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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Arc Capital | LSE:ARCH | London | Ordinary Share | KYG0450H1002 | ORD USD0.01 |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0.265 | 0.00 | 00:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Dec 2019 to Dec 2024
TIDMARCH
RNS Number : 9390Z
ARC Capital Holdings Limited
23 September 2015
23 September 2015
For Immediate Release
ARC Capital Holdings Limited
Audited Annual Accounts for the Financial Year Ending 31 December 2014
ARC Capital Holdings Limited ("ARCH" or the "Company") has today announced the publication of its audited annual accounts for the financial year ending 31 December 2014.
The annual report is reproduced below.
The Company's 2014 annual report will also be sent to registered shareholders shortly and a copy will be available for inspection on the Company's website (http://www.arch-fund.com/).
ARCH's shares will remain suspended from trading on AIM pending the appointment of a new Nominated Adviser, following the resignation of Grant Thornton LLP effective 15 September 2015. A further announcement relating to this matter will be released in due course.
Enquiries
For further information, please contact:
ARC Capital Holdings Limited
Alpay Ece / Sean Hurst
Tel: +44 (0)20 7845 5950
Edmond de Rothschild Securities (UK) Limited
William Marle
Tel: +44 (0)20 7845 5950
John Armstrong-Denby
Tel: +44 (0)20 7845 5950
Hiroshi Funaki
Tel: +44 (0)20 7845 5960
ARC Capital Holdings Limited
Board Report
(Financial year ended 31 December 2014)
The Board of Directors is pleased to present the annual financial statements of ARC Capital Holdings Limited ("ARCH") and its subsidiaries (collectively, the "Fund") for the year ended 31 December 2014.
Board and Management Changes
The composition of ARCH's Board and Management has undergone a significant number of changes since the beginning of 2014.
On 9 January 2014, Mr Christopher Gradel left the Board of ARCH as the other directors at that time wished the Board to be wholly independent from ARCH's then investment manager, ARC Capital Partners Limited (the "Investment Manager"). Mr Gradel could not be considered an independent director due to his role with the Investment Manager and its parent, PAG Holdings Ltd ("PAG"), the latter company being one in which he also held an equity interest.
On 7 February 2014, the Investment Manager provided written notice of its resignation, and its investment management agreement ended on 7 August 2014, following the conclusion of its 6 month notice period.
Subsequently, on 20 March 2014, Borrelli Walsh Limited ("Borrelli Walsh") was appointed as a consultant to the Board, with a mandate of providing independent oversight of the Fund's portfolio and guidance to ARCH's directors.
On 8 April 2014, Mr Timothy Rucquoi-Berger left the Board. The Board at that time announced that this was the outcome of its efforts to rationalise operating costs and streamline reporting and decision making processes.
In December 2014, entities related to PAG, which controls ARCH's former investment manager, increased their shareholding in ARCH to over 50% and requisitioned an extraordinary general meeting to remove the then existing directors and replace them with a new board of directors. As a consequence, the Board composition changed in February 2015, with Messrs Steven Feniger and Tian Cho Chu, and MsHelen Wong leaving the Board, and Messrs Alpay Ece, Cosimo Borrelli and Sean Hurst being appointed as the new Board of ARCH.
Mr Cosimo Borrelli was removed from the Board on 30 March 2015. Subsequent to this, Borrelli Walsh tendered its resignation as a consultant to the Board, effective 15 April 2015. The Board has decided not to appoint a replacement for the Investment Manager or Borrelli Walsh at this time but to retain specialist consultants in relation to individual assets when appropriate.
Investments
Xiajin Dairy
On 20 January 2014, ARCH completed the sale of its entire stake in Ningxia Xiajin Dairy Co. Ltd. for a total consideration of US$30.0 million, which was approximately 1.7 times ARCH's initial investment cost of US$18.1 million.
Buchang Pharmaceutical
On 30 April 2014, ARCH entered into a definitive agreement to sell its entire stake in Buchang Pharmaceutical for a total consideration of US$14.9 million. The transaction completed on 27 May 2014, at which point ARCH received the full consideration.
Jiadeli Holdback
Following the year end, on 15 June 2015, ARCH announced that an agreement had been reached with HNA Group for the settlement of the sum due from HNA Group in respect of the Jiadeli Holdback. This settlement was for the HNA Group to pay the full amount outstanding and this was achieved after a lengthy process of litigation in China. The full amount due of RMB90 million plus RMB3 million of costs was received by Shanghai Xinmeng Investment Co., Limited (a subsidiary of ARCH) on 12 June 2015. In return, ARCH has waived the interest due under the original China International Economic and Trade Arbitration Commission ("CIETAC") award of 3 June 2014.
The net value of this settlement has been reflected in the December 2014 NAV as the carrying value of the Jiadeli Holdback was previously nil. The carrying value in the financial statements as at 31 December 2014 has also been adjusted. The net adjustment to NAV was approximately US$8.1 million compared to the NAV as at 30 September 2014, being RMB93 million (equivalent to approximately US$15.2 million) less fees and expenses incurred in China together with a provision of US$5.3 million in respect of any taxes that may be required to be paid. The fees and expenses included the success fee of approximately RMB11 million (equivalent to approximately US$1.8 million) payable to ARCH's Chinese legal counsel. It should be noted that the success fee agreement with ARCH's Chinese legal counsel was entered into on 10 December 2013, prior to the appointment of the current directors in February 2015. ARCH received a net amount of approximately RMB81.8 million (equivalent to approximately US$13.4 million), before any provision for taxes payable in China.
Xian University (Shaanxi Da De Education)
On 23 November 2013, ARCH entered into a definitive agreement to sell its entire stake in Xian University for RMB165.2 million (approximately US$27.1 million).
On 1 December 2013, ARCH received an initial payment of RMB75.1 million (approximately US$12.3 million), and was expecting to receive a final payment of RMB90.1 million (US$14.8 million) no later than 10 December 2014 to complete the sale. The final payment has not been received and ARCH has commenced legal action in China to pursue recovery of the amount outstanding.
As at 31 December 2014, it was decided by the Board to recognise the initial deposit received as return of equity and the Board estimated the fair value of the investment at nil. The final payment had not been received by ARCH as at 31 December 2014 and has not been received since that date.
Bridge Loan to "DCSI" (Orient Home Retail Sale)
On 26 August 2013, ARCH agreed to extend the maturity date of the loan provided to a domestic Chinese strategic investor ("DCSI"), which related to the sale of Orient Home Retail, to 30 June 2014. In April 2014, ARCH's valuation committee (the "Valuation Committee") agreed to reduce the value of the loan by 10% and agreed to fully write off the remaining outstanding interests. The loan was not repaid on 30 June 2014. Following their appointment in February of this year, the new directors have initiated legal proceedings in China against the DCSI to seek recovery of the loan.
Orient Home Investment (RMB480 million)
In December 2010, the Fund's then Investment Manager procured the transfer of RMB480 million (US$76.2 million) (the "Orient Home Payment") under an equity purchase agreement (the "Equity Purchase Agreement") for the purchase of a majority stake in Orient Home Property. The price paid represented the full purchase price. Subsequent to this transfer Orient Home failed to comply with the conditions precedent set out in the Equity Purchase Agreement. Accordingly, repayment of the Orient Home Payment fell due, but no repayment has been forthcoming and, in May 2013, a request for arbitration was filed with CIETAC.
On 17 June 2015, ARCH announced that CIETAC had unanimously ruled that Orient Home Co., Ltd be required to refund Shanghai C.P. Jing Cheng Enterprise Development Co. Ltd. ("Shanghai CP JC") (a subsidiary of ARCH) the entire RMB480 million of the Orient Home Payment.
CIETAC also ruled that Orient Home Co., Ltd be required to pay Shanghai CP JC late payment interest calculated from 5 March 2011 to the actual payment date, applying the lending interest over the same period as published by the People's Bank of China, as well as the arbitration fee of approximately RMB4.4 million (equivalent to approximately US$0.7 million).
Subsequently, on 8 July 2015, Orient Home Co. Ltd applied to the Beijing Second Intermediate Court to have this award set aside. However, on 20 August 2015 the Beijing Second Intermediate Court dismissed this application.
The Board of ARCH is consulting with its advisers on the means of enforcing the award. The carrying value of the claim in ARCH's NAV is currently RMB250 million (approximately US$41 million) and the Board has resolved to keep this unchanged.
The Beijing First Immediate People's Court granted a property preservation order for RMB280 million against Orient Home in July 2013.
Claim against Investment Manager (Orient Home litigation in England)
On 6 February 2014, ARCH announced a possible claim against the Investment Manager. The then directors believed that the Investment Manager had been negligent and/or breached its investment management agreement (the "IMA") with ARCH in respect of the Orient Home investment. The then directors came to this view on the basis that the full consideration of RMB480 million in respect of the Orient Home transaction was paid away, without security or any escrow arrangements, and for merely a contractual promise to transfer all of the consideration shares at a future date if certain pre-conditions were met and, if they were not met, to return the money.
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On 15 August 2014, ARCH announced that, despite being engaged in pre-action correspondence with the Investment Manager since February 2014, this exchange of correspondence had not led to a resolution of the dispute. Having considered the position with its legal advisers, the then directors announced that ARCH had issued legal proceedings in the English High Court against the Investment Manager for negligence and/or breach of the IMA. It claimed damages in the sum of RMB480 million for the loss of the Orient Home Payment and other losses, including the professional fees and other costs ARCH had incurred in attempting to secure repayment from Orient Home.
