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MANDARIN ORIENTAL INTERNATIONAL LIMITED Revaluation

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					MANDARIN ORIENTAL INTERNATIONAL LIMITED

 1997 PRELIMINARY FINANCIAL STATEMENTS




  18th March 1998




                    1
                                     CONSOLIDATED
                                   PROFIT AND LOSS ACCOUNT
                                     for the year ended 31st December 1997


Note                                                                          1997       1996
                                                                              US$m      US$m

   1   Turnover                                                                258.1      227.2
       Operating costs                                                       (179.4)    (153.1)

       Operating profit                                                         78.7      74.1
       Share of profits less losses of associates                                3.9       7.4

   1   Trading profit                                                           82.6      81.5
   2   Provision against Hotel Majapahit, Surabaya                              (9.2)
                                                                                              -

       Profit before interest and taxation                                      73.4       81.5
   3   Net interest expense                                                   (15.0)      (8.2)

       Profit before taxation                                                   58.4       73.3
   4   Taxation                                                               (13.6)     (13.1)

       Profit after taxation                                                    44.8       60.2
       Minority interests                                                        0.2      (0.1)

       Profit after taxation and minority interests                             45.0      60.1

                                                                                US¢       US¢

   5   Earnings per share                                                       6.41      8.66
   5   Earnings per share excluding non-recurring item                          7.72      8.66


                      STATEMENT OF MOVEMENTS
                   ON REVENUE AND OTHER RESERVES
                                     for the year ended 31st December 1997


                                                                              1997       1996
Note                                                                          US$m      US$m

       At 1st January                                                        1,203.6      936.5
       Net exchange translation differences                                  (112.0)       (2.5)
       Profit after taxation and minority interests                              45.0       60.1
   6   Dividends                                                               (24.6)    (43.8)
       Property revaluation (deficit)/ surplus                               (217.7)      249.0
       Reserves arising on scrip issued in lieu of dividends                      7.2        4.3



                                                      2
At 31st December       901.5   1,203.6




                   3
                 CONSOLIDATED BALANCE SHEET
                                  at 31st December 1997

Note                                                       1997       1996
                                                           US$m      US$m

       Net operating assets
   7   Tangible assets                                     978.3     1,156.1
   8   Associates                                          200.4       335.8

       Fixed assets                                       1,178.7    1,491.9

       Stocks                                                5.9        6.6
       Debtors and prepayments                              23.8       28.8
       Bank balances                                       139.6      128.9

       Current assets                                      169.3      164.3

       Creditors, accruals and provisions                  (38.0)     (38.1)
   9   Bank and other advances                             (29.0)     (36.1)
       Taxation                                             (9.7)      (8.0)
       Proposed dividend                                   (13.0)     (32.3)

       Current liabilities                                 (89.7)    (114.5)


       Net current assets                                    79.6        49.8
  10   Term loans                                         (281.1)    (276.5)
       Deferred taxation                                     (2.6)      (2.7)
                                                            974.6    1,262.5

       Capital employed
  11   Share capital                                        35.1        34.7
  13   Share premium                                        22.7        22.6
  14   Revenue and other reserves                          901.5     1,203.6

       Shareholders' funds                                 959.3     1,260.9
  15   Minority interests                                   15.3         1.6
                                                           974.6     1,262.5



ALASDAIR MORRISON
ROBERT E RILEY
Directors
18th March 1998




                                              4
                     CONSOLIDATED CASH FLOW
                           STATEMENT
                             for the year ended 31st December 1997

                                                                     1997      1996
Note                                                                 US$m     US$m

       Operating activities
       Operating profit                                                78.7      74.1
       Depreciation                                                    14.4      10.8
 16a   Non-cash items                                                   0.3       1.3
 16b   Decrease in working capital                                      5.1       1.0
       Net interest expense                                          (15.0)     (8.2)
       Tax paid                                                       (9.5)     (6.6)
                                                                       74.0      72.4
       Dividends from associates                                        4.9       7.8

       Cash flows from operating activities                           78.9      80.2

       Investing activities
 16c   Purchase of a subsidiary                                       (6.3)   (142.9)
 16d   Increase in associates                                         (5.4)     (8.3)
       Purchase of tangible assets                                   (16.3)    (17.4)
       Sale of tangible assets                                          0.3       0.3

       Cash flows from investing activities                          (27.7)   (168.3)

