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, 1998
-------------
[ ] 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
- -------------------------------------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number, including area code: (310) 358-1006
--------------
Not applicable
- -------------------------------------------------------------------------------
(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 June 30, 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 June 30, 1998
Condensed Consolidated Statements of Operations
(Unaudited) - Three Months and Six Months Ended
June 30, 1997 and 1998
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Six Months Ended June 30, 1997 and 1998
Notes to Condensed Consolidated Financial
Statements (Unaudited) - Six Months Ended June 30,
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 June 30, 1998
----------------- ------------------
RMB USD RMB USD
------- ------ ------- ------
ASSETS
Current assets:
Cash and cash
equivalents 5,016 604 3,875 467
Accounts receivable,
net 72,600 8,747 91,430 11,016
Inventories (Note 2) 64,117 7,725 66,153 7,970
Due from SCH 8,338 1,005 12,760 1,537
Due from Easy Keen
(Note 5) 17,370 2,093 16,191 1,951
Prepayments and
other current assets 21,017 2,532 13,188 1,589
------- ------ ------- ------
Total current assets 188,458 22,706 203,597 24,530
------- ------ ------- ------
Property, plant and
equipment 163,826 19,737 164,452 19,814
Less accumulated
depreciation (31,291) (3,770) (36,037) (4,342)
------- ------ ------- ------
132,535 15,967 128,415 15,472
------- ------ ------- ------
Rental deposit to SCH 22,800 2,747 21,400 2,578
Goodwill, net 35,811 4,315 35,321 4,256
Other long-term assets 6,631 799 6,526 786
------- ------ ------- ------
Total assets 386,235 46,534 395,259 47,622
------- ------ ------- ------
------- ------ ------- ------
(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 June 30, 1998
----------------- ------------------
RMB USD RMB USD
------- ------ ------- ------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings 75,041 9,041 73,752 8,886
Accounts payable 32,662 3,935 36,627 4,413
Accrued expenses and
other liabilities 49,312 5,941 53,506 6,446
Taxes payable 12,839 1,547 14,246 1,716
Finance lease
obligations, current
portion 8,246 994 8,246 994
------- ------ ------- ------
Total current
liabilities 178,100 21,458 186,377 22,455
Finance lease
obligations,
non-current portion 2,363 284 1,655 199
Long-term bank loans 6,100 735 6,600 795
Loan from MTE (Note 3) 33,280 4,010 33,280 4,010
Other long-term payables 3,350 403 3,585 432
------- ------ ------- ------
Total liabilities 223,193 26,890 231,497 27,891
------- ------ ------- ------
Minority interests 11,103 1,338 11,382 1,372
------- ------ ------- ------
(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 June 30, 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
June 30, 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 22,412 2,700
------- ------ ------- ------
Total shareholders'
equity 151,939 18,306 152,380 18,359
------- ------ ------- ------
Total liabilities
and shareholders'
equity 386,235 46,534 395,259 47,622
------- ------ ------- ------
------- ------ ------- ------
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,
---------------------------------
1997 1998
--------- ---------------------
RMB RMB USD
--------- --------- ---------
Sales
- to related companies 5,430 6,242 752
- to others 41,548 29,570 3,563
------ ------ -----
46,978 35,812 4,315
------ ------ -----
Cost of goods sold
- purchases from related
companies 3,884 6,577 793
- others 33,483 21,093 2,541
------ ------ -----
37,367 27,670 3,334
------ ------ -----
Gross profit 9,611 8,142 981
Selling, general and
administrative expenses 4,439 7,004 844
Less: Shared by SCH (979) (1,074) (129)
Interest expense, net 2,818 2,033 245
Other expense, net 405 43 5
------ ------ -----
Income before income taxes 2,928 136 16
Provision for income taxes (675) (523) (63)
------ ------ -----
Income (loss) before
minority interests 2,253 (387) (47)
Minority interests 657 (584) (70)
------ ------ -----
Net income (loss) 2,910 (971) (117)
------ ------ -----
------ ------ -----
Net income (loss) per
common share (Note 6):
-Basic .50 (.17) (.02)
