Nkd Hotel Pages 18-33

Naked Hotel Limited Notes to the Financial Statements Year Ended 31 December 2006 (expressed in Jamaican dollars unless otherwise indicated)

NOTES TO THE FINANCIAL STATEMENTS 1.

Identification Naked Hotel Limited is incorporated and domiciled in Jamaica, with registered offices at 00 Gloucester Avenue, Montego Bay, Jamaica, West Indies. The company’s primary activity is the operation of an all inclusive hotel for adults. The company is listed on the Jamaica Stock Exchange.

2.

Summary of Significant Accounting Policies a) Statement of Compliance The financial statements have prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), interpretations issued by the International Accounting Interpretation Committee of the IASB, and recommendations by the Institute of Chartered Accountants of Jamaica and comply with the provisions of the Companies Act. b) Basis of Preparation The financial statements are presented in Jamaican dollars, which is the measurement currency of the company. The financial statements are prepared under the historical cost convention, modified for the inclusion of available-for-sale investments and certain classes of property, plant and equipment that are stated at fair value. The preparation of the financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the reported amount of assets, liabilities and contingent assets and liabilities at the Balance Sheet date and the income and expenses for the year then ended. Actual amounts could differ from those estimates.

18

Naked Hotel Limited Notes to the Financial Statements Year Ended 31 December 2006 (expressed in Jamaican dollars unless otherwise indicated) c) Depreciation Depreciation is calculated on the straight-line method at rates estimated to write off the assets over their expected useful lives as follows: Buildings Furniture & Fittings Equipment

2½% 10% 20%

Land is not depreciated. All property, plant and equipment are initially recorded at cost. All property, plant and equipment are subsequently stated at cost less accumulated depreciation and accumulated impairment losses except for land, which is stated at historical cost. Property, plant and equipment are reviewed periodically for impairment. Where the carrying amount of an asset is greater than its estimated recoverable, it is written down immediately to its recoverable amount. Gains and losses on disposal of property, plant and equipment are determined by reference to their carrying amount and are taken into account in determining operating profit. When revalued assets are sold, the amounts included in capital and fair value reserves are transferred to retained earnings. Repairs and maintenance are charged to the profit and loss account during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the business. Major renovations are depreciated over the remaining useful life of the related asset. d) Taxation Taxation on the profit or loss for the year comprises current and deferred taxation. Taxation is recognized in the Income Statement, except to the extent that it relates to items recognized directly to equity, in which case it is recognized in equity.

19

Naked Hotel Limited Notes to the Financial Statements Year Ended 31 December 2006 (expressed in Jamaican dollars unless otherwise indicated) Current taxation charges are based on taxable profits for the year, using taxation rates enacted at the Balance Sheet date, and any adjustment for prior years and taxation losses in respect of previous years. Taxable profits differ from profit before taxation reported because it excludes items that are taxable or deductible in other years, and items that re never taxable or deductible. Deferred taxation is computed using the Balance Sheet Liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred taxation is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities using taxation rates enacted at the Balance Sheet date. A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized. e) Pension Costs Contributions by the company to fund benefits under the defined contribution plan operated by trustees for employees of the company are charged as an expense in the year in which they are due. f) Allowance for Bad Debts A general allowance for bad debts is established as a result of reviews of trade debtors and is based on an assessment which takes into consideration all factors, including business and economic conditions. g) Dividend Dividend is not recognized as a liability until it is approved by the board of directors within the financial year.

20

Naked Hotel Limited Notes to the Financial Statements Year Ended 31 December 2006 (expressed in Jamaican dollars unless otherwise indicated) h) Revenue Recognition Revenue represents the value of goods and services sold to external customers of the business, net of sales tax, and after deducting discounts and allowances. Revenue from the sale of goods is recognized in the Income Statement when the significant risks and rewards of ownership have been transferred to the buyer. Revenue from services rendered is recognized in the Income Statement in to the stage of completion of the transaction at the Balance Sheet date. Interest income and interest expense are recorded on the accrual basis. i) Inventories Inventories are stated at the lower of average cost and net realizable value. Cost represents invoiced cost plus direct inventory related expenses. Net realizable value is the estimate of the selling price in the ordinary course of business, less the costs of completion and selling expenses. j) Accounts Receivable Trade and other receivables are stated at cost less impairment losses. k) Accounts Payable Trade and other payables are stated at cost.

l) Cash and Cash Equivalents Cash and cash equivalents are carried in the Balance Sheet at cost. For the purposes of the Cash Flow Statement, cash and cash equivalents comprise cash on hand, deposits held at call with banks, other short term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are included within borrowings in current liabilities in the Balance Sheet.