On 22 April 2015, the new directors announced that they had commissioned an independent review of ARCH's litigation against the Investment Manager in respect of the Orient Home investment and had appointed leading international law firm Baker & McKenzie LLP ("Baker & McKenzie") to undertake the review. Baker & McKenzie was tasked with undertaking an independent review of ARCH's claim in the English High Court against ARC Capital Partners Limited concerning Orient Home and providing an opinion on the reasonableness of pursuing such claim.
Funtalk China Holdings (formerly Beijing Pypo)
On 31 March 2014 ARCH announced that ARCH Digital Holdings Limited ("ARCH Digital"), a wholly owned subsidiary of ARCH, had entered into certain definitive agreements to sell, subject to shareholder approval, its entire equity stake in Fortress Group Limited ("Fortress") for a minimum cash consideration of US$137.3 million. Fortress was the 100% shareholder of Funtalk China Holdings Limited ("Funtalk"). The proposed buyer was Sanpower Group Co. Ltd. ("Sanpower"). The sale of Fortress was approved at the ARCH extraordinary general meeting, held on 16 May 2014, but did not progress to completion as the conditions precedent were not satisfied. Fortress subsequently entered into an agreement for the sale of its 100% equity interest in Funtalk ("Fortress Sale").
On 27 August 2014, subsequent to the Fortress Sale, ARCH Digital received a letter from Fortress, which enclosed a notice addressed to Fortress dated 25 August 2014 (the "Put Option Notice") issued by PAGAC Fortress Holding I Limited ("PAGAC"), a company affiliated with PAG, of the exercise by PAGAC of the put option (the "Put Option") referred to in the shareholder agreement, dated 25 August 2011, that ARCH Digital had entered into at the time of the privatisation of Funtalk (the "Shareholder Agreement"). The background to the Put Option is as follows. If Fortress did not consummate an exit of Funtalk by 25 August 2014 then PAGAC would have the right to require Fortress to repurchase PAGAC's holding in the preferred shares and convertible bonds issued by Fortress. If Fortress was unable to perform its obligation under the Put Option, the requirement to repurchase PAGAC's preferred shares and convertible bonds fell to the shareholders of Fortress, other than PAGAC, pro-rata, including ARCH Digital.
On 2 September 2014, the Fortress Board resolved to repurchase all of the convertible bonds and 2,093 out of the 4,999 preferred shares at a cost of approximately US$250 million. Subsequently, on 3 September 2014, ARCH Digital received a notice from PAGAC notifying ARCH Digital that Fortress had failed to pay the entire put price with respect to the Put Option and that PAGAC was exercising its right pursuant to the Shareholder Agreement to require that ARCH Digital purchase its pro rata portion of the put securities that were not purchased by Fortress (the "ARCH Digital Put Option"). The notice relating to the ARCH Digital Put Option (the "ARCH Digital Put Option Notice") further stated that the unpaid Put Option price attributable to ARCH Digital was US$52,322,284, and that ARCH Digital was required to pay this amount within 10 business days, i.e. no later than 17 September 2014.
ARCH Digital did not have the necessary cash or liquid assets to pay the unpaid Put Option price attributable to ARCH Digital as required in the ARCH Digital Put Option Notice. ARCH Digital had, by a share charge agreement dated 25 August 2011 (the "Share Charge Agreement"), conferred on PAGAC a security interest over ARCH Digital's equity holding in Fortress (the "Charged Assets") to secure, among other things, ARCH Digital's performance of its obligations under the Shareholder Agreement. If ARCH Digital failed to perform its obligations under the Shareholder Agreement, including its obligation with respect to the ARCH Digital Put Option, PAGAC could enforce its security under the Share Charge Agreement, including, but not limited to, to receive and retain all dividends, interest, distributions or assets accruing in respect of the Charged Assets, and to sell, transfer, grant options over or otherwise dispose of the Charged Assets. All money received by PAGAC under the Share Charge Agreement was to be paid in accordance with that agreement, including towards satisfaction of any amounts in respect of ARCH Digital's obligations under the Shareholder Agreement. Any surplus remaining following payment under the Share Charge Agreement was to be repaid to ARCH Digital.
ARCH Digital did not pay the US$52,322,284 to PAGAC by 17 September 2014 and has not made any payments to PAGAC since the ARCH Digital Put Option Notice was received from PAGAC on 3 September 2014. Shareholders should note that, other than its interest in Fortress, ARCH Digital has no other assets. Further, ARCH has not guaranteed ARCH Digital's obligations to PAGAC.
The current Board has commissioned an investigation into the acquisition of Funtalk by Fortress in 2011, ARCH's investment in Fortress and the events concerning the Fortress investment from 2011 to date from the same legal adviser acting for ARCH on the Claim against the Investment Manager in respect of Orient Home in England. This investigation is ongoing.
Asset Valuation and Audit Opinion
ARCH's auditor has qualified its opinion on the Fund's consolidated financial statements because it has been unable to obtain sufficient evidence as to the carrying value on several financial assets - Shannxi Da De Education, DCSI Bridge loan, Orient Home and Fortress. The Board acknowledges the significant uncertainty surrounding these financial assets which are all the subject of litigation and the likelihood of achieving any recovery in the future and has based its valuation of these assets on the information available to it and the advice of its various legal counsel. The Board acknowledges that the outcome of such litigation is uncertain and can have a material impact on the value of such assets.
NAV
ARCH's NAV has decreased by approximately 64.28% from US$0.3315 (as at 30 September 2014) to US$0.1184 (as at 31 December 2014). This decrease is primarily due to the accounting treatment of ARCH Digital when producing ARCH's consolidated balance sheet. Under ARCH's current accounting policies, even though the Fortress investment has been written down to nil, the exercise of the Put Option by PAGAC means that ARCH Digital's liabilities exceed its assets by approximately US$57.76 million (as at 31 December 2014). On consolidation, this net liability has to be recognised in ARCH's consolidated accounts, hence the reduction in NAV of US$57.76 million. However, shareholders should note that ARCH has not guaranteed ARCH Digital's obligations under the Shareholder Agreement.
Excluding the net liability of ARCH Digital, the pro forma net asset value of ARCH is as follows:
Hot Features
Premium
Total (US$ million) Per share
(US$)
--------------------- -------------------- ----------
Reported NAV as
at 31 December
2014 27,017,413 0.1184
--------------------- -------------------- ----------
Adjustment relating
to ARCH Digital 57,757,715 0.2532
--------------------- -------------------- ----------
Pro forma adjusted
NAV 84,775,128 0.3716
--------------------- -------------------- ----------
This pro forma adjusted NAV represents an increase of approximately 12.10% compared to the last reported NAV per share at the close of business on 30 September 2014.
The Board has resolved that, as ARCH's investment portfolio is predominantly comprised of claims against third parties rather than investments in businesses, it will no longer report quarterly NAVs. Updates to the market will be communicated at the time of the final and interim results and when there is any development in the Fund's portfolio.
Return of Capital
Following the sale of its stake in Ningxia Xiajin Dairy Co. Ltd., ARCH distributed US$28.0 million by way of a mandatory share repurchase which was settled on 3 February 2014 at US$0.85 per ordinary share, equal to ARCH's unaudited Net Asset Value per share as at 31 December 2013. ARCH has now distributed a total of US$113 million to shareholders in 2013 and 2014.
In addition to cash holdings, ARCH's remaining portfolio consists of a number of litigation and arbitration claims. While there are further challenges ahead, the Board has acted and will continue to act diligently to realise value where possible and to protect shareholders' interests.
The Board is currently reviewing the cash required for ARCH to continue its operations and plans to retain sufficient working capital to pursue the Fund's various litigation claims to the fullest extent necessary. The Board has therefore resolved to await the outcome of the investigation into the Funtalk investment and also the repatriation of the surplus cash held within ARCH's Chinese subsidiaries before considering making a further return of capital.
Trading on AIM
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On 14 August 2015, ARCH announced that it had been notified by Grant Thornton UK LLP of its resignation as Nominated Adviser effective 15 September 2015. The Fund futher announced that, pursuant to AIM Rule 1, if a replacement Nominated Adviser is not appointed by 15 September 2015 then ARCH will continue to be suspended for a further month, at which time the admission of its ordinary shares to trading on AIM will be cancelled.
Discussions concerning the appointment of a replacement Nominated Adviser continue and a further announcement regarding a replacement will be made in due course.
We sincerely thank the shareholders for their continued support throughout this difficult period for the Fund.
Sean Hurst & Alpay Ece
Directors
Independent Auditor's Report to the Shareholders of
ARC Capital Holdings Limited
(Incorporated in the Cayman Islands with limited liability)
We have audited the accompanying consolidated financial statements of ARC Capital Holdings Limited and its subsidiaries (collectively, the "Fund") set out on pages 12 to 43, which comprise the consolidated statement of assets and liabilities and the consolidated schedule of investments as at 31 December 2014 and the consolidated statement of operations, consolidated statement of changes in net assets and consolidated statement of cash flows for the year then ended and notes, comprising a summary of significant accounting policies and other explanatory information.
Directors' responsibility for the consolidated financial statements
The directors are responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. This report is made solely to you, as a body, in accordance with our agreed terms of engagement, and for no other purpose. We do not assume responsibility towards or accept responsibility to any other person for the contents of this report.
