jlh annual report 07

2008 ANNUAL REPORTJapan Leisure Hotels Limited Annual Report and Audited Financial Statements

For the period 17 October 2007 (date of incorporation) to 31 December 2007

Japan Leisure Hotels

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Chairman’s Statement

1

Asset Manager’s Report

3

Report of the Directors

13

Directors

16

Independent Auditors’ Report

17

Statement of Assets and Liabilities

19

Statement of Operations

20

Statement of Changes in Shareholders’ Equity

21

Notes to the Financial Statements

22

Management and Administration

29

Contents

Japan Leisure Hotels Limited is a newly incorporated, Guernsey registered,

closed-ended company which has been established to invest into the

Japanese leisure hotel industry and, through its investment, aid in the

consolidation of a highly fragmented industry.

The Company’s objective is to provide Shareholders with an attractive yield

by paying out all free cash fl ow from these cash generative assets and, with

increasing transparency and restructuring in the industry, deliver increasing

capital values to allow our investors to receive a signifi cant absolute return.


1JLH Annual Report 2008 | Chairman’s Statement

JAPAN LEISURE HOTELS was admitted to the AIM on 16 January 2008 during a particularly tumultuous period for global stock markets. During the fi rst quarter of 2008, only 32 companies were listed on AIM for a total market capitalisation of £290 million, compared with 284 companies and £6.5 billion for the comparable period in 2007. Those who have followed the Company will be aware that the Japanese leisure hotel market caters to the signifi cant demand for short stay hotel facilities, arising from the lack of space and the resulting lack of privacy available to many Japanese couples.

The Board believes that a well structured organisation can benefi t greatly from a number of factors prevalent within the industry: primarily, the fragmented nature of the industry; the number of hotels available to be acquired at below replacement cost; exceptionally high occupancy rates within well managed hotels; and the current lack of professional management standards in many leisure hotels.

Although Japan Leisure Hotels had intended to raise a larger amount of investment funds on Admission, even with the smaller amount, the Company has benefi ted greatly from its IPO. Admission to AIM has allowed the acquisition of the initial hotel portfolio and will improve access to funding, both equity and debt, in the future.

Given the debate taking place in corporate Japan over transparency and management accountability to their shareholders, perhaps the most signifi cant advance the listing has provided is to bring strong corporate governance to our Japanese operating assets. Investors in Japan Leisure Hotels can be assured that your Board is committed to high levels of corporate governance and that New Perspective, the asset manager, is committed to creating the most value possible from the assets while distributing all free cash fl ow from the operation of the hotels to the Company.

POST BALANCE SHEET EVENTS

All of the investments made by the Company have been made post the balance sheet date, and were concurrent with the listing of Japan Leisure Hotels on AIM. The details of these events have been provided in the Admission Document. The asset manager was successful in increasing both margin and effi ciencies within the portfolio throughout 2007. As the Company did not acquire the portfolio until January 2008, I would refer readers to the Asset Manager’s Report for further details.

All of Japan Leisure Hotels’ investments continue to be unhedged with respect to the Japanese Yen, but uninvested capital is held in Sterling. Since the listing, the Yen has generally been appreciating against Sterling and it is the

The leisure hotel sector in Japan is estimated to have annual gross revenue of more than £17 billion.

Chairman’s Statement

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2 JLH Annual Report 2008 | Chairman’s Statement

view of both the asset manager and the Board that this trend is likely to continue in the long term.

The Board has no intention of entering into any foreign exchange hedging transactions unless it perceives a material risk to the value of the portfolio and in such an event, will notify the market prior to any hedging transactions.

The Board has reviewed the current cash position of Japan Leisure Hotels and we are pleased to report that we have a strong cash position. As of the end of April 2008, the Company had cash on hand of more than £1.6 million and subsequently a dividend from our TK investments of ¥78 million (£390,000) has been received by the Company, which represents the free cash from the hotels from the fi rst quarter of operations.

While most of this cash is expected to be used to fund the acquisition of additional properties, suffi cient reserves will be retained to cover the operating expenses of the Company and any cash from earnings remaining after making an acquisition will be distributed to shareholders.

INVESTMENT STRATEGY AND OUTLOOK

In the current environment there is plenty of opportunity to expand our portfolio and we are keen to do so. Our strategy remains unchanged albeit adjusted for our more limited resources and thus we continue to pursue investment opportunities in existing leisure hotel properties in Japan with the intention to have them refurbished, re-branded

and have management systems incorporated under the supervision of New Perspective.

Without large cash reserves, it is intended that acquisitions of new properties will be funded through a mixture of debt and equity. The debt markets in Japan have not avoided the fall out from the sub-prime crisis but New Perspective continues to pursue borrowing opportunities although the success of these eff orts is dependent on the markets in general.

Ultimately, we aim to provide our Shareholders with an attractive absolute return, generating a stable and growing income stream whilst also benefi ting from an asset backed investment in an improving real estate environment.

ANNUAL MEETING

We look forward to discussing our current strategy and recent performance with Shareholders at the Annual General Meeting on 22 September 2008. This will be held at the Registered Offi ce of the Company, Polygon Hall, Le Marchant Street, St Peter Port, Guernsey.

Alan CliftonChairmanJapan Leisure Hotels Ltd20 June 2008

The defi ciencies in the Japanese leisure hotel industry also constitute its biggest

opportunity for investors: Just as investment by major operators in the 1980s

and 1990s changed Las Vegas from a town of questionable repute into what

is now a mainstream holiday destination, we believe that by developing a

transparent business which is accountable for its actions, we will help move

what is perceived as a fringe business into the mainstream.


JLH Annual Report 2008 | Asset Manager’s Report 3

THE JAPANESE LEISURE HOTEL SECTOR consists of approximately 25,000 hotels with an average of 25 rooms per hotel. Each room is occupied more than twice each day on average and each guest spends approximately 6,000 yen on average.

This is an industry that has revenues in excess of £17 billion per year, yet no single operator or owner controls more than 100 hotels; In fact, 90% of all owners own fi ve or fewer hotels. It is these statistics that attracted the asset manager, New Perspective, to the sector in 2002 and started our journey to extract value from this sector in Japan.

It was not until 1998 and the start of the liquidation of bad loans from the banking system that real estate began to show any signs of liquidity in Japan. Over the following years, real estate investment trusts and many private funds purchased and traded real estate. Over time, the scope of investment for real estate funds expanded into operationally intensive real estate assets – principally golf courses and business hotels.

We see this wave continuing, albeit with a little pause now and again for a global market crisis, and it is our intention to provide the guidance and management on the ground to ensure that Japan Leisure Hotels will be a key player in the consolidation and maturation of the Japanese leisure hotel market.

That is no small ambition and there are many challenges ahead. The biggest issue facing the industry is its fragmentation. As previously noted, 90% of owners own fi ve or fewer hotels – a segment of the market that Japan Leisure Hotels currently falls into, but which it intends to grow out of in the near future. This fragmentation leads to an opaque market with few, if any, operators who have the size and fi nancial resources to invest in the business in a manner that would result in the scale, transparency and accountability necessary to allow this industry to develop to a more mature state and one appropriate to an industry of this size.

These defi ciencies in the industry also constitute its biggest opportunity for investors: Just as investment by major operators in the 1980s and 1990s changed Las Vegas from a town of questionable repute into what is now a mainstream holiday destination, we believe that by developing a transparent business which is accountable for its actions, we will help move what is perceived as a fringe business into the mainstream.

