<PAGE>
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, 1997
-----------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ___________ to ____________
Commission File Number: 0-8128
------
FREMONT CORPORATION
----------------------------------------------
(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
------------------------------------------------------------
(Address of principal executive offices, including zip code)
Issuer's telephone number, including area code: (310) 358-1006
--------------
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 if 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]
1
<PAGE>
The issuer's revenues for the fiscal year ended December 31, 1997 were
$20,779,000.
The aggregate market value of the issuer's common stock held by
non-affiliates as of March 31, 1998, was approximately $1,030,000.
As of March 31, 1998, the issuer had 5,861,639 shares of common stock
issued and outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Documents incorporated by reference: None.
2
<PAGE>
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Annual Report on Form 10-KSB for the fiscal year ended December
31, 1997 contains "forward-looking statements" within the meaning of the Federal
securities laws. These forward-looking statements include, among others,
statements concerning the Company's expectations regarding sales trends, gross
margin trends, the availability of short-term bank borrowings to fund operations
and capital expenditures, the repayment of loans, facility expansion plans, and
other statements of expectations, beliefs, future plans and strategies,
anticipated events or trends, and similar expressions concerning matters that
are not historical facts. The forward-looking statements in this Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1997 are subject to risks
and uncertainties that could cause actual results to differ materially from
those results expressed in or implied by the statements contained herein.
3
<PAGE>
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
ORGANIZATION
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 its 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:
<TABLE>
<CAPTION>
Direct Equity
Name of Entity Interest
- -------------- --------
<S> <C>
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%
</TABLE>
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
4
<PAGE>
WITH SECTION 16(a) OF THE EXCHANGE ACT" and "ITEM 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS").
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. SCBW's manufacturing operations, which represent
substantially all of the Company's consolidated 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.
PRODUCTS
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 that SCBW has in the past made for customers located
outside China include the following brand names by country of destination:
United States Australia Israel
- ------------- --------- ------
Schwinn Repco Seven Stars
Randor ARL
Royce Union
CSA
Diamond Back
Dynacraft
SCBW is one of several bicycle manufacturers in the PRC that can
produce bicycles to international standards. SCBW believes it has a favorable
competitive position with its low production costs 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,
5
<PAGE>
including more than 260 different types of parts for the various models
produced.
SCBW began manufacturing an exercise equipment product line during
1996 and a bicycle with an automatic transmission during 1997. SCBW
manufactures such products on a purchase order basis for original equipment
manufacturers ("OEMs") that market their products in the United States under
various brand names through infomercials, television home shopping networks and
mass market retailers. As a contract manufacturer, SCBW does not own any rights
with respect to these products or the names under which they are marketed (see
"ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
Consolidated Results of Operations").
SALES AND MARKETING
SCBW has historically concentrated its sales and marketing efforts on
exporting bicycles from China. All export sales are made pursuant to customer
specifications under the brand names designated by the applicable customer. The
principal export market is 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 Australia, 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 the off-peak season is from December to March.
The majority of SCBW's bicycles are produced for export
sales. 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 BICYCLES
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PRC 56,000 101,300 70,000 79,000 30,000
Export 278,000 193,400 216,000 355,000 292,000
------- ------- ------- ------- -------
Total 334,000 294,700 286,000 434,000 322,000
======= ======= ======= ======= =======
</TABLE>
6
<PAGE>
GEOGRAPHIC DISTRIBUTION OF SALES REVENUES
<TABLE>
<CAPTION>
1994(1) 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRC (3) 64.5% 55.5% 21.0% 11.1%
----- ----- ----- -----
Export (4):
United States 18.2% 32.2% 5.9% 69.0%
Hong Kong/Others 17.3% 12.3% 73.1%(2) 19.9%
----- ----- ----- -----
Sub-total - Export 35.5% 44.5% 79.0% 88.9%
----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
- -------------------
(1) For the period July 1, 1994 through December 31, 1994.
(2) Consists primarily of exports to Hong Kong.
(3) PRC sales consist of the sales of both bicycles and bicycle parts,
allocated as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Bicycles 46.0% 90.0% 76.0%
Bicycle parts 54.0% 10.0% 24.0%
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
(4) The Company began the production of exercise equipment for export during
1996. Accordingly, export sales consist of the sales of both bicycles and
exercise equipment, allocated as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Bicycles 100.0% 92.2% 77.8%
Exercise equipment 7.8% 22.2%
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
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 and/or purchases
7
<PAGE>
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. 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. During the
year ended December 31, 1997, sales to related companies aggregated RMB
18,950,000 or 11.0% 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. Sze Yet Wen, 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.
During the year ended December 31, 1997, purchases from related companies
aggregated RMB 22,552,000, and consisted of purchases from SCH of RMB 14,795,000
and from Easy Keen of RMB 7,757,000. During the year ended December 31, 1996,
purchases of raw materials from SCH and its related companies and from Easy Keen
aggregated 2% and 37%, respectively, of total raw material purchases, as
compared to 13% and 6%, respectively, of total raw material purchases for the
year ended December 31, 1997.
As of December 31, 1995, amounts due from related companies aggregated
RMB 43,501,000 or 22.7% of total current assets, all of which was due from SCH.
As of December 31, 1996, amounts due from related companies aggregated RMB
97,416,000 or 40.5% of total current assets, of which RMB 62,258,000 was due
from SCH and its related companies and RMB 35,158,000 was due from Easy Keen.
As of December 31, 1997, amounts due from related companies aggregated RMB
25,708,000 or 13.6% of total current assets, of which RMB 8,338,000 was due from
SCH and its related companies and RMB 17,370,000 was due from Easy Keen. SCBW
and Easy Keen have agreed to settle the net amount due SCBW of RMB 17,370,000 at
December 31, 1997 by supplying raw materials of the same value during 1998, or
otherwise by payment in cash.
8
<PAGE>
DISTRIBUTION
In view of the growth of the economy of the PRC, SCBW has been
attempting to expand its marketing network within China. SCBW's domestic sales
network reaches in excess of 12 distinct regions of China. SCBW'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
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 1996
of approximately 7.5 million units, including 3.9 million units from
China, 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 annual per capita incomes of $1,000 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. China's production of bicycles for export 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.
9
<PAGE>
PRODUCTION
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 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 production
complex, comprising 671,690 square feet and costing approximately RMB
150,000,000, was completed at the end of 1995. Currently, there are
approximately 550 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 not be reached until 1998, and
will be subject to the availability of working capital (see "ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - Liquidity and
Capital Resources"). 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 3,500,000. Zhaoqing
enjoys a well-developed infrastructure, including transportation facilities, and
a 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.
10
<PAGE>
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 a 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
11
<PAGE>
20% to 30% of the total cost of raw materials, depending on specific models.
OTHER COMPONENTS AND ACCESSARIES OF BICYCLES. Other components and
accessories 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
accessories 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
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. SCBW's products are made with
the support of advanced technologies and machinery imported from Japan and
Germany.
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
12
<PAGE>
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
(see ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
Consolidated Results of Operations"). 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
SCBW has a department for product research and development that is
responsible for designing and developing new, sophisticated, high quality
products for both the Chinese and international markets.
EMPLOYEES
There are approximately 1,550 employees at the six factories and
the administrative offices of SCBW categorized as follows:
<TABLE>
<S> <C>
Production and Quality Control 1,232
Management and Administration 180
Engineering and Technology 106
Sales and Other 32
-----
1,550
=====
</TABLE>
In 1994, 1995, 1996 and 1997, labor costs (including the cost of
benefits) accounted for approximately 4% to 6% of the direct costs of the
production of bicycles, depending on the particular models. SCBW expects that
any increase in average wage rates of the employees in the near future will not
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.
13
<PAGE>
FORMATION OF SCBW
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
14
<PAGE>
The establishment and activities of SCBW are in accordance with the
"Law of the People's Republic of China on Joint Venture Using Chinese and
Foreign Investment" and other 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 the following matters require approval of the majority of directors
voting at a board meeting: (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
15
<PAGE>
Stars" and certain other trademarks for the production and sale of bicycles in
China for a period of 50 years in exchange for the one-time payment of RMB
900,000.
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 the general economic and
political conditions in China.
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 in general
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 enterprises, and in the slowing of the pace of economic growth and
general market consumption.
