FOUR SEASONS HOTELS INC.
The Corporation has made no provision for income taxes, or additional foreign taxes, on the cumulative unremitted earnings of foreign subsidiaries, which were approximately $176,000 as at December 31, 2005 (2004 - $158,500), because the Corporation does not intend to repatriate these earnings in the foreseeable future. These earnings could become subject to additional taxes if remitted as dividends or if the Corporation sells its interests in the affiliates. The Corporation cannot practically estimate the amount of additional taxes that might be payable on the unremitted earnings.
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
 | |
| 10. | Long-term obligations (continued): |
| | |
| (a) | Convertible notes, issued in 2004: |
In June 2004, FSHI issued $250,000 principal amount of convertible senior notes. The net proceeds of the issuance, after deducting offering expenses and underwriters' commission, were $241,332. 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 Limited Voting Shares of FSHI at an initial conversion rate of 13.9581 shares per each one thousand US dollar 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) FSHI calls the notes for redemption, or (iv) specified corporate transactions or a ‘‘fundamental change’’ occur. In connection with a ‘‘fundamental change’’ on or prior to July 30, 2009, on conversion holders of notes will be entitled to receive additional Limited Voting Shares having a value equal to the aggregate of the make whole premium they would have received if the notes were purchased plus an amount equal to any accrued but unpaid interest. FSHI may choose to settle conversion (including any make whole premium) in Limited Voting Shares, cash or a combination of Limited Voting Shares and cash (at its option).
On or after August 4, 2009, FSHI may (at its option) redeem all or a portion of the notes, in whole or in part, for cash at 100% of their principal amount, plus any accrued and unpaid interest. On each of July 30, 2009, 2014 and 2019, holders may require FSHI to purchase all or a portion of their notes at 100% of their principal amount, plus any accrued and unpaid interest. FSHI will pay cash for any notes so purchased on July 30, 2009. Repurchases made by FSHI on July 30, 2014 and July 30, 2019 may be made (at its option) in cash, Limited Voting Shares or a combination of cash and Limited Voting Shares.
Upon the occurrence of certain designated events, FSHI will be required to make an offer to purchase the notes at 100% of their principal amount plus any accrued and unpaid interest, and, in the case of a ‘‘fundamental change’’ that is also a ‘‘change of control’’ occurring on or before July 30, 2009, FSHI also will pay a make whole premium. FSHI may choose to pay the purchase price (including any make whole premium) for notes in respect of which its offer is accepted in (at its option) cash, Limited Voting Shares, securities of the surviving entity (if FSHI is not the surviving corporation), or a combination of cash and shares or securities.
26
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 10. | Long-term obligations (continued): |
In accordance with Canadian generally accepted accounting principles, the notes were bifurcated in the consolidated financial statements into a debt component (representing the principal value of a bond of $211,754, which was estimated based on the present value of a $250,000 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 (representing the value of the conversion feature of the notes). Accordingly, net proceeds have been allocated $211,754 to long-term obligations and $36,920 to shareholders' equity. The offering expenses and underwriters' commission of $7,019 relating to the debt component are recorded in ‘‘Other assets’’. The debt component of the notes will increase for accounting purposes at the compounded interest rate of 5.33%, less the coupon paid of 1.875% per annum.
In connection with the offering, FSHI entered into an interest rate swap agreement to July 30, 2009 with an initial notional amount of $211,754, pursuant to which FSHI had agreed to receive interest at a fixed rate of 5.33% per annum and pay interest at six-month LIBOR, in arrears, plus 0.4904%. FSHI had designated the interest rate swap as a fair value hedge of the notes. As a result, FSHI accounted for the payments under the interest rate swap to the date of termination on an accrual basis, which resulted in an effective interest rate (for accounting purposes) on the hedged notes of six-month LIBOR, in arrears, plus 0.4904%.
