SPINOLA DEVELOPMENT COMPANY LIMITED Annual Report...

Company Registration Number: C331

SPINOLA DEVELOPMENT COMPANY LIMITED Annual Report and Financial Statements 31 December 2006

SPINOLA DEVELOPMENT COMPANY LIMITED Annual Report and Financial Statements – 31 December 2006

Pages Directors’ report 1 - 2 Statement of directors’ responsibilities 3 Independent auditor’s report 4 Profit and loss account 5 Balance sheet 6 - 7 Statement of changes in equity 8 Cash flow statement 9 Accounting policies 10 - 17 Notes to the financial statements 18 - 37


1

Directors’ report The directors present their report and the audited financial statements for the year ended 31 December 2006. Principal activities The principal activities of the company are the development and the operation of the Portomaso Complex in St Julians, Malta. This complex includes the Hilton (Malta) and its convention centre, the Portomaso Business Tower, residential apartments, a car park and commercial outlets. Review of business The performance of the company for the year under review was on similar lines to the previous year with a turnover of Lm16.0 million which is 4.3% below the previous year. The gross profit margin stood of 34.0%, an improvement of 2.6% over 2005 reflecting better margins on sale of real estate within Portomaso and a better performance in ancillary activities within the complex. Administrative expenses increased by 20.4% reflecting higher indirect costs within the hotel and similar charges with respect to the running of the car park which as from 2006 was taken over by the company. Operating profit reached Lm3.2 million or 5.7% lower than last year. Interest payable continued to recede as the company’s loan facilities were reduced in line with repayment commitments and a lower interest rate scenario. However, profit before tax then improved by Lm214,000 to reach Lm2.3 million totally due to investment income derived from a subsidiary of the company which manages the leasing operations at the complex. Revenue from the hotel and ancillary operations topped the Lm8 million mark for the first time to reach Lm8.3 million or Lm418,000 over 2005. This was mainly due to additional hotel income and new income streams from the car park and ancillary operations. Despite the higher income, the profit from this area of operation was lower as a result of the higher administrative costs already referred to above. Turnover for the property sector reached Lm6.5 million or 15.4% below last year as a result of fewer deliveries. This was however offset by a higher margin which contributed to a gross profit of Lm2.9 million or Lm161,000 above last year. Income from rental operations decreased by Lm134,000 to Lm351,000, however this was to be seen in the light of investment income amounting to Lm299,000 derived from a subsidiary company which manages the company’s leasing operation. As from 2006 this company is the main vehicle through which rental operations are managed in the complex. The company’s equity position improved to Lm16.2 million an addition of Lm1.3 million over that of last year reflecting the profit for the year under review, less a net dividend paid out during 2006. The forecasted performance for 2007 continues to underline the shift from a property development company to an operating one as the main source of income is gradually shifting towards the hotel and ancillary operations including rental activities. Property development during 2007 continues to decrease in line with a lower stock of apartments for sale. It is however envisaged that during the course of 2007 a new site will come up for development within the complex. The hotel’s extension is currently underway and will have a short term negative impact on the hotel’s income generation, although this will be totally offset by the long term benefit and economies of scale which will be derived from an extensive operation in the five star category. The income from rental activities should be comparable to 2006.


2

Directors’ report - continued Results and dividends The profit and loss account is set out on page 5. During the year the directors declared a net dividend of Lm105,647 (2005: Lm180,000). Directors The directors of the company who held office during the year were: George Fenech Angelo Fenech Raymond Fenech The company’s articles of association do not require any directors to retire. Auditors PricewaterhouseCoopers have indicated their willingness to continue in office and a resolution for their re-appointment will be proposed at the Annual General Meeting. On behalf of the board

George Fenech Raymond Fenech Director Director Registered office: Tumas Group Head Office Portomaso Business Tower Level 20 Portomaso Malta 28 June 2007


3

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 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 the financial statements have been drawn up in accordance with International Financial

Reporting Standards as adopted by the European Union; • selecting and applying appropriate accounting policies; • making accounting estimates that are reasonable in the circumstances; • ensuring that the financial statements are prepared on the going concern basis unless it is

inappropriate to presume that the company will continue in business as a going concern. The directors are also responsible for designing, implementing and maintaining internal control relevant to the preparation and the fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error, and that comply with the Companies Act, 1995. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.


4

Independent auditor’s report To the Shareholders of Spinola Development Company Limited We have audited the financial statements of Spinola Development Company Limited on pages 5 to 37 which comprise the balance sheet as at 31 December 2006 and the profit and loss account, statement of changes in equity and cash flow statement for the year then ended and a summary of significant accounting policies and other explanatory notes. Directors’ Responsibility for the Financial Statements The directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and the requirements of the Maltese Companies Act, 1995. As described in the statement of directors’ responsibilities on page 3, this responsibility includes designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements give a true and fair view of the financial position of the company as at 31 December 2006, and of its financial performance and its 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 requirements of the Maltese Companies Act, 1995.

