EX-99.1 22 y51336exv99w1.htm EX-99.1: CONSOLIDATED FINANCIAL STATEMENTS OF MORGANS HOTEL GROUP EUROPE LIMITED EX-99.1
 

Exhibit 99.1
Registered No. 3203996
Morgans Hotel Group Europe Limited
Annual report
For the year ended 31 December 2007

 

 

Morgans Hotel Group Europe Limited
Annual report
for the year ended 31 December 2007
         
    Pages  
 
        
Directors and advisers
     1  
 
        
Independent auditors’ report
     2  
 
        
Consolidated Profit and loss account
     3  
 
        
Consolidated Balance sheet
     4 - 5  
 
        
Consolidated Cash flow Statement
     6  
 
        
Notes to the financial statements
     7 - 19  

 

Morgans Hotel Group Europe Limited
Directors and advisers
Directors
R Bloom
J Quicksilver
F Kleisner
D Smail
Secretary and registered office
Bibi Ali
MacFarlanes
10 Norwich Street
London EC4A 1BD
Solicitors
MacFarlanes
10 Norwich Street
London EC4A 1BD
Registered auditors
BDO Stoy Hayward LLP
55 Baker Street
London W1U 7EU
Bankers
National Westminster Bank PLC
135 Bishopsgate
London EC2M 3UR

1

 

Independent auditors’ report to the members of Morgans Hotel Group Europe Limited
Report of the Independent Registered Public Accounting Firm To the Board of Directors of Morgans Hotel Group Europe Limited
We have audited the financial statements of Morgans Hotel Group Europe Limited which comprise the consolidated balance sheet as of December 31, 2007 and December 31, 2006 and the related consolidated profit and loss account, cash flow statement and related notes for the year ended December 31, 2007 and December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Morgans Hotel Group Europe Limited as at December 31, 2007 and December 31, 2006, and the results of its operations and its cash flows for the year ended December 31, 2007 and December 31, 2006 in conformity with generally accepted accounting principles in the United Kingdom. Accounting principles generally accepted in the United Kingdom vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in note 24 to the financial statements.

BDO Stoy Hayward LLP
Chartered Accountants and Registered Auditors
London, UK
March 12, 2008

2

 

Morgans Hotel Group Europe Limited
Consolidated profit and loss account
for the year ended 31 December 2007
                                 
                      (Unaudited)  
    Notes     2007     2006     2005  
          £000     £000     £000  
 
                                
Turnover
             31,967       30,118       26,206  
Cost of sales
             (7,909 )     (7,560 )     (7,084 )
 
                          
Gross profit
             24,058       22,558       19,122  
 
                                
Administrative expenses
             (13,240 )     (13,988 )     (14,441 )
 
                          
 
                                
Operating profit
     3       10,818       8,570       4,681  
 
                                
Interest receivable
             705       397       218  
Interest payable and similar charges
     4       7,043       6,721       (7,932 )
Exceptional Interest Charge
     5       —       —       (3,357 )
 
                          
Net interest payable
             (6,338 )     (6,324 )     (11,071 )
 
                                
Profit on ordinary activities before taxation
             4,480       2,246       (6,390 )
 
                                
Tax on profit on ordinary activities
     6       (412 )     —       —  
 
                          
 
                                
Profit for the financial year
             4,068       2,246       (6,390 )
 
                          
All income and expenditure arises from continuing operations.
The group has no recognised gains or losses other than the profit for the year.
The historical cost profit and reported profit are the same.

3

 

Morgans Hotel Group Europe Limited
Consolidated balance sheet
At 31 December 2007
                                         
    Notes     2007     2007     2006     2006  
          £000     £000     £000     £000  
 
                                        
Fixed assets
                                        
Tangible assets
     8               102,898               101,828  
 
                                        
Current assets
                                        
Stock
     9       222               209          
Debtors
     11       2,254               2,769          
Cash at bank and in hand
             15,019               12,265          
 
                                    
 
             17,495               15,243          
 
                                        
Creditors: amounts falling due within one year
     12       (5,793 )             (4,795 )        
 
                                    
 
                                        
Net current assets
                     11,702               10,448  
 
                                    
 
                                        
Total assets less current liabilities
                     114,600               112,276  
 
