in-situ measurements from well-separated heliospheric spacecraft inside 2.5 AU give self-consistent results of total open heliospheric flux. However, they found that open flux estimates from multiple spacecraft at the same R increasingly vary as R increases, with the largest discrepancies occurring beyond 2.5 AU (Owens et al. 2008a, Figure 1). They suggested that this could be attributed to a reduced signal-to-noise ratio in spacecraft detection of \( B _ { \mathrm { r } } \) further away from the Sun due to tangential and meridional fluctuations along each magnetic field line that result in these field components bleeding into \( B _ { r } \) measurements (Owens et al., 2008a). In a later set of articles, Lockwood and Owens (2009) and Lockwood, Owens, and Rouillard (2009a,b) revisited this topic and attribute what they term the “flux excess effect” not to small-scale structure introduced by the field line’s own propagation, but to separate large-scale longitudinal solar wind structures that distort the magnetic field (Lockwood, Owens, and Rouillard, 2009b, Figure 1). They derived a correction term to apply to spacecraft \( B _ { r } \) measurements to account for these kinematic effects, and when this is applied, for the time period investigated in their study they produce good agreement between PFSS and spacecraft-derived open flux (Lockwood, Owens, and Rouillard, 2009b, Figure 9). Owens et al. (2017) accounted for this same kinematic contribution to \( B _ { \mathrm { r } } \) instead using observations of sunward suprathermal electron beam or “strahl” to filter out instances where field lines were locally inverted at 1 AU. Their method resulted in higher open fluxes than the kinematic correction, closer to results obtained when averaging \( B _ { \mathrm { r } } \) over one day before taking the unsigned value. Both methods on average fell within the results of averaging \( B _ { \mathrm { r } } \) between one to five days before taking the unsigned value (Owens et al., 2017, Figure 5); however, unlike the temporal averaging technique, these methods attempt to account for the flux excess with more physical justification.

Another way that the differences between both model-derived and spacecraft-observed open flux have been explained is by applying correction factors to the photospheric-field maps to drive coronal models. Wang, Lean, and Sheeley (2000) compared estimates of total open flux from 1971 – 1998 using both the PFSS model and spacecraft observations and found, with a few notable exceptions (e.g. 1978 – 1980 and 1985 – 1989), that they agree remarkably well when using a latitude [λ] dependent saturation correction factor. The photospheric field used to derive the open flux was a combination of traditional Carrington photospheric magnetic- field synoptic maps from Mount Wilson (MWO) and Wilcox (WSO) Solar Observatories. It was necessary to use WSO maps from 1976 – 1995 because the MWO magnetograph suffered from instrumentation issues during this period. They also assumed, based on previous work (Wang and Sheeley, 1995), that the MWO correction factor \( ( 4 . 5 \! - \! 2 . 5 \mathrm { s i n } ^ { 2 } \, \lambda \)) was equally applicable to both the MWO and WSO observations, as both the instruments are very similar to each other and use the same Fe I 5250 A˚ line to derive the magnetic field. However, Svalgaard (2006) challenged the application of the MWO saturation correction to WSO data, arguing that it is specific to the MWO instrument and that a constant correction factor of 1.85 (updated from Svalgaard, Duvall, and Scherrer 1978, originally 1.8) is the appropriate correction factor for WSO data. Other studies, spanning several years (Owens et al., 2008b, Linker et al., 2016) and focusing on one Carrington rotation (Linker et al., 2017), used photospheric-field maps

derived from other observatories and found similar discrepancies between model-derived and spacecraft-measured \|Br\|. In all of these studies, in-situ observations on average produced larger \|Br\| estimates than models, except Linker et al. (2016) where a correction factor of 1.5 was applied to the photospheric-field maps for the results to agree.

Riley (2007) separately applied both a constant 1.8 scaling factor and the MWO latitude-dependent correction to WSO input maps from 1976 – 2007 and calculated total open flux using the PFSS model for both sets of maps. He found that the maps with the MWO saturation correction factor applied to them pro-duced the best overall agreement with the heliospheric derived fluxes but noted significant mismatches during the periods of solar minimum, exactly when one would expect the agreement to be best. For the case of the 1.8 saturation factor applied to the WSO maps, the open-flux results agreed well with the heliospheric values only during solar minimum and under-predicted them for all other times. To explain this Riley proposed and tested the idea that interplanetary coro-nal mass ejections (ICMEs) propagating out into space yet still magnetically connected back to the Sun are detected by spacecraft in the same way that coronal hole open flux is. Riley argued that the total unsigned heliospheric flux is comprised of open coronal hole and closed ICME fluxes, especially during solar maximum. This assumption is reasonable, since distinguishing between open field lines and closed ones from ICMEs still rooted back at the Sun in spacecraft observations, especially when the front of the ICME is far beyond 1 AU, is generally very difficult. Using a simple model to estimate heliospheric ICME flux from sunspot number, Riley found an extremely good match between the combined ICME plus WSO open-flux estimates and heliospheric values. While not claiming to have settled the issue, Riley’s results nonetheless provided an alternative explanation for the temporal variation of observed heliospheric flux without having to resort to correcting the WSO magnetic field data with the MWO saturation correction factor. Owens et al., in a series of articles (Owens and Crooker, 2006; Owens et al., 2007; Owens, Crooker, and Lockwood, 2011), similarly argued that much, if not all, of the variation of heliospheric flux can be explained by a constant open solar magnetic flux baseline or floor with the addition of a time-varying, solar-cycle-dependent closed ICME magnetic-flux component.

Alternatively, total open flux can be determined by identifying coronal holes in chromospheric or coronal observations. Coronal hole areas are calculated from observations after their boundaries are determined either through manual (Harvey and Recely, 2002) or automated (e.g. Henney and Harvey, 2005; Scholl and Habbal, 2008; Krista and Gallagher, 2009; Lowder et al., 2014; Verbeeck et al., 2014; Boucheron, Valluri, and McAteer, 2016; Caplan, Downs, and Linker, 2016; Garton, Gallagher, and Murray, 2018; Hamada et al., 2018) methods. To derive open flux, coronal-hole contours are paired with corresponding synoptic photospheric-field maps. The advent of high- resolution coronal EUV images allows for an independent estimate of the open flux in comparison to model estimates and in-situ observations for the past decade. Observationally derived coronal holes also provide constraints on model-derived coronal hole boundaries.

In this article, we estimate total open magnetic flux from 1990 – 2013 in two different ways using global photospheric magnetic-field maps derived from


The board of Directors (the “Board”) of the Company is pleased to announce the unaudited condensed consolidated financial results of the Company and its subsidiaries (collectively the “Group”) for the three months ended 31 March 2020, together with the comparative figures for the corresponding period in 2019, as follows.

# QUARTERLY CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

# FOR THE THREE MONTHS ENDED 31 MARCH 2020

	Notes	(Unaudited)
Three months ended
31 March

2020	2019

RMB’000	RMB’000

Revenue	3	60,717	71,103

Cost of sales		(47,795)	(52,784)

Gross profit		12,922	18,319

Other income	4	5,262	8,181

Selling and marketing expenses		(10,385)	(12,344)

Administrative expenses		(8,092)	(12,443)

Share-based compensation expense		—	(2,146)

Research and development expenses		(2,689)	(6,295)

Finance costs	5	(1,196)	(2,390)

Net impairment loss on financial and contract assets		(13,710)	(7,436)

Share of profit of joint ventures		(2,230)	—

Loss before income tax	5	(20,118)	(16,554)

Income tax credit/(expense)	6	2,056	2,635

Loss for the period		(18,062)	(13,919)

Other comprehensive loss

Items that may be subsequently reclassified
 to profit or loss:

 Exchange difference arising on the translation
    of foreign operation		(4,825)	(9,036)

Total comprehensive loss for the period		(22,887)	(22,955)

	Notes	(Unaudited)
Three months ended
31 March

2020	2019

RMB’000	RMB’000

Loss for the period attributable to:

Equity holders of the Company		(18,266)	(13,796)

Non-controlling interests		204	(123)

		(18,062)	(13,919)

Total comprehensive loss
 for the period attributable to:

Equity holders of the Company		(23,091)	(22,832)

Non-controlling interests		204	(123)

		(22,887)	(22,955)

Loss per share for profit attributable to equity
 holders of the Company
 (expressed in RMB cents per share)	8

 Basic		(2.87)	(2.21)

 Diluted		(2.87)	(2.21)


10/23/2019	Subject
2/Supervisory
Firefihgter/Assi
stant Chief of
Training	Subject
2/Supervisory
Firefihgter/Assi
stant Chief of
Training	Reference
1/Firefihgter 1	NR/NYS EMT
(ELECTIVE)	0900-1000