167 Merchants Street Valletta Malta

28 June 2007


5

Profit and loss account

Year ended 31 December

Notes 2006 2005 Lm Lm Turnover 1 16,023,334 16,758,014 Cost of sales 3 (10,574,813) (11,487,307)

Gross profit 5,448,521 5,270,707 Administrative expenses 3 (2,210,786) (1,836,934)

Operating profit 3,237,735 3,433,773 Investment income 5 298,786 - Interest receivable 5 14,268 16,850 Interest payable and similar charges 5 (1,272,657) (1,385,830)

Profit before tax 2,278,132 2,064,793 Tax expense 6 (859,587) (753,712)

Profit for the financial year 1,418,545 1,311,081

Earnings per share 7 0.41 0.37


6

Balance sheet

As at 31 December

Notes 2006 2005 Lm Lm ASSETS Fixed assets Intangible assets 9 12,423 17,079 Tangible assets - Property, plant and equipment 10 27,738,493 27,999,391- Investment property 11 6,150,708 5,548,857 Financial assets - Investments in group undertaking 12 50,000 50,000- Investments – Available-for-sale 13 118,800 68,800

Total fixed assets 34,070,424 33,684,127

Current assets Stocks 14 4,599,763 6,462,485 Debtors 15 3,268,787 3,752,812 Cash at bank and in hand 22 3,037,673 3,372,970

Total current assets 10,906,223 13,588,267

Total assets 44,976,647 47,272,394


7

Balance sheet - continued

As at 31 December

Notes 2006 2005 Lm Lm EQUITY AND LIABILITIES Capital and reserves Called up issued share capital 19 3,500,000 3,500,000 Revaluation reserves 20 3,337,989 3,654,493 Profit and loss account 9,365,734 7,732,666

Total equity 16,203,723 14,887,159

Provision for liabilities and charges Deferred taxation 18 1,322,723 1,402,247

Creditors: Amounts falling due after more than one year

Interest-bearing borrowings 16 18,647,961 15,939,562 Trade and other creditors 17 400,000 200,000

Total non-current liabilities 20,370,684 17,541,809

Creditors: Amounts falling due within one year

Interest-bearing borrowings 16 1,638,077 6,895,905 Trade and other creditors 17 6,574,301 7,837,863 Current taxation 189,862 109,658

Total current liabilities 8,402,240 14,843,426

Total liabilities 28,772,924 32,385,235

Total equity and liabilities 44,976,647 47,272,394

The financial statements on pages 5 to 37 were authorised for issue by the board of directors on 28 June 2007 and were signed on its behalf by:

George Fenech Raymond Fenech Director Director


8

Statement of changes in equity Share Revaluation Profit and Notes capital reserves loss account Total Lm Lm Lm Lm Balance at 1 January 2005 3,500,000 4,287,067 5,968,207 13,755,274

Movement in deferred tax determined on the basis applicable to capital gains 20 - 804 - 804 Transfer upon realisation through property stock disposals, net of deferred tax 20 - (633,378) 633,378 -

Net (expense)/income recognised directly in equity

- (632,574) 633,378 804

Profit for the financial year - - 1,311,081 1,311,081

Total recognised (expense)/income for 2005 - (632,574) 1,944,459 1,311,885

Dividends 8 - - (180,000) (180,000)

Balance at 31 December 2005 3,500,000 3,654,493 7,732,666 14,887,159

Balance at 1 January 2006 3,500,000 3,654,493 7,732,666 14,887,159

Movement in deferred tax determined on the basis applicable to capital gains 20 - 3,666 - 3,666 Transfer upon realisation through property disposals, net of deferred tax 20 - (320,170) 320,170 -

Net (expense)/income recognised directly in equity

- (316,504) 320,170 3,666

Profit for the financial year - - 1,418,545 1,418,545

Total recognised (expense)/income for 2006 - (316,504) 1,738,715 1,422,211

Dividends 8 - - (105,647) (105,647)

Balance at 31 December 2006 3,500,000 3,337,989 9,365,734 16,203,723


9

Cash flow statement

Year ended 31 December

Notes 2006 2005 Lm Lm Operating activities Cash generated from operations 21 6,530,372 6,108,873 Net dividends received 208,000 - Interest received 14,268 16,850 Interest paid (1,267,024) (1,380,442) Tax paid (764,455) (807,266)

Net cash generated from operating activities 4,513,161 3,938,015

Investing activities Purchase of property, plant and equipment and investment property (2,264,442) (926,333) Movement in advance payments (81,307) 338 Proceeds from disposal of investment property - 1,787,667 Acquisition of available-for-sale investments (50,000) (29,800)

Net cash (used in)/generated from investing activities (2,395,749) 831,872

Financing activities Proceeds from bank borrowings 650,000 - Repayments of bank borrowings (1,711,102) (2,959,818) Proceeds from loans from group undertakings 895,035 - Dividends paid (105,647) (180,000) Contribution to bond redemption fund 16, 22 (1,200,000) (730,000)

Net cash used in financing activities (1,471,714) (3,869,818)

Movement in cash and cash equivalents 853,698 900,069 Cash and cash equivalents at beginning of year 1,476,998 576,929

Cash and cash equivalents at end of year 22 2,330,696 1,476,998


10

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

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 land and foreshore and fair valuation of available-for-sale investments, and except as disclosed in the accounting policies below. The company is exempt from preparing consolidated financial statements in accordance with IAS 27: Consolidated and Separate Financial Statements, as the company’s ultimate parent company produces consolidated financial statements. The preparation of financial statements in conformity with IFRSs requires the use of certain accounting estimates. It also requires directors to exercise their judgement in the process of applying the company’s accounting policies (see Note 2 – Critical accounting estimates and judgements). Standards, interpretations and amendments to published standards effective in 2006 In 2006, the company adopted new standards, amendments and interpretations to existing standards that are mandatory for the company’s accounting period beginning on 1 January 2006. The adoption of these revisions to the requirements of IFRSs did not result in substantial changes to the company’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 company’s accounting periods beginning after 1 January 2006. The company 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 company’s financial statements in the period of initial application.

2. 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 company’s activities. Revenue is shown net of value-added tax or other sales taxes, returns, rebates and discounts. Revenue is recognised as follows: (a) Property sales Sales of property are recognised when the significant risks and rewards of ownership of the property being sold are effectively transferred to the buyer. This is generally considered to occur at the later of the contract of sale and the date when all the company’s obligations relating to the property are completed and the possession of the property can be transferred in the manner stipulated by the contract of sale. Amounts received in respect of sales that have not yet been recognised in the financial statements, due to the fact that the significant risks and rewards of ownership still rest with the company, are treated as advance payments received and included with creditors – amounts due within one year.


