09:03 FOREFRONT INT'L<00885> - Results Announcement (3) SUMMARY OF AUDITORS' REPORT A summary of the auditors' report to the shareholders of the Company is set out below: Basis of opinion We planned our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public Accounts, except that the scope of our work was limited as explained below. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company's and the Group's circumstances, consistently applied and adequately disclosed. We planned our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. However, the evidence available to us was limited because, as explained in the financial statements, subscription money for convertible bonds amounting to US$5 million (equivalent to HK$38,850,000), included as trade and other receivables in the balance sheet, has not been received by the Company, despite the convertible bonds having been issued to a person representing himself as the subscriber. We have not been able to obtain sufficient reliable evidence to assess the recoverability of the receivable and to assess the implications of the matter on the convertible bonds issued. Fundamental uncertainty relating to the lawsuits against the Group In forming our opinion, we have considered the adequacy of the disclosures made in the financial statements which details the lawsuits against the Group for an aggregate claim of approximately HK$14.8 million. The future settlement of this litigation may have an adverse effect on the net assets of the Group as at 31 December 2004 and the result for the year then ended. However, the outcome of this litigation is uncertain. We consider that appropriate disclosures have been made in the financial statements in this respect. Fundamental uncertainty relating to the Taiwan subsidiaries Following the same reasons as set out in the financial statements, the operations of the Group's Taiwan Subsidiaries, which represent a substantial part of the Group's business, have been disrupted. The directors are currently undertaking a number of measures to resolve the disputes and restore full control of the Taiwan subsidiaries' operations. The financial statements have been prepared on a going concern basis, the validity of which depends on the satisfactory resolution of the matters referred to above and the successful attainment of profitable and positive cash flow operations. The financial statements do not include any adjustments that would result from a failure to attain the favourable results in respect of the above matters. If the outcome in respect of any of the above matters turns out to be unfavourable, the going concern basis might not be appropriate and, in such event, adjustments would have to be made to the financial statements to reduce the carrying value of the Group's assets to their recoverable amounts, to provide for any further liabilities which might arise and to reclassify non-current assets and liabilities as current assets and liabilities, respectively. Exclusion of Taiwan Subsidiaries from consolidation As explained in the financial statements, due to the absence of accounting information about the relevant subsidiaries and associates for the year ended 31 December 2004 that the Directors consider as reliable, the consolidated financial statements have excluded the results for the year and financial positions as at 31 December 2004 of certain subsidiaries and associates in Taiwan, which form a significant part of the Group. The Group's share of the net assets of these entities, based on latest audited financial information and totalling HK$149,054,000 has been included in the consolidated balance sheet as interests in unconsolidated subsidiaries. The financial information extracted from the unaudited financial statements of these entities have been disclosed in the financial statements. Whilst the directors consider that the exclusion of these subsidiaries is the best way of presenting the Group's financial position and the results for the year in the circumstances, the reason for the exclusion is not one of the reasons for exclusion provided for in Statement of Standard Accounting Practice 32 "Consolidated Financial Statements and Accounting for Investments in Subsidiaries" issued by the Hong Kong Institute of Certified Public Accountants ("SSAP 32") and, in this respect, the financial statements are not in compliance with SSAP 32. Qualified opinion: Disclaimer on view given by financial statements Because of the significance of the possible effect of the limitation in evidence and the fundamental uncertainties referred to above, we are unable to form an opinion as to whether the financial statements give a true and fair view of the state of affairs of the Group and of the Company as at 31 December 2004 and of the loss and cashflows of the Group for the year then ended.