Attached files

file filename
EX-10.6 - OPTION AGREEMENT, DATED DECEMBER 30, 2009, BETWEEN GREAT EAST PACKAGING INTERNATIONAL LIMITED AND GREAT EAST PACKAGING HOLDINGS LIMITED (ENGLISH TRANSLATION) - GREAT CHINA MANIA HOLDINGS, INC.exhibit10-6.htm
EX-10.1 - RESTRUCTURING AGREEMENT, DATED DECEMBER 30, 2009, BETWEEN GREAT EAST BOTTLES & DRINKS (BVI) INC. AND GREAT EAST PACKAGING HOLDINGS LIMITED (ENGLISH TRANSLATION) - GREAT CHINA MANIA HOLDINGS, INC.exhibit10-1.htm
EX-10.4 - SUBSCRIPTION AGREEMENT, DATED DECEMBER 30, 2009, BETWEEN GREATGRAND GLOBAL LIMITED AND GREAT EAST (OVERSEAS) PACKAGING LIMITED (ENGLISH TRANSLATION) - GREAT CHINA MANIA HOLDINGS, INC.exhibit10-4.htm
EX-10.5 - AGREEMENT, DATED DECEMBER 30, 2009, AMONG GREAT EAST BOTTLES & DRINKS (BVI) INC., TOP SHARP INVESTMENTS LIMITED AND BEST KEY INVESTMENT LIMITED (ENGLISH TRANSLATION) - GREAT CHINA MANIA HOLDINGS, INC.exhibit10-5.htm
EX-10.2 - SUBSCRIPTION AGREEMENT, DATED DECEMBER 30, 2009, BETWEEN UPJOY HOLDINGS LIMITED AND GREAT EAST (OVERSEAS) PACKAGING LIMITED (ENGLISH TRANSLATION) - GREAT CHINA MANIA HOLDINGS, INC.exhibit10-2.htm
EX-99.1 - AUDIT COMMITTEE CHARTER - GREAT CHINA MANIA HOLDINGS, INC.exhibit99-1a.htm
EX-31.1 - CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13-14(A) OF THE SECURITIES EXCHANGE OF 1934 - GREAT CHINA MANIA HOLDINGS, INC.exhibit31-1a.htm
EX-32.1 - CERTIFICATE OF THE PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - GREAT CHINA MANIA HOLDINGS, INC.exhibit32-1a.htm
EX-31.2 - CERTIFICATION OF THE ACTING PRINCIPAL ACCOUNTING OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13-14(A) OF THE SECURITIES EXCHANGE OF 1934 - GREAT CHINA MANIA HOLDINGS, INC.exhibit31-2a.htm
EX-32.2 - CERTIFICATE OF THE ACTING PRINCIPAL ACCOUNTING OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - GREAT CHINA MANIA HOLDINGS, INC.exhibit32-2a.htm
EX-10.3 - SUBSCRIPTION AGREEMENT, DATED DECEMBER 30, 2009, BETWEEN UNITED JOY INTERNATIONAL LIMITED AND GREAT EAST (OVERSEAS) PACKAGING LIMITED (ENGLISH TRANSLATION) - GREAT CHINA MANIA HOLDINGS, INC.exhibit10-3.htm
 
 


 

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 AND EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2009
 
or
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 
For the transition period from _______ to _______
 
Commission File No.: 333-139008
 
GREAT EAST BOTTLES & DRINKS (CHINA) HOLDINGS, INC
(Exact Name of Registrant as Specified in Its Charter)
 
Florida
59-2318378
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)
 
203 Hankow Center, 5-15 Hankow Road, Tsimshatsui, Kowloon, Hong Kong
(Address of Principal Executive Offices) (Zip Code)
 
Registrant’s telephone number, including area code: 852-2192-4805
 
Securities registered pursuant to Section 12(b) of the Act:  None
 
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x No o
 
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 o
 
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 the 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. o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.   
Large accelerated filer o      Accelerated filer o      Non-accelerated filer o      Smaller reporting company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o No  x
 
State the aggregate market value of the common stock held by non-affiliates of the Issuer on June 30, 2009: $2,850,000
 
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date: 40,200,000 at March 15, 2010.
 
Documents incorporated by reference: None



 

 
 

 


 
TABLE OF CONTENTS
 
   
Page
     
ITEM 1.
BUSINESS
1
     
ITEM 1A.
RISK FACTORS
11
     
ITEM 1B.
UNRESOLVED STAFF COMMENTS
19
     
ITEM 2.
PROPERTIES
19
     
ITEM 3.
LEGAL PROCEEDINGS
21
     
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
21
     
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
21
     
ITEM 6.
SELECTED FINANCIAL DATA
22
     
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
22
     
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
26
     
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
26
     
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
26
     
ITEM 9A.(T)
CONTROLS AND PROCEDURES
26
     
ITEM 9B.
OTHER INFORMATION
29
     
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
29
     
ITEM 11.
EXECUTIVE COMPENSATION
31
     
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
32
     
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
32
     
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
35
     
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
36

 
 
 

 

 
 
Item 1.
Business
 
Introduction

As used herein, unless the context otherwise requires, “Registrant” and the “Company” (and “we”, “our” and similar expressions) refer to the business of Great East Bottles & Drinks (China) Holdings, Inc. (formerly named Jomar Specialties, Inc.) before the Share Exchange (as hereinafter defined) and Great East Bottles & Drinks (BVI) Inc. (“GEBD BVI”, formerly known as Citysky Investment Holdings, Inc.) after the Share Exchange.

We were incorporated on July 8, 1983 in the business of providing specialty printing services to the commercial printing industry.  Until consummation of the Share Exchange, our revenue was derived from providing printing services to other printing businesses.

On March 10, 2008, we entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with GEBD BVI and Guy A-Tsan Chung (formerly known as Chung A. San Guy), the sole shareholder of GEBD BVI (the “Shareholder”) to acquire 100% of the outstanding equity of GEBD BVI from the Shareholder in consideration for 32,460,000 shares of our common stock (the “Share Exchange”).  The Share Exchange was consummated on March 10, 2008.

Subsequent to the completion of the Share Exchange Agreement, GEBD BVI’s business became our major business and the Shareholder became our majority shareholder. Our operating entities produced beverage bottles which mainly are made of PET, a type of plastic with desirable characteristic for packaging including a clear and wide range of colors and shapes and tough resistance to heat, moisture and dilute acid. The operating entities manufacture and sell beverage bottles in China for bottling of Carbonated Soft Drinks (“CSD”) for world brands including Coca-Cola and Pepsi.  

In December 2009, we restructured our group so that our subsidiary, HGEP, held our operating entities GEPNJ and GEPXA. As a result, any operations that we had were either conducted by HGEP or by its subsidiaries.  In December 2009, HGEP through its subsidiary, acquired a 99.99% interest in three new operating entities from a company controlled by Mr. Guy Chung.  These entities were United Joy International Limited (“United Joy”), Upjoy Holdings Limited (“Upjoy”) and Greatgrand Global Limited (“Greatgrand”).

In exchange for these new operating entities, we transferred shares in a wholly-owned subsidiary that holds a 15% interest in HGEP to a company controlled by Mr. Guy Chung.  Additionally, we granted another company controlled by Mr. Guy Chung an option exercisable at $1 to purchase 60% of our subsidiary GEPI whose sole assets are an 84% interest in HGEP.

We have assumed for the purposes of this annual report and the financial statements included herein that the option to acquire a 60% interest in GEPI has been exercised.  As a result, our only assets are our 33.6% interests in the operating entities described herein.


 
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The following chart sets out our group structure as of March 15, 2010:

GEBD Chart
 
 

General Description of Business

Business Overview

OUR PRODUCTS

We mainly produce 3 types of products: PET CSD bottles, PET CSD preforms for CSD bottles and OEM water bottles. PET (Polyethylene terephthalate) is a thermoplastic polymer resin of the polyester family.  It is widely used as raw material for synthetic fibers, beverage /food / liquid containers, thermoforming applications and as engineering resins.  PET CSD bottles are completed bottles ready for CSD bottling while PET CSD preforms are pre-production tubes made from PET resin that are used in a stretch-blow-molding machine to produce the final PET bottle

PET CSD preforms

PET CSD preforms are pre-production tubes made from PET resin that are used in a stretch-blow-molding machine to produce the final PET bottle.  PET CSD preforms can be colored green or blue according to customers’ requirements. The weight of PET CSD preforms determines the volume of the final PET CSD bottle.  Heavier PET preforms are used to produce larger PET CSD bottles.  Sizes of our PET CSD preforms range from 25g to 56g, which is our customers’ required weight range.

Newly produced PET CSD preforms are stored in warehouses for scheduled PET CSD bottle blowing process. PET preforms expire three months from their production date.

PET CSD bottles

PET CSD bottles are transformed from PET CSD preforms through a stretch-blow-molding manufacturing process.  PET CSD bottles are popular containers for the CSD bottling process.

 
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Unlike aluminum cans and glass bottles, PET CSD bottles are applied to medium to large volume CSD products, i.e., over 500ml.  Volume of PET CSD bottles ranges from 500ml to 2,500ml with PET CSD preforms weights ranging from 25g to 56g, respectively.  The shapes of the CSD bottle are designed by the customers.

Newly produced PET CSD bottles are stored in warehouses for scheduled CSD bottling process. The expiry period of PET CSD preforms varies from 15 days to 3 months from the date produced, depending on the storing conditions such as room temperature and relative humidity

OEM water bottles
 
Some of the operating entities manufacture OEM water bottles.  These operating entities purchase preforms for OEM water bottles from an unrelated third party called Guo Zhu Group and then use the preforms to create OEM water bottles in a process that is similar to the production of the PET CSD bottles.  The operating entities then fill the OEM water bottles with distilled water and deliver the bottled water to Coca Cola’s distribution centers. The sizes of the OEM water bottles range from 550ml to 1,500ml.
 
PET bottles are suitable for various applications including water, tea drinks, CSD and other beverages bottling.  Our PET CSD bottles and PET CSD preforms are targeted to CSD application, while our OEM business is targeted to bottled water application.  CSD contains instable carbonate components and it demands higher quality requirements on PET bottles and PET preforms compared to those applied to OEM water bottles and bottles for tea drinks.  Thus, CSD applications represent a higher margin segment in the PET bottles and PET preforms market as it demands a higher quality standard, and OEM applications represent a lower margin segment.  

INDUSTRY AND MARKET ENVIRONMENT

The operating entities are part of the plastic packing case and container manufacturing industry in China. Their existing market is the market for PET-plastic bottles for beverages in China.

The Chinese market for the industry has been expanding steadily at double-digit growth rates for the last several years. While there are no official statistical data on the industry’s growth, we believe that the market size and market growth of the industry has increased due to the unit volume sales growth experienced in these industries that we supply.  In particular, we believe that higher volume growth in plastic-bottled beverages would likely imply a corresponding similar volume growth in plastic bottles manufacturing.

OUR MAJOR CUSTOMERS

Our major customers are Coca-Cola and Pepsi, the two leading worldwide brands in the CSD industry. Our company continues to keep good customer relationship with Coca-Cola and Pepsi and they renewed the contracts with us in 2008. United Joy and Upjoy also signed agreements with NJBC and HZBC, respectively, for supplying OEM water bottles.
 
Coca-Cola

We serve Coca-Cola through our GEHZ, GENJ, United Joy, Upjoy and Greatgrand production facilities. GEHZ signed a Coordinated Supply Agreement to serve Coca–Cola through Hangzhou BC Foods Company Limited (“HZBC”) and GENJ signed a Coordinated Supply Agreement to serve Coca–Cola through Nanjing BC Foods Company Limited (“NJBC”).  HZBC and NJBC are subsidiaries of Swire Pacific Limited, which is the CSD bottler for Coca-Cola in China.
 

 
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Terms

HZBC and NJBC signed four year contracts commencing June 1, 2004 with GEHZ and GENJ, respectively.  Both HZBC and NJBC have indicated that they renewed their contracts with GEHZ and GENJ, respectively, on June 1, 2008 on similar terms and conditions.  Contracts of United Joy and Upjoy commenced in 2008 and will expire in 2012.  Contracts of Greatgrand commenced in 2009 and will expire in 2011.
 