In October 2004, FSHI terminated the interest rate swap agreement and received proceeds of $9,000. The book value of the interest rate swap at the date of termination was C$2.0 million ($1,617). The gain of C$9.3 million ($7,383) was deferred for accounting purposes and is being amortized over the period to July 30, 2009, which would have been the maturity date of the swap agreement. During 2005, C$1.9 million ($1,579) (2004 - C$0.5 million ($396)) of the deferred gain was amortized and recorded as a reduction of interest expense.
27
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 10. | Long-term obligations (continued): |
In April 2005, FSHI entered into a currency and interest rate swap agreement to July 30, 2009, pursuant to which FSHI has agreed to receive interest at a fixed rate of 5.33% per annum on an initial notional amount of $215,842 and pay interest at a floating rate of six-month Canadian bankers' acceptance, in arrears, plus 1.1% per annum on an initial notional amount of C$269.2 million. The notional amount of the swap will increase semi-annually in conjunction with the increase in the debt component of the convertible senior notes. On July 30, 2009, FSHI will pay C$311.8 million and receive $250,000 under the swap. FSHI has designated the swap as a fair value hedge of the convertible senior notes, which were issued in 2004. As a result, FSHI accounts for the payments under the interest rate swap on an accrual basis, which results in an effective interest rate (for accounting purposes) on the hedged notes of six-month Canadian bankers' acceptance, in arrears, plus 1.1%. In addition, foreign exchange translation gains and losses on the notional amount of the swap are accrued on a monthly basis under ‘‘Long-term obligations’’ on the balance sheet and recognized in ‘‘Other expense, net’’, offsetting the respective monthly translation losses and gains recognized on the convertible senior notes.
| | |
| (b) | Convertible notes, issued in 1999: |
During 1999, FSHI issued $655,519 principal amount at maturity (September 23, 2029) of convertible notes for gross proceeds of $172,500. The net proceeds of the issuance, after deducting offering expenses and underwriters' commission, were approximately $166,000. In accordance with Canadian generally accepted accounting principles, the notes were bifurcated into a debt component (representing the present value of a zero coupon bond of $655,519 maturing in 2029, yielding 9% per annum, compounding semi-annually) and an equity component (representing the value of the conversion feature of the notes). Accordingly, net proceeds were originally allocated $46,731 to long-term obligations and $121,115 to shareholders' equity. The offering expenses and underwriters' commission relating to the debt component of the notes of $1,729 were recorded in ‘‘Other assets’’. As at December 31, 2003, FSHI had 655,404 convertible notes outstanding.
FSHI was entitled to redeem the convertible notes commencing in September 2004 for cash equal to the issue price plus accrued interest calculated at 4.5% per annum. In September 2004, FSHI redeemed for cash all these convertible notes for $328.73 per each one thousand dollar principal amount at maturity (the redemption price being the issue price plus unpaid accrued interest to but excluding the date of redemption) for an aggregate payment of $215,451.
28
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 10. | Long-term obligations (continued): |
In accordance with Canadian generally accepted accounting principles, the consideration paid on the redemption was allocated to the liability and equity components of the convertible notes based on their relative fair values at the date of the redemption. A pre-tax accounting loss of $11,174 was recognized related to the debt component of the convertible notes (representing the difference between the carrying value of the debt component and the relative fair value of the debt component and calculated at the present value of the amount due on maturity, using an assumed 25-year interest rate of 8.474% per annum, compounding semi-annually). This loss was recorded in ‘‘Other expense, net’’ in the consolidated statements of operations. In addition, at the interest rate noted above, a pre-tax accounting gain of $6,241 was recognized on the extinguishment of the equity component of the convertible notes ($121,094). The gain of $6,241 was recorded in contributed surplus. The tax impact of the redemption of both the liability and equity components of the convertible notes was a decrease to future income tax assets and a decrease to contributed surplus of $3,167. The net after-tax impact on shareholders' equity from the redemption of both the debt and equity components of the convertible notes was a reduction of $8,100.
