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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number: 0-8128
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FREMONT CORPORATION
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(Name of small business issuer 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, including zip code)
Issuer's telephone number, including area code: (310) 358-1006
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Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $.001 par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check is disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
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The issuer's revenues for the fiscal year ended December 31, 1996 were
$25,184,000.
The aggregate market value of the issuer's common stock held by non-
affiliates as of March 31, 1997, computed by reference to the average closing
bid and ask prices on March 31, 1997 of $4.00 and $4.125, respectively, was
approximately $4,353,533.
As of March 31, 1997, the issuer had 5,831,639 shares of common stock
issued and outstanding.
Transitional Small Business Disclosure Format:
Yes [ ] No [X]
Documents incorporated by reference: None.
Total sequentially numbered pages in this document: 72.
Exhibit index page number: 67.
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS
ORGANIZATION
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Fremont Corporation, a Delaware corporation (the "Company," which term
shall include, when the context so requires, its subsidiaries and affiliates),
owns 100% of Winfill Holdings International Limited, a British Virgin Islands
corporation ("Winfill"). Winfill owns a 98% interest in South China Bicycles
Winfill Limited ("SCBW"), a Sino-foreign joint venture. The remaining 2%
interest in SCBW is owned by South China Bicycle (Holdings) Limited ("SCH"), a
related party (see "FORMATION OF SCBW" and "ITEM 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS").
SCBW conducts it operations in the People's Republic of China (the
"PRC" or "China") through the following entities, all of which are engaged in
manufacturing, except for Fogance Industries Limited, which is the Hong Kong-
based overseas purchasing and sales agent for the Company:
Percentage
Name of Entity Owned
- -------------- -----
Zhaoqing Seven Star Body 100%
Building Apparatus Co. Ltd.
Zhaoqing Seven Star Special 100%
Equipment Factory
Zhaoqing Bicycle Parts 100%
Factory
Zhaoqing Bicycle Steel Tube 100%
Factory
Zhaoqing Golden Wheel 100%
Company
South China Bicycles Co. 69%
Ltd.
Fogance Industries Limited 99.99%
The 31% minority interest in South China Bicycles Co. Ltd. ("SCB")
is owned by a company of which Sze Yet Wen, a director of the Company, is
president. SCB owns 99.99% of Fogance Industries Limited ("Fogance") (see
"ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT" and "ITEM 12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS").
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Through its interest in SCBW, the Company is engaged in the design,
manufacture and marketing of bicycles, bicycle parts and components, steel tubes
and exercise equipment. The Company's manufacturing operations, which represent
substantially all of the Company's assets (see "ITEM 2. DESCRIPTION OF
PROPERTY"), are located in the City of Zhaoqing, which is located in Guangdong
Province, PRC. Guangdong Province is located in the southern part of China.
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PRODUCTS
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The principal products manufactured and sold by SCBW consist of: (i)
bicycles; (ii) components and spare parts for bicycles; (iii) steel tubes; and
(iv) exercise equipment. The Company considers its operations to be in only one
business segment.
Bicycle products are of various sizes and designs and include 12 - 20
inch medium to high quality children's bicycles; 22 - 26 inch mountain bicycles
with a range of 3-21 speeds; 24 -28 inch single speed models; and 27 inch sport
bicycles. With colors and patterns, up to 180 different models can be produced.
Currently, the facilities of SCBW can support annual production of approximately
1,700,000 bicycles. For Chinese domestic sales, bicycles are distributed under
the brand names of "Bao Ma" and "Seven Stars," whereas bicycles for export sales
are made according to brand names designated by customers. Bicycles made by
SCBW for customers located outside China include the following brand names by
country of destination:
United States -
Schwinn
Randor
Royce Union
CSA
Diamond Back
Dynacraft
Australia -
Repco
ARL
Israel -
Seven Stars
SCBW is one of the few bicycle manufacturers in the PRC which can
produce bicycles up to international standards. SCBW believes it is in an
excellent competitive position with its low production costs especially because
the manufacture of bicycles is a labor intensive industry. While emphasizing
export sales, SCBW also is attempting to develop local markets in view of the
rapid economic growth of the PRC.
SCBW also produces various bicycle components and spare parts,
including frames, forks, handlebars, rims and steel tubes, including more than
260 different types of parts for the various models produced.
SCBW introduced an exercise equipment product line during 1996, which
is expected to become a substantial part of the Company's business in the
future. SCBW is a contract manufacturer for original equipment manufacturers
("OEMs") that market their products in the United States through major
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department stores such as Sears Roebuck and Robinsons-May. SCBW manufactured a
product known as the "AB-Toner" in 1996, and in 1997 will be manufacturing the
"Health Walker," a portable, stationary exercise machine (see "ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - Consolidated Results
of Operations").
SALES AND MARKETING
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SCBW has historically concentrated its sales and marketing efforts on
exporting bicycles from China. All export sales are made pursuant to customer
specifications and under the brand names designated by the applicable customer.
Principal export markets are Australia and the United States (see "OPERATING IN
CHINA - Anti-Dumping Investigation"). As a result of an anti-dumping tariff
imposed by the European Union on Chinese bicycle products in September 1993,
SCBW does not export bicycles to Europe. Other major markets include Europe (for
exercise equipment), Israel and other Middle East countries, Hong Kong and
Vietnam and other Southeast Asian countries. The annual peak season is from
April to November, while off-peak season is from December to March.
A substantial portion of SCBW's bicycles are produced for export
sales, although Chinese unit domestic sales have increased somewhat over the
past three years. Information with respect to unit sales of bicycles and the
geographic distribution of sales revenues is shown below (see "ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - Consolidated Results
of Operations").
Unit Sales of Bicycle
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<TABLE>
<CAPTION>
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRC 56,000 101,300 70,000 79,000
Export 278,000 193,400 216,000 355,000
------- ------- ------- -------
Total 334,000 294,700 216,000 434,000
======= ======= ======= =======
</TABLE>
Geographic Distribution of Sales Revenues
-----------------------------------------
<TABLE>
<CAPTION>
1994(1) 1995 1996
---- ---- ----
<S> <C> <C> <C>
PRC 64.5% 55.5% 21.0%
United States 18.2% 32.2% 5.9%
Hong Kong/Others 17.3% 12.3% 73.3%(2)
----- ------ -----
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Total 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
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(1) For the period July 1, 1994 through December 31, 1994.
(2) Consists of exports to Hong Kong of 71.9% and to other countries of 1.4%.
The Company conducts a substantial portion of its sales and purchases
through related parties, and has additional significant continuing transactions
with such related parties, including the sale/leaseback of the new production
facility with SCH in 1996 (see "ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS"). 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.
During the year ended December 31, 1995, sales to related companies
aggregated RMB 50,666,000 or 36.7% of total sales, and consisted of sales to SCH
and its related companies. SCH is a 2% minority shareholder of SCBW, which is
98% owned by the Company's wholly-owned subsidiary, Winfill. During the year
ended December 31, 1996, sales to related companies aggregated RMB 130,816,000
or 62.6% of total sales, and consisted of sales to SCH and its related companies
of RMB 34,727,000 and to Hong Kong Easy Keen Industries Ltd. ("Easy Keen") of
RMB 96,089,000. Sze Yet Wen is a director of the Company, indirectly controls a
31% minority interest in SCB, a subsidiary of SCBW, and is a shareholder of Easy
Keen and of Million Treasure Enterprises Limited, the controlling shareholder of
the Company.
During the year ended December 31, 1995, purchases from related
companies aggregated RMB 620,000, and consisted of purchases from SCH and its
related companies. During the year ended December 31, 1996, purchases from
related companies aggregated RMB 64,718,000, and consisted of purchases from SCH
and its related companies of RMB 3,896,000 and from Easy Keen of RMB 60,822,000.
SCBW and Easy Keen have agreed to settle the net amount due SCBW of
approximately RMB 35,158,000 at December 31, 1996 by supplying raw materials of
the same value during 1997.
As of December 31, 1995, amounts due from related companies aggregated
approximately RMB 43,501,000, all of which was due from SCH. As of December 31,
1996, amounts due from related companies aggregated approximately RMB
97,416,000, of which RMB 62,258,000 was due from SCH and its related companies
and RMB 35,158,000 was due from Easy Keen.
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DISTRIBUTION
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In view of the growth of the economy of the PRC, SCBW has been
attempting to expand its marketing network within China. The domestic sales
network reaches in excess of 12 distinct regions of China. The Company's sales
activity is conducted mainly through four types of channels: a direct sales
company; franchisees; sales agencies; and consignment. SCBW has franchising
arrangements with local trading companies in the cities of Chengdu, Xi'an,
Guangzhou, Changsha and Shanghai to promote the sales of "Seven Stars" bicycles.
The largest five sales agents of SCBW are located in Yunnan (2), Chenzhou,
Jingzhou and Jiangxi. In order to diversify local markets, SCBW has set up
consignment sales outlets in major cities, which include Zhongshan, Shenzhen,
Shijiazhuang, Tianjin, Beijing, Jinzhou, Yunnan, Guangzhou, Changsha, Jiangxi,
Qingdao, Humen, Kaiping, Kaifeng and Maoming.
MARKETS
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At present, the world demand for bicycles is approximately 100 million
units per annum. Major bicycle production countries include the PRC, Japan,
Taiwan, the United States, Germany and Korea. Currently, the United States is
the largest import market for bicycles with annual imports in 1994 of
approximately 7 million, followed by Japan. Other regions, such as Eastern
Europe, South Africa and South America, have experienced increasing demand.
Changes in real personal income and the bicycle replacement cycle (the
rate bicycles are replaced) are the two key factors affecting the bicycle
market. China is the world's largest consumer market, with 1.2 billion people
whose incomes are rising rapidly. It is estimated there are more than 60 million
people in China who have per capita incomes of $1,000 a year or more. These
consumers increasingly demand bicycles of quality, style and function instead of
single-speed utility models. It is estimated that only a small percentage of
China's 320 million bicycles have gears at the present time. Of the 200 million
bicycles made worldwide in 1993, 40 million were sold in China, 30 million in
India, and 9 million in Japan. China's domestic demand for bicycles is 30
million units per year, which is expected to remain relatively stable over the
near future. Chinese export production is 10 million units per year.
In the PRC, bicycles are both the most popular and the primary means
of transportation. In view of the government's economic reform program, demand
for bicycles is still increasing even though the market for popular priced
bicycles has already reached a mature stage. As a result of the general increase
in wealth brought about by the government's policies, the demand for product
quality has significantly increased.
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PRODUCTION
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SCBW's production facilities are located in two separate complexes in
Zhaoqing: the original facility and a recently constructed complex. On an annual
full scale production basis, SCBW can produce 1,700,000 bicycles with two
shifts.
The Original Facility. The original production facilities occupies
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a total land area of approximately 647,978 square feet and can support annual
production of approximately 500,000 bicycles.
The New Production Complex. The construction of a new 671,690
--------------------------
square feet production complex, costing approximately RMB 150,000,000, was
completed at the end of 1995. Currently, there are 657 employees working in the
new complex. During 1995, the new complex began commercial production on a small
scale. The new production complex became fully operational at the beginning of
1996, but it is expected that full-scale commercial production will take at
least until 1998 to reach, and will be subject to the availability of working
capital. The new production complex has an annual production capacity of
1,200,000 bicycles.
The new complex occupies a total land area of approximately 1,507,100
square feet and consists of two mills connected together: one four story fixing
mill of 322,928 square feet and one paint-spraying mill of 96,878 square feet.
Location. The production facilities of SCBW are located in the
--------
City of Zhaoqing. The municipality of Zhaoqing is one of the major municipal
areas of the Guangdong Province. It is strategically located at the lower and
middle reaches of the Xijang River, 100 kilometers from Guangzhou, the
provincial capital, by road and 142 sea miles from Hong Kong by water.
The Guangdong Province is the fifth most populous province in China
with a population of approximately 65,000,000, of whom over 7,000,000 are
located in the metropolitan Guangzhou area. The metropolitan area of the
Municipality of Zhaoqing has a population of approximately 3,460,000. Zhaoqing
enjoys a well-developed infrastructure, including transportation facilities,
reliable power, communication and service infrastructure. The area contains
extensive agricultural activity and a large population base.
Quality Control. Product quality is one of the most important
---------------
factors contributing to gaining and maintaining the confidence of customers.
SCBW has set up a quality control center to oversee and monitor the entire
production operation. The choice of bicycle components is crucial, and SCBW's
policy is to select suppliers which can consistently meet the high quality
standards set by SCBW.
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SCBW's products are made in accordance with the following standards:
(i) Bicycles Business Standards GB3563-3593-83 published by the National
Standards Bureau of China.
(ii) CPSC of United States of America, BIS of United Kingdom, AS of Australia,
and other respective national standards for export products.
Raw Materials. The primary raw materials utilized include more
-------------
than forty different components and parts for the bicycle body, the brake
system, the gear system and the wheels, as well as chemical materials and
packaging materials. The aggregate cost of raw materials represents
approximately 90% of the direct cost of production and packaging of bicycle.
Bicycle components and parts manufactured by the Company itself account for
approximately 20% of the direct cost of production and packaging of a bicycle.
Components and Parts for the Bicycle Body. Most of the components and
-----------------------------------------
parts utilized in the production of a bicycle body, such as the frame, fork,
handlebar and stem, are produced by the Company, except for the fork set and
gear set, which are purchased from bicycle components and parts manufacturers
located in Guangdong Province. The cost of components and parts for the bicycle
body represents approximately 19% to 27% of the total cost of raw materials,
depending on specific models.
Components and Parts for the Brake System. Virtually all of the
-----------------------------------------
components and parts for the brake system, such as the front brake, rear brake,
brake lever and brake cable, are either purchased from bicycle components and
parts manufacturers located in Guangdong and Fujian Provinces or imported from
Taiwan or Japan. The cost of components and parts for the brake system
represents approximately 4% to 7% of the total cost of raw materials, depending
on specific models.
Components and Parts for the Gear System. Virtually all of the
----------------------------------------
components and parts for the gear system, such as the chain wheel, crank, crank
set, chain, chain cover, free wheel, pedal, front derailleur, rear derailleur,
shift lever and shift cable, are either purchased from bicycle components and
parts manufacturers located in Guangdong or Zhejiang Provinces or imported from
Taiwan or Japan. The cost of components and parts for the gear system
represents approximately 13% to 35% of the total cost of raw materials,
depending on specific models.
Components and Parts for the Wheels. Most of the components and parts
-----------------------------------
for bicycle wheels, such as the spoke, front hub, rear hub, brake hub and tires,
except for the rim, which is manufactured by the Company, are either purchased
from bicycle components and parts manufacturers located in Guangdong or Guangxi
Provinces or Shanghai or imported from Taiwan. The cost of components and parts
for the wheels represents approximately
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20% to 30% of the total cost of raw materials, depending on specific models.
Other Components and Accessaries of Bicycles. Other components and
--------------------------------------------
accessaries of bicycles, such as the saddle, seat post, seat clamp, seat bolt,
kick stand, training wheel, carrier, mud guards, mud guard screws, reflector,
reflector bar, protection cover and handlebar bag, are generally purchased from
bicycle components and parts manufacturers located in Guangdong, Guangxi or
Fujian Provinces or imported from Japan. The cost of other components and
accessaries represents approximately 11% to 19% of the total cost of raw
materials, depending on specific models.
Chemical Materials. Most paints are imported from Taiwan. The cost
------------------
of chemical materials represents approximately 13% to 17% of the direct cost of
production, depending on specific models.
Packaging Materials. Most of the cartons for packaging are purchased
-------------------
from a company located in Shenzhen, Guangdong Province. The cost of packaging
materials accounts for approximately 4% to 7% of the total cost of raw
materials, depending on specific models.
COMPETITION
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SCBW competes based upon the following factors:
Variety of Products. SCBW produces more than 30 different models
-------------------
of bicycles, from children's to mountain bicycles, from 12 inches to 28 inches,
and from 10 to 18 speed models. With colors and patterns, SCBW can produce up
to 180 different models. Furthermore, SCBW produces a full range of bicycle
components to fit different models of bicycles. The products of its competitors
in the PRC are relatively homogeneous and less flexible with respect to
satisfying changing customer demand.
