UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1996
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[ ] Transition Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _________ to _________
Commission file number: 0-8128
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FREMONT CORPORATION
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(Exact name of small business issuer as specified in its charter)
Delaware 76-0402886
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9454 Wilshire Boulevard, 6th Floor
Beverly Hills, California 90212
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(Address of principal executive offices)
Issuer's telephone number, including area code: (310) 358-1006
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Not applicable
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(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
----- -----
As of April 30, 1996, the issuer had 5,768,639 shares of its common stock
outstanding.
Transitional Small Business Disclosure Format:
Yes No X
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Total sequentially numbered pages in this document: 22.
1
PART I. FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
2
FREMONT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
(Amounts in thousands, except number of shares and per share data)
December 31, 1995 March 31, 1996
----------------------- --------------------
RMB USD RMB USD
--------- --------- ------- -------
ASSETS
Current assets:
Cash and cash equivalents 6,507 781 9,833 1,180
Accounts receivable, net
(Note 4) 83,502 10,024 74,686 8,966
Inventories (Note 2) 35,469 4,258 38,566 4,630
Due from related companies
(Note 5) 43,501 5,222 17,735 2,129
Prepayments and other
current assets 22,316 2,679 36,429 4,373
------- ------ ------- ------
Total current assets 191,295 22,964 177,249 21,278
Property, plant and
equipment, net (Note 5) 243,392 29,219 117,721 14,132
Bank deposits 20,800 2,497 20,800 2,497
Goodwill, net 37,766 4,534 37,521 4,505
Deferred pre-operating
costs, net (Note 3) 8,534 1,024 6,400 768
Prepaid rent (Note 5) 27,400 3,289
Other long-term assets 7,971 957 10,178 1,222
------- ------ ------- ------
Total assets 509,758 61,195 397,269 47,691
======= ====== ======= ======
(continued)
3
FREMONT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
(Amounts in thousands, except number of shares and per share data)
December 31, 1995 March 31, 1996
----------------------- --------------------
RMB USD RMB USD
--------- --------- ------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings
(Note 5) 167,934 20,160 89,370 10,729
Accounts payable 31,124 3,736 33,270 3,994
Accrued expenses and
other liabilities 17,478 2,098 17,916 2,151
Taxes payable 7,712 926 7,296 876
Long-term bank loans,
current portion (Note 5) 27,726 3,328 1,944 233
Finance lease obligations,
current portion 10,817 1,299 10,817 1,298
------- ------ ------- ------
Total current liabilities 262,791 31,547 160,613 19,281
Long-term bank loans (Note 5) 43,938 5,275 26,012 3,123
Finance lease obligations 18,904 2,269 18,904 2,269
Loan from parent company
(Note 6) 33,280 3,995 33,280 3,995
Other long-term payables 9,755 1,171 12,055 1,447
------- ------ ------- ------
Total liabilities 368,668 44,257 250,864 30,115
------- ------ ------- ------
Minority interests 11,864 1,424 11,568 1,389
------- ------ ------- ------
Shareholders' equity (Note 7):
Common stock, par value US$.001
per share; authorized -
100,000,000 shares;
issued and outstanding -
5,602,639 shares at
December 31, 1995
and 5,768,639 shares at
March 31, 1996 47 6 48 6
Additional paid-in capital 112,145 13,463 115,876 13,911
Dedicated capital 10,213 1,226 10,213 1,226
Retained earnings 6,821 819 8,700 1,044
------- ------ ------- ------
Total shareholders' equity 129,226 15,514 134,837 16,187
------- ------ ------- ------
Total liabilities and
shareholders' equity 509,758 61,195 397,269 47,691
======= ====== ======= ======
See accompanying notes to condensed consolidated financial statements.
4
FREMONT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(Amounts in thousands, except number of shares and per share data)
Three Months Ended March 31,
-----------------------------------------
1995 1996
--------- --------------------------
RMB RMB USD
--------- ---------- ---------
Sales, including approximately
RMB 3,250,000 in 1995 and
RMB 10,000,000 in 1996 to
companies related to SCH 32,719 40,177 4,823
Cost of goods sold 25,885 30,484 3,659
--------- ---------- ---------
Gross profit 6,834 9,693 1,164
Selling, general and
administrative expenses 3,409 3,338 401
Amortization of deferred
pre-operating costs (Note 3) 2,134 256
Interest expense, net 1,151 1,922 231
Other (income) expense, net (76) 216 26
--------- ---------- ---------
Income before income taxes 2,350 2,083 250
Provision for income taxes (250) (500) (60)
--------- ---------- ---------
Income before minority
interests 2,100 1,583 190
Minority interests 189 296 35
--------- ---------- ---------
Net income 2,289 1,879 225
========= ========== =========
Net income per common share .47 .33 .04
========= ========== =========
Weighted average number of
common shares (Note 1) 4,832,639 5,684,962 5,684,962
========= ========== =========
See accompanying notes to condensed consolidated financial statements.