In accordance with Canadian generally accepted accounting principles, the cash paid on redemption of the convertible notes relating to the interest accreted from September 1999 to September 2004, for accounting purposes, of $25,840 on the convertible notes has been recorded in the consolidated statements of cash provided by operations. The remaining cash paid on redemption of $189,670 has been recorded under ‘‘Financing’’ in the consolidated statements of cash flows.
| | |
| (c) | Bank credit facility: |
The Corporation has a committed bank credit facility of $125,000, which expires in September 2007. 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, 2005 and 2004, no amounts were borrowed under this credit facility. However, approximately $1,600 of letters of credit were issued under this credit facility as at December 31, 2005. No amounts have been drawn under these letters of credit.
29
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 10. | Long-term obligations (continued): |
The bank credit facility contains certain covenants which require the Corporation to maintain certain financial ratios. In addition, the bank credit facility contains additional covenants which restrict the Corporation's ability to borrow funds ranking superior to these obligations and to undertake certain types of major transactions. The Corporation was in compliance with these covenants during 2005 and 2004. In addition, the lenders may require repayment of the bank credit facility on a change of control of FSHI.
| | |
| (d) | Interest income, net: |
|
| | | | | | | | | | |
| | | | 2005 | | | | 2004 | |
| Interest income | | $ | 16,746 | | | $ | 13,023 | |
| Interest on long-term obligations | | | (12,902 | ) | | | (11,667 | ) |
| Other interest expense | | | (442 | ) | | | (250 | ) |
| | | | | | | | | |
| Interest income, net | | $ | 3,402 | | | $ | 1,106 | |
|
30
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 11. | Shareholders' equity: |
Authorized:
| | |
| 3,725,698 | Variable Multiple Voting Shares (‘‘VMVS’’), entitling the holder to that number of votes that results in the aggregate votes attaching to the VMVS, representing approximately 65% of the votes attaching to the VMVS and the Limited Voting Shares (‘‘LVS’’), in aggregate, which, at December 31, 2005, was 16.09 votes (2004 - 16.07 votes) per VMVS. Changes in the number of votes attaching to the VMVS necessary to maintain this level will occur concurrently with the issue of additional LVS. |
The VMVS rank equally with the LVS as to distributions on liquidation, dissolution or winding-up of FSHI. Dividends declared and paid on the VMVS are in amounts per share equal to 50% of the dividends per share declared and paid on the LVS, regardless of whether the number of votes attaching to the VMVS is further increased.
VMVS are convertible into LVS on a one-for-one basis at the option of the holder. The shares automatically convert into LVS upon any transfer outside of the family of Mr. Isadore Sharp, the Chief Executive Officer of FSHI, except a transfer of a majority of the shares to a purchaser who makes an equivalent offer to purchase all outstanding VMVS and LVS.
| | |
| Unlimited | LVS, voting (one vote per share) and ranking equally with the VMVS as to distributions on liquidation, dissolution or winding-up of FSHI. |
| | |
| Unlimited | First Preference Shares and Second Preference Shares, issuable in series, non-voting and ranking prior to all other shares with respect to payment of dividends and distributions on liquidation or winding-up of FSHI. The dividend rate, redemption and conversion rights, if any, are to be determined prior to issuance by the directors of FSHI. |
31
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 11. | Shareholders' equity (continued): |
Issued:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | VMVS | | LVS | | | | |
| | | Shares | | Stated
value | | Shares | | Stated
value | | Total |
| December 31, 2003 | | | 3,832,172 | | | $ | 27 | | | | 31,409,420 | | | $ | 209,242 | | | $ | 209,269 | |
| Options exercised | | | – | | | | – | | | | 1,367,054 | | | | 39,711 | | | | 39,711 | |
| Conversion of VMVS | | | (106,474 | ) | | | (1 | ) | | | 106,474 | | | | 1 | | | | – | |
| December 31, 2004 | | | 3,725,698 | | | | 26 | | | | 32,882,948 | | | | 248,954 | | | | 248,980 | |
| Options exercised | | | – | | | | – | | | | 32,380 | | | | 1,450 | | | | 1,450 | |
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2005 | | | 3,725,698 | | | $ | 26 | | | | 32,915,328 | | | $ | 250,404 | | | $ | 250,430 | |
|
An amount of $5,708 relating to options exercised in 2004, which was recorded in ‘‘Receivables’’ as at December 31, 2004, was received by the Corporation in 2005 (note 2).