Quality and Technological Advancement. Products of SCBW are made
-------------------------------------
with the support of advanced technologies and machinery imported from Japan and
Germany. Currently, less than ten PRC manufacturers can produce bicycles to
international standards. In 1993, the export volume of SCBW's predecessor
entity was 278,000 units, which ranks fourth out of the top ten PRC enterprises
with the highest bicycle export unit volume.
Guaranteed Supply of Components. Since SCBW also produces many of
-------------------------------
the components utilized in the manufacture of its bicycles, both the quality and
stable supply of a significant portion of the components can be guaranteed.
Because of its ability to produce components, SCBW is able to service small
quantity orders and orders that require custom designed features, which can
generate higher profit margins. Moreover, internal
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production of components reduces the production cost of SCBW's final products,
which increases the competitiveness of SCBW's products.
Low Production Costs. Bicycle manufacturing is a labor intensive
--------------------
industry which gives low wage countries such as the PRC a significant advantage.
In addition, SCBW is a Sino-foreign joint venture that is entitled to a tax
exemption during the first three years of operation and a 50% reduction in tax
rate for the following two years of operation.
Flexibility. SCBW's export sales are customized for customers.
-----------
This has the effect of increasing the popularity and flexibility of SCBW's
products because they are manufactured based on the specifications of the
particular customer. Such a demand driven sales policy also reduces the risk of
producing unwanted products.
RESEARCH AND DEVELOPMENT
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SCBW recently established a department for product research and
development to design and develop new, sophisticated, high quality products for
both the Chinese and international markets. Products under development include
mopeds, electric bicycles and various exercise equipment.
EMPLOYEES
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There are approximately 1,822 employees at the five factories and the
administrative offices of SCBW categorized as follows:
<TABLE>
<S> <C>
Production and Quality Control 1,384
Management and Administration 203
Engineering and Technology 173
Sales and Other 62
-----
1,822
=====
</TABLE>
In 1994, 1995 and 1996, labor costs (including the cost of benefits)
accounted for approximately 3% to 5% of the direct costs of the production of
bicycles, depending on the particular models. SCBW expects any increase in
average wage rates of the employees in the near future not to exceed the rate of
inflation in China.
Each full-time employee is a member of a local trade union. Labor
relations have remained positive, and the Company has not had any employee
strikes or major labor disputes. Unlike trade unions in western countries,
trade unions in most parts of the PRC are organizations mobilized by the PRC
government and the management of the enterprises.
FORMATION OF SCBW
- -----------------
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In April 1985, Zhaoqing Bicycle Factory (the "Factory") was initially
established as a state-owned enterprise. In December 1988, in order to expand
its bicycle manufacturing business, the Factory acquired Zhaoqing Bicycle Steel
Tube Factory and Zhaoqing Bicycle Parts Factory, both of which produced bicycle
components.
In 1989, the Factory formed Sino-foreign joint ventures with non-PRC
investors to form South China Bicycles Company Limited and Zhaoqing Golden Wheel
Company Limited in order to produce different sizes of bicycles.
In July 1991, the Factory, together with Zhaoqing Bicycle Steel Tube
Factory, Zhaoqing Bicycle Parts Factory, South China Bicycles Company Limited
and Zhaoqing Golden Wheel Company Limited, formed the Zhaoqing Bicycle General
Factory as the holding company, in which the Factory, the Zhaoqing Bicycle Steel
Tube Factory and the Zhaoqing Bicycle Parts Factory were the core organizations
of this enterprise.
In 1992, as approved by the Zhaoqing Municipal Government, the
Zhaoqing Bicycle General Factory was reorganized through the contribution to SCH
of its interests in the various operating companies. At that time SCH was owned
51% by the state and 49% by private investors. As a result of the
reorganization, SCH became the holding company of the various operating
entities.
In 1993, Zhaoqing Seven Stars Special Equipment Factory and Zhaoqing
Seven Stars Body Building Apparatus Company Limited were established as wholly-
owned subsidiaries of SCH to further support SCH's vertical expansion.
In March 1994, SCH repurchased the part of Zhaoqing Golden Wheel
Company Limited owned by the non-PRC investors and Zhaoqing Golden Wheel Company
Limited became a wholly-owned subsidiary of SCH.
In June 1994, SCH entered into a Sino-foreign Joint Venture Agreement
with Winfill to form SCBW. Pursuant to the Joint Venture Agreement, Winfill
purchased 98% of the net assets, excluding immovable assets, of the steel tube,
bicycle and spare parts operations of SCH and injected the net assets into SCBW
as its equity capital contribution. SCH injected the remaining 2% of the
related operations as its equity capital contribution. Accordingly, upon
formation, SCBW succeeded to the manufacturing operations previously owned by
SCH effective July 1, 1994, including the existing factories and subsidiaries as
well as the management and operations of SCH.
OPERATION OF SCBW
- -----------------
The establishment and activities of SCBW is in accordance with the
"Law of the People's Republic of China on Joint Venture Using Chinese and
Foreign Investment" and other
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relevant PRC laws and regulations. SCBW is a legal entity under the laws of the
PRC and is governed and protected by the laws of the PRC.
The organizational form of SCBW is a limited liability company. The
profits, losses and risks of the Company are shared between SCH and Winfill in
proportion to their respective investments in SCBW (i.e., 2% and 98%,
respectively).
The duration of the joint venture is fifty (50) years commencing from
1994, the date on which the business license of SCBW was issued. An extension
of the duration of the joint venture must be agreed by both joint venture
partners and approved by relevant PRC government authorities.
SCBW is governed by a board of directors, consisting of five
individuals, four of whom, including the Chairman, are nominated by Winfill,
with the remaining one, the Vice Chairman, nominated by SCH. The Chairman and
Vice-Chairman and each director are appointed for a term of four years and may
serve consecutive terms. SCBW has a General Manager and three Deputy General
Managers appointed by the Board of Directors. The term of office and subsequent
appointments are also determined by the Board of Directors. The General Manager
and the three Deputy General Managers can be removed by the Board of Directors.
The responsibility of the General Manager is to carry out the decisions of the
Board of Directors, and to organize and conduct the daily management of SCBW.
The Deputy General Managers assist the General Manager in the conduct of his
work.
The Board of Directors decides all major issues concerning SCBW.
Decisions on certain matters require approval of the majority of directors
voting at a board meeting. These matters include: (1) dividend polices; (2)
allocation and use of all bank reserves, and the bonus, welfare, and research
and development funds; (3) the use of foreign currencies and foreign currency
exchange policy; (4) retaining the services of an independent accountant; (5)
annual production, sale and price plans; (6) budgeting decisions; (7) purchase
or sale of major machinery, equipment, plant, or transfer of land use rights;
and (8) employing or firing of senior managers. Decisions on the following
matters can be made only after being unanimously agreed upon by the directors
present at a board meeting: (1) modification of the articles of association of
the joint venture; (2) increase or assignment of the registered capital of SCBW;
(3) dissolution or merger of SCBW; (4) termination, dissolution or liquidation
of SCBW; and (5) change of the shares of SCBW.
Pursuant to the Joint Venture Agreement, SCH and Winfill have entered
into a Trademark License Agreement wherein SCH has granted to SCBW the exclusive
right to use SCH's "Seven Stars" and certain other trademarks for the production
and sale of bicycles in China for a period of 50 years in exchange for a one-
time payment of RMB 900,000.
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OPERATING IN CHINA
- ------------------
Because the production operations of the Company are based exclusively
in China, the Company (through SCBW) is subject to rules and restrictions
governing China's legal and economic system, as well as general economic and
political conditions in that country.
Inflation/Economic Policies. General economic conditions in China
---------------------------
could have a significant impact on the Company. The economy of China differs in
certain material respects from that of the United States, including its
structure, levels of development and capital reinvestment, growth rate,
government involvement, resource allocation, rate of inflation and balance of
payments position. Although the majority of China's productive assets are still
owned by the state, the adoption of an economic reform policy since 1978 has
resulted in the gradual reduction in the role of state economic plans and in the
allocation of resources, pricing and management of such assets, increased
emphasis on the utilization of market forces, and the rapid growth of the
Chinese economy. The success of the Company depends in part on the continued
economic growth of China.
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 adoption by the Chinese government from time to time of various
corrective measures designated to regulate growth and contain inflation. Since
1993, the Chinese government has implemented an economic program to control
inflation, which has resulted in the tightening of working capital available to
Chinese state-owned enterprises.
Currency Matters. The State Administration for Exchange Control
----------------
("SAEC"), under the authority of the People's Bank of China ("PBOC"), controls
the conversion of Renminbi ("RMB") into foreign currency. Prior to January 1,
1994, RMB could be converted to foreign currency through the Bank of China or
other authorized institutions at official rates fixed daily by the SAEC. RMB
could also be converted at swap centers ("Swap Centers") open to Chinese
enterprises and foreign-funded Chinese enterprises, subject to SAEC approval of
each foreign currency trade, at exchange rates negotiated by the parties for
each transaction. In the year ended December 31, 1993, as much as 80% by value
of all foreign exchange transactions in China took place through the Swap
Centers. The exchange rate quoted by the Bank of China differed substantially
from that available in the Swap Centers. Effective January 1, 1994, a unitary
exchange rate system was introduced in China, replacing the dual-rate system
previously in effect. In connection with the creation of a unitary exchange
rate, the establishment of the China Foreign Exchange Trading System inter-bank
foreign exchange market and the phasing out of the Swap Centers were announced.
However, the
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Swap Centers were retained, and foreign-funded enterprises have been permitted
to satisfy foreign exchange requirements through the Swap Centers.
Effective July 1, 1996, the government of China began to take steps to
make its currency fully convertible on a "current account" basis by the end of
1996. This will allow foreign-funded enterprises, whether wholly owned or joint
ventures with Chinese, to buy and sell foreign exchange in banks for purposes of
trade, services, debt repayment and profit repatriation. The "current account"
measures the flow of money into and out of a nation, including the net balance
on trade in goods and services, plus remittances.
Legal System. Since 1979, many laws and regulations dealing with
------------
economic matters in general and foreign investment in particular have been
promulgated in China. The Chinese constitution adopted in 1989 authorizes
foreign investment, and guaranties the "lawful rights and interests" of foreign
investors in China. The trend of legislation over the past several years has
significantly enhanced the protection afforded foreign investment and allowed
for more active control by foreign parties of foreign investment enterprises in
China. There can be no assurance, however, that the current trend and economic
legislation toward promoting market reforms and experimentation will not be
slowed, curtailed or reversed, especially in the event of a change in
leadership, social or political disruption, or unforeseen circumstances
affecting China's political, economic or social life.
Despite some progress in developing a legal system, China does not
have a comprehensive system of laws. The interpretation of Chinese laws may be
subject to policy changes reflecting domestic political factors. Enforcement of
existing laws may be uncertain and sporadic, and implementation and
interpretation may be inconsistent. The Chinese judiciary is relatively
inexperienced in enforcing the laws or terms of contract, leading to a higher
than usual degree of uncertainty as to the outcome of litigation. Even where
adequate laws exist in China, it may be impossible to obtain swift and equitable
law enforcement, or to obtain enforcement of a judgment by a court of another
jurisdiction. As the Chinese legal system develops, the promulgation of new
laws, changes to existing laws and the preemption of local regulations by
national laws, may adversely affect foreign investors, such as the Company.
SCBW's activities in China may be subject, in some cases, to
administrative review and approval by various national, provincial and local
agencies of the Chinese government. While China has promulgated an
administrative procedural law permitting redress to the courts with respect to
certain administrative actions, this law appears to be largely untested in its
context.
16
<PAGE>
Tax Matters. SCBW's operations in China are subject to the imposition
-----------
of an Income Tax and Value Added Tax.
SCBW is governed by the Income Tax Law of China concerning Foreign
Investment Enterprises and Foreign Enterprises (the "FIE Law"). Under the FIE
Law, SCBW is subject to income taxes in China at the applicable tax rate
(currently 33%) for Sino-foreign equity joint venture enterprises on its taxable
income. However, under the current FIE Law, SCBW is exempt from income taxes
for two years starting from the first profit-making year followed by a 50%
reduction for the next three years. SCBW first become profitable in 1994.
A foreign participant in a Sino-foreign joint venture which re-invests
its share of profits back to the joint venture or elsewhere in China for a
period of not less than five years may obtain a refund of 40% of the income tax
already paid in the amount of the re-investment. Additionally, such foreign
participant which utilizes the profits from a Sino-foreign joint venture to
establish or expand export-oriented or technologically advanced enterprises may
receive a refund on all income taxes paid for the re-invested amount.
In addition to the FIE Law which is computed on profits, SCBW is also
subject to a VAT tax on its sales. The applicable VAT rate is 17% for bicycle
products sold in China. The amount of VAT liability is determined by applying
the applicable tax rate to the invoiced amount less VAT paid on purchases made
with the relevant invoices as support.
Currently, there are no withholding taxes imposed on dividends that
may be paid by SCBW to Winfill.
Distribution of Profits. Applicable Chinese laws and regulations
-----------------------
require that, before a Sino-foreign joint venture enterprise (such as SCBW)
distributes profits to investors, it must (1) satisfy all tax liabilities; (2)
provide for losses in previous years; and (3) make allocations in proportions
determined at the sole discretion of the Board of Directors to a general reserve
fund, an enterprise development fund and a staff welfare and employee bonus
fund. Distribution of profits to Winfill and SCH is required to be in
proportion to each party's investment in the joint venture.
Regulations. Central, provincial and local laws and regulations
-----------
govern the operations of SCBW; the Central government and all provinces in which
SCBW's products are distributed regulate trade practices, advertising and
marketing practices, relationships with distributors and related matters.
Governmental entities also levy various taxes, license fees and other similar
charges and may require bonds to ensure compliance with applicable laws and
regulations.
17
<PAGE>
Trade Relations. The United States and China have been
---------------
periodically involved in controversies that have threatened from time to time a
disruption of trade between the countries over such matters as the protection in
China of intellectual property rights, human rights violations, Taiwan and the
export by China of military hardware. While the United States has extended
China's Most Favored Nation ("MFN") trade status through May 31, 1997, there can
be no assurances that future controversies will not arise that will threaten
trade between the United States and China, or that the United States will not
revoke or refuse to extend China's MFN trade status. In either of such cases,
the business of the Company could be adversely affected. In addition, while the
United States has announced a change in policy that may make it easier for China
to join the World Trade Organization ("WTO"), if China does not join the WTO,
the Company may not benefit from the lower tariffs and other privileges enjoyed
by competitors located in countries which are members of the world trade system
and, as a result, the Company's business could be adversely affected.
Anti-Dumping Investigation. Pursuant to a petition filed by three
--------------------------
United States bicycle manufacturers in early 1995, the United States
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 United States Department of
Commerce (the "Department of Commerce") began its investigation of the PRC
bicycle manufacturing industry, requesting financial and other information from
several Chinese bicycle manufacturers (not including SCB), in order to calculate
dumping margins and impose anti-dumping duties.
During November 1995, the Department of Commerce issued a preliminary
determination which calculated a 61.67% dumping margin on bicycles manufactured
by SCB and all but nine Chinese bicycle manufactures. 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, the Department of 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 of Commerce's dumping margin.
Throughout the investigations by the Department of Commerce and the ITC, SCB 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,
SCB and
18
<PAGE>
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 allowed all Chinese bicycle manufacturers (including SCB) to
resume exporting to the United States without the imposition of an anti-dumping
duty.
The United States bicycle manufacturers appealed the determinations of
both the Department of Commerce and the ITC in the United States Court of
International Trade on June 30, 1996 and July 19, 1996, respectively. Legal
counsel for SCB responded to such appeals, and, in addition, filed its own claim
pursuant to the Lanham Act to challenge the Department of Commerce's calculation
methodologies with respect to the 61.67% dumping margin.
All litigation regarding the anti-dumping investigation was settled
during March 1997. Pursuant to the settlement, the Lanham Act claim was
dismissed on or about March 4, 1997, the Department of Commerce action was
dismissed on or about March 26, 1997, and the ITC action was dismissed on or
about March 27, 1997.
