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, 1998
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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
- -------------------------------------------------------------------------------
(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 March 31, 1998, the issuer had 5,861,639 shares of common stock
issued and outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
1
FREMONT CORPORATION AND SUBSIDIARIES
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
December 31, 1997 and March 31, 1998
Condensed Consolidated Statements of Operations
(Unaudited) -
Three Months Ended March 31, 1997 and 1998
Condensed Consolidated Statements of Cash Flows
(Unaudited) -
Three Months Ended March 31, 1997 and 1998
Notes to Condensed Consolidated Financial
Statements (Unaudited) -
Three Months Ended March 31, 1997 and 1998
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, 1997 March 31, 1998
----------------- ------------------
RMB USD RMB USD
------- ------ ------- ------
ASSETS
Current assets:
Cash and cash
equivalents 5,016 604 4,197 506
Accounts receivable,
net 72,600 8,747 77,669 9,358
Inventories (Note 2) 64,117 7,725 64,361 7,754
Due from SCH 8,338 1,005 9,775 1,178
Due from Easy Keen
(Note 5) 17,370 2,093 17,370 2,093
Prepayments and
other current assets 21,017 2,532 21,087 2,540
------- ------ ------- ------
Total current assets 188,458 22,706 194,459 23,429
------- ------ ------- ------
Property, plant and
equipment 163,826 19,737 164,089 19,770
Less accumulated
depreciation (31,291) (3,770) (33,699) (4,060)
------- ------ ------- ------
132,535 15,967 130,390 15,710
------- ------ ------- ------
Rental deposit to SCH 22,800 2,747 22,100 2,662
Goodwill, net 35,811 4,315 35,566 4,285
Other long-term assets 6,631 799 5,853 705
------- ------ ------- ------
Total assets 386,235 46,534 388,368 46,791
------- ------ ------- ------
------- ------ ------- ------
(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, 1997 March 31, 1998
----------------- ------------------
RMB USD RMB USD
------- ------ ------- ------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings 75,041 9,041 75,252 9,067
Accounts payable 32,662 3,935 27,975 3,370
Accrued expenses and
other liabilities 49,312 5,941 54,261 6,537
Taxes payable 12,839 1,547 12,892 1,553
Finance lease
obligations, current
portion 8,246 994 8,246 994
------- ------ ------- ------
Total current
liabilities 178,100 21,458 178,626 21,521
Finance lease
obligations,
non-current portion 2,363 284 2,363 284
Long-term bank loans 6,100 735 6,600 796
Loan from MTE (Note 3) 33,280 4,010 33,280 4,010
Other long-term payables 3,350 403 3,350 403
------- ------ ------- ------
Total liabilities 223,193 26,890 224,219 27,014
------- ------ ------- ------
Minority interests 11,103 1,338 10,798 1,301
------- ------ ------- ------
(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, 1997 March 31, 1998
----------------- ------------------
RMB USD RMB USD
------- ------ ------- ------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Shareholders' equity:
Common stock, par value
US$ .001 per share;
authorized -
100,000,000 shares;
issued and
outstanding -
5,861,639 shares at
December 31, 1997 and
March 31, 1998 49 6 49 6
Additional paid-in
capital 118,134 14,233 118,134 14,233
Dedicated capital 11,785 1,420 11,785 1,420
Retained earnings 21,971 2,647 23,383 2,817
------- ------ ------- ------
Total shareholders'
equity 151,939 18,306 153,351 18,476
------- ------ ------- ------
Total liabilities
and shareholders'
equity 386,235 46,534 388,368 46,791
------- ------ ------- ------
------- ------ ------- ------
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 March 31,
---------------------------------
1997 1998
--------- ---------------------
RMB RMB USD
--------- --------- ---------
Sales
- to related companies 7,517 2,733 329
- to others 36,698 29,336 3,535
------ ------ -----
44,215 32,069 3,864
------ ------ -----
Cost of goods sold
- purchases from related
companies 3,259 1,616 195
- others 30,171 22,198 2,674
------ ------ -----
33,430 23,814 2,869
------ ------ -----
Gross profit 10,785 8,255 995
Selling, general and
administrative expenses 5,007 6,952 838
Less: Shared by SCH (1,298) (2,488) (299)
Interest expense, net 2,456 2,674 322
Other expense, net 47 10 1
------ ------ -----
Income before income taxes 4,573 1,107 133
Provision for income taxes (500)
------ ------ -----
Income before minority
interests 4,073 1,107 133
Minority interests 318 305 37
------ ------ -----
Net income 4,391 1,412 170
------ ------ -----
------ ------ -----
Net income per common share
(Note 1) .75 .24 .03
------ ------ -----
------ ------ -----
Weighted average number of
common shares outstanding
(Note 1) 5,824,972 5,861,639 5,861,639
--------- --------- ---------
--------- --------- ---------
See accompanying notes to
condensed consolidated financial statements.