       Financing activities
       Issue of shares                                                  0.4       0.3
       Increase in term loans                                             -      74.8
       Dividends paid by the Company                                 (36.7)    (37.3)


       Cash flows from financing activities                          (36.3)     37.8
       Effect of exchange rate changes                                (0.7)      0.1

       Net increase/(decrease) in cash and cash equivalents           14.2     (50.2)
       Cash and cash equivalents at beginning of year                125.1      175.3

 16e   Cash and cash equivalents at end of year                      139.3     125.1




                                                  5
                    PRINCIPAL ACCOUNTING POLICIES


a   Basis of preparation
    The financial statements have been prepared under the historical cost convention, as modified by
    the revaluation of certain fixed assets, and in conformity with International Accounting Standards.


b   Basis of consolidation
    (i) The consolidated profit and loss account and balance sheet include the financial statements of
        the Company, its subsidiaries and, on the basis set out in (ii) below, its associates. The results
        of subsidiaries and associates are included or excluded from their effective dates of acquisition
        or disposal respectively.

    (ii) Associates are companies, not being subsidiaries, in which the Group has an interest of 20% or
        more of the ordinary share capital held for the long term and over which it exercises
        significant influence. Associates are included on the equity basis of accounting.


c   Foreign currencies
    Assets and liabilities of subsidiaries and associates, together with all other monetary assets and
    liabilities expressed in foreign currencies are translated into United States Dollars at the rates of
    exchange ruling at the year end. Results expressed in foreign currencies are translated into
    United States Dollars at the average rates of exchange ruling during the year.

    Net exchange differences arising from the translation of the financial statements of subsidiaries
    and associates expressed in foreign currencies are taken directly to exchange reserves. All other
    exchange differences are dealt with in the consolidated profit and loss account.


d   Turnover
    Turnover from hotel ownership comprises amounts earned in respect of services, facilities and
    goods supplied by the five subsidiary hotel companies.

    Turnover from hotel management comprises gross fees earned from the management of all the
    hotels operated by the Group.

    Inter-Group turnover represents a deduction for management fees charged to the five subsidiary
    hotel companies.


e   Tangible fixed assets and depreciation
    Hotel properties acquired during the year or which are in their first three years of operation and
    have not yet fully established market position are stated at cost.




                                                    6
                      PRINCIPAL ACCOUNTING POLICIES

e   Tangible fixed assets and depreciation continued
    Properties held on leases with an expected remaining life of more than 20 years are stated at
    valuation. Independent valuations are performed every three years on an open market for
    existing use basis as fully operational business units. In the intervening years the Directors review
    the carrying value of properties and adjustment is made where there has been a material change.
    Revaluation surpluses and deficits are dealt with in capital reserves except for movements on
    individual properties below cost which are dealt with in the profit and loss account.

    Other tangible fixed assets are stated at cost less amounts provided for depreciation.

    Depreciation is calculated on the straight line basis at annual rates estimated to write off the cost
    of each asset over its estimated useful life. The principal rates in use are as follows:

    Leasehold improvements ………………… 10%
    Plant and machinery ……………………… 10%
    Furniture and equipment ………………… 10 - 33-1/3%

    No depreciation is provided on freehold properties or properties held on leases with an expected
    remaining life of more than 20 years or on integral fixed plant. It is the Group’s practice to
    maintain these assets in a continual state of sound repair, such that their value is not diminished by
    the passage of time. Accordingly, the Directors consider that the useful economic lives of these
    assets are so long and their residual values, based on prices prevailing at the time of valuation, are
    so high that their depreciation is insignificant. The cost of maintenance and repairs of the
    properties is charged to the profit and loss account as incurred and the cost of significant
    improvements is capitalised.


f   Development and pre -opening costs
    Costs directly attributable to development projects, including borrowing costs, are capitalised and
    upon completion of the project are included in tangible assets.

    Pre-opening costs are capitalised and amortised over five years from the date of opening.


g    Operating leases
    Operating lease rentals are charged to the consolidated profit and loss account as incurred.


h   Stocks
    Stocks are stated at the lower of cost and net realisable value.




                                                    7
                    PRINCIPAL ACCOUNTING POLICIES

i   Deferred taxation
    Deferred taxation is accounted for under the liability method in respect of timing differences
    between profit as computed for taxation purposes and profit as stated in the financial statements to
    the extent that a liability or asset is expected to be payable or receivable in the foreseeable future.