21

Naked Hotel Limited Notes to the Financial Statements Year Ended 31 December 2006 (expressed in Jamaican dollars unless otherwise indicated) m) Foreign Currency Translation

Assets and liabilities denominated in foreign currencies are translated into Jamaican dollars at the exchange rates prevailing at the balance sheet date. Transactions in foreign currencies are translated at the rates of exchange ruling at the dates of those transactions. Gains and losses arising from fluctuations in exchange rates are included in the Profit and Loss Statement. n) Investments Investments are classified into the following two categories: originated debts and available-for-sale securities. Management determines the appropriate classification of investments at the time of purchase. Loans and advances which are provided directly to a borrower, and Government or other securities which are purchased directly from the issuer, are classified as originated debts. These include bonds and treasury bills, long term loans and demand loans. They are initially recorded at cost, which is the cash given to originate the debt including any transaction costs, and are subsequently measured at amortized cost using the effective interest rate method. Investments purchased which are intended to be held for an indefinite period of time and may be sold in response to liquidity needs or changes in interest rate or exchange rate, are classified as available-for-sale. Availablefor-sale investments are included in non-current assets unless management has the express intention of holding the investment for less than 12 months from the Balance Sheet date or unless they will need to be sold to raise operating capital, in which case they are included in current assets. These investments are initially recognized at cost but are subsequently remeasured at fair value based on amounts derived from cash flow models. Unrealized gains and losses arising from changes in the fair value of securities classified as available-for-sale are recognized in equity. When securities are disposed of or impaired, the related accumulated fair value adjustments are included in the Income Statement as gains and losses from investment securities.

22

Naked Hotel Limited Notes to the Financial Statements Year Ended 31 December 2006 (expressed in Jamaican dollars unless otherwise indicated) o) Provisions A provision is recognized in the Balance Sheet when the company has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the obligation. Where the company expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. p) Employee Benefits Pension Plan The company operates a defined benefit plan which is administered by Long Life Insurance Limited in which all permanent employees must participate. The company contributes at the rate of 5% of pensionable salaries. Employees contribute at a mandatory rate of 5% but may make voluntary contributions not exceeding a further 5%. q) Termination Benefits Termination benefits are payable whenever an employee’s employment is terminated before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits. The company recognizes termination benefits when it is demonstrably committed to either terminate the employment of current employees according to a detailed formal plan without possibility of withdrawal or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after the Balance Sheet date are discounted to present value. r) Financial Instruments A financial instrument is any contract that gives rise to a financial asset of one enterprise and a financial liability or equity instrument of another

23

Naked Hotel Limited Notes to the Financial Statements Year Ended 31 December 2006 (expressed in Jamaican dollars unless otherwise indicated) enterprise. For the purposes of these financial statements, financial assets have been determined to include cash resources, short term investments, accounts receivable, long term investments and long term receivables. Financial liabilities include bank overdraft, accounts payable, due to related companies and long term loans.

3.

Profit before taxation is stated after charging/(crediting):

Depreciation Director's emoluments Fees Management remuneration Interest expense (see note 7) Interest income Dividend income Auditors remuneration Current year Prior year Staff costs (see note 15)

4.

2006 $'000 7,027

2005 $'000 7,000

1,200 12,375 15,000 (6,500) (5,544)

1,200 11,250 20,000

1,260 18 47,713

1,095 16 44,516

Taxation

Income tax at 33 1/3% Prior year under/(over)-provision Investment income tax Deferred taxation adjustment

2006 $'000 39,509 2,160 1,386 278 43,333

2005 $'000 33,713 (15) (1,526) 32,172

Income tax is computed at 33 1/3% of the profit for the year as adjusted for tax purposes. The charge for taxation comprises:

24

Naked Hotel Limited Notes to the Financial Statements Year Ended 31 December 2006 (expressed in Jamaican dollars unless otherwise indicated) The actual taxation charge differs from the “expected” taxation charge as follows:

Computed "expected" taxation charge Investment income tax Prior year under/(over)-provision Deferred taxation adjustment Actual taxation rate

5.

2006 % 43.99 1.54 2.41 0.31 48.25

2005 % 42.86 -0.019 -1.94 40.90

Earnings per share The earnings per share calculations are based on the profit attributable to ordinary shareholders of $46,477,000 (2005 - $46,481,000) and the 232,405,000 (2005 – 232,405,000) weighted average number of ordinary shares in issue during the year.

6.

Dividends

Ordinary @ 0.061341 7.

