ARC Capital Holdings Limited
(Incorporated in the Cayman Islands with limited liability)
30 June 2015
Unaudited Interim Consolidated Financial Statements
period ended 30 June 2015
Contents | Page(s) |
Corporate Information | 1 |
Board Report | 2 - 3 |
Consolidated Statement of Assets and Liabilities | 4 |
Consolidated Schedule of Investments | 5 |
Consolidated Statement of Operations | 6 |
Consolidated Statement of Changes in Net Assets | 7 |
Consolidated Statement of Cash Flows | 8 |
Notes to the Consolidated Financial Statements | 9 - 34 |
Corporate Information
BOARD OF DIRECTORS | NOMINATED ADVISER |
Steven Julien Feniger | Grant Thornton UK LLP |
(removed on 2 February 2015) | (resigned effective 15 September 2015) |
Helen Wong | 30 Finsbury Square |
(removed on 2 February 2015) | London EC2P 2YU |
Tian-Cho Chu | United Kingdom |
(removed on 2 February 2015) | |
Sean Hurst | BROKER |
(appointed on 2 February 2015) | |
Alpay Ece | Numis Securities Limited |
(appointed on 2 February 2015) | (resigned on 2 February 2015) |
Cosimo Borrelli | The London Stock Exchange Building |
(appointed on 2 February 2015 and | 10 Paternoster Square |
removed on 30 March 2015) | London EC4M 7LT |
United Kingdom | |
CONSULTANT | Edmond de Rothschild Securities (UK) Limited |
(appointed on 6 February 2015) | |
Borrelli Walsh | 4 Carlton Gardens |
(appointed on 20 March 2014, | London SW1 5AA |
resigned effective 15 April 2015) | United Kingdom |
Level 17, Tower 1 | |
Admiralty Centre | ADMINISTRATOR, CUSTODIAN AND |
18 Harcourt Road, Hong Kong | SHARE REGISTRAR |
AUDITOR | Sanne Fiduciary Services Limited |
13 Castle Street | |
KPMG | St Helier |
8th Floor, Prince's Building | Jersey JE4 5UT |
10 Chater Road, Central | Channel Islands |
Hong Kong | |
REGISTERED OFFICE | |
P.O. Box 472 | |
2nd Floor, Harbour Place | |
Grand Cayman | |
George Town KY1-1106 | |
Cayman Islands | |
PLACE OF LISTING | |
London Stock Exchange AIM Market | |
Stock Code: ARCH | |
WEBSITE | |
www.arch-fund.com |
(For the six months ended 30 June 2015)
The Board of Directors is pleased to present the interim financial statements of ARC Capital Holdings Limited ('ARCH') and its subsidiaries (collectively, the 'Fund') for the six months ended 30 June 2015.
On 23 September 2015, the Fund published its financial report for the year ending 31 December 2014. Included below is an update of the Fund's position since the year end which may include certain events disclosed and discussed in the 31 December 2014 annual report as post year end events but which are repeated here for completeness.
In February 2015 shareholders voted in general meeting to remove the then existing directors and replace them with a new board of directors. Messrs Steven Feniger and Tian Cho Chu, and Ms Helen Wong left the Board, and Messrs Alpay Ece, Cosimo Borrelli and Sean Hurst were 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.
There have been no material changes to the Fund's investments since the update that was provided to shareholders in the 2014 annual financial report, save for the following:
Claim against Investment Manager (Orient Home litigation in England)
On 22 April 2015, the new directors announced that they had commissioned an independent review of ARCH's litigation against the Fund's former investment manager, ARC Capital Partners Limited (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, and to provide an opinion on the reasonableness of pursuing such claim.
The Board announced on 24 September 2015 that, following the completion of Baker & McKenzie's review and in light of its advice, the Board had resolved to continue to pursue ARCH's claim against the Investment Manager. The Fund's legal advisers on this matter, Stephenson Harwood LLP ('Stephenson Harwood') shall therefore continue to pursue the claim in the English High Court.
Funtalk China Holdings (formerly Beijing Pypo)
As stated in the company's annual report, the Board 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 Stephenson Harwood, the same legal adviser acting for ARCH on the claim against the Investment Manager in respect of Orient Home in England.