    No deferred taxation is provided in respect of potential withholding tax which could arise on
    remittance of retained overseas earnings and no deferred taxation asset is recognised for tax
    losses. Deferred taxation is provided in relation to the revaluation of properties only where a
    liability is expected to arise on a property disposal in the foreseeable future.

j   Pension costs
    The Group operates defined benefit and defined contribution retirement schemes, the assets of
    which are held in trustee-administered funds.

    Pension costs relating to the defined benefit schemes are assessed in accordance with the advice
    of independent qualified actuaries using the aggregate cost method. Surpluses or deficits arising
    from past service cost, experience adjustments and the effects of changes in actuarial assumptions
    are amortised as an even percentage of pensionable payroll over the expected remaining service
    lives of the participating employees.

    Contributions to the defined contribution schemes are charged to the consolidated profit and loss
    account in the year to which they relate.

k   Derivative financial instruments
    The Group only enters into derivative financial instruments in order to hedge underlying exposures.
    Where these relate to interest rate movements, interest payable and receivable under such
    instruments is accrued and recorded as an adjustment to the interest income or expense related to
    the underlying exposure. Premiums paid or received on options are included in debtors or
    creditors and amortised to the profit and loss account over the life of the agreements. Where
    derivative financial instruments are used to hedge future commitments or transactions in foreign
    currencies, the unrealised exchange differences are deferred against the matching losses and gains
    on the specific transactions.




                                                    8
         NOTES TO THE FINANCIAL STATEMENTS

1   Segment information                                                   1997              1996
                                                                          US$m             US$m
    Analysis by activity:
    Turnover
    Company and subsidiaries
    - Hotel ownership                                                     251.7              219.6
    - Hotel management                                                      23.6              22.7
    - Less: Intra-Group turnover                                          (17.2)            (15.1)
                                                                          258.1              227.2

    Trading Profit
    Company and subsidiaries
    - Hotel ownership                                                       70.3             64.1
    - Hotel management                                                       8.4             10.0

    Share of profits less losses of associates
    - Hotel ownership                                                        6.1               8.2
    - Other                                                                  0.2               1.1
    - Interest                                                             (2.4)             (1.9)
                                                                           82.6               81.5

    Gross operating assets
    Substantially all of the gross operating assets of the Group are employed in hotel ownership.

    Analysis by geographical area:
    Turnover
    Company and subsidiaries
    - Hong Kong and Macau                                                 189.6             187.0
    - Southeast Asia                                                       39.6              35.9
    - Europe                                                               27.2               3.1
    - North America                                                         1.7               1.2
                                                                          258.1             227.2

    Trading Profit
    Company and subsidiaries
    - Hong Kong and Macau                                                   61.6             61.6
    - Southeast Asia                                                         9.3             10.6
    - Europe                                                                 6.1              0.7
    - North America                                                          1.7              1.2

    Share of profits less losses of associates
    - Hong Kong and Macau                                                    1.7               2.9
    - Southeast Asia                                                         7.1               9.5
    - North America                                                        (2.5)             (3.1)
    - Interest                                                             (2.4)             (1.9)
                                                                           82.6               81.5




                                                 9
           NOTES TO THE FINANCIAL STATEMENTS

1   Segment information continued                                          1997               1996
                                                                           US$m              US$m
    Gross operating assets
    Company and subsidiaries
    - Hong Kong and Macau                                                   751.6             960.4
    - Southeast Asia                                                         64.4              47.0
    - Europe                                                                154.0             146.0
    Associates
    - Hong Kong and Macau                                                   36.1               39.7
    - Southeast Asia                                                       125.3              255.0
    - North America                                                         39.0               41.1
                                                                         1,170.4            1,489.2

    Gross operating assets comprise assets employed in the business excluding bank balances and
    after deducting creditors, accruals and provisions.


2   Non-recurring item

    Provision against Hotel Majapahit, Surabaya includes a write-off of its carrying value and
    provision for commitments in respect of a guarantee of a bank loan to the Hotel.

3   Net interest expense

    Interest income                                                           8.2               10.0
    Interest expense                                                       (23.2)             (18.2)
                                                                           (15.0)              (8.2)


4   Taxation
    Company and subsidiaries                                                 11.7              10.3
    Associates                                                                1.9               2.8
                                                                             13.6              13.1


    Tax on profits has been calculated at the rates of taxation prevailing in the territories in which
    the Group operates.