------ ------ -----
------ ------ -----
-Diluted .49 (.17) (.02)
------ ------ -----
------ ------ -----
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,
---------------------------------
1997 1998
--------- ---------------------
RMB RMB USD
--------- --------- ---------
Sales
- to related companies 12,947 8,975 1,081
- to others 78,246 58,906 7,097
------ ------ -----
91,193 67,881 8,178
------ ------ -----
Cost of goods sold
- purchases from related
companies 7,143 8,193 987
- others 63,654 43,291 5,216
------ ------ -----
70,797 51,484 6,203
------ ------ -----
Gross profit 20,396 16,397 1,975
Selling, general and
administrative expenses 9,446 13,956 1,681
Less: Shared by SCH (2,277) (3,562) (429)
Interest expense, net 5,274 4,707 567
Other expense, net 452 53 6
------ ------ -----
Income before income taxes 7,501 1,243 150
Provision for income taxes (1,175) (523) (63)
------ ------ -----
Income before minority
interests 6,326 720 87
Minority interests 975 (279) (34)
------ ------ -----
Net income 7,301 441 53
------ ------ -----
------ ------ -----
Net income per common
share (Note 6):
-Basic 1.25 .08 .01
------ ------ -----
------ ------ -----
-Diluted 1.24 .08 .01
------ ------ -----
------ ------ -----
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,
---------------------------------
1997 1998
--------- ---------------------
RMB RMB USD
--------- --------- ---------
Cash flows from operating
activities:
Net income (loss) 7,301 441 53
Adjustments to reconcile
net income (loss) to net
cash provided by (used in)
operating activities:
Depreciation 5,094 4,746 572
Amortization 732 733 88
Minority interests (975) 279 34
Provision for bad debts 2,000 241
Rental expense offset
against rental deposit
to SCH 1,400 1,400 169
Changes in operating
assets and liabilities:
(Increase) decrease in -
Accounts receivable (12,172) (20,830) (2,510)
Inventories 1,245 (2,036) (245)
Due from SCH 3,169 (4,422) (533)
Due from Easy Keen 5,743 1,179 142
Prepayments and other
current assets (701) 7,829 943
Other long-term assets (886) (138) (17)
Increase (decrease) in -
Accounts payable (15,712) 3,965 478
Accrued expenses and
other liabilities (3,474) 4,194 505
Taxes payable (1,631) 1,407 170
Other long-term
payables 69 235 28
------ ------ ------
Net cash provided by
(used in) operating
activities (10,798) 982 118
------ ------ ------
(continued)
8
FREMONT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(continued)
(Amounts in thousands)
Six Months Ended June 30,
---------------------------------
1997 1998
--------- ---------------------
RMB RMB USD
--------- --------- ---------
Cash flows from investing
activities:
Additions to property,
plant and equipment (2,180) (626) (75)
------ ------ ------
Net cash used in
investing activities (2,180) (626) (75)
------ ------ ------
Cash flows from financing
activities:
Net proceeds from
(repayments of)
short-term borrowings 19,000 (1,289) (155)
Net proceeds from
long-term bank loans 500 60
Payments of finance
lease obligations (4,444) (708) (85)
Exercise of warrants,
net of costs 224
------ ------ ------
Net cash provided by
(used in) financing
activities 14,780 (1,497) (180)
------ ------ ------
Cash and cash equivalents:
Net increase (decrease) 1,802 (1,141) (137)
At beginning of period 4,806 5,016 604
------ ------ ------
At end of period 6,608 3,875 467
------ ------ ------
------ ------ ------
See accompanying notes to
condensed consolidated financial statements.
9
FREMONT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 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
10
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 whose president
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.
Sales to related companies are for both domestic and export purposes.
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
11
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 30, 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 June 30,
1998, the results of operations for the three months and six months ended
June 30, 1997 and 1998, and the changes in cash flows for the six months
ended June 30, 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 and six months ended June
30, 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.