Raw material

For PET CSD bottles, we are not required to purchase PET resin under the contracts and Coca–Cola has agreed to make special arrangement for us.  For instance, based on GEHZ’s expected production volume, HZBC shall purchase an adequate amount of PET resin from its approved suppliers, who will then deliver the PET resin directly to GEHZ.  NJBC and GENJ have the same supply arrangement.  For OEM water bottles, we are required to purchase PET resin for production.

Pricing

We are obliged to offer Coca-Cola whatever is the lowest price we offer PET CSD bottles to our other customers with substantially equivalent quality we sold to Coca-Cola under “the most favor customer” clause.  Moreover, we have to meet the most competitive pricing from other competitors over the market, who offer PET CSD bottles with substantially equivalent quality we sold to Coca-Cola.

The price of PET CSD bottles includes PET CSD bottles blowing, PET CSD preforms conversion, all packaging materials and pallet, transportation to customers, value added tax and colorant, but excludes PET resin and label price.  Except for PET resin which we are required to purchase, the price of OEM water bottles includes the same elements as PET CSD bottles.

Pepsi

We serve Pepsi through our GEXN production facilities.  GEXN has signed an Inline Mode Coordinated Supply Agreement (the “Pepsi Agreement”) to serve Pepsi through Xian Pepsi-Cola Beverage Company Limited, which is a joint venture company between PepsiCo Investment (China) Ltd. and local food and beverage companies in Xian.

We produce PET CSD bottles with capacities ranging from 600ml to 2,500ml with certain performance criteria including appearance, dimension, weight, fill point capacity, wall thickness & sectional weights, perpendicularity, burst resistance, thermal stability, stress crack, top load test, drop impact and carbonation loss.
 
The Pepsi Agreement was renewed on March 18, 2008 and has a term of five years. If we cannot reach a mutual consent for the renewal of this agreement, Pepsi has the right to buy back our production line for a price to be determined by 15 years depreciation without residual value.

Pepsi has committed a volume guarantee to us of not less than 70% of Pepsi’s annual PET CSD bottles requirements in Xian province during the terms of the contract.  Pursuant to the terms of the contract, we are obligated to guarantee a non interrupted supply of our PET CSD bottles to Pepsi.

We must offer the lowest competitive price to Pepsi. The price includes PET resin, the tolling fee of PET CSD bottles blowing and value added tax, but excludes label price, the tolling fee of label and colorant.

 
4

 

OUR PRODUCTION FACILITIES

We own and operate 8 manufacturing facilities in China: GEHZ, GENJ, GEXN, United Joy, Upjoy and Greatgrand.

GEHZ

GEHZ is located at No. 1 Road, Economic & Technological Development Zone, Jiubao Jianggan District, Hangzhou, China.  It is comprised of 2 buildings, one of which serves as an administration office, production line factory and warehouse and the other serves as a staff canteen and quality control office. GEHZ operates one PET CSD bottle production line and four PET CSD preform production lines.

The PET CSD bottles production line produces PET CSD bottles with capacities ranging from 0.5L to 2.5L. It consists of one stretch blow molding machine and one basic robot labeling machine:

1.
The stretch blow molding machine consists of 10 molds with a production capacity of 12,000 bottles per hour.
2.
The robot labeling machine model has a production capacity of 18,000 bottles per hour.

GEHZ’s PET CSD bottles production line is operated as an offline production mode (“Offline Mode”) Under Offline Mode, PET CSD bottles are blow-molded at GEHZ’s own production line factory, packed and delivered to Coca–Cola’s manufacturing plant for their bottle-filling process.  Coca–Cola’s manufacturing plant is located adjacent to GEHZ’s production line factory to ensure timely delivery of the PET CSD bottles supply and also to minimize transportation costs.
 
GENJ

GENJ is located at 16 Nanjing New & High Technology Industry Development Zone, Nanjing Jiangsu Province, China. It is comprised of two buildings, one of which serves as an administration office and the other serves as a production line factory and warehouse. GENJ operates three PET CSD bottles production lines and three PET CSD preforms production lines.

The 3 PET CSD bottles production lines produce PET CSD bottles with capacities ranging from 500ml to 2,500ml.
 
One of GENJ’s PET CSD bottles production lines is operated as an inline production mode (“Inline Mode”). Under Inline Mode, PET CSD bottles are blow-molded at Coca-Cola’s manufacturing plant and are then directly fed into Coca-Cola’s manufacturing production lines via conveyor belts for bottle-filling process.

Two of GENJ’s PET CSD bottles production lines are operated under Offline Mode. Coca-Cola’s manufacturing plant is located adjacent to GENJ’s production line factory.

Each production line consists of one stretch-blow-molding machine and one labeling machine:

GEXN

GEXN is located at No. 36 Development Road, New Type Industrial Garden High–Tech Industrial Development Zone, Xian, China. GEXN operates two PET CSD bottles production lines.

The two PET CSD bottles production lines produce PET CSD bottles with capacities ranging from 600ml to 2,500ml. Each production line consists of one stretch-blow-molding machine and one labeling machine:
 
 
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●      The stretch-blow-molding machines have with production capacities of 12,000 bottles (Inline Mode) and 10,000 bottles per hour respectively. They consist of 10 molds each machine.
 
●      The labeling machines have a production capacity of 18,000 bottles per hour each machine.

One of GEXN’s PET CSD bottles production lines is operated under Inline Mode and the other production line is under Offline Mode. Pepsi’s manufacturing plant is located adjacent to GEXN’s production line factory.

United Joy

United Joy has two OEM water bottle manufacturing facilities located at 6, Feng Huang Lu, Pu Kou Economic and Development Zone, Nanjing, Jiangsu Province and North Guan Qi Road, He Fe Economic and Development Zone, He Fe, An Hui Province.  Both are operated under Offline mode, and each has one OEM water bottle production line with capacity ranging from 550ml to 1,500ml.

Upjoy

Upjoy has two OEM water bottle manufacturing facilities located at No. 1 Road, Economic & Technological Development Zone, Jiubao Jianggan District, Hangzhou and Jiang Nan Logistic Centre, Jing Jiang Nan Lu, Lin Hai, Taizhou.  Both are operated under Offline mode, and each has one OEM water bottle production line with capacity ranging from 550ml to 1,500ml.
 
Greatgrand

Greatgrand has a hot fill packaging facility located in 8 Jia 2, No 7 Jie, Shenyang Economic and Development Zone, Shenyang.  Hot fill packaging is another process adopted in packaging of beverage such as tea, juice and milk based beverage.  The major difference between hot fill bottles and CSD bottles and OEM water bottles lies in the top of the bottle as hot fill bottles requires a crystallization manufacturing process for sustaining the heat involved in the hot fill process.  Greatgrand has one inline hot fill bottles production lines that produces PET hot fill bottles with capacities ranging from 600ml to 2,500ml that consists of one stretch-blow-molding machine and one labeling machine:

PRODUCTION PROCEDURES

Through eight of our operating facilities , we operate several PET CSD preforms production lines, several PET CSD bottles production lines, four OEM water bottle production lines, one hot fill bottle production line (some under Offline Mode and some under Inline Mode).

PET CSD preforms

PET CSD preforms are produced through the injection molding manufacturing process described below:

·
PET CSD preforms molds and changed.
·
PET resin is transferred from warehouse to the raw materials room .
·
PET resin is drawn into the feed hopper through pipeline by suction.
·
PET resin is heated, dried and moved into the Injection Molding machine.


 
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·
While PET resin enters the Injection Molding machine, it is heated above its transition temperature and move forward in the molds.
·
PET resin undergoes extreme pressure and is molded into PET CSD preforms.
·
The PET CSD preforms are automatically stripped through action of the mold after cooling.
·
PET CSD preforms undergo quality check by production team and quality control department to ensure the quality to achieve customers’ requirement.
·
PET CSD preforms are packaged and sent to storage.
 
PET CSD bottles

PET CSD bottles are produced through a stretch-blow-molding manufacturing process and operated under two operations modes, Inline Mode and Offline Mode.

Offline Mode

The following are the procedures followed in the Offline Mode:

·
PET CSD bottles molds are changed.
·
PET CSD preforms are transferred from warehouse to a PET CSD preforms container.
·
PET CSD preforms are sorted by a sorting machine, which is part of Stretch Blowing Machine.
·
The sorting machine screens out those PET CSD preforms of poor quality.
·
The PET CSD preforms are transferred to the main body of Stretch Blowing Machine and are heated (typically by infrared heaters) above their transition temperature.
·
PET CSD preforms are blown into bottles using high pressure air and the metal blow molds.
·
PET CSD bottles are transferred to the conveyor belt after cooling.
·
Our production team and quality control department perform quality check to ensure the quality of the PET CSD bottles meet Coca-Cola’s or Pepsi’s quality requirements.
·
PET CSD bottles are transferred to the labeling machine through conveyor belt for labeling.
·
Our production team and quality control department perform quality check on the labeled PET CSD bottles to ensure the quality meets Coca-Cola’s or Pepsi’s requirements.
·
Labeled PET CSD bottles are packed and stored.

Inline Mode

All procedures are exactly the same as Offline Mode except: that instead of packing the labeled PET CSD bottles for storage, the bottles are sent directly to Coca-Cola’s production line or Pepsi’s production line through a conveyor belt.

Under Inline Mode, if we cannot meet the customers’ bottle-filling process schedule, the labeled PET CSD bottles will not be sent to the customer’s production line directly, but will be packaged and sent to our storage.

 
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OEM water bottles

PET preforms used for OEM water bottles are produced exactly the same way as PET CSD bottles described above. The PET preforms are then processed exactly the same way as offline mode PET CSD bottles described above except that the OEM water bottles are filled with distilled water before they are packed and stored.

Hot fill bottles

PET preforms used for hot fill bottle are produced exactly the same way as PET CSD bottles described above. Hot fill bottles are produced exactly the same way as inline mode PET CSD bottles described above except that it involves an additional crystallization manufacturing process for sustaining the heat involved in the hot fill process.

INTELLECTUAL PROPERTY

We do not hold, own or license any patents, trademarks or other intellectual property.

RESEARCH AND DEVELOPMENT

We do not incur or pay any costs in relation to research and development in 2009 as our products are able to satisfy the existing product specifications from our major customers.

SEASONALITY

Sales by the operating entities are subject to seasonality.  In general, we believe sales will be higher in the second and third quarters of the year when the weather is hot and dry and lower in the first and fourth quarters of the year when the weather is cold and wet.  Sales peak during the months from June to September.

COMPETITION

There are a few PET CSD bottle producers that serve international CSD producers and a few CSD bottlers serving international CSD producers. The demand for high quality CSD bottles is expected to grow in line with the growth rate of the sales of international CSD products, which is associated with the strong economic growth of China.
 
We believe that the current competitive environment for the operating entities is moderate. There are only two PET CSD bottles producers that compete with our scale in an environment of high industry growth rate. According to our customers (Coca-Cola in GENJ / GEHZ and Pepsi in GEXN), their expected grow rates for 2009 are both at 10% level. Pepsi is the official sponsor of the World Cup 2010.

Glass bottles and aluminum cans are common substitutes for PET CSD bottles. We do not, however believe that glass bottles and aluminum cans would be considered desirable substitutes for PET CSD bottles by customers for the following reasons:

·
Glass bottles and aluminum cans are for typically for low volume CSD packing (less than 500ml) while PET bottles are for 500ml up to 2,500ml.
·
Glass bottles are heavier in weight and incur high transaction costs for delivery compared to PET CSD bottles.
·
Aluminum, the basic raw material for aluminum cans, has doubled its price in the past six years.  Current aluminum price levels are  more expensive than the PET price.

We believe that the threat of the entry of new competitors into the PET CSD market is low due to high barriers to entry which include the following:

 
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·
Production facilities have to be set up proximate to customers’ CSD bottling facilities. Because of high transaction costs, every PET CSD bottles producer has a limited perimeter of serving area.
·
Highly specialized and expensive production equipment are designated by customers.
·
International CSD producers, for example, Coca-Cola & Pepsi, have strict requirements on PET CSD bottles producer; at this time there are only a few PET CSD bottles producers who are qualified and capable of serving the international CSD producers.

Although customer concentration rate is high in the industry, the switching cost for customers to change vendors is also high as there are only a few PET CSD bottle producers in China qualified to produce high quality PET CSD bottles and PET CSD preforms to meet international standards. In addition, there is no current comparable substitute product for PET CSD bottles.

