Mountain China Resorts (Holding) Limited (TSX VENTURE:MCG) ("MCR" or the
"Company"), today reported its financial results for the three and nine-month
periods ended September 30, 2010 (the "Reporting Period"). The Company reports
in Canadian Dollars.
Corporate Developments
The Company obtained its shareholders' approval and endorsement for its change
of name from Melco China Resorts (Holding) Limited to Mountain China Resorts
(Holding) Limited at the Annual General Meeting held on June 1 ,2010. Such
change of name was certified by the Registrar of Companies, Province of British
Columbia Canada on June 7, 2010 and received approval from the TSX Venture
Exchange effective October 22, 2010. The change of name recognizes and
emphasizes the Company's primary focus on the mountain resort industry in China
and its premier and peak position.
Subsequent to the period end on October 28, 2010, the Company announced that it
has completed its convertible bond financing (the "Offering") with Century Zone
Limited ("Century Zone"), the majority shareholder of Wisecord Holdings Limited
(who currently holds approximately 49.4% of the issued outstanding common shares
of MCR) for aggregate gross proceeds of $4,600,000. The convertible bond is due
on October 27, 2012, has an interest rate of LIBOR + 3% and a conversion price
of $0.12. The Company has also extended an offer to existing shareholders who
are "accredited investors", to participate in the Offering on the same terms as
those entered into with Century Zone up to an aggregate amount of $2,000,000. To
the extent that such existing shareholders do not subscribe for the full
$2,000,000, the offer will be made to other "accredited investors". Existing
shareholders of the Company have been mailed documents containing further
details relating to the subscription for such Convertible Bonds. MCR anticipates
completing the Offering on or about December 23, 2010, and as such, will require
completed documentation from any shareholders who wish to participate as soon as
possible and in any event prior to December 21, 2010. Closing of the Offering is
subject to certain conditions, including conditional listing approval of the
TSXV. The gross proceeds from the Offering will be used to provide working
capital to the Company and to fund the continuing operations of MCR's Sun
Mountain Yabuli Resort.
Bernard Pouliot who was an independent director of the Company, will resign from
his directorship effective November30, 2010. MCR would like to recognize and
thank Mr. Pouliot for his contributions, and wish him well in his future
endeavours.
Corporate Current Issues
On November 17, 2010, the Company provided an updates with respect to certain
developments that have taken place with respect to its subsidiary Changchun
Lianhua Mountain Skiing Field Co. Ltd. ("Changchun Lianhua"). Changchun Lianhua
owns a skiing resort in Changchun (the "Changchun Resort"). The government of
Erdao district of Changchun city in the Jilin province of the People's Republic
of China (the "Erdao Government") holds the view that the Changchun Lianhua's
assets, including the Changchun Resort, are still owned by the government and it
may, through Changchun Lianhua Mountain Agricultural Project Development Company
Limited ("CCL Agricultural"), manage the same to the Company's exclusion. The
Company disagrees with the Erdao Government's position. The Company had engaged
Global Law Office, a reputable law firm in PRC, to do legal due diligence on the
assets before they were acquired by the Company. Global Law Office had advised
the Company that the assets acquired are not state-owned assets and the same may
be validly transferred to the Company. Because of CCL Agricultural's and the
Erdao Government's action, the Company has been deprived of management of the
Changchun Resort and Changchun Lianhua. Therefore, the financial statements and
MD&A are prepared on the basis of omission of Changchun Resort financial
information for the nine- month period ended September 30, 2010 due to the fact
that the financial information of Changchun Resort could not be obtained by the
management of MCR. As such, such financial statements are not comparable to
previous financial statements of the company where such financial information of
Changchun Resort was included. The Company has engaged in discussions with the
Erdao Government, Changchun Lianhua Mountain Sports & Travel Development Company
Changchun Sports and CCL Agricultural with an aim of resolving this matter. If
the current situation cannot be resolved through negotiations, the Company may
have to resort to legal means to protect its rights in relation to Changchun
Lianhua.
Financial Results
Total revenue and the net results were from resort operations with no real
estate sales activities being undertaken during the Reporting Period. For the
three-month period ended September 30, 2010, the Company generated revenues from
resort operations of $0.11 million and a net loss of $6.08 million or $0.05 per
share (MCR could not obtain financial information of the Changchun Lianhua,
therefore, the financial statements and MD&A are prepared on the basis of the
omission of the Changchun Resort financial information). The loss in the third
quarter was primarily due to reduced revenue from ski operations as the resorts
closed at the end of their respective ski seasons in late March or early April.
For the nine month period ended September 30, 2010, the Company generated
revenues from resort operations of $ 1.88 million and a net loss of $12.23
million, or $ 0.09 per share. Resort operations were severely limited in both
2009 and 2010 due to MCR's financial constraints caused by the global financial
crisis. The Company dramatically reduced expenditures on marketing and promotion
as part of a cash conservation strategy in order to continue the development of
its premiere Sun Mountain Yabuli Resort. The ski lifts, and sliding slope of the
Resort operate normally during the summer. Operating EBITDA for the nine-month
period ended September 30, 2010 was negative $ 1.51 million (RMB 7.07 million)
compared to negative $12.16 million (RMB 68.40 million) over the same period in
2009.
Cash and cash equivalents totaled $ 0.34 million and working capital was $ 9.98
million as at September 30, 2010. Capital expenditures were minimal in the
quarter.
Operations
Sun Mountain Yabuli
Sun Mountain Yabuli Resort opened for winter operations on November 18, 2009 and
closed for operations on April 4, 2010 for a 138 day operating season. Revenue
at the Yabuli Resort for the third quarter and the nine-month period ended
September 30, 2010 was $0.11 million and $1.88 million respectively. EBITDA was
negative $0.35 million in the third quarter and negative $1.06 million during
the nine-month period ended September 30, 2010.
During the third Quarter 2010, Club Med Asie S.A. ("Club Med") has completed
construction refinements. The handover of operations and management of hotels
from the Company to Club Med has completed on October 15, 2010. Club Med 2010
winter opening has commenced on November 27, 2010.
Sun Mountain Yabuli - Real Estate
The sales team is in the process of expanding in order to market the homes
extensively across the country. The sales campaign will start to be fully
implemented from this coming snow season in the fourth quarter of 2010.
Financial Highlights
Summary Financial Results (i)
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For the
For the three- For the For the
three-month month nine-month nine-month
(in thousands of period period period period
Canadian dollars ended ended ended ended
except for per September September September September
share data) 30, 2010 30, 2009 30, 2010 30, 2009
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Revenue $ 111 $ 218 $ 1,881 $ 1,882
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Operating expenses (461) (1,112) (2,936) (6,364)
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Other income 1,488 - 1,493 1
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General and
administrative
expenses (407) (1,280) (1,946) (7,682)
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Depreciation and
amortization (1,750) (2,209) (5,502) (5,997)
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Impairment of
investments (5,123) - (5,123) -
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Operating loss (6,142) (4,383) (12,133) (18,160)
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Total non-operating
income and expenses 50 (1,130) (152) (5,467)
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Recovery
of/(provision for)
future income taxes 17 27 53 87
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Results of
discontinued
operations - (489) - (2,580)
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Net loss $ (6,075) $ (5,975) $ (12,232) $ (26,120)
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Net loss per share
(Basic and Diluted) (0.05) (0.07) (0.09) (0.30)
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Weighted average
number of shares
outstanding (Basic
and Diluted) 133,295,698 87,439,344 133,295,698 87,439,344
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(i) MCR could not obtain financial information of the Changchun Resort for
the 2010 Period, therefore, the financial statements and MD&A are prepared
on the basis of the omission of the Changchun Resort financial information
for the 2010 Period. As at September 30, 2010, the relevant amount related
to the impairment of investment into the Changchun Resort was $5,123 in the
Financial Statements.
Balance Sheet Key Indicators
(in thousands of Canadian dollars except for ratios) September 30, 2010
Current Ratio(1) 1.60:1
Free Cash 340
Working Capital(2) 9,988
Total Assets 182,429
Total Debt(3) 105,406
Total Equity(4) 77,023
Total Debt to Total Equity Ratio 1.37:1
(1) Current ratio is defined as total current assets divided by total
current liabilities
(2) Working capital is defined as total current assets less total current
liabilities
(3) Total debt is defined as total current liabilities plus total non-
current liabilities
(4) Total equity is equal to the total shareholders' equity
The ability of the Company to meet its current obligations is dependent on its
ability to source financing and/or investment from external sources due to its
limited income generating capability while in a development stage. The ability
of the Company to arrange such financing in the future will depend in part upon
prevailing capital and financial market conditions, as well as upon the business
success of the Company. Historically, the Company has been successful in
obtaining funding and is actively seeking new financing sources, including via
Chinese and foreign banks, shareholder investment and/or loan and divestment of
assets, to meet operational obligations. There can be no assurance that the
Company will be able to arrange such financing. If the financing efforts are
unsuccessful or are not available on acceptable terms, the Company may not have
sufficient funds to meet its obligations or on-going operations and may need to
suspend part or all of its operations and consider other alternatives.
About MCR
MCR is the premier developer of four season destination ski resorts in China.
MCR is transforming existing China ski properties into world-class, four seasons
luxury mountain resorts with excellent real estate investment opportunities for
discerning buyers. In February 2009, the Company's Sun Mountain Yabuli Resort
was awarded Best Resort Makeover in Asia by TIME Magazine. Yabuli is also the
permanent home of the China Entrepreneur's Forum the leading and most
influential community of China's most distinguished and successful entrepreneurs
and business leaders with over 5,000 members from across a variety of key
industries.
www.mountainchinaresorts.com
FORWARD LOOKING INFORMATION
Information in this press release that is not current or historical factual
information may constitute forward-looking information within the meaning of
securities laws, and actual results may vary from the forward-looking
information. Implicit in this information are assumptions regarding future
operations, plans, expectations, anticipations, estimates and intentions, such
as the plans to develop the ski resorts in China. These assumptions, although
considered reasonable by MCR at the time of preparation, may prove to be
incorrect. Readers are cautioned that actual future operating results and
economic performance of MCR are subject to a number of risks and uncertainties,
including general economic, market and business conditions, uncertainty relating
to land use rights, adverse industry events for the ski and real estate
industries, MCR's ability to make and integrate acquisitions, the requirements
of recent Chinese regulations relating to cross-border mergers and acquisitions,
the inability to obtain required approvals or approvals may be subject to
conditions that are unacceptable to the parties, changing industry and
government regulation, as well as MCR's ability to implement its business
strategies, dispose of assets or raise sufficient capital, seasonality, weather
conditions, competition, currency fluctuations and other risks, and could differ
materially from what is currently expected as set out above.
Forward-looking information contained in this press release is based on current
estimates, expectations and projections, which MCR believes are reasonable as of
the date of this press release. MCR uses forward-looking statements because it
believes such statements provide useful information with respect to the
operation and financial performance of MCR, and cautions readers that the
information may not be appropriate for other purposes. Readers should not place
undue importance on forward-looking information and should not rely upon this
information as of any other date. While MCR may elect to, it does not undertake
to update this information at any particular time except as required by
applicable law.
NON-GAAP MEASURES
Throughout this news release we use certain non-GAAP measures such as the term
"EBIDTA" to analyze operating performance. We define EBITDA as operating
revenues less operating expenses from continuing operations and therefore
reflects earnings before interest, income tax, depreciation and amortization,
non-controlling interest and any non-operating and non-recurring items. These
non-GAAP measures do not have a standardized meaning prescribed by GAAP and may
not be comparable to similarly titled measures presented by other companies. We
refer you to MCR's Management's Discussion & Analysis where we have included
reconciliations between any non-GAAP measures mentioned in this news release and
the closest GAAP measure, if applicable. These non-GAAP measures are referred to
in this news release because we believe they are indicative measures of a
company's performance and are generally used by investors to evaluate companies
in the resort operations and resort development industries.
Mountain China Resorts (Holding) Limited
Management's Discussion and Analysis
Third Quarter, Fiscal 2010
Ended September 30th, 2010
Prepared by Management
November 30th, 2010
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following Management's Discussion and Analysis ("MD&A") of the financial
condition of Mountain China Resorts (Holding) Limited (the "Company" or "MCR")
should be read in conjunction with our unaudited interim financial statements
for the three-month and nine-month periods ended September 30th, 2010 and
accompanying notes included therein, and also the MD&A and Annual Audited
Consolidated Financial Statements for the year ended December 31st, 2009 and
accompanying notes included therein. The statements made in this MD&A may
contain forward-looking information about our future operations, financial
results and objectives that involves risks and uncertainties. All statements,
other than statements of historical facts, which address MCR's expectations,
should be considered forward-looking statements. Such statements are based on
management's exercise of business judgment as well as assumptions made by and
information currently available to management. When used in this document, the
words "may", "will", "anticipate", "believe", "estimate", "expect", "intend" and
words of similar import, are intended to identify any forward-looking
statements. You should not place undue reliance on these forward-looking
statements. Our actual results could differ materially from those anticipated,
expressed or implied by such forward-looking statements. Implicit in this
information are assumptions regarding future operations, plans, expectations,
anticipations, estimates and intentions, such as the plans to develop the ski
resorts in China and the ability of the Company to obtain additional financing.
These assumptions, although considered reasonable by MCR at the time of
preparation, may prove to be incorrect. Readers are cautioned that actual future
operating results and economic performance of MCR are subject to a number of
risks and uncertainties that could cause actual results to differ materially
from the forward looking information, including general economic, market and
business conditions, uncertainty relating to land use rights, adverse industry
events for the ski and real estate industries, MCR's ability to make and
integrate acquisitions, the requirements of recent Chinese regulations relating
to cross-border mergers and acquisitions, changes to government policies, the
inability to obtain required approvals or approvals may be subject to conditions
that are unacceptable to the parties, changing industry and government
regulation, as well as MCR's ability to implement its business strategies,
dispose of assets or raise sufficient capital or secure sufficient liquidity,
seasonality, weather conditions, competition, currency fluctuations and other
risks. For a further description of material factors that could cause our actual
results to differ materially from the forward looking statements in this MD&A,
please see the "Risk Factors" section.
Forward-looking information and future-oriented financial information contained
in this MD&A is based on current estimates, expectations and projections, which
MCR believes are reasonable as of the date of this MD&A. MCR uses
forward-looking information because it believes such statements provide useful
information with respect to the operation and financial performance of the
Company, and cautions readers that the information may not be appropriate for
other purposes. Readers should not place undue importance on forward-looking
information and should not rely upon this information as of any other date.
While MCR may elect to, it does not undertake to update forward looking
information at any particular time.
All amounts are in Canadian dollars unless otherwise noted (tabular amounts are
in thousands of Canadian dollars) and prepared in accordance with Canadian
Generally Accepted Accounting Principles ("Canadian GAAP"). We use non-GAAP
measures to assess our financial performance, such as operating EBITDA(1). Such
measures do not have a standardized meaning prescribed by GAAP and they may not
be comparable to similarly titled measures presented by other companies. We have
provided reconciliations between any non-GAAP measures mentioned in this MD&A
and our GAAP financial statements, if applicable. These non-GAAP measures are
referred to in this document because we believe they are indicative measures of
a company's performance and are generally used by investors to evaluate
companies in the resort operations and resort development industries.
Reference should also be made to the Company's filings with Canadian securities
regulatory authorities which are available at www.sedar.com. The date of this
MD&A is November 30th, 2010.
(1) Operating EBITDA is defined as operating revenues less operating expenses
from continuing operations and therefore reflects earnings before interest,
income tax, depreciation and amortization, non-controlling interest and any
non-operating and non-recurring items.
Company Overview
MCR was incorporated under the Business Corporations Act (British Columbia) on
February 6th, 2008. The Company had no significant assets and did not have any
results of operation and cash flow during the period from February 6th, 2008
(date of incorporation) to May 27th, 2008. On May 27th, 2008, the Company
entered into a sale and purchase agreement with the shareholders of Melco China
Resort Investment Limited (renamed as Mountain China Resorts Investment Limited
on July 21st, 2010) ("MCR Cayman") and agreed to purchase 100% of the equity
interests of MCR Cayman. The acquisition was completed on the same day and upon
completion it entitled the Company to own 100% of the assets and operations of
MCR Cayman. On May 28th, 2008, the Company completed the reverse takeover by way
of amalgamation with Virtual China Travel Services Co., Ltd. to form a listed
issuer on the TSX Venture Exchange under the symbol "MCG".