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. During 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 is substantially
different from that available in the Swap Centers. Effective January 1, 1994, a
unitary exchange
16
<PAGE>
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
China Foreign Exchange Trading System inter-bank foreign exchange market was
established and it was announced that the Swap Centers would be phased out.
However, the Swap Centers have been 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 and terms of contracts, 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
17
<PAGE>
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.
TAX MATTERS. SCBW's operations in China are subject to the imposition
of an Income Tax and a 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%, allocated 30% to the state unified income tax and 3% to the
local income tax) 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 year of profitable operations and
qualifies for a 50% reduction of income taxes in the following three years. SCB
is exempt from income taxes for three years starting from the first year of
profitable operations and qualified for a 50% reduction of income taxes in the
following four years. SCBW first became profitable in 1994 and SCB first became
profitable in 1993.
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.
18
<PAGE>
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.
TRADE RELATIONS. The United States and China have been
periodically involved in controversies that have threatened 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, 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, 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.
19
<PAGE>
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 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 in 1955 in the State of Utah as Fremont
Uranium Corporation. In 1993, the Company reincorporated in the State of
Delaware and changed its name to Fremont Corporation.
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
20
<PAGE>
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 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
21
<PAGE>
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1997.
22
<PAGE>
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The common stock of Fremont Corporation is traded under the symbol
"BYCL", and has been listed for trading on the NASDAQ SmallCap Market since May
29, 1997. From March 1996 until May 28, 1997, the common stock was traded on
the OTC Bulletin Board.
The following table sets forth the range of bid prices of the
Company's common stock as quoted during the periods indicated. 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. and by The NASDAQ Stock Market, Inc.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal Year Ended December 31, 1996
-----------------------------------
Three months ended March 31, 1996 $5.50 $1.00
Three months ended June 30, 1996 6.25 5.50
Three months ended September 30, 1996 7.25 6.25
Three months ended December 31, 1996 7.50 4.25
Fiscal Year Ended December 31, 1997
-----------------------------------
Three months ended March 31, 1997 6.00 3.88
Three months ended June 30, 1997 5.75 3.44
Three months ended September 30, 1997 5.62 4.00
Three months ended December 31, 1997 5.50 1.12
</TABLE>
(b) Holders
The Company had 2,209 security holders of record with respect to the
Company's common stock at March 31, 1998. Approximately 1,226,000 shares of
common stock are held in street name.
(c) Dividends
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.
23
<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 such
undistributed earnings. Should the Company ever decide to remit earnings from
its PRC subsidiaries to pay a dividend to its 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 accounting 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 boards of directors of the subsidiary
companies 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").
(d) Issuance of Unregistered Securities
24
<PAGE>
During the fiscal year ended December 31, 1996, the Company issued
30,000 shares of restricted common stock to Global Financial Group, Inc. as
payment for financial consulting services rendered. The shares were valued at
RMB 591,000 ($71,250), and were issued pursuant to Section 4(2) of the
Securities Act of 1933, as amended, based on the representations of Global
Financial Group, Inc. All other issuances of common stock during the fiscal
years ended December 31, 1996 and 1997 were pursuant to Regulation S of the
Securities Act of 1933, as amended.
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
25
<PAGE>
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 acquiror (reverse acquisition). Accordingly, the historical financial
statements prior to April 28, 1995 are those of 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, 1997 were RMB 172,469,000, a
decrease of RMB 36,559,000 or 17.5%, as compared to RMB 209,028,000 for the year
ended December 31, 1996. Sales to related companies for the year ended December
31, 1997 were RMB 18,950,000 or 11.0% of sales, as compared to RMB 130,816,000
or 62.6% of sales for the year ended December 31, 1996, a decrease of RMB
111,866,000 or 85.5% (see "ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS"). Sales to unrelated companies for the year ended December 31,
1997 were RMB 153,519,000 or 89.0% of sales, as compared to RMB 78,212,000 or
37.4% of sales for the year ended December 31, 1996, an increase of RMB
75,307,000 or 96.3%. Sales to related companies are for both domestic and
export purposes. During 1997, the Company elected to reduce its dependence on
related party sales in order to expand its export sales of exercise equipment
and accelerate its cash collections. 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 1997, PRC domestic sales accounted for 11.1% of sales, and
export sales accounted for 88.9% of sales. During 1996, PRC domestic sales
accounted for 21.0% of sales, and export sales accounted for 79.0% of sales.
During 1997, approximately 76% of domestic sales consisted of bicycles and 24%
consisted of various bicycle parts, as compared to approximately 90% of domestic
sales consisting of bicycles and 10% consisting of various bicycle parts in
1996. Total 1997 bicycle production was 322,000 units, with 30,000 units
allocated to domestic sales and 292,000 units allocated to export sales. Total
1996 bicycle production was 434,000 units, with 79,000 units allocated to
domestic sales and 355,000 units allocated to export sales. Export sales are
conducted through overseas agents and directly
26
<PAGE>
to OEM customers, as well as indirectly through PRC domestic import and export
companies. Since the collection cycle for export sales is generally faster than
for domestic sales, the Company continued its emphasis on export sales in 1997,
in particular by focusing on export sales of exercise equipment. Exercise
equipment export sales were approximately RMB 34,070,000 in 1997, or
approximately 22.2% of total export sales, as compared to approximately RMB
12,882,000 in 1996, or approximately 7.8% of total export sales.
The decrease in sales in 1997 as compared to 1996 of RMB 36,559,000 or
17.5% was primarily attributable to the following factors:
ANTI-DUMPING TARIFF - A 61.7% anti-dumping tariff was 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"), and was revoked during the second quarter of 1996,
resulting in a substantial fluctuation in export sales to the United States
during 1995 through 1997. Export sales to the United States were RMB 44,455,000
in 1995, RMB 12,442,000 in 1996, and RMB 119,095,000 in 1997.
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 during the second half of 1996. The Company experienced
strong initial demand, culminating in unusually high sales for the three months
ended December 31, 1996 of RMB 68,650,000, which represented 32.8% of total 1996
sales, as compared to sales of RMB 32,091,000 for the three months ended
December 31, 1997.
DOMESTIC SALE OF PARTS - The Company is a major supplier of parts to other
Chinese bicycle manufacturers which are significant exporters of finished
bicycles to the United States. The domestic sales of parts dropped
significantly in 1996 and 1997, as compared to 1995, because of the anti-dumping
tariff and the Asian financial crisis, which had the effect of reducing the
export of finished bicycles from China to the United States. Partially as a
result, domestic sales dropped from RMB 43,860,000 in 1996 to RMB 19,117,000 in
1997, a decrease of RMB 24,743,000 or 56.4%.
ASIAN FINANCIAL CRISIS - During late 1997, the Company began to suffer from the
effects of the Asian financial crisis. Although China was not directly affected
by the turmoil in South Korea and other Asian countries, the devaluation of
currencies in those countries had the effect of reducing one of the Company's
main competitive advantages, its low labor cost. Manufacturers in Taiwan, which
are the main competitors of Chinese companies, have reduced their prices an
average of 13% over the last few months, thus reducing demand for the Company's
products and increasing pressures on the Company's gross margin.
27
<PAGE>
WORKING CAPITAL REQUIREMENTS - The completion of the new production facility at
the end of 1995 substantially increased the Company's production capacity.
However, the Company's ability to increase production is dependent on adequate
working capital. During 1996 and 1997, the Company was not successful in
completing a financing to provide the working capital necessary to support
increased production levels at the new facility. As a result, during the latter
part of 1997, the Company began to experience a shortage of working capital,
which caused the Company to decline orders that under normal conditions it would
have accepted. In addition, the Company's normal production cycle and its
ability to provide timely shipments to customers was negatively impacted. The
working capital shortage also caused the Company to shift its emphasis from
production to assembly, as a result of which the Company recorded approximately
RMB 12,000,000 of assembly sales during the three months ended December 31,
1997. Assembly utilizes raw materials and components supplied by the Company's
customers, and although assembly generates lower sales, it generates a
substantially higher gross margin. The Company expects that revenues from
assembly will continue during 1998.