ORGANIZATION OF THE COMPANY
- ---------------------------
The Company was organized as Fremont Uranium Corporation in 1955 in
the State of Utah. In 1993, the Company effected a change of domicile merger,
the result of which was that the Company changed its name to Fremont Corporation
and became incorporated in the State of Delaware.
For a period of time prior to April 28, 1995, the business of the
Company was devoted to acquiring oil and natural gas properties and to seeking
potential acquisition or merger opportunities. On April 28, 1995, the Company
acquired all of the outstanding shares of Winfill Holdings International Limited
("Winfill") from Million Treasure Enterprises Limited ("MTE") for 4,760,000
shares of common stock of the Company (the"Reverse Acquisition"). In addition,
MTE also acquired 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 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 Certificate of Incorporation of the Company is
amended to authorize the Class B common stock. The shares were issued
19
<PAGE>
after giving effect to a 1-for-100 reverse stock split of the common stock
effective April 28, 1995. Pursuant to the terms of the Reverse Acquisition, the
Company transferred to Joseph Petrov, the Company's former President and
controlling stockholder, all of its operating assets existing immediately prior
to the closing of the Reverse Acquisition, 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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's major facilities are all located in the City of
Zhaoqing, People's Republic of China, and are set forth below:
Facility Products
- -------- --------
Zhaoqing Seven Star Body Bicycles and exercise
Building Apparatus Co. Ltd. equipment
South China Bicycles Co. Ltd. Bicycles
Zhaoqing Bicycles Parts Bicycle frames, forks and
Factory other related parts
Zhaoqing Bicycle Steel Tube Steel tubes
Factory
Zhaoqing Golden Wheel Company Rims and chrome plating
Zhaoqing Seven Star Special Bicycle manufacturing
Equipment Factory equipment
All of the Company's facilities are well maintained and suitable for
their respective operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property subject to,
any pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1996.
20
<PAGE>
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of Fremont Corporation is listed for trading on the
NASD's Electronic Bulletin Board (the "Electronic Bulletin Board") under the
symbol "BYCL."
The following table sets forth the range of bid prices of the
Company's common stock as quoted on the Electronic Bulletin Board during the
periods indicated. The trading market is limited and sporadic and should not be
deemed to constitute an "established trading market." Such prices reflect
prices between dealers in securities and do not include any retail markup,
markdown or commission and may not necessarily represent actual transactions.
The information set forth below was provided by the National Quotation Bureau,
Inc. For the quarter ended March 31, 1995, the prices do not reflect any
adjustment for the 1-for-100 reverse stock split effective April 28, 1995.
<TABLE>
<CAPTION>
High Low
---- ---
Fiscal Year Ended December 31, 1995
-----------------------------------
<S> <C> <C>
Quarter Ended March 31, 1995 .125 .125
Quarter Ended June 30, 1995 3.00 2.00
Quarter Ended September 30, 1995 - (1) - (1)
Quarter Ended December 31, 1995 1.00 .50
Fiscal Year Ended December 31, 1996
-----------------------------------
Quarter Ended March 31, 1996 5.50 1.00
Quarter Ended June 30, 1996 6.25 5.50
Quarter Ended September 30, 1996 7.25 6.25
Quarter Ended December 31, 1996 7.50 4.25
</TABLE>
- ---------------------
(1) The Company's common stock was not quoted during the quarter
ended September 30, 1995.
The approximate number of security holders of record of the Company's
common stock at March 31, 1997 was 2,229. Approximately 980,000 shares of
common stock are held in street name.
The Company has not paid any cash dividends on its common stock and
has no present intention of paying cash dividends in the foreseeable future. It
is the present policy of the Board of Directors to retain all earnings to
provide for the future growth of the Company.
21
<PAGE>
The Company's ability to pay dividends to its shareholders is
dependent on the Company receiving distributions through Winfill and SCBW from
its PRC subsidiaries, which generate substantially all of the Company's
earnings. However, it is the Company's intention that the undistributed
earnings of its PRC subsidiaries will be reinvested indefinitely, and as such,
the Company is not required to provide for U.S. Federal income taxes on the
undistributed earnings of its PRC subsidiaries. Should the Company ever decide
to remit earnings from its PRC subsidiaries to pay a dividend to it shareholders
(or for any other purpose), it would be required to provide for U.S. Federal
income taxes on the undistributed earnings of its PRC subsidiaries.
Pursuant to the relevant laws and regulations of Sino-foreign joint
venture enterprises, the earnings of the Company's PRC subsidiaries, calculated
pursuant to generally accepted accounted principles in the PRC ("PRC GAAP"), are
available for distribution in the form of cash dividends after satisfaction of
all tax liabilities, provision for any losses in previous years, and
appropriations to reserve funds. Transfers to contributory dedicated capital
are required under PRC government regulations and the articles of association of
the respective subsidiary companies, and transfers to discretionary dedicated
capital are determined by the respective subsidiary companies' boards of
directors in accordance with PRC accounting standards and regulations. The
principal adjustments necessary to conform PRC GAAP financial statements to
financial statements prepared in accordance with generally accepted accounting
principles in the United States ("US GAAP") are an additional provision for
doubtful accounts receivable and accelerated amortization of pre-operating
costs.
Contributory dedicated capital is a form of legal reserve fund that
represents an allocation of unappropriated retained earnings. Discretionary
dedicated capital includes an enterprise expansion fund and a staff welfare and
incentive bonus fund. Contributory and discretionary dedicated capital are not
distributable in the form of dividends. In the consolidated statements of
income prepared pursuant to US GAAP, amounts designated for payment of the staff
welfare and incentive bonus to employees have been charged to income and the
related provisions are reflected as liabilities in the consolidated balance
sheets.
If SCBW has foreign currency available after meeting the operational
needs of its PRC subsidiaries, it may make a profit distribution to Winfill in
foreign currency. Otherwise, it must convert such distributions at a Swap
Center or an approved bank (see "ITEM 1. DESCRIPTION OF BUSINESS - OPERATING IN
CHINA - Currency Matters").
22
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview:
Winfill was incorporated under the laws of the British Virgin Islands
on June 10, 1994, to operate as a holding company to hold a 98% interest in
SCBW. SCBW is a Sino-foreign equity joint venture enterprise established by
Winfill and SCH on July 7, 1994, to manufacture steel tubes, bicycles and
related spare parts in the PRC. Pursuant to the joint venture agreement between
Winfill and SCH, Winfill purchased 98% of the net assets, excluding immovable
assets, of the steel tube, bicycle and spare parts operations of SCH (the
"Operating Net Assets") at a consideration of RMB 152,076,000 and injected the
net assets into SCBW as its equity capital contribution while SCH injected the
remaining 2% of the related operations as its equity capital contribution.
Thus, SCBW succeeded to the steel tube, bicycle and spare parts manufacturing
operations formerly conducted by SCH effective July 1, 1994. The acquisition of
the Operating Net Assets by Winfill was accounted for by the purchase method of
accounting. The tangible assets were valued in the acquisition at their fair
value as estimated by the directors of Winfill. The excess of the purchase
price over the fair value of the net assets acquired of RMB 39,109,000 was
accounted for as goodwill and is being amortized on the straight-line basis over
40 years from the date of acquisition.
Winfill and Million Treasure Enterprises Limited, a British Virgin
Islands corporation ("MTE"), entered into a Share Exchange Agreement dated as of
March 23, 1995, and as amended on March 30, 1995, with the Company, a publicly-
traded United States company incorporated in the state of Delaware. MTE was the
parent and sole shareholder of Winfill. On April 28, 1995, MTE transferred
41,000 shares of common stock of Winfill, representing all of the issued and
outstanding capital stock of Winfill, to the Company, in exchange for which the
Company issued 4,760,000 shares of its common stock to MTE. In addition, MTE
was issued 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 "Warrant"). The 4,760,000 shares of common stock
represented 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. 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 Certificate of Incorporation of the Company is amended to
authorize the Class B common stock. The acquisition of Winfill by the Company
on April 28, 1995 was treated as a recapitalization of Winfill with Winfill as
the acquirer (reverse acquisition). Accordingly, the historical financial
statements prior to April 28, 1995 are those of
23
<PAGE>
Winfill. The consolidated financial statements include the accounts of Winfill
and its majority owned and controlled subsidiaries (see "ITEM 1. DESCRIPTION OF
BUSINESS - ORGANIZATION").
Consolidated Results of Operations:
Sales -
Sales for the year ended December 31, 1996 were RMB 209,028,000, an
increase of RMB 71,142,000 or 51.6% as compared to RMB 137,886,000 for the year
ended December 31, 1995. Sales to related companies for the year ended December
31, 1996 were RMB 130,816,000 or 62.6% of sales, as compared to RMB 50,666,000
or 36.7% of sales for the year ended December 31, 1995, an increase of RMB
80,150,000 or 158.2% (see "ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS"). Sales to unrelated companies for the year ended December 31,
1996 were RMB 78,212,000 or 37.4% of sales, as compared to RMB 87,220,000 or
63.3% of sales for the year ended December 31, 1995, a decrease of RMB 9,008,000
or 10.3%. Sales to related companies are both for domestic and export purposes.
Sales to related companies allow the Company to receive a more favorable VAT
rate and give it access to expanded domestic and export distribution networks.
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.
The increase in sales in 1996 as compared to 1995 of RMB 71,142,000 or
15.6% was primarily attributable to the following factors:
New Production Facility - The completion of the new production facility at the
- -----------------------
end of 1995 substantially increased the production capacity of the Company
Anti-Dumping Tariff - A 61.7% anti-dumping tariff had been imposed on the
- -------------------
Company's export sales of finished bicycles to the United States during the
fourth quarter of 1995 (see "ITEM 1. DESCRIPTION OF BUSINESS - OPERATING IN
CHINA - Anti-Dumping Investigation"), resulting in a decrease in export sales to
the United States from approximately USD 6,914,000 in 1994 to USD 4,959,000 in
1995. As a result of the revocation of the anti-dumping tariff during the
second quarter of 1996, the Company renewed exporting finished bicycles to the
United States market, with 1996 export sales totalling approximately USD
8,500,000. The domestic sales of parts also dropped significantly in 1995 and
1996 because the Company is a major supplier to other Chinese bicycle
manufacturers which are significant exporters of finished bicycles to the United
States.
Additional Distribution Channels - To offset the effect of the anti-dumping
- --------------------------------
tariff with respect to export sales to the United
24
<PAGE>
States, as well as a similar tariff which has been imposed on Chinese bicycle
products by the European Union since September 1993, during 1996 the Company
developed new distribution channels for its bicycles to Southeast Asia through a
Hong Kong company controlled by a director, and to Australia. In addition, the
Company began to export its exercise equipment products to Europe.
New Product Line - During 1996, the Company developed an exercise equipment
- ----------------
product line for export to the United States, which resulted in sales of
approximately USD 1,552,000, and which is expected to contribute substantial
sales during 1997.
During 1996, PRC domestic sales accounted for approximately 21.0% of
sales, and export sales accounted for 79.0% of sales. During 1995, PRC domestic
sales accounted for approximately 55.5% of sales, and export sales accounted for
44.5% of sales. During 1994, PRC domestic sales accounted for approximately 62%
of pro forma sales, and export sales accounted for 38% of pro forma sales.
During 1996, approximately 90% of domestic sales consisted of bicycles with the
remaining 10% consisting of various bicycle parts, as compared to approximately
46% of domestic sales consisting of bicycles with the remaining 54% consisting
of various bicycle parts in 1995. Total 1996 bicycle production was 434,000
units, with 79,000 units allocated to domestic sales and 355,000 units allocated
to export sales. Total 1995 bicycle production was 286,000 units, with 70,000
units allocated to domestic sales and 216,000 units allocated to export sales.
Total 1994 bicycle production was 294,700 units, with 101,300 units allocated to
domestic sales and 193,400 units allocated to export sales. Export sales are
conducted through overseas agents and directly to OEM customers, as well as
indirectly through PRC domestic import and export companies. Since the
collection cycle for export sales is quicker than for domestic sales, in 1996
the Company continued its emphasis on export sales. In addition, certain
Chinese bicycle manufacturers which buy parts from the Company reduced their
purchases during 1996 as a result of the anti-dumping investigation reducing
exports of finished bicycles to the United States. As a result, domestic sales
decreased to RMB 43,860,000 in 1996 from RMB 76,498,000 in 1995.
As a result of the completion of the new production facility and
substantially increased production capacity, an expanded product line and a
domestically focused marketing effort, subject to the availability of working
capital, the Company expects to substantially increase sales and unit volume in
future years. However, full-scale production at the new production facility is
not expected to be reached until 1998 at the earliest. In addition, the
availability of working capital represents a substantial limitation on the
ability of the Company to finance increased production levels.
Gross Profit -
25
<PAGE>
Gross profit for the year ended December 31, 1995 was RMB 44,086,000
or 21.1% of sales, as compared to gross profit for the year ended December 31,
1995 of RMB 35,764,000 or 25.9% of sales. The decrease in gross profit in 1996
as compared to 1995 was primarily the result of higher costs associated with the
operation of the new production facility combined with the Company lowering
certain prices for its products in order to expand into new markets.
Selling, General and Administrative -
Selling, general and administrative expenses, net of amounts assumed
by SCH, were RMB 18,810,000 or 9.0% of sales for the year ended December 31,
1995, as compared to RMB 17,791,000 or 12.9% of sales for the year ended
December 31, 1995. Selling, general and administrative expenses increased by
RMB 1,019,000 or 5.7% in 1996 as compared to 1995. The decrease in selling,
general and administrative expenses as a percentage of sales from 12.9% in 1995
to 9.0% in 1996 was attributable to several factors, including substantially
increased sales, a reduction in management staff, which decreased from 123 in
1995 to 102 in 1996, and decreased costs of export transportation. The decrease
in selling, general and administrative expenses was offset in part by an
allowance for doubtful accounts of RMB 3,272,000 that was recorded in the fourth
quarter of 1996. This allowance for doubtful accounts related primarily to
China Bicycle Company Limited, a public company in China, as a result of the
Company's review of the financial condition of China Bicycle Company Limited and
the Company's revised expectations regarding collectability of its accounts
receivable from China Bicycle Company Limited.
Pursuant to a cost-sharing agreement between SCBW and SCH effective
January 1, 1995, SCH agreed to bear 40% of the 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
years ended December 31, 1995 and 1996, such amounts aggregated approximately
RMB 2,000,000 and RMB 2,900,000.
Amortization of Pre-Operating Costs -
Through December 31, 1995, deferred pre-operating costs, representing
organization and certain start-up costs (excluding capital expenditures) related
to the new production facility, aggregated RMB 8,534,000, and were fully
amortized during the year ended December 31, 1996, when the new production
facility commenced commercial production.
Interest Expense -
Interest expense, net of amounts capitalized, for the year ended
December 31, 1996 was RMB 13,360,000 or 6.4% of sales, as compared to RMB
5,312,000 or 3.9% of sales for the year ended
26
<PAGE>
December 31, 1995. The Company capitalized RMB 15,078,000 of interest in 1995,
representing approximately 74% of total interest incurred in 1995, in
conjunction with the construction of the new production facility; no interest
was capitalized in 1996. The increase in interest expense in 1996 as compared
to 1995 is primarily a result of increased short-term borrowings to support
operations in 1996 and interest costs on certain borrowings that were
capitalized in 1995 and charged to interest expense in 1996.
Interest Income -
Interest income for the year ended December 31, 1996 was RMB
4,837,000, of which approximately RMB 4,300,000 was from SCH, as compared to RMB
280,000 for the year ended December 31, 1995. During the year ended December
31, 1996, SCBW charged SCH interest on the outstanding balance due from SCH at
the rate of 8.5% per annum. No interest was charged to SCH for the year ended
December 31, 1995.
Non-Recurring Recapitalization Cost -
During April 1995, the Company issued 770,000 shares of its common
stock to certain consultants in conjunction with the reverse acquisition. The
value of the 770,000 shares was accounted for as a non-recurring
recapitalization cost during the year ended December 31, 1995 based on
management's estimate of the fair value of the consideration paid of RMB
6,405,000.
