Annual Report and Consolidated Financial Statements 31 December 2005
Pages Directors report 1-2 Corporate governance - Statement of compliance 3-6 Report of the auditors on the statement of compliance on corporate governance 7 Statement of directors responsibilities 8 Report of the auditors 9 Profit and loss accounts 10 Balance sheets 11-12 Statements of changes in equity 13-14 Cash flow statements 15 Accounting policies 16-23 Notes to the financial statements 24-42
Directors report The directors present their report and the audited consolidated financial statements for the year ended 31 December 2005. Principal activity The group s principal activity is the operation of the Dolmen Resort Hotel in Bugibba, Malta, and the renting out of parts of the said property to a group undertaking and to third parties. Review of the business 2005 was the first full year of operations for the Dolmen Resort Hotel after its temporarily closure for refurbishing in the first quarter of 2004. Turnover reached Lm3.90 million, an increase of 21% over 2004 levels. Gross profit increased by 23% to reach Lm976,000 or a 25% margin. Operating profit stood at Lm516,000 as compared to Lm139,000 for 2004. This leap is mainly attributable to both the improved gross profit referred to above and a decrease in administrative expenses mainly from refurbishment costs incurred in 2004. The group reported a profit before tax for 2005 of Lm211,000. performance mainly reflects the operations of the Dolmen Resort Hotel the contribution of which increased to Lm1.82 million, a 16.9% increase over 2004 levels. Despite unsteadiness in the local tourism industry the Dolmen s performance has been a strong one even when compared to competition. Overall, the group has reached its budgeted profits for 2005 and the bond redemption fund is being built up in accordance with the provisions set out in the Offering Memorandum dated 28 October 2003. The hotel operations forecasted results for 2006 are expected to follow those attained in 2005 despite heavier competition and a subdued tourism trend to the Island. Results and dividends The profit and loss accounts are set out on page 10. The directors do not recommend the payment of a dividend. Directors The directors of the company who held office during the year were: George Fenech - Chairman Lino Spiteri Raymond Fenech Raymond Sladden The company s Articles of Association do not require any director to retire. 1
Directors report - continued Auditors PricewaterhouseCoopers have indicated their willingness to continue in office and a resolution for their reappointment will be proposed at the Annual General Meeting. On behalf of the Board George Fenech Chairman Lino Spiteri Director Registered office: Tumas Head Office Portomaso Business Tower Level 20 Portomaso Malta 20 July 2006 2
Corporate governance Statement of compliance Introduction This statement is being made by Dolmen Properties p.l.c. ( the company ) pursuant to Listing Rules 8.26 and 8.27 issued by the Malta Financial Services Authority and affirms the extent to which the has adopted the Code of Principles of Good Corporate Governance (the Principles ) referred to in the said Rules as well as the measures taken to ensure compliance therewith. As from its incorporation in 2003, the company was involved in a restructuring process in connection with the Dolmen Resort Hotel investment within the Tumas hospitality division. This was concluded with the successful public issue of Lm4.7million 6% secured bonds in November 2003. The company holds title to the land and buildings that constitute the Dolmen Resort Hotel and its amenities and surrounding grounds in Bugibba, Malta. Dolmen Properties p.l.c. is also the principal shareholder of Dolmen Complex Limited, the operator of the hotel, both collectively referred to as the group. The group s principal activity is the operation of the Dolmen Resort Hotel, and the renting out of parts of the said property to a group undertaking and third parties. The company therefore exercises full control over and is the beneficial owner of all the profit and net cash flow streams arising from the operation of the hotel, in part by way of rental payments and in part through dividends and other transfers. In deciding on the most appropriate manner in which to implement the Principles, the Board of Dolmen Properties p.l.c. (the Board ) has taken cognisance of the group s size, which inevitably impacts on the structures required to implement the Principles without diluting the effectiveness thereof. The company does not have any employees. Roles and responsibilities The Board acknowledges its statutory mandate to conduct the administration and management of the company. The Board, in fulfilling this mandate and discharging its duty of stewardship of the company, assumes responsibility for: the group s strategy and decisions with respect to the proper administration of its investments, and the servicing and redemption of its bonds; reviewing and approving of hotel management operation business plan and targets and implementation of such plans; identifying the principal business risks of the group and overseeing the implementation and monitoring of appropriate risk management systems; 3