As a result of the foregoing factors, revenues for the three months
ended December 31, 1997 were RMB 32,091,000, and the Company incurred a net
loss of RMB 4,580,000, which included an allowance for doubtful accounts of RMB
9,731,000. The Company expects that it may continue to experience such
working capital shortages during 1998, which could have a material adverse
effect on results of operations. The Company anticipates that revenues for
the three months ending March 31, 1998 will be at approximately break-even
levels, which will be below comparable revenues for the three months ended
March 31, 1997, but that operations for the three months ending June 30, 1998
will improve slightly.
Gross Profit -
Gross profit for the year ended December 31, 1997 was RMB 56,162,000
or 32.6% of sales, as compared to RMB 44,086,000 or 21.1% of sales for the year
ended December 31, 1996. The increase in gross profit in 1997 as compared to
1996, both on an absolute basis and as a percentage of sales, was the result of
a higher proportion of exercise equipment sales, which have a higher gross
margin than bicycle sales, and assembly revenues recorded during the three
months ended December 31, 1997, which also have a higher gross margin than
production revenues.
Selling, General and Administrative -
Selling, general and administrative expenses, net of amounts assumed
by SCH, were RMB 32,455,000 or 18.8% of sales, for the year ended December 31,
1997, as compared to RMB 18,810,000 or 9.0% of sales, for the year ended
December 31, 1996. Selling, general and administrative expenses increased by
28
<PAGE>
RMB 13,645,000 or 72.5% in 1997 as compared to 1996. Approximately RMB
6,459,000 or 47.3% of the increase in selling, general and administrative
expenses was attributable to an increase in the allowance for doubtful accounts.
The Company recorded an allowance for doubtful accounts of RMB 9,731,000 in the
fourth quarter of 1997, as compared to RMB 3,272,000 in the fourth quarter of
1996, as a result of the deteriorating financial condition of one customer in
China. The increase in selling, general and administrative expenses in 1997 as
compared to 1996 was also attributable to higher commissions as a result of
increased export sales, increased audit fees, and a provision for an
uncollectible VAT refund, which were partially offset by decreased
personnel-related costs as a result of a reduction in employees from 1,822 at
December 31, 1996 to 1,550 at December 31, 1997.
Pursuant to a cost-sharing agreement between SCBW and SCH effective
January 1, 1995, SCH agreed to bear 40% of certain selling, general and
administrative expenses incurred by SCBW, which represents its share of
management and selling activities incurred by SCBW on SCH's behalf. For the
years ended December 31, 1996 and 1997, such amounts aggregated approximately
RMB 2,900,000 and RMB 3,435,000.
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 for the year ended December 31, 1997 was RMB
21,819,000 or 12.7% of sales, as compared to RMB 13,360,000 or 6.4% of sales for
the year ended December 31, 1996. The increase in interest expense in 1997 as
compared to 1996 was a result of several factors, including a higher weighted
average interest rate (14.44% in 1997 as compared to 12.75% in 1996),
additional financing costs incurred to roll-over a portion of short-term bank
loans that had become due during 1997, notes issued to certain suppliers that
were guaranteed by the Company's bank, and additional financing costs as a
result of the Company discounting certain commercial notes receivable to its
bank during 1997 to provide cash to support operations.
Interest Income -
Interest income for the year ended December 31, 1997 was RMB
3,778,000, of which approximately RMB 3,400,000 was from SCH, as compared to
interest income for the year ended December 31, 1996 of RMB 4,837,000, of which
approximately RMB 4,300,000
29
<PAGE>
was from SCH. During the years ended December 31, 1996 and 1997, SCBW charged
interest on the outstanding balance due from SCH at the rate of 8.5% and 8.0%
per annum, respectively.
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 such 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. 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 statement of income for the year ended December
31, 1996.
Net Income -
Net income for the year ended December 31, 1997 was RMB 5,753,000 (RMB
.98 per share), as compared to RMB 10,969,000 (RMB 1.91 per share) for the year
ended December 31, 1996.
Consolidated Financial Condition - December 31, 1997:
Liquidity and Capital Resources -
During the year ended December 31, 1997, the Company's operations
generated RMB 21,663,000, as compared to using RMB 26,416,000 of cash in
operations during the year ended December 31, 1996. During 1997, the increase
in accounts receivable of RMB 30,519,000, which utilized cash, was offset by
changes in several operating account categories that had the effect of
generating cash, including the decrease in due from Easy Keen of RMB 10,000,000,
the increase in accrued expenses and other liabilities of RMB 8,175,000, and
non-cash charges to operations for depreciation and amortization of RMB
10,870,000 and an allowance for doubtful accounts of RMB 9,731,000. In
addition, long-term bank deposits decreased by RMB 19,319,000 in 1997.
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. The Company experienced an improvement in 1997 operating
cash flow since a greater proportion of sales were export sales in 1997 as
compared to 1996.
The Company had net working capital of RMB 10,358,000 at December 31,
1997, as compared to a net working capital deficit of RMB 17,564,000 at December
31, 1996, reflecting current ratios of 1.06:1 and .93:1, respectively.
30
<PAGE>
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, bear interest at
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, RMB 150,681,000 at
December 31, 1996, and RMB 75,041,000 at December 31, 1997. 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, bear interest at a
rate of 9% and are repayable in 1999. Long-term borrowings have historically
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 borrowings at December 31, 1996,
and had RMB 6,100,000 of long-term borrowings at December 31, 1997.
During the year ended December 31, 1997, financing activities used RMB
27,604,000, consisting of the net proceeds from long-term borrowings of RMB
6,100,000 and from the exercise of warrants of RMB 888,000, offset by the
payments of finance lease obligations of RMB 8,949,000 and the repayment of
short-term borrowings of RMB 25,643,000. During the year ended December 31,
1996, financing activities generated RMB 49,252,000, consisting of the net
proceeds from short-term borrowings of RMB 55,670,000 and from the exercise of
warrants of RMB 3,833,000, offset by the payments of finance lease obligations
of RMB 10,163,000 and distributions to minority interests of RMB 88,000.
On March 19, 1996, the Company completed the sale of 166,000 units to
Sangate Enterprises, Inc. ("Sangate") at a price of $3.00 per unit, which
represented gross proceeds of $498,000 and net proceeds of $448,200 (RMB
3,721,000). Each unit consisted of one share of common stock and one warrant to
purchase one share of common stock at a price of $3.00 per share exercisable
through February 28, 1998. Millennium Capital Partners, Ltd. received a 10% fee
in conjunction with the Sangate transaction.
On August 7, 1996, Sangate exercised 5,000 common stock purchase
warrants, resulting in the issuance of 5,000 shares of common stock, which
represented gross proceeds of $15,000 and net proceeds of $13,500 (RMB 112,000).
In conjunction with this
31
<PAGE>
warrant exercise, the Company issued an additional 7,500 warrants to Sangate.
On February 28, 1997, Sangate exercised 10,000 common stock purchase warrants,
resulting in the issuance of 10,000 shares of common stock, which represented
gross proceeds of $30,000 and net proceeds of $27,000 (RMB 222,000). On July 1,
1997, Sangate exercised 30,000 common stock purchase warrants, resulting in the
issuance of 30,000 shares of common stock, which represented gross proceeds of
$90,000 and net proceeds of $81,000 (RMB 666,000).
Pursuant to an agreement between SCBW and SCH dated October 2, 1997,
SCH assumed SCBW's short-term borrowings of RMB 49,997,000 effective October 1,
1997 as settlement of amounts due SCBW by SCH. In addition, as of December 31,
1997, SCBW's short-term borrowings of RMB 56,260,000 were secured by certain
properties of 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.
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 complex'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 these 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 years ended December 31, 1996 and 1997 was RMB
2,400,000 and RMB 2,800,000, respectively, 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
32
<PAGE>
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's short-term bank borrowings during
1995, 1996 and 1997 from the Bank of China have 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 sheet at December 31, 1997, and which is due and payable on
June 30, 1998. The Company anticipates that the due date of this note will be
extended. The USD 4,000,000 note payable to MTE is unsecured, bears no
interest, has no fixed payment terms, and is expected to remain outstanding for
the indefinite future. There have been no payments on this note, which is
presented as loan from MTE of RMB 33,280,000 in the consolidated balance sheets
at December 31, 1996 and 1997.
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. During the years ended December 31, 1996 and 1997, SCBW paid SCH
RMB 20,000,000 and RMB 10,000,000, respectively, related to this obligation.
