FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Years ended
(In thousands of US dollars
December 31, December
31,
except per share amounts)
2006 2005
2006 2005
-------------------------------------------------------------------------
Revenues:
Hotel management fees
$ 33,243 $ 25,239 $ 123,866 $ 100,841
Other fees
4,216 4,057 17,521
14,048
Hotel ownership revenues
8,633 7,505 33,374
65,475
Reimbursed costs
23,674 21,697 78,664
67,974
--------------------------------------------
69,766 58,498 253,425
248,338
--------------------------------------------
Expenses:
General and administrative
expenses
(18,361) (16,653) (62,428) (58,148)
Hotel ownership cost of
sales and expenses
(8,398) (7,897) (32,212) (66,086)
Reimbursed costs
(23,674) (21,697) (78,664) (67,974)
--------------------------------------------
(50,433) (46,247) (173,304) (192,208)
--------------------------------------------
Operating earnings before
other items
19,333 12,251 80,121
56,130
Depreciation and amortization
(4,723) (2,675) (14,598) (11,187)
Other income (expenses),
net (note 5)
3,184 (56,789) (3,811)
(89,208)
Interest income
6,483 5,156 22,405
16,746
Interest expense
(3,551) (3,144) (14,910) (11,545)
--------------------------------------------
Earnings (loss) before income
taxes
20,726 (45,201) 69,207
(39,064)
--------------------------------------------
Income tax recovery
(expense) (note 6):
Current
(3,246) (1,523) (13,415)
(1,912)
Future
(601) 8,954 (5,505)
12,753
--------------------------------------------
(3,847) 7,431 (18,920)
10,841
--------------------------------------------
Net earnings (loss)
$ 16,879 $ (37,770) $ 50,287 $ (28,223)
--------------------------------------------
--------------------------------------------
Basic earnings (loss) per
share (note 4(a))
$ 0.45 $ (1.03) $
1.36 $ (0.77)
--------------------------------------------
--------------------------------------------
Diluted earnings (loss) per
share (note 4(a))
$ 0.44 $ (1.03) $
1.33 $ (0.77)
--------------------------------------------
--------------------------------------------
See accompanying notes to consolidated
financial statements.
FOUR SEASONS HOTELS INC.
CONSOLIDATED BALANCE SHEETS
As at As at
(Unaudited)
December 31, December 31,
(In thousands of US dollars)
2006 2005
-------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents
$ 358,949 $ 242,178
Receivables
67,397 69,690
Inventory
6,096 7,326
Prepaid expenses
3,346 2,950
---------------------------
435,788 322,144
Long-term receivables
153,224 175,374
Investments in hotel partnerships
and
corporations (note 2)
65,552 99,928
Fixed assets
81,490 64,850
Investment in management contracts
187,861 164,932
Investment in trademarks
4,224 4,210
Future income tax assets
9,099 14,439
Other assets
54,729 34,324
---------------------------
$ 991,967 $ 880,201
---------------------------
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities $ 74,307
$ 54,797
Long-term obligations
due within one year
2,350 4,853
---------------------------
76,657 59,650
Long-term obligations (note 3)
266,835 273,825
Shareholders' equity (note 4):
Capital stock
287,576 250,430
Convertible notes
36,920 36,920
Contributed surplus
11,881 10,861
Retained earnings
207,600 160,741
Equity adjustment from
foreign currency
translation
104,498 87,774
---------------------------
648,475 546,726
Subsequent event (note 10)
---------------------------
$ 991,967 $ 880,201
---------------------------
---------------------------
See accompanying notes to consolidated
financial statements.
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended Years ended
(Unaudited)
December 31, December
31,
(In thousands of US dollars)
2006 2005
2006 2005
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net earnings (loss)
$ 16,879 $ (37,770) $ 50,287 $ (28,223)
Items not affecting cash:
Stock-based
compensation
expense
3,613 839
5,255 2,333
Depreciation
and
amortization
4,723 2,675 14,598
11,187
Foreign exchange
loss
(gain)
(7,976) 4,778 (1,343)
24,632
Gain on disposition
of
assets
(620) (9,015) (620)
(3,175)
Loss on retirement
benefit
plan
transition
- 35,467
- 35,467
Provision
for loss
2,712 25,559 3,074
32,284
Future income
tax expense
(recovery)
601 (8,954) 5,505
(12,753)
Other
102 3,482 1,291
4,969
Amount paid relating to
partial termination
of
currency and interest
rate
swap (note 3)
(21,000) -
(21,000) -
Amount paid relating to
retirement benefit
plan
transition
- (36,029)
- (36,029)
Changes in non-cash working
capital
21,407 9,061 20,925
(4,215)
--------------------------------------------
Cash provided by (used in)
operating activities
20,441 (9,907) 77,972
26,477
--------------------------------------------
Investing activities:
Advances of long-term
receivables
(3,787) (6,216) (25,568) (44,865)
Receipt of long-term
receivables
50,900 15,159 65,336
34,561
Investments in hotel
partnerships and
corporations
510 2,081
(190) (8,732)
Disposal of hotel
partnerships and
corporations
15,873 11,935 16,580
24,607
Purchase of fixed assets
(6,034) (5,885) (22,182) (18,706)
Investments in trademarks
and management contracts
(655) 11,148 (17,506)
10,473
Other assets
(3,357) 288
(9,883) (7,614)
--------------------------------------------
Cash provided by (used in)
investing activities
53,450 28,510 6,587
(10,276)
--------------------------------------------
Financing activities:
Long-term obligations,
including current
portion (323)
1,259 (3,099)
39
Issuance of shares
30,669 54
36,305 7,046
Dividends paid
- -
(3,378) (3,142)
--------------------------------------------
Cash provided by financing
activities
30,346 1,313 29,828
3,943
--------------------------------------------
Increase in cash and cash
equivalents
104,237 19,916 114,387
20,144
Increase (decrease) in cash
and cash equivalents due to
unrealized foreign exchange
gain (loss)
470 790
2,384 (4,343)
Cash and cash equivalents,
beginning of period
254,242 221,472 242,178
226,377
--------------------------------------------
Cash and cash equivalents,
end of period
$ 358,949 $ 242,178 $ 358,949 $ 242,178
--------------------------------------------
--------------------------------------------
Supplementary information:
Interest received
$ 8,061 $ 8,127 $ 21,186
$ 18,576
Interest paid
(101) (140) (6,172)
(5,056)
Income taxes received
(paid), net
1,146 521
(979) (6,376)
See accompanying notes to consolidated
financial statements.
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF RETAINED
EARNINGS
(Unaudited)
Years ended December 31,
(In thousands of US dollars)
2006 2005
-------------------------------------------------------------------------
Retained earnings, beginning of year
$ 160,741 $ 192,129
Net earnings (loss)
50,287 (28,223)
Dividends declared
(3,428) (3,165)
---------------------------
Retained earnings, end of year
$ 207,600 $ 160,741
---------------------------
---------------------------
See accompanying notes to consolidated
financial statements.
FOUR SEASONS HOTELS INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(In thousands of US dollars except
per share amounts)
-------------------------------------------------------------------------
In these interim consolidated financial
statements, the words, "we",
"us", "our", and other similar words
are references to Four Seasons
Hotels Inc. ("FSHI") and its consolidated
subsidiaries. These interim
consolidated financial statements
do not include all disclosures required
by Canadian generally accepted accounting
principles for annual financial
statements and should be read in conjunction
with our most recently
prepared annual consolidated financial
statements for the year ended
December 31, 2005.
1. Significant accounting policies:
The significant
accounting policies used in preparing these interim
consolidated
financial statements are consistent with those used in
preparing
our annual consolidated financial statements for the year
ended December
31, 2005, except as disclosed below:
(a)
Non-monetary transactions:
In June 2005, The Canadian Institute of Chartered Accountants
("CICA") issued Section 3831, "Non-Monetary Transactions",
which introduces new requirements for non-monetary transactions
initiated on or after January 1, 2006. The amended requirements
will result in non-monetary transactions being measured at fair
values unless certain criteria are met, in which case, the
transaction is measured at carrying value. The implementation
of Section 3831, on a prospective basis for transactions
initiated on or after January 1, 2006, did not have any impact
on our consolidated financial statements for the three months
and the year ended December 31, 2006.
(b)
Financial instruments:
In January 2005, the CICA issued three new accounting standards
related to financial instruments: Section 3855, "Financial
Instruments - Recognition and Measurement", Section 3865,
"Hedges", and Section 1530, "Comprehensive Income". These new
standards are effective for fiscal years beginning on or after
October 1, 2006. Section 3855 prescribes when a financial
instrument is to be recognized on the balance sheet and at what
amount, and also specifies how financial instrument gains and
losses are to be presented. Section 3865 provides additional
accounting treatments to Section 3855 for entities, which
choose to designate qualifying transactions as hedges for
accounting purposes, by specifying how hedge accounting is
applied and the required disclosures. It also defines a fair
value hedge, a cash flow hedge and a hedge of a net investment
in a self-sustaining foreign operation and provides guidance on
how to account for each. In addition, it requires that any
ineffectiveness in a hedging relationship be recorded
immediately in income. Section 1530 introduces a new
requirement to present certain revenues, expenses, gains and
losses, which may include the impact of certain financial
instruments, that otherwise would not be immediately recorded
in income, in a statement of comprehensive income with the same
prominence as other statements that constitute a complete set
of financial statements. We are still assessing the
implications of these new standards and have not yet determined
the impact of the implementation of these standards on our 2007
consolidated financial statements.
(c)
Stock-based compensation:
In July 2006, the Emerging Issues Committee of the CICA issued
Abstract EIC-162, "Stock-Based Compensation for Employees
Eligible to Retire Before the Vesting Date", which requires
compensation cost to be recognized over the period from the
grant date to the date the employee becomes eligible to
retire. The implementation of EIC-162, on a retroactive basis
from January 1, 2006, did not have an impact on our
consolidated financial statements for the three months and year
ended December 31, 2006.
(d)
Comparative figures:
Certain 2005 comparative figures have been reclassified to
conform with the financial statement presentation adopted for
2006.
2. Hotel investment transaction:
In February
2006, we exchanged our equity interest in a property
under our
management for a management contract enhancement of
approximately
the same fair value. No gain or loss was recorded in
connection
with this transaction.
3. Currency and interest rate
swap:
In December
2006, we terminated 80% of the notional amount of the
currency component
of our currency and interest rate swap relating to
the final
exchange of principal by making a payment of $21,000. The
swap had been
designated as a fair value hedge of our convertible
senior notes.
The book value of the terminated portion of the swap at
the date of
termination was C$19.5 million ($16,980). The loss of
C$4.6 million
($4,020) was deferred for accounting purposes
and recorded
in "Other assets", and is being amortized over the
period to
July 30, 2009, which is the maturity date of the swap
agreement.
For the three months and year ended December 31, 2006,
$87 of the
deferred loss was amortized and recorded as a foreign
exchange loss.
Under the amended
swap, we will pay C$62.4 million and receive
$50,000 on
July 30, 2009. There were no other changes to the original
swap, including
the notional amounts relating to the exchange of
interest.
As a result
of the partial termination of the swap, we no longer met
all the conditions
for designating the amended swap as a fair value
hedge of our
convertible senior notes, and therefore ceased hedge
accounting
as at this date. The unrealized loss relating to the
remaining
notional amount of the currency component of the swap of
C$1.2 million
($1,005) and the unrealized loss relating to the
notional amount
of the interest component of the swap of
C$2.1 million
($1,794) were deferred for accounting purposes and
recorded in
"Other assets". These deferred losses are being amortized
over the period
to July 30, 2009. For the three months and year ended
December 31,
2006, $22 of the deferred loss relating to the currency
component
of the swap was amortized and recorded as a foreign
exchange loss
and $39 of the deferred loss relating to the interest
component
of the swap was amortized and recorded as interest expense.
The amended
swap is being marked-to-market on a monthly basis and
accrued under
"Long-term obligations", with the resulting changes in
fair values
being recognized in "Other expenses, net". For the three
months and
year ended December 31, 2006, a gain of $752 was
recognized
on the marked-to-market valuation.
4. Shareholders' equity:
As at December
31, 2006, we have 3,725,698 outstanding Variable
Multiple Voting
Shares ("VMVS"), 33,661,638 outstanding Limited
Voting Shares
("LVS"), and 3,666,079 outstanding stock options
(weighted
average exercise price of C$59.70 ($51.23)).
(a)
Earnings (loss) per share:
A reconciliation of the net earnings (loss) and weighted
average number of VMVS and LVS used to calculate basic and
diluted earnings (loss) per share is as follows:
Three months ended
December 31,
2006
2005
-------------------------------------------------------------------------
Net earnings Shares Net loss
Shares
-------------------------------------------------------------------------
Basic earnings (loss)
per share amounts
$ 16,879 37,118,121 $ (37,770) 36,640,579
Effect of assumed
dilutive conversions:
Stock option plan
- 1,223,754
- -
------------------------------------------------
Diluted earnings (loss)
per share amounts
$ 16,879 38,341,875 $ (37,770) 36,640,579
------------------------------------------------
------------------------------------------------
Years ended
December 31,
2006
2005
-------------------------------------------------------------------------
Net earnings Shares Net loss
Shares
-------------------------------------------------------------------------
Basic earnings (loss)
per share amounts
$ 50,287 36,843,367 $ (28,223) 36,628,206
Effect of assumed
dilutive conversions:
Stock option plan
- 886,929
- -
------------------------------------------------
Diluted earnings (loss)
per share amounts
$ 50,287 37,730,296 $ (28,223) 36,628,206
------------------------------------------------
------------------------------------------------
The diluted earnings per share calculation excluded the effect
of the assumed conversions of 84,600 and 804,436 stock options
to LVS, under our stock option plan, during the three months
and year ended December 31, 2006, respectively, as the
inclusion of these options would have resulted in an anti-
dilutive effect. As we incurred a net loss for the three months
and year ended December 31, 2005, all 4,485,463 outstanding
stock options were excluded from the calculation of diluted
loss per share for these periods. In addition, the dilution
relating to the assumed conversion of convertible senior notes
to 3,489,525 LVS has been excluded from the calculation, as the
inclusion of this conversion resulted in an anti-dilutive
effect for the three months and year ended December 31, 2006
and 2005.
(b)
Stock-based compensation:
We use the fair value-based method to account for all employee
stock options granted or modified on or after January 1, 2003.
Accordingly, options granted prior to that date continue to be
accounted for using the settlement method.
Stock options to acquire 41,650 LVS were granted in the year
ended December 31, 2006 at a weighted average exercise price of
C$62.61 ($53.65). The fair value of stock options granted in
the year ended December 31, 2006 was estimated using the Black-
Scholes options pricing model with the following assumptions:
risk-free interest rates ranging from 4.09% to 4.17%; semi-
annual dividend per LVS of C$0.055; volatility factor of the
expected market price of our LVS of 27%; and expected lives of
the options ranging between four and seven years, depending on
the level of the employee who was granted stock options. For
the options granted in the year ended December 31, 2006, the
weighted average fair value of the options at the grant dates
was C$21.49 ($18.41). For purposes of stock option expense and
pro forma disclosures, the estimated fair value of the options
is amortized to compensation expense over the options' vesting
period. There were no stock options granted in the three months
ended December 31, 2006 and the year ended December 31, 2005.
Pro forma disclosure is required to show the effect of the
application of the fair value-based method to employee stock
options granted during 2002, which were not accounted for using
the fair value-based method. For the three months and years
ended December 31, 2006 and 2005, if we had applied the fair
value-based method to options granted during 2002, our net
earnings (loss) and basic and diluted earnings (loss) per share
would have been adjusted to the pro forma amounts indicated
below:
Three months ended Years ended
December 31, December
31,
2006 2005
2006 2005
-------------------------------------------------------------------------
Stock option expense
included in compensation
expense
$ (664) $ (839) $ (2,305) $
(2,333)
--------------------------------------------
--------------------------------------------
Net earnings (loss), as
reported
$ 16,879 $ (37,770) $ 50,287 $ (28,223)
Decrease (increase) in stock
option expense that would
have been recorded if all
stock options granted during
2002 had been expensed
(625) 463 (2,579)
(1,626)
--------------------------------------------
Pro forma net earnings (loss) $
16,254 $ (37,307) $ 47,708 $ (29,849)
--------------------------------------------
--------------------------------------------
Earnings (loss) per share:
Basic, as reported
$ 0.45 $ (1.03) $
1.36 $ (0.77)
Basic, pro forma
0.44 (1.02)
1.29 (0.81)
Diluted, as reported
0.44 (1.03)
1.33 (0.77)
Diluted, pro forma
0.42 (1.02)
1.27 (0.81)
5. Other income (expenses), net:
Three months ended Years ended
December 31, December
31,
2006 2005
2006 2005
-------------------------------------------------------------------------
Costs related to pending
arrangement
transaction (note 10)
$ (3,452) $ - $ (3,452)
$ -
Asset provisions and
write-downs(a)
(2,712) (25,558) (3,074) (32,284)
Foreign exchange gain
(loss)(b)
7,976 (4,778) 1,343
(24,632)
Unrealized swap derivative
gain (note 3)
752 -
752 -
Gain on disposition of
assets(c)
620 9,014
620 3,175
Loss on retirement benefit
plan transition
- (35,467)
- (35,467)
--------------------------------------------
$ 3,184 $ (56,789) $ (3,811) $ (89,208)
--------------------------------------------
--------------------------------------------
(a)
Asset provisions and write-downs of $2,712 and $3,074 for the
three months and year ended December 31, 2006, respectively,
relates primarily to a write-down on investments in hotel
partnerships and corporations. Asset provisions and write-downs
for the three months and year ended December 31, 2005 includes
a provision for loss of $8,829 on long-term receivables, a
write-down of $15,923 and $17,853, respectively, on investments
in hotel partnerships and corporations, a write-down of $479
and $5,105, respectively, on investment in management contracts
and other provisions of $327 and $497, respectively.
(b)
The foreign exchange gain (loss) in 2006 and 2005 related
primarily to the foreign currency translation gains and losses
on unhedged net monetary asset and liability positions,
primarily in US dollars, euros, pounds sterling and Australian
dollars, and local currency foreign exchange gains and losses
on net monetary assets incurred by our designated foreign self-
sustaining subsidiaries.
As at December 31, 2006, we have foreign exchange forward
contracts in place to sell forward $39,068 of US dollars to
receive Canadian dollars at a weighted average forward exchange
rate of 1.11 Canadian dollars to a US dollar maturing over the
period to April 2008. All our foreign exchange forward
contracts are being marked-to-market on a monthly basis with
the resulting changes in fair values being recorded as a
foreign exchange gain or loss. This resulted in foreign
exchange loss of $1,813 and $544 being recorded in the three
months and year ended December 31, 2006, respectively (2005 -
foreign exchange loss of $127 for both periods).
(c)
Gain on disposition of assets for the three months and year
ended December 31, 2006 includes a net gain of $620 (2005 -
$9,892 and $9,337, respectively) on the dispositions of
investments in hotel partnerships and corporations and the
settlement of long-term receivables, and in 2005, also included
a gain on the exit from certain management contracts. For the
three months and year ended December 31, 2005, it also included
a loss of $878 and $6,162, respectively, on the assignment of
leases and the sale of related assets of The Pierre.
6. Income taxes:
During the
three months and year ended December 31, 2006, we did not
record approximately
$1,477 and $3,434, respectively, of a tax
benefit related
to the foreign exchange losses, due to the
uncertainty
associated with the utilization of these losses.
In connection
with the disposition of The Pierre in June 2005, we
recorded an
income tax benefit of approximately $9,400 for the year
ended December
31, 2005.
7. Pension expense:
For the year
ended December 31, 2006, we incurred a pension expense
of $1,816
(2005 - $2,001) related to the defined benefit retirement
plan and $2,160
(2005 - $2,243) related to the defined contribution
retirement
plan.
8. Guarantees and commitments:
We have provided
certain guarantees and have other similar
commitments
typically made in connection with properties under our
management.
These contractual obligations and other commitments are
more fully
described in the consolidated financial statements for the
year ended
December 31, 2005. Since December 31, 2005, we have
decreased
our guarantees and commitments by approximately $1,300.
9. Segmented information:
Our strategy
is to focus on Management Operations rather than
Ownership
Operations. Four Seasons Hotel Vancouver is our only
remaining
hotel whose results we currently consolidate. As a result,
commencing
January 1, 2006, corporate expenses are reflected as
general and
administrative expenses in the consolidated statements of
operations
for the three months and year ended December 31, 2006.
Corporate
expenses for the three months and year ended December 31,
2005 that
previously were included in our Ownership Operations
segment have
been reclassified to the Management Operations segment
and included
in general and administrative expenses in the
consolidated
statements of operations.
Three months ended December 31, 2006
--------------------------------------
Management Ownership
Operations Operations Total
-------------------------------------------------------------------------
Revenues:
Hotel management fees
$ 33,243 $
- $ 33,243
Other fees
4,216
- 4,216
--------------------------------------
37,459
- 37,459
Hotel ownership revenues
- 8,633
8,633
Reimbursed costs
23,674
- 23,674
--------------------------------------
61,133 8,633
69,766
--------------------------------------
Expenses:
General and administrative
expenses
(18,361) -
(18,361)
Hotel ownership cost of
sales
and expenses
- (8,398)
(8,398)
Reimbursed costs
(23,674) -
(23,674)
--------------------------------------
(42,035) (8,398)
(50,433)
--------------------------------------
Operating earnings before
other items
$ 19,098 $ 235
$ 19,333
--------------------------------------
--------------------------------------
Three months ended December 31, 2005
--------------------------------------
Management Ownership
Operations Operations Total
-------------------------------------------------------------------------
Revenues:
Hotel management fees
$ 25,239 $
- $ 25,239
Other fees
4,057
- 4,057
--------------------------------------
29,296
- 29,296
Hotel ownership revenues
- 7,505
7,505
Reimbursed costs
21,697
- 21,697
--------------------------------------
50,993 7,505
58,498
--------------------------------------
Expenses:
General and administrative
expenses
(16,653) -
(16,653)
Hotel ownership cost of
sales
and expenses
- (7,897)
(7,897)
Reimbursed costs
(21,697) -
(21,697)
--------------------------------------
(38,350) (7,897)
(46,247)
--------------------------------------
Operating earnings (loss) before
other items
$ 12,643 $ (392)
$ 12,251
--------------------------------------
--------------------------------------
Year ended December 31, 2006
--------------------------------------
Management Ownership
Operations Operations Total
-------------------------------------------------------------------------
Revenues:
Hotel management fees
$ 123,866 $
- $ 123,866
Other fees
17,521
- 17,521
--------------------------------------
141,387
- 141,387
Hotel ownership revenues
- 33,374
33,374
Reimbursed costs
78,664
- 78,664
--------------------------------------
220,051 33,374
253,425
--------------------------------------
Expenses:
General and administrative
expenses
(62,428) -
(62,428)
Hotel ownership cost of
sales
and expenses
- (32,212) (32,212)
Reimbursed costs
(78,664) -
(78,664)
--------------------------------------
(141,092) (32,212) (173,304)
--------------------------------------
Operating earnings before
other items
$ 78,959 $ 1,162
$ 80,121
--------------------------------------
--------------------------------------
Year ended December 31, 2005
--------------------------------------
Management Ownership
Operations Operations Total
-------------------------------------------------------------------------
Revenues:
Hotel management fees
$ 100,841 $
- $ 100,841
Other fees
14,048
- 14,048
--------------------------------------
114,889
- 114,889
Hotel ownership revenues
- 65,475
65,475
Reimbursed costs
67,974
- 67,974
--------------------------------------
182,863 65,475
248,338
--------------------------------------
Expenses:
General and administrative
expenses
(58,148) -
(58,148)
Hotel ownership cost of
sales
and expenses
- (66,086) (66,086)
Reimbursed costs
(67,974) -
(67,974)
--------------------------------------
(126,122) (66,086) (192,208)
--------------------------------------
Operating earnings (loss) before
other items
$ 56,741 $ (611)
$ 56,130
--------------------------------------
--------------------------------------
10. Subsequent event:
On February
12, 2007, we announced that we had entered into a
definitive
acquisition agreement (the "Acquisition Agreement") to
implement
a previously announced proposal to take FSHI private at a
price of $82.00
cash per LVS (the "Arrangement Transaction").
Following
completion of the Arrangement Transaction, FSHI would be
owned by affiliates
of Cascade Investment, L.L.C. ("Cascade") (an
entity owned
by William H. Gates III), Kingdom Hotels International
("Kingdom"),
a company owned by a trust created for the benefit of
His Royal
Highness Prince Alwaleed Bin Talal Bin Abdulaziz Alsaud and
his family,
and Isadore Sharp (collectively the "Purchaser").
The Arrangement
Transaction, which would be implemented by way of a
court-approved
plan of arrangement under Ontario law, has been
approved unanimously
by our Board of Directors (with interested
directors
abstaining) following the report and favourable, unanimous
recommendation
of the Special Committee of independent directors. A
meeting of
shareholders to consider the Arrangement Transaction
is anticipated
to take place in April 2007. It is anticipated that
the Arrangement
Transaction, if approved by shareholders, will be
completed
in the second quarter of 2007.
Pursuant to
the Acquisition Agreement, FSHI agreed to certain
customary
negative and affirmative covenants relating to the
operation
of its business between the date of execution of the
Acquisition
Agreement and the closing of the Arrangement Transaction.
FSHI and the
Purchaser may terminate the Acquisition Agreement by
mutual written
consent and abandon the Arrangement Transaction at any
time prior
to the effective time. In addition, either FSHI or the
Purchaser
(and, in certain circumstances, only one of these parties)
may terminate
the Acquisition Agreement and abandon the Arrangement
Transaction
any time prior to the effective time of the Arrangement
Transaction
if certain specified events occur. The Acquisition
Agreement
provides that FSHI will pay a termination fee of $75,000
less any amounts
actually paid or required to be paid by FSHI to the
Purchaser
for reimbursement of expenses (as described below) if the
Acquisition
Agreement is terminated in certain circumstances. The
Acquisition
Agreement provides that the Purchaser will pay to FSHI a
termination
fee of $100,000 if the Acquisition Agreement is
terminated
in certain circumstances. This obligation is guaranteed by
Kingdom and
Cascade. The Acquisition Agreement also provides that
FSHI will
pay to the Purchaser reasonable documented expenses of the
Purchaser
and its affiliates incurred in connection with the
transactions
contemplated by the Acquisition Agreement (up to a
maximum of
$10,000) if the Acquisition Agreement is terminated in
certain circumstances.