We conducted our audit in accordance with International Standards on Auditing issued by the International Auditing and Assurance Standards Board. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.
Independent Auditor's Report to the Shareholders of
ARC Capital Holdings Limited (continued)
(Incorporated in the Cayman Islands with limited liability)
Basis for qualified opinion
Included in the Fund's consolidated statement of assets and liabilities as at 31 December 2014 and 31 December 2013 are the following assets and liabilities:
(1) An investment deposit receivable balance of US$52,248,017 and US$52,396,113, respectively, from Orient Home and Orient Group Industrial Co. Ltd ("Orient Group"), including an amount of approximately US$11,391,326 and US$11,391,326, respectively, which the Fund intends to offset against a remaining consideration payable to Orient Group. See notes 7, 8 and 17(f) to the consolidated financial statements for further details.
(2) An investment in Fortress Group Limited the fair value of which was determined to be US$nil and US$91,367,000, respectively, and a related liability balance of US$57,757,715 and US$nil, respectively. See the consolidated schedule of investments and note 3(i), 11(b) and 16(e) to the consolidated financial statements for further details.
(3) An investment in Shaanxi Da De Education the fair value of which was determined to be US$nil and US$11,822,000, respectively. See the consolidated schedule of investments and note 3(ii) and 16(d) to the consolidated financial statements for further details.
(4) A loan with a balance of US$7,354,143 and US$15,856,566, respectively and the related loan interest receivable balance of US$nil and US$2,416,451, respectively due to a Domestic Chinese Strategic Investor. See the consolidated schedule of investments and notes 3(iii), 8, 9 and 16(a) to the consolidated financial statements for further details.
While the Valuation Committee has made an estimate of the carrying values of the above financial assets, we were unable to obtain sufficient appropriate audit evidence about the timing or amount of estimated future cash inflows to satisfy ourselves that the carrying amounts of these financial assets and liabilities were fairly stated as at 31 December 2014. We also qualified our auditor's report on the financial statements for the year ended 31 December 2013 in respect of the same limitation of audit scope related to the Orient Home investment deposit as well as the loan investment and its related loan interest receivable balance, mentioned above. Any adjustments found necessary would have consequential effects on the Fund's net asset position as at 31 December 2014 and/or 31 December 2013 and the Fund's financial performance for the year ended 31 December 2014 and/or 31 December 2013.
Independent Auditor's Report to the Shareholders of
ARC Capital Holdings Limited (continued)
(Incorporated in the Cayman Islands with limited liability)
Qualified opinion
In our opinion, except for the possible effects of the matters described in the basis for qualified opinion paragraphs, the consolidated financial statements give a true and fair view of the financial position of the Fund as at 31 December 2014 and of its financial performance and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Certified Public Accountants
8th Floor, Prince's Building
10 Chater Road
Central, Hong Kong
Consolidated Statement of Assets and Liabilities
as at 31 December 2014
31 December 31 December
2014 2013
Note US$ US$
Assets
Investments, at fair value 3 7,354,143 165,373,566
(Cost: 31 December 2014:
US$170,435,220
31 December 2013: US$213,838,467)
Investment deposits 7 52,248,017 52,396,113
Other assets 9 21,471,845 13,881,212
Cash and cash equivalents 10 31,680,494 19,607,765
Total assets 112,754,499 251,258,656
------------------- -------------------
Liabilities
Deferred tax 6 350,857 1,871,928
Tax payable 6 13,129,527 7,355,220
Other payables and accruals 11 72,256,702 24,629,913
Total liabilities 85,737,086 33,857,061
------------------- -------------------
Net assets 27,017,413 217,401,595
=========== ===========
Shareholders' equity
Share capital 12 2,281,416 2,610,827
Share premium 12 326,371,746 354,042,331
Accumulated losses (308,578,458) (146,376,886)
Foreign currency translation
reserve 6,942,709 7,125,323
Total shareholders' equity 27,017,413 217,401,595
=========== ===========
Net asset value per share 15(a) 0.12 0.83
=========== ===========
Approved by the Board of Directors on 23 September 2015
Alpay Ece Director
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The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Schedule of Investments
as at 31 December 2014
31 December 2014 31 December 2013
Fair % of Fair % of
Cost value net Cost value net
Investment Instrument US$ US$ assets US$ US$ assets
Mobile phone
retail, China
Fortress Common
Group Limited(1) stock 100,800,044 - - 100,800,044 91,367,000 42.03%
Home decoration
retail, China
Orient Home
Decoration
& Building
Materials
Company Limited
("Orient
Home Retail") Loan 23,245,008 - - 23,245,008 - -
Dairy, China
Ningxia Xiajin
Dairy Co., Common
Ltd. stock - - - 18,130,000 30,000,000 13.80%
Education,
China
Shaanxi Da Common
De Education(2) stock 30,533,602 - - 42,806,849 11,822,000 5.44%
Pharmaceutical,
China
Buchang Pharmaceutical Common
Group stock - - - 13,000,000 16,328,000 7.51%
Others
A domestic
Chinese strategic
investor
("DCSI")(3) Loan 15,856,566 7,354,143 27.22% 15,856,566 15,856,566 7.29%
Total 170,435,220 7,354,143 27.22% 213,838,467 165,373,566 76.07%
========= ========= ===== ========= ========== =====
Notes:
1. On 31 January 2013, the Fund received 388 common shares of Fortress Group Limited ("Fortress"), the parent of Funtalk China Holdings Limited ("Funtalk") to settle the outstanding receivable from Funtalk's management, increasing ARCH's equity interest in Funtalk from approximately 18.47% to 20.49%, on a fully diluted basis. The shares received were valued at US$10.8 million which has been included in the cost of investment as at 31 December 2014. Also see note 3(i), 11(b) and 16(e).
2. As at 31 December 2014, it was decided by the Board to recognise the initial deposit received as return of equity. Also see note 3(ii) , 11(a) and 16(d)
3. The name of the investee is not disclosed due to a confidentiality arrangement. Also see note 3(iii) and 16(a).
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statement of Operations
for the year ended 31 December 2014
Year ended Year ended
31 December 31 December
Note 2014 2013
US$ US$
Investment income
Investment interest income - 1,280,138
Dividend income - 409,603
Bank interest and sundry income 240,541 708,441
Reversal of impairment loss 10,963,885 -
for other assets
Total investment income 11,204,426 2,398,182
------------------ ------------------
Expenses
Investment management fee 4 1,162,161 2,906,869
Consulting Fee 356,605 -
Administration, custodian and
registrar fees 255,225 195,159
Professional fees 3,978,071 3,706,108
Directors' remuneration and
expense reimbursement 5 584,805 225,000
Finance costs - 217,176
Impairment loss 8 2,410,386 17,735,070
Provision for put option 11 57,757,715 -
Other expenses 966,569 552,405
Total expenses 67,471,537 25,537,787
-------------------- --------------------
Net investment loss (56,267,111) (23,139,605)
-------------------- --------------------
Net loss on investments and
foreign currencies
Net realised gain on investments
before tax 13,727,143 23,415,777
Income tax expenses 6 (6,565,228) (1,633,003)
Net realised gain on investments 7,161,915 21,782,774
-------------------- --------------------
Net unrealised loss on investments
before tax (114,616,176) (27,993,458)
Deferred tax credit 6 1,519,800 2,063,666
Net unrealised loss on investments (113,096,376) (25,929,792)
-------------------- --------------------
Net realised gain on properties - 754,048
Net unrealised loss on properties - (991,061)
Net realised and unrealised
gain on foreign currencies - 3,682,993
Net loss on investments and
foreign currencies (105,934,461) (701,038)
-------------------- --------------------
Net decrease in net assets from
operations (162,201,572) (23,840,643)
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statement of Changes in Net Assets
for the year ended 31 December 2014
Retained Foreign
earnings/ currency
Share Share Tendered (accumulated translation
capital premium Shares losses) reserve Total
US$ US$ US$ US$ US$ US$
At 1 January
2013 3,548,051 437,966,017 - (122,536,243) 8,270,284 327,248,109
Share
repurchase (937,224) (83,923,686) - - - (84,860,910)
Net
investment
loss - - - (23,139,605) - (23,139,605)
Net realised
gain on
investments - - - 21,782,774 - 21,782,774
Net
unrealised
loss on
investments - - - (25,929,792) - (25,929,792)
Net realised
and
unrealised
gain on
foreign
currencies - - - 3,682,993 - 3,682,993
Net realised
gain on
properties - - - 754,048 - 754,048
Net
unrealised
loss on
properties - - - (991,061) - (991,061)
Foreign
currencies
translation
difference - - - - (1,144,961) (1,144,961)
______________ ______________ ______________ ______________ ______________ _______________
At 31
December
2013 2,610,827 354,042,331 - (146,376,886) 7,125,323 217,401,595
=========== =========== =========== =========== =========== ===========
At 1 January
2014 2,610,827 354,042,331 - (146,376,886) 7,125,323 217,401,595
Share
repurchase (329,411) (27,670,585) - - - (27,999,996)
Net
investment
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loss - - - (56,267,111) - (56,267,111)
Net realised
gain on
investments - - - 7,161,915 - 7,161,915
Net
unrealised
loss on
investments - - - (113,096,376) - (113,096,376)
Foreign
currencies
translation
difference - - - - (182,614) (182,614)
______________ ______________ ______________ ______________ ______________ _______________
At 31
December
2014 2,281,416 326,371,746 - (308,578,458) 6,942,709 27,017,413
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statement of Cash Flows
for the year ended 31 December 2014
Year ended Year ended
31 December 31 December
Note 2014 2013
US$ US$
Cash flows from operating activities
Net decrease in net assets
from operations (162,201,572) (23,840,643)
Adjustments to reconcile net
Increase
in net assets from operations
to net cash
provided by operating activities:
- Net realised gain on investments
before tax (13,727,143) (23,415,777)
- Net unrealised loss on investments
before tax 114,616,176 27,993,458
- Net realised gain on properties - (754,048)
- Net unrealised loss on properties - 991,061
- Proceeds from sale of investments 57,130,390 37,947,190
- Decrease/(increase) in investment
deposits 148,096 (1,653,607)
- Decrease/(increase) in other
assets 962,866 (2,803,362)
- Reversal of impairment loss (10,963,885) -
for other assets
- Impairment loss 8 2,410,386 17,735,070
- Provision for put option 11 57,757,715 -
- Decrease in deferred tax
liabilities (1,521,071) (2,297,200)
- Increase in tax payable 5,774,307 1,518,504
- (Decrease)/increase in other
payables and accruals (10,130,926) 10,998,651
- Foreign currencies translation
difference (182,614) (1,144,961)
Net cash provided by operating
activities 40,072,725 41,274,336
------------------- --------------------
Cash flows from financing activities
Repurchase of shares 12 (27,999,996) (84,860,910)
Net cash used in financing
activities (27,999,996) (84,860,910)
------------------- -------------------
Net increase/(decrease) in
cash and cash equivalents 12,072,729 (43,586,574)
Cash and cash equivalents at
beginning of year 19,607,765 63,194,339
Cash and cash equivalents at
end of year 10 31,680,494 19,607,765
=========== ===========
Supplemental cash flow information
- Interest paid - (217,176)
=========== ===========
Supplemental cash flow information
- Tax paid (790,919) (114,500)
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
1 General (a) Organisation
ARC Capital Holdings Limited (the "Company") was incorporated with limited liability in the Cayman Islands as an exempted company under the Companies Law on 27 July 2005. On 4 April 2006, the Company changed its name from Asia Retail Consumer Holdings Limited to ARC Capital Holdings Limited.