11

2. Revenue recognition - continued (b) 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. (c) Sales of goods – retail Sales of goods are recognised when the company 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. (d) Sales of services Sales of services including income from marina, car park and complex management 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. (e) Property rentals and 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. (f) Interest income Interest income is recognised on a time-proportion basis using the effective interest method. When a receivable is impaired, the company 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. (g) Dividend income Dividend income is recognised when the right to receive payment is established.


12

3. Foreign currencies

Functional and presentation currency

Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). These financial statements are presented in Maltese Liri, which is the company’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.

4. Intangible fixed assets

Franchise rights are initially shown at historical cost. Franchise rights have a definite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of franchise rights over their estimated useful lives.

Where an indication of impairment exists, in that the carrying amount of an intangible asset is greater than its estimated recoverable amount, a charge is made to write down the value of the asset to its estimated recoverable amount (see Accounting policy 7).

5. 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 company, 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. Land is shown at market value, based on valuations by external independent valuers. Valuations are carried out periodically when the directors consider it appropriate to do so such that the carrying amount of land does not differ materially from that which would be determined using fair values at the balance sheet date. Office, hotel and ancillary operations buildings, mechanical and electrical equipment, furniture, fixtures and operational equipment are stated at historical cost less depreciation. Assets in course of construction are not depreciated. 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.


13

5. Property, plant and equipment - continued

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: % Buildings 2 - 14 Mechanical and electrical equipment 5 - 25 Furniture, fixtures and operational equipment 7 - 50

Freehold land and land held on perpetual emphyteusis are not depreciated. Long-term leases are defined as those having a remaining term of more than 50 years. In view of the company’s policy of continuous refurbishment of long-term leasehold property, the long estimated useful life of such property and its high residual value, the depreciation charge of such property would in any event, be immaterial. 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 7).

6. Investment property

Investment property, principally comprising floors in the Portomaso Business Tower and commercial outlets, are held for long-term rental yields and are not occupied by the company. 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 50 years at most, in accordance with their useful lives.

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 7). 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.


14

7. 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 company 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 the 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.

The company assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in the profit and loss account. Impairment losses recognised in the profit and loss account on equity instruments are not reversed through the profit and loss account.

8. Investments in group undertaking

Investments in group undertaking 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 7. 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.


15

9. Investments – Available-for-sale

The company classifies its investments as available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and re-evaluates this designation at every reporting date. The company’s available-for-sale financial assets are non-derivatives that are designated in this category and are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date.

Purchases and sales of investments are recognised on trade-date – the date on which the company commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Investments are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the company has transferred substantially all risks and rewards of ownership.

Available-for-sale financial assets are subsequently carried at fair value. Unrealised gains and losses arising from changes in the fair value of non-monetary securities classified as available-for-sale are recognised in equity.

When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments are included in the profit and loss account as gains and losses from investment securities. If the market for a financial asset is not active, the company establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same and discounted cash flow analysis.

10. Operating leases

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.

11. 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. Property stocks are valued by specifically identifying the cost of individual items. The cost of construction work in progress represents acquisition costs, expenses incidental to acquisition, borrowing costs and, in the case of land previously held as tangible fixed assets, the carrying value of the land as last revalued prior to its transfer to stocks.

Gains and losses on disposal of property stocks are determined by reference to their carrying amount and are taken into account in determining gross profit. On disposal of a revalued asset, amounts in the revaluation reserve relating to that asset are transferred to retained earnings.


16

12. 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 company 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.

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, the bank overdrafts are included in borrowings in current liabilities.

14. Borrowings

Borrowings are recognised initially at the fair value of proceeds received, net of issue costs incurred, if any. In subsequent periods, borrowings are stated at amortised cost using the effective yield method; any difference between proceeds (net of issue costs) and the redemption value is recognised in the profit and loss account over the period of the borrowings using the effective yield method. Borrowings are classified as current liabilities unless the company has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Issue costs incurred in connection with the issue of the secured bonds include mainly arraignment fees and professional fees.

15. Other financial instruments

The company’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) 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 company 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 company’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), and are measured at cost, that is, the face value of such instruments.


17

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. 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 company’s financial statements in the period in which the dividends are approved by the company’s shareholders.

18. 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 company is required to make provision for deferred income taxes on the revaluation of certain assets. Such deferred tax is charged or credited directly to the revaluation reserve. 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.

19. Provisions Provisions are recognised when the company 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.

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.

20. Borrowing costs

Borrowing costs are capitalised within tangible fixed assets or property stocks in so far as they relate to the specific external financing of the project under construction. Such borrowing costs are capitalised up to the time that the related element of the project is completed. Other borrowing costs are recognised as an expense in the year to which they relate.


18

Notes to the financial statements 1. Segmental information

The company’s operations consist of hotel and ancillary operations, property development, rental operations and complex management operations. These operations are carried out on the local market and therefore segmental reporting is only shown on the basis of business segments. Hotel and Complex ancillary Property Rental management operations development operations operations Total Lm Lm Lm Lm Lm Year ended 31 December 2006

Turnover 8,303,886 6,535,800 351,005 832,643 16,023,334

Segment profit/(loss) 309,146 2,956,458 145,834 (173,703) 3,237,735

Interest receivable 14,268 Dividends received - - 298,786 - 298,786 Interest payable (1,272,657)

Profit before tax 2,278,132 Taxation (859,587)

Net profit for the year 1,418,545

Segment assets 29,779,709 8,482,795 6,293,795 251,548 44,807,847 Unallocated assets 168,800