                                        
Creditors: amounts falling due after more than one year
     13               (101,636 )             (103,380 )
 
                                    
 
                                        
Net assets
                     12,964               8,896  
 
                                    
 
                                        
Capital and reserves
                                        
Called up share capital
     15               5,000               5,000  
Share premium account
     16               10,000               10,000  
Other capital reserve
     16               9,460               9,460  
Profit and loss account
     16               (11,496 )             (15,564 )
 
                                    
 
                                        
Shareholders funds
     18               12,964               8,896  
 
                                    
The financial statements on pages 6 to 22 were approved by the board of directors and authorised for issue on March 12, 2008.
F Kleisner
Director

4

 

Morgans Hotel Group Europe Limited
Company balance sheet
At 31 December 2007
                                         
    Notes     2007     2007     2006     2006  
          £000     £000     £000     £000  
 
                                        
Fixed assets
                                        
Investment in subsidiary
     10               35,000               35,000  
 
                                        
Current assets
                                        
Debtors
     11       400               400          
Cash at bank and in hand
             5               5          
 
                                    
 
             405               405          
 
                                        
Creditors: amounts falling due within one year
     12       (12,634 )             (12,634 )        
 
                                    
 
                                        
Net current liabilities
                     (12,229 )             (12,229 )
 
                                    
Net assets
                     22,771               22,771  
 
                                    
 
                                        
Capital and reserves
                                        
Called up share capital
     15               5,000               5,000  
Share premium account
     17               10,000               10,000  
Other capital reserve
     17               9,460               9,460  
Profit and loss account
     17               (1,689 )             (1,689 )
 
                                    
 
                                        
Shareholders funds
     18               22,771               22,771  
 
                                    

5

 

Morgans Hotel Group Europe Limited
Consolidated cash flow statement
for the year ended 31 December 2007
                                 
                      (Unaudited)  
    Notes     2007     2006     2005  
          £000     £000     £000  
 
                                
Net cash inflow from operating activities
     21       14,198       12,067       7,036  
 
                                
Returns on investments and servicing of finance
     22       (6,338 )     (6,324 )     (11,514 )
 
                                
Capital expenditure
     22       (3,507 )     (671 )     (1,536 )
 
                          
 
                                
Net Cash inflow before taxation and financing
             4,353       5,072       (6,014 )
 
                                
Taxation
             (99 )     —       -  
 
                                
Management of liquid resources
             —       —       4,230  
 
                                
Financing
     22       (1,500 )     (1,250 )     9,829  
 
                          
 
                                
Increase in cash and cash equivalents
             2,754       3,822       8,045  
 
                          
Reconciliation of net debt
for the year ended 31 December 2007
                                 
                      (Unaudited)  
    Notes     2007     2006     2005  
          £000     £000     £000  
 
                                
Increase in cash in the year
             2,754       3,822       8,045  
Net cash outflow/(inflow) from decrease / (increase) in debt
     23       1,500       1,242       (9,829 )
Non cash movements
     23       (339 )     (339 )     518  
 
                          
 
                                
Movements in net debt in the year
             3,915       4,725       (1,266 )
Net debt at the start of the year
             (92,615 )     (97,340 )     (96,074 )
 
                          
 
                                
Net debt at the end of the year
     23       (88,700 )     (92,615 )     (97,340 )
 
                          

6

 

Morgans Hotel Group Europe Limited
Notes to the financial statements
for the year ended 31 December 2007
1.   Principal accounting policies
The consolidated financial statements have been prepared under the historical cost convention and in accordance with applicable Accounting Standards in the United Kingdom. A summary of the more important accounting policies is set out below.
Basis of consolidation
The consolidated financial statements include financial statements of the company and its subsidiary undertaking made up to 31 December 2007.
Investments
Investments are stated at cost or cost less provision where there is a permanent diminution in value.
Fixed assets and depreciation
Tangible fixed assets are stated at cost less depreciation and any provision for impairment. Assets are depreciated to their residual values on a straight line basis over their estimated useful lives as follows:
     
Freehold buildings
  50 years
(Included in Freehold Buildings are assets for building surface finishes which are depreciated over 25-38 years)
    