                                               10
            NOTES TO THE FINANCIAL STATEMENTS


5   Earnings per share

    Earnings per share are calculated on the profit after taxation and minority interests of US$45.0
    million (1996: US$60.1 million) and on the weighted average number of 701.7 million (1996:
    694.3 million) shares in issue during the year. The weighted average number excludes shares
    held by the Trustee of the Senior Executive Share Incentive Schemes (refer note 12).

    Earnings per share excluding non-recurring item are calculated on the profit after taxation and
    minority interests and after adjusting for the non-recurring item of US$9.2 million (1996: Nil).

    Full exercise of the options under the Schemes would not result in a material dilution of
    earnings per share.


6   Dividends                                                               1997           1996
                                                                            US$m           US$m

    Interim dividend
    - US¢1.65 per share paid
      (1996: US¢1.65 per share)                                                11.6           11.5
    Final dividend
    - US¢1.85 per share proposed
      (1996:US¢4.65 per share)                                                 13.0           32.3
                                                                               24.6           43.8

    Shareholders elected to receive scrip in respect of the following:

    Interim dividend                                                            0.8            0.8
    Final dividend                                                                *            6.4
                                                                                0.8            7.2

* Full provision has been made for the 1997 final dividend, which will be payable in cash with a
  scrip alternative, on the basis that all shareholders will elect to receive cash. The nominal
  amount of the ordinary shares issued as a result of elections for scrip will be capitalised out of
  the share premium account or other reserve, as appropriate.




                                                11
             NOTES TO THE FINANCIAL STATEMENTS


7   Tangible assets
                                                                Leasehold               Furniture
                                                 Land &        improve-     Plant &        &
                                                buildings        ments      machinery   equipment   Total
                                                  US$m           US$m        US$m        US$m       US$m
    1997
    Net book value at 1st January                    1,082.0        20.6       13.7         39.8    1,156.1
    Exchange rate adjustments                         (41.6)          0.1      (1.0)        (4.4)    (46.9)
    Subsidiary acquired                                 51.3          3.6        1.5          5.2      61.6
    Additions                                              -          6.4        1.1          8.8      16.3
    Disposals                                              -        (0.3)          -        (0.3)      (0.6)
    Depreciation charge                                    -        (3.6)      (2.6)        (8.2)    (14.4)
    Revaluation                                      (193.8)            -          -            -   (193.8)
    Net book value at 31st December                    897.9        26.8       12.7         40.9     978.3

    Cost or valuation                                 897.9          40.6       26.4         91.8   1,056.7
    Accumulated depreciation                              -        (13.8)     (13.7)       (50.9)    (78.4)
                                                      897.9          26.8       12.7         40.9    978.3

    1996
    Net book value at 1st January                      715.1        17.3       10.1         25.0      767.5
    Exchange rate adjustments                            1.4        (0.1)          -          0.1        1.4
    Subsidiary acquired                                127.4            -        3.7        12.2      143.3
    Additions                                            0.5          6.1        1.7          9.1      17.4
    Disposals                                              -            -          -        (0.3)      (0.3)
    Depreciation charge                                    -        (2.7)      (1.8)        (6.3)    (10.8)
    Revaluation                                        237.6            -          -            -     237.6
    Net book value at 31st December                  1,082.0        20.6       13.7         39.8    1,156.1

    Cost or valuation                                1,082.0         33.4       24.1         79.1   1,218.6
    Accumulated depreciation                               -       (12.8)     (10.4)       (39.3)    (62.5)
                                                     1,082.0         20.6       13.7         39.8   1,156.1

                                                                                           1997       1996
                                                                                           US$m      US$m
    Analysis of net book value of land and
    buildings
    Freehold                                                                               131.0      129.8
    Long leases (50 years and over unexpired)                                              705.8      913.4
    Other leases                                                                            61.1       38.8
                                                                                           897.9    1,082.0




                                                12
             NOTES TO THE FINANCIAL STATEMENTS


7     Tangible assets continued

    With the exception of the Group’s freehold hotel property in London which was shown at its
    acquisition cost in November 1996, land and buildings were revalued at 31st December 1996 by
    independent valuers on an open market for existing use basis as fully operational business units.
    The Directors have reviewed the carrying values of all properties at 31st December 1997 which
    resulted in a net deficit of US$193.8 million and the Group’s share which amounted to US$195.5
    million has been dealt with in capital reserves.

    If the land and buildings had been included in the financial statements at cost less depreciation,
    the carrying value would have been US$473.8 million (1996: US$461.4 million).

    Certain of the hotel properties are under mortgage to various banks as shown in note 10.