Total assets 44,976,647

Segment liabilities 1,754,963 4,059,223 751,613 408,502 6,974,301 Unallocated liabilities 21,798,623

Total liabilities 28,772,924

Capital expenditure 1,262,386 - 1,083,363 - 2,345,749 Depreciation 1,502,152 10,566 239,551 10,566 1,762,835 Amortisation 4,656 5,633 - - 10,289 Provision for impairment of debtors 1,238 - (46,745) 6,925 (38,582)


19

1. Segmental information - continued

Hotel and Complex ancillary Property Rental management operations development operations operations Total Lm Lm Lm Lm Lm Year ended 31 December 2005

Turnover 7,885,185 7,721,800 485,608 665,421 16,758,014

Segment profit/(loss) 583,150 2,795,206 264,838 (209,421) 3,433,773

Interest receivable 16,850 Interest payable (1,385,830)

Profit before tax 2,064,793 Taxation (753,712)

Net profit for the year 1,311,081

Segment assets 30,223,436 10,924,847 5,694,716 310,595 47,153,594 Unallocated assets 118,800

Total assets 47,272,394

Segment liabilities 1,836,695 5,208,760 598,764 393,644 8,037,863 Unallocated liabilities 24,347,372

Total liabilities 32,385,235

Capital expenditure 624,920 - 298,757 2,656 926,333 Depreciation 1,472,766 9,381 170,405 9,381 1,661,933 Amortisation 4,656 5,389 - - 10,045 Provision for impairment of debtors (114,279) (40,625) 39,632 20,000 (95,272)

Inter-segment transactions are entered into under the normal commercial terms and conditions that would also be available to unrelated third parties. Segment assets consist primarily of intangible fixed assets, property, plant and equipment, investment property, stocks, debtors and cash at bank and in hand, and exclude financial assets and taxation. Segment liabilities comprise trade, capital and other creditors, and exclude taxation and borrowings. Capital expenditure comprises additions to intangible fixed assets, property, plant and equipment, and investment property.


20

2. 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 directors, 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).

3. Expenses by nature

2006 2005 Lm Lm

Staff costs (Note 4) 3,080,212 2,990,045 Depreciation on tangible assets: - Property, plant and equipment (Note 10) 1,523,284 1,491,528 - Investment property (Note 11) 239,551 170,405 Amortisation of intangible assets (Note 9) 4,656 4,656 Property development costs 3,009,591 4,384,577 Operating supplies and related expenses 1,024,465 926,409 Utilities 878,450 777,861 Operators charge 602,958 550,370 Exchange differences (2,341) (19,051)Decrease in provision for impairment of debtors (Note 15) (38,582) (95,272)Other expenses 2,463,355 2,142,713

Total cost of sales and administrative expenses 12,785,599 13,324,241

Auditors’ remuneration amounted to Lm16,000 (2005: Lm12,100).

4. Staff costs

2006 2005 Lm Lm Wages and salaries 2,952,744 2,823,507 Social security costs 204,783 192,741

3,157,527 3,016,248

Staff costs disclosed above include an amount of Lm77,315 (2005: Lm26,203) which is recharged to group undertakings. The average number of persons employed by the company during the year:

2006 2005 Direct 361 359 Indirect 51 47 Administration 37 35

449 441


21

5. Financial income and expenses

2006 2005 Lm Lm Investment income Dividends received 298,786 -

Interest receivable Bank interest 13,733 16,454 Other interest 535 396

14,268 16,850

Interest payable and similar charges Bank loans and overdrafts 179,537 310,618 Loans from group undertakings 780,884 761,600 Interest payable on secured bonds 224,123 234,812 Amortisation of secured bonds issue costs (Note 16) 5,633 5,389 Other financial charges 82,480 73,411

1,272,657 1,385,830

No borrowing costs were capitalised in 2006 and 2005.

6. Tax expense

2006 2005 Lm Lm Current tax expense/(income): on taxable profit subject to tax at 35% 927,398 917,684 over-provision in prior years (78,613) (129,217) group relief relating to prior years 86,660 129,219 Deferred tax income (Note 18) (75,858) (163,974)

Tax expense 859,587 753,712


22

6. Tax expense - continued The tax on the company’s profit before tax differs from the theoretical amount that would arise using the basic tax rate as follows:

2006 2005 Lm Lm Profit before tax 2,278,132 2,064,793

Tax on profit at 35% 797,346 722,678 Tax effect of: Maintenance allowance on rental income attributable to immovable property (24,570) (33,993) Dividends not subject to tax (13,789) - Expenses not allowable for tax purposes 89,800 65,027 Under provisions in prior years 10,800 -

Tax expense 859,587 753,712

7. Earnings per share

Earnings per share is based on the profit after taxation attributable to the equity shareholders of the company divided by the weighted average number of ordinary shares in issue during the year. 2006 2005 Net profit attributable to equityholders Lm1,418,545 Lm1,311,081

Weighted average number of ordinary shares in issue (Note 19) 3,500,000 3,500,000

Earnings per share Lm0.41 Lm0.37

8. Dividends

2006 2005 Lm Lm Gross 162,534 276,923 Tax at source at 35% (56,887) (96,923)

Net dividends 105,647 180,000

Dividends per share (cents) 3c0 5c1


23

9. Intangible assets

2006 2005 Lm Lm Franchise rights Opening net book amount 17,079 21,735 Amortisation charge (4,656) (4,656)

Closing net book amount 12,423 17,079

Cost 41,915 41,915 Accumulated amortisation (29,492) (24,836)

Net book amount 12,423 17,079

As at 1 January 2005, the cost and accumulated amortisation of the company’s franchise rights amounted to Lm41,915 and Lm20,180 respectively. Amortisation of Lm4,656 (2005: Lm4,656) is included in cost of sales.