The Company obtained its shareholders' approval and endorsement for its change
of name from Melco China Resorts (Holding) Limited to Mountain China Resorts
(Holding) Limited at the Annual General Meeting held on June 1st 2010. Such
change of name was certified by the Registrar of Companies, Province of British
Columbia Canada on June 7th, 2010 and is approved by TSXV effective October
22nd, 2010. The change of name recognizes and emphasizes the Company's primary
focus on the mountain resort industry in China and its premier and peak
position. Following the Annual General Meeting, Mr. Graham Kwan tendered his
resignation as CEO and director of the Company. In addition, Mr. Danny Liu
tendered his resignation as CFO of the Company. Mr. Zhenhua Mao was appointed as
Chief Executive Officer, Mr. Gang Han as Chief Financial Officer, and Mr. Wang
Lian as Director of Corporate Finance & Investor Relations. Furthermore, all
other proposed resolutions were approved including the reappointment of Deloitte
Touche Tohmatsu as the auditors of the Company.
As at September 30th, 2010, the Company owned 100% of the issued share capital
of MCR Cayman, which in turn owned 100% of the following subsidiaries: (i)
Mountain China Resorts Limited ("MCR HK"); (ii) Heilongjiang Yabuli On Snow
Asian Game Village Hotel Co., Ltd. ("Yabuli Resort"); (iii) Heilongjiang
Yabuluoni Zhiye Co., Ltd. ("Zhiye"); (iv) Changchun Lianhua Mountain Skiing
Field Co., Ltd. ("Changchun Resort"); (v) Jilin Melco Sky Mountain Beidahu Ski
Resort Co., Ltd. ("Beidahu Resort"), (vi) Jilin Melco Sky Mountain Beidahu Real
Estate Co., Ltd., ("Beidahu Real Estate") and (vii) Melco China Resort Travel
Consultancy (Beijing) Co., Ltd. ("MCR Beijing"), among which Beidahu Resort,
Beidahu Real Estate and MCR Beijing are dormant as of the balance sheet and
report dates.
MCR, through its operating subsidiaries, that include the Yabuli Resort and
Changchun Resort, (collectively referred to as the "Group") are in the process
of developing existing ski areas in China into world class resort destinations
with new lifts, snowmaking and trails, hotels, conference and skier services,
dining, shopping, spa and entertainment. MCR expects that the development of its
properties into resort centered lifestyle experiences will allow it to attract a
disproportionate share of the Chinese ski market. As the skill level and
expectations of skiers develop in China, they are expected to increasingly seek
more advanced ski experiences and engaging destination resort locations.
The Company currently owns and operates the largest existing destination ski
resort in the People's Republic of China ("PRC" or "China"), Sun Mountain Yabuli
in Heilongjiang Province ("Sun Mountain Yabuli Resort") which successfully
hosted the 2009 World Winter University Games. This property enjoys favorable
mountain terrain directly connected to flat land at their base for real estate
development, excellent water supply, freeway and international airport access,
proximity to both major regional drive markets and major destination fly
markets, and government support for tourism and winter sports development. The
Sun Mountain Yabuli Resort also facilitates with two luxury, 5 star hotels,
restaurants, spa, retail, and conference facilities together with on mountain
facilities with new trails, lifts and snowmaking.
The successful combination of resort operations and real estate development in
MCR's resort centered business model is based on the traditional European alpine
pedestrian village which has also been utilized by other resort developers
outside of China in both North America and Europe. The resort centered model
creates superior value by:
-- increasing the market positioning, distinct image and reputation of the
resorts;
-- attracting a disproportionate share of the market and extending the
customer's length of stay which in turn results in higher overall
revenue per visit;
-- providing recurring earning streams in both hotel and condo-hotel
operations, as well as commercial operations (retail, food and beverage,
spa, attractions and entertainment);
-- attracting the interest of resort home buyers purchasing "trophy"
properties that in turn may enhance the status and reputation of the
resorts.
Major Corporate Developments
New RMB 150 million Loan with Harbin Bank
On February 12th, 2010, the Company's indirectly wholly owned subsidiary,
Heilongjiang Yabuli On Snow Asian Game Village Hotel Co. Ltd., repaid a RMB 120
million ($17.88 million) loan to the Harbin Bank due on February 15th, 2010 and
arranged a new loan facility of RMB 150 million ($22.35 million) with the same
bank for a two-year term with a maturity date of February 9th, 2012, and with a
fixed annual interest rate of 5.94%. This new loan was facilitated by a short
term bridge loan of RMB 74 million ($11.03 million) provided by Wisecord
Holdings Limited ("WHL") on February 11th, 2010. The bridge loan had a term of
60 days with a loan fee of 4.6% for each 30 day period on the principal amount
drawn down and was fully repaid on April 6th, 2010.
Club Med Resorts Appointed as Manager at the Sun Mountain Yabuli Resort
On February 17th, 2010, the Company announced that it has entered into
definitive management agreements (the "Agreements") with Club Med Asie S.A.
("Club Med") to operate and manage two hotels at the Sun Mountain Yabuli Resort
("Club Med Yabuli Resort"). Club Med will provide marketing and sales services
for the Club Med Yabuli Resort. The Agreements have renewable initial terms of
ten years with performance management fees tied to gross operating profit. As
well, Club Med will provide funding of up to US$3 million ($3.05 million) for
additions to the Club Med Yabuli Resort so as to include facilities and
refinements to meet Club Med's brand and operating standards. These improvements
will be undertaken prior to the resort re-opening for winter operations in
November 2010.
Strategic Relationship with the China Entrepreneurs' Forum
On March 1st, 2010, the Company announced that it has entered into a strategic
relationship agreement with the China Entrepreneurs' Forum ("CEF") under which
the CEF has agreed to hold all of its future Annual Forums at the Sun Mountain
Yabuli Resort. In addition, CEF and MCR both agree to establish a "CEF Founders
Club" that actively promotes the resort vacation homes situated in the Sun
Mountain Yabuli Resort for purchase by CEF members, as well as work with its
5,000 member companies to select Sun Mountain Yabuli Resort as the site for
their corporate meetings and retreats.
Final Payment to Zhiye Completed
The Company completed all of its payment obligations for the acquisition of
Heilongjiang Yabuluoni Zhiye Co. Ltd. on April 12th, 2010 with a final payment
of RMB 35 million ($5.21 million). Zhiye was acquired in August of 2008 for a
total consideration of RMB 55 million ($8.19 million) wherein the acquisition
included 144.6 hectares of development land at its Sun Mountain Yabuli Resort.
An initial payment of RMB 20 million ($2.98 million) was made in March 2009. The
second and final installment of RMB 35 million ($5.21 million) was required to
be deferred as the Company managed its cash resources over the last twelve
months to combat the worldwide economic downturn. With the completion of the
Private Placement (as defined in the below section), this amount has now been
fully paid and satisfied.
Approval of name change by TSXV
On October 28th, 2010, the Company announced that it has received approval of
its name change to Mountain China Resorts (Holding) Limited from the TSXV
effective October 22nd, 2010.
Major Current Corporate Issue
Update on Changchun Lianhua Mountain Skiing Field Co. Ltd. (Changchun Lianhua")
On November 17, 2010, the Company announced its updates with respect to certain
developments that have taken place with respect to its Changchun Resort. The
government of Erdao district of Changchun city in the Jilin province of the
People's Republic of China (the "Erdao Government") holds the view that the the
Changchun Resort, is still owned by the government and it may, through Changchun
Lianhua Mountain Agricultural Project Development Company Limited ("CCL
Agricultural"), manage the same to the Company's exclusion. The Company
disagrees with the Erdao Government's position. The Company had engaged Global
Law Office, a reputable law firm in PRC, to do legal due diligence on the assets
before they were acquired by the Company. Global Law Office had advised the
Company that the assets acquired are not state-owned assets and the same may be
validly transferred to the Company. Because of CCL Agricultural's and the Erdao
Government's action, the Company has been deprived of management of the
Changchun Resort. The Company has engaged in discussions with the Erdao
Government, Changchun Lianhua Mountain Sports & Travel Development Company
Changchun Sports and CCL Agricultural with an aim of resolving this matter. If
the current situation cannot be resolved through negotiations, the Company may
have to resort to legal means to protect its rights in relation to Changchun
Resort.
As a result of the foregoing, the Company could not obtain financial information
with respect to Changchun Resort, and these financial statements are prepared on
the basis of the omission of Changchun Resort financial information for the
nine-month period ended September 30, 2010, and therefore are not comparable to
previous financial statements of MCR where such financial information of
Chuanchun Resort was included.
Total assets, shareholders' equity, revenue and loss of Changchun Resort in 2009
were $11.71 million (RMB76.13 million), $2.91 million (RMB18.91 million), $1.30
million (RMB7.56 million) and negative $6.00 million (RMB38.32 million)
respectively, which compared with the Company's total assets, shareholders'
equity, revenue and loss of 6%, 4%, 43% and 9% , respectively over the same
period in 2009. If the Company loses the control over Changchun Resort in 2010,
the most significant impact of the exclusion of Chuangchun Resorts' financial
results will be on revenue and loss of the Company.
Financing and Going Concern Update
The Company has completed a number of financings in order to meet its working
capital requirements.
Completion of $15 million Private Placement with Wisecord Holdings Limited
On April 9th, 2010, the Company successfully completed its private placement
with WHL in which WHL subscribed for 100,000,000 common shares at a subscription
price of $0.15 per common share for a total subscription price of $15 million
(equivalent to RMB 102.93 million at the then CAN/ RMB exchange rate) (the
"Private Placement"). WHL subscribed for approximately 49.4% of the equity
interest of the Company (on a fully diluted basis and after the conversion of
MCR's outstanding Class B non-voting shares and the conversion of two-thirds of
the existing US$1.5 million ($1.53 million) loan from Melco Leisure and
Entertainment Group Limited ("MLE"), the holding company of Melco (Luxenbourg)
S.a.r.l, which is one of the shareholders of MCR. The Details of the conversion
of Class B non-voting shares and loan from MLE are given in the following
paragraphs.
Upon closing of the Private Placement, the Company established (in consultation
with WHL) that: the board of the Company be set at nine (9) MCR board members in
total, comprising of six (6) non-independent directors and three (3) independent
directors; the resignation of two of the four existing executive directors of
the Company who have been replaced with 2 new directors nominated by WHL; and
the appointment of an additional two (2) directors of the Company nominated by
WHL. As at September 30th 2010, the composition of the board is five (5)
non-independent directors and three (3) independent directors.
Revised Terms of Shareholder Loans and Call Option with MLE
In connection with the completion of the Private Placement, MLE, WHL and MCR
entered into a supplemental loan agreement (the "Shareholder Loans Agreement")
under which MLE has extended the maturity of its existing US$23 million ($23.74
million) aggregate principal amount in loans to the Company (the "Shareholder
Loans") to June 30th, 2013 such that the Shareholder Loans are no longer due on
demand and accrue interest at the rate of 3% per annum. Pursuant to the
Shareholder Loans Agreement, at any time before June 30th, 2013, if the
Company's 30 consecutive day weighted average trading price exceeds $1.00 per
common share, WHL has the right, subject to any applicable regulatory approvals,
to require MLE to convert all or part of the Shareholder Loans into common
shares (the "Converted Shares") at a 50% discount plus accrued interest at a
price (the "Conversion Price") equal to (a) 70% of the said weighted average
trading price or (b) $1.00, whichever is greater. Further, WHL will have a call
option to buy one-third of the Converted Shares from MLE at the Conversion Price
within 30 days of the conversion (the "Call Option").
In addition, MLE, WHL and MCR executed a binding agreement in relation to the
settlement of US$1.5 million ($1.53 million) loan provided by MLE to the Company
(the "Loan Settlement Agreement"). Pursuant to the Loan Settlement Agreement,
US$1 million ($1.02 million) principal amount of the loan was settled by way of
conversion of the said US$1 million ($1.02 million) principal amount at a price
of $0.15 per common share into 6,686,666 common shares, issued in the name of
Melco (Luxembourg) S.A.R.L. ("ML Luxco"). The remaining US$0.5 million ($0.51
million) principal amount of the loan has been repaid to MLE in cash upon the
completion of the Private Placement.
Conversion of Class B Non-Voting Shares
ML Luxco also converted its 8,437,565 Class-B non-voting shares in the capital
of the Company into common shares in accordance with the terms of the Loan
Settlement Agreement.
Completion of $4.6 million Convertible Bond with Century Zone Limited
On 28 October, 2010, the Company announced that it has completed its convertible
bond financing (the "Offering") with Century Zone Limited ("Century Zone"), the
majority shareholder of WHL for aggregate gross proceeds of $4,600,000. The
convertible bond is due on October 27, 2012, has an interest rate of LIBOR + 3%
and a conversion price of $0.12. The Company will also extend an offer to
existing shareholders who are "accredited investors", to participate in the
Offering on the same terms as those entered into with Century Zone Limited up to
an aggregate amount of $2,000,000. To the extent that such existing shareholders
do not subscribe for the full $2,000,000, the offer will be made to other
"accredited investors". The closing date of the offering is Dec 23, 2010. The
gross proceeds from the Offering will be used to provide working capital to the
Company and to fund the continuing operations of MCR's Sun Mountain Yabuli
Resort.
Going Concern Update
Through the completion of the Company's Private Placement refinancing and
revised terms of the Shareholder Loans with MLE and Completion of Convertible
Bond, the Company has significantly reduced and satisfied its immediate and
current financial obligations. The Company's ability to operate as a going
concern is dependent upon its ability to generate funds from resort operations
and resort real estate activities and/or on borrowing from third parties.
SUMMARY OF OVERALL PERFORMANCE
THREE-MONTH PERIOD ENDED SEPTEMBER 30TH, 2010 (THE "2010 3RD QUARTER")
COMPARED WITH THREE-MONTH PERIOD ENDED SEPTEMBER 30 TH, 2009 (THE "2009
3RD QUARTER")
2010 Period 2009 Period
$'000 RMB'000 $'000 RMB'000
Continuing Operations 111 740 218 1,328
Resort Operations Revenue
Resort Operations Expenses (461) (3,073) (1,112) (6,773)
---------------------------------------
Resort Operations EBITDA (350) (2,333) (894) (5,445)
Add: Other Income 1,488 9,909 - -
Less: Corporate General and
Administrative Expenses (407) (2,711) (1,280) (7,796)
---------------------------------------
Total Operating EBITDA from
Continuing Operations 731 4,865 (2,174) (13,241)
Add: Interest Income 2 16 136 828
Add/(Less): Exchange Gain/(Loss),
net 825 2,471 139 847
Less: Depreciation and
Amortization (1,750) (11,659) (2,209) (13,454)
Less: Finance Costs (777) (4,552) (1,405) (8,557)
Less : Impairment of investments (5,123) (32,646) - -
Add: Recovery of Future Income
Taxes 17 112 27 164
---------------------------------------
Loss from Continuing Operations (6,075) (41,393) (5,486) (33,413)
---------------------------------------
---------------------------------------
(i)In this table, there was no financial data from Changchun Resort for the
2010 Period due to the incident which has been summarized on page 5 of this
MD&A. As at September 30, 2010, the relevant amount related to the
impairment of investment into the Changchun Resort was $5,123 in the
Financial Statements.
Total revenue and net results from continuing operations were from minimal
resort operations only for the three-month period ended September 30th, 2010 and
2009. No real estate sales activities were undertaken during these periods.
Revenue from continuing operations totaled $0.11 million (RMB 0.74 million) for
the 2010 3rd Quarter versus $0.22 million (RMB 1.33 million) over the same
period in the prior year. Operating EBITDA from continuing operations for the
2010 3rd Quarter were $0.73 million (RMB 4.87 million) compared to negative
$2.17 million (RMB 13.24 million) in the 2009 3rd Quarter.
Resort operations expenses from continuing operations totaled $0.46 million (RMB
3.07 million) for the 2010 3rd Quarter compared to $1.11 million (RMB 6.77
million) in the 2009 3rd Quarter. Because of the CCL Agricultural's and the
Erdao Government's action which has been briefly summarized on page 5 of MD&A,
the Company has been deprived of management of the Changchun Resort. Therefore,
the financial information of Changchun Resort couldn't be obtained by the
Company.
Corporate general and administrative expenses ("G&A expenses") from continuing
operations totaled $ 0.41 million (RMB 2.71 million) for the 2010 3rd Quarter
compared to $1.28 million (RMB 7.80 million) in the 2009 3rd Quarter. This
amount mainly comprised executive employee costs, public company costs, audit
and legal fees, corporate information technology costs. And Changchun Resort's
financial data has not been consolidated into the group financial statements
since the incident which has been summarized on page 5 of this MD&A.