8   Associates                                                                    1997           1996
                                                                                  US$m          US$m

    Listed investment in The Oriental Hotel (Thailand) PCL                         46.1          90.3
    Unlisted investments in other associates                                      152.1         241.8
    Group share of attributable net assets of associates                          198.2         332.1
    Amounts due from associates                                                     2.2           3.7
                                                                                  200.4         335.8

    Market value of listed investment in
    The Oriental Hotel (Thailand) PCL                                              28.4           31.3



     The Directors are satisfied that there is no permanent diminution in the carrying value of the
     listed investment.

     The land and buildings owned by associates, with the exception of the Group’s properties in
     Surabaya and Hawaii which have not yet fully established their market position and properties
     under development, were revalued at 31st December 1996 by independent valuers on an open
     market for existing use basis as fully operational business units.

     The Directors have reviewed the carrying values of all operating properties except Hawaii at
     31st December 1997, and as a result, the Group’s share of the underlying net revaluation deficit
     of US$22.2 million has been dealt with in capital reserves. Hotel property in Hawaii has not yet
     fully established its market position in 1997 and therefore continues to be stated at cost.

     There is no clear indication of when Hotel Majapahit in Surabaya will achieve an adequate
     economic return. Full provision has therefore been made against the Group’s investment in
     this hotel at 31st December 1997.




                                                13
             NOTES TO THE FINANCIAL STATEMENTS

 9   Bank and other advances                                                        1997            1996
                                                                                   US$m            US$m

     Unsecured bank loans and overdrafts                                              0.3             3.8
     Current portion of secured bank loan (refer note 10)                            28.7            32.3
                                                                                     29.0            36.1

10   Term loans

     Secured                                                                        309.8           308.8
     Less current portion (refer note 9)                                            (28.7)         (32.3)
                                                                                    281.1           276.5

     Due dates of repayment:
     Within one year                                                                 28.7            32.3
     Between one and two years                                                       58.8            90.5
     Between two and five years                                                     157.4           116.8
     Beyond five years                                                               64.9            69.2
                                                                                    309.8           308.8

     Currency:                                       Fixed rate loans
                                                 Weighted Weighted                  Floating
                                                 average      average               rate
                                                 interest     period                loans            Total
                                                 rates
                                                 %            Years   US$m          US$m            US$m
     1997
     Hong Kong Dollar                              7.5%         2.0        129.1         103.2      232.3
     United States Dollar                                                      -           2.9        2.9
     United Kingdom Sterling                                                   -          74.6       74.6
                                                                          129.1         180.7       309.8
     1996
     Hong Kong Dollar                              7.7%         3.0       129.3         103.4        232.7
     United Kingdom Sterling                                                  -          76.1         76.1
                                                                          129.3         179.5        308.8


     Term loans at 31st December 1997 are secured against the Group’s subsidiary hotel properties in Hong
     Kong, London and Jakarta.




                                                 14
               NOTES TO THE FINANCIAL STATEMENTS


11     Share capital
                                                      Ordinary shares in millions   1997      1996
                                                            1997         1996       US$m     US$m
       Authorised
       Shares of US¢5 each                               1,500.0       1,500.0      75.0       75.0

       Issued and fully paid
       At 1st January                                      695.1        691.5       34.7       34.6
       Exercise of options                                   0.5          0.5          -          -
       Scrip issued in lieu of dividends                     6.6          3.1        0.4        0.1
       At 31st December                                  702.2*        695.1*       35.1       34.7


     * These shares exclude 13,891,962 (1996: 13,291,962) ordinary shares issued to the Trustee of
       the Senior Executive Share Incentive Schemes (refer note 12).


12     Senior Executive Share Incentive Schemes

       The Senior Executive Share Incentive Schemes were set up in order to provide selected
       executives with options to purchase ordinary shares in the Company. Under the Schemes,
       ordinary shares are issued to the Trustee of the Schemes, Mandarin Oriental Trustees
       Limited, a wholly-owned subsidiary which holds the ordinary shares until the options are
       exercised. Ordinary shares are issued at prices based on the average closing price for the
       five trading days immediately preceding the date of grant of options. Options are exercisable
       for up to 10 years following the date of grant.

       As the shares issued under the Schemes are held on trust by a wholly-owned subsidiary, for
       presentation purposes they are netted off the Company’s share capital in both the parent
       company and consolidated balance sheets (refer note 11), and the premium attached to them is
       netted off the share premium account (refer note 13).