Although there
is no certainty that the Arrangement Transaction, or
any other
transaction, will be completed or the timing of completion
of the pending
Arrangement Transaction, some of our arrangements and
agreements
may be impacted by the pending Arrangement Transaction,
including
the following:
(a)
Convertible notes:
The convertible senior notes issued by FSHI in 2004 are
convertible into LVS (although at our option, FSHI may make a
cash payment in lieu of all or some of those LVS) in certain
circumstances, including upon the occurrence of a "fundamental
change", as defined in the indenture pursuant to which the
notes were issued. The Arrangement Transaction, if completed,
would result in a fundamental change. As a result, holders may
convert the notes during the period from and after the tenth
day prior to the anticipated closing date of the Arrangement
Transaction until and including the close of business on the
later of the tenth day after the actual closing date and the
thirtieth business day after notice of an offer to repurchase
the notes has been mailed, as described below. Upon such
conversion, holders of the notes would be entitled to receive,
subject to our right to make a cash payment in lieu of some or
all of the LVS that otherwise would be issued, 13.9581 LVS for
each one thousand US dollar principal amount of notes and an
additional number of LVS equal to (a) the sum of a make whole
premium, and an amount equal to any accrued but unpaid interest
to, but not including, the conversion date, divided by (b) the
average of the closing sale price (or, in certain
circumstances, an average of bid and ask prices) of the LVS on
the New York Stock Exchange for the ten trading days before the
conversion date.
If the Arrangement Transaction is completed, FSHI will be
required to make an offer to repurchase the notes at a purchase
price equal to the principal amount of the notes plus a make
whole premium (as described above), and an amount equal to any
accrued and unpaid interest to, but not including, the date of
repurchase. FSHI must make this offer by providing a notice to
the trustee and the holders of notes within 30 days of the
completion of the Arrangement Transaction.
Further information regarding the terms of our convertible
senior notes is set out in the indenture pursuant to which the
notes were issued.
(b)
Long-term incentive arrangement:
Pursuant to an agreement approved by the shareholders of FSHI
in 1989, FSHI and its principal operating subsidiary, Four
Seasons Hotels Limited, agreed to make a cash payment to Mr.
Isadore Sharp, the Chief Executive Officer of FSHI, upon an
arm's length sale of control of FSHI. Under the plan of
arrangement through which the Arrangement Transaction will be
implemented, Mr. Sharp will receive the amount payable to him
calculated in accordance with this long-term incentive plan in
full satisfaction of all obligations to him under the plan.
Based on an acquisition price of $82.00 for each LVS and VMVS,
and using the noon rate of exchange as quoted by the Bank of
Canada for the conversion of Canadian dollars into United
States dollars on March 9, 2007, Mr. Sharp would receive
approximately $289,000 in satisfaction of the obligations to
him under the long-term incentive plan.
(c)
Stock options:
On February 9, 2007, the vesting of a total of 616,980 unvested
stock options (which excludes those outstanding options with an
unsatisfied performance condition) was accelerated for the
purpose of allowing these individuals to participate in respect
of such options in the Arrangement Transaction. If the
Arrangement Transaction is not completed, the vesting of the
616,980 stock options will not be accelerated and the stock
options will continue to vest in accordance with their terms
in existence prior to the acceleration. Pursuant to the plan of
arrangement in respect of the Arrangement Transaction, any
options that have not been exercised prior to the effective
time of the Arrangement Transaction will be transferred by each
holder thereof to FSHI without any further act or formality in
exchange for a cash amount equal to the excess, if any, of (a)
the product of the number of LVS underlying the options held by
such holder and $82.00, over (b) the sum of the exercise prices
for each LVS underlying the options held by such holder
(converted at the applicable foreign exchange rate).
(d)
Other arrangements and agreements:
Certain other arrangements and agreements are subject to
"change of control" provisions. These include, among others,
the following:
(i) Under the terms of the current $125,000 bank credit
facility of FSHI, a change of control triggers a default
under the bank credit facility, and if not waived, would
require the repayment of all amounts outstanding under
this credit facility and would also result in the
termination of this credit facility. As at March 9, 2007,
no amounts were borrowed under this credit facility, but
approximately $1,600 of letters of credit were issued
under this credit facility.
(ii) Pursuant to a cross default provision, a default under
the bank credit facility in turn would cause a default
under FSHI's currency and interest rate swap agreement.
In such circumstances, the counterparty to the swap
agreement may demand that the swap be terminated. As at
March 9, 2007, the net amount that would be required to
be paid by FSHI to the counterparty on termination was
approximately $5,800. As at December 31, 2006, the
estimated fair value of the swap on that date of $6,757
is included in "Long-term obligations".
(e)
Costs related to pending Arrangement Transaction:
In connection with the pending Arrangement Transaction, we
incurred costs of $3,452 in 2006 and expect to incur costs
of approximately $12,600 during 2007, primarily relating to
legal fees, filing fees, financial advisory, printing, proxy
solicitation and consulting services.
FOUR
SEASONS HOTELS INC.
SUMMARY OF HOTEL OPERATING DATA -
CORE HOTELS(i)
Three months ended December 31,
(Unaudited)
2006 2005
Variance
-------------------------------------------------------------------------
Worldwide
# of Properties
56 56
-
# of Rooms
14,290 14,290
-
Occupancy(ii)
67.2% 66.1%
1.1pts.
ADR(iii)
$383.87 $342.97
11.9%
RevPAR(iv)
$258.13 $226.61
13.9%
Gross operating margin(v)
32.5% 29.4%
3.1pts.
United States
# of Properties
20 20
-
# of Rooms
6,195 6,195
-
Occupancy(ii)
70.3% 69.7%
0.6pts.
ADR(iii)
$423.52 $394.25
7.4%
RevPAR(iv)
$297.83 $274.83
8.4%
Gross operating
margin(v)
30.2% 28.3%
1.9pts.
Other Americas/Caribbean
# of Properties
10 10
-
# of Rooms
2,165 2,165
-
Occupancy(ii)
61.7% 60.3%
1.4pts.
ADR(iii)
$383.37 $342.22
12.0%
RevPAR(iv)
$236.60 $206.41
14.6%
Gross operating
margin(v)
26.7% 22.9%
3.8pts.
Europe
# of Properties
10 10
-
# of Rooms
1,720 1,720
-
Occupancy(ii)
63.6% 61.3%
2.3pts.
ADR(iii)
$598.79 $497.32
20.4%
RevPAR(iv)
$380.59 $304.68
24.9%
Gross operating
margin(v)
31.9% 29.6%
2.3pts.
Middle East
# of Properties
5 5
-
# of Rooms
1,215 1,215
-
Occupancy(ii)
66.5% 64.0%
2.5pts.
ADR(iii)
$287.72 $211.00
36.4%
RevPAR(iv)
$191.42 $135.08
41.7%
Gross operating
margin(v)
50.9% 37.9%
13.0pts.
Asia/Pacific
# of Properties
11 11
-
# of Rooms
2,995 2,995
-
Occupancy(ii)
67.3% 66.5%
0.8pts.
ADR(iii)
$223.49 $202.13
10.6%
RevPAR(iv)
$150.37 $134.37
11.9%
Gross operating
margin(v)
38.8% 36.3%
2.5pts.
-------------------------------------------------------------------------
(i) The term "Core
Hotels" means hotels and resorts under
management for the full year of both 2006 and 2005. However, if
a "Core Hotel" has undergone or is undergoing an extensive
renovation program in one of those years that materially
affects the operation of the property in that year, it ceases
to be included as a "Core Hotel" in either year. Changes from
the 2005/2004 Core Hotels are the additions of Four Seasons
Resort Scottsdale at Troon North, Four Seasons Resort Whistler,
Four Seasons Resort Costa Rica at Peninsula Papagayo, Four
Seasons Hotel Gresham Palace Budapest, Four Seasons Resort
Provence at Terre Blanche and Four Seasons Hotel Cairo at Nile
Plaza, and the deletion of The Regent Kuala Lumpur. All room
numbers in this table are approximate.
(ii) Occupancy percentage
is defined as the total number of rooms
occupied divided by the total number of rooms available.
(iii) ADR is defined as average
daily room rate per room occupied,
calculated as the weighted average for each region. In 2004 and
2005, ADR was calculated as a straight average for each region.
(iv) RevPAR is defined
as average room revenue per available room.
It is a non-GAAP financial measure and does not have any
standardized meaning prescribed by GAAP and is therefore
unlikely to be comparable to similar measures presented by
other issuers. We use RevPAR because it is a commonly used
indicator of market performance for hotels and resorts and
represents the combination of the average daily room rate and
the average occupancy rate achieved during the period. RevPAR
does not include food and beverage or other ancillary revenues
generated by a hotel or resort. RevPAR is the most commonly
used measure in the lodging industry to measure the period-over
-period performance of comparable properties. Our calculation
of RevPAR may be different than the calculation used by other
lodging companies.
(v) Gross operating
margin represents gross operating profit as a
percentage of gross operating revenue.
FOUR SEASONS HOTELS INC.
SUMMARY OF HOTEL OPERATING DATA -
CORE HOTELS(i)
Years ended December 31,
(Unaudited)
2006 2005
Variance
-------------------------------------------------------------------------
Worldwide
# of Properties
56 56
-
# of Rooms
14,290 14,290
-
Occupancy(ii)
69.0% 68.3%
0.7pts.
ADR(iii)
$372.36 $336.59
10.6%
RevPAR(iv)
$257.03 $229.80
11.8%
Gross operating margin(v)
32.4% 30.2%
2.2pts.
United States
# of Properties
20 20
-
# of Rooms
6,195 6,195
-
Occupancy(ii)
73.6% 73.0%
0.6pts.
ADR(iii)
$406.03 $371.59
9.3%
RevPAR(iv)
$299.03 $271.32
10.2%
Gross operating margin(v)
30.4% 28.6%
1.8pts.
Other Americas/Caribbean
# of Properties
10 10
-
# of Rooms
2,165 2,165
-
Occupancy(ii)
64.6% 64.4%
0.2pts.
ADR(iii)
$376.57 $335.58
12.2%
RevPAR(iv)
$243.33 $216.06
12.6%
Gross operating margin(v)
27.8% 26.4%
1.4pts.
Europe
# of Properties
10 10
-
# of Rooms
1,720 1,720
-
Occupancy(ii)
66.7% 62.6%
4.1pts.
ADR(iii)
$596.20 $534.37
11.6%
RevPAR(iv)
$397.92 $334.70
18.9%
Gross operating margin(v)
33.7% 31.5%
2.2pts.
Middle East
# of Properties
5 5
-
# of Rooms
1,215 1,215
-
Occupancy(ii)
69.3% 67.3%
2.0pts.
ADR(iii)
$258.31 $212.05
21.8%
RevPAR(iv)
$178.90 $142.79
25.3%
Gross operating margin(v)
50.5% 44.5%
6.0pts.
Asia/Pacific
# of Properties
11 11
-
# of Rooms
2,995 2,995
-
Occupancy(ii)
63.9% 65.0%
(1.1)pts.
ADR(iii)
$211.36 $197.69
6.9%
RevPAR(iv)
$134.99 $128.57
5.0%
Gross operating margin(v)
34.8% 33.1%
1.7pts.
-------------------------------------------------------------------------
(i) The term "Core Hotels"
means hotels and resorts under management
for the full year of both 2006 and 2005. However, if a "Core
Hotel" has undergone or is undergoing an extensive renovation
program in one of those years that materially affects the
operation of the property in that year, it ceases to be included
as a "Core Hotel" in either year. Changes from the 2005/2004 Core
Hotels are the additions of Four Seasons Resort Scottsdale at
Troon North, Four Seasons Resort Whistler, Four Seasons Resort
Costa Rica at Peninsula Papagayo, Four Seasons Hotel Gresham
Palace Budapest, Four Seasons Resort Provence at Terre Blanche and
Four Seasons Hotel Cairo at Nile Plaza, and the deletion of The
Regent Kuala Lumpur. All room numbers in this table are
approximate.
(ii) Occupancy percentage is
defined as the total number of rooms
occupied divided by the total number of rooms available.
(iii) ADR is defined as average daily
room rate per room occupied,
calculated as the weighted average for each region. In 2004 and
2005, ADR was calculated as a straight average for each region.
(iv) RevPAR is defined as average
room revenue per available room. It
is a non-GAAP financial measure and does not have any standardized
meaning prescribed by GAAP and is therefore unlikely to be
comparable to similar measures presented by other issuers. We use
RevPAR because it is a commonly used indicator of market
performance for hotels and resorts and represents the combination
of the average daily room rate and the average occupancy rate
achieved during the period. RevPAR does not include food and
beverage or other ancillary revenues generated by a hotel or
resort. RevPAR is the most commonly used measure in the lodging
industry to measure the period-over- period performance of
comparable properties. Our calculation of RevPAR may be different
than the calculation used by other lodging companies.
(v) Gross operating margin
represents gross operating profit as a
percentage of gross operating revenue.
FOUR SEASONS HOTELS INC.
SUMMARY OF HOTEL OPERATING DATA - ALL
MANAGED HOTELS(i)
As at December 31,
(Unaudited)
2006 2005
Variance
-------------------------------------------------------------------------
Worldwide
# of Properties
73 68
5
# of Rooms
18,025 17,300
725
United States
# of Properties
26 23
3
# of Rooms
7,445 6,845
600
Other Americas/Caribbean
# of Properties
10 10
-
# of Rooms
2,165 2,165
-
Europe
# of Properties
12 12
-
# of Rooms
1,960 1,960
-
Middle East
# of Properties
7 7
-
# of Rooms
1,735 1,740
(5)
Asia/Pacific(ii)
# of Properties
18 16
2
# of Rooms
4,720 4,590
130
-------------------------------------------------------------------------
(i) All room numbers in
this table are approximate.
(ii) Since December 31, 2006,
we have commenced management of Four
Seasons Resort Koh Samui, Thailand, which has 65 rooms. This
property is not reflected in this table.
FOUR SEASONS HOTELS INC.
REVENUES UNDER MANAGEMENT - ALL MANAGED
HOTELS
(Unaudited)
Three months ended
Years ended
(In thousands of
December 31,
December 31,
US dollars)
2006 2005
2006 2005
-------------------------------------------------------------------------
Revenues under
management(i)
$ 801,612 $ 676,662 $2,943,795 $2,559,746
------------------------------------------------
------------------------------------------------
-------------------------------------------------------------------------
(i) Revenues under management
consist of rooms, food and beverage,
telephone and other revenues of all the hotels and resorts that we
manage. Approximately 59% of the fee revenues (excluding
reimbursed costs) we earned represented a percentage of the total
revenues under management of all hotels and resorts.
FOUR SEASONS HOTELS INC.
SCHEDULED OPENING OF PROPERTIES UNDER
CONSTRUCTION OR
IN ADVANCED STAGES OF DEVELOPMENT
Approximate
Number
Hotel/Resort/Residence Club and Location(i)(ii)
of Rooms
Scheduled 2007/2008 openings
----------------------------
Four Seasons Hotel Alexandria, Egypt
125
Four Seasons Hotel Beijing, People's
Republic of China
325
Four Seasons Hotel Beirut, Lebanon
235
Four Seasons Resort Bora Bora, French
Polynesia(x)
105
Four Seasons Hotel Florence, Italy
120
Four Seasons Hotel Hangzhou, People's
Republic of China
100
Four Seasons Hotel Istanbul at the
Bosphorus, Turkey
170
Four Seasons Hotel Macau, Special
Administrative Region
370
of the People's Republic of
China(x)
Four Seasons Resort Mauritius, Republic
of Mauritius(x)
120
Four Seasons Hotel Moscow, Russia(x)
185
Four Seasons Hotel Mumbai, India(x)
230
Four Seasons Hotel Seattle, Washington,
USA(x)
150
Four Seasons Resort Seychelles, Seychelles(x)
65
Beyond 2008
-----------
Four Seasons Hotel Bahrain, Bahrain
270
Four Seasons Hotel Baltimore, Maryland,
USA(x)
200
Four Seasons Resort Barbados, Barbados(x)
120
Four Seasons Resort Cham Island, Vietnam
80
Four Seasons Hotel Doha at the Pearl,
Qatar(x)
250
Four Seasons Hotel Dubai, United Arab
Emirates(x)
375
Four Seasons Hotel Guangzhou, People's
Republic of China(x) 325
Four Seasons Hotel Kuala Lumpur, Malaysia(x)
275
Four Seasons Hotel Kuwait, Kuwait
300
Four Seasons Hotel Marrakech, Morocco(x)
140
Four Seasons Hotel Moscow Kamenny
Island, Russia(x)
80
Four Seasons Hotel New Orleans, Louisiana,
USA(x)
240
Four Seasons Resort Puerto Rico, Puerto
Rico(x)
250
Four Seasons Hotel Shanghai at Pudong,
People's
190
Republic of China(x)
Four Seasons Hotel St. Petersburg,
Russia
200
Four Seasons Hotel Toronto, Ontario,
Canada(x)
265
Four Seasons Resort Vail, Colorado,
USA(x)
120
(x) Expected to include
a residential component.
---------------------------
(i) Information
concerning hotels, resorts and residential projects
under construction or under development is based upon agreements
and letters of intent and may be subject to change prior to the
completion of the project. The dates of scheduled openings have
been estimated by management based upon information provided by
the various developers. There can be no assurance that the date of
scheduled opening will be achieved or that these projects will be
completed. In particular, in the case where a property is
scheduled to open near the end of a year, there is a greater
possibility that the year of opening could be changed. The process
and risks associated with the management of new properties are
dealt with in greater detail in the Operating Risks sections of
our 2006 Management Discussion and Analysis.
(ii) We have made an investment
in Orlando, in which we expect to
include a Four Seasons Residence Club and/or a Four Seasons
branded residential component. The financing for this project has
not yet been completed and therefore a scheduled opening date
cannot be established at this time.
FOUR SEASONS HOTELS INC.
FORM 51-102F1
MANAGEMENT'S DISCUSSION AND ANALYSIS
March 9, 2007
Arrangement Transaction
On February 12, 2007, we announced that we had entered
into a definitive acquisition agreement (the "Acquisition Agreement") to
implement a previously announced proposal to take FSHI private at a price
of $82.00 cash per Limited Voting Share (the "Arrangement Transaction").
Following completion of the transaction, FSHI would be owned by affiliates
of Cascade Investment, L.L.C. ("Cascade") (an entity owned by William H.
Gates III), Kingdom Hotels International ("Kingdom"), a company owned by
a trust created for the benefit of His Royal Highness Prince Alwaleed Bin
Talal Bin Abdulaziz Alsaud and his family, and Isadore Sharp. The transaction,
which would be implemented by way of a court-approved plan of arrangement
under Ontario law, has been approved unanimously by our Board (with interested
directors abstaining) following the report and favourable, unanimous recommendation
of the Special Committee of independent directors. In doing so, our Board
determined that the Arrangement Transaction is fair to the shareholders
of FSHI (other than Mr. Sharp, Kingdom, Cascade, their respective directors
and senior officers and any other "related parties", "interested parties"
and "joint actors") and in the best interests of FSHI and authorized the
submission of the Arrangement Transaction to shareholders of FSHI for their
approval at a special meeting of shareholders. Our Board also has determined
unanimously (with interested directors abstaining) to recommend to FSHI
shareholders that they vote in favour of the Arrangement Transaction.
As previously disclosed, upon completion of the Arrangement
Transaction, Triples Holdings Limited (which is Mr. Sharp's family holding
company) would hold a significant continuing interest in FSHI and Mr. Sharp
would, as Chairman and Chief Executive Officer, continue to be directly
involved in all aspects of the operations and the strategic direction of
Four Seasons, which will remain headquartered in Toronto. If the Arrangement
Transaction is completed, Mr. Sharp will be entitled to realize proceeds
of approximately $289 million related to a long-term incentive agreement
that was approved by FSHI's shareholders before it was put in place in
1989. (See "Description of Share Capital - Sale of Control Agreement" in
our Annual Information Form.)
A meeting of shareholders to consider the Arrangement
Transaction is anticipated to take place in April 2007. To be implemented,
the Arrangement Transaction will require approval by two-thirds of the
votes cast by holders of Limited Voting Shares, voting separately as a
class, and approval by Triples, as the sole holder of the Variable Multiple
Voting Shares, voting separately as a class. Kingdom, Cascade and Triples
have agreed to vote their Limited Voting Shares and Variable Multiple Voting
Shares to approve the Arrangement Transaction. The Arrangement Transaction
also will require approval by a simple majority of the votes cast by holders
of Limited Voting Shares, other than Mr. Sharp, Kingdom, Cascade, their
respective directors and senior officers and any other "related parties",
"interested parties" and "joint actors". In addition, the Arrangement Transaction
will require approval by the Ontario Superior Court of Justice. The Arrangement
Transaction also will be subject to certain other customary conditions,
including receipt of a limited number of regulatory approvals. The transaction
is not subject to any financing condition, and FSHI has been advised that
commitments for the required debt financing have been received. FSHI has
received from Cascade and Kingdom a limited guaranty of certain obligations
of FS Acquisition Corp. (the "Purchaser"), the newly-formed company that
is the purchaser under the Acquisition Agreement. There are certain risks
inherent in the Arrangement Transaction which are described in the management
information circular prepared in connection with the special meeting of
shareholders, a copy of which will be available as part of FSHI's public
filings at www.sedar.com and www.sec.gov. Among other things, there are
risks that the parties will not proceed with the Arrangement Transaction,
that the ultimate terms of the Arrangement Transaction will differ from
those that currently are contemplated, and that the Arrangement Transaction
will not be successfully completed for any reason (including the failure
to obtain the required approvals or clearances from regulatory authorities).
Copies of the Acquisition Agreement and certain related
documents have been filed with Canadian securities regulators and with
the United States Securities and Exchange Commission and will be available
at the Canadian SEDAR website at www.sedar.com and at the U.S. Securities
and Exchange Commission's website at www.sec.gov. The management information
circular in connection with the special meeting of shareholders to consider
the Arrangement Transaction is currently expected to be mailed to shareholders
on or about the week of March 12, 2007.
It is anticipated that the Arrangement Transaction, if
approved by shareholders, will be completed in the second quarter of 2007.
Given the current Arrangement Transaction, it is likely
there will be no annual meeting and therefore no management information
circular in connection therewith. As a result, some of the items usually
included in the management information circular for the annual meeting
will instead be included in the annual information form this year.
This Management's Discussion and Analysis ("MD&A")
for the year ended December 31, 2006 is provided as of March 9, 2007. It
should be read in conjunction with the consolidated financial statements
including the notes thereto and the Annual Information Form for the year
ended December 31, 2006. All amounts disclosed in this MD&A (including
amounts for prior periods) are in US dollars unless otherwise noted. Our
consolidated financial statements are prepared in accordance with Canadian
generally accepted accounting principles ("GAAP").
This MD&A generally reflects the historical operations
of FSHI as a public entity and is generally drafted from the perspective
of FSHI as a continuing public entity.
Endnotes can be found at the end of
this document.
Business of Four Seasons
Four Seasons is one of the world's leading managers of
luxury hotels and resorts. We endeavour to offer business and leisure travelers
the finest accommodations and experiences beyond compare in each destination
in which we operate.
Four Seasons has a portfolio of 74 luxury hotel and resort
properties (containing approximately 18,090 guest rooms), several of which
include a residential component. These properties are operated primarily
under the Four Seasons brand name in principal cities and resort destinations
in 31 countries in North America, the Caribbean, Europe, Asia, Australia,
the Middle East and South America. In addition, 30 properties are under
construction or development around the world including properties in a
further 13 countries. Of these, 20 new properties are to include a residential
component.
Objectives
Our core strategic goal as a public company is to be recognized
as the undisputed global leader in luxury lodging. Supporting that goal
are the following strategic objectives:
- Create guest experiences
beyond compare so that we are first choice
for luxury
travelers.
- Maintain and enhance
our unique culture based on treating all others
- partners,
guests and employees - the way we would want to be
treated.
- Provide economic returns
that are acceptable to our hotel owners to
sustain our
portfolio and generate new opportunities.
- Protect and enhance
the value of Four Seasons reputation and brand
name globally.
- Generate premium shareholder
returns over the long-term.
Set out below are key financial and growth objectives
that have been and continue to guide us as a public company:
Revenue Growth:
- Achieve
leading RevPAR(1) results in each of the hotels and
resorts we manage.
- Produce
leading profitability performance in each of the hotels
and resorts we manage.
- Identify
and secure new development opportunities in destinations
and locations that meet the needs of our international guest base.
- Successfully
open an average of six to eight new projects per year
over the long-term.
- Be
the first choice for existing and new capital partners for
luxury hotel development.
- Generate
top-tier management revenue growth through improved
results at properties under management and through the addition of
new properties under management.
Cost Management:
- Control
general and administrative expenses to increase operating
earnings before other items.
- Minimize
exposure to short-term fluctuations in foreign exchange
rates on operating results.
Capital Allocation:
- Achieve
over the long-term an average return on capital employed
in excess of our long-term cost of capital.
- Maintain
a strong balance sheet and a low cost of capital.
- Deploy
the majority of our annual operating cash flow to obtain
and enhance management opportunities that expand the Four Seasons
brand and further improve the overall liquidity of the Company.
- Divest
equity investments or advances when appropriate
opportunities arise, to allow previously committed capital to be
made available for new investments or enhanced management or
royalty opportunities.
- Maintain
a prudent risk profile when investing our cash.
In achieving our key financial and growth objectives,
we seek to balance any associated risk. See "Operating Risks" for a description
of the risks inherent in our business.
ADD: /FIRST ADD - TO396 - Four Seasons Hotels and Resorts/
Our Business Model
We have two operating segments: (i) management operations,
and (ii) ownership operations.
