New customers or customers without
collateral but with material transaction volume are required to issue bills of
exchange from their respective banks to secure payment on the due date. The
Marketing Company typically appoints only one distributor in each region (except
for a large region in which more than one distributor may be appointed) to
ensure that such distributor devotes adequate efforts 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 2002.
During the year ended December 31, 2002, approximately RMB 79,665,545
was allocated to promotional advertising for Pabst Blue Ribbon beer and
approximately RMB 55,791,465 was allocated to other specific promotional
activities and incentives to distributors. In addition, approximately RMB
1,170,000 was allocated to advertising and promotional activities for other
local brand name beer in 2002. Advertising media includes television, radio,
billboards, magazines and newspapers. The Marketing Company also 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. In 2002, 2001 and 2000, certain promotional sales incentives
and sales bonuses given to distributors for their specific promotional
activities amounting to RMB 31,669,780, RMB 46,745,947 and RMB 19,121,816,
respectively, have been accounted for as a reduction in net sales, pursuant to
EITF 01-9, "Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)" (see "VOLUME OF BEER SOLD").
15
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 2003, and additional marketing and
advertising efforts will have to be implemented in order to maintain the market
leadership position of Pabst Blue Ribbon beer.
MARKETS: Difficulties in the Chinese beer market continued unabated
in recent years. Prices in general continued to decline due to aggressive
competition and over-capacity. It is estimated that nearly half of the total
beer production capacity in China was idle. There are about 600 breweries left
in the market in China. Larger national beer group are still vigorously
conducting their expansion plans in China through merger and acquisition in an
attempt to consolidate and broaden their market share in China.
Many breweries compete by selling their products at very low margins
and have switched their focus to cheaper local brands in their product portfolio
in order to maintain their production and sales volume.
Management anticipates that the market demand for higher-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 2003. 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-to-low priced products under separate labels to suit the
market's changing needs.
COMPETITION: Of the brands comprising the foreign premium sector,
Budweiser, Suntory, Pabst Blue Ribbon and San Miguel are the major market
leaders. Tsingtao, Yanjing and Zhujiang are major mainstream local premium
brands. Other companies seeking to develop market share in the Chinese market
include Heineken, Carlsberg, Beck's, Asahi, Miller, Foster's, Kirin, and Stella
Artois.
CAPITAL INVESTMENT
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 expended
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 expended
approximately RMB 8,400,000 and RMB 2,900,000, respectively, for renovating and
improving the existing machinery.
In 2002, Zao Yang High Worth Brewery, Zhaoqing Brewery and the
Marketing Company expended approximately RMB 5,300,000, RMB 2,400,000 and RMB
4,200,000, respectively, for renovating and improving the existing machinery,
and the acquisition of vehicles, branch office premises and office equipment.
Due to declining sales and diminishing working capital resources in
2002, the Company has revised its capital expenditures program. Approximately
25% of the 2002 annual repair and maintenance budget scheduled for Zhaoqing
Brewery and Noble Brewery has been deferred until 2003 or thereafter, or as when
required.
16
PRODUCT DEVELOPMENT
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
As of December 31, 2002, there were approximately 1,522 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 859 166 485 - 208
(2) Engineering, Technology
and Quality Control 100 17 49 - 34
(3) Management and
Administration 133 25 29 18 61
(4) Marketing 239 7 37 150 45
(5) Warehouse 105 18 51 - 36
(6) Others 86 16 18 20 32
----- -------- ------- --------- ----------
Total 1,522 249 669 188 416
===== ======== ======= ========= ==========
In 2002, labor costs (including the cost of benefits) accounted for
approximately 6.7%, 4.9% and 7.0% 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
approximately the same level in 2003 as compared to 2002.
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.
17
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 sub-license 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
sub-licensor under the License Agreement between Pabst Zhaoqing as sub-licensor,
and Noble Brewery and High Worth JV as sub-licensee, respectively, as described
below.