2006 $'000 14,256

2005 $'000 9,504

2006 $'000 15,000

2005 $'000 20,000

Finance Cost

Interest expense

25

Naked Hotel Limited Notes to the Financial Statements Year Ended 31 December 2006 (expressed in Jamaican dollars unless otherwise indicated) 8.

9.

Share Capital 2006 $'000

2005 $'000

Authorized Ordinary shares

63,897

63,897

Issued and fully paid 250,000,000 (2005 - 250,000,000) ordinary shares

59,400

59,400

2006 $'000 25,000 37,884 8,988 7,128 79,000

2005 $'000 25,000 33,701 2,628 4,752 66,081

2006 $'000

2005 $'000

25,000

27,720

2,720 27,720

27,720

2006 $'000

2005 $'000 10,874

Other Payables and Accruals

Current portion of long term loan Corporation tax payable Accruals Ordinary dividends payable 10.

Investments

Originated debt Government of Jamaica securities Available-for-sale Unquoted investments

11.

Inventories

Stock

10,647

26

Naked Hotel Limited Notes to the Financial Statements Year Ended 31 December 2006 (expressed in Jamaican dollars unless otherwise indicated) 12.

Receivables

Accounts receivable Less allowance for bad debts 13.

2006 $'000 18,783 30 18,813

2005 $'000 17,255 17,255

2006 $'000 50,000 25,000 75,000

2005 $'000 75,000 25,000 100,000

2006 $'000 40,100 2,100 1,500 2,678 1,335 47,713

2005 $'000 37,300 2,030 1,450 2,522 1,214 44,516

Long Term Loan

Long term loan Less current portion

15.

2005 $'000 16,241 16,241

Prepayments

Prepayments Prepaid property tax

14.

2006 $'000 21,366 (4,127) 17,239

Employee’s Remuneration Staff Costs

Salaries and wages Statutory contributions Pension costs Other benefits Contractors' costs

27

Naked Hotel Limited Notes to the Financial Statements Year Ended 31 December 2006 (expressed in Jamaican dollars unless otherwise indicated) The average number of persons employed by the company during the year:

Full time Part time Contractors and their employees

16.

2006 86 32 39 157

2005 84 21 38 143

2006 $'000 53,594 30,000 20,000 103,594

2005 $'000 80,817 80,817

Cash and Short Term Investments

Cash at bank and in hand Short term investments Short term deposits

Short-term deposits have maturity of 90 days or less and short-term investments have a maturity of over 90 days but less than 12 months or which the company intends to realize within 12 months. 17.

Cash and Cash Equivalents 2006 $'000 53,594 20,000 73,594

Cash at bank and in hand Short term deposits

28

2005 $'000 80,817 80,817

Naked Hotel Limited Notes to the Financial Statements Year Ended 31 December 2006 (expressed in Jamaican dollars unless otherwise indicated) 18.

Reserves 2006 $'000 25,000 4,000 29,000

General reserves Revaluation reserve

2005 $'000 20,000 20,000

Revaluation reserve represents unrealized surplus on the revaluation of land and buildings net of deferred taxation. The general reserve was established by the Board of Directors and transfers to and from this reserve is at the discretion of the Board of Directors.

19.

Property, Plant and Equipment

At cost January 1, 2006 Additions Disposals Revaluation At December 31, 2006

Land and Buildings $'000 102,370 0 0 6,000 108,370

Furniture and Fittings Equipment $'000 $'000 22,270 14,850 810 0 (580) 0 0 22,270 15,080

Total $'000 139,490 810 (580) 6,000 145,720

Depreciation at January 1, 2006 Charge for the year Relieved on Disposal At December 31, 2006

18,030 1,803 0 19,833

11,135 2,227 0 13,362

5,940 2,997 (348) 8,589

35,105 7,027 (348) 41,784

Carrying value at December 31, 2006 Carrying value at December 31, 2005

88,537 84,340

8,908 11,135

6,491 8,910

103,936 104,385

Douglas and Associate professionally revalued the land at open market value on December 29, 2006.

29

Naked Hotel Limited Notes to the Financial Statements Year Ended 31 December 2006 (expressed in Jamaican dollars unless otherwise indicated) 20.

Deferred Taxation

Opening balance payable Adjustment during the year Revaluation surplus Closing balance payable 21.

2006 $'000

2005 $'000

1,200

-

Cash flows from operating activities

Profit before taxation Adjustments for non-cash items Depreciation Loss/(profit) on disposal of fixed assets Foreign exchange gain Dividend income Interest income Interest expense

23.

2005 $'000 18,421 (1,526) 16,895

Capital Commitments

Capital expenditure authorized but not contracted for

22.

