June 30, 2005; Results of Abercrombie & Kent During First Year
of Ownership Exceeds Expectations
|All dollar amounts are in U.S. currency
"The strong performance of Abercrombie & Kent, the newest member of Intrawest's portfolio, was very gratifying and it speaks to the power of its brand," said Joe Houssian, chairman, president and chief executive officer. "We are also pleased at the acceleration and expansion of our partnering strategy in all phases of real estate development. The joint ventures that we entered into in the fourth quarter are great examples of how this strategy is paying off for our shareholders."
Fiscal 2005 Year End Highlights
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is an extract of the operations and liquidity and capital resources sections of Management's Discussion and Analysis ("MD&A") for the year ended June 30, 2005. The full text of the MD&A will be included in our Annual Information Form and other corporate filings.
SUMMARY OF FISCAL 2005 OPERATIONS
Fiscal 2005 was a year of both challenges and achievements. Our mountain resorts experienced mixed results as generally good weather conditions in the East and the U.S. west were offset by the most unfavourable weather conditions for the ski industry in 40 years in British Columbia. Sandestin was also tested by the weather, particularly in our first fiscal quarter when several hurricanes impacted its operations. The results of Abercrombie & Kent ("A&K"), during our first year of ownership, far exceeded our expectations as the luxury travel tour business rebounded from several years of contraction brought on by economic and geo-political events. We saw significant growth in our management services businesses in 2005 and demand for our real estate was strong across our resorts. Operating profit from real estate development declined in 2005, as expected, after an unusually high number of closings in 2004 due to the timing of project completions.
These factors combined to reduce Total Company EBITDA to $243.1 million in 2005 from $268.3 million in 2004. After several years of disappointing returns from our stand-alone golf courses, we made the decision to exit this business and reinvest our capital in higher returning businesses. As a result, we had our stand-alone golf operations appraised and recorded a write-down of $17.6 million. We improved our capital structure and lowered our borrowing costs by refinancing $394.4 million of senior notes in 2005, on top of the $200 million of senior notes that we refinanced in 2004. The call premium and other costs to redeem senior notes amounted to $30.2 million in 2005, up from $12.1 million in 2004. The golf asset write-down and refinancing expenses lowered our net income in 2005 to $32.6 million ($0.68 per diluted share) from $59.9 million ($1.25 per diluted share) in 2004.
We were very successful in 2004 in generating free cash flow and reducing our debt. This success continued in 2005 as we increased cash flow from our operating businesses and completed a number of transactions with real estate partners enabling us to realize $62.1 million of free cash flow.
FISCAL 2005 REVIEW OF RESORT AND TRAVEL OPERATIONS
The following table highlights the results of our resort and travel operations business.
(1) Skier visits for all resorts are at 100% except
Mammoth at 59.5% and
Revenue from resort and travel operations was $862.5 million in 2005 compared with $541.3 million in 2004. Revenue from the mountain segment increased from $488.2 million to $545.4 million while revenue from the non- mountain segment increased from $53.1 million to $317.1 million.
Mountain Resort and Travel Operations Revenue
On December 15, 2004, we acquired the remaining 55% of Alpine Helicopters that we did not already own and the incremental revenue in 2005 from our increased ownership interest was $26.6 million. On a same-business basis (i.e., excluding the 55% acquisition of Alpine Helicopters), mountain resort and travel operations revenue increased by $30.6 million in 2005 due to:
The rise in the value of the Canadian dollar, from an average rate of US$0.74 in 2004 to US$0.80 in 2005, increased reported mountain resort and travel operations revenue by $18.8 million.
Our mountain resorts experienced mixed results in 2005 with a 6% increase in revenue at our eastern Canadian and U.S. resorts and an 11% increase in revenue at our western U.S. resorts being partially offset by a 10% decrease in revenue at our western Canadian resorts. British Columbia endured the most challenging weather for the ski industry in 40 years, with heavy rainfall in mid-January followed by warm, dry conditions through mid-March. Although conditions improved after mid-March, it was too late to change market perceptions and the decline in visits continued in the fourth quarter. As a result, skier visits decreased 14% at Whistler Blackcomb and 7% at Panorama in 2005. Our eastern and western U.S. resorts benefited from strong season pass programs, the maturing of their villages and generally good weather conditions, particularly in the third quarter. Consequently, skier visits increased 7% at our eastern resorts and 9% at our western U.S. resorts. For the company as a whole, skier visits increased 1% in 2005, which increased mountain segment revenue by $4.4 million.