12
2. INVENTORIES
Inventories consisted of the following at December 31, 1997 and June 30,
1998:
December 31, 1997 June 30, 1998
--------------------- ---------------------
RMB USD RMB USD
---------- --------- ---------- ---------
Raw materials 33,498,000 4,036,000 27,688,000 3,336,000
Work-in-progress 7,330,000 883,000 8,962,000 1,080,000
Finished goods 23,289,000 2,806,000 29,503,000 3,554,000
---------- --------- ---------- ---------
64,117,000 7,725,000 66,153,000 7,970,000
---------- --------- ---------- ---------
---------- --------- ---------- ---------
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. 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 June 30, 1998, the shares of common stock had
not been issued.
5. DUE FROM EASY KEEN
As of December 31, 1997 and June 30, 1998, RMB 17,370,000 and RMB
16,191,000, respectively, 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. NET INCOME (LOSS) 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
13
dividing net income (loss) by the weighted average number of common shares
outstanding during the period. Diluted earnings per share are calculated by
dividing net income (loss) by the basic shares and all dilutive securities,
but does not include the impact of potential common shares which would be
anti-dilutive. These dilutive securities were anti-dilutive in 1998.
Potentially dilutive securities outstanding at June 30, 1998 consist of
a warrant entitling the holder to purchase 56,000 shares of common stock at
US$2.50 per share through May 31, 2000.
Net income per share for the three months and six months ended June 30,
1997 was restated as a result of SFAS 128, from RMB .49 and RMB 1.24 per
share, respectively, to RMB .50 and RMB 1.25 per share, respectively.
The following tables present the components of basic and diluted
earnings per share:
14
Three Months Ended June 30,
----------------------------------
1997 1998
--------- ----------------------
RMB RMB USD
--------- --------- ---------
Basic Earnings Per
Share Computation
- -----------------
Net income (loss) 2,910,000 (971,000) (117,000)
--------- --------- ---------
--------- --------- ---------
Weighted average
common shares
outstanding 5,831,639 5,861,639 5,861,639
--------- --------- ---------
--------- --------- ---------
Net income (loss)
per share - Basic .50 (.17) (.02)
--------- --------- ---------
--------- --------- ---------
Diluted Earnings
Per Share Computation
- ---------------------
Net income (loss) 2,910,000 (971,000) (117,000)
--------- --------- ---------
--------- --------- ---------
Weighted average
common shares
outstanding 5,831,639 5,861,639 5,861,639
Net shares
issuable upon
exercise of
warrants 76,341
--------- --------- ---------
Diluted common
shares outstanding 5,907,980 5,861,639 5,861,639
--------- --------- ---------
--------- --------- ---------
Net income (loss)
per share - Diluted .49 (.17) (.02)
--------- --------- ---------
--------- --------- ---------
15
Six Months Ended June 30,
----------------------------------
1997 1998
--------- ----------------------
RMB RMB USD
--------- --------- ---------
Basic Earnings Per
Share Computation
- -----------------
Net income 7,301,000 441,000 53,000
--------- --------- ---------
--------- --------- ---------
Weighted average
common shares
outstanding 5,828,306 5,861,639 5,861,639
--------- --------- ---------
--------- --------- ---------
Net income per
share - Basic 1.25 .08 .01
--------- --------- ---------
--------- --------- ---------
Diluted Earnings
Per Share Computation
- ---------------------
Net income 7,301,000 441,000 53,000
--------- --------- ---------
--------- --------- ---------
Weighted average
common shares
outstanding 5,828,306 5,861,639 5,861,639
Net shares
issuable upon
exercise of
warrants 81,706
--------- --------- ---------
Diluted common
shares outstanding 5,910,012 5,861,639 5,861,639
--------- --------- ---------
--------- --------- ---------
Net income per
share - Diluted 1.24 .08 .01
--------- --------- ---------
--------- --------- ---------
16
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 June 30, 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 and Six Months Ended June
30, 1997 and 1998:
Sales:
Sales for the three months ended June 30, 1998 were RMB 35,812,000, as
compared to RMB 46,978,000 for the three months ended June 30, 1997, a
decrease of RMB 11,166,000 or 23.8%.