NOBLE BREWERY
By a Sub-license Agreement dated October 12, 1993 (the "Noble
Sub-license Agreement") between Pabst Zhaoqing and Noble Brewery and approved by
Pabst US, Pabst Zhaoqing granted to Noble Brewery a sub-license to use
beer-related Pabst trademarks, the non-exclusive right to produce beer in
accordance with its production capacity under the sub-licensed 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 Sub-license Agreement,
Pabst Zhaoqing agreed that, except with respect to the enterprises of Guangdong
Blue Ribbon, it would not grant further sub-licenses to any other enterprises in
Guangdong Province to use the Pabst trademarks thereby granted. At the time of
the Noble Sub-license Agreement, Zhaoqing Brewery was a member enterprise of
Guangdong Blue Ribbon.
HIGH WORTH JV/ZHAOQING BREWERY
By a Sub-license 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
sub-license to allow Zhaoqing Brewery to use Pabst trademarks to produce beer in
accordance with its production capacity under the sub-licensed 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 Sub-license
Agreement, Zhaoqing Brewery was entitled to produce Pabst Blue Ribbon beer in
Guangdong Province.
Under the terms of the High Worth Sub-license Agreement, High Worth JV
and/or its affiliates have the sole right to be granted further sub-licenses 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 sub-licenses 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 sub-licensing 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.
18
Other terms of the High Worth Sub-license 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.
ZAO YANG HIGH WORTH BREWERY
Pursuant to the terms of the Settlement Agreement and the High Worth
Sub-license Agreement, Guangdong Blue Ribbon granted a sub-license 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.
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. At that
time, Goldjinsheng was a wholly-owned subsidiary of Noble China Inc. and in
1998, the 60% equity interest in Noble Brewery was transferred to its fellow
subsidiary, Linchpin Holdings Limited. 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. In 2001, the
Company wrote-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'
19
interest in the profits of High Worth JV is in the same proportion (i.e., 60%)
as its investment in High Worth JV; Zhaoqing Brewery's interest in the profits
of Noble Brewery is in the same proportion (i.e., 40%) as its investment in
Noble Brewery; High Worth JV's interest in the profits of Zao Yang High Worth
Brewery is in the same proportion (i.e., 55%) as its investment in Zao Yang High
Worth Brewery.
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 a 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 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.
20
(b) High Worth JV and/or companies in which High Worth JV has an interest are
entitled to be granted a sub-license 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 sub-license 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 and development of the Chinese economy.
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
21
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 a time when the prevailing market rates have stabilized.
LEGAL SYSTEM. Since 1979, many laws and regulations dealing with
economic matters in general and foreign investment in particular have been
promulgated in China. The Chinese constitution adopted in 1989 authorizes
foreign investment, and guarantees the "lawful rights and interests" of foreign
investors in China. The trend of legislation over the past twelve years has
significantly enhanced the protection afforded foreign investment and allowed
for more active control by foreign parties of foreign investment enterprises in
China. There can be no assurance, however, that the current trend and economic
legislation toward promoting market reforms and experimentation will not be
slowed, curtailed or reversed, especially in the event of a change in
leadership, social or political disruption, or unforeseen circumstances
affecting China's political, economic or social life.
Despite some progress in developing a legal system, China does not
have a comprehensive system of laws. The interpretation of Chinese laws may be
subject to policy changes reflecting domestic political factors. Enforcement of
existing laws may be uncertain and sporadic, and implementation and
interpretation may be inconsistent. The Chinese judiciary is relatively
inexperienced in enforcing the laws or terms of contracts, leading to a higher
than usual degree of uncertainty as to the outcome of litigation. Even where
adequate laws exist in China, it may be impossible to obtain swift and equitable
law enforcement, or to obtain enforcement of a judgment by a court of another
jurisdiction. As the Chinese legal system develops, the promulgation of new
22
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.
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,
23
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 formerly 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.