Revenue per skier visit increased moderately from $56.36 in 2004 (after adjusting for the impact of the improvement in the Canadian dollar exchange rate) to $56.74 in 2005. Revenue per skier visit is a function of ticket prices and ticket yields, and revenue from non-ticket sources such as retail and rental stores, ski school, and food and beverage services. Ticket yields reflect the mix of ticket types (e.g., adult, child, season pass and group), the proportion of day versus destination visitors (destination visitors tend to be less price sensitive), and the amount of discounting of full-price tickets in regional markets. Revenue per visit from non-ticket sources is also influenced by the mix of day versus destination visitors, the affluence of the visitor base, and the quantity and type of amenities and services offered at the resort.
Revenue per skier visit from ticket sales (our effective ticket price) decreased 2% from $29.31 to $28.61 due mainly to a 6% decline at our British Columbia resorts as we discounted ticket prices at Whistler Blackcomb and Panorama to compensate for the sub-standard snow conditions. Revenue per visit from non-ticket sources increased 4% from $27.06 to $28.13. The impact on non-ticket revenue per visit of the poor weather at our British Columbia resorts was mitigated by the fact that many visitors, who did not access the mountain for skiing, spent on retail, food and beverage and other services in the base area. The increase in revenue per visit increased mountain segment revenue by $2.7 million in 2005.
For the purposes of this MD&A, non-skier visit revenue for our mountain segment comprises revenue from sources that are not driven by skier visits (i.e., golf and other summer activities at our mountain resorts and revenue from businesses such as Alpine Helicopters and the Intrawest Retail Group). Revenue from golf and other summer activities increased 7% across our mountain resorts from $39.1 million in 2004 to $42.0 million in 2005, led primarily by Whistler Blackcomb (due to strong events business and continued growth in mountain bike park visits) and Tremblant (due to a 32% increase in summer lift rides). Golf rounds at our mountain resorts in 2005 were 2% below 2004, however this was offset by higher revenue per round, resulting in a 4% increase in golf revenue. Revenue at Alpine Helicopters (excluding the impact of our increased ownership interest) decreased 4% in 2005 due to reduced heli-skiing revenue in the weather-challenged third quarter and lower revenue from forest fire-fighting activities in the summer. Strong visit growth in the western U.S. and the opening of a new outlet store in Summit County enabled the Intrawest Retail Group to increase its revenue by 21% in 2005. Overall, on a same-business basis, non-skier visit revenue increased by $4.7 million in 2005.
Non-mountain Resort and Travel Operations Revenue
Non-mountain resort and travel operations revenue increased from $53.1 million in 2004 to $317.1 million in 2005 with the acquisition of A&K in July 2004 accounting for $257.0 million of the increase. The luxury-tour and travel industry experienced a rebound in 2005 after several years of contraction resulting from economic pressures and concerns about geo-political events (terrorism, war and health issues). Revenue at A&K in 2005 increased more than 30% compared with last year, before we acquired our ownership interest.
Most of the balance of the increase in non-mountain resort and travel operations revenue was due to a 15% increase in revenue at Sandestin. Food and beverage revenue at Sandestin increased 42% due to the opening of several new outlets, a significant increase in banquet business and higher occupancy levels at the resort. The continued build out of the village and its growing reputation has positively impacted both individual traveler and conference business.
Golf rounds in 2005 were 10% lower than 2004 at Sandestin (due in part to the hurricanes) and 3% lower at our stand-alone golf courses. Demand for golf has not grown over the past few years and the markets in which our warm- weather golf courses operate are highly competitive. The shortfall in rounds was counterbalanced by higher revenue per round, resulting in a 6% decline in golf revenue at Sandestin and a 5% increase in golf revenue at our stand-alone courses. As described elsewhere in this MD&A, we have decided to exit the stand-alone golf business.
Resort and Travel Operations Revenue Breakdown
Resort and travel operations revenue for the mountain and non-mountain segments combined (as reported and on a same-business, constant exchange rate basis) was broken down by major business component as follows:
2005 2004 INCREASE
The decrease in mountain operations revenue was due mainly to declines in ticket revenues at our British Columbia resorts and lower heli-skiing revenue at Alpine Helicopters, partially offset by higher ticket revenues at our other resorts.
