Mr. Han Gang reports

MOUNTAIN CHINA RESORTS REPORTS 2014 SECOND QUARTER FINANCIAL AND OPERATIONAL RESULTS

Mountain China Resorts (Holding) Ltd. has released its financial results for the quarter ended June 30, 2014. Mountain China reports its results in Canadian dollars.

Financial results

With winter operations ended in March and summer operations to be started in July, second quarter has been the traditional slack season for Mountain China. For the quarter ended June 30, 2014, the company generated revenues from resort operations of $1,000 and a net loss of $2.12-million or one cent per share compared with revenue of $80,000 and a net loss of $5.51-million or two cents per share in 2013. Total revenue and the net results were from resort operations with no real estate sales revenue during the quarter ended June 30, 2014. Resort operations earnings before interest, taxes, depreciation and amortization for second quarter 2014 were $260,000 compared with negative $850,000 last year.

Resort operations expenses totalled $860,000 for the second quarter of 2014 compared with $740,000 in 2013. Operations expenses within the resorts are mainly attributable to snow-making, grooming, staffing, fuel and utilities, which also include the general and administrative expenses relating to the resort's senior management, marketing and sales, information technology, insurance, and accounting.

Other income totalled $1.31-million (2013: $90,000), which mainly consists of income of $1.22-million (seven million renminbi) of government subsidy received for the bank loan interest of Harbin Commercial Bank paid by the company up to October, 2013. Other major components of other income include $90,000 (2013: $80,000) recognized from the deposit by Club Med for the quarter ended June 30, 2014.

Corporate general and administrative expenses totalled $190,000 for the quarter ended June 30, 2014, compared with $280,000 in 2013. This amount mainly comprised executive employee costs, public company costs and corporate information technology costs.

Depreciation and amortization expense from continuing operations totalled $1.38-million for the quarter ended June 30, 2014, compared with $2.77-million in 2013. Decrease in depreciation and amortization was mainly caused by certain properties being fully depreciated in the first quarter of 2014. Those properties include furnishing constructions of hotels and some furniture bought in the first quarter of 2009 with an expected useful life of five years. No renewing work is required as those constructions and furniture are still in good condition and can be used in resort operations.

The company incurred financing cost of $1.60-million during the quarter ended June 30, 2014, compared with $1.58-million in 2013. Financing costs mainly related to the loan interests, accretion expenses of convertible bonds, and also included bank administrative fee and service charge.

Cash and cash equivalents totalled $7.18-million, and working capital deficiency was $94.30-million as at June 30, 2014.

Operations

Sun Mountain Yabuli

The company's 2012-2013 Sun Mountain Yabuli resort winter season operations commenced on Nov. 24, 2012, and closed on March 24, 2013. In comparison, the 2013-2014 winter season operations commenced on Nov. 29, 2013, and closed on March 23, 2014. The revenue of Sun Mountain Yabuli resort operation comprises mainly mountain operation, beverage, skiing-related services and hotel lodging. Skiing-related services includes rental of ski equipment, goggles, lockers and gloves, sales of ski equipment, and skiing training services offered in the ski school. It also includes the mountain operation, which is using the facilities built in the mountain, such as sightseeing trams, snow tubing and alpine.

The 2013-2014 winter operations ended in March. There were no resort operations in the second quarter. The 2014 summer operations started on July 5, and finished on Aug. 31. Preparation work, including staffing, procurement, sanitation and equipment maintenance, was undertaken in the second quarter. Management provides a more detailed analysis on revenue and future prospects in its 2014 interim management's discussion and analysis.

Sun Mountain Yabuli -- real estate development

By the end of fiscal 2010, the company had finished working on the exterior decoration of the 55 villas, of which three were completed with interior finishing. At the time of this reporting date, certain construction is still needed on the exterior grounds to complete lighting, roads and utility connections. The company had not been successful in selling any of the villas. Management is of the opinion that to complete sales, it is necessary to first complete the exterior construction. Management estimated these additional construction costs to be at least $4.50-million.

In 2013, general political environment further affected tourism-related real estate industry negatively. A few other similar projects in ski resort areas in China started marketing, and the outcome was quite frustrating. Those projects include Qingyun town in the Yabuli region and real estate projects of Changbai Mountain. As of Dec. 31, 2013, management was of the opinion that, even with additional costs to be invested to get the villas ready for sale, it is unlikely that the benefit will exceed the cost at this time. Therefore, no further investment was made in 2013, and management did not expect any investment to be made in the near future. Judging from the current economic environment, management's opinion is that there is very limited recoverable amount associated with the villas at the moment, and an impairment of $22.80-million was provided and reduced the carrying value of properties under construction to $1 as of Dec. 31, 2013. As at June 30, 2014, the book value of properties under construction was still $1.