Effective February 28, 2003, CBR Brewing Company, Inc. reincorporated
from the State of Florida in the United States to the British Virgin Islands
("BVI") by merging into its wholly-owned British Virgin Islands subsidiary, High
Worth Holdings Ltd ("Holdings"). This off-shore reincorporation was
accomplished for tax planning purposes, since all of the Company's assets and
operations are currently located in China and are expected to continue to be
located outside the United States in the future. Holdings was the surviving
corporation subsequent to the merger and possesses all rights, privileges,
powers and franchises and is subject to all the restrictions, disabilities and
duties of the dissolved Florida corporation. The reincorporation had no effect
on the Company's current business operations in China. On March 3, 2003,
Holdings changed its name to CBR Brewing Company Inc. (see BUSINESS - OVERVIEW).
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
24
The facilities of Noble Brewery and Zhaoqing Brewery are 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 49.2%, 49.2% and 56.9%,
respectively, of their theoretical brewing capacities during the year ended
December 31, 2002. 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. Noble Brewery has engaged legal
counsel in the PRC to file a challenge to the court order, but there can be no
assurances that this effort will be successful.
As a consequence of the preservation order, the remaining cash not
affected by such court order has been transferred either to High Worth JV or the
Marketing Company in trust and is being held on behalf of Noble Brewery for the
purpose of funding the operations of Noble Brewery. During the year ended
December 31, 2002, High Worth JV and the Marketing Company have utilized all the
cash held in trust for Noble Brewery for the purchase of raw materials and
settlement of the expenses on behalf of Noble Brewery. As a result, as of
December 31, 2002, High Worth JV and the Marketing Company did not hold any cash
in trust for Noble Brewery.
Management of Noble Brewery believes that Noble Brewery's operations
will not be impaired as a result of the court order freezing a portion of its
bank accounts, and that Noble Brewery has adequate working capital resources to
fund its operating requirements in the near term.
In May 2002, Noble Brewery declared a dividend distribution of RMB
75,511,040, of which RMB 30,204,416 has been paid to High Worth JV, while the
dividend payable to Linchpin amounting to RMB 45,306,624 can only be remitted to
Linchpin when the preservation order is released and approval from the Foreign
Exchange Bureau is obtained.
On July 19, 2002, Noble China Inc. announced that the Shandong Court
ruled against it and ordered it to pay the amount of claims in the sum of
US$3,999,988 and RMB 20,000,000 plus legal costs of RMB 541,210, and interest
from June 21, 2001 within one month of the judgment. Noble China Inc. announced
that it would appeal the Shandong Court's decision to the Supreme Court of the
PRC.
25
On September 29, 2002, the Shandong Court issued a new preservation
order to those banks where Noble Brewery kept its previously frozen funds,
requesting them to extend the period of preservation for an additional six
months until end of March 2003.
On March 21, 2003, the Shandong Court further extended its
preservation order for another six months until September 23, 2003.
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, 2002.
26
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. was traded on
the OTC Bulletin Board under symbol "CBRB" until February 28, 2003. Effective
February 28, 2003, CBR Brewing Company, Inc. reincorporated from the State of
Florida in the United States to the British Virgin Islands ("BVI") by merging
into its wholly-owned British Virgin Islands subsidiary, High Worth Holdings
Ltd. ("Holdings"). Subsequent to the reincorporation, High Worth Holdings Ltd.
changed its name to CBR Brewing Company, Inc. effective March 14, 2003, and
began to trade on the OTC Bulletin Board under the new symbol "CBRAF".
During 2002 and 2001, 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 Yahoo Finance.
High Low
----- -----
Year Ended December 31, 2002:
Three Months Ended -
March 31, 2002 $0.25 $0.24
June 30, 2002 0.23 0.12
September 30, 2002 0.11 0.09
December 31, 2002 0.14 0.08
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
(b) Holders
As of March 31, 2003, the Company had 12 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
27
operation 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.
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, 2000, 2001 and 2002.
28
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, 1998, 1999, 2000, 2001 and 2002.
CBR Brewing Company, Inc.