Exclusive of the purchase of the land use right from SCH, additions to
property, plant and equipment aggregated RMB 3,168,000 during the year ended
December 31, 1997. SCBW does not expect to make any major capital expenditures
during 1998, and had no capital expenditure commitments outstanding at December
31, 1997.
An important factor in the Company's ability to increase production
levels is the timely availability of sufficient operating capital at a
reasonable cost. Recently the Company has experienced working capital shortages
as it has attempted to expand production at the new production complex, which
has hampered the Company's ability to increase sales, and which has negatively
impacted the Company's normal production cycle and the Company's ability to
provide timely shipments to customers.
33
<PAGE>
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. The Company is continuing
to explore various financing alternatives, but to date has been unsuccessful in
arranging an equity financing, and there can be no assurances that the Company
will be successful in completing such a financing in the future.
New Accounting Pronouncements:
In February 1997, the Financial Accounting Standards Board issued
Statement No. 129, "Disclosure of Information about Capital Structure", which is
effective for financial statements issued for fiscal years ending after December
15, 1997. The new standard reinstates various securities disclosure
requirements previously in effect under Accounting Principles Board Opinion No.
15, which has been superseded by this statement. Adoption of this statement did
not have an impact on the Company's current disclosures and presentation.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, "Reporting Comprehensive Income", which is effective for
financial statements issued for fiscal years beginning after December 15, 1997.
This statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income refers to revenues, expenses,
gains and losses that under generally accepted accounting principles are
included in comprehensive income but are excluded from net income. Adoption of
this statement is not expected to have an impact on the Company's current
disclosures and presentation.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information", which is effective for financial statements issued for fiscal
years beginning after December 15, 1997. This statement requires that public
companies report certain information about their major customers, operating
segments, products and services, and the geographic areas in which they operate.
Adoption of this statement is not expected to have an impact on the Company's
current disclosures and presentation.
Year 2000 Issue:
34
<PAGE>
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year.
Computer programs that have sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities. Based on a recent internal
assessment, the Company does not anticipate that the cost of any needed
modifications will have a material effect on results of operations.
Inflation and Currency Matters:
In recent years, the Chinese economy has experienced periods of rapid
economic growth as well as high rates of inflation, which in turn has resulted
in the periodic adoption by the Chinese government of various corrective
measures designed to regulate growth and contain inflation. Since 1993, the
Chinese government has implemented an economic program designed to control
inflation, which has resulted in the tightening of working capital available to
Chinese business enterprises. The success of the Company depends in substantial
part on the continued growth and development of the Chinese economy.
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies. Changes in the relative value
of currencies occur periodically and may, in certain instances, materially
affect the Company's results of operations.
A substantial portion of the Company's revenues are denominated in
RMB. As a result, 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, 1996 and 1997. 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, RMB 8.32 at December 31, 1996, and RMB 8.30 at
December 31, 1997.
Environmental Matters:
Management believes that the Company complies with all national and
local environmental protection laws and regulations of the PRC. In 1996 and
1997, 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.
35
<PAGE>
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.
None.
36
<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, 1998. 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.
DIRECTORS
<TABLE>
<CAPTION>
Date Elected
Name Age as Director
- ---- --- -----------
<S> <C> <C>
Rong Shao Jia 56 April 1995
Zhao Ya Wen 47 April 1995
Winston Wu (Wu Fa Pei) 39 April 1995
Sze Yet Wen 42 April 1995
Li Fai 43 April 1995
Gao Wei Son 60 May 1997
Zhen Da Qing 50 May 1997
</TABLE>
37
<PAGE>
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Date Elected
Name Age Position as Officer
- ---- --- -------- ----------
<S> <C> <C> <C>
Rong Shao Jia 56 Chief Executive April 1995
Officer
Winston Wu 39 President April 1995
(Wu Fa Pei)
Zhao Ya Wen 47 Chief Operating April 1995
Officer
Edward Ding 35 Vice President September
(Ding Yuehua) and 1997
Chief Financial
Officer
</TABLE>
Biographies of Directors and Executive Officers:
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 its current size. Mr. Rong
owns a 31% interest in MTE and a .01% interest in Fogance.
Winston Wu (Wu Fa Pei), 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.
38
<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.
Edward Ding (Ding Yuehua), Vice President and Chief Financial Officer
of the Company, is responsible for the accounting and financial reporting
functions. From 1995 to 1997, Mr. Ding was the corporate business development
manager of FTB Packaging Ltd., a Hong Kong-based subsidiary of Ball Corp., a
Fortune 500 company. From 1992 to 1995, Mr. Ding was a senior economist and
manager of the Research and Planning Division of China Merchants Holdings Co.
Ltd., a Hong-Kong-based Chinese company.
Gao Wei Son, a Director 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 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, 1997 and Form 5 and amendments thereto furnished to the Company
with respect to the fiscal year ended December 31, 1997, 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, 1997 failed to
file on a timely basis reports required by Section 16(a) during the fiscal year
ended December 31, 1997.
39
<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 1997 $10,000
Chief Executive 1996 10,000
Officer 1995 5,779
</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, 1997, 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 nominating or
compensation committees, or committees performing similar functions, during the
year ended December 31, 1997.
Effective May 1, 1997, the Board of Directors formed an audit
committee, consisting of Gao Wei Son and Zhen Da Qing. The audit committee's
primary responsibilities are 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 then
Chief Financial Officer of the Company a warrant to purchase 56,000 shares of
common stock, exercisable at $2.50 per share on or before May 31, 2000. The
warrant had a fair value of approximately $108,000 (RMB 900,000), was fully
vested upon issuance and has not been exercised.
Stock Option Plan:
40
<PAGE>
On January 6, 1997, the Board of Directors adopted the 1997 Stock
Option Plan covering options to purchase up to 600,000 shares of common stock to
be issued to key executives, consultants and directors. The Company intends to
present the stock option plan to the shareholders for approval at the next
shareholders' meeting. 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, 1998, the Company had a total of 5,861,639 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, 1998: (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.
41
<PAGE>
<TABLE>
<CAPTION>
Name of Amount and Nature of Percent of Shares
Beneficial Owner Beneficial Ownership of Common Stock
- ---------------- -------------------- ---------------
<S> <C> <C>
Million Treasure 4,685,000 (1) 79.9%
Enterprises Limited
Flat 3, 9/F
Swire & Maclane House
21 Austin Avenue
Tsim Sha Tsui
Kowloon, Hong Kong
Rong Shao Jia (3) - (2) -
Sze Yet Wen (3) - (2) -
Li Fai (3) - (2) -
Zhao Ya Wen (3) - -
Winston Wu (3) - -
Edward Ding (3) - -
Gao Wei Son (3) - -
Zhen Da Qing (3) - -
All Directors and
Executive Officers
as a Group (8 persons) - (2) -
</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) The address for each such officer and/or director is c/o SCBW, No. 8
Duanzhou 7 Road, Zhaoqing City, Guangdong Province, People's Republic of China.
Changes in Control:
42
<PAGE>
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
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 sheet at December 31, 1997, and which is due and payable on
June 30, 1998. The USD 4,000,000 note payable to MTE is unsecured, bears no
interest, has no fixed payment terms, and is expected to remain outstanding for
the indefinite future. There have been no payments on this note, which is
presented as loan from MTE of RMB 33,280,000 in the consolidated balance sheets
at December 31, 1996 and 1997.
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. During the year ended December
31, 1997, sales to related companies aggregated RMB 18,950,000 or 11.0% 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. Sze Yet Wen, 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, 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. During
the year ended December 31, 1997, purchases from related companies aggregated
RMB 22,552,000, and consisted of purchases from SCH of RMB 14,795,000 and from
Easy Keen of RMB 7,757,000. During the year ended December 31, 1996, purchases
of raw materials from SCH and its related companies and from Easy Keen
aggregated 2% and 37%, respectively, of total raw material purchases, as
compared to 13% and 6%, respectively, of total raw material purchases for the
year ended December 31, 1997.
As of December 31, 1996, amounts due from related companies aggregated
RMB 97,416,000 or 40.5% of total current assets, of which RMB 62,258,000 was due
from SCH and its related companies and RMB 35,158,000 was due from Easy Keen.