The increase in retail and rental revenue was due mainly to a 15% increase at our western U.S. resorts, as a result of excellent conditions and strong visitor growth.
Half of the increase in food and beverage revenue came from Sandestin where we opened several new outlets, achieved higher occupancy levels in the village and increased conference business. The remainder came mainly from a 13% increase in revenue at our western U.S. resorts.
Ski school revenue increased 9% at our western U.S. resorts and 7% at our eastern resorts. These increases were partly offset by a 4% decrease in revenue at our British Columbia resorts.
The small increase in golf revenue resulted from a 4% increase at the mountain resorts partially offset by a 2% decrease at the non-mountain courses as competitive pressures and poor weather at key times reduced the number of rounds played.
The "other" category comprises revenue from a host of miscellaneous activities, such as tubing, tennis, aqua centers, club operations, telephone services and one-off businesses like the marina at Sandestin and the service station at Copper. The 2005 amount included $1.1 million of business interruption insurance for Sandestin due to the hurricanes in the first quarter. The balance of the increase was mainly due to higher club operations revenue, particularly at Stratton and Copper and increased activities and events revenues across most of our resorts.
Resort and Travel Operations Expenses and EBITDA
Resort and travel operations expenses increased from $436.2 million in 2004 to $744.9 million in 2005. The mountain segment increased by $63.2 million to $445.8 million while the non-mountain segment increased by $245.5 million to $299.1 million.
Our acquisition of the remaining 55% of Alpine Helicopters increased mountain resort and travel expenses by $19.7 million and the translation effect of the stronger Canadian dollar increased it by a further $13.8 million. Excluding these two factors, mountain resort and travel expenses increased by $29.7 million (8%) in 2005 due mainly to increased business volumes at our eastern resorts and our western U.S. resorts and higher insurance, marketing and administrative costs. In order to control our third- party costs of insurance, we have a program of self insurance for all our major lines of coverage. In 2005, we chose to adopt a more conservative position and increased our estimated reserves for unreported workers' compensation and general liability claims by $3.0 million. Following on from the formation of the Leisure and Travel Group in May 2004, we introduced several new cross-resort marketing programs that increased mountain segment expenses by $3.5 million in 2005. In addition, as described under Review of Corporate Operations below, we transferred personnel from corporate operations to the Leisure and Travel Group, which increased resort and travel expenses by approximately $5 million in 2005.
The acquisition of A&K added $236.6 million of non-mountain resort and travel operations expenses in 2005. The balance of the increase of $8.9 million in the non-mountain segment was almost entirely due to Sandestin as increased business volumes, and the opening of new retail and food and beverage outlets resulted in higher labor costs and costs of goods sold. In addition, fixed costs at Sandestin rose by $2.1 million resulting mainly from increased resort association fees, workers' compensation insurance, utility costs and rent expense for the new outlets.
EBITDA from resort and travel operations increased 12% from $105.1 million in 2004 to $117.6 million in 2005. The acquisitions of A&K and 55% of Alpine Helicopters increased EBITDA by $20.4 million and $6.9 million, respectively. In addition, the translation effect of the higher Canadian dollar increased EBITDA by a further $5.0 million. On a same-business, constant exchange rate basis, EBITDA from the mountain segment decreased from $105.6 million to $87.7 million while EBITDA from the non-mountain segment declined from a loss of $0.5 million to a loss of $2.4 million.
The poor ski season in British Columbia reduced EBITDA in the mountain segment by $17.7 million. Given the fixed cost nature of many operating expenses at a resort, we had limited ability to reduce costs in response to the decline in revenue. Furthermore, we chose to spend more on grooming and snow management in order to maintain the quality of the limited terrain and on guest services to compensate for the substandard conditions. The decline in EBITDA at our British Columbia resorts was partially offset by a 12% increase in EBITDA from our eastern and western U.S. resorts, as several resorts achieved record results.
The decrease in EBITDA from the non-mountain segment was due mainly to the higher fixed costs at Sandestin, as described above.
A&K's EBITDA in 2005 was augmented by $6.5 million of licensing fees from an operator of destination clubs, who was given the right to use A&K's brand name for marketing the clubs. The licensing agreement terminated in August 2005. While replacement licensing arrangements may be negotiated in the future, EBITDA of $13.9 million from A&K's tour business is a more indicative base for projecting EBITDA in the future.