Unusual Item -
Pursuant to an agreement between SCBW and an unrelated third party
supplier on February 26, 1997, the supplier reduced its accounts receivable from
SCBW by approximately RMB 4,299,000 as a result of downward price adjustments on
certain raw materials purchased by SCBW from this supplier in 1994 and 1995,
which were used from 1994 to 1996. Approximately RMB 2,902,000 of the price
reduction related to raw materials used in 1994 and 1995, and was recorded as an
unusual item in the consolidated statements of income for the year ended
December 31, 1996. The remaining approximately RMB 1,397,000 of the price
reduction related to raw materials used in 1996, and was recorded as a credit to
cost of goods sold in the consolidated statements of income for the year ended
December 31, 1996.
Net Income -
Net income for the year ended December 31, 1996 was RMB 10,969,000
(RMB 1.91 per share), as compared to RMB 6,997,000 (RMB 1.31 per share) for the
year ended December 31, 1995.
27
<PAGE>
Consolidated Financial Condition - December 31, 1996:
Liquidity and Capital Resources -
For the year ended December 31, 1996, the Company used RMB 26,416,000
of cash in operations, as compared to RMB 41,644,000 for the year ended December
31, 1995, a reduction of RMB 15,228,000, despite a substantial increase in sales
in 1996 as compared to 1995. The most significant components of the cash
utilized in operations in 1996 were the increase in inventories of RMB
24,934,000 and the increase in due from related companies of RMB 81,915,000,
reduced in part by the increase in accrued expenses and other liabilities of RMB
23,659,000.
Exclusive of the amounts due from related companies, accounts
receivable decreased by RMB 31,690,000 from 1995 to 1996, of which RMB
13,120,000 was a result of a transfer of certain accounts receivable to SCH. 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 book value,
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 RMB 13,120,000 of short-term bank loans.
In addition, pursuant to an agreement dated March 31, 1997, SCH agreed to
guarantee the recoverability of certain other accounts receivable purchased by
SCBW upon its formation aggregating approximately RMB 5,700,000 as of December
31, 1996.
Operating cash flow is adversely affected by the long collection cycle
that is typical of Chinese companies that have a substantial portion of their
customers in China. This had a reduced effect on the Company's 1996 operating
cash flow since a greater proportion of sales in 1996 were export sales as
compared to 1995. The Company's operating cash flow was also positively
impacted by a reduction in accounts receivable outstanding in excess of one
year. Of the Company's RMB 59,719,000 of accounts receivable (excluding related
companies) at December 31, 1996, approximately RMB 12,000,000 or 20.1% had been
outstanding in excess of one year. Of the Company's RMB 88,137,000 of accounts
receivable (excluding related companies) at December 31, 1995, approximately RMB
36,600,000 or 41.5% had been outstanding in excess of one year.
The Company had a net working capital deficit of RMB 17,564,000 at
December 31, 1996, as compared to a working capital deficit of RMB 71,496,000 at
December 31, 1995, reflecting current ratios of .93:1 and .73:1, respectively.
The Company has relied on short-term and long-term bank loans to finance its
operations and, prior to 1996, the construction of the new
28
<PAGE>
production complex. As of December 31, 1995, short-term bank loans of RMB
59,803,000 and long-term bank loans of RMB 71,664,000 were assumed by SCH in
conjunction with a sale/leaseback of the new production complex effective
January 1, 1996, which had a substantial positive impact on the Company's net
working capital deficit and current ratio in 1996.
Except with regard to the initial transactions pursuant to which SCBW
was organized and capitalized, the Company's primary method of financing its
capital requirements has been borrowings. Short-term borrowings consist
primarily of bank loans, are unsecured, repayable in one year, have interest
rates ranging from 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. Short-term borrowings were RMB 112,740,000 at
December 31, 1994, RMB 167,934,000 at December 31, 1995, and RMB 150,681,000 at
December 31, 1996. The use of short-term bank loans to finance the development
of productive assets occurs when the Bank of China's quota of funds allocated
for long-term bank loans has been fully utilized.
Long-term borrowings, consisting of bank loans, are secured by
property, plant and equipment and long-term bank deposits, have interest rates
ranging from 5.4% to 13.2%, are guaranteed by related enterprises of SCH, and
have been utilized to finance the expansion of the production facility and the
purchase of equipment. Long-term borrowings (including the current portion)
aggregated RMB 49,947,000 at December 31, 1994 and RMB 71,664,000 at December
31, 1995. The long-term borrowings of RMB 71,664,000 were assumed by SCH in
conjunction with the sale/leaseback of the new production complex effective
January 1, 1996. The Company had no long-term bank loans at December 31, 1996.
During the year ended December 31, 1996, cash flows from financing
activities consisted of net proceeds from short-term borrowings of RMB
55,670,000 and the sale of equity securities of RMB 3,833,000, and were utilized
primarily to fund operating cash flow requirements and payments under capital
leases. During the year ended December 31, 1995, cash flows from financing
activities consisted of net proceeds from short-term borrowings of RMB
55,194,000 and long-term borrowings of RMB 21,717,000, and were utilized
primarily to fund operating cash flow requirements, the construction of the new
production complex, and the purchase of equipment and payments under capital
leases. In addition, during the year ended December 31, 1995, the Company
financed RMB 16,819,000 of equipment under capital leases.
During March 1996, the Company raised net proceeds of 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
29
<PAGE>
the holder to purchase one share of common stock for $3.00 per share on or
before February 28, 1998. During August 1996, 5,000 common stock purchase
warrants were exercised, generating net proceeds of USD 13,500, and during March
1997, 10,000 common stock purchase warrants were exercised, generating net
proceeds of USD 27,000.
SCBW and SCH entered into a sale/leaseback agreement dated April 20,
1996 and a subsequently amended agreement dated May 6, 1996. Both agreements
were effective as of January 1, 1996. Pursuant to the transaction, SCBW sold
the new production facility's buildings and production facilities and related
land use rights to SCH at the then net book values of approximately RMB
83,507,000 and RMB 47,960,000, respectively (aggregate net book value of RMB
131,467,000). SCH paid such consideration by assuming an equivalent amount of
SCBW's short-term and long-term bank loans of RMB 59,803,000 and RMB 71,664,000,
respectively. This transaction did not result in any gain or loss. SCBW leased
back the sold assets from SCH for a period of 20 years under an operating lease
agreement with the lease rental to be determined annually based on utilization.
SCBW paid a rental deposit of RMB 28,000,000 by reducing its accounts receivable
from SCH. Rent expense for the year ended December 31, 1996 was RMB 2,400,000,
and was paid by reducing the rental deposit.
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 utilizes 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 bank borrowings during 1995 and 1996 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, 1995 and 1996. The USD 4,000,000
note payable to MTE is unsecured, bears no interest and has no fixed payment
terms. 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,
1995 and 1996. The Company believes that the terms of the loan will continue
30
<PAGE>
until substantial full-scale production of the new facility is reached, which is
expected to take at least until 1998.
During the next two years, SCBW currently plans to expend
approximately RMB 40,000,000 with respect to the second phase of development of
the new production complex, including the tube production line and the spare
parts welding line. Although the Company expects to fund the second phase of
development through long-term bank loans, to the extent available, and/or the
sale of the Company's debt or equity securities, there can be no assurances that
the Company will be successful in this regard. To the extent that the Company
is unable to arrange adequate financing under acceptable terms on a timely
basis, the Company will delay the second phase of development of the new
production complex. In addition, during 1997, SCBW plans to add a new paint and
assembly line for exercise equipment and to upgrade and relocate the steel tube
factory to the new production complex at an estimated cost of RMB 6,000,000.
Pursuant to an agreement dated November 8, 1996, SCBW agreed to buy a
land use right from SCH for RMB 30,000,000. The land use right relates to a
parcel of land in the center of Zhaoqing which contains one of SCBW's operating
factories, has a useful life of 40 years, and has a potential for commercial
development. As of December 31, 1996, SCBW had paid a deposit of RMB 20,000,000
to SCH, and is required to settle the remaining RMB 10,000,000 obligation to SCH
during 1998.
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 operating capital would most likely
be in the form of some type of an equity investment.
Inflation and Currency Matters:
In recent years, the Chinese economy has experienced periods of rapid
economic growth as well as high rates of inflation, which in turn has resulted
in the periodic adoption by the Chinese government of various corrective
measures designed to regulate growth and contain inflation. Since 1993, the
Chinese government has implemented an economic program designed to control
inflation, which has resulted in the tightening of working capital available to
Chinese business enterprises. The success of the Company depends in substantial
part on the continued growth and development of the Chinese economy.
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and
31
<PAGE>
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, 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 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 during 1994, 1995 and 1996. The swap center rate was
US$1.00 to RMB 8.70 at December 31, 1993, RMB 8.45 at December 31, 1994, RMB
8.32 at December 31, 1995, and RMB 8.32 at December 31, 1996.
Environmental Matters:
Management believes that the Company complies with all national and
local environmental protection laws and regulations of the PRC. In 1996,
compliance with the provisions of all national and local environmental laws and
regulations did not have a material effect upon earnings, capital expenditures
or the competitive position of the Company.
ITEM 7. FINANCIAL STATEMENTS
The financial statements are listed at "Index to Consolidated
Financial Statements" elsewhere in this document.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Effective October 6, 1995, the Company dismissed Hein & Associates LLP
("Hein"), Houston, Texas, as the Company's independent accountants, and engaged
Arthur Andersen as the Company's new independent accountants. The dismissal of
Hein and the retention of Arthur Andersen were approved by the Company's Board
of Directors on October 6, 1995.
Arthur Andersen is the independent accountants for the Company's
wholly-owned subsidiary, Winfill Holdings International Limited ("Winfill"),
which was acquired in a reverse acquisition effective April 28, 1995. Arthur
Andersen audited the financial statements of such subsidiary as of and for the
six months ended December 31, 1994.
Prior to the engagement of Arthur Andersen, the Company did not
consult with such firm regarding the type of audit
32
<PAGE>
opinion that might be rendered on the Company's financial statements, or any
matter that was either the subject of a disagreement or a reportable event.
However, prior to the engagement of Arthur Andersen, during August 1995, the
Company consulted with such firm regarding the application of accounting
principles to a specified transaction, either completed or proposed, and Arthur
Andersen provided verbal advice as follows (no written report was issued):
(1) The Company's common stock is registered pursuant to Section 12(g)
of the Securities Exchange Act of 1934, and the Company's only asset is its
interest in Winfill, a wholly-owned subsidiary whose operations are located in
China. The Company discussed with Arthur Andersen the appropriate reporting
currency to be utilized in the preparation of the Company's consolidated
financial statements. It was Arthur Andersen's opinion that the Chinese
Renminbi was the appropriate reporting currency.
(2) In conjunction with the reverse acquisition of Winfill effective
April 28, 1995, the Company issued shares of common stock to certain consultants
for consulting fees. The company discussed with Arthur Andersen the appropriate
accounting treatment for such shares. It was Arthur Andersen's opinion that the
fair value of such shares should be charged to operations.
Hein audited the Company's financial statements for the year ended
December 31, 1994, the nine months ended December 31, 1993 and the year ended
March 31, 1993. Hein's reports for each of such periods contained modifications
as to (i) accounting principles, since the Company's financial statements did
not disclose supplementary oil and gas information as required for publicly-
traded companies in accordance with generally accepted accounting principles,
and as to (ii) uncertainty, due to the uncertainty with respect to the Company's
ability to continue as a going concern. Other than the foregoing modifications,
Hein's reports on the Company's financial statements for the periods described
herein did not contain an adverse opinion or a disclaimer of opinion, nor were
the reports qualified or modified as to audit scope.
During the period from January 1, 1995 to October 6, 1995, the year
ended December 31, 1994, the nine months ended December 31, 1993, and the year
ended March 31, 1993, there were no disagreements with Hein on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Hein, would have caused such firm to make reference to the subject matter of the
disagreements in connection with its reports on the Company's financial
statements. Hein was not consulted by the Company regarding the previously
described accounting issues that were discussed with Arthur Andersen.
33
<PAGE>
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following tables and text sets forth the names and ages of all
directors and executive officers of the Company as of March 31, 1997. The Board
of Directors of the Company is comprised of only one class. All of the
directors will serve until the next annual meeting of shareholders and until
their successors are elected and qualified, or until their earlier death,
retirement, resignation or removal. Executive officers serve at the discretion
of the Board of Directors, and are appointed to serve until the first Board of
Directors meeting following the annual meeting of shareholders. There are no
family relationships among directors and executive officers. Also provided is a
brief description of the business experience of each director and executive
officer during the past five years and an indication of directorships held by
each director in other companies subject to the reporting requirements under the
Federal securities laws.
<TABLE>
<CAPTION>
DIRECTORS
---------
Date Elected
Name Age as Director
- ---- --- ------------
<S> <C> <C>
Rong Shao Jia 55 April 1995
Zhao Ya Wen 46 April 1995
Winston Wu (Wu Fa Pei) 38 April 1995
Sze Yet Wen 41 April 1995
Li Fai 42 April 1995
Robert N. Weingarten 44 May 1995
Gao Wei Son 59 (1)
Zhen Da Qing 49 (1)
</TABLE>
- -----------------------
(1) Gao Wei Son and Zhen Da Qing have been appointed to the Board of Directors
effective May 1, 1997.
34
<PAGE>
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS
------------------
Date Elected
Name Age Position as Officer
- ---- --- -------- ----------
<S> <C> <C> <C>
Rong Shao Jia 55 Chief Executive April 1995
Officer
Winston Wu (Wu Fa Pei) 38 President April 1995
Zhao Ya Wen 46 Chief Operating April 1995
Officer
Robert N. Weingarten 44 Chief Financial May 1995
Officer
</TABLE>
Biographies of Directors, Officers and Director - Designees:
RONG SHAO JIA, Chief Executive Officer and a Director of the Company,
is responsible for the formulation of the Company's overall policies and
development strategies. He has over 34 years of experience in bicycle production
and business management. Under his supervision, since 1988 SCBW has expanded
from a small factory of 200 employees to almost 2,000 employees. Mr. Rong owns a
31% interest in MTE and a .01% interest in Fogance.
WINSTON WU, President and a Director of the Company, is responsible
for domestic and overseas market development. Before joining SCBW in January
1995, Mr. Wu was the Deputy General Manager of the China Division of Le Saunda
Holdings Limited, a public company listed on the Hong Kong Stock Exchange, from
June 1993 to December 1994, where he was in charge of developing shoes and
clothing retail stores in China. From December 1991 to June 1993, he was an
associate professor of marketing and statistics in the School of Business at the
South China University of Technology.
ZHAO YA WEN, Chief Operating Officer and a Director of the Company, is
responsible for overseeing the overall operations of the Company and assisting
in the formulation of the Company's policies and development strategies. Before
joining SCBW in 1993, Mr. Zhao was the Deputy Head of Zhaoqing Light Industries
Department from 1990 to 1993.
SZE YET WEN, a Director of the Company, has been an independent
businessman and investor for the past five years. Mr. Sze is president of South
Bridge Industries Ltd., a Hong Kong company, which owns a 31% minority interest
in SCB, a subsidiary of SCBW. Mr. Sze is also president of Hong Kong Easy Keen
Industries Ltd., a Hong Kong company (see "ITEM 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS"). Mr. Sze owns a 43% interest in MTE.
35
<PAGE>
LI FAI, a Director of the Company, has been an independent businessman
and investor for the past five years. Mr. Li is the managing director of
Lanzhou Guanghua Hotel in China, and is also a director of the Kei Tak Institute
of Old Age Ltd., a retirement home located in Hong Kong. Mr. Li owns a 26%
interest in MTE.
ROBERT N. WEINGARTEN, Chief Financial Officer and a Director of the
Company, is responsible for the accounting and financial reporting functions.
From July 1992 to present, Mr. Weingarten has been the sole shareholder of
Resource One Group, Inc., a financial consulting and advisory company.
Commencing January 1, 1997, Mr. Weingarten joined Chelsea Capital Corporation, a
merchant banking firm located in Beverly Hills, California, as a principal.