Developing the transparency and accountability on the ground will benefi t Japan Leisure Hotels in two key aspects: First, the brand, Bonita Hotels, will be able to appeal to a wider market in Japan; and second, this will allow for the assets that Japan Leisure Hotels invests in to achieve higher valuations.

AssetManager’s

Report

The biggest issue facing the Japanese leisure hotel industry is fragmentation: 90% of owners own fi ve or fewer hotels.

BONITA ISAWA


JLH Annual Report 2008 | Asset Manager’s Report4

INVESTMENT PHILOSOPHY

Before detailing the opportunity, it would be instructive to outline our objective when considering an investment in a leisure hotel. In making each investment and in managing each hotel, we have a single goal: to earn the best returns available over the life of the asset. Our focus is on our business and how to maximise its realisable value to our investors.

New Perspective’s focus on the business on the ground, coupled with the strong corporate governance from the board of Japan Leisure Hotels and a tail wind from the restructuring of the sector itself, and inevitably in Japan more broadly, provides an exceptional platform for investors to enjoy investment returns without many of the issues that currently affl ict the Japanese corporate market.

INVESTMENT CYCLE

From 1 January 2008 until 31 May 2008, the asset manager reviewed nearly 100 hotels that were indicated to us as available for sale at the time of introduction. Each potential acquisition is subject to a rigorous process of analysis and due diligence prior to making an investment.

This process covers the structural integrity of the building, the legal title and regulatory environment of the property, and the current and forecast performance of the hotel.

We are at various stages in the due diligence process for several properties. After fi nal negotiations are complete a presentation will be made to the Strategy Committee

of Japan Leisure Hotels, which will then make a fi nal determination on the funding of the investment. Purchasing a property is just the beginning; developing and managing the property to extract the desired return is the harder part. New Perspective achieves this through:

• Increasing RevenueOur ability to drive sales is a combination of our brand and its communication, the product we deliver to the market and more aggressive pricing based on detailed analysis. This is illustrated in the before and after analysis of Room 602 in the Sendai hotel, which saw a 48% increase in sales post-renovation, the details of which can be seen on pages 6 and 7 of this report.

• Training and Supervising PersonnelEach property’s prosperity is reliant on the staff and their ability to manage the property in an effi cient manner. The majority of the staff management is outsourced to hotel operators, but the asset manager seeks to improve operating processes and leverage knowledge across the portfolio to improve staff productivity.

As personnel is the largest expense for any of our hotels, the asset manager takes a very proactive role in managing these expenses and overseeing staff training at each of the hotels.

Some of the initiatives that bore fruit in 2007 are the implementation of a real time time-reporting system that has lead to a signifi cant reduction in overtime that

“Given that labour productivity per hour worked in Japan is 30% below the US

level, there appears to be a large potential for faster productivity growth.”

– OECD Economic Surveys: Japan 2008



attracts penalty rates and reduces productivity, and the benchmarking of cleaning processes across all hotels, leading to a 5% reduction in labour costs from 2006.

• Sourcing and Aggregating PurchasingFrom inception we have been keenly aware of the value that aggregate purchasing across the whole portfolio can provide for us. For example, during 2007, we started importing toothbrush and toothpaste sets at a cost of ¥10 (5 pence) per set, compared to ¥20 (10 pence) per set paid to domestic suppliers. Given that 180,000 couples visited our hotels in 2007, this resulted in savings of ¥2.8 million (£14,000) over the year.

We continue to broaden the range of products sourced directly and are in the early stages of implementing an automated central purchasing and inventory system to take this value driver to its next stage of development.

• Making Engineering ImprovementsHotels are very heavy users of natural resources. There is no end in sight to the onward march of infl ation, and as such, New Perspective continues to review and seek to improve the operating effi ciencies to reduce our hotels’ impact on the environment and, by extension, our ongoing operating expenses.

Predominantly through eff orts in reengineering electrical services, utility costs as a fraction of sales fell by more than 5% in 2007.

DEVELOPMENT OF THE MANAGER

In order to extract the value for the investors of Japan Leisure Hotels, we require a talented group of people to drive the processes we need to implement. Since the listing of Japan Leisure Hotels, New Perspective has increased its headcount by three, adding a Finance Manager, a Project Manager and a Trainee Asset Manager. We now number a team of nine (six Japanese and three foreign nationals) and are seeking one further hire as a Trainee Asset Manager.

The increase in headcount has allowed us to bring the fi nancial management and accounting of all of the hotels under the direct control of New Perspective, thereby improving the speed, accuracy and transparency of reporting, the capture of key data and reducing the cost to the hotels.

It is imperative that investment continues to be made in the control and management systems for the hotels. This will allow us to leverage sourcing more effi ciently across the portfolio, enforce stricter purchasing policies and, perhaps most critically, capture the detailed data required to ensure that investments in the operations are focused accurately and that returns from these investments can be monitored accurately.

BONITA MATSUSAKA



Our ability to drive sales is a combination of our

brand and its communication, the product we

deliver to the market and more aggressive pricing

based on detailed analysis.

This is illustrated in the before and after analysis of

Room 602 in the Bonita Sendai hotel.

AFTER RENOVATION

Delivering Value



BEFORE RENOVATION

BEFORE RENOVATION

AFTER RENOVATION

AVERAGE COST PER ROOM – PURCHASE AND RENOVATION ¥21.9 MILLION

RO

OM

SA

LE

S I

N J

AP

AN

ES

E Y

EN

SALES AUGUST 2006(PRE-RENOVATION)

SALES AUGUST 2007(POST-RENOVATION)

0

200000

400000

600000

800000

1000000

48% Ω

This hotel was purchased in February 2006 and reopened in December 2006 under the Bonita brand. Prior to the renovation, the hotel had 78 guest rooms; after the renovation, 80 guest rooms.

Sales in the highest grossing room in August 2006 (pre-renovation) increased by 48% in August 2007 following the renovation and rebranding of the hotel.

¥598,000

¥885,000



2007 PERFORMANCE

Komaki Isawa Matsusaka Sendai Yamagata(in Yen) (Thousands) (Thousands) (Thousands) (Thousands) (Thousands)

Revenue 155,344 136,347 260,563 510,247 114,666

Raw materials and consumables -19,579 -21,971 -36,520 -53,235 -14,202

Employee benefi ts costs -41,205 -35,551 -62,186 -112,703 -32,601

Repairs and maintenance -4,020 -5,238 -9,614 -7,514 -3,468

Hotel operator fees -6,585 -5,442 -11,337 -20,380 -4,593

Asset manager fees -4,671 -4,097 -7,844 -15,342 -3,445

Property tax and insurance -4,300 -3,440 -5,518 -10,327 -3,558

Professional services -9,941 -10,125 -11,603 -12,767 -8,801

Operating lease payments -4,608 0 0 -495 -189

Other expenses -30,136 -28,161 -45,811 -80,235 -21,973

Operating expenses -125,045 -114,026 -190,435 -312,998 -92,829

EBITDA 30,299 22,321 70,128 197,249 21,837

EBITDA: Earnings before interest, tax, depreciation and amortisation. The information in the table above is an extract from the audited Japanese GAAP fi nancial statements of the operating companies, converted to IFRS on an unaudited basis.

New Perspective has been the sole asset manager for all the properties that Japan Leisure Hotels acquired on listing since their initial purchase and rebranding. Many of the current shareholders have been invested in these hotels since their original purchase. Presented below are unaudited statements of EBITDA for each of the hotels in 2007 for the 12-month period ended 31 December 2007.