17
Sales to related companies for the three months ended June 30, 1998 were RMB
6,242,000 or 17.4% of sales, as compared to RMB 5,430,000 or 11.6% of sales
for the three months ended June 30, 1997, an increase of RMB 812,000 or
15.0%. Sales to unrelated companies for the three months ended June 30, 1998
were RMB 29,570,000 or 82.6% of sales, as compared to RMB 41,548,000 or 88.4%
of sales for the three months ended June 30, 1997, a decrease of RMB
11,978,000 or 28.8%.
Sales for the six months ended June 30, 1998 were RMB 67,881,000, as
compared to RMB 91,193,000 for the six months ended June 30, 1997, a decrease
of RMB 23,312,000 or 25.6%. Sales to related companies for the six months
ended June 30, 1998 were RMB 8,975,000 or 13.2% of sales, as compared to RMB
12,947,000 or 14.2% of sales for the six months ended June 30, 1997, a
decrease of RMB 3,972,000 or 30.7%. Sales to unrelated companies for the six
months ended June 30, 1998 were RMB 58,906,000 or 86.8% of sales, as compared
to RMB 78,246,000 or 85.8% of sales for the six months ended June 30, 1997, a
decrease of RMB 19,340,000 or 24.7%.
The Company conducts a substantial portion of its sales through related
parties. Sales to related companies are for both domestic and export
purposes.
For the three months ended June 30, 1998, PRC domestic sales were RMB
16,688,000 or 46.6% of sales, and export sales were RMB 19,124,000 or 53.4%
of sales. For the three months ended June 30, 1997, PRC domestic sales were
RMB 10,973,000 or 23.4% of sales, and export sales were RMB 36,005,000 or
76.6% of sales. For the three months ended June 30, 1998, sales of bicycles
and bicycle parts were RMB 29,176,000 or 81.5% of sales, and sales of
exercise equipment were RMB 6,636,000 or 18.5% of sales. For the three
months ended June 30, 1997, sales of bicycles and bicycles parts were RMB
22,908,000 or 48.8% of sales, and sales of exercise equipment were RMB
24,070,000 or 51.2% of sales.
For the six months ended June 30, 1998, PRC domestic sales were RMB
31,693,000 or 46.7% of sales, and export sales were RMB 36,188,000 or 53.3%
of sales. For the six months ended June 30, 1997, PRC domestic sales were
RMB 23,345,000 or 25.6% of sales, and export sales were RMB 67,848,000 or
74.4% of sales. For the six months ended June 30, 1998, sales of bicycles
and bicycle parts were RMB 47,278,000 or 69.6% of sales, and sales of
exercise equipment were RMB 20,603,000 or 30.4% of sales. For the six months
ended June 30, 1997, sales of bicycles and bicycles parts were RMB 54,823,000
or 60.1% of sales, and sales of exercise equipment were RMB 36,370,000 or
39.9% 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
18
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 undermining
the competitiveness of China's basic steel, petrochemical and textile
industries, and reducing one of the Company's main competitive advantages,
its low labor cost. Manufacturers in Taiwan, which represent the Company's
primarily competition, 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. Industrial
production in China has decreased by one-third and retail sales have dropped
by half in 1998 as compared to 1997. Exports, which are a critical part of
the Chinese economy, are being negatively effected by these factors.
Although the fiscal policy of the government of China has been to avoid a
devaluation of its currency, there is growing speculation that China may not
be able to avoid such an action. In addition, as a result of the turmoil and
uncertainty in the Chinese economy, short-term bank credit has been
restricted by the central government of China.