5
FREMONT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(Amounts in thousands)
Three Months Ended March 31,
-----------------------------------------
1995 1996
--------- --------------------------
RMB RMB USD
--------- ---------- ---------
Cash flows from
operating activities:
Net income 2,289 1,879 225
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation 2,497 2,129 255
Amortization 245 2,979 358
Minority interests (189) (296) (35)
Changes in operating assets
and liabilities:
(Increase) decrease in -
Accounts receivable, net (82) (4,304) (517)
Inventories 11,025 (3,097) (372)
Due from related companies (2,234) (268)
Prepayments and other
current assets (5,592) (14,113) (1,694)
Other long-term assets 466 (2,207) (265)
Increase (decrease) in -
Accounts payable (11,673) 2,089 251
Accrued expenses and
other liabilities 11,788 494 59
Taxes payable 1,490 (416) (50)
Other long-term payables (1,425) 2,300 276
------- ------- ------
Net cash provided by
(used in) operating
activities 10,839 (14,797) (1,777)
------- ------- ------
Cash flows from
investing activities:
Additions to property, plant
and equipment (5,102) (7,925) (951)
------- ------- ------
Net cash used in
investing activities (5,102) (7,925) (951)
------- ------- ------
(continued)
6
FREMONT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(Amounts in thousands)
Three Months Ended March 31,
-----------------------------------------
1995 1996
--------- --------------------------
RMB RMB USD
--------- ---------- ---------
Cash flows from
financing activities:
Net proceeds from short-term
borrowings 505 22,315 2,679
Net proceeds from long-term
bank loans 2,189
Payments of finance
lease obligations (6,150)
Sale of common stock
and warrants, net of costs 3,733 448
------ ------ -----
Net cash provided by
(used in) financing
activities (3,456) 26,048 3,127
------ ------ -----
Cash and cash equivalents:
Net increase 2,281 3,326 399
At beginning of period 8,275 6,507 781
------ ------ -----
At end of period 10,556 9,833 1,180
====== ====== =====
See accompanying notes to condensed consolidatedd financial statements.
7
FREMONT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization - Fremont Corporation, a Delaware corporation (the "Company"), was
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incorporated in the State of Utah on April 22, 1955, as Fremont Uranium
Corporation. As of July 1, 1993, a change of domicile merger was effected, the
result of which was that the Company changed its name to Fremont Corporation and
became incorporated in the State of Delaware.
Reverse Acquisition - From 1989 through April 28, 1995, the Company was engaged
- -------------------
in acquiring interests in oil and natural gas properties and in seeking
potential acquisition or merger opportunities. The Company entered into a Share
Exchange Agreement dated as of March 23, 1995, and as amended on March 30, 1995,
with Million Treasure Enterprises Limited ("MTE") and Winfill Holdings
International Limited ("Winfill"), both of which are British Virgin Islands
corporations. Pursuant to the Share Exchange Agreement, on April 28, 1995, the
Company acquired from MTE 41,000 shares of common stock of Winfill, representing
all of the issued and outstanding capital stock of Winfill, in exchange for the
issuance of 4,760,000 shares of the Company's common stock, together with a
warrant which allows MTE and/or its designee to receive up to 2,000,000 shares
of Class B common stock in exchange for an equivalent number of shares of common
stock. The terms of the Class B common stock are identical to that of the common
stock (which will be designated Class A common stock) except that the holder
thereof will be entitled to three votes per share. The warrant can be exercised
after the Company's Certificate of Incorporation is amended to authorize the
Class B common stock. The 4,760,000 shares of common stock represent
approximately 85% of the issued and outstanding shares of common stock of the
Company, after all shares were issued and a 1-for-100 reverse stock split was
effected as set forth in the Share Exchange Agreement.
Immediately prior to this transaction, the Company had a total of 842,639
shares of common stock issued and outstanding, after a 1-for-100 reverse stock
split effective April 28, 1995. All common share and per share data in the
accompanying condensed consolidated financial statements have been restated to
reflect this reverse stock split.