Corporate governance Statement of compliance - continued Roles and responsibilities - continued monitoring that its operations are in conformity with its commitments towards bondholders, shareholders and all relevant laws and regulations; ensuring that the group installs and operates effective internal control and management information systems; assessing the performance of the group s senior officers, including monitoring the establishment of appropriate systems of succession planning and for approving the compensation levels of such officers; ensuring that the group has a policy in place to enable it to communicate effectively with the market. The Board delegates authority and vests accountability for the group s day to day operational business with the company s sole subsidiary organisational structure. Dolmen Complex Limited has its own management structure and accounting systems and internal controls, and is governed by its own board, whose members comprise Dolmen Properties p.l.c. directors. The hotel management team comprising, the hotel general manager, Mr Alex Pace and the financial controller, Mr Lino Grima are supported by group officers designated to the different functional roles within the hotel operations. Matters related to the bond issue and the market are delegated to Mr Raymond Sladden who is supported by a separate team of group officers. Board of Directors The company has four directors who are appointed by its ultimate principal shareholder, Tumas Limited. Each director receives an annual remuneration of Lm500. Three of the directors, Mr George Fenech, Mr Raymond Fenech and Mr Raymond Sladden, occupy senior executive positions within the Tumas of Companies. The fourth director, Mr Lino Spiteri, serves on the Board of the company and of another group undertaking, in a non-executive capacity. The exercise of the role of the Board The activities of the Board are exercised in a manner designed to ensure that it can function independently of management and effectively supervise the operations of the group and protect the interests of bondholders and shareholders. 4
Corporate governance Statement of compliance - continued The exercise of the role of the Board - continued Meetings of the Board, chaired by Mr George Fenech, are held regularly. Individual directors, apart from attendance at formal Board meetings, participate in other informal meetings during the year as may be required, either to assure good corporate governance, or to contribute more effectively to the decision making process. The Board members are notified of forthcoming meetings by the company secretary with the issue of an agenda and supporting documents as necessary. Apart from setting the strategy and direction of the group, the Board retains direct responsibility for approving and monitoring: direct supervision, supported by expert professional advice as appropriate, on the issue and listing of bonds; that the proceeds of the bonds are applied for the purposes for which they were sanctioned for as specified in the offering memorandum dated 28 October 2003; proper utilisation of the group s resources, and financing opportunities, through budgets and annual plans for the hotel operations and property rentals; approval of the annual report and financial statements and of relevant public announcements and for the company s compliance with its continuing listing obligations. During the year, regular operational review board meetings have been held whereby management presented the Board with performance reviews on hotel and rental operations. This ensured sufficient delegation of powers to achieve effective management, as well as an organisational structure ensuring that proper control and reporting systems are in place and maintained. The Board does not consider it necessary to institute separate committees such as remuneration and audit committees, as would be appropriate in a larger corporate set-up. As required by the Maltese Companies Act, 1995 and the Malta Financial Services Authority Listing Rules, the financial statements of Dolmen Properties p.l.c. are subject to annual audit by its external auditors. Moreover, the Board has direct access to the external auditors of the group, who attend at Board meetings at which the group s and company s financial statements are approved. Moreover, in ensuring compliance with other statutory requirements and with continuing listing obligations, the Board is advised directly, as appropriate, by its appointed broker, legal advisor and the external auditors. Directors are entitled to seek independent professional advice at any time on any aspect of their duties and responsibilities, at the group s expense. The company has formal mechanisms to monitor dealings by directors and senior officials in the bonds of the company and has also put in place the appropriate mechanisms for the advance notification of such dealings. 5
Corporate governance Statement of compliance - continued Going Concern The directors, having made due enquiries, are of the opinion that, at the time of approving the financial statements, the group and the company have adequate resources to continue operating for the foreseeable future. For this reason, the directors have adopted the going concern basis in preparing the financial statements. Relations with bondholders and the market Pursuant to the company s statutory obligations in terms of the Maltese Companies Act, 1995 and the Malta Financial Services Authority Listing Rules, the Annual Report and Financial Statements, the election of directors and approval of directors fees, the appointment of the auditors and the authorisation of the directors to set the auditors fees, and other special business, are proposed and approved at the company s Annual General Meeting. The company communicates with its bondholders by way of the Annual Report and Financial Statements. The Board feels that it is providing the market with adequate information about its activities through these channels. The Board considers that the company has been in compliance with the Principles throughout the year as befits a company of this size and nature. Approved by the Board on 20 July 2006 and signed on its behalf by: George Fenech Chairman Lino Spiteri Director 6