Management Operations
Our strategy has been to focus on hotel management rather
than ownership, and we are principally a management company. We generally
manage our hotels and resorts on behalf of our property owners pursuant
to separate management agreements for each property. Under our management
agreements, we generally oversee, as agent for the property owner, all
aspects of the day-to-day operations of the hotels and resorts, including
sales and marketing, advertising, reservations, accounting, purchasing,
budgeting and the hiring, training and supervising of staff. In addition,
we generally provide owners with advice with respect to information technology
systems and development of certain database applications, as well as, advice
with respect to the design, construction and furnishing of new or renovated
hotels, resorts and residences. We also provide a centralized purchasing
system for goods. We generally perform these services within the guidelines
contained in annual hotel operating and capital plans that are submitted
to the owners of the hotels and resorts during the last quarter of the
preceding year for their review and approval. For providing these services,
we generally receive a variety of fees, including hotel management fees
(comprised of a base fee and an incentive fee); we also receive other fees
(including royalty and management fees from our residential business, fees
we earn during the development of our hotels and resorts and other miscellaneous
fees) and reimbursed costs(2) (including a sales and marketing charge,
an advertising charge and a reservation charge).
Our base fees are dependent on total revenues of all
managed hotels and resorts, which consist of rooms, food and beverage,
and other revenues. Our base fees are typically earned as a percentage
of total revenues for each property under management. RevPAR, which relates
to room revenues and does not represent total revenue of a property, provides
a strong indication of changes in revenues from properties under management
and is a commonly used indicator of market performance for hotels and resorts.
Our incentive fees are typically earned based on the
profitability of each property that we manage, but may vary depending on
the specific terms of the relevant management agreement. Gross operating
profit(3) changes at the hotels and resorts provide an indication of the
change in each property's profitability. However, due to the variations
in the calculation of incentive fees in our management agreements, there
is not always a direct link between changes in gross operating profit and
changes in incentive fees.
We receive royalty fees for the use of our name in association
with the sale of Four Seasons branded real estate. These royalties are
typically based on the sales proceeds of the residences sold. We also manage
Four Seasons branded and serviced residential projects pursuant to management
agreements under which we oversee the management of the day-to-day operations
of the completed projects in return for ongoing management fees from the
owners of interests in these projects.
In order to expand our portfolio of properties under
management, we make investments in the form of long-term receivables, minority
equity investments and investments in management contracts. In determining
whether to make these investments, we consider the overall expected returns
to us, including the expected management operations revenue. These investments
must meet our financial criteria and have a manageable risk profile. We
consider whether the structure should be in the form of an investment or
an advance, and, among other things, the relative risk and returns of the
investment or advance, including interest, dividends and fee income. We
generally seek to limit our total long-term capital exposure to no more
than 20% of the total equity required for a property. We generally structure
our equity investments to be able to have our equity interest diluted if
additional capital is required. Depending on the nature of the investment
or advance, it will be classified on our consolidated balance sheet as
"Long-term receivables", "Investments in hotel partnerships and corporations",
or "Investment in management contracts".
General and administrative expenses are incurred by us
to provide management services, together with those items normally associated
with corporate overhead, such as operations, finance, information technology,
accounting, legal, development and other costs of maintaining the corporate
offices. Reimbursed costs, representing the sales, marketing, advertising
and central reservation expenses, are generally incurred on a cost-recovery
basis to us and are a function of the number of hotels and resorts we manage.
Ownership Operations
As a result of our strategy to focus on hotel management,
the ownership operating segment represents our remaining (and primarily
minority) interests in hotels and resorts. Our earnings from ownership
operations include the consolidated results of our 100% leasehold interest(4)
in Four Seasons Hotel Vancouver and results for The Pierre for the first
six months of 2005. In June 2005, we disposed of our interest in The Pierre
and ceased managing the property on June 30, 2005, leaving Four Seasons
Hotel Vancouver as our one remaining leasehold interest and the only remaining
hotel whose results we consolidate. In addition, we include in ownership
operations profit distributions from our other ownership interests relating
to minority equity positions. Other ownership interests are discussed under
"Balance Sheet Review and Analysis - Investments in Hotel Partnerships
and Corporations".
Our investment strategy as a public company is not to
hold any majority investments in hotels and resorts. However, Four Seasons
Hotel Vancouver is a long-term leasehold interest that was established
at an earlier stage in our development. We currently believe that we will
operate the Vancouver hotel under the existing lease agreement, until its
expiry on January 31, 2020.
Overview of 2006
During 2006, worldwide travel demand remained robust,
and the operating results at the hotels and resorts under our management
reflect this travel trend. We realized RevPAR growth, primarily as a result
of improvements in achieved room rates in each of the regions in which
we operate. Gross operating margins(5) at the hotels and resorts under
our management also improved in 2006 as a result of revenue improvements
at the hotels and resorts and effective cost management programs. There
was some variation in performance among the regions in which we operate,
with the properties in Europe and Middle East/Africa achieving the strongest
performance.
We are pleased with the growth in hotel management fee
revenues in 2006, which reflects the strong operating results achieved
at our Core Hotels(6) and improvements at the recently opened hotels (which
are excluded from our Core Hotel statistics). Base fees increased generally
in line with RevPAR improvements, and the strong growth in incentive fees
is consistent with the improvement in gross operating profits at the hotels
and resorts under our management.
Royalty fees from our residential business increased
in 2006, primarily as a result of increased revenues from the sale of residential
units in Miami, Punta Mita and Costa Rica. Royalty fees are earned on the
sale of residences and, as a result, vary based on the number and nature
of residences sold in a given period.
Our cost base is relatively small. We directly employ
approximately 515 employees, the majority of whom are located in Toronto.
We also have corporate offices in Geneva and Singapore and have 15 sales
offices around the world. Of these corporate employees, almost half are
devoted to sales and marketing activities (including our worldwide reservations
service), the cost of which is reimbursed by the hotels and resorts that
we manage.
During 2006, we substantially completed an addition to
our Toronto corporate office, which allowed us to centralize our Toronto-based
staff in one location from three facilities. In addition to improving communication
and efficiency, we believe this centralization should allow us to realize
certain cost reducing synergies over time. On a Canadian dollar basis,
during 2006, our general and administrative expenses, which are incurred
primarily in Canadian dollars, increased modestly. Our costs increased
on a US dollar basis due to the US dollar having declined relative to the
Canadian dollar on a year-over-year basis. During late 2005 and through
2006, we purchased foreign exchange forward contracts to moderate the impact
of changes in foreign currency rates over time. However, the impact of
foreign currency rate movements cannot be completely eliminated.
Revenues from hotel ownership declined, primarily as
a result of the disposition of The Pierre mid-year 2005. With the disposition
of The Pierre, we achieved a significant milestone in our long-term strategic
objective as a public company of reducing exposure to hotel ownership and
the associated potentially volatile impact on earnings caused by, among
other things, business cycles, seasonality and event risk.
In November 2006, we announced that our Board of Directors
had received a proposal to pursue a transaction through which FSHI would
be taken private. The Board of Directors established a special committee
of independent directors to consider the proposed transaction and make
recommendations to the Board. In connection with this proposal, and the
resulting process leading to the execution of the acquisition agreement,
we incurred in 2006 certain costs primarily relating to legal fees, financial
advisory and consulting services, and certain filing fees (during the three
months ended December 31, 2006, we incurred $3.4 million of expenses).
Please see the "Subsequent Event" section.
In 2006, as the result of the sales of our ownership
interests in the Four Seasons hotels in London, Sydney and Aviara, we were
repaid loans, accrued interest and investments, and after deducting transaction
costs, received cash and promissory notes totalling $100.6 million. In
each case we retained long-term management of these properties. In addition,
during 2006 we opened new properties in the Golden Triangle (Thailand),
Silicon Valley, Maldives, Lana'i and Westlake Village. Since the beginning
of 2006, we added 11 new Four Seasons projects to our list of properties
under construction or advanced stages of development, including new projects
in Shanghai, Macau and Barbados.
Operational and Financial Review and Analysis
Hotel and Resort Operating Results
Consistent with industry practices, we track RevPAR on
a US dollar basis, and all numbers noted below reflect that practice unless
otherwise noted. For the full year 2006, RevPAR of our worldwide Core Hotels
increased 11.8%, as compared to 2005, reflecting improvements in each of
the regions in which we manage hotels and resorts. The increase in RevPAR
was attributable to a 10.6% improvement in achieved room rates and a 70
basis point increase in occupancy. For the three months ended December
31, 2006, RevPAR for our worldwide Core Hotels increased 13.9%, as compared
to the same period in 2005. This increase was primarily attributable to
an 11.9% improvement in achieved room rates and a 110 basis point increase
in occupancy.
Gross operating revenues of our worldwide Core Hotels
increased 10.5% and 14.0% for the full year and fourth quarter of 2006,
respectively, as compared to the same periods in 2005. The improvements
in revenue, combined with continued cost management efforts at the properties
under our management, resulted in an 18.2% and 220 basis point increase
in gross operating profits and gross operating margins, respectively, for
the full year ended December 31, 2006. For the three months ended December
31, 2006, gross operating margins of our worldwide Core Hotels increased
310 basis points to 32.5%, as compared to 29.4% in the same period in 2005.
With respect to our Core Hotels, the United States represents
the most significant geographic area to us, with 49.6% of revenues under
management for the full year 2006, followed by Europe (16.7%), Other Americas/Caribbean
(14.7%), Asia/Pacific (12.8%), and the Middle East (6.2%). The following
tables highlight our results of operations for our Core Hotels in each
of these regions.
United States Region
-------------------------------------------------------------------------
Results for periods in 2006, as compared to periods in 2005
-------------------------------------------------------------------------
Gross Gross
Operating Operating Gross
Operating
RevPAR Revenue (GOR) Profit (GOP)
Margin
---------------------------------------------------------------
Percentage Percentage Percentage
Basis Point
$ Increase Increase
Increase Margin Improvement
-------------------------------------------------------------------------
Fourth
Quarter 298
8.4% 10.2%
17.9% 30.2%
190
-------------------------------------------------------------------------
Full
Year
299 10.2%
9.8% 16.8%
30.4% 180
-------------------------------------------------------------------------
In the fourth quarter of 2006, RevPAR increased 8.4%, which was
primarily attributable to increases in achieved room rates at
the majority of the Core Hotels in the region. In addition,
certain of the Core Hotels, including properties in Jackson
Hole, Miami, Palm Beach and Philadelphia, experienced strong
improvements in occupancy. The only Core Hotel in the region
that had a significant decline in occupancy and RevPAR was our
property in Maui, which is undergoing a renovation. As a result
of improvements in RevPAR, gross operating profits and gross
operating margins increased 17.9% and 190 basis points,
respectively, during the fourth quarter of 2006. Excluding the
results from the resort under management in Maui, RevPAR would
have increased 12.2% and gross operating profits and gross
operating margins would have increased 25.8% and 310 basis
points, respectively, during the fourth quarter of 2006 as
compared to the same period in 2005.
For the full year 2006, virtually all of the properties under
management in the region realized RevPAR improvements. The
increases in RevPAR for 2006 were attributable to a 9.3%
increase in achieved room rates as overall occupancy levels
were essentially unchanged in this region. Properties under
management in Austin, Los Angeles (Beverly Wilshire), New York,
Philadelphia, Houston and Palm Beach realized particularly
strong improvements in RevPAR, relative to the average for the
region. RevPAR for the full year 2006 for the region increased
10.2% over 2005. In addition, for the full year 2006, gross
operating profits and gross operating margins improved 16.8%
and 180 basis points, respectively, as compared to 2005. This
improvement was primarily attributable to a 9.8% increase in
gross operating revenues mostly resulting from the RevPAR
increase in the region. Excluding the results from our resort
under management in Maui, RevPAR would have increased 11.1% and
gross operating margins would have increased 220 basis points
during the full year 2006.
-------------------------------------------------------------------------
Other Americas/Caribbean Region
-------------------------------------------------------------------------
Results for periods in 2006, as compared to periods in 2005
-------------------------------------------------------------------------
Gross Gross
Operating Operating Gross
Operating
RevPAR Revenue (GOR) Profit (GOP)
Margin
---------------------------------------------------------------
Percentage Percentage Percentage
Basis Point
$ Increase Increase
Increase Margin Improvement
-------------------------------------------------------------------------
Fourth
Quarter 237
14.6% 17.0%
36.3% 26.7%
380
-------------------------------------------------------------------------
Full
Year
243 12.6%
12.0% 17.5%
27.8% 140
-------------------------------------------------------------------------
In the fourth quarter of 2006, all of the properties under
management in the region experienced increases in RevPAR with
the exception of Four Seasons Hotel Buenos Aires, which had
essentially unchanged occupancy and achieved room rates. On a
local currency basis RevPAR increased 13.1%. Properties under
management in Costa Rica, Mexico City and Punta Mita had
particularly strong improvements relative to the average for
the region. As a result of improvements in RevPAR, gross
operating profits and gross operating margins increased 36.3%
and 380 basis points, respectively, in the fourth quarter of
2006, as compared to the same period in 2005.
For the full year 2006, the 10.7% improvement in RevPAR, on a
local currency basis, was primarily attributable to a 10.3%
increase, on a local currency basis, in achieved room rates.
For the full year 2006, all of the properties under management
in the region experienced improvements in RevPAR with the
exception of Four Seasons Resort Nevis, which experienced a
decline in occupancy from late in the second quarter of 2006
through to early in the fourth quarter of 2006, due to travel
concerns related to weather. Overall, the improvements in
RevPAR led to increases in gross operating profits and gross
operating margins of 17.5% and 140 basis points, respectively,
as compared to 2005. Properties under management in Costa Rica
and Punta Mita had particularly strong improvements in RevPAR
and gross operating profits, as compared to the averages for
the region.
-------------------------------------------------------------------------
Europe Region
-------------------------------------------------------------------------
Results for periods in 2006, as compared to periods in 2005
-------------------------------------------------------------------------
Gross Gross
Operating Operating Gross
Operating
RevPAR Revenue (GOR) Profit (GOP)
Margin
---------------------------------------------------------------
Percentage Percentage Percentage
Basis Point
$ Increase Increase
Increase Margin Improvement
-------------------------------------------------------------------------
Fourth
Quarter 381
24.9% 18.1%
27.1% 31.9%
230
-----------------------------------------------------------------------
Full
Year
398 18.9%
10.5% 18.1%
33.7% 220
-------------------------------------------------------------------------
All of the Core Hotels in the region experienced RevPAR
improvement in the fourth quarter of 2006, with the exception
of Four Seasons Resort Provence at Terre Blanche, which had
strong achieved room rate improvement that was offset by a
reduction in occupancy. On a local currency basis, RevPAR
increased 16.0%, reflecting an 11.8% increase in achieved room
rates in local currency and a 20.4% increase in achieved room
rates on a US dollar basis. Gross operating profits and gross
operating margins increased 27.1% and 230 basis points,
respectively, in the fourth quarter of 2006, as compared to the
same period in 2005. This increase was primarily a result of
strong RevPAR, revenue and operational improvements at the Four
Seasons properties in Paris, London, Prague, Dublin and Milan.
All of the Core Hotels in the region experienced RevPAR
improvements for the full year 2006. The properties in Lisbon,
London and Terre Blanche had particularly strong RevPAR results
relative to the regional average. On a local currency basis,
RevPAR increased 17.5%, reflecting a 10.2% increase in achieved
room rates on a local currency basis and an 11.6% increase in
achieved room rates on a US dollar basis. Gross operating
profits and gross operating margins increased 18.1% and 220
basis points, respectively, for the full year 2006, as compared
to the same period in 2005. Many of the properties in the
region had strong improvement in gross operating margins,
including properties in Budapest, Istanbul, Lisbon and Paris.
The improvements in gross operating profits and gross operating
margins for the region were offset in part by the impact on the
profitability performance at the Four Seasons Hotel Dublin,
which was undergoing a conversion of 62 hotel rooms into
residential units that is now complete.
-------------------------------------------------------------------------
Middle East Region
-------------------------------------------------------------------------
Results for periods in 2006, as compared to periods in 2005
-------------------------------------------------------------------------
Gross Gross
Operating Operating Gross
Operating
RevPAR Revenue (GOR) Profit (GOP)
Margin
---------------------------------------------------------------
Percentage Percentage Percentage
Basis Point
$ Increase Increase
Increase Margin Improvement
-------------------------------------------------------------------------
Fourth
Quarter 191
41.7% 34.8%
81.2% 50.9% 1,300
-----------------------------------------------------------------------
Full
Year
179 25.3%
24.5% 41.3%
50.5% 600
-------------------------------------------------------------------------
In the Middle East region, all of the properties under
management had improvements in RevPAR in the fourth quarter of
2006, which were driven primarily by a 36.4% increase in
achieved room rates, as compared to the same period in 2005.
Four Seasons Hotel Riyadh and Four Seasons Hotel Cairo at Nile
Plaza had particularly strong improvements in RevPAR, as
compared to the average for the region. On a local currency
basis, RevPAR and achieved room rates improved 40.4% and 35.1%,
respectively, in the fourth quarter of 2006, as compared to the
same period in 2005. Gross operating profits and gross
operating margins increased significantly in the fourth quarter
of 2006, reflecting the strong operational performance in the
region.
For the full year 2006, the 25.3% improvement in RevPAR was
attributable to a 21.8% increase in achieved room rates and
a 200 basis point improvement in occupancy, as compared to
2005. During the full year 2006, all of the properties under
management in the region had RevPAR improvements, with the
exception of Four Seasons Resort Sharm el Sheikh. In Sharm el
Sheikh, RevPAR was essentially unchanged as a result of a
decline in occupancy, as demand was adversely affected during
the early part of 2006 as business continued to recover from
three terrorist bombings in the prior 18 months. On a local
currency basis, RevPAR and achieved room rates for the region
improved 23.8% and 20.3%, respectively, for the full year 2006
as compared to the same period in 2005. Also for the full year
2006, gross operating profits and gross operating margins
improved 41.3% and 600 basis points, respectively, from 2005,
as all of the properties under management in the region had
stronger operating results, with the exception of the resort in
Sharm el Sheikh, where profitability was essentially unchanged
for the reason noted above.
-------------------------------------------------------------------------
Asia/Pacific Region
-------------------------------------------------------------------------
Results for periods in 2006, as compared to periods in 2005
-------------------------------------------------------------------------
Gross Gross
Operating Operating Gross
Operating
RevPAR Revenue (GOR) Profit (GOP)
Margin
---------------------------------------------------------------
Percentage Percentage Percentage
Basis Point
$ Increase Increase
Increase Margin Improvement
-------------------------------------------------------------------------
Fourth
Quarter 150
11.9% 12.0%
19.9% 38.8%
250
-----------------------------------------------------------------------
Full
Year
135 5.0%
5.5% 10.9%
34.8% 170
-------------------------------------------------------------------------
In the Asia/Pacific region, RevPAR increased 11.9% in the
fourth quarter of 2006, as compared to the same period in 2005.
On a local currency basis, RevPAR improved 7.0% for the fourth
quarter of 2006. Achieved room rates in the fourth quarter of
2006 improved 10.6% (5.8% on a local currency basis), as
compared to the same period in 2005. Virtually all of the
properties in the region experienced RevPAR improvements, with
the exception of the properties in Bangkok and Chiang Mai,
where occupancy levels declined due to political unrest. In
particular, the properties under management in Bali, Singapore
and Sydney had strong RevPAR improvements relative to the other
properties in the region. The Bali properties showed strong
occupancy improvements in the fourth quarter of 2006, compared
to the results earlier in the year, and increased significantly
over the same period last year. During the fourth quarter of
2006, gross operating profits and gross operating margins
improved 19.9% and 250 basis points, respectively. Excluding
the impact of the properties in Bangkok and Chiang Mai, which
had reduced profitability related to the decline in RevPAR,
gross operating profits and gross operating margins would have
increased 26.3% and 380 basis points, respectively.
For the full year 2006, RevPAR improved 5.0% on a US dollar
basis and 3.6% on a local currency basis, as compared to 2005.
This improvement was attributable to a 6.9% increase in
achieved room rates (5.5% on a local currency basis). The
majority of the properties in the region had RevPAR
improvements for the full year. The most notable exceptions
were the properties under management in Bali, where the market
was continuing a gradual recovery from the impact of terrorist
bombings and did not show strong occupancy improvements until
the fourth quarter of 2006. For the full year 2006, gross
operating profits and gross operating margins for the region
improved 10.9% and 170 basis points, respectively, as compared
to 2005 mainly due to strong profitability improvements at the
properties under management in Singapore and Shanghai.
-------------------------------------------------------------------------
For our 2006 to 2005 comparisons, 56 of our 73 properties
were considered Core Hotels, as compared to 51 of 68 properties for our
2005 to 2004 comparisons. Of the properties not considered Core Hotels
for 2006 to 2005, three properties, Four Seasons Resort Maldives at Kuda
Huraa, Four Seasons Biltmore Resort Santa Barbara and Four Seasons Hotel
Washington, were not included as they were undergoing extensive renovations.
We have opened 12 new properties over the course of 2005 and 2006 (Four
Seasons Hotel Hampshire, Four Seasons Resort Langkawi, Four Seasons Hotel
Doha, Four Seasons Hotel Hong Kong, Four Seasons Resort Lana'i at Manele
Bay, Four Seasons Hotel Geneva, Four Seasons Hotel Damascus, Four Seasons
Tented Camp Golden Triangle, Four Seasons Hotel Silicon Valley, Four Seasons
Resort Maldives at Landaa Giraavaru, Four Seasons Resort Lana'i the Lodge
at Koele and Four Seasons Hotel Westlake Village). The results from these
properties are not included in the comparison of Core Hotels from 2006
to 2005 because they were not open during both 2005 and 2006. In addition,
Regent Taipei and Regent Kuala Lumpur are excluded from the comparisons
in both years. For our 2005 to 2004 comparisons, four properties (Four
Seasons Resort Maldives at Kuda Huraa, Four Seasons Biltmore Resort Santa
Barbara, Four Seasons Resort Scottsdale at Troon North and Four Seasons
Hotel Washington) were undergoing extensive renovations during 2005, and
11 properties had not been under management during both 2005 and 2004 and
thus were not included as Core Hotels.
At December 31, 2006, we had approximately 18,025 total
rooms under management, as compared to approximately 17,300 rooms as at
December 31, 2005.
-------------------------------------------------------------------------
Approximate number of rooms
under management
As at December 31,
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
United States
7,445 6,845
-------------------------------------------------------------------------
Other Americas/Caribbean
2,165 2,165
-------------------------------------------------------------------------
Europe
1,960 1,960
-------------------------------------------------------------------------
Middle East
1,735 1,740
-------------------------------------------------------------------------
Asia/Pacific
4,720 4,590
-------------------------------------------------------------------------
18,025(i) 17,300
-------------------------------------------------------------------------
---------------------------
(i) Since December
31, 2006, we have commenced management of Four
Seasons Resort Koh Samui, Thailand, which has approximately 65
rooms. This property is not reflected in this table.
For the full year 2006, total revenues of all managed
hotels and resorts were approximately $2.9 billion, as compared to $2.6
billion in 2005, representing an increase of 15.0%. In the three months
ended December 31, 2006, hotel and resort total revenues increased 18.5%
to $801.6 million, as compared to $676.7 million for the same period in
2005. The increases in total revenues of all managed hotels and resorts
were due to increased revenues at existing hotels as a result of general
improvements in travel trends and due to an increase in revenues from recently
opened hotels and resorts.
Company Operating Results
Revenues
-------------------------------------------------------------------------
Years ended Dollar Percentage
(in millions of dollars)
December 31, Change
Change
-------------------------------------------------------------------------
2006 over 2006 over
2006 2005
2005 2005
-------------------------------------------------------------------------
Hotel management fees
Base
$ 83.8 $ 73.7 $
10.1 13.7%
Incentive
40.0 27.1
12.9 47.7%
-------------------------------------------------------------------------
Subtotal
123.8 100.8
23.0 22.8%
-------------------------------------------------------------------------
Other fees
17.5 14.0
3.5 24.7%
-------------------------------------------------------------------------
Subtotal
141.3 114.8
26.5 23.1%
-------------------------------------------------------------------------
Hotel ownership revenues
33.4 65.5
(32.1) (49.0)%
-------------------------------------------------------------------------
Reimbursed costs
78.7 68.0
10.7 15.7%
-------------------------------------------------------------------------
Total revenues
$ 253.4 $ 248.3 $
5.1 2.0%
-------------------------------------------------------------------------
--------------------------------------------
-------------------------------------------------------------------------
Three months
ended Dollar
Percentage
(in millions of dollars)
December 31, Change
Change
-------------------------------------------------------------------------
2006 over 2006 over
2006 2005
2005 2005
-------------------------------------------------------------------------
Hotel management fees
Base
$ 22.4 $ 19.2 $
3.2 16.6%
Incentive
10.8 6.0
4.8 79.9%
-------------------------------------------------------------------------
Subtotal
33.2 25.2
8.0 31.7%
-------------------------------------------------------------------------
Other fees
4.2 4.1
0.1 3.9%
-------------------------------------------------------------------------
Subtotal
37.4 29.3
8.1 27.9%
-------------------------------------------------------------------------
Hotel ownership revenues
8.6 7.5
1.1 15.0%
-------------------------------------------------------------------------
Reimbursed costs
23.7 21.7
2.0 9.1%
-------------------------------------------------------------------------
Total revenues
$ 69.7 $ 58.5 $
11.2 19.3%
-------------------------------------------------------------------------
--------------------------------------------
Hotel Management
Fees
The increases in hotel management fees for the year ended
and three months ended December 31, 2006 were the result of the improvements
in revenues and gross operating profits at the worldwide Core Hotels, resulting
primarily from RevPAR and other revenue increases, as well as fees from
new properties and increases in reimbursed costs.
Base Fees
Base fees increased $10.1 million (from $73.7 million
to $83.8 million) for the year ended December 31, 2006, as compared to
2005. Of this increase, base fees from Core Hotels contributed $6.5 million
or 64.4% of the increase. The increase in base fees from Core Hotels in
2006 represented a 9.7% increase over the base fees generated from Core
Hotels in 2005. Properties that opened in 2005 and 2006 contributed base
fees of $6.3 million and $1.7 million in 2006 and 2005, respectively. The
$10.1 million increase in base fees in 2006 reflects a $1.8 million reduction
in base fees as a result of properties that we managed in 2005 no longer
being under management in 2006.