6
FREMONT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
Three Months Ended March 31,
---------------------------------
1997 1998
--------- ---------------------
RMB RMB USD
--------- --------- ---------
Cash flows from operating
activities:
Net income 4,391 1,412 170
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation 2,854 2,408 290
Amortization 367 367 44
Minority interests (318) (305) (37)
Rental expense offset
against rental deposit
to SCH 700 700 85
Changes in operating
assets and liabilities:
(Increase) decrease in -
Accounts receivable (3,961) (5,069) (611)
Inventories (112) (244) (29)
Due from SCH 655 (1,437) (173)
Due from Easy Keen 2,559
Prepayments and other
current assets 1,386 (70) (8)
Other long-term assets 85 656 79
Increase (decrease) in -
Accounts payable (9,691) (4,687) (565)
Accrued expenses and
other liabilities (787) 4,949 596
Taxes payable 825 53 7
Other long-term payables 72
------ ------ ------
Net cash used in
operating activities (975) (1,267) (152)
------ ------ ------
Cash flows from investing
activities:
Additions to property, plant
and equipment (263) (32)
------ ------ ------
Net cash used in
investing activities (263) (32)
------ ------ ------
(continued)
7
FREMONT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(continued)
(Amounts in thousands)
Three Months Ended March 31,
---------------------------------
1997 1998
--------- ---------------------
RMB RMB USD
--------- --------- ---------
Cash flows from financing
activities:
Net proceeds from short-term
borrowings 4,200 211 26
Net proceeds from long-term
bank loans 500 60
Payments of finance lease
obligations (3,117)
Exercise of warrants, net
of costs 224
------ ------ ------
Net cash provided by
financing activities 1,307 711 86
------ ------ ------
Cash and cash equivalents:
Net increase (decrease) 332 (819) (98)
At beginning of period 4,806 5,016 604
------ ------ ------
At end of period 5,138 4,197 506
------ ------ ------
------ ------ ------
See accompanying notes to
condensed consolidated financial statements.
8
FREMONT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION - Fremont Corporation, a Delaware corporation (the "Company"),
was incorporated in the State of Utah on April 22, 1955, as Fremont Uranium
Corporation. As of July 1, 1993, the Company reincorporated in the State of
Delaware and changed its name to Fremont Corporation.
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.
Immediately prior to this transaction, after a 1-for 100 reverse stock
split effective April 28, 1995, the Company had a total of 842,639 shares of
common stock issued and outstanding, including 770,000 shares issued to
certain consultants in conjunction with the reverse acquisition which were
valued at RMB 6,405,000 and charged to operations. The 4,760,000 shares of
common stock represented approximately 85% of the outstanding shares of
common stock of the Company, after all shares were issued and the 1-for-100
reverse stock split was effected as set forth in the Share Exchange
Agreement. All common share and per share data in the accompanying condensed
consolidated financial statements have been restated to reflect this reverse
stock split.
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
9
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.
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
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. SCB owns a 99.99% interest in Fogance Industries Limited, which is
the Hong Kong-based overseas purchasing and sales agent for the Company. For
accounting purposes, the transaction has been treated as a recapitalization
of Winfill with Winfill as the acquiror (reverse acquisition). The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America.