South China Bicycles Winfill Limited ("SCBW") is a Sino-foreign joint
venture formed to engage in the design, manufacture and marketing of bicycles,
bicycle parts and components and steel tubes. Winfill owns a 98% equity interest
in SCBW and South China Bicycles Company (Holdings) Limited ("SCH"), a state-
owned enterprise incorporated in the People's Republic of China, owns the
remaining 2% equity interest in SCBW. Winfill and SCH formed
8
SCBW effective July 1, 1994, to acquire and operate the bicycle, bicycle parts
and components and steel tube manufacturing operations of SCH at a consideration
of RMB 152,076,000. Except for a 69% interest in South China Bicycles Co., Ltd.
("SCB"), SCBW owns 100% interests in its principal operating subsidiaries, all
of which are organized in the People's Republic of China. The factory operations
of SCBW's subsidiaries are located at several sites in Zhaoqing City, Guangdong
Province, People's Republic of China. For accounting purposes, the transaction
has been treated as a recapitalization of Winfill with Winfill as the acquiror
(reverse acquisition). The historical financial statements prior to April 28,
1995 are those of Winfill. The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America.
Pursuant to the terms of the Share Exchange Agreement, the Company
transferred to Joseph W. Petrov, the Company's former president and controlling
shareholder, all of its operating assets existing immediately subsequent to the
closing of the previously described transaction (excluding the shares of
Winfill) in exchange for the assumption by Mr. Petrov of all of the liabilities
of the Company as of the closing and the delivery of a release of all
obligations owed by the Company to an affiliate of Mr. Petrov. In addition, at
the closing, each member of the Company's Board of Directors resigned, and was
replaced by representatives of MTE and Winfill.
Foreign Currency Translation - In preparing the consolidated financial
- ----------------------------
statements, the financial statements of the Company are measured using Renminbi
("RMB") as the functional currency. All foreign currency transactions are
translated into RMB using the applicable rates of exchange, quoted by the
applicable foreign exchange adjustment center ("swap center") at the date of the
transactions. Monetary assets and liabilities denominated in foreign currencies
are translated into RMB using the applicable swap center rates prevailing at the
balance sheet dates. The resulting exchange gains or losses are recorded in the
consolidated statements of operations for the periods in which they occur.
The Company's share capital is denominated in United States dollars ("USD")
and the reporting currency is the RMB. For financial reporting purposes, the USD
share capital amounts have been translated into RMB at the applicable rates
prevailing on the transaction dates.
Translation of amounts from RMB into USD for the convenience of the reader
has been made at the noon buying rate in New York City for cable transfers in
foreign currencies as certified for customs purposes by the Federal Reserve Bank
of New York on March 31, 1996 of US$1.00 = RMB 8.33. No representation is made
that the RMB amounts could have been, or could be, converted into USD at that
rate or at any other certain rate.
9
Basis of Presentation - The accompanying consolidated financial statements are
- ---------------------
unaudited but, in the opinion of management of the Company, contain all
adjustments necessary to present fairly the financial position at March 31,
1996, the results of operations for the three months ended March 31, 1995 and
1996, and the changes in cash flows for the three months ended March 31, 1995
and 1996. These adjustments are of a normal recurring nature. The consolidated
balance sheet as of December 31, 1995 is derived from the Company's audited
financial statements. The accompanying consolidated financial statements include
the operations of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Certain information and footnote disclosures normally included in financial
statements that have been prepared in accordance with generally accepted
accounting principles 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 therein not
misleading. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1995, as filed with the Securities
and Exchange Commission.
The results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 1996.
Net Income Per Common Share - During April 1995, the Company issued new shares
- ---------------------------
of common stock in consideration for the acquisition of all of the capital stock
of Winfill, in a transaction which has been accounted for as a reverse
acquisition. As a result, net income per common share for the three months ended
March 31, 1995 is presented on a pro forma basis, and has been calculated using
the shares of common stock as if the existing and new common shares had been
outstanding during the three months ended March 31, 1995, except for the common
shares issued to consultants related to the non-recurring recapitalization cost,
which were appropriately weighted in the calculation. Net income per common
share for the three months ended March 31, 1996 is based on the weighted average
number of shares of common stock outstanding, including common stock
equivalents. Common stock equivalents consist of outstanding common stock
purchase warrants.
10
2. INVENTORIES
Inventories consisted of the following at December 31, 1995 and March 31,
1996:
December 31, 1995 March 31, 1996
---------------------- ----------------------
RMB USD RMB USD
---------- --------- ---------- ---------
Raw materials 18,743,000 2,250,000 19,742,000 2,370,000
Work in progress 3,075,000 369,000 3,541,000 425,000
Finished goods 13,651,000 1,639,000 15,283,000 1,835,000
---------- --------- ---------- ---------
35,469,000 4,258,000 38,566,000 4,630,000
========== ========= ========== =========
3. DEFERRED PRE-OPERATING COSTS
Deferred pre-operating costs represent organization and certain start-up
costs (excluding capital expenditures) related to the new production facility.