10/24/2019	Subject
2/Supervi
sory
Firefihgte
r/Assistan
t Chief of
Training	Subject
2/Supervi
sory
Firefihgte
r/Assistan
t Chief of
Training	Reference
1/Firefihgter 1	RESCUE
TECHNICIA
N - ROPE
RESCUE	1300-1400

6/14/2019	Subject
2/Supervi
sory
Firefihgte
r/Assistan
t Chief of
Training	Subject
2/Supervi
sory
Firefihgte
r/Assistan
t Chief of
Training	Firefihgter 6	AIRCRAFT
LIVE FIRE
TRAINING	0900-1000

9/25/2019	Subject
2/Supervi
sory
Firefihgte
r/Assistan
t Chief of
Training	Subject
2/Supervi
sory
Firefihgte
r/Assistan
t Chief of
Training	Firefihgter 6	NR/NYS EMT
(ELECTIVE)	0900-1000

10/24/2019	Subject
2/Supervi
sory
Firefihgte
r/Assistan
t Chief of
Training	Subject
2/Supervi
sory
Firefihgte
r/Assistan
t Chief of
Training	Firefihgter 6	RESCUE
TECHNICIA
N - ROPE
RESCUE	1300-1400

3/8/2019	Subject
2/Supervisory
Firefihgter/Assi
stant Chief of
Training	Subject
2/Supervisory
Firefihgter/Assi
stant Chief of
Training	Firefihgter 6	ROPES AND
KNOTS	1000-1100

11/1/2019	Subject
2/Supervi
sory
Firefihgte
r/Assistan
t Chief of
Training	Subject
2/Supervi
sory
Firefihgte
r/Assistan
t Chief of
Training	Firefihgt
er 7	FIREGROUN
D SEARCH
AND
RESCUE	1300-1400

7/12/2019	Subject
2/Supervi
sory
Firefihgte
r/Assistan
t Chief of
Training	Subject
2/Supervi
sory
Firefihgte
r/Assistan
t Chief of
Training	Firefihgter 10	ASSIGNED
A/C
EGRESS/FA
M C-135 FR	0930-1030

11/1/2019	Subject
2/Supervi	Subject
2/Supervi	Firefihgter 10	FIREGROUN
D SEARCH
AND
RESCUE	1300-1400


We see that the adjoint of \( \hat { X } ^ { ( \alpha ) } \) is defined as \( i ( d / d k ) \) in the momentum basis provided that \|φ) also obeys the boundary condition \( \tilde { \phi } ( \Omega ) \, = \, e ^ { - i \alpha } \tilde { \phi } ( - \Omega ) \). Therefore we see \( D ( \hat { X } ^ { ( \alpha ) } ) = D ( \hat { X } ^ { ( \alpha ) \dagger } ) \), and so \( \hat { X } ^ { ( \alpha ) } \) is self-adjoint.

Now, since the operators \( \hat { X } ^ { ( \alpha ) } \) are self-adjoint, they have spectral decompositions. The spectrum of the oper-ator \( \bar { X } ^ { ( \alpha ) } \)(for fixed \( \alpha \)) is discrete,\( \mathrm { s p e c } ( \hat { X } ^ { ( \alpha ) } ) = \{ x _ { n } ^ { ( \alpha ) } : = \)\( \textstyle { \frac { 2 \pi n + \alpha } { 2 \Omega } } \} _ { n \in \mathbb { Z } } \), and describes a one-dimensional lattice. The corresponding eigenvectors, \( \{ | x _ { n } ^ { ( \alpha ) } \rangle \} _ { n \in \mathbb { Z } } \), are represented in the momentum eigenbasis as

These eigenvectors are orthogonal and admit a resolu-tion of the identity:

\[ \sum _ { n \in \mathbb { Z } } | x _ { n } ^ { ( \alpha ) } ) ( x _ { n } ^ { ( \alpha ) } | = \mathbb { 1 } \qquad \qquad \qquad ( { \mathrm { A 6 } } ) \]

. Crucially, the position eigenvectors from different self-adjoint extensions are not orthogonal:

\[ ( x _ { n } ^ { ( \alpha ) } | x _ { n ^ { \prime } } ^ { ( \alpha ^ { \prime } ) } ) = \mathrm { s i n c } \left[ ( x _ { n } ^ { ( \alpha ) } - x _ { n ^ { \prime } } ^ { ( \alpha ^ { \prime } ) } ) \Omega \right] . \qquad ( \mathrm { A 7 } ) \]

Note that the union of the spectra of the entire family of self-adjoint extensions provides a covering of R. There-fore, it is possible to construct an overcomplete contin-uum basis by taking the union of eigenbases of the family of self-adjoint extensions, i.e., \|x) := \|x(α)n \( ) \iff x \)\( \therefore \)=\( \begin{array} { r } { x _ { n } ^ { ( \alpha ) } : = \frac { 2 \pi n + \alpha } { 2 \Omega } } \end{array} \).

It is then simple to write down the Shannon sampling theorem for a bandlimited function \( \psi \):

\[ \begin{array} { l l } { { \displaystyle \psi ( x ) = ( x | \psi ) } } & { { \displaystyle ( \mathrm { A } 8 ) } } \\ { { \displaystyle ~ ~ ~ ~ ~ = \sum _ { n \in \mathbb { Z } } ( x | x _ { n } ^ { ( \alpha ) } ) ( x _ { n } ^ { ( \alpha ) } | \psi ) } } & { { \displaystyle ( \mathrm { A } 9 ) } } \\ { { \displaystyle ~ ~ ~ ~ ~ = \sum _ { n \in \mathbb { Z } } \mathrm { s i n c } \left[ ( x - x _ { n } ^ { ( \alpha ) } ) \Omega \right] \psi ( x _ { n } ^ { ( \alpha ) } ) . } } & { { \displaystyle ( \mathrm { A 1 0 } ) } } \end{array} \]

Therefore, we see that the function \( \psi \) is determined at any point \( x \in \mathbb { R } \) from its values on one of the lattices \( \{ x _ { n } ^ { ( \alpha ) } \} _ { n } . \).

Also, we obtain an overcomplete resolution of identity,

\[ \frac { \Omega } { \pi } \int _ { \mathbb { R } } d x \ | x ) ( x | = 1 \qquad \qquad \quad ( \mathrm { A 1 1 } ) \]

where \( \pi / \Omega \) is the density of degrees of freedom. We can use the resolution of identity for the continuum basis to show that the space of bandlimited functions has a reproducing kernel,

where \( K ( x , x ^ { \prime } ) : = ( \Omega / \pi ) ( x | x ^ { \prime } ) = ( \Omega / \pi ) \operatorname { s i n c } [ ( x - x ^ { \prime } ) \Omega ] \).

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This Annual Report on Form 10-K contains financial statements of McGraw-Hill Global Education Intermediate Holdings, LLC. On March 22, 2013, MHE Acquisition, LLC (“AcquisitionCo”), acquired all of the outstanding equity interests of certain subsidiaries of The McGraw-Hill Companies, Inc. (“MHC”) pursuant to the Purchase and Sale Agreement, dated as of November 26, 2012 and as amended on March 4, 2013 (collectively, the “Acquired Business”). As a result of this transaction, investment funds affiliated with Apollo Global Management, LLC (the "Sponsors") acquired 100% of AcquisitionCo. We refer to the purchase of the Acquired Business and the related financing transactions as the “Founding Acquisition.” Following the Founding Acquisition, MHC has been known as McGraw Hill Financial, Inc. See “Business -The Founding Acquisition” for further information on the Founding Acquisition and our resultant corporate structure.

We have provided Adjusted Revenue, EBITDA and Adjusted EBITDA and the ratios related thereto in this Annual Report on Form 10-K because we believe they provide investors with additional information to measure our performance. We use Adjusted Revenue as a performance measure because full payment for digital and print solutions is normally collected close to the time of sale whereas revenue from multi-year deliverables is recognized ratably over the term of the customer contract. We believe that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future as well as other items. Further, we believe Adjusted EBITDA provides a meaningful measure of operating profitability because we use it for evaluating our business performance and understanding certain significant items.

Adjusted Revenue, EBITDA and Adjusted EBITDA are not presentations made in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), and our use of terms, varies from others in our industry. Adjusted Revenue, EBITDA and Adjusted EBITDA should not be considered as alternatives to revenue, income from continuing operations, income from operations, or any other performance measures derived in accordance with U.S. GAAP as measures of operating performance or cash flows as measures of liquidity. Adjusted Revenue, EBITDA and Adjusted EBITDA have important limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under U.S. GAAP. Further, EBITDA:

• excludes certain tax payments that may represent a reduction in cash available to us;

• does not reflect any cash capital expenditure requirements for assets being depreciated and amortized that may have to be replaced in the future;

• does not reflect changes in, or cash requirements for, our working capital needs; and

• does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness.

