09:11 SHANGHAI LAND<00067> - Results Announcement (3) 4. Amount due from Shun Loong Holdings Limited ("Shun Loong") Shun Loong had filed an Originating Summons seeking declaratory reliefs against Profitex Investments Limited ("Profitex") to the effect that the sub-tenancy agreement entered into between Shun Loong and Profitex dated 23 May 2003 effectively came to an end on 19 October 2003 by virtue of Shun Loong's own repudiation of it. Profitex filed an affirmation in opposition to the Originating Summons. The Originating Summons will be set down for argument by Counsel before a Judge in open court on 29 September 2005. In view of the foregoing, we are unable to ascertain if the amount due from Shun Loong as at 31 December 2004 of HK$5,896,000 included in deposits, prepayments and other receivables is fully recoverable. Any adjustments arising in relation to the matters referred to in paragraphs 1 to 4 above would have a consequential significant effect on the loss and cash flows of the Group for the six months ended 31 December 2004 and the net assets of the Group as at that date. FUNDAMENTAL UNCERTAINTY RELATING TO THE GOING CONCERN OF CERTAIN SUBSIDIARIES In arriving at our review conclusion, we have considered the adoption of the going concern basis in consolidating Longbai and Hongxin. a. Longbai Longbai's hotel properties, with a carrying value of RMB170,000,000 ( equivalent to HK$160,650,000), were secured against a loan of RMB350,000, 000 (equivalent to HK$330,750,000) granted by Shanghai Pudong New District Liuli Rural Credit Cooperative Union ("Liuli SRCC"). As a result of the decrease in the carrying value of the hotel properties, Longbai had net liabilities as at 31 December 2004. Thus, Longbai might have a going concern problem. In addition, Longbai will lose its ownership of the hotel properties if the enforcement action against Longbai is completed. The Receivers are also currently unable to determine whether there are any other contingent liabilities resulting from Liuli SRCC's enforcement action against Longbai. b. Hongxin Hongxin's property under development, with a carrying value of RMB285,000,000 (equivalent to HK$269,325,000), was secured against a loan of RMB300,000,000 (equivalent to HK$283,500,000) granted by the Shijidadao Branch of Shanghai Pudong New District Rural Credit Cooperative Union (" Shijidadao SRCC"). The Receivers have been unable to determine whether Hongxin is able to meet all its liabilities as the Receivers only had limited access to Hongxin's books and records. Further, according to the information obtained by the Receivers, fund equivalent to the purported loan was deposited and/or advanced to a PRC entity. Should this receivable become irrecoverable and the proceeds from the realisation of the property under development be insufficient to cover the purported loan and other liabilities, Hongxin might have a going concern problem. Further, the registered capital of Hongxin according to the business licence of Hongxin issued on 15 January 2004 is listed at US$30,000,000, of which only US$16,700,000 has been paid up. The investment amount which was originally listed at US$50,000,000 is subsequently listed at US$90, 000,000 pursuant to Hongxin's Certificate of Approval. Hongxin has requested the Foreign Economic Commission of Huangpu District Shanghai (" FEC") to extend the deadline for paying up the additional registered capital to 24 November 2005. In light of the judgment on Hongxin dated 17 November 2004, FEC has verbally rejected Hongxin's application to extend the payment of the additional registered capital to 24 November 2005. Should the business licence of Hongxin be revoked, Hongxin might also have a going concern problem. In addition, Hongxin will lose its ownership of the property under development if the enforcement action against Hongxin is completed. The Receivers are also currently unable to determine whether there are any other contingent liabilities resulting from Shijidadao SRCC's enforcement action against Hongxin. As the Receivers have indicated that they will unlikely be providing the necessary funding to maintain Longbai and Hongxin as a going concern, the interim financial report includes appropriate adjustments to state Longbai's hotel properties and Hongxin's property under development at valuation on a forced sale basis and to reclassify the purported loans under current liabilities. No adjustments have been made to restate the other assets to their recoverable amounts and to provide for any further liabilities that might arise as the amounts are not quantifiable. DISAGREEMENT ABOUT ACCOUNTING TREATMENT Interest expenses of HK$51,142,000 have been accrued on the purported loan borrowed by Hongxin and were recorded as prepayments in the interim financial report. The interest accrued should be accounted for as an expense as required by Statement of Standard Accounting Practice 19 " Borrowing costs" ("SSAP 19") issued by HKICPA. If the Group had accounted for the borrowing costs in accordance with SSAP 19, the Group's loss attributable to shareholders for the six months ended 31 December 2004 would have been increased by HK$31,477,000, accumulated losses as at 1 July 2004 of HK$19,665,000 and the debtors, deposits and prepayments as at 31 December 2004 would have been decreased by HK$51,142,000.