Due to low level of competitive rivalry threat and substitute products threat, we believe competition for the industry should continue to be moderate during the next 3-5 years.

United Joy, Upjoy and Greatgrand face similar competitive environments as GEHZ, GENJ and GEXA.

Major competitors

We consider international CSD producers and CSD bottlers serving international CSD producers to be the target market for the operating entities. There are two major competitors in the China market competing with the operating entities to serve the same market.  They are Zhuhai Zhongfu Enterprise Co. Ltd. (“Zhongfu”) and Shanghai Zijiang Enterprise Co. Ltd. (“Zijiang”).

Zhongfu is a listed company on the Shenzhen Stock Exchange stock symbol 000659.sz. Zhongfu manufactures and sells PET preforms, PET bottles, and film labels and has an approximately $282 million in annual revenue and 934 employees.  Zhongfu has 30 production facilities throughout China including Shenzhen, Kunshan, Chengdu, Tianjin and Beijing.

Zijiang is a listed company on the Shanghai Stock Exchange stock symbol 600210.ss. Zijiang manufactures PET preforms, PET bottles, bottle caps, plastic bags and other diversified businesses, including real estate and hotels.  Zijiang has approximately $550 million in annual revenue and 683 employees. Zijiang has production facilities in 15 locations in China.

REGULATION

Our company has a policy to comply with all applicable laws and regulations not only in China but also all countries throughout the world in which we do business.

The production in China of the operating entities’ is generally subject to environmental protection regulations that require all manufacturing industries to adopt measures to control the disposal of industrial waste, industrial manufacturing licensing and company licensing laws that regulate the business scope of companies, taxation laws that require income tax payable to the Chinese government, and labor laws that restrict maximum work-hours.

 
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Environmental Protection Regulations

The Environmental Protection Law of China has been developed and implemented by the Ministry of Environment Protection (the “Ministry”).  Since 1984, the Chinese government has attempted to mitigate its pollution problem amid the industrialization process. The Ministry has set up subsidiary bureaus throughout all provinces of China to implement fast-improving measures for environmental protection. In particular, companies are required to adopt measures to control pollution engendered by industrial waste, noise, radiation, and vibration. All companies are required to report to the bureau in their county about the status of pollutants and the measures adopted to deal with the pollutants. Penalty fees are levied on companies whose pollutant discharge levels exceed the standards set by the Ministry. The Ministry also often issues warning notices and fines, and may mandate temporary suspension of production for installation of pollution control facilities. In serious cases where the pollution causes physical or personal damage, the Ministry may impose sanctions, demand compensation to victims, coerce permanent termination of companies, or sue company owners for criminal liability.

Our Company only paid some minimal administrative costs with respect to submitting environmental reports and other related documents to the Ministry of Environment Protection in accordance with environmental laws in China. No other substantial cost was paid relating to compliance with environmental protection laws in China.

Company Laws and Regulations

The Chinese government has promulgated company laws and regulations through its State Administration for Industry and Commerce. To operate a business in China, a company has to apply for business and production licenses at the Enterprise Registration Bureau and/or the Registration Bureau of Foreign-Invested Enterprise. Such various licenses have to be obtained for companies manufacturing important industrial products such as plastic bottles and containers. Application for production licenses requires official tests and inspections by the government be passed, and maintenance of the licenses require subsequent regular periodic inspections. Production and product quality is also monitored by government, through the General Administration of Quality Supervision, Inspection, and Quarantine of PRC.

Corporate Income Taxation

Income taxes chargeable to companies in China may differ across industries and location due to differences in preferential tax treatment or subsidies. In general, the corporate income tax rate has a ceiling of 33%, but foreign-invested companies shall enjoy preferential rates: full tax exemption applies to the first two years when the company records profits, and thereafter there is a 50% tax exemption for the subsequent third to fifth years. Our company belongs to this foreign-invested category, hence our present and future subsidiaries shall enjoy the same tax concessions.
 
Labor Laws

According to Chinese Labor Law, the maximum work hours for a labor are 40 hours per week. Owing to the seasonality factor, the PET CSD bottle production industry has peak and non-peak seasons throughout the year. During peak seasons, our employees may have to work for more than 40 hours per week; but during non-peak seasons, our employees may have to work for less than 40 hours per week. The operating entities have therefore applied for and have been granted approvals from relevant government authorities to count the work hours for a labor on yearly basis instead of weekly basis. As a result, the operating entities have not violated the maximum work-hour requirement, but at the same time have greatly improved flexibility of their labor force in coping with the seasonality problem.
 
 
10

 

Employees

As of March 1, 2010, the Company and the operating entities had about 713 employees.

The following table summarizes the employees of GEBD BVI and of GEHZ, GENJ, GEXN, United Joy, Upjoy Greatgrand and their operations.

Department
 
GEBD BVI
 
GEHZ
 
GENJ
 
GEXN
United Joy
 
Upjoy
Great-
grand
 
Total
CEO
1
           
1
COO
1
           
1
CFO
1
           
1
General manager
 
1
1
1
1
 
1
5
Human resources and administration
 
3
3
3
6
6
3
24
Storage and transportation
 
15
15
15
30
30
15
120
Quality control
 
15
18
8
16
16
8
81
Equipment maintenance
 
5
5
5
10
10
5
40
Bottle Blowing
 
40
40
20
40
40
20
200
Preforms Production
 
40
40
20
40
40
20
200
Sales & Marketing
 
1
1
1
2
2
1
8
Purchasing
 
1
1
1
2
2
1
8
Finance
 
3
3
3
6
6
3
24
Total
3
124
127
77
153
152
77
713
 
Item 1A.
Risk Factors

Risks Related to Our Business

If the option to acquire 60% of one of our subsidiaries is exercised, another person will have a majority interest in all of the operating entities.

GEPH, an affiliate of Mr. Guy Chung, our principal shareholder who owns approximately 75% of our outstanding and issued common stock, has an option for $1 to purchase 60% of GEPI.  GEPI is our subsidiary that holds an 84% interest in HZGE.  HZGE is our subsidiary that owns over 99% of all of our operating entities, including GEPNJ, GEPXA, United Joy, Upjoy and Greatgrand, that together generate all of our revenue and compromise substantially all of our assets.  An affiliate of Mr. Guy Chung’s already owns a 15% stake in GEPI.

If GEPH exercises its option, our effective ownership of these operating entities would be reduced from 84% to 33.6%.  We have assumed in the preparation of our audited financial statements that GEPH has exercised the option.  In that instance, we will become a minority shareholder in all of our current operations and other entities controlled by Mr. Guy Cheung will hold 64.4 percent of those operations.  As a result, we will no longer have the majority vote regarding the operating entities described herein, the operations described herein or the assets described herein.  If the interests of the persons who will have majority control of the operating entities as to management, disposition of assets, the future of the operating entities or any other matters affecting their results of operations differ from our interests, our interest may not be protected.

The operating entities engage in significant transactions with a related party and in the future such transactions may lead to a conflict of interests

The operating entities have engaged in significant transactions with companies that are controlled by our majority shareholder, Mr. Guy Chung, and that have an effective interest in 65.6% of the operating entities.  In the year ended December 31, 2009, these transactions included

 
11

 

 
 
the acquisition of significant assets from GEPH with an enterprise value that we estimate at approximately $9.9 million,
 
the disposition of significant assets to GEPH and another entity controlled by Mr. Guy Chung with an enterprise value that we estimate at approximately $9.4 million,
 
the receipt of advances from GEPH totaling $16,431,222 as of December 31, 2009,
 
the advancement of funds to GEPH totaling $16,431,222 as of December 31, 2009,
 
the purchase of preforms for OEM water bottles and other materials from GEPH totaling $402,466 in the year ended December 31, 2009 and
 
sales to GEPH totaling $1,391,949 in the year ended December 31, 2009.

We strive to make sure any such transactions are either conducted at an arm’s length basis or, if not on an arm’s length basis, that they are for the benefit of the operating entities, such as was the case with advances from GEPH being interest free.  However, we cannot guarantee that we were successful in these efforts or that the interests of our minority shareholders will not conflict with the interests of our related parties or the controlling shareholder in these and future transactions. Any such conflicts may not be resolved in the favor of the minority shareholders.

We may be classified as an inadvertent investment company.

The Investment Company Act of 1940 (the "ICA") regulates the activities of an entity which is deemed to be an ''investment company" under the ICA. The regulations are extensive, and among other things, impose a restriction on the types of businesses an investment company can engage in, imposes reporting requirements, limits leverage and affiliate transactions and imposes limitations on capital structure and dividend paying ability. An unregistered investment company is prohibited by the ICA from engaging in any business in interstate commerce.
 
Under the ICA, an entity is generally deemed to be an investment company if the value of its investment securities (excluding securities of majority-owned subsidiaries) exceeds 40% of the value of such issuer's total assets (exclusive of government securities and cash).
 
If the GEPH exercises its option to acquire approximately 50.4% of the operating entities, our equity percentage ownership in the operating entities, including those that until December 2009 were majority-owned subsidiaries, will be reduced to approximately 33.6%. Since our interest in the operating entities comprises substantially all of our assets, we may be deemed to have become an 'inadvertent' investment company under the ICA, even though we are not engaged in the business of investing, reinvesting or trading in securities and we do not hold ourselves out as being engaged in those activities.

We are considering seeking an order from the SEC which will exempt us from being characterized as an investment company. We may not seek such an order or receive confirmation of an exemption from the SEC if we do

As long as we may be an investment company under the ICA but are not registered as such thereunder, we may have trouble raising money in capital markets.  Additionally, if we do not register as an investment company under the ICA and do not qualify for an exemption, we could be subject to an enforcement action by the SEC which could result in the imposition of significant fines and other penalties.

If we determine that we are an investment company under the ICA, we will register as such under the ICA.  Such registration will be an expensive proposition that will require a diversion of management’s resources.  If we become an investment company, our ability to engage in certain actions will be restricted and the value of your investment could be affected as a result.

 
12

 


 
We may not successfully integrate our recent acquisitions into the group.

We recently acquired an interest in United Joy, Upjoy, Greatgrand and their operations.  Failure to integrate those holdings into our group structure may cause us to lose out on cost savings from expected synergies, lead to additional costs, increase our liabilities or alienate our key customers.

The operating entities expansion strategy may not be proven successful.

One of the key strategies of our operating entities is to aggressively expand production capacity. They will need to engage in various forms of capacity expansion activities at corporate level, and of production activities at operational level in order to carry out those plans. Therefore, the operations are subject to all of the risks inherent in the unforeseen costs and expenses, challenges, complications and delays frequently encountered in connection with the formation of any new business, as well as those risks that are specific to the bottled water industry in general. Despite their best efforts, they may never overcome these obstacles to financial success. We cannot assure you that the efforts will be successful or result in revenue or profit, or that investors will not lose their entire investment.
 
Results of operations may fluctuate due to seasonality.

Sales of the operating entities are subject to seasonality. For example, sales of bottled water are typically higher in summer time in coastal cities while the sales remain constant through out the entire year in some inland cities. In general, we believe sales will be higher in the second and third quarters of the year when the weather is hot and dry, and lower in the fourth and first quarters of the year when the weather is cold and wet. Sales peak during the months from June to September. Sales can also fluctuate during the course of a financial year for a number of other reasons, including weather conditions and the timing of advertising and promotional campaigns. As a result of these reasons, operating results may fluctuate. In addition, the seasonality of results may be affected by other unforeseen circumstances, such as production interruptions. Due to these fluctuations, comparison of sales and operating results between the same periods within a single year, or between different periods in different financial years, are not necessarily meaningful and should not be relied on as indicators of performance.

Increases in raw material prices that may not be passed along to customers would reduce profit margins

The principal raw materials used in production, is subject to a high degree of price volatility caused by external conditions like price fluctuations of PET raw materials-the byproducts of oil, which account for a significant portion of product cost. We cannot guarantee that the price of the raw materials will be stable in the future. Price changes to raw materials may result in unexpected increases in production, packaging and distribution costs, and the operating entities may be unable to increase the prices our final products to offset these increased costs to customers for instance, Pepsi, and therefore may suffer a reduction to our profit margins. We do not currently hedge against changes in raw material prices.

The operating entities face increasing competition from both domestic and foreign companies, which may affect market share and profit margin.