24

10. Property, plant and equipment

Mechanical Furniture, Land Assets in Advance and fixtures and and course of payments electrical operational buildings construction on contracts equipment equipment Total Lm Lm Lm Lm Lm Lm At 1 January 2005 Cost or valuation 20,625,743 690,417 17,315 8,421,129 4,933,630 34,688,234 Accumulated depreciation (2,023,039) - - (1,833,692) (1,950,580) (5,807,311)

Net book amount 18,602,704 690,417 17,315 6,587,437 2,983,050 28,880,923

Year ended 31 December 2005

Opening net book amount 18,602,704 690,417 17,315 6,587,437 2,983,050 28,880,923 Commissioned assets and additions 1,008,746 (690,417) - 30,726 278,521 627,576 Advance payments - - (338) - - (338)Transferred to Investment property (17,242) - - - - (17,242)Depreciation charge (451,746) - - (485,521) (554,261) (1,491,528)

Closing net book amount 19,142,462 - 16,977 6,132,642 2,707,310 27,999,391

At 31 December 2005 Cost or valuation 21,617,247 - 16,977 8,451,855 5,212,151 35,298,230 Accumulated depreciation (2,474,785) - - (2,319,213) (2,504,841) (7,298,839)

Net book amount 19,142,462 - 16,977 6,132,642 2,707,310 27,999,391

Year ended 31 December 2006

Opening net book amount 19,142,462 - 16,977 6,132,642 2,707,310 27,999,391 Commissioned assets and additions 11,730 903,656 81,307 187,049 78,644 1,262,386 Depreciation charge (509,709) - - (495,277) (518,298) (1,523,284)

Closing net book amount 18,644,483 903,656 98,284 5,824,414 2,267,656 27,738,493

At 31 December 2006 Cost or valuation 21,628,977 903,656 98,284 8,638,904 5,290,795 36,560,616 Accumulated depreciation (2,984,494) - - (2,814,490) (3,023,139) (8,822,123)

Net book amount 18,644,483 903,656 98,284 5,824,414 2,267,656 27,738,493


25

10. Property, plant and equipment - continued

Land comprises an area situated in St Julians, which until the year ended 31 December 2005 was held under a temporary emphyteutical grant expiring on 19 May 2114. Subsequently during 2006, the freehold title was acquired by the company. On 31 December 1994, the directors approved a revaluation of the land by Lm4,180,814 on the basis of advice from the company’s architects, having regard to current property values in the area, the location of the site, its intended use and title. The surplus resulting on revaluation has been credited to a revaluation reserve (Note 20). As at 31 December 2006, the carrying amount of land within property, plant and equipment amounts to Lm3,664,986 (2005: Lm3,664,986). In the directors’ opinion the carrying amount of land as at year end does not differ materially from that which would be determined using fair values. The carrying amount of land would have been Lm370,687 (2005: Lm370,687) had the assets been included in the financial statements at cost.

During the year ended 31 December 2005, property with a cost Lm17,242 was transferred to investment property upon a change in the intended use of these assets. Depreciation charge of Lm1,523,284 (2005: Lm1,491,528) is included in the profit and loss account as follows: Lm1,512,718 (2005: Lm1,482,147) in cost of sales and Lm10,566 (2005: Lm9,381) in administrative expenses. Bank borrowings are secured by the company’s property, plant and equipment (Note 16).

11. Investment property

2006 2005 Lm Lm Year ended 31 December Opening net book amount 5,548,857 8,279,455 Additions 1,083,363 298,757 Transferred/commissioned from property, plant and equipment - 17,242 Disposals - (1,787,667) Transferred to property held for resale (241,961) (1,088,525) Depreciation charge (239,551) (170,405)

Closing net book amount 6,150,708 5,548,857

At 31 December Cost or valuation 6,881,678 6,064,475 Accumulated depreciation (730,970) (515,618)

Net book amount 6,150,708 5,548,857

As at 1 January 2005, the cost and accumulated amortisation of the company’s investment property amounted to Lm8,686,079 and Lm406,624 respectively.


26

11. Investment property - continued

Included in investment property is land with a cost of Lm102,119 (2005: Lm102,783), which is stated at its carrying value of Lm677,147 (2005: Lm702,407). This represents the revalued amount at which the land was transferred from property, plant and equipment and property held for resale to investment property upon the commissioning of these assets and upon change in intended use. Property transferred to/from investment property upon change in intended use was as follows:

2006 2005 Lm Lm

Transferred from property, plant and equipment - 17,242 Transferred to property held for resale 241,961 1,088,525

Bank borrowings are secured by the company’s investment property (Note 16).

Depreciation charge of Lm239,551 (2005: Lm170,405) is included in cost of sales. The fair open market value of investment property as at 31 December 2006 is estimated by the directors at Lm8,999,332 (2005: Lm8,467,517) on the basis of the present value of contracted and anticipated income streams from the property concerned.

Investment property leased out under operating leases included above, where the company is the lessor comprise: 2006 2005 Lm Lm Year ended 31 December Opening net book amount 3,819,456 3,253,695 Net commissioned assets and additions of investment property leased under operating leases

650,923

624,805

Transferred/commissioned from property, plant and equipment

-

17,242

Depreciation charge (137,438) (76,286)

Closing net book amount 4,332,941 3,819,456

At 31 December Cost or valuation 4,727,411 4,076,488 Accumulated depreciation (394,470) (257,032)

Net book amount 4,332,941 3,819,456

The following amounts have been recognised in the profit and loss account: 2006 2005 Lm Lm Rental income 351,005 485,608 Dividend received 298,786 - Direct operating expenses arising from investment property that generate rental income

(205,171)

(220,770)


