10-Q 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended MARCH 31, 2003 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to ____________ Commission File Number: 33-26617A CBR BREWING COMPANY, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) British Virgin Islands -- ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 23/F., Hang Seng Causeway Bay Building 28 Yee Wo Street, Causeway Bay, Hong Kong ------------------------------------------------------------ (Address of principal executive offices, including Zip Code) Registrant's telephone number, including area code: 852-2866-2301 Not applicable -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). [ ] As of March 31, 2003, the Company had 5,010,013 shares of Class A Common Stock and 3,000,000 shares of Class B Common Stock issued and outstanding. Documents incorporated by reference: None 1 CBR BREWING COMPANY, INC. AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - March 31, 2003 (Unaudited) and December 31, 2002 Consolidated Statements of Operations (Unaudited) - Three Months Ended March 31, 2003 and 2002 Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended March 31, 2003 and 2002 Notes to Consolidated Financial Statements (Unaudited) - Three Months Ended March 31, 2003 and 2002 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk Item 4. Controls and Procedures PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K SIGNATURES CERTIFICATIONS 2

CBR BREWING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ~~September~~March 3031, ~~2002~~2003 December 31, ~~2001~~2002 ------------------------ -----------------~~--------~~ RMB USD RMB ~~USD~~ ----------- -~~-----------~~ ------------ ----------- (Unaudited) (Unaudited) ASSETS Current assets: Cash ~~111,825,200~~and ~~13,472,916~~cash equivalents 71,~~366~~321,~~480~~312 8,~~598~~592,~~371~~929 117,075,072 Accounts receivable, net (Note 3) 6174,~~468~~991,~~391~~866 79,~~405~~035,~~830~~165 59114,~~978~~641,~~050~~020 ~~7,226,271~~ Bills receivable 171,~~499~~605,~~300~~000 2193,~~108,349~~373 4500,~~465,~~000 ~~537,952~~ Inventories (Note 4) 5949,~~859~~752,~~706~~546 75,~~212~~994,~~013~~283 5354,~~313~~180,~~982~~017 ~~6,423,371~~ Amounts due from related companies (Note 5) 151,~~071~~605,~~055~~225 ~~129~~6,~~043~~217,497 14,~~069~~647,~~599~~971 ~~128,867~~ Income taxes receivable 1,927,759 232,260 -1,927,759 - Prepayments and deposits 1514,~~309~~672,~~446~~542 1,~~844~~767,~~512~~777 149,~~827~~212,~~385~~093 ~~1,786,432~~ Other receivables 3318,~~679~~120,~~231~~287 42,~~057~~183,~~739~~167 11,~~460~~109,~~511~~615 ~~1,380,784~~ ----------- ------------ ------------ ~~-----------~~ Total current assets ~~302~~283,~~640~~996,~~088~~537 3634,~~462~~216,~~662~~451 ~~216~~313,~~481~~293,~~007~~547 26Loan receivable (Note 5) 7,~~082~~086,~~048~~358 853,778 - Interest in an associated company (Note 6) ~~185~~119,~~027~~692,~~990~~586 2214,~~292~~420,~~529~~793 ~~259~~213,~~164~~760,~~383~~312 ~~31,224,624~~ Property, plant and equipment, net (Note 7) ~~136~~726,~~489,597~~331 1687,~~444,530~~510 ~~217~~64,~~668~~186,~~104~~910 ~~26,225,073~~ ----------- ------------ ------------ ~~-----------~~ Total assets ~~624~~411,~~157~~501,~~675~~812 7549,~~199~~578,~~721~~532 ~~693~~591,~~313~~240,~~494~~769 ~~83,531,745~~ =========== ============ ===========~~= =========== (continued)~~

(continued) 3

CBR BREWING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) ~~September~~March 3031, ~~2002~~2003 December 31, ~~2001~~2002 -------------------------- -----------------~~-------~~ RMB USD RMB ~~USD~~ ------------ ------------ ----------- ~~-----------~~ (Unaudited) (Unaudited) LIABILITIES AND SHAREHOLDERS' ~~EQUITY~~DEFICIENCY Current liabilities: Bank borrowings ~~116,032,146~~(Note 138) 137,~~979~~766,~~777~~319 ~~109~~16,~~835~~598,~~524~~352 13130,~~233~~818,~~196~~717 Accounts payable 1517,~~617~~408,~~937~~324 12,~~881~~097,~~679~~388 2118,~~699~~182,~~421~~253 2Accrued advertising expenses 57,~~614~~011,~~388~~256 6,868,826 55,478,622 Accrued other liabilities ~~187~~100,~~075~~495,~~785~~760 2212,~~539~~107,~~251~~923 ~~144~~102,~~429~~288,~~286~~435 ~~17,401,119~~ Amounts due to related companies (Note 5) ~~534~~1,~~064~~560 ~~64,345~~188 21,~~435,577~~560 ~~293,443~~ Amount due to an associated company (Note 89) ~~260~~285,~~933~~271,~~300~~416 3134,~~437~~370,~~747~~050 ~~210~~298,~~805~~379,~~218~~194 ~~25,398,219~~ Sales taxes payable 1527,~~506~~492,~~693~~559 13,~~868~~312,~~276~~357 2327,~~160~~693,~~813~~120 ~~2,790,459~~ ------------ ------------ ----------- -~~----------~~ Total current liabilities ~~595~~625,~~699~~447,~~925~~194 7175,~~771~~355,~~075~~084 ~~512~~632,~~365~~841,~~839~~901 ~~61,730,824~~ ------------ ------------ ----------- -~~----------~~ Long-term liabilities: Bank borrowings 11155,~~533,872~~260 118,~~389,623~~706 12155,~~400,211~~260 ~~1,494,001 Advance from a related company (Note 9) 11,000,000 1,325,301~~ - - ---------~~---~~ ------------ ----------- -~~----------~~ Total long-term liabilities 22155,~~533,872~~260 218,~~714,924~~706 12155,~~400,211~~260 ~~1,494,001~~ ------------ ------------ ----------- -~~----------~~ Minority interests (Note 1011) - - - - ------------ ------------ ----------- -~~----------~~ Contingencies (Note 12) Common stock: -Class A, with no par value (2002: US$0.0001 par value), 90,000,000 shares authorized, 5,010,013 shares outstanding ~~4,273~~- ~~515~~- 4,273 ~~515~~ -Class B, with no par value (2002: US$0.0001 par value), 10,000,000 shares authorized, 3,000,000 shares outstanding ~~2,559~~- ~~308~~- 2,559 ~~308~~ Additional paid-in capital 107,~~361~~368,~~845~~677 12,935,~~162~~985 107,361,845 ~~12,935,162~~ General reserve and enterprise development funds 18,735,220 2,257,255 1618,~~108~~735,~~349~~220 ~~1,940,765~~Accumulated ~~Retained earnings (~~deficit) (~~120~~340,~~180~~204,~~019~~539) (1440,~~479~~988,~~518~~498) 45(167,~~070~~860,~~418~~289) ~~5,430,170~~ ------------ ------------ ----------- -~~----------~~ Total shareholders' ~~equity~~deficiency 5(214,~~923~~100,~~878~~642) ~~713~~(25,~~722 168~~795,~~547,444~~258) 20(41,~~306~~756,~~920~~392) ------------ ------------ ----------- -~~----------~~ Total liabilities and shareholders' ~~equity~~deficiency ~~624,157,675~~) 75411,~~199~~501,~~721~~812 ~~693~~49,~~313~~578,~~494~~532 83591,~~531~~240,~~745~~769 ============ ============ =========== =~~========== See accompanying notes to the consolidated financial statements.~~

See accompanying notes to the consolidated financial statements. 4

CBR BREWING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended ~~Nine Months Ended~~ Three Months Ended ~~September~~March 3031, ~~2002~~2003 ~~September~~March 3031, 2002 ~~September 30, 2001~~ ------------- ------------ --~~-----------~~ ------------ --~~-----------------~~ RMB USD RMB ~~USD~~(1) ~~RMB~~ ------------- ------------ ------------- -~~-----------~~ ~~-------------------~~ Sales ~~137~~80,~~418~~531,~~923~~286 169,~~556~~702,~~497~~565 ~~497~~183,~~344~~902,~~472~~477 ~~59,921,021 181,239,840~~ Sales taxes (4,~~784~~528,~~662~~486) (~~576~~545,~~465~~601) (~~15,619,077) (1,881,817) (~~5,~~700~~730,~~267~~529) ------------- ------------ ------------- -~~-----------~~ ~~-------------------~~ Net sales ~~132~~76,~~634~~002,~~261~~800 159,~~980~~156,~~032~~964 ~~481~~178,~~725~~171,~~395~~948 ~~58,039,204 175,539,573~~ Cost of sales, including net inventory transferred from anrelated ~~associated~~companies ~~company~~ of RMB 1320,~~529~~607,~~348~~505 and RMB 4110,~~784~~739,~~234~~986; ~~for~~beer ~~the~~products ~~three~~purchased ~~months~~from ~~and~~associated ~~nine~~company ~~months~~for ~~ended~~resale ~~September~~of ~~30, 2002, respectively, and~~ RMB 2135,~~058~~752,~~068~~181 and RMB 5091,~~603~~270,~~657~~127; ~~for~~other ~~the~~beer ~~three~~products ~~and nine months ended September 30, 2001, respectively; inventory~~ purchased from ~~related~~associated ~~companies~~company ofby ~~RMB~~Zhaoqing ~~58,667,365~~Brewery ~~and~~of RMB ~~221~~22,~~247~~356,~~110~~037 ~~for the three months~~ and ~~nine months ended September 30,2002, respectively, and~~ RMB 8915,~~360~~574,~~090 and RMB 275,329,511 for the three months and nine months ended September 30, 2001, respectively~~954; and royalty fee paid to a related company of RMB ~~695~~514,~~553~~315 and RMB 2865,~~523~~718,~~108~~ ~~for the three months and nine months ended September 30, 2002,~~ respectively, ~~and RMB 1,104,665 and RMB 3,013,126 for the three months and nine months ended September 30, 2001,respectively~~ (Note 5) (~~102,006,200~~b) to (~~12,289,904~~d)) (~~339~~55,~~377~~588,~~662~~856) (406,~~888~~697,~~875~~453) (~~110~~128,~~278~~678,~~908~~113) ------------- ------------ ------------- -~~-----------~~ ~~-------------------~~ Gross profit 3020,~~628~~413,~~061~~944 32,~~690~~459,~~128~~511 ~~142~~49,~~347~~493,~~733~~835 ~~17,150,329 65,260,665~~ Selling, general and administrative expenses (4331,~~373~~462,~~556~~718) (53,~~225~~790,~~729~~689) (~~167~~51,~~752~~561,~~548~~315) ~~(20,211,150) (57,622,319)~~ Impairment of property, plant and equipment (Note 7) (2965,~~000~~250,000) (37,~~493~~861,~~976~~446) ~~(69,000,000) (8,313,253) (2,750,000) Investment in subsidiary written off (Note 7)~~ - - - - - ~~Restructuring costs (Note 11)~~ - - - - ~~(988,054) Gain on disposal of property, plant and equipment 94,950 11,440 94,950 11,440~~ - ----~~---------~~ ------------ ------------- -~~-----------~~ ~~-------------------~~ Operating (loss) ~~income~~ (4176,~~650~~298,~~545~~774) (59,~~018~~192,~~137~~624) (942,~~309~~067,~~865~~480) ~~(11,362,634) 6,650,292~~ Interest income ~~170~~102,~~848~~335 2012,~~584~~330 ~~426,120~~- ~~51,340 549,577~~ Interest expense (12,~~605~~080,~~381~~085) (~~193~~250,~~419~~613) (52,~~928~~298,~~483~~004) ~~(714,274) (1,926,718)~~ ------------- ------------ ------------- -~~-----------~~ ~~------------------- (~~Loss) ~~income~~ before ~~income taxes,~~ minority interests and equity in (loss) earnings of an associated company (4378,~~085~~276,~~078~~524) (59,~~190~~430,~~972~~907) (994,~~812~~365,~~228~~484) ~~(12,025,568)~~Minority ~~5,273,151~~interests ~~Income taxes - -~~ (~~325,894)~~Note ~~(39,264~~11) ~~1,624,580~~- -~~------------~~ -~~-----------~~ ------------- ------------ --------------~~-----~~ (Loss) ~~income~~ before ~~minority interests and~~ equity in (loss) (earnings) of an associated company (4378,~~085~~276,~~078~~524) (59,~~190~~430,~~972~~907) (~~100~~4,~~138~~365,~~122~~484) Equity in (~~12,064,832~~loss) ~~6,897,731~~earnings ~~Minority~~of ~~interests~~an ~~(Note~~associated ~~10)~~company ~~- -~~ (1894,~~553~~067,~~467~~726) (211,~~235~~333,~~357~~461) (13,~~500~~915,~~000)~~814 ------------- ------------ ------------- -~~-----------~~ ~~-------------------~~Net ~~(Loss) income before equity in (~~loss) ~~earnings of an associated company~~ (43172,~~085~~344,~~078~~250) (520,~~190~~764,~~972~~368) (~~118~~449,~~691,589~~670) ~~(14,300,189) 5,397,731 Equity in (loss) earnings of an associated company (16,375,619) (1,972,966) (43,931,977) (5,293,009) (1,253,603)~~ ------------- ------------ ------------- -~~-----------~~ ~~-------------------~~ Net (loss) ~~income for the period (59,460,697) (7,163,938) (162,623,566) (19,593,198) 4,144,128 ============= ============ ============= ============ =================== Net (loss) income~~ per common share (Note 12) - basic and diluted (721.4252) (02.8959) (200.3006) ~~(2.45) 0.52~~ ============= ============ ============= =~~===========~~ ~~===================~~ Weighted average number of common shares outstanding - basic and diluted 8,010,013 8,010,013 8,010,013 ~~8,010,013 8,010,013~~ ============= ============ ============= ============ =================== Nine Months Ended September 30, 2001 ------------------- RMB ------------------- Sales 591,200,099 Sales taxes (16,136,351) ------------------- Net sales 575,063,748 Cost of sales, including net inventory transferred from an associated company of RMB 13,529,348 and RMB 41,784,234 for the three months and nine months ended September 30, 2002, respectively, and RMB 21,058,068 and RMB 50,603,657 for the three and nine months ended September 30, 2001, respectively; inventory purchased from related companies of RMB 58,667,365 and RMB 221,247,110 for the three months and nine months ended September 30,2002, respectively, and RMB 89,360,090 and RMB 275,329,511 for the three months and nine months ended September 30, 2001, respectively; and royalty fee paid to a related company of RMB 695,553 and RMB 2,523,108 for the three months and nine months ended September 30, 2002, respectively, and RMB 1,104,665 and RMB 3,013,126 for the three months and nine months ended September 30, 2001,respectively (Note 5) (414,342,257) ------------------- Gross profit 160,721,491 Selling, general and administrative expenses (184,694,938) Impairment of property, plant and equipment (Note 7) Investment in subsidiary written off (Note 7) (1,224,109) Restructuring costs (Note 11) (22,309,236) Gain on disposal of property, plant and equipment - ------------------- Operating (loss) income (50,256,792) Interest income 1,017,277 Interest expense (6,047,447) ------------------- (Loss) income before income taxes, minority interests and equity in (loss) earnings of an associated company (55,286,962) Income taxes (40,000) ------------------- (Loss) income before minority interests and equity in (loss) earnings of an associated company (55,326,962) Minority interests (Note 10) 17,169,258 ------------------- (Loss) income before equity in (loss) earnings of an associated company (38,157,704) Equity in (loss) earnings of an associated company 6,812,639 ------------------- Net (loss) income for the period (31,345,065) =================== Net (loss) income per common share (Note 1) - basic and diluted (3.91) =================== Weighted average number of common shares outstanding - basic and diluted 8,010,013 =================== See accompanying notes to the consolidated financial statements.