The Company is a closed-end investment company trading on the AIM Market of the London Stock Exchange. The Company's principal investment objective is to provide its shareholders with capital appreciation by investing in listed and unlisted companies in the retail, consumer goods and consumer service sectors principally in China and in neighbouring Asian countries. The Company finances these companies for expansion through buy-outs, pre-IPO opportunities and other equity and mezzanine securities.
The Company was managed by ARC Capital Partners Limited (the "Investment Manager") until 7 August 2014. The Investment Manager was responsible for the day-to-day management of the Company's investment portfolio, including, subject to approval by the Investment Committee which is appointed by the Investment Manager and approved by the Company's Board of Directors, the day-to-day acquisition and disposal of investments in accordance with the Company's investment objective and policies. On 7 February 2014, the Investment Manager provided written notice of its resignation, and its investment management agreement with the Company ended on 7 August 2014, following the conclusion of its 6 month notice period. As at the date of the report no replacement investment manager has been appointed nor do the directors intend to make such an appointment.
(b) Investment policy (i) Change of investment policy
On 31 January 2012, Shareholders voted to change the Company into a realisation vehicle. Accordingly, the Company's investment policy has been changed permanently so that no new investments will be made. The Company's Ordinary Shares, however, were to continue to be admitted to trading on AIM.
(ii) Nature of returns to shareholders
All of the Company's existing investments will be realised in the ordinary course of business. The net proceeds from realisations will be returned to shareholders, after which the Company will be wound up. The Company's realisation policy will not result in any immediate or accelerated sales and investments will only be realised when, in the opinion of the Board, an appropriate opportunity presents itself.
1 General (continued) (b) Investment policy (continued) (iii) Estimated time of divestment
The estimated time of divestment is between 2012 and 2015.
Prior to 31 January 2012, the Company's Investment Policy was as follows:
(i) Geographical focus
At least 70% of the Company's gross assets will be invested in China. Up to a maximum of 30% of the Company's gross assets may also be invested in Greater China and other countries in Asia, should the Board consider that such investments offer potentially attractive returns. Any investment made in countries outside of Greater China must be approved by the Board.
(ii) Target companies
The Company targets (i) late stage companies with growth, back up or performance enhancement potential; and (ii) expansion stage companies with proven management and significant growth potential.
(iii) Sector focus
The Company invests primarily in listed and unlisted companies engaged in retailing, providing services that support the retail industry (such as consumer finance, distribution and logistics), manufacturing or distributing consumer products or services, developing or managing property with a focus on retailing, and other retail and consumer-related firms.
(iv) Types of investment
As a general principle, the Company can engage in all forms of investment as allowed under the laws of each jurisdiction in which it operates, utilising instruments and structures that may be suitable to allow participation in selected investment opportunities. The Company may invest in equity, quasi-equity or debt instruments, which may or may not represent shareholding or management control. Where the Board deems it appropriate, the Company may also invest up to 20% of its net asset value in other investment pools, which themselves invest in unlisted and listed securities in the same target geographic regions and sectors as the Company.
(v) Diversification limit
The Company aims to achieve a balance in its exposure to different sectors. Furthermore, no single investment may at the time of investment exceed 20% of the Company's net asset value.
2 Summary of significant accounting policies
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These consolidated financial statements of the Company and its subsidiaries (collectively "the Fund") are prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"), which includes the application of the provision of the AICPA Audit and Accounting Guide for Investment Companies (the "Guide"). The following are the significant accounting policies adopted in the preparation of these financial statements.
(a) Use of estimates
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expense during the reporting period. Actual results could differ from those estimates.
(b) Principles of consolidation
These consolidated financial statements include the financial statements of the Company and its special purpose vehicles. Special purpose vehicles ("SPVs") are consolidated from the date on which control is transferred to the Fund and are deconsolidated from the date that control ceases. Investments held by the SPVs are not subject to consolidation and equity accounting as they are non-investment company investees with the purpose to realise a gain upon disposal rather than provide services to the Company. Inter-company transactions and balances have been eliminated on consolidation.
(c) Investments (i) Recognition, derecognition and measurement
Regular purchase and sale of investments are accounted for on the trade day, which is the day the trade is executed. All investment securities are initially recognised at cost. Costs used in determining net realised gains or losses on the sale of investment securities are based on average-cost method. Legal and due diligence fees and other charges associated with acquiring the investments are capitalised as part of the cost of the investment securities.
Transfer of investments is accounted for as a sale when the Fund has relinquished control over the transferred assets. Any realised gains or losses from investments are recognised in the consolidated statement of operations.
Investments are subsequently carried at fair value and changes in fair value are presented in the consolidated statement of operations.
2 Summary of significant accounting policies (continued) (c) Investments (continued) (ii) Fair value measurement
The Fund is an investment company under the Guide. As a result, the Fund records its investments in the consolidated statement of assets and liabilities at their fair value, with unrealised gains and losses resulting from changes in fair value recognised in the consolidated statement of operations.
Fair value is the amount that would be received to sell the investments in an orderly transaction between market participants at the measurement date (i.e. the exit price). Fair value of investments is determined by the Valuation Committee, which is established by the Board of Directors.
The Valuation Committee uses its best judgement in estimating fair value. In determining the fair value, the Valuation Committee engages third party valuation agents to assist in the selection of valuation techniques and models. However, there are inherent limitations in any valuation technique due to the lack of observable inputs. Estimated fair values may differ significantly from the values that would have been used had a ready market existed for the securities, and the differences could be material to the financial statements. Additional information about the level of market observability associated with investment carried at fair value is disclosed in Note 3.
(d) Fair value hierarchy
Generally accepted accounting principles establish a fair value hierarchy that prioritises inputs to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable input (Level 3 measurements).
The three levels of the fair value hierarchy are described below:
Level 1: Inputs to measure fair values are unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Inputs to measure fair values are quoted prices in markets that are not active, quoted prices for similar assets or liabilities in active markets, or prices or valuations for which all significant inputs are observable, either directly or indirectly;
Level 3: Inputs to measure fair values are both significant to the fair value measurement and unobservable.
2 Summary of significant accounting policies (continued) (d) Fair value hierarchy (continued)
Inputs to measure fair values broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics, and other factors. An asset or liability's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes "observable" requires significant judgment. The Valuation Committee considers observable data to be such market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by multiple, independent sources that are actively involved in the relevant market. The categorisation of an asset or liability within the hierarchy is based upon the pricing transparency of the asset or liability and does not necessarily correspond to the Valuation Committee's perceived risk of that asset or liability.
Securities traded on a securities exchange are stated at the last reported sales price on the day of valuation. To the extent these securities are actively traded and valuation adjustments are not applied, they are categorised in Level 1 of the fair value hierarchy. Preferred stock and other equities traded on inactive markets or valued by reference to similar instruments are categorised in Level 2.
Restricted securities for which quotations are not readily available are valued at fair value as determined by the Valuation Committee. Restricted securities issued by publicly traded companies are generally valued at a discount to similar publicly traded securities. Depending on the relative significance of valuation inputs, these instruments may be classified in either Level 2 or Level 3 of the fair value hierarchy.