From January 1991 through December 1992, Mr. Weingarten served as a general
partner of Commerce Partners, a consulting firm specializing in financial
restructurings and business reorganizations. Since 1979, Mr. Weingarten has
served as a consultant with numerous public companies in various stages of
development, operation or reorganization. Mr. Weingarten is currently serving
on the Board of Directors of Fotoball USA, Inc., which is a publicly-held
corporation.
GAO WEI SON, a Director - Designee of the Company, is the president
and senior engineer of Hong Kong Hopewick International Ltd. Mr. Gao was an
officer of Guangdong Province Light Industries Bureau from 1961 to 1983. From
1983 to 1995, he was general manager of the Guangdong Province Daily Necessities
Company.
ZHEN DA QING, a Director - Designee of the Company, is a director and
vice general manager of Zhaoqing Industries State Property Development Co., Ltd.
Mr. Zhen worked in the Zhaoqing Chemical Industry Factory and was also a
director of the Zhaoqing Administration Training Institution from 1968 to 1988.
From 1988 to 1993, he was an official of the Zhaoqing Economic Commission and a
director of the Zhaoqing Industries Project Development Office.
Compliance with Section 16(a) of the Exchange Act:
- -------------------------------------------------
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company under Rule 16a-3(e) during the fiscal year ended
December 31, 1996 and Form 5 and amendments thereto furnished to the Company
with respect to the fiscal year ended December 31, 1996, and any written
representations, no persons who were either a director, officer or beneficial
owner of more than 10% of the Company's common stock registered pursuant to
Section 12 at any time during the fiscal year ended December 31, 1996 failed to
file on a timely basis reports required by Section 16(a) during the fiscal year
ended December 31, 1996.
36
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to
its Chief Executive Officer during the last three fiscal years. No executive
officer of the Company earned more than $100,000 during the last three fiscal
years.
Summary Compensation Table (US$)
--------------------------------
<TABLE>
<CAPTION>
Name and
Principal
Position Year Salary
- -------- ---- ------
<S> <C> <C>
Rong Shao Jia 1996 $10,000
Chief Executive 1995 5,779
Officer 1994 5,238
</TABLE>
Compensation Agreements:
The Company has not entered into any long-term employment or
consulting agreements with its officers or directors.
Board of Directors:
During the year ended December 31,1996, no meetings of the Board of
Directors were held; all corporate actions were conducted by unanimous written
consent of the Board of Directors. Directors receive no compensation for
serving on the Board of Directors, but are reimbursed for any out-of-pocket
expenses incurred in attending board meetings. The Company had no audit,
nominating, or compensation committees, or committees performing similar
functions, during the year ended December 31, 1996.
Effective May 1, 1997, the Board of Directors intends to form an audit
committee. The members of the audit committee will be Gao Wei Son, Zhen Da Qing
and Robert N. Weingarten. The audit committee's primary responsibilities will
be to recommend the appointment of the Company's independent auditors and to
review the scope and results of the audits, the internal accounting controls of
the Company, audit practices and the professional services furnished by the
independent auditors.
Common Stock Purchase Warrant:
During May 1995, the Board of Directors agreed to issue to the Chief
Financial Officer of the Company a common stock purchase warrant for 56,000
shares of common stock, exercisable at USD 2.50 per share on or before May 31,
2000. The warrant was fully vested upon issuance, and has not been exercised.
Stock Option Plan:
37
<PAGE>
On January 6, 1997, the Board of Directors adopted a stock option plan
covering options to purchase up to 600,000 shares of common stock to be issued
to officers, directors, key employees and consultants. The Company intends to
present the stock option plan to the shareholders for approval during 1997. No
stock options have been granted under the stock option plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As used in this section, the term beneficial ownership with respect to
a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934,
as amended, as consisting of sole or shared voting power (including the power to
vote or direct the vote) and/or sole or shared investment power (including the
power to dispose of or direct the disposition of) with respect to the security
through any contract, arrangement, understanding, relationship or otherwise,
subject to community property laws where applicable.
As of March 31, 1997, the Company had a total of 5,831,639 shares of
common stock issued and outstanding. All common share amounts reflect the 1-
for-100 reverse stock split effective April 28, 1995. There are no other
classes of equity securities currently authorized or outstanding.
The following table sets forth, as of March 31, 1997: (a) the names
and addresses of each beneficial owner of more than five percent (5%) of the
Company's common stock known to the Company, the number of shares of common
stock beneficially owned by each such person, and the percent of the Company's
common stock so owned; and (b) the number of shares of common stock beneficially
owned, and the percentage of the Company's common stock so owned, by each
director, and by all directors and officers of the Company as a group. Each
person has sole voting and investment power with respect to the shares of common
stock, except as other wise indicated. Beneficial ownership consists of a
direct interest in the shares of common stock, except as otherwise indicated.
<TABLE>
<CAPTION>
Name of Amount and Nature of Percent of Shares
Beneficial Owner Beneficial Ownership of Common Stock
- ---------------- -------------------- -----------------
<S> <C> <C>
Million Treasure 4,760,000 (1) 81.6%
Enterprises Limited
Flat 3, 9/F
Swire & Maclane House
21 Austin Avenue
Tsim Sha Tsui
Kowloon, Hong Kong
Rong Shao Jia - (2) -
</TABLE>
38
<PAGE>
<TABLE>
<S> <C> <C>
Sze Yet Wen - (2) -
Li Fai - (2) -
Zhao Ya Wen - -
Winston Wu - -
Robert N. Weingarten 56,000 (3) 1.0%
All Directors and 56,000 (4) 1.0%
Executive Officers
as a Group (6 persons)
Gao Wei Son - -
Zhen Da Qing - -
</TABLE>
- -----------------------
(1) In conjunction with the acquisition of Winfill by the Company in April
1995, Million Treasure Enterprises Limited ("MTE") received a warrant entitling
the holder, upon amendment of the Company's Certificate of Incorporation, to
convert up to 2,000,000 shares of common stock into an equivalent number of
Class B common shares. The Class B common shares are identical to the
outstanding shares of common stock except that they will have three votes per
share. The existing shares of common stock have one vote per share.
(2) Rong Shao Jia, Sze Yet Wen and Li Fai are the sole shareholders of MTE, and
own equity interests in MTE of 31%, 43% and 26%, respectively. Each such person
disclaims beneficial ownership of the shares of common stock owned by MTE.
(3) Consists of 56,000 shares issuable upon exercise of an immediately
exercisable stock purchase warrant expiring May 31, 2000 at an exercise price of
$2.50 per share.
(4) See footnotes (2) and (3).
Changes in Control:
The Company is unaware of any contract or other arrangement, the
operation of which may at a subsequent date result in a change in control of the
Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to the terms of the transaction effective April 28, 1995, the
Company transferred to Joseph Petrov, the Company's former President and
controlling shareholder, all of its operating assets existing immediately prior
to the closing of
39
<PAGE>
the transaction, 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.
On April 5, 1995, the Company issued 5,164 shares (516,376 shares
prior to the 1-for-100 reverse stock split effective April 28, 1995) of its
common stock to a company related to its management at that time as settlement
for prior advances of $51,638 to the Company.
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, 1995 and 1996. The USD 4,000,000
note payable to MTE is unsecured, bears no interest and has no fixed payment
terms. 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,
1995 and 1996. The Company believes that the terms of the loan will continue
until substantial full-scale production of the new facility is reached, which is
expected to take at least until 1998.
During the year ended December 31, 1995, sales to related companies
aggregated RMB 50,666,000, and consisted of sales to SCH and its related
companies. SCH is a 2% minority shareholder of SCBW, which is 98% owned by the
Company's wholly-owned subsidiary, Winfill. During the year ended December 31,
1996, sales to related companies aggregated RMB 130,816,000, and consisted of
sales to SCH and its related companies of RMB 34,727,000 and to Hong Kong Easy
Keen Industries Ltd. ("Easy Keen") of RMB 96,089,000. Sze Yet Wen is a director
of the Company, indirectly controls a 31% minority interest in SCB, a subsidiary
of SCBW, and is a shareholder of Easy Keen and of MTE, the controlling
shareholder of the Company.
During the year ended December 31, 1995, purchases from related
companies aggregated RMB 620,000, and consisted of purchases from SCH and its
related companies. During the year ended December 31, 1996, purchases from
related companies aggregated RMB 64,718,000, and consisted of purchases from SCH
and its related companies of RMB 3,896,000 and from Easy Keen of RMB 60,822,000.
SCBW and Easy Keen have agreed to settle the net amount due SCBW of
approximately RMB 35,158,000 at December 31, 1996 by supplying raw materials of
the same value during 1997.
As of December 31, 1995, amounts due from related companies aggregated
approximately RMB 43,501,000, all of which was due from SCH. As of December 31,
1996, amounts due from related companies aggregated approximately RMB
97,416,000, of which RMB 62,258,000 was due from SCH and its related companies
and RMB 35,158,000 was due from Easy Keen.
40
<PAGE>
Effective July 1, 1994, SCBW entered into an agreement with SCH to
rent certain factory buildings without charge through December 31, 1997. It is
management's opinion that the imputed rent expense was not material for the
years ended December 31, 1995 and 1996.
Pursuant to a cost-sharing agreement between SCBW and SCH effective
January 1, 1995, SCH agreed to bear 40% of the 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
years ended December 31, 1995 and 1996, such amounts aggregated approximately
RMB 2,000,000 and RMB 2,900,000, respectively.
As of December 31, 1995, SCH and its related companies had guaranteed
the Company's long-term bank debt aggregating RMB 71,664,000. The Company had
no long-term bank debt at December 31, 1996.
During May 1995, the Board of Directors agreed to issue to the Chief
Financial Officer of the Company a common stock purchase warrant for 56,000
shares of common stock, exercisable at USD 2.50 per share on or before May 31,
2000. The warrant was fully vested upon issuance.
During the year ended December 31, 1996, SCBW charged SCH interest on
the outstanding balance due from SCH at the rate of 8.5% per annum, aggregating
approximately RMB 4,300,000. SCBW did not charge SCH any interest during the
year ended December 31, 1995.
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 book value, 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 RMB 13,120,000 of short-
term bank loans. In addition, pursuant to an agreement dated March 31, 1997, SCH
agreed to guarantee the recoverability of certain other accounts receivable
purchased by SCBW upon its formation aggregating approximately RMB 5,700,000 as
of December 31, 1996.
Pursuant to an agreement dated November 8, 1996, SCBW agreed to buy a
land use right from SCH for RMB 30,000,000. The land use right relates to a
parcel of land in the center of Zhaoqing which contains one of SCBW's operating
factories, has a useful life of 40 years, and has a potential for commercial
development. As of December 31, 1996, SCBW had paid a deposit of RMB 20,000,000
to SCH, and is required to settle the remaining RMB 10,000,000 obligation to SCH
during 1998.
41
<PAGE>
SCBW and SCH entered into a sale/leaseback agreement dated April 20,
1996 and a subsequently amended agreement dated May 6, 1996. Both agreements
were effective as of January 1, 1996. Pursuant to the transaction, SCBW sold
the new production facility's buildings and production facilities and related
land use rights to SCH at the then net book values of approximately RMB
83,507,000 and RMB 47,960,000, respectively (aggregate net book value of RMB
131,467,000). SCH paid such consideration by assuming an equivalent amount of
SCBW's short-term and long-term bank loans of RMB 59,803,000 and RMB 71,664,000,
respectively. This transaction did not result in any gain or loss. SCBW leased
back the sold assets from SCH for a period of 20 years under an operating lease
agreement with the lease rental to be determined annually based on utilization.
SCBW paid a rental deposit of RMB 28,000,000 by reducing its accounts receivable
from SCH. Rent expense for the year ended December 31, 1996 was RMB 2,400,000,
and was paid by reducing the rental deposit.
During the year ended December 31, 1996, the Company distributed
earnings of its partially-owned subsidiaries aggregating RMB 88,000 to its
minority shareholders, SCH and South Bridge Industries, Ltd. There were no
distributions of earnings to minority shareholders during the year ended
December 31, 1995.
42
<PAGE>
PART IV.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description of Document
------- -----------------------
2.1 Share Exchange Agreement dated March 23, 1995, with Amendment
dated March 30, 1995, among Fremont Corporation, Million
Treasure Enterprises Limited and Winfill Holdings International
Limited, previously filed as Exhibit C to the Company's Current
Report on Form 8-K dated April 28, 1995, and incorporated herein
by reference.
3.1(P) Certificate of Incorporation, previously filed as Exhibit 3.1 to
the Company's Registration Statement on Form 8-B dated July 1,
1993, and incorporated herein by reference.
3.2(P) Bylaws, previously filed as Exhibit 3.2 to the Company's
Registration Statement on Form 8-B dated July 1, 1993, and
incorporated herein by reference.
10.1(P) Chinese-Foreign Joint Venture Contract between South China
Bicycle (Holdings) Company Limited and Winfill Holdings
International Limited dated June 1994 relating to the formation
of SCBW, previously filed as Exhibit 10.1 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1995, and incorporated herein by reference.
10.2 Sale Leaseback Contract between South China Bicycle (Holdings)
Company Limited and South China Bicycles Winfill Limited.
10.3 Purchase Agreement for Land Use Right between South China
Bicycle (Holdings) Company Limited and South China Bicycles
Winfill Limited.
10.4 Guarantee Letter between South China Bicycle (Holdings) Company
Limited and South China Bicycles Winfill Limited relating to the
guarantee of certain accounts receivable.
21 Subsidiaries of the Company.
27 Financial data schedule (electronic filing only).
- ---------------
43
<PAGE>
(P) Indicates that document was originally filed with the Securities and
Exchange Commission in paper form and that there have been no changes or
amendments to the document which would require filing of the document
electronically with this Form 10-KSB.
(b) Reports on Form 8-K: The Company did not file any Current Reports
on Form 8-K during or related to the fourth quarter of the fiscal year ended
December 31, 1996.
44
<PAGE>
SIGNATURES
----------
In accordance with Section 13 or 15(d) 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: April 14, 1997 By: /s/ Winston Wu
--------------
Winston Wu
President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Date: April 14, 1997 By: /s/ Rong Shao Jia
-----------------
Rong Shao Jia
Chief Executive Officer and
Director
Date: April 14, 1997 By: /s/ Zhao Ya Wen
---------------
Zhao Ya Wen
Chief Operating Officer and
Director
Date: April 14, 1997 By: /s/ Winston Wu (Wu Fa Pei)
--------------------------
Winston Wu (Wu Fa Pei)
President and Director
Date: April 14, 1997 By: /s/ Sze Yet Wen
---------------
Sze Yet Wen
Director
Date: April 14, 1997 By: /s/ Li Fai
----------
Li Fai
Director
Date: April 14, 1997 By: /s/ Zhou Fen Qui
----------------
Zhou Fen Qui
Accounting Manager
Date: April 14, 1997 By: /s/ Robert N. Weingarten
------------------------
Robert N. Weingarten
Chief Financial Officer and
Director
45
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Sequential
Page Numbers
------------
Report of Independent Public Accountants -
Arthur Andersen & Co. 47
Consolidated Statements of Income -
For the Years Ended December 31, 1996
and 1995 48
Consolidated Balance Sheets -
As of December 31, 1996 and 1995 49
Consolidated Statements of Cash Flows -
For the Years Ended December 31, 1996
and 1995 50
Consolidated Statements of Changes in
Shareholders' Equity - For the Years
Ended December 31, 1996 and 1995 51
Notes to Consolidated Financial Statements 52-66
46
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Fremont Corporation:
We have audited the accompanying consolidated balance sheets of Fremont
Corporation (incorporated in the State of Delaware, United States of America;
the "Company") and subsidiaries (the "Group") as of December 31, 1996 and 1995
and the related consolidated statements of income, cash flows and changes in
shareholders' equity for the years then ended, expressed in Chinese Renminbi.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Fremont Corporation
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles in the United States of America.
ARTHUR ANDERSEN & CO.
Hong Kong,
April 11, 1997.
