SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM - 6K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the nine months ended September 30, 1997
CHINA ENERGY RESOURCES CORPORATION
(Exact name of Registrant as specified in its charter)
British Virgin Islands
(Jurisdiction of incorporation or organization)
Citco Building, Wickhams Cay c/o Arimoto, Ogasawara & Mo
P.O. Box 662, Road Town 276 Fifth Avenue, Suite 703
Tortola, British Virgin Islands New York, NY 10001
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F __X__ Form 40-F ______
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act 1934.
Yes ______ No __X___
If "Yes" is marked, indicated below the file number assigned to the
registrant in connection with Rule 12g3-2(b). Not applicable
TABLE OF CONTENTS
Page
SELECTED FINANCIAL DATA 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 6
UNAUDITED FINANCIAL STATEMENTS
Unaudited consolidated statements of operations for the
nine months ended September 30, 1997 and 1996 10
Unaudited consolidated balance sheets at September 30, 1997
and 1996 11
Unaudited consolidated statements of stockholders' equity
for the nine months ended September 30, 1997 and 1996 13
Unaudited consolidated statements of cash flows for the
nine months ended September 30, 1997 and 1996 14
Notes to unaudited consolidated financial statements 16
SIGNATURE 26
SELECTED FINANCIAL DATA
Summary Financial and Operating Data
The selected information set forth below should be read in conjunction with
the unaudited consolidated financial statements of the Company included in
this Report. The Company prepares its financial statements in accordance
with U.S. GAAP.
China Energy Resources Corporation ("the Company") was incorporated for the
sole purpose of holding 100% of the capital stock of China Coal Mining
(B.V.I.) Co. Ltd. ("CCM") and being the surviving entity of the merger with
Jackson Holding Corp. ("JHC").
CCM, which was incorporated on August 18, 1995, entered into the joint
venture which created Mishan Hua Xing Coke Limited ("the Operating Company")
on September 16, 1995. The Company was subsequently incorporated on March
15, 1996 to be the sole shareholder of CCM. All of the Company's operations
are conducted through its operating subsidiary, CCM, and in turn through
CCM's interest in the Operating Company. As a result, the Company's
operations and financial condition depend entirely upon the Operating
Company's results of operations and financial condition.
The Operating Company has two wholly-owned coal refining operations, MCCF and
QCCF. The Operating Company derives its revenues principally from two lines
of business within the PRC's coal industry: (1) the production and sale of
metallurgical coke to steel mills and machinery manufacturers; and (2) the
production and sale of steam coal to power plants, with all of such sales to
customers located in the PRC.
MCCF
MCCF engages primarily in the production and sale of metallurgical coke.
MCCF completed its steam coal preparation facility in 1993. Subsequently, in
1995, MCCF completed construction of an additional production facility to
process steam coal into metallurgical coke and foundry coke. This facility
has been designed for annual production capacities of approximately 200,000
tons of steam coal, approximately 85,000 tons of metallurgical coke and
approximately 56,000 tons of foundry coke. Improvements to the facility,
which cost approximately $3,000,000 were financed through an unsecured loan
by a local PRC bank at a fixed term rate of 15.3%. These improvements
enabled MCCF to produce metallurgical coke and foundry coke which it was
unable to do prior to such improvements. Presently, the main product of the
MCCF plant is metallurgical coke.
On June 20, 1995, the Mishan City Municipal Government granted MCCF
exclusive underground rights to mine coal from certain coal reserves located
in Mishan City, within Heilongjiang Province, PRC. MCCF's mining rights
were granted on June 20, 1995 and continue in force for 100 years. MCCF is
not presently involved in the mining of these reserves due to the lack of
funds available for this purpose. MCCF has been engaged in conducting mine
site surveys, clearing the surface of potential mine entrance sites,
performing geological surveys and preparing mining plans. The Company
believes that these activities will enable MCCF to begin its mining
operations as soon as practicable after sufficient funds are available. The
costs associated with mining preparation work have been capitalized as part
of MCCF's coal mine use rights.
QCCF
QCCF engages in the production and sale of steam coal. The QCCF factory was
constructed in 1993 and employs the "air-heavy medium fluid bed" dry process
of coal preparation, which management believes is a leading production
technology worldwide and is appropriate for production in cold and dry
regions such as the region where QCCF's factory is located. QCCF's annual
production capacity is approximately 750,000 tons of steam coal.
Following are certain operating results, set forth separately, of the Company,
MCCF and QCCF. These operating results form the basis for the unaudited
Consolidated Statement of Operations Data for the Company.