Investments are classified within Level 3 of the fair value hierarchy if they are traded infrequently and therefore have little or no price transparency. Such assets and liabilities include unlisted equities and convertible bonds. Their fair values are estimated with reference to the valuation techniques recommended by the International Private Equity and Venture Capital Valuation Guidelines. Valuation methodologies utilised by the Valuation Committee include but are not limited to comparable transactions or performance multiples, latest round of financing, discounted cash flow, and are supported by independent valuations of underlying assets. The selection of appropriate valuation techniques may be affected by the availability of reliable inputs. In some cases, one valuation technique may provide the best indication of fair value while in other circumstances, multiple valuation techniques may be appropriate. Once an appropriate valuation methodology is determined for an asset or liability, it will continue to be used until a more appropriate method is determined.
2 Summary of significant accounting policies (continued) (e) Cash and cash equivalents
Cash and cash equivalents comprise cash at banks placed with reputable banking institutions with an original maturity of less than three months.
(f) Income and expenses
Dividend income is recognised on the ex-dividend date with the corresponding foreign withholding taxes recorded as an expense. Withholding taxes on dividends have been provided for in accordance with the Fund's understanding of the applicable country's tax rules and rates.
Interest income and all the expenses are accounted for on an accruals basis. Offering costs are charged to the Company's share premium account upon the issuance of shares.
(g) Foreign currency translation
Assets and liabilities denominated in foreign currencies are translated into US$ at the rates of exchange ruling at the reporting date. Income and expenses denominated in foreign currencies during the year are translated into US$ at the rates of exchange ruling at the transaction dates. All exchange differences arising are included in the consolidated statement of operations.
The Fund does not isolate that portion of the results of operations resulting from changes in foreign currency exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realised and unrealised gain or loss from investments.
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Net realised foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realised between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the US$ equivalent of the amounts actually received or paid. Net unrealised foreign exchange gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates.
2 Summary of significant accounting policies (continued) (g) Foreign currency translation (continued)
If a subsidiary's functional currency is a foreign currency, translation adjustments result from the process of translating that entity's financial statements into the reporting currency. Translation adjustments shall not be included in determining net income but shall be reported separately and accumulated in a separate component of equity.
(h) Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognised for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognised in the consolidated statement of operations in the period that includes the enactment date.
The Fund has adopted the authoritative guidance contained in FASB ASC 740 on accounting for and disclosure of uncertainty in tax positions, which requires management to determine whether a tax position of the Fund is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the tax amount recognised in the consolidated financial statements is reduced by the largest benefit that has a greater than 50% likelihood of being realised upon ultimate settlement with the relevant tax authority. Prior to the adoption of Interpretation 48, the Fund recognised the effect of income tax positions only if such positions were probable of being sustained.
(i) Share Capital
Ordinary shares are classified as equity. Where any group company purchases the Company's equity share capital (tendered shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company's equity holders until the shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company's equity holders. The holders of tendered shares have no voting and participation rights.
3 Securities valuation
The following table summarises the changes in fair value of the Fund's instruments by captions:
Investments Investments Investments
-common -loan -option Total
stock
US$ US$ US$ US$
As at 31 December
2014
Level 1 - - - -
Level 2 - - - -
Level 3 - 7,354,143 - 7,354,143
Total investments - 7,354,143 - 7,354,143
========== =========== =========== ===========
Investments Investments Investments
-common stock -loan -option Total
US$ US$ US$ US$
As at 31
December
2013
Level 1 - - - -
Level 2 - - - -
Level 3 149,517,000 15,856,566 - 165,373,566
Total investments 149,517,000 15,856,566 - 165,373,566
=========== =========== =========== ===========
3 Securities valuation (continued)
The following is a reconciliation of investments for which Level 3 inputs were used in determining fair value:
Investments Investments Investments
-common -loan -option Total
stock
US$ US$ US$ US$
As at 1 January
2013 151,300,000 15,856,566 513,325 167,669,891
Cost of purchases 10,800,000 - - 10,800,000
Proceeds from
sales (6,764,400) (542,130) - (7,306,530)
Net unrealised
loss on investments (12,583,000) - (513,325) (13,096,325)
Net realised
gain on sale
of investments 6,764,400 542,130 - 7,306,530
As at 31 December
2013 149,517,000 15,856,566 - 165,373,566
Proceeds from
sales (57,130,390) - - (57,130,390)
Net unrealised
loss on investments (106,113,753) (8,502,423) - (114,616,176)
Net realised
gain on sale
of investments 13,727,143 - - 13,727,143
As at 31 December
2014 - 7,354,143 - 7,354,143
=========== ========== ========== ==========
The following table summarises the net unrealised loss on investment before tax included in consolidated statement of operations attributable to Level 3 instruments still held as at 31 December by caption:
31 December 31 December
2014 2013
Net unrealised loss before tax US$ US$
Investments - common stock (90,915,753) (9,883,000)
Investments - option - (513,325)
Investments - loan (8,502,423) -
(99,418,176) (10,396,325)
Total ============ ============
3 Securities valuation (continued)
The following table summarises quantitative information about the valuation techniques and the significant unobservable inputs used for Level 3 investments:
Fair value Significant
at 31 December Valuation Unobservable
Industry/Type 2014 methodology inputs Inputs
US$
Mobile phone - Recent transaction Not applicable Not applicable
retail(i)
Education(ii) - Recent transaction Not applicable Not applicable
Cost less
Loan receivable(iii) 7,354,143 discount Discount 55%
7,354,143
===========
Note:
(i) Fortress Group Limited
On 31 March 2014 ARCH announced that ARCH Digital Holdings Limited ("ARCH Digital"), a wholly owned subsidiary of ARCH, had entered into certain definitive agreements to sell, subject to shareholder approval, its entire equity stake in Fortress Group Limited ("Fortress") for a minimum cash consideration of US$137.3 million. Fortress was the 100% shareholder of Funtalk China Holdings Limited ("Funtalk"). The proposed buyer was Sanpower Group Co. Ltd. ("Sanpower"). The sale of Fortress was approved at the ARCH extraordinary general meeting, held on 16 May 2014, but did not progress to completion as the conditions precedent were not satisfied. Fortress subsequently entered into an agreement for the sale of its 100% equity interest in Funtalk ("Fortress Sale").
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On 27 August 2014, subsequent to the Fortress Sale, ARCH Digital received a letter from Fortress, which enclosed a notice addressed to Fortress dated 25 August 2014 (the "Put Option Notice") issued by PAGAC Fortress Holding I Limited ("PAGAC"), a company affiliated with PAG, of the exercise by PAGAC of the put option (the "Put Option") referred to in the shareholder agreement, dated 25 August 2011, that ARCH Digital had entered into at the time of the privatisation of Funtalk (the "Shareholder Agreement"). If Fortress did not consummate an exit of Funtalk by 25 August 2014 then PAGAC would have the right to require Fortress to repurchase PAGAC's holding in the preferred shares and convertible bonds issued by Fortress. If Fortress was unable to perform its obligation under the Put Option, the requirement to repurchase PAGAC's preferred shares and convertible bonds fell to the shareholders of Fortress, other than PAGAC, pro-rata, including ARCH Digital.
3 Securities valuation (continued)
On 2 September 2014, the Fortress Board resolved to repurchase all of the convertible bonds and 2,093 out of the 4,999 preferred shares at a cost of approximately US$250 million. Subsequently, on 3 September 2014, ARCH Digital received a notice from PAGAC notifying ARCH Digital that Fortress had failed to pay the entire put price with respect to the Put Option and that PAGAC was exercising its right pursuant to the Shareholder Agreement to require that ARCH Digital purchase its pro rata portion of the put securities that were not purchased by Fortress (the "ARCH Digital Put Option"). The notice relating to the ARCH Digital Put Option (the "ARCH Digital Put Option Notice") further stated that the unpaid Put Option price attributable to ARCH Digital was US$52,322,284, and that ARCH Digital was required to pay this amount within 10 business days, i.e. no later than 17 September 2014.
ARCH Digital did not have the necessary cash or liquid assets to pay the unpaid Put Option price attributable to ARCH Digital as required in the ARCH Digital Put Option Notice. ARCH Digital had, by a share charge agreement dated 25 August 2011 (the "Share Charge Agreement"), conferred on PAGAC a security interest over ARCH Digital's equity holding in Fortress (the "Charged Assets") to secure, among other things, ARCH Digital's performance of its obligations under the Shareholder Agreement. If ARCH Digital failed to perform its obligations under the Shareholder Agreement, including its obligation with respect to the ARCH Digital Put Option, PAGAC could enforce its security under the Share Charge Agreement, including, but not limited to, to receive and retain all dividends, interest, distributions or assets accruing in respect of the Charged Assets, and to sell, transfer, grant options over or otherwise dispose of the Charged Assets. All money received by PAGAC under the Share Charge Agreement was to be paid in accordance with that agreement, including towards satisfaction of any amounts in respect of ARCH Digital's obligations under the Shareholder Agreement. Any surplus remaining following payment under the Share Charge Agreement was to be repaid to ARCH Digital.
ARCH Digital did not pay the US$52,322,284 to PAGAC by 17 September 2014 and has not made any payments to PAGAC since the ARCH Digital Put Option Notice was received from PAGAC on 3 September 2014.