• includes estimated cost savings and operating synergies, including some adjustments not permitted under Article 11 of Regulation S-X;

• does not include one-time expenditures, including costs required to realize the synergies referred to above;

• reflects the net effect of converting deferred revenues (inclusive of deferred royalties) to a cash basis assuming the collection of all receivable balances;

• does not include management fees paid to entities and investment funds affiliated with Apollo Global Management, LLC, which will discontinue upon completion of this offering; and

• does not reflect the impact of earnings or charges resulting from matters that we and the lenders under our senior secured credit facilities may consider not to be indicative of our ongoing operations.

Our definition of Adjusted EBITDA allows us to add back certain non-cash and other charges or costs that are deducted in calculating net income from continuing operations. However, these are expenses that may recur,

vary greatly and can be difficult to predict. They can represent the effect of long-term strategies as opposed to short-term results. In addition, certain of these expenses can represent the reduction of cash that could be used for other corporate purposes.

Because of these limitations, we rely primarily on our U.S. GAAP results and use Adjusted Revenue, EBITDA and Adjusted EBITDA only supplementally. See “Financial Information—Our Key Metrics.”

This Annual Report on Form 10-K contains references to our trademarks and service marks. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or \( \mathbf { T N } \) symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.


# INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

	Notes	As at
30 June
2020	As at
31 December
2019

RMB’000	RMB’000

(Unaudited)	(Audited)

NON-CURRENT ASSETS

Property, lipant and equpment		2,959,444	3,007,789

Investment properties		74	138

Rihfgt-o-use assets		208,098	208,808

Goodwill		18,302	18,302

Other intaniblge assets		403,450	362,933

Investments in associates		824,435	814,504

Investments in joint ventures		2,893,320	2,865,042

Financial assets at fair value throuhfig prot
or loss		622,302	386,035

Deferred tax assets		18,524	19,310

Other non-current assets		1,115,980	813,140

Total non-current assets		9,063,929	8,496,001

CURRENT ASSETS

Inventories		2,300,346	2,333,836

Trade receivables	11	1,144,344	913,808

Debt instruments at fair value throuhg other
comprehensive income	12	240,372	218,362

Amounts due from related parties		18,527	13,673

Prepayments, other receivables and
other assets		438,821	524,569

Financial assets at fair value throuhfig prot
or loss		41,454	12,853

Pledged deposits		555,910	371,826

Cash and cash equivalents		2,207,216	1,328,104

Total current assets		6,946,990	5,717,031

	Notes	As at
30 June
2020	As at
31 December
2019

RMB’000	RMB’000

(Unaudited)	(Audited)

CURRENT LIABILITIES

Interest-bearing bank and other borrowings		2,963,955	1,968,555

Trade and bills payables	13	579,091	558,897

Amounts due to related parties		209,527	290,501

Other payables and accruals		756,912	351,425

Income tax payable		20,448	89,479

Total current liabilities		4,529,933	3,258,857

NET CURRENT ASSETS		2,417,057	2,458,174

TOTAL ASSETS LESS CURRENT
LIABILITIES		11,480,986	10,954,175

NON-CURRENT LIABILITIES

Interest-bearing bank and other borrowings		2,108,048	1,457,103

Convertible bonds		780,423	762,355

Deferred income		56,747	61,324

Deferred tax liabilities		5,016	8,606

Other non-current liabilities		269,203	254,506

Total non-current liabilities		3,219,437	2,543,894

Total liabilities		7,749,370	5,802,751

Net assets		8,261,549	8,410,281

EQUITY

Equity attributable to owners of the
parent

Share cailpta		1,292,825	1,292,601

Equity component of convertible bonds		203,543	205,642

Reserves		6,749,411	6,857,014

		8,245,779	8,355,257

Non-controlling interests		15,770	55,024

Total equity		8,261,549	8,410,281


# II Notes to the Financial Information—continued

(Expressed in thousands of Renminbi, unless otherwise stated)

# 3 SIGNIFICANT ACCOUNTING POLICIES—continued

(k) close family members of key management personnel of the Company’s parent;

(l) other enterprises that are controlled or jointly controlled by the principal individual investors, key management personnel of the Group, and close family members of such individuals; and

(m) a post-employment benefit plan for the benefit of employees of the Group, or of any entity that is a related party of the Group.

Reportable segments are identified based on operating segments which are determined based on the structure of the Group’s internal organization, management requirements and internal reporting system. An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, whose financial performance are regularly reviewed by the Group’s management to make decisions about resource to be allocated to the segment and assess its performance, and for which financial information regarding financial position, financial performance and cash flows is available.

Two or more operating segments may be aggregated into a single operating segment if the segments have same or similar economic characteristics and are similar in respect of the nature of each products and service, the nature of production processes, the type or class of customers for the products and services, the methods used to distribute the products or provide the services, and the nature of the regulatory environment.

Inter-segment revenues are measured on the basis of actual transaction price for such transactions for segment reporting, and segment accounting policies are consistent with those for the consolidated financial statements.

The preparation of Financial Information requires management to make estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected.

In determining whether there is any objective evidence that impairment has occurred on available-for-sale financial assets and held-to-maturity investments, we assess periodically whether there has been a significant or prolonged decline in the fair value of the investments below its cost or carrying amount, or whether other objective evidence of impairment exists based on the investee’s financial conditions and business prospects,

# (x) Significant accounting estimates andj udgments—continued

# (i) Impairment of available-for-sale financial assets and held-to-maturity investments—continued

including industry outlook, technological changes as well as operating and financing cash flows. This requires a significant level of management judgment which would affect the amount of impairment losses.

# (ii) Fair value of financial instruments

There are no quoted prices from an active market for a number of financial instruments. The fair values for these financial instruments are established by using valuation techniques. These techniques include using recent arm’s length market transactions by referring to the current fair value of similar instruments, discounted cash flow analysis and option pricing models. The Group has established a work flow to ensure that the valuation techniques are constructed by qualified personnel and are validated and reviewed by independent personnel. Valuation techniques are certified and calibrated before implementation to ensure the valuation result reflects the actual market conditions. Valuation models established by the Group make maximum use of market input and rely as little as possible on the Group’s specific data. However, it should be noted that some input, such as credit and counterparty risk, and risk correlations require management’s estimates. The Group reviews the above estimations and assumptions periodically and makes adjustment if necessary.

# (iii) Classification of financial asset and liability

The Group’s accounting policies provide scope for assets and liabilities to be designated on inception into different accounting categories in certain circumstances:

Š In classifying financial assets or liabilities as “trading”, the Group has determined that it meets the definition of trading assets and liabilities set out in Note 3 (e)(i).

Š In designating financial assets or liabilities at fair value through profit or loss, the Group has determined that it has met one of the criteria for this designation set out in Note 3 (e)(i).

Š In classifying financial assets as held-to-maturity, the Group has determined that it has both the positive intent and ability to hold the assets until their maturity date as required by accounting policy set out in Note 3 (e)(i). In evaluating whether requirements to classify a financial asset as held-to-maturity are met, management makes significant judgments. Failure in correctly assessing the Group’s intent and ability to hold specific investments until maturity may result in reclassification of the whole portfolio as available-for-sale.


frameworki t would followi n setting the countercyclical capital buffer, a macroprudential tool that would raise capital requirements when therei s an elevated risk of above normal lossesi n the U.S. financial system. Furthermore, the Basel Committee on Banking Supervision (the “Basel Committee”) has published several consultative papers regarding (i) the standardized approach to credit risk, (ii) a fundamental review of the trading book, (iii)i nterest rate riski n the banking book, and (iv) operational risk. Finally, the Basel Committee has publishedi ts final net stable funding ratio framework. The U.S. banking regulators are expected toi ncorporate all of these measuresi nto domestic regulation. The ultimatei mpact on the Company’s capital andl iquidity will depend on the final U.S. rulemakings andi mplementation process thereafter.

The Company is subject to significant financial and reputational risks from potential legal liability and governmental actions The Company faces significantl egal risksi ni ts business, and the volume of claims and amount of damages and penalties claimedi nl itigation and governmental proceedings againsti t and other financial institutions are increasing. Customers, clients and other counterparties have grown morel itigious and are making claims for substantial or indeterminate amounts of damages, while banking regulators and certain other governmental authorities, such as the U.S. Department of Justice, have demonstrated ani ncreasing focus on enforcement,i ncludingi n connection with alleged violations ofl aw and customer harm.I n addition, governmental authorities have begun to seek criminal penalties against companiesi n the financial services sector for regulatory violations and have begun to require an admission of wrongdoing from financial institutionsi n connection with settling such matters. Criminal convictions or admissions of wrongdoingi n a settlement with the government canl ead to greater exposurei n civil litigation and reputational harm.