Nine Nine
Months Months
The Company: Ended Ended
Statement of Operations Data (Unconsolidated): 9/30/96 9/30/97
(amounts in thousands)
Net Sales $ - $ -
---------- ----------
Total revenue - -
Cost of sales - -
---------- ----------
Gross profit - -
Selling, general and administrative expenses - (638)
----------- ----------
Operating loss - (638)
Interest expenses - (427)
Other income 29 84
----------- ----------
Income/(loss) before income taxes and
minority interest 29 (981)
Income tax - -
---------- ----------
Income/(loss) before minority interest 29 (981)
Minority interest - -
---------- ----------
Net income/(loss) $ 29 $ (981)
========== ==========
Nine Nine
Months Months
MCCF: Ended Ended
Statement of Operations Data: 9/30/96 9/30/97
(amounts in thousands)
Net Sales $ 244 $ 873
Subcontracting income 414 363
--------- ----------
Total revenue 658 1,236
Cost of sales (546) (945)
---------- ----------
Gross Profit 112 291
Selling, general and administrative expenses (139) (432)
---------- ---------
Operating loss (27) (141)
Interest expenses (96) (165)
Other income - 16
--------- ----------
Loss before income taxes and minority interest (123) (290)
Income tax - -
--------- ----------
Loss before minority interest (123) (290)
Minority interest 25 58
--------- ---------
Net loss $ (98) $ (232)
========= =========
Nine Nine
Months Months
Ended Ended
QCCF: 9/30/96 9/30/97
Statement of Operations Data: (amounts in thousands)
Net Sales $ 5,788 $ 5,281
-------- -------
Total revenue 5,788 5,281
Cost of sales (3,871) (3,345)
--------- -------
Gross profit 1,917 1,936
Selling, general and administrative expenses (356) (451)
--------- --------
Operating income 1,561 1,485
Interest expenses (187) (101)
other income 4 1
--------- ---------
Income before income taxes and minority interest 1,378 1,385
Income tax - -
--------- --------
Income before minority interest 1,378 1,385
Minority interest (276) (277)
--------- ---------
Net income $ 1,102 $ 1,108
========= ========
Operating Company:
Product Mix and Sales Volume
Nine Months Ended
9/30/96 9/30/97
Metallurgical coke:
Sales volume (in tons) 6,277 16,842
Average sales price per ton $37.47 $38.58
Average production cost per ton $72.66 $44.09
Steam coal:
Sales volume (in tons) 369,390 273,955
Average sales price per ton $15.67 $ 19.28
Average production cost per ton $10.48 $ 12.21
Exchange Rate Information
The following table sets forth the applicable exchange rate used for the
presentation of financial information in this Report and in the financial
statements presented herein:
Period Ended Exchange Rate
September 30, 1996 US$1.00 = Rmb8.2892
September 30, 1997 US$1.00 = Rmb8.2728
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations - Nine months ended 9/30/97 Compared to nine months
ended 9/30/96
Net sales - Net sales is recorded as gross sales less returns and discounts.
Net sales slightly increased from $6,032,000 in the nine months ended 9/30/96
to $6,154,000 in the nine months ended 9/30/97.
MCCF terminated the subcontracting agreement on March 31, 1997 and resumed
the production and sales of metallurgical coke during the second quarter of
1997. In order to alleviate the immediate problem of obtaining the necessary
transportation capacity, MCCF sold most of the finished products at the
production point to the subcontracting party which in turn sold to its
customers using its own transportation capacity. Since April of 1997, MCCF
has been building up customer base and arranging for transportation capacity
which is the key element for making sales. MCCF produced a total of 16,842
tons of metallurgical coke for the nine months ended 9/30/97. The unit
sales price was slightly increased from $37.47 in the nine months ended
9/30/96 to $38.58 in the nine months ended 9/30/97 due to the improvement in
the quality of the product. The production level of MCCF in the nine months
ended 9/30/97 was below the normal operating level due to lack of working
capital.
QCCF's sales of steam coal decreased from $5,788,000 in the nine months ended
9/30/96 to $5,281,000 in the nine months ended 9/30/97 due to the shortage
of transportation capacity in May 1997. The local government utilized all of
the transportation capacity to transport agricultural products because the
harvest was better than expected. The transportation capacity was still in
short supply during the third quarter of 1997. Although QCCF sold
approximately 95,000 tons less steam coal when compared to the nine months
ended 9/30/96, its sales price increased 23% due to stricter quality control
of coal inspection and testing processes which resulted in higher customer
satisfaction and fewer discounts and rebates. Sales to Mudanjiang No. 2
Power Plant represented 72% of the Company's total net sales in the nine
months ended 9/30/97. Sales to Mudanjiang amounted to 236,000 tons in the
nine months ended 9/30/97 as compared to 295,000 tons in the nine months
ended 9/30/96. Such decrease was due to shortage of transportation capacity.
Cost of sales - The cost of coal sales includes the cost of raw material,
direct labor and benefits, depreciation, transportation and manufacturing
overhead.
MCCF's average unit cost of producing metallurgical coke decreased 39% from
$72.66 in the nine months ended 9/30/96 to $44.09 in the nine months ended
9/30/97 due to economy of scale arising from increased production volume of
metallurgical coke.
QCCF's average unit cost of producing steam coal increased moderately from
$10.48 in the nine months ended 9/30/96 to $12.21 in the nine months ended
9/30/97. The increase was attributed to increases in labor and benefits and
depreciation which was offset by a decrease in raw material and
transportation cost.
Gross Profit - Gross profit increased 10% from $2,029,000 in the nine months
ended 9/30/96 to $2,227,000 in the nine months ended 9/30/97. The increase
was primarily attributable to : (1) MCCF gross profit on sales of coke
products increased by 76% as the production and sales increased by 258% and
(2) QCCF's gross profit increased by a moderate 1% due to shortage of
transportation capacity. The increase was offset by a decrease of 12% in
MCCF's subcontracting income.
Selling, general and administrative expenses - Selling, general and
administrative expenses increased to $1,521,000 in the nine months ended
9/30/97 from $495,000 in the nine months ended 9/30/96. The increase of
$1,026,000 is mainly attributable to (1) write off of uncollectible
receivables and transportation vehicles of $221,000 in MCCF and its salary
increased by $69,000; (2) the Company incurred an additional $566,000
administrative and professional expenses associated with increased
reporting obligations of the Company and advances of $109,000 to the
officer was written off and (3) salary and benefits of QCCF increased by
29.6%, approximately $37,000, as management provided incentives to employees.
The management of QCCF continues to exercise a tighter control over office
and administrative expenditures.
Interest expenses - Interest expenses increased 145% to 93,000 in the nine
months 9/30/97 from $283,000 in the nine months ended 9/30/96 for the
following reasons: (1) the Company incurred additional $427,000 interest
expenses on the $6,122,500 convertible notes; (2) MCCF repaid $363,000 bank
loan in second quarter of 1997; one lender lowered its monthly interest rate
from 25% to 15% as a result of government policy, this lender has not agreed
to waive the interest for the nine months ended 9/30/97 whereas they did in
the nine months ended 9/30/96. All of these resulting in a net increase of
$49,000 in interest expenses incurred by MCCF. The increase was partially
offset by a decrease in QCCF's interest expenses of $86,000 as they paid
down $648,000 loan on March 31, 1997.