27

12. Investments in group undertaking

2006 2005 Lm Lm At 31 December Cost and net book amount 50,000 50,000

Details of the above investment held in a group undertaking at 31 December is shown below: Registered Class of Percentage of office shares held shares held 2006 2005

Portomaso Leasing Company Limited

Tumas Group Head Office Portomaso Business Tower Level 20, Portomaso Malta

Ordinary shares 100% 100%

Investments in group undertaking are exempt from being consolidated in the financial statements of the company, in accordance with IAS 27: Consolidated and Separate Financial Statements, as these are consolidated in the financial statements of Tumas Group Company Limited, the company’s ultimate parent company. Financial information of Portomaso Leasing Company Limited is disclosed below: Assets Liabilities Turnover Results Lm Lm Lm Lm At 31 December 2006 479,494 (195,504) 707,003 233,180 At 31 December 2005 59,150 (8,340) 2,500 1,300

13. Investments – Available-for-sale

2006 2005 Lm Lm Local unquoted investments Opening net book amount 68,800 39,000 Additions 50,000 29,800


The fair values of unlisted investments are based on cash flows discounted using a rate based on the market interest rate and the risk premium specific to the unlisted investment of 6% (2005: 6%).


28

14. Stocks

2006 2005 Lm Lm

Property held for resale 4,340,115 6,221,195 Food and beverage 105,910 90,667 Consumables 153,738 150,623

4,599,763 6,462,485

Included in property held for resale is land with a cost of Lm27,467 (2005: Lm39,982), which is stated at its carrying value of Lm1,051,638 (2005: Lm1,532,126). This represents the revalued amount at which the land was transferred from property, plant and equipment and investment property to property held for resale upon the commencement of the project, or the change in intended use of the asset. Property transferred from property held for resale upon change in intended use was as follows:

2006 2005 Lm Lm

Transferred from investment property 241,961 1,088,525

Bank borrowings are secured by the company’s property held for resale (Note 16).

15. Debtors

2006 2005 Lm Lm

Current Trade debtors 1,111,894 1,557,709 Amounts owed by parent undertakings (Note 23) 78,366 95,645 Amounts owed by group undertakings (Note 23) 1,667,342 1,764,645 Amounts owed by associated undertakings 66,311 - Indirect taxation - 31,185 Other debtors 111,916 89,246 Prepayments and accrued income 232,958 214,382

3,268,787 3,752,812

Amounts owed by parent and group undertakings are unsecured, interest free and are repayable on demand. Debtors above are stated net of provision for impairment of debtors:

2006 2005 Lm Lm

Trade debtors 183,783 222,365


29

15. Debtors - continued The provision for impairment of debtors for the year is disclosed in Note 3 and is included in the

profit and loss account as follows:

2006 2005 Lm Lm

Cost of sales (46,745) (993) Administrative expenses 8,163 (94,279)

(38,582) (95,272)

16. Interest-bearing borrowings

2006 2005 Lm Lm

Non-current Bank loans 2,566,963 3,459,232 Loans from group undertakings 12,095,035 7,000,000 FRN secured bonds 2009 - 2011 3,985,963 5,480,330

18,647,961 15,939,562

Current Bank overdrafts 1,977 890,972 Bank loans 1,636,100 1,804,933 Loan from group undertaking - 4,200,000

1,638,077 6,895,905

Total borrowings 20,286,038 22,835,467

The bank loans and overdrafts are secured by: (a) general and special hypothecs over the company’s assets; (b) general hypothecs and guarantees provided by group undertakings; (c) special hypothecs over the hotels owned by the companies forming part of the Tumas Group; (d) pledges on the company’s insurance policies; (e) letters of undertaking.

The company’s banking facilities as at 31 December 2006 and 2005 amounted to Lm12,498,276 and Lm14,264,165 respectively.


30

16. Interest-bearing borrowings - continued The FRN secured bonds are disclosed at the value of the proceeds less the net book amount of the issue costs, as follows:

2006 2005 Lm Lm Face value of secured bonds 4,000,000 5,500,000

Issue costs 27,795 27,795 Accumulated amortisation (13,758) (8,125)


Amortised cost at 31 December 3,985,963 5,480,330

During the year ended 31 December 2004, the company issued a private placement in the form of bonds for an amount of Lm5,500,000. These bonds are due for redemption between 2009 and 2011. The company may at its discretion request the conversion of the denomination of the bonds from Maltese Lira to Euro. The company also has a one-time option to convert from a floating interest rate into a fixed interest rate for the remaining period of the bonds up to maturity. The proceeds from the bonds have been used to repay existing bank facilities and to provide working capital for the progression of the project. These bonds are secured by a general hypothec over all the company’s assets and by special hypothecs and privileges on property held for resale as identified in the private placement memorandum. The company has also undertaken to set up a bond redemption fund as described in this memorandum (Note 22).

During the year ended 31 December 2002, the Tumas Group issued bonds maturing between 2010 and 2012 for an amount of Lm7,000,000 through Tumas Investments p.l.c. The proceeds have been utilised by Spinola Development Company Limited for its general financing needs, including the completion of the Portomaso project and the re-financing of existing bank liabilities. The company has guaranteed payment of all interest and capital relating thereto.

During the year ended 31 December 2000, the group issued secured notes for an amount of Lm4,200,000 through the same finance company. The secured notes were redeemed during 2006 from the proceeds of a bank loan. The loan is repayable over a 10 year term and is secured over the floors of the Portomaso Business Tower, which have been retained by the company for long term rental purposes.