Despite the current difficulty, the company does have confidence with its first-of-a-kind skiing-in and skiing-out villas in China. The company will be reasonably flexible with its pricing when the market shows sign of a turnaround. No other detail milestones for this matter are available from the company as the related government policies are set to be temporary but with durations undetermined.

Financial highlights

                      SUMMARY FINANCIAL RESULTS
        (in thousands of Canadian dollars except for per-share data)

                                             For the quarter For the quarter  
                                               ended June 30,  ended June 30,
                                                        2014            2013

Revenue                                                   $1             $82
Operating expenses                                      (861)           (739)
Other income                                           1,310              90
General and administrative expenses                     (189)           (287)
Depreciation and amortization                         (1,384)         (2,765)
Operating (loss)                                      (1,123)         (3,619)
Total non-operating income and (expenses)             (1,000)         (1,986)
Deferred income tax recovery                               6              99
Results of discontinued operation                         --              --
Net (loss)                                            (2,118)         (5,506)
Net (loss) per share (basic and diluted)               (0.01)          (0.02)

The company has an accumulated deficit and a working capital deficiency and has defaulted on a bank loan, all of which cast a substantial doubt on the company's ability to continue as a going concern. The company's ability to meet its obligations as they fall due and to continue to operate as a going concern is dependent on further financing and ultimately, the attainment of profitable operations. These consolidated financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the company be unable to continue as a going concern. Management of the company plans to finance its future operation by obtaining additional financing through loans, private placements and the sale of the properties under construction. However, there is no assurance that the company will be able to obtain additional financing or sell the properties under construction. The company will need to settle with Construction Bank, either by negotiating new payment terms or by obtaining other financing to repay the debt in full. If it is not successful in doing so, and the bank takes possession of the assets, the company will no longer be able to continue operating the resort.

Despite the financial difficulty posed by the overdue debts and continued loss, management is confident in the development of both the industry and the company in the future. The government of Heilongjiang province had demonstrated strong incentive to support the skiing industry and the company by increasing local infrastructure investment. In June, 2014, the company received a $1.23-million (seven-million-renminbi) government subsidy for loan interest. Revenue from ClubMed in the winter season has been growing steadily, and the company will be the official partner and playing field of the 2016 world championships of snowboarding. Management is also working on various means to attract new investments into the company to complete the construction of villas and improve the capital structure of the company.

Subsequent events

There has been no substantial subsequent event up to the reporting date.

Major corporate developments in 2014

Sun Mountain Yabuli resort prepared for its third summer operations

The 2013-2014 winter operations ended in March. There were no resort operations in the second quarter. The 2014 summer operations started on July 5 and finished on Aug. 31. Preparation work, including staffing, procurement, sanitation and equipment maintenance, was undertook in the second quarter.

Updates on China Construction Bank loan defaults

In March, 2014, the company defaulted on its fourth principal payment of $8.61-million (50 million renminbi) under its $43.03-million (250-million-renminbi) loan agreement with China Construction Bank. According to the loan agreement between Yabuli and Construction Bank, Construction Bank has the right to accelerate Yabuli's obligation to repay the entire unpaid principal plus interest immediately and to take legal actions to enforce on the security. The company received a statement of claim demanding repayment in June, 2013.

On April 22, 2014, the company received a decision from the Higher People's Court of Heilongjiang Province stating that: (1) the company is obliged to pay off the principal of $39,583 (230 million renminbi) within 10 days of receipt of the decision; (2) the company is obliged to pay off the accrued interest of $6,314 (36.69 million renminbi), which was accrued up to Dec. 21, 2013, within 10 days of receipt of the decision; (3) the company should pay off the accrued interests between the actual settlement date and Dec. 21, 2013; (4) if the company did not pay off the debts within the required time, China Construction Bank will have the priority to recover the debts from the sales of pledged land use rights, property and equipment. As of June 30, 2014, the principal and interest owing were $47.70-million, and the collaterals associated with the loan agreement are made up of the company's land use rights and property and equipment with a carrying value of approximately $54.23-million.

The company has been negotiating with the bank to arrange for a debt restructuring plan, and as of the reporting date, no consensus has been arrived yet. Although the bank informally expressed its intention to maintain normal operations of the company, there is no assurance that it will not take further actions in the future.