The PET bottles industry in China is highly competitive, and we expect it to continue to become even more competitive. The ability of the operating entities to compete against these enterprises depends, to a significant extent, on the ability to distinguish the products of the operating entities from those of competitor by providing high quality products at reasonable prices that appeal to consumers. Some competitors may have been in business longer than the operating entities, may have substantially greater financial and other resources than the operating entities have and may be better established in their markets. Competitors in any particular market may also benefit from raw material sources or production facilities that are closer to such markets, which provide them with competitive advantages in terms of costs and proximity to consumers.

 
13

 

 
We cannot assure you that current or potential competitors will not provide products comparable or superior to those the operating entities provide or adapt more quickly than the operating entities do to evolving industry trends or changing market requirements. It is also possible that there will be significant consolidation in the PET bottle industry among competitors, alliances may develop among competitors and these alliances may rapidly acquire significant market share. Furthermore, competition may lead competitors to substantially increase their advertising expenditures and promotional activities or to engage in irrational or predatory pricing behavior. We also cannot assure you that third parties will not actively engage in activities, whether legal or illegal, designed to undermine the brand name of the operating entities and product quality or to influence consumer confidence in those products. Increased competition may result in price reductions, reduced margins and loss of market share, any of which could materially adversely affect profit margin. We cannot assure you that the operating entities will be able to compete effectively against current and future competitors.

The operating entities inability to diversify may subject us to economic fluctuations within our industry.

Our limited financial resources reduce the likelihood that we will be able to diversify our holdings into other operations. Our probable inability to diversify our holdings into activities in more than one business area will subject us to economic fluctuations within the bottled water industry and therefore increase the risks associated with our operations.

The operating entities are subject to environmental laws and regulations in the PRC. Changes in the existing laws and regulations or additional or stricter laws and regulations on environmental protection in China may result in significant capital expenditures, and we cannot assure that the operating entities will be able to comply with any such laws and regulations.

The operating entities carry on business in an industry that is subject to PRC environmental protection laws and regulations. These laws and regulations require enterprises engaged in manufacturing and construction that may cause environmental waste to adopt effective measures to control and properly dispose of waste gases, waste water, industrial waste, dust and other environmental waste materials, as well as fee payments from producers discharging waste substances. Fines may be levied against producers causing pollution. If failure to comply with such laws or regulations results in environmental pollution, the administrative department for environmental protection can levy fines. If the circumstances of the breach are serious, it is at the discretion of the central government of the PRC including all governmental subdivisions to cease or close any operation failing to comply with such laws or regulations. There can also be no assurance that operation will fail to comply with such laws or regulations. There can also be no assurance that the PRC government will not change the exiting laws or regulations or impose additional or stricter laws or regulations, compliance with which may cause us to incur significant capital expenditure, which we may be unable to pass on to our customers through higher prices for our products. In addition, we cannot assure that we will be able to comply with any such laws and regulations.
 
The operating entities depend on a few key customers, the loss of any of which could cause a significant decline in our revenues.

Coca-Cola and Pepsi accounted for80% and 15%, respectively, of the operating entities’ net revenue in 2009 and 70% and 12%, respectively, of our net revenue in 2008.  The loss of either of these customers or a significant reduction in sales to either of these customers would materially adversely affect our profitability.

Supplying PET bottles to beverage and service companies constitutes a major portion of the revenue of the operating entities. Any delays in delivery may affect sales, damage long-term relationship with clients, and even incur penalty.

Sales made to beverage and service companies account for a large portion of the total sales of the operating entities. Recently, their production capacity is at more than 95%. If we failed in deliver the goods to those companies on time, we may run into a risk of damaging our long-term relationship with the client.

 
14

 


We may not successfully manage our growth.

Our success will depend upon the expansion of the operating entities and the effective management of their growth, which will place a significant strain on our management and administrative, operational, and financial resources. To manage this growth, we must expand the facilities of the operating entities, augment their operational, financial and management systems, and hire and train additional qualified personnel. Our ability to manage these changes will be significantly reduced if we lose our controlling interest in the operating entities through GEPH’s exercise of the option to acquire an interest over 50% of the operating entities. If we are unable to manage growth of the operating entities effectively, our business would be harmed.

The operating entities may experience material disruptions to manufacturing.

The operating entities operate facilities in compliance with applicable rules and regulations and take measures to minimize the risks of disruption at their facilities.  A material disruption at one of those facilities could prevent them from meeting customer demand, reduce sales and/or negatively impact financial results.  Any of such manufacturing facilities, or any machine within an otherwise operational facility, could cease operations unexpectedly due to a number of events including:

·
unscheduled maintenance outages;
·
prolonged power failures;
·
an equipment failure;
·
disruptions in the transportation infrastructure, including roads, bridges and railroad tracks;
·
fires, floods, earthquakes or other catastrophes; and
·
other operational problems.
 
We rely on key executive officers. Their knowledge of our business and technical expertise would be difficult to replace.

We were founded in 1994 by Mr. Guy A-Tsan Chung.  Since then, Mr. Stetson Chung, the son of Guy A-Tsan Chung, and our senior management team have developed the operating entities into a large scale PET bottle production group. Stetson Chung, together with other senior management, has been key to the group’s strategy and has been fundamental to its achievements to date. The successful management of the operating entities depends, to a considerable extent, on the services of Stetson Chung and other senior management. The loss of the services of any key management employee or failure to recruit a suitable or comparable replacement could have a significant impact upon our ability to manage the operating entities and our business and future growth may be adversely affected.

The ownership of our common stock is concentrated and one stockholder is able to exercise significant influence over all matters requiring stockholder approval and over the operating entities.

Guy A-Tsan Chung currently owns 73.88% of our outstanding common stock. As a result, Guy A-Tsan Chung will be able to continue to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of mergers, acquisitions and other significant corporate transactions. In addition, this concentration of stock ownership may have the effect of delaying or preventing a change in control of our Company.

In addition to his 73.88 interest in our outstanding common stock, Mr. Guy Chung has a controlling interest in an entity that has a 15% interest in the operating entities and has a controlling interest in an entity that may acquire a 50.4% interest in the operating entities.

 
15

 

We are subject to the reporting requirements of federal securities laws, which can be expensive.

We are a public reporting company in the U.S. and, accordingly, subject to the information and reporting requirements of the Exchange Act and other federal securities laws, and the compliance obligations of the Sarbanes-Oxley Act. The costs of preparing and filing annual and quarterly reports, proxy statements and other information with the SEC and furnishing audited reports to stockholders will cause our expenses to be higher than they would be if we remained a privately-held company.

Our compliance with the Sarbanes-Oxley Act and SEC rules concerning internal controls may be time consuming, difficult and costly.

It may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by Sarbanes-Oxley.  We may need to hire additional financial reporting, internal controls and other finance staff in order to develop and implement appropriate internal controls and reporting procedures. If we are unable to comply with Sarbanes-Oxley’s internal controls requirements, we may not be able to obtain the independent accountant certifications that Sarbanes-Oxley Act requires publicly-traded companies to obtain.

There is not now, and there may not ever be, an active market for our common stock.

There currently is no market for our common stock. Further, although our common stock may be quoted on the OTC Bulletin Board, trading of our common stock has been, and may continue to be, extremely sporadic. For example, several days may pass before any shares may be traded. We cannot assure you that a more active market for the common stock will develop.
 
Because we became public by means of a “reverse merger”, we may not be able to attract the attention of major brokerage firms.

Additional risks may exist since we will become public through a “reverse merger.” Securities analysts of major brokerage firms may not provide coverage of us since there is little incentive to brokerage firms to recommend the purchase of our common stock. We cannot assure you that brokerage firms will want to conduct any secondary offerings on behalf of our company in the future.

We cannot assure you that the common stock will become liquid or that it will be listed on a securities exchange.

We would like to list our common stock on the American Stock Exchange or the NASDAQ Capital Market as soon as practicable. However, we cannot assure you that we will be able to meet the initial listing standards of either of those or of any other stock exchange, or that we will be able to maintain any such listing. Until the common stock is listed on an exchange, we expect that it would be eligible to be quoted on the OTC Bulletin Board, another over-the-counter quotation system, or in the “pink sheets.” In those venues, however, an investor may find it difficult to obtain accurate quotations as to the market value of the common stock. In addition, if we failed to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling the common stock, which may further affect its liquidity. This would also make it more difficult for us to raise additional capital.

There may be issuances of shares of preferred stock in the future.

Although we currently do not have preferred shares outstanding, the board of directors could authorize the issuance of a series of preferred stock that would grant holders preferred rights to our assets upon liquidation, the right to receive dividends before dividends would be declared to common stockholders, and the right to the redemption of such shares, possibly together with a premium, prior to the redemption of the common stock. To the extent that we do issue preferred stock, the rights of holders of common stock could be impaired thereby, including without limitation, with respect to liquidation.

 
16

 

We have never paid dividends.

We have never paid cash dividends on our common stock and do not anticipate paying any for the foreseeable future.

Our common stock is considered a “penny stock.”

The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock is less than $5.00 per share and therefore is a “penny stock.” Broker and dealers effecting transactions in “penny stock” must disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect your ability to sell shares. In addition, if our common stock is quoted on the OTC Bulletin Board as anticipated, investors may find it difficult to obtain accurate quotations of the stock, and may find few buyers to purchase such stock and few market makers to support its price.
 
Risks relating to doing business in China

Substantially all of our business assets are located in China, and substantially all of our sales is derived from China. Accordingly, our results of operations, financial position and prospects are subject to a significant degree to the economic, political and legal development in China.

The operating entities derive a substantial portion of sales from China

Substantially all sales by the operating entities are generated from China. We anticipated that sales of the operating entities’ products in China will continue to represent a substantial proportion of our total sales in the near future. Any significant decline in the condition of the PRC economy could adversely affect consumer buying power and reduce consumption of their products, among other things, which in turn would have a material adverse effect on our business and financial condition.

The ability to implement planned development depends on many factors, including the ability to receive various governmental permits.

In accordance with PRC laws and regulations, the operating entities are required to maintain various licenses and permits in order to operate at each production facility including, without limitation, hygiene permits and industrial products production permits. The operating entities are required to comply with applicable hygiene and food safety standards in relation to production processes. Failure to pass these inspections, or the loss of or suspend some or all of production activities, could disrupt their operations and adversely affect our business.

Changes in the policies of the Chinese government could have a significant impact upon the ability to sustain growth and expansion strategies.

Since 1978, the PRC government has promulgated various reforms of its economic system and government structure. These reforms have resulted in significant economic growth and social progress for China in the last two decades. Many of the reforms are unprecedented or experimental, and such reforms are expected to be modified from time to time. Although we can not predict whether changes in China’s political, economic and social conditions, laws, regulations and policies will have any materially adverse effect on the operating entities’ current or future business, results of operation or financial condition.
 
The operating entities’ ability to continue to expand business depends on a number of factors, including general economic and capital market conditions in China and credit availability from banks and other lenders in China. Recently, the PRC government has implemented various measures to control the rate of economic growth and tighten its monetary policies. Slower economic growth rate may in turn have an adverse effect on the ability to sustain the growth rate historically achieved due to the aggregate market demand for consumer goods like bottled water.

 
17

 

Fluctuation in the value of the RMB may have a material adverse effect on your investment.

The value of RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions.  The operating entities’ revenues and costs are mostly denominated in RMB.  Any significant fluctuation in value of RMB may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of our stock in U.S. dollars.  For example, an appreciation of RMB against the U.S. dollar would make any new RMB denominated investments or expenditures more costly, to the extent that the operating entities need to convert U.S. dollars into RMB for such purposes.  In addition, the depreciation of significant U.S. dollar denominated assets could result in a charge to our income statement and a reduction in the value of the assets of the operating entities.

We must comply with the Foreign Corrupt Practices Act.

We are required to comply with the United States Foreign Corrupt Practices Act, which prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business.  Foreign companies, including some of our competitors, are not subject to these prohibitions.  Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in mainland China.  If our competitors engage in these practices, they may receive preferential treatment from personnel of some companies, giving our competitors an advantage in securing business or from government officials who might give them priority in obtaining new licenses, which would put us at a disadvantage.  Although we inform our personnel that such practices are illegal, we can not assure you that our employees or other agents will not engage in such conduct for which we might be held responsible.  If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties.

Failure to comply with the State Administration of Foreign Exchange regulations relating to the establishment of offshore special purpose companies by PRC residents may adversely affect the operating entities.