As at 31 December 2014, the Board estimates the fair value of the investment at nil due to the Put Option raised against ARCH Digital.
(ii) Shaanxi Da De Education
On 23 November 2013, ARCH entered into a definitive agreement (the "Framework Agreement") to sell its entire stake in Shannxi Da De Education for RMB165.2 million (approximately US$27.1 million).
3 Securities valuation (continued)
On 1 December 2013, ARCH received an initial payment of RMB75.1 million (approximately US$12.3 million), and was expecting to receive a final payment of RMB90.1 million (US$14.8 million) no later than 10 December 2014 to complete the sale. The final payment has not been received. As a result of the default, pursuant to the agreement, ARCH Education has the right to: a) Request that the buyers continue to fulfil their obligations under the Framework Agreement, or b) Unilaterally terminate the Framework Agreement, request that the buyers pay contractual overdue penalty of RMB55m (US$8.9m) and, amongst other parties, ARCH and buyer shall to be bound by the original investment agreement (the "Original Investment Agreement") signed on 28 May 2008.
ARCH has commenced legal action in China to pursue recovery of the amount outstanding and, based upon legal advice received, has treated the initial payment of RMB 75.1 million (approximately US$12.3 million) as a payment under the Original Investment Agreement.
As at 31 December 2014, it was decided by the Board to recognise the initial deposit received as return of equity and the Board estimated the fair value of the investment at nil due to the uncertainty of the recoverability of any future amounts, the timing of any future receipts even if the outcome of the legal action is favourable.
(iii) Loan to DCSI
On 26 August 2013, DCSI negotiated and signed a loan extension agreement with ARCH that the repayment date is extended to 30 June 2014. The condition for the extension is that DCSI needs to pay RMB$1M first (part of interest expense). The interest rate is at 8%.
On 30 June 2014, the date that DCSI was granted the extension to, DCSI has failed to repay the loan. In November 2014, the Board decided to commence legal action against DCSI in respect of the overdue loan. On 4 November 2014, a demand letter was sent by the Company's lawyer but no response has been received from DCSI to date.
As at 31 December 2014, it was decided by the Board to write down 55% on the investment due to the uncertainty of the recoverability of the loan, the timing of the repayment and timing of the outcome of the legal action.
4 Investment management fee and realisation fee
The Investment Manager was previously entitled to receive an investment management fee of 2% per annum of the Fund's net asset value ("NAV") calculated at the beginning of each quarter based on the average month end NAV of the Fund of the previous quarter and payable in advance.
From 31 January 2012, the investment management fee was reduced from 2% to 1% per annum of the Fund's NAV. On 7 February 2014, the Investment Manager provided written notice of its resignation, and its investment management agreement ended on 7 August 2014, following the conclusion of its 6 month notice period.
For the period up to the date of resignation, the Fund incurred an investment management fee of US$1,162,161(2013: US$2,906,869), of which US$606,355 was payable as at 31 December 2014 (2013: nil).
With effect from 31 January 2012, as an incentive to realise the best possible exit value for the Fund's assets, the Investment Manager became entitled to receive a realisation fee equal to a percentage of the net proceeds received by the Fund on the realisation of each asset (the "Fee Percentage"), to be paid once the "Company Realisation Value" (being the aggregate net proceeds received by the Fund on the disposal of the assets) exceeds the Fund's audited NAV at 31 December 2011. For assets realised in 2013, the Fee Percentage shall be 2.52%, and this will reduce to 2.268% for assets realised in 2014. Thereafter, the Fee Percentage shall continue to reduce by 10% per annum until the Fund's last asset is realised. Following its resignation, the Investment Manager is no longer entitled to any realisation fees.
On 20 March 2014, Borrelli Walsh Limited ("Borrelli Walsh") was appointed as a consultant to the Board, with a mandate of providing independent oversight of the Fund's portfolio and guidance to the Fund's directors. Borrelli Walsh resigned, effective 15 April 2015.
For the year ended 31 December 2014, the Fund has not accrued a realisation fee. (2013: US$ Nil).
5 Directors' remuneration and expense reimbursement
The Company pays each of its directors an annual fee of US$30,000, and an additional US$10,000 per annum for chairing any committee of the Board and an additional US$5,000 per annum for serving as a regular member of any committee of the Board. A total of US$400,000 (2013: US$ nil) additional directors' remuneration was paid to Steve Feniger (US$150,000) Helen Wong (US $150,000) and Tian Cho Chu (US $100,000) for their extra work performed during the year ended 31 December 2014.
Christopher Marcus Gradel and John Timothy Rucquoi-Berger were removed as directors on 9 January 2014 and 8 April 2014 respectively.
5 Directors' remuneration and expense reimbursement (continued)
In January 2012, the Company entered into separate 3-year consulting service agreements with Helen Wong and Steven Feniger as requested by the Board of Directors. Consulting fees are subject to a maximum of US$40,000 each per annum. During the year ended 31 December 2014, consulting fees totalling US$80,000 (2013: US$80,000) were paid to Helen Wong (US$40,000) and Steven Feniger (US40,000). The abovementioned consulting service agreements were terminated at the time the directors left the Board. See note 17(a) for detail of directors resignation subsequent to year ended 31 December 2014.
6 Current and deferred income taxes
(a) No provision for Cayman Islands taxes are provided as the Fund is not currently subject to income tax in the Cayman Islands. The Fund has obtained an undertaking from the Governor in Cabinet of the Cayman Islands that for a period of 20 years from 9 August 2005 that:
- no law which is thereafter enacted in the Cayman Islands imposing any tax to be levied on profits, income, capital gains or appreciations shall apply to the Fund or its operations; and
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- no aforesaid tax or withholding tax, nor estate duty or inheritance tax shall be payable on or in respect of the share debentures or other obligations of the Fund.
(b) The Fund may be subject to taxes imposed in other countries in which it invests. Such taxes are generally based on income and/or gains generated. Dividend and interest income received by the Fund may be subject to withholding tax imposed in the country of origin. This income is recorded gross of such taxes and the withholding tax, if any, is recognised separately in the consolidated statement of operations.
The Board has reviewed the structure of the Fund's investment portfolio and considered the Fund's exposure to Hong Kong and China profits tax has been properly reflected in the Fund's consolidated financial statements.
7 Investment deposits
In December 2007, the Fund transferred US$13.6 million to Orient Group Industrial Co. Ltd. ("Orient Group") as an investment deposit. In December 2011, the Fund recognised an impairment of US$2.2 million for the deposit resulting from the intention to offset the US$11.4 million payable balance included in other payables.
In December 2010, the Fund transferred US$76.2 million (or RMB480 million) to Orient Home Company Ltd ("Orient Home"), a controlled affiliate of Orient Group to invest in Orient Home's real estate portfolio under the Equity Purchase Agreement dated 10 December 2010 (the "Agreement"). Orient Home failed to fulfil the terms of the Agreement, and the Fund has not received any repayment from Orient Home as of the date of this report. The Board had recognised an impairment of US$22.9 million for this investment deposit in December 2012, representing approximately 30% of the investment deposit.
In May 2013, the Fund's PRC investment vehicle filed a Request for Arbitration with the China International Economic and Trade Arbitration Commission ("CIETAC") with respect to the investment deposit, and in July 2013 was granted an asset preservation order against Orient Home by the Beijing First Immediate People's Court. The order has legally preserved a 14% equity interest in Beijing Taiyanghuo Culture Industry Investment Co., Ltd, which is an equity investment of Orient Home. The 14% equity interest was believed at the time to be equivalent to RMB280 million of registered capital. The Fund was able to obtain the preservation order for RMB280 million with a guarantee obtained from a guaranteeing company, including pledging certain assets of the Company amounting to RMB16.8 million (or US$2.8 million) to the guaranteeing company (see note 9(c)).
Taking account of the face value of the asset preservation order and the development of the arbitration, further impairment provision of RMB86 million (US$14.1 million) was made in 2013 to write down the carrying amount of the investment deposits to RMB250 million (US$41.0 million). The Board of ARCH has been consulting with its advisor on the means of recovering the investment deposit. The Board has resolved to keep the carrying value unchanged as at 31 December 2014. See note 17(f) for subsequent events on the investment deposit with Orient Home.
8 Impairment loss
31 December 31 December
2014 2013
US$ US$
Provision on investment deposit
(Note 7) - 14,105,530
Provision on loan interest receivable 2,410,386 -
(Note 16(a))
Provision on Jiadeli sale proceeds
and dividends (Note 9(a)) - 3,629,540
Total impairment loss 2,410,386 17,735,070
= ========== ===========
9 Other assets
At 31 December 2014 and 31 December 2013, other assets were as follows:
31 December 31 December
2014 2013
US$ US$
Jiadeli sale proceeds and
dividends (Note 9(a)) 15,198,562 4,560,271
Properties (Note 9(c)) 2,467,723 2,476,668
Loan interest receivable (Note
16(a)) - 2,416,451
Goodbaby private tax escrow
(Note 9(b)) 1,879,000 1,879,000
Others 1,926,560 2,548,822
Total other assets 21,471,845 13,881,212
========== ===========
(a) The Fund sold its entire interest in Shanghai Jiadeli Supermarket Co., Ltd ("Jiadeli") for RMB1.1billion, with RMB100 million of the consideration withheld by the purchaser for any post-closing adjustment to the purchase price. Adjustments to the total purchase price, if any, shall not exceed RMB100 million and can only be claimed from the withheld amount.