Through December 31, 1995, such deferred pre-operating costs aggregated RMB
8,534,000, and are being amortized over one year commencing January 1, 1996, the
date of commencement of commercial production from the new production facility.
4. TRANSFER OF ACCOUNTS RECEIVABLE
In conjunction with the formation of SCBW and the transfer of the operating
assets of SCH to SCBW effective July 1, 1994, SCBW was granted an option to
transfer to SCH certain accounts receivable outstanding as of July 1, 1994 at
cost, should such accounts receivable remain uncollected as of June 30, 1996. As
of December 31, 1995, the amount of such outstanding accounts receivable was
approximately RMB 13,200,000. The parties elected to modify the option's
transfer date, and accordingly, as of January 1, 1996, SCBW transferred to SCH
RMB 13,200,000 of accounts receivable, and SCH assumed an equivalent amount of
SCBW's short-term bank debt.
5. SALE/LEASEBACK
Effective as of January 1, 1996, SCBW entered into a sale/leaseback
transaction with SCH. Pursuant to this transaction, SCBW sold the new production
facility's buildings and land with net book values of RMB 83,507,000 and RMB
47,960,000, respectively (aggregate net book value of RMB 131,467,000), to SCH
in exchange for RMB 131,467,000. SCH paid such consideration by assuming RMB
87,759,000 of SCBW's short-term bank debt and RMB 43,708,000 of SCBW's long-term
bank debt. This transaction did not result in any gain or loss. In the opinion
of management, this transaction was at fair value.
11
SCBW leased back the buildings from SCH for a period of 20 years under an
operating lease agreement that provides for escalating minimum rental payments
during the first five years of the lease, and also an escalating minimum usage
rate, of RMB 28,000,000. The escalating minimum usage rate increases from 30% in
1996 to 70% in 2000, and to the extent that the usage rate is between the
respective annual rate and 70%, such portion of rent expense payable will be
deferred. SCBW will account for scheduled rent increases payable regardless of
future usage of the buildings on the straight-line basis over the lease term.
The minimum annual rent expense in each of the first five years commencing
January 1, 1996 is as follows: 1996 - RMB 4,200,000; 1997 - RMB 4,900,000; 1998-
RMB 5,600,000; 1999 - RMB 6,300,000; and 2000 - RMB 7,000,000. SCBW prepaid the
first five years of rent to SCH, assuming a usage rate of 70%, of RMB 28,000,000
by reducing its accounts receivable due from SCH by an equal amount.
6. LOAN FROM PARENT COMPANY
The loan from parent company of RMB 33,280,000 is denominated in USD,
unsecured, bears no interest, and has no fixed repayment terms.
7. SHAREHOLDERS' EQUITY
During March 1996, the Company raised net proceeds of RMB 3,733,000 (USD
448,200) through the sale of 166,000 units, each unit consisting of one share of
common stock and one common stock purchase warrant. Each common stock purchase
warrant entitles the holder to purchase one share of common stock for US$3.00
per share on or before February 28, 1998.
8. ANTI-DUMPING INVESTIGATION
The Company manufactures bicycles in the People's Republic of China (the
"PRC" or "China") through its subsidiary, SCBW, and exports to the United States
through various distributors and trade intermediaries. Although there are other
markets for SCBW's products, the United States market is considered an important
market for SCBW.
Pursuant to a petition filed by three United States bicycle manufacturers
in early 1995, the U.S. International Trade Commission (the "ITC") launched an
anti-dumping investigation against companies which manufacture bicycles in the
PRC for import into the United States. In May 1995, the ITC found a reasonable
indication that "a U.S. industry is materially injured or threatened with
material injury by reason of imports of bicycles (from the PRC) allegedly sold
at less than fair value." After the ITC's initial determination, the U.S.
Department of Commerce ("Commerce") began its investigation of the PRC bicycle
12
manufacturing industry, requesting financial and other information from several
Chinese bicycle manufacturers (not including SCBW), in order to calculate
dumping margins and impose anti-dumping duties.
During November 1995, Commerce issued a preliminary determination which
calculated a 61.67% dumping margin on bicycles manufactured by SCBW and all but
nine Chinese bicycle manufacturers. As a result, SCBW and each such Chinese
bicycle manufacturer was required to post a "single-entry bond" equal to the
estimated potential duty on bicycles exported to the United States from the date
of the preliminary notice until the date of the final determination.