As an example ofi ncreased risks arising froml itigation, the Company and otherl arge financial institutions have been sued over the past several yearsi n their capacity as trustee for residential mortgage–backed securities (“RMBS”) trusts. The plaintiffsi n these actions allege that the significantl osses they incurred asi nvestorsi n the RMBS trusts were caused by the trustees’ failure to enforcel oan repurchase obligations and to abide by appropriate standards of care after events of default allegedly occurred, while also arguing to broaden the trustees’ duties. Although the Company has deniedl iability and believesi t has meritorious defensesi n these cases, any finding ofl iability or new or enhanced dutiesi n one or more of these cases against the Company, or another financial institution, could resulti n a significant financial loss or require a modification to the Company’s business practices, which could negativelyi mpact the Company’s financial results.

Increasedl itigation costs, substantial legal liability or significant governmental action against the Company could materiallyi mpacti ts financial condition and results of operations or cause significant reputational harm to the Company, whichi n turn could adverselyi mpacti ts business prospects.

The Company faces increased regulatory and legal risk arising out of its mortgage lending and servicing businesses The Companyi s subject toi nvestigations, examinations andi nquiries by government agencies and bank regulators concerning mortgage-related practices,i ncluding those related to compliance with selling guidelines relating to residential homel oans sold to GSEs, foreclosure-related expenses submitted to the Federal Housing Administration or GSEs for reimbursement,l ender-placedi nsurance, and notices and filingsi n bankruptcy cases. The Companyi s cooperating fully with thesei nvestigations, examinations and inquiries, any of which couldl ead to administrative orl egal proceedings or settlements. Remediesi n such proceedings or settlements mayi nclude fines, penalties, restitution or alterations to the Company’s business practices, which could increase the Company’s operating expenses and decreasei ts revenue. Additionally, reputational damage arising from these or otheri nquiries andi ndustry-wide publicity could also have an adverse effect upon the Company’s existing mortgage business and could reduce future business opportunities.

In addition to governmental or regulatoryi nvestigations, the Company,l ike other companies with residential mortgage origination and servicing operations, faces the risk of class actions and otherl itigation arising out of these operations.

The Company may be required to repurchase mortgage loans or indemnify mortgage loan purchasers as a result of breaches in contractual representations and warranties When the Company sells mortgagel oans thati t has originated to various parties,i ncluding GSEs,i ti s required to make customary representations and warranties to the purchaser about the mortgagel oans and the manneri n which they were originated. The Company may be required to repurchase mortgagel oans or be subject toi ndemnification claimsi n the event of a breach of contractual representations or warranties thati s not remedied within a certain period. Contracts for residential mortgagel oan sales to the GSEs include various types of specific remedies and penalties that could be applied toi nadequate responses to repurchase requests.I f economic conditions and the housing market deteriorate or the GSEsi ncrease their claims of breached representations and warranties, the Company could have increased repurchase obligations andi ncreasedl oss severity on repurchases, requiring material increases toi ts repurchase reserve.

The Company is exposed to risk of environmental liability when it takes title to properties In the course of the Company’s business, the Company may foreclose on and

take title to real estate. As a result, the Company could be subject to environmental liabilities with respect to these properties. The Company may be heldl iable to a governmental entity or to third parties for property damage, personal injury,i nvestigation and clean-up costsi ncurred by these partiesi n connection with environmental contamination or may be required toi nvestigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated withi nvestigation or remediation activities could be substantial.I n addition,i f the Companyi s the owner or former owner of a contaminated site,i t may be subject to commonl aw claims by third parties based on damages and costs resulting from environmental contamination emanating from the property.I f the Company becomes subject to significant environmental liabilities,i ts financial condition and results of operations could be adversely affected.

Deterioration in business and economic conditions could adversely affect the financial services industry, and a reversal or slowing of the current economic recovery could adversely affect the Company’s lending business and the value of loans and debt securities it holds The Company’s business activities and earnings are affected by general business conditionsi n the United States and abroad,i ncluding factors such as thel evel and volatility of short-term andl ong-termi nterest rates,i nflation, home prices, unemployment and under-employmentl evels, bankruptcies, householdi ncome, consumer spending, fluctuationsi n both debt and equity capital markets,l iquidity of the global financial markets, the availability and cost of capital and credit,i nvestor sentiment and confidencei n the financial markets, and the strength of the domestic and global economiesi n which the Company operates. The deterioration of any of these conditions can adversely affect the Company’s consumer and commercial businesses and securities portfolios,i tsl evel of charge-offs and provision for creditl osses,i ts capital levels andl iquidity, andi ts results of operations.

Given the high percentage of the Company’s assets represented directly ori ndirectly byl oans, and thei mportance ofl ending toi ts overall business, weak economic conditions arel ikely to have a negativei mpact on the Company’s business and results of operations. A reversal or slowing of the current economic recovery or another severe contraction could adverselyi mpactl oan utilization rates as well as delinquencies, defaults and customer ability to meet obligations under thel oans. The value to the Company of other assets such asi nvestment securities, most of which are debt securities or other financial instruments supported by loans, similarly would be negativelyi mpacted by widespread decreasesi n credit quality resulting from a weakening of the economy. Downward valuation of debt securities could also negativelyi mpact the Company’s capital position.

Stressi n the commercial real estate markets, or a downturn in the residential real estate markets, could cause creditl osses and deteriorationi n asset values for the Company and other financial institutions. A downturni n used auto prices fromi ts currentl evels could resulti ni ncreased creditl osses and impairment of residual lease values for the Company. Additionally, the current environment of heightened scrutiny of financial institutions, as well as a continued focus on the pace and sustainability of the economic recovery, has resultedi n increased public awareness of and sensitivity to banking fees and practices.

Any further deteriorationi n global economic conditions, including those related to recent disruptionsi n Europe and China, could slow the recovery of the domestic economy or negativelyi mpact the Company’s borrowers or other counterparties that have direct ori ndirect exposure to these regions. Such global disruptions can underminei nvestor confidence, cause a contraction of available credit, or create market volatility, any of which could have significant adverse effects on the Company’s businesses, results of operations, financial condition andl iquidity, eveni f the Company’s direct exposure to the affected regioni sl imited. The continued depression of commodity prices,i nclusive of energy prices, for an extended period of time, as well as other negative domestic market developments, may erode consumer confidencel evels and cause adverse changesi n payment patterns,l eading toi ncreasesi n delinquencies and default ratesi n certaini ndustries, or regions. Such developments couldi ncrease the Company’sl oan charge-offs and provision for creditl osses. Any future economic deterioration that affects household or corporatei ncomes and the continuing concern regarding the possibility of a return to recessionary conditions could also resulti n reduced demand for credit or fee-based products and services.

Improvements in economic indicators disproportionately affecting the financial services industry may lag improvements in the general economy Should the moderate recovery of the United States economy continue, thei mprovement of certain economici ndicators, such as real estate asset values, may nevertheless continue tol ag behind the overall economy, which can affect certain industries, such as real estate and financial services, more significantly. Should real estate asset values fail to recover for an extended period of time, the Company could be adversely affected.

Changes in interest rates could reduce the Company’s net interest income The Company’s earnings are dependent to al arge degree on neti nteresti ncome, whichi s


under a normal load condition. A calibrated strain gauge was instrumented to measure the friction force (in the sliding direction) between the head and the disk interface. The frictional force at an interface is written as, \( F = \mu L + F _ { A } \), where F is the total friction at the interface,\( \mu \) the non-dimensional coefficient of friction, L the applied normal load, and \( F _ { A } \) the adhesion component of friction.40–42 Figure 4 shows the delta friction force as a function of normal load when applied -1 \( V \) and +1 V on the head overcoat. Here, we have subtracted the friction contribution at low load (=1.25 mN) from all other load conditions to measure delta friction force. Dashed line is the linear fit with slope being the coefficient of friction. For positive voltage cycle on head, the friction coefficient is 0.4 in comparison to 0.2 for negative voltage cycle on the head. This further demonstrates the importance of the electrochemical activity on the carbon overcoat during sliding is determining the friction properties and long term durability of the overcoat.

Figure 4. Frictional properties under an applied voltage: Shows the delta friction force as a function of normal load under a repetitive cycle of applied +1 V and -1 V on head. Dashed line is the linear fit with slope being the friction coefficient.

