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 June 30, 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
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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 July 31, 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: 28.
1
FREMONT CORPORATION AND SUBSIDIARIES
------------------------------------
INDEX
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
December 31, 1995 and June 30, 1996
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months and Six Months Ended June 30, 1995 and 1996
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended June 30, 1995 and 1996
Notes to Condensed Consolidated Financial Statements (Unaudited) -
Three Months and Six Months Ended June 30, 1995 and 1996
Item 2. Management's Discussion and Analysis or Plan of Operation
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
FREMONT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands,
except number of shares and per share data)
December 31, 1995 June 30, 1996
------------------ ----------------
RMB USD RMB USD
------- ------ ------- ------
ASSETS
Current assets:
Cash and cash
equivalents 6,507 782 7,762 933
Accounts receivable,
net (Note 4) 83,502 10,036 72,115 8,668
Inventories (Note 2) 35,469 4,263 56,144 6,748
Due from related
companies (Note 5) 43,501 5,229 25,501 3,065
Other receivables 20,280 2,437 21,182 2,546
Prepayments and
other current assets 2,036 245 2,455 295
------- ------ ------- ------
Total current assets 191,295 22,992 185,159 22,255
------- ------ ------- ------
Property, plant and
equipment (Note 5) 256,107 30,782 145,332 17,468
Less accumulated
depreciation (12,715) (1,528) (17,070) (2,052)
------- ------ ------- ------
243,392 29,254 28,262 15,416
------- ------ ------- ------
Bank deposits 20,800 2,500 20,800 2,500
Goodwill, net 37,766 4,539 37,277 4,480
Deferred pre-operating
costs, net (Note 3) 8,534 1,026 4,267 513
Prepaid rent (Note 5) 26,800 3,221
Intangible assets, net 5,835 701 5,592 672
Other long-term assets 2,136 257 1,953 235
------- ------ ------- ------
Total assets 509,758 61,269 410,110 49,292
======= ====== ======= ======
(continued)
3
FREMONT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)(continued)
(Amounts in thousands,
except number of shares and per share data)
December 31, 1995 June 30, 1996
------------------ ----------------
RMB USD RMB USD
------- ------ ------- ------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank loans
(Note 5) 161,278 19,384 144,274 17,341
Other short-term
borrowings 6,656 800 624 75
Accounts payable 31,124 3,741 18,508 2,225
Accrued expenses and
other liabilities 17,478 2,101 16,901 2,031
Taxes payable 7,712 927 7,124 856
Long-term bank loans,
current portion
(Note 5) 27,726 3,333
Finance lease
obligations, current
portion 10,817 1,300 10,817 1,300
------- ------ ------- ------
Total current
liabilities 262,791 31,586 198,248 23,828
Long-term bank loans
(Note 5) 43,938 5,281 230 28
Finance lease
obligations 18,904 2,272 15,588 1,873
Loan from parent company
(Note 6) 33,280 4,000 33,280 4,000
Other long-term payables 9,755 1,172 15,268 1,835
------- ------ ------- ------
Total liabilities 368,668 44,311 262,614 31,564
------- ------ ------- ------
Minority interests 11,864 1,426 11,093 1,333
------- ------ ------- ------
(continued)
4
FREMONT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)(continued)
(Amounts in thousands,
except number of shares and per share data)
December 31, 1995 June 30, 1996
------------------ ----------------
RMB USD RMB USD
------- ------ ------- ------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Shareholders' equity
(Note 8):
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
June 30, 1996 47 6 48 6
Additional paid-in
capital 112,145 13,479 115,877 13,928
Dedicated capital 10,213 1,227 10,213 1,227
Retained earnings 6,821 820 10,265 1,234
------- ------ ------- ------
Total shareholders'
equity 129,226 15,532 136,403 16,395
------- ------ ------- ------
Total liabilities
and shareholders'
equity 509,758 61,269 410,110 49,292
======= ====== ======= ======
See accompanying notes to
condensed consolidated financial statements.