Updates on Harbin Commercial Bank loan

On Feb. 14, 2012, the company secured a bank loan for the amount of $24.09-million (140 million renminbi) from Harbin Commercial Bank.

To improve the capital structure, management of the company negotiated with the bank to extend the repayment schedule. In August, 2013, the company was notified by Harbin Commercial Bank that the bank had approved to extend the repayment schedule from three years to 10 years. According to the new arrangement, the loan will mature in December, 2022. The first instalment of $520,000 (three million renminbi) was repayable in August, 2013, and thereafter the company will need to repay $2.41-million (14 million renminbi) each year for eight consecutive years (200,000 renminbi in December and 13.8 million renminbi in February), and $4.30-million (25 million renminbi) in the final year (400,000 renminbi in December and 24.6 million renminbi in February). On Feb. 28, 2014, the company made payment of $2.37-million (13.8 million renminbi) as the third instalment.

Updates on MLE loan restructuring

On Feb. 8, 2012, the company entered into a debt settlement agreement with Melco Leisure and Entertainment Group Ltd. for the settlement of a loan in the principal of $12-million (U.S.) and a loan in the principal of $11-million (U.S.) made by Melco to the company and Mountain ChinaI. The Mountain China loan and the Mountain ChinaI loan were borrowed in 2008. On May 29, 2012, the company and Melco entered into an amended and restated debt settlement agreement to clarify details of the loan settlement mechanism and procedures to implement the settlement of the Melco loans. On July 10, 2012, during the company's annual general meeting, the company obtained shareholder approval on the agreement. The transactions contemplated under the agreement have been approved by the TSX Venture Exchange.

Detailed settlement arrangement can be found in Note 14 of the 2013 annual consolidated financial statements. Settlement procedures were started in the second quarter of 2013, and the company paid $3.01-million ($2.5-million of loan principal and $510,000 of interest) to MLE on May 31, 2013, as a partial fulfilment to its cash repayment obligation specified in the agreement. The company also filed for issuance of 20.6 million and 19,444,444 common shares to its subsidiary Mountain ChinaI on July 2, 2013, and July 23, 2013, respectively. Subject to the agreement, the 20.6 million shares issued in issuance I are proposed to be transferred to MLE for full satisfaction of the Mountain ChinaI loan with the new principal amount of $14.9-million (U.S.). According to the company's initial contact with MLE, the $3.5-million (U.S.) principal would be settled by conversion into 19,444,444 shares. Issuance II was then made for the purpose of settlement. However, after a series of negotiation, it is probable that management of MLE will choose to take up to the maximum of five villas on the basis of $700,000 (U.S.) per villa as part of the settlement. Therefore, it is probable that the issuance II will be later cancelled accordingly. Furthermore, there is discrepancy in calculation of the number of shares in relation to the issuance II. As of the reporting date, the company is still in negotiation with MLE on the details of the settlement.

Update on Changchun resort

On Nov. 17, 2010, the company announced its updates with respect to certain developments that have taken place with respect to its Changchun resort. The government of Erdao district of Changchun city in the Jilin province of the People's Republic of China holds the view that the Changchun resort is still owned by the government, and it may, through Changchun Lianhua Mountain Agricultural Project Development Company Ltd., manage the same to the company's exclusion. The company disagrees with the Erdao government's position. The company had engaged Global Law Office, a reputable law firm in PRC, to do legal due diligence on the assets before they were acquired by the company. Global Law Office had advised the company that the assets acquired are not state-owned assets, and the same may be validly transferred to the company. Because of CCL Agricultural's and the Erdao government's action, the company has been deprived of management of the Changchun resort. The company has engaged in discussions with the Erdao government, Changchun Lianhua Mountain Sports & Travel Development Company Changchun Sports and CCL Agricultural with an aim of resolving this matter. As a result of the foregoing, the company has lost control of the company itself and has therefore written off the full value of the assets and liabilities of Changchun resort and reported it as a loss from discontinued operations as of Dec. 31, 2010. In 2011, the company commenced legal actions against the Erdao government in an effort to regain control and ownership of the assets and operations.

The company's legal department has sent three letters of formal complaint to the Ministry of Commerce of the People's Republic of China in June, 2012, the Erdao government and Jilin Lianhua tourist committee. Recently, the Ministry of Commerce of the People's Republic of China has assigned the case to the relevant authority called the Economic and Technological Co-operation Department of Jilin province for handling. After a series of negotiations made and no consensus arrived as at reporting date, management had decided to start a formal administrative prosecution process against the government. As at June 30, 2014, management had sent several letters of notice, but no formal prosecution has been started.

We seek Safe Harbor.