The Directors submit their report together with the audited accounts for the year ended 31st December 1997, which are set out on pages 54 to 81 and 93 to 104.
Principal activities
The principal activity of the Company is investment holding and those of its principal subsidiary and associated companies are shown on pages 93 to 104. An analysis of Group turnover and operating profit, and share of profits of associated companies' before taxation by principal activities, and Group attributable profit by division is set out on pages 34 to 36.
Dividends
The Directors recommend the payment of final dividends for 1997 of HK¢130.0 per 'A' share and HK¢26.0 per 'B' share which, together with the interim dividends paid on 3rd October 1997 of HK¢47.0 per 'A' share and HK¢9.4 per 'B' share, make total dividends for the year of HK¢177.0 per 'A' share and HK¢35.4 per 'B' share, being the same as those for 1996. This represents a total distribution for the year of HK$2,756 million. Subject to the approval of the 1997 final dividends by the shareholders at the annual general meeting on 14th May 1998, it is expected that those dividends will be paid on 2nd June 1998 to shareholders registered on 14th May 1998. The share registers will be closed from 11th May 1998 to 14th May 1998, both dates inclusive.
Reserves
Movements in the reserves of the Group and the Company during the year are set out in note 18 to the accounts.
Accounting policies
The principal accounting policies of the Group are set out on pages 54 to 56. The reason for a departure from Statement of Standard Accounting Practice No.11 (HK SSAP11) issued by the Hong Kong Society of Accountants is set out in principal accounting policy no.3.
Donations
During the year, the Company and its subsidiaries made donations for charitable purposes of HK$8.3 million and donations towards various scholarships of HK$0.9 million. In addition, The Swire Educational Trust, of which the Company is a founding contributor, funded scholarships of HK$6.0 million.
Fixed assets
Details of movements in fixed assets are shown in note 11 to the accounts. An analysis of capital expenditure by division and type is shown on page 43.
Properties
The annual valuation of the Group's property portfolio, whether complete or in the course of development, was carried out by independent valuers on the basis of open market value at 31st December 1997. The valuations have been recorded in the accounts of the individual companies concerned and an overall decrease of HK$11,351 million in respect of these properties is reflected in the Group reserves.
A schedule of the principal properties of Swire Pacific Limited and its subsidiaries and associated companies is given on pages 84 to 92.
Bank and other borrowings and Perpetual Capital Securities
The bank loans and overdrafts, other borrowings and Perpetual Capital Securities of Swire Pacific Limited and its subsidiaries are shown in notes 15, 19 and 20 to the accounts.
In May 1997, a wholly-owned subsidiary of Swire Pacific Limited issued US$300 million 8.84% Perpetual Capital Securities guaranteed by the Company. These are perpetual instruments listed on the Luxembourg Stock Exchange with no scheduled maturity.
In June 1997, a wholly-owned subsidiary of Swire Pacific Limited issued HK$3,000 million Floating Rate Notes, guaranteed by the Company, in two tranches of HK$1,500 million each. The first tranche has a three-year maturity and bears interest at 0.25% over 3-month HIBOR whilst the second tranche has a five-year maturity and bears interest at 0.325% over 3-month HIBOR.
The funds raised are being used for general working capital purposes.
Interest
A statement of the amount of interest capitalised by Swire Pacific Limited and its subsidiaries is included in note 5 to the accounts.
Financial summary
A ten-year financial summary of the results and of the assets and liabilities of the Group is shown on pages 44 to 45.
Major customers and suppliers
During the year, less than 30% of the Group's sales and 30% of the Group's purchases were attributable to the Group's five largest customers and suppliers respectively.
Connected transactions
(1) In December 1997, Robert and Christopher Burch ("the Burch brothers"), executives and minority shareholders of The Eagle's Eye, a ladies apparel business in Philadelphia USA in which Swire Pacific Limited had a 70% interest, exercised the option contained in the original acquisition agreement to sell their interest in The Eagle's Eye to the Company. Following this, the Company signed an Amended Agreement ("the Amended Agreement") on 31st December 1997 to purchase a further 20% interest in The Eagle's Eye for US$12 million increasing its interest in the business to 90%. The Burch brothers retain a 10% interest and, at the request of the Company, remain as non-executives and consultants. The Amended Agreement also provides for a call over the Burch brothers' remaining interest for a further US$6 million.