The 31% minority interest in SCB is owned by a company, the president of
which is a director of the Company. The director is also a shareholder of
Hong Kong Easy Keen Industries Ltd. ("Easy Keen") and of MTE, the controlling
shareholder of the Company. The Company conducts a substantial portion of
its sales and purchases through related parties (SCH and Easy Keen), and has
additional significant continuing transactions with such related parties.
The inability of the Company to continue to conduct a substantial portion of
its sales through related companies could have a material adverse effect on
the Company's results of operations and financial condition.
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
10
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 March 31, 1998 of US$1.00 = RMB 8.3. 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 March 31,
1998, the results of operations for the three months ended March 31, 1997 and
1998, and the changes in cash flows for the three months ended March 31, 1997
and 1998. These adjustments are of a normal recurring nature. The
consolidated balance sheet as of December 31, 1997 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, 1997, as filed with the
Securities and Exchange Commission.
The results of operations for the three months ended March 31, 1998 are
not necessarily indicative of the results of operations to be expected for
the full fiscal year ending December 31, 1998.
Certain prior period amounts have been reclassified to conform with the
current year presentation.
11
NET INCOME PER COMMON SHARE - Effective December 31, 1997, the Company
adopted Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (SFAS 128), which requires the presentation of basic and diluted
earnings per share. Basic earnings per share are calculated by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted earnings per share are calculated by dividing net income by
the basic shares and all dilutive securities (warrants), but does not include
the impact of potential common shares which would be antidilutive. These
dilutive securities were anti-dilutive in 1998, and were not material in
1997. Net income per share for the three months ended March 31, 1997 was
restated as a result of SFAS 128.
Net income per common share for the three months ended March 31, 1997
and 1998 is based on the weighted average number of shares of common stock
outstanding for each period. No diluted earnings per share has been
presented, as the effect of outstanding common stock purchase warrants is
either anti-dilutive or not material.
2. INVENTORIES
Inventories consisted of the following at December 31, 1997 and March
31, 1998:
December 31, 1997 March 31, 1998
--------------------- ---------------------
RMB USD RMB USD
---------- --------- ---------- ---------
Raw materials 33,498,000 4,036,000 30,625,000 3,690,000
Work-in-progress 7,330,000 883,000 9,358,000 1,127,000
Finished goods 23,289,000 2,806,000 24,378,000 2,937,000
---------- --------- ---------- ---------
64,117,000 7,725,000 64,361,000 7,754,000
---------- --------- ---------- ---------
---------- --------- ---------- ---------
3. LOAN FROM MTE
The unsecured loan of RMB 33,280,000 from MTE, the parent company, is
denominated in USD, bears no interest, and has no fixed repayment terms.
4. CONSULTING CONTRACTS
Pursuant to consulting service agreements dated August 1, 1997 and
subsequent amendments, the Company engaged the services of two consultants to
provide corporate and financial consulting services for a period of three
years commencing January 1, 1998.
12
As consideration for their services, the Company agreed to issue to the
consultants a total of 120,000 shares of common stock in 1998. As of March
31, 1998, the shares of common stock had not been issued.
5. DUE FROM EASY KEEN
As of December 31, 1997 and March 31, 1998, RMB 17,370,000 was due from
Easy Keen. A director of the Company is also a shareholder of Easy Keen and
MTE. SCBW and Easy Keen have agreed to settle the net amount due SCBW by
Easy Keen supplying raw materials of the same value during 1998, or otherwise
by payment in cash.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income", which is effective for financial
statements issued for fiscal years beginning after December 15, 1997. This
statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income refers to revenues,
expenses, gains and losses that under generally accepted accounting
principles are included in comprehensive income but are excluded from net
income. Adoption of this statement is not expected to have an impact on the
Company's current disclosures and presentation.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related
Information", which is effective for financial statements issued for fiscal
years beginning after December 15, 1997. This statement requires that public
companies report certain information about their major customers, operating
segments, products and services, and the geographic areas in which they
operate. Adoption of this statement is not expected to have an impact on the
Company's current disclosures and presentation.