As of December 31, 1997, amounts due from related companies aggregated
43
<PAGE>
RMB 25,708,000 or 13.6% of total current assets, of which RMB 8,338,000 was due
from SCH and its related companies and RMB 17,370,000 was due from Easy Keen.
During the year ended December 31, 1997, Easy Keen settled RMB 7,788,000 of
amounts due SCBW by supplying raw materials of the same value, and SCBW and Easy
Keen have agreed to settle the net amount due SCBW of RMB 17,370,000 at December
31, 1997 by Easy Keen supplying raw materials of the same value during 1998, or
otherwise by payment in cash.
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, 1996 and 1997.
Pursuant to a cost-sharing agreement between SCBW and SCH effective
January 1, 1995, SCH agreed to bear 40% of certain selling, general and
administrative expenses incurred by SCBW, which represents its share of
management and selling activities incurred by SCBW on SCH's behalf. For the
years ended December 31, 1996 and 1997, such amounts aggregated approximately
RMB 2,900,000 and RMB 3,435,000, respectively.
Pursuant to an agreement between SCBW and SCH dated October 2, 1997,
SCH assumed SCBW's short-term borrowings of RMB 49,997,000 effective October 1,
1997 as settlement of amounts due SCBW by SCH. In addition, as of December 31,
1997, SCBW's short-term borrowings of RMB 56,260,000 were secured by certain
properties of SCH.
During the year ended December 31, 1996, SCBW charged SCH interest of
RMB 4,300,000 on the outstanding balance due from SCH at the rate of 8.5% per
annum. During the year ended December 31, 1997 SCBW charged SCH interest of RMB
3,400,000 on the outstanding balance due from SCH at the rate of 8.0% per annum.
Such amounts are included in due from SCH in the consolidated balance sheets.
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.
44
<PAGE>
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. During the years ended December 31, 1996 and 1997, SCBW paid SCH
RMB 20,000,000 and RMB 10,000,000, respectively, related to this obligation.
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 these 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 years ended December 31, 1996 and 1997 was RMB
2,400,000 and RMB 2,800,000, respectively, 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, 1997.
45
<PAGE>
PART IV.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ------ -----------------------
<S> <C>
2.1(P) 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,
previously filed as Exhibit 10.2 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1996, and
incorporated herein by reference.
10.3 Purchase Agreement for Land Use Right between South China Bicycle
(Holdings) Company Limited and South China Bicycles Winfill
Limited, previously filed as Exhibit 10.3 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31,
1996, and incorporated herein by reference.
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, previously filed as
Exhibit 10.4 to the Company's Annual Report on Form 10-KSB
46
<PAGE>
for the fiscal year ended December 31, 1996, and incorporated
herein by reference.
10.5 Agreement Letter between South China Bicycle (Holdings) Company
Limited and South China Bicycles Winfill Limited dated October 2,
1997 relating to assumption of short-term borrowings.
21 Subsidiaries of the Company, previously filed as Exhibit 21 to
the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996, and incorporated herein by reference.
27.1(E) Financial Data Schedule - December 31, 1997.
27.2(E) Amended and Restated Financial Data Schedule - June 30, 1996.
27.3(E) Amended and Restated Financial Data Schedule - September 30,
1996.
27.4(E) Amended and Restated Financial Data Schedule - March 31, 1997.
27.5(E) Amended and Restated Financial Data Schedule - June 30, 1997.
27.6(E) Amended and Restated Financial Data Schedule - September 30,
1997.
</TABLE>
- ----------------------
(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.
(E) Indicates electronic filing only.
(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, 1997.
47
<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 27, 1998 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 27, 1998 By: /s/ Rong Shao Jia
---------------------------------------
Rong Shao Jia
Chief Executive Officer and Director
Date: April 27, 1998 By: /s/ Zhao Ya Wen
---------------------------------------
Zhao Ya Wen
Chief Operating Officer and Director
Date: April 27, 1998 By: /s/ Winston Wu
---------------------------------------
Winston Wu (Wu Fa Pei)
President and Director
Date: April 27, 1998 By: /s/ Sze Yet Wen
---------------------------------------
Sze Yet Wen
Director
Date: April 27, 1998 By: /s/ Li Fai
---------------------------------------
Li Fai
Director
Date: April 27, 1998 By: /s/ Zhou Fen Qui
---------------------------------------
Zhou Fen Qui
Accounting Manager
Date: April 27, 1998 By: /s/ Edward Ding
--------------------------------------
Edward Ding (Ding Yuehua)
Chief Financial Officer
48
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
Report of Independent Public Accountants -
Arthur Andersen & Co.
Consolidated Statements of Income -
For the Years Ended December 31, 1997
and 1996
Consolidated Balance Sheets -
As of December 31, 1997 and 1996
Consolidated Statements of Cash Flows -
For the Years Ended December 31, 1997
and 1996
Consolidated Statements of Changes in
Shareholders' Equity - For the Years
Ended December 31, 1997 and 1996
Notes to Consolidated Financial Statements
49
<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, 1997 and 1996
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, 1997 and 1996, 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 10, 1998.
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(Amounts in thousands, except for share data)
<TABLE>
<CAPTION>
1997 1996
------------------------- ----------
RMB US$ RMB
<S> <C> <C> <C>
Sales
- to related companies 18,950 2,283 130,816
- to others 153,519 18,496 78,212
---------- ---------- ----------
172,469 20,779 209,028
Cost of goods sold
- related companies (22,552) (2,717) (64,718)
- others (93,755) (11,296) (100,224)
---------- ---------- ----------
Gross profit 56,162 6,766 44,086
Selling, general and administrative expenses (35,890) (4,324) (21,710)
Less: shared by SCH 3,435 414 2,900
Amortization of pre-operating costs - - (8,354)
Interest expense (21,819) (2,629) (13,360)
Interest income (principally from SCH) 3,778 455 4,837
Other (expense) income, net (556) (67) 1,236
Unusual item - reduction of price of raw materials
purchased in prior years - - 2,902
---------- ---------- ----------
Income before income taxes 5,110 615 12,537
Provision for income taxes (234) (28) (1,364)
---------- ---------- ----------
Income before minority interests 4,876 587 11,173
Minority interests 877 106 (204)
---------- ---------- ----------
Net income 5,753 693 10,969
========= ========= ==========
Earnings per common share RMB0.98 US$0.12 RMB1.91
========= ========= ==========
Weighted average number of common shares
outstanding 5,844,972 5,844,972 5,738,431
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- ----------------------------
Translation of amounts from Renminbi (RMB) into United States dollars (US$) 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 10, 1998 of US$1.00=RMB8.3. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate on April 10, 1998 or at any
other certain rate.
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(Amounts in thousands, except for share data)
<TABLE>
<CAPTION>
1997 1996
---------------------- -------
RMB US$ RMB
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 5,016 604 4,806
Accounts receivable, net 72,600 8,747 51,812
Inventories 64,117 7,725 60,403
Due from SCH 8,338 1,005 62,258
Due from Easy Keen 17,370 2,093 35,158
Prepayments and other current assets 21,017 2,532 26,151
------- ------- -------
Total current assets 188,458 22,706 240,588
Property, plant and equipment, net 132,535 15,967 109,260
Prepayment to SCH for property - - 20,000
Rental deposit to SCH 22,800 2,747 25,600
Bank deposits - - 19,319
Goodwill, net 35,811 4,315 36,788
Other long-term assets 6,631 799 7,008
------- ------- -------
Total assets 386,235 46,534 458,563
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings 75,041 9,041 150,681
Accounts payable 32,662 3,935 45,070
Accrued expenses and other liabilities 49,312 5,941 41,137
Taxes payable 12,839 1,547 8,795
Finance lease obligations, current portion 8,246 994 12,469
------- ------- -------
Total current liabilities 178,100 21,458 258,152
Finance lease obligations 2,363 284 7,089
Long-term bank loans 6,100 735 -
Loan from MTE 33,280 4,010 33,280
Other long-term payables 3,350 403 2,764
------- ------- -------
Total liabilities 223,193 26,890 301,285
------- ------- -------
Minority interests 11,103 1,338 11,980
------- ------- -------
Shareholders' equity:
Common stock, par value US$0.001 per share;
authorized -100,000,000 shares;
outstanding -5,861,639 shares as of December 31, 1997 and
-5,821,639 shares as of December 31, 1996 49 6 48
Additional paid-in capital 118,134 14,233 117,247
Dedicated capital 11,785 1,420 11,785
Retained earnings 21,971 2,647 16,218
------- ------- -------
Total shareholders' equity 151,939 18,306 145,298
------- ------- -------
Total liabilities and shareholders' equity 386,235 46,534 458,563
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- -----------------------------
Translation of amounts from Renminbi (RMB) into United States dollars (US$) 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 10, 1998 of US$1.00=RMB8.3. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate on April 10, 1998 or at any
other certain rate.