The consideration of US$12 million was two-thirds of a valuation calculated at arm's length and incorporated in an amendment dated 1st January 1993 to the original acquisition agreement which provided for a minimum of US$18 million for the Burch brothers' 30% interest in the business.
The Directors of Swire Pacific Limited, including the independent non-executive Directors, considered that, based on the results of The Eagle's Eye for the period from 1989 to 1992, this valuation was fair and reasonable.
This was a connected transaction under the Listing Rules as the Burch brothers held a 30% interest in, and are also directors of, the subsidiary companies of Swire Pacific Limited conducting The Eagle's Eye business.
(2) On 2nd December 1996, Swire Beverages Limited ("SBL"), an indirect 87.5% owned subsidiary of Swire Pacific Limited, entered into an agreement ("the Loan Agreement") with Coca-Cola Financial Corporation ("CCFC"), a wholly-owned subsidiary of The Coca-Cola Company ("TCCC"), under which CCFC granted an unsecured loan facility of up to US$10 million to SBL in order to finance the implementation of a beverage sales promotion programme by SBL's bottling plants in Mainland China. This agreement allowed funds to be drawn during the period to 31st December 1997. Interest is payable by SBL quarterly in arrears on each advance made under the Loan Agreement at a fixed rate which is currently below the prevailing market rate for US dollar funds. As at 31st December 1997, the total drawdown from this loan facility amounted to US$2.5 million.
A supplemental agreement was made on 30th December 1997 extending the drawdown period to 31st December 1998.
This is a connected transaction under the Listing Rules by virtue of TCCC's indirect 12.5% shareholding in SBL.
(3) Swire and Island Communication Developments Limited ("JV Co.") is a joint venture company formed in 1991 for the purpose of undertaking a development ("Island Place") relating to certain properties at North Point which were acquired from China Motor Bus Company, Limited and its wholly-owned subsidiary, Island Communication Enterprises Limited ("ICE"). JV Co. is 60% owned by Swire Properties Limited, which is a wholly-owned subsidiary of Swire Pacific Limited, and the remaining 40% is owned by ICE.
On 4th March 1998, JV Co. as vendor entered into agreements ("the Agreements") with certain wholly-owned subsidiaries of ICE as purchasers in respect of the 27th and 28th floors of the office tower known as Island Place Tower and six flats, on the 35th and 36th floors, in the residential tower known as Two Island Place. The total consideration was HK$296 million. A non-refundable 10% deposit was paid on the signing of the Agreements, and the balance is payable at completion which is scheduled to be within 60 days of the date of the Agreements.
The total consideration represented a 10% discount to the price list originally prepared prior to any such units at Island Place being marketed. This was in accordance with arrangements agreed between the shareholders when JV Co. was set up in 1991 under which ICE could elect to purchase certain of the units at Island Place at such a discount. The Directors of Swire Pacific Limited (including two independent non-executive Directors) considered that these arrangements were fair and reasonable.
As JV Co. is a subsidiary of Swire Pacific Limited and the sale was to wholly-owned subsidiaries of ICE which is a "connected person" by virtue of the fact that it owns more than 10% of JV Co., the transaction was a connected transaction under the Listing Rules.
Other significant transactions
(1) During the year, Swire Pacific Limited disposed of the majority of its insurance interests as follows:
(a) In February, a wholly-owned subsidiary of Swire Pacific Limited purchased from G R Bearman his 20% minority interest in Swire Fraser Insurance (Holdings) Limited ("Swire Fraser") and then sold 70% of this company to E W Blanch International Inc. The Group holds the remaining 30% shareholding in Swire Fraser which later changed its name to Swire Blanch Insurance (Holdings) Limited.
(b) In March, Swire Pacific Limited sold its 49% interest in Taikoo Royal Insurance Company Limited to the majority shareholder of the company, a wholly-owned subsidiary of the Royal & SunAlliance Insurance Group plc.
(c) In May, Swire Pacific Limited sold its following insurance interests to Zurich Insurance Company:
(i) 100% of Swire Insurance Holdings Limited which comprised various agency operations and minority interests in Wing Hang Swire Insurance Company Limited and Zurich Insurance Company (Asia) Limited.
(ii) 60% of Paofoong Insurance Company (Hong Kong) Limited, whilst the remaining 15% of the Group's original 75% interest was sold to Shanghai Commercial and Savings Bank Limited and Shanghai Commercial Bank Limited.
