Mountain China Resorts (Holding) Limited
TSX VENTURE : MCG

Mountain China Resorts (Holding) Limited

October 03, 2013 18:41 ET

Mountain China Resorts Reports 2013 Second Quarter Interim Financial and Operational Results, Loan Default and Trading Reinstatement Updates

BEIJING, CHINA--(Marketwired - Oct. 3, 2013) - Mountain China Resorts (Holding) Limited (TSX VENTURE:MCG) ("MCR" or the "Company"), recently reported its financial results for the quarter ended June 30, 2013 (the "Reporting Period"). MCR reports its results in Canadian Dollars.

Financial Results

Total revenue and the net results for the Reporting Period were from resort operations with no real estate sales revenue. The Company's resort operations business at its Sun Mountain Yabuli Resort is seasonal and there is typically little or no revenue generated in the second quarter because winter operations usually end in the first quarter and summer operations do not start until the third quarter.

For the quarter ended June 30, 2013, the Company generated revenues from resort operations of $0.08 million and a net loss of $5.51 million or $0.02 per share compared to $0.025 million and a net loss of $3.7 million or $0.01 per share in 2012 Q2. Resort Operations EBITDA from continuing operations for the second quarter of 2013 were ($0.85 million) compared to $1.4 million last year. The lower EBITDA and net loss in the Reporting Period compared to the previous year was because in the second quarter of 2012, the Company received a $2.2 million insurance compensation for certain equipment damage and that was included as other income for that period.

Resort operations expenses from continuing operations totaled $0.74 million for the quarter ended June 30, 2013 compared to $0.68 million in 2012. Operations expenses within the resorts are mainly attributable to snow making, grooming, staffing, fuel and utilities, which also include the G&A expenses relating to the resort's senior management, marketing and sales, information technology, insurance and accounting.

Other income for the Reporting Period totaled $0.09 million (2012: 2.3 million), which mainly consisted of income recognized from the deposit by Club Med of $0.08 million. As mentioned earlier, for the same period in 2012, a major portion of other income included a $2.2 million insurance compensation received for the damage to Gondola B as well as $0.08 million recognized from the deposit by ClubMed.

Corporate general and administrative expenses ("G&A expenses") totaled $0.29 million for the Reporting Period compared to $0.31 million in 2012. This amount mainly comprised executive employee costs, public company costs, and corporate information technology costs.

Depreciation and amortization expense from continuing operations totaled $2.77 million for the quarter ended June 30, 2013 compared to $2.96 million in 2012.

The Company incurred financing cost of $1.58 million for the Reporting Period from continuing operations compared to $1.85 million in 2012. Financing costs were mainly related to the loan interests, and also included bank administrative fees, and service charges.

Cash and cash equivalents totaled $9.97 million and the Company has a working capital deficiency of $72.76 million as at June 30, 2013.

Sun Mountain Yabuli - Real Estate Development

At the end of Fiscal 2010, the Company had finished working on the exterior decoration of the 55 villas of which three were completed with interior finishing. At the time of this release, certain construction is still needed on the exterior grounds to complete lighting, roads and utility connections. As of June 30, 2013, the Company had not been successful in selling any of the villas. Management is of the opinion that in order to complete sales it is necessary to first complete the exterior construction. Management estimates these additional construction costs to be $4.70 million and has plans to commence construction in the autumn of 2013.

Since 2010, due to a combination of temporary Chinese government policies trying to cool down the rapid growing housing price in mainland China, the property investment demand have gone down significantly, which also impacted the Yabuli area. At the same time, with a tight expense budget and shortage of working capital, the Company had decided for the time being not to take the risk by inputting its limited working capital into the villa's remaining public infrastructure construction (for example: public lighting, roads, landscape engineering) and a full scale marketing and advertising regime. However, the Company does have confidence with its first of a kind ski-in and ski-out villas in China. And the Company will be reasonably flexible with its pricing when the market shows sign of a turn-around. No other detail milestones for the above matter are available from the Company as the related government policies are set to be temporary but with durations undetermined.

Financial Highlights

Summary Financial Results

(in thousands of Canadian dollars except for per share data) For the quarter ended June 30, 2013 For the quarter ended June 30, 2012
Revenue 82 25
Operating expenses (739 ) (675 )
Other income 90 2,324
General and administrative expenses (287 ) (306 )
Depreciation and amortization (2,765 ) (2,958 )
Operating loss (3,619 ) (1,590 )
Total non-operating income and expenses (1,986 ) (2,146 )
Deferred income tax recovery 99 33
Results of discontinued operation - -
Net loss (5,506 ) (3,703 )
Net loss per share (Basic and Diluted) (0.02 ) (0.01 )
Weighted average number of shares outstanding(Basic and Diluted) 308,859,103 308,859,103