Depreciation and Amortization
Depreciation and amortization expense from continuing operations totaled $1.75
million (RMB 11.66 million) for the 2010 3rd Quarter compared to $2.21 million
(RMB 13.45 million) in the 2009 3rd Quarter. The depreciation and amortization
charges are provided using the straight-line method over the estimated useful
lives of each asset category and the term of land use rights under the Group's
accounting policies.
Finance Costs
The Group incurred interest expenses of $0.78 million (RMB 4.55 million) for the
2010 3rd Quarter from continuing operations. This compared to $1.41 million (RMB
8.56 million) for the respective period in 2009. The proceeds of the RMB 250
million bank loan were primarily utilized on redevelopment works at the Sun
Mountain Yabuli Resort. On February 12th, 2010, the Company's indirectly wholly
owned subsidiary, Heilongjiang Yabuli On Snow Asian Game Village Hotel Co. ltd.,
successfully repaid a RMB 120 million (17.88 million) loan to the Harbin Bank
due on February 15th, 2010. Heilongjiang Yabuli then arranged a new loan
facility of RMB 150 million ($22.35 million) with the same bank for a two year
term with a maturity date of February 9th, 2012, and with a fixed annual
interest rate of 5.94%. A short term bridge loan of RMB 74 million ($11.03
million) provided by WHL on February 11th, 2010, facilitated this new loan. The
bridge loan had a term of 60 days with a loan fee of 4.6% for each 30 day period
on the principal amount drawn down and was fully repaid by April 6th, 2010.
Third Quarter Fiscal 2010 Review of Resort Operations
The key drivers of resort operations are skier visits, revenue per visit and
margins. Skier visits are impacted by many factors including the quality of the
on-mountain and resort center facilities, weather conditions, snow quality, the
accessibility of the resort and the cost to the visitor. MCR's strategy to
increase skier visits is primarily focused on upgrading the on-mountain
facilities and building animated resort centers that provide accommodation and
add amenities to attract a broader range of guests. The resort centers also help
to extend the length of stay and spread visits more evenly during the week and
during the season. Apart from a drop in skier visits in 2006 due to a warm
winter, the trend of skier visits has been positive due to the growing
popularity of skiing in China. Revenue per visit is primarily driven by entrance
fees and the attraction of facilities provided, such as quality ski clothing
rentals, ski lessons provided by professional instructors, hotel accommodation
and the quality of food and beverage offerings. In 2008 we completed our initial
upgrades to rental ski clothing and equipment, and the quality and selection of
food and beverage offerings. By upgrading the resort facilities and service,
management expects to be able to increase prices and enhance margins.
The current revenue stream from resort and hotel operations is seasonal and
mostly generated in the first quarter during the ski season (i.e., the January
to March period). Revenue totaled $0.11million (RMB 0.74 million) for 2010 3rd
quarter compared to $ 0.22 million (RMB 1.33 million) during 2009 3rd quarter.
The following table summarizes the results of Resort Operations from continuing
operations (and before corporate G&A expenses) for the 2010 and 2009 3rd
Quarters:(i)
2010 3rd Quarter 2009 3rd Quarter
$'000 RMB'000 $'000 RMB'000
Resort Operations Revenue
Continuing Operations Yabuli Resort 111 740 11 67
Changchun Resort/ LHS Group - - 207 1,261
---------------------------------------
Total Resort Operations Revenue from
Continuing Operations 111 740 218 1,328
---------------------------------------
---------------------------------------
Resort Operations EBITDA
Continuing Operations Yabuli Resort (350) (2,340) (872) (5,312)
Changchun Resort/LHS Group - - (22) (133)
---------------------------------------
Total Resort Operations EBITDA from
Continuing Operations (350) (2,340) (894) (5,445)
---------------------------------------
---------------------------------------
(i)In this table, there was no financial data from Changchun Resort for the
2010 Period due to the incident which has been summarised on page 5 of this
MD&A.
Third Quarter Fiscal 2010 Sun Mountain Yabuli Resort Operations
MCR's Sun Mountain Yabuli Resort opened for winter operations on November 18th,
2009 and closed for operations on April 4th, 2010 for a 138 day operating
season. The winter season operations has commenced on November 27th, 2010.
Revenue in the Yabuli Resort for the 2010 3rd quarter was $0.11 million (RMB
0.74 million) with EBITDA of negative $0.35 million (RMB 2.34 million).
The resort attracted both regional and destination visitors from city ski clubs
as well as independent travelers. Consistent with the response from conference
and event attendees, visitors consistently ranked the Sun Mountain Yabuli Resort
the superior ski experience in China. This exceeded both expatriate and domestic
market expectations.
With the completion of the Private Placement during the second quarter of 2010,
the Company can now focus on implementing enhanced marketing and sales programs
to drive revenue while maintaining discipline over its operating cost base. In
the near future, the Company has been advised that it is expected that Harbin
official transport department will open an express train line from Beijing to Mu
Dan Jiang (a major city of Harbin) with a stop in Yabuli. It is expected that
this expedient new express train differs from the current train lines in that it
will reduce a considerable amount of travel time and attract additional visitors
from major cities such as Beijing and Tianjin.
Third Quarter Fiscal 2010 Review of Resort Real Estate Development
MCR's resort real estate development activities are focused on the development
of four and five-star hotel rooms and suites together with luxury resort
vacation homes. The hotel units are usually built over ground-floor commercial
space that MCR either retains for its own operations or leases out to
third-party tenants. In order to broaden market appeal, the resort vacation home
units are sold with Club Member Services(2) allowing owners to be rewarded and
recognized within the properties as VIP customers and receive premium services
when they stay at their properties including provisioning, house-keeping and
executive chef services.
MCR's business strategy for resort real estate has two major elements: (i) to
maximize profits from the sale of real estate units; and (ii) to maximize
accommodation inventory for destination visitors to stay at the resort. The
Company has significant flexibility over its profitability from real estate
activities in its resorts that include:
-- The development for sale of resort vacation homes that can be
constructed within a 9 - 12 month development cycle and where sales
pricing can be increased based on development density, proximity to
resort amenities (ski-in / ski-out locations, golf course fairway
frontage, etc.), size and configuration of unit;
-- The two hotels which completed in 2009 were transferred from
Construction in Progress to operating fixed assets within Buildings.
-- The development for sale condohotel units has not been commenced. Such
development can be constructed within an 18 - 24 month development cycle
and where sales pricing can be increased based on amenities offered
within each development (e.g. spa) and proximity to resort amenities,
size and configuration of unit, and rental returns since these units are
included within the rental pool of units under MCR's management; and
-- The joint venture development for sale of land parcels with other
developers that allow the company to pass on construction, sales and
capital risk to others and where profitability can be regulated by the
number and size of units developed in such an arrangement.
The ability to maintain this development flexibility is a function of the
Granted Land Use Rights ("Granted LURs") that the Company currently controls
through direct control or under option. In China, private users secure the right
to use land through three processes: (i) obtaining "allocated land", (ii)
obtaining "granted land", or (iii) entering into a traditional lease where the
lessor, if a private party, holds Granted LURs over the leased lands, or the
land is designated as state-owned construction land and leased directly from the
government. Granted LURs may be transferred, leased, or mortgaged to a third
party and are particularly relevant to asset sales and real estate development
where title may be sold to a third party. Granted LURs can be mortgaged or
pledged as a secured asset to obtain bank financing. Generally speaking, it is
necessary for a property developer to secure Granted LURs, whether through a
grant by the state or through acquisition of existing rights from the current
holder. The rights of the holder of Granted LURs will be evidenced by a land use
rights certificate issued by the PRC government at county or higher levels.
For the Sun Mountain Yabuli Resort, MCR controls Granted LURs of approximately
220.3 hectares which includes 127.5 hectares at the base of the mountain
available for real estate development and approximately 92.8 hectares on the
mountain.
(2) Club Member Services revenue is driven by the completion of the resort
development improvements and resort vacation homes. As resort vacation homes are
yet to be completed in the resorts no Club Member Services operations are being
undertaken at this time.
Third Quarter Fiscal 2010 Overview of Sun Mountain Yabuli Resort Real Estate
Development
Since May 2010, the Company has been working on the exterior decoration of the
55 homes (a total of 75 homes) of which three were completed with interior
finishing. The sales team is in the process of expanding in order to market the
homes extensively across the country. The sales campaign will start to be fully
implemented from this coming snow season in the fourth quarter of 2010.
Third Quarter Fiscal 2010 Review of Corporate Operations
Fluctuations in Foreign Exchange
MCR earns all of its revenue in Chinese RMB. Accordingly, reported revenue will
fluctuate with changes in the exchange rate to Canadian dollars. The average
exchange rate for the third quarter of 2010 and closing exchange rate as at
September 30th, 2010 was $0.15012 and $0.14899 to 1 RMB, respectively.
Income Tax
Under the Law of the People's Republic of China on Enterprise Income Tax (the
"EIT Law") and Implementation Regulation of the EIT Law, the tax rate of the PRC
subsidiaries is 25% from January 1st, 2008 onwards. During the period from
January 1st, 2010 to September 30th, 2010, there is no material income tax
effect.
Legal Proceedings
MCR currently, and from time to time, is involved in litigation in the ordinary
course of its business. The Company does not believe that it is involved in any
litigation that will, individually or in the aggregate, have a material adverse
effect on its financial condition or results of operations or cash flows.
MCR's resorts can be subject to lawsuits with respect to personal injury claims
related principally to skiing activities at each resort. The Company maintains
liability insurance that it considers adequate to insure claims related to usual
and customary risks associated with the operation of a ski resort.
There are no financially material environmental protection requirements in
connection with MCR's resort operations.
NINE-MONTH PERIOD ENDED SEPTEMBER 30 TH, 2010 (THE "2010 PERIOD") COMPARED
WITH NINE-MONTH PERIOD ENDED SEPTEMBER 30 TH, 2009 (THE "2009 PERIOD")(i)
2010 Period 2009 Period
$'000 RMB'000 $'000 RMB'000
Continuing Operations
Resort Operations Revenue 1,881 12,438 1,882 10,435
Resort Operations Expenses (2,936) (19,463) (6,364) (35,790)
---------------------------------------
Resort Operations EBITDA (1,055) (7,025) (4,482) (25,355)
Add: Other Income 1,493 9,946 1 6
Less: Corporate General and
Administrative Expenses (1,946) (9,988) (7,682) (43,048)
---------------------------------------
Total Operating EBITDA from
Continuing Operations (1,508) (7,067) (12,163) ( 68,397)
Add: Interest Income 16 108 458 2,614
Add/(Less): Exchange Gain/(Loss),
net 3,018 17,680 276 1,630
Less: Depreciation and
Amortization (5,502) (36,547) (5,997) (34,546)
Less: Finance Costs (3,186) (19,895) (6,201) (35,031)
Less : Impairment of investments (5,123) (32,646) - -
Add: Recovery of Future Income
Taxes 53 351 0 497
---------------------------------------
Loss from Continuing Operations (12,232) (78,016) (23,627) (133,233)
---------------------------------------
---------------------------------------
(i) MCR could not obtain financial information for the 2010 period,
therefore, the FS and MD&A are prepared on the basis of the omission of the
Changchun Resort financial information for the 2010 Period. As at September
30, 2010, the relevant amount related to the impairment of investment into
the Changchun Resort was $5,123 in the Financial Statements.
Total revenue and net results were driven by resort operations for the
nine-month period ended September 30th, 2010 and 2009. No real estate sales
results were delivered during these periods. Revenue totaled $1.88million (RMB
12.44 million) for the 2010 Period versus $1.88 million (RMB 10.44 million) in
2009 Period. Resort operations were severely limited in both the 2009 and 2010
Periods due to MCR's financial constraints caused by the global financial
crisis. The Company dramatically reduced expenditures on marketing and promotion
as part of a cash conservation strategy in order to continue the development of
its premiere Sun Mountain Yabuli Resort. Operating EBITDA for the 2010 period
was negative $1.51 million (RMB 7.07 million) compared to negative $12.16
million (RMB 68.40 million) over the same period in 2009. In addition, MCR could
not obtain financial information for 2010 period, therefore, the FS and MD&A are
prepared on the basis of the omission of the Changchun Resort financial
information for the 2010 Period.
Resort operations expenses totaled $2.94million (RMB19.46 million) for the 2010
Period compared to $6.36 million (RMB 35.79 million) in the 2009 Period. Resort
operations were severely limited in both 2009 and 2010 Periods due to MCR's
financial constraints caused by the global financial crisis. The Company
dramatically reduced expenditures. After the completion of the Private
Placement, the Company maintained discipline over its operating cost base.
Corporate G&A expenses totaled $ 1.95 million (RMB 9.99 million) for the 2010
Period compared to $7.68 million (RMB 43.05 million) over the same period in
2009. This amount was mainly comprised of executive employee costs, public
company costs, audit and legal fees, corporate information technology costs,
Beijing head office occupancy costs. The Changchun Resort's financial data has
not been consolidated into the group financial statements since the incident
which has been summarized on page 5 of this MD&A.
Depreciation and Amortization
Depreciation and amortization expense totalled $ 5.50 million (RMB 36.55
million) for the 2010 Period compared to $6.00 million (RMB 34.55 million) in
the 2009 Period. The depreciation and amortization charges are provided using
the straight-line method over the estimated useful lives of each asset category
and the term of land use rights under the Group's accounting policies.
Finance Costs
The Group incurred interest expenses of 3.19 million (RMB 19.90 million) during
the 2010 period, compared to $6.20 million (RMB 35.03 million) during the
respective period in 2009. The decrease was due to additional bank loan secured
by the Group and shareholder loans in 2009 and a $2.24 million (RMB12.25
million) one-time charge related to finance arrangement fee and transaction
costs pertaining to the new RMB 250 million bank loan. The proceeds were
primarily employed in the redevelopment works at Yabuli Resort. There was a
short term bridge loan of RMB 74 million ($11.03 million) provided by WHL on
February 11th, 2010. The bridge loan had a term of 60 days with a loan fee of
4.6% for each 30 day period on the principal amount drawn down and was fully
repaid by April 6th 2010.
Given the early stage nature of the Company's redevelopment of its resorts, the
current revenue stream from resort and hotel operations is seasonal and mostly
generated in the first quarter during the ski season (i.e., the January to March
period). Revenue from operations totaled $ 1.88 million (RMB 12.44 million) for
the 2010 Period. Operating expenses within the resorts were mainly attributable
to snow making, grooming, staffing, fuel and utilities, which also include the
G&A expenses relating to these resorts' senior management, marketing and sales,
information technology, insurance and accounting.
2010 Period Review of Resort Operations
Revenue was constrained as the Company was required to maintain cash reserves
and limit all expenditures prior to the completion of the Private Placement. As
such the Company did not implement any major marketing campaigns and limited all
advertising expenses with the exception of corporate sales and functions and
season pass sales to major ski clubs in Harbin, Changchun and Beijing.
On February 17th, 2010, the Company entered into definitive management
agreements with Club Med to operate and manage two hotels at the Sun Mountain
Yabuli Resort ("Club Med Yabuli Resort"). Club Med will also provide all
marketing and sales services for the Club Med Yabuli Resort at their cost under
a commission arrangement. The Agreements have renewable initial terms of ten
years with performance management fees tied to gross operating profit. As well,
Club Med will provide funding of up to US$3 million ($3.05 million) for
additions to the Club Med Yabuli Resort so as to include facilities and
refinements to meet Club Med's brand and operating standards.
During the third Quarter 2010, Club Med has completed construction refinements.
The handover of operations and management of hotels from the Company to Club Med
has completed on October 15th, 2010. Club Med 2010 winter opening has commenced
on November 27th, 2010.
The Club Med Yabuli Resort marks China's first Club Med collaboration. Located
in Heilongjiang Province, this winter ski resort sits atop a breathtaking
mountain. This new Club Med resort will provide clients with "an all-inclusive"
luxury resort experience. Open all year, the resort boasts 284 luxurious guest
rooms including 27 with full room service in Mountain View Suites, 22 deluxe
rooms, and 235 superior rooms. The resort also provides daytime supervised
facilities such as the Petit Club and the Mini Club which offer a place for
young adults and children to relax.
On March 1st, 2010, the Company entered into a strategic relationship agreement
with the China Entrepreneurs' Forum ("CEF") under which the CEF has agreed to
hold all of its future Annual Forums at the Sun Mountain Yabuli Resort. CEF and
MCR have established a "CEF Founders Club". This prestigious club actively
promotes the resort vacation homes situated in the Sun Mountain Yabuli Resort
for purchase by CEF members. Furthermore, the Club works with its 5,000 member
companies to select Sun Mountain Yabuli Resort to host their corporate meetings
and retreats.