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
1997 1996
----------------------- --------
RMB US$ RMB
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 5,753 693 10,969
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 9,893 1,192 8,683
Amortization 977 118 9,332
Minority interests (877) (106) 204
Allowance for doubtful accounts 9,731 1,172 3,272
Rental expense offset against rental deposit 2,800 337 -
Rental expense offset against due from SCH - - 2,400
Consultancy fees settled by issuance of common stock - - 591
Changes in operating assets and liabilities:
- (Increase) decrease in accounts receivable (30,519) (3,677) 15,298
- Increase in inventories (3,714) (447) (24,934)
- Decrease (increase) in due from SCH 3,923 473 (46,757)
- Decrease (increase) in due from Easy Keen 10,000 1,205 (35,158)
- Decrease (increase) in prepayments and other
current assets 5,134 619 (3,835)
- Decrease in other long-term assets 377 45 1,143
- (Decrease) increase in accounts payable (4,620) (557) 13,946
- Increase in accrued expenses and other liabilities 8,175 985 23,659
- Increase in taxes payable 4,044 487 1,083
- Increase (decrease) in other long-term payables 586 71 (6,312)
-------- -------- --------
Net cash provided by (used in) operating activities 21,663 2,610 (26,416)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (3,168) (382) (6,018)
Payment to SCH for property (10,000) (1,205) (20,000)
Decrease in bank deposits 19,319 2,328 1,481
-------- -------- --------
Net cash provided by (used in) investing activities 6,151 741 (24,537)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term borrowings (25,643) (3,090) -
Proceeds from short-term borrowings - - 55,670
Increase in long-term bank loans 6,100 735 -
Payments of finance lease obligations (8,949) (1,078) (10,163)
Proceeds from issuance of common stock upon exercise
of warrants 888 107 3,833
Distribution to minority interests - - (88)
-------- -------- --------
Net cash (used in) provided by financing activities (27,604) (3,326) 49,252
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 210 25 (1,701)
Cash and cash equivalents, beginning of year 4,806 579 6,507
-------- -------- --------
Cash and cash equivalents, end of year 5,016 604 4,806
======== ======== ========
</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 10, 1998 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 10, 1998 or at any
other certain rate.
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(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, 1996 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
Net income for the year ended
December 31, 1997 - - - - 5,753
Common stock issued upon
exercise of warrants 40,000 1 887 - -
--------- --------- --------- --------- ---------
Balance as of December 31, 1997 5,861,639 49 118,134 11,785 21,971
========= ======== ========= ========= =========
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
<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 a
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, 1997 were as
follows:
<TABLE>
<CAPTION>
Date and place of Registered Percentage of
Name of subsidiaries incorporation capital interest held Principal activities
--------------------- ----------------- ---------- ------------- --------------------
<S> <C> <C> <C> <C>
Winfill June 10, 1994, US$50,000 100% Investment holding
British Virgin (direct)
Islands
South China Bicycles July 7, 1994, US$7,280,000 98% Manufacture and sale of
Winfill Limited the PRC (indirect) steel tubes, bicycles
("SCBW") and spare parts
South China Bicycles March 29, 1989, US$2,000,000 68% Assembly and sale of
Co., Ltd. ("SCB") the PRC (indirect) bicycles
Fogance Industries November 2, 1990, HK$10,000 68% Overseas purchases and
Limited Hong 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 the bicycle manufacturing
industry in the PRC. These are described further in the following
paragraphs:
<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. More recently, it has
been exposed to the economic crisis in Asia. The central government
has from time to time adopted various measures designed to stabilize
the economy, regulate growth and contain inflation. All such economic
events and measures 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.
<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"). 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. 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
RMB. 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.
<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 incorporated in British Virgin Islands, 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) 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.
(c) PRE-OPERATING COSTS
Pre-operating costs 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.
(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.
<PAGE>
FREMONT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f) 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.
(g) 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.
(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 statement 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 Group 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 prevailing at the dates of the transactions. Monetary
assets and liabilities denominated in foreign currencies are
translated into Renminbi using the applicable rates of exchange
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.
<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>
1997 1996
---------------------- ---------
RMB'000 US$'000 RMB'000
--------- --------- ---------
<S> <C> <C> <C>
Trade receivables 90,238 10,872 59,719
Less: Allowance for doubtful accounts (17,638) (2,125) (7,907)
--------- --------- ---------
72,600 8,747 51,812
========= ========= =========
</TABLE>
See also Note 15(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>
1997 1996
---------------------- ---------
RMB'000 US$'000 RMB'000
<S> <C> <C> <C>
Raw materials 33,498 4,036 31,736
Work-in-progress 7,330 883 5,232
Finished goods 23,289 2,806 23,435
--------- --------- ---------
64,117 7,725 60,403
========= ========= =========
</TABLE>
<PAGE>
6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment comprised:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------
RMB'000 US$'000 RMB'000
<S> <C> <C> <C>
Fixed assets:
Land use rights 30,000 3,614 -
Buildings 23,457 2,826 23,251
Machinery and equipment 43,871 5,286 41,139
Machinery and equipment financed under
finance leases 39,064 4,707 39,064
Motor vehicles 4,668 562 3,758
Furniture, fixtures and office equipment 8,599 1,036 8,133
Construction-in-progress:
Machinery and equipment 14,167 1,706 15,313
-------- -------- --------
163,826 19,737 130,658
Less: Accumulated depreciation (31,291) (3,770) (21,398)
-------- -------- --------
132,535 15,967 109,260
======== ======== ========
</TABLE>
As of December 31, 1996 and 1997, accumulated depreciation included
RMB3,306,000 and RMB6,562,000, respectively, related to machinery and
equipment under finance leases.
See also Note 15(c) for a sale-leaseback transaction between SCBW and SCH
in 1996.
7. GOODWILL, NET
Goodwill comprised:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------
RMB'000 US$'000 RMB'000
<S> <C> <C> <C>
Cost 39,109 4,712 39,109
Less: Accumulated amortization (3,298) (397) (2,321)
-------- -------- --------
35,811 4,315 36,788
======== ======== ========
</TABLE>
Goodwill is reviewed for impairment whenever events or circumstances
indicate that its undiscounted expected cash flows are not sufficient to
recover its carrying amount. In the opinion of management, there has been
no impairment of goodwill.
8. SHORT-TERM BORROWINGS AND LONG-TERM BANK LOANS
Short-term borrowings are dominated in Renminbi or United States dollars
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.
As of December 31, 1997, short-term borrowings of approximately
RMB56,260,000 were secured by certain properties of SCH.
<PAGE>
8. SHORT-TERM BORROWINGS AND LONG-TERM BANK LOANS (CONTINUED)
In connection with the sale-leaseback transaction and the transfer of
accounts receivable as stated in Note 15(c) and Note 15(d), respectively,
SCH assumed short-term borrowings of approximately RMB72,923,000 of the
Group effective January 1, 1996. Also, pursuant to an agreement dated
October 2, 1997, SCH assumed short-term borrowings of approximately
RMB49,997,000 of the Group effective October 1, 1997 as settlement of
amounts due to the Group.
Long-term bank loans are dominated in Renminbi, bear interest at 9% per
annum, and are repayable in 1999.
9. 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>
1997 1996
------------------- ---------
RMB'000 US$'000 RMB'000
<S> <C> <C> <C>
Year ending December 31,
1997 - - 12,469
1998 8,246 993 4,726
1999 2,363 285 2,363
------- ------- -------
Present value of net minimum
lease payments 10,609 1,278 19,558
Less: Current portion (8,246) (994) (12,469)
------- ------- -------
Long-term portion 2,363 284 7,089
======== ======== ========
</TABLE>
10. TAXES PAYABLE
Taxes payable comprised:
<TABLE>
<CAPTION>
1997 1996
------------------- ---------
RMB'000 US$'000 RMB'000
<S> <C> <C> <C>
Sales tax 346 42 190
Value added tax 12,233 1,474 7,482
Other taxes 260 31 1,123
------- ------- -------
12,839 1,547 8,795
======== ======== ========
</TABLE>
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 year ended December 31, 1996, SCBW was granted refund on VAT of
RMB4,000,000 by the ZhaoQing Finance Bureau. The VAT refund was 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.