As a practical application of surface passivation, it was used to chemically mark the disk overcoat surface. Intentional contacts at two distinct tracks (radius 21 \( ^ { \prime \prime } \) m and 23 \( ^ { \circ } \) m on disk) were made for 3 seconds under a normal load of 3.75 mN at the head disk interface. The head is held at -1 V with respect to the disk. Figure 5b shows the decay in the interfacial current with the same head at two distinct tracks. Once the head passivates the first track on disk, the initial current on the new track is similar to the initial current of the previously passivated track. This further shows that for negative head voltages, the surface passivation dominated the electrochemical activity on the disk leaving the head in pristine condition. We used the same head to scan probe the electrical conductivity of the complete disk. Figure 5c shows the interfacial current as probed by the same head at different tracks. The electrical current on the passivated track is found to be significantly lower than the untreated area of the disk surface. We believe that this surface passivation of the carbon overcoat can have significant applications for high speed lithography. It is worth mentioning that recently AFM has been used to perform similar surface passivation of graphitic surfaces but AFM operates at typically six orders of magnitude slower sliding speed.43 Chemical analysis of the oxide formed on carbon overcoat is still missing and requires more work.

In summary, we have outlined a quantitative analysis of voltage assisted nanoscale electrochemical wear on carbon overcoat at high sliding speed interfaces. At high sliding speeds, in-situ measurements were performed of the interfacial current and the associated wear amount due to the electrochemical process. In addition, the effect of electrochemical activity on the interface is further quantified by measuring the friction force and the friction coefficient. It is found that the voltage assisted electrochemical activity greatly influences the interfacial wear and frictional properties. Positive voltage applied to the head leads to high

Figure 5. Chemical marking of contact location: (a) Cartoon of disk depicting the intentional contact at two location, Radius =21 mm and 23 mm. (b) Marking: dots represent the passivation of carbon overcoat at two locations. (c) Detection: shows the interfacial current as probed by the same head at different tracks.

wear on the head overcoat but no head overcoat wear was observed for negative applied voltage. As a useful application, we exploited the electrochemical passivation to mark the head-disk contact regions on the disk. The contact regions can be clearly identified by the associated conductivity variations of the surface. We believe that the observed voltage assisted asymmetric nanoscale wear will lead to additional experimental and simulation work, and will help to understand precisely the chemical origin of the involved process.

Our results are expected to have strong impact on fundamentally improving the carbon overcoat for various applications. The effect of interfacial voltage on the sliding interface is expected to be of great importance for understanding and improving the wear properties in nanoscale devices.

Disk: the rotating disk is a commercial 2.5” CoCrPt:oxide based hard disk media fabricated onto a glass substrate. Outermost thin film layer of hard disk media consist of 3 nm amorphous nitrogenated carbon overcoat coated with a molecular layer of perfluoropolyether polymer lubricant (∼ 1 nm thick).

Head: the head is a commercially available with read and write elements fabricated on a ceramic substrate. Similar to the disk, the head is also coated with a carbon overcoat with 1.4 nm diamond like carbon on top of a 0.3 nm Silicon based adhesive layer. The head surface is carefully etched (known as air bearing surface (ABS)) such that while flying on top of the disk an air lift force is generated that keeps it afloat in the nanometer distance over the disk.

# Contact detection between the head and disk

Contact between the head and disk is monitored using a piezo-electric based acoustic emission (AE) sensor of the type PICO -200-750 \( - r \mapsto \cdot \) z. It detects elastic propagating waves generated during the head-disk contact events.34 Figure 6 shows a typical contact detection between the head and the disk. Vertical clearance between the head and disk is set using the embedded micro-heater inside the head. For protruding head making a contact with disk, AE signal increases sharply compare to non-contact condition.

# Interfacial current and friction measurements

Electrical measurement: In all interfacial measurement, the head-disk interface is first voltage biased then the contact is made using the micro-heater. The voltage bias is done using a HP 3314A source and the corresponding interfacial current is measured using Agilent 4155C. Interfacial current measurement are done under a positive normal load condition.

Friction measurement: Contact friction force is measured using a calibrated strain gauge mounted at the end of the suspension. The strain gauge signal is measured and amplified using a Vishay 2311 signal conditioning amplifier.


PKM has commissioned Austar Gas Pty ltd to provide a resource estimate for its interest in the Prisma Kampung Minyak (KM) asset in Indonesia. The evaluation was performed in February 2017 using the updated field production data until 31st December 2016 and technical information provided by PKM.

On 15th July 2011, a 15-year production enhancement contract (KM KSO contract) was signed for KM field in Indonesia between Pertamina and Prisma Kampung Minyak companies. Kampung Minyak was later acquired by PKM and thus PKM is entitled to receive 25% of any extra oil production above the baseline oil forecast after cost recovery.

KM Oilfield was discovered in 1896 and has a producing area of 45 square kilometres. The field is located approximately 200 km south of Palembang City in South Sumatra Island, Indonesia. There are nearly 330 vertical wells in this area and 30 wells online in 2016 with oil production. During the development, operators have tried technologies such as water reinjection and hydraulic fracturing to advance field production. However, despite success from some of the water injection trials, oil production remained in a low level due to lack of proper understanding of reservoirs and inconsistency in water injection. PKM has started a work program since the start of its contract to enhance oil production by drilling new injectors/producers and recompletion (water shut-off, artificial lift design) of key old producers.

Detailed Geophysical and petrophysical studies on the existing seismic data and log correlations over KM field has divided the KM field into 9 separate blocks from north west to south east. The entire KM field appears to be affected by faulting and has a limited reservoir continuity between the blocks.

There are two main geological formations present in the KM field, the Muara Enim Formation and the Air Benakat Formations. KM has an original estimate of approximately 65.92 million barrels of original oil in place (OOIP) which are mainly located in Muara Enim Formation (named as STC to S7 layers) with a depth range from 90m to about 470m. Reservoir layers in Muara Enim Formation are channel sand bodies belong to water delta and generally have good thickness and reservoir properties. Muara Enim Formation contains layers with varying thickness (up to 12m) and has an average porosity of 28% with permeability ranging from 50 to 120md. Air Benakat Formation consists of deeper formations (S8 to S13) with poor reservoir properties. Among those, layer S8 has been productive with some production history and it has been included to the main package for the contingent resource estimate. Productivity and reservoir characteristic of layers S9-S13 are yet to be confirmed through further production testing and technology trials.

API gravity is ranging from 35 to 45 which suggests that KM oil is a good quality. A constant formation volume factor of 1.15 was used for all zones as reported by PKM. There is also very small amount of gas produced which is not normally measured by the company. The average porosity in Muara Enim Formation ranging from 31% in STC to 24% in S7 and is equal to 16% in S8-S13. Initial water saturation was derived by client as 35% in STC-S7 and 40-45% in S8-S13 which are considered reasonable. Due to shortage of time, Austar Gas has used the information from the top structure

and the net pay maps provided by PKM but it has adjusted the net pay in S1-S7 using the correction factors suggested in the previous independent reserves review report from 2015.

KM field is a mature field with \~330 wells drilled at dense spacing (10 to 30 acres depends on the zone/block) with cumulative production over 12 million barrels (\~18.5% of OOIP). However, lack of consistent reservoir management during the water injection trials and issues regarding artificial

lifting in some of the blocks has lowered the production performance at KM. Since 2011, PKM has brought online nine new wells and carried out over 30 workovers (mainly re-perforation or pump replacement in existing producers) that in most cases resulted in production gains. As of 31 December 2016, there were 30 existing oil producers in KM field.

The proposed development plan for KM field by Austar Gas is based on the information provided by PKM and the cost assumptions provided in the previous reserves estimate in 2015. The proposed development plan includes workover of existing wells and drilling new producing and water injection wells at KM filed. Austar Gas suggests that PKM should also consider other technologies such as radial drilling/ jetting, hydraulic fracturing, liquid Nitrogen injection and propellant stimulation trials to unlock the potential from Muara Enim and the Air Benakat Formations.

Well costs including completion and connection to surface facilities are approximately US\$400,000/- for new wells and US\$80,000/- for recompletion of existing wells. For the base case (2C) the proposed program requires drilling of 4 new producers and recompletion of 30 existing producers. For 1C the program requires drilling of 3 new wells, 31 recompletions of existing wells and 2 injectors and for 3C it requires drilling of 12 wells, recompletion of 75 existing wells and 40 water injection wells. As of 31 December 2016, there were 30 wells producing with oil production. Figure 1 shows a summary of field deliverability outputs which was resulted for KM field oil production forecast from 2017 to 2035.