In April 1996, Commerce finalized this dumping margin and the ITC began its
investigation of Chinese bicycle manufacturers. An affirmative ITC injury or
threat of material injury determination would have resulted in the imposition of
the Department's dumping margin. Throughout the investigations by Commerce and
the ITC, SCBW has maintained that it has not engaged in "dumping" bicycles in
the United States market and has opposed the imposition of the anti-dumping
duty. In this regard, SCBW and other PRC bicycle manufacturers retained legal
counsel to protect their legal rights and to investigate and pursue several
alternative solutions.
On June 4, 1996, the ITC made a negative final determination in its anti-
dumping investigation on imports of bicycles from China. The negative ITC
determination means that the ITC found that there is not a reasonable indication
that a United States industry is materially injured or threatened with material
injury by reason of imports of bicycles from China. The negative ITC
determination allows SCBW to resume its normal operations and continue to export
to the United States without the imposition of an anti-dumping duty. In
addition, the bond which was required will be released, and the U.S. Customs
Service will refund to SCBW the cost of such bond plus interest.
Within 30 days of the final determination by the ITC, an appeal may be
filed with the International Court of Appeals with respect to either or both of
the Commerce or ITC determinations. Appeals either have been or are likely to be
filed shortly. The resolution of the appeals will take approximately one year to
complete. The Company is unable to predict the ultimate resolution of this
matter.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview:
Effective April 28, 1995, the Company acquired Winfill. Winfill owns a 98%
interest in SCBW, a Sino-foreign joint venture engaged in the design,
manufacture and marketing of bicycles, bicycle parts and components, and steel
tubes. Winfill commenced operations effective July 1, 1994. Except for a 69%
interest in SCB, SCBW owns 100% interests in its principal operating
subsidiaries, all of which are organized in the People's Republic of China. The
factory operations of SCBW's subsidiaries are located at several sites in
Zhaoqing City, Guangdong Province, People's Republic of China.
For accounting purposes, the transaction has been treated as a
recapitalization of Winfill with Winfill as the acquiror (reverse acquisition).
The historical financial statements prior to April 28, 1995 are those of
Winfill.
All amounts in the following discussion are in RMB.
Anti-Dumping Investigation:
The Company manufactures bicycles in the People's Republic of China (the
"PRC" or "China") through its subsidiary, SCBW, and exports to the United States
through various distributors and trade intermediaries. Although there are other
markets for SCBW's products, the United States market is considered an important
market for SCBW.
Pursuant to a petition filed by three United States bicycle manufacturers
in early 1995, the U.S. International Trade Commission (the "ITC") launched an
anti-dumping investigation against companies which manufacture bicycles in the
PRC for import into the United States. In May 1995, the ITC found a reasonable
indication that "a U.S. industry is materially injured or threatened with
material injury by reason of imports of bicycles (from the PRC) allegedly sold
at less than fair value." After the ITC's initial determination, the U.S.
Department of Commerce ("Commerce") began its investigation of the PRC bicycle
manufacturing industry, requesting financial and other information from several
Chinese bicycle manufacturers (not including SCBW), in order to calculate
dumping margins and impose anti-dumping duties.
During November 1995, Commerce issued a preliminary determination which
calculated a 61.67% dumping margin on bicycles manufactured by SCBW and all but
nine Chinese bicycle manufacturers. As a result, SCBW and each such Chinese
bicycle manufacturer was required to post a "single-entry bond" equal to the
estimated potential duty on bicycles exported to the United States from the date
of the preliminary notice until the date of
14
the final determination.
In April 1996, Commerce finalized this dumping margin and the ITC began its
investigation of Chinese bicycle manufacturers. An affirmative ITC injury or
threat of material injury determination would have resulted in the imposition of
the Department's dumping margin. Throughout the investigations by Commerce and
the ITC, SCBW has maintained that it has not engaged in "dumping" bicycles in
the United States market and has opposed the imposition of the anti-dumping
duty. In this regard, SCBW and other PRC bicycle manufacturers retained legal
counsel to protect their legal rights and to investigate and pursue several
alternative solutions.
On June 4, 1996, the ITC made a negative final determination in its anti-
dumping investigation on imports of bicycles from China. The negative ITC
determination means that the ITC found that there is not a reasonable indication
that a United States industry is materially injured or threatened with material
injury by reason of imports of bicycles from China. The negative ITC
determination allows SCBW to resume its normal operations and continue to export
to the United States without the imposition of an anti-dumping duty. In
addition, the bond which was required will be released, and the U.S. Customs
Service will refund to SCBW the cost of such bond plus interest.