Report of the auditors on the statement of compliance on corporate governance To the members of Dolmen Properties p.l.c. pursuant to the Listing Rule 8.28 issued by the Listing Authority Listing Rules 8.26 and 8.27 issued by the Malta Financial Services Authority require the company s directors to include in their Annual Report a Statement of Compliance to the extent to which they have adopted the Code of Principles of Good Corporate Governance and the effective measures that they have taken to ensure compliance with those Principles. Our responsibility, as auditors of the group, is laid down by Listing Rule 8.28 which requires us to include a report on the Statement of Compliance. We read the Statement of Compliance and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to considering whether this Statement is consistent with any other information included in the Annual Report. We are not required to, and we do not, consider whether the Board s statements on internal control included in the Statement of Compliance cover all risks and controls, or form an opinion on the effectiveness of the group s corporate governance procedures, or its risk and control procedures. In our opinion, the Statement of Compliance set out on pages 3 to 6 has been properly prepared in accordance with the requirements of Listing Rules 8.26 and 8.27 issued by the Listing Authority. 167 Merchants Street Valletta Malta 20 July 2006 7
Statement of directors responsibilities The directors are required by the Companies Act, 1995 to prepare financial statements which give a true and fair view of the state of affairs of the group and the company as at the end of each financial period and of the profit or loss for that period. In preparing the financial statements, the directors are responsible for ensuring that: appropriate accounting policies have been consistently applied and supported by reasonable and prudent judgements and estimates; the financial statements have been drawn up in accordance with International Financial Reporting Standards as adopted by the European Union; the financial statements are prepared on the going concern basis unless it is inappropriate to presume that the group and the company will continue in business as a going concern. The directors are also responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the group and the company and to enable them to ensure that the financial statements comply with the Companies Act, 1995. They are also responsible for ensuring that an appropriate system of internal controls is in operation to provide them with reasonable assurance that the assets of the group and the company are properly safeguarded and that fraud and other irregularities will be prevented or detected. 8
Report of the auditors To the Members of Dolmen Properties p.l.c. We have audited the financial statements on pages 10 to 42. As described in the statement of directors responsibilities on page 8, these financial statements are the responsibility of the company s directors. Our responsibility is to form an independent opinion, based on our audit, on these financial statements and to report our opinion to you. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the directors, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion the financial statements give a true and fair view of the state of affairs of the group and the company as at 31 December 2005 and of the profit, changes in equity and cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union and have been properly prepared in accordance with the Maltese Companies Act, 1995. 167 Merchants Street Valletta Malta 20 July 2006 9
Profit and loss accounts Year ended 31 December Notes Turnover 2 3,899,891 3,233,365 812,997 613,057 Cost of sales 3 (2,924,105) (2,441,473) (248,341) (199,122) Gross profit 975,786 791,892 564,656 413,935 Other operating income 2 10,841 9,255 - - Administrative expenses 3 (470,624) (662,413) (16,147) (26,911) Operating profit 516,003 138,734 548,509 387,024 Interest receivable 5 7,779 15,601 20,620 15,601 Interest payable and similar charges 6 (312,404) (314,536) (426,338) (425,981) Profit/(loss) before tax 211,378 (160,201) 142,791 (23,356) Tax (expense)/income 7 (13,607) 134,276 (71,525) 3,610 Profit/(loss) for the year 197,771 (25,925) 71,266 (19,746) Earnings per share (cents) 9 2c8 (0c4) 10
Balance sheets As at 31 December Notes ASSETS Fixed assets Tangible assets - Property, plant and equipment 10 16,363,977 16,697,642 - - - Investment property 11 - - 14,919,512 14,762,572 Financial assets - Investments in group undertakings 12 - - 2,475,723 2,475,723 Total fixed assets 16,363,977 16,697,642 17,395,235 17,238,295 Other non-current assets Debtors 14 381,085 381,085 - - Total non-current assets 16,745,062 17,078,727 17,395,235 17,238,295 Current assets Stocks 13 89,427 80,665 - - Debtors 14 912,506 932,550 224,302 872,173 Taxation recoverable 1,221 - - - Cash at bank and in hand 23 619,797 149,968 586,209 91,665 Total current assets 1,622,951 1,163,183 810,511 963,838 Total assets 18,368,013 18,241,910 18,205,746 18,202,133 11