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. The Company's ability to
utilize short-term bank debt to support its operations has been impaired as a
result of the Asian financial crisis, as short-term bank debt is now subject
to restrictions imposed by the central government of China. 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. As a result of this working capital shortage, the
Company has instituted a change in the way it acquires certain out-sourced
parts. The Company has arranged for certain customers to purchase, pay for
and deliver specific
19
parts, such as bicycle pedals and derailleurs, to the Company's production
facility that in the past the Company would have purchased directly from the
manufacturer. Sales of approximately RMB 24,188,000 and RMB 25,508,000
during the three months and six months ended June 30, 1998, respectively,
were recorded under this new policy. This policy allows the Company to
maintain approximately the same level of unit sales, although at a lower
aggregate value, and generate a higher gross margin while at the same time
conserving working capital. In addition, in order to remain competitive,
during 1998 the Company began to grant extended credit terms to certain
export accounts, which has also negatively impacted the Company's operating
cash flow. Accordingly, the Company expects that it will continue to
experience working capital shortages during the remainder of 1998, which
could have a material adverse effect on results of operations.
DOMESTIC SALES 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 decreased in 1998
as compared to 1997 as a result of the Asian financial crisis, which had the
effect of reducing the export of finished bicycles from China to the United
States.
As a result of the foregoing factors, the Company expects that sales and
earnings will be reduced during the remainder of 1998 as compared to 1997.
Gross Profit:
Gross profit for the three months ended June 30, 1998 was RMB 8,142,000
or 22.7% of sales, as compared to RMB 9,611,000 or 20.5% of sales for the
three months ended June 30, 1997. Gross profit for the six months ended June
30, 1998 was RMB 16,397,000 or 24.2% of sales, as compared to RMB 20,396,000
or 22.4% of sales for the six months ended June 30, 1997.
The increase in gross profit as a percentage of sales in 1998 as
compared to 1997 was a result of a higher percentage of sales with
out-sourced parts, which generate a higher gross margin, and a reduction in
employees and employee-related costs.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses for the three months ended
June 30, 1998 increased by RMB 2,470,000 or 71.4%, to RMB 5,930,000 or 16.6%
of sales, as compared to RMB 3,460,000 or 7.4% of sales for the three months
ended June 30, 1997, net of amounts assumed by SCH. Selling, general and
administrative expenses for the six months ended June 30, 1998 increased by
RMB 3,225,000 or 45.0%, to RMB 10,394,000 or 15.3% of sales, as
20
compared to RMB 7,169,000 or 7.9% of sales for the six months ended June 30,
1997, net of amounts assumed by SCH. During the three months and six months
ended June 30, 1998, the Company recorded a provision for bad debts of RMB
2,000,000. No provision for bad debts was recorded during the three months
and six months ended June 30, 1997.
Selling, general and administrative expenses increased as a percentage
of sales in 1998 as compared to 1997 as a result of the provision for bad
debts of RMB 2,000,000 for the three months and six months ended June
30,1998, a government-mandated housing allowance to employees of
approximately RMB 600,000 and RMB 1,200,000 for the three months and six
months ended June 30, 1998, respectively, and a reduction in sales levels in
1998 as compared to 1997. Selling, general and administrative expenses
increased on an absolute basis in 1998 as compared to 1997 as a result of the
provision for bad debts and the government-mandated housing allowance to
employees.
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 June 30, 1998 and 1997, such amounts aggregated
approximately RMB 1,074,000 and RMB 979,000, respectively. For the six
months ended June 30, 1998 and 1997, such amounts aggregated approximately
RMB 3,562,000 and RMB 2,277,000, respectively.
Interest Income and Interest Expense:
Interest expense for the three months ended June 30, 1998 was RMB
2,033,000 or 5.7% of sales, as compared to RMB 2,818,000 or 6.0% of sales for
the three months ended June 30, 1997. Interest expense for the six months
ended June 30, 1998 was RMB 4,707,000 or 6.9% of sales, as compared to RMB
5,274,000 or 5.8% of sales for the six months ended June 30, 1997. Interest
expense decreased in 1998 as compared to 1997 as a result of a reduction in
short-term borrowings. The reduction in short-term borrowings was
accomplished through an agreement between SCBW and SCH pursuant to which SCH
assumed SCBW's short-term borrowings of RMB 49,997,000 effective October 1,
1997, as settlement of amounts due SCBW by SCH.
Interest income for the three months and six months ended June 30, 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.