(in RMB) and Subsidiaries
------------------------
Years Ended December 31,
-----------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------ ------------ ------------ --------------
(1) (1) (1) (1) (1)
Consolidated Statement
of Operations Data:
Sales, net of sales taxes 657,386,695 667,048,652 922,025,729 986,458,832 1,121,007,111
Gross profit 162,599,720 168,112,391 186,857,571 218,202,956 193,523,991
Operating loss (181,479,256) (47,055,065) (94,288,604) (412,431) (24,070,401)
Net income (loss) (210,303,836) (29,277,019) (28,905,192) 23,655,102 21,391,510
Net income (loss)
per common share (26.26) (3.66) (3.61) 2.95 2.67
Cash dividends declared per
common share -0- -0- -0- -0- -0-
As of December 31,
-------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- -------------
Consolidated Balance
Sheet Data:
Net working capital
Deficiency (319,548,354) (295,884,832) (274,731,879) (160,971,900) (192,019,443)
Total assets 591,240,769 693,313,494 782,793,235 822,467,276 870,426,327
Long-term liabilities 155,260 12,400,211 16,699,543 10,000,000 2,847,911
Advances from shareholders - - - 36,719,200 50,267,705
Shareholders' equity
(deficiency) (41,756,392) 168,547,444 197,824,463 226,555,203 202,202,300
(1) The provisions of Emerging Issues Task Force ("EITF") No. 01-9, "Accounting
for Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor's Products)", were adopted during 2002. The adoption of EITF No. 01-9
resulted in the reclassification of certain sales incentives previously
classified as selling expenses to a reduction from sales. Prior year amounts
have been reclassified to conform to the current year's presentation. The
amount of sales incentives included as a deduction from sales in accordance with
EITF No. 01-9 was RMB 31,669,780, RMB 46,745,947 and RMB 19,121,816 for the
years ended December 31, 2002, 2001 and 2000, respectively. Determination of
the amount of sales incentives to be included as a deduction from sales in
accordance with EITF No. 01-9 for the years ended December 31, 1999 and 1998 is
not practicable. The reclassification had no effect on the Company's net income
(loss), working capital deficiency, shareholders' equity (deficiency) or
financial position.
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW:
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 Sub-license Agreement dated May 6, 1994 between Pabst
Zhaoqing and High Worth JV, High Worth JV acquired a sub-license to utilize
Pabst trademarks in conjunction with the production and marketing of beer in
China and other Asian countries except Hong Kong, Macau, Japan and South Korea.
The sub-license is subject to a prior License Agreement between Pabst US and
Pabst Zhaoqing, and a subsequent Assets Transferring Agreement among Pabst
Zhaoqing, Pabst US and Guangdong Blue Ribbon (see "ITEM 1. BUSINESS - PABST
LICENSING ARRANGEMENTS AND TRADEMARKS"). The License Agreement expires on
November 7, 2003.
Effective February 28, 2003, CBR Brewing Company, Inc. reincorporated
from the State of Florida in the United States to the British Virgin Islands
("BVI") by merging into its wholly-owned British Virgin Islands subsidiary, High
Worth Holdings Ltd ("Holdings"). This off-shore reincorporation was
accomplished for tax planning purposes, since all of the Company's assets and
operations are currently located in China and are expected to continue to be
located outside the United States in the future. The reincorporation had no
effect on the Company's current business operations in China. On March 3, 2003,
Holdings changed its name to CBR Brewing Company Inc. (hereinafter referred to
as the "Company", which term shall include, when the context so requires, its
subsidiaries and affiliates) and the members of the Board of Directors were
replaced by the Board members of the Florida corporation.
The Agreement and Plan of Merger dated January 24, 2003 was approved
by majority of shareholders of each class of common stock outstanding as of
December 31, 2002. Holdings was the surviving corporation subsequent to the
merger and possesses all of the rights, privileges, powers and franchises and is
subject to all the restrictions, disabilities and duties of the dissolved
Florida corporation. Each Class A share of the Florida corporation was
converted into one fully paid and non-assessable (with no face value) Class A
share of capital stock of the BVI corporation and each Class B share of the
Florida corporation was converted into one fully paid and non-assessable (with
no face value) Class B share of capital stock of the BVI corporation. The
surviving BVI corporation assumed and continued the public reporting obligations
of the dissolved Florida corporation under the new OTC Bulletin Board trading
symbol "CBRAF", and the consolidated operating results of the Company continued
without interruption.