CBR BREWING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) ~~Nine~~Three Months Ended ~~Nine~~Three Months Ended ~~September~~March 3031, ~~2002~~2003 ~~September~~March 3031, ~~2001~~2002 --------------------------- ------------------ RMB USD RMB ------------ ------------- ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss (~~162~~172,~~623~~344,~~566~~250) (1920,~~593~~764,~~198~~368) (31449,~~345,065~~670) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Allowance for doubtful accounts 212,~~000~~600,000 2313,~~530,120~~253 186,~~900~~500,000 Depreciation and amortization 192,~~297~~167,~~598~~987 2261,~~325,012~~204 227,~~476~~554,~~910~~837 Impairment of property, plant and equipment 6965,~~000~~250,000 87,~~313~~861,~~253~~446 ~~2,750,000 Write~~-~~off~~ ofEquity ~~investment~~ in ~~subsidiary - - 1,224,109 Gain on disposal of property, plant and equipment~~ (~~94,950~~loss) ~~(11,440) - Minority interests 18,553,467 2,235,357 (17,169,258) Equity in loss (~~earnings) of an associated company 4394,~~931~~067,~~977~~726 511,~~293~~333,~~009~~461 (63,~~812~~915,~~639~~814) Changes in operating assets and liabilities: (Increase) decrease in - Accounts receivable ~~(22~~37,~~490~~049,~~341)~~154 (24,~~709~~463,~~679)~~753 (301,~~225~~116,~~446~~709) Bills receivable (131,~~034~~105,~~300~~000) (1133,~~570,397~~132) 18(9,~~172~~592,~~471~~000) Inventories (64,~~545~~427,~~724)~~471 ~~(788~~533,~~642)~~430 847,~~074,740~~404 Amounts due from related companies (116,~~456~~631) (~~176~~2,003) (~~645~~5,~~484~~062,35) Income taxes receivable - - (1,~~927~~624,~~759~~580) ~~(232,260) -~~ Prepayments and deposits (~~482~~5,~~061~~460,449) (58657,~~080~~886) (51,~~951~~493,~~781)~~378 Other receivables (227,~~218~~010,~~720~~672) (2844,~~676,955~~659) (358,~~970~~784,~~155~~824) Increase (decrease) in - Accounts payable (6773,~~081,484~~929) (~~732~~93,~~709~~245) (176,~~867~~722,~~940~~340) Accrued liabilities 42(2,~~646~~660,~~499~~041) 5(320,~~138,132~~487) 4816,~~345~~660,~~376~~126 Amount due to an associated company 50(13,~~128~~107,~~082~~778) 6(1,~~039~~579,~~528~~250) ~~40,241,478 Income taxes payable - -~~ (511,~~656~~051,~~663~~238) Sales taxes payable (7200,~~654,120~~561) (~~922~~24,~~183~~163) 21,~~446~~251,~~050~~622 ------------ ------------- ------------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 212,~~403~~883,~~142~~027 2347,~~578,692~~354 10(14,~~986~~812,~~703~~161) ------------ ------------- ------------------ CASH FLOWS FROM INVESTING ACTIVITIES: ~~Proceeds~~Advance ~~from~~to ~~disposal~~related ofparty ~~property~~(46,940,623) ~~plant~~(5,655,497) ~~and~~- ~~equipment~~Loan ~~130~~receivable (7,~~000~~086,358) 15(853,~~663~~778) - Purchases of property, plant and equipment (71,~~154~~557,~~141~~408) (~~861~~187,~~945~~640) (6737,~~799,481~~432) ------------ ------------- ------------------ NET CASH USED IN INVESTING ACTIVITIES (755,~~024~~584,~~141~~389) (~~846~~6,~~282~~696,915) (6737,~~799,481~~432) ------------ ------------- ------------------ CASH FLOWS FROM FINANCING ACTIVITIES: New bank borrowings 857,000,000 10843,~~240,964~~373 2014,~~534~~000,~~607~~000 Repayment of bank borrowings (7952,~~669,717~~398) (96,~~598,761~~313) (2313,~~000~~080,~~000~~195) Advance from a related ~~company~~party 11- - 5,~~000~~700,000 ~~1,325,301~~Increase ~~- Decrease~~ in amounts due to related companies ~~(4,019,980)~~- ~~(484,335) (12,064,194) Dividend received from an associated company 30,204,416 3,639,086~~ - ~~Payment of cash dividend to minority interest (16~~263,~~435,000)~~352 ~~(1,980,120) (1,500,000)~~ ------------ ------------- ------------------ NET CASH PROVIDED BY ~~(USED IN)~~ FINANCING ACTIVITIES 266,~~079~~947,~~719~~602 3837,~~142,135~~060 ~~(16~~6,~~029~~883,~~587)~~157 ------------ ------------- ------------------ Net ~~increase (~~decrease) in cash 40and cash equivalents (45,~~458~~753,~~720~~760) 4(5,~~874~~512,~~545~~501) (118,~~842~~666,~~365~~436) Cash and cash equivalents at beginning of period 71117,~~366~~075,~~480~~072 814,~~598~~105,~~371~~430 9071,~~313~~366,~~060~~480 ------------ ------------- ------------------ Cash and cash equivalents at end of period ~~111~~71,~~825~~321,~~200~~312 138,~~472~~592,~~916~~929 7862,~~470~~700,~~695~~044 ============ ============= =================~~= See accompanying notes to the consolidated financial statements.~~