On October 21, 2005, the State Administration of Foreign Exchange issued a new public notice which became effective on November 1, 2005. The notice requires PRC residents to register with the local State Administration of Foreign Exchange branch before establishing or controlling any company, referred to in the notice as a “special purpose offshore company”, outside of China for the purpose of capital financing. PRC residents who are shareholders of a special purpose offshore company established before November 1, 2005 were required to register with the local State Administration of Foreign Exchange Branch. Our beneficial owners need to comply with the relevant the State Administration of Foreign Exchange requirements in all material respects in connection with our investments and financing activities. If such beneficial owners fail to comply with the relevant the State Administration of Foreign Exchange requirements, such failure may subject the beneficial owners to fines and legal sanctions and may also adversely affect our business operations.
 
Because assets and operations of the operating entities are located outside the United States and a majority of our officers and directors are non-United States citizens living outside of the United States, investors may experience difficulties in attempting to enforce judgments based upon United States federal securities laws against us and our directors. United States laws and/or judgments might not be enforced against us in foreign jurisdictions.

All of our holdings are held through a subsidiary corporation organized and located outside of the United States, and all the assets of our subsidiary and the operating entities are located outside the United States. In addition, all of our officers and directors are foreign citizens. As a result, it may be difficult or impossible for U.S. investors to enforce judgments made by U.S. courts for civil liabilities against the operating entities or against any of our individual directors or officers. In addition, U.S. investors should not assume that courts in the countries in which our subsidiary is incorporated or where the assets of our subsidiary or the operating entities are located (i) would enforce judgments of U.S. courts obtained in actions against us or our subsidiary based upon the civil liability provisions of applicable U.S. federal and state securities laws or (ii) would enforce, in original actions, liabilities against us or our subsidiary based upon these laws.

 
18

 

The legal system in China has inherent uncertainties that may limit the legal protections available in the event of any claims or disputes with third parties.

The legal system in China is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, the central government has promulgated laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. As China’s foreign investment laws and regulations are relatively new and the legal system is still evolving, the interpretation of many laws, regulations and rules is not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit the remedies available in the event of any claims or disputes with third parties. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

The Chinese government exerts substantial influence over the manner in which we the operating entities must conduct their business activities.

The operating entities depend on their relationships with the local governments in the province in which they operate. The Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership.  Operations in China may be harmed by changes in its laws and regulations, including those relating to taxation, environmental regulations, land use rights, property and other matters.  We believe that the operating entities are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.  Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties.
 
We may have difficulty establishing adequate management, legal and financial controls in the PRC.

The PRC historically has been deficient in Western style management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards. We concluded that our internal controls over financial reporting were not effective as of the periods for our annual reports for the fiscal years December 31, 2008 and 2009.
 
Item 1B.
Unresolved Staff Comments
 
Not Applicable.
 
Item 2.
Properties
 
According to the law of PRC, the government owns all the land in the PRC. Companies or individuals are authorized to possess and use the land only through land use right granted by the PRC government for 40 to 50 years. The table below sets which land the operating entities are authorized to possess and use and for how long:

 
19

 
 
 
Entity
 
Locations and addresses
 
Areas
Authorization Until
 
GEHZ
No. 1 Road, Economic & Technological Development Zone, Jiubao Jianggan District, Hangzhou, China
163,977 square feet
March 16, 2049
 
GENJ
16 Nanjing New & High Technology Industry Development Zone, Nanjing Jiangsu Province, China
133,515 square feet
July 21, 2053
 
NJCP
6, Feng Huang Lu, Pu Kou Economic and Development Zone, Nanjing, Jiangsu Province, China
266,800 square feet
January 13, 2054
 
       
       

The following properties are leased by the Company and the operating entities:
Entity
 
Locations and addresses
 
Areas
 
Rent
 
Leasing period until
 
Owner
GEXA
 
No. 36 Development Road, New Type Industrial Garden High-tech Industrial Develop Zone, Xian, China
 
10,764 square feet
 
$1,428 per month
 
Oct. 21, 2010
 
Xian Pepsi
GEXA
 
North-east corner of Development Road and Chuanghui Road, New Type Industrial Garden High-Tech Industrial Development Zone, Xian China
 
40,545 square feet
 
$5,919 per month
 
June 1, 2011
 
Xian Yongxin Huanbao Equipment Co. Ltd.
GENJ
 
No. 8 Gaoxin Road, Nanjing New & High Technology Industry Development Zone, Nanjing Jiangsu Province, China
 
69,965 square feet
 
$7,142 per month
 
Dec. 31, 2010
 
Nanjing Kingbrand Property Management Co. Ltd.
GESY
 
8 Jia 2, No 7 Jie, Shenyang Economic and Development Zone, Shenyang, China
 
100,000 square feet
 
$918 per month
 
January 11, 2011
 
Mr. Tang Xian Liang
HFCP
 
North Guan Qi Road, He Fe Economic and Development Zone, He Fe, An Hui Province, China
 
166,60 square feet
 
$3,972 per month
 
January 13, 2011
 
Hefe Shen He Jin Shu Zhi Pin Company Limited
TZCP
 
Jiang Nan Logistic Centre, Jing Jiang Nan Lu, Lin Hai, Taizhou, China
 
233,600 square feet
 
$4,235 per month
 
February 13, 2011
 
Jiang Nan Logistic Centre
                     
 
 
20

 

Item 3.
Legal Proceedings

To the knowledge of our management, there is no litigation currently pending or contemplated against us or any of our officers or directors in their capacity as such.
 
Item 4.
Submission of Matters to a Vote of Security Holders
 
During the fourth quarter of our fiscal year ended December 31, 2009, there were no matters submitted to a vote of security holders.
 
PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our common stock has been traded on the Over the Counter Bulletin Board (OTCBB) under the symbol “GEBD,” since May 22, 2008.  The following table sets forth the high and low bid information for our common stock from the commencement of trading on May 22, 2008 through March 15, 2010 as reported by OTCBB.
 
Period
 
Low ($)
   
High ($)
 
2010
First Quarter (through March 15, 2010)
 
$
0.1
   
$
0.36
 
2009
Fourth Quarter
 
$
0.05
   
$
0.35
 
2009
Third Quarter
 
$
0.25
   
$
0.35
 
2009
Second Quarter
 
$
0.28
   
$
0.5
 
2009
First Quarter
 
$
0.25
   
$
1.01
 
2008
Fourth Quarter
 
$
1.01
   
$
3.75
 
2008
Third Quarter
 
$
1.50
   
$
3.49
 
2008
Second Quarter (Beginning May 22, 2008) (1)(2)
 
$
2.25
   
$
2.65
 
 
(1) Our common stock commenced trading on May 22, 2008.
(2) On April 16, 2008, our board of directors approved a 1-for-5 forward stock split (the “Forward Split”) of our common stock. The record date for the Forward Stock split was April 26, 2008.  Pursuant to the Forward Split, every one (1) share of our then issued and outstanding Common Stock was reclassified and divided into five (5) post-split shares of our Common Stock.  

Number of Holders of Common Stock
 
The number of holders of record of our common stock on March 15, 2010 was 67.
 
 
21

 
 
Dividends
 
There were no cash dividends or other cash distributions made by us during the fiscal year ended December 31, 2008 or the fiscal year ended December 31, 2009. The payment of dividends in the future will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition.  The payment of any dividends is within the discretion of our board of directors. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board does not anticipate declaring any dividends in the foreseeable future.
 
Recent Sales of Unregistered Securities and Use of Proceeds

In July 2009, we issued to a consultant in exchange for services rendered and services to be rendered 200,000 shares of our common stock.  We issued these shares in transactions relying on the registration exemption provided by Section 4(2) of the Securities Act of 1933.
 
Repurchases of Equity Securities
 
None.
 
Equity Compensation Plan Information
 
None.
 
Item 6.
Selected Financial Data
 
As a smaller reporting company, we are not required to include this information in our annual report on Form 10-K.

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Note regarding forward – looking statements

This annual report contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate", "expect", "intend", "plan", "will", "we believe", "the Company believes", "management believes" and similar language. The forward-looking statements are based on the current expectations of the Company and are subject to certain risks, uncertainties and assumptions, including those set forth in the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report. The actual results may differ materially from results anticipated in these forward-looking statements. We base the forward-looking statements on information currently available to us, and we assume no obligation to update them.

Investors are also advised to refer to the information in our filings with the Securities and Exchange Commission, specifically Forms 10-Q and 8-K, in which we discuss in more detail various important factors that could cause actual results to differ from expected or historic results. It is not possible to foresee or identify all such factors. As such, investors should not consider any list of such factors to be an exhaustive statement of all risks and uncertainties or potentially inaccurate assumptions.

Except as otherwise indicated by the context, references in this Form 10-K to “we”, “us”, “our”, the Registrant, our Company or the Company are to Great East Bottles & Drinks (China) Holdings, Inc., a Florida corporation and its consolidated subsidiaries. Unless the context otherwise requires, all references to (i) “BVI” are to British Virgin Islands; (ii) “PRC” and “China” are to the People’s Republic of China; (iii) “U.S. dollar”, “$” and “US$” are to United States dollars; (iv) “RMB” are to Yuan Renminbi of China; (v) “Securities Act” are to the Securities Act of 1933, as amended; and (vi) “Exchange Act” are to the Securities Exchange Act of 1934, as amended.

 
22

 


Critical Accounting Policies and Estimates

Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States ("US GAAP"). US GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expenses amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.

We believe the following is among the most critical accounting policies that impact our consolidated financial statements. We suggest that our significant accounting policies, as described in our consolidated financial statements in the Summary of Significant Accounting Policies, be read in conjunction with this Management's Discussion and Analysis of Financial Condition and Results of Operations.

We recognize revenue in accordance with ASC 605. All of the following criteria must exist in order for us to recognize revenue:

 
Persuasive evidence of an arrangement exists;
 
Delivery has occurred;
 
The seller's price to the buyer is fixed or determinable; and
 
Collectability is reasonably assured.

The majority of the Company's revenue results from sales contracts with direct customers and revenues are generated upon the shipment of goods. The Company's pricing structure is fixed and there are no rebate or discount programs. Management conducts credit background checks for new customers as a means to reduce the subjectivity of assuring collectability. Based on these factors, the Company believes that it can apply the provisions of ASC 605 with minimal subjectivity.

Recent Accounting Pronouncements

The Company does not expect that the adoption of any recent accounting pronouncements will have any material impact on its financial statements.

Results of Operations – Twelve Months Ended December 31, 2009 as compared to Twelve Months Ended December 31, 2008

The following table summarizes the results of our operations during the twelve-month period ended December 31, 2009 and 2008, and provides information regarding the dollar and percentage increase or (decrease) from the twelve-month period ended December 31, 2009 to the twelve-month period ended December 31, 2008.

 
23

 

                         
   
Twelve months ended December 31,
             
   
2009
   
2008
   
Increase/(Decrease)
   
% Increase/(Decrease)
 
Revenue
  $ 47,845,825     $ 44,478,224     $ 3,367,601       7.57 %
Cost of sales
    35,909,267       34,868,946       1,040,321       2.98 %
Gross margin
    11,936,558       9,609,278       2,327,280       24.22 %
General & administrative expenses
    4,418,799       2,937,253       1,481,546       50.44 %
Selling and distribution
    1,031,579       785,131       246,448       31.39 %
Operating income
    6,486,180       5,886,894       599,286       10.18 %
Other expense
    745,682       1,028,290       (282,608     (27.48 %)
Provision for income taxes
    1,159,279       948,949       210,330       22.16 %
Net income attributable to noncontrolling interest
    3,635,486       2,559,589       1,075,897       42.03 %
Loss from discontinued operations
 
 0
      30,094       (30,094     (100 %)
Net income attributable to Great East Bottles & Drinks (China) Holdings, Inc. and Subsidiaries
    945,733       1,319,972       (374,239 )     (28.36 %)
Net Income      4,581,219       3,879,561       701,658       18.09
 
Revenues

Sales revenue increased from $44,478,224 in the twelve months of 2008 to $47,845,825 in the same period in 2009, representing a 7.57% increase. The increase in revenue was mainly due to the increase in sales of HFCP and TZCP, which were set up in 2008.
Cost of sales and gross margin

Cost of sales increased from $34,868,946 in the twelve months of 2008 to $35,909,267 in the same period in 2009, representing a 2.98% increase. The increase was due to the increase in sales of HFCP and TZCP in the twelve months of 2009 as compared to the same period last year. We recorded a gross margin of 24.95 % in the twelve months of 2009, an increase of 24.22% as compared to 21.60 % in the same period last year. The increase was mainly due to the decrease in materials costs, which increased gross profits.