The interest rate exposure of borrowings was as follows:

2006 2005 Lm Lm

Total borrowings: At fixed rates 7,000,000 11,200,000 At floating rates 13,286,038 11,635,467

20,286,038 22,835,467


31

16. Interest-bearing borrowings - continued

Weighted average effective interest rates at the balance sheet date:

2006 2005 Bank overdrafts 5.4% 5.5% Bank loans 5.3% 5.6% Loans from group undertaking 6.3% 6.8% FRN secured bonds 2009 - 2011 4.2% 4.2%

Maturity of long term borrowings:

2006 2005 Lm Lm Between 1 and 2 years 812,160 1,609,036 Between 2 and 5 years 13,361,636 14,212,770 Over 5 years 4,474,165 117,756

18,647,961 15,939,562

17. Trade and other creditors

2006 2005 Lm Lm Non-current Capital creditors 400,000 200,000

Current Trade creditors 1,225,398 990,301 Advance deposits on sale of property 1,179,347 2,038,475 Capital and other creditors 1,354,290 1,627,684 Amounts owed to parent undertaking (Note 23) - 43,700 Amounts owed to group undertakings (Note 23) 1,223,188 1,217,631 Amounts owed to related parties (Note 23) 331,663 414,641 Indirect taxes and social security 129,657 53,078 Accruals and deferred income 1,130,758 1,452,353

6,574,301 7,837,863

Total creditors 6,974,301 8,037,863

Amounts owed to parent, group undertakings and related parties are unsecured, interest free and

are repayable on demand.

Non-current capital creditors amounting to Lm400,000 (2005: Lm200,000) are repayable between 2 and 5 years (2005: between 1 and 2 years).


32

18. Deferred taxation

2006 2005 Lm Lm At beginning of year 1,402,247 1,567,025 Movement in deferred tax determined on the basis applicable to capital gains (Note 20) (3,666) (804)

Transfer upon realisation through property disposals (Note 6) (172,399) (341,050)Deferred tax on temporary differences arising on depreciation of fixed assets (Note 6) 83,037 143,731 Deferred tax on temporary differences arising on provisions (Note 6) 13,504 33,345

At 31 December 1,322,723 1,402,247

Deferred income taxes are calculated on all temporary differences under the liability method using a principal tax rate of 35% (2005: 35%).

Act II of 2006, regulates the recent introduction of the reform in the system of taxation in respect of transfers of immovable property. In line with the requirements of IAS 12 (revised) the impact of revalued immovable property of the application of the enacted changes to the tax rules did not effect the deferred tax liability of the company since the land on which the Portomaso development was constructed has been declared as a special designated area by legal notice 137/1999. Such defined property is exempt by provision 5A(3)(c) of the said Act.

The balance at 31 December represents temporary differences on: 2006 2005 Lm Lm Revaluation of property, plant and equipment (Note 20) 1,057,255 1,060,961 Revaluation of investment property (Note 20) 184,546 193,114 Revaluation of property held for resale (Note 20) 313,706 477,497 Depreciation of fixed assets (168,460) (251,497)Provisions (64,324) (77,828)

1,322,723 1,402,247

At 31 December 2006 and 2005, the company had the following unutilised tax credits and temporary differences, all of which were recognised in these financial statements:

2006 2005 Lm Lm Unutilised tax credits arising from unabsorbed capital allowances 3,098,762 3,609,191 Deductible temporary differences arising on provisions 183,783 222,365 Taxable temporary differences arising on tangible fixed assets (2,617,448) (2,890,628)


33

19. Share capital

2006 2005 Lm Lm

Authorised, issued and fully paid 3,500,000 Ordinary shares of Lm1 each 3,500,000 3,500,000

20. Revaluation reserves

2006 2005 Lm Lm Surplus arising on revaluation of: Land utilised for construction of property, plant and equipment 2,237,043 2,233,337 Land utilised for construction of investment property 390,482 406,509 Land utilised for construction of property held for resale 710,464 1,014,647

Revaluation reserves at end of year 3,337,989 3,654,493

Revaluation of property, plant and equipment At the beginning of year, before deferred taxation 3,294,298 3,294,298 Deferred taxation (Note 18) (1,057,255) (1,060,961)

At 31 December 2,237,043 2,233,337

Revaluation of investment property At the beginning of year, before deferred taxation 599,623 1,045,093 Revaluation surplus upon transfer from property held for resale - - Release of reserve upon transfer to property held for resale (24,595) (116,827)Transfer upon realisation through property disposals - (328,643)

575,028 599,623 Deferred taxation (Note 18) (184,546) (193,114)

At 31 December 390,482 406,509

Revaluation of property held for resale At the beginning of year, before deferred taxation 1,492,144 2,021,102 Revaluation surplus upon transfer from investment property 24,595 116,827 Transfer upon realisation through property stock disposals (492,569) (645,785)

1,024,170 1,492,144 Deferred taxation (Note 18) (313,706) (477,497)

At 31 December 710,464 1,014,647

The revaluation reserves are non-distributable reserves.


34

21. Cash generated from operations

Reconciliation of operating profit to cash generated from operations:

2006 2005 Lm Lm Operating profit 3,237,735 3,433,773 Adjustments for: Depreciation on tangible assets: - Property, plant and equipment (Note 10) 1,523,284 1,491,528 - Investment property (Note 11) 239,551 170,405 Amortisation of intangible assets (Note 9) 4,656 4,656 Decrease in provision for impairment of debtors (Note 15) (38,582) (95,272) Changes in working capital: Stocks 2,104,683 3,097,165 Debtors 522,607 (146,288)Creditors (1,063,562) (1,847,094)

Cash generated from operations 6,530,372 6,108,873

22. Cash and cash equivalents For the purposes of the cash flow statement, the year end cash and cash equivalents comprise the

following:

2006 2005 Lm Lm Cash at bank and in hand 3,037,673 3,372,970 Bank overdrafts (1,977) (890,972)

3,035,696 2,481,998 Bond redemption fund (705,000) (1,005,000)

2,330,696 1,476,998

As disclosed above, cash and cash equivalents exclude contributions to the bond redemption fund which use is restricted pursuit to the terms and conditions stated in the private placement memorandum of the FRN secured bonds. In 2005, the bond redemption fund included Lm615,000 invested in treasury bills maturing within 3 months from the balance sheet date and carrying interest at 3.2%, and Lm390,000 held in fixed term deposits with the bank maturing within 3 months from the balance sheet date and carrying interest at 2.8%.