When the standard of these improved amenities and in resort lodging are combined
with marketing activities that increase and position attendance and drive demand
throughout the overall ski season, we anticipate advanced bookings, revenue per
guest and length of stay to increase throughout the winter months. The Company
shall also implement additional summer attractions as well as marketing to
corporate and incentive group segments to increase attendance throughout the
summer months.
The following table summarizes the results of Resort Operations (and before
corporate G&A expenses) for the 2010 Period:(i)
2010 Period 2009 Period
$'000 RMB'000 $'000 RMB'000
Resort Operations Revenue
Yabuli Resort 1,881 12,438 936 5,125
Changchun Resort 946 5,310
---------------------------------------
Total Resort Operations Revenue 1,881 12,438 1,882 10,435
---------------------------------------
---------------------------------------
Resort Operations EBITDA
Yabuli Resort (1,055) (7,025) (4,479) (25,335)
Changchun Resort (3) (20)
---------------------------------------
Total Resort Operations EBITDA (1,055) (7,025) (4,482) (25,355)
---------------------------------------
---------------------------------------
(i) MCR could not obtain financial information for the 2010 period,
therefore, the FS and MD&A are prepared on the basis of the omission of
the Changchun Resort financial information for the 2010 Period.
2010 Period Sun Mountain Yabuli Resort Operations
Revenue in Yabuli Resort for the 2010 period was $1.89 million (RMB 12.43
million) with EBITDA of negative $1.06 million (RMB 7.03 million).
As before noted revenue at Yabuli was constrained as the Company was required to
maintain cash reserves and limit all expenditures prior to the completion of the
Private Placement. As such the Company did not implement any major marketing
campaigns and limited all advertising expenses with the exception of corporate
sales and functions and season pass sales to major ski clubs in Harbin,
Changchun and Beijing.
Such corporate functions included the 10th China Entrepreneurs Forum held at the
resort from February 26th to 28th, 2010. This major conference was attended by
over 500 of the country's most prominent business leaders and senior executives
from industries ranging from banking, real estate, insurance and manufacturing.
This was the 10th Forum that had been held at the Sun Mountain Yabuli Resort.
The overall consensus from all attendees was exceptionally positive in regards
to MCR's operations at the resort. Subsequent to the event on March 1st, 2010,
MCR announced that it has entered into a strategic relationship agreement with
the CEF under which the CEF agreed to hold all of its future Annual Forums on a
permanent basis at the Sun Mountain Yabuli Resort. In addition, both parties
also agreed to establish a "CEF Founders Club" that actively promotes the resort
vacation homes situated in the Sun Mountain Yabuli Resort for purchase by CEF
members, as well as work with its 5,000 member companies to select the Sun
Mountain Yabuli Resort as the site for their corporate meetings and retreats.
Other corporate events were held throughout the season with such organizations
as major luxury automobile companies, financial institutions and sporting
groups.
The resort attracted both regional and destination visitors from city ski clubs
as well as independent travelers. Consistent with the response from conference
and event attendees, visitors consistently ranked the Sun Mountain Yabuli Resort
the superior ski experience in China which exceeded both the expatriate and
domestic market expectations. The ski season at the resort runs from November to
April. As China's most extensive ski resort, Sun Mountain Yabuli boasts 17
different trails with varying levels of difficulty for a total length of 31,075
meters. In addition to skiing, other outdoor sports such as sledding and skating
are accessible. The resort is outfitted with first-class ski equipment available
for leasing.
With the completion of the Private Placement during the second quarter of 2010,
the Company can now focus on implementing enhanced marketing and sales programs
to drive revenue while maintaining discipline over its operating cost base.
As before noted, the Company has entered into definitive management agreements
with Club Med to operate and manage two hotels at the Sun Mountain Yabuli
Resort. Club Med will also provide all marketing and sales services for the Club
Med Yabuli Resort at their cost under a commission arrangement. Management
anticipates that with the inclusion of Club Med, the resort shall benefit with
increased revenue per guest due to the "all inclusive" pricing of Club Med
vacations and advanced sales prior to the winter season. The all-inclusive
experience at Club Med Yabuli Resort includes ski-related services, ski tickets,
ski schools, professional training, high-quality ski equipment, children's
clubs, gourmet cuisine, the services of staff specializing in hospitality, and a
friendly comfortable atmosphere.
From March 20th to 21st, 2010 Club Med held a major international media event at
the resort launching the marketing of Club Med Yabuli Resort for the 2010/11
winter season. The event was attended by leading international travel and
leisure media representatives from Europe, Asia, Australia, and China and
included a taste of what the new Club Med Yabuli Resort will include when
operational for the coming winter season. Guests to the event experienced the
finest ski conditions in China complimented with international and local
cuisine, live entertainment, and Club Med's extraordinary hospitality provided
by their over 50 international GO's (Club Med's signature Gentils Organisateurs
resort managers) who were on hand for the event.
2010 Period Review of Resort Real Estate Development
As discussed above, MCR's resort real estate development activities are focused
on the development of four and five-star hotel rooms and suites together with
luxury resort vacation homes.
2010 Period Overview of Sun Mountain Yabuli Resort Real Estate Development
Prior to the first quarter of 2010, the Company completed the construction of 55
home structures (of a total of 75 homes) of which three were been completed with
interior finishing options and appliances as show homes for sales and marketing
purposes. The homes are located on a prominent ski in ski out location adjacent
the resort center. No home construction was undertaken during the winter.
Since May 2010, the Company has been working on the exterior decoration of the
55 homes (a total of 75 homes) of which three were completed with interior
finishing. The sales team is in the process of expanding in order to market the
homes extensively across the country. The sales campaign will start to be fully
implemented from this coming snow season in the fourth quarter of 2010.
These homes were originally intended for sale for the personal use by their
owners and were not considered to be placed into a rental pool. However,
customer response after reviewing the resort's operations this winter and
location of the homes indicate the majority of buyers wish to place their homes
into a rental pool arrangement. As such the Company is in discussions with a
number of rental management companies in regards to the rental program for these
homes which includes final selection of loose furniture, artwork and operating
items (linens, kitchenware, etc). The Company aims to have these homes fully
completed in 2010 once the rental management company is engaged and buyers have
selected their home and finishing preferences.
MCR has yet to complete a final construction contract with the contractor for
these homes. The construction continues to be financed by the builder and the
Company expects a final contract can be agreed once buyers have selected their
home finishing packages. During the first quarter of 2010, a prepayment of RMB
10 million ($1.49 million) has been paid to the builder to finance the
construction of real estate homes. On July 12th, 2010, a further RMB 20 million
($2.98 million) has been paid to the builder for the purpose of financing the
construction of real estate homes.
As of September 30th, 2010, approximately $17.66 million has been recorded as
Properties under Development for Sale ("PUD") (of which approximately $2.88
million is allocated to the first phase of 75 homes) in the 2010 Interim
Consolidated Financial Statements of the Company.
2010 Period Review of Corporate Operations
G&A Expenses
Corporate G&A expenses totaled $1.95 million (RMB 9.99 million) for the 2010
period compared to $7.68 million (RMB 43.05 million) over the same period in
2009. Corporate G&A expenses mainly comprise executive employee costs, public
company costs, audit and legal fees, corporate information technology costs and
Beijing head office occupancy costs. However, during this period the Company
reduced corporate staff, compensation and occupancy costs due to the reduction
of MCR's resort portfolio following the divestment of the Jilin Resort and
Beijing Resort in the last quarter of 2008 and the ongoing discussions to divest
the Changchun Resort and the decision to forego major capital projects continued
in 2009. And Changchun Resort's financial data has not been consolidated into
the group financial statements since the incident which has been summarized on
page 5 of this MD&A.
Fluctuations in Foreign Exchange
MCR earns all of its revenue in Chinese RMB. Accordingly, reported revenue will
fluctuate with changes in the exchange rate to Canadian dollars. The average
exchange rate for September 2010 and closing exchange rate as at 30th September,
2010 was $0.15012 and $0.14899 to 1 RMB, respectively.
Income Tax
On March 16th, 2007, the PRC promulgated the New Tax law by Order No. 63 of the
President of PRC. On December 6th, 2007, the State Council of the PRC issued
Implementation Regulations of the New Tax law. The New Tax law and
Implementation Regulations changed the tax rate from 33% to 25% for certain MCR
subsidiaries from January 1st, 2008. During the 2010 Period, there was no
material income tax effect.
Legal Proceedings
MCR currently, and from time to time, is involved in litigation in the ordinary
course of its business. The Company does not believe that it is involved in any
litigation that will, individually or in the aggregate, have a material adverse
effect on its financial condition or results of operations or cash flows.
It should be noted that the Company is managing its cash flow as it continues to
seek financing to meet its business requirements. This includes maintaining an
open dialogue with all of its current vendors and suppliers.
MCR's resorts can be subject to lawsuits with respect to personal injury claims
related principally to skiing activities at each resort. The Company maintains
liability insurance that it considers adequate to insure claims related to usual
and customary risks associated with the operation of a ski resort.
There are no financially material environmental protection requirements in
connection with MCR's resort operations.
Summary of Quarterly Results(i)
Q3-10 Q2-10 Q1-10 Q4-09
(in thousands of Canadian dollars, except
per share amounts)
Operating revenue from
continuing operations 111 13 1,758 876
Loss from continuing operations (6,075) (3,752) (2,403) (40,717)
Results of discontinued
operations - - -
Net loss (6,075) (3,752) (2,403) (40,717)
Loss per share from continuing
Operations
Basic (0.05) (0.03) (0.05) (0.46)
Diluted (0.05) (0.03) (0.05) (0.46)
Net loss per share
Basic (0.05) (0.03) (0.05) (0.46)
Diluted (0.05) (0.03) (0.05) (0.46)
Q3-09 Q2-09 Q1-09 Q4-08
(in thousands of Canadian dollars, except
per share amounts)
Operating revenue from
continuing operations 218 149 3,245 1,118
Loss from continuing operations (5,486) (8,517) (11,628) (98,254)
Results of discontinued
operations (489) - - (20,746)
Net loss (5,975) (8,517) (11,628) (119,000)
Loss per share from continuing
Operations
Basic (0.06) (0.10) (0.13) (1.12)
Diluted (0.06) (0.10) (0.13) (1.12)
Net loss per share
Basic (0.07) (0.10) (0.13) (1.36)
Diluted (0.07) (0.10) (0.13) (1.36)
(i) In this summary, there was no restatement of prior periods' financial
data in connection with the results of discontinued operations from the
Beijing, Jilin and Beidahu Resorts. There was no financial data from
Changchun Resort for the 2010 Period.
Several factors impact comparability between quarters:
The timing of disposals. MCR disposed 100% of the Beijing and Jilin Resorts in
the fourth quarter of 2008 and the major assets and prepaid lease payment of the
Beidahu Resort in the third quarter of 2009. The financial results of these
resorts up to the date of disposal are excluded from the continuing operations,
and included in the results of discontinued operations as stated in the 2009
Annual Audited Consolidated Financial Statements of the Company.
The timing of discontinued operations. The Company announced on October 5th,
2009, that the agreement (the "Acquisition Agreement") with the Jilin Beidahu
Sports and Tourism Industry Development Company Limited ("Jilin Beidahu
Development Zone") dated November 22nd, 2007 for the acquisition of the Beidahu
Resort was terminated. The acquisition terms for Beidahu Resort included an
initial payment of RMB 30 million ($4.47 million) paid on March 1st, 2008, a
second installment of RMB 70 million ($10.43 million) due December 31st, 2008,
and a final payment of RMB 120 million ($17.88 million) due December 31st, 2010.
The Acquisition Agreement was terminated pursuant to its terms as MCR had failed
to pay the RMB 70 million ($10.43 million) payment which was due on December
31st, 2008. The Company was unsuccessful in renegotiating terms of the
Acquisition Agreement to defer the acquisition payments and the Acquisition
Agreement was terminated on September 17th, 2009.
The seasonality of ski resorts and hotels operations. Revenue and operating
EBITDA from this business are weighted disproportionately to the first and
fourth quarters each year. As before stated:
The Sun Mountain Yabuli Resort was closed for operations given the major
construction being undertaken throughout 2008 to late January 2009. This resort
hosted two major events in February 2009. It was closed for operations on April
6th, 2009 and re-opened for its winter 09/10 operations on November 18th, 2009.
The operation for winter 09/10 was closed on April 4th, 2010.
Summer operations were undertaken at the Changchun Resort but were
disproportionate to winter operations that are typically more significant in
terms of visitation and revenue. Changchun Resort closed for winter operations
on March 15th, 2009 and re-opened for its winter 09/10 operations on November
21st, 2009. The operation for winter 09/10 was closed on March 7th, 2010.
The Beidahu Resort had only minimal 2008 summer operations mainly concentrating
on post acquisition integration leading into the core winter operations
beginning in the fourth quarter of 2008. Beidahu Resort opened for winter
operations on November 12th, 2008 and closed for operations on March 22nd, 2009
for a 131 day operating season. As mentioned above, the operation of the Beidahu
Resort was handed over to Jilin Beidahu Development Zone in mid-August 2009.
The timing of recording reserves and valuation adjustments. In the fourth
quarter of 2008, MCR wrote down the goodwill amounting to $96.09 million due to
the global economic crisis in the second half of 2008. By the end of 2009, MCR
further wrote down the goodwill by $22.70 million to reflect the current
macro-economic environment as China and international economies recover from the
financial crisis with MCR's recovery yet to be fully realized in 2010.
Private placement. On April 9th, 2010, the Company successfully completed its
private placement with Wisecord Holdings Limited ("WHL") in which WHL subscribed
for 100,000,000 common shares at a subscription price of $0.15 per common share
for a total subscription price of $15 million (the "Private Placement") or RMB
102.93 million. WHL subscribed for approximately 49.4% of the equity interest of
the Company (on a fully diluted basis and after the conversion of MCR's
outstanding Class B non-voting shares and the conversion of two-thirds of the
existing US$1.5 million ($1.53 million) loan from Melco Leisure and
Entertainment Group Limited ("MLE"), a beneficial shareholder of the Company).
The Exclusion of Changchun Resort. The financial statements are prepared on the
basis of the omission of the Changchun Resort financial information for the
nine-month period ended September 30, 2010 due to the fact that the financial
information of Changchun Resort could not be obtained by the management of MCR.
Liquidity and Capital Resources
Cash Flow and Cash Position
The following table summarizes our major sources and uses of cash for the 2010
3rd Quarter. This table should be read in conjunction with the interim
consolidated statement of cash flows.
2010 3rd Quarter
-------------------
$'000
Cash outflow from operations (24,551)
Cash inflow from financing activities 15,351
Cash outflow from investing activities 8,524
-------------------
Net cash (outflow)/inflow (676)
-------------------
-------------------
Funds from financing activities for the 2010 Period were comprised primarily of:
(i) a bank loan repayment with the Harbin Bank for an amount of RMB 120 million
($17.88 million) in February 2010; (ii) a bank loan with the Harbin Bank drawn
down for an amount of RMB 150 million ($22.35 million) in February 2010; (iii)
the proceeds of the Private Placement of RMB 96 million ($14.30 million) in
February 2010. and (iv) a bridge loan advanced from WHL for an amount of RMB 74
million ($11.03 million) in February 2010; The bridge loan had a term of 60 days
with a loan fee of 4.6% for each 30 day period on the principal amount drawn
down and was fully repaid by April 6th 2010.
Funds used for investing activities for the 2010 Period mainly included capital
expenditures for resort and hotel operations assets of the Group.
Contractual Obligations
In normal operations, MCR enters into arrangements that obligate it to make
future payments under contracts such as debt and lease agreements. The following
table summarizes our contractual obligations as at September 30th, 2010 in the
future periods:
Payments due by period
Less than Over 5
Total 1 year 2-5 years years
(in thousands of Canadian dollars)
Accounts payable and accrued
liabilities 1,146 1,146
Other payables 11,589 8,111 3,478
Amount due to related parties 341 341
Amount due to intermediate
shareholder 27,165 27,165
Bank loans 69,388 3,057 66,331
Purchase obligations(3)(3) 2,856 2,856
--------------------------------------
Total 112,755 15,781 96,974
--------------------------------------
--------------------------------------
(3) This refers to the capital commitments contracted for but not provided
in respect of the construction of property and equipment. Apart from
this, there are additional capital commitments amounting to $0.026
million, which are authorized but not contracted for in respect of
construction of property and equipment.