(2) In April, Swire Properties Limited and a wholly-owned subsidiary of Sun Hung Kai Properties Limited entered into a 50:50 joint venture to develop the steel mill site at Tseung Kwan O of Shiu Wing Steel Limited.
(3) In July, Taikoo Motors Limited, a wholly-owned subsidiary of Swire Pacific Limited, acquired Cimbria Motors Limited (now known as CML Limited), which holds the authorised distribution agency for Volvo passenger cars in Hong Kong, Macau and South and Central China, and for Volvo trucks in Hong Kong.
Share capital
During the year under review, Swire Pacific Limited made the following purchases of its shares on the Hong Kong stock exchange. These purchases were made as a result of a fall in the price of both 'A' and 'B' shares. All the shares purchased were cancelled.
Agreements for services
There are agreements for services, in respect of which John Swire & Sons Limited provides services to various companies in the Swire Pacific Limited Group and under which costs are reimbursed and fees payable. These agreements can be terminated by either party giving not less than twelve months' notice of termination expiring on 31st December 1999 or any subsequent 31st December. D R Y Bluck, Baroness Dunn, H M P Miles, E J R Scott and Sir Adrian Swire, as Directors and shareholders of John Swire & Sons Limited, are interested in these agreements.
Directors
The names of the present Directors of Swire Pacific Limited are listed on pages 46 to 47. Of these, D Ho and M J Bell were appointed on 15th March 1997 and 7th April 1997 respectively. In addition, B P Wong served until 15th March 1997 on which date he retired. The remaining Directors served throughout the calendar year 1997.
Article 93 of the Company's Articles of Association provides for all Directors to retire at the third annual general meeting following their election by ordinary resolution. In accordance therewith, P A Johansen and Sir Adrian Swire retire this year and being eligible offer themselves for re-election.
No Director has a service contract which is not determinable by the employer within one year without payment of compensation (other than statutory compensation).
Directors' fees paid to the independent non-executive Directors during the year totalled HK$198,000 (1996: HK$198,000). They received no other emoluments from the Company or any of its subsidiaries.
Corporate governance
The Company has complied throughout the year with the Code of Best Practice as set out in the Listing Rules.
Directors' interests
At 31st December 1997, the interests of the Directors in the shares of Swire Pacific Limited and in its associated corporation, Cathay Pacific Airways Limited, as recorded in the register maintained under section 29 of the Securities (Disclosure of Interests) Ordinance ("SDI") were as follows:
Notes
(1) Sir Adrian Swire's holding of shares in Swire Pacific Limited included under "Other Interests" is made up as follows:
(2) P A Johansen is a beneficiary of a trust which holds the 100,000 Swire Pacific Limited 'B' shares listed under "Other Interests".
Neither during nor prior to the year under review, has any right been granted to, or exercised by, any Director of Swire Pacific Limited, or to or by the spouse or minor child of any Director, to subscribe for shares, warrants or debentures of Swire Pacific Limited.
Other than as stated above, the Directors of Swire Pacific Limited held no interests, whether beneficial or non-beneficial, in the shares or warrants of Swire Pacific Limited or its associated corporations (within the meaning of the SDI).
At no time during the year did any Director, other than as stated above, have a beneficial interest, whether directly or indirectly, in a contract to which Swire Pacific Limited or any of its associated corporations was a party which was of significance and in which the Director's interest was material.
At no time during the year was Swire Pacific Limited, or any of its associated corporations, a party to any arrangements to enable the Directors of the Company to acquire benefits by means of the acquisition of shares in or debentures of the Company or any other body corporate.
Substantial shareholders
The register of substantial shareholders maintained under Section 16(1) of the SDI shows that at 31st December 1997 the Company had been notified of the following interests, being 10% or more of the Company's issued capital. These interests are in addition to those disclosed above in respect of the Directors:
At 31st December 1997, the John Swire & Sons Limited Group owned directly or indirectly interests in shares of Swire Pacific Limited representing 27.93% of the issued capital and 50.11% of the voting rights.
Auditors
A resolution for the reappointment of Price Waterhouse as auditors of the Company is to be proposed at the forthcoming annual general meeting.
On behalf of the Board
P D A Sutch
Chairman
Hong Kong, 13th March 1998
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