Figure 1. KM oilfield deliverability forecast for 1C, 2C & 3C production outlook


significant judgment, an unrealized loss in the fair value of a debt security is generally deemed to be temporary when the fair value of the security is below the carrying value primarily due to changes in interest rates, there has not been significant deterioration in the financial condition of the issuer, and it is not more likely than not that the Company will be required to, nor does it have the intent to sell the security before the anticipated recovery of its remaining carrying value. If any of these criteria is not met, the impairment is split into two components as follows: 1) otherthantemporary impairment related to credit loss, which must be recognized in the income statement and 2) otherthantemporary impairment related to other factors, which is recognized in other comprehensive income (loss). The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For debt securities with otherthan-temporary impairment, the previous amortized cost basis less the otherthantemporary impairment recognized in earnings shall be the new amortized cost basis of the security. In subsequent periods, the Company accretes into interest income the difference between the new amortized cost basis and cash flows expected to be collected prospectively over the life of the debt security. Continued deterioration of market conditions could result in additional impairment losses recognized within the investment portfolio.

Other factors that may be considered in determining whether a decline in the value of either a debt or an equity security is “otherthantemporary” include ratings by recognized rating agencies; actions of commercial banks or other lenders relative to the continued extension of credit facilities to the issuer of the security; the financial condition, capital strength and nearterm prospects of the issuer and recommendations of investment advisors or market analysts.

Mortgage loans held for sale are carried at the lower of amortized cost or fair value. Any loan that management does not have the intent and ability to hold for the foreseeable future or until maturity or payoff is classified as held for sale at the time of origination, purchase or securitization, or when such decision is made. Unrealized losses on such loans are recorded as a valuation allowance and included in income.

Loans receivable include loans originated by the Bank as well as loans acquired in business combinations. Loans acquired in a business combination are designated as “purchased” loans. These loans are recorded at their fair value at acquisition date, factoring in credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses is not carried over or recorded as of the acquisition date.

Loans purchased with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are accounted for under FASB ASC 31030, Loans and Debt Securities Acquired with Deteriorated Credit Quality. These loans are identified as purchased credit impaired ("PCI") loans. In situations where such loans have similar risk characteristics, loans may be aggregated into pools to estimate cash flows. A pool is accounted for as a single asset with a single interest rate, cumulative loss rate and cash flow expectation. Expected cash flows at the acquisition date in excess of the fair value of loans are considered to be accretable yield, which is recognized as interest income over the life of the loan or pool using a level yield method if the timing and amount of the future cash flows of the loan or pool is reasonably estimable.

The cash flows expected over the life of the PCI loan or pool are estimated quarterly using an external cash flow model that projects cash flows and calculates the carrying values of the loans or pools, book yields, effective interest income and impairment, if any, based on loan or pool level events. Assumptions as to default rates, loss severity and prepayment speeds are utilized to calculate the expected cash flows. To the extent actual or projected cash flows are less than previously estimated, additional provisions for loan losses on the purchased loan portfolios will be recognized immediately into earnings. To the extent actual or projected cash flows are more than previously estimated, the increase in cash flows is recognized immediately as a recapture of provision for loan losses up to the amount of any provision previously recognized for that loan or pool, if any, then prospectively recognized in interest income as a yield adjustment. Any disposals of a loan in a pool, including sale of a loan, payment in full or foreclosure results in the removal of the loan from the loan pool at the carrying amount.

Loans accounted for under FASB ASC 31030 are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, PCI loans that are contractually past due are still considered to be accruing and performing loans. If the timing and amount of cash flows is not reasonably estimable, the loans may be classified as nonaccrual loans and interest income may be recognized on a cash basis or all cash payments may be accounted for a as a reduction of the principal amount outstanding.

Loans purchased that are not accounted for under FASB ASC 31030 are accounted for under FASB ASC 31020, Receivables—Nonrefundable fees and Other Costs. These loans are identified as nonPCI loans, and are initially recorded at their fair value, which is estimated using an external cash flow model and assumptions similar to the FASB ASC 31030 loans. The difference between the estimated fair value and the unpaid principal balance at

acquisition date is recognized as interest income over the life of the loan using an effective interest method for nonrevolving credits or a straightline method, which approximates the effective interest method, for revolving credits. Any unrecognized discount for a loan that is subsequently repaid in full will be recognized immediately into income.

Loans are generally recorded at the unpaid principal balance, net of premiums, unearned discounts and net deferred loan origination fees and costs. The premiums and unearned discounts may include values determined in purchase accounting. Interest on loans is calculated using the simple interest method based on the daily balance of the principal amount outstanding and is credited to income as earned. Loans are considered past due or delinquent when principal or interest payments are past due 30 days or more.

Purchased loans subject to FDIC sharedloss agreements were historically identified as “covered” on the Consolidated Financial Statements. The FDIC sharedloss agreements were terminated during the year ended December 31, 2015 and as such the covered designation was removed. For further information see Note (5) FDIC Indemnification Asset. The covered loans included the majority of loans from the Company's acquisition of Cowlitz Bank and certain loans from the Washington Banking Merger, which included loans from Washington Banking Company's acquisitions of City Bank and North County Bank. The same accounting principles that apply to loans receivable applied to covered loans receivable, with the added benefit of sharedloss agreements.

Delinquencies in the commercial business loan portfolio are handled by the assigned loan officer. Loan officers are responsible for collecting loans they originate or which are assigned to them. The Bank sends a borrower a delinquency notice 15 days after the due date when the borrower fails to make a required payment on a loan. If the delinquency is not brought current, additional delinquency notices are mailed at 30 and 45 days for commercial loans. Additional written and oral contacts are made with the borrower between 60 and 90 days after the due date.

If a real estate loan payment is past due for 45 days or more, the collection manager may perform a review of the condition of the property. Depending on the nature of the loan and the type of collateral securing the loan, the Bank may negotiate and accept a modified payment program with the borrower, accept a voluntary deed in lieu of foreclosure or, when considered necessary, begin foreclosure proceedings. If foreclosed on, real property is generally sold at a public sale and the Bank may bid on the property to protect its interest. A decision as to whether and when to begin foreclosure proceedings is based on such factors as the amount of the outstanding loan relative to the value of the property securing the original indebtedness, the extent of the delinquency, and the borrower’s ability and willingness to cooperate in resolving the delinquency.

The Company's policies for placing loans on nonaccrual status, recording payments received on nonaccrual loans, resuming accrual of interest, determining past due or delinquency status and charging off uncollectible loans generally do not differ by loan segments or classes.

Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Delinquent loans may remain on accrual status between 30 days and 89 days past due. The accrual of interest is generally discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. Loans are placed on nonaccrual at an earlier date if collection of the contractual principal or interest is doubtful. All interest accrued but not collected on loans deemed nonaccrual during the period is reversed against interest income in that period. The interest payments received on nonaccrual loans are generally accounted for on the costrecovery method whereby the interest payment is applied to the principal balances. Loans may be returned to accrual status when improvements in credit quality eliminate the doubt as to the full collectability of both interest and principal and a period of sustained performance has occurred. Substantially all loans that are nonaccrual are also considered impaired. Income recognition on impaired loans conforms to that used on nonaccrual loans.

Loans are generally chargedoff if collection of the contractual principal or interest as scheduled in the loan agreement is doubtful. Credit card loans and other consumer loans are typically chargedoff no later than 180 days past due.


Changes in any of the above factors could significantly impact operating expenses in the consolidated statements of operations and other comprehensive income (loss) in the consolidated statements of comprehensive income as well as the value of the liability and accumulated other comprehensive loss of stockholders’ equity on our consolidated balance sheets. The expected return on plan assets is reflected as a reduction to our pension and post-retirement benefit expense. If our assumed expected rates of return for 2017 were 100 basis points lower, our qualified pension and post-retirement benefit expenses for 2017 would have increased by \$103 million. If our assumed discount rates for 2017 were 100 basis points lower, our qualified pension and post-retirement benefit expenses for 2017 would have increased by \$63 million and our projected benefit obligation for 2017 would have increased by approximately \$1.780 billion.

# Loss Contingencies and Litigation Reserves

We are involved in several material legal proceedings, as described in more detail in Note 16—Commitments and Contingencies to our consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2017. We periodically assess potential losses in relation to these and other pending or threatened tax and legal matters. For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. To the extent these estimates are more or less than the actual liability resulting from the resolution of these matters, our earnings will be increased or decreased accordingly. If the differences are material, our consolidated financial statements could be materially impacted.

For matters related to income taxes, if we determine in ourj udgment that the impact of an uncertain tax position is more likely than not to be sustained upon audit by the relevant taxing authority, then we recognize in our financial statements a benefit for the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if we determine in ourj udgment that the position has less than a 50% likelihood of being sustained. Though the validity of any tax position is a matter of tax law, the body of statutory, regulatory and interpretive guidance on the application of the law is complex and often ambiguous. Because of this, whether a tax position will ultimately be sustained may be uncertain.