Key indicators as to the Company's liquidity and capital resources as of
September 30th, 2010 and December 31st, 2009 are noted in the following table:
(in thousands of Canadian dollars except September December
for ratios) 30th, 2010 31st, 2009
----------------------------------------------------------------------------
Current Ratio(4) 1.60:1 0.23:1
Free Cash 340 1,636
Working Capital(5) 9,988 (57,773)
Total Assets 182,429 193,308
Total Debt(6) 105,406 121,852
Total Equity(7) 77,023 71,456
Total Debt to Total Equity Ratio 1.37:1 1.71:1
Working Capital and Funding Updates
MCR's working capital balance was $9.988 million as of September 30th, 2010
(December 31st, 2009 was negative $57.77 million). The balance does not include
any commitments to the Harbin general contractor regarding the completion of
resort vacation homes at the Sun Mountain Yabuli Resort, which were incurred
after September 30th, 2010.
On February 12th, 2010, the Company's indirect wholly owned subsidiary,
Heilongjiang Yabuli On Snow Asian Game Village Hotel Co. Ltd., repaid the full
principal amount of its RMB 120 million ($17.88 million) loan with the Harbin
Bank and also entered into a new loan agreement with the same bank for a loan
facility of RMB 150 million ($22.35 million), which has a term of two years with
principal repayable on February 9th, 2012, and a fixed annual interest rate of
5.94%.
The new loan was facilitated by a short term bridge loan of RMB 74 million
($11.03 million) provided by WHL on February 11th, 2010. The bridge loan has a
term of 60 days with a loan fee of 4.6% for each 30 day period on the principal
amount drawn down and has been fully repaid by April 6th, 2010.
The Company has continued to actively pursue a number of alternate financing
sources in order to meet working capital requirements.
On 28 October, 2010, the Company announced that it has completed its convertible
bond financing (the "Offering") with Century Zone Limited ("Century Zone"), the
majority shareholder of WHL for aggregate gross proceeds of $4,600,000. The
convertible bond is due on October 27, 2012, has an interest rate of LIBOR + 3%
and a conversion price of $0.12. The Company will also extend an offer to
existing shareholders who are "accredited investors", to participate in the
Offering on the same terms as those entered into with Century Zone up to an
aggregate amount of $2,000,000. To the extent that such existing shareholders do
not subscribe for the full $2,000,000, the offer will be made to other
"accredited investors". The closing date of the offering is expected to be on or
about December 23, 2010.The gross proceeds from the Offering will be used to
provide working capital to the Company and to fund the continuing operations of
MCR's Sun Mountain Yabuli Resort.
(4) Current ratio is defined as total current assets divided by total
current liabilities
(5) Working capital is defined as total current assets less total current
liabilities
(6) Total debt is defined as total current liabilities plus total non-
current liabilities
(7) Total equity is equal to the total shareholders' equity
Meanwhile, the Company is undertaking a number of measures to reduce its costs
and overhead while seeking new funds. See "Risk Factors" concerning
"Availability and Cost of Credit" and "Deterioration of Economic Conditions",
regarding future funding.
Other Financial Information
Goodwill
Goodwill of $19.50 million as at September 30th, 2010 (December 31st, 2009:
$20.14 million) arose from the acquisition of MCR Cayman and its subsidiaries on
May 27th, 2008. This was after the write off of the relevant amounts related to:
(i) the disposition of MCR's Beijing Resort and Jilin Resort amounting to $21.73
million, and (ii) the relevant amounts related to the impairment of goodwill of
Changchun Resort, Beidahu Resort and Yabuli Resort, amounting to $96.09 million
and $22.70 million, in 2008 and 2009 respectively, in view of the current
macro-economic environment as China and international economies recover from the
financial crisis with MCR's recovery yet to be fully realized in 2010. The
Company is not aware of any significant adverse events which trigger an
impairment indictor during the 2010 Period and therefore, no impairment test has
been performed as at September 30th, 2010. The movement in current period
represents the currency alignment for the period.
Property and Equipment and Construction in Progress
Property and equipment net of accumulated depreciation, including the
construction in progress, was $94,236million as of September 30th, 2010
(December 31st, 2009: $109.26 million). It consists of $ 77,910 million of
existing buildings and ski lifts, and $7.18 million of construction in progress
across various resorts. Further, the Company has pledged property and equipment
for an amount of $91.41 million as at September 30th, 2010 to secure its bank
loans.
The Company has (i) capital commitments contracted for but not provided, and
(ii) authorized but not contracted in respect of the construction of property
and equipment of $2.86 million and $ 0.026 million, respectively.
Prepaid Lease Payment
Prepaid lease payments net of amortization was $43 million, including the
current and non-current portion, as of September 30th, 2010 (December 31st,
2009: $47.53 million). It mainly includes all the Granted LURs held by Yabuli
Resort of approximately 220.3 hectares which includes 127.5 hectares at the base
of the mountains available for real estate development. The Company has pledged
Granted LURs having a carrying value of approximately $38.89 million located in
the Sun Mountain Yabuli Resort at September 30th, 2010 to secure the bank loans.
Off-Balance Sheet Arrangements
The construction costs for the 55 resort vacation homes being constructed at the
Sun Mountain Yabuli Resort are currently being financed by the general
contractor. The Company has not yet finalized a construction contract agreement
with the contractor. The total construction costs for the 55 resort vacation
homes, other than $17.66 million recorded under the PUD, would constitute a
future commitment of the Company not recorded within the third quarter of 2010
financial statements.
Other than the construction costs mentioned above, MCR does not have any
off-balance sheet arrangements that have, or are reasonably likely to have, a
current or future effect on the results of operations or financial condition of
MCR including, without limitation, such considerations as liquidity and capital
resources that have not previously been discussed.
Transactions with Shareholders and Related Parties
As of September 30th, 2010, the amount due to Melco Services Limited ("Melco
Services") was $0.31 million, which is unsecured, non-interest bearing and
repayable on demand. This balance is mainly derived from the provision of
advisory services by Melco Services to MCR.
During the 2010 Period, the Company incurred $0.085 million of advisory service
fees payable to Melco Services pertaining to a service agreement entered into on
August 15th, 2008. The agreement stipulates that Melco Services shall provide
various professional services utilizing its expertise and personnel for a
monthly fee not to exceed HK$500,000 ($65,259).
As mentioned in the previous section, upon the completion of the Private
Placement, the amount of US$1.5 million ($1.55 million) has been settled through
conversion and repayment and the terms of the remaining two shareholders loans
have been revised with repayment of the two shareholder loans due on June 30th,
2013.
As at September 30th, 2010, the loans from intermediate shareholders include the
remaining two shareholder loans from Melco Leisure and Entertainment Group
Limited ("MLE") in the principal amounts of US$12 million ($12.20 million) (the
"MLE US$12m Loan") and US$11 million ($11.19 million) (the "MLE US$11m Loan")
respectively. The original terms of the MLE US$12m Loan and the MLE US$11m Loan
were interest bearing at 3-month LIBOR plus 3% and non-interest bearing with
fixed repayment terms to March 31, 2010 and March 31, 2010, respectively.
Through a Supplemental Loan Agreement made on April 8, 2010, the new terms of
both loans are interest bearing at 3% per annum with fixed repayment terms to
March 31, 2013. Accrued interest is repayable quarterly. As at April 8th, 2010,
the outstanding accrued interests arising from the MLE US$12m Loan amounted to
US$0.29 million ($0.29 million). All loans are unsecured.
Both Melco Services and MLE are subsidiaries of MIDL, a company held a
beneficial interest in one of the shareholders of MCR. Therefore, both Melco
Services and MLE are the related companies of MCR.
Restricted Stock Units
On June 2nd, 2009, the Company adopted the Restricted Stock Unit Plan ("RSU
Plan") after the approval by the shareholders on the same date so as to provide
employees, consultants, and/or directors of the Company with an additional
incentive program to further the growth and development of the Company and to
encourage them to remain with the Company. On the same date, the Company granted
a total of six RSU awards ("RSU awards"), one to each of the non-management
directors. The RSU awards are valued at $80,000 each and will be satisfied with
common shares to be issued from treasury in accordance with the terms of the RSU
Plan. These awards will vest equally in one-third portions on the anniversary
date of the grant over a three year period, that is, on June 2nd, 2010, June
2nd, 2011 and June 2nd, 2012 respectively. As at September 30th, 2010, the
Company had outstanding 4 RSU awards with an aggregated value of $320,000.
On May 3rd, 2010, an additional 261,436 common shares of the Company were issued
from treasury under the RSU Plan and, after such issuance, the Company has
outstanding 4 RSU awards with an aggregated value of $320,000. The first portion
of the RSU awards in the aggregate value of $106,664 operated to the non-
management directors has not yet been satisfied as at September 30, 2010, but
are expected to be satisfied with common shares to be issued from treasury.
Capital Structure and Outstanding Share Data
The Company is authorized to issue an unlimited number of common shares and
unlimited number of Class B non-voting shares without nominal or par values.
Each common share provides the holder with one vote. Each Class B non-voting
share is convertible into one common share of the Company for no additional
consideration, subject to certain conditions, and is entitled to a dividend of
$0.001 per annum.
On April 9th, 2010, the Private Placement with WHL was successfully completed in
which WHL has subscribed for 100,000,000 common shares at a subscription price
of $0.15 per common share for a total subscription price of $15 million or RMB
102.93 million. US$1 million ($1.02 million) principal amount of the
shareholders loan was settled by way of conversion of the said US$1 million
($1.02 million) principal amount at a price of $0.15 per common share into
6,686,666 common shares, issued in the name of Melco (Luxembourg) S.A.R.L. ("ML
Luxco"). ML Luxco also converted its 8,437,565 Class-B non-voting shares in the
capital of the Company into common shares.
After the completion of the Private Placement with WHL, WHL has subscribed for
approximately 49.4% of the equity interest of the Company.
On May 3rd, 2010, an additional 261,436 common shares of the Company were issued
from treasury under the RSU plan.
As of September 30th, 2010, there were:
-- 202,825,011 common shares outstanding
-- Nil Class B non-voting shares outstanding.
-- 566,666 stock options granted under the Stock Option Plan are currently
exercisable.
-- 480,000 stock options granted in connection with the reverse takeover
expired on April 15th, 2010. None of these stock options were exercised.
-- There were 12,021,816 warrants with an exercise price of $4.00 each,
which expired on May 27th, 2010. None of these warrants options were
exercised.
Critical Accounting Policies
This MD&A should be read in conjunction with our unaudited interim financial
statements for the three-month and nine-month periods ended September 30th, 2010
and accompanying notes included therein, and also the MD&A and Annual Audited
Consolidated Financial Statements for the year ended December 31st, 2009 and
accompanying notes included therein. Those consolidated financial statements
outline the significant accounting principles and policies used to prepare our
financial statements. Accounting policies are critical if they rely on a
substantial amount of judgment in their application or if they result from a
choice between accounting alternatives and that choice has a material impact on
reported results or financial position.
The preparation of our interim consolidated financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and disclosure of contingencies. These
estimates and judgments are based on factors that are inherently uncertain. On
an ongoing basis, we evaluate our estimates based on historical experience and
on various other assumptions that we believe are reasonable under the
circumstances. Actual amounts could differ from those based on such estimates
and assumptions.
New Accounting Standards
The Company has applied all accounting standards as set out in the Canadian
Institute of Chartered Accountants ("CICA") handbook that is applicable to the
period from January 1st, 2010 to September 30th, 2010.
New Accounting Standards Not Yet Adopted
International Financial Reporting Standards ("IFRS")
In February 2008, the Accounting Standards Board (Canada) ("AcSB") confirmed
that Canadian GAAP for publicly accountable enterprises will be converged with
IFRS effective in calendar year 2011, with early adoption possibly allowed
starting in calendar year 2009. The conversion to IFRS will be required, for the
Company, for interim and annual financial statements beginning on January 1st,
2011. IFRS uses a conceptual framework similar to Canadian GAAP, but there are
significant differences on recognition, measurement and disclosures.
In the period leading up to the conversion, the AcSB will continue to issue
accounting standards that are converged with IFRS such as IAS 2 "Inventories"
and IAS 38 "Intangible assets", thus mitigating the impact of adopting IFRS at
the mandatory transition date. The Company is currently evaluating the impact of
the adoption of IFRS on its consolidated financial statements.
Business Combinations
In January 2009, the AcSB issued Section 1582, Business Combinations, which
replaces former guidance on business combinations. Section 1582 establishes
principles and requirements of the acquisition method for business combinations
and related disclosures. This statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after January 2011 with earlier
application permitted. The Company does not expect the adoption of this
statement to have a material impact on its results of operations or financial
position.
Revenue recognition
In December 2009, the CICA issued EIC 175, Multiple Deliverable Revenue
Arrangements, replacing EIC 142, Revenue Arrangements with Multiple
Deliverables. This abstract was amended to: (1) provide updated guidance on
whether multiple deliverables exist, how the deliverables in an arrangement
should be separated, and the consideration allocated; (2) require, in situations
where a vendor does not have vendor-specific objective evidence ("VSOE") or
third-party evidence of selling price, that the entity allocate revenue in an
arrangement using estimated selling prices of deliverables; (3) eliminate the
use of the residual method and require an entity to allocate revenue using the
relative selling price method; and (4) require expanded qualitative and
quantitative disclosures regarding significant judgments made in applying this
guidance. The accounting changes summarized in EIC 175 are effective for fiscal
years beginning on or after January 1st, 2011, with early adoption permitted.
Adoption may either be on a prospective basis or by retrospective application.
If the abstract is adopted early, in a reporting period that is not the first
reporting period in the entity's fiscal year, it must be applied retroactively
from the beginning of the Company's fiscal period of adoption. The Company does
not expect the adoption of this statement to have a material impact on its
results of operations or financial position.
Consolidated Financial Statements
In January 2009, the AcSB issued Sections 1601, "Consolidated Financial
Statements", and 1602, "Non-controlling Interests", which replaces existing
guidance. Section 1601 establishes standards for the preparation of consolidated
financial statements. Section 1602 provides guidance on accounting for a
non-controlling interest in a subsidiary in consolidated financial statements
subsequent to a business combination. These standards are effective on or after
the beginning of the first annual reporting period beginning on or after January
2011 with earlier application permitted. The Company does not expect the
adoption will have a material impact on its results of operations or financial
position.
Financial Instruments and Other Instruments
The Group's carrying value of cash, pledge bank deposits, accounts and other
receivables, amounts due to related party and ultimate shareholder, accounts
payable, other payables and other borrowings approximates the fair value thereof
because of the short-term nature of these instruments. The Group's carrying
value of the bank loans and amount due to intermediate shareholder approximates
the fair value thereof by using the current market rates for debt securities.
RISK FACTORS
The Company is exposed to a variety of risks in the normal course of operations.
In the 2009 MD&A and Annual Audited Consolidated Financial Statements dated
March 18th, 2010, MCR provided a detailed review of the risks that could affect
its financial condition, results of operations or business and that could cause
actual results to differ materially from those expressed in our forward-looking
statements. We highlight the main areas of the risk factors, as mentioned in the
2009 MD&A and Annual Audited Consolidated Financial Statements dated March 18th,
2010, as follows:
Risk Factors Related to the Company's Business
The Company's business is in an early stage of development, and is subject to
significant risks and uncertainties.
The operating subsidiaries of the Company are subject to a wide variety of laws
and regulations relating to land use and development and to environmental
compliance and permitting obligations.
The land use rights relating to the Company's ski resorts may not be enforceable
or may be terminated or non-renewable.
Real estate development and the Company's ability to generate revenues there
from may be adversely affected by numerous factors, many of which are beyond the
control of the Company.
The Company will require more debt or equity financing, which will require the
Company to incur substantial additional indebtedness or sell additional debt or
other equity securities. The Company's ability to obtain additional financing
may be limited, which could delay or prevent the launch of one or more projects.
The market price of common shares of the Company can fluctuate.
Simultaneous planning, design, construction and development of the Company's
major projects may stretch its management's time and resources, which could lead
to delays, increased costs and other inefficiencies in the development of one or
more of the Company's projects.
The Company will need to recruit a substantial number of new employees before
each of its projects can open and competition may limit the Company's ability to
attract qualified management and personnel.
The Company's business depends substantially on the continuing efforts of its
senior management, and the Company's business may be severely disrupted if it
loses their services or their other responsibilities cause them to be unable to
devote sufficient time and attention to the Company.
Possible inadequacy of insurance coverage could materially adversely affect the
Company's business, results of operations and financial condition.
The Company's contractors may face difficulties in finding sufficient labor at
acceptable cost, which could cause delays and increase construction costs of the
Company's projects.
The Company may be unable to attract additional skiers through investment in
on-mountain and base area improvements.
Risk Factors Related to China
PRC economic, political and social conditions as well as government policies
could adversely affect the Company's business.
The Company's land use rights in China are subject to acquisition and State
confiscation.