Within 30 days of the final determination by the ITC, an appeal may be
filed with the International Court of Appeals with respect to either or both of
the Commerce or ITC determinations. Appeals either have been or are likely to be
filed shortly. The resolution of the appeals will take approximately one year to
complete. The Company is unable to predict the ultimate resolution of this
matter.
Consolidated Results of Operations:
Three Months Ended March 31, 1995 and 1996 -
Sales for the three months ended March 31, 1996 were RMB 40,177,000, as
compared to RMB 32,719,000 for the three months ended March 31, 1995, an
increase of RMB 7,458,000 or 22.8%. Sales to companies related to SCH, a related
entity, for the three months ended March 31, 1996 were approximately RMB
10,000,000 or 24.9% of sales, as compared to RMB 3,250,000 or 9.9% of sales for
the three months ended March 31, 1995. The increase in sales in 1996 as compared
to 1995 was the result of the development of new distribution channels in the
domestic bicycle market in China and an increase in the sale of bicycle parts.
As a result of the anti-dumping investigation, export sales to the United
States had ceased beginning in the fourth quarter of 1995, resulting in an
increased reliance on domestic sales in
15
China. The Company's normal operating cash flow, which is adversely affected by
the extended accounts receivable collection cycle that is typical of Chinese
companies that have a substantial portion of their customers in China, has also
been affected by the reduction in United States dollars that are generated
through export sales. Accordingly, the Company has focused its recent sales
efforts on not only increasing domestic sales in China, but also on concurrently
developing distribution channels to other Southeast Asian markets, South America
and Australia. However, with the recent favorable resolution of the anti-dumping
investigation, the Company expects to reopen its distribution channel to the
United States during the third quarter of 1996.
Gross profit for the three months ended March 31, 1996 was RMB 9,693,000 or
24.1% of sales, as compared to RMB 6,834,000 or 20.9% of sales for the three
months ended March 31, 1995. The increase in gross profit as a percentage of
sales was a result of the application of a new steel tube manufacturing
technology in mid-1995, which requires less raw materials, has a lower
production cost, and entitles the Company to a refund on Value Added Tax paid.
Selling, general and administrative expenses for the three months ended
March 31, 1996 were RMB 3,338,000 or 8.3% of sales, as compared to RMB 3,409,000
or 10.4% of sales for the three months ended March 31, 1995, a decrease of RMB
71,000 or 2.1%. The decrease in selling, general and administrative expenses in
1996 as compared to 1995, both on an absolute basis and as a percentage of
sales, was due primarily to the effect of the cost sharing agreement with SCH,
which became effective July 1, 1995. Pursuant to this cost sharing agreement,
SCH agreed to bear 40% of the selling, general and administrative expenses of
SCBW, representing its share of management and selling activities incurred by
SCBW on SCH's behalf. Selling, general and administrative expenses for the three
months ended March 31, 1995 did not include any costs associated with the
operation of a public company.
Amortization of deferred pre-operating costs for the three months ended
March 31, 1996 was RMB 2,134,000. Deferred pre-operating costs represent
organization and certain start-up costs (excluding capital expenditures) related
to the new production facility. Through December 31, 1995, such deferred pre-
operating costs aggregated RMB 8,534,000, and are being amortized over one year
commencing January 1, 1996, the date of commencement of commercial production
from the new production facility.
Interest expense, net of amounts capitalized in 1995, for the three months
ended March 31, 1996 was RMB 1,922,000 or 4.8% of sales, as compared to RMB
1,151,000 or 3.5% of sales for the three months ended March 31, 1995. The
increase in interest expense in 1996 as compared to 1995 was a result of
increased short-term bank loans which provided most of the working capital
16
necessary to fund capital expenditures and operating cash requirements resulting
from increased sales.
As a result of the aforementioned factors, net income for the three months
ended March 31, 1996 was RMB 1,879,000 (RMB .33 per share) or 4.7% of sales, as
compared to RMB 2,289,000 (RMB .47 per share) or 7.0% of sales for the three
months ended March 31, 1995. Excluding the amortization of deferred pre-
operating costs of RMB 2,134,000, pro forma net income for the three months
ended March 31, 1996 would have been RMB 4,013,000 (RMB .71 per share) or 10.0%
of sales.
Consolidated Financial Condition - March 31, 1996:
Liquidity and Capital Resources -
For the three months ended March 31, 1996, the Company's operations
utilized cash resources of RMB 14,797,000. The most significant component of the
cash utilized by operations in 1996 was the increase in prepayments and other
current assets of RMB 14,113,000, which consisted primarily of an increase in
other receivables of RMB 5,246,000 and prepayments of RMB 7,693,000.