See accompanying notes to the consolidated financial statements. 6 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) THREE MONTHS ENDED MARCH 31, 2003 AND 2002 1. ORGANIZATION AND PRINCIPAL ACTIVITIES CBR Brewing Company, Inc. ("CBR") was originally incorporated on April 20, 1988 under the laws of the State of Florida. At December 31, 2001, CBR's principal shareholder was Shenzhen Huaqiang Holdings Limited ("Huaqiang"), incorporated in the People's Republic of China (the "PRC" or "China"), which held indirectly 63.2% of the outstanding Class A common stock and 80% of the outstanding Class B common stock. Effective January 10, 2002, Zhaoqing City Lan Wei Alcoholic Beverage (Holdings) Limited ("Lan Wei") acquired from Huaqiang all of its equity interest in CBR. Lan Wei is a company controlled by the City of Zhaoqing, which is located in Guangdong Province, People's Republic of China. In February 2002, Lan Wei acquired additional Class A common shares representing an approximate 7.2% equity interest in CBR from a third party in a private transaction. As part of this transaction, Lan Wei also acquired Huaqiang's 19.6% equity interest in Noble China Inc., a Canadian public company. Effective February 28, 2003, CBR reincorporated from the State of Florida in the United States of America ("US") to the British Virgin Islands ("BVI") by merging into its wholly-owned BVI subsidiary, High Worth Holdings Ltd ("Holdings"). This off-shore reincorporation was for tax planning purposes, since all of CBR's assets and operations are currently located in China and are expected to continue to be located outside the US in the future. The reincorporation had no effect on CBR's current business operations in China. On March 3, 2003, Holdings changed its name to CBR Brewing Company Inc. (hereinafter referred to as the "Company", which term shall include, when the context so requires, its subsidiaries and affiliates). The Agreement and Plan of Merger related to the reincorporation dated January 24, 2003 was approved by majority of shareholders of each class of common stock outstanding as of December 31, 2002. Holdings was the surviving corporation subsequent to the merger and possesses all of the rights, privileges, powers and franchises and is subject to all the restrictions, disabilities and duties of the dissolved Florida corporation. Each Class A share of the Florida corporation was converted into one fully paid and non-assessable (with no par value) Class A share of capital stock of the BVI corporation and each Class B share of the Florida corporation was converted into one fully paid and non-assessable Class B share of capital stock of the BVI corporation. The surviving BVI corporation assumed and continued the reporting obligations of the dissolved Florida corporation under new OTC Bulletin Board trading symbol "CBRAF" and the consolidated operations of the Company continued without interruption. The Company is a holding company and its principal subsidiaries are engaged in the production and sale of beer in the PRC. Substantially all of the beer currently sold by the Company is marketed under the Pabst Blue Ribbon label, and is brewed under a sub-license agreement with Guangdong Blue Ribbon Group Co., Ltd. ("Guangdong Blue Ribbon"), which, through an assignment and transfer, obtained its license from Pabst Brewing Company ("Pabst US"). The term of this sub-license will expire on November 7, 2003. Prior to the reincorporation, the Company's wholly-owned subsidiary, Holdings, was a holding company that was formed solely to effect the acquisition of a 60% interest in Zhaoqing Blue Ribbon High Worth Brewery Ltd. ("High Worth JV"). High Worth JV is a Sino-foreign equity joint venture enterprise that was registered in the PRC on July 2, 1994 in which Guangdong Blue Ribbon, an unrelated joint stock limited company incorporated in the PRC, and Holdings hold 40% and 60% interests, respectively. 7 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) THREE MONTHS ENDED MARCH 31, 2003 AND 2002 1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued) On October 31, 1994, High Worth JV acquired a 100% interest in Zhaoqing Brewery ("Zhaoqing Brewery"), including Zhaoqing Brewery's 40% interest in Zhaoqing Blue Ribbon Brewery Noble Ltd. ("Noble Brewery"). Prior to the acquisition of the entire interest in Zhaoqing Brewery by High Worth JV, Zhaoqing Brewery was a wholly-owned subsidiary of Guangdong Blue Ribbon. Noble Brewery is a Sino-foreign equity joint venture enterprise which was registered in the PRC on October 8, 1993, in which Goldjinsheng Holding Limited ("Goldjinsheng"), an unrelated party at that time, and Zhaoqing Brewery hold 60% and 40% interests, respectively. Zhaoqing Brewery and Noble Brewery are both engaged in the production and sale of beer products in the PRC. In April 1995, Zhaoqing Brewery ceased the production of Zhaoqing beer and commenced the production of Pabst Blue Ribbon beer. Pursuant to the terms of a sub-license agreement which also expires on November 7, 2003, Guangdong Blue Ribbon granted Zhaoqing Brewery the right to produce and distribute Pabst Blue Ribbon beer under Pabst trademarks in the PRC at a royalty fee of US$11.70 for each metric ton produced. Pursuant to the terms of a sub-license agreement, Guangdong Blue Ribbon granted Noble Brewery the right in the PRC to use two specific Pabst trademarks for the production, promotion, distribution and sale of beer under such trademarks. However, the production right of Noble Brewery is confined exclusively to the Guangdong Province and it does not preclude High Worth JV's production right in Guangdong. The sub-license agreement is valid until November 7, 2003. In consideration for the sub-license granted, Noble Brewery is committed to pay Guangdong Blue Ribbon a royalty fee of US$0.10 for each carton of bottled or canned beer produced. On February 19, 1995, Zhaoqing Blue Ribbon Beer Marketing Company Limited (the "Marketing Company") was registered as a limited company in the PRC and owned 70% by Zhaoqing Brewery and 30% by Guangdong Blue Ribbon. The Marketing Company was appointed as the sole distributor to conduct the distribution, marketing and promotion of all Pabst Blue Ribbon beer products produced by Zhaoqing Brewery and Noble Brewery. The Marketing Company started to purchase beer products from Zhaoqing Brewery and Noble Brewery in April 1995 and July 1995, respectively. In January 1996, Zhaoqing Brewery transferred all of its operating assets and liabilities to High Worth JV pursuant to the original Joint Venture Agreement, the Asset Transfer Agreement signed in May 1994, and the relevant government regulations. Subject to the completion of [certain legal procedures and documentation], investments in Noble Brewery and the Marketing Company will be transferred to High Worth JV. Zhaoqing Brewery is currently acting as the nominee for High Worth JV with respect to the investments in Noble Brewery and the Marketing Company. Upon the completion of the required procedures and documentation, all of the assets and liabilities formerly controlled by Zhaoqing Brewery will then be transferred to High Worth JV (in this context, Zhaoqing Brewery and High Worth JV are used interchangeably to refer to the same entity). Since January 1996, the operating activities of Zhaoqing Brewery have been part of High Worth JV. The Company is expecting the completion of the approval procedures by the end of 2003. 8 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) THREE MONTHS ENDED MARCH 31, 2003 AND 2002 1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued) On January 13, 1998, High Worth JV entered into a joint venture contract with Zao Yang Brewery in Hubei Province to establish a new brewery. The new brewery was designated Zao Yang Blue Ribbon High Worth Brewery Limited ("Zao Yang High Worth Brewery"), with a total capital investment of RMB 29,280,000, allocated 55% to High Worth JV and 45% to Zao Yang Brewery. Zao Yang High Worth Brewery commenced the production of Pabst Blue Ribbon beer in June 1998 based on the sub-license granted by Guangdong Blue Ribbon in June 1998. Commencing June 1998, the Marketing Company also began purchasing Zao Yang High Worth Brewery's production of Pabst Blue Ribbon beer for distribution. In November 2002, High Worth JV and Zao Yang Brewery agreed to contribute additional capital of RMB 24,444,500 into Zao Yang High Worth Brewery in proportion to their respective equity interests of 55% and 45%. High Worth JV has contributed RMB 13,444,500 through a deduction from its intercompany balance due from Zao Yang High Worth Brewery and Zao Yang Brewery has made a cash contribution of RMB 11,000,000 effective December 31, 2002. On January 20, 1998, Zhaoqing Brewery and Goldjinsheng entered into an agreement which calls for the interest of Goldjinsheng in Noble Brewery to be transferred to Linchpin Holdings Limited ("Linchpin"), a wholly-owned subsidiary of Noble China Inc. In March 1999, approval from the relevant PRC authorities for the registration of the Linchpin transfer was obtained. Linchpin and Zhaoqing Brewery currently own 60% and 40% equity interests in Noble Brewery, respectively. NOBLE CHINA INC. - Noble China Inc., the 60% shareholder of Noble Brewery, has publicly reported that in May 1999 it entered into a license agreement with Pabst US granting it the right to utilize the Pabst Blue Ribbon trademarks in connection with the production, promotion, distribution and sale of beer in China for 30 years commencing in November 2003. As at March 31, 2003, the Company has not yet obtained a renewal of the Pabst Blue Ribbon sub-license agreement. The inability of the Company to obtain a sub-license from Noble China Inc. or to renew the Company's sub-license or enter into some other form of strategic relationship under acceptable terms and conditions to allow the Company to continue to produce and distribute Pabst Blue Ribbon beer in China would have a material adverse effect on the Company's future results of operations, financial position and cash flows. During December 2000, the Company and Noble China Inc. signed a memorandum pursuant to which a management committee was established to coordinate and enhance the operations of Zhaoqing Brewery, Noble Brewery and the Marketing Company. Effective January 1, 2001, the management, marketing, production and operations of Zhaoqing Brewery, Noble Brewery and the Marketing Company were pooled together under a newly-created management entity named "Blue Ribbon Enterprises" in order to achieve improved coordination of human resources, financial, production and marketing activities, greater efficiency and improved operating profitability. Zhaoqing Brewery, Noble Brewery and the Marketing Company each remain as legally distinct entities (see Note 5(a)). 9 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) THREE MONTHS ENDED MARCH 31, 2003 AND 2002 1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued) Under the new management team, the Company implemented a restructuring program that eliminated the positions of a total of 538 employees, of which 313 were from Zhaoqing Brewery, 177 were from Noble Brewery and 48 were from the Marketing Company. Severance payments to these employees from Zhaoqing Brewery and the Marketing Company totaled RMB 20,396,494 and RMB 1,912,742, respectively. As a result, the Company recorded restructuring costs of RMB 22,309,236 for the year ended December 31, 2001. In addition, severance payments to the employees of Noble Brewery were RMB 8,729,830, of which RMB 3,491,932 was included in the equity in (loss) earnings of an associated company for the year ended December 31, 2001. During 2002, Noble China Inc. publicly reported that it was experiencing severe financial difficulties, was unable to meet its financial commitments and was insolvent, and was considering various courses of action. On July 19, 2002, Noble China Inc. announced that the Shandong Court ruled against it and ordered it to pay claims of US$3,999,988 and RMB 20,000,000 plus legal costs of RMB 541,210, and interest from June 21, 2001 within one month of the judgment. The litigation was related to a claim by China Coastal Development Ltd. (see Note 6). Noble China Inc. appealed the Shandong Court's decision to the Supreme Court of the PRC, which was accepted on November 4, 2002, a hearing for which is still pending. On July 22, 2002, Noble China Inc. held its Annual and General Meeting of Shareholders. A Special Meeting of Shareholders and a Meeting of Debenture holders were also held on July 22, 2002 to seek approval for certain amendments to the 9% Convertible Subordinated Debentures and to the Trust Indenture governing the Debentures. Noble China Inc. has CN$30,000,000 of outstanding Debentures. As a result of ongoing discussions between the major Debenture holders and the City of Zhaoqing, indirectly a major shareholder of Noble China Inc., regarding a possible restructuring of Noble China Inc., the amendments to the Debentures and to the Trust Indenture were not presented for a vote at the Special Meeting of Shareholders and at the Meeting of Debenture holders; both such meetings were instead adjourned to times and places to be determined. The Board of Directors of Noble China Inc. was re-elected and confirmed its short-term assistance to facilitate the negotiations between the major shareholder of Noble China Inc. and the major Debenture holder. The Directors of Noble China Inc. indicated that if the major shareholder and major Debenture holder could not reach a resolution on an appropriate restructuring plan that the Board of Directors could support in the interest of all shareholders and Debenture holders within 60 days, the Board of Directors would resign. On September 3, 2002, Noble China Inc.'s report for the three months ended June 30, 2002 disclosed that although the major shareholder and the major Debenture holder were continuing their discussions, no meaningful process had been noted and the Directors planned to resign on September 20, 2002. On September 24, 2002, a press release by Noble China Inc. announced that one of its three directors had resigned on September 20, 2002, and that the remaining two directors intended to resign. On November 12, 2002, Noble China Inc. held a meeting of shareholders to elect a new Board of Directors to consist of three members; three candidates nominated by Lan Wei, a company controlled by the City of Zhaoqing, the major shareholder of the Company, were elected to the Board of Directors. 10 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) THREE MONTHS ENDED MARCH 31, 2003 AND 2002 1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued) Discussions between holders of a majority of the Debentures and representatives of the City of Zhaoqing regarding a reorganization of Noble China Inc. resulted in a preliminary agreement in principle with respect to settlement in full of the outstanding Debentures. Discussions between representatives of the City of Zhaoqing and Pabst Brewing Company regarding a reorganization of Noble China Inc. and a restructuring of the master license agreement that becomes effective on November 7, 2003 resulted in the execution of a non-binding term sheet in March 2003. These agreements are both conditional on Noble China Inc. being able to implement a formal reorganization of its debt and equity securities. The successful reorganization of Noble China Inc. is subject to the preparation and execution of definitive agreements and a plan of reorganization, compliance with all applicable laws and regulations, and the funding, approval and consummation of a court-approved reorganization plan of Noble China Inc. Accordingly, as a result of the uncertainty with respect to these matters, there can be no assurances that Noble China Inc. will be successfully reorganized or that the Company and Noble Brewery will be able to retain the right to produce and distribute Pabst Blue Ribbon beer in China subsequent to November 7, 2003. As of March 31, 2003, the Company and Noble Brewery have not obtained a renewal of their respective Pabst Blue Ribbon sub-license agreements, which expire on November 7, 2003. The inability of the Company or Noble Brewery to obtain or renew a sub-license from Noble China Inc. or enter into some other form of strategic relationship under acceptable terms and conditions to allow the Company and Noble Brewery to continue to produce and distribute Pabst Blue Ribbon beer in China would have a material adverse effect on the Company's future results of operations, financial position and cash flows. On March 24, 2003, the Board of Directors of the Company and High Worth JV approved a short-term loan of RMB 46,000,000 from High Worth JV to Lan Wei, a company controlled by the City of Zhaoqing that is the controlling shareholder of the Company. Of such amount, RMB 20,000,000 is to be invested in businesses affiliated with Lan Wei and RMB 26,000,000 is to be used to facilitate the reorganization or restructuring of Noble China Inc. (see Note 5(f)). Lan Wei has agreed to repay the RMB 20,000,000 loan by June 30, 2003. The RMB 26,000,000 is being held in a bank escrow account, and will be repaid to the Company if and when it is determined that it is not possible to file a confirmable plan of reorganization or implement an out-of-court restructuring of Noble China Inc., but in no event later than December 31, 2003. The loans bear interest at 3.9% per annum. During the past few years, Lan Wei has invested substantial capital in Noble China Inc. and the Company, and has also used its relationships to arrange for substantial bank financing for the Company, in order to facilitate the strategic development of the Pabst Blue Ribbon beer business in China. Lan Wei believes that a successful reorganization or restructuring of Noble China Inc. is in the long-term interest of the Company and Blue Ribbon Noble, as it will assure such entities the right to produce and distribute Pabst Blue Ribbon beer in China for a period of thirty years from November 7, 2003. 11 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) THREE MONTHS ENDED MARCH 31, 2003 AND 2002 1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued) If and when Noble China Inc. is successfully reorganized or restructured with the assistance of Lan Wei, it is expected that the Company will receive a sub-license or an assignment of the license to produce and distribute Pabst Blue Ribbon in China, and that the Company will have the option to have the RMB 26,000,000 loan repaid in cash or by the transfer to the Company of any assets that Lan Wei may acquire in conjunction with a reorganization or restructuring of Noble China Inc. with a fair value equivalent to the loan amount. The Company is currently unable to predict the effect that these developments may have on future operations, including any effect on the Company's ability to obtain a sub-license to produce and distribute Pabst Blue Ribbon beer in China effective from November 7, 2003, or the impact on Noble Brewery, the Company's affiliate. However, management has made certain assumptions with respect to these uncertainties in order to evaluate the carrying value of its property, plant and equipment, as well as its investment in an associated company (see Notes 6 and 7). During the three months ended March 31, 2003, as a result of an unexpected substantial deceases in sales, continuing operating losses, a working capital deficiency and the outbreak of severe acute respiratory syndrome ("SARS"), the Company conducted a re-evaluation of the carrying value of its land use rights, property and building, plant and equipment, office equipment and motor vehicles, construction in progress, and the accrued capital commitment with respect to the purchase of production assets, and the related expected future cash flows. As a result of this evaluation, the Company recorded a provision for impairment of RMB 50,400,000, RMB 8,050,000 and RMB 6,800,000 for the three months ended March 31, 2003, for Zhaoqing Brewery, the Marketing Company and Zao Yang High Worth Brewery, respectively. These impairment charges aggregating RMB 65,250,000 were based on certain assumptions regarding the Company's future cash flows and other factors used to determine the fair value of its land use rights, property and building, office equipment and motor vehicles, plant and equipment, and construction in progress, including the assumptions that some of the local brand beers developed and produced by Zao Yang High Worth Brewery will be shifted to Zhaoqing Brewery and Noble Brewery for production and distribution; and that, as a result of Lan Wei's efforts, Zhaoqing Brewery has a 50% chance of being granted a renewal of the Pabst sub-license jointly with Noble Brewery to produce Pabst Blue Ribbon beer after the existing sub-license expires on November 7, 2003, with a production ratio of 1 to 2. Included in the impairment charges were amounts related to the purchase commitments for production equipment of RMB 2,400,000, which have been recorded as an accrued expense. As a result of the persistent decrease in sales and continuing operating losses, the related expected future cash flows to be generated from the sales of Pabst Blue Ribbon beer at the estimated reduced level of distribution are expected to be negative. Accordingly, the effect of the Company successfully obtaining a renewal of a sub-license is expected to have little impact on the recoverability of the assets. As a result, a provision for impairment was provided for a majority of the assets of Zhaoqing Brewery, the Marketing Company and Zao Yang High Worth Brewery. 12 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) THREE MONTHS ENDED MARCH 31, 2003 AND 2002 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The unaudited consolidated financial statements include the results of operations of Zhaoqing Brewery, the Marketing Company and Zao Yang High Worth Brewery on a consolidated basis and Noble Brewery under the equity method of accounting for investments. The unaudited consolidated financial statements include the Marketing Company, as the Company has effective control of the Marketing Company through its board of directors. COMMENTS - The accompanying consolidated financial statements are unaudited, but in the opinion of the management of the Company, contain all adjustments, which include normal recurring adjustments, necessary to present fairly the Company's financial position at March 31, 2003, its results of operations for the three months ended March 31, 2003 and 2002, and its cash flows for the three months ended March 31, 2003 and 2002. The consolidated balance sheet as of December 31, 2002 is derived from the Company's audited financial statements. Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with accounting principles generally accepted in the United State of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although management of the Company believes that the disclosures contained in these financial statements are adequate to make the information presented herein not misleading. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, as filed with the Securities and Exchange Commission. A summary of the Company's significant accounting policies is included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. The results of operations for the three months ended March 31, 2003 are not necessary indicative of the results of operations to be expected for the full fiscal year ending December 31, 2003. GOING CONCERN - The accompanying unaudited consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the accompanying unaudited consolidated financial statements do not purport to represent the realizable or settlement values. The Company has experienced decreased sales and a net loss for the past three consecutive years, incurred significant losses during the three months ended March 31, 2003, has a net working capital deficiency of RMB 341,450,657 as of March 31, 2003, and may not receive an extension of its sub-license to produce and distribute Pabst Blue Ribbon beer, which expires on November 7, 2003. In addition, Noble China Inc., the majority shareholder of the Company's associated company, is experiencing severe financial difficulties and management and other uncertainties which may impact the operations of Noble Brewery and its ability to renew its sub-license to continue to produce and distribute Pabst Blue Ribbon in China. These factors raise substantial doubt as to the Company's ability to continue as a going concern. The Company's independent certified public accountants, in their independent auditors' report on the consolidated financial statements as of and for the year ended December 31, 2002, have reported that there is substantial doubt about the Company's ability to continue as a going concern. 13 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) THREE MONTHS ENDED MARCH 31, 2003 AND 2002 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES During 2002, the Company experienced reduced net sales as a result of intense competition, reduced cash flows and diminished working capital. The Company expects that these pressures will continue for the remainder of 2003 and into 2004, resulting in continued net losses. The Company has implemented an overhaul of its operations and marketing programs through the efforts of the management committee. With the pooling of the resources of Zhaoqing Brewery, Noble Brewery and the Marketing Company, the Company implemented a large scale restructuring plan in 2001 in which almost one-third of the work force was eliminated. Although effective control of the Company changed on January 22, 2002 and a new management team was appointed to operate the Company in 2002, the Company anticipates that the restructuring and internal consolidation programs will continue if it is unable to regain profitability in the near future. In 2002, the Company implemented a series of new sales programs to launch various newly developed or modified local brand beers into the market, including brands such as "Lanli", "Lancheng", "Lanshi", "Xile" and "Zhaopi". Together with the local brand beer "Di Huang Quan" produced by Zao Yang High Worth Brewery, the Company intends to increase its marketing efforts with respect to these new local brands. If the Company is unable to obtain a new sub-license to produce Pabst Blue Ribbon beer in China after November 7, 2003, these new local brands would be expected to become the main product lines and the major source of revenues for High Worth JV and Zao Yang High Worth Brewery. However, pursuant to the joint venture agreement of Noble Brewery, the Company will continue to manage the daily operations of Noble Brewery until the expiration of the joint venture on June 10, 2013. In May 1999, Noble China Inc. entered into a license agreement with Pabst Brewing Company granting it the right to utilize the Pabst Blue Ribbon trademarks in connection with the production, promotion, distribution and sale of beer in the PRC for 30 years commencing in November 2003. Accordingly, management currently believes that Noble Brewery will be able to obtain a sub-license from Noble China Inc., the 60% shareholder of Noble Brewery, to continue to produce and sell Pabst Blue Ribbon beer in China after November 7, 2003, although there can be no assurances in this regard. In January 2003, the Company reorganized its marketing teams by reducing the number of branch offices from 15 to 6. Management believes that the reduction in branch offices will enhance the implementation of its marketing strategies through clearer responsibilities and can allow its sales force to more effectively attempt to arrest the decline in sales volume. However, there can be no assurances that the Company will become profitable in the near future. The Company may consider more severe restructuring alternatives if it is unable to operate profitably in the near future. The Company anticipates that its operating cash flows, combined with cash on hand, bank lines of credit, and other external credit sources, and the credit facilities provided by affiliates or related parties, are adequate to satisfy the Company's working capital requirements through December 31, 2003. However, if the foregoing assumptions prove to be inaccurate, the Company's cash flow may be adversely affected, which would negatively impact the ability of the Company to conduct operations at current levels and continue as a going concern. 14 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) THREE MONTHS ENDED MARCH 31, 2003 AND 2002 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including those related to interest in an associated company, allowance for doubtful accounts, impairment of assets and income taxes, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FOREIGN CURRENCY TRANSLATION - The financial records and the statutory financial statements of the Company's subsidiaries and associated company in the PRC are maintained in Renminbi, the functional currency and the currency of the PRC. In preparing the financial statements, all foreign currency transactions are translated into Renminbi using the applicable rates of exchange for the respective periods. Monetary assets and liabilities denominated in foreign currencies have been translated into Renminbi using the rate of exchange prevailing at the balance sheet date. Foreign currency exchange gains or losses are included in the unaudited consolidated statements of operations. Prior to the reincorporation, in 2002, the Company's share capital was denominated in United States dollars ("US$") and for reporting purposes, the US$ share capital amounts have been translated into Renminbi ("RMB") at the applicable rates prevailing on the transaction dates. Effective March 1, 2003, the Company transferred its share capital to additional paid-in capital and recorded no par value for both of the Company's common stock in Class A and Class B subsequent to the reincorporation. Translation of amounts from RMB into US$ is for the convenience of the reader only and has been made at US$1.00 = RMB8.30. No representation is made that the Renminbi amounts could have been, or could be, converted into United States dollars at that rate or at any other rate. REVENUE RECOGNITION - Sales represent the invoiced value of goods sold, net of discounts. Sales and sales discounts are recognized when goods are delivered to customers, the sales amount is determinable and collectibility is reasonably assured. The provisions of Emerging Issues Task Force (EITF) No. 01-9 "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)", were adopted during 2002. The adoption of EITF No. 01-9 resulted in the reclassification of certain sales incentives previously classified as selling expenses to reductions from sales. Prior year amounts have been reclassified to conform to the current year's presentation. These changes had no effect on the Company's operating results. The amount of sales incentives included as a deduction from sales in accordance with EITF No. 01-9 was RMB 7,006,485 and RMB 7,433,616 for the three months ended March 31, 2003 and 2002, respectively. COMPREHENSIVE INCOME - The Company reports comprehensive income in accordance with Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". Comprehensive income is defined to include all changes in equity during a period from non-owner sources. Comprehensive income (loss) equaled the net loss for the three months ended March 31, 2003 and 2002. 15 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) THREE MONTHS ENDED MARCH 31, 2003 AND 2002 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) NET INCOME (LOSS) PER COMMON SHARE ("EPS") - Basic EPS excludes the dilutive effects of stock options, warrants and convertible securities, if any, and is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock, such as convertible preferred stock, warrants to purchase common stock and common stock options, were exercised or converted into common stock. At March 31, 2003, potentially dilutive securities representing 105,000 shares of common stock were outstanding, consisting of stock options to purchase 30,000 shares exercisable at $3.87 per share and 75,000 shares exercisable at $0.72 per share. At March 31, 2002, potentially dilutive securities representing 165,000 shares of common stock were outstanding, consisting of stock options to purchase 60,000 shares exercisable at $3.87 per share, and 105,000 shares exercisable at $0.72 per share. For the three months ended March 31, 2003 and 2002, common shares issuable upon exercise of outstanding stock options were excluded from the calculation of diluted EPS since the exercise prices exceeded the average fair market value of the common stock for all periods presented, and thus would have been anti-dilutive. Accordingly, basic and diluted EPS are the same for all periods presented. RECENT ACCOUNTING PRONOUNCEMENTS - In April 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." ("SFAS No.149), which is effective for any new derivative instruments the Company enters into after June 30, 2003. SFAS No.149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The clarification provisions of SFAS No. 149 require that contracts with comparable characteristics be accounted for similarly. The adoption of SFAS No. 149 is not anticipated to have a significant impact on the Company's financial position and results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.150"), which is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No.150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability. Many of those instruments were previously classified as equity. The adoption of SFAS No.150 is not anticipated to have a significant impact on the Company's financial position and results of operations. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 addresses the diverse accounting practices for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company has adopted SFAS No. 143 effective January 1, 2003. The adoption of SFAS No. 143 did not have a significant impact on the Company's financial position and results of operations. 16 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) THREE MONTHS ENDED MARCH 31, 2003 AND 2002 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Such costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS No. 146 replaces the previous accounting guidance provided by the Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 was applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a significant impact on the Company's financial position or results of operations. In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45, "Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN No. 45 clarifies disclosures that are required to be made for certain guarantees and establishes a requirement to record a liability at fair value for certain guarantees at the time of the guarantee's issuance. The disclosure requirements of FIN No. 45 had been applied in the Company's 2002 financial statements. The requirement to record a liability applied to guarantees issued or modified after December 31, 2002. The Company has adopted the measurement and recording provisions of FIN No. 45 in 2003 prospectively. In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB 51". FIN No. 46 requires that the primary beneficiary in a variable interest entity consolidate the entity even if the primary beneficiary does not have a majority voting interest. The consolidation requirements of this Interpretation are required to be implemented for any variable interest entity created on or after January 31, 2003. In addition, FIN No. 46 requires disclosure of information regarding guarantees or exposures to loss relating to any variable interest entity existing prior to January 31, 2003 in financial statements issued after January 31, 2003. FIN No. 46 was effective for the Company on January 31, 2003, and did not have a material impact on the Company's financial position and results of operations. 17 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) THREE MONTHS ENDED MARCH 31, 2003 AND 2002 3. ACCOUNTS RECEIVABLE The balance of accounts receivable is presented in the accompanying consolidated financial statements net of the allowance for doubtful accounts. The Company provided an allowance for doubtful accounts of RMB 2,600,000 and RMB 6,500,000 for the three months ended March 31, 2003 and 2002, respectively. Changes in the allowance for doubtful accounts for the three months ended March 31, 2003 and for the year ended December 31, 2002 were as follow:

~~2002~~March ~~2001~~31, 2003 December 31, 2002 ------------------------- ---- -----------------~~----~~ RMB USD RMB ~~USD~~ (Unaudited) (Unaudited) (~~Unaudited~~Audited) ~~(Unaudited)~~ ------------- ----------- --- --------- --------~~---~~ Balance as at ~~January~~beginning 1,of ~~104,632,067~~period 1290,~~606~~991,~~273~~024 8110,~~652~~962,~~544~~774 9104,~~837~~632,~~656~~067 Provision for doubtful accounts: - for the three months ended March 31, 62,~~500~~600,000 ~~783~~313,~~133~~253 ~~6,300,000 759,036~~ -~~-----------~~ ~~-----------~~during ~~------------ ----------- Balance as at March 31, 111,132,067 13,389,406 87,952,544 10,596,692 Provision for doubtful accounts for~~ the ~~three~~year ~~months~~2002 ~~ended~~- ~~June~~- 3018, 6411,~~780,883~~931 ~~816,974 9,300,000 1,120,482~~ Accounts written off: - during the three months ended ~~June~~March 3031, (322,~~052~~639,~~974~~460) (3318,~~861,804~~007) - - ~~------------~~during ~~----------- ------------ ----------- Balance as at June 30, 85,859,976 10,344,576 97,252,544 11,717,174 Provision for doubtful accounts for~~ the ~~three~~year ~~months~~2002 ~~ended September 30~~(32, 7052,~~719,117~~974) ~~930,014 3,300,000 397,590~~ ------------- ----------- --- --------- --------~~---~~ Balance as at ~~September~~end ~~30,~~of ~~93,579,093~~period 1190,~~274~~951,~~590~~564 ~~100~~10,~~552~~958,~~544~~020 1290,~~114~~991,~~764~~024 ============= =========== === ========= ========~~===~~

4. INVENTORIES Inventories consisted of the following at March 31, 2003 and December 31, 2002:

~~Three~~March ~~Months~~31, ~~Ended~~2003 ~~Nine~~December ~~Months Ended Three Months Ended Nine Months Ended September 30~~31,~~2002~~ ~~September 30,~~2002 ~~September 30,2001 September 30, 2001~~ ------------ ----------- -~~------------~~ ------------ -----~~--------------~~ ~~------------------~~ RMB USD RMB ~~USD RMB RMB~~ ------------ ----------- ----------~~---~~ ~~------------~~(Unaudited) ~~-------------------~~(Unaudited) ~~------------------~~Raw ~~Net~~materials ~~sales 69~~27,~~731~~861,~~612~~538 83,~~401~~356,~~399~~812 ~~221~~28,~~247~~130,~~110~~712 ~~26,656,278~~Work ~~83,521,230~~in ~~248,663,629~~progress ~~============ =========== ============= ============ =================== ================== Net income (loss) (46~~4,~~764~~355,~~046)~~367 (5524,~~634,222)~~743 ~~(124~~4,~~404~~169,~~942)~~690 ~~(14~~Finished goods 17,~~988~~535,~~547)~~641 72,~~440~~112,~~993~~728 121,~~494~~879,~~126~~615 ~~============~~----------- ~~===========~~----------- ~~=============~~---------- ~~============ =================== ================== The Company's share of net income (loss) after adjustment of unrealized intercompany profit and other intercompany adjustments (16~~49,~~375~~752,~~619)~~546 ~~(1,972,966) (43,931,977) (~~5,~~293~~994,~~009)~~283 (154,~~253~~180,~~603)~~017 ~~6,812,639~~ ============ =========== ==========~~=== ============ =================== ==================~~

18 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) THREE MONTHS ENDED MARCH 31, 2003 AND 2002 5. RELATED PARTIES TRANSACTIONS AND ARRANGEMENTS (a) Management arrangement During December 2000, the Company and Noble China signed a memorandum pursuant to which a management committee was established to coordinate and enhance the operations of Zhaoqing Brewery, Noble Brewery and the Marketing Company. Effective January 1, 2001, the management, marketing, production and operations of Zhaoqing Brewery, Noble Brewery and the Marketing Company were pooled together under a newly-created management entity named "Blue Ribbon Enterprises" to improve coordination of human resources, financial, production and marketing activities. Under this arrangement: - Certain administrative expenses of the Marketing Company, Zhaoqing Brewery and Noble Brewery, as well as the total production volume of Zhaoqing Brewery and Noble Brewery and the related direct variable costs incurred for beer production of the two breweries, were pooled and re-allocated among Zhaoqing Brewery and Noble Brewery at a 1 to 2 ratio, respectively, in proportion to each brewery's respective production capacities. In order to maximize production efficiencies at the present reduced levels of sales volume, Noble Brewery is currently producing all of the beer sold by both Zhaoqing Brewery and Noble Brewery. - Certain direct selling expenses and advertising expenses incurred by the Marketing Company relating to the sale of beer products from the two breweries are allocated among Zhaoqing Brewery and Noble Brewery at a 1 to 2 ratio, respectively, either through intercompany transfer pricing adjustment or direct absorption. The administrative, direct selling and advertising expenses of the Marketing Company and the direct variable costs incurred for beer production of the two breweries were allocated at cost. This pooled management structure is expected to achieve greater efficiency and improved operating profitability. (b) Sales of raw materials The Company sold raw materials including packaging materials and beer products of RMB 1,748,532 and RMB 4,834,968 to Noble Brewery during the three months ended March 31, 2003 and 2002, respectively. These transactions were carried out at cost between the parties. (c) Purchases of beer products During the three months ended March 31, 2003 and 2002, the Company purchased beer products for resale from Noble Brewery amounting to RMB 35,752,181 and RMB 91,270,127, respectively, and received an allocation of sales incentives (as defined in EITF No.01-9) from Noble Brewery of RMB nil and RMB 548,787, respectively. The transactions were carried out at agreed terms between the parties. During the three months ended March 31, 2003 and 2002, the Company purchased RMB 22,356,037 and RMB 15,574,954 of beer products from Noble Brewery, respectively, pursuant to the management arrangement of re-allocating the total production volume at a 1 to 2 ratio among Zhaoqing Brewery and Noble Brewery (see Note 5(a)). This amount represents the direct variable cost of producing these beer products. 19 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) THREE MONTHS ENDED MARCH 31, 2003 AND 2002 5. RELATED PARTIES TRANSACTIONS AND ARRANGEMENTS (continued) (d) Royalty fee For the three months ended March 31, 2003 and 2002, a royalty fee of RMB 514,315 and RMB 865,718, respectively, was payable to Guangdong Blue Ribbon for the right to use the Pabst trademarks in the PRC. (e) Amounts due from related companies and loan receivable The amounts due from related companies primarily represent receivable balances from Guangdong Blue Ribbon and its group of companies resulting from routine inter-company business transactions. The amounts are unsecured, interest-free and repayable on demand. On May 10, 2003, out of the amounts due from Guangdong Blue Ribbon, approximately RMB 7,090,000 was converted into a short-term loan due to be payable in one year bearing an interest rate of 5.6% per annum, which was reclassified to non-current assets in the accompanying consolidated financial statements. (f) Loans to related companies During the three months ended March 31, 2002, the Company loaned RMB 5,500,000 to Zao Yang High Worth Brewery. The loan was unsecured, with interest at 3.6% per annum and was repayable on December 31, 2002. During the three months ended March 31, 2002, Zao Yang High Worth Brewery advanced RMB 5,500,000 to Guangdong Blue Ribbon. The advance to Guangdong Blue Ribbon was unsecured, with no agreed-upon interest and no fixed date of repayment. During the three months ended June 30, 2002, both of these loans were repaid in full. On March 24, 2003, the Board of Directors of the Company and High Worth JV approved a short-term loan of RMB 46,000,000 from High Worth JV to Lan Wei, a company controlled by the City of Zhaoqing that is the controlling shareholder of the Company. Of such amount, RMB 20,000,000 is to be invested in businesses affiliated with Lan Wei and RMB 26,000,000 is to be used to facilitate the reorganization or restructuring of Noble China, Inc. Lan Wei has agreed to repay the RMB 20,000,000 loan by June 30, 2003. The RMB 26,000,000 is being held in a bank escrow account, and will be repaid to the Company if and when it is determined that it is not possible to file a confirmable plan of reorganization or implement an out-of-court restructuring of Noble China, Inc., but in no event later than December 31, 2003. The loans bear interest at 3.9% per annum. Pursuant to the loan memorandum, if and when Noble China, Inc. is successfully reorganized or restructured with the assistance of Lan Wei, it is expected that the Company will receive a sub-license or an assignment of the license to produce and distribute Pabst Blue Ribbon in China, and that the Company will have the option to have the RMB 26,000,000 loan repaid in cash or by the transfer to the Company of any assets that Lan Wei may acquire in conjunction with a reorganization or restructuring of Noble China, Inc. with a fair value equivalent to the loan amount. (g) Amounts due to related companies As of March 31, 2003 and December 31, 2002, the amounts due to related companies consist of amounts payable to Guangdong Blue Ribbon and its group of companies of RMB 1,560 and RMB 1,560, respectively. The amounts payable to group companies of Guangdong Blue Ribbon arose from the purchases of raw materials. The amounts are unsecured, interest-free and repayable on demand. 20 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) THREE MONTHS ENDED MARCH 31, 2003 AND 2002 6. INTEREST IN AN ASSOCIATED COMPANY The investment consists of the Company's 40% equity interest in Noble Brewery, which is held by a 60% owned subsidiary. The condensed unaudited statements of operations of Noble Brewery for the three months ended March 31, 2003 and 2002 are as follows:

~~September~~Three 30Months Ended Three Months Ended March 31,~~2002~~ ~~December~~2003 March 31, ~~2001~~2002 ------------------------- -- ------------------~~----~~ RMB USD RMB ~~USD~~(1) ------------- ------------ ------------ ------~~----~~ ~~(Unaudited)~~Net ~~(Unaudited)~~sales ~~Current assets 212~~32,238,~~053~~019 253,~~570~~884,~~850~~099 ~~261~~86,~~423~~934,~~849~~510 ~~31,496,850~~============= ~~Property,~~============ ~~plant~~================== ~~and~~Net ~~equipment~~(loss) income (237,~~848~~957,~~128~~576) (28,~~656~~669,~~401~~585) ~~360~~5,~~162~~164,~~062~~534 ~~43,393,020 Restricted bank deposits 35,700,000 4,301,205 35,700,000 4,301,205 ------------ ----------- ------------ ---------- Total assets 485,786,181 58,528,456 657,285,911 79,191,075~~ ============= ============ ============ ======~~====~~ ~~Current~~The ~~liabilities~~Company's ~~136,035,465~~share ~~16,389,816~~of ~~107,619,213~~net ~~12,966,172~~(loss) ~~Deferred~~ income ~~taxes~~after ~~13,218,000~~adjustment ~~1,592,530~~of ~~13,218,000~~intercompany ~~1,592,530~~profit ~~Equity~~unrealized ~~336,532,716~~and ~~40,546,110~~other ~~536,448,698~~intercompany ~~64,632,373~~adjustments ~~------------~~(2)(3) ~~----------- ------------ ---------- Total liabilities and equity 485~~(94,~~786~~067,~~181~~726) 58(11,~~528~~333,~~456~~461) ~~657~~3,~~285~~915,~~911~~814 ~~79,191,075~~ ============= ============ ============ ======~~====~~

(1) The provisions of Emerging Issues Task Force ("EITF") No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)", were adopted during 2002. The adoption of EITF No. 01-9 resulted in the reclassification of certain sales incentives previously classified as selling expenses to a reduction from sales. Prior quarter amounts have been reclassified to conform to the current quarter's presentation; this reclassification had no effect on the Company's operating results. The amount of sales incentives recorded as a deduction from sales in accordance with EITF No. 01-9 was RMB 548,787 for the three months ended March 31, 2002. (2) As at March 31, 2003 and 2002, the balance of the amounts due to Noble Brewery was RMB 285,271,416 and RMB 199,753,980, respectively. During the three months ended March 31, 2003 and 2002, Noble Brewery recorded an allowance for doubtful accounts of RMB 1,700,000 and RMB 4,000,000, respectively, on amounts receivable from the Company. The provision for doubtful accounts were eliminated, together with the unrealized profit on stock of the Company, as intercompany adjustments when the Company recorded its equity in the results of operations of Noble Brewery based on the equity accounting method. (3) During the three months ended March 31, 2003, the Company's share of net (loss) income of an associated company of RMB 94,067,726 includes RMB 87,840,000 with respect to the impairment charges recorded by the associated company. The following is summarized balance sheet information of Noble Brewery:

(1) Net of allowances on amounts receivable from the Company of RMB 165,175,000 and RMB 163,475,000 as of March 31, 2003 and December 31, 2002, respectively. 21 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) THREE MONTHS ENDED MARCH 31, 2003 AND 2002 6. INTEREST IN AN ASSOCIATED COMPANY (continued) During the three months ended March 31, 2003, as a result of unexpected substantial decrease in sales, continuing operating losses and the outbreak of SARS in China, Noble Brewery conducted an evaluation of the carrying value of its land use right, property and building, plant and equipment and construction in progress, as well as the related estimated future cash flows, which included the assumption that there is a probability of (1) 40%;(2) 40%; and (3) 20% that Noble Brewery will: (1) continue to produce Pabst Blue Ribbon beer after November 7, 2003 exclusively; (2) continue to produce Pabst Blue Ribbon beer after November 7, 2003 jointly with Zhaoqing Brewery in a 2:1 ratio; and (3) not be able to renew its sub-license agreement and switch to produce local brand beer. As a result of this evaluation, Noble Brewery recorded a provision for impairment of its land use right, property and building, plant and equipment, office equipment and construction in progress of RMB 219,600,000 for the three months ended March 31, 2003. Included in the impairment charges were amounts related to the purchase commitments for production equipment, which have been recorded as an accrued expense and a reduction of prepaid amounts totaling RMB 2,600,000 and RMB 2,600,000, respectively. Accordingly, the effect of Noble Brewery successfully obtaining a renewal of the sub-license is expected to have little impact on the recoverability of the assets. As a result of these impairment charges, the majority of assets of Noble Brewery have been fully written down. On April 3, 2002, Noble Brewery was served with an preservation order from the High Court of Shandong Province freezing a portion of its bank accounts with aggregate balances of approximately RMB 35,700,000, in connection with litigation between Noble China Inc., Shandong Noble Brewery Ltd. and China Coast Property Development Ltd, with respect to Noble China Inc.'s 1994 investment in Shandong Shouguang Brewery Co. Ltd. China Coast Property Development Ltd. is asserting a total claim against Noble China Inc. of approximately RMB 53,100,000. Noble China Inc., through its wholly-owned subsidiary, Linchpin, owns a 60% interest in Noble Brewery. The court order specified that a total of RMB 53,100,000 was to be retained by Noble Brewery pending resolution of the litigation. Accordingly, in addition to the RMB 35,700,000 of funds frozen, Noble Brewery will also be obligated to withhold potential dividend distributions or equity interests due to Linchpin Holdings Limited of RMB 17,400,000. Noble Brewery has engaged legal counsel in the PRC to file a challenge to the court order, but there can be no assurances that this effort will be successful. As a consequence of the preservation order, the remaining cash not affected by such court order has been transferred either to High Worth JV or the Marketing Company in trust and is being held on behalf of Noble Brewery for the purpose of funding the operations of Noble Brewery. During the three months ended March 31, 2003, High Worth JV and the Marketing Company have utilized all the cash held in trust for Noble Brewery for the purchase of raw materials and settlement of the expenses on behalf of Noble Brewery. As a result, as of March 31, 2003, High Worth JV and the Marketing Company did not hold any cash in trust for Noble Brewery. 22 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) THREE MONTHS ENDED MARCH 31, 2003 AND 2002 6. INTEREST IN AN ASSOCIATED COMPANY (continued) Management of Noble Brewery believes that Noble Brewery's operations will not be impaired as a result of the court order freezing a portion of its bank accounts, and that Noble Brewery has adequate working capital resources to fund its operating requirements in the near term. If the foregoing assumptions prove to be inaccurate, Noble Brewery's cash flow may be adversely affected, which would negatively impact the ability of Noble Brewery to conduct operations at current levels and continue as a going concern. In May 2002, Noble Brewery declared a dividend distribution of RMB 75,511,040, of which RMB 30,204,416 has been paid to High Worth JV, while the dividend payable to Linchpin amounting to RMB 45,306,624 can only be remitted to Linchpin when the preservation order is released and approval from the Foreign Exchange Bureau is obtained. On July 19, 2002, Noble China Inc. announced that the Shandong Court ruled against it and ordered it to pay the amount of claims in the sum of US$3,999,988 and RMB 20,000,000 plus legal costs of RMB 541,210, and interest from June 21, 2001 within one month of the judgment. Noble China Inc. appealed the Shandong Court's decision to the Supreme Court of the PRC, which was accepted by the Supreme Court on November 4, 2002, a hearing for which is still pending. On September 29, 2002, the Shandong Court issued a new preservation order to those banks where Noble Brewery kept its previously frozen funds, requesting them to extend the period of preservation for an additional six months until March 23, 2003. On March 21, 2003, the Shandong Court further extended its Preservation Order for another six months to September 23, 2003. The Company is currently unable to predict the effect of Noble China Inc.'s financial difficulties and management uncertainty on Noble Brewery, including Noble China Inc.'s ability to grant a sub-license to Noble Brewery to produce Pabst Blue Ribbon beer after the existing sub-license expires on November 7, 2003. If Noble China Inc. is unable to renew the Pabst sub-license with Noble Brewery, or if other related estimates and assumptions change adversely in the future, Noble Brewery may be required to record an additional impairment charge. As of March 31, 2003, given the various issues discussed above, the Company has conducted an evaluation on the carrying value of its investment in Noble Brewery taking into consideration the related amounts due to Noble Brewery and the net working capital of Noble Brewery and determined an immediate write down of the investment is not necessary. However, if the circumstances related to the recoverability of the investment change adversely in the future, the Company may be required to write down its value. 23 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) THREE MONTHS ENDED MARCH 31, 2003 AND 2002 7. IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT During the three months ended March 31, 2003, as a result of an unexpected substantial decreases in sales, continuing operating losses, the outbreak of SARS in China, working capital deficiency and various business issues, the Company conducted an evaluation of the carrying value of its land use right, property and building, plant and equipment, office equipment and motor vehicles and construction in progress, the accrued capital commitment with respect to the purchase of production assets, and the related expected future cash flows. As a result of this evaluation, the Company recorded a provision for impairment charges of RMB 50,400,000, RMB 8,050,000 and RMB 6,800,000 for the three months ended March 31, 2003 for Zhaoqing Brewery, the Marketing Company and Zao Yang High Worth Brewery, respectively. These impairment charges aggregating RMB 65,250,000 were based on certain assumptions regarding the Company's future cash flows and other factors used to determine the fair value of its land use rights, property and building, office equipment and motor vehicles, plant and equipment, and construction in progress, including the assumptions that some of the local brand beers developed and produced by Zao Yang High Worth Brewery will be shifted to Zhaoqing Brewery and Noble Brewery for production and distribution; and that, as a result of Lan Wei's efforts, Zhaoqing Brewery has a 50% chance of being granted a renewal of the Pabst sub-license jointly with Noble Brewery to produce Pabst Blue Ribbon beer after the existing sub-license expires on November 7, 2003, with a production ratio of 1 to 2. Included in the impairment charges were amounts related to the purchase commitments for production equipment of RMB 2,400,000, which have been recorded as an accrued expense. As a result of the persistent decrease in sales and continuing operating losses, the related expected future cash flows to be generated from the sales of Pabst Blue Ribbon beer at the estimated reduced level of distribution are expected to be negative. Accordingly, the effect of the Company successfully obtaining a renewal of a sub-license is expected to have little impact on the recoverability of the assets. As a result, a provision for impairment was provided for a majority of the assets of Zhaoqing Brewery, the Marketing Company and Zao Yang High Worth Brewery. 8. BANK BORROWINGS As at December 31, 2002, a bank loan of RMB 30,104,000 granted to Zao Yang High Worth Brewery, which expired on September 30, 2002, was pending for completion of the official loan renewal agreement. Zao Yang High Worth Brewery has continued to pay the interest that is accruing on the loan, and the bank has not made a demand for repayment. The renewal agreement, without a specific date of repayment and guaranteed by High Worth JV, had been approved and signed by the relevant bank and was returned to Zao Yang High Worth Brewery in May 2003. The loan has been recorded as a current liability at March 31, 2003 and is payable on demand. 9. AMOUNT DUE TO AN ASSOCIATED COMPANY The amount due to an associated company represents amounts payable to Noble Brewery. Commencing in 2001, these obligations resulted from the sale of beer products by Noble Brewery to the Marketing Company as well as from the sale of raw materials to Zhaoqing Brewery by Noble Brewery and other recurring intercompany transactions. As of March 31, 2003 and December 31, 2002, the amount due to an associated company was RMB 285,271,416 and RMB 298,379,194, respectively, which was unsecured, interest-free and repayable on demand. 24 CBR BREWING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED) THREE MONTHS ENDED MARCH 31, 2003 AND 2002 10. ADVANCE FROM RELATED PARTY During the three months ended March 31, 2002, Zao Yang High Worth Brewery received an advance of RMB 5,700,000 from its local partner, Zao Yang Brewery, which is the 45% shareholder of Zao Yang High Worth Brewery. The loan was unsecured, without interest and had no fixed term of repayment. This advance has been utilized to fund the working capital requirements of Zao Yang High Worth Brewery. This advance was subsequently converted into additional capital of Zao Yang High Worth Brewery in 2002 (see Note 1). 11. MINORITY INTERESTS As a result of the substantial operating losses incurred by the Company during the year ended December 31, 2002 and the three months ended March 31, 2003, and the cumulative effect of paying dividends based on distributable earnings calculated in accordance with PRC accounting standards, which were higher than the distributable earnings determined under United States accounting standards, the minority interests at March 31, 2003 reflected a debit balance of RMB 71,707,225. Since the minority interest parties have no legal obligation to fund these obligations to the Company, the debit balance of RMB 71,707,225 was charged to operations during the three months ended March 31, 2003. The Company expects to continue to charge to operations any future debit balances of the minority interest parties. 12. CONTINGENCIES For information with respect to licensing and legal matters related to Noble China Inc., see "NOBLE CHINA INC." at Note 1 and Note 6, respectively. 25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995: This Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 contains "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, including statements that include the words "believes", "expects", "anticipates", or similar expressions. These forward-looking statements include, among others, statements concerning the Company's expectations regarding sales trends, gross margin trends, operating costs, the availability of funds to finance capital expenditures and operations, facility expansion plans, competition, and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The forward-looking statements in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 involve known and unknown risks, uncertainties and other factors that could the cause actual results, performance or achievements of the Company to differ materially from those expressed in or implied by the forward-looking statements contained herein. Summary of Business Operations and Corporate Structure: The Company produces principally Pabst Blue Ribbon beer for distribution throughout China. In general, the beer market in China is experiencing a steady overall growth rate, although the growth in the Company's beer sales has been hindered by the general softening in demand for its premium beers and the keen competitive environment in the Chinese beer market. The Company's brewing facilities and primary operating entities are as follows: ZHAOQING BREWERY: The original facilities of Zhaoqing Brewery were constructed between 1978 and 1980 with annual production capacity based on old brewing technology of 50,000 metric tons or 425,000 barrels of beer. With the implementation of the new brewing technology and the purchase of additional equipment, Zhaoqing Brewery reached an annual production capacity of 100,000 metric tons or 850,000 barrels by the end of 1995. During March 1995, Zhaoqing Brewery discontinued production of all domestic brands and commenced exclusive production of Pabst Blue Ribbon beer on a full-scale basis. However, beer that does not meet Pabst Blue Ribbon quality standards is generally packaged and distributed as local brand beer. In anticipation of the possible non-renewal of Zhaoqing Brewery's sub-license to produce Pabst Blue Ribbon beer, Zhaoqing Brewery has commenced the production of various newly developed or modified local brand beers in order to meet the needs of the lower to medium market segment. NOBLE BREWERY: The original facilities of Noble Brewery were constructed between 1988 and 1990 with annual production capacity of approximately 80,000 metric tons or 680,000 barrels of beer. During July 1994, a second brewing facility was completed, which increased annual production capacity by an additional 120,000 metric tons or 1,020,000 barrels of beer. The second brewing facility commenced full-scale production during late 1994. Noble Brewery has produced Pabst Blue beer exclusively since it commenced operations. In 2002, Noble Brewery also commenced production of various newly developed local brand beers in order to meet the needs of the lower to medium market segment. ZAO YANG HIGH WORTH BREWERY: The original facilities of Zao Yang High Worth Brewery were constructed between 1980 and 1985 with annual production capacity based on old brewing technology of approximately 40,000 metric tons or 340,000 barrels of beer. Zao Yang High Worth Brewery commenced the production of Pabst Blue Ribbon beer in June 1998, and the Marketing Company began purchasing Zao Yang High Worth Brewery's 26 production of Pabst Blue Ribbon beer for distribution. In addition, Zao Yang High Worth Brewery also produces domestic brand beer under the brand name "Di Huang Quan" and sells directly to distributors in nearby regions. MARKETING COMPANY: During February 1995, the Marketing Company was established to conduct the distribution, marketing and promotion throughout China of the Pabst Blue Ribbon beer produced by the Company's breweries. The Company owns a 42% net interest in the Marketing Company. The consolidated financial statements include the results of operations of the Marketing Company on a consolidated basis, as the Company has effective control of the board of directors of the Marketing Company. The Company conducts a substantial portion of its purchases through related parties, and has additional significant continuing transactions with such parties. Overview: During 2002 the Company experienced decreased net sales and a net loss for the third successive year, diminished working capital, and intense competition. The Company expects that these pressures will continue in 2003, resulting in net losses for the short-term. The Company has implemented an overhaul of its operations and marketing programs through the efforts of the management committee. With the pooling of the resources of Zhaoqing Brewery, Noble Brewery and the Marketing Company, the Company implemented a large scale restructuring plan in 2001 in which almost one-third of the work force was eliminated. Although effective control of the Company changed on January 22, 2002 and a new management team has been appointed to operate the Company in 2002, the Company anticipates that the consolidation plan will continue. In 2002, the Company implemented a series of new sales programs to launch various newly developed or modified local brand beers into the market, including brands such as "Lanli", "Lancheng", "Lanshi", "Xile" and "Zhaopi". Together with the local brand beer "Di Huang Quan" produced by Zao Yang High Worth Brewery, the Company intends to increase its marketing efforts with respect to these new local brands. If the Company is unable to obtain a new sub-license to produce Pabst Blue Ribbon beer in China after November 7, 2003, these new local brands would be expected to become the main product lines and the major source of revenues for High Worth Brewery and Zao Yang High Worth Brewery after the expiration of the Pabst sub-license on November 7, 2003. However, pursuant to the joint venture agreement of Blue Ribbon Noble, the Company will continue to manage the daily operations of Blue Ribbon Noble until the expiration of the joint venture on June 10, 2013. In May 1999, Noble China Inc. entered into a license agreement with Pabst Brewing Company granting it the right to utilize the Pabst Blue Ribbon trademarks in connection with the production, promotion, distribution and sale of beer in the PRC for 30 years commencing in November 2003. Accordingly, management currently believes that Noble Brewery will be able to obtain a sub-license from Noble China Inc., the 60% shareholder of Noble Brewery, to continue to produce and sell Pabst Blue Ribbon beer in China after November 7, 2003, although there can be no assurances in this regard. In January 2003, the Company reorganized its marketing teams by reducing the number of branch offices from 15 to 6. Management believes that the reduction in branch offices will enhance the implementation of its marketing strategies through clearer responsibilities and can allow its sales force to more effectively attempt to arrest the decline in sales volume. However, there can be no assurances that the Company will become profitable in the near future. The Company may consider more severe restructuring alternatives if it is unable to operate profitably in the near future. The accompanying unaudited consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the accompanying unaudited consolidated financial statements do not purport to represent 27 the realizable or settlement values. The Company has suffered recurring operating losses and had a working capital deficit at December 31, 2002 and March 31, 2003. The Company's independent certified public accountants, in their independent auditors' report on the consolidated financial statements as of and for the year ended December 31, 2002, have expressed substantial doubt about the Company's ability to continue as a going concern. During the three months ended March 31, 2003, as a result of an unexpected substantial deceases in sales, continuing operating losses, the outbreak of SARS in China, working capital deficiency and various business issues, the Company conducted a re-evaluation of the carrying value of its land use right, property and building, office equipment and motor vehicles, plant and equipment, construction in progress, and the accrued capital commitment with respect to the purchase of production assets and the related expected future cash flows. As a result of this evaluation, the Company recorded a provision for impairment charges of RMB 50,400,000, RMB 8,050,000 and RMB 6,800,000 for the three months ended March 31, 2003, for Zhaoqing Brewery, the Marketing Company and Zao Yang High Worth Brewery, respectively. These impairment charges aggregating RMB 65,250,000 were based on certain assumptions regarding the Company's future cash flows and other factors used to determine the fair value of its land use rights, property and building, office equipment and motor vehicles, plant and equipment, and construction in progress, including the assumptions that some of the local brand beers developed and produced by Zao Yang High Worth Brewery will be shifted to Zhaoqing Brewery and Noble Brewery for production and distribution; and that, as a result of Lan Wei's efforts, Zhaoqing Brewery has a 50% chance of being granted a renewal of the Pabst sub-license jointly with Noble Brewery to produce Pabst Blue Ribbon beer after the existing sub-license expires on November 7, 2003, with a production ratio of 1 to 2. Included in the impairment charges were amounts related to the purchase commitments for production equipment of RMB 2,400,000, which have been recorded as an accrued expense. As a result of the persistent decrease in sales and continuing operating losses, the related expected future cash flows to be generated from the sales of Pabst Blue Ribbon beer at the estimated reduced level of distribution are expected to be negative. Accordingly, the effect of the Company successfully obtaining a renewal of a sub-license is expected to have little impact on the recoverability of the assets. As a result, a provision for impairment was provided for a majority of the assets of Zhaoqing Brewery, the Marketing Company and Zao Yang High Worth Brewery. This estimate represents a change from prior estimates based on the events which have transpired during the three months ended March 31, 2003. In addition, during the three months March 31, 2003, Noble Brewery also recorded a provision for impairment of land use right, property and building, office equipment, plant and equipment and construction in progress of RMB 219,600,000, as a result of its reassessment of the fair value of its property, plant and equipment based on the related expected cash flows. Included in the impairment charges were amounts related to the purchase commitments for production equipment, which have been recorded as an