Pursuant to an agreement approved by the shareholders of FSHI at a special meeting held on December 19, 1989, FSHI and its principal operating subsidiary, FSHL, have agreed that FSHL will make a payment to Mr. Isadore Sharp on an arm's-length sale of control of FSHI. The first portion of the payment will be an amount equal to 5% of the product of (i) the total number of VMVS and LVS outstanding at the time of the sale, and (ii) the per share consideration received by holders of LVS minus C$6.30. If the per share consideration received by holders of LVS on the sale is equal to or more than 125% of the weighted average price of LVS traded in board lots on The Toronto Stock Exchange during the period commencing six months and ending one month before the first public announcement of the sale, Mr. Sharp will be entitled to an additional payment equal to 5% of the product of (i) the total number of VMVS and LVS outstanding at the time of the sale, and (ii) the per share consideration received by holders of LVS minus C$20.84.
The right to receive the two payments may be transferred among members of Mr. Sharp's family, their holding companies and trusts. Upon the death of Mr. Sharp, the right to the payments passes to his legal or personal representatives, heirs or permitted assigns.
32
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 11. | Shareholders' equity (continued): |
Under the Corporation's stock option plan, eligible directors, executives and employees may be granted options to acquire LVS at a price which is not less than the weighted average price of board lots traded on The Toronto Stock Exchange in the five trading days preceding the date of grant. The options are not transferable, have a term of 10 years, and generally vest in varying proportions on the first, second, third, fourth and fifth anniversaries of the date of grant. All vested options must be exercised within specified periods in the event of retirement, termination other than for cause (including as a result of a change of control of FSHI), incapacity or death of the director, executive or employee.
Changes in stock options for the years ended December 31, 2005 and 2004 were as follows:
|
| | | | | | | | | | | | | | |
| | | Options
outstanding | | Weighted average
exercise price | | Available
for grant |
| Balance at December 31, 2003 | | 5,839,697 | | C$53.91 | | 166,366 |
| Additional options approved by shareholders | | – | | – | | 500,000 |
| Granted | | 160,900 | | 71.14 | | (160,900) |
| Exercised | | (1,367,054) | | 36.35 | | – |
| Cancelled | | (58,160) | | 88.05 | | 58,160 |
| Balance at December 31, 2004 | | 4,575,383 | | 59.32 | | 563,626 |
| Exercised | | (32,380) | | 55.22 | | – |
| Cancelled | | (57,540) | | 67.53 | | 57,540 |
| | | | | | | |
| Balance at December 31, 2005 | | 4,485,463 | | C$59.25 | | 621,166 |
|
Information relating to stock options outstanding at December 31, 2005 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Options outstanding | | Options exercisable | | |
| Range of exercise prices | | Options
outstanding | | Weighted
average
remaining
contractual life | | Weighted
average
exercise
prices | | Options
exercisable | | Weighted
average
exercise
prices |
| C$21.52 - - C$37.47 | | 312,548 | | 2.1 years | | C$30.94 | | 294,346 | | C$30.25 |
| C$39.25 - C$50.23 | | 1,385,214 | | 4.0 years | | 47.07 | | 1,129,614 | | 47.20 |
| C$53.28 - - C$67.07 | | 1,278,085 | | 4.4 years | | 54.97 | | 1,069,005 | | 54.68 |
| C$68.80 - C$84.00 | | 820,140 | | 6.4 years | | 73.43 | | 290,140 | | 75.35 |
| C$86.97 - C$108.14 | | 689,476 | | 4.5 years | | 87.63 | | 658,096 | | 87.66 |
| | | | | | | | | | | |
| C$21.52 - - C$108.14 | | 4,485,463 | | 4.5 years | | C$59.25 | | 3,441,201 | | C$58.18 |
|
33
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 11. | Shareholders' equity (continued): |
The Corporation uses the fair value-based method for all employee stock options granted or modified on or after January 1, 2003. There were no stock options granted in 2005. The fair value of stock options granted in 2004 was estimated using a Black-Scholes option pricing model with the following assumptions: risk-free interest rates ranging from 2.96% to 4.39%; semi-annual dividend per LVS of C$0.055; volatility factor of the expected market price of LVS ranging from 28% to 30%; 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 2004, the weighted average fair value of the options at the grant dates was C$25.32 ($19.46). 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.