Through December 31, 1995, the Company relied primarily on short-term
borrowings to finance the construction of its new production facility, resulting
in a net working capital deficit of RMB 71,496,000 at December 31, 1995.
However, primarily as a result of the sale/leaseback transaction described
below, the Company had net working capital of RMB 16,636,000 at March 31, 1996.
As a result, the Company's current ratio at March 31, 1996 was 1.10:1, as
compared to .73:1 at December 31, 1995.
Except with regard to the initial transaction pursuant to which SCBW was
organized and capitalized, the Company's primary method of financing its capital
requirements has been borrowings. Short-term borrowings consist primarily of
bank loans, are unsecured, repayable in one year, have interest rates ranging
from 9.9% to 13.0%, and have been utilized for working capital purposes and to
finance the expansion of the production facility and the purchase of equipment.
Long-term borrowings consist of bank loans, are secured by property, plant and
equipment and long-term bank deposits, have interest rates ranging from 5.4% to
13.2%, are guaranteed by related enterprises of SCH, and have been utilized to
finance the expansion of the production facility and the purchase of equipment.
Exclusive of the reduction in short-term and long-term borrowings as a
result of the sale/leaseback with SCH and the transfer of accounts receivable to
SCH as discussed below, during the three months ended March 31, 1996, short-term
borrowings increased by RMB 21,690,000 and long-term borrowings (including the
current portion) were unchanged.
17
During March 1996, the Company raised net proceeds of RMB 3,733,000 (USD
448,200) through the sale of 166,000 units, each unit consisting of one share of
common stock and one common stock purchase warrant. Each common stock purchase
warrant entitles the holder to purchase one share of common stock for US$3.00
per share on or before February 28, 1998.
During the three months ended March 31, 1996, cash flows from financing
activities consisted of the short-term borrowings of RMB 21,690,000 and the sale
of the Company's securities of RMB 3,733,000, and were utilized primarily to
fund operating cash flow requirements and capital expenditures.
SCBW is considered by the government of China as an important component of
the bicycle production and exporting base of China, and has been designated for
continuing financial support by the Zhaoqing Branch of the Bank of China. SCBW
has utilized borrowings from the Bank of China to support increases in
production and sales, and to finance the expansion of the production facility
and to purchase equipment. Pursuant to guidelines issued by the government of
China, SCBW increased its short-term borrowings during 1995 and 1996 from the
Bank of China with loans having maturities ranging from one to three months. The
working capital loans that the Bank of China makes to SCBW are renewed so long
as SCBW's production and business operations continue to meet certain operating
and financial criteria. Management believes that the Bank of China will continue
to renew SCBW's existing borrowings and increase its borrowing base as necessary
to support operations at current levels.
In connection with the formation of SCBW as a Sino-foreign joint venture
between SCH and Winfill in June 1994, Winfill issued a note payable to MTE for
RMB 34,800,000. The note is denominated in United States dollars, is unsecured,
bears no interest, has no fixed repayment terms, and had a balance of RMB
33,280,000 at March 31, 1996. There have been no payments on this note, with the
principal balance changing only as a result of changes in the currency
conversion rates between the Chinese Renminbi and the United States dollar. The
Company believes that the existing terms of this note will continue until
substantial full-scale production at the new facility is reached. Although the
new production facility has been completed and will become fully operational in
1996, substantial full-scale production will take at least two years to reach.
Through the end of 1997, SCBW currently plans to expend approximately RMB
40,000,000 with respect to the second phase of development of the new production
facility, including the tube production line and the spare parts welding line,
which is expected to be funded through long-term debt, to the extent available,
and/or the sale of the Company's equity securities.
In conjunction with the formation of SCBW and the transfer of the operating
assets of SCH to SCBW effective July 1, 1994,
18
SCBW was granted an option to transfer to SCH certain accounts receivable
outstanding as of July 1, 1994 at cost, should such accounts receivable remain
uncollected as of June 30, 1996. As of December 31, 1995, the amount of such
outstanding accounts receivable was approximately RMB 13,200,000. The parties
elected to modify the option's transfer date, and accordingly, effective as of
January 1, 1996, SCBW transferred to SCH RMB 13,200,000 of accounts receivable,
and SCH assumed an equivalent amount of SCBW's short-term bank debt.