The margin on resort and travel operations decreased from 19.4% in 2004 to 13.6% in 2005 due to the inclusion of A&K and lower profitability from our British Columbia operations. Excluding A&K, the margin in 2005 was 16.1%.
FISCAL 2005 REVIEW OF MANAGEMENT SERVICES
Management services revenue increased by 46% from
$124.4 million in 2004
The $16.5 million increase in revenue from lodging and property management was due mainly to increases in the occupied room nights and average daily rates (ADR). The growth in occupied room nights came both from increased supply of available room nights, as we continued to build out our resort villages, and higher average occupancy rates during the year. At our mountain resorts, occupied room nights increased 8% and ADR increased 4%, with particularly strong growth at Mammoth, Copper and Stratton. Since we do not have a portfolio of managed lodging units at Whistler Blackcomb, the decline in visitors to that resort did not have a significant impact on the management services segment. We also saw growth of 23% and 6%, respectively, in occupied room nights and ADR at our warm-weather locations (Sandestin and Lake Las Vegas). In addition to higher occupancy levels, revenue in 2005 was augmented by $1.4 million of reservation fees (these fees were not charged in 2004) and increased charges for housekeeping and miscellaneous lodging services. The translation effect of the stronger Canadian dollar also increased reported lodging and property management revenue by $1.6 million in 2005.
Higher revenues increased EBITDA from lodging and property management services by $5.2 million. Our margin increased from 15.7% in 2004 to 18.7% in 2005, reflecting improved operating leverage from managing more units and spreading our costs over a higher number of occupied room nights.
Other resort and travel fees comprise reservation fees earned by our central call center, RezRez, golf course management fees and club management fees earned by Intrawest Resort Club. An increase of $1.9 million in club management fees was offset by a decrease of the same amount in reservation fees. RezRez continues to expand its role as our internal call center and to move away from selling to third parties. Golf course management fees increased by $0.1 million to $2.1 million in 2005. At June 30, 2005, we managed 17 third-party golf courses, a decrease of one from the end of the previous year. The decrease of $0.7 million in EBITDA from other resort and travel fees was due to incurring a higher loss at RezRez, principally from its Fly4Less and Moguls business units, both of which have now been sold.
Real estate development services fees increased by $11.8 million as we managed more projects for partnerships and the value of construction expenditures, on which the fees are based, was much higher in 2005. We also realized higher marketing fees from partnerships as projects completed construction in 2005 and units closed. We expect the rate of growth of real estate development fee revenue and EBITDA to level off somewhat now that we have completed the ramp-up stage of our partnering strategy.
Approximately half of the increase of $27.9 million in Playground sales fees was due to executing additional sales contracts on behalf of Leisura. Leisura is categorized as a third-party developer and therefore the fees that Playground earns on sales for Leisura are included in the management services segment. Prior to implementing our partnering strategy for real estate, Playground would have sold more units for Intrawest and the sales fees that it charged to Intrawest would not have been recorded in the management services segment. Instead, they would have been eliminated on consolidation against the corresponding commission expenses included in real estate cost of sales. The other half of the increase in Playground sales fees was due to new business with third-party developers and strong resales markets, particularly at Sandestin and Stratton. Playground's profile as a leader in recreational property sales and marketing continues to grow, resulting in new opportunities across North America and abroad. The rate of growth in EBITDA of $3.2 million in 2005 was less than the rate of growth in revenue because of the lower commission structure on sales for Leisura and a greater allocation of Playground general and administrative costs to management services expenses from real estate development expenses.
FISCAL 2005 REVIEW OF REAL ESTATE DEVELOPMENT
The following table highlights the results of our real estate business in 2005 compared with 2004.
(1) Units closed excludes units in projects sold
to partnerships. In
Revenue for 2005 includes $200.5 million for sales of 10 projects and one land parcel to partnerships compared with $193.0 million for sales of 14 projects and one land parcel to partnerships in 2004. These sales proceeds comprise the fair market value of the land for the projects as well as accumulated development costs. In addition, in 2005, we sold commercial properties at seven of our resort villages for a total of $109.5 million to a partnership in which CNL Income Properties, Inc., a real estate investment trust, is an 80% partner and we are a 20% partner. Excluding these sales to partnerships, revenue from real estate development decreased from $686.9 million in 2004 to $318.8 million in 2005. Revenue generated by Intrawest Placemaking decreased from $642.4 million to $274.1 million while revenue generated by Intrawest Resort Club increased from $44.5 million to $44.7 million.