13     Share premium


       At 1st January                                                                22.6      22.4
       Capitalisation arising on scrip issued in lieu of dividends                  (0.4)     (0.1)
       Exercise of share options                                                      0.5       0.3
       At 31st December                                                             22.7       22.6

       Share premium excludes US$14.1 million (1996: US$13.3 million) arising on the ordinary
       shares issued to the Trustee of the Senior Executive Share Incentive Schemes (refer note 12).




                                                    15
            NOTES TO THE FINANCIAL STATEMENTS


14   Revenue and other reserves
                                                             Revenue        Capital     Exchange
                                                             reserves     reserves      reserves            Total
                                                               US$m         US$m           US$m            US$m
     At 1st January 1997                                         167.0     1,026.6           10.0         1,203.6
     Net exchange translation differences                            -            -       (112.0)         (112.0)
     Profit after taxation and minority interests                 45.0            -             -            45.0
     Dividends                                                  (24.6)            -             -          (24.6)
     Property revaluation deficit                                    -     (217.7)              -         (217.7)
     Reserves arising on scrip issued in lieu of dividends         7.2            -             -             7.2
     At 31st December 1997                                     194.6        808.9        (102.0)           901.5

     Including:
     - Company                                                   35.5           -              -            35.5
     - Associates                                                 8.3       112.2         (75.5)            45.0


     At 1st January 1996                                        146.4        778.7           11.4           936.5
     Net exchange translation differences                           -         (1.1)         (1.4)            (2.5)
     Profit after taxation and minority interests                60.1             -             -             60.1
     Dividends                                                 (43.8)             -             -          (43.8)
     Property revaluation surplus                                   -        249.0              -           249.0
     Reserves arising on scrip issued in lieu of dividends        4.3             -             -              4.3
     At 31st December 1996                                      167.0      1,026.6           10.0         1,203.6

     Including:
     - Company                                                   29.5            -              -           29.5
     - Associates                                                15.9        162.6            2.9          181.4


     Capital reserves include property revaluation reserves of US$554.8 million (1996:US$772.5 million).
     Net exchange translation differences are mainly attributable to the translation of the Group’s net assets
     in Indonesia, The Philippines, Singapore and Thailand.


15   Minority interests                                                                     1997           1996
                                                                                           US$m           US$m

     At 1st January                                                                            1.6            0.9
     Net exchange translation differences                                                   (10.5)
                                                                                                      -
     Subsidiary acquired during the year                                                      22.7
                                                                                                      -
     Attributable (losses)/ profits                                                          (0.2)            0.1
     Property revaluation                                                                      1.7            0.6
     At 31st December                                                                        15.3             1.6




                                                16
            NOTES TO THE FINANCIAL STATEMENTS


16    Notes to consolidated cash flow statement                                         1997          1996
                                                                                        US$m         US$m
      (a) Other non-cash items
            Loss on sale of tangible assets                                                0.3               -
            Provisions                                                                       -             1.3
                                                                                           0.3             1.3


      (b) Decrease in working capital
            Decrease/(increase) in stocks                                                  0.7            (0.1)
            Decrease/ (increase) in debtors and prepayments                                7.2            (8.3)
            (Decrease)/increase in creditors, accruals and                               (4.3)              9.0
      provisions
            Decrease in amounts due from associates                                        1.5             0.4
                                                                                           5.1             1.0

      (c) Purchase of a subsidiary

           Tangible assets                                                                61.6        143.3
           Current                                                                         2.6          2.1
      assets
           Current liabilities                                                           (6.3)         (2.4)
           Minority interests                                                           (22.7)             -
           Fair value at acquisition                                                      35.2        143.0
           Transfer from associates                                                     (28.7)             -
           Total consideration                                                             6.5        143.0
           Cash and cash equivalents of subsidiary                                       (0.2)         (0.1)
      acquired
           Net cash outflow                                                                6.3        142.9

          Total consideration of US$6.5 million in 1997 relates to the acquisition of additional 10.45%
          interests in Mandarin Oriental, Jakarta which became a subsidiary hotel in September 1997.


     (d) Increase in associates
         Increase in associates includes the Group’s investment in Mandarin Oriental, Miami and
         shareholder advances to Kahala Mandarin Oriental Hawaii and Hotel Majapahit,
         Surabaya for operational funding.