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 years ended December 31, 2005 and 2004, if the Corporation had applied the fair value-based method to options granted during 2002, the Corporation's net earnings and basic and diluted earnings per share would have been reduced to the pro forma amounts indicated below:
|
| | | | | | | | | | |
| | | | 2005 | | | | 2004 | |
| Stock option expense included in compensation expense | | $ | (2,333 | ) | | $ | (1,633 | ) |
| | | | | | | | | |
| Net earnings (loss), as reported | | $ | (28,223 | ) | | $ | 25,698 | |
| Additional expense that would have been recorded if all outstanding stock options granted during 2002 had been expensed | | | (1,626 | ) | | | (2,622 | ) |
| | | | | | | | | |
| Pro forma net earnings (loss) | | $ | (29,849 | ) | | $ | 23,076 | |
| Earnings (loss) per share: | | | | | | | | |
| Basic, as reported | | $ | (0.77 | ) | | $ | 0.72 | |
| Basic, pro forma | | | (0.81 | ) | | | 0.65 | |
| Diluted, as reported | | | (0.77 | ) | | | 0.69 | |
| Diluted, pro forma | | | (0.81 | ) | | | 0.62 | |
| | | | | | | | | |
|
34
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 11. | Shareholders' equity (continued): |
| | |
| (c) | Restricted stock program: |
The Corporation has implemented a restricted stock program, under which eligible employees will be entitled to earn performance-based compensation in the form of LVS purchased on their behalf by a third party administrative agent with funds deposited by the Corporation. Subject to limited exceptions, participants in the plan will not be able to dispose of those LVS for a three-year period. During 2005, the Corporation recorded compensation expense of $445 relating to the restricted stock program.
Changes in contributed surplus for the years ended December 31, 2005 and 2004 were as follows:
|
| | | | | | | | | | |
| | | | 2005 | | | | 2004 | |
| Contributed surplus, beginning of year | | $ | 8,088 | | | $ | 3,593 | |
| Stock option expense (b) | | | 2,333 | | | | 1,633 | |
| Adjustment relating to stock options exercised | | | (5 | ) | | | (212 | ) |
| Restricted stock program (c) | | | 445 | | | | – | |
Gain on redemption of the equity component of
convertible notes, net of income taxes of $3,167 (note 10(b)) | | | – | | | | 3,074 | |
| | | | | | | | | |
| Contributed surplus, end of year | | $ | 10,861 | | | $ | 8,088 | |
|
35
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 11. | Shareholders' equity (continued): |
| | |
| (e) | Earnings (loss) per share: |
Basic earnings (loss) per share is calculated by dividing net earnings (loss) by the weighted average number of VMVS and LVS outstanding during the year. Potentially issuable LVS are excluded from the calculation of basic earnings (loss) per share, but are included in the calculation of diluted earnings (loss) per share by application of the ‘‘treasury stock method’’, which takes into account the dilution relating to LVS issuable under the Corporation's stock option plan, and by application of the ‘‘if-converted method’’, which takes into account the potential dilution relating to the conversion of the Corporation's convertible notes.