Selling and distribution expenses

Selling and distribution expenses increased by $246,448 or 31.39% from $785,131 in twelve months of 2008 to $1,031,579 in the same period 2009. The increase was mainly due to increase in selling expenses, which increased primarily as a result of an increase in freight charges.

 
24

 


General and administrative expenses

General and administrative expenses increased from $2,937,253 in the twelve months of 2008 to $4,418,799 for the same period 2009, representing an increase of $1,481,546 or 50.44%. The increase was mainly due to significant increases in staff costs and reorganization related legal and professional fees and travelling costs.
 
Net income

Net income for the twelve months ended December 31, 2009 was $4,581,219 as compared to $3,879,561 for the same period in 2008. Net income increased between these two periods because gross margin improved.


Despite the increase in net income overall, net income attributable to Great East Bottles & Drinks (China) Holdings, Inc. and Subsidiaries decreased to $945,733 for the year ended December 31, 2009 from $1,319,972 for the same period in 2008. Although our interest in the operating entities is 33.6%, the share of net income attributable to Great East Bottles & Drinks (China) Holdings, Inc. and Subsidiaries is not equal to 33.6% of net income as our administrative expenses are borne entirely by us and added to expenses prior to the calculation of net income.  The noncontrolling interests do not share the administrative expenses covered by GEBD. Net income attributable to Great East Bottles & Drinks (China) Holdings, Inc. and Subsidiaries decreased between the periods mainly because the administrative expenses paid by GEBD in 2009 in connection with the operating entities United Joy, Upjoy and Greatgrand used to be paid by GEPI.

Liquidity and Capital Resources

Cash

Our cash balance at December 31, 2009 was $1,630,739, representing an increase of $1,423,431, compared with our cash balance of $207,308 as at December 31, 2008. The material increase was mainly attributable to the decrease in purchase of machine and equipment in 2009.

Cash flow

Operating Activities

Net cash provided by operating activities during the twelve months ended December 31, 2009 amounted to $6,764,376, which is in line with net cash inflows from operating activities of $6,896,018 in the same period of 2008.

Investing Activities

Net cash used in investing activities decreased from $10,203,994 for the twelve months ended 2008 to $3,028,969 for the same period of 2009, representing a decrease of $ 7,175,025. The change was primarily due to the decrease in purchase of machine and equipment in 2009.
 
Financing Activities

Net cash used in financing activities was $2,302,077 for the twelve months of 2009, representing an increase of $4,802,950 over the net cash porvided by financing activities $2,500,873 recorded in the same period of 2008. The change was primarily due to the increase in restricted cash in 2009.

 
25

 

Working capital

Our cash and cash equivalents increased by $1,423,431 to $1,630,739 at December 31, 2009 from $ 207,308 at December 31, 2008, mainly due to a decrease in net cash outflow from investing activities during the twelve months of 2009.

We currently generate our cash flow through production and sales of PET CSD bottles, PET CSD preforms and OEM water bottles water in China. We believe that our cash flow generated from operations will be sufficient to sustain operations for at least the next 12 months. There is no identifiable expansion plan as of December 31, 2009, but from time to time, we may identify new expansion opportunities for which there will be a need for use of cash.
 
Our working capital deficit decreased to $9,317,824 at December 31, 2009 from $12,555,748 at December 31, 2008.
 
Off-Balance Sheet Arrangements

We do not have any off balance sheet arrangements

Inflation

Inflation has not had a material impact on our business and we do not expect inflation to have an impact on our business in the near future

Currency Exchange Fluctuations

All of the Company’s revenues and a majority of its expenses in the twelve months ended December 31, 2009 were denominated in Renminbi (“RMB”), the currency of China, and were converted into US dollars at the exchange rate of 6.812 to 1. In the third quarter of 2005, the Renminbi began to rise against the US dollar. We cannot assure you that RMB-to-U.S. dollar exchange rates will remain stable. A devaluation of RMB relative to the U.S. dollar would adversely affect our business, consolidated financial condition and results of operations. We do not engage in currency hedging.
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
 
As a smaller reporting company, we are not required to include this information in our annual report on Form 10-K.
 
Item 8.
Financial Statements and Supplementary Data

The response to this item is included in a separate section of this Annual Report. See “Index to Consolidated Financial Statements” on Page F-1.
 
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not Applicable.
 
Item 9A.
(T) Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported as specified in the SEC’s rules and forms and that such information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer, or CEO, and our Chief Financial Officer, or CFO, to allow timely decisions regarding required disclosure. Management, with the participation of our CEO and CFO, performed an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2009. Based on that evaluation and as described below under “Management’s Report on Internal Control Over Financial Reporting”, we have identified a material weakness in our internal control over financial reporting. As a result of this material weakness and as a result of our failure to identify this material weakness in our internal control over financial reporting as a material weakness in our disclosure controls and procedures, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were not effective as of December 31, 2009.
 

 
26

 


Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).  Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. In connection with management's assessment of our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002, we identified the following material weakness in our internal control over financial reporting as of December 31, 2009:
 
 
1.
Insufficient accounting personnel with the appropriate level of accounting knowledge, experience and training in the application of accounting principles generally accepted in the United States commensurate with financial statement reporting requirements.
 
As a result, we have concluded that our internal controls over financial reporting are not effective as of December 31, 2009.
 
Remediation of Material Weakness in Internal Control

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can only provide reasonable assurances with respect to financial statement preparation and presentation. In addition, any evaluation of effectiveness for future periods is subject to the risk that controls may become inadequate because of changes in conditions in the future.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
 
To remediate the material weakness surrounding this, we have performed and are continuing to perform, among others, the following actions:

additional training of our accounting personnel by our independent accountants of the proper format and compilation of data for US GAAP financial statements;
implementation of new software to facilitate the handling of all financial data as well as the accumulation of data in a format more user friendly to the preparation of US GAAP financial statements; and
additional coordination with our local accountants and auditors to strengthen our controls in an attempt to supplement the additional training of our employees.
 
The Company has begun to convene meetings among its top executives to address budgeting issues.  As a private company for over fourteen years, the budgeting process was never formalized.  We have recently begun to utilize an independent third party to assist in the preparation of formal budget forecasts
 
Changes in Internal Control over Financial Reporting
 
Our Certifying Officers have indicated that there were significant changes in our internal controls or other factors that could significantly affect such controls subsequent to the date of their evaluation, and there were such control actions with regard to significant deficiencies and material weaknesses.  We have performed, among others, the following actions:

 
27

 



additional training of our accounting personnel by our independent accountants of the proper format and compilation of data for US GAAP financial statements;
implementation of new software to facilitate the handling of all financial data as well as the accumulation of data in a format more user friendly to the preparation of US GAAP financial statements; and
additional coordination with our local accountants and auditors to strengthen our controls in an attempt to supplement the additional training of our employees.


 
28

 


 
Item 9B.
Other Information
 
None.
 
PART III
 
Item 10.
Directors, Executive Officers and Corporate Governance
 
Our current directors and executive officers are as follows:
 
Name
 
Age
 
Position
Stetson Chung
 
43
 
Chief Executive Officer, President, Director
Elvan Kwong
Danny Poon
 
44
38
 
Chief Operating Officer
Chief Financial Officer
 
Stetson Chung, aged 43, is the Chief Executive Officer, Acting Chief Financial Officer and Director of GEBD. Stetson assumed his current role of the company in 1996. Prior to GEBD, he worked for the IT industry and was the youngest recipient of the prestigious Governor’s Award for Industry Grand Prize (Consumer product design – video conferencing) in Hong Kong. Stetson is responsible for the overall management of the company. Stetson graduated from Dartmouth College in the United States with a degree in Economics and Computer Science.
 
Elvan Kwong, aged 44, is the Chief Operating Officer.  Elvan began his career with us in 1996 as General Manager. Elvan has over 8 years' experience in the PET bottle industry and over 15 years experience in the manufacturing industry in China. He oversees the general managers of all facilities in the country and supervises and monitors the daily operation including technical, purchasing, Sales & Marketing and HR & Administration. Mr. Kwong works closely with the CEO and CFO to manage the implementation of new product development with potential clients. He is a graduate of the Chinese University of Hong Kong with a BBA degree in business management and international business.
 
On September 14, 2009, we appointed Danny Poon as our new Chief Financial Officer.  Mr. Poon graduated from Simon Fraser University in Canada with a BBA degree in Accounting. He is a CPA and a member of the American Institute of Certified Public Accountants.  He speaks fluent English, Mandarin, and Cantonese. Prior to joining Great East Bottles & Drinks, Mr. Poon spent 5 years as financial controller for Meng Ding Tea Co., Ltd. a Sino-Japanese joint venture in Sichuan province that specializes in seasonal green tea processing. During this period, he was also assigned to a number of external projects in a wide range of professional and managerial activities, such as set up of Sino-foreign joint ventures, consolidation accounting, and financial restructuring for companies in the food and beverages, textiles, and semi-conductor manufacturing industries at places like Dongguan, Chongqing, Heyuan, and Hong Kong. From 1997 to 2003, he was with PricewaterhouseCoopers at Hong Kong and Guangzhou. His main responsibilities included MNC audits, IPOs and special assignments such as due diligence projects. His client portfolio included listed companies at the US NYSE, China A and B shares, London Stock Exchange, Singapore Main Board, and the HK Stock Exchange, in the food, machinery, pharmaceuticals, Insurance, Software, and Telecom industries.
 
CORPORATE GOVERANCE
 
Number and Term of Directors
 
The Company’s sole director is Stetson Chung. Mr. Chung shall serve as a director until his successor has been duly elected and is qualified.

 
29

 


Audit Committee

In October 2009, our board of directors established an audit committee . The audit committee consists of two independent members: Mr. Ivan Lee, a financial expert, and Ms. Hu Hui Lin.  The scope of the audit committee includes:

 
oversight over independent auditors (including engaging the auditors, receiving reports from auditors, resolving auditor/management disputes, reviewing the quality of the auditing firm, compensating the auditors, approving non-audit services, and replacing the auditors, when necessary), and acting as a channel for communication between the independent auditors and the full board;
 
oversight of financial reporting, including recommending to the full board that financial information be included in the annual report filed with the SEC;
 
oversight over the certifications attached to this annual report;
 
oversight over internal control over financial reporting and disclosure controls and procedures;
 
oversight over the internal audit function;
 
preparation of the audit committee report, for inclusion in the company's annual proxy statement;
 
adoption and maintenance an audit committee charter; and
 
maintenance of “whistleblower” systems.
 
Other Committees

We intend to establish compensation, nominating committees of the Board of Directors within the twelve months after the year end of 2009.
 
Family Relationships

Stetson Chung, our sole officer and director is the son of Guy A-Tsan Chung, our 73.88% shareholder and an affiliate of the entity that has a 15% interest in the operating entities and in an entity that has an option to acquire a 50.4% interest in the operating entities for $1.

Code of Ethics

We have adopted a Code of Business Conduct and Ethics (the “Code”) that applies to our directors and employees, including our principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions in accordance with applicable federal securities laws. The Code was filed as Exhibit 14 to our Registration Statement on Form SB-2 (Registration No. 333-139008).
 
Changes in Director Nomination Process for Stockholders
 
None.
 

 
30

 


Beneficial Ownership Reporting Compliance
 
Section 16(a) of the Securities Exchange Act requires our directors, executive officer and persons who own more than 10% of our common stock to file reports of ownership and changes in ownership of our common stock with the Securities and Exchange Commission. Our directors, executive officer and persons who own more than 10% of our common stock are required by Securities and Exchange Commission regulations to furnish to us copies of all Section 16(a) forms they file. To our knowledge, based solely upon a review of Forms 3, 4 and 5 and amendments to these forms furnished to the Company, none of our directors, executive officer or persons who own more than 10% of our common stock filed Forms 3, 4 and 5 on a timely basis during the year ended December 31, 2009.
 