In February 1998, the Financial Accounting Standards Board issued
Statement No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits", which is effective for financial statements issued
for fiscal years beginning after December 15, 1997. This statement revises
employers' disclosures about pension and other postretirement benefit plans.
Adoption of this statement is not expected to have an impact on the Company's
current disclosures and presentation.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Quarterly Report on Form 10-QSB contains "forward-looking
statements" within the meaning of the Federal securities laws. These
forward-looking statements include, among others, statements concerning the
Company's expectations regarding sales trends, gross margin trends, the
availability of short-term bank borrowings to fund operations and capital
expenditures, the repayment of loans, facility expansion plans, and other
statements of expectations, beliefs, future plans and strategies, anticipated
events or trends, and similar expressions concerning matters that are not
historical facts. The forward-looking statements in the Quarterly Report on
Form 10-QSB for the quarterly period ended March 31, 1998 are subject to
risks and uncertainties that could cause actual results to differ materially
from those results expressed in or implied by the statements contained
herein.
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, steel
tubes, and exercise equipment. 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. SCB owns a 99.99% interest in Fogance Industries Limited, which is the
Hong Kong-based overseas purchasing and sales agent for the Company.
For accounting purposes, the transaction has been treated as a
recapitalization of Winfill with Winfill as the acquiror (reverse
acquisition). The consolidated financial statements include the accounts of
Winfill and its majority owned and controlled subsidiaries.
Consolidated Results of Operations:
Three Months Ended March 31, 1997 and 1998 -
Sales for the three months ended March 31, 1998 were RMB 32,069,000, as
compared to RMB 44,215,000 for the three months ended March 31, 1997, a
decrease of RMB 12,146,000 or 27.5%. Sales to related companies for the
three months ended March 31,
14
1998 were RMB 2,733,000 or 8.5% of sales, as compared to RMB 7,517,000 or
17.0% of sales for the three months ended March 31, 1997, a decrease of RMB
4,784,000 or 63.6%. Sales to unrelated companies for the three months ended
March 31, 1998 were RMB 29,336,000 or 91.5% of sales, as compared to RMB
36,698,000 or 83.0% of sales for the three months ended March 31, 1997, a
decrease of RMB 7,362,000 or 20.1%. Sales to related companies are both for
domestic and export purposes. During 1997, the Company elected to reduce its
dependence on related party sales in order to expand its export sales of
exercise equipment and accelerate its cash collections. However, the
inability of the Company to continue to conduct a substantial portion of its
sales through related companies could have a material adverse effect on the
Company's results of operations and financial condition.
For the three months ended March 31, 1998, PRC domestic sales were RMB
15,005,000 or 46.8% of sales, and export sales were RMB 17,064,000 or 53.2%
of sales. For the three months ended March 31, 1997, PRC domestic sales were
RMB 12,372,000 or 28.0% of sales, and export sales were RMB 31,843,000 or
72.0% of sales. For the three months ended March 31, 1998, sales of bicycles
and bicycle parts were RMB 18,102,000 or 56.4% of sales, and sales of
exercise equipment were RMB 13,967,000 or 43.6% of sales. For the three
months ended March 31, 1997, sales of bicycles and bicycles parts were RMB
31,915,000 or 72.2% of sales, and sales of exercise equipment were RMB
12,300,000 or 27.8% of sales.
SCBW began to manufacture an exercise equipment product line during 1996
and a bicycle with an automatic transmission during 1997. SCBW manufactures
such products on a purchase order basis for original equipment manufacturers
("OEMs") that market their products in the United States under various brand
names through infomercials, television home shopping networks and mass market
retailers. As a contract manufacturer, SCBW does not own any rights with
respect to these products or the names under which they are marketed.