The combined EBITDA from all hotels, less net operating expenses not specifi cally attributable to the hotels of ¥3.7 million, equals ¥338 million, a margin of 28.7%. This represents nearly 30% increase in EBITDA over 2006, largely the impact of the renovation of the Sendai hotel that was completed in late 2006, and more importantly an increase in the EBITDA margin from 25.5%. After adjusting for the impact of one-time legal and consulting fees, and bulk purchase of linen on the re-branding of the Sendai hotel, the EBITDA margin for 2007 increases to 30.5%.

Cash and cash equivalents held by the special purpose companies in Japan at the end of 2007 totalled ¥203 million, an increase of ¥43.8 million over the balance at the end of 2006. After allowing for distributions to investors, capital expenditure and movements in working capital, the cash fl ow from operations for 2007 was ¥357 million. All capital expenditure in 2007 was funded out of equity or current cash fl ow, and the only material liabilities at the end of 2007 were trade payables of ¥93 million, an amount slightly less than one month of sales.

The following key performance indicators further illustrate the growth and performance of the portfolio:

2005 2006 2007

REVPAR ¥10,506 ¥15,350 ¥16,572

Occupancy 160% 239% 254%

EBITDA Margin (43.5%) 25.5% 28.7%

NOI Margin N/A 11.7% 14.8%

EBITDA Margin: Earnings before interest, tax, depreciation and amortisation as a percentage of revenuesNOI Margin: Profi t (loss) from operations before interest and tax, as a percentage of revenues



CURRENT TRADING

Revenue since the year end has proved resilient, remaining in line with our expectations and unchanged from the prior period. The success of the web based membership schemes has resulted in 85% of customers being members in four of the hotels. At the fi fth property, the Hotel Bonita – Sendai, this fi gure is 48% and a programme is underway to attract more repeat business.

Hotel operations continue to be aff ected by the signifi cant increases in fuel and food and beverage costs – these are escalating at a considerable pace at the moment with fuel oil signifi cantly higher than the price last year. We are taking action to improve the effi ciencies of plant and equipment, thereby limiting the impact of these infl ationary pressures.

Following a detailed review of the hotel pricing structures of the hotels, New Perspective is introducing, initially at one hotel, new pricing practices, which if successful, will be rolled out across the portfolio. This will help alleviate some of the current cost pressures.

At the EBITDA level, we are seeing the impact of increased audit fees over prior years and the impact of a change in the method of calculating the asset management fee following the admission of Japan Leisure Hotels to AIM. In addition, there will be one-off increased consulting fees in relation to the pricing review.

The portfolio continues to produce a good cash yield. The net cash from operations from the beginning of 2008 to the end of May 2008 has exceeded ¥140 million (approximately £0.66million).

LOOKING FORWARD

In the immediate future, there are a number of challenges facing New Perspective, breaking down into two categories. The fi rst is strategic and in particular, how to expand the portfolio with the limited resources available; the second is the operational challenge posed by the changing environment as the Japanese economy emerges from more than ten years of defl ation.

Portfolio ExpansionTo improve our ability to increase the size of the portfolio, we have been in discussions with a number of lenders to provide leverage for our current hotels. This process continues but given the current market conditions it is progressing much slower than we hoped for. A second avenue that is being explored with a number of sellers is to acquire a portfolio of hotels in exchange for shares of Japan Leisure Hotels. This would be a complex transaction and would need a signifi cant amount of cooperation from the seller, so while we are exploring this option, we currently view it as being appropriate only in limited circumstances.

Future AcquisitionsThe turmoil in the banking world has had its eff ect on the property market in Japan and in particular the leisure hotel sector, which explains the large number of properties we have been able to review so far this year. This is an exceptional time with some excellent properties available for sale as the credit crunch and tighter bank lending environment forces leveraged owners to divest of non-core assets such as leisure hotels.

BONITA YAMAGATA


The Portfolio

BONITA MATSUSAKA

41 rooms purchased June 2005, reopened after refurbishment December 2005

BONITA YAMAGATA

23 rooms purchased February 2005, reopened after refurbishment August 2005

BONITA KOMAKI

25 rooms purchased January 2005, reopened after refurbishmentApril 2005



BONITA SENDAI LOBBY

78 rooms purchasedFebruary 2006, reopenedafter refurbishment December 2006 with 80 rooms

BONITA ISAWA

BONITA ISAWA

26 rooms purchased March 2005, reopened after refurbishment August 2005




“Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

– Warren Buff et

The sage of Omaha may have been speaking about shares, but it is just as applicable to the purchase of leisure hotels. As a buyer in the market we are happy to see prices come down, although that may have an impact on the valuation of the current portfolio in the future.

However, any impact from revaluation does not aff ect the cash generating ability of the portfolio: the current portfolio created ¥78 million (£390,000) of positive cash fl ow in the fi rst quarter of 2008, and this is after allowing for an increase in capital expenditure reserves of ¥14 million (£70,000) and one-time professional fees of ¥5 million (£25,000).

OperationalThe biggest operational challenge going forward is to manage the cost pressures that are entering all businesses in Japan as the economy moves from over ten years of defl ation to an infl ationary environment. We will be actively managing this both by seeking to improve economies of scale and effi ciency at all levels and by constantly refi ning the pricing at the hotels.

CONCLUSION

This industry has annual revenues of over £17 billion and even with the current fragmentation and ineffi ciencies still manages to make, in New Perspective’s opinion, consistently attractive returns.

By acquiring a large portfolio of hotels we expect to derive increasing gains from greater economies of scale. This, coupled with clearly available productivity gains in a restructuring industry, is a compelling landscape for any investor. While the current fi nancial turmoil has certainly delayed our plans, the strategy remains intact.

“Invest on the basis of value, not popularity”– Warren Lichtenstein

Value is most commonly found in areas that are out of favour. We are investing in a country that is out of favour, seeking to consolidate in a sector that is out of favour, but the industry size, returns, and cash generation are undeniable. We remain confi dent that excellent returns will be enjoyed by our investors over the coming years.

Stephen Mansfi eld Robert MarshallDirector DirectorNew Perspective Y.K. New Perspective Y.K.20 June 2008 20 June 2008

The current portfolio created ¥78 million (£390,000) of positive cash fl ow in

the fi rst quarter of 2008, and this is after allowing for an increase in capital

expenditure reserves of ¥14 million (£70,000) and one-time professional fees of

¥5 million (£25,000).


13JLH Annual Report 2008 | Report of the Directors

IncorporationThese are the fi rst fi nancial statements of the Company which was incorporated on 17 October 2007 and commenced operations on 7 January 2008.

Principal activitiesJapan Leisure Hotels Limited is a newly incorporated, Guernsey registered closed ended company which has been established to invest into the Japanese Leisure Hotel industry and, through its investments, aid the consolidation of a highly fragmented industry.

The Company was listed and admitted to trading on AIM, the market of that name operated by the London Stock Exchange on 16 January 2008.

Business reviewA review of the business together with the likely future developments is contained in the Chairman’s Statement on page 1 and the Asset Manager’s Report on page 3.

Please note that the Asset Manager’s report does refer to results and actions that occurred in 2007. While these are not attributable to JLH the Directors believe it is in the interest of all shareholders to show the continuity of management of the portfolio.

Results and dividendThe result for the period is set out in the Statement of Operations on page 20.

The directors do not recommend payment of a dividend in respect of the period to 31 December 2007.

DirectorsThe directors of the Company who served during the period and at 31 December 2007 are shown on the back cover. Biographies of the Directors are shown on page 16. All the directors, with the exception of Stephen Mansfi eld served throughout the period.