5
FREMONT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands,
except number of shares and per share data)
Three Months Ended June 30,
-------------------------------------
1995 1996
--------- ------------------------
RMB RMB USD
--------- --------- ---------
Sales, including
approximately RMB 4,140 in
1995 and RMB 15,000 in 1996
to companies related to SCH 49,435 42,801 5,144
Costs of goods sold 40,400 35,973 4,324
--------- --------- ---------
Gross profit 9,035 6,828 820
Selling, general and
administrative expenses 2,733 2,194 264
Amortization of deferred
pre-operating costs (Note 3) 2,133 256
Interest expense, net 1,410 992 119
Other (income) expense, net 67 (81) (10)
Non-recurring recapitalization
cost (Note 8) 6,407
--------- --------- ---------
Income (loss) before income
taxes (1,582) 1,590 191
Provision for income taxes (250) (500) (60)
--------- --------- ---------
Income (loss) before
minority interests (1,832) 1,090 131
Minority interests (144) 475 57
--------- --------- ---------
Net income (loss) (1,976) 1,565 188
========= ========= =========
Net income (loss) per
common share (.37) .27 .03
========= ========= =========
Weighted average number of
common shares (Note 1) 5,345,972 5,877,217 5,877,217
========= ========= =========
See accompanying notes to
condensed consolidated financial statements.
6
FREMONT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands,
except number of shares and per share data)
Six Months Ended June 30,
-------------------------------------
1995 1996
--------- ------------------------
RMB RMB USD
--------- --------- ---------
Sales, including
approximately RMB 7,390 in
1995 and RMB 25,000 in 1996
to companies related to SCH 82,154 82,978 9,973
Costs of goods sold 66,285 66,457 7,988
--------- --------- ---------
Gross profit 15,869 16,521 1,985
Selling, general and
administrative expenses 6,142 5,532 665
Amortization of deferred
pre-operating costs (Note 3) 4,267 513
Interest expense, net 2,561 2,914 350
Other (income) expense, net (9) 135 16
Non-recurring recapitalization
cost (Note 8) 6,407
--------- --------- ---------
Income before income taxes 768 3,673 441
Provision for income taxes (500) (1,000) (120)
--------- --------- ---------
Income before minority
interests 268 2,673 321
Minority interests 45 771 93
--------- --------- ---------
Net income 313 3,444 414
========= ========= =========
Net income per common share .06 .59 .07
========= ========= =========
Weighted average number of
common shares (Note 1) 5,089,306 5,808,050 5,808,050
========= ========= =========
See accompanying notes to
condensed consolidated financial statements.
7
FREMONT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
Six Months Ended June 30,
-------------------------------------
1995 1996
--------- ------------------------
RMB RMB USD
--------- --------- ---------
Cash flows from operating
activities:
Net income 313 3,444 414
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation 4,995 4,354 523
Amortization 490 6,199 745
Non-recurring
recapitalization cost 6,407
Minority interests (45) (771) (93)
Changes in operating
assets and liabilities:
(Increase) decrease in -
Accounts receivable, net 1,171 (1,733) (208)
Inventories (4,228) (20,675) (2,485)
Due from related
companies (10,000) (1,202)
Other receivables (902) (108)
Prepayments and other
current assets (16,373) (419) (50)
Other long-term assets 664 183 22
Increase (decrease) in -
Accounts payable (21,658) (12,673) (1,523)
Accrued expenses and
other liabilities 2,050 (521) (63)
Taxes payable 1,875 (588) (71)
Other long-term payables 5,513 663
--------- --------- ---------
Net cash used in
operating activities (24,339) (28,589) (3,436)
--------- --------- ---------
Cash flows from investing
activities:
Additions to property, plant
and equipment (22,375) (20,691) (2,487)
--------- --------- ---------
Net cash used in
investing activities (22,375) (20,691) (2,487)
--------- --------- ---------
(continued)
8
FREMONT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(continued)
(Amounts in thousands)
Six Months Ended June 30,
----------------------------
1995 1996
------- ------------------
RMB RMB USD
------- -------- -------
Cash flows from financing
activities:
Net proceeds from short-term
bank loans 23,270 83,875 10,081
Net proceeds from other
short-term borrowings 624 75
Repayment of other short-term
borrowings (6,656) (800)
Net proceeds from (repayments
of) long-term bank loans 24,380 (27,726) (3,332)
Payments of finance lease
obligations (6,954) (3,316) (399)
Sale of common stock and
warrants, net of costs 3,734 449
------- -------- -------
Net cash provided by
financing activities 40,696 50,535 6,074
------- -------- -------
Cash and cash equivalents:
Net increase (decrease) (6,018) 1,255 151
At beginning of period 8,275 6,507 782
------- -------- -------
At end of period 2,257 7,762 933
======= ======== =======
See accompanying notes to
condensed consolidated financial statements.
9
FREMONT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 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
10
enterprise incorporated in the People's Republic of China, owns the remaining 2%
equity interest in SCBW. Winfill and SCH formed 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 floating rates of exchange as quoted by
the People's Bank of China prevailing at the date of the transactions. Monetary
assets and liabilities denominated in foreign currencies are translated into RMB
using the applicable exchange 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"
or "US$") 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 June
11
30, 1996 of US$1.00 = RMB 8.32. 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.