Intrawest Placemaking Revenue
We closed a total of 557 units in 2005 down from 1,334 in 2004 due to the implementation of our partnering strategy. Closings of units in projects sold to partnerships are excluded from our reported closings. In 2005 Leisura closed 467 units. The number of closings in 2004 does not reflect our strategy of using partnerships for vertical development and therefore our closings in 2005 represent a more indicative base of closings for future years.
The translation effect of the higher Canadian dollar increased reported real estate development revenue by $3.2 million in 2005. The average price per closed unit increased from $480,000 in 2004 to $483,000 (on a constant exchange rate basis) in 2005. In an effort to sell long-standing inventory at Solitude and Copper we discounted prices and closed 62 units at an average price of $286,000 per unit. Excluding these units, the average price per closed unit in 2005 was $507,000, 6% higher than in 2004.
The average price per closed unit was also impacted by the mix of product types (i.e., condo-hotel, townhome and single-family lot). Closings were weighted more towards townhomes and lots and less towards condo-hotels in 2005, reflecting our strategy of selling the most capital-intensive projects (typically condo-hotels) to partnerships. In total, 46% of the closings in 2005 were condo-hotel units, 31% were townhomes and 23% were lots, compared with 78% condo-hotel units, 17% townhomes and 5% lots in 2004.
Intrawest Resort Club Revenue
The resort club group generated $44.7 million in sales revenue in 2005, up slightly from $44.5 million in 2004. The translation effect of the higher Canadian dollar increased reported resort club revenue by $2.6 million in 2005. The decline in visitors to Whistler Blackcomb reduced revenue at that club location by 20%, however, increases in sales at the Blue Mountain club and higher add-on points sales to existing resort club members offset the decline. We had expected stronger revenue growth from the resort club over the past few years, however, sales were impacted by the slow economy and the uncertainty created by recent world events. This product type appears to be more of a consumer purchase than our other real estate products and confidence is an important factor in the purchase consideration. Furthermore, resort club product does not have the same sense of scarcity as other types of real estate so purchasers are under less pressure to buy.
Sales to Partnerships
As mentioned above, revenue from sales of projects and land parcels to partnerships totaled $200.5 million in 2005, up from $193.0 million in 2004. The nature of our investment in these partnerships determines how we account for them. Profits on sales of projects and land parcels to partnerships that we account for using the equity method are initially deferred under Canadian GAAP and then recognized on the same basis as the partnership recognizes its real estate revenue. In 2005 revenue from sales to such partnerships totaled $170.7 million and we recorded real estate expenses of the same amount, comprising land and accumulated development costs of $97.7 million and deferred profits of $73.0 million. Subsequently, when the partnership recognizes its real estate revenue, we record a portion of the deferred land profit as a credit to real estate development expenses in our statement of operations. Any properties that are sold at a loss to an equity accounted partnership are recognized at the closing date. Profits on sales to partnerships that we account for using the cost method are recognized in full on the closing date.
Real Estate EBITDA
Real estate EBITDA decreased, as expected, from $156.1 million to $103.1 million. Real estate EBITDA comprises operating profit from real estate plus interest included in real estate expenses. During the development process, interest is capitalized to properties and the interest is expensed when the properties are closed. Operating profit from real estate, rather than real estate EBITDA, factors into the computation of net income.
Operating profit from real estate development decreased from $91.4 million in 2004 to $67.7 million in 2005. The 58% decrease in unit closings reduced operating profit from Intrawest units from $82.2 million in 2004 to $38.0 million in 2005. The margin on these sales was 12.0% in both years. Operating profit from sales to partnerships (land profit and equity income) increased from $9.2 million in 2004 to $33.9 million in 2005. The 2005 amount includes a loss of $3.4 million on the sale of commercial properties to the CNL partnership. We have now sold the majority of our commercial properties at all resorts except for Lake Las Vegas and Squaw Valley. We wrote-down the carrying value of our Lake Las Vegas commercial properties by $4.2 million in 2005 to maintain a more conservative book value as we prepare the properties for sale.