Balance sheets - continued As at 31 December EQUITY AND LIABILITIES Notes Capital and reserves Called-up issued share capital 19 7,000,000 7,000,000 7,000,000 7,000,000 Revaluation reserve 20 476,447 - - - Other reserve 21 - - 2,453,671 1,977,224 Profit and loss account 1,997,764 1,799,993 76,066 4,800 Total equity 9,474,211 8,799,993 9,529,737 8,982,024 Provisions for liabilities and charges Deferred taxation 17 2,612,799 3,101,599 2,801,265 3,302,147 Provisions for other liabilities and charges 18 120,963 116,454 - - 2,733,762 3,218,053 2,801,265 3,302,147 Creditors: Amounts falling due after more than one year Interest-bearing borrowings 15 4,595,136 4,577,379 5,759,458 5,791,701 Total non-current liabilities 7,328,898 7,795,432 8,560,723 9,093,848 Creditors: Amounts falling due within one year Interest-bearing borrowings 15 216,362 77,702 50,000 50,000 Trade and other creditors 16 1,348,542 1,545,915 59,305 52,576 Current taxation - 22,868 5,981 23,685 Current liabilities 1,564,904 1,646,485 115,286 126,261 Total liabilities 8,893,802 9,441,917 8,676,009 9,220,109 Total equity and liabilities 18,368,013 18,241,910 18,205,746 18,202,133 The financial statements on pages 10 to 42 were authorised for issue by the board of directors on 20 July 2006 and were signed on its behalf by: George Fenech Chairman Lino Spiteri Director 12
Statements of changes in equity Profit and Share Revaluation loss Note capital reserve account Total Balance at 1 January 2004 7,000,000 27,335 1,798,583 8,825,918 Transfer of depreciation through asset use, net of deferred taxation 20 - (27,335) 27,335 - Loss for the financial year - - (25,925) (25,925) Balance at 31 December 2004 7,000,000-1,799,993 8,799,993 Balance at 1 January 2005 7,000,000-1,799,993 8,799,993 Transfer of deferred taxation to reserves upon changes in tax rules 20-476,447-476,447 Net income recognised directly in equity - 476,447-476,447 Profit for the financial year - - 197,771 197,771 Total recognised income for 2005-476,447 197,771 674,218 Balance at 31 December 2005 7,000,000 476,447 1,997,764 9,474,211 13
Statements of changes in equity - continued Profit and Share Other loss Note capital reserve account Total Balance at 1 January 2004 7,000,000 1,977,224 24,546 9,001,770 Loss for the financial year - - (19,746) (19,746) Balance at 31 December 2004 7,000,000 1,977,224 4,800 8,982,024 Balance at 1 January 2005 7,000,000 1,977,224 4,800 8,982,024 Transfer of deferred taxation to reserves upon changes in tax rules 21-476,447-476,447 Net income recognised directly in equity - 476,447-476,447 Profit for the financial year - - 71,266 71,266 Total recognised income for 2005-476,447 71,266 547,713 Balance at 31 December 2005 7,000,000 2,453,671 76,066 9,529,737 14
Cash flow statements Year ended 31 December Notes Operating activities Cash generated from/(used in) operations 22 778,218 277,880 1,065,295 (334,199) Interest received 7,779 15,601 20,620 15,601 Interest paid (307,895) (310,027) (426,338) (425,981) Tax paid (50,049) (45,955) (113,664) (21,673) Net cash generated from/(used in) operating activities 428,053 (62,501) 545,913 (766,252) Investing activities Purchase of property, plant and equipment (96,884) (1,670,978) - - Acquisition of investment property - - (1,369) (1,118,447) Proceeds from disposal of property, plant and equipment - 1,160 - - Net cash used in investing activities (96,884) (1,669,818) (1,369) (1,118,447) Financing activities Repayments of loans from group undertakings - - (50,000) (140,663) Increase in bank borrowings - 14,700 - - Repayments of bank borrowings (5,079) (26,641) - - Contribution to bond redemption fund 23 (303,537) - (303,537) - Net cash used in financing activities (308,616) (11,941) (353,537) (140,663) Movement in cash and cash equivalents 22,553 (1,744,260) 191,007 (2,025,362) Cash and cash equivalents at beginning of year 82,051 1,826,311 91,665 2,117,027 Cash and cash equivalents at end of year 23 104,604 82,051 282,672 91,665 15
Accounting policies The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 1. Basis of preparation The consolidated financial statements include the financial statements of Dolmen Properties p.l.c. and its subsidiary undertaking. These financial statements are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and with the requirements of the Companies Act, 1995. The financial statements are prepared under the historical cost convention as modified by the revaluation of property, plant and equipment. The preparation of financial statements in conformity with IFRSs requires the use of certain accounting estimates. It also requires company directors to exercise their judgement in the process of applying the group s accounting policies (see Note 1 Critical accounting estimates and judgements). Standards, interpretations and amendments to published standards effective in 2005 In the financial year ended 31 December 2005, the group adopted new standards, amendments and interpretations to existing standards that are mandatory for the group s accounting period beginning on 1 January 2005. The adoption of these revisions to the requirements of IFRSs did not result in substantial changes to the group s accounting policies. Standards, interpretations and amendments to published standards that are not yet effective Certain new standards, amendments and interpretations to existing standards have been published by the date of authorisation for issue of these financial statements, that are mandatory for the group s accounting periods beginning on or after 1 January 2006 or later periods. The group has not early adopted these revisions to the requirements of IFRSs and the company s directors are of the opinion that there are no requirements that will have a possible material impact on the group s financial statements in the period of initial application. 