47
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(Amounts in thousands, except for share data)
<TABLE>
<CAPTION>
1996 1995
----------------------- ----------
RMB US$ RMB
<S> <C> <C> <C>
Sales
- to related companies 130,816 15,761 50,666
- to others 78,212 9,423 87,220
---------- ---------- ----------
209,028 25,184 137,886
Cost of goods sold
- purchases from related companies (64,718) (7,797) (620)
- others (100,224) (12,075) (101,502)
---------- ---------- ----------
Gross profit 44,086 5,312 35,764
Selling, general and administrative (21,710) (2,616) (19,791)
expenses
Less: shared by SCH 2,900 349 2,000
Amortization of pre-operating costs (8,354) (1,007) --
Interest expense (13,360) (1,610) (5,312)
Interest income (principally from SCH) 4,837 583 280
Other income, net 1,236 149 685
Non-recurring recapitalization cost -- -- (6,405)
Unusual item - reduction of price of
raw materials purchased in prior years 2,902 350 --
---------- ---------- ----------
Income before income taxes 12,537 1,510 7,221
Provision for income taxes (1,364) (164) --
---------- ---------- ----------
Income before minority interests 11,173 1,346 7,221
Minority interests (204) (25) (224)
---------- ---------- ----------
Net income 10,969 1,321 6,997
========== ========== ==========
Earnings per common share RMB1.91 US$0.23 RMB1.31
========== ========== ==========
Weighted average number of common
shares outstanding 5,738,431 5,345,972
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Translation of amounts from Renminbi (RMB) into United States dollars (US$) for
the convenience of the readers 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 April 11, 1997 of US$1.00=RMB8.3. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate on April 11, 1997 or at any
other certain rate.
48
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(Amounts in thousands, except for share data)
<TABLE>
<CAPTION>
1996 1995
---------------- ----------
RMB US$ RMB
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 4,806 579 6,507
Accounts receivable, net 51,812 6,242 83,502
Inventories 60,403 7,277 35,469
Due from SCH 62,258 7,501 43,501
Due from Easy Keen 35,158 4,236 --
Prepayments and other current assets 26,151 3,151 22,316
------- ------- -------
Total current assets 240,588 28,986 191,295
Property, plant and equipment, net 109,260 13,164 243,392
Prepayment to SCH for property 20,000 2,410 --
Rental deposit to SCH 25,600 3,084 --
Bank deposits 19,319 2,328 20,800
Goodwill, net 36,788 4,432 37,766
Other long-term assets 7,008 844 16,505
------- ------- -------
Total assets 458,563 55,248 509,758
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings 150,681 18,154 167,934
Accounts payable 45,070 5,430 31,124
Accrued expenses and other liabilities 41,137 4,956 17,478
Taxes payable 8,795 1,060 7,712
Long-term bank loans, current portion -- -- 27,726
Finance lease obligations, current 12,469 1,502 10,817
portion
------- ------- -------
Total current liabilities 258,152 31,102 262,791
Long-term bank loans -- -- 43,938
Finance lease obligations 7,089 854 18,904
Loan from MTE 33,280 4,010 33,280
Other long-term payables 2,764 333 9,755
------- ------- -------
Total liabilities 301,285 36,299 368,668
------- ------- -------
Minority interests 11,980 1,443 11,864
------- ------- -------
Shareholders' equity:
Common stock, par value US$0.001 per
share;
authorized -100,000,000 shares;
outstanding -5,821,639 shares
as of December 31, 1996 and
-5,602,639 shares as of
December 31, 1995 48 6 47
Additional paid-in capital 117,247 14,126 112,145
Dedicated capital 11,785 1,420 10,213
Retained earnings 16,218 1,954 6,821
------- ------- -------
Total shareholders' equity 145,298 17,506 129,226
------- ------- -------
Total liabilities and
shareholders' equity 458,563 55,248 509,758
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Translation of amounts from Renminbi (RMB) into United States dollars (US$) for
the convenience of the readers 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 April 11, 1997 of US$1.00=RMB8.3. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate on April 11, 1997 or at any
other certain rate.
49
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
1996 1995
-------------------- ---------
RMB US$ RMB
<S> <C> <C> <C>
Cash flows from operating activities:
- -------------------------------------
Net income 10,969 1,321 6,997
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation 8,683 1,046 10,041
Amortization 9,332 1,124 978
Minority interests 204 25 224
Allowance for doubtful accounts 3,272 394 --
Rental expense offset against due
from SCH 2,400 289 --
Consultancy fees settled by issuance
of common stock 591 71 6,405
Changes in operating assets and
liabilities:
- Decrease in accounts receivable 15,298 1,843 2,736
- (Increase) decrease in inventories (24,934) (3,004) 6,120
- Increase in due from SCH (46,757) (5,633) (43,501)
- Increase in due from Easy Keen (35,158) (4,236) --
- Increase in prepayments and other
current assets (3,835) (462) (15,250)
- Decrease (increase) in other
long-term assets 1,143 138 (5,385)
- Increase in accounts payable 13,946 1,680 4,516
- Increase (decrease) in accrued
expenses and other liabilities 23,659 2,850 (18,166)
- Increase in taxes payable 1,083 130 1,586
- (Decrease) increase in other
long-term payables (6,312) (760) 1,055
------- ------- -------
Net cash used in operating activities (26,416) (3,184) (41,644)
------- ------- -------
Cash flows from investing activities:
- -------------------------------------
Additions to property, plant and
equipment (6,018) (724) (26,403)
Prepayment to SCH for property (20,000) (2,410) --
Decrease in bank deposits 1,481 178 --
------- ------- -------
Net cash used in investing activities (24,537) (2,956) (26,403)
------- ------- -------
Cash flows from financing activities:
- -------------------------------------
Net proceeds from short-term borrowings 55,670 6,707 76,911
Payments of finance lease obligations (10,163) (1,224) (9,151)
Proceeds from issuance of common
stock/exercise of warrants 3,833 462 39
Distribution to minority interests (88) (11) --
------- ------- -------
Net cash provided by financing
activities 49,252 5,934 67,799
------- ------- -------
Net decrease in cash and cash
equivalents (1,701) (206) (248)
Effect of currency conversion -- -- (1,520)
Cash and cash equivalents, beginning
of year 6,507 785 8,275
------- ------- -------
Cash and cash equivalents, end of year 4,806 579 6,507
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- ---------------------
Translation of amounts from Renminbi (RMB) into United States dollars (US$) for
the convenience of the readers 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 April 11, 1997 of US$1.00=RMB8.3. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate on April 11, 1997 or at any
other certain rate.
50
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(Amounts in thousands, except for number of shares)
<TABLE>
<CAPTION>
Common stock
--------------------- Additional
paid-in Dedicated Retained
Shares Amount capital capital earnings
----------- ---------- ----------- ---------- ----------
RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
Balance as of January 1, 1995 4,760,000 40 105,708 5,442 4,595
Net income for the year ended December
31, 1995 -- -- -- -- 6,997
Transfer to dedicated capital -- -- -- 4,771 (4,771)
Common stock issued
- for consultancy services
rendered 770,000 6 6,399 -- --
- others 72,639 1 38 -- --
--------- --------- --------- --------- ---------
Balance as of December 31, 1995 5,602,639 47 112,145 10,213 6,821
Net income for the year ended December
31, 1996 -- -- -- -- 10,969
Transfer to dedicated capital -- -- -- 1,572 (1,572)
Common stock issued and/or warrants
exercised
- for cash 171,000 1 3,832 -- --
- for consultancy services rendered 30,000 -- 591 -- --
- for settlement of indebtedness 18,000 -- 679 -- --
--------- --------- --------- --------- ---------
Balance as of December 31, 1996 5,821,639 48 117,247 11,785 16,218
========= ========= ========= ========= =========
</TABLE>
The accompanying notes form an integral part of these consolidated
financial statement.
51
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Renminbi unless otherwise stated)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Fremont Corporation (the "Company") was incorporated in the State of Utah,
United States of America (the "USA" or "U.S.") on April 22, 1955 under the
name of Fremont Uranium Corporation. As of July 1, 1993, the Company
effected a change of domicile merger and became incorporated in the State
of Delaware, USA. In this connection, the Company changed its name to
Fremont Corporation.
Pursuant to a Share Exchange Agreement dated March 23, 1995 and subsequent
amended agreement dated March 30, 1995, the Company acquired a 100%
interest in Winfill Holdings International Limited ("Winfill") on April 28,
1995 from Million Treasure Enterprises Limited ("MTE"). As consideration,
the Company issued to MTE 4,760,000 shares of common stock, and a warrant
which allows MTE and/or its designee to receive up to 2,000,000 shares of
Class B common stock by exchanging an equivalent number of shares of common
stock which will be designated as Class A common stock. The terms of Class
B common stock are identical to those of the common stock except that the
holder of common stock is entitled to one vote per share while that of
Class B common stock 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. Up to the date of this
report, the Company has not amended its Certificate of Incorporation to
authorize the Class B common stock. Subsequent to the aforesaid share
exchange, MTE became the parent company of the Company.
The Company and its subsidiaries (the "Group") are principally engaged in
the design, manufacture and sale of steel tubes, bicycles, spare parts and
exercise equipment, through its subsidiaries incorporated in the People's
Republic of China ("PRC").
Details of the Company's subsidiaries as of December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
Date and place of Registered capital Percentage of
Name of subsidiaries incorporation interest held Principal activities
- ----------------------------- ------------------------- ------------------ ----------------------- ----------------------
<S> <C> <C> <C> <C>
Winfill June 10, 1994, British US$50,000 100% Investment holding
Virgin Islands (direct)
South China Bicycles Winfill July 7, 1994, US$7,280,000 98% Manufacture and sale of
Limited ("SCBW") the PRC (indirect) steel tubes, bicycles
and spare parts
South China Bicycles Co., March 29, 1989, US$2,000,000 68% Assembly and sale of
Ltd. ("SCB") the PRC (indirect) bicycles
Fogance Industries Limited November 2, 1990, Hong HK$10,000 68% Overseas purchases and
Kong (indirect) sales agent of the Group
</TABLE>
Substantially all of the Group's operations are conducted in the PRC and
accordingly the Group is subject to special considerations and significant
risks not typically associated with investments in equity securities of
North American and Western European companies. These include risks
associated with, among others, the political, economic and legal
environments, foreign currency exchange and bicycle manufacturing industry
in the PRC. These are described further in the following paragraphs:
52
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
(a) Political Environment
The operating subsidiaries' results may be adversely affected by
changes in the political and social conditions in the PRC and by
changes in governmental policies with respect to laws and regulations,
inflationary measures, currency conversion and remittance abroad,
rates and methods of taxation, among other things. While the PRC
government is expected to continue its economic reform policies, many
of the reforms are new or experimental and may be refined or changed.
It is also possible that a change in the PRC leadership could lead to
changes in economic policy.
(b) Economic Environment
The economy of the PRC differs significantly from that of the USA in
many respects, including its structure, levels of development and
capital reinvestment, growth rate, government involvement, resource
allocation, self-sufficiency, rate of inflation and balance of
payments position. The adoption of economic reform policies since 1978
has resulted in a gradual reduction in the role of state economic
plans in the allocation of resources, pricing and management of such
assets, and increased emphasis on the utilization of market forces,
and rapid growth in the PRC economy. However, such growth has been
uneven among various regions of the country and among various sectors
of the economy.
In recent years, the PRC economy has experienced periods of rapid
economic expansion and high rates of inflation, which have led to the
adoption by the central government from time to time of various
corrective measures designed to regulate growth and contain inflation.
High inflation may cause the government to take other action which
could inhibit economic activity in the PRC and may thereby delay
planned expansion. Such action could adversely affect the Group's
results of operations and expansion plans.
(c) Legal Environment
The PRC legal system is based on written statutes under which prior
court decisions may be cited as authority but do not have binding
precedential effect. The PRC legal system is relatively new, and the
government is still in the process of developing a comprehensive
system of laws, a process that has been ongoing since 1979.
Considerable progress has been made in the promulgation of laws and
regulations dealing with economic matters such as corporate
organization and governance, foreign investment, commerce, taxation
and trade. Such legislation has significantly enhanced the protection
afforded to foreign investors. However, experience with respect to the
implementation, interpretation and enforcement of such laws is
limited.
53
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
(d) Foreign Currency Exchange
Chinese Renminbi ("RMB") is not freely convertible into foreign
currencies. All foreign exchange transactions involving RMB must take
place either through the Bank of China or other institutions
authorized to buy and sell foreign exchange, or at a Foreign Exchange
Adjustment Center ("Swap Center"). The exchange rate used for
transactions through the Bank of China and other authorized
institutions ("official exchange rate") was set by the PRC Government
from time to time whereas the exchange rate available at a Swap Center
was determined largely by supply and demand. Effective from January 1,
1994, the PRC Government unified the official and Swap Center exchange
rates of RMB against foreign currencies and there is now one unified
floating exchange rate administered by the People's Bank of China.
Prior to April 1, 1996, approval for exchange at a Swap Center was
granted for valid reasons such as the purchases of imported equipment
and remittance of earnings. Subsequent to April 1, 1996, enterprises
no longer need to obtain pre-approval from the PRC authorities and can
deal directly with an approved bank for foreign exchange on recurring
items. Such payments are subject to the availability of foreign
currencies which is dependent on the foreign currency denominated
earnings of the entity and must be arranged through a Swap Center or
an approved bank.
SCBW and SCB, the principal subsidiaries of the Company in the PRC,
expect that a major portion of their revenues will be denominated in
Chinese Renminbi. A portion of such revenues will need to be converted
into other currencies to meet foreign currency obligations such as
payment of any dividends declared.
No assurance can be given that SCBW and SCB will continue to be able
to acquire sufficient amounts of foreign currencies in the PRC foreign
exchange markets in the future for payment of dividends.
(e) Anti-Dumping Investigation by the U.S. Government
The Group manufactures bicycles through its subsidiaries, SCBW and
SCB, and exports to the USA through various distributors and trade
intermediaries. Pursuant to a petition filed by three U.S. bicycle
manufacturers in early 1995, the U.S. International Trade Commission
(the "ITC") and the U.S. Department of Commerce (the "Department")
launched an anti-dumping investigation against companies which
manufacture bicycles in the PRC for import into the USA. Anti-dumping
duties were proposed to be imposed on bicycles imported from the PRC.
On June 4, 1996, the ITC made a negative final determination
concluding that the "industry in the USA is neither materially injured
nor threatened with material injury by reason of imports of bicycles
from the PRC that the Department has determined are sold in the USA at
less than fair value". Since then, no anti-dumping duties have been
imposed on bicycles imported to the USA from the PRC.
In March 1997, all litigation regarding this matter was dismissed.
54
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BASIS OF PRESENTATION
The acquisition of Winfill by the Company on April 28, 1995 (see Note 1)
was treated as a recapitalization of Winfill with Winfill as the acquirer
(reverse acquisition).
The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles in the USA ("US
GAAP") which differ from those adopted in preparing the statutory accounts
of certain of the Company's subsidiaries. SCBW and SCB prepare their
statutory accounts in accordance with generally accepted accounting
principles in the PRC ("PRC GAAP") and the relevant financial regulations
applicable to enterprises with foreign investment as established by the
Ministry of Finance of the PRC. Fogance Industries Limited prepares its
statutory accounts in accordance with the Statements of Standard Accounting
Practice issued by the Hong Kong Society of Accountants. As an investment
holding company, no statutory accounts are required to be prepared by
Winfill.
The principal adjustments made to conform those statutory accounts to US
GAAP included the following:
- Additional provision for doubtful accounts receivable; and
- Accelerated amortization of pre-operating costs.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All material intra-group balances and
transactions have been eliminated on consolidation.
(b) Goodwill
Goodwill represents the excess of cost over fair value of the net
assets acquired, resulting from Winfill's acquisition of the
operations now incorporated into SCBW. Goodwill is amortized on a
straight-line basis over 40 years.
(c) Sales
Sales represent the invoiced value of goods, net of value added tax on
sales, supplied to customers. Sales are recognized upon delivery of
goods and passage of title to customers.
(d) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and demand deposits
with banks.
(e) Inventories
Inventories are stated at the lower of cost, on a first-in first-out
basis, or market value. Costs of work-in-progress and finished goods
are composed of direct materials, direct labor and an attributable
portion of production overheads.