The Board will update shareholders in due course.
ARCH's NAV has decreased by approximately 53.97% from US$0.1184 as at 31 December 2014 to US$0.0545 as at 30 June 2015. As explained more fully in the Fund's 2014 annual financial reports, this decrease is primarily due to the accounting treatment of ARCH Digital Holdings Limited ('ARCH Digital') when producing ARCH's consolidated balance sheet. Under ARCH's current accounting policies, even though the investment in Fortress Group Limited ('Fortress') has been written down to nil, the exercise of the Put Option by PAGAC Fortress Holding I Limited ('PAGAC'), a company affiliated with the Company's former manager, means that ARCH Digital's liabilities exceed its assets by approximately US$70.05 million as at 30 June 2015 ($57.8 million as at 31 December 2014). This liability is growing at the rate of 18% per annum compounding daily. On consolidation, this net liability has to be recognised in ARCH's consolidated accounts. However, shareholders should note that ARCH has not guaranteed ARCH Digital's obligations.
Excluding the net liability of ARCH Digital, the pro forma net asset value of ARCH is as follows:
30 June 2015 | 31 December 2014 | |||
Total (US$) | Per share (US$) | Total (US$) | Per share (US$) | |
Reported NAV | 12,430,706 | 0.0545 | 27,017,413 | 0.1184 |
Adjustment relating to ARCH Digital | 70,052,278 | 0.3071 | 57,757,715 | 0.2532 |
Pro forma adjusted NAV | 82,482,984 | 0.3615 | 84,775,128 | 0.3716 |
This pro forma adjusted NAV represents a decrease of approximately 2.7% compared to the last reported adjusted NAV per share at the close of business on 31 December 2014 (US$0.3716). It should be noted that the reported NAV does not reflect the recent falls in the value of the renminbi which occurred after the balance sheet date.
On 15 September 2015, ARCH announced that its then Nominated Adviser, Grant Thornton UK LLP, had resigned, following notification received by the Fund on 14 August 2015. As a replacement Nominated Adviser had not been appointed at that time, pursuant to AIM Rule 1, ARCH shares remained suspended from trading on AIM. The Board of Directors continues its efforts to appoint a replacement Nominated Adviser and is currently in active discussions with a party whom it hopes to appoint shortly, however, if a replacement is not found, the admission of ARCH's ordinary shares to trading on AIM will be cancelled at 7.00 a.m. on 16 October 2015. A further announcement will be made in due course.
We sincerely thank the shareholders for their continued support throughout this difficult period for the Fund.
Sean Hurst & Alpay Ece Directors
Consolidated Statement of Assets and Liabilities as at 30 June 2015
30 June 2015 | 31 December 2014 | |||
US$ | US$ | |||
Note | (unaudited) | (audited) | ||
Assets | ||||
Investments, at fair value | 3 | 7,360,639 | 7,354,143 | |
(Cost: 30 June 2015: US$170,435,220 | ||||
31 December 2014: US$170,435,220) | ||||
Investment deposits | 7 | 52,284,105 | 52,248,017 | |
Other assets | 9 | 6,354,030 | 21,471,845 | |
Cash and cash equivalents | 10 | 42,888,150 | 31,680,494 | |
Total assets | 108,886,924 | 112,754,499 | ||
------------------- | ------------------- | |||
Liabilities | ||||
Deferred tax | 6 | 351,167 | 350,857 | |
Tax payable | 6 | 13,129,527 | 13,129,527 | |
Other payables and accruals | 11 | 82,975,524 | 72,256,702 | |
Total liabilities | 96,456,218 | 85,737,086 | ||
------------------- | ------------------- | |||
Net assets | 12,430,706 | 27,017,413 | ||
=========== | =========== | |||
Shareholders' equity | ||||
Share capital | 12 | 2,281,416 | 2,281,416 | |
Share premium | 12 | 326,371,746 | 326,371,746 | |
Accumulated losses | (323,225,190) | (308,578,458) | ||
Foreign currency translation reserve | 7,002,734 | 6,942,709 | ||
Total shareholders' equity | 12,430,706 | 27,017,413 | ||
=========== | =========== | |||
Net asset value per share | 15(a) | 0.05 | 0.12 | |
=========== | =========== |
Approved by the Board of Directors on 14 October 2015
Sean Hurst Director
The accompanying notes on pages 9 to 34 are an integral part of these consolidated financial statements.