Building surface finishes
  25-38 years
Plant and machinery
  15 years
Fixtures, fittings and equipment
  5-10 years
No depreciation is provided on freehold land. No residual values are ascribed to building surface finishes.
Interest paid on fixed assets purchases is capitalised up until the time the asset is available for use.
Foreign currency transactions
Translations into sterling are made at the average of rates ruling throughout the period for profit and loss items and at the rate ruling at 31 December 2007 for assets and liabilities. Exchange differences arising in the ordinary course of trading are included in the profit and loss account.
Deferred taxation
Deferred taxation is provided in respect of all timing differences that have originated but not reversed at the balance sheet date, where transactions or events have occurred which result in an obligation to pay more or less tax in the future.
Deferred tax is measured at the average tax rates which apply in the period in which the timing differences are expected to reverse. Deferred tax is measured on a non-discounted basis.
Deferred tax assets are regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it is more likely than not that there will be adequate future taxable profits against which to recover carried forward tax losses.

7

 

Morgans Hotel Group Europe Limited
Finance costs
Finance costs are included within the carrying value of the loan and are amortised over the term of the loan.
Stocks
Stocks are stated at the lower of cost and net realisable value.
Turnover
Turnover represents the amounts (excluding value added tax) derived from the provision of goods and services to customers. Turnover arises wholly in the United Kingdom.
Pension scheme
The group operates a defined contribution pension scheme. Contributions are charged to the profit and loss account in the period in which they are incurred.
2.   Staff numbers and costs
                         
                    (Unaudited)  
    2007     2006     2005  
    Number     Number     Number  
 
                        
The average number of employees in the year was:
                        
Hotel operating staff
     151       141       150  
Management/administration
     33       31       30  
Sales and marketing
     14       11       12  
Maintenance
     18       20       21  
 
                  
Total
     216       203       213  
 
                  
The aggregate payroll costs for these persons were as follows:
                         
                    (Unaudited)  
    2007     2006     2005  
    £000     £000     £000  
 
                        
Wages and salaries
     6,303       5,730       5,476  
Social security costs
     497       444       407  
Pension costs
     70       44       47  
 
                  
 
     6,870       6,218       5,930  
 
                  
None of the directors received any remuneration during the year (2006: Nil).
Funded defined contribution scheme for employees (group scheme)
Pension costs of £70,000 (2006: £44,000) were charged to the profit and loss account of which £nil (2006: nil) was outstanding at the balance sheet date.
The pension scheme is held with Standard Life and is administered by Origen.

8

 

Morgans Hotel Group Europe Limited
3.   Operating profit
This is arrived at after charging:
                         
                    (Unaudited)  
    2007     2006     2005  
    £000     £000     £'000  
 
                        
Auditors remuneration:
                        
Group
     54       50       63  
Company
     10       10       13  
Non audit Group (Tax compliance)
     —       —       182  
 
                        
Depreciation of tangible fixed assets
     2,437       2,778       3,267  
Loss on disposal of fixed assets
     —       274       —  
 
                  
4.   Interest payable and similar charges
                         
                    (Unaudited)  
    2007     2006     2005  
    £000     £000     £'000  
 
                        
Amounts payable on bank loans and overdrafts
     6,658       6,721       7,220  
Finance charges
     385       —       712  
 
                  
 
     7,043       6,721       7,932  
 
                  
5.   Exceptional Interest Charge
During 2005 Morgans Hotel Group Europe undertook a review of their debt structure. In November 2005 Management took advantage of the improvement in the Company’s business performance and a favourable capital market and secured new financing at more competitive rates providing a strong, stable financial base from which to operate in the future. Costs of £3,357,000 were incurred in cancelling the previous loan financing in the 2005 financial statements.