Balance Sheet Key Indicators

(in thousands of Canadian dollars except for ratios) June 30, 2013 December 31, 2012
Current Ratio1 0.34:1 0.40:1
Free Cash 9,967 9,080
Working Capital2 (72,759 ) (60,661 )
Total Assets 152,304 151,815
Total non-current liabilities 14,890 19,817
Total Debt3 125,166 120,511
Total Equity4 27,138 31,304
Total Debt to Total Equity Ratio 4.61:1 3.85:1
Notes:
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 Company has an accumulated deficit, a working capital deficiency and has defaulted on a bank loan, which cast a substantial doubt on the Company's ability to continue as a going concern. The Company's ability to meet its obligations as they fall due and to continue to operate as a going concern is dependent on further financing and ultimately, the attainment of profitable operations. These consolidated financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern. Management of the Company plans to fund its future operation by obtaining additional financing through loans and private placements and through the sale of the properties held for sale. However, there is no assurance that the Company will be able to obtain additional financing or sell the properties held for sale.

Despite of the financial difficulty posed by the overdue debts and continued loss, management is optimistic in the development of both the industry and the Company in the near future. The government of Heilongjiang Province has demonstrated welcomed signs of supporting the skiing industry and the Company by increasing local infrastructure investment and potentially providing a bank loan interest subsidy scheme. Recently in August the Company was advised by Harbin Commercial Bank that they had approved to extend the repayment schedule of its loan to the Company with an outstanding balance of $23,982 (RMB 140 million) from 3 years to 10 years. As a result, the Company's current working capital deficiency will be decreased by approximately 15% in the next quarter. Revenue from ClubMed had been growing steadily, and the Company will be the official partner and the venue to host the 2016 World Championships of Snowboarding. Management are also working on various means to attract new investment into the Company to complete the construction of villas and improve the capital structure of the Company.

June 30, December 31,
2013 2012
(in thousands of Canadian dollars)
Accumulated deficit $ 300,255 $ 291,358
Working capital (deficiency) $ 72,759 $ 60,661

SUBSEQUENT EVENTS

Bank Loans - Harbin Commercial Bank

As mentioned earlier, in August of 2013, the Company was advised by Harbin Commercial Bank that it had approved to extend the repayment schedule of its loan with an outstanding balance of $23,982 (RMB 140 million) from 3 years to 10 years. The original bank loan was made on February 14 2012, and carried a three year-term with a maturity date of February 15, 2015 and a fixed annual interest rate of 7.315%.

According to the revised terms, the loan will now mature in December, 2022. The first installment of $514 (RMB 3 million) is repayable in August 2013, and thereafter the Company will need to repay $2,398 (RMB 14 million) each year for eight consecutive years, and $4,283 (RMB 25 million) in the final year. The Company made payment of the first installment of $514 (RMB 3 million) in August of 2013.

Beijing Lianhua Mountain Skiing Field

In August the Company was awarded an arbitration decision from the China International Economic and Trade Arbitration Commission ("CIETAC") in Beijing on the dispute over the sale of shares in Beijing Lianhua Mountain Skiing Field Co., Ltd. ("Beijing Lianhua"), which decision orders, among other things, that 100% of the shares in Beijing Lianhua be transferred back to the Company. The Company is in the process of instructing its Chinese law firm to work on the transfer of the ownership of Beijing Lianhua back to the Company.

On December 12, 2008, the Company entered into a Share Purchase Agreement between Jilin Wahaha Drinking Water Co., Ltd. (the "Purchaser") and the Company and a Guaranty Contract between Jilin Lianhua Mountain Group Co., Ltd. and the Company for the sale of Beijing Lianhua to the Purchaser at the price RMB 28,320,000. The Purchaser defaulted in 2011 on its initial payment obligations. As a result, the Company applied to CIETAC for an arbitration for the return of the Beijing Lianhua shares due to the default of the Purchaser.

The Purchaser also defaulted on its payment obligations to the Company under a separate purchase agreement for the sale of Panshi Lianhua Mountain Skiing Field Co., Ltd. to the Purchaser. The Company intends to continue its demand for the purchase price under this transaction.

2013 SECOND QUARTER MAJOR CORPORATE DEVELOPMENTS

Sun Mountain Yabuli Resort Preparing for its Second Summer Operations

As the 2012-2013 winter operations ended in March, there were no resorts operations in the second quarter. The 2013 summer operations started on July 5th, and finished on August 17th. Preparation work such as staffing, procurement, sanitation and equipment maintenance were undertaken in the second quarter.

Updates on Loan Defaults

On March 31, 2013 the Company defaulted on its third principal payment of $6.85 million (RMB 40 million) under its $42.83 million (RMB 250 million) loan agreement with the China Construction Bank ("Construction Bank"). According to the Loan Agreement between Yabuli and Construction Bank, Construction Bank has the right to accelerate Yabuli's obligation to repay the entire unpaid principal plus interest immediately and to take legal actions to enforce on the security. Subsequently in August of 2013, the Company was made aware by the Higher People's Court of Heilongjiang Province that Construction Bank had commenced formal legal action against Yabuli to demand repayment. As of June 30, 2013, the principal and interest owing under the Construction Bank loan was $44.2 million, and the collaterals associated with the loan agreement are made up of the Company's land use rights and property and equipment with a carrying value of approximately $67.38 million. The outcome of this lawsuit cannot be accurately estimated at the time. The Company has been negotiating with Construction Bank to arrange for a debt restructuring plan, and as of the date of this release, no consensus has been arrived yet.