Consolidated Schedule of Investments as at 30 June 2015
30 June 2015 | 31 December 2014 | |||||||
Cost | Fair value | % of net | Cost | Fair value | % of net | |||
Investment | Instrument | US$ | US$ | assets | US$ | US$ | assets | |
Mobile phone retail, China | ||||||||
Fortress Group Limited1 | Common stock | 100,800,044 | - | - | 100,800,044 | - | - | |
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., Ltd. | Common stock | - | - | - | - | - | - | |||||
Education, China | ||||||||||||
Shaanxi Da De Education2 | Common stock | 30,533,602 | - | - | 30,533,602 | - | - | |||||
Pharmaceutical, China | ||||||||||||
Buchang Pharmaceutical Group | Common stock | - | - | - | - | - | - | |||||
Others | ||||||||||||
A domestic Chinese strategic investor ('DCSI')3 | Loan | 15,856,566 | 7,360,639 | 59.21% | 15,856,566 | 7,354,143 | 27.22% | |||||
Total | 170,435,220 | 7,360,639 | 59.21% | 170,435,220 | 7,354,143 | 27.22% | ||||||
========= | ========= | ===== | ========= | ========== | ===== |
Notes:
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$10.8 million which has been included in the cost of investment as at 30 June 2015. Also see note 3(i), 11(b) and 16(e).
As at 30 June 2015, it was decided by the Board to recognise the initial deposit received as return of equity. Also see note 3(ii) , 11(a) and 16(d)
The name of the investee is not disclosed due to a confidentiality arrangement. Also see note 3(iii) and 16(a).
The accompanying notes on pages 9 to 34 are an integral part of these consolidated financial statements.
Consolidated Statement of Operations for the period ended 30 June 2015
6 months ended | 6 months ended | ||
30 June 2015 | 30 June 2014 | ||
US$ | US$ | ||
Note | (unaudited) | (unaudited) | |
Investment income | |||
Bank interest and sundry income | 43,747 | 121,866 | |
Total investment income | 43,747 | 121,866 | |
------------------ | ------------------ | ||
Expenses | |||
Investment management fee | 4 | - | 1,078,756 |
Consulting Fee | 265,656 | - | |
Administration, custodian and registrar fees | 116,081 | 145,225 | |
Professional fees | 1,677,424 | 1,111,424 | |
Directors' remuneration and expense reimbursement | 5 | 106,944 | 99,805 |
Finance costs | 4 | - | |
Impairment loss | 8 | - | 6,612,981 |
Provision for put option | 11 | 12,294,563 | - |
Other expenses | 236,303 | 493,590 | |
Total expenses | 14,696,975 | 9,541,781 | |
-------------------- | -------------------- | ||
Net investment loss | (14,653,228) | (9,419,915) | |
-------------------- | -------------------- | ||
Net loss on investments and foreign currencies | |||
Net realised gain on investments before tax | - | 13,727,143 | |
Income tax expenses | 6 | - | (1,372,714) |
Net realised gain on investments | - | 12,354,429 | |
-------------------- | -------------------- | ||
Net unrealised gain/(loss) on investments before tax | 6,496 | (109,553,657) | |
Deferred tax credit | 6 | - | 1,519,800 |
Net unrealised gain/(loss) on investments | 6,496 | (108,033,857) | |
-------------------- | -------------------- | ||
Net gain/(loss) on investments and foreign currencies | 6,496 | (95,679,428) | |
-------------------- | -------------------- | ||
Net decrease in net assets from operations | (14,646,732) | (105,099,343) | |
=========== | ============ |
The accompanying notes on pages 9 to 34 are an integral part of these consolidated financial statements.