Real Estate Pre-sales
At August 31, 2005, real estate pre-sales amounted to $218 million for delivery in fiscal 2006 and an additional $77 million for delivery in fiscal 2007. In addition, the real estate partnerships had pre-sales of $300 million and $196 million, respectively, to close in fiscal 2006 and fiscal 2007.
FISCAL 2005 REVIEW OF CORPORATE OPERATIONS
Interest and Other Income
Interest and other income was $5.2 million in 2005, down from $6.1 million in 2004 due mainly to the recovery in 2004 of $2.6 million of fuel spill remediation costs at Mammoth partially offset by higher interest income in 2005, including $1.1 million earned by A&K.
Interest incurred decreased from $94.6 million in 2004 to $80.9 million in 2005 due mainly to the refinancing of senior notes in both 2004 and 2005 and lower interest on construction debt as a result of our real estate partnering strategy, partially offset by $1.5 million of interest incurred at A&K. In the second quarter of 2004 we redeemed our $200 million, 9.75% senior notes by issuing $350 million, 7.5% senior notes and using the surplus proceeds to pay down our senior credit facility. Then in the second and third quarters of 2005 we redeemed our $394.4 million, 10.5% senior notes by issuing $329.9 million of 7.5% and 6.875% senior notes and drawing on our senior credit facility. These refinancings have helped to reduce the weighted average cost of our bank and other indebtedness from 8.2% at June 30, 2004 to 6.7% at June 30, 2005.
In total, $62.2 million of the interest incurred in 2005 was expensed ($44.6 million as interest expense and $17.6 million of interest within real estate expenses), down from $71.3 million in 2004 ($45.8 million as interest expense and $25.5 million within real estate expenses).
We expensed call premiums and unamortized deferred financing costs of $30.2 million in 2005 and $12.1 million in 2004 to redeem the senior notes.
General and Administrative Costs
All general and administrative ("G&A") costs incurred by our resorts and other Leisure and Travel Group businesses are included in resort and travel operations and management services expenses. Similarly, G&A costs incurred in the development of real estate are initially capitalized to properties, and then expensed as part of real estate costs in the period when the properties are closed. Corporate G&A expenses, which mainly comprise executive employee costs, public company costs, audit and legal fees, corporate information technology costs and head office occupancy costs are disclosed as a separate line in the statement of operations.
Corporate G&A expenses increased from $20.4 million in 2004 to $20.6 million in 2005. This small change is the net result of a number of larger increases and decreases that offset each other. The unification of our resort and travel operations businesses into the Leisure and Travel Group in May 2004 and the transfer of personnel from corporate operations to the Leisure and Travel Group reduced corporate G&A (and increased resort and travel operations expenses) by approximately $5 million in 2005. This reduction in corporate G&A was offset by an increase of approximately $4 million primarily for higher internal and external audit costs, higher compensation costs (including the cost of expensing stock options and mark-to-market adjustments of long-term incentive plans) and increased corporate governance and privacy compliance expenses. In addition, the higher Canadian dollar increased reported corporate G&A by $1.3 million.
Depreciation and Amortization
Depreciation and amortization expense increased from $68.6 million in 2004 to $78.3 million in 2005. The acquisitions of A&K and the remaining 55% of Alpine Helicopters increased depreciation and amortization expense by $6.6 million and the translation effect of the higher Canadian dollar added a further $2.2 million. The balance of the increase was attributable to our increased fixed asset base due to normal capital expenditures.
Write-down of Stand-alone Golf Course Assets
We own five stand-alone golf courses - Swaneset in British Columbia (two), Three Peaks in Colorado, South Mountain in Arizona and Big Island Country Club in Hawaii. We have decided that these courses no longer serve our financial or strategic objectives and we plan to sell them. In preparation for sale, we engaged independent appraisers to value the operations and as a result we have written down the golf assets by $17.6 million.
We remain committed to the golf business at our resorts where golf adds to the diversity of activities we can offer our visitors, drives multiple sources of revenue (e.g., lodging, food and beverage, retail as well as golf) and enhances real estate values.