The decrease in sales in 1998 as compared to 1997 was primarily
attributable to the following factors:
ASIAN FINANCIAL CRISIS - During late 1997, the Company began to suffer from
the effects of the Asian financial crisis. Although China was not directly
affected by the turmoil in South Korea and other Asian countries, the
devaluation of currencies in those countries had the effect of reducing one
of the Company's main competitive advantages, its low labor cost.
Manufacturers in Taiwan, which are the main competition for Chinese
companies, have reduced their prices an average of 13% over the last several
months, thus reducing demand for the Company's products and increasing
pressures on the Company's revenues and gross margin.
15
DOMESTIC SALE OF PARTS - The Company is a major supplier of parts to other
Chinese bicycle manufacturers which are significant exporters of finished
bicycles to the United States. The domestic sales of parts dropped
significantly in 1998 as compared to 1997, because of the anti-dumping tariff
and the Asian financial crisis, which had the effect of reducing the export
of finished bicycles from China to the United States.
WORKING CAPITAL REQUIREMENTS - The completion of the new production facility
at the end of 1995 substantially increased the Company's production capacity.
However, the Company's ability to increase production is dependent on
adequate working capital. The Company has not been successful in completing
an equity financing to provide the working capital necessary to support
increased production levels at the new facility. As a result, during the
latter part of 1997, the Company began to experience a shortage of working
capital, which has caused the Company to decline orders that under normal
conditions it would have accepted. In addition, the Company's normal
production cycle and its ability to provide timely shipments to customers was
negatively impacted. The working capital shortage also caused the Company to
shift its emphasis from production to assembly, as a result of which the
Company recorded approximately RMB 1,320,000 of assembly sales during the
three months ended March 31, 1998. Assembly utilizes raw materials and
components supplied by the Company's customers, and although assembly
generates lower sales, it generates a substantially higher gross margin. The
Company expects that it may continue to experience such working capital
shortages during 1998, which could have a material adverse effect on results
of operations.
Gross profit for the three months ended March 31, 1998 was RMB 8,255,000
or 25.7% of sales, as compared to RMB 10,785,000 or 24.4% of sales for the
three months ended March 31, 1997. The increase in gross profit as a
percentage of sales was a result of a higher percentage of sales being
generated by exercise equipment, which has a higher gross margin than
bicycles and bicycle parts, and the increase in assembly orders which
generates a higher gross margin.
Selling, general and administrative expenses for the three months ended
March 31, 1998 increased by RMB 755,000 or 20.4%, to RMB 4,464,000 or 13.9%
of sales, as compared to RMB 3,709,000 or 8.4% of sales for the three months
ended March 31, 1997, net of amounts assumed by SCH of RMB 2,488,000 and RMB
1,298,000, respectively. Selling, general and administrative expenses
increased on an absolute basis in 1998 as compared to 1997 as a result of
increased PRC domestic sales, which have higher transportation, freight and
selling expenses than export sales. Selling, general and administrative
expenses increased as a percentage of sales as a result of higher
distribution and selling costs associated with increased with increased PRC
16
domestic sales, and lower absolute sales.
Pursuant to a cost sharing agreement between SCBW and SCH effective
January 1, 1995, SCH agreed to bear 40% of certain selling, general and
administrative expenses incurred by SCBW, which represents its share of
management and selling activities incurred by SCBW on SCH's behalf. For the
three months ended March 31, 1998 and 1997, such amounts aggregated
approximately RMB 2,488,000 and RMB 1,298,000, respectively.
Interest expense for the three months ended March 31, 1998 was RMB
2,674,000 or 8.3% of sales, as compared to RMB 2,456,000 or 5.68% of sales
for the three months ended March 31, 1997. The increase in interest expense
in 1998 as compared to 1997 was a result of several factors, including higher
interest rates, additional financing costs incurred to roll-over a portion of
short-term bank loans that became due, and notes issued to certain suppliers
that were guaranteed by the Company's bank.
