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 six months ended June 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
six months ended June 30, 1997 and 1996 10
Unaudited consolidated balance sheets at June 30, 1997 and 1996 11
Unaudited consolidated statements of stockholders' equity
for the six months ended June 30, 1997 and 1996 13
Unaudited consolidated statements of cash flows for the six
months ended June 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.
Six Six
Months Months
The Company: Ended Ended
Statement of Operations Data (Unconsolidated): 6/30/96 6/30/97
(amounts in thousands)
Net Sales $ - $ -
------- -------
Total revenue - -
Cost of sales - -
------- -------
Gross profit - -
Selling, general and administrative expenses - (350)
------- -------
Operating income - (350)
Interest expenses - (315)
Other income - 49
------- -------
Income before income taxes and minority interest - (616)
Income tax - -
------- -------
Income before minority interest - (616)
Minority interest - -
------- -------
Net income $ - $ (616)
======= =======
Six Six
Months Months
MCCF: Ended Ended
Statement of Operations Data: 6/30/96 6/30/97
(amounts in thousands)
Net Sales $ 325 $ 383
Subcontracting income - 362
-------- --------
Total revenue 325 745
Cost of sales (243) (525)
-------- --------
Gross Profit 82 220
Selling, general and administrative expenses (108) (157)
-------- --------
Operating income (26) 63
Interest expenses (130) (146)
Other income - 5
-------- --------
Income before income taxes and minority interest (156) (78)
Income tax - -
-------- --------
Income before minority interest (156) (78)
Minority interest 31 16
-------- --------
Net income $ (125) $ (62)
======== ========
Six Six
Months Months
Ended Ended
QCCF: 6/30/96 6/30/97
Statement of Operations Data: (amounts in thousands)
Net Sales $ 3,920 $ 3,742
------- --------
Total revenue 3,920 3,742
Cost of sales (2,948) (2,248)
-------- --------
Gross profit 972 1,494
Selling, general and administrative expenses (463) (284)
-------- --------
Operating income 509 1,210
Interest expenses (132) (72)
Other income 3 25
-------- --------
Income before income taxes and minority interest 380 1,163
Income tax - -
-------- --------
Income before minority interest 380 1,163
Minority interest (76) (233)
-------- ---------
Net income $ 304 $ 930
======== ========
Operating Company:
Product Mix and Sales Volume
Six Months Ended
6/30/96 6/30/97
Metallurgical coke:
Sales volume (in tons) 7,736 9,210
Average sales price per ton $42.01 $41.60
Average production cost per ton $31.41 $57.03
Steam coal:
Sales volume (in tons) 255,681 190,954
Average sales price per ton $15.33 $ 19.59
Average production cost per ton $11.53 $ 11.77
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
June 30, 1996 US$1.00 = Rmb8.2784
June 30, 1997 US$1.00 = Rmb8.2810
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations - Six months ended 6/30/97 Compared to six months ended
6/30/96
Net sales - Net sales is recorded as gross sales less returns and discounts.
Net sales slightly decreased from $4,245,000 in the six months ended 6/30/96
to $4,125,000 in the six months ended 6/30/97.
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
9,210 tons of metallurgical coke in the months of May and June of 1997.
Since the production facilities were not totally geared up to produce
metallurgical coke, the quality of the product was below standard. As a
result, the unit sales price of metallurgical coke decreased from $42.01 in
the six months ended 6/30/96 to $41.60 in the six months ended 6/30/97. The
production level of MCCF in the six months ended 6/30/96 was below the
normal operating level due to lack of working capital.
QCCF's sales of steam coal decreased $3,920,000 in the six months ended
6/30/96 to $3,742,000 in the six months ended 6/30/97 due to the shortage of
transportation capacity in the month of May 1997. The local government
utilized all of the transportation capacity to transport agricultural
products because the harvest was better than expected. Although QCCF sold
approximately 65,000 tons less steam coal when compared to the six months
ended 6/30/96, its sales price increased 28% 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 77% of the Company's total net sales in the six
months ended 6/30/97. Sales to Mudanjiang amounted to 166,896 tons in the
six months ended 6/30/97 as compared to 204,532 tons in the six months ended
6/30/96.
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 increased 82% from
$31.41 in the six months ended 6/30/96 to $57.03 in the six months ended
6/30/97 due to additional work needed to gear up the coking furnace.
QCCF's average unit cost of producing steam coal increased moderately from
$11.53 in the six months ended 6/30/96 to $11.77 in the six months ended
6/30/97. The increase was attributed to increases in raw material, labor and
benefits, depreciation which was offset by a decrease in transportation cost.
Gross Profit - Gross Profit increased 63% from $1,054,000 in the six months
ended 6/30/96 to $1,714,000 in the six months ended 6/30/97. The increase
was primarily attributable to : (1) $362,000 subcontracting income received
by MCCF in the first quarter of 1997 and (2) QCCF's profit margin reached 40%
in the six months ended 6/30/97 when compared to 25% in the six months ended
6/30/96 due to stricter quality control and high customer satisfaction. The
increase was offset by a loss in profit margin generated by MCCF because its
production facility was gearing up to a normal production level.