9

 

Morgans Hotel Group Europe Limited
6.   Taxation
(a) Analysis of charge in the year
                         
                    (Unaudited)  
    2007     2006     2005  
    £000     £000     £000  
 
                        
United Kingdom corporation tax at 30%
     200       —       —  
Adjustments in respect of prior years
     212       —       —  
 
                  
Total tax charge (note 6 (b))
     412       —       —  
 
                        
Deferred taxation (note 14)
     —       —       —  
 
                  
 
                        
Tax on profit on ordinary activities
     412       —       —  
 
                  
There is no movement on the deferred tax asset from 2006.
(b) Factors affecting tax charge for the year
                         
                    (Unaudited)  
    2007     2006     2005  
    £000     £000     £'000  
 
                        
Profit on ordinary activities before tax
     4,480       2,246       (6,390 )
 
                  
Profit on ordinary activities multiplied by standard rate of corporation tax in the UK of 30% (2006 : 30%)
     1,343       674       (1,917 )
 
                        
Effects of:
                        
Expenses not deductible for tax purposes
     62       171       194  
Capital allowances in excess of depreciation
     (552 )     695       739  
Tax losses
     (653 )     (1,540 )     984  
Adjustment in respect of prior years
     212       —       —  
 
                  
Tax charge for the period
     412       —       —  
 
                  
7.   Profit for the financial year
The company has taken advantage of the exemption allowed under section 230 of the Companies Act 1985 and has not presented it’s own profit & loss account, in these financial statements. The profit for the year is £Nil (2006:Profit £Nil, 2005:Loss £712,000)

10

 

Morgans Hotel Group Europe Limited
8.   Fixed assets — Group
                                 
                    Fixtures,        
    Land and     Plant and     fittings and        
    buildings     machinery     equipment     Total  
    £000     £000     £000     £000  
Cost
                                
At 1 January 2007
     100,584       8,290       11,607       120,481  
Additions
     1,434       136       1,937       3,507  
Disposal
     —       —       —       —  
 
                        
At 31 December 2007
     102,018       8,426       13,544       123,988  
 
                        
 
                                
Depreciation
                                
At 1 January 2007
     6,899       3,711       8,043       18,653  
Charge for the year
     923       575       939       2,437  
Disposals
     —       —       —       —  
 
                        
At 31 December 2007
     7,822       4,286       8,982       21,090  
 
                        
 
                                
Net book value
                                
At 31 December 2007
     94,196       4,140       4,562       102,898  
 
                        
At 31 December 2006
     93,685       4,579       3,564       101,828  
 
                        
Included in total net book value of land and buildings is £41,091,000 (2006: £41,955,000) of long leasehold property and £4,193,000 (2006: £4,219,000) of capitalised interest (net of accumulated depreciation).
All tangible fixed assets of the group are held by the subsidiary undertaking, Morgans Hotel Group London Limited.

11

 

Morgans Hotel Group Europe Limited
9.   Stock
                 
    Group     Group  
    2007     2006  
    £000     £000  
 
                
Consumables
     222       209  
 
            
10.   Investment in subsidiary company
                 
    Company     Company  
    £000     £000  
 
                
At 1 January 2007 and 31 December 2007
     35,000       35,000  
 
            
The company owns 100% of the ordinary shares of Morgans Hotel Group London Limited, a company incorporated in England and Wales, whose principal activity is the operation of two Morgans Hotel Group hotels in London.
11.   Debtors: amounts due within one year
                                 
    Group     Company     Group     Company  
    2007     2007     2006     2006  
    £000     £000     £000     £000  
 
                                
Trade debtors
     1,072       —       1,471       —  
Amounts due from related parties
     418       400       857       400  
Prepayments and accrued income
     764       —       441       —  
 
                        
 
     2,254       400       2,769       400  
 
                        
12.   Creditors: amounts falling within one year
                                 
    Group     Company     Group     Company  
    2007     2007     2006     2006  
    £000     £000     £000     £000  
 
                                
Bank loans
     2,083       —       1,500       —  
Trade creditors
     596       —       356       —  
Amounts due to group undertakings and related parties
     605       12,634       520       12,634  
Taxation and social security
     559       —       675       —  
Accruals and deferred income
     1,638       —       1,744       —  
Corporation Tax
     312       —       —       —  
 
                        
 
     5,793       12,634       4,795       12,634  
 
                        
13.   Creditors: amount falling due after more than one year
                 
    Group     Group  
    2007     2006  
    £000     £000  
 
                
Bank loans net of unamortised costs
     101,636       103,380  
 
            
 
     101,636       103,380  
 
            

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Morgans Hotel Group Europe Limited
Bank loans are repayable as follows:
                 