A local bank continued its one-time waiver of interest expenses owed by MCCF.
The amounts of forgiven interest were $108,000 in the nine months ended
9/30/97 and 125,000 in the nine months ended 9/30/96. Commencing October 1,
1995, the Mishan City government agreed to share one-half of the interest
owed by MCCF on certain long-term interest bearing loans. The government's
share of interest expenses was $131,000 in the nine months ended 9/30/97 and
$148,000 in the nine months ended 9/30/96. This agreement expires on
December 31, 1997. Interest expense was $250,000 for the nine months ended
9/30/97 and $344,000 for the nine months ended 9/30/96 on the interest free
loan from CCM's joint venture partner at the rate of 16% per annum. Such
interest was capitalized as part of MCCF's coal mine use rights.
Income taxes - Substantially all of the Company's current profits accrue in
the PRC where the applicable tax rate is currently 33%. However, pursuant to
the PRC Income Tax Law, the Operating Company is exempt from income tax for
its first two profitable years. This two-year "tax-holiday" was to begin
with the first profitable year of the Operating Company, measured from its
formation on September 16, 1995. For the following three years, the
Operating Company will pay income tax at a rate of one-half of the then
current tax rate. There is no tax payable in the British Virgin Islands on
dividends paid to CCM and the Company by any of their subsidiaries or
factories. Therefore, there was no provision for income tax for the nine
months ended 9/30/97 and 9/30/96.
Net Income - Net income before minority interest decreased from $1,284,000 in
the nine months ended 9/30/96 to $114,000 in the nine months ended 9/30/97.
The decrease was attributable to (1) additional interest expenses for the
convertible notes of $427,000; (2) write off of uncollectible receivables and
transportation vehicles of $330,000 and (3) increase in professional and
administrative expenses of $566,000 in connection with the reporting
requirements of the Company which were partially offset by (4) a higher
selling price was realized on the steam coal resulting from better quality
control in QCCF.
Liquidity and Capital Resources
As a holding company, the Company's only sources of cash flow are dividends,
if any, paid by the Operating Company and retained net proceeds from its
Regulation S offerings of securities. The Company believes that such
sources of cash flow are sufficient to fund its operating expenses except for
MCCF.
After the Company raised $6,122,500 of convertible notes in November 1996
and January 1997, $4,500,000 out of the net proceeds of $5,400,000 was
remitted to be used in the operations of the two factories: MCCF and QCCF.
As of September 30, 1997, $1,977,000 was used to purchase raw material,
working capital and secure transportation capacity for MCCF, $363,000 was
used to commence the survey on the coal mine reserve and $648,000 was used to
pay down the bank loan incurred by QCCF to reduce interest expenses.
Due to the lack of working capital, in June 1996, operations of the MCCF
plant was subcontracted to a company under the control of the PRC's Ministry
of Coal to maintain the production facility and its workers. Following the
receipt of additional working capital in early 1997, this subcontract was
terminated on March 31, 1997 and the management resumed the operations of
MCCF. Due to the inability to collect account receivable, MCCF was in
shortage of working capital beginning the month of October 1997.
As of September 30, 1997, MCCF had $2 million in short-term loans and
$967,000 in long-term loans. MCCF has not incurred any additional bank
loans since 1995.
QCCF has generally satisfied its working capital requirements, capital
expenditures and scheduled debt repayments from its operating cash flows.
Due to improved credit controls and trade receivable collection procedures,
management believes that cash generated from operations will continue to be
sufficient to meet QCCF's working capital requirements, planned or
anticipated capital expenditures, scheduled debt repayments and other
financial commitments. As of September 30, 1997, QCCF had $967,000 in
short-term loans and no long-term debt.
Both factories incurred, on an average, 17% on its short-term loans and 14%
on its long-term borrowings in 1997.
Capital Expenditures
The two factories spent $165,000 in the nine months ended 9/30/97 to
modernize its older coal production facility and improve productivity.
MCCF is currently reviewing the amount of capital improvement needed to
improve its foundry coke production facility which management believes
should be commenced as soon as possible. Such review is conducted by the
Beijing Research Institute of Coal Chemistry, a leading consulting firm in
the China coal industry, together with John T. Boyd Company. The Chairman
of the Institute is a director of the Company.
Financing Activities
In November 1996 and January 1997, the Company raised net proceeds of
approximately $5,400,000 through an offering of convertible notes and
warrants in an exempt transaction pursuant to Regulation S under 1933 Act.
The convertible notes and warrants are referred to hereinafter as the "Notes"
and the "Warrants." The aggregate principle amount of Notes issued was
$6,122,500. Based on a conversion price of $3.50 per share of Common Stock,
the Notes were convertible at the time of issuance into an aggregate of
1,749,293 shares of Common Stock. In connection with the purchase of a Note,
each purchaser was issued Warrants exercisable for the same number of shares
of Common Stock into which such purchaser's Note was convertible. Including
Warrants issued in payment of offering-related fees, the Company issued
Warrants exercisable for an aggregate of 1,894,150 shares of Common Stock
based on an exercise price of $3.50 per share of Common Stock at the time of
issuance.
As of September 30, 1997, Notes in the aggregate amount of $2,885,000 and
related accrued interest has been converted into Common Stock based on the
conversion price of $3.50 per share. The Company issued 828,644 shares of
Common Stock as the result of the conversion during the first half of 1997.
Total Common Stock outstanding as of September 30, 1997 was 3,248,494.
In addition, the Company issued 64,000 Options to a consulting firm on July
22, 1997 with an exercise price of $5.00 per share that vest over a period of
two years.
Major Events
Mr. Li Hong Wu, the Chairman of the Board and President of the Company,
passed away on October 12, 1997 after a brief illness. The Board of
Directors appointed Gongquan Wang, age 37, as Chairman of the Board and
President of the Company. Mr. Wang has served as Chairman and President of
Vantone International Group (`VIG') since 1994. VIG is affiliated with
Vantone Enterprise Group in China, for which Mr. Wang serves as Honorary
Chairman of the Board, founding President, major shareholder and Executive
Director of the Executive Committee.