As part of the sale of Jiadeli, it was agreed that a holdback of RMB100 million would be paid to the Fund 12 months after closing, subject to adjustments based on the result of a post-closing audit by the purchaser. The Fund and the purchaser could not agree on the result of the closing audit. In accordance with the sale and purchase agreement an independent third-party mediator was appointed by both parties to resolve the dispute.
9 Other assets (continued)
In May 2013, the Fund's PRC investment vehicle filed a Request for Arbitration with CIETAC. A total of 75% impairment was made against the holdback payment amount as at 31 December
2013, and a further 25% impairment was made against the holdback payment amount in March 2014.
On 20 April 2015, it was announced that Beijing Second Intermediate Court had rejected the HNA Group's claim to set aside the arbitral award in respect of the Jiadeli holdback and a net RMB81.8 million (equivalent to approximately US$13 million) has been paid by HNA Group on 12 June 2015. As a consequence of the receipt, it was decided by the Board to adjust the carrying value of the Fund as at 31 December 2014. As a result, the total impairment loss of RMB93 million (equivalent to approximately US$15.2 million) made previously was written back as of 31 December 2014.
(b) On 11 December 2013, the Fund completed the sale of its entire holding in Goodbaby Private, a total of approximately US$6.8 million was realised of which approximately US$1.9 million was deposited as the tax escrow based on the escrow agreement signed on 9 December 2013.
(c) The properties are pledged as part of the guarantee required to secure the preservation order of RMB280 million as described in Note 7.
10 Cash and cash equivalents
Cash and cash equivalents at 31 December 2014 consisted of:
31 December 31 December
2014 2013
US$ US$
US$ 18,840,179 6,978,166
RMB 12,839,809 12,627,576
HK$ 506 2,023
Total cash and cash equivalents 31,680,494 19,607,765
=========== ===========
11 Other payables
At 31 December 2014, other payables and accruals were as follows:
31 December 31 December
2014 2013
US$ US$
Payable for an investment
(Note 7) 11,391,326 11,391,326
Deposit received from Shaanxi
Da De's buyer (Note 11 (a)) - 12,317,735
Fortress put option liability 57,757,715 -
(Note 11(b))
Other creditors 3,107,661 920,852
Total other payables and
accruals 72,256,702 24,629,913
========== ==========
a) On 23 November 2013, the Fund entered into a definitive agreement to sell its entire stake in Shaanxi Da De Education. The Fund has received an initial deposit of RMB75.1 million (approximately US$12.3 million) as at 31 December 2013. The Fund expected to receive a final payment of RMB90.1 million (US$14.8 million) no later than 10 December 2014 to complete the sale. As at 31 December 2014, it was decided by the Board to recognise the initial deposit received as return of equity and the Board estimated the fair value of the investment at nil. The final payment has not been received by the fund as at 31 December 2014.
b) In August 2011, ARCH Digital Holdings Limited ("ARCH Digital"), a wholly owned subsidiary of the Fund entered into a shareholder agreement with Fortress Group Limited ("FGL") at the time of the privatisation of Funtalk China Holdings Limited ("Funtalk"). In accordance with the shareholder agreement, PAGAC Fortress Holding I Limited ("PAGAC") issued a notice on 25 August 2014 to exercise its right and option to require FGL as a purchasing shareholder to repurchase PAGAC's holding in the preferred shares and convertible bonds issued by FGL. If FGL was unable to perform its obligation under the put option, the requirement to repurchase PAGAC's preferred shares and convertible bonds fell to the shareholders of FGL, other than PAGAC, pro-rata, including ARCH Digital.
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The exercise of the put option by PAGAC means that ARCH Digital's liabilities exceed its assets even though the Fortress investment has been written down to nil. While the final terms and consideration for Fortress's sale of Funtalk, and the payment covered by Fortress to PAGAC for the put option, are not known to the Board, the Board has decided to recognise the liability of approximately US$57.8 million under the current accounting policies. See note 3(i) for details of put option liabilities in relation to Fortress Group Limited investment.
12 Share capital, share premium and tendered shares
Number Share Share Tendered
of shares capital Premium Shares Total
outstanding US$ US$ US$ US$
As at 1 January
2013 354,805,070 3,548,051 437,966,017 - 441,514,068
Share repurchase
and cancellation (93,722,332) (937,224) (83,923,686) - (84,860,910)
As at 31 December
2013 261,082,738 2,610,827 354,042,331 - 356,653,158
========= ========== ========== ========== ==========
Share repurchase
and cancellation (32,941,172) (329,411) (27,670,585) - (27,999,996)
As at 31 December
2014 228,141,566 2,281,416 326,371,746 - 328,653,162
========= ========== ========== ========== ==========
On 31 January 2014, 32,941,172 ordinary shares were repurchased and cancelled by the Company at a price of US$0.85 per share, representing approximately 12.6% of the Company's ordinary shares in issue. The shares were repurchased for a total consideration of approximately US$28 million.
Following the repurchase and cancellation, the Company has a total of 228,141,566 ordinary shares in issue as at 31 December 2014.
At 31 December 2014, the total authorised number of ordinary shares was 500,000,000 (2013: 500,000,000) with par value of US$0.01 (2013: US$0.01) per share.
13 Concentration of market, industry, credit, foreign exchange and liquidity risks
The Fund's activities (including both investments and loans) may expose it to a variety of risks: mainly market risk, industry risk, credit risk, foreign exchange risk and liquidity risk.
(a) Market risk
Market risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market variables such as interest, foreign exchange rates and equity prices, whether those changes are caused by factors specific to the particular security or factors that affect all securities in the markets. Investments are typically made with a specific focus on Greater China and thus are concentrated in that region. Political or economic conditions and the possible imposition of adverse governmental laws or currency exchange restrictions in that region could cause any of the Fund's investments and their markets to be less liquid and prices more volatile. The Fund is exposed to market risk on all of its investments.
13 Concentration of market, industry, credit, foreign exchange and liquidity risks (continued)
(b) Industry risk
The Fund's investments may be concentrated in a particular industry or sector and performance of the particular industry or sector may have a significant impact on the Fund.
The Fund's investments may also be subject to the risk associated with investing in private equity securities. Investments in private equity securities may be illiquid, can be subject to various restrictions on resale and there can be no assurance that the Fund will be able to realise the value of such investments in a timely manner.
(c) Credit risk
Credit risk is the risk that an issuer/counterparty will be unable or unwilling to meet its commitments to the Fund. Financial assets that are potentially subject to significant credit risk consist of cash and cash equivalents, investments in convertible bonds, investment deposits and receivables.
The maximum credit risk exposure of these items is their carrying value.
(d) Currency risk
The Fund has assets and liabilities denominated in currencies other than the US$, the functional currency. The Fund is therefore exposed to currency risk as the value of assets and liabilities denominated in other currencies will fluctuate due to changes in exchange rates.
The table below summarises the Fund's net exposure to each currency as at 31 December 2014 and 2013.
31 December 31 December
2014 2013
US$ US$
US$ (57,006,052) 136,126,201
RMB 84,022,959 81,273,371
HK$ 506 2,023
Total 27,017,413 217,401,595
========== ==========
13 Concentration of market, industry, credit, foreign exchange and liquidity risks (continued)
(e) Liquidity risk
The Fund is exposed to liquidity risk as the Fund's investments are largely illiquid while the majority of the Fund's liabilities are of short maturity. Illiquid investments include any securities or instruments which are not actively traded on any major securities market or for which no established secondary market exists where the investments can be readily converted into cash. Reduced liquidity resulting from the absence of an established secondary market may have an adverse effect on the prices of the Fund's investments and the Fund's ability to dispose of them where necessary to meet liquidity requirements. As a result, the Fund may be exposed to significant liquidity risk.
China currently has foreign exchange restrictions, especially in relation to the repatriation of foreign funds. Any unexpected foreign exchange control in China may cause difficulties in the repatriation of funds. The Fund invests in China and is exposed to the risk of repatriating funds out of China to meet its obligations on a timely basis.
14 Related party transactions
(a) During the period, certain directors of the Company were shareholders and directors of the former Investment Manager, which provided investment management services to the Company and earned an investment management fee and a realisation fee (Note 4).
(b) As at 31 December 2014, the former Investment Manager together with its associated PAG Group entities held 114,272,413 ordinary shares of the Company (2013: 2,380,783).
15 Financial highlights
(a) Per share operating performance
31 Dec-2014 31 Dec-2013
US$ US$
Net asset value per share,
start of year 0.83 0.92
--------- ---------
Income from investment operations:
- net investment loss (0.25) (0.08)
- net realised and unrealised
loss on
investments and foreign currencies (0.46) (0.01)
Total from investment operations (0.71) (0.09)
--------- ---------
Net asset value per share,
end of year 0.12 0.83
===== =====
The net asset value per share is calculated based on the total number of shares issued and outstanding excluding tendered shares (Note 12).
(b) Ratios to average net assets and other supplemental information
31-Dec-2014 31-Dec-2013
US$ US$
Ratio of net investment loss
to average net assets (44.8%) (8.4%)
====== ======
Ratio of expenses to average
net assets
Operating expenses before incentive
fees(1) (53.7%) (9.3%)
Incentive fees (2) 0.0% 0.0%
Total expenses (53.7%) (9.3%)
====== ======
Cumulative internal rate of return ("IRR")
since
inception through the year
end (2) (13.31%) (5.9%)
====== ======
Note:
1. The operating expenses before incentive fees include an impairment loss of US$2,410,386 (Note 8) and put option provision of US$57,757,715. If both the impairment loss and put option provision are excluded, the ratio of expenses to average net assets is 5.81%.