6
Consolidated Statement of Changes in Net Assets for the period ended 30 June 2015
Retained | Foreign | |||||
earnings/ | currency | |||||
Share | Share | Tendered | (accumulated | translation | ||
capital | premium | Shares | losses) | reserve | Total | |
US$ | US$ | US$ | US$ | US$ | US$ | |
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 loss | - | - | - | (9,419,915) | - | (9,419,915) |
Net realised gain on investments | - | - | - | 12,354,429 | - | 12,354,429 |
Net unrealised loss on investments | - | - | - | (108,033,857) | - | (108,033,857) |
Foreign currencies translation difference | - | - | - | - | (447,165) | (447,165) |
At 30 June 2014 | 2,281,416 | 326,371,746 | - | (251,476,229) | 6,678,158 | 83,855,091 |
=========== | =========== | =========== | =========== | =========== | =========== | |
At 1 January 2015 | 2,281,416 | 326,371,746 | - | (308,578,458) | 6,942,709 | 27,017,413 |
Share repurchase | - | - | - | - | - | - |
Net investment loss | - | - | - | (14,653,228) | - | (14,653,228) |
Net unrealised gain on investments | - | - | - | 6,496 | - | 6,496 |
Foreign currencies translation difference | - | - | - | - | 60,025 | 60,025 |
At 30 June 2015 | 2,281,416 | 326,371,746 | - | (323,225,190) | 7,002,734 | 12,430,706 |
=========== | =========== | =========== | =========== | =========== | =========== |
The accompanying notes on pages 9 to 34 are an integral part of these consolidated financial statements.
Consolidated Statement of Cash Flows for the period ended 30 June 2015
6 months ended | 6 months ended | ||
30 June 2015 | 30 June 2014 | ||
US$ | US$ | ||
Note | (unaudited) | (unaudited) | |
Cash flows from operating activities | |||
Net decrease in net assets from operations | (14,646,732) | (105,099,343) | |
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) | |
- Net unrealised(gain)/ loss on investments before tax | (6,496) | 109,553,657 | |
- Proceeds from sale of investments | - | 44,857,143 | |
- (Increase)/decrease in investment deposits | (36,088) | 372,537 | |
- Decrease in other assets | 15,117,815 | 992,905 | |
- Impairment loss | 8 | - | 6,612,981 |
- Provision for put option | 11 | 12,294,563 | - |
- Increase/(decrease) in deferred tax liabilities | 310 | (1,522,999) | |
- Increase in tax payable | - | 510,559 | |
- (Decrease)/increase in other payables and accruals | (1,575,741) | 230,388 | |
- Foreign currencies translation difference | 60,025 | (447,165) | |
Net cash provided by operating activities | 11,207,656 | 42,333,520 | |
------------------- | -------------------- | ||
Cash flows from financing activities | |||
Repurchase of shares | 12 | - | (27,999,996) |
Net cash used in financing activities | - | (27,999,996) | |
------------------- | ------------------- | ||
Net increase in cash and cash equivalents | 11,207,656 | 14,333,524 | |
Cash and cash equivalents at beginning of period | 31,680,494 | 19,607,765 | |
Cash and cash equivalents at end of period | 10 | 42,888,150 | 33,941,289 |
=========== | =========== | ||
Supplemental cash flow information | |||
- Interest paid | (4) | - | |
=========== | =========== | ||
Supplemental cash flow information | |||
- Tax paid | - | 862,154 | |
=========== | =========== |
The accompanying notes on pages 9 to 34 are an integral part of these consolidated financial statements.
8
Notes to the Consolidated Financial Statements
-
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.
On 30 June 2015, the Company announced that it had requested the suspension of its shares from trading on AIM, pending the finalisation of its audited annual accounts for the financial year ending 31 December 2014. Furthermore, 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.
Pursuant to AIM Rule 1, ARCH shares will continue to be suspended from trading on AIM until a new Nominated Adviser is appointed. The Board of Directors continues its efforts to appoint a replacement Nominated Adviser, however, if a replacement is not found, the admission of ARCH's ordinary shares to trading on AIM will be cancelled at 7.00 a.m. on 16 October 2015.
Notes to the Consolidated Financial Statements
1 General (continued) - Investment policy
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.
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.
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:
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.
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.
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.
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