Soon after the death of Mr. Li, the Company performed an internal audit of
its accounts. The internal audit reuslted in the discovery of a questionable
payment in the amount of $285,562. The payment has been traced as follows:
on March 31, 1997 the Company made a working capital payment in the amount of
$285,562 to its joint venture, Mishan Hua Xing Coke Ltd.("MHXC"). On April
4, 1997 MHXC, at the instruction of Mr. Li, transferred all of the funds into
a account in the name of Shanghai Trust and Investment Co. at Industrial
and Commercial Bank of China-Shanghai Branch, however this account was within
the personal control of Mr. Li and not within the control of the Company or
its subsidiaries or joint venture. It is believed that Mr. Li then
transferred those funds to his personal accounts and possibly to members of
his family. MHXC together with the Mishan City Government are in the process
of commencing proceedings in the PRC to recover the funds from Mr. Li's
estate and his family. No adjustment has been made with respect to this item
to the Company's financial statement as of September 30, 1997.
The Company engaged John T. Boyd Company, a mining and geological consulting
firm based in Pittsburgh to evaluate the coal mine reserve and the coke
production facility of MCCF. The result will be used as a guide to assist
the management to formulate its plan to commence the mining operations as
well as to increase the efficiency of the plant.
The Company engaged The Equity Group Inc. as its investor relations counsel.
Mr. Ren Guanxun resigned from all of his posts at the Company and its
subsidiaries as of July 1997. Mr. Li Pei Cheng replaced Mr. Ren in August
1997 as the General Manager of MCCF. Mr. Li is a effective manager and the
management believes that he will quickly bring MCCF into a profitable self-
sustained business.
CHINA ENERGY RESOURCES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Amounts in thousands except per share amounts)
Nine months ended
September September
30, 1997 30, 1996
Net sales $ 6,154 $ 6,032
Subcontracting income (note 1) 363 414
_______ _______
Total revenue 6,517 6,446
Cost of sales (4,290) (4,417)
_______ _______
Gross profit 2,227 2,029
Selling, general and administrative expenses (1,521) (495)
_______ _______
Operating income 706 1,534
Interest expense (693) (283)
Other income 101 33
_______ _______
Income before minority interests 114 1,284
Minority interest (219) (251)
_______ _______
Net(loss)/income $ (105) $1,033
_______ _______
Earnings per share - Basic $(0.04) $ 0.60
_______ _______
Weighted average number of shares outstanding
- Basic 2,905 1,730
_______ _______
See accompanying notes to unaudited consolidated financial statements.
CHINA ENERGY RESOURCES CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
(Amounts in thousands except per share amounts)
September 30, September 30,
1997 1996
ASSETS
Current assets:
Cash and cash equivalents $ 914 $ 60
Accounts receivable, net of allowance for
doubtful accounts of $304 3,028 3,069
Inventories (note 5) 5,158 3,484
Prepayments, prepaid expenses, and other assets 843 1,579
Amount due from related party 1,397 -
_______ _______
Total current assets 11,340 8,192
Property, plant and equipment, net (note 6) 18,103 17,936
Value added taxes receivable (nte 7) - 133
Other assets 412 5
_______ _______
Total assets $ 29,855 $ 26,266
_______ _______
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings (note 8) $ 2,513 $ 3,038
Current portion of long-term debt (note 9) 484 301
Accounts payable 1,039 1,880
Other payables 1,344 1,634
Value added taxes payable 340 -
Plant construction payables 183 183
Amount due to PRC joint venture partner 279 806
Accrued payroll and employee benefits 427 379
Accrued interest 1,787 1,466
Other accrued liabilities 239 114
_______ _______
Total current liabilities 8,635 9,801
Long-term debt (note 9)
Related parties 2,095 3,370
Other 967 1,508
Convertible notes (note 10) 2,300 -
Minority interests 2,603 2,276
Commitments and contingencies (note 12)
Stockholders' equity:
Preferred share, $0.01 par value, 2,000,000 shares
authorized, no share issued and outstanding - -
Common stock, $0.01 par value, 5,000,000 shares
authorized, 3,248,494 (1996: 2,399,850) shares
issued and outstanding 32 24
Additional paid-in capital 11,726 7,911
Retained earnings 1,497 1,376
______ _______
Total stockholders' equity 13,255 9,311
_______ _______
Total liabilities and stockholders' equity $ 29,855 $ 26,266
_______ _______
See accompanying notes to unaudited consolidated financial statements.