2. The IRR is computed net of all incentive fees (being performance fees and realisation fees as defined in the Investment Management Agreement entered into between the Company and the Investment Manager dated 20 June 2006, as amended on 1 April 2009 and 31 January 2012) based on the Fund's actual dates of the cash inflows (capital contributions), outflows (cash and stock distributions) and the ending NAV at the end of the year (residual value) as of each measurement date.
16 Investment Update (a) Loan with a Domestic China Strategic Investor (DCSI)
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On 29 December 2011, as part of the sale of the Fund's equity interest in Orient Home Retail to DCSI, the Fund also provided the DCSI with a RMB100 million (or US$15.9 million) bridge loan, which is to be used by the DCSI to meet Orient Home Retail's short term working capital needs during the transition of ownership. The loan carries interest at 8% per annum and has a term of 12 months. On 26 August 2013, the loan was extended to 30 June 2014 with the same interest at 8% per annum.
During the year 2014, it was decided by the Board to value the loan at 55% discount of the loan principle and to write down the entire interests receivable accrued. The carrying value of the loan as at 31 December 2014 is RMB45 million (or US$7.4 million).
In February 2015, the Board has initiated legal proceedings in China against the DCSI to seek recovery of the loan.
(b) Disposal of Ningxia Xiajin Dairy
On 20 January 2014, the Fund completed the sale of its entire stake in Ningxia Xiajin Dairy Co, LTD. to Prosoect Link Limited, an investment holding company controlled by a trade buyer, for a total cash consideration of US$30.0 million.
(c) Disposal of Buchang Pharmaceutical
On 30 April 2014, ARCH Media Development Limited, a subsidiary of the Fund, sold its entire equity stake in PA China Industrial Advisory Limited, which held Buchang Pharmaceutical. ARCH's share of the total aggregate consideration received by ARCH Media was US$14,857,143.
(d) Disposal of Shannxi Da De Education
On 23 November 2013, ARCH entered into a definitive agreement to sell its entire stake in Shannxi Da De Education for RMB165.2 million (approximately US$27.1 million).
On 1 December 2013, ARCH received an initial payment of RMB75.1 million (approximately US$12.3 million), and was expecting to receive a final payment of RMB90.1 million (US$14.8 million) no later than 10 December 2014 to complete the sale. The final payment has not been received and ARCH has commenced legal action in China to pursue recovery of the amount outstanding. As at 31 December 2014, the Board has decided to recognise the initial deposit received as return of equity and the Board estimated the fair value of the investment at nil. See note 3(ii) for details of Shannxi Da De Education investment during the year and note 17(h) for details on subsequent events in relation to Shannxi Da De Education investment legal action.
16 Investment Update (continued) (e) Fortress Group Limited
On 31 March 2014 ARCH announced that ARCH Digital Holdings Limited ("ARCH Digital"), a wholly owned subsidiary of ARCH, had entered into certain definitive agreements to sell, subject to shareholder approval, its entire equity stake in Fortress Group Limited ("Fortress") for a minimum cash consideration of US$137.3 million. Fortress was the 100% shareholder of Funtalk China Holdings Limited ("Funtalk"). The proposed buyer was Sanpower Group Co. Ltd. ("Sanpower"). The sale of Fortress was approved at the ARCH extraordinary general meeting, held on 16 May 2014, but did not progress to completion as the conditions precedent were not satisfied. Fortress subsequently entered into an agreement for the sale of its 100% equity interest in Funtalk ("Fortress Sale").
On 27 August 2014, subsequent to the Fortress Sale, ARCH Digital received a letter from Fortress, which enclosed a notice addressed to Fortress dated 25 August 2014 (the "Put Option Notice") issued by PAGAC Fortress Holding I Limited ("PAGAC"), a company affiliated with PAG, of the exercise by PAGAC of the put option (the "Put Option") referred to in the shareholder agreement, dated 25 August 2011, that ARCH Digital had entered into at the time of the privatisation of Funtalk (the "Shareholder Agreement").
As at 31 December 2014, the Board estimates the fair value of the investment at nil due to the Put Option raised against ARCH Digital. See note 3(i) and note 11(b) for details of the Fortress Group Investment and related put option liabilities.
The current Board has commissioned an investigation into the acquisition of Funtalk by Fortress in 2011, ARCH's investment in Fortress and the events concerning the Fortress investment from 2011 to date from the same legal adviser acting for ARCH on the Claim against the Investment Manager in respect of Orient Home in England. This investigation is ongoing. See note 17(g) for details on subsequent events in relation to claims against the Investment Manager.
17 Subsequent events (a) Resignation of Directors
On 2 February 2015, the Company announced that Steven Feniger, Helen Wong and Tian-Cho Chu had been removed as the directors of the Company.
(b) Appointment of Directors
On 2 February 2015, the Company announced that Alpay Ece, Sean Hurst and Cosimo Borrelli were appointed as directors of the Company with immediate effect. Cosimo Borrelli was removed as a director of the Company on 30 March 2015.
(c) Appointment of Broker
On 6 February 2015, the Company announced the appointment of Edmond de Rothschild Securities (UK) Limited as Broker to the Company with immediate effect.
(d) Resignation of Nominated Advisor
On 14 August 2015, the Company announced the resignation of Grant Thornton UK LLP as Nominated Advisor to the Company with effect from 15 September 2015.
(e) Jiadeli Holdback
On 20 April 2015, the Company was informed that the Beijing Second Intermediate Court had rejected the HNA Group's claim to set aside the arbitral award in respect of the Jiadeli Holdback and that the Court's ruling on that matter was final.
The Board has reached agreement with HNA Group whereby HNA Group has paid the full amount of the claim (approximately RMB 90 million) plus costs of RMB 3 million. In return, the Company has waived the interest due under the CIETAC award of 3 June 2014.
RMB 93 million was paid by HNA Group to ARCH in China on 12 June 2015 and, after settlement of outstanding fees and expenses (including a contingency fee of approximately RMB11 million payable to Fund's Chinese legal counsel under an agreement entered into on 10 December 2013), has resulted in the Fund receiving a net amount of RMB 81.8 million (equivalent to approximately US$ 13 million), before any taxes payable in China.
17 Subsequent events (continued) (e) Jiadeli Holdback (continued)
The carrying value of the holdback had previously been written off to nil and the Board determined to adjust the carrying value as at 31 December 2014 to reflect the proceeds received.
(f) Orient Home Arbitration
On 16 June 2015, CIETAC ruled that the Orient Home Group shall be required to refund Shanghai C.P. Jing Cheng Enterprise Development Co. Ltd. ("Shanghai CP JC") (a subsidiary of ARCH) the entire RMB480 million deposit (equivalent to approximately US$77.3 million) relating to the acquisition of a majority stake in Orient Home Industrial Co., Ltd ("Orient Home Property") in December 2010.
CIETAC also ruled that the Orient Home Group shall pay Shanghai CP JC late payment interest calculated from 5 March 2011 to the actual payment date, applying the lending interest over the same period as published by the People's Bank of China, as well as the arbitration fee of approximately RMB4.4 million (equivalent to approximately US$0.7 million).
The carrying value of the investment included within ARCH's NAV as at 31 December 2014 is RMB 250 million (approximately US$41 million), and the Board has resolved to keep this unchanged. The Board of ARCH is consulting with its advisers on the means of enforcing the award.
On 9 July 2015, the Board announced that they have been advised that Orient Home Co. Ltd had filed an application with the Beijing Second Intermediate Court to set aside the award which was previously made by the CIETAC in favour of Shanghai CP JC on 16 June 2015 in respect of the refund of a RMB480 million deposit relating to the acquisition of a majority stake in Orient Home Property in December 2010.
On 20 August 2015, the Board announced that they have been advised that the Beijing Second Intermediate Court has rejected Orient Home's application and the Board intended to continue with the enforcement of the original CIETAC award.
17 Subsequent events (continued) (g) Claim against Investment Manager
On 22 April 2015, the Board announced that they had commissioned an independent review of ARCH's litigation against the Investment Manager in respect of the Orient Home investment and had appointed leading international law firm Baker & McKenzie to undertake the review. Baker & McKenzie was tasked with undertaking an independent review of ARCH's claim in the English High Court against ARC Capital Partners Limited concerning Orient Home and providing an opinion on the reasonableness of pursuing such claim.
(h) Claim against founder of Shannxi Da De Education
In March 2015, the Company appointed legal advisers to commence legal action in China to pursue recovery of the amount outstanding from the Original Investment Agreement. On 7 July 2015, the arbitration against the buyer to claim amounts outstanding was accepted by CIETAC. See note 3(ii) for details of the Shaanxi Da De Education investment.
18 New accounting pronouncements
Up to the date of issue of these financial statements, the Financial Accounting Standards Board ("FASB") has issued a number of Accounting Standards Update ("ASU") which are not yet effective for the year ended 31 December 2014 and which have not been adopted in these financial statements. These include the following which may be relevant to the Fund.
-- ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern (effective for annual periods beginning after 15 December 2016);
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