The Company's operations are subject to the uncertainty of the PRC legal system.
Restrictions on foreign currency exchange may limit the Company's ability to
obtain foreign currency or to utilize its revenue effectively.
Failure to comply with foreign exchange registration requirements for offshore
investment by PRC residents may result in liability.
Recent PRC regulations relating to cross-border mergers and acquisitions may
impact the Company.
The Company is subject to risks presented by fluctuations in foreign currencies.
Intellectual property rights are not generally well protected in China.
The Company's net profitability is subject to changes in PRC tax treatment.
Risk Factors Related to the Ski Resort and Real Estate Industries
Unfavorable weather conditions could have a material adverse effect on the
Company's financial condition and results of operations.
Seasonality of operations has an effect on the Company's financial condition and
results of operations.
The development of real estate contains a number of risks.
The skiing and real estate development industries are cyclical in nature and are
particularly vulnerable to shifts in regional and national economic conditions.
The skiing industry is highly competitive and capital intensive.
Certain world events could adversely affect the Company's financial condition
and results of operations.
Additional information relating to MCR, including the Interim Consolidated
Financial Statements dated August 27th 2010, are available on SEDAR at
www.sedar.com.
Mountain China Resorts (Holding) Limited
Interim Consolidated Financial Statements
Third Quarter, Fiscal 2010
Ended September 30, 2010
(Unaudited)
--------------------------------------------------------
The interim consolidated financial statements which are
included in this report have not been subject to a
review by the Company's external auditors.
--------------------------------------------------------
Mountain China Resorts (Holding) Limited
----------------------------------------------------------------------------
Table of Contents
For the nine-month period ended September 30, 2010
(Unaudited)
----------------------------------------------------------------------------
Page
Interim Consolidated Financial Statements
Consolidated Balance Sheet F-1
Consolidated Statement of Loss and Comprehensive Loss F-2
Consolidated Statement of Cash Flows F-3
Consolidated Statement of Shareholders' Equity and
Accumulated Other Comprehensive Income F-4
Notes to Consolidated Financial Statements F-5 - F-24
Mountain China Resorts (Holding) Limited
----------------------------------------------------------------------------
Interim Consolidated Balance Sheet
September 30, 2010
(Unaudited)
(in thousands of Canadian dollars)
September 30, December 31,
2010 2009
----------------------------
Assets
Current assets:
Cash $ 340 $ 1,636
Accounts receivable 2,287 140
Other receivables and prepayments 4,316 2,309
Prepaid lease payment (note 9) 1,357 1,448
Inventory 773 975
Properties under development for sale 17,662 10,779
----------------------------
Total current assets 26,735 17,287
----------------------------
Non-current assets:
Property and equipment (note 8) 94,236 109,260
Prepaid lease payment (note 9) 41,690 46,089
Other receivables - -
Prepayment for construction 267 443
Goodwill (note 14) 19,501 20,142
Future tax assets - 87
----------------------------
Total non-current assets 155,694 176,021
----------------------------
Total assets $ 182,429 $ 193,308
----------------------------
----------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 1,416 $ 1,690
Other payable (note 10) 11,589 21,818
Deferred revenue - 19
Amounts due to related parties (note 11) 341 398
Amount due to shareholder (note 11) - 25,803
Bank loans (note 12) 2,980 18,466
Other borrowings - 3,847
Income taxes 421 3,019
----------------------------
Total current liabilities 16,747 75,060
----------------------------
Non-current liabilities:
Deferred revenue - 144
Other payable (note 10) 3,478 3,636
Future tax liabilities 4,345 4,542
Amount due to shareholder (note 11) 24,222 -
Bank loans (note 12) 56,614 38,470
----------------------------
Total non-current liabilities 88,659 46,792
----------------------------
Total liabilities 105,406 121,852
----------------------------
Shareholders' equity:
Accumulated deficits (211,217) (206,363)
Accumulated other comprehensive income (6,277) (7,686)
----------------------------
(217,494) (214,049)
Common shares (note 15) 291,835 250,385
Class B non-voting shares (note 15) - 25,313
Contributed surplus 2,682 2,834
Warrants - 6,973
----------------------------
Total shareholders' equity 77,023 71,456
----------------------------
Total liabilities and shareholders' equity $ 182,429 $ 193,308
----------------------------
----------------------------
The accompanying notes are an integral part of these interim consolidated
financial statements.
Approved on behalf of the Board of Directors
(signed) Zhenhua Mao (signed) Gang Han
--------------------------- ---------------------------
Director Director
Interim Consolidated Statement of Loss and Comprehensive Loss
(Unaudited)
(in thousands of Canadian dollars, except for number of shares and per
share amounts)
Three-month Three-month Nine-month Nine-month
period ended period ended period ended period ended
September 30, September 30, September 30, September 30,
2010 2009 2010 2009
------------- ------------- ------------- --------------
Revenue $ 111 $ 218 $ 1,881 $ 1,882
Operating
expenses (461) (1,112) (2,936) (6,364)
-------------- -------------- -------------- --------------
(350) (894) (1,055) (4,482)
Other income 1,488 - 1,493 1
General and
administrative
expenses (407) (1,280) (1,946) (7,682)
Depreciation and
amortization (1,750) (2,209) (5,502) (5,997)
Impairment of
investments
(note 20) (5,123) - (5,123) -
-------------- -------------- -------------- --------------
Operating loss (6,142) (4,383) (12,133) (18,160)
-------------- -------------- -------------- --------------
Non-operating
income and
expenses
Finance costs (777) (1,405) (3,186) (6,201)
Interest income 2 136 16 458
Exchange gain,
net 825 139 3,018 276
-------------- -------------- -------------- --------------
Total non-
operating income
and expenses 50 (1,130) (152) (5,467)
-------------- -------------- -------------- --------------
Loss before
income tax (6,092) (5,513) (12,285) (23,627)
Recovery of/
(provision for)
future income
taxes 17 27 53 87
-------------- -------------- -------------- --------------
Loss from
continuing
operations (6,075) (5,486) (12,232) (23,540)
Results of
discontinued
operation (note
7) - (489) - (2,580)
-------------- -------------- -------------- --------------
Net loss $ (6,075) $ (5,975) $ (12,232) $ (26,120)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Other
comprehensive
income:
Unrealized gains
and losses on
translation of
self-sustaining
foreign
operations $ 2,054 $ (7,203) $ 1,409 $ (15,432)
-------------- -------------- -------------- --------------
Comprehensive
loss $ (4,021) $ (13,178) $ (10,823) $ (41,552)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Loss from
continuing
operations per
share
- Basic $ (0.05) $ (0.06) $ (0.09) $ (0.27)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
- Diluted $ (0.05) $ (0.06) $ (0.09) $ (0.27)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Net loss per
share
- Basic $ (0.05) $ (0.07) $ (0.09) $ (0.30)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
- Diluted $ (0.05) $ (0.07) $ (0.09) $ (0.30)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Weighted average
number of shares
outstanding
- Basic 133,295,698 87,439,344 133,295,698 87,439,344
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
- Diluted 133,295,698 87,439,344 133,295,698 87,439,344
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
The accompanying notes are an integral part of these interim consolidated
financial statements.
Interim Consolidated Statement of Cash Flows
(Unaudited)
(in thousands of Canadian dollars)
Three- Three- Nine- Nine-
month month month month
period period period period
ended ended ended ended
September September September September
30, 2010 30, 2009 30, 2010 30, 2009
---------- ---------- ---------- ----------
Cash Provided By (Used In):
Operations:
Net loss $ (6,075) $ (5,975) $ (12,232) $ (26,120)
Items not affecting cash:
Results of discontinued
operation (note 7) - 489 - 2,580
Depreciation and
amortization 1,731 2,209 5,472 5,997
Future income taxes (17) (27) (48) (87)
Notional interest on amount
due to shareholder - 155 146 491
Notional interest on other
receivables - (128) - (412)
Share-based compensation 75 225 390 819
(Gain)/loss on disposal of
property and equipment - 30 5 32
Impairment of property and
equipment - - - -
Changes in non-cash
operating working capital
(note 6) (9,692) 373 (18,284) 793
Funds from discontinued
operation (note 7) - - - (923)
---------- ---------- ---------- ----------
(13,978) (2,649) (24,551) (16,830)
---------- ---------- ---------- ----------
Financing:
Advance of bank loans - - 33,899 46,575
Repayment of bridge loan
(RMB 74 million) - - (11,102) -
Repayment of bank loan (RMB
120 million) - - (18,160) -
Final payment for
acquisition of "Zhiye" (RMB
35 million) - - (5,251) -
Repayment of bank loans - - - (3,726)
Advance from shareholder 35 54 397 1,974
Proceeds of the Private
Placement - - 15,568 -
---------- ---------- ---------- ----------
35 54 15,351 44,823
---------- ---------- ---------- ----------
Investing:
Purchases of property and
equipment (80) (743) (91) (11,328)
Construction prepayment - (7,176) - (14,687)
Repayment of other payable - - - (3,726)
Decrease in pledged bank
deposits - - - 4,069
Acquisition of land use
rights - - - -
Net cash acquired (used)
through acquisition of
subsidiaries - - - -
Net cash acquired through
reverse takeover - - - -
Disposal of property and
equipment and prepaid lease
payment 8,615 4,188 8,615 4,189
---------- ---------- ---------- ----------
8,535 (3,731) 8,524 (21,483)
---------- ---------- ---------- ----------
(Decrease)/increase in cash (5,408) (6,326) (676) 6,510
Effect of changes in exchange
rate (17) (793) (620) (2,918)
Cash, beginning 5,765 14,205 1,636 3,494
---------- ---------- ---------- ----------
Cash, end $ 340 $ 7,086 $ 340 $ 7,086
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Supplemental information:
Finance costs paid $ 600 $ 1,051 $ 2,558 $ 5,724
Tax paid - - - -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The accompanying notes are an integral part of these interim consolidated
financial statements.
Interim Consolidated Statement of Shareholders' Equity and Accumulated Other
Comprehensive Income
(Unaudited)
(in thousands of Canadian dollars, except for number of shares)
Class B non-voting
Common shares, issued shares, issued and
and outstanding outstanding Contributed
Shares Amount Shares Amount surplus
------------- ------- ----------- -------- ------------
Balance at
December 31, 2008
and January 1,
2009 87,439,344 $250,385 8,437,565 $ 25,313 $ 2,150
Employee's share-
based
compensation - - - - 684
Dividend payable
to Class B non-
voting shares - - - - -
Net loss - - - - -
Unrealized losses
on translation of
self-sustaining
foreign
operations - - - - -
------------- ------- ----------- -------- ------------
Balance at
December 31, 2009
and January 1,
2010 87,439,344 $250,385 8,437,565 $ 25,313 $ 2,834
Issue of common
shares (note 15) 100,000,000 15,000 - - -
Conversion of
Class-B non-
voting shares
(note 15) 8,437,565 25,313 (8,437,565) (25,313) -
Conversion of
Shareholder's
Loan (note 15) 6,686,666 1,003 - - -
Issue of common
shares under RSU
(note 15) 261,436 134 - - -
Warrants Expire
(note 16) - - - - -
Stock option
expire (note 17) - - - - (408)
Employee's share-
based
compensation
(notes 17 and 18) - - - - 256
Dividend payable
to Class B non-
voting shares - - - - -
Net loss - - - - -
Transaction
adjustments - - - - -
------------- ------- ----------- -------- ------------
Balance at
September 30,
2010 202,825,011 $291,835 - - $ 2,682
------------- ------- ----------- -------- ------------
------------- ------- ----------- -------- ------------
Accumulated
other Total
Accumulated comprehensive shareholders'
Warrants deficits income equity
---------- ------------ --------------- --------------
Balance at
December 31, 2008
and January 1,
2009 $ 6,973 $ (139,518) $ 11,605 $ 156,908
Employee's share-
based
compensation - - - 684
Dividend payable
to Class B non-
voting shares - (8) - (8)
Net loss - (66,837) - (66,837)
Unrealized losses
on translation of
self-sustaining
foreign
operations - - (19,291) (19,291)
---------- ------------ --------------- --------------
Balance at
December 31, 2009
and January 1,
2010 $ 6,973 $ (206,363) $ (7,686)$ 71,456
Issue of common
shares (note 15) - - - 15,000
Conversion of
Class-B non-
voting shares
(note 15) - - - -
Conversion of
Shareholder's
Loan (note 15) - - - 1,003
Issue of common
shares under RSU
(note 15) - - - 134
Warrants Expire
(note 16) (6,973) 6,973 - -
Stock option
expire (note 17) - 408 - -
Employee's share-
based
compensation
(notes 17 and 18) - - - 256
Dividend payable
to Class B non-
voting shares - (2) - (2)
Net loss - (12,233) - (12,233)
Transaction
adjustments - - 1,409 1,409
---------- ------------ --------------- --------------
Balance at
September 30,
2010 - $ (211,217) $ (6,277)$ 77,023
---------- ------------ --------------- --------------
---------- ------------ --------------- --------------
The accompanying notes are an integral part of these interim consolidated
financial statements.
Notes to Interim Consolidated Financial Statements
For the nine-month period ended September 30, 2010
(Unaudited)
(in thousands of Canadian dollars, unless otherwise indicated and except for
share and per share amounts)
1. OPERATIONS
Mountain China Resorts (Holding) Limited (the "Company" or "MCR"), is an
investment holding company that has its registered office in Canada with its
subsidiaries engaged in the development and operation of mountain resorts and
provision of hotel services in the People's Republic of China (the "PRC"). MCR
common shares trade on the TSX Venture Exchange under the symbol "MCG".
As at September 30, 2010, the Company obtained its shareholders' approval and
endorsement for its change of name from Melco China Resorts (Holding) Limited to
Mountain China Resorts (Holding) Limited at the Annual General Meeting held on
June 1, 2010. Such change of name was certified by the Registrar of Companies,
Province of British Columbia Canada on June 7, 2010 and it has received approval
of its name change to Mountain China Resorts (Holding) Limited from the TSXV
effective October 22, 2010. The change of name recognizes and emphasizes the
Company's primary focus on the mountain resort industry in China.
The Company was incorporated under the Business Corporations Act (British
Columbia) on February 6, 2008. The Company holds 100% of the issued share
capital of Melco China Resort Investment Limited, renamed as Mountain China
Resorts Investment Limited on July 21, 2010, which in turn holds 100% of the
issued share capital of Melco China Resort Limited ("MCRHK"), renamed as
Mountain China Resorts Limited on July 9, 2010. MCRHK holds 100% of the
registered capital of the following subsidiaries in the PRC, including
Heilongjiang Yabuli On Snow Asian Game Village Hotel Co. Ltd. ("Yabuli Resort"),
Heilongjiang Yabuluoni Zhiye Co. Ltd. ("Zhiye"), Changchun Lianhua Mountain
Skiing Field Co. Ltd. ("Changchun Resort"), Jilin Melco Sky Mountain Beidahu Ski
Resort Co. Ltd. ("Beidahu Resort"), Jilin Melco Sky Mountain Beidahu Real Estate
Co. Ltd. ("Beidahu Real Estate") and Melco China Resort Travel Consultancy
(Beijing) Co. Ltd. ("MCR Beijing"), among which, Beidahu Resort, Beidahu Real
Estate and MCR Beijing are dormant as of the balance sheet date.
2. BASIS OF PREPARATION
The interim consolidated financial statements as at September 30, 2010 and for
the nine-month period ended September 30, 2010 comprise the financial statements
of the Company and its subsidiaries (collectively referred to as the "Group")
except Changchun Resort and have been prepared by management, in accordance with
Canadian generally accepted accounting principles ("Canadian GAAP") for the
preparation of interim financial statements and are unaudited. These interim
consolidated financial statements do not include all of the information and
notes required by Canadian GAAP for annual financial statements and should be
read in conjunction with the annual audited consolidated financial statements
and notes thereto for the year ended December 31, 2009.
The majority of the Group's resort and hotel operations revenue is generated
during the period from October to March.
The interim consolidated financial statements have been presented in Canadian
dollars ("CAD"). The measurement currency of the Company is CAD.
Financing and Going Concern Update
These financial statements have been prepared on a going-concern basis. As at
September 30, 2010, the Company had working capital of $9,988. The Company's
ability to operate as a going concern is dependent upon its ability to generate
funds from resort operations and resort real estate activities and/or on
borrowing from third parties. The Company has completed a number of financings
in order to meet its working capital requirements.