Effective as of January 1, 1996, SCBW entered into a sale/leaseback
transaction with SCH. Pursuant to this transaction, SCBW sold the new production
facility's buildings and land, with net book values of RMB 83,507,000 and RMB
47,960,000, respectively (aggregate net book value of RMB 131,467,000), to SCH
in exchange for RMB 131,467,000. SCH paid such consideration by assuming RMB
87,759,000 of SCBW's short-term bank debt and RMB 43,708,000 of SCBW's long-term
bank debt. This transaction did not result in any gain or loss. In the opinion
of management, this transaction was at fair value.
SCBW leased back the buildings from SCH for a period of 20 years under an
operating lease agreement that provides for escalating minimum rental payments
during the first five years of the lease, and also an escalating minimum usage
rate, of RMB 28,000,000. The escalating minimum usage rate increases from 30% in
1996 to 70% in 2000, and to the extent that the usage rate is between the
respective annual rate and 70%, such portion of rent expense payable will be
deferred. SCBW will account for scheduled rent increases payable regardless of
future usage of the buildings on the straight-line basis over the lease term.
The minimum annual rent expense in each of the first five years commencing
January 1, 1996 is as follows: 1996 - RMB 4,200,000; 1997 - RMB 4,900,000; 1998-
RMB 5,600,000; 1999 - RMB 6,300,000; and 2000 - RMB 7,000,000. SCBW prepaid the
first five years of rent to SCH, assuming a usage rate of 70%, of RMB 28,000,000
by reducing its accounts receivable due from SCH by an equal amount. As a result
of this sale/leaseback transaction, the Company has been able to substantially
reduce future depreciation expense related to the new production facility and
interest expense related to the debt that had been incurred to build the new
production facility.
The Company believes that its cash flow provided by operations, combined
with short-term borrowings, will be sufficient to support operations at current
levels. However, in order to increase sales and fully utilize the expanded
production capacity of the new production facility, the Company will require
operating capital substantially in excess of that available from domestic
sources in China. The availability of working capital represents a substantial
limitation on the ability of the Company to finance increased production levels.
As a result of the Company's existing capital structure and reliance on
borrowings, such additional operating capital would most likely be in the form
of some type of an equity investment.
19
The Company expects that 1996 will be a transition year, during which
operating results will be under significant pressure as a result of several
factors. Although the new production facility has been completed and will become
fully operational in 1996, substantial full-scale production will take at least
two years to reach. During this period, the Company will incur substantial
additional operating costs, including increased depreciation and the
amortization of deferred pre-operating costs, without the full benefit of
increased production from the new facility. In addition, the Company will
require additional operating capital substantially in excess of that available
from domestic sources in China to support increased production levels at the new
facility. Finally, as a result of the anti-dumping investigation, export sales
to the United States had ceased beginning in the fourth quarter of 1995,
resulting in an increased reliance on domestic Chinese sales, which typically
have an extended collection cycle and do not generate United States dollars.
However, with the recent favorable resolution of the anti-dumping investigation,
the Company expects to reopen its distribution channel to the United States
during the third quarter of 1996.
Inflation and Currency Matters -
In recent years, the Chinese economy has experienced periods of rapid
economic growth as well as high rates of inflation, which in turn has resulted
in the periodic adoption by the Chinese government of various corrective
measures designed to regulate growth and contain inflation. Since 1993, the
Chinese government has implemented an economic program designed to control
inflation, which has resulted in the tightening of working capital available to
Chinese business enterprises. The success of the Company depends in substantial
part on the continued growth and development of the Chinese economy.
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies. Changes in the relative value
of currencies occur periodically and may, in certain instances, materially
affect the Company's results of operations.
A substantial portion of the Company's revenues are denominated in RMB. As
a result, continued devaluation of the RMB against the USD will adversely affect
the Company's financial performance when measured in USD, and may have material
adverse effects upon the results of operations and financial position. In
addition, a significant portion of revenues will need to be converted into USD
on a continuing basis to meet foreign currency obligations. Although prior to
1994 the RMB experienced significant devaluation against the USD, the RMB has
remained fairly stable since late 1994. The swap center rate was US$1.00 to RMB
8.70 at December 31, 1993, RMB 8.45 at December 31, 1994, RMB 8.32 at December
31, 1995, and RMB 8.33 at March 31, 1996.
20
PART II. OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K -
Three Months Ended March 31, 1996: None.
21
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
FREMONT CORPORATION
-------------------
(Registrant)
Date: June 12, 1996 By: /s/ ROBERT N. WEINGARTEN
-----------------------------
Robert N. Weingarten
Chief Financial Officer
(Duly authorized officer
and principal financial
officer)
22