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").
30
MAJOR DEVELOPMENTS:
Noble China Inc. is a Canadian public company previously listed on the
Toronto Stock Exchange and 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.
Discussions between holders of a majority of the Debentures and
representatives of the City of Zhaoqing regarding a reorganization of Noble
China, Inc. resulted in a preliminary agreement in principle with respect to
settlement in full of the outstanding Debentures. Discussions between
representatives of the City of Zhaoqing and Pabst Brewing Company regarding a
reorganization of Noble China, Inc. and a restructuring of the master license
agreement that becomes effective on November 7, 2003 resulted in the execution
of a non-binding term sheet in March 2003. These agreements are both
conditional on Noble China, Inc. being able to implement a formal reorganization
of its debt and equity securities. The successful reorganization of Noble
China, Inc. is subject to the preparation and execution of definitive agreements
and a plan of reorganization, compliance with all applicable laws and
regulations, and the funding, approval and consummation of a court-approved
reorganization plan of Noble China, Inc. Accordingly, as a result of the
uncertainty with respect to these matters, there can be no assurances that Noble
China, Inc. will be successfully reorganized or that the Company and Noble
Brewery will be able to retain the right to produce and distribute Pabst Blue
Ribbon beer in China subsequent to November 7, 2003.
As of December 31, 2002, the Company and Noble Brewery have not
obtained a renewal of their respective Pabst Blue Ribbon sub-license agreements,
which expire on November 7, 2003. The inability of the Company or Noble Brewery
to obtain or renew a sub-license from Noble China Inc. or enter into some other
form of strategic relationship under acceptable terms and conditions to allow
the Company and Noble Brewery to continue to produce and distribute Pabst Blue
Ribbon beer in China would have a material adverse effect on the Company's
future results of operations, financial position and cash flows.
The Company's controlling shareholder, Lan Wei, owns a 19.6% equity
interest in Noble China Inc., which it acquired in January 2002 as part of the
transaction in which it acquired a controlling interest in the Company. The
Company's prior controlling shareholder, Huaqiang, acquired this 19.6% equity
interest in Noble China Inc. during 2001.
Noble China Inc. recently publicly reported that it was experiencing
severe financial difficulties, was unable to meet its financial commitments and
was insolvent, and was considering various courses of action.
On July 22, 2002, Noble China Inc. held its Annual and General Meeting
of Shareholders. A Special Meeting of Shareholders and a Meeting of Debenture
holders were also held on July 22, 2002 to seek approval for certain amendments
to the 9% Convertible Subordinated Debentures and to the Trust Indenture
governing the Debentures. Noble China Inc. has CN$30,000,000 of outstanding
Debentures. As a result of ongoing discussions between the major Debenture
holders and the City of Zhaoqing, which is indirectly a major shareholder of
Noble China Inc., regarding a possible restructuring of Noble China Inc., the
amendments to the Debentures and to the Trust Indenture were not presented for a
vote at the Special Meeting of Shareholders and at the Meeting of Debenture
holders; both such meetings were instead adjourned to times and places to be
determined. The Board of Directors of Noble China Inc. was re-elected and
confirmed its short-term assistance to facilitate the negotiations between the
31
major shareholder of Noble China Inc. and the major Debenture holders. The
Directors of Noble China Inc. indicated that if the major shareholder and major
Debenture holders could not reach a resolution on an appropriate restructuring
plan that the Board of Directors could support in the interest of all
shareholders and Debenture holders within 60 days, the Board of Directors would
resign.
On September 3, 2002, Noble China Inc.'s report for the three months
ended June 30, 2002 disclosed that although the major shareholder and the major
Debenture holders were continuing their discussions, no meaningful process had
been noted and the Directors planned to resign on September 20, 2002.