Item 11.
Executive Compensation

The following table sets forth all cash compensation paid or to be paid by the Company, as well as certain other compensation paid or accrued, during each of the Company’s last two fiscal years to each of the following named executive officers (the “Named Executive Officers”):
 
SUMMARY COMPENSATION TABLE
Name &
Principal
Position
Year
 
Salary
($)
   
Bonus
($)
   
Stock
Awards
($)
   
Option
Awards
($)
   
Non-Equity
Incentive Plan
Compensation
($)
   
Change in
Pension value
and
Nonqualified
deferred
compensation
earnings
($)
   
All other
Compensation
($)
   
Total
($)
 
Stetson Chung
2009
   
0
     
0
     
0
     
0
     
0
     
0
     
0
     
0
 
CEO, President
2008
   
0(1)
     
0
     
0
     
0
     
0
     
0
     
0
     
0
 
 
Danny Poon
2009
   
0
     
0
     
0
     
0
     
0
     
0
     
0
     
0
 
CFO
                                                                 
 
(1)  Although no compensation was paid to our officers in 2008, in 2008 Stetson Chung accrued compensation in the amount of $90,000. Mr. Chung waived such compensation and it has been accounted for as paid in capital.

Employment Agreements

None.

Equity Compensation Plans
 
We do not maintain any equity compensation plans and we have not granted any stock options or stock appreciation rights or any awards under long-term incentive plans.

Pension Benefits

We do not sponsor any qualified or non-qualified defined benefit plans.

 
31

 


Nonqualified Deferred Compensation

We do not maintain any non-qualified defined contribution or deferred compensation plans.

DIRECTOR COMPENSATION

The following table summarizes compensation that our directors earned during 2009 for services as members of our Board.

Name
 
Fees Earned or
Paid in Cash
 ($)
   
Options
Awards
 ($)
   
All Other
Compensation
($)
   
Total
 ($)
 
Stetson Chung
   
0
     
0
     
0
     
0
 
 
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The following table sets forth, as of March 15, 2010, certain information regarding beneficial ownership of our common stock by each person who is known by us to beneficially own more than 5% of our common stock. The table also identifies the stock ownership of each of our directors, our officer, and all directors and our officer as a group. Except as otherwise indicated, the stockholders listed in the table have sole voting and investment powers with respect to the shares indicated.
 
Shares of common stock which an individual or group has a right to acquire within 60 days pursuant to the exercise or conversion of options, warrants or other similar convertible or derivative securities are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table.

Name and Address of Beneficial Owner
 
Amount and Nature of Beneficial Ownership (1)
   
Percentage of Outstanding Common Stock
 
Guy A-Tsan Chung
   
29,700,000
     
74
%
Stetson Chung, Director (2)
   
0
     
0
 
Mary and Joseph Flad
   
4,600,000
     
11.4
All directors and executive officers as a group
   
0
     
0
 
______________
(1)
Based on 40,200,000 outstanding shares of common stock on March 15, 2010.
 
(2)
The business address for each of our sole director and officer is c/o Great East Bottles & Drinks (China) Holdings, Inc, 203 Hankow Center, 5-15 Hankow Road, Tsimshatsui, Kowloon, Hong Kong
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence

There has not been since January 1, 2009 nor is there currently pending any transaction or series of similar transactions to which we were or are to be a party in which the amount involved exceeded $120,000 and in which any director, executive officer, holder of more than 5% of our Common Stock or any member of the immediate family of any of these persons had or will have a direct or indirect material interest other than the following.:

 
32

 

Acquisitions/Dispositions
 
We entered into a series of transactions to acquire several business owned by Mr. Guy Chung, our majority shareholder who beneficially owns approximately 74% of our shares of common stock, through his affiliate GEPH.  As a result of these transactions, our wholly-owned subsidiary HGEP acquired 99.99% of the outstanding share capital of United Joy, Upjoy and Greatgrand.
 
In exchange for GEPH’s sale of Upjoy, United Joy and Greatgrand, GEBD BVI entered into a sale and purchase agreement with Top Sharp, by which Top Sharp acquired the entire issued share capital of Best Key Investment Limited (“Best Key”) for a consideration of HK$1 and Best Key’s only asset was its 15% ownership of HGEP. As a result of the sale of Best Key, our beneficial ownership interest in our all of our operating entities, including GEPNJ, GEPXA, HGEP, GEPL, Upjoy, United Joy and Greatgrand, decreased from at least 99.99% to 84%.
 
In addition to the sale of Best Key, GEPI granted GEPH a three-year share option to subscribe for 9,638,769 ordinary shares of GEPI, an amount equal to 60% of GEPI’s enlarged share capital.  GEPH may exercise this option for US$1 until December 31, 2012.  If GEPH were to exercise this option, our beneficial ownership interest in our all of our operating entities, including GEPNJ, GEPXA, HGEP, GEPL, Upjoy, United Joy and Greatgrand would decrease from 84% to 33.6%.
 
As the acquisitions and dispositions were with Mr. Guy Chung, a related party, we hired Huayan Assets Appraisal Co., Ltd., an independent evaluator, to calculate the enterprise value of the subsidiaries of which we would dispose a substantial ownership interest in if GEPH exercised its option to acquire 60% of GEPI, namely HGEP, GEPNJ and GEPXA, and of the subsidiaries that we acquired, namely United Joy, Upjoy and Greatgrand. Based on their appraisal, we calculate that the consideration we received for the dispositions exceeds the consideration we paid for the acquisitions.
 
Consideration paid for acquisitions
 
We estimate the cost of the sale of Best Key and the 60% interest in GEPI, if the option is exercised, at approximately 64.2 million Renminbi (or US$9.4 million).  Huayan Assets Appraisal estimated that the value of HGEP and the subsidiaries that we restructured under HEGP, including GEPNJ and GEPXA, amounted to 98.3 million Renminbi (approximately US$14.4 million).  By disposing of Best Key, we disposed of our interest in 15% of that amount, or 14.7 million Renminbi (approximately US$2 million).
 
Additionally, if GEPH exercised its option to acquire 60% of GEPI, our interest in that amount would be further reduced by 50.4%, which represents 60% of GEPI’s 84% interest in HGEP, GEPNJ and GEPXA.  50.4% of 98.3 million Renminbi amounts to 49.5 million Renminbi (approximately US$7.3 million).
 
 Consideration received for dispositions
 
We estimate the gain to us of the acquisition of United Joy, Upjoy and Greatgrand, assuming GEPH exercises its option to acquire a 60% interest in GEPI, is approximately 67.7 million Renminbi (or US$9.9 million). Huayan Assets Appraisal estimated that the value of the subsidiaries that HGEP acquired, including United Joy, Upjoy and Greatgrand, amounted to 201.6 million Renminbi (or approximately US$29.4 million).  Our interest in those subsidiaries is through our interest in GEPI, which has an 84% interest in HGEP.  If GEPH exercised its option to acquire 60% of GEPI, our portion of the value of those subsidiaries would be approximately 33.6%.  33.6% of 201.6 million Renminbi is 67.7 million Renminbi (or approximately US$9.9 million).
 

 
33

 
 
All intercompany gains and losses discussed in this subsection have been eliminated in the consolidation.  All of the above currency translations were made at an exchange rate of US$1:RMB0.146.
 
Advances from GEPH

In 2009, GEPH provided us with advances of capital for working capital use. All amounts advanced to us by GEPH since January 1, 2009 were interest free and had no fixed terms of repayment.  No interest has been due or paid on the advances since January 1, 2009. As of December 31, 2009, advances from GEPH totaled $16,431,222, and as of February 28, 2010, they totaled $16,522,234. The largest aggregate amount of advances outstanding during 2009 was $16,431,222.  We did not repay any advances in 2009.

Advances to GEPH

In 2009, we provided GEPH with advances of capital. We made these advances to GEPH and its subsidiaries, including United Joy, Upjoy and Greatgrand, prior to our acquisition of an interest in those entities on December 31, 2009. All amounts that we advanced to GEPH in 2009 bore interest at 9% per annum and had no fixed terms of repayment.  GEPH paid us $39,985 on these advances in 2009.  As of December 31, 2009 and February 28, 2010, we had no advances to GEPH outstanding. The largest aggregate amount of advances outstanding during 2009 was $450,188.

Sales to GEPH

During our fiscal year ended December 31, 2009, the operating entities sold PET CSD bottles, OEM water bottles and other materials to GEPH in an aggregate amount of $1,391,949.  There were no supply agreements or other contracts governing theses sales.  We believe that these sales were made at the prevailing sales price in the market and were on terms similar to other purchasers of these items from the operating entities.

Purchases from GEPH

During our fiscal year ended December 31, 2009, the operating entities purchased PET CSD bottles, OEM water bottles and other materials from GEPH in an aggregate amount of $402,466.  There were no supply agreements or other contracts governing these purchases.  We believe that these sales were made at the prevailing price in the market and were on terms similar to other sellers of these items to the operating entities.

Loan Guarantees

The operating entities have entered into arrangements with several banks to borrow funds on a short term basis to purchase raw materials or finance the business operations of the Company. Bank loans as of December 31, 2009 included Hong Kong Dollar (“HKD”) and RMB bank loans.  As of December 31, 2009, these loans totaled $11,102,725 with interest rates ranging from 4.9% to 10.8% and terms ranging from early 2010 to early 2015.  Each of these loans have been guaranteed by several related parties, including
 
our director, Mr. Stetson Chung,
 
our directors wife, Ms. Christine Wong,
 
our majority shareholder, Mr. Guy Chung, and
●     several companies controlled by Mr. Guy Chung, including GEPH, Great East Packaging (Hong Kong) Limited, Janwise Limited and Shanghai Great East Packaging Co. Ltd.
 
Director Independence
 
The Company’s sole director is not an “independent director” within the meaning of Rule 121(A) of the American Stock Exchange Company Guide and Rule 10A-3 promulgated under the Securities Act of 1934, as amended.

 
34

 

 
Item 14.
Principal Accountant Fees and Services

On January 14, 2008, the Company engaged Madsen & Associates CPA Inc. (“Madsen”) as its new principal independent accountants. The decision to engage Madsen as the Company’s principal independent accountants was approved by the Company’s Board of Directors on April 18, 2008.  During the Company’s fiscal years ended December 31, 2007 and 2006 and through January 14, 2008, the Company did not consult with Madsen on (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that may be rendered on the Company’s financial statements, and Madsen did not provide either a written report or oral advice to the Company that was an important factor considered by the Company in reaching a decision as to any accounting, auditing, or financial reporting issue; or (ii) the subject of any disagreement, as defined in Item 304 (a)(1)(iv) of Regulation S-K and the related instructions, or a reportable event within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.
 
The Company paid the following fees to its auditors during its fiscal years ended December 31, 2009 and 2008:

Fee Category
 
2009
   
2008
 
Audit fees – Madsen
 
$
52,600
   
$
42,370
 
 
 
 
 
   
 
 
 
Audit Fees
 
Audit fees consist of fees for professional services rendered for the audit of the Company’s financial statements and review of the final financial statements included in our annual reports on Form 10-K.
 
Audit Related Fees
 
We did not incur any audit-related fees with Madsen for the years ended December 31, 2009 and 2008.
 
Tax Fees
 
We did not incur any tax fees with Madsen for the years ended December 31, 2009 and 2008.
 
 
35

 

All Other Fees
 
We did not incur any fees with Madsen for other professional services rendered for the years ended December 31, 2009 or 2008.
 
Pre-Approval of Services
 
The Board of Director’s policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. The Board may also pre-approve particular services on a case-by-case basis.
 
Item 15.
Exhibits, Financial Statement Schedules
 
(a)(1) Financial Statements
 
An index to Consolidated Financial Statements appears on page F-1.
 
(b) Exhibits
 
The following Exhibits are filed as part of this report:
 
Exhibit No.
 