At each annual general meeting when one or more of the Directors who are subject to retirement by rotation:

(a) were last appointed or reappointed three years or more prior to the meeting;

(b) were last appointed or reappointed at the third immediately preceding annual general meeting; or

(c) at the time of the meeting will have served more than eight years as a non executive director of the Company;

he, she or they shall retire from offi ce. If the number of Directors required to retire at any annual general meeting is less than one third, additional Directors shall retire so that the total number of Directors retiring is at least equal to one third.

Directors’ interestsAs at the date of these fi nancial statements, none of the Directors had any interests in the share capital of the Company, save that Sarah Evans was the benefi cial owner of the single Ordinary Share held by HG Nominees 1 Limited and Mark Huntley was the benefi cial owner of the single Ordinary Share held by HG Nominees 2 Limited.

Reportof the

Directors


14 JLH Annual Report 2008 | Report of the Directors

The interests of the Directors in the share capital of the Company at the date of this Report of the Directors, is as follows:

Number of Warrants

Number of Ordinary

Shares

Issued share

capital %

Alan Clifton 100,000 50,000 0.11%

William Hunter 200,000 100,000 0.23%

Sarah Evans 100,000 50,000 0.11%

Total 400,000 200,000 0.45%

Directors’ remunerationDuring the period the Directors received the following remuneration in the form of Directors’ fees from the Company:

£ ¥

Alan Clifton 6,082 1,364,332

William Hunter 3,041 682,166

Sarah Evans 4,164 934,137

Mark Huntley 3,123 700,603

Total 16,410 3,681,238

Substantial interestsAs of 20 June 2008, the following persons had interests in 3% or more of the issued share capital of the Company:

Number of Warrants

Number of Ordinary Shares

Issued share

capital %

Japan Leisure Investments LLC

- 36,723,656 83.27%

Vidacos Nominees Limited

- 2,202,000 4.99%

OMX Securities LLP

3,000,000 1,500,000 3.4%

Total 3,000,000 40,425,656 91.66%

Statement of Directors’ responsibilitiesThe Directors are responsible for preparing fi nancial statements for each fi nancial period which give a true and fair view of the state of aff airs of the Company and of the profi t or loss of the Company for that period and are in accordance with applicable laws. In preparing those fi nancial statements the Directors are required to:

(a) select suitable accounting policies and then apply them consistently;

(b) make judgements and estimates that are reasonable and prudent;

(c) state whether applicable accounting standards have been followed subject to any material departures disclosed and explained in the fi nancial statements;

(d) prepare the fi nancial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors confi rm that they have complied with the above requirements in preparing the fi nancial statements.

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the fi nancial position of the Company which enable them to ensure that the fi nancial statements comply with the Companies (Guernsey) Law, 1994. 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.

Independent auditorsBDO Novus have agreed to off er themselves for reappointment as Auditors of the Company and a resolution proposing their reappointment and authorising the Directors to determine their remuneration will be presented at the Annual General Meeting.

Annual General MeetingThe Annual General Meeting of the Company shall be held on 22 September 2008 at the Registered Offi ce of the Company, Polygon Hall, Le Marchant Street, St Peter Port, Guernsey.

Corporate governanceAs a company admitted to AIM, the Company is not required to comply with the Combined Code. However, the Directors take appropriate measures to ensure that the Company complies with the Combined Code to the extent they consider to be appropriate and taking into account the size of the Company and the nature of its business. The Company complies with all provisions of the Companies (Guernsey) Law, 1994 to the extent that the same are applicable and relevant to the Company’s activities. In particular, each Director will seek to act in accordance with the “Code of Practice – Company Directors” issued by the Guernsey Financial Services Commission, whether or not the same is directly applicable to the Director in question.

The Company has established an audit committee and a strategy committee, each of which has formally delegated responsibilities.


15JLH Annual Report 2008 | Report of the Directors

Board responsibilitiesThe Board comprises four non-executive directors. None of the Directors has a contract of service with the Company.

The Board meets formally on a quarterly basis to review the performance of the Company, its subsidiaries and investments and its service providers. The Directors maintain overall control and supervision of the Company’s aff airs. The Board is responsible for the appointment and monitoring of all service providers.

There may be a requirement to hold board meetings outside the scheduled quarterly meetings in order to review and consider investment opportunities and/or formal execution of documents.

Chairman, Senior Independent Director and Chief ExecutiveThe Chairman of the Board is Alan Clifton. A biography for him and for all the other Directors follows in the next section. In considering the independence of the Chairman, the Board has taken note of the provisions of the Code relating to independence, and has determined that Mr. Clifton is an Independent Director. As the Chairman is an Independent Director, no appointment of a senior Independent Director has been made.

The Company has no employees and therefore there is no requirement for a chief executive.

Board meetings, Committee meetings & Directors’ attendanceDuring the period there were two board meetings and one committee meeting held. The Directors’ attendance was as follows:

BoardMeeting

Attendances

Committee Meeting

Attendances

Alan Clifton - -

William Hunter 2 1

Sarah Evans 2 1

Mark Huntley 2 -

Stephen Mansfi eld 2 -

Audit committeeThe Audit Committee comprises Sarah Evans (Chair of the committee), Alan Clifton and Mark Huntley and meets at least twice a year. The Audit Committee is responsible both for ensuring that the fi nancial performance of the Company is properly reported on and monitored, including reviews

of the annual and interim fi nancial statements and related announcements, results, internal control systems and procedures and accounting policies.

Strategy CommitteeThe Strategy Committee, comprising William Hunter (Chairman of the committee), Sarah Evans and Mark Huntley, will decide whether or not to invest in new opportunities and also whether or not funds generated from the fi nancing or disposal of assets are returned to the Company or reinvested.

Directors’ dealingsThe Company has adopted a code similar to the Model Code, for Directors’ dealings in securities of the Company, which is appropriate for a company quoted on AIM. The Directors will also comply with Rule 21 of the AIM Rules relating to Directors’ dealings.

Annual reviewOn an annual basis the Board will formally consider their strategic objectives and delivery, internal controls and risk management, procedures, prospectus and documentation content, board composition, adherence to corporate governance and its relationship with service providers.

Risk assessmentTaking into account the relevant provisions of the Combined Code in formulating the systems and procedures in operation in the Company, the Board will conduct a formal risk assessment on an annual basis and will report by exception on any material changes during the year. In performing such reviews, the Board will consider:

1) the nature and extent of the risks which they regard as acceptable for the Company to bear within its particular business;

2) the threat of such risks becoming reality;

3) the Company’s ability to reduce the incidence and impact on business if the risk crystallises; and

4) the costs and benefi ts resulting from operating relevant controls.

On behalf of the Board

Alan Clifton Sarah EvansChairman DirectorJapan Leisure Hotels Ltd Japan Leisure Hotels Ltd20 June 2008 20 June 2008


16 Annual Report 2008 | Directors

Alan Clifton (aged 61), Non-Executive ChairmanAlan Clifton was previously the managing director of Morley Fund Management, the asset management arm of Aviva plc, the UK’s largest insurance group. He is currently chairman of JPMorgan Fleming Japanese Smaller Companies Trust plc, Principle Capital Investment Trust plc and of Schroder UK Growth Fund plc and a director of several other investment companies, including Macau Property Opportunities Fund Limited. He also serves as Chairman of the Strategic Investment Board at the Ministry of Justice. Alan Clifton is a UK resident.