New RMB 150 million Loan with Harbin Bank
On February 12, 2010, the Company's indirectly wholly owned subsidiary,
Heilongjiang Yabuli On Snow Asian Game Village Hotel Co. Ltd., repaid a RMB 120
million ($17.88 million) loan to the Harbin Bank due on February 15th, 2010 and
arranged a new loan facility of RMB 150 million ($22.35 million) with the same
bank for a two-year term with a maturity date of February 9, 2012, and with a
fixed annual interest rate of 5.94%. This new loan was facilitated by a short
term bridge loan of RMB 74 million ($11.03 million) provided by WHL (as defined
below) on February 11, 2010. The bridge loan had a term of 60 days with a loan
fee of 4.6% for each 30 day period on the principal amount drawn down and was
fully repaid on April 6, 2010.
Completion of $15,000 Private Placement with Wisecord Holdings Limited
On April 9, 2010, the Company successfully completed its private placement with
Wisecord Holdings Limited ("WHL") in which WHL subscribed for 100,000,000 common
shares of MCR at a subscription price of $0.15 per common share for a total
subscription price of $15,000 (the "Private Placement") or RMB 102.93 million.
WHL subscribed for approximately 49.4% of the equity interest of the Company (on
a fully diluted basis and after the conversion of MCR's outstanding Class B
non-voting shares and the conversion of two-thirds of the existing US$1.5
million ($1.53 million) loan from Melco Leisure and Entertainment Group Limited
("MLE"), is the holding company of Melco (Luxembourg) S.A.R.L, which is one of
the shareholders of MCR.
Revised Terms of Shareholder Loans and Call Option with MLE
In connection with the completion of the Private Placement, MLE, WHL and MCR
entered into a supplemental loan agreement (the "Shareholder Loan Agreement")
under which MLE has extended the maturity of its existing US$23 million ($23.39
million) aggregate principal amount in loans to the Company (the "Shareholder
Loans") to March 31, 2013 such that the Shareholder Loans are no longer be due
on demand and accrue interest at the rate of 3% per annum. Pursuant to the
Shareholder Loan Agreement, at any time before March 31, 2013, if the Company's
30 consecutive day weighted average trading price exceeds $1.00 per common
share, WHL has the right, subject to any applicable regulatory approvals, to
require MLE to convert all or part of the Shareholder Loans into common shares
(the "Converted Shares") at a 50% discount plus accrued interest at a price (the
"Conversion Price") equal to (a) 70% of the said weighted average trading price
or (b) $1.00, whichever is greater. Further, WHL will have a call option to buy
one-third of the Converted Shares from MLE at the Conversion Price within 30
days of the conversion (the "Call Option").
In addition, MLE, WHL and MCR executed a binding agreement in relation to the
settlement of a US$1.5 million ($1.53 million) loan provided by MLE to the
Company (the "Loan Settlement Agreement"). Pursuant to the Loan Settlement
Agreement, US$1 million ($1.02 million) principal amount of the loan was settled
by way of conversion of the said US$1 million ($1.02 million) principal amount
at a price of $0.15 per common share into 6,686,666 common shares of MCR, issued
in the name of Melco (Luxembourg) S.A.R.L. ("ML Luxco"). The remaining US$0.5
million ($0.51 million) principal amount of the loan was re-paid to MLE in cash
upon the completion of the Private Placement.
Conversion of Class B Non-Voting Shares
ML Luxco also converted its 8,437,565 Class-B non-voting shares in the capital
of the Company into common shares in accordance with the terms of the Loan
Settlement Agreement.
Through the completion of the Company's refinancing efforts of the Private
Placement and revised terms of the Shareholder Loans with MLE prior to the
current period, the Company has significantly reduced and satisfied its
immediate and current financial obligations.
Acquisition of Heilongjiang Yabuluoni Zhiye Co. Ltd
On April 12, 2010, the Company completed all of its payment obligations for the
acquisition of Heilongjiang Yabuluoni Zhiye Co. Ltd. with a final payment of RMB
35 million ($5.21 million). Zhiye was acquired in August of 2008 for a total
consideration of RMB 55 million ($8.19 million) (wherein the acquisition
included 144.6 hectares of development land at its Sun Mountain Yabuli Resort).
An initial payment of RMB 20 million ($2.98 million) was made in March 2009. The
second and final installment of RMB 35 million ($5.21 million) was required to
be deferred as the Company managed its cash resources over the last twelve
months to combat the worldwide economic downturn.
The Exclusion of Changchun Resort
The financial statements are prepared on the basis of the omission of the
Changchun Resort financial information for the nine-month period ended September
30, 2010 due to the fact that the financial information of Changchun Resort
could not be obtained by the management of MCR (see note 20 subsequent events
for further details on Page F-24).
3. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies applied in these interim consolidated financial
statements are consistent with those applied in the annual audited consolidated
financial statements of the Company for the year ended December 31, 2009.
Recently adopted accounting standards
The Company adopted the following new accounting standard that was issued by the
Canadian Institute of Chartered Accountants ("CICA"). The standard was adopted
on a prospective basis. There were no adjustments recorded to opening deficit as
a result of the adoption of this standard.
Goodwill and Intangible Assets
Section 3064, Goodwill and Intangible Assets replaced Section 3062, "Goodwill
and Other Intangible Assets", and Section 3450, "Research and Development
Costs". The new pronouncement establishes standards for the recognition,
measurement, presentation, and disclosure of goodwill subsequent to its initial
recognition and of intangible assets by profit oriented enterprises. Section
3064 establishes standards for the recognition, measurement, presentation and
disclosure of intangible assets. These changes clarify that costs may only be
deferred when they relate to an item that meets the definition of an asset.
The concept of matching revenues and expenses remains appropriate only for
allocating the cost of an asset that is consumed in generating revenue over
multiple reporting periods. Standards relating to goodwill are unchanged from
those included in Section 3062. The standard has no significant effect to these
interim consolidated financial statements.
New Accounting Standards Not Yet Adopted
International Financial Reporting Standards ("IFRS")
In February 2008, AcSB confirmed that Canadian GAAP for publicly accountable
enterprises will be converged with IFRS effective in calendar year 2011, with
early adoption possibly allowed starting in calendar year 2009. The conversion
to IFRS will be required, for the Group, for annual financial statements
beginning on January 1, 2011. IFRS uses a conceptual framework similar to
Canadian GAAP, but there are significant differences on recognition, measurement
and disclosures.
In the period leading up to the conversion, the AcSB will continue to issue
accounting standards that are converged with IFRS such as IAS 2 "Inventories"
and IAS 38 "Intangible assets", thus mitigating the impact of adopting IFRS at
the mandatory transition date. The Company is currently evaluating the impact of
the adoption of IFRS on its consolidated financial statements.
Business Combinations
In January 2009, the AcSB issued Section 1582, "Business Combinations", which
replaces former guidance on business combinations. Section 1582 establishes
principles and requirements of the acquisition method for business combinations
and related disclosures. It provides the Canadian equivalent to the IFRS
standard, IFRS 3 (Revised), "Business Combinations". This statement applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
January 2011 with earlier application permitted. We do not expect the adoption
of this statement to have a material impact on our results of operations or
financial position.
Revenue recognition
In December 2009, the CICA issued EIC Abstract 175, "Multiple Deliverable
Revenue Arrangements", replacing EIC Abstract 142, "Revenue Arrangements with
Multiple Deliverables". This abstract was amended to: (1) provide updated
guidance on whether multiple deliverables exist, how the deliverables in an
arrangement should be separated, and the consideration allocated; (2) require,
in situations where a vendor does not have vendor-specific objective evidence
("VSOE") or third-party evidence of selling price, that the entity allocate
revenue in an arrangement using estimated selling prices of deliverables; (3)
eliminate the use of the residual method and require an entity to allocate
revenue using the relative selling price method; and (4) require expanded
qualitative and quantitative disclosures regarding significant judgments made in
applying this guidance. The accounting changes summarized in EIC Abstract 175
are effective for fiscal years beginning on or after January 1, 2011, with early
adoption permitted. Adoption may either be on a prospective basis or by
retrospective application. If EIC Abstract 175 is adopted early, in a reporting
period that is not the first reporting period in the entity's fiscal year, it
must be applied retroactively from the beginning of the Company's fiscal period
of adoption. We do not expect the adoption will have a material impact on our
results of operations or financial position.
4. CAPITAL DISCLOSURES
The Group manages its capital to ensure that entities in the Group will be able
to continue as a going concern while maximizing the return to shareholders
through the optimization of the debt and equity balance.
Total capital is calculated as follows:
As at As at
September 30, December 31,
2010 2009
------------- -------------
Amount due to intermediate shareholder $ 24,222 $ 25,803
------------- -------------
Bank loans 59,594 56,936
Other borrowings - 3,847
Equity 77,023 71,456
------------- -------------
$ 160,839 $ 158,042
------------- -------------
------------- -------------
The directors of the Company review the capital structure from time to time. As
part of this review, the directors considered the cost of capital and the risks
associated with each class of capital. The Group will balance its overall
capital structure through issue of new shares, new debts or the redemption or
extension of existing debts.
5. FINANCIAL INSTRUMENTS
Fair Value
The carrying values of cash, accounts and other receivables, amount due to
related parties, accounts payable, other payables and other borrowings
approximate the fair values thereof because of the short-term nature of these
instruments. The carrying values of the bank loans, amount due to intermediate
shareholder approximate the fair values thereof by using the current market
rates for similar debt securities.
Risk Management Policies
The Group, through its financial assets and liabilities, is exposed to various
risks. The following analysis provides a measurement of risks as at the balance
sheet date of September 30, 2010.
Credit Risk
The Group's maximum exposure to credit risk which will cause a financial loss to
the Group due to failure to discharge an obligation by the counterparties totals
the carrying amount of these assets as stated in the consolidated balance sheet.
The Group's principal financial assets are cash and accounts and other
receivables, which represent the Group's exposure to credit risk in relation to
financial assets.
The credit risk on cash is mitigated by transacting with banks with high credit
ratings assigned by international credit-rating agencies.
The credit risk on accounts and other receivables is also limited as (i) most of
the amounts are repaid during the credit period and (ii) the amount consists of
a large number of customers and thus the concentration of credit risk is low.
The Group does not have any significant financial assets that are past due but
not impaired.
Foreign Exchange Risk
The Group's results in its respective measurement currency are subject to
fluctuations as a result of exchange rate movements to the extent that
transactions are made in currencies other than the measurement currency.
A 10% increase or decrease in the USD/CAD exchange rate would have increased or
decreased the net loss of the Group by approximately $1,423 (2009: $1,480) for
the nine-month period.
A 10% increase or decrease in the HKD/CAD exchange rate would have increased or
decreased the net loss of the Group by $ 1,135 (2009: nil) for the nine-month
period.
A 10% increase or decrease in the RMB/CAD exchange rate would have increased or
decreased the net loss of the Group by nil (2009: nil) for the nine-month
period.
The Group has not entered into derivative instruments to hedge its foreign
exchange risk during the periods.
Interest Rate Risk
The Group is exposed to fair value interest rate risk in relation to fixed bank
interest rate as of September 30, 2010.
A 1% increase or decrease in interest rates on bank borrowings would have
increased or decreased the net loss of the Group by approximately $149 (2009:
$443) during the period.
The Group is also exposed to cash flow interest rate risk with regard to amount
due to intermediate shareholder and total cash deposits.
A 1% increase or decrease in interest rates on the total amount due to
intermediate shareholder would have increased or decreased the net loss of the
Group by approximately $61 (2009: $198) during the period.
A 1% increase or decrease in interest rates on total cash deposits would have
decreased or increased the net loss of the Group by approximately $1 (2009: $53)
during the period.
Liquidity Risk
The Group's policy is to actively maintain credit facilities to ensure
sufficient available funds to meet current and foreseeable financial
requirements at a reasonable cost.
The following items are the contractual maturities of financial liabilities as
at September 30, 2010:
6 to 12 to After
Carrying Contractual 0 to 6 12 24 24
Amount Cash Flows months months months months
-------- ----------- ------ ------ ------ ------
Accounts payable and
accrued liabilities $ 1,416 $ 1,416 $ 1,416 $ - $ - $ -
Other payable 11,589 11,589 8,111 - 3,478
Amounts due to
related parties 341 341 341 - - -
Amounts due to
shareholders 24,222 27,165 - - 27,165
Bank loans 59,594 69,388 3,057 29,018 37,313
Other borrowings - - - - - -
-------- ----------- ------ ------ ------ ------
Total $ 97,162 $ 109,899 $12,925 $ - $32,496 $64,478
-------- ----------- ------ ------ ------ ------
-------- ----------- ------ ------ ------ ------
The Group will be seeking to establish committed equity financing, debt
refinancing, new debt, or negotiated terms of payment. Some of the financial
liabilities are coming due in the current year. The contractual cash flows of
amounts due to shareholders, bank loans and other borrowings are interest
bearing.
CASH FLOW INFORMATION
The changes in non-cash operating working capital balance consist of the following:
Three- Three- Nine- Nine-
month month month month
period period period period
ended ended ended ended
September September September September
30, 30, 30, 30,
2010 2009 2010 2009
---------- ---------- ---------- ----------
Cash provided by (used in):
Accounts and other
receivables $ (3,788) $ 1,162 $ (4,382) $ 1,712
Inventory 23 18 126 (329)
Properties under development
for sale (3,128) (2,604) (7,300) (2,619)
Accounts and other payables (2,799) 1,830 (6,677) 2,759
Amounts due to related
parties - (33) (51) (730)
---------- ---------- ---------- ----------
$ (9,692) $ 373 $ (18,284) $ 793
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
7. DISCONTINUED OPERATION
On July 17, 2009, Jilin Beidahu Sports and Tourism Industry Development Company
Limited ("Jilin Beidahu Development Zone") served formal notice to the Company
that the agreement (the "Acquisition Agreement") with Jilin Beidahu Development
Zone dated November 22, 2007 for the acquisition of Beidahu Resort's assets
would be terminated pursuant to its terms as the Company had failed to pay the
RMB 70 million ($10,772) payment which was due on December 31, 2008. The Company
was unsuccessful in renegotiating terms of the Acquisition Agreement to defer
the acquisition payments and the Acquisition Agreement was terminated on
September 17, 2009.
For comparative purposes, the results of operation of Beidahu Resort have been
disclosed separately from those of continuing operations for the period
presented.
Loss from discontinued operation and the results of the loss relating to the
discontinued operation of Beidahu Resort during the three-month and nine-month
period ended September 30, 2009 are as follows:
Three-month Nine-month
period ended period ended
September 30, September 30,
2009 2009
------------- -------------
Revenue $ 63 1,793
------------- -------------
------------- -------------
Loss from discontinued operation net of income
tax expenses $ (287) $ (2,378)
Loss on disposal of discontinued operation $ (202) $ (202)
------------- -------------
Results of discontinued operation $ (489) $ (2,580)
------------- -------------
------------- -------------
Results of discontinued operation per share:
Basic $ (0.01) $ (0.03)
------------- -------------
------------- -------------
Dilute $ (0.01) $ (0.03)
------------- -------------
------------- -------------
Cash from discontinued operation:
Loss from discontinued operation $ (287) $ (2,378)
Adjustments for:
Depreciation and amortization $ 291 $ 1,478
Future income taxes $ (4) $ (23)
------------- -------------
$ - $ (923)
------------- -------------
------------- -------------
8. PROPERTY AND EQUIPMENT
September 30,
2010
------------------------------------
Accumulated Net
Cost depreciation book value
------- ------------ ----------
Ski assets:
Buildings and ski lifts $ 82,534 $ (4,624) $ 77,910
Construction in progress 7,183 - 7,183
Machineries 6,972 (889) 6,083
Tools and equipment 2,130 (575) 1,555
Motor vehicles 317 (106) 211
Ski clothes and equipment 2,714 (1,420) 1,294
------- ------------ ----------
$101,850 $ (7,614) $ 94,236
------- ------------ ----------
------- ------------ ----------
December 31, 2009
------------------------------------
Accumulated Net
Cost depreciation book value
------- ------------ ----------
Ski assets:
Buildings and ski lifts $ 95,866 $ (6,887) $ 88,979
Construction in progress 7,371 - 7,371
Machineries 9,886 (1,357) 8,529
Tools and equipment 2,220 (358) 1,862
Motor vehicles 502 (150) 352
Ski clothes and equipment 3,056 (889) 2,167
------- ------------ ----------
$118,901 $ (9,641) $ 109,260
------- ------------ ----------
------- ------------ ----------
Depreciation expense charged to statement of operations for the three-month and
nine-month periods ended September 30, 2010 were $1,404 and $4,443 respectively.
The Group has pledged property and equipment of $91,409 at September 30, 2010
(December 31, 2009: $69,623) to secure the bank loans (note 12).