accrued expense and a reduction of prepaid amounts totaling RMB 2,600,000 and RMB 2,600,000, respectively. The Company anticipates that its operating cash flow, combined with cash on hand, bank lines of credit, and other external credit sources, and the credit facilities provided by affiliates or related parties, are adequate to satisfy the Company's working capital requirements through December 31, 2003. If the foregoing assumptions prove to be inaccurate, the Company's cash flow may be adversely affected, which would negatively impact the ability of the Company to conduct operations at current levels and continue as a going concern. Licensing Arrangements and Relationship with Noble China Inc.: Through a Sub-license Agreement dated May 6, 1994 between Pabst Zhaoqing, the then subsidiary of Guangdong Blue Ribbon, and High Worth JV, High Worth JV acquired a sub-license to utilize Pabst trademarks in conjunction with the production and 28 marketing of beer in China and other Asian countries except Hong Kong, Macau, Japan and South Korea. The sub-license is subject to a prior License Agreement between Pabst US and Pabst Zhaoqing, and a subsequent Assets Transferring Agreement among Pabst Zhaoqing, Pabst US and Guangdong Blue Ribbon. The License Agreement expires on November 7, 2003. Noble China Inc. is the 60% shareholder of Noble Brewery. Noble China Inc. has publicly reported that in May 1999 it entered into a license agreement with Pabst Brewing Company granting it the right to utilize the Pabst Blue Ribbon trademarks in connection with the production, promotion, distribution and sale of beer in China for 30 years commencing in November 2003. During December 2000, the Company and Noble China Inc. signed a memorandum pursuant to which a management committee was established to coordinate and enhance the operations of Zhaoqing Brewery, Noble Brewery and the Marketing Company. Effective January 1, 2001, the management, marketing, production and operations of Zhaoqing Brewery, Noble Brewery and the Marketing Company were pooled together under a newly-created management entity named "Blue Ribbon Enterprises" in order to achieve improved coordination of human, financial, production and marketing activities. Zhaoqing Brewery, Noble Brewery and the Marketing Company each remain as legally distinct entities. The Company's controlling shareholder, Lan Wei, owns a 19.6% equity interest in Noble China Inc., which it acquired in January 2002 as part of the transaction in which it acquired a controlling interest in the Company. The Company's prior controlling shareholder, Huaqiang, acquired this 19.6% equity interest in Noble China Inc. during 2001. Noble China Inc. has also recently publicly reported that it was experiencing severe financial difficulties, was unable to meet its financial commitments and was insolvent, and was considering various courses of action. On July 19, 2002, Noble China Inc. announced that the Shandong Court ruled against it and ordered it to pay claims of US$3,999,988 and RMB 20,000,000 plus legal costs of RMB 541,210, and interest from June 21, 2001 within one month of the judgment. The litigation was related to a claim by China Coastal Development Ltd. Noble China Inc. appealed the Shandong Court's decision to the Supreme Court of the PRC, which was accepted on November 4, 2002, a hearing for which is still pending. On July 22, 2002, Noble China Inc. held its Annual and General Meeting of Shareholders. A Special Meeting of Shareholders and a Meeting of Debenture holders were also held on July 22, 2002 to seek approval for certain amendments to the 9% Convertible Subordinated Debentures and to the Trust Indenture governing the Debentures. Noble China Inc. has CN$30,000,000 of outstanding Debentures. As a result of ongoing discussions between the major Debenture holder and indirectly a major shareholder of Noble China Inc., the City of Zhaoqing, regarding a possible restructuring of Noble China Inc., the amendments to the Debentures and to the Trust Indenture were not presented for a vote at the Special Meeting of Shareholders and at the Meeting of Debenture holders; both such meetings were instead adjourned to times and places to be determined. The Board of Directors of Noble China Inc. was re-elected and confirmed its short-term assistance to facilitate the negotiations between the major shareholder of Noble China Inc. and the major Debenture holder. The Directors of Noble China Inc. indicated that if the major shareholder and major Debenture holder could not reach a resolution on an appropriate restructuring plan that the Board of Directors could support in the interest of all shareholders and Debenture holders within 60 days, the Board of Directors would resign. On September 3, 2002, Noble China Inc.'s report for the three months ended June 30, 2002 disclosed that although the major shareholder and the major Debenture holder were continuing their discussions, no meaningful process had been noted and the Directors planned to resign on September 20, 2002. 29 On September 24, 2002, a press release by Noble China Inc. announced that one of its three directors had resigned on September 20, 2002, and that the remaining two directors intended to resign. On November 12, 2002, Noble China Inc. held a meeting of shareholders to elect a new Board of Directors to consist of three members; three candidates nominated by Lan Wei, the major shareholder of the Company, were elected to the Board of Directors. Discussions between holders of a majority of the Debentures and representatives of the City of Zhaoqing regarding a reorganization of Noble China Inc. resulted in a preliminary agreement in principle with respect to settlement in full of the outstanding Debentures. Discussions between representatives of the City of Zhaoqing and Pabst Brewing Company regarding a reorganization of Noble China Inc. and a restructuring of the master license agreement that becomes effective on November 7, 2003 resulted in the execution of a non-binding term sheet in March 2003. These agreements are both conditional on Noble China Inc. being able to implement a formal reorganization of its debt and equity securities. The successful reorganization of Noble China Inc. is subject to the preparation and execution of definitive agreements and a plan of reorganization, compliance with all applicable laws and regulations, and the funding, approval and consummation of a court-approved reorganization plan of Noble China Inc. Accordingly, as a result of the uncertainty with respect to these matters, there can be no assurances that Noble China Inc. will be successfully reorganized or that the Company and Blue Ribbon Noble will be able to retain the right to produce and distribute Pabst Blue Ribbon beer in China subsequent to November 7, 2003. As of March 31, 2003, the Company has not yet obtained a renewal of the Pabst Blue Ribbon sub-license agreement. The inability of the Company to obtain a sub-license from Noble China Inc. or to renew the Company's sub-license or enter into some other form of strategic relationship under acceptable terms and conditions to allow the Company to continue to produce and distribute Pabst Blue Ribbon beer in China would have a potential adverse effect on the Company's future business development, including the possible formation of strategic alliance with other brewing group in China. On March 24, 2003, the Board of Directors of the Company and High Worth JV approved a short-term loan of RMB 46,000,000 from High Worth JV to Lan Wei, a company controlled by the City of Zhaoqing that is the controlling shareholder of the Company. Of such amount, RMB 20,000,000 is to be invested in businesses affiliated with Lan Wei and RMB 26,000,000 is to be used to facilitate the reorganization or restructuring of Noble China Inc. Lan Wei has agreed to repay the RMB 20,000,000 loan by June 30, 2003. The RMB 26,000,000 is being held in a bank escrow account, and will be repaid to the Company if and when it is determined that it is not possible to file a confirmable plan of reorganization or implement an out-of-court restructuring of Noble China Inc., but in no event later than December 31, 2003. The loans bear interest at 3.9% per annum. During the past few years, Lan Wei has invested substantial capital in Noble China Inc. and the Company, and has also used its relationships to arrange for substantial bank financing for the Company, in order to facilitate the strategic development of the Pabst Blue Ribbon beer business in China. Lan Wei believes that a successful reorganization or restructuring of Noble China Inc. is in the long-term interest of the Company and Blue Ribbon Noble, as it will assure such entities the right to produce and distribute Pabst Blue Ribbon beer in China for a period of thirty years from November 7, 2003. If and when Noble China Inc. is successfully reorganized or restructured with the assistance of Lan Wei, it is expected that the Company will receive a sub-license or an assignment of the license to produce and distribute Pabst Blue Ribbon in China, and that the Company will have the option to have the RMB 26,000,000 loan repaid in cash or by the transfer to the Company of any assets that Lan Wei may acquire in 30 conjunction with a reorganization or restructuring of Noble China Inc. with a fair value equivalent to the loan amount. The Company is currently unable to predict the effect that these recent developments may have on future operations, including any effect on the Company's ability to obtain a sub-license to produce and distribute Pabst Blue Ribbon beer in China effective from November 7, 2003, or the impact on Noble Brewery, the Company's affiliate. Critical Accounting Policies: The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Management periodically evaluates the estimates and judgments made, including those related to interest in an associated company, income taxes, impairment of assets and allowance for doubtful accounts. Management bases their estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions. The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company's consolidated financial statements. Interest in an Associated Company: The Company accounts for its 40% interest in Noble Brewery using the equity method of accounting. At March 31, 2003, the total value of the Company's interest in Noble Brewery was RMB 119,692,586, representing 29.1% of the Company's total assets. At December 31, 2002, the total value of the Company's interest in Noble Brewery was RMB 213,760,312, representing 36.2% of the Company's total assets. The net sales of Noble Brewery for the three months ended March 31, 2003 decreased by RMB 54,696,491 or 62.9% to RMB 32,238,019, as compared to RMB 86,934,510 for the three months ended March 31, 2002. During the three months ended March 31, 2003, because of unexpected substantial reduction in sales and continued operating losses, Noble Brewery conducted an evaluation of the carrying value of its land use right, property and building, office equipment, plant and equipment and construction in progress, based on the related estimated future cash flows. As a result of this calculation, Noble Brewery recorded a provision for impairment of land use right, property and building, office equipment, plant and equipment and construction in progress of RMB 219,600,000. Included in the impairment charges were amounts related to the purchase commitments for production equipment, which have been recorded as an accrued expense and a reduction of prepaid amounts totaling RMB 2,600,000 and RMB 2,600,000, respectively. As a result of these factors, the Company's share of the net loss from Noble Brewery for the three months ended March 31, 2003 was RMB 94,067,726, as compared to net income of RMB 3,915,814 for the three months ended March 31, 2002. As of March 31, 2003, given the various issues discussed above, the Company has conducted an evaluation on the carrying value of its investment in Noble Brewery taking into consideration the related amounts due to Noble Brewery and the net working capital of Noble Brewery and determined an immediate write down of the investment is not necessary. However, if the circumstances related to the recoverability of the investment change adversely in the future, the Company may be required to write down its value. In addition, Noble China Inc., the majority shareholder of Noble Brewery, is experiencing certain financial difficulties and management uncertainty. The Company is currently unable to predict the effect of Noble China Inc.'s financial difficulties and management uncertainties on Noble Brewery, including Noble China Inc.'s ability to grant a sub-license to Noble Brewery to produce Pabst Blue Ribbon beer. 31 Income Taxes: The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. In the event the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of its recorded amount, an adjustment to the deferred tax asset would be credited to operations in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of its deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to operations in the period such determination was made. Impairment of Assets: The Company's long-lived assets include a land use right, property and building, plant and equipment as well as construction in progress. At March 31, 2003, the net residual value of the land use right, property and building, office equipment and motor vehicles, plant and equipment and construction in progress was RMB 726,331, which accounted for 0.2% of the Company's total assets. At December 31, 2002, the net value of property, plant and equipment was RMB 64,186,910, which accounted for 10.9% of the Company's total assets. In assessing the impairment of the land use right, property and building, plant and equipment and construction in progress, the Company makes assumptions regarding the estimated future cash flows and other factors to determine the fair value of the respective assets. During the three months ended March 31, 2003, as a result of an unexpected substantial deceases in sales, continuing operating losses, the outbreak of SARS in China, working capital deficiency, and various business issues, the Company conducted an re-evaluation of the carrying value of its land use right, property and building, office equipment and motor vehicles, plant and equipment, construction in progress, the accrued capital commitment with respect to the purchase of production assets, and the related expected future cash flows. As a result of this evaluation, the Company recorded a provision for impairment charges of RMB 50,400,000, RMB 8,050,000 and RMB 6,800,000 for the three months ended March 31, 2003, for Zhaoqing Brewery, the Marketing Company and Zao Yang High Worth Brewery, respectively. These impairment charges aggregating RMB 65,250,000 were based on certain assumptions regarding the Company's future cash flows and other factors used to determine the fair value of its land use rights, property and building, office equipment and motor vehicles, plant and equipment, and construction in progress, including the assumptions that some of the local brand beers developed and produced by Zao Yang High Worth Brewery will be shifted to Zhaoqing Brewery and Noble Brewery for production and distribution; and that, as a result of Lan Wei's efforts, Zhaoqing Brewery has a 50% chance of being granted a renewal of the Pabst sub-license jointly with Noble Brewery to produce Pabst Blue Ribbon beer after the existing sub-license expires on November 7, 2003, with a production ratio of 1 to 2. Included in the impairment charges were amounts related to the purchase commitments for production equipment of RMB 2,400,000, which have been recorded as an accrued expense. As a result of the persistent decrease in sales and continuing operating losses, the related expected future cash flows to be generated from the sales of Pabst Blue Ribbon beer at the estimated reduced level of distribution are expected to be negative. Accordingly, the effect of the Company successfully obtaining a renewal of a sub-license is expected to have little impact on the recoverability of the assets. As a result, a provision for impairment was provided for a majority of the assets of Zhaoqing Brewery, the Marketing Company and Zao Yang High Worth Brewery. This estimate represents a change from prior estimates based on the events which have transpired during the three months ended March 31, 2003. In addition, during the three months March 31, 2003, Noble Brewery also recorded a provision for impairment of land use right, property and building, office equipment, plant and equipment and construction in progress of RMB 219,600,000, as a result of 32 its reassessment of the fair value of its property, plant and equipment and the related expected future cash flow. Included in the impairment charges were amounts related to the purchase commitments for production equipment, which have been recorded as an accrued expense and a reduction of prepaid amounts totaling RMB 2,600,000 and RMB 2,600,000, respectively. Allowance for Doubtful Accounts: The Company uses the allowance method to account for uncollectible accounts receivable. The Company periodically adjusts the allowance for doubtful accounts based on management's continuing review of accounts receivable. This analysis by management is based on prior years' experience, as well as an analysis of current economic and business trends. Management expects to continue to update the allowance for doubtful accounts during 2003. The Company records full allowance for accounts receivable that have been outstanding in excess of 365 days. For accounts receivable that have been outstanding for 365 days or less, the Company determines an appropriate allowance based on individual circumstances. Consolidated Results of Operations: Three Months Ended March 31, 2003 and 2002 - Sales: During the three months ended March 31, 2003, net sales of beer products decreased by RMB 102,169,148 or 57.3% to RMB 76,002,800, as compared to RMB 178,171,948 for the three months ended March 31, 2002. The Company sold 24,971 metric tons of beer to distributors in 2003 as compared to 39,714 metric tons of beer in 2002, a decrease of 37.1%. The decrease in net sales of beer products during the three months ended March 31, 2003 as compared to the three months ended March 31, 2002 was primarily attributable to the decrease in volume of beer sold particularly, which was attributable to the reorganization of its marketing teams and marketing strategies, the reduction in sales branch offices, the outbreak of severe acute respiratory syndrome in China and in general, reduced demand for Pabst beer as well as increasing competition from local brands. The decrease in net sales was also attributable to the increased proportion of local brand beers which were sold at lower sales prices. During the three months ended March 31, 2003 and 2002, approximately 80.6% and 95.4% of net sales, respectively, were generated by the sale of products under the Pabst Blue Ribbon brand name. Gross Profit: For the three months ended March 31, 2003, gross profit was RMB 20,413,944 or 26.9% of total net sales, as compared to gross profit of RMB 49,493,835 or 27.8% of total net sales for the three months ended March 31, 2002. Gross margin from beer sales decreased to 26.9% in 2003 as compared to 27.8% in 2002 as a result of the lowering of the selling price for some of the Pabst Blue Ribbon beer products, the decrease in sales volume as well as the increase in sales volume of lower profit margin local brand beers, which was partially offset by the slightly lower production costs associated with the local brand beers. The Company expects that it will continue to experience pressure on its gross profit in the near term due to a continuing softness in consumer demand for Pabst Blue Ribbon beer in China, which the Company believes is attributable to a change in the consumption pattern in China caused by the increasing competition from other foreign premium brand beers and other major local brewers. Selling, General and Administrative Expenses: For the three months ended March 31, 2003, selling, general and administrative expenses were RMB 31,462,718 or 41.4% of net sales, consisting of selling expenses of RMB 18,521,538 and general and administrative expenses of RMB 12,941,180. Net of an allowance for doubtful accounts 33 of RMB 2,600,000 for the three months ended March 31, 2003, general and administrative expenses were RMB 10,341,180. For the three months ended March 31, 2002, selling, general and administrative expenses were RMB 51,561,315 or 28.9% of net sales, consisting of selling expenses of RMB 36,744,869 and general and administrative expenses of RMB 14,816,446. Net of an allowance for doubtful accounts of RMB 6,500,000 for the three months ended March 31, 2002, general and administrative expenses were RMB 8,316,446. Selling expenses include costs relating to the advertising, promotion, marketing and distribution of Pabst Blue Ribbon beer and other local brand name beers in China. Selling expenses decreased by RMB 18,223,331 or 49.6% in 2003 as compared to 2002, and increased as a percent of net sales, to 24.4% in 2003 from 20.6% in 2002. Selling expenses decreased in 2003 as compared to 2002, as a result of a change in the Company's marketing strategy to lower the selling price for some of its Pabst Blue Ribbon beer products to encourage distributors to enhance their respective promotional activities in different geographical sales regions. By lowering the selling price, the Company was able to reduce amounts expended for selling expenses. A portion of the reduction in selling expenses was used to support new advertising and promotional campaigns for the Company's local brand name beers, which can be implemented with smaller budgets. For the three months ended March 31, 2003 and 2002, certain promotional and sales incentives provided to distributors for their specific promotional activities amounting to RMB 7,006,485 and RMB 7,433,616, respectively, have been accounted for as a reduction in net sales, pursuant to EITF 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)". Selling expenses are recognized through the consolidation of the operations of the Marketing Company. The Marketing Company incurs such expenses on behalf of all of the Pabst Blue Ribbon brewing facilities in China, even though not all of the results of operations of such facilities are reflected in the Company's operations. Although the Marketing Company is budgeted annually to operate at break-even levels, based on agreed upon ex-factory prices that the Marketing Company pays to the breweries to purchase their production of Pabst Blue Ribbon beer, actual profitability, particularly on an interim basis, is subject to substantial variability. Under