<PAGE>
10. TAXES PAYABLE (CONTINUED)
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,
1997. 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, 1997 was approximately RMB234,000 (1996: 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, but it is
uncertain as to whether similar adjustments will be granted 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>
1997 1996
-------- --------
<S> <C> <C>
Weighted average statutory tax rate 33.0% 33.0%
Effect of tax holiday (16.5%) (16.5%)
Effect of rate negotiated with tax authorities (11.9%) (5.6%)
-------- --------
Effective income tax rate 4.6% 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.
While SCBW and SCB are entitled to the preferential tax rates and credits
described above under current Chinese tax laws and regulations, and
appropriate approvals have been received from the local tax authorities,
certain of these exemptions are subject to final approval by the PRC State
Tax Bureau.
<PAGE>
10. 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.
11. COMMON STOCK
During the years ended December 31, 1997 and 1996, movements in the
Company's capital stock were as follows:
(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, resulting
in net proceeds of US$448,200 (RMB3,721,000). 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, exercisable at
a price of US$3.00 per share on or before February 28, 1998.
In August 1996, the Company granted 7,500 additional warrants to the
same party at no consideration. Such warrants are also exercisable
at a price of US$3.00 per share on or before February 28, 1998.
These warrants were exercised as follows:
<TABLE>
<CAPTION>
Common
Timing of exercise stock purchased Exercise price Net proceeds
------------------ --------------- -------------- ---------------------------
US$ RMB
<S> <C> <C> <C> <C>
August 1996 5,000 US$3.00 13,500 112,000
February 1997 10,000 US$3.00 27,000 222,000
July 1997 30,000 US$3.00 81,000 666,000
</TABLE>
(b) In December 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 (RMB591,000).
(c) In December 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 (RMB621,000) and US$7,000 (RMB58,000),
respectively.
Pursuant to consulting service agreements dated August 1, 1997 and the
subsequent amendments, the Company engaged the services of two consultants
for a period of three years commencing from January 1, 1998. As
consideration thereto, the Company agreed to issue to the consultants a
total of 120,000 shares of common stock in 1998.
<PAGE>
12. 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.
13. EARNINGS PER SHARE
No diluted earnings per share has been presented as the effect of dilution
is not significant.
14. 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).
15. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
(a) SUMMARY OF RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
1997 1996
------------------ -------
RMB'000 US$'000 RMB'000
<S> <C> <C> <C>
Sales to Easy Keen - - 96,089
Sales to SCH and its related companies 18,950 2,283 34,727
Purchases from Easy Keen 7,757 935 60,822
Purchases from companies related to SCH 14,795 1,783 3,896
</TABLE>
Hong Kong Easy Keen Industries Ltd. ("Easy Keen") and MTE have a common
shareholder. As agreed between SCBW and Easy Keen, the latter will settle
the amount due to the Group of approximately RMB17,370,000 in 1998 by
supplying raw materials of the same value, or otherwise by payment in cash.
SCH was the former owner of the operations now incorporated into SCBW and
currently owns a 2% equity interest in SCBW.
<PAGE>
15. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (CONTINUED)
(b) LEASE OF FACTORY BUILDINGS
SCBW has rented office space from SCH effective July 1, 1994 and no
rent is chargeable. Management has determined that the imputed
rental expense is insignificant.
(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, 1997 was
RMB2,800,000 (1996: RMB2,400,000) and was settled by reducing the
rental deposit.
(d) 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 ended December 31, 1996, 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.
(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. SCBW paid
RMB10,000,000 and 20,000,000, respectively, in 1997 and 1996.
(f) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SCH agreed to bear 40% (approximately RMB3,435,000and RMB2,900,000 in
1997 and 1996, respectively) of selling, general and administrative
expenses incurred by SCBW, representing its share of management and
selling activities incurred by SCBW on its behalf.
<PAGE>
15. 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.
Pursuant to an agreement dated October 2, 1997, SCH assumed short-term
borrowings of approximately RMB49,997,000 of SCBW effective October 1,
1997 as settlement of amounts due to the Group.
During the year ended December 31, 1997, SCBW charged SCH interest on
the amount due from SCH throughout the year at a rate of 8.0% per
annum (1996: 8.5%). The interest charged for the year ended December
31, 1997 amounted to approximately RMB3,400,000 (1996: RMB4,300,000)
and has been included in the amount due from SCH as of December 31,
1997.
(h) LOAN FROM MTE
The loan from MTE is denominated in United States dollars, is
unsecured, interest-free and has no fixed repayment terms.
16. 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.
17. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1996
------------------------ -------
RMB'000 US$'000 RMB'000
<S> <C> <C> <C>
Cash paid for interest 21,819 2,629 13,360
Non-cash operating, investing and financing
activities:
Short-term borrowings assumed by SCH as
settlement of amounts due to the Group
(Note 15(g)) 49,997 6,024 -
Rental paid by offsetting rental deposit (Note
15(c)) 2,800 337 -
Supply of raw materials by Easy Keen as
settlement of amounts due to the Group 7,788 938 -
Property, plant and equipment, short-term
borrowings and long-term bank loans
transferred to SCH under the sale-
leaseback arrangement (Note 15(c)) - - 131,467
Rental deposit, net and rental paid for the
sale-leaseback arrangement by offsetting
against amount due from SCH
(Note15(c)) - - 28,000
Accounts receivable and short-term borrowings
transferred to SCH - - 13,120
Common stock issued for settlement of
indebtedness - - 679
</TABLE>
<PAGE>
18. EXECUTIVES AND DIRECTORS' OPTIONS AND WARRANTS
In May 1995, the Board of Directors agreed to issue to the then 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. This warrant was accounted for in full
in 1995 and hence there was no effect on the statements of income for the
years ended December 31, 1997 and 1996.
During the year ended December 31, 1997, the Company adopted a stock option
plan pursuant to which stock options to purchase up to 600,000 shares of
common stock may be issued to key executives, consultants and directors.
The detailed terms and conditions for stock options issued pursuant to this
plan are to be set out separately in a written stock option agreement. Up
to the date of this report, no stock option has been issued pursuant to
this plan.
19. 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, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Percentage of net sales
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Easy Keen - 46%
SCH and its related companies 11% 17%
Ay Chern Enterprise Co. Ltd. 31% 6%
Actstar Customer Service Co. Ltd. 17% 6%
Unipark Trading Ltd. 12% 2%
Gory Development Co. Ltd. 11% -
</TABLE>
Concentration of accounts receivable as of December 31, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
Percentage of accounts
receivable
-----------------------
1997 1996
----- -----
<S> <C> <C>
Five largest accounts receivable 54% 78%
</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 companies related to SCH and
Easy Keen accounted for 13% and 6%, respectively, of the Group's total
purchases for the year ended December 31, 1997 (1996: 2% and 37%).
<PAGE>
20. 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. Substantially all of the
Group's identifiable assets are located in the PRC. Geographic sales
information is as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ -------
RMB'000 US$'000 RMB'000
<S> <C> <C> <C>
PRC 19,117 2,303 43,860
Export Sales/Re-export Sales
USA 119,095 14,349 12,442
Hong Kong 9,552 1,151 150,263
Others 24,705 2,976 2,463
----------- --------- -------
Total sales 172,469 20,779 209,028
=========== ========= =======
</TABLE>
21. COMMITMENTS
As of December 31, 1997, the Group had no significant commitments
outstanding but not provided for in the consolidated financial statements.
22. CONTINGENCIES
The Group had no significant contingent liabilities as of December 31,
1997.
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ------ -----------------------
<S> <C>
10.5 Agreement Letter between South China Bicycle (Holdings) Company
Limited and South China Bicycles Winfill Limited dated October 2, 1997
relating to assumption of short-term borrowings.
27.1(E) Financial Data Schedule - December 31, 1997.
27.2(E) Amended and Restated Financial Data Schedule - June 30, 1996.