A reconciliation of net earnings and the weighted average number of VMVS and LVS used to calculate basic earnings per share and diluted earnings per share is as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2004 |
| | | Net loss | | Shares | | Net
earnings | | Shares |
| Basic earnings (loss) per share amounts | | $ | (28,223 | ) | | | 36,628,206 | | | $ | 25,698 | | | | 35,647,986 | |
| Effect of assumed dilutive conversions: | | | | | | | | | | | | | | | | |
| Stock option plan | | | – | | | | – | | | | – | | | | 1,666,230 | |
| | | | | | | | | | | | | | | | | |
| Diluted earnings (loss) per share amounts | | $ | (28,223 | ) | | | 36,628,206 | | | $ | 25,698 | | | | 37,314,216 | |
|
The diluted earnings (loss) per share calculation excluded the effect of the assumed conversions of 4,485,463 stock options to LVS, under the Corporation's stock option plan, during the year ended December 31, 2005 (2004 - 847,876 stock options), as the inclusion of these conversions resulted in an anti-dilutive effect. As the Corporation incurred a net loss for the year ended December 31, 2005, all outstanding stock options were excluded from the calculation of diluted loss per share for 2005. There was no dilution in 2005 and 2004 relating to the convertible senior notes issued in 2004 (note 1(n)(iii)). In addition, the effect of the assumed conversion of convertible notes (issued in 1999 and subsequently redeemed in 2004) (note 10(b)) to 3,463,155 LVS, by application of the ‘‘if-converted method’’, has been excluded from the calculation for 2004 as the inclusion of this conversion resulted in an anti-dilutive effect.
36
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 11. | Shareholders' equity (continued): |
| | |
| (f) | Equity adjustment from foreign currency translation: |
Changes in equity adjustment from foreign currency translation for the years ended December 31, 2005 and 2004 were as follows:
|
| | | | | | | | | | |
| | | | 2005 | | | | 2004 | |
| Balance, beginning of year | | $ | 98,783 | | | $ | 97,058 | |
Changes in exchange rates used to translate the Corporation's net
investment in foreign self-sustaining subsidiaries | | | (29,393 | ) | | | (14,327 | ) |
| Changes arising from US dollar reporting currency | | | 18,384 | | | | 16,052 | |
| | | | | | | | | |
| Balance, end of year | | $ | 87,774 | | | $ | 98,783 | |
|
| |
| 12. | Consolidated revenues: |
|
| | | | | | | | | | |
| | | | 2005 | | | | 2004 | |
| Revenues from Management Operations (a) | | $ | 186,250 | | | $ | 168,076 | |
| Revenues from Ownership Operations | | | 65,343 | | | | 97,436 | |
| Distributions from hotel investments | | | 132 | | | | 293 | |
| Fees from Ownership Operations to Management Operations | | | (3,387 | ) | | | (4,538 | ) |
| | | | | | | | | |
| | | $ | 248,338 | | | $ | 261,267 | |
|
| | |
| (a) | Effective January 1, 2004, the Corporation ceased designating its US dollar foreign exchange forward contracts as hedges of its US dollar fee revenues. These contracts were entered into during 2002, and all of these contracts matured during 2004. The foreign exchange gains on these contracts of $11,201, which were deferred prior to January 1, 2004, were recognized in 2004 as an increase of fee revenues over the course of the year. In addition, effective January 1, 2004, the US dollar foreign exchange forward contracts were marked-to-market on a monthly basis with the resulting changes in fair values being recorded as a foreign exchange gain or loss and was included in ‘‘Other expense, net’’. This resulted in a $497 foreign exchange gain being recorded in 2004. The Corporation did not hedge any of its US dollar fee revenues during 2005. |
37
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 13. | Other expense, net: |
|
| | | | | | | | | | |
| | | | 2005 | | | | 2004 | |
| Loss on retirement benefit plan transition (a) and (note 15(b)) | | $ | (35,467 | ) | | $ | – | |
| Asset provisions and write-downs (b) | | | (31,787 | ) | | | – | |
| Foreign exchange gain (loss) (note 14) | | | (24,632 | ) | | | 3,173 | |
| Loss on redemption of convertible notes (note 10(b)) | | | – | | | | (11,174 | ) |
| Gain (loss) on disposition of assets (c) | | | 3,175 | | | | (3,672 | ) |
| Legal and enforcement costs (note 3(c)) | | | (497 | ) | | | (233 | ) |
| | | | | | | | | |
| | | $ | (89,208 | ) | | $ | (11,906 | ) |
|
| | |