the pooled management arrangement, operating losses arising from unbudgeted selling and advertising expenses incurred by the Marketing Company are being reallocated back to Zhaoqing Brewery and Noble Brewery in proportion to their respective production capacities commencing July 1, 2001. The Company expects that the reallocation of these unbudgeted selling and advertising expenses will allow the Marketing Company to operate at approximately breakeven levels during 2003, excluding the allowance for doubtful accounts. These reallocated costs are reflected in the operating results of Zhaoqing Brewery and Noble Brewery. As a result of these factors, during the three months ended March 31, 2003 and 2002, the Marketing Company incurred operating losses of RMB 10,703,100 (including an impairment charge of RMB 8,050,000) and RMB 7,306,302, respectively which reduced consolidated operating results accordingly. General and administrative expenses consist of the management office operating costs of Zhaoqing Brewery, the Marketing Company and Zao Yang High Worth Brewery, the costs associated with the operation of the Company's executive offices, and the legal and accounting and other costs associated with the operation of a public company. Excluding the allowance for doubtful accounts, general and administrative expenses increased by RMB 2,024,734 or 24.3% in 2003 as compared to 2002, and as a percentage of net sales, increased to 13.6% in 2003 from 4.7% in 2002, respectively, primarily as a result of the legal and professional fees incurred for the reincorporation of the Company to BVI and the increase in other personnel expenditures. The allowance for doubtful accounts, which is calculated based primarily on the age of outstanding accounts receivable, slightly decreased to 3.4% of net sales in 34 2003 as compared to 3.6% of net sales in 2002. However, accounts receivable are typically outstanding for a longer period of time in China than in the United States. Impairment of Property, Plant and Equipment: During the three months ended March 31, 2003, as a result of an unexpected substantial deceases in sales, continuing operating losses, the outbreak of SARS in China, working capital deficiency and various business issues, the Company conducted an re-evaluation of the carrying value of its land use right, property and building, office equipment and motor vehicles, plant and equipment, construction in progress, the accrued capital commitment with respect to the purchase of production assets, and the related expected future cash flows. As a result of this evaluation, the Company recorded a provision for impairment charges of RMB 50,400,000, RMB 8,050,000 and RMB 6,800,000 for the three months ended March 31, 2003, for Zhaoqing Brewery, the Marketing Company and Zao Yang High Worth Brewery, respectively. These impairment charges aggregating RMB 65,250,000 were based on certain assumptions regarding the Company's future cash flows and other factors used to determine the fair value of its land use rights, property and building, office equipment and motor vehicles, plant and equipment, and construction in progress, including the assumptions that some of the local brand beers developed and produced by Zao Yang High Worth Brewery will be shifted to Zhaoqing Brewery and Noble Brewery for production and distribution; and that, as a result of Lan Wei's efforts, Zhaoqing Brewery has a 50% chance of being granted a renewal of the Pabst sub-license jointly with Noble Brewery to produce Pabst Blue Ribbon beer after the existing sub-license expires on November 7, 2003, with a production ratio of 1 to 2. Included in the impairment charges were amounts related to the purchase commitments for production equipment of RMB 2,400,000, which have been recorded as an accrued expense. As a result of the persistent decrease in sales and continuing operating losses, the related expected future cash flows to be generated from the sales of Pabst Blue Ribbon beer at the estimated reduced level of distribution are expected to be negative. Accordingly, the effect of the Company successfully obtaining a renewal of a sub-license is expected to have little impact on the recoverability of the assets. As a result, a provision for impairment was provided for a majority of the assets of Zhaoqing Brewery, the Marketing Company and Zao Yang High Worth Brewery. Operating Loss: For the three months ended March 31, 2003, operating loss was RMB 76,298,774 or 100.4% of net sales. For the three months ended March 31, 2002, operating loss was RMB 2,067,480 or 1.2% of net sales. The increase in operating loss in 2003 as compared to 2002 is primarily attributable to the increase in provision for impairment of property, plant and equipment and the substantial reduction in net sales. Interest Expense: For the three months ended March 31, 2003, interest expense decreased by RMB 217,919 or 9.5% to RMB 2,080,085, as compared to RMB 2,298,004 for the three months ended March 31, 2002. Interest expense decreased in 2003 as compared to 2002 as a result of a decrease in the average interest rate on bank borrowings. Income Taxes: Commencing in 2001, the Company is required to pay local income tax at the full normal rate of 33% on its profit as determined in accordance with PRC accounting standards applicable to the Company. Income tax expenses for the three months ended March 31, 2003 and 2002 was RMB nil. Net Loss: Net loss was RMB 172,344,250 for the three months ended March 31, 2003, as compared to net loss RMB 449,670 for the three months ended March 31, 2002. Noble Brewery: Three Months Ended March 31, 2003 and 2002 - 35 Sales: For the three months ended March 31, 2003 and 2002, net sales were RMB 32,238,019 and RMB 86,934,510, respectively. During the three months ended March 31, 2003, Noble Brewery sold 14,057 metric tons of beer to the Marketing Company, as compared to 22,306 metric tons of beer sold to the Marketing Company during the three months ended March 31, 2002. Total beer sold by Noble Brewery to the Marketing Company decreased by 8,249 metric tons or 36.7% in 2003 as compared to 2002. Gross Profit: For the three months ended March 31, 2003, gross loss was RMB 1,901,091 or 5.9% of net sales, as compared to gross profit of RMB 25,234,668 or 29.0% of net sales for the three months ended March 31, 2002. The decrease in gross profit in 2003 as compared to 2002 was attributable to the unexpected substantial decrease in sales which was below the critical break-even marginal sales volume Selling, General and Administrative Expenses: For the three months ended March 31, 2003, selling, general and administrative expenses totaled RMB 14,155,772 or 43.9% of net sales, consisting of selling expenses of RMB 6,657,770 and general and administrative expenses of RMB 7,498,002. Net of an allowance for doubtful accounts of RMB 1,700,000 for the three months ended March 31, 2003, general and administrative expenses were RMB 5,798,002. For the three months ended March 31, 2002, selling, general and administrative expenses totaled RMB 18,608,033 or 21.4% of net sales, consisting of selling expenses of RMB 8,255,059 and general and administrative expenses of RMB 10,352,974. Selling expenses consist of warehousing, storage and freight costs. Net of an allowance for doubtful accounts of RMB 4,000,000 for the three months ended March 31, 2002, general and administrative expenses were RMB 6,352,974. For the three months ended March 31, 2003 and 2002, certain promotional and sales incentives provided to distributors for their specific promotional activities amounting to RMB nil and RMB 548,787, respectively, have been accounted for as a reduction in net sales, pursuant to EITF 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)". Impairment of Property, Plant and Equipment: During the three months ended March 31, 2003, as a result of an unexpected substantial decrease in sales and continuing operating losses and the outbreak of SARS in China, Noble Brewery conducted an evaluation of the carrying value of its land use right, property and building, office equipment, plant and equipment and construction in progress, and the related estimated future cash flows, which included the assumption that there is a probability of (1) 40%;(2) 40%; and (3) 20% that Noble Brewery will: (1) continue to produce Pabst Blue Ribbon beer after November 7, 2003 exclusively; (2) continue to produce Pabst Blue Ribbon beer after November 7, 2003 jointly with Zhaoqing Brewery in a 2:1 ratio; and (3) not be able to renew its sub-license agreement and switch to produce local brand beer. As a result of this evaluation, Noble Brewery recorded a provision for impairment of its property, plant and equipment of RMB 219,600,000 for the three months ended March 31, 2003. Included in the impairment charges were amounts related to the purchase commitments for production equipment which have been recorded as an accrued expense and a reduction of prepaid amounts totaling RMB 2,600,000 and RMB 2,600,000, respectively. Accordingly, the effect of Noble Brewery successfully obtaining a renewal of the sub-license is expected to have little impact on the recoverability of the assets. As a result of these impairment charges, the majority of assets of Noble Brewery have been fully written down. Noble China Inc., the majority shareholder of Noble Brewery, is experiencing certain financial difficulties and management uncertainty. Management is currently unable to predict the effect of Noble China Inc.'s financial difficulties and management uncertainty on Noble Brewery, including Noble China Inc.'s ability to grant a sub-license to Noble Brewery to produce Pabst Blue Ribbon beer after the existing sub-license expires on November 7, 2003. 36 Operating Income (Loss): For the three months ended March 31, 2003, operating loss was RMB 235,656,863 or 731.0% of net sales. For the three months ended March 31, 2002, operating income was RMB 6,626,635 or 7.6% of net sales. Income Taxes: Commencing in 1999, Noble Brewery is required to pay local income tax at the full normal rate of 33% (less a special temporary reduction of 6% granted by the Tax Authority) on its profit as determined in accordance with PRC accounting standards applicable to Noble Brewery. Accordingly, for the three months ended March 31, 2003, income tax expense was RMB 1,479,103, as compared to RMB nil for the three months ended March 31, 2002. Net Income (Loss): Net loss was RMB 237,957,576 for the three months ended March 31, 2003, as compared to net income of RMB 5,164,534 for the three months ended March 31, 2002. Consolidated Financial Condition - March 31, 2003: Liquidity and Capital Resources: Operating. For the three months ended March 31, 2003, the Company's operations generated cash resources of RMB 2,883,027, as compared to utilizing cash resources of RMB 14,812,161 for the three months ended March 31, 2002. The Company's operations generated cash resources during the three months ended March 31, 2003 primarily as a result of a decrease in cash utilized to support accounts receivable. The Company's cash balance decreased by RMB 45,753,760 to RMB 71,321,312 at March 31, 2003, as compared to RMB 117,075,072 at December 31, 2002. The Company's net working capital deficit increased by RMB 21,902,303 to RMB 341,450,657 at March 31, 2003, as compared to RMB 319,548,354 at December 31, 2002, resulting in a current ratio at March 31, 2003 of 0.45:1, as compared to 0.50:1 at December 31, 2002. Net of an allowance for doubtful accounts of RMB 2,600,000 for the three months ended March 31, 2003, accounts receivable decreased by RMB 37,049,154 or 32.3% to RMB 74,991,866 at March 31, 2003, as compared to RMB 114,641,020 at December 31, 2002, which was attributable to the substantial decrease in net sales, which reduced the level of accounts receivable. The Company's prepayments and deposits increased by RMB 5,460,449 or 59.2% to RMB 14,672,542 at March 31, 2003, as compared to RMB 9,212,093 at December 31, 2002. The increase in prepayments and deposits was primarily due to an increase in prepayments of general and administrative expenses including prepaid insurance premiums. Net of the short-term loan of approximately RMB 46,940,623 advanced to Lan Wei, the amount due from related companies increased by RMB 2,455,018 or 52.8% to RMB 7,102,989 at March 31, 2003, as compared to RMB 4,647,971 at December 31, 2002, which consist of amounts due from Guangdong Blue Ribbon and its group of companies arising from routine intercompany business transactions, which are unsecured, interest-free and repayable on demand. On May 10, 2003, of the amounts due from Guangdong Blue Ribbon, approximately RMB 7,090,000 was converted into a short-term loan payable in one year bearing an interest rate of 5.6% per annum. Accordingly, the loan to Guangdong Blue Ribbon of approximately RMB 7,090,000 was classified as loan receivable in the consolidated financial statements at March 31, 2003. The Company's other receivables increased by RMB 7,010,672 or 63.1% to RMB 18,120,287 at March 31, 2003, as compared to RMB 11,109,615 at December 31, 2002. The increase in other receivables was primarily due to an increase in prepayments related to advertising and promotional programs scheduled by the Marketing Company for subsequent periods. 37 The amount due to an associated company decreased by RMB 13,107,778 or 4.4% to RMB 285,271,416 at March 31, 2003, as compared to RMB 298,379,194 at December 31, 2002, and represents the amounts due to Noble Brewery from its sale of Pabst Blue Ribbon beer to the Marketing Company and from its sale of raw materials (which were purchased under the new pooled management structure) to Zhaoqing Brewery as well as other balances arising from recurring intercompany transactions. These obligations are unsecured, interest-free and repayable on demand. The repayment schedule for these obligations generally reflects the collection period for accounts receivable generated by beer sales and normal trade credit terms for raw material purchases. Investing. For the three months ended March 31, 2002, additions to property, plant and equipment aggregated RMB 1,557,408, which includes approximately RMB 700,000 and RMB 850,000 for renovation and continuous improvement of Zao Yang High Worth Brewery and Zhaoqing Brewery, respectively. The Company anticipates that additional capital expenditures in connection with the continuing improvement of production facilities at Zao Yang High Worth Brewery and Zhaoqing Brewery during the remainder of 2003 will be approximately RMB 3,500,000. The Company believes that it will be able to fund the expected capital expenditures through internal cash flow and external resources. On March 24, 2003, a short-term loan of RMB 46,940,623 was granted from High Worth JV to Lan Wei, a company controlled by the City of Zhaoqing that is the controlling shareholder of the Company. Of such amount, RMB 20,000,000 is to be invested in businesses affiliated with Lan Wei and RMB 26,000,000 is to be used to facilitate the reorganization or restructuring of Noble China, Inc. Lan Wei has agreed to repay the RMB 20,000,000 loan by June 30, 2003. The RMB 26,000,000 is being held in a bank escrow account, and will be repaid to the Company if and when it is determined that it is not possible to file a confirmable plan of reorganization or implement an out-of-court restructuring of Noble China, Inc., but in no event later than December 31, 2003. The loans bear interest at 3.9% per annum. During the past few years, Lan Wei has invested substantial capital in Noble China, Inc. and the Company, and has also used its relationships to arrange for substantial bank financing for the Company, in order to facilitate the strategic development of the Pabst Blue Ribbon beer business in China. Lan Wei believes that a successful reorganization or restructuring of Noble China, Inc. is in the long-term interest of the Company and Noble Brewery, as it will assure such entities the right to produce and distribute Pabst Blue Ribbon beer in China for a period of thirty years from November 7, 2003. If and when Noble China, Inc. is successfully reorganized or restructured with the assistance of Lan Wei, it is expected that the Company will receive a sub-license or an assignment of the license to produce and distribute Pabst Blue Ribbon in China, and that the Company will have the option to have the RMB 26,000,000 loan repaid in cash or by the transfer to the Company of any assets that Lan Wei may acquire in conjunction with a reorganization or restructuring of Noble China, Inc. with a fair value equivalent to the loan amount. On May 10, 2003, out of the amounts due from Guangdong Blue Ribbon, approximately RMB 7,090,000 was converted into a short-term loan payable in one year bearing an interest rate of 5.6% per annum. Accordingly, the loan to Guangdong Blue Ribbon of approximately RMB 7,090,000 was classified as loan receivable in the consolidated financial statements at March 31, 2003. Financing. During the three months ended March 31, 2003, the Company's secured bank loans increased by RMB 6,947,602, reflecting new borrowings of RMB 7,000,000 and repayments of RMB 52,398. The bank loans bear interest at fixed rates ranging from 5.6% to 6.2%, and are repayable within the next three years. A substantial portion of the bank loans have been utilized to fund the working capital requirements of Zhaoqing Brewery and Zao Yang High Worth Brewery. 38 As at December 31, 2002, a bank loan of RMB 30,104,000 granted to Zao Yang High Worth Brewery, which expired on September 30, 2002, was pending for completion of the official loan renewal agreement. Zao Yang High Worth Brewery has continued to pay the interest that is accruing on the loan, and the bank has not made a demand for repayment. The renewal agreement, without a specific date of repayment and guaranteed by High Worth JV, had been approved and signed by the relevant bank and was returned to Zao Yang High Worth Brewery in May 2003. The loan has been recorded as a current liability at March 31, 2003 and is payable on demand. During the three months ended March 31, 2002, Zao Yang High Worth Brewery received an advance of RMB 5,700,000 from its local partner, Zao Yang Brewery, which is the 45% shareholder of Zao Yang High Worth Brewery. The advance was unsecured, without interest and had no fixed term of repayment. This advance has been utilized to fund the working capital requirements of Zao Yang High Worth Brewery. This advance was subsequently converted into additional capital of Zao Yang High Worth Brewery in 2002. During the three months ended March 31, 2002, the Company loaned RMB 5,500,000 to Zao Yang High Worth Brewery. The loan was unsecured, with interest at 3.6% per annum and repayable on December 31, 2002. During the three months ended March 31, 2002, Zao Yang High Worth Brewery advanced RMB 5,500,000 to Guangdong Blue Ribbon. The advance was unsecured, without interest and had no fixed date of repayment. Both of these loans were repaid in full in 2002. The Company anticipates that its operating cash flow, combined with cash on hand, bank lines of credit, and other external credit sources, and the credit facilities provided by its principal shareholder and affiliates or related parties, are adequate to satisfy the Company's working capital requirements through December 31, 2003. If the foregoing assumptions prove to be inaccurate, the Company's cash flow may be adversely affected, which would negatively impact the ability of the Company to conduct operations at current levels and continue as a going concern. 39 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not have any market risk with respect to such factors as commodity prices, equity prices, and other market changes that affect market risk sensitive investments. A 10 point basis change in the Company's average debt interest rate would not have a material effect on the Company's results of operations. With respect to foreign currency exchange rates, the Company does not believe that a devaluation or fluctuation of the RMB against the USD would have a detrimental effect on the Company's operations, since the Company conducts virtually all of its business in China, and the sale of its products and the purchase of raw materials and services is settled in RMB. The effect of a devaluation or fluctuation of the RMB against the USD would affect the Company's results of operations, financial position and cash flows, when presented in USD (based on a current exchange rate) as compared to RMB. As the Company's debt obligations are primarily short-term in nature, with fixed interest rates, the Company does not have any risk from an increase in interest rate. However, to the extent that the Company arranges new borrowings in the future, an increase in interest rates would cause a commensurate increase in the interest expense related to such borrowings. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act of 1934 is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Within the 90 days prior to the filing of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act of 1934 is recorded, processed, summarized and reported as and when required. (b) Changes in Internal Controls There were no changes in the Company's internal controls or in other factors that could have significantly affected those controls subsequent to the date of the Company's most recent evaluation. 40 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which immediately precedes such exhibits, and is incorporated herein by reference. (b) Reports on Form 8-K Three Months Ended March 31, 2003: None 41 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CBR BREWING COMPANY, INC. ---------------------------- (Registrant) Date: June 9, 2003 By: /s/ DA-QING ZHENG ------------------------------- Da-qing Zheng Chairman of the Board and Chief Executive Officer (Duly authorized officer) Date: June 9, 2003 By: /s/ GARY C.K. LUI ------------------------------- Gary C.K. Lui Vice President and Chief Financial Officer (Principal financial officer) 42 CERTIFICATIONS I, Da-qing Zheng, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CBR Brewing Company, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ DA-QING ZHENG June 9, 2003 By: _________________________ Da-qing Zheng Chairman of the Board and Chief Executive Officer 43 CERTIFICATIONS I, Gary C.K. Lui, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CBR Brewing Company, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ GARY C.K. LUI June 9, 2003 By: _________________________ Gary C.K. Lui Vice President and Chief Financial Officer 44 INDEX TO EXHIBITS Exhibit Number Description of Document ------ ------------------------- 99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 45

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