55
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f) Pre-operating Costs
Included in other long-term assets as of December 31, 1995 are pre-
operating costs amounting to RMB8,354,000 which represented
organization and certain start-up costs (excluding capital
expenditures) incurred by an operating factory of the Group during its
pre-operating period. Such expenses were fully amortized in 1996 when
the operating factory commenced commercial production.
(g) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
provided using the straight-line method over the assets' estimated
useful lives after taking into account the estimated residual value,
if any. The estimated useful lives are as follows:
Land use rights 50 years
Buildings 20-35 years
Machinery and equipment 5-15 years
Motor vehicles 5 years
Furniture, fixtures and office equipment 5-8 years
Land use rights represent the rights to use the land on which the
premises of SCB and SCBW are located for a period of 50 years.
Construction-in-progress represents factories and office buildings
under construction and machinery and equipment pending installation.
This includes the costs of construction, the costs of machinery and
equipment, and interest charges arising from borrowings used to
finance these assets during the period of construction or
installation.
(h) Income Taxes
The Group accounts for income tax under the provisions of Statement of
Financial Accounting Standards No. 109, which requires recognition of
deferred tax assets and liabilities for the expected future tax
consequence of events that have been included in the financial
statements or tax returns. Deferred income taxes are provided using
the liability method. Under the liability method, deferred income
taxes are recognized for all significant temporary differences between
the tax and financial statements bases of assets and liabilities.
Income taxes are not accrued for unremitted earnings of international
operations that have been, or are intended to be, reinvested
indefinitely.
(i) Foreign Currency Translation
The Company uses RMB as its functional currency. The Company's capital
stock is denominated in United States dollars. All foreign currency
transactions are translated into Renminbi using the applicable rates
of exchange quoted by the applicable Swap Centre at the dates of the
transactions. Monetary assets and liabilities denominated in foreign
currencies are translated into Renminbi using the applicable Swap
Center rates prevailing at the balance sheet dates. The resulting
exchange gains or losses are recorded in the consolidated statements
of income for the years in which they occur.
56
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(j) Leases
Leases that substantially transfer to the Group all the rewards and
risks of ownership of assets, other than legal title, are accounted
for as finance leases. Fixed assets held under finance leases are
initially recorded at the present value of the minimum lease payments
at the inception of the leases, with equivalent liabilities
categorized as appropriate under current or non-current liabilities.
Finance charges, which represent the difference between the minimum
lease payments at the inception of the leases and the fair value of
the assets acquired, are allocated to accounting periods over the
period of the relevant leases so as to produce a constant periodic
rate of charge on the outstanding balances.
Leases in which substantially all the rewards and risks of ownership
of assets remain with the lessors are accounted for as operating
leases. Operating lease rentals are charged to the consolidated
statements of income on a straight-line basis over the lease term.
(k) Use of Estimates
The preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect
certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable comprised:
<TABLE>
<CAPTION>
1996 1995
------------------- --------
RMB'000 US$'000 RMB'000
<S> <C> <C> <C>
Trade receivables 59,719 7,195 88,137
Less: Allowance for doubtful accounts (7,907) (953) (4,635)
------ ----- ------
51,812 6,242 83,502
====== ===== ======
</TABLE>
See also Note 16(d) for a transfer of accounts receivable from SCBW to
South China Bicycles Company (Holdings) Limited ("SCH"), a related company,
in 1996.
5. INVENTORIES
Inventories comprised:
<TABLE>
<CAPTION>
1996 1995
------------------ --------
RMB'000 US$'000 RMB'000
<S> <C> <C> <C>
Raw materials 31,736 3,824 18,743
Work-in-progress 5,232 630 3,075
Finished goods 23,435 2,823 13,651
------ ----- ------
60,403 7,277 35,469
====== ===== ======
</TABLE>
57
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment comprised:
<TABLE>
<CAPTION>
1996 1995
-------------------- --------
RMB'000 US$'000 RMB'000
<S> <C> <C> <C>
Fixed assets:
Land use rights -- -- 47,960
Buildings 23,251 2,801 22,787
Machinery and equipment 41,139 4,956 39,629
Machinery and equipment financed under
finance leases 39,064 4,707 39,064
Motor vehicles 3,758 453 2,786
Furniture, fixtures and office 8,133 980 8,072
equipment
Construction-in-progress:
Buildings -- -- 87,444
Machinery and equipment 15,313 1,845 7,827
Motor vehicles -- -- 538
-------- -------- --------
130,658 15,742 256,107
Less: Accumulated depreciation (21,398) (2,578) (12,715)
-------- -------- --------
109,260 13,164 243,392
======== ======== ========
</TABLE>
See also Note 16(c) for a sale-leaseback transaction between SCBW and SCH that
occurred in 1996.
7. GOODWILL, NET
Goodwill comprised:
<TABLE>
<CAPTION>
1996 1995
------------------ --------
RMB'000 US$'000 RMB'000
<S> <C> <C> <C>
Cost 39,109 4,712 39,109
Less: Accumulated amortization (2,321) (280) (1,343)
------- ----- ------
36,788 4,432 37,766
======= ===== ======
</TABLE>
In the opinion of management, there has been no impairment of goodwill.
8. SHORT-TERM BORROWINGS
Short-term borrowings are dominated in Renminbi or United States dollars,
are unsecured and bear interest at commercial lending rates in the PRC which
currently range from 7.63% to 21.6% per annum. Such loans are due for
repayment within one year and are renewable with the lenders' consents.
In connection with the sale-leaseback transaction and the transfer of
accounts receivable as stated in Note 16(c) and Note 16(d) respectively, SCH
assumed short-term borrowings of approximately RMB59,803,000 of the Group
effective January 1, 1996.
58
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SHORT-TERM BORROWINGS (CONTINUED)
Supplemental information with respect to short-term borrowings for the
years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------------------------------- ---------------
<S> <C> <C> <C>
Maximum amount outstanding during the
year RMB190,798,000 US$22,988,000 RMB167,934,000
Average amount outstanding during the
year RMB147,173,000 US$17,732,000 RMB143,665,000
Weighted average interest rate at the
end of year 12.5% 13%
Weighted average interest rate during
the year 12.75% 13%
</TABLE>
9. LONG-TERM BANK LOANS
Pursuant to the sale-leaseback transaction as described in Note 16(c), the
Group's long-term bank loans were all assumed by SCH effective January 1,
1996.
10. LEASE OF MACHINERY
The Group has three finance lease agreements to lease certain machinery. The
finance leases have implicit annual interest rates of 2% above the Hong Kong
Interbank Offer Rate, and 1.5% and 3% above the London Interbank Offer Rate,
respectively. Scheduled future minimum lease payments for these finance
leases, which are denominated in United States dollars, net of future
finance charges, were as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------- --------
RMB'000 US$'000 RMB'000
<S> <C> <C> <C>
Year ending December 31,
1996 - - 10,817
1997 12,469 1,502 11,815
1998 4,726 569 4,726
1999 2,363 285 2,363
------- ----- ------
Present value of net minimum lease
payments 19,558 2,356 29,721
Less: Current portion (12,469) (1,502) (10,817)
--------- ------- -------
Long-term portion 7,089 854 18,904
======= ======= =======
</TABLE>
11. TAXES PAYABLE
Taxes payable comprised:
<TABLE>
<CAPTION>
1996 1995
----------------------- --------
RMB'000 US$'000 RMB'000
<S> <C> <C> <C>
Sales tax 190 23 120
Value added tax 7,482 902 6,173
Other taxes 1,123 135 1,419
----- ----- -----
8,795 1,060 7,712
===== ===== =====
</TABLE>
59
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. TAXES PAYABLE (CONTINUED)
Value Added Tax
In the PRC, the Group is subject to value added tax ("VAT") payable at 17%
on purchases of raw materials or semi-finished goods, except for certain
limited types of goods, which can be offset against the VAT payable on
sales. Furthermore, exports of foreign investment enterprises are
generally exempted from VAT on raw materials imported for production of
exports.
For the years ended December 31, 1996 and 1995, SCBW was granted refunds on
VAT of RMB4,000,000 and RMB6,918,000 respectively by the ZhaoQing Finance
Bureau. The VAT refunds were offset against cost of sales in the
consolidated statements of income. Management of SCBW is uncertain as to
whether further VAT refunds will be granted in the future.
Income Taxes
The Company and its subsidiaries are subject to income taxes on an entity
basis on income arising in or derived from the tax jurisdiction in which
they are domiciled and operate. The British Virgin Islands subsidiary is
not liable for income taxes. The Hong Kong subsidiary is subject to Hong
Kong profits tax at the rate of 16.5%. The joint venture enterprises
established in the PRC are subject to income taxes at the rate of 33% (30%
state unified income tax and 3% local income tax). However, SCBW is
exempted from local income tax and state unified income tax for two years
starting from the first year of profitable operation and a 50% reduction of
income tax in the next three years whereas SCB is exempted from local
income tax and state unified income tax for three years starting from the
first year of profitable operation and a 50% reduction in the next four
years.
SCBW recognized its first year of profitable operations in 1994 and SCB
recognized its first year of profitable operations in 1993. Both SCBW and
SCB were subject to income tax at 16.5% for the year ended December 31,
1996. SCBW and SCB, however, negotiated with the ZhaoQing Finance Bureau
and reached an agreement that the total income tax payable for the year
ended December 31, 1996 was approximately RMB1,364,000. Management of SCBW
and SCB expect to negotiate with the ZhaoQing Finance Bureau with respect
to the income tax payable on a yearly basis, and similar adjustments may be
required to the tax provision in future years.
The reconciliation of the effective income tax rate based on income before
provision for income taxes and minority interests stated in the
consolidated statements of income to the weighted average statutory income
tax rate in the PRC, Hong Kong and the U.S., is as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Weighted average statutory tax rate 33.0% 33.0%
Effect of tax holiday (16.5%) (33.0%)
Effect of rate negotiated with tax (5.6%) -
authorities
------ -----
Effective income tax rate 10.9% -
===== =====
</TABLE>
Since the actual tax liabilities of SCBW and SCB, the principal operating
entities of the Group, are subject to negotiation with the tax authorities,
temporary differences between book and taxable income do not exist, and no
deferred taxes are considered necessary.
60
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. TAXES PAYABLE (CONTINUED)
Use of the Company's net operating loss carryforward for U.S. federal
income tax purposes may be severely limited under the Internal Revenue Code
due to the fact that a cumulative change in ownership of more than 50%
occurred in 1995. The Company does not provide for U.S. federal income
taxes on the undistributed earnings of its international subsidiaries
because earnings have been reinvested and, in the opinion of management,
will be reinvested indefinitely.
12. COMMON STOCK
During the year ended December 31, 1996, the following changes in the
Company's capital stock took place:
(a) In March 1996, the Company issued 166,000 units of common stock and
warrants to a third party at a price of US$3.00 per unit, totalling
US$498,000, resulting in net proceeds of US$448,200 to the Company.
Each unit of such consists of one share of common stock of the Company
and one warrant to purchase one share of common stock of the Company,
exerciseable at a price of US$3.00 per share on or before February 28,
1998.
In August 1996, 5,000 warrants were exercised by the holder to purchase
5,000 shares of common stock of the Company at a price of US$3.00 per
share. The Company also granted 7,500 additional warrants at no
consideration to the holder pursuant to an agreement dated August 7,
1996. Such warrants are exerciseable at a price of US$3.00 per share on
or before February 28, 1998.
(b) On December 8, 1996, 30,000 shares of common stock were issued to a
consultancy firm in conjunction with the financial consultancy services
rendered by the firm.
The value of these shares of common stock was accounted for as selling,
general and administrative expenses for the year ended December 31,
1996, based on management's estimate of the fair value of the
consideration amounting to US$71,250.
(c) On December 31, 1996, 18,000 shares of common stock were issued to a
third party in settlement of a loan payable and related interest
payable of approximately US$75,000 and US$7,000 respectively.
13. UNUSUAL ITEM
Pursuant to an agreement entered into between SCBW and a third party
supplier on February 26, 1997, the latter reduced its accounts receivable
from SCBW by approximately RMB4,299,000 as a result of downward price
adjustments on certain raw materials purchased by SCBW from this supplier
in 1994 and 1995, and used throughout 1994 to 1996.
Approximately RMB2,902,000 of the price reduction related to raw materials
used in 1994 and 1995 and was recorded as an unusual item in the
consolidated statement of income for the year ended December 31, 1996.
61
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. EARNINGS PER SHARE
Earnings per share for the year ended December 31, 1995 has been calculated
assuming the common stock issued to MTE in April 1995 as consideration for
the acquisition of Winfill was outstanding during the year.
No fully diluted earnings per share has been presented as the effect of
dilution is not significant.
15. DISTRIBUTION OF PROFIT
At present, substantially all of the Group's profit is contributed by SCBW
and SCB. Income of SCBW and SCB as determined under PRC GAAP is
distributable to investors after transfers to contributory dedicated
capital required under PRC government regulations and the articles of
association of the companies, and discretionary dedicated capital as
determined by the companies' boards of directors. Contributory dedicated
capital is a form of legal reserve fund. Discretionary dedicated capital
includes an enterprise expansion fund and a staff welfare and incentive
bonus fund. Contributory and discretionary dedicated capital are not
distributable in the form of dividends. In the consolidated statements of
income prepared under US GAAP, amounts designated for payments of staff
welfare and incentive bonus to employees have been charged to income and
the related provisions are reflected as liabilities in the consolidated
balance sheet.
The income of SCBW and SCB on which dividends are based is determined
according to the income reported in the statutory accounts under PRC GAAP.
This differs from the amounts reported under US GAAP (See Note 2).
16. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
(a) Summary of Related Party Transactions
<TABLE>
<CAPTION>
1996 1995
--------------------- --------
RMB'000 US$'000 RMB'000
<S> <C> <C> <C>
Sales to Easy Keen 96,089 11,577 -
Sales to SCH and its related companies 34,727 4,184 50,666
Purchases from Easy Keen 60,822 7,328 -
Purchases from companies related to SCH 3,896 469 620
</TABLE>
Hong Kong Easy Keen Industries Ltd. ("Easy Keen") and MTE have a common
shareholder. During the year ended December 31, 1996, SCBW purchased
bicycle components amounting to US$7,328,000 from Easy Keen, and sold
bicycles to Easy Keen at approximately US$11,557,000. As agreed between
SCBW and Easy Keen, the latter will settle the net receivable balance of
approximately US$4,229,000 (RMB35,158,000) by supplying raw materials of
the same value in 1997.
SCH was the former owner of the operations now incorporated into SCBW and
currently owns a 2% equity interest in SCBW.
(b) Lease of Factory Buildings
SCBW has rented factory buildings from SCH effective July 1, 1994 and no
rent is chargeable. Management of the Company expects that SCBW will
move to the new factory buildings leased back from SCH (see (c) below) in
1997. Management has determined that the imputed rental expense is
insignificant.
62
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (CONTINUED)
(c) Sale-Leaseback of Buildings, Production Facility and Land Use Rights
SCBW and SCH entered into a sale-leaseback agreement dated April 20,
1996 and a subsequently amended agreement dated May 6, 1996. Both
agreements were effective as of January 1, 1996. Pursuant to the
agreements, SCBW sold certain buildings, production facilities and
related land use rights to SCH at the then net book values of
approximately RMB83,507,000 and RMB47,960,000 respectively. SCH settled
such consideration by assuming an equivalent amount of SCBW's
short-term borrowings and long-term bank loans of RMB59,803,000 and
RMB71,664,000 respectively. SCBW agreed to lease the sold assets back
from SCH for a period of 20 years under an operating lease agreement
with the lease rental to be agreed on a yearly basis. SCBW paid a
rental deposit of RMB28,000,000 by reducing the amount due from SCH. In
the opinion of management of SCBW, the transactions were recorded at
fair value.
The agreed rental for the year ended December 31, 1996 was RMB2,400,000
and was settled by reducing the rental deposit.
(d) Transfer of Accounts Receivable
Upon its incorporation, SCBW was granted an option by SCH to transfer
back to the latter accounts receivable purchased from SCH if such
accounts receivable remained uncollected for a period of time. During
the year, SCBW exercised the option by transferring such purchased
accounts receivable amounting to approximately RMB13,120,000 at book
value. In return, SCH assumed an equivalent amount of SCBW's short-term
borrowings. The transfer was deemed to be effective on January 1, 1996
by SCH and SCBW.