Selling, general and administrative expenses - Selling, general and
administrative expenses increased 38% to $791,000 in the six months ended
6/30/97 from $571,000 in the six months ended 6/30/96. The increase of
$220,000 is attributable to (1) MCCF's expenses increased $49,000 as the
selling effort commenced in the second quarter of 1997, (2) the Company
incurred an additional $350,000 administrative and professional expenses
associated with increased reporting obligations of the Company and (3) salary
and benefits of QCCF increased by 13.6%, approximately $10,000, as management
provided incentives to employees. The increase was partially offset by a
proportional decrease in QCCF's selling expenses as a lesser tonnage of steam
coal was sold when compared to the previous year, and the management of QCCF
continues to exercise a tighter control over office and administrative
expenditures.
Interest expenses - Interest expenses increased 103% to $533,000 in the six
months 6/30/97 from $262,000 in the six months ended 6/30/96 for the
following reasons: (1) the Company incurred additional $350,000 interest
expenses on the $6,122,500 convertible notes and (2) QCCF's interest expenses
decreased by a $60,000 as they paid down $600,000 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 $75,000 in the six months ended 6/30/97
and $ 83,000 in the six months ended 6/30/96. 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 $93,000 in the six months ended 6/30/97 and $99,000 in
the six months ended 6/30/96. This agreement expires on December 31, 1997.
Interest expense was $166,000 for the six months ended 6/30/97 and $234,000
for the six months ended 6/30/96 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 six
months ended 6/30/97 and 6/30/96.
Net Income - Net income increased by 41% from $179,000 in the six months
ended 6/30/96 to $252,000 in the six months ended 6/30/97. The increase was
attributable to (1) MCCF commenced the sales and production of metallurgical
coke in the second quarter of 1997 as the result of obtaining additional
working capital and (2) additional subcontracting fee was received by MCCF in
the first quarter of 1997 and a higher selling price was realized on the
steam coal resulting from better quality control in QCCF. The increase was
partially offset by (3) additional interest expenses for the convertible
notes and decreased sales of steam coal due to lack of transportation
capacity in the month of May and June in 1997.
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.
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 June
30, 1997, $1,673,000 was used to purchase raw material, working capital and
secure transportation capacity for MCCF, $360,000 was used to commence the
survey on the coal mine reserve and $600,000 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.
As of June 30, 1997, MCCF had $2 million in short-term loans and $966,000 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 June 30, 1997, QCCF had $966,000 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 $157,000 in the six months ended 6/30/97 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 June 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 June 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
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. Li Hong Wu, the Chairman of the Company, will be compensated at an
annual salary of $75,000 beginning January 1, 1997.
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 SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Amounts in thousands except per share amounts)
Six months ended
June June
30, 1997 30, 1996
Net sales $ 4,125 $ 4,245
Subcontracting income (note 1) 362 -
_______ _______
Total revenue 4,487 4,245
Cost of sales (2,773) (3,191)
_______ _______
Gross profit 1,714 1,054
Selling, general and administrative expenses (791) (571)
_______ _______
Operating income 923 483
Interest expense (533) (262)
Other income 79 3
_______ _______
Income before minority interests 469 224
Minority interest (217) (45)
_______ _______
Net income $ 252 $ 179
_______ _______
Earnings per share - Basic and fully diluted $ 0.09
- Basic $ 0.13
_______ _______
Weighted average number of shares outstanding
- Basic and fully diluted 2,734
- Basic 1,409
_______ _______
See accompanying notes to unaudited consolidated financial statements.