CHINA ENERGY RESOURCES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
Total
Additional stock-
Common stock paid-in Retained holders'
Shares Amount capital earnings equity
Issue of shares on establishment
of China Coal (note 1) 2,290 $ 23 $ 7,864 $ - $ 7,887
Net income - - - 346 346
______ _____ _______ ______ _______
Balance at December 31, 1995 2,290 23 7,864 346 8,233
Merger with Jackson (note 1) 110 1 47 (2) 46
Amount created on issuance of
convertible notes - - 2,619 - 2,619
Net income - - - 1,258 1,258
_____ _____ _______ ______ _______
Balance at December 31, 1996 2,400 $ 24 $ 10,530 $ 1,602 $ 12,156
Issue of shares for the
convertible notes 824 8 1,196 - 1,204
Issue of shares for interest
accrued on the convertible
notes in above 24 - - - -
Net loss - - - (105) (105)
_______ _____ _______ ______ ______
Balance at September 30, 1997 3,248 $ 32 $ 11,726 $ 1,497 $13,255
====== ======= ======= ====== ======
See accompanying notes to unaudited consolidated financial statements
CHINA ENERGY RESOURCES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Amounts in thousands)
Nine months ended
September September
30,1997 30,1996
Cash flow from operating activities:
Net loss $ (105) $ 1,033
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest 219 251
Bad debt provisions 93 -
Depreciation and amortization 599 275
Fixed assets written off 87 -
Changes in assets and liabilities:
Accounts receivable (1,877) (354)
Inventories (2,086) (517)
Prepayments and other assets 294 (535)
Amount due from related party (1,397) -
Other assets (492) -
Accounts payable 321 247
Customer deposits (168) (250)
Other payables (485) 92
Value added taxes payable/receivable 507 87
Plant construction payables (251) (605)
Amount due to PRC joint venture partner 1 -
Accrued payroll and employee benefits 118 77
Accrued interest 886 (15)
Other accrued liabilities 231 74
_______ _______
Net cash (used in)/provided by operating activities (3,505) (140)
_______ _______
Cash flow from investing activities:
Purchase of property, plant and equipment (778) (569)
_______ _______
Net cash used in investing activities
(778) (569)
_______ _______
Cash flow from financing activities:
Increase in long-term debt from related parties 37 509
(Repayment)/increase in long-term debt from other (357) 5
Increase/(repayment) in minority interests 7 (84)
(Repayment)/increase in short-term borrowings - net (595) 70
Decrease in convertible notes (47) -
Issuance of common stock 1,204 48
_______ _______
Net cash provided by financing activities 249 548
_______ _______
Increase in cash and cash equivalents (4,034) (161)
Cash and cash equivalents at beginning of period 4,948 221
_______ _______
Cash and cash equivalents at end of period $ 914 $ 60
_______ _______
Supplementary disclosures of cash flow information
Cash paid during the period for:
Interest $ 137 298
See accompanying notes to unaudited consolidated financial statements
CHINA ENERGY RESOURCES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
1. ORGANIZATION AND BASIS OF PRESENTATION
China Energy Resources Corporation (the "Company"), a private company
incorporated in the British Virgin Islands, was incorporated on March 15,
1996 for the purpose of holding a 100% interest in China Coal Mining (B.V.I.)
Co. Ltd. ("China Coal") and to enter into an agreement with Jackson Holding
Corp. ("Jackson"), a New York Corporation.
On March 15, 1996 the shareholders in China Coal exchanged their shares in
China Coal for shares in the Company. The exchange of shares has been
accounted for as a reorganization of entities under common control similar
to a pooling of interests. The accompanying financial statements include
the combined results and operations and financial position of the Company,
China Coal and its 80% held subsidiary for all periods presented.
On March 22, 1996, pursuant to an agreement and plan of merger between the
Company and Jackson, Jackson was merged into the Company and the Company
issued 109,850 shares of its common stock to the shareholders of Jackson for
the entire issued share capital of Jackson. Jackson had been established in
1994 for the sole purpose of acquiring or merging with an unspecified
business, and at the time of merger Jackson had no operating assets and had
not engaged in any business activities. The transaction has been accounted
for as a reverse acquisition.
China Coal, a private company incorporated in the British Virgin Islands,
was incorporated on August 18, 1995. Pursuant to a joint venture agreement
dated September 16, 1995 between China Coal and Mishan Coal Chemical Holding
Company ("the Factory"), China Coal acquired for cash of Renminbi 65,600
(approximately $7,886) an 80% interest in a new joint venture company, Mishan
Hua Xing Coke Limited ("MHXC"), incorporated in the People's Republic of
China ("PRC"), which has succeeded to the business of the Factory. In
conjunction with the agreement the former owner contributed land use rights
with a fair value of Renminbi 14,806 (approximately $1,780) and coal mine
use right with a contractual value of Renminbi 95,760 (approximately $11,312)
to MHXC. The former owner provided an interest free loan of Renminbi 65,760
(approximately $7,906) to MHXC to finance the acquisition of the coal mine
use right by MHXC. The coal mine use right and interest free loan are
recorded at estimated fair value determined based on the estimated net
present value of the interest free loan. The joint venture period is 30
years from the date of formation and may be extended by the unanimous
resolution of the board of directors, subject to the approval of the relevant
government authorities. The remaining 20% interest in MHXC is owned by the
former owner of the Factory. The acquisition has been accounted for as a
purchase and the results of the MHXC have been included in the consolidated
financial statements since October 1, 1995. The purchase price approximated
the estimated fair values of MHXC at the date of acquisition.
MHXC operates two production facilities in Heilongjiang Province, PRC; the
Mishan City Coke Factory ("MCCF") and the Qitaihe City Coal Factory ("QCCF").
During 1996 the operation of the MCCF plant was subcontracted to a company
under the control of the central government under an agreement where the
Company received a subcontracting fee and the other party was entitled to all
the revenues from the operations of the plant and was obligated to meet all
the operating expenses of the plant. For the nine months ended September
30, 1997, the Company received a subcontracting fee of Renminbi 3,000
(approximately $363) and the subcontracting agreement was terminated on
March 31, 1997.
2. BASIS OF PREPARATION
The financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America ("U.S. GAAP").
This basis of accounting differs from that used in the statutory accounts of
MHXC, the Company's principal operating subsidiary, which were prepared in
accordance with the accounting principles and the relevant financial
regulations applicable to Sino-foreign equity joint venture enterprises as
established by the Ministry of Finance of China.
The principal adjustments made to conform the statutory accounts of MHXC to
U.S. GAAP included the following:
Adjustment to record the coal mine use right and interest free loan at
estimated fair value.
Adjustment to depreciation expense for property, plant and equipment to
reflect more accurately the economic useful life of the assets;
Adjustment to recognize interest expense on the accruals basis.
Adjustment to recognize sales and cost of sales upon shipment to customers.
Adjustment to write back excess provisions made by MHXC.
Adjustment to include the attributable share of transportation cost in
closing inventories.
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation - The consolidated financial statements include
the assets, liabilities, revenues and expenses of the Company and its
subsidiaries. All material intra-group transactions have been eliminated.