In addition, pursuant to an agreement dated March 31, 1997, SCH agreed
to guarantee the recoverability of certain other accounts receivable
purchased by SCBW upon its incorporation. Such accounts receivable
amounted to approximately RMB5,700,000 as of December 31, 1996. Should
these accounts receivable remained uncollected for a period of time,
SCH would settle the amount by certain land and factory buildings
currently used by SCBW as discussed in (b) above.
(e) Purchase of land use right
Pursuant to an agreement dated November 8, 1996, SCBW agreed to buy a
land use right from SCH at a consideration of RMB30,000,000. The land
use right relates to a piece of land where one of SCBW's operating
factories is located, and has a useful life of 40 years. As of December
31, 1996, SCBW had paid a deposit of RMB20,000,000. The remaining
balance of RMB10,000,000 will be settled in 1998.
(f) Selling, General and Administrative Expenses
SCH agreed to bear 40% (approximately RMB2,900,000 and RMB2,000,000 in
1996 and 1995 respectively) of selling, general and administrative
expenses incurred by SCBW, representing its share of management and
selling activities incurred by SCBW on its behalf.
63
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (CONTINUED)
(g) Due from SCH
The amount due from SCH mainly represents balances arising from the
sales of goods to SCH. During the year ended December 31, 1996, SCBW
charged SCH interest on the amount due from SCH throughout the year at
a rate of 8.5% per annum. The interest charged for the year ended
December 31, 1996 amounted to approximately RMB4,300,000 and has been
included in the amount due from SCH as of December 31, 1996. No
interest was charged to SCH for the year ended December 31, 1995.
(h) Loan from MTE
The loan from MTE is denominated in United States dollars, is
unsecured, interest-free and has no fixed repayment terms.
17. RETIREMENT PLAN
As stipulated by the regulations in the PRC, SCBW and SCB are required to
maintain defined contribution retirement plans. All of their employees are
entitled to an annual pension equal to their basic salary at retirement.
SCBW and SCB pay to a PRC insurance company 14.6% of the basic salary of
their employees, and the insurance company is responsible for the entire
pension obligations payable to retired employees.
18. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1996 1995
--------------------- --------
RMB'000 US$'000 RMB'000
<S> <C> <C> <C>
Cash paid for:
Interest (net of amount capitalized) 13,360 1,610 5,312
Non-cash investing and financing
activities:
Property, plant and equipment,
short-term borrowings and long-term
bank loans transferred to SCH under
the sale-leaseback arrangement (Note
16(c)) 131,467 15,839 -
Rental deposit, net and 1996 rental
paid for the sale-leaseback
arrangement by offsetting against
amount due from SCH (Note 16(c)) 28,000 3,373
Accounts receivable and short-term
borrowings transferred to SCH (Note
16(d)) 13,120 1,581 -
Common stock issued for settlement of
indebtedness (Note 12 (c)) 679 82
Equipment acquired under capital
lease arrangement - - 16,819
Valuation surplus on assets
contributed by minority shareholders - - 4,502
</TABLE>
64
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. OTHER SUPPLEMENTAL INFORMATION
The following items were included in the consolidated statements of income:
<TABLE>
<CAPTION>
1996 1995
--------------------- -------
RMB'000 US$'000 RMB'000
<S> <C> <C> <C>
Interest expense 13,360 1,610 20,390
Less: interest capitalized - - (15,078)
------ ------- -------
13,360 1,610 5,312
Foreign exchange gain (loss) 506 61 (1,292)
</TABLE>
20. OFFICER'S WARRANT
In May 1995, the Board of Directors agreed to issue to the Chief Financial
Officer of the Company, a warrant for 56,000 shares of common stock,
exerciseable at US$2.50 per share on or before May 31, 2000. The warrant
was fully vested upon issuance. Up to the date of this report, this
warrant has not been exercised.
For the year ended December 31, 1995, had compensation cost for the above
warrant been determined based on the fair value at the date of grant, the
Group's net income and earnings per share would have been reduced by
approximately RMB900,000 and RMB0.17 per share, respectively. There was no
effect on the statement of income for the year ended December 31, 1996 as
the fair value of the warrant was charged to operations in full in 1995.
21. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS AND SUPPLIERS
A substantial portion of the Group's sales are made to a small number of
customers on an open account basis and generally no collateral is required.
Details of individual customers accounting for more than 10% of the Group's
sales for the years ended December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Percentage of net sales
----------------------------------
1996 1995
----------------- --------------
<S> <C> <C>
Easy Keen, Hong Kong 46% -
SCH and its related companies 17% 37%
Li Chen Mechanic Co., Ltd., PRC 15% 28%
</TABLE>
Concentration of accounts receivable as of December 31, 1996 and 1995
is as follows:
<TABLE>
<CAPTION>
Percentage of accounts
receivable
----------------------------
1996 1995
------------ --------------
<S> <C> <C>
Five largest accounts receivable 78% 45%
</TABLE>
The Group performs ongoing credit evaluation of each customer's
financial condition. It maintains reserves for potential credit losses
and such losses, in the aggregate, have not exceeded management's
expectations.
In addition, purchases of raw materials from Easy Keen accounted for
31% of the Group's total purchases for the year ended December 31,
1996.
65
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. SEGMENTAL INFORMATION
The Group is primarily engaged in the manufacture of steel tubes, bicycles,
spare parts and exercise equipment in the PRC and the Company considers its
operations to be in only one business segment. Accordingly, substantially
all of the Group's identifiable assets are located in the PRC. Geographic
sales information is as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- --------
RMB'000 US$'000 RMB'000
<S> <C> <C> <C>
PRC 43,860 5,284 76,498
Export Sales/Re-export Sales
USA 12,442 1,499 44,455
Hong Kong 150,263 18,104 -
Others 2,463 297 16,933
------- ------ -------
Total sales 209,028 25,184 137,886
======= ====== =======
</TABLE>
23. COMMITMENTS
As of December 31, 1996, the Group had no significant commitments
outstanding but not provided for in the consolidated financial statements,
other than the commitment to purchase certain land use rights discussed in
Note 16(e).
24. CONTINGENCIES
The Group had no significant contingent liabilities as of December 31,
1996.
25. PRIOR YEAR FINANCIAL STATEMENTS
Certain figures in the prior year financial statements have been
reclassified to conform to the current year's presentation.
66
<PAGE>
INDEX TO EXHIBITS
Exhibit Sequential
Number Description of Document Page Numbers
------- ----------------------- ------------
10.2 Sale Leaseback Contract
between South China
Bicycle (Holdings)
Company Limited and
South China Bicycles
Winfill Limited. 68-69
10.3 Purchase Agreement for
Land Use Right between
South China Bicycle
(Holdings) Company
Limited and South China
Bicycles Winfill Limited. 70
10.4 Guarantee Letter between
South China Bicycle
(Holdings) Company
Limited and South China
Bicycles Winfill Limited
relating to the guarantee
of certain accounts
receivable. 71
21 Subsidiaries of the Company. 72
27 Financial data schedule
(electronic filing only). --
67
<PAGE>
EXHIBIT 10.2
SALE LEASEBACK CONTRACT
- -----------------------
ZHAOQING SOUTH CHINA BICYCLES COMPANY (HOLDINGS) LIMITED (HEREINAFTER CALLED
SCH) AND ZHAOQING SOUTH CHINA BICYCLE WINFILL LTD (HEREINAFTER CALLED SCBW) HAVE
AGREED THE FOLLOWING TERMS AND CONDITIONS FOR SALE LEASEBACK OF LAND USE RIGHTS
AND BUILDINGS.
1. SCH AGREES TO BUY AND SCBW AGREE TO SELL THE LAND USE RIGHTS OF 144,665 SQ.
METERS LOCATED IN ZHAOQING SANRONG INDUSTRIAL DEVELOPING ZONE IN A PRICE OF
RMB 47,960,000.
2. SCH AGREES TO BUY AND SCBW AGREE TO SELL BUILDINGS FROM SCBW LOCATED IN
ZHAOQING SANRONG INDUSTRIAL DEVELOPING ZONE IN THE PRICE OF RMB 83,507,000.
DETAILS LIST OF BUILDINGS IS IN ATTACHMENT 1.
3. AS TERMS OF PAYMENT, SCH AGREE TO TAKE OVER BANK LOAN DEBTS OF SCBW IN AN
AMOUNT OF RMB 13,146,700. DETAILS LIST OF BANK LOANS IS IN ATTACHMENT 2.
4. SCH AGREES TO LEASE THE LAND USE RIGHTS AS WELL AS BUILDINGS TO SCBW FOR 20
YEARS FROM JANUARY 1, 1996 TO DECEMBER 31, 2015. ATTACHMENT 3 IS THE TERMS
OF RENTAL.
5. SCBW AGREES TO PREPAY 5 YEARS RENTAL OF RMB 28,000,000 AS FOR THE
UTILIZATION RATE OF 70% (FROM JANUARY 1, 1996 TO DECEMBER 31, 2000). DURING
THESE 5 YEARS, IF ACTUAL UTILIZATION RATE IS LESS THAN 70%, RENTAL CAN BE
DEFERRED TO NEXT YEAR. IF ACTUAL UTILIZATION RATE EXCESS 70% CASH PAYMENT IS
NEEDED.
6. THIS CONTRACT SHALL BE EFFECTIVE FROM JANUARY 1, 1996. ALL THE DOCUMENTATION
SHALL BE FINISHED WITHIN 7 DAYS SOON AFTER THE CONTRACT IS SIGNED BY TWO
PARTIES.
7. THE INTERPRETATION OF THIS AGREEMENT IS SUBJECT TO THE LAWS OF ECONOMIC
CONTRACT OF PEOPLE'S REPUBLIC OF CHINA.
PARTY A: ZHAOQING SOUTH CHINA BICYCLES COMPANY (HOLDING) LIMITED
DATE: APRIL 20, 1996
PARTY B: ZHAOQING SOUTH CHINA BICYCLE WINFILL LIMITED
DATE: APRIL 20, 1996
ATTACHMENT 3:
A. SCH AGREES THAT THE RENTAL FROM SCBW CAN BE CALCULATED UPON ACTUAL
UTILIZATION RATE. THE ACTUAL UTILIZATION RATE MUST MEET THE MINIMUM UTILIZATION
RATE.
68
<PAGE>
B. SCBW AGREE THAT SCH TO LEASE THE UNUSED BUILDING AND LANDS TO THIRD PARTY OR
SELF USAGE IN THE EVENT OF NO BAD INFLUENCE OF SCBW PRODUCTION. SCH GUARANTEE
THAT SCBW CAN HAVE 70% UTILIZATION RATE FROM JAN. 1, 1999.
<TABLE>
<CAPTION>
C. RENTAL CALCULATION: IN RMB
YEAR TOTAL RENTAL/YEAR MINIMUM U. RATE MINIMUM RENTAL/YEAR
<S> <C> <C> <C>
1996 6,000,000 30% 1,800,000
1997 7,000,000 40% 2,800,000
1998 8,000,000 50% 4,000,000
1999 9,000,000 60% 5,400,000
2000 10,000,000 70% 7,000,000
2001-2015 NEGOTIATE IN 2000* 70% RECALCULATION IN 2000
</TABLE>
* RENTAL FROM 2001 TO 2015 WILL BE NEGOTIATE IN 2000 IN THE CONDITION OF
ANNUAL INCREASE RATE LESS THAN 10%.
REMARK:
IN 1996, SCBW PAYS RENTAL ON MINIMUM BASIS. IT MEANS THAT RENT EXPENSE FOR THREE
MONTH ENDED MARCH 31, 1996 WAS 600,000.
RENTAL EXPENSE IN 1996 ON ACCOUNTING BASIS:
TOTAL RENTAL: 8,000,000
UTILIZATION RATE: 30%
ACTURL RENTAL PER YEAR: 2,400,000
ACTURL RENTAL PER QUARTER 600,000
69
<PAGE>
EXHIBIT 10.3
PURCHASING AGREEMENT FOR LAND USE RIGHT
ZHAOQING SOUTH CHINA BICYCLES COMPANY (HOLDINGS) LIMITED (HEREINAFTER
CALLED SCH) AND ZHAOQING SOUTH CHINA BICYCLE WINFILL LTD (HEREINAFTER CALLED
SCBW) HAVE AGREED THE FOLLOWING TERMS AND CONDITIONS FOR PURCHASE OF LAND USE
RIGHTS.
1. SCBW AGREES TO BUY AND SCH AGREE TO SELL THE LAND USE RIGHTS OF 19,021 SQ.
METERS LOCATED IN ZHAOQING BICYCLE PARTS FACTORY WHICH IS BELONG TO SCH IN
A PRICE OF RMB 30,000,000.
2. SCBW HAS A USEFUL LIFE OF 40 YEARS UPON THIS PIECE OF LAND.
3. AS TERMS OF PAYMENT, SCBW AGREE TO PAY RMB 20,000,000 BEFORE DECEMBER 31,
1996 AND THE REMAINING RMB 10,000,000 WOULD BE SETTLE AFTER SCBW MOVING
ITS OPERATION FROM THIS PIECE OF LAND TO ZHAOQIN SANRONG INDUSTRIAL ZONE.
70
<PAGE>
EXHIBIT 10.4
GUARANTEE LETTER
The Guangdong Zhaoqing South China Winfill Limited (Hereafter called Winfill)
aquisist several subsidiary of Zhaoqing South China Bicycle (Holdings) Co.,
Limited (Hereafter called SCH) including the Steel Tube Factory, The Parts
Factory and at the same time purchased the respective account receivable of SCH.
The total balance of these receivable is RMB 5,206,882 (see attached) which have
not been received by Winfill yet by Dec. 31, 1996. SCH herewith agrees to
pay the equivalent amount to Winfill if Winfill cannot receive the respective
receivable by June 31th 1997.
SCH agrees to guarantee the above with the land valued as RMB 27,000,000 located
in 59th, Jianbing Road, Zhaoqing city (the Steel Tube Factory) which is now
using by Winfill without reimbursement.
attachement:
Shenzhen China Bicycle (Holdings) Co., Ltd. 3,000,000.00
Chitech Co. Limited 522,805.28
Randor Co., Limited 2,206,882.41
Total: 5,729,687.60
71
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
State or Other
Jurisdiction of
Percentage Incorporation or
Name of Subsidiary Owned Organization
- ----------------------- -------------- -----------------
<S> <C> <C>
Winfill Holdings 100% British Virgin
International Islands
Limited
South China Bicycles 98% Sino-foreign
Winfill Limited Joint Venture
Zhaoqing Seven Star 100% People's Republic
Body Building of China
Apparatus Co. Ltd.
Zhaoqing Seven Star 100% People's Republic
Special Equipment of China
Factory
Zhaoqing Bicycle 100% People's Republic
Parts Factory of China
Zhaoqing Bicycle 100% People's Republic
Steel Tube Factory of China
Zhaoqing Golden 100% People's Republic
Wheel Company of China
South China Bicycles 69% People's Republic
Co. Ltd. of China
Fogance Industries 99.99% Hong Kong
Limited
</TABLE>
72
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S ANNUAL REPORT ON
FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> CHINESE RENMINBI
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> .12048
<CASH> 4,806
<SECURITIES> 0
<RECEIVABLES> 59,719
<ALLOWANCES> 7,907
<INVENTORY> 60,403
<CURRENT-ASSETS> 240,588
<PP&E> 130,658
<DEPRECIATION> 21,398
<TOTAL-ASSETS> 458,563
<CURRENT-LIABILITIES> 258,152
<BONDS> 7,089
0
0
<COMMON> 48
<OTHER-SE> 145,250
<TOTAL-LIABILITY-AND-EQUITY> 458,563
<SALES> 209,028
<TOTAL-REVENUES> 209,028
<CGS> 164,942
<TOTAL-COSTS> 164,942
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,272
<INTEREST-EXPENSE> 13,360
<INCOME-PRETAX> 12,537
<INCOME-TAX> 1,364
<INCOME-CONTINUING> 10,969
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,969
<EPS-PRIMARY> 1.91
<EPS-DILUTED> 0
</TABLE>