35

23. Related party transactions

The company forms part of the Tumas Group of Companies. All companies forming part of the Tumas Group are related parties since these companies are all ultimately owned by Tumas Group Company Limited which is considered by the directors to be the ultimate controlling party. Trading transactions between these companies include items which are normally encountered in a group context. The group is ultimately fully owned by members of the Fenech family, who are therefore considered to be related parties. Related parties also include foreign Hilton hotels. Trading transactions with these related parties are entered into on a regular basis as a result of normal trading transactions, and mainly relate to management fees and operators’ charges.

The following transactions were carried out with related parties: 2006 2005 Lm Lm Income from services Rents receivable from group undertakings 254,200 50,408 Maintenance fees receivable from group undertakings 132,078 11,068

Expenditure for goods and services Interest and similar charges payable to group undertakings 833,926 815,723 Management fees charged by group undertakings 145,500 120,500 Operators’ charges payable to other related parties 410,163 397,470

Furthermore, during the year ended 31 December 2005, investment property with a carrying value of Lm1,787,667 was transferred to a group undertaking. Year end balances arising from related party transactions are disclosed in Notes 15, 16 and 17 to the financial statements.

24. Financial instruments

The company is potentially exposed to a range of risks that are managed as outlined below. Credit risk

Financial assets which potentially subject the company to concentrations of credit risk consist principally of amounts owed by group undertakings, debtors and cash and cash equivalents. The company’s cash is placed with quality financial institutions. Debtors are presented net of impairment charges for bad and doubtful debts. The company has policies to ensure that hospitality sales are made to customers with an appropriate credit history. Sales to retail customers are made in cash or via major credit cards. Credit risk with respect to debtors is limited due to the large number of customers comprising the company’s debtor base and hence the company has no significant concentration of credit risk. Credit risk with respect to amounts owed by group undertakings is limited since the Tumas Group showed a net asset position as at 31 December 2006.


36

24. Financial instruments - continued

Liquidity risk The company’s liquidity risk is considered to be relatively insignificant by the directors in view of the nature of its main financial assets and liabilities.

Interest rate risk The company’s income and operating cash flows are substantially influenced by market interest rates. The company’s significant interest-bearing instruments comprise cash and cash equivalents, loans from group undertakings, bank borrowings and secured bonds. Notes 16 and 22 incorporate interest rates and maturity information with respect to the company’s interest-bearing instruments. Up to the balance sheet date the company did not have any hedging arrangements with respect to floating interest rate risk.

Currency risk

The company is exposed to foreign exchange risk arising from various currency exposures with respect to the company’s sales and purchases, a significant part of which are denominated in foreign currencies. Up to the balance sheet date, the company did not have any hedging policy with respect to foreign exchange as exposure to such risks was not considered to be significant by the company’s directors.

Fair values

At 31 December 2006 and 2005 the carrying amounts of cash and cash equivalents, debtors, creditors and short term borrowings approximated their fair values due to the nature or short term maturity of the instruments. Information on the fair value of the company’s main long term interest-bearing borrowings is disclosed in Note 16. The nominal value less provision for impairment of trade debtors and creditors are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the company for similar financial instruments.

25. Commitments Capital commitments At 31 December the company had capital commitments in connection with the completion of the

project not provided for in these financial statements as follows:

2006 2005 Lm Lm Authorised and contracted 1,567,365 1,817,758 Authorised but not contracted 1,565,530 1,815,629

3,132,895 3,633,387


37

25. Commitments - continued Operating lease commitments – where the company is the lessor The future minimum lease payments receivable under non-cancellable operating leases are as follows: 2006 2005 Lm Lm Not later than 1 year 263,333 349,748 Later than 1 year and not later than 5 years 758,333 557,028 Later than 5 years - 354,700

1,021,666 1,261,476

26. Contingencies

At 31 December 2006, the company had guarantees of Lm4,700,000 (2005: Lm4,700,000) issued jointly with other group undertakings, on behalf of other group undertakings’ bank facilities. The guarantees are supported by general and special hypothecs over the company’s assets. At 31 December 2005, the company also had the following contingent liabilities: (a) Guarantees of Lm500,000 issued on behalf of group undertakings’ bank facilities. The

guarantees are supported by general and special hypothecs over the company’s assets.

(b) Guarantees amounting to Lm100,000 issued by the bank on behalf of the company, in favour of third parties in the ordinary course of business.

28. Statutory information Spinola Development Company Limited is a limited liability company and is incorporated in Malta.

The immediate parent company of Spinola Development Company Limited is Spinola Investments Limited, a company registered in Malta, with its registered address at Tumas Group Head Office, Portomaso Business Tower, Level 20, Portomaso, Malta. Spinola Investments Limited is exempt from the preparation of consolidated accounts by virtue of section 174(1)(a) of the Companies Act, 1995.

The ultimate parent company of Spinola Development Company Limited is Tumas Group Company Limited, a company registered in Malta, with its registered address at Tumas Group Head Office, Portomaso Business Tower, Level 20, Portomaso, Malta.

29. Comparative information

Certain comparative information has been reclassified to conform with the current year’s disclosure for the purpose of fairer presentation.

SPINOLA DEVELOPMENT COMPANY LIMITED Annual Report...

Documents

Transcript of SPINOLA DEVELOPMENT COMPANY LIMITED Annual Report...