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 June 30, 1996,
the results of operations for the three months and six months ended June 30,
1995 and 1996, and the changes in cash flows for the six months ended June 30,
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 and six months ended June
30, 1996 are not necessarily indicative of the results of operations to be
expected for the full fiscal year ending December 31, 1996.
Net Income (Loss) 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 (loss) per common share for the
three months and six months ended June 30, 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 throughout each respective
period, 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 and six months
ended June 30, 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.
12
2. INVENTORIES
Inventories consisted of the following at December 31, 1995 and June 30,
1996:
December 31, 1995 June 30, 1996
--------------------- ---------------------
RMB USD RMB USD
---------- --------- ---------- ---------
Raw materials 18,743,000 2,253,000 27,673,000 3,326,000
Work-in-progress 3,075,000 369,000 3,950,000 475,000
Finished goods 13,651,000 1,641,000 24,521,000 2,947,000
---------- --------- ---------- ---------
35,469,000 4,263,000 56,144,000 6,748,000
========== ========= ========== =========
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 on the straight line basis 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
RMB 13,120,000. The parties elected to modify the option's transfer date, and
accordingly, as of January 1, 1996, SCBW transferred to SCH RMB 13,120,000 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-
13
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 payable in each of the first five years commencing
January 1, 1996, assuming a usage rate of 70%, is as follows: 1996 - RMB
4,200,000; 1997 - RMB 4,900,000; 1998 - RMB 5,600,000; 1999 - RMB 6,300,000;
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. To the extent that the utilization
rate is less than 70% in any year during the five year period ending December
31, 2000, the unused prepaid rent can be carried forward during the first four
years of such five year period. In the opinion of management, the prepaid rent
will be fully utilized during the five years ending December 31, 2000.
6. LOAN FROM PARENT COMPANY
The loan from parent company of RMB 33,280,000 is denominated in USD, is
unsecured, bears no interest, and has no fixed repayment terms.
7. SALE OF SECURITIES
During March 1996, the Company sold 166,000 units, each unit consisting of
one share of common stock and one common stock purchase warrant, generating net
proceeds of RMB 3,734,000 (USD 449,000). 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. NON-RECURRING RECAPITALIZATION COST
On April 5, 1995, the Company issued 770,000 shares of common stock to
certain consultants in conjunction with the reverse acquisition. The Company
accounted for the value of the 770,000 shares as a non-recurring
recapitalization cost during the three months and six months ended June 30,
1995, and recorded
14
a charge to operations of USD 770 (US$1.00 per share) as management's estimate
of the fair value of the consideration paid.
9. 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, each Chinese bicycle
manufacturer which continued to export product to the United States 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
15
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
export to the United States without the imposition of an anti-dumping duty.
The United States bicycle manufacturers appealed the determinations of both
Commerce and the ITC in the United States Court of International Trade on June
30, 1996 and July 19, 1996, respectively. Legal counsel for SCBW is responding
to such appeals, and, in addition, has filed its own action to challenge
Commerce's calculation methodologies with respect to the 61.67% dumping margin.
The resolution of the appeals will take approximately one year to complete. The
Company is unable to predict the ultimate resolution of this matter.
16
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, each Chinese bicycle
manufacturer which continued to export product to the United States was required
to post a "single-entry bond" equal to
17
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 export to the
United States without the imposition of an anti-dumping duty.
The United States bicycle manufacturers appealed the determinations of both
Commerce and the ITC in the United States Court of International Trade on June
30, 1996 and July 19, 1996, respectively. Legal counsel for SCBW is responding
to such appeals, and, in addition, has filed its own action to challenge
Commerce's calculation methodologies with respect to the 61.67% dumping margin.
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 June 30, 1995 and 1996 -
Sales for the three months ended June 30, 1996 were RMB 42,801,000, as
compared to RMB 49,535,000 for the three months ended June 30, 1995, a decrease
of RMB 6,634,000 or 13.4%. Sales to companies related to SCH, a related entity,
for the three months ended June 30, 1996 were approximately RMB 15,000,000 or
35.0% of sales, as compared to RMB 4,140,000 or 8.4% of sales for the three
months ended June 30, 1995. The decrease in sales in 1996 as compared to 1995
was a result of the negative effect that the anti-dumping investigation had on
export sales to the United
18
States, which caused a change in the product mix, which in turn caused a
reduction in sales prices ranging from 6% to 8%.
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 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 under its "Seven Stars" brand, but also on concurrently
developing distribution channels to other Southeast Asian markets, South America
and Australia, and on establishing an exercise equipment product line. 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 latter part of 1996.