    2007     2006  
    £000     £000  
 
                
In one year or less, or on demand
     2,083       1,500  
In more than one year, but not more than two years
     2,200       2,083  
In more than two years, but not more than five years
     99,436       101,297  
 
            
 
     103,719       104,880  
 
            
Bank loans are as follows:
                 
    2007     2006  
    £000     £000  
 
                
Sterling bank loans: 6.280%
     103,719       104,880  
 
            
 
     103,719       104,880  
 
            
Bank loans are repayable in monthly instalments, are denominated in sterling and bear interest at a fixed rate as noted above.
The bank loan is secured by way of a first ranking legal charge over the properties including fixtures, fittings and property management agreements, and an assignment over all revenues due from operation of the properties.
14.   Deferred taxation
                 
    2007     2006  
    £000     £000  
 
                
Accelerated capital allowances
     (6,182 )     —  
Short term timing differences
     19       107  
Losses
     6,163       3,005  
Valuation allowance
     —       (3,112 )
 
            
Total deferred tax asset
     —       —  
 
            
In 2007 a retrospective capital allowances claim was agreed with the HMRC, this has resulted in a reduction in the tax written down value of the assets and therefore a provision for accelerated capital allowances has been recognised in the 2007 Financial Statements.

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Morgans Hotel Group Europe Limited
15.   Called up share capital
                 
    31 December     31 December  
    2007     2006  
    £000     £000  
Authorised
                
1,000 ordinary shares of £1 each
     1       1  
2,499,999 A ordinary shares of £1 each
     2,500       2,500  
2,499,999 B ordinary shares of £1 each
     2,500       2,500  
2 preferred non-voting ordinary shares of £1 each
     —       —  
 
            
 
     5,001       5,001  
 
            
Allotted, called up and fully paid
                
2 ordinary shares of £1 each
     —       —  
2,499,999 A ordinary shares of £1 each
     2,500       2,500  
2,499,999 B ordinary shares of £1 each
     2,500       2,500  
1 preferred non-voting ordinary shares of £1 each
     —       —  
 
            
 
     5,000       5,000  
 
            
Both the A and B ordinary shares carry equal voting rights, equal rights to dividends and equal rights on winding up and rank pari passu with each other. The preferred ordinary shares carry non-voting rights and rank pari passu with the A and B ordinary shares.
16.   Reserves — group
                         
    Share     Other capital     Profit and  
    premium     Reserve     loss account  
    £000     £000     £000  
 
                        
At 1 January 2007
     10,000       9,460       (15,564 )
Profit for the financial year
     —       —       4,068  
 
                  
At 31 December 2007
     10,000       9,460       (11,496 )
 
                  
17.   Reserves — company
                         
    Share     Other capital     Profit and  
    Premium     Reserve     loss account  
    £000     £000     £000  
 
                        
At 1 January 2007
     10,000       9,460       (1,689 )
Profit for the financial year
     —       —       —  
 
                  
At 31 December 2007
     10,000       9,460       (1,689 )
 
                  

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Morgans Hotel Group Europe Limited
18.   Reconciliation of movements in shareholders’ funds
                                 
    Group     Company     Group     Company  
    2007     2007     2006     2006  
    £000     £000     £000     £000  
 
                                
Profit for the financial year
     4,068       —       2,246       -  
 
                        
 
                                
Net movement in shareholders’ funds
     4,068       —       2,246       -  
Opening shareholders funds
     8,896       22,771       6,650       22,771  
 