2. Consolidation undertakings are all entities over which the group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the group controls another entity. undertakings are fully consolidated from the date on which control is transferred to the group. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of group undertakings by the group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the group s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the group undertaking acquired, the difference is recognised directly in the profit and loss account (see Accounting policy 9). 16
2. Consolidation - continued Inter-company transactions, balances and unrealised gains on transactions between group undertakings are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of group undertakings have been changed where necessary to ensure consistency with the policies adopted by the group. Dolmen Properties p.l.c acquired a 99.9% shareholding in Dolmen Complex Limited on 24 September 2003, in exchange for the issue of shares to the previous shareholder of this subsidiary. The substance of this transaction was that of a group restructuring and accordingly the provisions in respect of business combinations set out in IFRS 3 were not applicable. In accordance with generally accepted accounting principles, the predecessor basis of accounting has been adopted and this transaction has been recorded as if it had occurred at the beginning of the earliest period recorded. 3. Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the group s activities. Revenue is shown net of value-added tax or other sales taxes, returns, rebates and discounts and after eliminating sales within the group. Revenue is recognised as follows: (a) Sales of services in the hospitality activity Sales of services are recognised in the accounting period in which the services are rendered, by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. Sales arising on hospitality activities are recognised when the service is performed and goods are supplied. Revenue is usually in cash, credit card or on credit. The recorded revenue, includes credit card fees payable for the transaction. (b) Sales of goods retail Sales of goods are recognised when a group undertaking sells a product to the customer. Retail sales are usually in cash or by credit card. The recorded revenue, includes credit card fees payable for the transaction. Such fees are included in finance costs. Restaurant and bar sales are recognised upon performance of the service. (c) Sales of services Sales of services are recognised in the accounting period in which the services are rendered, by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. (d) Property related income Rentals receivable, short-term lets receivable and premia charged to tenants of immovable property are recognised in the period when the property is occupied. Premia are taken to the profit and loss account over the period of the leases to which they relate. 17
3. Revenue recognition - continued (e) Interest income Interest income is recognised on a time-proportion basis using the effective interest method. When a receivable is impaired, the group undertaking reduces the carrying amount to its recoverable amount, being the estimated future cash flows discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate. (f) Dividend income Dividend income is recognised when the right to receive payment is established. 4. Interest income and expense Interest income and expense are recognised in the profit and loss account for all interest-bearing instruments on an accrual basis using the effective yield method. Interest expense includes the effect of amortising any difference between net proceeds and redemption value in respect of the group s interest-bearing borrowings. Other income is recognised as it accrues, unless collectibility is in doubt. Interest expense is charged against income without restriction. No borrowing costs have been capitalised. 5. Foreign currencies Functional and presentation currency Items included in the financial statements of each of the group s entities are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The consolidated financial statements are presented in Maltese Liri, which is the group s functional and presentation currency. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the profit and loss account. 6. Property, plant and equipment Property, plant and equipment, are initially recorded at cost and are subsequently stated at cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of items. Subsequent costs are included in the asset s carrying amount, or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the group, and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the profit and loss account during the financial period in which they are incurred. 18