Gross profit for the three months ended June 30, 1996 was RMB 6,828,000 or
16.0% of sales, as compared to RMB 9,035,000 or 18.3% of sales for the three
months ended June 30, 1995. The decrease in gross profit as a percentage of
sales in 1996 as compared to 1995 was a result of the negative effect that the
anti-dumping investigation had on export sales to the United States, which
caused a change in the product mix, which in turn caused a reduction in sales
price ranging from 6% to 8%.
Selling, general and administrative expenses for the three months ended
June 30, 1996 were RMB 2,194,000 or 5.1% of sales, as compared to RMB 2,733,000
or 5.5% of sales for the three months ended June 30, 1995, a decrease of RMB
539,000 or 19.7%. 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 primarily a result of export sales, which have lower selling expenses
than domestic sales in China, representing a larger portion of total sales in
1996 as compared to 1995, and 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 June 30, 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
June 30, 1996 was RMB 2,133,000. Deferred pre-operating costs represent
organization and certain start-up costs (excluding capital expenditures) related
to the new production
19
facility. Through December 31, 1995, such deferred pre-operating costs
aggregated RMB 8,534,000, and are being amortized on the straight line basis
over one year commencing January 1, 1996, the date of commencement of commercial
production from the new production facility.
On April 5, 1995, the Company issued 770,000 shares of common stock to
certain consultants in conjunction with the reverse acquisition. The Company
accounted for the value of the 770,000 shares as a non-recurring
recapitalization cost during the three months ended June 30, 1995, and recorded
a charge to operations of USD 770 (US$1.00 per share) as management's estimate
of the fair value of the consideration paid.
Interest expense, net of amounts capitalized in 1995, for the three months
ended June 30, 1996 was RMB 992,000 or 2.3% of sales, as compared to RMB
1,410,000 or 2.9% of sales for the three months ended June 30, 1995. The
decrease in interest expense was primarily a result of a reduction in bank loans
utilized to finance working capital requirements in 1996 as compared to 1995 and
a reduction in interest rates during 1996.
As a result of the aforementioned factors, net income for the three months
ended June 30, 1996 was RMB 1,565,000 (per share - RMB .27; USD .03) or 3.7% of
sales, as compared to a net loss of RMB 1,976,000 (RMB .37 per share) for the
three months ended June 30, 1995. Excluding the amortization of deferred pre-
operating costs of RMB 2,133,000 in 1996 and the non-recurring recapitalization
cost of RMB 6,407,000 in 1995, pro forma net income for the three months ended
June 30, 1996 would have been RMB 3,698,000 (per share - RMB .63; USD .08) or
8.6% of sales, as compared to RMB 4,431 (RMB .83 per share) or 9.0% of sales for
the three months ended June 30, 1995.
Six Months Ended June 30, 1995 and 1996 -
Sales for the six months ended June 30, 1996 were RMB 82,978,000, as
compared to RMB 82,154,000 for the six months ended June 30, 1995, an increase
of RMB 824,000 or 1.0%. Sales to companies related to SCH, a related entity,
for the six months ended June 30, 1996 were approximately RMB 25,000,000 or
30.1% of sales, as compared to RMB 7,390,000 or 9.0% of sales for the six months
ended June 30, 1995. The increase in sales in 1996 as compared to 1995 was a
result of the development of new distribution channels in the domestic bicycle
market in China.
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 China. The Company's normal operating
cash flow, which is adversely affected by the extended accounts receivable
collection
20
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 under its "Seven Stars" brand, but also on concurrently developing
distribution channels to other Southeast Asian markets, South America and
Australia, and on establishing an exercise equipment product line. 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
latter part of 1996.
Gross profit for the six months ended June 30, 1996 was RMB 16,521,000 or
19.9% of sales, as compared to RMB 15,869,000 or 19.3% of sales for the six
months ended June 30, 1995. The increase in gross profit as a percentage of
sales in 1996 as compared to 1995 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 six months ended June
30, 1996 were RMB 5,532,000 or 6.7% of sales, as compared to RMB 6,142,000 or
7.5% of sales for the six months ended June 30, 1995, a decrease of RMB 610,000
or 9.9%. 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
primarily a result of export sales, which have lower selling expenses than
domestic sales in China, representing a larger portion of total sales in 1996 as
compared to 1995, and 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 six months
ended June 30, 1995 did not include any costs associated with the operation of a
public company.
Amortization of deferred pre-operating costs for the six months ended June
30, 1996 was RMB 4,267,000. 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 on the straight line
basis over one year commencing January 1, 1996, the date of commencement of
commercial production from the new production facility.