Cash and cash equivalents - Cash and cash equivalents include cash on hand,
demand deposits and highly liquid instruments with a maturity of three
months or less at the time of purchase.
Inventories - Inventories are stated at the lower of cost, determined by the
average cost method, or market. Finished goods inventories consist of raw
materials, direct labor and overhead associated with the manufacturing
process.
Property, plant and equipment - Property, plant and equipment is stated at
cost. Depreciation is provided to write off the cost of property, plant and
equipment over their estimated useful lives in equal instalments as follows:
Land use rights 30-50 years
Buildings 8-45 years
Plant and machinery 5-20 years
Transportation vehicles 5-10 years
Railway 50 years
Coal mine use right - Coal mine use right is stated at estimated fair value
at date of acquisition determined based on the estimated market value of the
interest free loan used to finance the acquisition of the asset plus the
costs of preparing the mine site for its intended mining operations.
Interest is capitalised on the coal mine use right during the period in which
activities are in progress necessary to get the mine ready for its intended
mining operations. As of September 30, 1997 and 1996, aggregated interest
and development costs capitalised amounted to $613 and $344 respectively.
Amortization is provided to write off the value of coal mine use right over
the units extracted compared with estimated total units to be extracted. The
coal mine use right and the Company's other long-lived assets are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Construction-in-progress represents plant and buildings under construction
and includes cost of construction, purchase of plant and machinery and
interest arising from borrowings used to finance these assets during the
period of construction or installation. No interest was capitalised during
the period. Construction-in-progress is not depreciated until amounts
are reclassified to property when available for use.
Net sales - Net sales represent the invoiced value of products, net of sales
taxes. Sales are recognized when products are shipped to customers.
Foreign currency translation - The consolidated financial statements of the
Company are presented in United States dollars. The Company's principal
operating subsidiary, MHXC, conducts substantially all its business in
Renminbi. Foreign currency transactions of MHXC are translated into
Renminbi at the applicable rates of exchange quoted by the People's Bank of
China (the "PBOC"), prevailing at the date of the transactions. Monetary
assets and liabilities denominated in foreign currencies are translated into
Renminbi using the applicable PBOC rate prevailing at the relevant balance
sheet date. Substantially all the transactions of MHXC are denominated in
Renminbi and MHXC did not have any material monetary assets or liabilities
denominated in foreign currencies. On consolidation, the assets and
liabilities of MHXC are translated into United States dollars at the year
end rates of exchange and revenues and expenses are translated at average
exchange rates prevailing during the period. Translation adjustments are
included as a separate components of stockholders' equity.
Provisions for doubtful accounts - Provisions for doubtful accounts are
established based on management's assessment of the recoverability of
accounts receivable.
Repairs and maintenance - Repair and maintenance costs are charged against
income in the period in which they are incurred. The expense is allocated to
cost of sales and selling, general and administrative expenses.
Income taxes - Deferred income taxes are provided using the liability method.
Under the liability method, deferred income taxes are recognized for all
significant temporary differences between the tax and financial statement
bases of assets and liabilities. The tax consequences of those differences
are classified as current or non current based upon the classification of the
related asset or liability in the financial statements. During the period
there were no significant temporary differences.
Earnings per share - Earnings per share is based on the weighted average
number of common stock outstanding during each period, plus, when the effect
is dilutive, the common stock equivalents consisting of certain shares
subject to issue in connection with the conversion of the outstanding
convertible notes and warrants.
4. INCOME TAXES
Income is subject to taxation in the various countries in which the Company
and its subsidiary operate. The Company is not taxed in the British Virgin
Islands where it is incorporated. The components of income before income
taxes and minority interest are as follows:
Nine months ended
September September
30, 1997 30, 1996
British Virgin Islands $ - $ -
China 114 1,284
_______ _______
$ 114 $ 1,284
_______ _______
A reconciliation of the statutory income tax rate and the effective tax rate
is as follows:
% %
Statutory tax rate in PRC 33 33
Tax holidays and concessions attributable to activities
in PRC (33) (33)
_______ _______
Effective tax rate - -
_______ _______
The Company's subsidiary, MHXC, which is incorporated in China is subject to
Chinese income taxes at the applicable tax rate (currently 33%) on taxable
income based on income tax laws applicable to foreign enterprises. Pursuant
to the same income tax laws, the subsidiary is fully exempt from Chinese
income tax on its manufacturing operations for two years starting from the
first profit making year, followed by a 50% exemption for the next three
years. The exemptions applicable to these subsidiaries will expire in 1999.
5. INVENTORIES
Most of the inventory consists of raw materials. The amount of
work-in-progress, finished goods and consumables are insignificant.
6. PROPERTY, PLANT AND EQUIPMENT
September 30,
1997 1996
Coal mine use right $ 7,338 $ 6,611
Land use rights 1,780 1,780
Buildings 6,378 6,229
Plant and machinery 2,131 1,990
Transportation vehicles 902 677
Railway 1,247 1,233
_______ _______
Total 19,776 18,520
Less: Accumulated depreciation (2,280) (1,178)
Construction in progress 607 594
_______ _______
Total $ 18,103 $ 17,936
_______ _______
The coal mine use right is stated at estimated fair value at date of
acquisition determined based on the estimated market value of the interest
free loan used to finance the acquisition of the asset plus the costs of
preparing the mine site for its intended use. The contractual price of the
coal mine use right was $11,312.
7. VALUE ADDED TAXES RECEIVABLE
Value added tax ("VAT") is applicable to MHXC at a rate of 17% on the gross
sales amounts and credit given at the same rate for VAT paid on purchases.
The net VAT payable is accounted for to the tax authorities.
In accordance with notices issued by the government authorities, the Factory
can deem VAT, at the rate of 14%, to have been paid on the opening inventory
amount at January 1, 1995 (the date VAT was introduced) and applied against
future VAT payable based on criteria to be agreed with the local authorities.