6. Property, plant and equipment - continued Land and buildings are subsequently shown at market value, based on valuations by external independent valuers, less subsequent depreciation. Valuations are carried out periodically when the directors consider it appropriate to do so such that the carrying amount of land and buildings does not differ materially from that which would be determined using fair values at the balance sheet date. All other plant and equipment is stated at historical cost less depreciation. Increases in the carrying amount arising on revaluation are credited to the revaluation reserve in shareholders equity. Decreases that offset previous increases of the same asset are charged against the revaluation reserve; all other decreases are charged to the profit and loss account. Each year the difference between depreciation based on the revalued carrying amount of the asset (the depreciation charged to the profit and loss account) and depreciation based on the asset s original cost, net of any related deferred income taxes, is transferred from the revaluation reserve to retained earnings. Gains and losses on disposal of property, plant and equipment are determined by comparing proceeds with the carrying amount, and are taken into account in determining operating profit. On disposal of a revalued asset, amounts in the revaluation reserve relating to that asset are transferred to retained earnings. Depreciation is calculated on the straight-line method to allocate the cost of the assets to their residual values over their estimated useful lives as follows: % Freehold and long-term leasehold land Nil Buildings and improvements 1-5 Plant and equipment and fixtures, fittings and furniture 6.7-30 Motor vehicles 20 The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset s carrying amount is written down immediately to its recoverable amount if its carrying amount is greater than its estimated recoverable amount (see Accounting policy 9). 7. Investment property The company owns investment property, principally comprising the Dolmen Complex land and buildings and integral plant, which is held for long-term rental yields and is not occupied by the company but rented out to its subsidiary undertaking in its entirety. Consequently this property is classified and measured as property, plant and equipment in the group s financial statements in accordance with the requirements of IAS 16. The company s investment property is stated in the balance sheet at cost less accumulated depreciation and impairment losses. Maintenance expenses and repairs are recognised as an expense. Subsequent expenditure that increases the value of property is capitalised if it extends the useful life. The capitalised costs of buildings are amortised over one hundred years at most, in accordance with their useful lives. 19
7. Investment property - continued An asset s carrying amount is written down immediately to its recoverable amount if its carrying amount is greater than its estimated recoverable amount (see Accounting policy 9). Property that is being constructed or developed for future use as investment property is classified as property, plant and equipment and stated at cost until construction or development is complete, at which time it is reclassified and subsequently accounted for as investment property at the carrying amount. If an investment property becomes owner-occupied, it is reclassified as property, plant and equipment and its carrying amount at the date of reclassification becomes its cost for accounting purposes or subsequent recording. If an item of property, plant and equipment becomes an investment property because its use has changed, the carrying amount at the date of reclassification becomes its cost for accounting purposes or subsequent recording. 8. Investments in group undertakings In the company s financial statements, investments in group and associated undertakings are accounted for by the cost method of accounting. The dividend income from such investments is included in the profit and loss account in the accounting year in which the company s rights to receive payment of any dividend is established. The company gathers objective evidence that an investment is impaired using the same process disclosed in Accounting policy 9. On disposal of an investment, the difference between the net disposal proceeds and the carrying amount is charged or credited to the profit and loss account. 9. Impairment of assets Impairment of non financial assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Impairment of financial assets The group assesses at each balance sheet date whether there is objective evidence that a financial asset is impaired. A financial asset is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset and that has an impact on the estimated future cash flows of the financial asset that can be reliably estimated. Objective evidence that a financial asset is impaired includes observable data about certain events which can include (but are not restricted to) indications that there is a measurable decrease in the estimated future cash flow from the financial asset since the initial recognition. If there is objective evidence that an impairment loss has been incurred on loans and receivables carried at amortised cost, the amount of the loss is recognised in the profit and loss account and measured as the difference between the asset s carrying amount and the present value of estimated future cash flows discounted at the financial asset s original effective interest rate. 20