William Hunter (aged 52), Non-Executive DirectorWilliam Hunter is president of USA Financial Group, where he manages a portfolio of high yield and distressed real estate investments. He has a long and successful track record working in the real estate industry in a variety of functions, having most recently served as General Manager of Shinsei Bank in Tokyo, where he was responsible for managing a team of over 50 people that originated and managed a portfolio of over ¥700 billion of real estate transactions. Prior to that he worked at six diff erent organisations across the United States in a variety of roles focused on the real estate sector. He holds a BA from Amherst College and an MBA from Stanford University.

Sarah Evans (aged 53), Non-Executive DirectorSarah Evans is a Chartered Accountant and has had a successful career in a variety of accounting and fi nance roles. Most recently she was a treasury director for Barclays Group Treasury, which she left in 2001 to take a career sabbatical and devote time to fundraising for charity. In addition to having developed her own fi nancial services consultancy, she has held senior positions with a number of other organisations including Kleinwort Benson. Sarah is a non-executive director of four other Guernsey registered investment companies. She is a graduate of Oxford University and a Guernsey resident.

Mark Huntley (aged 49), Non-Executive DirectorMark Huntley is an associate member of the Chartered Institute of Bankers (with Trustee Diploma). Presently he is Managing Director of Heritage International Fund Managers Limited, a subsidiary of the independent Guernsey based fi nancial services group, Heritage Group Limited. He has held a number of board appointments for private, fund management and fund investment companies incorporated in Guernsey and other jurisdictions. He is a founding director of the Channel Islands Stock Exchange (“CISX”) and Chairman of the CISX Business Development Committee. Prior to joining Heritage he acquired broad experience with Baring Asset Management over the previous 18 years. Prior to that, he held a senior trust position at The First National Bank of Chicago, where his duties included overseeing real estate portfolios, and Coutts in fi duciary services, private banking and off shore funds. He is a Guernsey resident.

Directors


17Annual Report 2008 | Independent Auditors’ Report

WE HAVE AUDITED the fi nancial statements of Japan Leisure Hotels Limited for the period ended 31 December 2007 which include the Statement of Assets and Liabilities, Statement of Operations, Statement of Changes in Shareholder’s Equity and Notes to the Financial Statements. These fi nancial statements have been prepared under the historical cost convention and in accordance with the accounting policies set out on page 22.

This report is made solely to the company’s members, as a body, in accordance with Section 64 of the Companies (Guernsey) Law, 1994. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS

As described in the Statement of Directors’ Responsibilities within the Directors’ Report the company’s directors are responsible for the preparation of the fi nancial statements in accordance with applicable law and International Financial Reporting Standards (IFRS).

Our responsibility is to audit the fi nancial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the fi nancial statements give a true and fair view and are properly prepared in accordance with the Companies (Guernsey) Law, 1994. We also report to you if, in our opinion, the Report of the Directors is not consistent with the fi nancial statements, if the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specifi ed by law is not disclosed.

We read the other information accompanying the fi nancial statements and consider whether it is consistent with the audited fi nancial statements. This other information comprises the Chairman’s Statement, Asset Manager’s Report and the Report of the Directors. We consider the implications for our report if we become aware of any apparent misstatements within it. Our responsibilities do not extend to any other information.

BASIS OF OPINION

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the fi nancial statements. It also includes an assessment of the signifi cant estimates and judgments made by the directors in the preparation of the fi nancial statements, and of whether the accounting policies are appropriate to the company’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with suffi cient evidence to give reasonable assurance that the fi nancial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the fi nancial statements.

OPINION

In our opinion the fi nancial statements:

• give a true and fair view, in accordance with IFRS, of the state of the company’s aff airs as at 31 December 2007 and of its net loss for the period then ended; and

• have been properly prepared in accordance with the Companies (Guernsey) Law, 1994.

BDO NovusCHARTERED ACCOUNTANTSElizabeth HouseSt Peter Port Guernsey

Independent Auditors’Report


18 JLH Annual Report 2008 | Financials


19JLH Annual Report 2008 | Financials

Statement of Assets and Liabilities31 December 2007

Note 31.12.2007

¥

ASSETS

Current assets

Other receivables 5

Total assets 5

EQUITY

Capital and reserves attributable to the Company’s equity shareholders

Share capital 7 5

Accumulated losses (5,027,134)

Total equity (5,027,129)

LIABILITIES

Current liabilities

Trade and other payables 6 5,027,134

Total liabilities 5,027,134

Total equity and liabilities 5

The Notes to the Financial Statements form an integral part of these fi nancial statements.

The fi nancial statements were approved by the Board of Directors and authorised for issue on 20 June 2008.

Alan Clifton Sarah EvansChairman DirectorJapan Leisure Hotels Ltd Japan Leisure Hotels Ltd20 June 2008 20 June 2008

Financial Statements


20 JLH Annual Report 2008 | Financials

Statement of OperationsFor the period from 17 October 2007 to 31 December 2007

Note 17.10.2007 to 31.12.2007

¥

Expenses

Directors’ fees (3,681,238)

Audit fees (1,345,896)

Loss for the period resulting from operations (5,027,134)

Basic and diluted loss per share attributable to the equity-holders of the Company during the period

5 (2,513,567)


All income is attributable to the equity holders of the Company. All items in the above statements derive from continuing operations.


21JLH Annual Report 2008 | Financials

Statement of Changes in Shareholders’ EquityFor the period from 17 October 2007 to 31 December 2007

Note 17.10.2007 to 31.12.2007

¥

Balance at 17 October 2007 -

Issue of share capital 7 5

Net loss for the year (5,027,134)

Balance as at 31 December 2007 (5,027,129)



22 JLH Annual Report 2008 | Notes to the Financials

General InformationJapan Leisure Hotels Limited is a company incorporated and registered in Guernsey under the Companies (Guernsey) Law, 1994 (as amended) on 17 October 2007. The address of the registered offi ce is given in the Management and Administration section. The Company has been established to derive cashfl ow and capital gains by investing in Japanese leisure hotels. The Company was listed and admitted to trading on AIM, the market of that name operated by the London Stock Exchange on 16 January 2008.

These fi nancial statements have been approved for issue by the Board of Directors on 20 June 2008.

1. SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of these fi nancial statements are set out below. These policies have been consistently applied throughout the current period, unless otherwise stated.

Basis of accountingThe fi nancial statements of the Company have been prepared in accordance with IFRS, which comprise standards and interpretations issued by the International Accounting Standards Board (“IASB”) and the International Financial Reporting Interpretations Committee (“IFRIC”) approved by the International Accounting Standards Committee (“IASC”) that remain in eff ect, to the extent that they have been adopted by the European Union.

IFRS requires management to make judgments, estimates and assumptions that aff ect the application of the reported amounts in these fi nancial statements. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may diff er from these estimates.

InvestmentsBy virtue of the TK structure (see Note 10) entered into after the period end, the Company will be a passive investor. The Company’s investments will be made solely in leisure hotel assets in Japan although the Company will seek to invest in a broad range of assets within this class.

Segmental reportingA business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are diff erent from those of other

business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are diff erent from those segments operating in other economic environments.

The Directors are of the opinion that the Company is engaged in a single segment of business, being property investment and related business. The Company has been formed to invest in leisure hotels in Japan. Therefore, no segmental information has been presented.

Foreign currency translationFunctional and presentation currencyItems included in the fi nancial statements of the Company are measured using the currency of the primary economic environment in which the Company operates (“the functional currency”). The functional currency of the Company is Sterling whereas Japanese Yen is the functional currency of the underlying TK assets. The fi nancial statements of the Company are presented in Japanese Yen (“the presentation currency”).