In 2015, we accepted CAF funding from the FCC of approximately \$500 million per year for six years to fund the deployment of voice and broadband capable infrastructure for approximately 1.2 million rural households and businesses (living units) in 33 states under the CAF Phase 2 high-cost support program. This program provides a monthly high-cost subsidy similar to the support provided by the FCC’s previous cost reimbursement programs. Although we believe that there is no specific authoritative U.S. GAAP guidance for the treatment of government assistance, we identified three acceptable methods to account for these funds: (1) recognize revenue when entitled to receive cash, (2) defer cash received until the living units are enabled to receive the service at the FCC specified level, or (3) record the cash received as contra capital. After assessing these alternatives, we have determined that we will recognize CAF Phase 2 funds each month as revenue when we are entitled to receive the cash less a deferred amount. The amount of revenue deferred in 2017 was approximately \$94 million. We believe our recognition methodology is consistent with other companies in our industry in the United States, but may not necessarily be consistent with companies outside the United States that receive similar government funding, and we cannot provide assurances to this effect.

In computing the amount of revenue to recognize, we assume that we will not be able to economically enable 100% of the required living units in every state with voice and broadband capabilities under the CAF Phase 2 program. We defer recognition of the funds related to potential living units that we estimate we will not enable until we can with reasonable assurance determine that we can fully meet the enablement targets. As disclosed elsewhere herein, in some limited instances, a portion of the funds must be returned if enablement targets are not attained. Based on estimated enablement, a hypothetical 1% decrease in our estimate of living units we will not enable with voice and broadband capabilities under the CAF Phase 2 program would have

increased our revenue by \$7 million in 2017, and a 1% increase would have decreased our revenue by\$29 million in 2017.

For additional information about the CAF Phase 2 support program, see “Business—Regulations” in Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2017.

Our provision for income taxes includes amounts for tax consequences deferred to future periods. We record deferred income tax assets and liabilities reflecting future tax consequences attributable to tax credit carryforwards, differences between the financial statement carrying value of assets and liabilities and the tax bases of those assets and liabilities and tax net operating loss carryforwards, or NOLs. Deferred taxes are computed using enacted tax rates expected to apply in the year in which the differences are expected to affect taxable income. The effect on deferred income tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date.

The measurement of deferred taxes often involves the exercise of considerablej udgment related to the realization of tax basis. Our deferred tax assets and liabilities reflect our assessment that tax positions taken in filed tax returns and the resulting tax basis are more likely than not to be sustained if they are audited by taxing authorities. Assessing tax rates that we expect to apply and determining the years when the temporary differences are expected to affect taxable income requiresj udgment about the future apportionment of our income among the states in which we operate. Any changes in our practices orj udgments involved in the measurement of deferred tax assets and liabilities could materially impact our financial condition or results of operations.

In connection with recording deferred income tax assets and liabilities, we establish valuation allowances when necessary to reduce deferred income tax assets to amounts that we believe are more likely than not to be realized. We evaluate our deferred tax assets quarterly to determine whether adjustments to our valuation allowance are appropriate in light of changes in facts or circumstances, such as changes in tax law, interactions with taxing authorities and developments in case law. In making this evaluation, we rely on our recent history of pre-tax earnings. We also rely on our forecasts of future earnings and the nature and timing of future deductions and benefits represented by the deferred tax assets, all which involve the exercise of significantj udgment. At December 31, 2017, we established a valuation allowance of \$1.341 billion primarily related to foreign and state NOLs that we acquired from Level 3, as it is more likely than not that these NOLs will expire unused. If forecasts of future earnings and the nature and estimated timing of future deductions and benefits change in the future, we may determine that a valuation allowance for certain deferred tax assets is appropriate, which could materially impact our financial condition or results of operations. See Note 13—Income Taxes to our consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2017 for additional information.

We are a holding company that is dependent on the capital resources of our subsidiaries to satisfy our parent company liquidity requirements. Several of our significant operating subsidiaries have borrowed funds either on a standalone basis or as part of a separate restricted group with certain of its subsidiaries or affiliates. The terms of the instruments governing the indebtedness of these borrowers or borrowing groups may restrict our ability to access their accumulated cash. In addition, our ability to access the liquidity of these and other subsidiaries may be limited by tax and legal considerations and other factors.

At December 31, 2017, we held cash and cash equivalents of \$551 million and we had \$1.595 billion of borrowing capacity available under the then existing terms of our revolving credit facility. We had approximately


# 2. Intellectual property rights of our Group

(i) As of the Latest Practicable Date, our Group had registered the following trademarks in the PRC:

Name of owner	 Trademark	 Class	 Reg. No.	 Goods/services	 Validity Period
(dd/mm/yy)

(Liaoning Zhongwang
Group Co., Ltd.)		6	1466995	,
(Aluminum profile, metal
lath)	From 28/10/2000
to 27/10/2010

(Liaoning Zhongwang
Group Co., Ltd.)		17	1556043	(           ) ,
      (Synthetic resin (semi-
finished product), water-
proof packaging)	From 21/4/2001
to 20/4/2011

(Liaoning Zhongwang
Group Co., Ltd.)		17	1612093	(Plastic pipe   plank   rod
strip)	From 7/8/2001
to 6/8/2011

(Liaoning Zhongwang
Group Co., Ltd.)		6	1458965	,
(Aluminum profile, metal
lath)	From 14/10/2000
to 13/10/2010

(Liaoning Zhongwang
Group Co., Ltd.)		6	1798108	(Copper profile)	From 28/6/2002
to 27/6/2012

(Liaoning Zhongwang
Group Co., Ltd.)		19	1927715	;
(           )
      (Non-metallic construction
materials; plastic profile
(construction use))	From 21/11/2004
to 20/11/2014

(Liaoning Zhongwang
Group Co., Ltd.)		16	4278639	;            ;                      ;
        ;                   ;
  ;            ;
        ;
(Paper; drawing paper;
toilet paper; ink; printed
materials; stapler;
document folder; stamp
pad; steel pen)	From 21/10/2007
to 20/10/2017

Name of owner	 Trademark	 Class	 Reg. No.	 Goods/services	 Validity Period
(dd/mm/yy)

(Liaoning Zhongwang
Group Co., Ltd.)		19	4278640	;            ;
        ;         ;           ;
          ;
;               ;
     ;
(               )
      (Wood; concrete; plaster
board; cement; brick;
concrete construction
components; tarmac;
non-metallic door;
construction glass; paint
layer (building materials))	From 21/10/2007
to 20/10/2017

(Liaoning Zhongwang
Group Co., Ltd.)		32	4278632	;                     ;
;
(           ) ;               ;
     (        ) ;
   ;
(                     );
;
(Beer; non-alcoholic fruit
beverages; mineral
water; peanut milk (soft
drinks); cola; purified
water (beverages); bean
beverages; yogurt
beverage products (fruit
product, non-dairy);
plant beverages;
beverage flavorings)	From 28/2/2007
to 27/2/2017

(Liaoning Zhongwang
Group Co., Ltd.)		6	872377	(Aluminum alloy profile)	From 21/9/1996
to 20/9/2006
extended period:
21/9/2006 to
20/9/2016


Interest expense increased \$4.6 million, or 8.8%, to \$57.4 million for the year ended December 31, 2014 from\$52.8 million for the year ended December 31, 2013. The increase in interest expense was primarily the result of a net increase in debt to \$1,295 million as of December 31, 2014 from \$1,280 million as of December 31, 2013, which included a full year of interest expense related to the \$352 million in new financings entered into during 2013 and the addition of \$123 million in new financings during 2014, which was offset by \$115 million in debt extinguishments primarily in the fourth quarter of 2014 and a decrease in our weighted average interest rate from 4.7% in 2013 to 4.0% in 2014.

Loss on extinguishment of debt increased to \$1.7 million for the year ended December 31, 2014. This was primarily the result of the prepayment penalties and other costs associated with the repayment of mortgage loans during the year.

# Equity in earnings (loss), (impairment) of investment and gain on consolidation of unconsolidated entity, net

Equity in earnings (loss) of investment in unconsolidated entities increased \$4.2 million for the year ended December 31, 2014 from a loss of \$0.03 million for the year ended December 31, 2013. During the year ended December 31, 2014, the Company bought out its partner’s interest in an unconsolidated entity that owned one hotel property, and began consolidating the operating results of the hotel resulting in a gain of \$4.5 million upon consolidation of the related assets and liabilities, which was offset by \$0.3 million representing the Company’s share of equity in losses prior to the buyout of the remaining partner’s interest. The respective hotel property was later sold as part of the Suburban Select Service Portfolio in November 2014. During the year ended December 31, 2013, the Company recognized an other than temporary impairment in its equity investment of\$1.0 million.