Base fees increased $3.2 million (from $19.2 million
to $22.4 million) for the three months ended December 31, 2006, as compared
to the three months ended December 31, 2005. Of the $3.2 million increase
in base fees, base fees from Core Hotels contributed $2.0 million or 63.6%
of the increase. The increase in base fees from Core Hotels in the three
months ended December 31, 2006 represented an 11.8% increase over the fees
generated from Core Hotels in the same period in 2005. Properties that
opened in 2005 and 2006 contributed base fees of $1.8 million and $1.1
million in the three months ended December 31, 2006 and 2005, respectively.
The $3.2 million increase in base fees in the three months ended December
31, 2006 reflects a $0.2 million reduction in base fees as a result of
properties that we managed in 2005 that we no longer managed in 2006.
Incentive Fees
For the full year 2006, incentive fees increased $12.9
million, as compared to 2005. Incentive fees contributed 32.4% of the total
hotel management fee revenues for the full year 2006, as compared to 26.9%
for the full year 2005. The increase was attributable to improvements in
each of the regions we operate, with the strongest improvement being in
the Middle East. The incentive fees earned from properties that opened
in 2005 and 2006 represented $4.3 million of the increase in incentive
fees. Due to a one-time charge at the properties under our management related
to the transition of the retirement benefit plan (see "Other Income (Expenses),
Net" - "Retirement Benefit Plan" below) during the three months ended December
31, 2005, incentive fees that year were reduced by approximately $1.0 million.
We have the ability to earn incentive fees in virtually all(7) of the hotels
and resorts that we manage. In 2006, incentive fees were earned under 49
of our 73 management agreements, as compared to 45(8) of our 68 management
agreements in 2005.
For the three months ended December 31, 2006, incentive
fees increased $4.8 million, as compared to the same period in 2005. As
mentioned above, due to a one-time charge at the properties under our management
related to the transition of the retirement benefit plan in the three months
ended December 31, 2005, incentive fees in the three months ended December
31, 2005 were reduced by $1.0 million. The incentive fees earned from properties
that opened in 2005 and 2006 represented $1.1 million of the increase.
Incentive fees were earned from 47 of the 73 hotels and resorts under management
for the three months ended December 31, 2006, as compared to 37 of the
68 hotels and resorts under management in 2005.
Other Fees
For the year ended December 31, 2006, other fees increased
24.7% ($3.5 million), to $17.5 million, as compared to 2005. The increase
was attributable to a $2.6 million increase in residential fees primarily
related to an increase in royalty fees as a result of a larger number of
residential sales closing and a $0.9 million increase in other miscellaneous
fees. For the three months ended December 31, 2006, other fees increased
3.9% ($0.1 million), to $4.2 million.
Hotel Ownership Revenues
We have a 100% leasehold interest in the Four Seasons
Hotel Vancouver and, as a result, we consolidate the results of that hotel.
During the first half of 2005, we also had a 100% leasehold interest in
The Pierre and consolidated the results of that property. We assigned the
lease of The Pierre to a third party at the end of June 2005 and, as a
result, we ceased to consolidate that property at that time. Our investment
strategy as a public company is not to hold any majority interests in properties.
However, Four Seasons Hotel Vancouver is a long-term leasehold interest
that was established at an earlier stage in our development and we expect
that we will continue to operate this property under the terms of the current
lease, which expires January 31, 2020.
We have seven units of residential inventory at two resorts,
which we acquired with the intent to resell at our book value cost during
the next several years as a combination of fractional and whole home ownership
residences. We do not intend for this ownership to be an ongoing business
activity and expect, over time, the costs related to the sales process
to be approximately equal to the proceeds from the sale of these units.
The revenue associated with the sales of these units is included in hotel
ownership revenues, and the cost of the sales is included in hotel ownership
cost of sales and expenses. During the year ended and the three months
ended December 31, 2006, we sold residential inventory for gross proceeds
of $2.2 million and $0.8 million, respectively (nil proceeds for both periods
in 2005).
For the full year 2006, the decline in hotel ownership
revenue was primarily related to our owning and consolidating 100% of The
Pierre during the first six months of 2005 and our not owning and not consolidating
it during any part of 2006. Hotel ownership revenue for full year 2006
relates primarily to the Four Seasons Hotel Vancouver. Revenue at that
property increased 19.2% during 2006 compared to 2005, as the result of
strong occupancy and rate increases at that property and the decline in
the US dollar relative to the Canadian dollar, as Canadian dollar revenue
from the property was translated into US dollars (on a Canadian dollar
basis, revenue increased 11.4%).
In the three months ended December 31, 2006, the increase
in hotel ownership revenue was primarily related to a 13.9% increase in
revenue from the Four Seasons Hotel Vancouver due to improved operating
results at that property and the decline in the US dollar relative to the
Canadian dollar, as Canadian dollar revenue from the property was translated
into US dollars (on a Canadian dollar basis, revenue increased 10.2%).
Reimbursed Costs
As described above under "Our Business Model", reimbursed
costs are incurred on a cost recovery basis to us and, as a result, we
analyze our management operations excluding reimbursed costs. For the year
ended and the three months ended December 31, 2006, reimbursed costs increased
$10.7 million and $2.0 million, respectively, as compared to the corresponding
periods in 2005. The increase in both the year ended and the three months
ended December 31, 2006 was due primarily to an increase in the number
of properties in the portfolio and increased costs related to increased
activity, as compared to the same periods in 2005.
Expenses
General and
Administrative Expenses
The majority of our general and administrative expenses
are incurred in Canadian dollars. For the year ended and the three months
ended December 31, 2006, general and administrative expenses (excluding
reimbursed costs) increased by 0.6% and 6.6%, respectively, on a Canadian
dollar basis, as compared to the same period in 2005. As reported in US
dollars, for the year ended December 31, 2006, general and administrative
expenses increased 7.4% to $62.4 million, from $58.1 million in the same
period of 2005. As reported in US dollars, for the three months ended December
31, 2006, general and administrative expenses increased 10.3% to $18.4
million, from $16.7 million in the same period of 2005. The greater increase
on a US dollar basis was attributable to the US dollar having declined
relative to the Canadian dollar.
Included in general and administrative expense is $2.3
million of stock option compensation expense for each of 2006 and 2005.
In addition, compensation expense of $3.0 million relating to share appreciation
rights issued pursuant to phantom equity agreements was included for the
full year 2006 (nil for 2005).
As noted, the majority of our general and administrative
expenses are incurred in Canadian dollars, while the majority of hotel
management fee revenues and cash balances are in US dollars. We also incur
Canadian dollar capital funding requirements, which are primarily attributable
to our corporate office expansion. Accordingly, in December 2005, we began
selling forward US dollars for conversion to Canadian dollars, to help
fix the cost of our Canadian dollar expenditures in US dollars. The foreign
exchange gains and losses arising from both the forward contracts settled
and the forward contracts outstanding as at December 31, 2006, are included
in "Other Income (Expenses), Net" and are discussed below.
Hotel Ownership Cost of Sales and Expenses
As discussed above, we consolidate 100% of the operations
of Four Seasons Hotel Vancouver and, until June 30, 2005, we also consolidated
the operations of The Pierre. Also as noted above, costs relating to the
sale of residential units are included in hotel ownership cost of sales
and expenses.
Hotel ownership cost of sales and expenses declined 51.3%
to $32.2 million in the year ended December 31, 2006, from $66.1 million
in the same period of 2005, primarily as a result of the operations of
The Pierre being consolidated until June 30, 2005, and not being consolidated
in the same period of 2006. Expenses at Four Seasons Hotel Vancouver increased
9.7% in the year ended December 31, 2006, primarily as a result of the
decline in the US dollar relative to the Canadian dollar, as the Canadian
dollar costs are translated into US dollars for reporting purposes. On
a Canadian dollar basis, expenses at Four Seasons Hotel Vancouver increased
2.5% in the year ended December 31, 2006. For the year ended December 31,
2006, costs relating to the sale of the residential units were $3.0 million.
Hotel ownership cost of sales and expenses increased
6.3% to $8.4 million for the three months ended December 31, 2006, from
$7.9 million in the same period of 2005, as a result of increased expenses
at Four Seasons Hotel Vancouver (primarily as a result of the decline in
the US dollar relative to the Canadian dollar, as the Canadian dollar costs
are translated into US dollars for reporting purposes) and costs relating
to the sale of the residential units. On a Canadian dollar basis, hotel
ownership cost of sales and expenses increased 2.8% in the three months
ended December 31, 2006.
Operating Earnings Before Other Items(9)
For the year ended December 31, 2006, operating earnings
before other items increased 42.7% to $80.1 million, as compared to $56.1
million in the same period in 2005. As a result of the items described
above, operating earnings before other items increased 57.8% to $19.3 million
in the three months ended December 31, 2006, as compared to $12.3 million
in the same period in 2005.
Depreciation and Amortization
For the year ended December 31, 2006, depreciation and
amortization was $14.6 million, as compared to $11.2 million for the year
ended December 31, 2005. For the three months ended December 31, 2006,
depreciation and amortization was $4.7 million, as compared to $2.7 million
for the same period in 2005. The increase in depreciation and amortization
for the year ended and three months ended December 31, 2006, as compared
to the same periods in 2005, was primarily attributable to an increase
of $3.3 million and $1.6 million, respectively, in the amortization of
our investment in The Ritz-Carlton Chicago management contract.
We have reached an agreement with the owner of The Ritz-Carlton
Chicago relating to the possible sale of that property by the owner to
a third party, and the potential cessation of our management of that property,
as well as the significant refurbishment of Four Seasons Hotel Chicago
(which is owned by an affiliated owner). These arrangements provide the
owner of The Ritz-Carlton Chicago with the option to terminate our management
prior to a sale of the property, and the obligation to terminate our management
upon a sale of the property. Under this arrangement we are entitled to
payments in connection with both a termination of our management of the
property and the owner's sale of the property. Although there is no certainty
as to the sale of the property or the date of termination of our management,
given the possibility it could occur in the near term, we amortized the
$3.3 million difference between the expected value of the payment to be
made on termination of our management and the book value of our investment
in this management contract, over the last half of 2006. We may subsequently
record a gain following a future sale of the property, depending on the
payments we actually receive.
Other Income (Expenses), Net
For the year ended December 31, 2006, other expenses,
net was $3.8 million, as compared to other expenses, net of $89.2 million
for the same period in 2005.
-------------------------------------------------------------------------
(in millions of dollars)
Years ended December 31,
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Costs related to pending
Arrangement Transaction
$ (3.4) $
0.0
-------------------------------------------------------------------------
Asset provisions and write-downs
(3.1) (32.3)
-------------------------------------------------------------------------
Foreign exchange gain (loss)
1.3 (24.6)
-------------------------------------------------------------------------
Unrealized swap derivative gain
0.8 0.0
-------------------------------------------------------------------------
Gain on disposition of assets
0.6 3.2
-------------------------------------------------------------------------
Loss on retirement benefit plan transition
0.0 (35.5)
-------------------------------------------------------------------------
Other expenses, net
$ (3.8) $ (89.2)
-------------------------------------------------------------------------
---------------------------
For the three months ended December 31, 2006, other income,
net was $3.2 million, as compared to other expenses, net of $56.8 million
for the same period in 2005.
-------------------------------------------------------------------------
Three months ended
(in millions of dollars)
December 31,
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Costs related to pending
Arrangement Transaction
$ (3.4) $
0.0
-------------------------------------------------------------------------
Asset provisions and write-downs
(2.7) (25.5)
-------------------------------------------------------------------------
Foreign exchange gain (loss)
7.9 (4.8)
-------------------------------------------------------------------------
Unrealized swap derivative gain
0.8 0.0
-------------------------------------------------------------------------
Gain on disposition of assets
0.6 9.0
-------------------------------------------------------------------------
Loss on retirement benefit plan transition
0.0 (35.5)
-------------------------------------------------------------------------
Other income (expenses),
net
$ 3.2 $
(56.8)
-------------------------------------------------------------------------
---------------------------
Costs Related
to Pending Arrangement Transaction
In November 2006, we announced that our Board of Directors
had received a proposal to pursue a transaction through which FSHI would
be taken private. The Board of Directors established a special committee
of independent directors to consider the proposed transaction and make
recommendations to the Board. In connection with this proposal, and the
resulting process leading to the execution of the acquisition agreement,
we incurred in 2006 certain costs primarily relating to legal fees, financial
advisory and consulting services, and certain filing fees (during the three
months ended December 31, 2006, we incurred $3.4 million of expenses).
Please see the "Subsequent Event" section.
Asset Provisions and Write-Downs
From time to time, we make investments in hotels and
resorts under our management in the form of loans, equity and investments
in management contracts in order to obtain long-term management agreements
in respect of these projects. In making these investments, we assess the
expected overall returns to Four Seasons, including the value created through
our long-term management agreements. However, for financial reporting purposes,
each discrete investment or component of an investment must be valued only
in relation to the cash flow that the particular investment or component
of an investment generates to Four Seasons, without regard to the ongoing
value of the management agreement.
For the year ended December 31, 2006, other expenses,
net, included $3.1 million relating primarily to a write-down on investments
in hotel partnerships and corporations. For the year ended December 31,
2005, other expenses, net, included an expense of $32.3 million relating
to the provision for, and the write-down of, certain assets, including
a provision for loss of $8.8 million on long-term receivables, a write-down
of $17.9 million on investments in hotel partnerships and corporations,
a write-down of $5.1 million on investment in management contracts and
a provision for other assets of $0.5 million.
For the three months ended December 31, 2006, other expenses
included $2.7 million relating primarily to a write-down on investments
in hotel partnerships and corporations. For the three months ended December
31, 2005, other expenses, net, included an expense of $25.5 million relating
to the provision for, and the write-down of, certain assets, including
a provision for loss of $8.8 million on long-term receivables, a write-down
of $15.9 million on investments in hotel partnerships and corporations,
a write-down of $0.6 million related to investment in management contracts
and a provision for other assets of $0.2 million.
Foreign Exchange
Other expenses, net for the year ended December 31, 2006
included a foreign exchange gain of $1.3 million, as compared to a foreign
exchange loss of $24.6 million for the year ended December 31, 2005. Other
income (expenses), net for the three months ended December 31, 2006 included
a foreign exchange gain of $7.9 million, as compared to a foreign exchange
loss of $4.8 million for the same period in 2005.
Foreign exchange gains and losses arose primarily from
the translation to Canadian dollars (using current exchange rates at the
end of each quarter) of our foreign currency-denominated net monetary assets,
which are not included in our designated foreign self-sustaining subsidiaries.
They also reflected local currency foreign exchange gains and losses on
net monetary assets incurred by our designated foreign self-sustaining
subsidiaries. Net monetary assets is the difference between our foreign
currency-denominated monetary assets and our foreign currency-denominated
monetary liabilities in each currency, and consist primarily of cash and
cash equivalents, accounts receivable, long-term receivables and short-term
and long-term liabilities, as determined under Canadian generally accepted
accounting principles. The foreign exchange gain during the year ended
and the three months ended December 31, 2006 and the foreign exchange loss
during the year ended and the three months ended December 31, 2005 resulted
primarily from the translation of our US dollar and British pound sterling
net monetary asset positions to Canadian dollars using the current exchange
rates at the end of each quarter.
Our US dollar net monetary asset position increased significantly
during the second quarter of 2005 as a result of entering into a currency
and interest rate swap agreement relating to our convertible senior notes.
The swap was designated as a fair value hedge of our convertible senior
notes. In December 2006, we terminated 80% of the notional amount of the
currency component of the swap and ceased hedge accounting on the remaining
portion of the currency component of the swap and on the interest component
of the swap. This is described below under "Liquidity and Capital Resources
- Convertible Notes".
As discussed above, we have entered into a program to
sell forward US dollars for Canadian dollars to help us to predict the
US dollar cost of our Canadian dollar general and administrative expenses
and Canadian dollar capital funding requirements. All our forward contracts
are being marked-to-market with the resulting changes in fair values being
recorded as a foreign exchange gain or loss. Other expenses, net included
a foreign exchange loss of $0.5 million and $1.8 million for the year ended
and the three months ended December 31, 2006, respectively, related to
the forward contracts. In 2005, foreign exchange loss of $0.1 million was
included in other expenses, net for the three months ended and year ended
December 31, 2005.
As at December 31, 2006, we had forward contracts in
place to sell forward $39.1 million of US dollars and receive Canadian
dollars at a weighted average exchange rate of 1.11 Canadian dollars to
a US dollar at various maturities extending to April 2008. On these outstanding
forward contracts, the marked-to-market loss for the three months ended
December 31, 2006 was $1.6 million, and the marked-to-market loss for the
year ended December 31, 2006 was $1.5 million. These amounts are included
in the $0.5 million foreign exchange loss for the year ended December 31,
2006 and $1.8 million foreign exchange loss for the three months ended
December 31, 2006, as noted above.
While this program of selling forward US dollars allows
us to better predict the cost in US dollars of the majority of our Canadian
dollar general and administrative expenses and capital funding requirements,
it will not eliminate the impact of foreign currency fluctuations related
to our management fees in currencies other than US dollars. It will also
not eliminate foreign currency gains and losses related to un-hedged net
monetary assets and liability positions. As such, our consolidated results
will continue to include gains and losses related to foreign currency fluctuations.
The impact of foreign currency gains and losses has been material in the
past and could continue to be material in the future.
The following table sets out the exchange rates obtained
from the Bank of Canada:
-------------------------------------------------------------------------
As at As at
Average
December 31, December 31, during
2005 2006
2006
-------------------------------------------------------------------------
US dollar to Canadian $1.00
0.8577 0.8581
0.8818
-------------------------------------------------------------------------
Pound sterling to Canadian $1.00
0.4991 0.4387
0.4788
-------------------------------------------------------------------------
Euro to Canadian $1.00
0.7244 0.6503
0.7024
-------------------------------------------------------------------------
Australian dollar to US $1.00
1.3630 1.2684
1.3275
-------------------------------------------------------------------------
Gain/Loss on
Disposition of Assets
Other expenses, net for the year ended December 31, 2006
included a net gain on the disposition of assets of $0.6 million. During
the three months ended December 31, 2006, the ownership interests in three
of the hotels under our management were sold. As a result of the sales,
we were repaid loans, accrued interest and investments, and after deducting
transaction costs, received cash and promissory notes totalling $100.6
million. In connection with these sales, we realized a $0.6 million gain.
Included in other expenses, net for the year ended December 31, 2005, was
a net gain of $9.4 million related to the disposition of certain investments
in hotel partnerships and corporations and the exit from certain management
contracts, and a loss of $6.2 million on the assignment of leases and the
sale of related assets in The Pierre.
Other income, net for the three months ended December
31, 2006 included a net gain on the disposition of assets of $0.6 million,
as discussed above. Other expenses, net for the three months ended December
31, 2005 included a net gain of $9.9 million related to the disposition
of certain investments in hotel partnerships and corporations and the exit
from certain management contracts, and a loss of $0.9 million on the assignment
of leases and the sale of related assets in The Pierre.
Retirement Benefit Plan
During the three months ended December 31, 2005, we transitioned
the majority of our senior executives and hotel and resort general managers
from an unfunded defined benefit retirement plan to a fully funded defined
contribution retirement plan. We made the change in the retirement plan
to improve the certainty and predictability related to the cost of the
retirement benefits. We do not expect that the change will have a significant
impact on our ongoing annual pension cost.
The transition to this defined contribution format resulted
in a funding requirement of $42.2 million, of which $36.0 million was funded
in 2005, and a one-time pre-tax loss of $35.5 million. In addition, as
a result of the costs incurred by our hotels and resorts for the transition
of general manager participants, our incentive fees for 2005 were reduced
by approximately $1.0 million since the funding by the hotel owners was
typically deducted in calculating the amounts upon which our incentive
fees are determined.
We continue to maintain the unfunded, multiemployer,
non-contributory, defined benefit plan on behalf of four active executives
and 14 retired executives and general managers, as well as the owner of
two of our managed properties. As at December 31, 2006, we had accrued
$26.3 million in "Long-term obligations" in respect of this plan. This
accrued defined benefit liability excludes the defined benefit obligation
of the owner of the two managed properties for their current general managers.
Interest Income / Interest Expense
-------------------------------------------------------------------------
Years ended
Dollar
(in millions of dollars)
December 31,
Change
-------------------------------------------------------------------------
2006 over
2006 2005
2005
-------------------------------------------------------------------------
Interest income
$ 22.4 $ 16.8
$ 5.6
-------------------------------------------------------------------------
Interest expense
$ (14.9) $ (11.5) $
(3.4)
-------------------------------------------------------------------------
The $5.6 million increase in interest income for the
year ended December 31, 2006, as compared to the same period in 2005, was
primarily attributable to higher deposits and higher deposit interest rates.
The $3.4 million increase in interest expense for the
year ended December 31, 2006, as compared to the same period in 2005, was
primarily attributable to the increase in interest expense accrued relating
to the currency and interest rate swap agreement we entered into in the
second quarter of 2005, related to our convertible senior notes.
This currency and interest rate swap agreement was designated
as a fair value hedge of our convertible senior notes. In December 2006,
we terminated 80% of the notional amount of the currency component of the
swap, and ceased hedge accounting on the remaining portion of the currency
component of the swap and on the interest component of the swap. This is
described below under "Liquidity and Capital Resources - Convertible Notes".
Taking into account the amortization of the gain on the
terminated interest rate swap in 2004, the 2005 currency and interest rate
swap and the amortization of the loss on the termination of hedge accounting
on the interest component of the 2005 currency and interest rate swap,
the effective interest rate on the convertible senior notes was approximately
5.2% and 5.3%, for the three months ended and year ended December 31, 2006,
respectively. This represents $2.9 million of interest expense for the
three months ended December 31, 2006 and $12.0 million of interest expense
for the full year 2006.
Taking into account the amortization of the gain on the
terminated interest rate swap in 2004 and the 2005 currency and interest
rate swap, the effective interest rate on the convertible senior notes
was approximately 4.5% and 4.2%, for the three months ended and year ended
December 31, 2005, respectively. This represents $2.5 million of interest
expense for the three months ended December 31, 2005 and $9.2 million of
interest expense for the full year 2005.
-------------------------------------------------------------------------
Three months ended Dollar
(in millions of dollars)
December 31,
Change
-------------------------------------------------------------------------
2006 over
2006 2005
2005
-------------------------------------------------------------------------
Interest income
$ 6.5 $
5.2 $ 1.3
-------------------------------------------------------------------------
Interest expense
$ (3.6) $ (3.2)
$ 0.4
-------------------------------------------------------------------------
The $1.3 million increase in interest income for the
three months ended December 31, 2006, as compared to the same period in
2005, was primarily attributable to higher deposits and higher deposit
interest rates.
The $0.4 million increase in interest expense for the
three months ended December 31, 2006, as compared to the same period in
2005, was primarily attributable to the increase in interest expense accrued
relating to the currency and interest rate swap agreement we entered into
in the second quarter of 2005 related to our convertible senior notes.
As noted above, a portion of the currency and interest rate swap was terminated
in December 2006.
Income Tax Recovery (Expense)
Our income tax expense during the year ended and three
months ended December 31, 2006 was $18.9 million and $3.8 million, respectively
(effective tax rate of 27.3% and 18.6%, respectively), as compared to income
tax recovery of $10.8 million and $7.4 million, respectively (effective
tax rate of 27.8% and 16.4%, respectively), for the same periods in 2005.
During the three months ended and year ended December
31, 2006, we did not record approximately $1.5 million and $3.4 million,
respectively, of a tax benefit related to the foreign exchange losses,
due to the uncertainty associated with the utilization of those losses.
In connection with the disposition of The Pierre in 2005,
we recorded a tax benefit of approximately $9.4 million.
Net Earnings (Loss) and Earnings (Loss) per Share
For the reasons outlined above, net earnings for the
year ended December 31, 2006 was $50.3 million ($1.36 basic earnings per
share and $1.33 diluted earnings per share), as compared to net loss of
$28.2 million ($0.77 basic and diluted loss per share) for the year ended
December 31, 2005.
For the reasons outlined above, net earnings for the
three months ended December 31, 2006 was $16.9 million ($0.45 basic earnings
per share and $0.44 diluted earnings per share), as compared to net loss
of $37.8 million ($1.03 basic and diluted loss per share) for the three
months ended December 31, 2005.
Adjusted Net Earnings and Adjusted Earnings per Share(10)
In the year ended December 31, 2006, other expenses,
net of $3.8 million related primarily to the costs related to the pending
Arrangement Transaction and a write-down of investments in hotel partnerships
and corporations, offset by a foreign exchange gain, a gain on disposition
of assets and an unrealized swap derivative gain. In the year ended December
31, 2005, other expenses, net of $89.2 million related primarily to a foreign
exchange loss, a loss on retirement benefit plan transition and asset provisions
and write-downs.
Adjusting for other expenses, net and the applicable
income taxes, adjusted net earnings were as follows:
-------------------------------------------------------------------------
(in millions of dollars except
per share amounts)
Years ended December 31,
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Net earnings (loss)
$ 50.3 $
(28.2)
-------------------------------------------------------------------------
Adjustments - Other expenses, net
3.8 89.2
-------------------------------------------------------------------------
Tax effect related to foregoing adjustments
0.7 (24.6)(i)
-------------------------------------------------------------------------
Adjusted net earnings
$ 54.8 $
36.4
-------------------------------------------------------------------------
---------------------------
Adjusted basic earnings per share
$ 1.49 $
0.99
-------------------------------------------------------------------------
---------------------------
Adjusted diluted earnings per share
$ 1.45 $
0.96
-------------------------------------------------------------------------
---------------------------
(i) We recorded
a tax benefit associated with the loss on retirement
benefit plan transition and other items included as adjustments on
this schedule. In addition, in connection with the disposition of
The Pierre in the second quarter of 2005, we recorded a tax
benefit of approximately $9.4 million in the year ended
December 31, 2005.
In the three months ended December 31, 2006, other income,
net of $3.2 million related primarily to a foreign exchange gain, which
was offset partially by the costs related to the pending Arrangement Transaction
and a write-down of investments in hotel partnerships and corporations.