The cost of buildings and ski lifts was reduced by an amount RMB102.1 million
($15.21 million) during the year ended December 31, 2009 as the Group obtained a
government grant of the same amount on June 16, 2008 with a condition that the
Group will provide the requested infrastructure facilities for the 24th World
Winter University Games, which was finished in February 28, 2009. As such, the
government grant amount was reflected as a reduction of the property and
equipment.
9. PREPAID LEASE PAYMENT
As at As at
September 30, December 31,
2010 2009
-------------- ------------
Current portion $ 1,357 $ 1,448
Non-current portion 41,690 46,089
-------------- ------------
$ 43,047 $ 47,537
-------------- ------------
-------------- ------------
Prepaid lease payments represented the payments for the certificates of land use
rights of the Group.
Amortization of prepaid lease payments was an expense of $327 and $1,029 for the
three-month and nine-month periods ended September 30, 2010. The following table
represents the total estimated amortization expense of prepaid lease payments
for each of the next five years.
Period ending September 30
2010 $ 1,357
2011 1,357
2012 1,357
2013 1,357
2014 1,357
Thereafter 36,262
--------
Total $ 43,047
--------
--------
The Group has pledged land use rights which having a carrying value of
approximately $38,887, at September 30, 2010 (December 31, 2009: $41,150) to
secure the bank loans (note 12).
10. OTHER PAYABLE
As at As at
September 30, December 31,
2010 2009
----------------------------------
Construction payable $ 6,041 $ 10,196
Amounts due to former related parties - 5,386
Retention payable for construction 3,478 3,636
Others 5,548 6,236
-------------- --------------
15,067 25,454
Classified as non-current (3,478) (3,636)
-------------- --------------
Classified as current $ 11,589 $ 21,818
-------------- --------------
-------------- --------------
11. RELATED PARTY BALANCES/TRANSACTIONS
The balances owing to related parties as at September 30, 2010 and December 31,
2009 are as follows:
Name of related
party Relationship with the Group
-------------------- -------------------------------------
MLE Beneficial
shareholder
Melco Services Subsidiary of
Limited shareholder
As at September As at December
30, 31,
Account Name of related party 2010 2009
-------------------- --------------------- --------------- -----------------
Loans from MLE
beneficial
shareholder $ 23,532 $ 25,730
Notional interest - (149)
--------------- -----------------
25,581
Accrued interest 690 222
--------------- -----------------
$ 24,222 $ 25,803
--------------- -----------------
--------------- -----------------
Amount due to Melco Services
related party Limited $ 341 $ 398
--------------- -----------------
--------------- -----------------
The loans from shareholders include the remaining two shareholder loans from MLE
in the principal amounts of US $12 million ($12,202) and US $11 million
($11,185) before notional interest. The original terms of these loans were
interest bearing at 3-month LIBOR plus 3% and non-interest bearing with fixed
repayment terms to March 31, 2010 and March 31, 2010, respectively. Through the
Supplemental Loan Agreement made on April 8, 2010, the new terms of both loans
are interest bearing at 3% per annum with fixed repayment terms to March 31,
2013. Accrued interest is repayable quarterly. All loans are unsecured.
The remaining balances with shareholder and related party are unsecured,
non-interest bearing and repayable on demand.
During the period, the Group had the following transactions with the related
parties:
Three- Three- Nine- Nine-
month month month month
period period period period
ended ended ended ended
September September September September
30, 30, 30, 30,
Name of related Nature of
party transaction 2010 2009 2010 2009
--------------- --------------- --------- --------- --------- ---------
Melco Services Advisory
Limited service fee $ - $ 157 $ 85 $ 504
MLE Loan interest
expense 189 286 626 970
--------- --------- --------- ---------
--------- --------- --------- ---------
The advisory service fee was charged on an actual basis with reference to the
actual amount of time provided by the personnel of Melco Services Limited for
the provision of the services, subject to certain fee caps. The loan interest
expense was related to the above amount due to MLE with a total principal amount
of US$23 million as at September 30, 2010.
12. BANK LOANS
The Group has obtained financing for its resort and hotel operations from
various financial institutions by pledging land use rights of $38,887 and
property and equipment of $91,409 as securities for such financing (December 31,
2009: pledged land use rights of $41,150 and property and equipments of
$69,623).
On February 12, 2010, the Group repaid a RMB 120 million ($17.88) loan to the
Harbin Bank due on February 15, 2010 and arranged a new loan facility of RMB 150
million ($22,35 million) with the same bank for a two-year term with a maturity
date of February 9, 2012.
The following are the significant terms of the bank loans:
Weighted
average As at As at
interest September 30, December 31,
Maturity dates rates (%) 2010 2009
--------------- ------------- ------------- -------------
General February 15,
corporate 2009
debt 6.48% $ - $ 18,466
March 2, 2011
to
March 2, 2016 6.237% 34,266 38,470
February 9,
2012 5.94% 22,348 -
------------- -------------
56,614 56,936
Current
portion 2,980 (18,466)
------------- -------------
$ 59,594 $ 38,470
------------- -------------
------------- -------------
The bank loans are repayable as follows: Year ending June 30
2011 $ 2,980
2012 26,818
2013 5,959
2014 7,449
2015 8,194
2016 8,194
---------
$ 59,594
---------
---------
13. NET LOSS PER SHARE
As of September 30, 2010, the Company had 1,710,000 outstanding stock options
granted under the stock option plan (note 17). The options are potentially
dilutive, but have been excluded in the computation of diluted net loss per
share, as these are anti-dilutive for the three-month and nine- month periods
ended September 30, 2010.
14. GOODWILL
Goodwill of $ 19,501 as at September 30, 2010 arose from the acquisition of MCR
China Resort Limited ("MCR Cayman") and its subsidiaries on May 27, 2008. This
was after the write off of the relevant amounts related to the disposition of
Beijing and Jilin Mountain Resorts, amounting to $21,733, and the relevant
amounts related to the impairment of goodwill of Changchun, Beidahu and Yabuli
Resorts, amounting to $96,090 in 2008 and $22,700 in 2009.
Goodwill impairment is tested annually or if factors indicative of impairment
are present. The Company is not aware of any significant adverse events which
trigger an impairment indicator during the three-month period ended September
30, 2010. Accordingly, no impairment test has been performed as at September 30,
2010. The movement in current period represents the currency realignment for the
period.
15. SHARE CAPITAL
(a) Issued Share Capital
The Company's authorized share capital consists of unlimited number of common
shares and Class B non-voting shares without nominal or par value.
At January 1, 2009, December 31, 2009, January 1, 2010, June 30, 2010, and
September 30, 2010, the Company had the following issued common shares and Class
B non-voting shares:
MOVEMENTS IN SHARE CAPITAL
Date Details Number of shares Amount
------------------- ------------------ ------------------ ------------------
COMMON SHARE
January 1, 2009,
December 31, 2009
and Opening balance 87,439,344 $ 250,385
January 1, 2010
Issue of shares
for Private
Placement 100,000,000 15,000
Conversion of
Class-B non-
voting shares 8,437,565 25,313
Conversion of
shareholder's
loan of US$1
million 6,686,666 1,003
Issue of shares
under Restricted
Stock Units Plan
("RSU Plan") 261,436 134
September 30, 2010 Closing balance 202,825,011 291,835
------------------ ------------------
------------------ ------------------
CLASS-B NON-VOTING
SHARES
January 1, 2009,
December 31, 2009
and Opening balance 8,437,565 $25,313
January 1, 2010
Conversion of
Class-B non-voting
shares into common
shares (8,437,565) $ (25,313)
- -
September 30, 2010 Closing balance
------------------ ------------------
------------------ ------------------
16. SHARE PURCHASE WARRANTS
There were 12,021,816 warrants with an exercise price of $4.00 each, which
expired on May 27, 2010. None of these warrants options were exercised. As at
September 30, 2010, no share purchase warrant was outstanding.
17. STOCK OPTIONS
The Company adopted the Stock Option Plan so as to provide additional incentives
to attract and retain directors, executive officers, employees and consultants
of the Company and its affiliates. Under the Stock Option Plan, options to
purchase shares may be granted by the Board of Directors of the Company (the
"Board") to directors, executive officers, employees and consultants of the
Company or its affiliates. Options granted will have an exercise price of not
less than the volume weighted average trading price of the shares on the stock
exchange on which the shares are traded for the five trading days immediately
preceding the day on which the option is granted. The maximum aggregate number
of shares which may be subject to options under the Stock Option Plan is 10% of
the shares of the Company outstanding from time to time. Unless the Board
decides otherwise, options granted under the Stock Option Plan will vest over a
three- year period and may be exercised in whole or in part at any time as to
one-third on each anniversary of the grant date for the three-year period and
the options will expire on the tenth anniversary of the grant date. Any option
not exercised prior to the expiry date will become null and void.
The Cox, Ross and Rubinstein Binomial option valuation model, used by the
Company to determine fair values, was developed for use in estimating the fair
value of freely traded options. This model requires the input of highly
subjective assumptions including future stock price volatility and expected time
until exercise. Changes in the subjective input assumptions can materially
affect the fair value estimate, and therefore the existing model does not
necessarily provide a reliable single measure of the fair value of the Company's
stock options granted.
The following table summarizes the activity of the Company's stock option plan.
Weighted
Average
exercise
Options price
------------- -------------
Outstanding - January 1, 2009 3,520,000 $ 3.00
Lapsed during the year (1,790,000) 3.00
-------------
Outstanding - December 31, 2009 and January 1,
2010 1,730,000 3.00
Lapsed during the period (20,000) 3.00
-------------
Outstanding - September 30, 2010 1,710,000 3.00
-------------
-------------
Options exercisable - September 30, 2010 556,666 3.00
-------------
-------------
Options exercisable - December 31, 2009 576,666 3.00
-------------
-------------
Each option entitles the holder to purchase one common share of the Company at a
price of $3.00 per common share. These options have vesting periods of up to 3
years and an exercise period of up to 10 years, expiring on May 28, 2018, August
15, 2018 and September 1, 2018 respectively. The fair value of the options
issued was estimated using the Cox, Ross and Rubinstein Binomial Model on the
date of issue to be $1.41 per option, $0.38 per option and $0.37 per option
respectively. Assumptions used to determine the value of the options were as
follows:
May 28, August 15, September 1,
2008 2008 2008
------------- ------------- -------------
Number of options issue 1,500,000 3,250,000 50,000
Risk-free interest rate 3.788% 3.568% 3.536%
Contractual life 10 years 10 years 10 years
Expected volatility 49% 48% 47%
Dividend yield 0% 0% 0%
The options granted under Stock Option Plan resulted in a compensation expense
of $42 (2009:$264) and $192 (2009: $570) for the three-month and nine-month
period ended September 30, 2010, which is included in general and administrative
expenses. As at September 30, 2010, there was $139 of unrecognized compensation
cost related to non-vested stock options (December 31, 2009: $289).
Further, on April 15, 2010, 480,000 stock options granted to finders of VCTS in
connection with the reverse takeover expired and none of these options were
exercised. The fair value of the options issued was estimated using the Cox,
Ross and Rubinstein Binomial Model on the date of issue to be $0.85 per option.
Assumptions used to determine the value of the options were: dividend yield 0%;
risk-free interest rate 3.086%; expected volatility 50%; and contractual life of
1.88 years. All compensation expense related to the options granted to finders
was charged to the consolidated statement of operations in 2008.
18. RESTRICTED STOCK UNITS
The Company adopted the Restricted Stock Unit Plan ("RSU Plan") on June 2, 2009
after the approval by the shareholders on the same date so as to provide
employees, consultants, and/or directors of the Company with an additional
incentive program to further the growth and development of the Company and
encourage them to remain with the Company. Each RSU granted under the RSU Plan
will entitle the participant to cash and/or common shares, provided (i) the
participant is continuously employed by or in service with the Company or any of
its affiliates from the date or the effective date of such grant until vested,
and (ii) all other terms and conditions of the grant have been satisfied.
On June 2, 2009, the Company has granted a total of six RSU awards ("RSU
awards"), one to each of the non-management directors. The RSU awards are valued
at $80 each and will be satisfied with common shares to be issued from treasury
in accordance with the terms of the RSU Plan. The awards do not have a
performance target and are otherwise subject to the proposed RSU Plan. These
awards will be vested equally in one-third portions on the anniversary date of
the grant over a three year period, that is, on June 2, 2010, June 2, 2011 and
June 2, 2012 respectively.
The following table summarizes the activity of the Company's RSU Plan.
Awards
-----------------
Outstanding - January 1, 2009 $ -
Granted during the period 480
----------
Outstanding - December 31, 2009 and January 1, 2010 $ 480
Lapsed during the period (160)
----------
Outstanding - September 30, 2010 $ 320
----------
----------
The awards granted under RSU Plan resulted in a compensation expense of $33 and
$198 for the three-month and nine-month periods ended September 30, 2010
respectively, which is included in general and administrative expenses. As at
September 30, 2010, there was $112 of unrecognized compensation cost related to
non-vested RSU awards.
On May 3, 2010, an additional 261,436 common shares of the Company were issued
from treasury under the RSU plan and resulted in a compensation expense of $44.
After such issuance, the Company has outstanding 4 RSU awards with an aggregated
value of $320. The first portion of the RSU awards in the aggregate value of
$107 operated to the non- management directors has not yet been satisfied as at
September 30, 2010, but are expected to be satisfied with common shares to be
issued from treasury.
19. CONTINGENCIES AND COMMITMENTS
At September 30, 2010, the Group had capital commitments contracted for but not
provided and authorized but not contracted in respect of construction of
property and equipment of $2,856 and $26 respectively. The amount is expected to
be settled upon the satisfactory certification of the property construction or
the delivery of properties under development for sale in 2010.
20. SUBSEQUENT EVENTS
Subsequent to the period end, on October 28, 2010, the Company announced that it
completed a convertible bond financing (the "Offering") with Century Zone
Limited ("Century Zone"), the majority shareholder of WHL for aggregate gross
proceeds of $4,600,000. The convertible bond is due on October 27, 2012, has an
interest rate of LIBOR + 3% and a conversion price of $0.12. The Company also
extended an offer to existing shareholders who are "accredited investors", to
participate in the Offering on the same terms as those entered into with Century
Zone up to an aggregate amount of $2,000,000. To the extent that such existing
shareholders do not subscribe for the full $2,000,000, the offer is expected to
be made to other "accredited investors". MCR anticipates completing the Offering
on or about December 23, 2010. The gross proceeds from the Offering will be used
to provide working capital to the Company and to fund the continuing operations
of MCR's Sun Mountain Yabuli Resort.
On November 17, 2010, the Company announced its updates with respect to certain
developments that have taken place with respect to its Changchun Resort. The
government of Erdao district of Changchun city in the Jilin province of the
People's Republic of China (the "Erdao Government") holds the view that the the
Changchun Resort, is still owned by the government and it may, through Changchun
Lianhua Mountain Agricultural Project Development Company Limited ("CCL
Agricultural"), manage the same to the Company's exclusion. The Company
disagrees with the Erdao Government's position. The Company had engaged Global
Law Office, a reputable law firm in PRC, to do legal due diligence on the assets
before they were acquired by the Company. Global Law Office had advised the
Company that the assets acquired are not state- owned assets and the same may be
validly transferred to the Company. Because of CCL Agricultural's and the Erdao
Government's action, the Company has been deprived of management of the
Changchun Resort. The Company has engaged in discussions with the Erdao
Government, Changchun Lianhua Mountain Sports & Travel Development Company
Changchun Sports and CCL Agricultural with an aim of resolving this matter. If
the current situation cannot be resolved through negotiations, the Company may
have to resort to legal means to protect its rights in relation to Changchun
Resort.
As a result of the foregoing, the Company could not obtain financial information
with respect to Changchun Resort, and these financial statements are prepared on
the basis of the omission of Changchun Resort financial information for the
nine-month period ended September 30, 2010, and therefore are not comparable to
previous financial statements of MCR where such financial information of
Chuanchun Resort was included.
As at September 30, 2010, the relevant amount related to the impairment of
investment into the Changchun Resort was $5,123 in the Financial Statements (see
Page F-2). Total assets, shareholders' equity, revenue and loss of Changchun
Resort in 2009 were $11.71 million (RMB76.13 million), $2.91 million (RMB18.91
million), $1.30 million (RMB7.56 million) and negative $6.00 million (RMB38.32
million) respectively, which compared with the Company's total assets,
shareholders' equity, revenue and loss of 6%, 4%, 43% and 9% , respectively over
the same period in 2009. If the Company loses the control over Changchun Resort
in 2010, the most significant impact of the exclusion of Chuangchun Resorts'
financial results will be on revenue and loss of the Company.
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