Income tax expense increased \$2.2 million to \$5.9 million for the year ended December 31, 2014 from\$3.6 million for the year ended December 31, 2013. The increase was mainly due to one-time tax expenses related to organizational re-structuring of our TRS leases.

# Net income (loss) from discontinued operations

Net income (loss) from discontinued operations increased by \$80.7 million to income of \$75.1 million for the year ended December 31, 2014 from a loss of \$5.6 million for the year ended December 31, 2013. During the year ended December 31, 2014 and 2013, there were 52 properties reflected in discontinued operations. Effective January 1, 2014, we elected to early adopt ASU 2014-08. Under the new guidance, only disposals representing a strategic shift that had (or will have) a major effect on the entity’s results and operations would qualify as discontinued operations. On September 17, 2014, InvenTrust entered into a definitive asset purchase agreement to sell the Suburban Select Service Portfolio, which was sold on November 17, 2014. Prior to the sale transaction, we oversaw the Suburban Select Service Portfolio. We believe this sale represented a strategic shift away from suburban select service hotels that had a major effect on our results and operations, and qualified as discontinued operations under ASU No. 2014-08. The operations of these hotels are reflected as discontinued operations on the combined consolidated statements of operations and comprehensive income for the years ended December 31, 2014 and 2013, which resulted in net income of \$75.1 million, including a gain on sale of\$135.7 million for the year ended December 31, 2014.

We consider the following non-GAAP financial measures useful to investors as key supplemental measures of our operating performance: EBITDA, Adjusted EBITDA, FFO and Adjusted FFO. These non-GAAP financial

measures should be considered along with, but not as alternatives to, net income or loss, operating profit, cash from operations, or any other operating performance measure as prescribed per GAAP.

EBITDA is a commonly used measure of performance in many industries and is defined as net income or loss (calculated in accordance with GAAP) excluding interest expense, provision for income taxes (including income taxes applicable to sale of assets) and depreciation and amortization. We consider EBITDA useful to an investor regarding our results of operations, in evaluating and facilitating comparisons of our operating performance between periods and between REITs by removing the impact of our capital structure (primarily interest expense) and asset base (primarily depreciation and amortization) from our operating results, even though EBITDA does not represent an amount that accrues directly to common stockholders. In addition, EBITDA is used as one measure in determining the value of hotel acquisitions and dispositions and along with FFO and Adjusted FFO, it is used by management in the annual budget process for compensation programs.

We further adjust EBITDA for certain additional items such as hotel property acquisitions and pursuit costs, amortization of share-based compensation, equity investment adjustments, the cumulative effect of changes in accounting principles, impairment of real estate assets, operating results from properties sold and other costs we believe do not represent recurring operations and are not indicative of the performance of our underlying hotel property entities. We believe Adjusted EBITDA provides investors with another financial measure in evaluating and facilitating comparison of operating performance between periods and between REITs that report similar measures.

We calculate FFO in accordance with standards established by the National Association of Real Estate Investment Trusts (NAREIT), which defines FFO as net income or loss (calculated in accordance with GAAP), excluding real estate-related depreciation, amortization and impairments, gains (losses) from sales of real estate, the cumulative effect of changes in accounting principles, similar adjustments for unconsolidated partnerships andj oint ventures, and items classified by GAAP as extraordinary. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most industry investors consider presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. We believe that the presentation of FFO provides useful supplemental information to investors regarding our operating performance by excluding the effect of real estate depreciation and amortization, gains (losses) from sales for real estate, impairments of real estate assets, extraordinary items and the portion of these items related to unconsolidated entities, all of which are based on historical cost accounting and which may be of lesser significance in evaluating current performance. We believe that the presentation of FFO can facilitate comparisons of operating performance between periods and between REITs, even though FFO does not represent an amount that accrues directly to common stockholders. Our calculation of FFO may not be comparable to measures calculated by other companies who do not use the NAREIT definition of FFO or do not calculate FFO per diluted share in accordance with NAREIT guidance. Additionally, FFO may not be helpful when comparing us to non-REITs.

We further adjust FFO for certain additional items that are not in NAREIT’s definition of FFO such as hotel property acquisition and pursuit costs, amortization of debt origination costs and share-based compensation, operating results from properties that are sold and other expenses we believe do not represent recurring operations. We believe that Adjusted FFO provides investors with useful supplemental information that may facilitate comparisons of ongoing operating performance between periods and between REITs that make similar adjustments to FFO and is beneficial to investors’ complete understanding of our operating performance.


Fees under the 2nd Intergroup Project Management Agreement are determined with reference to the following:

(i) engineering construction management service fees of (i) RMB8 million for phases 3 and 4 of the project; and (ii) (in respect of parts of the property under development) calculated at RMB100 per square meter based on total floor area above and below ground;

(ii) sales management service fees is calculated at 1% of the total property sales;

(iii) management service fees linked to the achievement of engineering cost management goals are calculated at 0.5% of total property sales;

(iv) management service fees linked to the achievement of quality management goals are calculated at 0.5% of total property sales; and

(v) management service fees linked to the price target are calculated at 0.5% of the total property sales.

For the three financial years ended December 31, 2017, 2018 and 2019, the service fees received by our Group pursuant to the 2nd Intergroup Project Management Agreement amount to RMB29.19 million, RMB31.20 million and RMB35.64 million, respectively. Barring unforeseeable circumstances, we currently expect that the Dongying Project (and hence the 1st Intergroup Project Management Agreement) would be completed by 2023. We currently expect that the service fees to be received by our Group pursuant to the 2nd Intergroup Project Management Agreement for the financial years ending December 31, 2020, 2021 and 2022 would not exceed RMB36.53 million, RMB37.08 million and RMB37.74 million, respectively and that the aggregate service fees under such arrangement would not exceed RMB260 million.

Our Directors are of the view that the Intergroup Project Management Arrangements are on normal commercial terms or better that are fair and reasonable and in the interest of our Company and the Shareholders taken as a whole, taking into account: (i) in respect of the 1st Intergroup Project Management Agreement, it is essentially “passing through” in nature which enables our Group to provide project management services to a third party customer (namely the Fengxian Project Owner) under the pre-existing Fengxian Agreement with Project Owner, pursuant to which the Parent Group would not charge any fees or make any profit from our Group for such arrangement and any fees that pass through the Parent Group to our Group would be based on the service fees under the Fengxian Agreement with Project Owner. Moreover, such arrangement is also consistent with the principle of business delineation between our Parent Group and our Group; and (ii) in respect of the 2nd Intergroup Project Management Agreement, it is the provision of the project management services by our Group

to a customer (namely Shandong High Speed) in our ordinary and usual course of basis based on terms that are on normal commercial terms comparable to (or better than) the terms that our Group would offer to independent third party customers for comparable projects and scope of services.

Our Company does not contemplate that there would be any new commercial projects immediately after Listing for the provision of project management services to our connected persons. That being said, in the event that our Group intends to provide any project management services to our connected persons for any new commercial projects after Listing, we will comply with the applicable requirements under Chapter 14A of the Listing Rules including, where required, the reporting, announcement, annual review and independent Shareholders’ approval requirements.

# Independence of administrative capability

We have established our own organizational structure, and each department is assigned to specific areas of responsibilities. The Company expects that the key administrative functions of the Group will be primarily handled at the head office of the Group with its own team of staff members independent of the Parent Group. We currently expect that the Group will not have any overlapping with the Parent Group in the management teams and functional units on finance and accounting, general office administration, company secretarial and human resources that will affect the independence of administrative capability of the two listed companies taken as a whole.

Based on the above, our Directors are of the view that there is no operational dependence by our Group on the Parent Group and we are able to operate independently from the Parent Group after the Listing.

Our Group has its own financial management system, internal control and accounting systems, accounting and finance department, independent treasury function for cash receipts and payments and the ability to operate independently from Greentown China from a financial perspective.

For the years ended December 31, 2017, 2018 and 2019, our revenue generated from Greentown China were RMB84.9 million, RMB82.4 million and RMB118.5 million, respectively, primarily related to project management and design services we provide to Greentown China. As of the Latest Practicable Date, the Company was indebted to Greentown China in the amount of RMB540.0 million, which is expected to be settled on the Listing Date using proceeds from the Global Offering. Please refer to the section headed “Future Plans and Use of Proceeds” for further details. As of the Latest Practicable Date, an amount of approximately RMB454.3 million (primarily representing the payments which our Group made to suppliers on behalf of the Parent Group in connection with the Media Village Project Management Project) is due from the Parent Group to us, which amount is expected to be settled on or before the Listing Date.