Mountain China Resorts (Holding) Limited
TSX VENTURE : MCG

Mountain China Resorts (Holding) Limited

November 30, 2010 15:32 ET

Mountain China Resorts Reports Third Quarter 2010 Financial and Operational Results

BEIJING, CHINA--(Marketwire - Nov. 30, 2010) - 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 *

(in thousands of Canadian dollars except for per share data)     For the three-month period ended September 30, 2010       For the three-month period ended September 30, 2009       For the nine-month period ended September 30, 2010       For the nine-month period ended September 30, 2009  
Revenue   $ 111     $ 218     $ 1,881     $ 1,882  
Operating expenses     (461 )     (1,112 )     (2,936 )     (6,364 )
                                 
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     (5,123 )     -       (5,123 )     -  
Operating loss     (6,142 )     (4,383 )     (12,133 )     (18,160 )
                                 
Total non-operating income and expenses     50       (1,130 )     (152 )     (5,467 )
Recovery of/(provision for) future income taxes     17       27       53       87  
Results of discontinued operations     -       (489 )     -       (2,580 )
Net loss   $ (6,075 )   $ (5,975 )   $ (12,232 )   $ (26,120 )
                                 
Net loss per share (Basic and Diluted)     (0.05 )     (0.07 )     (0.09 )     (0.30 )
                                 
Weighted average number of shares outstanding (Basic and Diluted)     133,295,698       87,439,344       133,295,698       87,439,344  
 
* 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 Ratio1 1.60:1
Free Cash 340
Working Capital2 9,988
Total Assets 182,429
Total Debt3 105,406
Total Equity4 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 )
                         
*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:*

    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 )
                         
*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")*  
             
    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 )
                         
* 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:*  
             
    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 )
                         
* 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*
                                 
  Q3-10   Q2-10   Q1-10   Q4-09   Q3-09   Q2-09   Q1-09   Q4-08  
  (in thousands of Canadian dollars, except per share amounts)  
                                 
Operating revenue from continuing operations 111   13   1,758   876   218   149   3,245   1,118  
Loss from continuing operations (6,075 ) (3,752 ) (2,403 ) (40,717 ) (5,486 ) (8,517 ) (11,628 ) (98,254 )
Results of discontinued operations     -   -   -   (489 ) -   -   (20,746 )
Net loss (6,075 ) (3,752 ) (2,403 ) (40,717 ) (5,975 ) (8,517 ) (11,628 ) (119,000 )
Loss per share from continuing Operations                                
  Basic (0.05 ) (0.03 ) (0.05 ) (0.46 ) (0.06 ) (0.10 ) (0.13 ) (1.12 )
  Diluted (0.05 ) (0.03 ) (0.05 ) (0.46 ) (0.06 ) (0.10 ) (0.13 ) (1.12 )
Net loss per share                                
  Basic (0.05 ) (0.03 ) (0.05 ) (0.46 ) (0.07 ) (0.10 ) (0.13 ) (1.36 )
  Diluted (0.05 ) (0.03 ) (0.05 ) (0.46 ) (0.07 ) (0.10 ) (0.13 ) (1.36 )
   
* 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
    Total   Less than 1 year   2-5 years   Over 5 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 obligations3(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 for ratios)   September
30
th, 2010
  December
31
st, 2009
 
           
  Current Ratio4   1.60:1   0.23:1  
             
  Free Cash   340   1,636  
             
  Working Capital5   9,988   (57,773 )
             
  Total Assets   182,429   193,308  
             
  Total Debt6   105,406   121,852  
             
  Total Equity7   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 period ended September 30,     Three-month period ended September 30,     Nine-month period ended September 30,   Nine-month period ended 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-month period ended September 30, 2010       Three-month period ended September 30, 2009       Nine-month period ended September 30, 2010       Nine-month period ended September 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)
   
 
 
 
 
Common shares, issued and outstanding   Class B non-voting shares, issued and outstanding     Contributed           Accumulated     Accumulated other comprehensive     Total shareholders'  
  Shares   Amount   Shares     Amount     surplus     Warrants     deficits     income     equity  
Balance at December 31, 2008 and January 1, 2009 87,439,344 $ 250,385   8,437,565   $ 25,313   $ 2,150   $ 6,973   $ (139,518 ) $ 11,605   $ 156,908  
Employee's share-based compensation -   -   -     -     684     -     -     -     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 87,439,344 $ 250,385   8,437,565   $ 25,313   $ 2,834   $ 6,973   $ (206,363 ) $ (7,686 ) $ 71,456  
Issue of common shares (note 15) 100,000,000   15,000   -     -     -     -     -     -     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   -     -     -     -     -     -     1,003  
Issue of common shares under RSU (note 15) 261,436   134   -     -     -     -     -     -     134  
Warrants Expire (note 16) -   -   -     -     -     (6,973 )   6,973     -     -  
Stock option expire (note 17) -   -   -     -     (408 )   -     408     -     -  
Employee's share-based compensation (notes 17 and 18) -   -   -     -     256     -     -     -     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 202,825,011 $ 291,835   -     -   $ 2,682     -   $ (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
September 30,
2010
  As at
December 31,
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:

    Carrying   Contractual   0 to 6   6 to 12   12 to 24   After 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-month period ended September 30,     Three-month period ended September 30,     Nine-month period ended September 30,     Nine-month period ended September 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 period ended September 30,   Nine-month period ended 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 September 30,   As at 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 September 30,     As at 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 Limited   Subsidiary of shareholder        
   
        As at September 30,   As at December 31,  
Account   Name of related party   2010   2009  
                   
Loans from beneficial shareholder   MLE   $ 23,532   $ 25,730  
Notional interest         -     (149 )
                   
                25,581  
Accrued interest         690     222  
                   
        $ 24,222   $ 25,803  
                   
Amount due to related party   Melco Services 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-month period ended September 30,   Three-month period ended September 30,   Nine-month period ended September 30,   Nine-month period ended September 30,
Name of related party   Nature of transaction   2010   2009   2010   2009
 
Melco Services Limited   Advisory 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 interest     As at September 30,   As at December 31,  
  Maturity dates   rates (%)     2010   2009  
   
General corporate debt February 15, 2009   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.

  Options     Weighted Average exercise 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 ende