This amount has been established as a receivable. The Company believes that
the amount will be recoverable against future VAT payable subject to approval
as to timing by the tax authorities.
8. SHORT-TERM BORROWINGS
Short-term borrowings represent unsecured short-term loans provided by banks
and other lenders to the Company's PRC subsidiary.
September 30,
1997 1996
Short-term borrowings at the end of period
$2,513 $3,038
Weighted average interest rate on borrowings at end
of period 17% 17%
Interest rates are determined periodically by the banks and other lenders in
consultation with the Company's subsidiary and are normally subject to annual
review. There are no formal short-term credit facilities with the banks and
short-term borrowings are negotiated on a loan-by-loan basis.
9. LONG-TERM DEBT
September 30,
1997 1996
Long-term debt, which is unsecured, consists of:
Bank loans at fixed interest rates
(14.04% at September 30, 1997)
Due in 1996 $ - $ 301
Due in 1997 484 541
Due in 1998 241 241
Due in 1999 242 242
Due in 2000 242 242
After 2000 242 242
_______ _______
1,451 1,809
_______ _______
Interest free loan from PRC joint venture partner
Due in 2000 - 1,581
Due in 2001 - 1,581
Due in 2002 1,335 1,581
Due in 2003 1,336 1,581
Due in 2004 1,336 1,582
Due in 2005 1,336 -
Due in 2006 1,336 -
_______ _______
6,679 7,906
Less: notional interest 4,584 4,536
_______ _______
2,095 3,370
_______ _______
Total 3,546 5,179
Current portion of long-term debt 484 301
_______ _______
Long-term debt, less current portion
$3,062 $ 4,878
_______ _______
All long-term bank loans are authorized by the provincial or local
governments and are administered by the banks. The Company repaid Renminbi
3,000 (approximately US$363) to the bank on March 31, 1997 .
On December 28, 1996, the repayment of the portion of long-term debt due in
1996 was extended to December 31, 1997.
The interest free loan from the PRC joint venture partner was raised to
partially finance the acquisition of the coal mine use right. At the date
the loan was obtained it was to be repaid by five equal instalments with each
instalment limited to 40% of the income after tax of the relevant year. In
1996 the Company made repayments ahead of the original planned payment
schedule and the scheduled repayments of the remaining balance of the loan
were rateably amended. In addition, the scheduled repayments were postponed
by an agreement dated May 11, 1997 for an additional two years. The loan is
stated in the financial statements at the estimated present value calculated
based on the annual discount rate of 16%, being the estimated annual interest
rate for fixed asset lending in the PRC. This estimate of the market value
of the loan is subject to a high degree of uncertainty because there is no
market for the loan, the loan is not transferrable and the repayment terms
are contingent on future operations of the Company.
With effect from October 1, 1995 the government of Mishan City agreed to
share 50 percent of the interest paid by MCCF on the long-term interest -
bearing loans and certain short-term borrowings. This agreement expires in
December 31, 1997. With effect from 1996 the bank providing the above
interest-bearing loan agreed to forfeit the balance of the interest due on
the loan. The interest shared by the local government party of $131 and the
interest forfeited by the bank of $108 have been netted against interest
expense in the statement of operations.
10. CONVERTIBLE NOTES
At September 30, 1997 the Company had outstanding convertible notes with
detachable warrant hereof amounting to $2,300 which were issued in 1996 and
1997. These notes carry interest at 8 percent per annum and the principal
amount and the accrued interest thereon are payable in 2001.
The holders have the right prior to the payment in full of all principal of
and interest on the notes, to convert any outstanding and unpaid principal
portion of the notes and accrued interest into fully paid and nonassessable
shares of common stock, $0.01 par value per share, of the Company, as such
shares exist on the date of issuance of the notes, or any shares of capital
stock of the Company into which such shares have been changed or
reclassified (the "common stock") at the conversion price as defined in the
note. In the event the holders do not convert the entire principal amount of
the notes and all accrued and unpaid interest earned thereon before the
maturity date, then on that date the Company has the option of compelling the
conversion of the notes or paying to the holders the remaining unpaid
principal amount of the notes and interest thereon.
The conversion price is subject to a floor price and a ceiling price (as
defined in the note agreement) and is equal to 60% of the average closing bid
and ask price for the common stock on any securities exchange or other
securities market on which the common stock is then being traded, for the ten
trading days immediately preceding the conversion date; provided, however,
that in the event of a public offering or private placement of securities of
the Company, resulting in gross proceeds of at least $10,000, consummated
within 18 months of the date of the notes, the floor price shall be adjusted
to equal 60 percent of the offering price per share in such an offering; and
provided, further, that the floor price, as adjusted, (i) shall never be
lower than $3.50 per share (the "floor price") and (ii) shall never exceed
$8.50 per share (the "ceiling price"). At any time prior to the date on
which the common stock is traded on the American Stock Exchange or other U.S.
securities exchange or market, the conversion price for the common stock
shall equal $3.50 per share.
The conversion price and number and kind of shares or other securities to be
issued upon conversion is subject to adjustment from time to time upon the
happening of certain events specified in the note agreement while this
conversion right remains outstanding.
The principal amount outstanding on the notes, and all interest accrued and
payable thereon, may be prepaid by the Company, in whole but not in part, on
or after November 15, 1997; provided that the average closing bid price of
the common stock has remained at or above $17.00 per share for thirty
consecutive business days; and provided, further, that written notice of
prepayment is delivered to the holder not more than sixty days nor less than
thirty days prior to the applicable prepayment date. The holder has the
right to exercise any conversion rights it may have hereunder until such time
as any prepayment is made.
Within ten business days after a holder receives notice from the Company
that a qualifying offering has been consummated, the holder may demand in
writing that the principal amount outstanding on the note, and all interest
accrued thereon, be prepaid by the Company, in whole or in part, but any
partial demand shall be in increments of $25. The borrower shall repay the
principal amount outstanding on the note, and all interest accrued on
payable thereon, within 15 days after receipt of such a notice from the
holder.