     (e) Analysis of cash and cash equivalents

           Bank                                                                         139.6         128.9
      balances
           Unsecured bank loans and overdrafts
                                                                                         (0.3)         (3.8)
                                                                                        139.3         125.1



                                                 17
              NOTES TO THE FINANCIAL STATEMENTS

17 Financial instruments

   The Group manages its exposure to financial risks using a variety of techniques and
   instruments. Entering into speculative transactions is specifically prohibited.

   Foreign exchange risk
   Material foreign currency transaction exposures are covered by forward contracts and
   options.

   Interest rate risk
   The Group is exposed to interest rate risk through the impact of rate changes on interest
   bearing liabilities and assets. These exposures are managed partly by using natural hedges
   that arise from offsetting interest rate sensitive assets and liabilities, and partly through the use
   of derivative financial instruments such as interest rate swaps and caps.

   Funding risk
   The Group’s ability to fund its existing and prospective debt requirements is managed by
   maintaining the availability of adequate committed funding lines from high quality lenders.

   Counterparty risk
   The Group’s ownership of financial assets involves the risk that counterparties may be unable
   to meet the terms of their agreements. The Group manages these risks by monitoring credit
   ratings and limiting the aggregate risk to any individual counterparty.

   Fair values
   The fair values of the Group’s financial assets and liabilities, before taking account of hedging
   transactions, are summarised as follows:

                                                                                1997             1996
                                                                               US$m             US$m
   Financial assets
   Debtors                                                                       20.8             26.3
   Bank balances                                                                139.6            128.9
                                                                                160.4            155.2
   Financial liabilities
   Creditors and accruals                                                        28.5             32.3
   Bank and other advances                                                        0.3              3.8
   Term loans                                                                   309.8            308.8
                                                                                338.6            344.9



   The fair values for debtors, bank balances, creditors and accruals, and bank and other
   advances are the same as their carrying amount due to the short-term maturities of these
   assets and liabilities.

   The fair value of term loans is estimated using the expected future payments discounted at
   market interest rates and is the same as its carrying amount.


                                                18
               NOTES TO THE FINANCIAL STATEMENTS


17 Financial instruments continued

    Currency profile
    The currency profile of the Group’s financial assets and liabilities, before taking account of hedging
    transactions, is summarised as follows:

                                                        1997                              1996
                                       Financial           Financial         Financial             Financial
                                         assets            liabilities          assets             liabilities
                                          US$m                 US$m             US$m                  US$m
    Currency:
    Hong Kong Dollar                        12.4                  249.3          18.3                  253.8
    Indonesian Rupiah                        1.2                    1.1             -                      -
    Philippine Peso                          4.0                    4.2           5.2                    8.5
    Singapore Dollar                         1.4                    0.2           1.6                      -
    United Kingdom Sterling                  3.0                   78.4           5.8                   79.9
    United States Dollar                   138.2                    5.3         124.2                    2.4
    Others                                   0.2                    0.1           0.1                    0.3
                                          160.4                  338.6          155.2                  344.9

    Derivative financial instruments
                                        Contract            Fair value       Contract            Fair value
                                         amount         assets/(liability)    amount        assets/(liability)
                                          US$m                   US$m          US$m                   US$m
    Analysis of interest rate swaps
    and caps:
    Hong Kong Dollars                     232.2                      8.4        129.3                     (1.5)
    United Kingdom Sterling                71.3                      0.2            -                         -

    Analysis of forward foreign
    exchange contracts:
    Singapore Dollars                       1.2                         -            -                        -



    The fair value of derivative financial instruments represents the unrealised gains/(losses) on open
    contracts, which are not recognised in the financial statements.




                                                   19
     NOTES TO THE FINANCIAL STATEMENTS


18   Commitments                                                          1997          1996
                                                                          US$m         US$m
     Capital commitments
     Authorised not contracted                                               6.2          7.3
     Contracted not provided                                                35.8         19.8
                                                                            42.0         27.1


     Pension commitments
     The Group has pension commitments in respect of four defined benefit pension schemes and
     two defined contribution schemes.

     The defined benefit schemes are valued annually by independent qualified actuaries. The
     principal assumptions were that investment returns would be higher than salary increases by
     1% to 2%. The fair value of the assets of these schemes at their latest valuations on 1st
     January 1998 was US$48.9 million, and the actuarial present value of the benefits that had
     accrued to members after allowing for future salary increase amounted to US$35.6 million.
     Total pension cost for the year relating to the defined benefit schemes amounted to US$1.8
     million (1996: US$2.2 million).