On April 5, 1995, the Company issued 770,000 shares of common stock to
certain consultants in conjunction with the
21
reverse acquisition. The Company accounted for the value of the 770,000 shares
as a non-recurring recapitalization cost during the six months ended June 30,
1995, and recorded a charge to operations of USD 770 (US$1.00 per share) as
management's estimate of the fair value of the consideration paid.
Interest expense, net of amounts capitalized in 1995, for the six months
ended June 30, 1996 was RMB 2,914,000 or 3.5% of sales, as compared to RMB
2,561,000 or 3.1% of sales for the six months ended June 30, 1995. The increase
in interest expense was primarily a result of an increase in bank loans utilized
to finance working capital requirements in 1996 as compared to 1995, which more
than offset the reduction in interest rates during 1996.
As a result of the aforementioned factors, net income for the six months
ended June 30, 1996 was RMB 3,444,000 (per share - RMB .59; USD .07) or 4.2% of
sales, as compared to net income of RMB 313,000 (RMB .06 per share) or .4% of
sales for the six months ended June 30, 1995. Excluding the amortization of
deferred pre-operating costs of RMB 4,267,000 in 1996 and the non-recurring
recapitalization cost of RMB 6,407,000 in 1995, pro forma net income for the six
months ended June 30, 1996 would have been RMB 7,711,000 (per share - RMB 1.33;
USD .16) or 9.3% of sales, as compared to RMB 6,720,000 (RMB 1.32 per share) or
8.2% of sales for the six months ended June 30, 1995.
Consolidated Financial Condition - June 30, 1996:
Liquidity and Capital Resources -
For the six months ended June 30, 1996, the Company's operations utilized
cash resources of RMB 28,589,000. The most significant components of the cash
utilized by operations in 1996 were the increase in inventories of RMB
20,675,000, the increase in due from related companies (as a result of sales to
companies related to SCH) of RMB 10,000,000, and the decrease in accounts
payable of RMB 12,673,000, which was partially offset by an increase of RMB
5,513,000 in other long-term payables.
Through December 31, 1995, the Company relied primarily on short-term bank
loans 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 reduced its net working capital deficit to RMB 13,089,000 at June
30, 1996. As a result, the Company's current ratio at June 30, 1996 was .93:1,
as compared to .73:1 at December 31, 1995.
Except with regard to the initial transaction pursuant to
22
which SCBW was organized and capitalized and the sale of the Company's equity
securities during March 1996, the Company's primary method of financing its
capital requirements has been bank loans. Short-term bank loans are unsecured,
repayable within 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 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 bank loans as a
result of the sale/leaseback with SCH and the transfer of accounts receivable to
SCH as discussed below, during the six months ended June 30, 1996, short-term
bank loans increased by RMB 83,875,000, which were utilized to repay other
short-term borrowings of RMB 6,656,000, payments of finance lease obligations of
RMB 3,316,000 and long-term bank loans (including the current portion) of RMB
27,726,000.
During March 1996, the Company raised net proceeds of RMB 3,734,000 (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 six months ended June 30, 1996, the net cash provided by
financing activities of RMB 50,535,000 was utilized to fund additions to
property, plant and equipment of RMB 20,691,000 and operating cash flow
requirements.
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.
23
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 June 30, 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 attain.
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, 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
RMB 13,120,000. The parties elected to modify the option's transfer date, and
accordingly, effective as of January 1, 1996, SCBW transferred to SCH RMB
13,120,000 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
24
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 payable in each of the first five
years commencing January 1, 1996, assuming a usage rate of 70%, is as follows:
1996 - RMB 4,200,000; 1997 - RMB 4,900,000; 1998 - RMB 5,600,000; 1999 - RMB
6,300,000; 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. To the extent that the utilization
rate is less than 70% in any year during the five year period ending December
31, 2000, the unused prepaid rent can be carried forward during the first four
years of such five year period. In the opinion of management, the prepaid rent
will be fully utilized during the five years ending December 31, 2000. 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.
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 attain. 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, and
non-United States export sales. However,
25
with the recent favorable resolution of the anti-dumping investigation, the
Company expects to reopen its distribution channel to the United States during
the latter part 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. During the six
months ended June 30, 1996, the general inflation rate in China was in excess of
10% on an annualized basis. 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 unified exchange 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 8.32 at June 30, 1996.
26
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 June 30, 1996: None.
27
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: September 12, 1996 By: /s/ ROBERT N. WEINGARTEN
------------------------
Robert N. Weingarten
Chief Financial Officer
(Duly authorized officer
and principal financial
officer)
28