In the three months ended December 31, 2005, other expenses, net of $56.8
million related primarily to a loss on retirement benefit plan transition,
a foreign exchange loss and asset provisions and write-downs.
Adjusting for other income (expenses), net and the applicable
income taxes, adjusted net earnings were as follows:
-------------------------------------------------------------------------
(in millions of dollars except
Three months
per share amounts)
ended December 31,
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Net earnings (loss)
$ 16.9 $
(37.8)
-------------------------------------------------------------------------
Adjustments - Other (income) expenses,
net (3.2)
56.8
-------------------------------------------------------------------------
Tax effect related to foregoing adjustments
(1.1) (12.0)
-------------------------------------------------------------------------
Adjusted net earnings
$ 12.6 $
7.0
-------------------------------------------------------------------------
---------------------------
Adjusted basic earnings per share
$ 0.34 $
0.19
-------------------------------------------------------------------------
---------------------------
Adjusted diluted earnings per share
$ 0.33 $
0.19
-------------------------------------------------------------------------
---------------------------
Eight Quarter Summary
-------------------------------------------------------------------------
(in millions of dollars
except per share amounts)
Fourth Quarter Third Quarter
-------------------------------------------------------------------------
2006 2005
2006 2005
-------------------------------------------------------------------------
Total revenues
$ 69.7 $ 58.5 $
58.2 $ 52.2
-------------------------------------------------------------------------
Operating earnings before
other items
$ 19.3 $ 12.3 $
16.6 $ 11.7
-------------------------------------------------------------------------
Net earnings (loss)
$ 16.9 $ (37.8) $
10.9 $ (11.4)
-------------------------------------------------------------------------
Basic earnings (loss) per
share(11)
$ 0.45 $ (1.03) $
0.30 $ (0.31)
-------------------------------------------------------------------------
Diluted earnings (loss)
per share
$ 0.44 $ (1.03) $
0.29 $ (0.31)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Canadian/US dollar
foreign exchange rate
used for specified
quarter
1.13629 1.17478 1.12087
1.20687
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions of dollars
except per share amounts)
Second Quarter First Quarter
-------------------------------------------------------------------------
2006 2005
2006 2005
-------------------------------------------------------------------------
Total revenues
$ 67.8 $ 74.5 $
57.6 $ 63.1
-------------------------------------------------------------------------
Operating earnings before
other items
$ 23.7 $ 20.1 $
20.5 $ 12.1
-------------------------------------------------------------------------
Net earnings (loss)
$ 9.1 $ 15.8 $
13.4 $ 5.2
-------------------------------------------------------------------------
Basic earnings (loss) per
share(11)
$ 0.25 $ 0.43 $
0.36 $ 0.14
-------------------------------------------------------------------------
Diluted earnings (loss)
per share
$ 0.24 $ 0.42 $
0.36 $ 0.14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Canadian/US dollar
foreign exchange rate
used for specified
quarter
1.12509 1.24401 1.15421
1.22652
-------------------------------------------------------------------------
The disposition of our interest in The Pierre during
2005 affects the comparative amounts. Net earnings for each quarter were
impacted by, among other things, the fluctuation of the US dollar against
the Canadian dollar over the course of 2006 and 2005 (resulting in foreign
exchange gains and losses upon the translation to Canadian dollars of non-Canadian
dollar-denominated net monetary assets not included in our designated self-sustaining
operations) (See "Company Operating Results - Other Income (Expenses),
Net"). In addition, as discussed under "Other Income (Expenses), Net",
during the fourth quarter of 2005, we wrote down certain of our investments
and transitioned our retirement benefit plan. The impact of certain of
these items is highlighted in the following table:
-------------------------------------------------------------------------
(in millions of dollars)
Fourth Quarter Third Quarter
-------------------------------------------------------------------------
2006 2005
2006 2005
-------------------------------------------------------------------------
Costs related to pending
Arrangement Transaction
$ (3.4) $ -
$ - $
-
-------------------------------------------------------------------------
Asset provisions and
write-downs
(2.7) (25.5) (0.7)
(4.6)
-------------------------------------------------------------------------
Foreign exchange gain (loss)
7.9 (4.8)
1.3 (16.2)
-------------------------------------------------------------------------
Unrealized swap derivative
gain
0.8 -
- -
-------------------------------------------------------------------------
Gain (loss) on disposition
of assets
0.6 9.0
- (0.3)
-------------------------------------------------------------------------
Loss on retirement benefit
plan transition
- (35.5)
- -
-------------------------------------------------------------------------
Other income (expenses), net
$ 3.2 $ (56.8) $
0.6 $ (21.1)
-------------------------------------------------------------------------
-------------------------------------------
-------------------------------------------------------------------------
(in millions of dollars)
Second Quarter First Quarter
-------------------------------------------------------------------------
2006 2005
2006 2005
-------------------------------------------------------------------------
Costs related to pending
Arrangement Transaction
$ - $
- $ - $
-
-------------------------------------------------------------------------
Asset provisions and
write-downs
0.6 (0.1)
(0.3) (1.9)
-------------------------------------------------------------------------
Foreign exchange gain (loss)
(7.4) (3.3)
(0.5) (0.4)
-------------------------------------------------------------------------
Unrealized swap derivative
gain
- -
- -
-------------------------------------------------------------------------
Gain (loss) on disposition
of assets
- (5.2)
- (0.4)
-------------------------------------------------------------------------
Loss on retirement benefit
plan transition
- -
- -
-------------------------------------------------------------------------
Other income (expenses), net
$ (6.8) $ (8.6) $
(0.8) $ (2.7)
-------------------------------------------------------------------------
-------------------------------------------
Balance Sheet Review and Analysis
Corporate Strategy Relating to Investments
An important part of our overall objectives as a public
company has been and would continue to be to maintain the strength of our
balance sheet. Accordingly, we intend to continue to be disciplined in
the allocation of our capital. Our capital investment plans remain focused
on allocating the majority of our capital for investment opportunities
that are intended to establish new long-term management contracts in key
destinations or enhance existing management arrangements. We make investments
in, or advances in respect of or to owners of, properties with a view to
obtaining management agreements or enhancing existing management agreements
where we believe the overall returns will justify the investment or advance.
These investments must meet our financial criteria considering
all sources of cash flow (including management fees), certain minimum return
hurdles and a manageable risk profile. We consider whether the structure
should be in the form of an investment or an advance and, among other things,
the relative risk and returns of the investment or advance, including interest,
dividends and fee income. As a public company, we generally seek to limit
our total long-term capital exposure to no more than 20% of the total equity
required for a property and can typically choose to have our equity interest
diluted if additional capital is required. We attempt to structure our
equity interests separately from our management interests to enable us
to dispose of equity interests as opportunities arise, without affecting
our management interests. Depending on the nature of the investment or
advance, it will be characterized on our consolidated balance sheet as
"Long-term receivables", "Investments in hotel partnerships and corporations"
or "Investment in management contracts".
As part of our ongoing balance sheet evaluation, we reviewed
our significant investments and advances at December 31, 2006 and 2005
and determined that certain write-downs were required with respect to certain
of our investments. These charges are discussed under "Company Operating
Results - Other Income (Expenses), Net".
Long-Term Receivables
Included on our balance sheet as at December 31, 2006
is $153.2 million (2005 - $175.4 million) of long-term receivables relating
primarily to advances in respect of, and to owners of, properties that
we manage, including secured and unsecured long-term receivables relating
to our managed properties in Punta Mita, Hampshire, Sydney, Geneva, Prague,
Toronto, Scottsdale, Buenos Aires, Costa Rica and the Maldives. In addition,
the 2005 long-term receivables included advances in respect of our managed
property in London, which was repaid in 2006.
Investments in Hotel Partnerships and Corporations
Included on our balance sheet as at December 31, 2006
is $65.6 million (2005 - $99.9 million) related to investments in hotel
partnerships and corporations. For a listing of hotels and resorts under
management in which we have equity investments, see "Four Seasons Portfolio
- Description of Hotels and Resorts". We account for these equity investments
on a cost basis because either the percentage ownership or the structure
does not give us significant influence over these investments. Each of
our investments in hotel partnerships and corporations individually represents
less than 5% of our total assets, and none of these investments individually
is material to us. We are not liable for any further obligations relating
to these investments, other than any commitment discussed under "Four Seasons
Portfolio - Properties under Construction or Development", "Liquidity and
Capital Resources", and "Off-Balance Sheet Arrangements".
Investment in Management Contracts
Included in our balance sheet as at December 31, 2006
is $187.9 million (2005 - $164.9 million) relating to our investment in
management contracts. The largest component of these amounts relates to
management contracts acquired during the Regent transaction in 1992, including
the management contracts for the Four Seasons hotels in New York and Milan
and Four Seasons Resort Bali at Jimbaran Bay. The most significant amounts
advanced for individual management contracts include amounts advanced in
the context of obtaining or improving the management contracts for Four
Seasons properties in Paris, Scottsdale, Hampshire, San Francisco, Jackson
Hole, Nevis and Chicago.
Fixed Assets
Included on our balance sheet as at December 31, 2006
is $81.5 million (2005 - $64.9 million) relating to our fixed assets. A
majority of this amount relates to the land, building, and furniture, fixtures,
and equipment for our corporate office in Toronto. Also included in fixed
assets at December 31, 2006 is $5.2 million (2005 - $6.2 million), representing
a majority of our investment in Four Seasons Hotel Vancouver.
Liquidity and Capital Resources
As at December 31, 2006, our cash and cash equivalents
were $358.9 million, as compared to $242.2 million as at December 31, 2005.
Our investments in cash and cash equivalents are highly liquid, with maturities
of less than 90 days. These investments include bank deposits, guaranteed
investment certificates and money market funds held with major financial
institutions.
We have a committed bank credit facility of $125 million,
which expires at the earlier of September 2007 or upon a change of control,
including one that would arise at the consummation of our currently pending
Arrangement Transaction. Borrowings under this credit facility bear interest
at LIBOR plus a spread ranging between 0.875% and 2.25% in respect of LIBOR-based
borrowings (prime rate plus a spread ranging between nil and 1.25% in respect
of prime rate borrowings), depending upon certain criteria specified in
the loan agreement. As at December 31, 2006, no amounts were borrowed under
the credit facility. However, approximately $1.6 million of letters of
credit were issued under the facility. No amounts have been drawn under
these letters of credit. We believe that, absent unusual opportunities,
this bank credit facility, when combined with cash on hand and internally
generated cash flow, should be more than adequate to allow us to finance
our normal operating needs and anticipated investment commitments related
to our current growth objectives.
Our commitments include the contractual obligations and
other commitments described below in this "Liquidity and Capital Resources"
section as well as those described under "Off-Balance Sheet Arrangements"
and "Four Seasons Portfolio - Properties under Construction or Development".
Contractual Obligations
-------------------------------------------------------------------------
Payments Due by Period
Contractual
-------------------------------------------------
Obligations
Less
(in millions
than 1 - 3 4 - 5
After
of dollars)
Total 1 year years
years 5 years
-------------------------------------------------------------------------
Convertible Notes(i)
$ 252.0 $ 2.0 $ 250.0 $
- $ -
-------------------------------------------------------------------------
Currency and Interest
Rate Swap(ii)
6.8 1.0
5.8 -
-
-------------------------------------------------------------------------
Operating Leases(iii)
37.9 4.8
7.0 5.8
20.3
-------------------------------------------------------------------------
Other Long-Term
Obligations(iv)
9.1 9.1
- -
-
-------------------------------------------------------------------------
Retirement Benefit
Plan(v)
26.3 1.3
2.8 3.3
18.9
-------------------------------------------------------------------------
Total Contractual
Obligations(vi)
$ 332.1 $ 18.2 $ 265.6 $
9.1 $ 39.2
-------------------------------------------------------------------------
-------------------------------------------------
(i) The amount represents
the principal amount plus accrued interest
at December 31, 2006. See "Convertible Notes".
(ii) The amount represents the
fair value of the swap as at
December 31, 2006.
(iii) This amount excludes the future
minimum lease payments in
connection with Four Seasons Hotel London and includes the future
minimum lease payments in connection with Four Seasons Hotel
Vancouver. See note 14(a) to our consolidated financial
statements.
(iv) This amount includes our
contractual obligations related to the
expansion of our Toronto corporate office, as well as other long-
term obligations.
(v) We continue to maintain
the unfunded multiemployer,
non-contributory, defined benefit plan on behalf of four active
executives and 14 retired executives and general managers, as well
as the owner of two of our managed properties. As at December 31,
2006, we have accrued a defined benefit liability of $26.3 million
in "Long-term obligations" in respect of this plan. This accrued
defined benefit liability excludes the defined benefit liability
of the owner of the two managed properties for their current
general managers.
(vi) This does not include the
amounts that are disclosed as capital
commitments in the chart under "Four Seasons Portfolio -
Properties under Construction or Development".
Convertible Notes
During the second quarter of 2004, we issued $250 million
principal amount of convertible senior notes. We used a majority of the
net proceeds from the issuance of these convertible senior notes to repay
previously issued convertible notes. These notes bear interest at the rate
of 1.875% per annum (payable semi-annually in arrears on January 30 and
July 30 to holders of record on January 15 and July 15, beginning January
30, 2005) and will mature on July 30, 2024, unless earlier redeemed or
repurchased. The notes are convertible into our Limited Voting Shares at
an initial conversion rate of 13.9581 shares per $1,000 principal amount
(equal to a conversion price of approximately $71.64 per Limited Voting
Share), subject to adjustments in certain events, in circumstances in which
(i) the Limited Voting Shares have traded for more than 130% of the conversion
price for a specified period, (ii) the notes have a trading price of less
than 95% of the market price of the Limited Voting Shares into which they
may be converted for a specified period, (iii) we call the notes for redemption,
or (iv) specified corporate transactions or a "fundamental change" occurs.
We may choose to settle conversion in our Limited Voting Shares, cash or
a combination of our Limited Voting Shares and cash. Holders of the notes
will have the right to require us to purchase the notes for their principal
amount plus accrued and unpaid interest on July 30, 2009, July 30, 2014
and July 30, 2019 and in connection with certain events. Repurchases of
notes made on July 30, 2014 and July 30, 2019 may be made (at our option)
in cash, our Limited Voting Shares or a combination of cash and our Limited
Voting Shares. Subject to conversion rights, we will have the right to
redeem the convertible senior notes for their principal amount, plus any
accrued and unpaid interest, beginning August 4, 2009.
The Arrangement Transaction, if completed, would result
in a "fundamental change". As a result, holders may convert the notes during
the period from and after the tenth day prior to the anticipated closing
date of the Arrangement Transaction until and including the close of business
on the later of the 10th day after the actual closing date and the 30th
business day after notice of an offer to repurchase the notes has been
mailed, as described below. Upon such conversion, holders of the notes
would be entitled to receive, subject to our right to make a cash payment
in lieu of some or all of the Limited Voting Shares that otherwise would
be issued, 13.9581 Limited Voting Shares for each $1,000 principal amount
of notes and an additional number of Limited Voting Shares equal to (a)
the sum of a make whole premium and an amount equal to any accrued but
unpaid interest to, but not including, the conversion date, divided by
(b) the average of the closing sale price (or, in certain circumstances,
an average of bid and ask prices) of the Limited Voting Shares on the NYSE
for the ten trading days before the conversion date.
If the Arrangement Transaction is completed, FSHI will
be required to make an offer to repurchase the notes at a purchase price
equal to the principal amount of the notes plus a make whole premium (as
described above), and an amount equal to any accrued and unpaid interest
to, but not including, the date of repurchase. FSHI must make this offer
by providing a notice to the trustee and the holders of notes within 30
days of the completion of the Arrangement Transaction.
In accordance with Canadian GAAP, the convertible senior
notes are bifurcated on our consolidated financial statements into a debt
component (representing the principal value of a bond of $211.8 million,
which was estimated based on the present value of a $250.0 million bond
maturing in 2009, yielding 5.33% per annum, compounded semi-annually, and
paying a coupon of 1.875% per annum) and an equity component of $36.9 million
(representing the value of the conversion feature of the convertible senior
notes). For further details, see note 10(a) to our consolidated financial
statements.
In connection with the offering of the convertible senior
notes, we entered into a five-year interest rate swap with an initial notional
amount of $211.8 million, pursuant to which we agreed to receive interest
at a fixed rate of 5.33% per year and pay interest at six-month LIBOR,
in arrears, plus 0.4904%. In October 2004, we terminated the interest rate
swap agreement and received proceeds of $9.0 million. The book value of
the interest rate swap at the date of termination was approximately $1.5
million. The recognition of the resulting gain was deferred and is being
amortized over the period to July 30, 2009.
In the second quarter of 2005, we entered into a new
currency and interest rate swap agreement until July 30, 2009, pursuant
to which we had agreed to receive interest at a fixed rate of 5.33% per
annum on an initial notional amount of $215.8 million (C$269.2 million)
and pay interest at a floating rate of six-month Canadian Bankers Acceptances
("BA") in arrears plus 1.1% per annum. Pursuant to this agreement, we had
agreed that on July 30, 2009, we would pay C$311.8 million and would receive
$250.0 million under the swap. We had designated the swap as a fair value
hedge of our convertible senior notes.
In December 2006, we terminated 80% of the notional amount
of the currency component of the currency and interest rate swap agreement
relating to the final exchange of principal by making a payment of $21.0
million. The book value of the terminated portion of the swap at the date
of termination was C$19.5 million ($17.0 million). The loss of C$4.6 million
($4.0 million) was deferred for accounting purposes and recorded in "Other
assets", and is being amortized over the period to July 30, 2009, which
would have been the maturity date of the swap agreement. The amortization
of the deferred loss is being recorded as a foreign exchange loss.
Under the amended swap, we will pay C$62.4 million and
receive $50.0 million on July 30, 2009. There were no other changes to
the original swap, including the notional amounts relating to the exchange
of interest.
In the event the convertible senior notes are settled
as a result of the pending Arrangement Transaction, the revised currency
and interest rate swap will be terminated at the same time.
As a result of the partial termination of the swap, we
no longer met all of the conditions for designating the amended swap as
a fair value hedge of the convertible senior notes, and therefore ceased
hedge accounting as at that date. The unrealized loss relating to the remaining
notional amount of the currency component of the swap of C$1.2 million
($1.0 million) and the unrealized loss relating to the notional amount
of the interest component of the swap of C$2.1 million ($1.8 million) were
deferred for accounting purposes and recorded in "Other assets". These
deferred losses are being amortized over the period to July 30, 2009. The
amortization of the deferred loss relating to the currency component of
the swap is being recorded as a foreign exchange loss and the amortization
of the deferred loss relating to the interest component of the swap is
being recorded as interest expense.
The amended swap is being marked-to-market on a monthly
basis and accrued under "Long-term obligations", with the resulting changes
in fair values being recognized in "Other expenses, net".
Arrangement Transaction
An aggregate amount of approximately $3.8 billion will
be required to fund the transactions under the Arrangement Transaction.
This aggregate amount will be funded from the proceeds of $750.0 million
of acquisition debt financing, approximately $2.75 billion of equity contributions,
and a majority of cash balances of Four Seasons.
Cash Flows
Cash Provided by Operations
During the year ended December 31, 2006, we generated
cash from operating activities of $78.0 million, as compared to $26.5 million
in 2005. During the three months ended December 31, 2006, we generated
cash of $20.4 million from operating activities, as compared to using cash
of $9.9 million for the same period in 2005.
The increase in cash from operating activities of $51.5
million in the year ended December 31, 2006, as compared to 2005, resulted
primarily from higher earnings generated from our management business,
a net increase from 2005 of $25.1 million in non-cash working capital and
a reduction of taxes paid of $5.4 million as compared to 2005. In addition,
cash provided by operating activities in 2006 was reduced by a cash payment
of $21.0 million related to the partial termination of our currency and
interest rate swap, as compared to a reduction in 2005 of $36.0 million
for the cash payment related to the retirement benefit plan transition
from an unfunded defined benefit plan to a fully funded defined contribution
plan for a substantial number of the participants.
The increase in cash from operating activities of $30.3
million in the three months ended December 31, 2006, as compared to the
same period in 2005, resulted primarily from higher earnings generated
from our management business and a net increase from 2005 of $12.3 million
in non-cash working capital. In addition, cash provided by operating activities
in 2006 was reduced by a cash payment of $21.0 million related to the partial
termination of our currency and interest rate swap, as compared to a reduction
in 2005 of $36.0 million for the cash payment related to the retirement
benefit plan transition as discussed above.
Investing Activities
Long-Term Receivables
In the year ended December 31, 2006, we advanced $25.6
million, in the aggregate, as long-term receivables, including amounts
to Four Seasons properties in Geneva, Toronto, Punta Mita, and the Maldives.
Also in 2006, we were repaid $65.3 million, in the aggregate, of our long-term
receivables, including repayments from Four Seasons properties in London,
Washington, Cairo and Sydney. In the year ended December 31, 2005, we advanced
$44.9 million, in the aggregate, as long-term receivables, including amounts
to Four Seasons properties in Geneva, Toronto, Washington, Buenos Aires,
and Exuma at Emerald Bay. Also in 2005, we were repaid $34.6 million, in
the aggregate, of our long-term receivables, including repayments from
Four Seasons properties in Nevis, San Francisco, and Scottsdale.
During the three months ended December 31, 2006, we advanced
$3.8 million, in the aggregate, as long-term receivables, including amounts
to Four Seasons properties in Punta Mita and Toronto. Also during the three
months ended December 31, 2006, we were repaid $50.9 million, in the aggregate,
of which the largest component related to our long-term receivables relating
to the Four Seasons Hotel London. During the three months ended December
31, 2005, we advanced $6.2 million, in the aggregate, as long-term receivables,
including amounts to Four Seasons properties in Geneva, Bangkok and Buenos
Aires. Also during the three months ended December 31, 2005, we were repaid
$15.2 million, in the aggregate, of which the largest component related
to our loan receivable from Nevis.
ADD: /SECOND ADD - TO396 - Four Seasons Hotels and Resorts/
Investments in Hotel Partnerships and Corporations
To fund capital requirements in properties in which we
have an interest (primarily in properties under construction or development),
we invested $3.0 million during the year ended December 31, 2006 to an
existing hotel in which we have a 15% equity interest, and received cash
of $2.8 million from another investment. In addition, we disposed of our
investment in the properties in Four Seasons Hotel London, Four Seasons
Resort Aviara and Four Seasons Hotel Sydney, and our remaining equity interest
in Four Seasons Resort Scottsdale at Troon North, and received net cash
proceeds in 2006 of $16.6 million. For the year ended December 31, 2005,
investments of $8.7 million included Four Seasons Resort Jackson Hole and
Four Seasons Hotel Silicon Valley at East Palo Alto, with our equity investments
in these properties being 10% and 15%, respectively, at December 31, 2005.
In 2005, we realized cash of $24.6 million, from the sales of approximately
53% of our equity interest in Four Seasons Hotel Shanghai, 80% of our equity
interest in Four Seasons Residence Club Scottsdale at Troon North, and
all of our interests in Four Seasons Hotel Cairo at Nile Plaza and Four
Seasons Hotel Amman.
During the three months ended December 31, 2006, we received
cash of $0.5 million from one of our investments. In addition, we disposed
of our investment in the properties in Four Seasons Hotel London, Four
Seasons Resort Aviara and Four Seasons Hotel Sydney, and received net cash
proceeds in 2006 of $15.9 million. During the three months ended December
31, 2005, on a net basis, we realized cash from the disposition of our
investments of $14.0 million, reflecting the sale of our interests in Four
Seasons Hotel Cairo at Nile Plaza and Four Seasons Hotel Amman, and the
sale of a portion of our interest in Four Seasons Hotel Miami.
Investment in Management Contracts
For the year ended December 31, 2006, we funded an aggregate
of $17.5 million related to our investment in management contracts. These
included amounts funded to Four Seasons Hotel Austin, Four Seasons Hotel
Singapore and Four Seasons Resort Maldives at Landaa Giraavaru. For the
three months ended December 31, 2006, we funded an aggregate of $0.7 million,
primarily related to our investment in management contracts. For the year
ended and the three months ended December 31, 2005, we received total net
proceeds of $10.5 million and $11.1 million, respectively, related to our
investments in management contracts, including our property in Canary Wharf
and our property in Newport Beach (which we ceased managing in October
2005). Of the amounts that were invested in management contracts during
2006 and 2005, there was no significant investment in any individual management
contract.
Fixed Assets
Our capital expenditures were $22.2 million for the year
ended December 31, 2006 and $6.0 million in the three months ended December
31, 2006, as compared to $18.7 million and $5.9 million, respectively,
for the same periods in 2005. In 2004, we commenced construction on our
Toronto corporate office expansion, which is scheduled to be completed
during 2007. Capital expenditures related to this expansion were $20.9
million in 2006 and $14.7 million in 2005. Costs to complete the facility
are estimated at $9.1 million and are expected to be fully incurred in
2007.
During the three months ended December 31, 2006 and 2005,
our capital expenditures were $6.0 million and $5.9 million, respectively,
which primarily related to our Toronto corporate office expansion.
Owners of properties that we manage are contractually
responsible for funding the capital requirements of the properties, including
guest room and common area renovations, and for maintaining capital reserves
to fund ongoing annual maintenance capital expenditures required by the
management agreements. The owners annually spend an average of between
3% and 5% of hotel gross revenues on capital expenditures to maintain properties
at the Four Seasons standard (other than in newly constructed or recently
renovated properties where the annual amounts generally range from 1% to
2% in the initial years of operation following opening and major refurbishment).
Capital expenditures are funded primarily by working capital generated
from property operations and through advances from the owners. Our share
of capital expenditures in 2006 and 2005 was immaterial for the properties
in which we have a minority equity interest or pursuant to management contract
obligations.
Financing Activities
In 2006, we received proceeds of $36.3 million relating
to the exercise of options by employees to purchase 746,310 Limited Voting
Shares, as compared to option exercise proceeds of $7.0 million in 2005
relating to the purchase of 32,380 Limited Voting Shares.
We paid $3.4 million and $3.1 million in dividends during
2006 and 2005, respectively, based on a dividend policy of C$0.11 per Limited
Voting Share and C$0.055 per Variable Multiple Voting Share per annum,
paid semi-annually in January and July.