     The Group’s contribution to the defined contribution schemes during the year amounted to
     US$0.3 million (1996: US$0.3 million).


19   Parent company balance sheet


     Subsidiaries at cost                                                106.5        119.5
     Net current liabilities                                             (13.2)      (32.7)
     Net operating assets                                                  93.3        86.8

     Share capital (refer note 11)                                        35.1         34.7
     Share premium (refer note 13)                                        22.7         22.6
     Revenue and other reserves                                                        29.5
                                                                      35.5
     Shareholders' funds                                                  93.3         86.8




                                             20
                 NOTES TO THE FINANCIAL STATEMENTS

20   Related party transactions

     In the normal course of business the Group undertakes on an arms length basis a variety of
     transactions with its associates and with Jardine Matheson Holdings Limited and its subsidiary
     undertakings and associates. In addition, the Group paid a management fee of US$0.2 million
     (1996: US$0.3 million) to Jardine Matheson Limited, being 0.5% per annum of the Group’s net
     profit after taxation and minority interests in consideration for certain management consultancy
     services provided by Jardine Matheson Limited.

     Bank balances at 31st December 1997 include deposits placed on normal commercial terms and
     amounting to US$10 million with Matheson Bank Limited, a wholly owned United Kingdom
     subsidiary of Jardine Matheson Holdings Limited.




                                                 21
                                                       FIVE YEAR SUMMARY
                                                    in millions of United States Dollars

Consolidate d profit and loss account               1993            1994            1995       1996       1997

T urnover                                          158.8           183.4            192.0      227.2     258.1

Operating profit                                     41.2            51.5            55.5       74.1       78.7
Share of profits less losses of associates            9.5            10.9            12.3        7.4        3.9
Provision against Hotel Majapahit, Surabya              -               -               -          -      (9.2)
Profit before interest and taxation                  50.7            62.4            67.8       81.5       73.4
Net interest expense                                (2.7)           (4.0)           (4.8)      (8.2)     (15.0)

Profit before taxation                               48.0            58.4            63.0       73.3       58.4
T axation                                           (7.1)           (9.5)           (9.2)     (13.1)     (13.6)

Profit after taxation                                40.9            48.9            53.8       60.2       44.8
Minority interests                                  (0.1)           (0.1)           (0.1)      (0.1)        0.2

Profit attributable to Shareholders                  40.8            48.8            53.7       60.1       45.0
Dividends                                          (34.0)          (37.9)          (40.8)     (43.8)     (24.6)

Retained profit for the year                          6.8           10.9             12.9       16.3       20.4

Earnings per share (US¢)                              6.0             7.1             7.8        8.7        6.4
Earnings per share excluding non-recurring item       6.0             7.1             7.8        8.7        7.7
(US¢)
Dividends per share (US¢)                             5.0             5.5             5.9        6.3        3.5

Consolidate d balance sheet
T angible assets                                    652.9          754.9            767.5    1,156.1      978.3
Associates and other investments                    244.8          274.2            323.4      335.8      200.4
Net current assets                                    92.5           83.3           106.7        49.8       79.6
T erm loans                                       (149.6)        (129.2)          (200.4)    (276.5)    (281.1)
Other non-current liabilities                        (2.9)          (3.0)            (2.8)      (2.7)      (2.6)

Net operating assets                               837.7           980.2            994.4    1,262.5     974.6

Share capital                                       34.0            34.5             34.6       34.7      35.1
Share premium                                       23.7            22.5             22.4       22.6      22.7
Revenue and other reserves                         778.0           922.2            936.5    1,203.6     901.5

Shareholders' funds                                835.7           979.2            993.5    1,260.9     959.3
Minority interests                                   2.0             1.0              0.9        1.6      15.3

Capital employed                                   837.7           980.2            994.4    1,262.5     974.6

Net asset value per share (US$)                       1.2             1.4             1.4        1.8        1.4

Consolidate d cash flow statement

Cash flows from operating activities                 48.7            59.8            51.5       80.2       78.9
Cash flows from investing activities               (19.7)          (20.2)          (67.8)    (168.3)     (27.7)
Net cash flow before financing                       29.0           39.6           (16.3)     (88.1)       51.2

Cash flow per share
 from operating activities (US¢)                      7.2             8.7             7.5       11.6       11.2




                                                   22
23

				
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Description: MANDARIN ORIENTAL INTERNATIONAL LIMITED Revaluation