9. Impairment of assets - continued The group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. Impairment losses recognised in the profit and loss account on equity instruments are not reversed through the profit and loss account. 10. Stocks Stocks are stated at the lower of cost and net realisable value, and include transport and handling costs, determined on a weighted average basis. 11. Trade debtors Trade debtors are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade debtors is established when there is objective evidence that the group will not be able to collect all amounts due according to the original terms of debts. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the profit and loss account. 12. Operating leases A group company is the lessee Leases of assets where a significant portion of the risk and rewards of ownership are effectively retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the profit and loss account on a straight-line basis over the period of the lease. A group company is the lessor Assets leased out under operating leases are included in investment property in the balance sheet. They are depreciated over their expected useful lives on a basis consistent with similar owned investment property. Rental income is recognised as it accrues, unless collectibility is in doubt. 13. Cash and cash equivalents Cash and cash equivalents are carried in the balance sheet at face value. For the purposes of the cash flow statement, cash and cash equivalents comprise cash in hand and deposits held at call with banks, net of bank overdrafts. In the balance sheet, bank overdrafts are included as borrowings under current liabilities. 14. Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the profit and loss account over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. 21
15. Other financial instruments The group s other financial assets, which have not been referred to in the accounting policies disclosed above, are classified as loans and receivables in accordance with the requirements of IAS 39 (revised 2004) and are measured at cost, that is, the face value of these assets. All regular way transactions in assets classified in this category are accounted for using settlement date accounting. A credit risk provision for financial asset impairment is established if there is objective evidence that the group will not be able to collect all amounts due. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of the expected cash flows, including amounts recoverable from collateral, discounted based on the interest rate at inception. The group s financial liabilities, other than those referred to in the accounting policies above, are classified as liabilities which are not held for trading ( other liabilities ) under IAS 39 (revised 2004), and are measured at cost, that is, the face value of such instruments. 16. Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. 17. Deferred taxation Deferred taxation is provided using the liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Under this method the group is required to make provision for deferred income taxes on the revaluation of certain fixed assets. Such deferred tax is charged or credited directly to the revaluation reserve. Deferred income tax on the difference between the actual depreciation on the property and the equivalent depreciation based on the historical cost of the property is realised through the profit and loss account. Deferred tax assets are recognised only to the extent that future taxable profit will be available such that realisation of the related tax benefit is probable. 18. Provisions Provisions are recognised when the group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Restructuring provisions principally comprise termination benefits. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense. 22
19. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable to the issue of new shares or for the acquisition of a business, are included in the cost of acquisition as part of the purchase consideration. Dividend distribution to the company s shareholders is recognised as a liability in the group s financial statements in the period in which the dividends are approved by the company s shareholders. 23
Notes to the financial statements 1. Critical accounting estimates and judgements Estimates and judgements are continually evaluated and based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. In the opinion of the company directors (except as disclosed in note 10), the accounting estimates and judgements made in the course of preparing these financial statements are not difficult, subjective or complex to a degree which would warrant their description as critical in terms of the requirements of IAS 1 (revised). 2. Turnover and other operating income By class of business Hospitality 3,738,246 3,041,944 - - Property rentals 161,645 191,421 600,000 600,000 Management fees - - 12,997 13,057 Dividends receivable - - 200,000-3,899,891 3,233,365 812,997 613,057 Other operating income consists of exchange differences amounting to Lm10,841 (2004: Lm9,255). 3. Expenses by nature Staff costs (Note 4) - operational 1,460,347 1,203,990 - - - refurbishment - 159,564 - - Depreciation on fixed assets: - Property, plant and equipment (Note 10) 430,549 432,020 - - - Investment property (Note 11) - - 248,341 199,122 Operating supplies and related expenses 617,026 485,747 - - Utilities 220,472 179,107 - - Increase in provision for impairment of debtors (Note 14) 9,682 7,190 - - Impairment for debtors 2,190 2,370 - - Property rentals payable 1,367 1,333 - - Other expenses 653,096 632,565 16,147 26,911 Total cost of sales and administrative expenses 3,394,729 3,103,886 264,488 226,033 Auditors remuneration amounted to Lm5,880 (2004: Lm5,700) for the group and Lm800 (2004: Lm800) for the company. 24