Outstanding Share Data
-------------------------------------------------------------------------
Designation
Outstanding as at March 9, 2007
-------------------------------------------------------------------------
Variable Multiple Voting Shares(i)
3,725,698
-------------------------------------------------------------------------
Limited Voting Shares
33,774,038
-------------------------------------------------------------------------
Options to acquire Limited Voting
Shares(ii):
-------------------------------------------------------------------------
Outstanding
3,548,799
-------------------------------------------------------------------------
Exercisable
2,904,419
-------------------------------------------------------------------------
Convertible Senior Notes issued
June 2004 and due 2024(iii)
$250.5 million(iv)
-------------------------------------------------------------------------
(i) Convertible into Limited
Voting Shares at any time at the option
of the holder on a one-for-one basis.
(ii) As disclosed in note 11(a)
to our annual consolidated financial
statements for the year ended December 31, 2006, pursuant to an
agreement approved by the shareholders in 1989, Four Seasons has
agreed to make a payment to Mr. Isadore Sharp on an arm's length
sale of control of Four Seasons Hotels Inc. Please see the
"Subsequent Event" section.
(iii) The terms of the convertible
senior notes are more fully described
under "Liquidity and Capital Resources-Convertible Notes".
(iv) This amount is equal to
the issue price of the convertible senior
notes issued in June 2004 and due 2024 plus accrued interest
calculated at 1.875% per annum.
Financial Instruments
In January 2005, the CICA issued three new accounting
standards related to financial instruments: Section 3855, "Financial Instruments
- Recognition and Measurement", Section 3865, "Hedges", and Section 1530,
"Comprehensive Income". These new standards are effective for fiscal years
beginning on or after October 1, 2006. See description under "Recent Canadian
Accounting Standards Issued but Not Yet Adopted".
Foreign Exchange Forward Contracts
We use derivative financial instruments in the management
of our foreign currency exposures, when we believe it is appropriate. We
do not use derivative financial instruments for trading or speculative
purposes.
Because a significant portion of our revenues is generated
in foreign currencies (the most significant currency being the US dollar,
our reporting currency) and the expenditures we incur for our management
operations are denominated primarily in Canadian dollars, we enter into
foreign exchange forward contracts from time to time as a hedge against
foreign currency fluctuations. We estimate future foreign currency cash
flows on an ongoing basis and enter into foreign exchange forward contracts
in proportion to the magnitude and timing of these anticipated cash flows.
For a description of foreign currency-related risks, see "Operating Risks
- Currency Exposure". We are also subject to credit risks related to the
counterparties to our foreign exchange forward contracts.
As at December 31, 2006, we had foreign exchange forward
contracts in place to sell forward $39.1 million of US dollars to receive
Canadian dollars at a weighted average forward exchange rate of 1.11 Canadian
dollars to a US dollar maturing over the period to April 2008. These foreign
exchange forward contracts are marked-to-market each period, with the resulting
changes in fair values being recorded as a foreign exchange gain or loss.
As of December 31, 2006, the fair value of the outstanding contracts was
a loss of $1.5 million and has been included in accounts payable and accrued
liabilities on our consolidated balance sheet and in other expenses, net
in our consolidated statements of operations.
Currency and Interest Rate Swap
In April 2005, we entered into a currency and interest
rate swap agreement with a duration until July 30, 2009 pursuant to which
we had agreed to receive interest at a fixed rate of 5.33% per annum on
an initial notional amount of $215.8 million and pay interest at a floating
rate of six-month Canadian Bankers Acceptances ("BA") in arrears plus 1.1%
per annum on an initial notional amount of C$269.3 million. On July 30,
2009, we would pay C$311.8 million and receive $250.0 million under the
swap. We had designated the swap as a fair value hedge of our convertible
senior notes (see "Liquidity and Capital Resources - Convertible Notes"
above). A liability of $17.1 million had been recorded in our accounts
in 2005 related to the swap as a fair value hedge, offsetting the translation
gain on the underlying debt obligation. Interest income and interest expense
recognized on the swap agreement during 2005 was $8.0 million and C$8.3
million, respectively.
As discussed in "Convertible Notes" above, in December
2006, we terminated 80% of the notional amount of the currency component
of the swap relating to the final exchange of principal.
The amended swap is being marked-to-market on a monthly
basis and accrued under "Long-term obligations", with the resulting changes
in fair values being recognized in "Other expenses, net". The fair value
of the swap at December 31, 2006 was $6.8 million and has been accrued.
During 2006, a gain of $0.8 million was recognized on the marked-to-market
valuation.
As part of the interest rate component of the swap agreement,
we receive a fixed interest rate amount in exchange for our payment of
a floating interest rate charge on the notional Canadian value of the swap.
As a result, the amount we are obligated to pay is subject to changes in
the six-month BA rate. By way of example, a 1% increase in the six-month
BA rate would result in an increase in interest expense, on an annualized
basis, of approximately C$2.9 million. Conversely, a 1% decrease in the
six-month BA rate would result in a decrease in interest expense, on an
annualized basis, of approximately C$2.9 million. We try to manage our
exposure to changes in short-term interest rates by investing our available
cash balances in short-term securities, to provide a partial offset to
changes in interest expense, however, there can be no assurance that this
practice, which is dependent upon cash balances available for investment
and the short-term interest rate spreads between Canada and the US, will
be effective.
Other Financial Instruments
In addition to the foreign exchange forward contracts
and the currency and interest rate swap, we had the following financial
instruments at December 31, 2006: cash equivalents (see "Liquidity and
Capital Resources"), long-term receivables (see "Balance Sheet Review and
Analysis - Long-Term Receivables"), convertible senior notes (see "Liquidity
and Capital Resources - Convertible Notes") and short-term financial instruments,
including current receivables and current accounts payable.
Fair Value of Financial Instruments
The estimated fair value of a financial instrument is
the amount at which the instrument could be exchanged in a transaction
between willing parties, other than a forced or liquidation sale. These
estimates, although based on the relevant market information about the
financial instrument, are subjective in nature and involve uncertainties
and matters of significant judgment and, therefore, cannot be determined
with precision. Changes in assumptions could materially affect the estimates.
As cash equivalents, current receivables, current accounts
payable and certain other short-term financial instruments are all short-term
in nature, their carrying amounts approximate fair values. The fair value
of our convertible senior notes is based on market quotes obtained from
one of our financial advisors. The fair value of foreign exchange forward
contracts is estimated from quotes obtained from our counterparties for
the same or similar financial instruments.
We do not have plans to sell loans receivable to third
parties, and we expect to realize or settle them in the ordinary course
of business. There is no active and liquid market for these instruments.
The fair values of our financial instruments
are as follows:
-------------------------------------------------------------------------
Estimated Carrying
(in millions of dollars)
fair value amount
-------------------------------------------------------------------------
2006:
-------------------------------------------------------------------------
Convertible senior notes(i)
$ (307.5) $ (267.7)
-------------------------------------------------------------------------
Currency and interest
rate swap
(6.8) (6.8)
-------------------------------------------------------------------------
Foreign exchange forward
contracts
(1.5) (1.5)
-------------------------------------------------------------------------
2005:
-------------------------------------------------------------------------
Convertible senior notes(i)
$ (243.0) $ (260.4)
-------------------------------------------------------------------------
Currency and interest
rate swap
(24.0) (17.1)
-------------------------------------------------------------------------
Foreign exchange forward
contracts
(0.1) (0.1)
-------------------------------------------------------------------------
(i) The carrying amount of the
convertible senior notes includes the
amounts
allocated to both long-term obligations and shareholders'
equity.
It excludes, however, the offering expenses and
underwriters'
commission related to the shareholders' equity
component
of the notes of $1.3 million in each of 2006 and 2005,
which
are recorded in shareholders' equity.
Off-Balance Sheet Arrangements
In addition to the financial instruments discussed above
we have various off-balance sheet arrangements, the most significant of
which are discussed below.
Guarantees and Commitments
As at December 31, 2006, we had provided certain guarantees
in connection with properties under our management. These include guarantees
in respect of four projects totalling a maximum of approximately $21.9
million, as well as a guarantee of $0.3 million for relocation costs for
certain employees. We have a lease guarantee in respect of Four Seasons
Hotel Prague of approximately (euro)0.9 million (see note 14(c) to our
consolidated financial statements). To the extent we are called upon to
honour any one of these guarantees, we generally have either the right
to be repaid from hotel operations and/or have various forms of security
or recourse to the owner of the property.
In addition, in 2006, we also had four other commitments
totalling approximately $11.2 million to four properties under our management.
During 2005, we assigned our lease and sold the related assets of The Pierre.
As part of the sale, in accordance with statutory provisions, the purchaser
agreed to assume a portion of our contribution history with a multiemployer
pension fund for the unionized hotel employees (the "NYC Pension"). This
permitted us to withdraw from the NYC Pension without incurring a withdrawal
liability estimated at $10.7 million. In certain limited circumstances,
as a part of our agreement, we may be required to pay a portion of the
purchaser's withdrawal liability, if any. We believe that the likelihood
of our being required to make a payment is remote, and no amount has been
recorded as at December 31, 2006 in respect of a potential NYC Pension
withdrawal liability.
We do not expect to fund any of these guarantees or commitments
during 2007. Our assessment of our potential liability for such matters
could change as a result of, among other things, the associated risks and
uncertainties.
Indemnities
Disposition
Indemnification Arrangements
In connection with the sale of all or a part of our interest
in a property, we may agree to provide an indemnity against claims relating
to breaches of specific covenants or representations and warranties. The
maximum amount of the indemnification in these transactions is generally
limited to the purchase price paid for the interest being purchased. The
nature of these indemnities prevents the calculation of an exact amount
that may be payable to the indemnified parties.
Director and Officer Indemnification Arrangements
To the extent permitted by law, we indemnify individuals
that are, or have been, directors or officers against certain claims that
may be made against them as a result of their being, or having been, a
director or officer at our request. We have documented these indemnification
arrangements in agreements with each of our directors and certain of our
senior officers. We have purchased directors' and officers' liability insurance
that may be available in respect of certain of these claims.
Other Indemnification Arrangements
In the ordinary course of our business, we enter into
other agreements with third parties that may contain indemnification provisions
pursuant to which the parties to the agreements agree to indemnify one
another if certain events occur (such as, but not limited to, changes in
laws and regulations or as a result of litigation claims or liabilities
that arise in respect of tax or environmental matters).
The terms of our indemnification provisions vary based
on the contract, a fact which (together with the fact that any amounts
that could be payable would be dependent on the outcome of future, contingent
events, the nature and likelihood of which cannot be determined at this
time) precludes us from making a reasonable estimate of the maximum potential
amount we could be required to pay to counterparties. We believe that the
likelihood that we would incur significant liability under these obligations
is remote. Historically, we have not made any significant payments under
such indemnification arrangements. No amount has been recorded in the consolidated
financial statements with respect to these indemnification provisions.
Our assessment of our potential liability could change in the future as
a result of currently unforeseen circumstances.
Looking Ahead
Our business objectives for 2007 as a public company
are to continue to focus on those aspects of our business that we believe
provide the greatest potential for maximizing long-term shareholder value.
New Openings
In addition to Four Seasons Resort Koh Samui, which opened
in February 2007, we expect to open 13 new hotels and resorts over the
course of 2007 and 2008. The average term of the management contracts for
these properties is 56 years, and these management contracts are expected
to provide us with significant additional long-term fee income. During
2007, we expect to fund in the range of $50.0 million to $60.0 million
in connection with obtaining new or enhancing existing management agreements.
Service
During 2007, we intend to maintain our focus on value
to our guests by continuing to deliver our exceptional quality of service,
while at the same time controlling costs. We also intend to focus on enhancing
our premium service quality and rate premiums at each of the 12 Four Seasons
hotels and resorts that opened over the past 24 months and the new Four
Seasons projects that are expected to open in 2007.
We expect that the strong economic environment should
translate into continued strength in travel demand, particularly business
travel. We also expect that leisure travel demand will remain strong. On
a full-year basis, we expect our average daily room rates for 2007 to exceed
the rates achieved in 2006.
Operating Environment
If the travel trends that we experienced in 2006 continue
and exchange rates remain at current levels, we expect RevPAR, on a US
dollar basis, for worldwide Core Hotels for the full year 2007 to increase
in the range of 9% to 11%, as compared to 2006. We expect that this improvement
will result from both occupancy and pricing improvements. If current trends
continue, we expect the full-year gross operating margins of our worldwide
Core Hotels to increase in the range of 175 to 200 basis points for the
full year of 2007, as compared to the full year of 2006.
Management Operations
We expect full year hotel management fee revenues to
grow in line with our full year RevPAR growth expectations for 2007. Assuming
no significant changes to the US to Canadian dollar exchange rate, we expect
our general and administrative expenses to increase in the range of 8%
to 10% for the full year 2007 as compared to full year 2006.
Subsequent Event
Arrangement Transaction
On February 12, 2007, we announced that we had entered
into a definitive acquisition agreement (the "Acquisition Agreement") to
implement a previously announced proposal to take FSHI private at a price
of $82.00 cash per Limited Voting Share (the "Arrangement Transaction").
Following completion of the Arrangement Transaction, FSHI would be owned
by affiliates of Cascade Investment, L.L.C. ("Cascade") (an entity owned
by William H. Gates III), Kingdom Hotels International ("Kingdom"), a company
owned by a trust created for the benefit of His Royal Highness Prince Alwaleed
Bin Talal Bin Abdulaziz Alsaud and his family, and Isadore Sharp (collectively
the "Purchaser"). The Arrangement Transaction, which would be implemented
by way of a court-approved plan of arrangement under Ontario law, has been
approved unanimously by our Board (with interested directors abstaining)
following the report and favourable, unanimous recommendation of the Special
Committee of independent directors. In doing so, our Board determined that
the arrangement is fair to the shareholders of FSHI (other than Mr. Sharp,
Kingdom, Cascade, their respective directors and senior officers and any
other "related parties", "interested parties" and "joint actors") and in
the best interests of FSHI and authorized the submission of the arrangement
to shareholders of FSHI for their approval at a special meeting of shareholders.
Our Board also has determined unanimously (with interested directors abstaining)
to recommend to FSHI shareholders that they vote in favour of the transaction.
As previously disclosed, upon completion of the Arrangement
Transaction, Triples Holdings Limited (which is Mr. Sharp's family holding
company) would hold a significant continuing interest in FSHI and Mr. Sharp
would, as Chairman and Chief Executive Officer, continue to be directly
involved in all aspects of the operations and the strategic direction of
Four Seasons, which will remain headquartered in Toronto. If the Arrangement
Transaction is completed, Mr. Sharp will be entitled to realize proceeds
of approximately $289.0 million related to a long-term incentive agreement
that was approved by FSHI's shareholders before it was put in place in
1989. (See "Description of Share Capital - Sale of Control Agreement" in
our annual information form.)
A meeting of shareholders to consider the Arrangement
Transaction is anticipated to take place in April 2007. To be implemented,
the Arrangement Transaction will require approval by two-thirds of the
votes cast by holders of Limited Voting Shares, voting separately as a
class, and approval by Triples, as the sole holder of the Variable Multiple
Voting Shares, voting separately as a class. Kingdom, Cascade and Triples
have agreed to vote their Limited Voting Shares and Variable Multiple Voting
Shares to approve the arrangement. The Arrangement Transaction also will
require approval by a simple majority of the votes cast by holders of Limited
Voting Shares, other than Mr. Sharp, Kingdom, Cascade, their respective
directors and senior officers and any other "related parties", "interested
parties" and "joint actors". In addition, the Arrangement Transaction will
require approval by the Ontario Superior Court of Justice. The Arrangement
Transaction also will be subject to certain other customary conditions,
including receipt of a limited number of regulatory approvals. The Arrangement
Transaction is not subject to any financing condition, and FSHI has been
advised that commitments for the required debt financing have been received.
FSHI has received from Cascade and Kingdom a limited guaranty of certain
obligations of the Purchaser. There are certain risks inherent in the Arrangement
Transaction which are described in the management information circular
prepared in connection with the special meeting of shareholders; a copy
of which will be available as part of FSHI's public filings at www.sedar.com
and www.sec.gov. Among other things, there are risks that the parties will
not proceed with the Arrangement Transaction, that the ultimate terms of
completion of the Arrangement Transaction will differ from those that currently
are contemplated, and that the Arrangement Transaction will not be successfully
completed for any reason (including the failure to obtain the required
approvals or clearances from regulatory authorities).
Copies of the Acquisition Agreement and certain related
documents have been filed with Canadian securities regulators and with
the United States Securities and Exchange Commission and are available
at the Canadian SEDAR website at www.sedar.com and at the U.S. Securities
and Exchange Commission's website at www.sec.gov. The management information
circular in connection with the special meeting of shareholders to consider
the Arrangement Transaction is expected to be mailed to shareholders on
or about the week of March 12, 2007. The management information circular
will also be available as part of FSHI's public filings at www.sedar.com
and www.sec.gov.
It is anticipated that the Arrangement Transaction, if
approved by shareholders, will be completed in the second quarter of 2007.
Interim Operations
Pursuant to the Acquisition Agreement, FSHI agreed to
certain customary negative and affirmative covenants relating to the operation
of the business between the date of execution of the Acquisition Agreement
and the closing of the Arrangement Transaction.
Termination of the Acquisition Agreement
FSHI and the Purchaser may terminate the Acquisition
Agreement by mutual written consent and abandon the Arrangement Transaction
at any time prior to the effective time. In addition, either FSHI or the
Purchaser (and, in certain circumstances, only one of these parties) may
terminate the Acquisition Agreement and abandon the Arrangement Transaction
any time prior to the effective time of the Arrangement Transaction if
certain specified events occur. The Acquisition Agreement provides that
FSHI will pay a termination fee of $75.0 million less any amounts actually
paid or required to be paid by FSHI to the Purchaser for reimbursement
of expenses (as described below) if the Acquisition Agreement is terminated
in certain circumstances. The Acquisition Agreement provides that the Purchaser
will pay to FSHI a termination fee of $100.0 million if the Acquisition
Agreement is terminated in certain circumstances. This obligation is guaranteed
by Kingdom and Cascade. The Acquisition Agreement also provides that FSHI
will pay to the Purchaser reasonable documented expenses of the Purchaser
and its affiliates incurred in connection with the transactions contemplated
by the Acquisition Agreement (up to a maximum of $10.0 million) if the
Acquisition Agreement is terminated in certain circumstances.
Impact of Finalization of Arrangement Transaction
Although there is no certainty that the Arrangement Transaction,
or any other transaction, will be completed or the timing of completion
of the pending Arrangement Transaction, some of our arrangements and agreements
may be impacted by the pending Arrangement Transaction, including the following:
1) Convertible Senior Notes:
If the Arrangement Transaction is completed, FSHI will
be required to make an offer to repurchase the notes at a purchase price
equal to the principal amount of the notes plus a make whole premium (as
described above), and an amount equal to any accrued and unpaid interest
to, but not including, the date of repurchase. FSHI must make this offer
by providing a notice to the trustee and the holders of notes within 30
days of the completion of the Arrangement Transaction. For further information,
please refer to the section "Convertible Notes".
Further information regarding the terms of our convertible
senior notes is set out in the indenture pursuant to which the notes were
issued.
2) Long-Term Incentive Arrangement:
Pursuant to an agreement approved by the shareholders
of FSHI in 1989, FSHI and its principal operating subsidiary, Four Seasons
Hotels Limited, agreed to make a cash payment to Mr. Isadore Sharp, the
Chief Executive Officer of FSHI upon an arm's length sale of control of
FSHI. Under the plan of arrangement through which the Arrangement Transaction
will be implemented, Mr. Sharp will receive the amount payable to him calculated
in accordance with this long-term incentive plan in full satisfaction of
all obligations to him under the plan. Based on an acquisition price of
$82.00 for each Limited Voting Share and Variable Multiple Voting Share,
and using the noon rate of exchange as quoted by the Bank of Canada for
the conversion of Canadian dollars into United States dollars on March
9, 2007, Mr. Sharp would receive approximately $289.0 million in satisfaction
of the obligations to him under the long-term incentive plan.
3) Stock Options:
On February 9, 2007, the vesting of a total of 616,980
unvested stock options (which excludes those outstanding options with an
unsatisfied performance condition) was accelerated for the purpose of allowing
these individuals to participate in respect of such options in the Arrangement
Transaction. If the Arrangement Transaction is not completed, the vesting
of the 616,980 stock options will not be accelerated and the stock options
will continue to vest in accordance with their terms in existence prior
to the acceleration. Pursuant to the plan of arrangement in respect of
the Arrangement Transaction, any options that have not been exercised prior
to the effective time of the Arrangement Transaction will be transferred
by each holder thereof to FSHI without any further act or formality in
exchange for a cash amount equal to the excess, if any, of (a) the product
of the number of Limited Voting Shares underlying the options held by such
holder and $82.00, over (b) the sum of the exercise prices for each Limited
Voting Share underlying the options held by such holder (converted at the
applicable foreign exchange rate).
4) Other Arrangements and Agreements:
Certain other arrangements and agreements are subject
to "change of control" provisions. These include, among others, the following:
(a) Under the terms of our current
$125.0 million bank credit facility, a
change of
control triggers a default under the bank credit facility,
and if not
waived, would require the repayment of all amounts
outstanding
under this credit facility and would also result in the
termination
of this credit facility. As at March 9, 2007, no amounts
were borrowed
under this credit facility, but approximately
$1.6 million
of letters of credit were issued under this credit
facility.
(b) Pursuant to a cross default provision,
a default under the bank
credit facility,
in turn, would cause a default under our currency
and interest
rate swap agreement. In such circumstances, the
counterparty
to the swap agreement may demand that the swap be
terminated.
As at March 9, 2007, the net amount that would be
required to
be paid by FSHI to the counterparty on termination was
approximately
$5.8 million. As at December 31, 2006, the estimated
fair value
of the swap on that date of $6.8 million is included in
"Long-term
obligations".
5) Costs Related to Pending Arrangement
Transaction
In connection with the pending Arrangement Transaction,
we incurred costs of $3.4 million in 2006 and expect to incur costs of
approximately $12.6 million during 2007, primarily relating to legal fees,
filing fees, financial advisory, printing, proxy solicitation and consulting
services.
Four Seasons Portfolio
The properties that we manage are comprised of luxury
hotels and resorts, many of which include a residential component, whose
target customers are principally business travelers, corporate and incentive
groups and discerning leisure travelers. Our urban hotels generally are
centrally located in the commercial and financial districts of the world's
leading cities in North America, South America, Asia, Europe and the Middle
East. Our luxury resorts and serviced and branded residential projects
are located in world-class leisure destinations and provide extensive recreational
and meeting facilities to attract upscale leisure travelers and groups.