Transactions and balancesAssets and liabilities are translated from Sterling to Japanese Yen at the rate prevailing on the balance sheet date. Income and expenses are translated from Sterling to Japanese Yen at the rate prevailing at the date of the transaction.

Non-monetary items are translated from Sterling to Japanese Yen at the rate prevailing at the date of the transaction. Exchange diff erences arising from translation into the presentation currency are recognised as a separate component of equity.

Financial instrumentsFinancial assetsTrade receivables, loans and other receivables that have fi xed or determinable payments that are not quoted in an active market are classifi ed as “loans and receivables”. Loans and receivables are measured at amortised cost.

Financial liabilitiesFinancial liabilities are classifi ed as “trade and other payables” and are measured initially at fair value, net of transaction costs and subsequently measured at amortised cost.

ExpensesExpenses are accounted for on an accruals basis.

For the period from 17 October 2007 to 31 December 2007

Notes to the Financial

Statements


23JLH Annual Report 2008 | Notes to the Financials

2. NEW STANDARDS AND INTERPRETATIONS NOT APPLIED

The following new standards and interpretations, which have been issued by the IASB and the IFRIC, are eff ective for future periods and have not been adopted early in these fi nancial statements.

A description of these standards and interpretations, which will be adopted in accordance with the required eff ective date, is set out below.

None is expected to have a material eff ect on the reported results or fi nancial position.

IFRS 8 – Operating segmentsThis standard is eff ective for periods beginning on or after 1 January 2009 and supersedes IAS 14 Segment Reporting. The standard changes the way segments are identifi ed and measured, and includes new disclosure requirements, therefore adopting IFRS 8 will change the disclosures required in the fi nancial statements.

IFRIC 12 – Service Concession ArrangementsThis interpretation was issued in November 2006 and is eff ective for annual periods beginning on or after 1 January 2009. IFRIC 12 prohibits private sector operators from recognising as their own those infrastructure assets which are owned by the grantor.

IFRIC 13 – Customer Loyalty ProgramsThis interpretation was issued in May 2007 and is eff ective for annual periods beginning on or after 1 July 2008. IFRIC 13 addresses how companies that grant their customers loyalty award credits when buying goods or services (“points”), should account for their obligation to provide free or discounted goods or services if and when the customers redeem the points.

IFRIC 14, IAS 19 – The Limit on a Defi ned Benefi t Asset, Minimum Funding Requirements and Their InteractionThis interpretation was issued in June 2007 and is eff ective for annual periods beginning on or after 1 January 2008. IFRIC 14 clarifi es how any asset to be recognised should be determined, in particular where a minimum funding requirement exists.

Amendment to IAS 23 – Borrowing CostsThis amendment was issued in May 2007 and is eff ective for accounting periods beginning on or after 1 January 2009. The amendment requires borrowing costs that are directly

attributable to the acquisition, construction or production of a qualifying asset to be added to the cost of that asset.

There are certain other current standards, amendments and interpretations that are not relevant to the Company’s operations.

3. TAXATION

Guernsey taxationThe Company is exempt from taxation in Guernsey under the provisions of the Income Tax (Exempt Bodies) (Guernsey) Ordinances, 1989 and is charged an annual exemption fee of £600.

4. SUBSIDIARIES

The Company has two wholly owned subsidiaries. JLH 1 Limited and JLH 2 Limited were both incorporated on 22 October 2007. At 31 December 2007 both companies were dormant companies and therefore they have not been consolidated into the results of the Company. Note 10 gives a more detailed explanation of the purpose of these companies and their position in the overall structure of the Group.

5. BASIC AND DILUTED LOSS PER SHARE

Basic and diluted loss per share is based on the following data:

17.10.2007 to 31.12.2007

¥

Loss per income statement (5,027,134)

Issued average number of Ordinary Shares 2

Basic and diluted loss per share (2,513,567)

6. TRADE AND OTHER PAYABLES

31.12.2007

¥

Directors’ fees 3,681,238

Audit fees 1,345,896

Total trade and other payables 5,027,134



7. SHARE CAPITAL

31.12.2007

Number ¥

Authorised:

160,000,000 ordinary shares of £0.01 each

160,000,000 –

Allotted, called up and fully paid ordinary shares of £0.01 each

2 5

8. RELATED PARTIES

During the period, the directors received the following directors’ fees:

17.10.2007 to 31.12.2007

Outstanding at 31.12.2007

¥ ¥

Alan Clifton 1,364,332 1,364,332

William Hunter 682,166 682,166

Sarah Evans 934,137 934,137

Mark Huntley 700,603 700,603

The Directors are entitled to the following annual fees (converted at 31 December 2007 exchange rate of 224.3158):

¥

Alan Clifton 6,729,475

William Hunter 3,364,738

Sarah Evans 4,486,317

Mark Huntley 3,364,738

9. FINANCIAL RISK MANAGEMENT

Capital risk managementThe Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to provide returns to shareholders and benefi ts for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

The Company has no borrowings and accordingly the Company has a nil gearing ratio.

Financial risk management objectivesThe asset manager of the underlying TK Operators (see Note 10) provides advice to the TK Operators and the administrator provides advice to the Company which allows it to monitor and manage fi nancial risks relating to its operations through internal risk reports which analyse exposures by degree and magnitude of risks. The asset manager and the administrator report to the board on a quarterly basis.

The Company does not enter into or trade fi nancial instruments, including derivative fi nancial instruments, for speculative purposes or to hedge its exposure to risks. The risks relating to the Company’s operations include foreign currency rate risk and liquidity risk.

Foreign currency rate risk management Currency risk arises in fi nancial instruments that are denominated in a currency other than the functional currency in which they are measured (“foreign currency”). Therefore, the Company will be exposed to currency risk in fi nancial instruments that are denominated in a currency other than Sterling. Currency risk does not arise from fi nancial instruments that are non-monetary items or from fi nancial instruments denominated in the functional currency, Sterling. For the period ended 31 December 2007, the Company had no transactions denominated in currencies other than Sterling and at 31 December 2007, the Company held no fi nancial assets or liabilities denominated in currencies other than Sterling.

Liquidity Risk ManagementUltimate responsibility for liquidity risk management rests with the board of directors, which has built an appropriate liquidity risk management framework for the management of the Company’s liquidity management requirements. At 31 December 2007, the Company is reporting net liabilities as it was not fully operational. See Note 10 for the information relating to the subsequent listing of the Company on the AIM and the commencement of operations.

10. POST BALANCE SHEET EVENTS

The Company was listed and admitted to trading on AIM on 16 January 2008. On admission, 44,100,000 shares were in issued at £0.50 per share resulting in proceeds of £22.05 million.



The placing was undertaken to raise funds necessary to allow the Company to pursue its investment strategy.

Group StructureThe funds raised in the placing have been invested through wholly owned subsidiary companies of the Company, which are also Guernsey registered companies: JLH 1 Limited and JLH 2 Limited. These companies are responsible for investing in properties in the Japanese leisure hotel sector.

£19 million of the placing proceeds has been invested in an existing portfolio of 5 leisure hotels. This has been accomplished through the issue of loan notes by the Company’s subsidiary, JLH 1 Limited to Cayman Trust Co. as trustee of Japan Leisure Trust and Japan Leisure Investments LLC (the original TK investors) which have then been transferred to the Company in exchange for shares in the Company.

These hotels are owned and operated in Japan by Yugen Kaishas (“YK”), a form of Japanese corporation. The Company, through its wholly owned subsidiaries, has invested in the YKs by entering into Tokumei Kumiai agreements (“TK Agreements”), see below.