Updates on Melco Debt Restructuring

On February 8, 2012, the Company entered into a Debt Settlement Agreement with Melco Leisure and Entertainment Group Limited ("Melco" or "MLE") for the settlement of a loan in the principal of US$12 million made by Melco to the Company (the "MCR Loan") and a loan in the principal of US$11 million (the "MCRI Loan", and together with the MCR Loan, the "Melco Loans" or "MLE Loan") made by Melco to Mountain China Resorts Investment Limited ("MCRI"), the Company's Cayman subsidiary, both in 2008. On May 29, 2012, the Company and Melco entered into Amended and Restated Debt Settlement Agreement (the "Agreement") to clarify details of the loan settlement mechanism and procedures to implement the settlement of the Melco Loans. Detailed settlement arrangement can be found in Note 13 of the Company's Interim Consolidated Financial Statements for the Reporting Period. On July 10, 2012, during the Company's Annual General Meeting, the Company obtained Shareholder Approval on the Agreement. The transactions contemplated under the Agreement have been approved by the TSX Venture Exchange. Settlement procedures were started in the second quarter of 2013, and the Company paid $3,01 million to MLE on May 31, 2013 as a partial fulfilment to its cash repayment obligation specified in the Agreement. As of the date of this news release, management are still in negotiation with MLE to proceed on the remaining parts of the settlement.

Update on Changchun Resort

On November 17, 2010, the Company announced its updates with respect to certain developments 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 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. However, because of CCL Agricultural's and the Erdao Government's actions, the Company has been deprived of management of the Changchun Resort.

As a result of the foregoing, the Company has lost control of the Changchun Resort and has therefore written off the full value of the assets and liabilities of Changchun Resort and reported it as a loss from discontinued operations as of December 31, 2010. In 2011, the Company commenced legal actions against the Erdao Government in an effort to regain control and ownership of the assets and operations.

The Company's legal department has sent three letters of formal complaint to the Ministry of Commerce of the People's Republic of China in June 2012, the Erdao Government, and Jilin Lianhua Tourist Committee. Recently, the Ministry of Commerce of the People's Republic of China has assigned the case to the relevant authority named the Economic and Technological Cooperation Department of Jilin Province for further handling. After a series of negotiations, no consensus was reached. Management decided to commence a formal administrative proceeding against the government. As at June 30, 2013, management had sent several formal notice letters to the respective government offices, but no formal proceeding had been started.

Update on Temporary Suspension of Trading

On April 30, 2013, the Company was late in filing its Annual Filings due to the last minute requests for re-assessment of the fair value of certain assets including the villas under construction and goodwill. As a result the Company received a Cease Trade Order ("CTO") issued by BCSC dated May 8, 2013, and accordingly TSX Venture Exchange (the "Exchange") suspended trading in the Company's securities. Although the CTO was revoked by BCSC on May 16th, 2013 as the requested Annual Filings were filed on May 14, 2013, trading in the Company's securities has not been reinstated by the Exchange as the Exchange was reviewing the Company's status with respect to its Tier 1 Continued Listing Requirements and further clarification on status of Beijing Lianhua Mountain litigation matter, status of bank loan default and status of the debt settlement arrangement with Melco. The Company has been notified that an Exchange bulletin will be issued on reinstatement to trading after the Exchange has satisfactorily reviewed the Company for reinstatement.

Board Committee Member Change

The Company is pleased to announce that Mr. Wang Lian will replace Mr. Philip Li's role as the Chairman of the Nomination Committee.

Appointment of Investor Relations Manager

Furthermore, the Company is pleased to announce that the Exchange has accepted the Company's filing for Ms. Lili Tian as the Company's Investor Relations Manager. Ms. Tian has worked for the Company as Investor Relations Manager since April of 2013 and is based in Beijing China.

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

The TSX Venture Exchange nor its Regulation Services Provider has neither approved nor disapproved the contents of this press release.

The TSX Venture Exchange nor its Regulation Services Provider does not accept responsibility for the adequacy or accuracy of this release.

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 in China, adverse industry events for the ski and real estate industries, real estate prices in general in China, 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, MCR's ability to obtain additional financial resources and sufficient working capital, MCR's ability to complete the announced non-brokered private placement, 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-IFRS MEASURES

Throughout this news release we use certain non-IFRS measures such as the term "EBIDTA" to analyze operating performance. We define EBITDA as operating revenues less operating expenses from continuing operations and therefore reflect earnings before interest, income tax, depreciation and amortization, non-controlling interest and any non-operating and non-recurring items. These non-IFRS measures do not have a standardized meaning prescribed by IFRS and may not be comparable to similarly titled measures presented by other companies. These non-IFRS 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. Figures used in calculation of EBITDA are in compliance with IFRS, therefore no reconciliation is needed.

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