27.3(E) Amended and Restated Financial Data Schedule - September 30, 1996.
27.4(E) Amended and Restated Financial Data Schedule - March 31, 1997.
27.5(E) Amended and Restated Financial Data Schedule - June 30, 1997.
27.6(E) Amended and Restated Financial Data Schedule - September 30, 1997.
- ----------------------
(E) Indicates electronic filing only.
</TABLE>
<PAGE>
EXHIBIT 10.5
AGREEMENT LETTER
Zhaoqing South China Bicycle Winfill Co., Ltd. (SCBW) has the following
borrowings amounting to RMB 49,997,028.41 which is warranted by the lands
and buildings of Zhaoqing South China Bicycle (Holdings) Co., Ltd. (SCH).
Meanwhile the two parties agree that the amounts due from SCH to SCBW should
be settled. Hence the two parties agree to transfer the repayment obligations
of the following borrowings from SCBW to SCH and deduct the same amount
due from SCH to SCBW simultaneously. Any interest occurring afterward from
the borrowings will be the responsibility of SCH.
<TABLE>
<CAPTION>
Lending Bank Amount(RMB) Period Warranted by
- ------------ ----------- ------ ------------
<S> <C> <C> <C>
Zhaoqing Agricultural Bank 7,000,000 short-term Buildings of Steel Tube Factory
Zhaoqing China Bank 23,549,927 short-term Buildings of Steel Tube Factory
Zhaoqing Finance Bureau 500,000 short-term Lands of Golden China Factory
Zhaoqing Finance Bureau 500,000 short-term Lands of Golden China Factory
Guangdong China Bank 2,000,000 short-term Buildings of Golden China Factory
Zhaoqing Duanzhou People's Bank 5,000,000 short-term Lands of Seven Stars Equipment
Zhaoqing State Asset Office 247,101.41 short-term Buildings of Seven Stars Factory
Zhaoqing Beinin Jiangshe Bank 1,600,000 short-term Buildings of Seven Stars Factory
Zhaoqing Agricultural Bank 7,600,000 short-term Lands of the headquarters of SCH
-------------
TOTAL 49,997,028.41
=============
</TABLE>
<TABLE>
<S><C>
Zhaoqing South China Bicycle Winfill Co., Ltd. Zhaoqing South China Bicycle (Holdings) Co., Ltd.
(SCBW) (SCH)
</TABLE>
Dated on October 2, 1997
<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, 1997, 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> .12048
<CASH> 5,016
<SECURITIES> 0
<RECEIVABLES> 90,238
<ALLOWANCES> 17,638
<INVENTORY> 64,117
<CURRENT-ASSETS> 188,458
<PP&E> 163,826
<DEPRECIATION> 31,291
<TOTAL-ASSETS> 386,235
<CURRENT-LIABILITIES> 178,100
<BONDS> 8,463
0
0
<COMMON> 49
<OTHER-SE> 151,890
<TOTAL-LIABILITY-AND-EQUITY> 386,235
<SALES> 172,469
<TOTAL-REVENUES> 172,469
<CGS> 116,307
<TOTAL-COSTS> 116,307
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 9,731
<INTEREST-EXPENSE> 21,819
<INCOME-PRETAX> 5,110
<INCOME-TAX> 234
<INCOME-CONTINUING> 5,753
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,753
<EPS-PRIMARY> .98
<EPS-DILUTED> .98
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S
QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> CHINESE RENMINBI
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> .12019
<CASH> 7,762
<SECURITIES> 0
<RECEIVABLES> 72,115
<ALLOWANCES> 0
<INVENTORY> 56,144
<CURRENT-ASSETS> 185,159
<PP&E> 145,332
<DEPRECIATION> 17,070
<TOTAL-ASSETS> 410,110
<CURRENT-LIABILITIES> 198,248
<BONDS> 15,818
0
0
<COMMON> 48
<OTHER-SE> 136,355
<TOTAL-LIABILITY-AND-EQUITY> 410,110
<SALES> 82,978
<TOTAL-REVENUES> 82,978
<CGS> 66,457
<TOTAL-COSTS> 66,457
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,914
<INCOME-PRETAX> 3,673
<INCOME-TAX> 1,000
<INCOME-CONTINUING> 3,444
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,444
<EPS-PRIMARY> .60
<EPS-DILUTED> .60
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE
COMPANY'S QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> CHINESE RENMINBI
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> .12005
<CASH> 20,754
<SECURITIES> 0
<RECEIVABLES> 73,097
<ALLOWANCES> 0
<INVENTORY> 57,982
<CURRENT-ASSETS> 208,182
<PP&E> 148,169
<DEPRECIATION> 19,180
<TOTAL-ASSETS> 430,762
<CURRENT-LIABILITIES> 218,205
<BONDS> 12,506
0
0
<COMMON> 48
<OTHER-SE> 137,345
<TOTAL-LIABILITY-AND-EQUITY> 430,762
<SALES> 139,650
<TOTAL-REVENUES> 139,650
<CGS> 111,984
<TOTAL-COSTS> 111,984
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,957
<INCOME-PRETAX> 6,118
<INCOME-TAX> 1,250
<INCOME-CONTINUING> 4,310
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,310
<EPS-PRIMARY> .75
<EPS-DILUTED> .75
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S
QUARTERLY REPORT ON FORM 10-QSB FOR THE THREE MONTHS ENDED MARCH 31, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> CHINESE RENMINBI
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> .12048
<CASH> 5,138
<SECURITIES> 0
<RECEIVABLES> 55,773
<ALLOWANCES> 0
<INVENTORY> 60,515
<CURRENT-ASSETS> 240,393
<PP&E> 130,658
<DEPRECIATION> 24,252
<TOTAL-ASSETS> 454,362
<CURRENT-LIABILITIES> 249,582
<BONDS> 7,089
0
0
<COMMON> 48
<OTHER-SE> 149,865
<TOTAL-LIABILITY-AND-EQUITY> 454,362
<SALES> 44,215
<TOTAL-REVENUES> 44,215
<CGS> 33,430
<TOTAL-COSTS> 33,430
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,456
<INCOME-PRETAX> 4,573
<INCOME-TAX> 500
<INCOME-CONTINUING> 4,391
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,391
<EPS-PRIMARY> .75
<EPS-DILUTED> .75
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE
COMPANY'S QUARTERLY REPORT ON FORM 10-QSB FOR THE THREE MONTHS ENDED
JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> CHINESE RENMINBI
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> .12048
<CASH> 6,608
<SECURITIES> 0
<RECEIVABLES> 63,984
<ALLOWANCES> 0
<INVENTORY> 59,158
<CURRENT-ASSETS> 245,106
<PP&E> 132,838
<DEPRECIATION> 26,492
<TOTAL-ASSETS> 458,921
<CURRENT-LIABILITIES> 251,891
<BONDS> 7,089
0
0
<COMMON> 48
<OTHER-SE> 152,775
<TOTAL-LIABILITY-AND-EQUITY> 458,921
<SALES> 91,193
<TOTAL-REVENUES> 91,193
<CGS> 70,797
<TOTAL-COSTS> 70,797
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,274
<INCOME-PRETAX> 7,501
<INCOME-TAX> 1,175
<INCOME-CONTINUING> 7,301
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,301
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.25
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S
QUARTERLY REPORT ON FORM 10-QSB FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> CHINESE RENMINBI
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> .12048
<CASH> 4,616
<SECURITIES> 0
<RECEIVABLES> 73,532
<ALLOWANCES> 0
<INVENTORY> 44,272
<CURRENT-ASSETS> 265,787
<PP&E> 132,902
<DEPRECIATION> 29,125
<TOTAL-ASSETS> 475,915
<CURRENT-LIABILITIES> 269,647
<BONDS> 2,597
0
0
<COMMON> 49
<OTHER-SE> 156,478
<TOTAL-LIABILITY-AND-EQUITY> 475,915
<SALES> 140,378
<TOTAL-REVENUES> 140,378
<CGS> 108,623
<TOTAL-COSTS> 108,623
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,365
<INCOME-PRETAX> 10,322
<INCOME-TAX> 871
<INCOME-CONTINUING> 10,333
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,333
<EPS-PRIMARY> 1.77
<EPS-DILUTED> 1.77
</TABLE>