On September 24, 2002, a press release by Noble China Inc. announced
that one of its three directors had resigned on September 20, 2002, and that the
remaining two directors intended to resign. On November 12, 2002, Noble China
Inc. held a meeting of shareholders to elect a new Board of Directors to consist
of three members; three candidates nominated by Lan Wei, the major shareholder
of the Company, were elected to the Board of Directors.
On February 13, 2003, Noble China Inc. announced that it has requested
and has been granted permission to voluntarily delist its common shares from the
Toronto Stock Exchange effective from February 14, 2003.
On April 3, 2002, Noble Brewery was served with a preservation order
from the High Court of Shandong Province freezing a portion of its bank accounts
with aggregate balances of approximately RMB35,700,000, in connection with
litigation between Noble China Inc., Shandong Noble Brewery Ltd. and China Coast
Property Development Ltd., with respect to Noble China Inc.'s 1994 investment in
Shandong Shouguang Brewery Co. Ltd. China Coast Property Development Ltd. is
asserting a total claim against Noble China Inc. of approximately RMB53,100,000.
Noble China Inc., through its wholly-owned subsidiary, Linchpin, owns a 60%
interest in Noble Brewery.
The court order specified that a total of RMB53,100,000 was to be
retained by Noble Brewery pending resolution of the litigation. Accordingly, in
addition to the RMB35,700,000 of funds frozen, Noble Brewery will also be
obligated to withhold potential dividend distributions or equity interests due
to Linchpin of RMB17,400,000. Noble Brewery has engaged legal.counsel in the
PRC to file a challenge to the court order, but there can be no assurances that
this effort will be successful.
Management of Noble Brewery believes that Noble Brewery's operations
will not be impaired as a result of the court order freezing a portion of its
bank accounts, and that Noble Brewery has adequate working capital resources to
fund its current operating requirements.
In May 2002, Noble Brewery declared a dividend distribution of
RMB75,511,040, of which RMB30,204,416 has been paid to High Worth Brewery, while
the dividend payable to Linchpin amounting to RMB45,306,624 can only be remitted
to Linchpin when the preservation order is released and approval from the
Foreign Exchange Bureau is obtained.
On July 19, 2002, Noble China Inc. announced that the Shandong Court
ruled against it and ordered it to pay the amount of claims in the sum of
US$3,999,988 and RMB20,000,000 plus legal costs of RMB541,210, and interest from
June 21, 2001 within one month of the judgment. Noble China Inc. announced that
it would appeal the Shandong Court's decision to the Supreme Court of the PRC.
On September 23, 2002, the Shandong Court issued a new preservation
order to those banks where Noble Brewery kept its previously frozen funds,
requiring them to extend the period of preservation for an additional six months
until March 23, 2003. On March 21, 2003, the Shandong Court further extended
its Preservation Order for another six months to September 23, 2003.
32
During the three months ended June 30, 2002, as a result of the
uncertainty with respect to the renewal of the Pabst Blue Ribbon sub-license and
the continuing negotiations between the Company's major shareholder and the
major Debenture holders of Noble China Inc. regarding the future of Noble China
Inc., combined with reduced sales, continuing operating losses and various legal
and business issues, the Company conducted an evaluation of the carrying value
of its property, plant and equipment. As a result of this evaluation, the
Company recorded a provision for impairment of RMB 40,000,000 with respect to
the property, plant and equipment of Zhaoqing Brewery.
During the three months ended September 30, 2002, due to a further
decrease in sales, the Company re-evaluated the carrying value of its property,
plant and equipment, as well as the related estimated cash flows. As a result
of this re-evaluation, the Company recorded an impairment charge of RMB
29,000,000 with respect to Zao Yang High Worth Brewery. As a result of these
evaluations, the Company recorded total impairment charges of RMB 40,000,000 and
RMB 69,000,000 for the three months and nine months ended September 30, 2002,
respectively.