Income tax expense was $0.1 million in 2005 compared with $10.4 million in 2004. We had expected that our effective income tax rate in 2005 would be in the range of 10% to 15%, however the decline in our pre-tax income, mainly from lower resort and travel operations EBITDA in British Columbia and the write-down of our stand-alone golf courses, reduced the amount of income taxed at higher marginal rates, lowering our overall tax rate. Our income tax provision was further reduced by the utilization of income tax losses that we had previously expected to expire unutilized. We expect our effective tax rate to be approximately 15% in fiscal 2006.
We fully consolidate the results of Whistler Blackcomb and A&K and record the third-party owner's share of income in non-controlling interest. We also fully consolidate three variable interest entities, however they have not yet started to generate income and therefore do not impact non-controlling interest in the statement of operations. Non-controlling interest decreased from $12.9 million in 2004 to $9.4 million in 2005. Lower resort and travel operations EBITDA and significantly reduced real estate closings at Whistler Blackcomb reduced non-controlling interest by $8.3 million, while the acquisition of A&K increased it by $4.8 million.
2005 FOURTH QUARTER RESULTS
Total Company EBITDA was $43.5 million in the fourth quarter of 2005 (the "2005 quarter"), down from $62.7 million in the fourth quarter of 2004 (the "2004 quarter") mainly due to lower profits from real estate development. As described above, we wrote-down our stand-alone golf assets by $17.6 million and this contributed to a net loss of $21.5 million ($0.45 per diluted share) in the 2005 quarter compared with net income of $2.6 million ($0.05 per diluted share) in the 2004 quarter. Excluding this unusual item, the loss in the 2005 quarter was $4.0 million ($0.08 loss per diluted share).
Resort and travel operations revenue increased from $76.2 million in the 2004 quarter to $146.5 million in the 2005 quarter. The acquisitions of A&K in the first quarter and the remaining 55% of Alpine Helicopters in the second quarter increased resort and travel operations revenue by $50.9 million and $11.5 million, respectively, and the impact of the higher Canadian dollar increased reported revenue by a further $7.9 million. Declines in revenue at our British Columbia resorts due to the continuation of trends from the third quarter were offset by increases at our other resorts. Resort and travel operations incurred an EBITDA loss of $17.0 million in the 2005 quarter compared with a $20.7 million loss in the 2004 quarter. Increases in EBITDA of $4.2 million for A&K and $3.4 million for our additional interest in Alpine Helicopters were partially offset by a $2.8 million decline in EBITDA at our British Columbia resorts. In addition, higher insurance, marketing and G&A expenses in the 2005 quarter reduced EBITDA by $1.1 million.
Management services revenue increased from $29.2 million in the 2004 quarter to $49.8 million in the 2005 quarter due mainly to increases of $11.9 million in fees charged by Playground and $6.5 million in development and sales service fees charged to partnerships. In the 2005 quarter, we allocated $7.5 million of Playground G&A costs, which included a catch-up for the first three quarters, to management services expenses. The reallocation of these G&A costs from real estate expenses reflects the categorization of Playground revenue and expenses related to Leisura projects as third-party business. This limited the growth in management services EBITDA to $6.5 million in the 2005 quarter from $5.7 million in the 2004 quarter.
Revenue from real estate development decreased from $379.7 million in the 2004 quarter to $334.0 million in the 2005 quarter. We sold nine properties to partnerships for $180.7 million in the 2005 quarter compared with five properties for $84.2 million in the 2004 quarter. We closed 243 units in the 2005 quarter at an average price per unit of $592,000 compared with 540 units in the 2004 quarter at an average price per unit of $531,000. The higher average price per unit reflects a much greater weighting of closings at Canadian resorts in 2004. The reduced closings lowered operating profit from real estate development from $49.0 million in the 2004 quarter to $40.8 million in the 2005 quarter.
Interest and other income was a loss of $0.4 million in the 2005 quarter compared with income of $1.3 million in the 2004 quarter. The amount in the 2005 quarter was reduced by foreign exchange losses recorded by A&K and a provision against a loss on sale after the quarter of a Colorado-based reservations company. Interest expense increased from $11.1 million to $12.3 million as reduced interest due to the refinancing of senior notes in the second quarter was offset by capitalizing less interest to real estate properties. Corporate G&A expenses decreased from $6.7 million to $5.2 million due mainly to the transfer of personnel to the Leisure and Travel Group and the inclusion of their costs in resort and travel operations expenses. Depreciation and amortization expense increased from $13.9 million to $17.1 million due to the acquisitions of A&K and Alpine, adjustments to accelerate depreciation of certain technology systems and depreciation related to capital expenditures during the year.