4. Staff costs 2005 2004 Lm Lm Wages and salaries 1,339,096 1,254,365 Social security costs 121,251 111,041 1,460,347 1,365,406 Recharged to group undertakings and third parties - (1,852) 1,460,347 1,363,554 Average number of persons employed by the group during the year: 2005 2004 Direct 210 184 Administration 75 73 285 257 5. Interest receivable Interest receivable from group undertaking 4,229 13,656 17,068 13,656 Bank interest 3,550 1,945 3,552 1,945 7,779 15,601 20,620 15,601 6. Interest payable and similar charges Bank loans and overdraft 5,480 8,899 - - Coupon interest payable on secured bonds 282,000 282,773 282,000 282,773 Amortisation of secured bonds issue costs (Note 15) 17,757 16,666 17,757 16,666 Loans from group undertakings - - 126,449 126,449 Other interest payable 4,624 4,998 - - Bank and other financial charges 2,543 1,200 132 93 312,404 314,536 426,338 425,981 25
7. Tax expense/(income) Current tax expense: on profit subject to tax at 15% 27 292 27 292 on profit subject to tax at 35% 25,933 23,686 95,933 23,686 under provision in prior year - 1,654-1,654 Deferred tax income (Note 17) (12,353) (159,908) (24,435) (29,242) Tax expense/(income) 13,607 (134,276) 71,525 (3,610) The tax on the group s and the company s profit/(loss) before tax differs from the theoretical amount that would arise using the basic tax rate as follows: Profit/(loss) on before tax 211,378 (160,201) 142,791 (23,356) Tax on profit/(loss) at 35% 73,982 (56,070) 49,977 (8,175) Tax effect of: Temporary differences attributable to property, plant and equipment (81,923) (82,771) - - Under provision of current tax in prior year - 1,654-1,654 Maintenance allowance on rental income attributable to immovable property (42,000) (42,000) (42,000) (42,000) Movement in deferred tax determined on the basis applicable to capital gains - (4,807) - (4,807) Movement in deferred tax arising from depreciation through asset use (24,435) (24,435) (24,435) (24,435) Income subject to tax at 15% (38) (389) (38) (389) Expenses not allowable for tax purposes 88,021 74,542 88,021 74,542 Tax expense/(income) 13,607 (134,276) 71,525 (3,610) 8. Directors emoluments Directors fees 2,000 2,000 2,000 2,000 26
9. Earnings per share Earnings per share is based on the profit/(loss) for the year attributable to the equity holders of the group divided by the weighted average number of ordinary shares in issue during the year and ranking for dividend. 2005 2004 Net profit/(loss) attributable to equityholders Lm197,771 Lm(25,925) Weighted average number of ordinary shares in issue (Note 19) 7,000,000 7,000,000 Earnings per share 2c8 (0c4) 27
10. Property, plant and equipment Plant and equipment, and fixtures, Land and Advance fittings and Motor buildings payments furniture vehicles Total Lm At 1 January 2004 Cost or valuation 13,873,633 104,831 5,209,330 17,765 19,205,559 Accumulated depreciation (485,831) - (3,920,026) (17,765) (4,423,622) Net book amount 13,387,802 104,831 1,289,304-14,781,937 Year ended 31 December 2004 Opening net book amount 13,387,802 104,831 1,289,304-14,781,937 Commissioned assets and additions 631,783 (104,831) 1,832,452-2,359,404 Disposals - - (577,885) (10,265) (588,150) Depreciation charge (105,055) - (326,965) - (432,020) Depreciation released on disposals - - 566,206 10,265 576,471 Closing net book amount 13,914,530-2,783,112-16,697,642 At 31 December 2004 Cost or valuation 14,505,416-6,463,897 7,500 20,976,813 Accumulated depreciation (590,886) - (3,680,785) (7,500) (4,279,171) Net book amount 13,914,530-2,783,112-16,697,642 Year ended 31 December 2005 Opening net book amount 13,914,530-2,783,112-16,697,642 Additions 5,211-91,673-96,884 Disposals - - (3,000) - (3,000) Depreciation charge (105,107) - (325,442) - (430,549) Depreciation released on disposals - - 3,000-3,000 Closing net book amount 13,814,634-2,549,343-16,363,977 At 31 December 2005 Cost or valuation 14,510,627-6,552,570 7,500 21,070,697 Accumulated depreciation (695,993) - (4,003,227) (7,500) (4,706,720) Net book amount 13,814,634-2,549,343-16,363,977 The group s land and buildings were last revalued on 31 December 1998. Valuations were made on the basis of open market value, after considering the returns being attained by the hotel and the intrinsic value of the property. The book values of the land and buildings were adjusted to the revalued amounts and the resultant surplus net of deferred income taxes was credited to the revaluation reserve. 28
10. Property, plant and equipment - continued This valuation has been confirmed by an independent architects valuation dated 28 October 2003. Although two years have lapsed, since the approval of this valuation assessment, the company directors have confirmed that the carrying amount of land and buildings as at 31 December 2005 does not differ materially from that which would be determined using fair values. The directors take cognisance of certain economic factors that have negatively impacted the group net cash inflows including increases in utility prices and changes in interest rates which they believe have been counterbalanced by appreciation in property values. The carrying amount of land and buildings would have been Lm4,125,994 (2004: Lm4,156,075) had the assets been included in the financial statements at cost less depreciation. Fully depreciated assets which were still in use at 31 December 2005 amounted to Lm2,764,953 (2004: Lm2,376,636). Interest-bearing borrowings are secured by the group s property, plant and equipment (Note 15). 29