2006 $'000 16,895 278 2,000 19,173

2006 $'000 89,810

2005 $'000 78,653

7,027 (7) (2,667) (5,544) (6,500) 15,000 97,119

7,000 20,000 105,653

Customer complaint A couple made a complaint in writing on December 27, 2006 about the poor quality of their room. On December 30, 2006 the President of Naked Hotel Limited made a verbal commitment to provide a room for 2 nights free of cost to the couple during the Winter Season. The current cost per night in the Winter Season for a similar room is J$26,000. The couple plan to return to the hotel in February 2008. 30

Naked Hotel Limited Notes to the Financial Statements Year Ended 31 December 2006 (expressed in Jamaican dollars unless otherwise indicated) 24.

Fair Value of Financial Instruments Fair value amounts represent estimates of the arm’s length consideration for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties who are under no compulsion to act. Fair value is best evidenced by a quoted market price, if one exists. The cost of some monetary assets and liabilities has been appropriately adjusted to reflect estimated impairment losses on realization or discounts on settlement. The fair value of cash resources, short term investments, accounts receivable, accounts payable, and amounts due to related parties are assumed to approximate their carrying values due to their relatively short term nature. The fair value of quoted investments is at market value. The fair value for long-term loans and long term receivables are assumed to approximate carrying value as no discount on settlement is anticipated.

25.

Financial Risk Management The company’s activities expose it to a variety of financial risks including the effects of changes in debt and equity market prices, foreign currency exchange rates, interest rates and liquidity risks. The company’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the financial performance of the company. The Board of Directors sets guidelines for overall risk management including specific areas, such as credit risk, interest rate risk, foreign exchange risk, liquidity risk and market risk.

i.

Credit Risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation resulting in loss to the other party. The company manages this risk by: • Having a credit policy in place to minimize exposure to risk. • Performing credit evaluations on all customers requiring credit. • Maintaining cash resources with reputable financial institutions. • Having a diverse customer base. Cash and short-term investments are held with substantial financial institutions that are believed to have minimal risk of default. The company 31

Naked Hotel Limited Notes to the Financial Statements Year Ended 31 December 2006 (expressed in Jamaican dollars unless otherwise indicated) considers that it has concentration of credit risk with three credit customers, which individually exceed 5% of turnover. At December 31, 2003, amounts receivable from these credit customers aggregated to $112,540,000 (2002 $120,612,000). This represents 15% (2002 – 14%) of the gross amount of trade receivables. ii.

Interest Rate Risk Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. The company manages this risk by contracting financial liabilities at fixed interest rates for the duration of the term. Bank overdrafts are subject to fixed interest rates, which may be varied by appropriate notice by the lender.

iii.

Foreign Currency Risk Foreign currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The company is exposed to foreign currency risk on transactions that are denominated in currencies other than the Jamaican dollar. The main currencies giving rise to this risk are the United States dollar (US$) and the Pound Sterling (£). The company manages this risk by matching foreign currency assets with liabilities as far as possible.

iv.

Liquidity Risk Liquidity risk, also referred to as funding risk, is the risk that the company will encounter difficulty in raising funds to meet commitments associated with financial instruments. Liquidity risk may result from an inability to sell a financial asset quickly at, or close to, its fair value. The company manages this risk by maintaining sufficient cash resources and marketable securities in appropriate currencies, and the availability of funding through an adequate amount of committed credit facilities.

32

Naked Hotel Limited Notes to the Financial Statements Year Ended 31 December 2006 (expressed in Jamaican dollars unless otherwise indicated) v.

Market Risk Market risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices, whether those changes are caused by factors specific to the individual security, its issuer or factors affecting all securities traded in the market. The company’s significant exposure to market risk relates to the holding of available for sale quoted trade investments which are reflected in the financial statements at fair value. The company manages this risk by conducting research and monitoring the price movement of securities on the local and international market.

26.

Subsequent Event An ordinary dividend of $11,620,250 ($0.05) per share) was proposed on March 9, 2007 in respect of the 2006 financial year. On Friday, February 2, 2007, the Company Secretary received a letter from the liquidator of Good Vacations Limited, indicating that the company was placed into liquidation under the terms of the loan agreement by the loan creditors on December 29, 2006. The accounts receivable balance includes an amount of $4,217,000 (Jamaican dollars) owed by Good Vacations Limited. Good Vacations Limited is located in the United States of America.

27.

Contingent Liability A guest filed a lawsuit against the company in November 2006. The guest is claiming damages amounting to $150,000 arising out of an alleged accident in the fitness room in which she sustained injuries to her back and neck. In the opinion of the company’s attorney the plaintiff’s (guest’s) claim against the company is unlikely to succeed.

33