LIQUIDITY AND CAPITAL RESOURCES
We achieved a number of important objectives in 2005 that improved our liquidity and capital structure:
- We generated $62.1 million of free
Cash Flows in 2005 compared with 2004
The major sources and uses of cash in 2005 and 2004 are summarized in the table below. This table should be read in conjunction with the Consolidated Statements of Cash Flows, which are more detailed as prescribed by GAAP.
2005 2004 CHANGE
We generated $116.2 million of funds from operations in 2005, down from $148.7 million in 2004 due mainly to lower real estate profits partially offset by increased resort and travel operations and management services EBITDA. In addition, we spent $15.6 million more in 2005 to redeem senior notes. For more details see the Review of Operations sections above.
The most significant year-over-year change in our cash flows was in real estate, where we invested $13.0 million in 2005 versus a recovery of $218.3 million in 2004. These amounts include cash requirements for real estate that we develop on our own as well as our net investment in real estate partnerships. The significant shift was due mainly to the first year impact of selling projects to partnerships in 2004. Since 2004 was the first year that we implemented our strategy of selling our most capital-intensive projects to partnerships, we benefited from recovering the book value of several major condo-hotel projects that pre-date this strategy, while restricting our capital requirements for new projects to our investment in the partnerships. Real estate cash flow in 2005 was improved by $100.4 as a result of selling our commercial properties.
Resort and travel operations capital expenditures ("capex") and other assets used $101.6 million of cash in 2005, up from $92.6 million in 2004. Capex comprised $79.4 million and $69.3 million, respectively, in 2005 and 2004 of these amounts. Each year we spend about $40 million on maintenance capex at our resorts and in our other businesses. Maintenance capex is considered non-discretionary (since it is required to maintain the existing level of service) and comprises such things as snow grooming machine or golf cart replacement, snowmaking equipment upgrades and building refurbishments. Expansion capex (e.g., new lifts or new restaurants) is considered discretionary and the annual amount varies year by year. In 2005 our major expansion capex items included a conference center and second golf course at Blue Mountain, employee housing and a new lift at Mammoth and an administration building at Tremblant. We expect maintenance and expansion capex to be about the same in 2006 as 2005. Our planned expansion capex for 2006 includes approximately $20 million for new lifts, buildings and equipment at our mountain resorts and $13 million for resort operations IT infrastructure.
We spent $22.2 million on other assets in 2005, slightly below the $23.3 million that we spent in 2004. These expenditures mainly comprise furniture, fixtures and equipment outside of our resorts, information technology systems, long-term financing costs and miscellaneous investments.
Long-term receivables and working capital generated $60.5 million of cash in 2005, up from $18.5 million in 2004. This represents the cash flow from changes in receivables, other assets, payables and deferred revenue. Cash from pre-booked revenue for next fiscal year (mainly season passes and lodging deposits) was $15.9 million higher at June 30, 2005 than the end of last year. The balance of the change was mainly due to increasing payables and deferred revenue.
We generated $62.1 million of free cash flow in 2005, down from $292.9 million in 2004. Our free cash flow in 2004 was unusually high because of the large volume of real estate closings and the first-year impact of our strategy of developing real estate with partners. On an ongoing basis, we manage both of our divisions (Leisure and Travel Group and Intrawest Placemaking) to generate positive annual free cash flow.
We used $21.8 million of our free cash flow in 2005 for acquisitions. We spent $36.9 million (net) to acquire 55% of Alpine Helicopters but we gained $15.1 million (net) on the acquisition of 67% of A&K. Proceeds from asset sales generated $1.5 million of cash in 2005, down from $15.9 million in 2004 when we sold our investment in Compagnie des Alpes. We plan to sell our stand- alone golf courses in fiscal 2006 and we have identified other non-core assets for disposal.
In total, our operating and investing activities generated $41.8 million
of cash in 2005, which we mainly used to pay dividends and distributions
to non-controlling interests. By comparison, in 2004 we generated $308.8
million from operating and investing activities that we mainly used to
|Also See:||Bob Schrader, former Four Seasons and Ritz Carlton Executive, Named Chief Operating Officer for Private Retreats by Abercrombie & Kents / December 2003|
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