21
Net Income (Loss):
For the three months ended June 30, 1998, net loss was RMB 971,000 or 2.7%
of sales. For the three months ended June 30, 1997, net income was RMB
2,910,000 or 6.2% of sales.
For the six months ended June 30, 1998, net income was RMB 441,000 or 0.9%
of sales. For the six months ended June 30, 1997, net income was RMB 7,301,000
or 8.0% of sales.
Consolidated Financial Condition - June 30, 1998:
Liquidity and Capital Resources -
For the six months ended June 30, 1998, the Company's operations
provided cash resources of RMB 982,000, as compared to utilizing cash
resources of RMB 10,798,000 for the six months ended June 30, 1997. The most
significant components of the cash provided by operations in 1998 were the
decreases in prepayments and other current assets of RMB 7,829,000 and the
increases in accounts payable of RMB 3,965,000 and accrued expenses and other
liabilities of RMB 4,194,000, offset in part by the increases in net accounts
receivable of RMB 18,830,000 and due from SCH of RMB 4,422,000. The 25.9%
increase in net accounts receivable between December 31, 1997 and June 30,
1998 was primarily a result of extended credit terms that the Company began
to grant to certain export accounts beginning in 1998.
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. Accordingly, to the extent that the Company's
business in China increases, the Company expects that its operating cash flow
will be negatively impacted.
The Company had working capital of RMB 17,220,000 at June 30, 1998, as
compared to working capital of RMB 10,358,000 at December 31, 1997. As a
result, the Company's current ratio at June 30, 1998 was 1.09:1, as compared
to 1.06:1 at December 31, 1997. The most significant component of the
increase in working capital was the increase in accounts receivable.
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.
22
During the six months ended June 30, 1998, short-term borrowings
decreased by RMB 1,289,000, and long-term borrowings increased by RMB
500,000. As of June 30, 1998, short-term borrowings were RMB 73,752,000 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, however increases to SCBW's borrowing base,
although granted in the past, are now subject to restrictions imposed by the
central government of China.
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 June 30, 1998, and which
became due and payable on June 30, 1998, at which time it became a demand
note. 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, 1997 and June 30, 1998.
Additions to property, plant and equipment totalled RMB 626,000 during
the six months ended June 30, 1998. SCBW does not expect to make any major
capital expenditures during 1998, and had no capital expenditure commitments
outstanding at June 30, 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. As previously discussed, 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
23
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 a long-term debt or equity investment. The
Company is continuing to explore various financing alternatives, but to date has
been unsuccessful in arranging a 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 -
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.
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
recent Asian financial crisis has resulted in a general reduction in domestic
production and sales, and a general tightening of credit, throughout China. The
success of the Company depends in substantial part on the continued growth and
development of the Chinese economy.
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. Although prior to 1994
the RMB experienced significant devaluation against the USD, the RMB has
remained fairly stable since then.
The continuing negative impact of the Asian financial crisis on the
Company's operations, with respect to both Chinese domestic sales and export
sales, could have a material adverse effect on the Company's results of
operations, financial condition and cash flows. Should the central government
of China
24
decide to devalue the Chinese currency, the Company believes that such an
action would have a positive impact on operations by stimulating export
sales, which are denominated in USD. As of June 30, 1998, the Company's only
USD-denominated debt, which would be more expensive to repay in the event of
a devaluation, are the capital lease obligations of RMB 9,901,000 and the MTE
loan of RMB 33,280,000. However, MTE is the Company's parent, owning
approximately 80% of the Company's outstanding common stock, and the loan is
not currently scheduled for repayment.
Year 2000 Issue:
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year.
Computer programs that have sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities. Based on a
recent internal assessment, the Company does not anticipate that the cost of
any needed modifications will have a material effect on results of
operations.
25
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,
1998: None
26
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: August 12, 1998 By: /s/ WINSTON WU
----------------------------
Winston Wu (Wu Fa Pei)
President
(Duly Authorized Officer)
Date: August 12, 1998 By: /s/ EDWARD DING
----------------------------
Edward Ding (Ding Yuehua)
Vice President and Chief
Financial Officer
(Principal Financial
Officer)
27