The existing portfolio of leisure hotels are operated by Y.K. First Dormitory and Y.K. KN Planning as the TK Operators. Asset management services are provided through a separate Japanese company, Y.K. New Perspective (the “Asset Manager”). Information on this relationship is provided in the material agreements section below.

Material agreementsThe following agreements have been entered into after the date of these audited fi nancial statements.

TK AgreementsTK Agreements have been entered into between the TK Operator and the TK Investor in relation to the existing portfolio. This form of agreement will also govern the relationship between the TK Investor and the TK Operator for future acquisitions.

Under the agreement, the TK Investor may from time to time provide funds to the TK Operator to enable the TK Operator to engage in business relating to acquiring and operating leisure hotels in Japan, and other related business activities of the TK Operator in exchange for which the TK Operator will allocate the TK Investor an agreed percentage of operating profi ts and losses.

Asset Management AgreementAsset Management Agreements have been entered into by each of the TK Operators and the Asset Manager. Under these agreements the TK Operators have delegated to the Asset Manager authority in respect of the management and operation of the leisure hotels.

Under the TK Agreements, the Asset Manager receives an annual management fee paid quarterly in advance of 2 per cent of the net asset value of the Group, as defi ned in the admission document. This will reduce to 1.5 per cent until such time as 50 per cent of the net funds raised upon admission to trading in AIM have been invested.

The Asset Manager is entitled to a fee (the “Performance Fee”), calculated by reference to Absolute Shareholder Returns (the amount by which the value of the Ordinary Shares in the capital of the Company, after adjusting for dividends and other distributions paid or made to holders of Ordinary Shares, and further subscriptions for Ordinary Shares, exceeds the aggregate subscription for the placing shares) of the Company following admission. The Asset Manager is obliged to apply half of the sum received in subscriptions for new shares.

The payment of the Performance Fee is subject to two conditions: fi rst, that the average middle market closing price of an Ordinary Share on the 30 dealing days before the last day of the relevant accounting period plus any dividends and other distributions of the Company since admission (the “Benchmark Price”) exceeds the Benchmark Price for all prior periods; and, second, that Absolute Shareholder Returns exceed 10 per cent per annum of the subscribed ordinary share capital of the Company (the “Hurdle”). Once the Hurdle has been achieved in respect of any fi nancial year, the Asset Manager will be entitled to receive a payment equal to the aggregate of:

1) 25 per cent of the Hurdle or, if less, the amount by which Absolute Shareholder Returns exceed the Hurdle (the “Surplus”); and

2) If the Surplus exceeds 25 per cent of the Hurdle, 20 per cent of that excess.

Master Hotel Operation AgreementsMaster Hotel Operation Agreements have been entered into between the TK Operators as the Owners of the hotels, the Asset Manager and Bonita Services LLP (the “Hotel Operator”). Under the agreement, the Owner allows the Hotel Operator, under the Asset Manager’s supervision, to run the day to day operation and maintain the hotel



properties. This agreement remains in eff ect until 31 December 2008 whereupon it may be terminated. If there is no application to terminate, the agreement will automatically renew for one year. The contract renews annually until terminated.

Total Produce Operating AgreementsK.K. Total Produce (“Total Produce”), Y.K. First Dormitory (“Owner”) and the Asset Manager have entered into two hotel operation agreements during 2007 in respect of the day to day operation of two of the hotel properties in the existing portfolio. Under these agreements the Owner has entrusted Total Produce with certain management and maintenance responsibilities regarding the relevant hotel properties, under the Asset Manager’s supervision.

Under the agreements, the owner pays Total Produce an operator fee, which has two components:

1) a revenue fee of an amount equal to 4 per cent of the monthly revenue (excluding consumption tax) of the property for the month just ended, which is payable within 30 days from when the Asset Manager receives the monthly report from Total Produce; and

2) an incentive fee, calculated quarterly in arrears at the end of each quarter and payable within 45 days from when it receives the quarterly report from Total Produce. The incentive fee is calculated as follows: 25 per cent of (a) sum of the average monthly revenue per room less the actual costs incurred over the quarter divided by the gross revenue, and multiplied by 3, minus (b) the sum of the minimum revenue per room less all costs in the operation of the property divided by the projected revenue in the relevant business year and multiplied by three; and (c) the sum of (a) minus (b) is to be multiplied by the number of rooms in the property. The incentive fee can never be less than JPY zero.

Trade Mark Licence AgreementThe Trademark Licence Agreement has been entered into by Bonita Services LLP (the “Licensor”), and each TK Operator (the “Licensee”). Under this agreement the Licensor granted a non-exclusive, non-transferable licence (the “Licence”) for the use of certain trademarks to the Licensee for use in a specifi ed territory on hotels and related promotional materials. The agreement provides that the Licensee will pay an annual royalty payment of ¥1,000. The Licensee will also reimburse to the Licensor expenses within 30 days from the date of any invoice for the cost of stipulated products.

Where the Licensee fails to make a due payment, an interest charge is incurred at the rate of 10 per cent per annum until paid.

Call Option DeedThe Call Option Deed is between Bonita Services (the “Seller”) and the Company (the “Buyer”) whereby the Seller has granted to the Buyer a call option to purchase the trade mark for a cash consideration of £100,000. To exercise the option, the Buyer’s shares must be listed on AIM, and either (i) any of the master hotel agreements entered into between the Seller and Y.K. New Perspective and a Tokumei Kumiai must have been terminated or (ii) the Seller must have breached obligations regarding trademark maintenance. The period to exercise the option ends on whichever is the earlier of the sixth anniversary of the Buyer’s admission to AIM and the termination of any TK agreement in which the buyer has invested through subsidiaries.

Assignment AgreementsAssignment Agreements all dated 7 January 2008, (the “Completion Date”), between (1) JLH1 Limited, Japan Leisure Investments LLC (referred to therein as the “TK Investor”) and Y.K. First Dormitory (referred to therein as the “TK Operator”); (2) JLH1 Limited, Japan Leisure Investments LLC (referred to therein as the “TK Investor”) and Y.K. KN Planning (referred to therein as the “TK Operator”); (3) JLH1 Limited, Cayman National Trust Co. Ltd (solely in its capacity as trustee of the Japan Leisure Trust No. 1) (referred to therein as the “TK Investor”) and First Dormitory (referred to therein as the “TK Operator”) (4) JLH1 Limited, Cayman National Trust Co. Ltd (solely in its capacity as trustee of the Japan Leisure Trust No. 1 (referred to therein as the “TK Investor”) and Y.K. KN Planning (referred to therein as the “TK Operator”) by which the respective TK Investors (as “Assignor”) have assigned their interests in and rights and obligations under the respective TK Agreements (as defi ned in the relevant Assignment Agreement) to JLH1 Limited (as “Assignee”) for the sum of £19 million to be satisfi ed by the issuance of loan notes by JLH1 Limited (the “Assignment Agreements”).

Under the Assignment Agreements, the respective Assignor has transferred to the Assignee its rights to receive the distribution and payments (including a proportion of the operating profi ts receivable) under the respective TK Agreement arising after the Completion Date, the TK investor fi nancial reports, notices, fi nal distribution amount following termination of the respective TK Agreement and its right to be indemnifi ed by and, to be held harmless by the respective TK Operator. The Assignee



is not, however, entitled to interfere with the management or administration of the business and must abide by the terms of the respective TK agreements as if it were the Assignor.