Description of Hotels and Resorts
The following table provides an overview of the properties
that we currently manage, many of which include a residential component:
-------------------------------------------------------------------------
Approximate Approximate
Hotel/Resort and Location
Number of Rooms Equity Interest(i)
-------------------------------------------------------------------------
United States
-------------------------------------------------------------------------
Four Seasons Hotel Atlanta, Georgia
245
-
-------------------------------------------------------------------------
Four Seasons Hotel Austin, Texas
290
-
-------------------------------------------------------------------------
Four Seasons Resort Aviara,
California(ii)
330
-
-------------------------------------------------------------------------
The Beverly Wilshire (Beverly Hills),
California
395
-
-------------------------------------------------------------------------
Four Seasons Biltmore Resort (Santa
Barbara), California
205
-
-------------------------------------------------------------------------
Four Seasons Hotel Boston,
Massachusetts(ii)
275
-
-------------------------------------------------------------------------
Four Seasons Hotel Chicago, Illinois
345
-
-------------------------------------------------------------------------
The Ritz-Carlton Hotel Chicago,
Illinois
435
-
-------------------------------------------------------------------------
Four Seasons Resort and Club Dallas
at Las Colinas, Texas
400
-
-------------------------------------------------------------------------
Four Seasons Hotel Houston, Texas(ii)
405
-
-------------------------------------------------------------------------
Four Seasons Resort Hualalai at
Historic Ka'upulehu, Hawaii
245
-
-------------------------------------------------------------------------
Four Seasons Resort Jackson Hole,
Wyoming(ii)
125
-(iv)
-------------------------------------------------------------------------
Four Seasons Resort Lana'i at
Manele Bay, Hawaii
235
-
-------------------------------------------------------------------------
Four Seasons Lana'i The Lodge at
Koele, Hawaii
100
-
-------------------------------------------------------------------------
Four Seasons Hotel Las Vegas,
Nevada
425
-
-------------------------------------------------------------------------
Four Seasons Hotel Los Angeles,
California
285
-(iv)
-------------------------------------------------------------------------
Four Seasons Resort Maui at
Wailea, Hawaii
375
-
-------------------------------------------------------------------------
Four Seasons Hotel Miami,
Florida(ii)
220
4.7%(iii)
-------------------------------------------------------------------------
Four Seasons Hotel New York,
New York
370
-
-------------------------------------------------------------------------
Four Seasons Resort Palm Beach,
Florida
210
-
-------------------------------------------------------------------------
Four Seasons Hotel Philadelphia,
Pennsylvania
365
-
-------------------------------------------------------------------------
Four Seasons Hotel San Francisco,
California(ii)
275
-
-------------------------------------------------------------------------
Four Seasons Resort Scottsdale at
Troon North, Arizona(ii)
210
-(iv),(v)
-------------------------------------------------------------------------
Four Seasons Hotel Silicon Valley
at East Palo Alto, California
200
15%(iii)
-------------------------------------------------------------------------
Four Seasons Hotel Washington,
District of Columbia
210
-
-------------------------------------------------------------------------
Four Seasons Hotel Westlake Village,
California
270
-
-------------------------------------------------------------------------
Other Americas/Caribbean
-------------------------------------------------------------------------
Four Seasons Hotel Buenos Aires,
Argentina
165
-
-------------------------------------------------------------------------
Four Seasons Resort Carmelo,
Uruguay(ii)
45
-
-------------------------------------------------------------------------
Four Seasons Resort Costa Rica at
Peninsula Papagayo, Costa Rica(ii)
155 11.4%(vi)
-------------------------------------------------------------------------
Four Seasons Resort Great Exuma at
Emerald Bay, The Bahamas(ii)
185
-
-------------------------------------------------------------------------
Four Seasons Hotel Mexico City,
Mexico
240
-
-------------------------------------------------------------------------
Four Seasons Resort Nevis, West
Indies(ii)
195
-
-------------------------------------------------------------------------
Four Seasons Resort Punta Mita,
Mexico(ii)
150
-
-------------------------------------------------------------------------
Four Seasons Hotel Toronto, Ontario,
Canada
380
-
-------------------------------------------------------------------------
Four Seasons Hotel Vancouver, British
Columbia, Canada
375
100%(vi)
-------------------------------------------------------------------------
Four Seasons Resort Whistler, British
Columbia, Canada(ii)
275
-(iv)
-------------------------------------------------------------------------
Europe
-------------------------------------------------------------------------
Four Seasons Hotel Gresham Palace
Budapest, Hungary
180 18.3%(iii)
-------------------------------------------------------------------------
Four Seasons Hotel Dublin,
Ireland(ii)
195
-
-------------------------------------------------------------------------
Four Seasons Hotel Geneva,
Switzerland
105
-
-------------------------------------------------------------------------
Four Seasons Hotel Hampshire,
England
135
-(iv)
-------------------------------------------------------------------------
Four Seasons Hotel Istanbul, Turkey
65
-(ix)
-------------------------------------------------------------------------
Four Seasons Hotel The Ritz Lisbon,
Portugal
280
-
-------------------------------------------------------------------------
Four Seasons Hotel Canary Wharf,
England
140
-
-------------------------------------------------------------------------
Four Seasons Hotel London, England
220
-(iv),(x)
-------------------------------------------------------------------------
Four Seasons Hotel Milan, Italy
120
-
-------------------------------------------------------------------------
Four Seasons Hotel George V Paris,
France
245
-
-------------------------------------------------------------------------
Four Seasons Hotel Prague, Czech
Republic
160
-(iv)
-------------------------------------------------------------------------
Four Seasons Resort Provence at
Terre Blanche, France(ii)
115
-
-------------------------------------------------------------------------
Middle East
-------------------------------------------------------------------------
Four Seasons Hotel Amman, Jordan
190
-
-------------------------------------------------------------------------
Four Seasons Hotel Cairo at The
First Residence, Egypt(ii)
270
-
-------------------------------------------------------------------------
Four Seasons Hotel Cairo at Nile
Plaza, Egypt(ii)
365
-
-------------------------------------------------------------------------
Four Seasons Hotel Damascus,
Syria(viii)
295
-
-------------------------------------------------------------------------
Four Seasons Hotel Doha, Qatar
230
-
-------------------------------------------------------------------------
Four Seasons Hotel Riyadh, Saudi
Arabia
250
-
-------------------------------------------------------------------------
Four Seasons Resort Sharm el Sheikh,
Egypt(ii)
135
-
-------------------------------------------------------------------------
Asia/Pacific
-------------------------------------------------------------------------
Four Seasons Resort Bali at Jimbaran
Bay, Indonesia(ii)
145
-
-------------------------------------------------------------------------
Four Seasons Resort Bali at Sayan,
Indonesia
60
-
-------------------------------------------------------------------------
Four Seasons Hotel Bangkok, Thailand
355
-
-------------------------------------------------------------------------
Four Seasons Resort Chiang Mai,
Thailand
80
-
-------------------------------------------------------------------------
Four Seasons Tented Camp, Golden
Triangle, Thailand
15
-
-------------------------------------------------------------------------
Four Seasons Hotel Hong Kong,
Special Administrative Region
of
the People's Republic of China(ii)
400
-
-------------------------------------------------------------------------
Four Seasons Hotel Jakarta,
Indonesia(ii)
365
2%(iii)
-------------------------------------------------------------------------
Four Seasons Resort Koh Samui,
Thailand
65
-
-------------------------------------------------------------------------
The Regent Kuala Lumpur,
Malaysia(vii)
470
-
-------------------------------------------------------------------------
Four Seasons Resort Langkawi,
Malaysia
90
-
-------------------------------------------------------------------------
Four Seasons Resort Maldives at
Kuda Huraa, Maldives
95
-
-------------------------------------------------------------------------
Four Seasons Resort Maldives at
Landaa Giraavaru, Maldives
100
-
-------------------------------------------------------------------------
Four Seasons Hotel Shanghai,
People's Republic of China
440
10%(iii),(iv)
-------------------------------------------------------------------------
Four Seasons Hotel Singapore,
Singapore
255
-
-------------------------------------------------------------------------
The Regent Singapore, Singapore
440
-
-------------------------------------------------------------------------
Four Seasons Hotel Sydney, Australia
530
-
-------------------------------------------------------------------------
Grand Formosa Regent Taipei, Taiwan
540
-
-------------------------------------------------------------------------
Four Seasons Hotel Tokyo at
Chinzan-so, Japan
285
-
-------------------------------------------------------------------------
Four Seasons Hotel Tokyo at
Marunouchi, Japan
55
-
-------------------------------------------------------------------------
(i) In the
ordinary course, we make investments in, or advances in
respect of or to owners of, properties to obtain new management
agreements or to enhance existing management agreements where we
believe the overall returns will justify the investment or
advance. We generally seek to limit our total long-term capital
exposure to no more than 20% of the total equity required for a
property. For a description of our investments in, or advances
made in respect of or to owners, of properties and other
commitments in respect of existing properties, including the
equity investments listed in this chart, see "Balance Sheet
Review and Analysis" and "Liquidity and Capital Resources" in
Management's Discussion and Analysis.
(ii) This project
includes, or is expected to include, a Four Seasons
branded residential component.
(iii) Freehold interest.
(iv) In addition
to providing management services to this property,
we have a guarantee or other off-balance sheet commitment in
respect of this property. See "Off-Balance Sheet Arrangements"
in Management's Discussion and Analysis.
(v) We have
a preferred profits interest derived from previously
existing subordinated loans to the resort or property of
approximately $17.4 million in aggregate plus a loan in the
amount of $6.0 million to an entity that owns approximately 85%
of the entity that owns the hotel.
(vi) Leasehold interest.
(vii) We have entered into
an agreement to manage a new 140 room Four
Seasons hotel in Kuala Lumpur and have reached agreement with
the owner of the existing Kuala Lumpur hotel to transition out
of managing that Regent property as of May 31, 2007.
(viii) The Four Seasons Hotel
Damascus is located in Damascus, Syria,
a country that is on the U.S. list of state sponsors of
terrorism and that is subject to U.S. regulations (including
prohibitions on dealings with specified entities) and
legislatively mandated penalties (including export sanctions and
ineligibility to receive most forms of U.S. aid or to purchase
U.S. military equipment).
(ix) Subject to satisfaction
of certain conditions, we may invest up
to $4.08 million to acquire up to an 18% interest in conjunction
with a proposed expansion and renovation of Four Seasons Hotel
Istanbul and new management contract related to Four Seasons
Hotel Istanbul at the Bosphorus.
(x) Four Seasons
Hotels Limited ("FSHL") is the tenant of the land
and premises constituting Four Seasons Hotel London. FSHL has
entered into a sublease of the hotel with the entity on whose
behalf we manage the hotel. The annual rent payable by FSHL
under the lease is the same as the annual rent that is payable
by the sub-tenant pursuant to the sublease.
Properties under Construction or Development
We currently have 30 properties under construction or
development that are to be operated under the Four Seasons name. We expect
20 of those properties to include a residential branded component. The
following table provides an overview of these properties:
-------------------------------------------------------------------------
Approximate Capital
Hotel/Resort and Location(i),(ii)
Number of Rooms Commitment(iii)
-------------------------------------------------------------------------
Scheduled 2007/2008 Openings
-------------------------------------------------------------------------
Four Seasons Hotel Alexandria, Egypt
125
-------------------------------------------------------------------------
Four Seasons Hotel Beijing, People's
Republic of China
325
YES
-------------------------------------------------------------------------
Four Seasons Hotel Beirut, Lebanon
235
YES
-------------------------------------------------------------------------
Four Seasons Resort Bora Bora, French
Polynesia(iv)
105
YES
-------------------------------------------------------------------------
Four Seasons Hotel Florence, Italy
120
-------------------------------------------------------------------------
Four Seasons Hotel Hangzhou, People's
Republic of China
100
-------------------------------------------------------------------------
Four Seasons Hotel Istanbul at the
Bosphorus, Turkey
170
YES
-------------------------------------------------------------------------
Four Seasons Hotel Macau, Special
Administrative Region of the
People's Republic of China(iv)
370
-------------------------------------------------------------------------
Four Seasons Resort Mauritius,
Republic of Mauritius(iv)
120
YES
-------------------------------------------------------------------------
Four Seasons Hotel Moscow, Russia(iv)
185
YES
-------------------------------------------------------------------------
Four Seasons Hotel Mumbai, India(iv)
230
YES
-------------------------------------------------------------------------
Four Seasons Hotel Seattle,
Washington USA(iv)
150
YES
-------------------------------------------------------------------------
Four Seasons Resort Seychelles,
Seychelles(iv)
65
-------------------------------------------------------------------------
Beyond 2008
-------------------------------------------------------------------------
Four Seasons Hotel Bahrain, Bahrain
270
-------------------------------------------------------------------------
Four Seasons Hotel Baltimore,
Maryland, USA(iv)
200
YES
-------------------------------------------------------------------------
Four Seasons Resort Barbados,
Barbados(iv)
120
-------------------------------------------------------------------------
Four Seasons Resort Cham Island,
Vietnam
80
-------------------------------------------------------------------------
Four Seasons Hotel Doha at the
Pearl, Qatar(iv)
250
YES
-------------------------------------------------------------------------
Four Seasons Hotel Dubai, United
Arab Emirates(iv)
375
-------------------------------------------------------------------------
Four Seasons Hotel Guangzhou,
People's Republic of China(iv)
325
-------------------------------------------------------------------------
Four Seasons Hotel Kuala Lumpur,
Malaysia(iv)
275
-------------------------------------------------------------------------
Four Seasons Hotel Kuwait, Kuwait
300
-------------------------------------------------------------------------
Four Seasons Hotel Marrakech,
Morocco(iv)
140
YES
-------------------------------------------------------------------------
Four Seasons Hotel Moscow Kamenny
Island, Russia(iv)
80
YES
-------------------------------------------------------------------------
Four Seasons Hotel New Orleans,
Louisiana, USA(iv)
240
YES
-------------------------------------------------------------------------
Four Seasons Resort Puerto Rico,
Puerto Rico(iv)
250
YES
-------------------------------------------------------------------------
Four Seasons Hotel Shanghai at
Pudong, People's Republic of
China(iv)
190
YES
-------------------------------------------------------------------------
Four Seasons Hotel St. Petersburg,
Russia
200
YES
-------------------------------------------------------------------------
Four Seasons Hotel Toronto, Ontario,
Canada(iv)
265
YES
-------------------------------------------------------------------------
Four Seasons Resort Vail, Colorado,
USA(iv)
120
YES
-------------------------------------------------------------------------
(i) Information concerning
hotels, resorts and residential projects
under construction or under development is based upon agreements
and letters of intent and may be subject to change prior to the
completion of the project. The dates of scheduled openings have
been estimated by management based upon information provided by the
various developers. There can be no assurance that the date of
scheduled opening will be achieved or that these projects will be
completed. In particular, in the case where a property is scheduled
to open near the end of a year, there is a greater possibility that
the year of opening could be changed. The process and risks
associated with the management of new properties are dealt with in
greater detail under "Operating Risks".
(ii) We have made an investment
in Orlando, Florida, in which we expect
to include a Four Seasons Residence Club and/or a Four Seasons
branded residential component. The financing for this project has
not yet been completed and therefore a scheduled opening date
cannot be established at this time.
(iii) The aggregate capital commitment
for the properties indicated is
$129.0 million, of which nothing has been funded and $24.1 million
is expected to be funded in the remainder of 2007. These amounts
include capital commitments in respect of Four Seasons branded
residential projects under construction or development.
(iv) We expect this project to
include a Four Seasons branded
residential component.
Three-Year Review
-------------------------------------------------------------------------
(In millions of dollars except
per share amounts and unless
otherwise noted)
2006 2005
2004
-------------------------------------------------------------------------
Statements of Operations Data:
-------------------------------------------------------------------------
Total revenues
$ 253.4 $ 248.3
$ 261.3
-------------------------------------------------------------------------
Management Operations:
-------------------------------------------------------------------------
Fee revenues(i)
$ 141.3 $ 114.8
$ 109.2
-------------------------------------------------------------------------
Management operating earnings
before other items(ii),(iv)
78.9 56.7
61.6
-------------------------------------------------------------------------
Ownership Operations:
-------------------------------------------------------------------------
Hotel ownership revenues
33.4 65.5
97.7
-------------------------------------------------------------------------
Ownership operating earnings
(loss)
before other items(iii),(iv)
1.2 (0.6)
(2.2)
-------------------------------------------------------------------------
Operating earnings before other
items(v)
80.1 56.1
59.4
-------------------------------------------------------------------------
Depreciation and amortization
(14.6) (11.2)
(11.8)
-------------------------------------------------------------------------
Other expenses, net(vi)
(3.8) (89.2)
(11.9)
-------------------------------------------------------------------------
Interest income
22.4 16.8
13.0
-------------------------------------------------------------------------
Interest expense
(14.9) (11.5)
(10.4)
-------------------------------------------------------------------------
Earnings (loss) before income
taxes(vii)
69.2 (39.0)
38.3
-------------------------------------------------------------------------
Income tax recovery (expense)
(18.9) 10.8
(12.6)
-------------------------------------------------------------------------
Net earnings (loss)
$ 50.3 $ (28.2)
$ 25.7
-------------------------------------------------------------------------
Earnings (loss) per share:
-------------------------------------------------------------------------
Basic
$ 1.36 $ (0.77)
$ 0.72
-------------------------------------------------------------------------
Diluted
$ 1.33 $ (0.77)
$ 0.69
-------------------------------------------------------------------------
Weighted average number of shares
(millions):
-------------------------------------------------------------------------
Limited Voting Shares
33.1 32.9
31.8
-------------------------------------------------------------------------
Variable Multiple Voting
Shares 3.7
3.7 3.8
-------------------------------------------------------------------------
Cash Flow Data:
-------------------------------------------------------------------------
Cash provided by operating
activities
$ 78.0 $ 26.5
$ 44.4
-------------------------------------------------------------------------
Cash provided by (used in) investing
activities
6.6 (10.3)
(41.2)
-------------------------------------------------------------------------
Cash provided by financing activities
29.8 3.9
82.6
-------------------------------------------------------------------------
Balance Sheet Data:
-------------------------------------------------------------------------
Cash and cash equivalents
$ 358.9 $ 242.2
$ 226.4
-------------------------------------------------------------------------
Total assets
992.0 880.2
902.1
-------------------------------------------------------------------------
Long-term obligations
266.8 273.8
253.0
-------------------------------------------------------------------------
Shareholders' equity
648.5 546.7
584.9
-------------------------------------------------------------------------
Other Data:
-------------------------------------------------------------------------
Total revenues of all managed
hotels and resorts(viii)
$ 2,943.8 $ 2,559.7 $ 2,240.9
-------------------------------------------------------------------------
Management operations profit margin
(excluding reimbursed costs
and the
impact of foreign exchange forward
contracts)
55.8% 49.4%
56.4%
-------------------------------------------------------------------------
Market price per share at
year-end (C$)
$ 95.02 $ 57.84
$ 98.11
-------------------------------------------------------------------------
Cash dividends declared per
share (C$):
-------------------------------------------------------------------------
Limited Voting Shares
$ 0.11 $ 0.11
$ 0.11
-------------------------------------------------------------------------
Variable Multiple Voting
Shares $ 0.055 $
0.055 $ 0.055
-------------------------------------------------------------------------
Shares outstanding (millions):
-------------------------------------------------------------------------
Limited Voting Shares
33.7 32.9
32.9
-------------------------------------------------------------------------
Variable Multiple Voting
Shares 3.7
3.7 3.7
-------------------------------------------------------------------------
Market capitalization at
year-end (C$)
$ 3,552.5 $ 2,119.3 $ 3,591.7
-------------------------------------------------------------------------
Employees(ix)
33,280 31,420
31,300
-------------------------------------------------------------------------
(i) Fee revenues
are comprised of hotel management fees and other
fees.
(ii) Management operating
earnings before other items are comprised
of hotel management fees, other fees and reimbursed costs, less
general and administrative expenses and reimbursed costs.
(iii) Ownership operating
earnings (loss) before other items is equal
to hotel ownership revenues less hotel ownership cost of sales
and expenses.
(iv) Our strategy
is to focus on Management Operations rather than
Ownership Operations. Four Seasons Hotel Vancouver is our only
remaining hotel whose results we currently consolidate. As a
result, commencing January 1, 2006, corporate expenses are
reflected in our results as general and administrative expenses
in the consolidated statements of operations for the year ended
December 31, 2006. Corporate expenses for the year ended
December 31, 2005 and 2004 that previously were included in our
Ownership Operations segment have been reclassified to our
Management Operations segment and included in general and
administrative expenses in our consolidated statements of
operations.
(v) Operating
earnings before other items is equal to net earnings
(loss) plus (i) income tax expense less (ii) income tax
recovery plus (iii) interest expense less (iv) interest income
plus (v) other expenses less (vi) other income plus (vii)
depreciation and amortization. Operating earnings before other
items is a non-GAAP measure and is not intended to represent
cash flow from operations, as defined by Canadian GAAP, and it
should not be considered as an alternative to net earnings,
cash flow from operations or any other measure of performance
prescribed by GAAP. Our operating earnings before other items
may also not be comparable to operating earnings before other
items used by other companies, which may be calculated
differently. We consider operating earnings before other items
to be a meaningful indicator of our operations and we use it as
a measure to assess our operating performance. It is included
because we believe it can be useful in measuring our ability to
service debt, fund capital expenditures and expand our
business. Operating earnings before other items is also used by
investors, analysts and our lenders as a measure of our
financial performance.
(vi) Other expenses,
net in 2004 is primarily attributable to an
accounting loss incurred on the redemption of the Company's
Liquid Yield Option Notes which were issued in 1999.
(vii) Earnings (loss) before
income taxes represent operating
earnings before other items less (i) depreciation and
amortization plus (ii) other income less (iii) other expenses
plus (iv) interest income less (v) interest expense.
(viii) Total revenues of all
managed hotels and resorts consist of
rooms, food and beverage, telephone and other revenues of all
the hotels and resorts that we manage.
(ix) We directly
employ, and are financially responsible for,
approximately 515 people at our various corporate offices,
worldwide sales offices and central reservations office. Of
these corporate employees, almost half are devoted to sales and
marketing activities (including our worldwide reservations
service), the cost of which is reimbursed by the hotels and
resorts that we manage. In addition, there are approximately
32,800 employees located at the 74 hotels and resorts that we
manage, many of which include a residential component. All
costs relating to these property-based employees, including
wages, salaries and health and insurance benefits, are the
responsibility of the property owners and are generally paid
out of the operating cash flow of the property.
Operating Risks
Our business is subject to many risks and uncertainties,
including those discussed below.
Geopolitical, Economic and Lodging Industry Conditions
We focus exclusively on the luxury segment of the lodging
industry, which is subject to operating risks inherent in the industry.
These risks include, among other things:
- changes
in general, local and industry-specific economic and
financial conditions, such as the airline industry,
- periodic
overbuilding in the industry or a specific market,
- varying
levels of demand for rooms and related services (including
food and beverage and function space),
- competition
from other properties,
- changes
in travel patterns,
- the
recurring need for renovation, refurbishment and improvement
of hotel and resort properties,
- changes
in wages, benefits, prices, construction and maintenance,
insurance and operating costs that may result from inflation or
otherwise,
- government
regulations,
- changes
in taxes and interest rates,
- currency
fluctuations,
- the
availability and cost of financing for operating or capital
requirements,
- natural
disasters,
- extreme
weather conditions,
- labour
disputes,
- infectious
diseases, and
- war,
civil unrest, terrorism, international conflict and political
instability.
We operate and have interests in luxury hotels, resorts
and serviced and branded residential projects in many areas of the world
and our revenues are dependent upon the results of the individual properties.
The conditions listed above can have, and have from time to time had, a
significant adverse impact upon individual properties or particular regions.
A period of economic recession or downturn in any of the world's primary
outbound travel markets could materially and adversely affect, and have
from time to time materially and adversely affected, our business, results
of operations and financial condition, including fee revenue and ownership
earnings. An economic downturn generally affects ownership results to a
significantly greater degree than management results due to the high fixed
costs associated with hotel ownership.
Competition
The luxury segment of the hotel and resort industry is
subject to intense competition, both for guests and for the acquisition
of new management agreements. Competition for guests arises primarily from
other luxury hotel chains, individual luxury hotels and resorts and a limited
number of luxury properties operated by larger hotel chains. That competition
is primarily based on, among other things, brand name recognition, location,
room rates and quality of service and accommodations. Demographic, geographic
and other changes in specific market conditions could materially and adversely
affect the convenience or desirability of the locales in which hotels and
resorts that we manage are located.
We compete for management opportunities with other operators
of luxury hotels. We believe that our ability to obtain management agreements
is based primarily on the value and quality of our management services,
brand name recognition and the economic advantages to the hotel owner of
retaining our management services and using our brand name. We also believe
that an owner's assessment of the economic advantages of retaining our
management services and using our brand name is, in part, a function of
the success of the hotels and resorts currently under management by us.
Competitive factors also include relationships with hotel owners and investors,
marketing support, reservation system capacity and the ability to make
investments that may be necessary to obtain management agreements. Our
failure to compete successfully for expansion opportunities or to attract
and maintain relationships with current hotel owners could materially and
adversely affect our business, results of operations and financial condition.
Dependence on Management Agreements
Management agreements expire in the ordinary course,
and may in certain circumstances be renegotiated and be subject to termination
upon the occurrence of specified events. Failure to obtain new management
agreements or maintain existing management agreements could materially
and adversely affect our business, results of operations and financial
condition. We manage hotels and resorts for various owners subject to the
terms of each property's management agreements. Those agreements generally
can be terminated by the non- defaulting party upon default in payment
or unremedied failure to comply with the terms of the agreements unless,
in most cases, such default or unremedied failure was caused by typical
force majeure events. Most of the management agreements are subject to
performance tests that, if not met, could allow the agreements to be terminated
by the owner prior to the expiration of their respective terms. The failure
to maintain the standards specified in the agreement or to meet the other
terms and conditions of an agreement, including a performance test, could
result in the loss or cancellation of a management agreement. Typically,
but not in all cases, we have certain rights to cure a default to avoid
termination. Substantially all of the management agreements include typical
force majeure events, which, if they were to occur would prevent the termination
of the management agreements. Some management agreements also can be terminated,
subject in certain cases, to a payment to us, upon a change in use of the
property or upon a sale by the owner to a new owner who does not wish to
retain the existing agreement.
In the event of bankruptcy involving a property and foreclosure,
a management agreement may be terminated in most jurisdictions, unless
the lender has executed a non-disturbance agreement that is enforceable
under applicable bankruptcy laws. We generally have non-disturbance agreements
with the lenders to owners of hotels and resorts that we manage. Where
no non- disturbance agreement is in place or where it is not enforceable
under applicable bankruptcy laws, the risk of loss of a management agreement
increases where the owner incurs debt at the property level that cannot
be serviced adequately. In some jurisdictions, particularly in the United
States, management agreements have been construed by courts to create an
agency relationship that is terminable by the owner, notwithstanding any
provision of the agreement that purports to make the agreement not terminable
under such circumstances. In such circumstances, we would generally have
an unsecured claim for breach of contract against the owner of the hotel
or its trustee in bankruptcy.
Management agreements for hotels and resorts we manage
have varying remaining terms (including extension periods that we may elect)
and have remaining terms averaging of approximately 51 years. Renewal of
management agreements at the end of their term is the subject of negotiation
between us and the relevant owners. There can be no assurance that any
particular management agreement or agreements will be renewed or with respect
to the terms and conditions of any renewal.
Dependence on Property Owners
As a result of our strategic decision to focus on management
as opposed to ownership of hotel and resort properties, our growth opportunities
are dependent in part on our ability to establish and maintain satisfactory
relationships and enhance those relationships with existing and new property
owners. Those growth opportunities are also dependent on access to capital
by these investors. In 2006, one owner had an ownership interest in a combination
of hotels, resorts and serviced and branded residential properties managed
by Four Seasons that represented in excess of 10% of our fee revenues from
management operations. A failure by us to maintain satisfactory relationships
with any owner or owners of a significant number of properties could have
a material adverse effect on our business, results of operations and financial
condition.
Risk Associated with Expansion, Growth and New Construction
An element of our business strategy is to increase the
number of hotels and resorts under management. That expansion is dependent
upon a number of factors, including the identification of appropriate management
opportunities, competing successfully for the management agreements relating
to those opportunities, availability of financing for new developments
and timely completion of construction of new hotels and resorts (or the
refurbishment of existing properties) that are, or are to be, managed by
us.
From time to time, the hotel industry has experienced
periods during which financial institutions generally have been reluctant
to provide financing for the construction of real estate properties, including
hotels and resorts. There can be no assurance that we will be able to obtain
financing for projects or that the terms on which such financing can be
obtained will be acceptable to us. The inability to obtain financing for
a project could cause cancellation of, or short-term interruption in, the
progress or completion of properties under construction or development.
Additionally, any construction project entails significant
construction risks that could delay or result in a substantial increase
in the cost of construction. The opening of newly constructed properties,
in particular, is contingent upon, among other things, receipt of all required
licences, permits and authorizations, including local land use permits,
building and zoning permits, health and safety permits and liquor licences.
Changes or concessions required by regulatory authorities could also involve
significant additional costs and delays or prevent completion of construction
or opening of a project. As a result of the global nature of our business,
these regulatory matters arise in a number of jurisdictions, many of which
have distinctive regulatory regimes.