The holder of the warrant detached to the convertible notes is entitled to
purchase from the Company at any time on or after May 14, 1997 or from time
to time before 5:00 p.m. on November 14, 1999 fully paid and nonassessable
shares of common stock, $0.1 par value per share, of the Company, as
adjusted in the event that the following computation results in a greater
number of shares: the quotient obtained by dividing the principal amount of
the loan from the holder to the Company pursuant to a note from the Company
to the holder by the purchase price. The purchase price shall be subject to
a floor price and a ceiling price and shall equal 60% of the average closing
bid and ask price for the common stock on any securities exchange or other
securities market on which the common stock is then being traded, for the ten
trading days immediately preceding the date of exercise; provided, however,
that in the event of a qualifying offering, the floor price shall be adjusted
to equal 60% of the offering price per share in such qualifying offering; and
provided, further, that the floor price, as adjusted, (i)shall never be lower
than $3.50 per share and (ii) shall never exceed $8.50 per share.
11. RELATED PARTY TRANSACTIONS
Substantially all of the sales, purchases, raw materials and purchases of
ancillary items the Company's PRC subsidiary are with state-owned
enterprises. Even though such state-owned enterprises may be regarded as
having the same beneficial owner of the PRC joint venture partner of the
Company's subsidiary, the PRC central government, such state-owned
enterprises are frequently under separate control and do not possess any
management, ownership or other interest in each other. As a result, the
Company does not view transactions with such state-owned enterprises as
constituting related party transactions.
12. COMMITMENTS AND CONTINGENCIES
During 1996 the Company entered into an agreement with a company under the
control of the central government in respect of the Company's Mishan City
Coke Factory ("MCCF") whereby MCCF provided equipment, workers and
technology and the other party was responsible for all operating costs, other
than depreciation, and for all sales and transport of coal. The Company
received a subcontracting fee of Renminbi 3,000 ( approximately $363) for the
nine months ended September 30, 1997. The agreement was terminated on March
31, 1997.
At September 30, 1997, the Company and its subsidiaries had no contracted
capital expenditure.
At September 30, 1997, a subsidiary of the Company has issued a guarantee of
$36 to a bank in respect of a loan provided by the bank to a company in PRC.
The Company and its PRC subsidiary do not currently maintain any insurance
coverage on the property, plant and equipment owned by the subsidiary. In
addition, the Company and the subsidiary do not currently carry any business
interruption insurance or any third party liability insurance to cover claims
in respect of bodily injury, property or environmental damages arising from
accidents on the subsidiary's property or relating to its operations.
13. FOREIGN CURRENCY EXCHANGE
The PRC government imposes control over its foreign currency reserves in
part through direct regulation of the conversion of Renminbi into foreign
exchange and through restrictions on foreign trade. The conversion of
Renminbi into US dollars and other foreign currencies is based on the rate
set by the People's Bank of China, which is set based on the previous day's
PRC interbank foreign exchange market rate and with reference to current
exchange rates on the world financial markets. The exchange rate at
September 30, 1997 was US$1 = Rmb8.2728.
Foreign investment enterprises may generally remit out of the PRC profits or
dividends derived from a source within the PRC, subject to the availability
of foreign currency. Except for such profits or dividends, remittance out of
the PRC by foreign investors of any other amount (including proceeds from a
disposition of an investment in the PRC) is subject to the approval of State
Administration of Exchange Control and to the availability of foreign
currency (at the central government or provincial level). In addition, if
there is a deterioration in the PRC's balance of payments or for other
reasons, the PRC may impose restrictions on foreign currency remittances
abroad. No assurance can be given that the Company's PRC subsidiary will be
able or permitted to remit out of the PRC amounts due to the Company.
14. CONCENTRATION OF CREDIT RISK
The subsidiary's trade receivables in respect of sales on credit terms are
subject to a concentration of credit risk with customers in the industrial
sectors of steel making, metallurgy, electricity and other heavy industries.
In addition, the PRC subsidiary has no formal credit terms and its sales are
predominantly to PRC companies. Therefore, the subsidiary's ability to
collect its trade receivables is related to the economic conditions in these
industrial sectors and in the PRC as a whole.
15. FINANCIAL INSTRUMENTS
The carrying values of financial instruments, including cash and cash
equivalents and short-term borrowings, were equal to their approximate fair
value as of September 30, 1997 because of the relatively short maturities of
these investments. At September 30, 1997 the fair value of bank loans and
interest free loan from PRC joint venture partner were approximately $1,451
and $2,095 respectively, estimated based on the discount rate the seller
would pay to a credit-worthy third party to assume its obligation.
16. EMPLOYEE RETIREMENT BENEFITS
All the subsidiary's full-time employees are entitled to a retirement
pension calculated with reference to their basic salaries on retirement and
their length of service in accordance with a government managed pension plan.
The PRC government is responsible for the pension obligations of retired
staff. The PRC subsidiary is required to make contributions to the state
retirement plan at 15-25% of the monthly salaries of the current full-time
employees subject to local authorities' discretion. Employees are required
to make contributions at 2% of their basic salary. Contract and part-time
employees are not entitled to such benefits. The expense of such arrangements
to the subsidiary was immaterial for the period. The Company and its
subsidiaries are not obligated under any other post-retirement plans and
post-employment benefits are not material.
17. SEGMENT INFORMATION AND CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company through its PRC subsidiary is engaged in one industry segment,
the manufacture and sale of coal products in the PRC where the PRC
subsidiary's operations are located. One customer, Mudanjiang No. 2 Power
Plant of Heilongjiang Province, PRC, accounted for 72% of net sales for the
nine months ended September 30, 1997. No customer accounted for more than
10% of trade accounts receivable as of September 30, 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorised.
China Energy Resources Corporation
By: /s/Gongquan Wang
Chairman of the Board and President
Dated: December 15, 1997