CHINA ENERGY RESOURCES CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1996
(Amounts in thousands except per share amounts)
June 30, June 30,
1997 1996
ASSETS
Current assets:
Cash and cash equivalents $ 1,608 $ 444
Accounts receivable, net of allowance for
doubtful accounts of $211 2,155 3,413
Inventories (note 5) 4,796 2,473
Prepayments, prepaid expenses, and other assets 1,100 1,640
Amount due from related party 1,267 -
Loans to officers 63 -
_______ _______
Total current assets 10,989 7,970
Property, plant and equipment, net (note 6) 18,241 17,614
Value added taxes receivable (note 7) - 219
Other assets 436 5
_______ _______
Total assets $ 29,666 $ 25,808
_______ _______
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings (note 8) $ 2,491 $ 3,011
Current portion of long-term debt (note 9) 483 301
Accounts payable 769 1,570
Other payables 1,044 1,799
Value added taxes payable 318 -
Plant construction payables 434 833
Amount due to PRC joint venture partner 278 902
Accrued payroll and employee benefits 292 364
Accrued interest 1,862 1,618
Other accrued liabilities 181 249
_______ _______
Total current liabilities 8,152 10,647
Long-term debt (note 9)
Related parties 2,083 3,092
Other 966 1,503
Convertible notes (note 10) 2,254 -
Minority interests 2,599 2,154
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: 2,290,000) shares
issued and outstanding 32 23
Additional paid-in capital 11,726 7,864
Retained earnings 1,854 525
_______ _______
Total stockholders' equity 13,612 8,412
_______ _______
Total liabilities and stockholders' equity $ 29,666 $ 25,808
_______ _______
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 income - - - 252 252
_______ ______ _______ _______ _______
Balance at June 30, 1997 3,248 $ 32 $11,726 $ 1,854 $13,612
======= ====== ======= ====== ======
See accompanying notes to unaudited consolidated financial statements
CHINA ENERGY RESOURCES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Amounts in thousands)
Six months ended
June June
30, 1997 30, 1996
Cash flow from operating activities:
Net income $ 252 $ 179
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest 217 45
Depreciation 366 334
Changes in assets and liabilities:
Accounts receivable (911) (698)
Inventories (1,724) 494
Prepayments and other assets 37 (596)
Amount due from related party (1,267) -
Loans to officers (63) -
Other assets (431) -
Accounts payable 51 (63)
Customer deposits (168) (250)
Other payables (785) 257
Value added taxes payable 485 -
Plant construction payables - 45
Amount due to PRC joint venture partner - 99
Accrued payroll and employee benefits (17) 62
Accrued interest 961 137
Other accrued liabilities 173 209
_______ _______
Net cash (used in)/ provided by operating activities (2,824) 254
_______ _______
Cash flow from investing activities:
Purchase of property, plant and equipment (681) (191)
_______ _______
Net cash used in investing activities (681) (191)
_______ _______
Cash flow from financing activities:
Increase in long-term debt from related parties 25 117
Repayment of long-term debt from other (359) -
Increase in minority interests 5 -
(Repayment)/increase in short-term borrowings - net (617) 43
Decrease in convertible notes (93) -
Issuance of common stock 1,204 -
_______ _______
Net cash provided by financing activities 165 160
_______ _______
Increase in cash and cash equivalents (3,340) 223
Cash and cash equivalents at beginning of period 4,948 221
_______ _______
Cash and cash equivalents at end of period $ 1,608 $ 444
_______ _______
Supplementary disclosures of cash flow information
Cash paid during the period for:
Interest $ 296 $ 262
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 six months ended June 30,
1997, the Company received a subcontracting fee of Renminbi 3,000
(approximately $362) 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 June 30, 1997 and 1996, aggregated interest and
development costs capitalised amounted to $524 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:
Six months ended
June June
30, 1997 30, 1996
British Virgin Islands $ - $ -
China 469 224
_______ _______
$ 469 $ 224
_______ _______
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
June 30,
1997 1996
Coal mine use right $ 7,249 $ 6,501
Land use rights 1,780 1,753
Buildings 6,378 6,584
Plant and machinery 2,123 2,064
Transportation vehicles 989 675
Railway 1,247 1,231
_______ _______
Total 19,766 18,808
Less: Accumulated depreciation (2,132) (1,224)
Construction in progress 607 30
_______ _______
Total $ 18,241 $ 17,614
_______ _______
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.
June 30,
1997 1996
Short-term borrowings at the end of period $2,491 $3,011
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
June 30,
1997 1996
Long-term debt, which is unsecured, consists of:
Bank loans at fixed interest rates
(14.04% at June 30, 1997)
Due in 1996 $ - $ 301
Due in 1997 483 541
Due in 1998 241 240
Due in 1999 241 240
Due in 2000 242 241
After 2000 242 241
_______ _______
1,449 1,804
_______ _______
Interest free loan from PRC joint venture partner
Due in 2000 - 1,581
Due in 2001 - 1,581
Due in 2002 1,334 1,581
Due in 2003 1,334 1,581
Due in 2004 1,334 1,582
Due in 2005 1,335 -
Due in 2006 1,335 -
_______ _______
6,672 7,906
Less: notional interest 4,589 4,814
_______ _______
2,083 3,092
_______ _______
Total 3,532 4,896
Current portion of long-term debt 483 301
_______ _______
Long-term debt, less current portion $3,049 $ 4,595
_______ _______
All long-term bank loans are authorized by the provincial or local
governments and are administered by the banks. On March 31, 1997, the
Company repaid Renminbi 3,000 (approximately US$362) to the bank.
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 $93 and the
interest forfeited by the bank of $75 have been netted against interest
expense in the statement of operations.
10. CONVERTIBLE NOTES
At June 30, 1997 the Company had outstanding convertible notes with
detachable warrant hereof amounting to $2,254 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. In June 1997, the Company made
loans of $63 to two officers of the Company with no interest charge.
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 $362) for the six
months ended June 30, 1997. The agreement was terminated on March 31, 1997.
At June 30, 1997, the Company and its subsidiaries had no contracted capital
expenditure.
At June 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 June 30, 1997 was
US$1 = Rmb8.281.
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 June 30, 1997 because of the relatively short maturities of these
investments. At June 30, 1997 the fair value of bank loans and interest free
loan from PRC joint venture partner were approximately $1,449 and $2,083
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 77% of net sales for the
six months ended June 30, 1997. No customer accounted for more than 10% of
trade accounts receivable as of June 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/Li Hong Wu
Chairman of the Board and President
Dated: August 22, 1997