Description
10.1
 
Restructuring Agreement, dated December 30, 2009, between Great East Bottles & Drinks (BVI) Inc. and Great East Packaging Holdings Limited (English translation)
10.2
 
Subscription Agreement, dated December 30, 2009, between Upjoy Holdings Limited and Great East (Overseas) Packaging Limited (English translation)
10.3
 
Subscription Agreement, dated December 30, 2009, between United Joy International Limited and Great East (Overseas) Packaging Limited (English translation)
10.4
 
Subscription Agreement, dated December 30, 2009, between Greatgrand Global Limited and Great East (Overseas) Packaging Limited (English translation)
10.5
 
Agreement, dated December 30, 2009, among Great East Bottles & Drinks (BVI) Inc., Top Sharp Investments Limited and Best Key Investment Limited (English translation)
10.6
 
Option Agreement, dated December 30, 2009, between Great East Packaging International Limited and Great East Packaging Holdings Limited (English translation)
31.1
 
Certification of the Principal Executive Officer pursuant to Rule 13-14(a) of the Securities Exchange of 1934
31.2
 
Certification of the Acting Principal Accounting Officer and Principal Financial Officer pursuant to Rule 13-14(a) of the Securities Exchange of 1934
32.1
 
Certificate of the Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 
Certificate of the Acting Principal Accounting Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1
 
Audit Committee Charter
 

 
36

 
 
SIGNATURES
 
In accordance with the requirements of the Securities and Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
GREAT EAST BOTTLES & DRINKS (CHINA) HOLDINGS, INC
     
March 23, 2010
By:
/s/ Stetson Chung
   
Name:
Stetson Chung
   
Title:
Chief Executive Officer, President, Director
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 
March 23, 2010
By:
/s/ Stetson Chung
   
Name:
Stetson Chung
   
Title:
Chief Executive Officer, President and Director
       
 
March 23, 2010
By:
/s/ Danny Poon
   
Name:
Danny Poon
   
Title:
Chief Financial Officer (Acting Principal Accounting Officer)
       

 
37

 

To the Board of Directors and Shareholders of
Great East Bottles and Drinks (China) Holdings, Inc. and subsidiaries
Hong Kong
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have audited the accompanying consolidated balance sheets of Great East Bottles and Drinks (China) Holdings, Inc. and subsidiaries (the Company) as of December 31, 2009 and 2008 and the consolidated statements of income, stockholders’ equity and comprehensive income and cash flows for each of the years in the two year period ended December 31, 2009.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (“PCAOB”).  Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used, significant estimates made by management and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, these consolidated financial statements referred to above present fairly, in all material aspects, the consolidated financial position of the Company as of December 31, 2009 and 2008, and the consolidated results of its operations and cash flows for each of the years in the two year period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.
 
 
s/Madsen & Associates CPA’s, Inc.
Madsen & Associates CPA’s, Inc.
March 23, 2010
Salt Lake City, Utah

 
 

 
GREAT EAST BOTTLES & DRINKS (CHINA) HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and 2008

   
2009
   
2008
 
ASSETS
           
CURRENT ASSETS
           
Cash and cash equivalents
  $ 1,630,739     $ 207,308  
Restricted cash
    9,771,965       5,678,732  
Accounts receivable
    5,620,841       3,987,739  
Inventories, net
    4,348,410       4,474,969  
Prepaid expenses and other receivables
    2,074,952       2,336,141  
Total current assets
    23,446,907       16,684,889  
                 
PROPERTY, PLANT & EQUIPMENT, NET
    33,661,061       33,909,117  
                 
LAND USE RIGHTS, NET
    614,116       636,680  
                 
TOTAL ASSETS
  $ 57,722,084     $ 51,230,686  
                 

LIABILITIES AND EQUITY
           
LIABILITIES
           
CURRENT LIABILITIES
           
Accounts payable
  $ 4,632,352     $ 4,653,505  
Notes payable
    1,725,727       2,303,646  
Accrued expenses and other payables
    1,470,897       1,223,879  
Amount due to a related party
    16,431,222       15,493,979  
Taxes payable
    537,520       735,758  
Current maturities of long-term bank loans
    7,967,013       4,829,870  
Total current liabilities
    32,764,731       29,240,637  
                 
LONG-TERM BANK LOAN
    3,135,712       4,791,966  
                 
TOTAL LIABILITIES
    35,900,443       34,032,603  
                 
SHAREHOLDERS’ EQUITY
               
Common stock, Par value $0.01; 375,000,000 shares authorized; $0.01 par value; 40,200,000 and 40,000,000 shares issued and outstanding in 2009 and 2008, respectively
    402,000       400,000  
Additional paid in capital
    3,335,106       3,237,106  
PRC statutory reserves
    919,146       830,672  
Retained earnings/(accumulated deficit)
    658,399       (198,860 )
Accumulated other comprehensive income
    1,557,163       1,613,808  
Total shareholders’ equity attributable to Great East Bottles & Drink (China) Holdings, Inc. and subsidiaries
    6,871,814       5,882,726  
                 
Noncontrolling interests
    14,949,827       11,315,357  
                 
TOTALSHAREHOLDERS’ EQUITY
    21,821,641       17,198,083  
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 57,722,084     $ 51,230,686  
                 

See accompanying notes to consolidated financial statements

 
F-1

 

GREAT EAST BOTTLES & DRINKS (CHINA) HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2009 and 2008

   
2009
   
2008
 
             
REVENUE
  $ 47,845,825     $ 44,478,224  
                 
COST OF SALES
    35,909,267       34,868,946  
                 
GROSS MARGIN
    11,936,558       9,609,278  
                 
EXPENSES
               
Selling and distribution
    1,031,579       785,131  
General and administrative
    4,418,799       2,937,253  
TOTAL OPERATING EXPENSE
    5,450,378       3,722,384  
                 
OPERATING INCOME
    6,486,180       5,886,894  
                 
OTHER INCOME/(EXPENSE)
               
Other income
    450,924       431,992  
Interest income
    167,043       347,237  
Interest expense
    (755,567 )     (867,395 )
Other expenses
    (608,082 )     (940,124 )
TOTAL OTHER EXPENSE
    (745,682 )     (1,028,290 )
                 
INCOME BEFORE PROVISION FOR INCOME TAXES
    5,740,498       4,858,604  
                 
PROVISION FOR INCOME TAXES
    1,159,279       948,949  
                 
INCOME FROM CONTINUING OPERATIONS
    4,581,219       3,909,655  
                 
DISCONTINUED OPERATIONS
               
Income from discontinued operations
    -       1,311  
Loss on disposal of subsidiary
    -       (31,405 )
LOSS FROM DISCONTINUED OPERATIONS
    -       (30,094 )
                 
NET INCOME
  $ 4,581,219     $ 3,879,561  
                 
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
    3,635,486       2,559,589  
                 
NET INCOME ATTRIBUTABLE TO GREAT EAST BOTTLES & DRINKS (CHINA) HOLDINGS, INC. AND SUBSIDIARIES
    945,733       1,319,972  
                 
OTHER COMPREHENSIVE (LOSS)/INCOME ATTRIBUTABLE TO GREAT EAST BOTTLES & DRINKS (CHINA) HOLDINGS, INC. AND SUBSIDIARIES
               
   (Loss)/gain on foreign exchange translation
    (56,645 )     701,569  
                 
COMPREHENSIVE INCOME ATTRIBUTABLE TO GREAT EAST BOTTLES & DRINKS (CHINA) HOLDINGS, INC. AND SUBSIDIARIES
  $ 889,088     $ 2,021,541  
                 
EARNINGS PER SHARE, BASIC AND DILUTED
  $ 0.02     $ 0.03  
                 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED
    40,083,836       40,000,000  

See accompanying notes to consolidated financial statements



 
F-2

 

GREAT EAST BOTTLES & DRINKS (CHINA) HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY
AND COMPREHENSIVE INCOME
Years Ended December 31, 2009 and 2008

                                                       
   
Common stock
                                           
   
Number of shares
   
Amount
   
Additional paid incapital
   
Capital reserves
   
(Accumulated deficit)/ retained earnings
   
Accumulated other comprehensive income
   
Shareholders’ equity attributable to Great East Bottles & Drinks (China) Holdings, Inc. and subsidiaries
   
Non-controlling interest
   
Total equity
 
                                                       
Balance at January 1, 2008
    8,000,000     $ 80,000     $ 3,467,106     $ 732,160     $ (1,418,962)     $ 912,239     $ 3,772,543     $ 7,353,010     $ 11,125,553  
                                                                         
Net income for the year
    -       -       -       -       1,319,972       -       1,319,972       2,559,589       3,879,561  
                                                                         
1 for 5 forward split
    32,000,000       320,000       (320,000)       -       -       -       -       -       -  
                                                                         
Non-cash capital contribution by an officer
    -       -       90,000       -       -       -       90,000       -       90,000  
                                                                         
Utilization during the year
    -       -       -       (1,358)       -       -       (1,358)       -       (1,358)  
                                                                         
Transfer from retained earnings to PRC statutory reserves
    -       -       -       99,870       (99,870)       -       -       -       -  
                                                                         
Foreign currency translation adjustments
    -       -       -       -       -       701,569       701,569       1,402,758       2,104,327  
                                                                         
Balance at December 31, 2008 and January 1, 2009
    40,000,000     $ 400,000     $ 3,237,106     $ 830,672     $ (198,860)     $ 1,613,808     $ 5,882,726     $ 11,315,357     $ 17,198,083  
 
                                                                         
Net income for the year
    -       -       -       -       945,733       -       945,733       3,635,486       4,581,219  
                                                                         
Stock issued for services at $.50 per share
    200,000       2,000       98,000       -       -       -       100,000       -       100,000  
                                                                         
Transfer from retained earnings to PRC statutory reserves
    -       -       -       88,474       (88,474)       -       -       -       -  
                                                                         
Foreign currency translation adjustments
    -       -       -       -       -       (56,645)       (56,645)       (1,016)       (57,661)  
                                                                         
Balance at December 31, 2009
    40,200,000     $ 402,000     $ 3,335,106     $ 919,146     $ 658,399     $ 1,557,163     $ 6,871,814     $ 14,949,827     $ 21,821,641  
 

See accompanying notes to consolidated financial statements
 
 

 
F-3

 

GREAT EAST BOTTLES & DRINKS (CHINA) HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2009 and 2008

   
2009
   
2008
 
             
Cash flows from operating activities
           
Net income
  $ 4,581,219     $ 3,879,561  
Less:  Net income attributable to noncontrolling interests
    3,635,486       2,559,589  
                 
Net income attributable to Great East Bottles & Drinks (China) Holdings, Inc. and Subsidiaries
    945,733       1,319,972  
Adjustments to reconcile net income to net cash flows provided by operating activities for:
               
Depreciation
    3,285,260       2,621,025  
Amortization of land use right
    15,624       15,434  
Stock issued for services
    100,000       -  
Net income attributable to noncontrolling interest
    3,635,486       2,559,589  
Non cash contribution by an officer
    -       90,000  
Changes in operating assets and liabilities:
               
Increase in accounts receivable
    (1,633,102 )     (198,404 )
Decrease in inventories
    126,559       79,209  
Decrease/(increase) in prepaid expenses and other receivables
    261,189       (1,539,365 )
Decrease in other assets
    -       275  
(Decrease)/increase in accounts payable
    (21,153 )     1,588,517  
Decrease in taxes payable
    (198,238 )     (29,075 )
Increase in accrued expenses and other payables
    247,018       388,839  
                 
Net cash provided by operating activities
    6,764,376       6,896,016  
                 
Cash flows from investing activities
               
Purchase of plant and equipment
    (3,028,969 )     (10,203,994 )
                 
Net cash used in investing activities
    (3,028,969 )     (10,203,994 )
                 
Cash flows from financing activities
               
Proceeds from bank loans
    6,293,627       7,103,993  
Repayment of bank loans
    (4,861,795 )     (7,444,293 )
(Decrease)/increase in notes payable
    (577,919 )     1,217,690  
Increase/(decrease) in amount due to a related party
    937,243       (91,169 )
Decrease in capital reserve
    -       (1,358 )
(Decrease)/increase in restricted cash
    (4,093,233 )     1,716,010  
                 
Net cash (used in)/provided by financing activities
    (2,302,077 )     2,500,873  
                 
Net increase/(decrease) in cash and cash equivalents
    1,433,330       (807,105 )
                 
Effect of foreign exchange rate changes
    (9,899 )     794,815  
                 
Cash and cash equivalents at beginning of year
    207,308       219,598  
                 
Cash and cash equivalents at end of year
  $ 1,630,739     $ 207,308  
                 
Supplemental disclosure of cash flows information:
               
Cash paid for interest
  $ 755,567     $ 867,395  
Cash paid for income taxes
  $ 1,206,884     $ 1,065,083  
                 
Non cash financing activities:
               
Stock issued for services
  $ 100,000     $ -  
Officer compensation contributed to additional paid-in capital
  $ -     $ 90,000  
                 

See accompanying notes to consolidated financial statements