Investments in and Advances to Managed and Owned Properties
We have made investments in, and/or advances in respect
of or to owners of, hotels and resorts that we manage, to enable us to
acquire the management agreements for those properties or to enhance the
terms of those agreements. Currently, we hold an ownership interest in,
or have made advances in respect of, 34 of the 74 hotels and resorts that
we manage. We also have one remaining 100% leasehold interest in the Four
Seasons Hotel Vancouver. We also have made, or expect to make in the near
term, investments in, or advances in respect of or to owners of, 18 of
the 30 properties under construction or development. The book value of
total investments and advances as at December 31, 2006 was approximately
$380 million.
In addition to the risks associated with the operation
of a hotel, we are subject to risks generally related to owning and leasing
real estate in connection with these properties. These risks include, among
others, adverse changes in general or local economic conditions, local
real estate market conditions, property and income taxes, interest rates,
the availability, cost and terms of financing, the financial stability
of the property owner, liability for long-term lease obligations, the availability
and costs of insurance coverage, the potential for uninsured casualty and
other losses, the impact of present or future legislation or regulation
(including those relating to the environment), adverse changes in zoning
laws and other regulations, civil unrest, terrorism, war and political
instability. In addition, these investments in real estate are relatively
illiquid and our ability to dispose of our ownership interests, particularly
our leasehold interests, in response to changes in economic or other conditions
may be limited. Further, advances to owners of properties are typically
subordinated and, in any event, may be subject to loss in the event of
insolvency of the owner to which an advance was made. Any of these factors
could result in material operating losses by us or a particular hotel or
resort and possibly the whole or partial loss of our investment in the
property or the inability to collect advances outstanding. Holding an interest
in a hotel also introduces risks associated with funding of capital expenditures
and incurring our proportionate share of any operating losses. Where cash
and working capital reserves provided by hotel operations are insufficient,
debt service, major repairs, renovations, refurbishments, alterations or
other capital expenditures generally must be funded by the owners of the
hotels and resorts, including us in some cases.
Debt Rating Risks
Our corporate rating is currently investment grade (BB+)
as rated by Standard & Poor's. Our senior unsecured debt is currently
rated by three debt rating agencies (Standard & Poor's: BBB-; Moody's:
Baa3 with stable outlook; Dominion Bond Rating Service: BBB). In each case
our rating is under review with the possibility of a down grade as a result
of the implementation of the proposed Arrangement Transaction. A negative
change in either global economic or political events may result in the
rating agencies downgrading the rating and/or outlook for many of the lodging
companies, including us, which would result in an increase in our borrowing
costs. In addition, pricing of any amounts drawn under our syndicated bank
credit facilities (which are undrawn but under which $1.6 million of letters
of credit were issued at December 31, 2006) includes a spread to LIBOR
ranging between 0.875% and 2.25%, depending upon the ratings from Standard
& Poor's and Moody's and certain financial ratios.
Government Regulation
We are subject to laws, ordinances and regulations relating
to, among other things, taxes, environmental matters, the preparation and
sale of food and beverages, accessibility for disabled persons and general
building and zoning requirements in the various jurisdictions in which
we manage hotels and resorts. Owners and managers of hotels and resorts
also may be subject to laws governing the relationship with employees,
including minimum wage requirements, overtime, working conditions and work
permit requirements. In addition, the properties we manage (and in, or
in respect of which, we may have made advances or investments) may be located
in countries (such as Syria), which may from time to time be subject to
international trade restrictions, regulations or other forms of economic
or political sanction. Compliance with these laws can affect the revenues
and profits of properties managed by us or could materially and adversely
affect our business, results of operations and financial condition.
Four Seasons, as the current or previous owner or operator
of certain hotels, could be liable for investigation and clean-up of contamination
and other corrective or remedial action under various laws, ordinances
and regulations relating to environmental matters. These laws often impose
liability without regard to whether the owner or operator knew of, or was
responsible for, the condition requiring environmental response and whether
the party is currently or formerly the owner or manager of the property.
The presence of contamination from hazardous or toxic substances, or the
failure to properly remediate a contaminated property, may affect the ability
to use the property for its intended purpose, to sell or rent the property,
or to borrow using the property as collateral. Persons who arrange for
the disposal or treatment of hazardous or toxic substances also may be
liable for the cost of removal or remediation of substances at the disposal
or treatment facility. In connection with the operation and ownership of
various properties, we could be held liable for the cost of remedial action
with respect to environmental matters. We are not aware of any potential
material environmental liabilities for which we will be responsible with
respect to any of the properties which we currently manage or previously
managed.
Pursuant to the management agreements to which we are
a party, the owner is responsible for the costs and expenses of the employees
at each hotel and for all costs, expenses and liabilities incurred in connection
with the operation of the hotel, including compliance with government regulations.
However, as the manager, we may be contingently liable for certain liabilities
in respect of which we do not maintain insurance, including certain workers'
compensation claims, environmental liabilities and, in respect of hotels
in the United States, claims arising under the Americans with Disabilities
Act.
We generally obtain indemnities from the owners of the
hotels that we manage in respect of these liabilities. The value of those
indemnities is dependent upon, among other things, the financial condition
of the owners who have provided them.
Political Risk
We currently manage and in some cases have an ownership
interest in hotels and resorts in 31 countries and currently have development
plans to open hotels and resorts in 13 additional countries around the
world. In certain of these countries, from time to time, the related assets
and revenues may be exposed to political and other risks associated with
foreign investment. In some jurisdictions, at certain times, there may
be a risk that we may have difficulty enforcing our contractual rights
relating to our assets including our non-disturbance agreements and any
security relating to our loan receivables if due process of law is not
respected.
Insurance
Our management agreements require the hotels and resorts
that we manage to be insured against property damage, business interruption
and liability at the expense of the owner of the property. Under these
policies we are also typically insured against loss of fee income in the
event of a temporary business interruption at any of the hotels and resorts
that we manage. We also maintain our own insurance coverage in respect
of liability, in excess of that obtained at the property level. In addition,
we obtain indemnities from the owners of the hotels and resorts that we
manage in respect of damages caused by acts, omissions and liabilities
of the employees of the property or of Four Seasons, other than damages
resulting from certain actions of Four Seasons and certain senior management
personnel. Insurance premiums are continuing to increase and underwriters
are imposing increasingly restrictive terms and conditions. All lines of
coverage generally have been affected; however, commercial properties generally
continue to be the most difficult to insure. Exposures for terrorism, cyber
perils and toxic mould are now common exclusions. If we were held liable
for amounts exceeding the limits of our insurance coverage or for claims
outside the scope of that coverage or if the indemnities were insufficient
for any reason, including as a result of the owner's or indemnitor's financial
condition, our business, results of operations and financial condition
could be materially and adversely affected.
Legal Proceedings
In the ordinary course of our business, we are named
as a defendant in legal proceedings resulting from incidents taking place
at properties we manage or in which we have an ownership interest. We maintain
comprehensive liability insurance and also require owners to maintain adequate
insurance coverage as described above under "Insurance". We believe such
coverage to generally be of a nature and amount sufficient to ensure that
we are adequately protected from suffering material financial loss as a
result of such claims.
Currency Exposure
We have entered into management agreements with respect
to hotels throughout the world and accordingly, earn revenue and make investments
and advances in many foreign currencies. Our most significant currency
is US dollars, as approximately half of our revenues and assets currently
are US dollar-denominated, as are the majority of our investment commitments.
However, we incur the majority of our costs in Canadian dollars and our
most significant liability (which is related to our convertible senior
notes) is a Canadian dollar obligation.
In 2005, we adopted US dollars as our reporting currency.
This means that our Canadian dollar consolidated financial statements are
translated into US dollars for reporting purposes. Our consolidated statements
of operations, consolidated statements of cash provided by operations and
consolidated statements of cash flow are translated using the weighted
average exchange rates for the period, and assets and liabilities are converted
from Canadian dollars into US dollars at the foreign exchange rate applicable
at the balance sheet date.
We have not changed our functional currency, which remains
Canadian dollars, or the functional currencies of any of our subsidiaries.
As a result, while US dollar reporting will minimize the currency fluctuations
related to the majority of our US dollar management fee revenues, it will
not eliminate the impact of foreign currency fluctuations related to our
management fees in other currencies, or our general and administrative
expenses, which are incurred primarily in Canadian dollars. It will also
not eliminate foreign currency gains and losses related to un-hedged net
monetary assets and liability positions. As such, our consolidated results
will continue to include gains and losses related to foreign currency fluctuations.
The impact of foreign currency gains and losses has been material in the
past and could continue to be material in the future.
We endeavour to match foreign currency revenues to costs
and investment commitments to provide a natural hedge against currency
fluctuations, although there can be no assurance that these measures will
be effective in the management of those risks. We also endeavour to manage
our currency exposure through, among other things, the use of foreign exchange
forward contracts. As at December 31, 2006, we held $39.1 million in foreign
exchange forward contracts for the sale of US dollars into Canadian dollars
to meet our operating needs. In addition, certain currencies are subject
to exchange controls or are not freely tradeable and as a result are relatively
illiquid. We attempt to minimize our foreign currency risk by monitoring
our cash position, keeping fee receivables current, monitoring the political
and economic climate and considering whether to insure convertibility risk
in each country in which we manage a property. In certain properties, the
foreign currency risk is further mitigated by pricing room rates in US
dollars. However, no assurances can be given as to whether our strategies
relating to currency exposure will be successful or that foreign exchange
fluctuations will not materially adversely affect our business, results
of operations and financial condition.
Seasonality/Quarterly Predictability
Our hotels and resorts are generally affected by normally
recurring seasonal patterns and, for most of the properties, demand is
typically lower in December through March than during the remainder of
the year.
Management operations are seasonal in nature, as fee
revenues are affected by the seasonality of hotel and resort revenues and
operating results. Urban hotels generally experience lower revenues and
operating results in the first quarter, which has a negative impact on
management revenues. However, this negative impact on management revenues
generally is offset, to some degree, by increased travel to resorts in
that quarter and may be offset to a greater extent as the portfolio of
resort properties that we manage increases. However, seasonality can be
affected by specific local events that can cause, and from time to time
have caused, unanticipated disruptions to the operations of certain of
the properties we manage.
In addition, certain management fees, in particular incentive
fees and residential royalty fees, are difficult to predict both in terms
of timing and amount and can be impacted to a greater extent than other
elements of our business by economic cycles, interest rate levels and other
external factors. Although the majority of our management fees are based
on the total revenues of the properties we manage and as a result are easier
to predict, fluctuations in our incentive fees and residential royalty
fees can cause volatility in our earnings, particularly as measured from
quarter to quarter.
Our hotel ownership position is also affected by seasonal
fluctuations, with lower revenue, operating profit and cash flow in the
first quarter; ownership positions typically incur an operating loss in
the first quarter of each year. Typically, the third quarter has been the
strongest quarter for the Four Seasons Hotel Vancouver.
Intellectual Property
In the highly competitive service industry in which we
operate, trademarks, service marks and logos are very important in the
sales and marketing of those services. We have a significant number of
trademarks, service marks and logos, and significant time and effort are
expended each year on surveillance, registration and protection of our
trademarks, service marks and logos. The loss or infringement of any of
our trademarks, service marks or logos could have a material and adverse
effect on our business, results of operations and financial condition.
Risks Associated with the Four Seasons Branded Residential
Business
We currently license and manage Four Seasons branded
residential projects, including whole ownership and fractional ownership,
in many of our existing hotel and resort locations. We are expanding our
presence in the luxury segment of the whole ownership and fractional ownership
business with a number of other projects under development. Our ability
to successfully develop and sell interests in the residential units that
are built, and the various fees earned by us from each residential project,
could be materially and adversely affected by one or any combination of
the factors described in this "Operating Risks" section. Although we believe
that we are in compliance in all material respects with applicable laws
and regulations to which the marketing, sale and operation of Four Seasons
branded residential projects are currently subject, changes in these requirements
or a determination by a regulatory authority that we are not in compliance
could materially and adversely affect our business, results of operations
and financial condition.
Dependence on Key Employees
Our success depends in part on the continued service
of our senior executives, who have an average tenure of approximately 23
years with Four Seasons. In particular, our senior management is responsible
for the development and/or maintenance of ongoing relationships with new
and existing investors in the properties that are managed by us. The unanticipated
departure of individuals responsible for those relationships could have
a material and adverse effect on, among other things, relationships affecting
properties that are, or that may be, managed by us.
Critical Accounting Estimates
The significant accounting policies used by us in preparing
our consolidated financial statements are described in note 1 to our consolidated
financial statements and should be read to ensure a proper understanding
and evaluation of the estimates and judgments made by management in preparing
those financial statements. Our consolidated financial statements are prepared
in accordance with Canadian GAAP.
Under Canadian GAAP, we are also required to make estimates
when we account for and report assets, liabilities, revenues and expenses,
and contingencies. We are also required to evaluate the estimates that
we use.
We base our estimates on past experience and other factors
that we believe are reasonable under the circumstances. Because this process
of estimation involves varying degrees of judgment and uncertainty, the
amounts currently reported in the financial statements could, in the future,
prove to be inaccurate.
We believe the following critical accounting estimates
involve the more significant judgments and estimates used in the preparation
of our consolidated financial statements.
ADD: /THIRD AND FINAL ADD - TO396 - Four Seasons Hotels
and Resorts/
Recoverability of Investments
Estimates are required to be used by management to assess
the recoverability of our investments in long-term receivables, hotel partnerships
and corporations and management contracts.
Long-term receivables are reviewed for impairment when
significant events or circumstances occur, including, but not limited to,
the following: changes in general economic trends, defaults in interest
or principal payments, deterioration in a borrower's financial condition
or creditworthiness (including severe losses in the current year or recent
years), or a significant decline in the value of the security underlying
a loan. We measure the impairment of long-term receivables based on the
present value of expected future cash flows (discounted at the original
effective interest rate) or the estimated fair value of the collateral.
If an impairment exists, we establish a specific allowance for doubtful
long-term receivables for the difference between the recorded investment
and the present value of the expected future cash flows or the estimated
fair value of the collateral. We apply this impairment policy individually
to all long-term receivables and do not aggregate long-term receivables
for the purpose of applying this policy.
Investments in hotel partnerships and corporations are
written down to their estimated recoverable amount in the event of a decline
in value that is other than temporary.
Investment in management contracts are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of investment in management contracts may not be recoverable. Recoverability
is measured by a comparison of the carrying amount of the investment to
estimated undiscounted future cash flows expected to be generated by the
investment. If the carrying amount of the investment exceeds its estimated
undiscounted future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the investment exceeds its fair
value.
Estimates of recoverable amounts, future cash flows,
and fair values are based on estimates of the profitability of the related
managed properties, which, in turn, depend upon assumptions regarding future
conditions in the general or local hospitality industry, including competition
from other hotels, changes in travel patterns, and other factors that affect
the properties' gross operating revenues and profits. Estimates of recoverable
amounts, future cash flows, and fair values may also depend upon, among
other things, periodic independent valuations, assumptions regarding local
real estate market conditions, property and income taxes, interest rates
and the availability, cost and terms of financing, the impact of present
or future legislation or regulation, debt incurred by the properties that
rank ahead of debt owed to us, owners' termination rights under the terms
of the management agreements, disputes with owners, and other factors affecting
the profitability and saleability of the properties (including the proposed
timing of a sale) and our investments. Estimates of recoverable amounts
can also be affected by variations in historical and current foreign exchange
rates.
These assumptions, estimates and evaluations are among
other things, subject to the availability of reliable comparable data,
ongoing geopolitical concerns and the uncertainty of predictions concerning
future events. Accordingly, estimates of recoverable amounts, future cash
flows, and fair values are subjective and may not ultimately be achieved.
Should the underlying circumstances change, the estimated recoverable amounts
and future cash flows could change by a material amount.
Fixed Assets
Fixed assets include land, buildings, furniture, fixtures,
equipment and leasehold interests and improvements (including our 100%
leasehold interest in Four Seasons Hotel Vancouver), which are all recorded
at cost. Our fixed assets are reviewed for impairment whenever events or
changes in circumstances indicate that their carrying amount may not be
recoverable. An impairment loss will be recorded if the projected undiscounted
future cash flows from the fixed assets are less than the net book value
of the fixed assets. Impairment losses are measured by the excess of the
book value over the fair value of the asset. Future cash flows are forecasted
on an asset specific basis based on our intentions with respect to the
asset, historical results and recent trends or events that may impact the
asset's future performance, including general economic conditions, property
and income taxes, the impact of present or future legislation or regulation,
and other factors affecting the recoverability of the fixed assets.
Retirement Benefit Plan
We maintain an unfunded, multiemployer, non-contributory,
defined benefit retirement plan on behalf of four active executives and
14 retired executives and general managers, as well as the owner of two
of our managed properties (see "Other Income (Expenses), Net - Retirement
Benefit Plan" discussed above). The accrued benefit liability of $26.3
million that is recorded on our balance sheet in "Long-term obligations"
as at December 31, 2006 excludes the accrued benefit liability owed by
the owner of the two managed properties in respect of the general managers
of those properties. Due to the long-term nature of the defined benefit
plan, the calculation of benefit expenses and liabilities depends on various
assumptions, such as discount rates, expected rates of increase in future
compensation levels, retirement age, and mortality. These assumptions are
determined by management and are reviewed annually by the actuaries. Actual
future experience that differs from the assumed or future changes in assumptions
may affect the amounts of benefit liability and expense. For further details
on our retirement plan expense and liability, see note 14(b) of our consolidated
financial statements.
Income Taxes
We account for income taxes using the liability method
and calculate our income tax provision based on the expected tax treatment
of transactions recorded in our consolidated financial statements. Under
this method, future tax assets and liabilities are recognized based on
differences between the bases of assets and liabilities used for financial
statement and income tax purposes, using substantively enacted tax rates.
In determining the current and future components of the tax provision,
management interprets tax legislation in a variety of jurisdictions and
makes assumptions about the expected timing of the reversal of future tax
assets and liabilities. If our interpretations differ from those of the
tax authorities, enacted tax rates change or the timing of reversals is
not as anticipated, the tax provision could materially increase or decrease
in future periods.
In measuring the amount of future income tax assets and
liabilities, we are periodically required to develop estimates of the tax
basis of assets and liabilities. In circumstances where the applicable
tax laws and regulations are either unclear or subject to ongoing varying
interpretations, changes in these estimates could occur that could materially
affect the amounts of future income tax assets and liabilities recorded
in our consolidated financial statements. For the year ended December 31,
2006, the most significant tax basis estimate that would be affected by
differences in interpretation of tax laws was the accumulated net operating
losses carried forward of $56.5 million.
For every material future tax asset, we evaluate the
likelihood of realization of some portion or all of the asset. This evaluation
is based on, among other things, expected levels of future taxable income
and the pattern and timing of reversals of temporary timing differences
that give rise to future tax assets and liabilities. If, based on the available
evidence, we determine that it is more likely than not (a likelihood of
more than 50%) that all or some portion of a future tax asset will not
be realized, we record a valuation allowance against that asset. For the
year ended December 31, 2006, the future income tax assets were $23.7 million,
net of a valuation allowance of $13.6 million.
Recent Canadian
Accounting Standards Issued but Not Yet Adopted
Financial Instruments
In January 2005, the Canadian Institute of Chartered
Accountants ("CICA") issued three new accounting standards related to financial
instruments: Section 3855, "Financial Instruments - Recognition and Measurement",
Section 3865, "Hedges", and Section 1530, "Comprehensive Income". These
new standards are effective for fiscal years beginning on or after October
1, 2006. Section 3855 prescribes when a financial instrument is to be recognized
on the balance sheet and at what amount. It also specifies how financial
instrument gains and losses are to be presented. Section 3865 provides
additional accounting treatments to Section 3855 for entities, which choose
to designate qualifying transactions as hedges for accounting purposes,
by specifying how hedge accounting is applied and the required disclosures.
It also defines a fair value hedge, a cash flow hedge and a hedge of a
net investment in a self sustaining foreign operation and provides guidance
on how to account for each. In addition, it requires that any ineffectiveness
in a hedging relationship be recorded immediately in income. Section 1530
introduces a new requirement to present certain revenues, expenses, gains
and losses, which may include the impact of certain financial instruments,
that otherwise would not be immediately recorded in income in a comprehensive
income statement with the same prominence as other statements that constitute
a complete set of financial statements. We are still assessing the implications
of these new standards and have not yet determined the impact of the implementation
of these standards on our 2007 consolidated financial statements.
Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of the Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of
our disclosure controls and procedures (as defined in the rules of the
SEC and the policies of the Canadian Securities Administrators (CSA)) as
at December 31, 2006, and has concluded that such disclosure controls and
procedures are effective.
Management's Annual Report on Internal
Control over Financial Reporting
The following report is provided by management in respect
of our internal control over financial reporting:
(1) Our management is responsible
for establishing and maintaining
adequate internal
control over financial reporting for Four Seasons
Hotels Inc.
Internal control over financial reporting is a process
designed to
provide reasonable assurance regarding the reliability of
financial
reporting and the preparation of financial statements for
external reporting
purposes in accordance with generally accepted
accounting
principles in Canada. All internal control systems, no
matter how
well designed, have inherent limitations. Therefore, even
those systems
determined to be effective can provide only reasonable
assurance
with respect to financial statement preparation and
presentation.
(2) Our management has used criteria
set forth by the Committee of
Sponsoring
Organizations of the Treadway Commission (COSO) framework
to evaluate
as at December 31, 2006, the effectiveness of our
internal control
over financial reporting.
(3) As at December 31, 2006, our management
assessed the effectiveness of
our internal
control over financial reporting and concluded that such
internal control
over financial reporting is effective and that there
are no material
weaknesses in our internal control over financial
reporting
that have been identified by management.
(4) KPMG LLP, which has audited the
consolidated financial statements of
Four Seasons
Hotels Inc. for the year ended December 31, 2006, has
also issued
a report on management's assessment of the effectiveness
of our internal
control over financial reporting and our financial
statements
under Auditing Standard # 2 of the Public Company
Accounting
Oversight Board (United States). This report is included
with the consolidated
financial statements.
Changes in Internal Control over Financial
Reporting
There have been no changes in our internal control over
financial reporting during the year ended December 31, 2006, that have
materially affected, or are reasonably likely to materially affect our
internal control over financial reporting.
Reporting Currency
We have historically prepared our consolidated financial
statements in Canadian dollars ("C$"). Effective January 1, 2005, we adopted
US dollars as our reporting currency. There were no changes in the functional
currency of FSHI, which remains Canadian dollars, or the functional currencies
of any of our subsidiaries.
Additional Information
Additional information about us (including our most recent
Annual Information Form) is available on our website at www.fourseasons.com/investor,
and on SEDAR at www.sedar.com.
Endnotes
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(1) RevPAR is defined as average
room revenue per available room. It
is a
non-GAAP financial measure and does not have any standardized
meaning
prescribed by GAAP and is, therefore, unlikely to be
comparable
to similar measures presented by other issuers. We use
RevPAR
because it is a commonly used indicator of market
performance
for hotels and resorts and represents the combination
of the
average daily room rate and the average occupancy rate
achieved
during the period. RevPAR does not include food and
beverage
or other ancillary revenues generated by a hotel or resort.
RevPAR
is the most commonly used measure in the lodging industry to
measure
the period-over-period performance of comparable properties.
Our
calculation of RevPAR may be different than the calculation used
by other
lodging companies.
(2) Reimbursed costs include
the reimbursement of all out-of-pocket
costs,
including sales and marketing and advertising charges.
(3) Gross operating profit is
defined as gross operating revenues less
operating
expenses.
(4) We have leased and managed
Four Seasons Hotel Vancouver since 1976.
The
lease on Four Seasons Hotel Vancouver expires in 2020.
(5) Gross operating margin represents
gross operating profit as a
percentage
of gross operating revenue.
(6) The term "Core Hotels" means
hotels and resorts under management for
the
full year of both 2006 and 2005. However, if a "Core Hotel" has
undergone
or is undergoing an extensive renovation program in one of
those
years that materially affects the operation of the property in
that
year, it ceases to be included as a "Core Hotel" in either
year.
Changes from the 2005/2004 Core Hotels are the additions of
Four
Seasons Resort Scottsdale at Troon North, Four Seasons Resort
Whistler,
Four Seasons Resort Costa Rica at Peninsula Papagayo, Four
Seasons
Hotel Gresham Palace Budapest, Four Seasons Resort Provence
at Terre
Blanche and Four Seasons Hotel Cairo at Nile Plaza, and the
deletion
of The Regent Kuala Lumpur.
(7) We have this ability in 70
of 74 of the hotels and resorts that we
manage.
(8) This includes The Pierre
in New York and Four Seasons Hotel Newport
Beach,
which are no longer managed by Four Seasons.
(9) Operating earnings before
other items is equal to net earnings
(loss)
plus (i) income tax expense less (ii) income tax recovery
plus
(iii) interest expense less (iv) interest income plus (v) other
expenses
less (vi) other income plus (vii) depreciation and
amortization.
Operating earnings before other items is a non-GAAP
financial
measure and does not have any standardized meaning
prescribed
by GAAP and is therefore unlikely to be comparable to
similar
measures presented by other issuers. We consider operating
earnings
before other items to be a meaningful indicator of
operations
and use it as a measure to assess our operating
performance.
It is included because we believe it can be useful in
measuring
our ability to service debt, fund capital expenditures and
expand
our business. Operating earnings before other items is also
used
by investors, analysts and our lenders as a measure of our
financial
performance.
(10) Adjusted net earnings is a non-GAAP
financial measure and does not
have
any standardized meaning prescribed by GAAP. It is, therefore,
unlikely
to be comparable to similar measures presented by other
issuers
and should not be considered as an alternative to net
earnings,
cash flow from operating activities or any other measure
of performance
prescribed by Canadian GAAP. Our adjusted net
earnings
may also not be comparable to adjusted net earnings used by
other
lodging companies, which may be calculated differently. We
consider
adjusted net earnings to be a meaningful indicator of our
operations,
and management uses it as a measure to assess our
operating
performance. Adjusted net earnings is also used by
investors,
analysts, and our lenders as a measure of our financial
performance.
As a result, we have chosen to provide this
information.
(11) Quarterly and year-to-year computations
of per share amounts are
made
independently. The sum of per share amounts for the quarters
may
not agree with per share amounts for the year.
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