Loan Note InstrumentAs described above in Group Structure, JLH 1 Limited is a Guernsey incorporated company. The loan note instrument issued on 7 January 2008 (the “Instrument”) constitutes £19 million of loan notes with a coupon of 6 month LIBOR plus 0.5 per cent, which are unsecured obligations. Interest is payable annually in arrears on each anniversary of the date of issue. Notes are redeemable on 7 January 2013 although JLH1 Limited can elect to prepay by way of purchase by tender or private treaty.

Placing AgreementThe Company, Shore Capital and Corporate Limited (“SCC”), Shore Capital Stockbrokers Limited (“SCS”), the Asset Manager, the Directors and Robert Marshall entered into the Placing Agreement on 7 January 2008 pursuant to which, inter alia:

1) SCS agreed, subject to certain conditions, to use reasonable endeavours to procure subscribers for the Placing Shares at the Placing Price;

2) the Company agreed to pay to SCC a corporate fi nance fee of £205,000 and to SCS a commission of 3 per cent of the amount equal to the Placing Price multiplied by the number of Placing Shares placed pursuant to the Placing;

3) the obligations of the Company to issue the Placing Shares and of SCS to procure purchasers for the Placing Shares is subject to certain conditions (including, amongst others, that Admission occurs by no later than 8.00 a.m. on 29 February 2008 or such later time and/or date as may be agreed in accordance with the Placing Agreement. SCS may waive or extend the time for fulfi lment of any condition. Each of SCS and the Company has the right to terminate the Placing Agreement in certain circumstances that are typical for an agreement of this nature, exercisable prior to the expected date of Admission.

4) the Company agreed to pay (together with any related value added tax) certain costs, charges, fees and expenses in connection with, or incidental to, amongst others, the Placing, Admission or the other arrangements contemplated by the Placing Agreement, including (but

not limited to) the costs and expenses of the Registrar and any other advisers’ fees and expenses;

5) the Company, Asset Manager, the Directors, Stephen Mansfi eld and Robert Marshall have each agreed to give certain warranties and undertakings to SCS and SCC and the Company and the Asset Manager will give certain indemnities to SCS and SCC, in each case that are typical for an agreement of this nature.

Nominated Adviser and Broker AgreementThe Company, SCS and SCC entered into a nominated adviser and broker agreement on 7 January 2008 pursuant to which, SCC agreed to act as nominated adviser and SCS to act as broker to the Company following Admission as required under the AIM Rules for Companies. The agreement has an initial term of 12 months from Admission and is thereafter terminable on 3 months’ notice given by either SCC or the Company. SCC is entitled to be paid an annual fee of £40,000.

Warrant InstrumentA warrant instrument was executed as a deed poll by the Company in favour of the warrant holders on 7 January 2008. This instrument provides that the holder of each warrant shall have the right to subscribe in cash for Ordinary Shares at the subscription price of £0.45 per Ordinary Share on any business day between 31 January 2009 and 31 January 2013. Subscription rights are subject to each warrant holders exercising warrants of at least £10,000.

Lock-in AgreementThe Company entered into a lock-in agreement with Japan Leisure Investments LLC, the Cayman National Trust Co. Ltd (solely in its capacity as trustee of the Japan Leisure Trust No.1), the Asset Manager, certain directors and DKR SoundShore Oasis Holding Fund Ltd in which these parties will not directly or indirectly dispose of any interest in the Company without the prior written consent of SCC and the Company.

Administration AgreementThe Company entered into an administration agreement with Heritage International Fund Managers Limited (“HIFM”) on 7 January 2008. Under this agreement, the administrator will be paid an annual fee of 0.1 per cent of the gross asset value of the group (subject to a minimum of £75,000 (per annum). There is a further annual fee of £3,500 per annum for providing the services of a Compliance Offi cer and a Money Laundering Reporting Offi cer.



Registrar’s AgreementThe Company entered into a registrar’s agreement with Capita Registrars (Guernsey) Limited on 7 January 2008. The fees to be charged in respect of the diff erent activities to be undertaken by the Registrar are itemised in a schedule to the agreement: the registrar is entitled to receive a minimum of £6,250 in fees per annum.

West Hill EngagementThe Company has entered into an agreement with West Hill pursuant to which West Hill has agreed to provide fi nancial advice in respect of the Placing and Admission. The Company has agreed to pay West Hill a commission, representing one per cent of the proceeds from the Placing.

Placing proceeds and share issue expensesPlacing proceeds amounted to £22.05 million of which £19 million was absorbed in the acquisition of the TK interests in the existing portfolio of hotels. Share issue expenses incurred in the initial launch of the Company amounted to £1,291,898. They have been treated as a deduction from equity and written off against the share premium account. The remaining proceeds have been placed on deposit with Barclays Private Clients International Limited.

Share premium accountBy way of a special resolution passed on passed on 7 January 2008, it was resolved that the amount standing to the credit of the share premium account of £20,317,102 of the Group following completion of the issue (less formation and initial expenses set off against the share premium account) be cancelled and the amount so cancelled be credited as a

distributable reserve. This resolution was approved by the Royal Court of Guernsey on 14 March 2008.

Related partiesThe administration agreement described above is a related party transaction in nature in consequence of Mark Huntley’s interest in the administrator.

There are no other related party transactions although it should be noted that the management of New Perspective and Bonita Services are Robert Marshall and Stephen Mansfi eld. New Perspective is the Asset Manager and Bonita Services is a party to:

1) Each Master Hotel Operating Agreement between Bonita Services and a TK Operator;

2) Each Trademark Licence Agreement between Bonita Services and a TK Operator; and

3) The Call Option Agreement between the Company and Bonita Services.


Directors

Alan Clifton (appointed 19 October 2007)

William Hunter (appointed 19 October 2007)

Sarah Evans (appointed 17 October 2007)

Mark Huntley (appointed 17 October 2007)

Stephen Mansfi eld (appointed 19 October 2007,

resigned 22 December 2007)

Registered Offi ce

Polygon Hall

Le Marchant Street

St. Peter Port

Guernsey GY1 4HY

Administrator and Secretary

Heritage International Fund Managers Limited

Polygon Hall

PO Box 255

Le Marchant Street

St. Peter Port

Guernsey GY1 4HY

Nominated Adviser

Shore Capital and Corporate Limited

Bond Street House

14 Cliff ord Street

London W1S 4JU

Broker

Shore Capital Stockbrokers Limited

Bond Street House

14 Cliff ord Street

London W1S 4JU

Financial Adviser

West Hill Corporate Finance Limited

60 Lombard Street

London EC3V 9EA

Independent Auditor

BDO Novus Limited (appointed 19 October 2007)

Elizabeth House

St. Peter Port

Guernsey GY1 3LL

Legal Advisers to the Company

As to English Law

Ashurst LLP

Broadwalk House

5 Appold Street

London EC2A 2HA

As to Japanese Law

Ashurst Tokyo Law Offi ce

Shiroyama Trust Tower

30th Floor

4-3-1 Toranomon

Minato-Ku

Tokyo 105-6030

Japan

As to Guernsey Law

Ogier

Ogier House

St. Julian’s Avenue

St. Peter Port

Guernsey

GY1 1WA

Registrars

Capita Registrars (Guernsey) Limited

2nd Floor

No. 1 Le Truchot

St. Peter Port

Guernsey GY1 4AE

Websites

www.japanleisurehotels.com

www.japanleisurehotels.gg

Managementand

Administration


Japan Leisure Hotels

WWW.JAPANLEISUREHOTELS.COM


jlh annual report 07

Documents

managed hotels

japanese leisure hotel

number of hotels available

statement of assets

corporate japan

fragmented industry

pm1jlh annual report

japanese operating assets