                        
Closing shareholders funds
     12,964       22,771       8,896       22,771  
 
                        
19.   Immediate and ultimate controlling parties
Up until 16th February 2007 Morgans Hotel Group Europe Limited was owned 50% by Burford Hotels Limited, whose ultimate holding company is Lehman Brothers Holdings Inc., a company incorporated in the state of Delaware in the USA.
The consolidated accounts of Lehman Brothers Holdings Inc are available to the public from 399, Park Avenue, New York, USA and from One Broadgate, London.
From the 16th February 2007 Morgans Hotel Group Europe Limited is owned 50% by Walton MG Hotels Investors V, LLC, an affiliate of Walton Street Capital LLC., a company incorporated in the state of Delaware in the USA.
The other 50% is owned by Royalton Europe Holdings LLC, a wholly owned subsidiary of Morgans Hotel Group Co, a company incorporated in the USA, whose principal place of business is 475 10th Avenue New York, NY 10018 USA.
20.   Related party transactions
Morgans Hotel Group UK Management Limited
Morgans Hotel Group UK Management Limited is 100% owned by Morgans Hotel Group Co.
Morgans Hotel Group UK Management Limited charge Morgans Hotel Group Europe Limited a management fee and staff costs relating to hotel management, which totalled £3,242,000 (2006: £2,865,000).
SC London Limited
SC London Limited is indirectly owned 50% by Morgans Hotel Group Co and 50% by Chodorow Ventures LLC.
SC London Limited pays rent and recharged expenditure to Morgans Hotel Group Europe Limited, which totalled £3,699,000 (2006: £3,729,000).

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Morgans Hotel Group Europe Limited
                 
Related party balances and transactions   2007     2006  
    £000     £000  
 
                
Debtors: amounts falling within one year
                
SC London Limited
     —       345  
Morgans Hotel Group Co
     400       400  
Other Morgans Hotel Group Co companies
     18       112  
 
            
 
     418       857  
 
            
                 
    2007     2006  
    £000     £000  
 
                
Creditors: amounts falling due within one year
                
Morgans Hotel Group UK Management Limited
     306       318  
SC London Limited
     215       97  
Other Morgans Hotel Group Co companies
     84       105  
 
            
 
     605       520  
 
            
The directors confirm that there were no related party transactions other than those disclosed in these financial statements and that all transactions were undertaken on an arms length basis.
21.   Reconciliation of operating profit to net cash inflow from operating activities
                         
                    (Unaudited)  
    2007     2006     2005  
    £000     £000     £000  
Operating profit
     10,818       8,570       4,681  
Depreciation and Amortisation
     2,804       2,778       3,267  
Loss on disposal of assets
     —       274       —  
(Increase) / Decrease in stock
     (14 )     (62 )     62  
(Increase) / Decrease in debtors
     515       (431 )     105  
Increase / (Decrease) in creditors
     75       938       (1,079 )
 
                  
Net cash inflow from operating activities
     14,198       12,067       7,036  
 
                  

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Morgans Hotel Group Europe Limited
22.   Analysis of cash flows
                         
                    Unaudited  
    2007     2006     2005  
    £000     £000     £000  
 
                        
Return on Investment and servicing of finance
                        
Interest received
     705       397       218  
Interest on bank loan
     (6,658 )     (6,721 )     (11,732 )
Finance charges
     (385 )     —       —  
 
                  
 
     (6,338 )     (6,324 )     (11,514 )
 
                        
Capital expenditure
                        
Purchase of tangible fixed assets
     (3,507 )     (671 )     (1,536 )
 
                        
Management of liquid resources
                        
Decrease/(Increase) in restricted cash
     —       —       4,230  
 
                        
Financing
                        
Repayment of bank loan
     (1,500 )     (1,250 )     (92,750 )
Drawn down of loan (see note 12)
     —       —       107,456  
Repayment of inter-company debt
     —       —       (4,877 )
 
                  
 
     (1,500 )     (1,250 )     9,829  
 
                  
23.   Analysis of changes in net debt
                                 
                    Other     At 31  
    At 1 January             non-cash     December  
    2007     Cash flows     movements     2007  
    £000     £000     £000     £000  
 
                                
Cash at bank and in hand
     12,265       2,754       —       15,019  
Debt due within one year
     (1,500 )     1,500       (2,083 )     (2,083 )
Debt due after more than one year
     (104,706 )     —       2,083       (102,623 )
Deferred finance costs
     1,326               (339 )     987  
 
                        
 
                                
Net debt
     (92,615 )     4,254       (339 )     (88,700 )
 
                        

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Morgans Hotel Group Europe Limited
24.   Summary of differences between United Kingdom Generally Accepted Accounting Practice (“UK GAAP”) and United States Generally Accepted Accounting Principles (“US GAAP”)
The following table contains a summary of the material adjustments to profit for the financial year between UK GAAP and US GAAP:
                                 