In December 2002, the Company conducted a subsequent test and review
of its previous assumptions and calculation adopted with respect to the
estimates of those impairment charges recorded in its quarterly reports for the
three months ended June 30, 2002 and September 30, 2002. The Company determined
that some of the assumptions made in the calculations of those impairment
estimations should be amended to include land use rights, buildings and
construction in progress. As a result, the provision for impairment for the
three months ended June 30, 2002 with respect to Zhaoqing Brewery should have
been recorded as RMB 82,000,000, instead of RMB 40,000,000. The provision for
impairment for the three months ended September 30, 2002 with respect to Zao
Yang High Worth Brewery should have been recorded as RMB 42,000,000, instead of
RMB 29,000,000. Accordingly, as a result of these revisions, the Company's
provision for impairment has been restated as RMB 82,000,000 and RMB 82,000,000
for the three months and six months ended June 30, 2002, respectively; and as
RMB 42,000,000 and RMB 124,000,000 for the three months and nine months ended
September 30, 2002, respectively.
During the three months ended December 31, 2002, the Company further
evaluated the carrying value of its land use rights, buildings, plant, machinery
and equipment, and construction in progress, as well as the related estimated
cash flows. As a result of this re-evaluation, the Company recorded a further
impairment charge of RMB 20,000,000 with respect to Zao Yang High Worth Brewery.
As a result of the aforesaid evaluations and re-evaluations, during the year
ended December 31, 2002, the Company recorded total impairment charges of RMB
144,000,000, consisting of RMB 82,000,000 with respect to Zhaoqing Brewery and
RMB 62,000,000 with respect to Zao Yang High Worth Brewery.
These impairment charges were based on assumptions regarding the
Company's future cash flows and other factors used to determine the fair value
of its land use rights, buildings, plant, machinery and equipment, and
construction in progress, including that the assumption that High Worth JV and
Zao Yang High Worth Brewery will not be granted a renewal of the sub-license to
produce Pabst Blue Ribbon beer after the existing sub-license expires on
November 7, 2003 and that the operations of these two breweries will then rely
on the production and sale of other newly developed local brand beers, as well
as the equity in income from Noble Brewery, which is expected to continue the
production and sale of Pabst Blue Ribbon beer. If these estimates or the
related assumptions change adversely in the future, the Company may be required
to record an additional impairment charge in the future.
During the three months ended March 31, 2003, the Company and Noble
Brewery experienced significant decreases in sales and continuing operating
losses. The Company and Noble Brewery are in the preliminary stages of
33
assessing the potential effect, if any, that this development may have on the
Company's financial position and results of operations at March 31, 2003,
including a possible further impairment charge with respect to property, plant
and equipment.
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, had a working capital deficit at December 31, 2002, and
certain bank borrowing agreements as of December 31, 2002 had expired. The
Company's Pabst Blue Ribbon sub-license agreement will expire on November 7,
2003 and the severe financial difficulties and management and other
uncertainties of Noble China Inc. may impact the Company's associated company,
Noble Brewery, and the ability of Noble China Inc. to renew or grant
sub-licenses to the Company and Noble Brewery to continue to produce and
distribute Pabst Blue Ribbon beer in China after November 7, 2003. 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 2002, the Company implemented a series of new sales programs to
launch various newly developed or modified local brand beers into the market,
including brands such as "Lanli", "Lancheng", "Lanshi", "Xile" and "Zhaopi".
Together with the local brand beer "Di Huang Quan" produced by Zao Yang High
Worth Brewery, the Company intends to increase its marketing efforts with
respect to these new local brands. If the Company is unable to obtain a new
sub-license to produce Pabst Blue Ribbon beer after November 7, 2003, these new
local brands would be expected to become the main product lines and the major
source of revenues for High Worth Brewery and Zao Yang High Worth Brewery after
the expiration of the Pabst sub-license on November 7, 2003. However, pursuant
to the joint venture agreement of Blue Ribbon Noble, the Company will continue
to manage the daily operation of Blue R