Interest income for the three months ended March 31, 1998 and 1997 was
not material. During the year ended December 31, 1997, the Company recorded
approximately RMB 3,400,000 of interest income on amounts due from SCH
primarily for the purchase of goods, which was calculated at a rate of 8.0%
per annum. Due to the significant reduction in the balance due from SCH, the
Company does not expect interest income from SCH to be material during 1998.
For the three months ended March 31, 1998, net income was RMB 1,412,000
(RMB .24 per share) or 4.4% of sales. For the three months ended March 31,
1997, net income was RMB 4,391,000 (RMB .75 per share) or 9.9% of sales.
Consolidated Financial Condition - March 31, 1998:
Liquidity and Capital Resources -
For the three months ended March 31, 1998, the Company's operations
utilized cash resources of RMB 1,267,000, as compared to utilizing cash
resources of RMB 975,000 for the three months ended March 31, 1997. The most
significant components of the cash utilized by operations in 1998 were the
increases in accounts receivable of RMB 5,069,000 and due from SCH of RMB
1,437,000.
Operating cash flow is adversely affected by the long collection cycle
that is typical of Chinese companies that have a substantial proportion of
their customers in China. The Company experienced an increase in cash used
in operating activities in 1998 as compared to 1997 primarily as a result of
reduced sales.
17
The Company had working capital of RMB 15,833,000 at March 31, 1998, as
compared to working capital of RMB 10,358,000 at December 31, 1997. As a
result, the Company's current ratio at March 31, 1998 was 1.09:1, as compared
to 1.06:1 at December 31, 1997.
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 within one year, have
interest rates ranging from 7.63% to 21.6%, and have been utilized for
working capital purposes and, prior to 1996, to finance the expansion of the
production facility and the purchase of equipment.
During the three months ended March 31, 1998, short-term borrowings
increased by RMB 211,000, and long-term borrowings increased by RMB 500,000.
As of March 31, 1998, short-term borrowings were RMB 75,252,000 and long-term
borrowings were RMB 6,600,000.
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, 1996 and 1997 from the Bank of China with loans having
maturities ranging from one to two 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 USD 5,000,000. MTE assigned USD 1,000,000 of such note to a third party,
which is included in accrued expenses and other liabilities in the
consolidated balance sheets at December 31, 1997 and March 31, 1998, and
which is due and payable on June 30, 1998. The Company anticipates that the
due date of this note will be extended. The USD 4,000,000 note payable to
MTE is unsecured, bears no interest, has no fixed repayment terms, and is
expected to remain outstanding for the indefinite future. There have been no
payments on this note, which is presented as loan from MTE of RMB 33,280,000
in the consolidated balance sheets at December 31,
18
1997 and March 31, 1998.
Additions to property, plant and equipment totalled RMB 263,000 during
the three months ended March 31, 1998. SCBW does not expect to make any
major capital expenditures during 1998, and had no capital expenditure
commitments outstanding at March 31, 1998.
An important factor in the Company's ability to increase production
levels is the timely availability of sufficient operating capital at a
reasonable cost. During the latter part of 1997, the Company began to
experience working capital shortages as it attempted to expand production at
the new production complex, which has hampered the Company's ability to
increase sales, and which has negatively impacted the Company's normal
production cycle and its ability to provide timely shipments to customers.
The Company believes that its cash flow provided by operations, combined
with short-term and long-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 complex, the
Company will require operating capital substantially in excess of that
available from domestic Chinese sources. 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 is continuing to explore various financing
alternatives, but to date has been unsuccessful in arranging an equity
financing, and there can be no assurances that the Company will be successful
in completing such a financing in the future.
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 year ended December 31, 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
19
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, devaluation of the RMB against the USD would adversely affect
the Company's financial performance when measured in USD, and could have
material adverse effects upon its 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 then.
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,
1998: 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: May 13, 1998 By: /s/ WINSTON WU
----------------------------
Winston Wu (Wu Fa Pei)
President
(Duly Authorized Officer)
Date: May 13, 1998 By: /s/ EDWARD DING
----------------------------
Edward Ding (Ding Yuehua)
Vice President and Chief
Financial Officer
(Principal Financial
Officer)
22