                            (Unaudited)  
            Year Ended     Year Ended     Year Ended  
            31 December     31 December     31 December  
    Note     2007     2006     2005  
          £000     £000     £000  
 
                                
Profit for the financial year as reported under UK GAAP
             4,068       2,246       (6,390 )
US GAAP adjustments:
                                
Depreciation of tangible fixed assets
     a       (864 )     (988 )     (988 )
Financial instruments
     b       (1,341 )     2,454       —  
 
                                
 
                          
Total US GAAP adjustments
             (2,205 )     1,466       (988 )
 
                          
 
                                
 
                          
Net income as reported under US GAAP
             1,863       3,712       (7,378 )
 
                          
The following table contains a summary of the material adjustments to shareholders’ funds between UK GAAP and US GAAP:
                                 
                            (Unaudited)  
            Year Ended     Year Ended     Year Ended  
            31 December     31 December     31 December  
    Note     2007     2006     2005  
          £000     £000     £000  
Total shareholders’ funds as reported under UK GAAP
             12,964       8,896       6,650  
US GAAP adjustments
                                
Depreciation of tangible fixed assets
     a       (7,913 )     (7,157 )     (6,169 )
Financial instruments
     b       1,113       2,454       —  
 
                                
 
                          
Total US GAAP adjustments
             (6,800 )     (4,703 )     (6,169 )
 
                          
 
                                
 
                          
Shareholders’ funds under US GAAP
             6,164       4,193       481  
 
                          

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Morgans Hotel Group Europe Limited
A summary of the principal differences between United Kingdom Generally Accepted Accounting Practice and United States Generally Accepted Accounting Principles is set out below:
(a) Depreciation of tangible fixed assets
Under UK GAAP, the freehold buildings are depreciated on a straight line basis over 50 years to their residual values. Under US GAAP, the freehold building are depreciated on a straight line basis over 40 years and there is considered to be no residual value. The result of this is an accelerated depreciation charge under US GAAP.
(b) Financial instruments
Under US GAAP an entity recognises all of its derivative instruments as either assets or liabilities depending on the rights or obligations under the contracts. All derivative instruments are measured at fair value in accordance with Financial Accounting Standards Board Statement No. 133 “Accounting for Derivative Instruments and Hedging Contracts”. The equivalent UK GAAP is not required to be applied by the Company for the periods under audit. This adjustment reflects the impact of revaluing all the Company derivative financial instruments.
(c) Financial statement presentation
The balance sheet prepared in accordance with UK GAAP differs in certain respects from US GAAP. Under UK GAAP, current assets are netted against current liabilities in the balance sheet whereas US GAAP requires the separate presentation of total assets and total liabilities. UK GAAP requires assets to be presented in ascending order of their liquidity, whereas under US GAAP assets are presented in descending order of liquidity.
(d) Cash flow statement
The cash flow statement presented under UK GAAP has been presented in accordance with FRS1 (revised). “cash flow statements”. There are certain differences from UK GAAP to US GAAP with regard to the classification of items within the cash flow statement and with regard to the definition of cash and cash equivalents. In accordance with FRS1, cash flows are prepared separately for operating activities, returns on investment and servicing of finance, taxation, capital expenditure and financial investment, acquisitions and disposals, equity dividends paid, management of liquid resources and financing.
US GAAP, however, requires only three categories of cash flow activity to be reported. Under SFAS No. 95, “Statement of Cash Flows”, cash flows are classified under operating activities (including cash flows from taxation and returns on investment and servicing of finance), investing activities and financing activities.
A summary of the Company’s operating, investing and financing activities classified in accordance with US GAAP is presented below:
                         
                    (Unaudited)  
    2007     2006     2005  
    £000     £000     £000  
Net cash provided by (used in) operating activities
     7,761       5,743       (4,478 )
Net cash (used in) investing activities
     (3,507 )     (671 )     (1,536 )
Net cash (used in) provided by financing activities
     (1,500 )     (1,250 )     14,059  
 
                  
Net increase in cash and cash equivalents
     2,754       3,822       8,045  
Cash and cash equivalents at beginning of period
     12,265       8,443       398  
 
                  
Cash and cash equivalents at end of period
     15,019       12,265       8,443  
 
                  

 

19