| (a) | Loss on retirement benefit plan transition includes past service costs recognized on curtailment of $1,595, actuarial loss recognized on plan settlement of $1,497, realignment of pension liability between the Corporation and managed hotels and resorts of $12,331, costs relating to settlement with employees of $10,321 and other settlement costs of $9,723. |
| | |
| (b) | Asset provisions and write-downs for the year ended December 31, 2005 includes a provision for loss of $8,829 on long-term receivables, a write-down of $17,853 on investments in hotel partnerships and corporations and a write-down of $5,105 on investment in management contracts. |
| | |
| (c) | Gain (loss) on disposition of assets for the year ended December 31, 2005 includes a net gain of $9,337 (2004 - net loss of $3,672) on the dispositions of investments in hotel partnerships and corporations, the settlement of long-term receivables and the exit from certain management contracts, and a loss of $6,162 on the assignment of leases and the sale of related assets of The Pierre (note 15(c)(i)). |
| |
| 14. | Foreign exchange gain (loss): |
During 2005, the Corporation recorded a net foreign exchange loss of $24,632 (2004 - net foreign exchange gain of $3,173), which is included in ‘‘Other expense, net’’. The net foreign exchange loss in 2005 and the net foreign exchange gain in 2004 related primarily to the foreign currency translation gains and losses on unhedged net 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 the Corporation's designated foreign self-sustaining subsidiaries.
38
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 14. | Foreign exchange gain (loss) (continued): |
In December 2005, the Corporation entered into 24 foreign exchange forward contracts to convert $21,189 of US dollars to Canadian dollars at a weighted average forward exchange rate of 1.16 over the period ending June 2006. The Corporation entered into these contracts to protect itself in the event of a strengthening Canadian currency as it relates to expenditures incurred by the Corporation for its management operations and corporate expenses, which are denominated primarily in Canadian dollars. These 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 a $127 foreign exchange loss being recorded in 2005.
Effective January 1, 2004, the Corporation ceased designating its US dollar foreign exchange forward contracts as hedges of its 2004 US dollar revenue and, as a result, these contracts were marked-to-market on a monthly basis with the resulting changes in fair values being recorded as a foreign exchange gain or loss (note 12(a)).
| |
| 15. | Commitments and contingencies: |
The Corporation has entered into lease agreements for certain hotel properties and corporate offices for periods up to the year 2054.
| | |
| (i) | Future minimum lease payments for Four Seasons Hotel Vancouver and certain corporate offices (but exclusive of any contingent rentals, occupancy costs, and lease commitments relating to Four Seasons Hotel London, which is discussed below), are as follows: |
|
| | | | | | |
| 2006 | | $ | 4,281 | |
| 2007 | | | 3,491 | |
| 2008 | | | 3,142 | |
| 2009 | | | 2,995 | |
| 2010 | | | 2,922 | |
| Subsequent to 2010 | | | 22,984 | |
| | | | | |
| | | $ | 39,815 | |
|
39
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 15. | Commitments and contingencies (continued): |
| | |
| (ii) | The Corporation is the tenant of the land and premises constituting Four Seasons Hotel London pursuant to the terms of a lease (the ‘‘FS Lease’’) expiring on January 28, 2054. The leasehold interest of the Corporation in the hotel is a continuing obligation which survived the sale by the Corporation of its ownership interest in the hotel in 1995. The Corporation has entered into a sublease of the hotel with the entity (the ‘‘Sub-Tenant’’) on whose behalf the Corporation manages the hotel. The Sub-Tenant is owned 12.5% by the Corporation and 87.5% by an affiliate of Kingdom. The annual rent payable by the Corporation under the FS Lease is currently £3.9 million. The same amount of annual rent is payable by the Sub-Tenant to the Corporation pursuant to the sublease and is payable out of the operating accounts of the hotel. |
Pursuant to the arrangements relating to the ownership of the Sub-Tenant, the Corporation would be required to fund its proportionate 12.5% share of any amounts required to ensure that the Sub-Tenant honoured all of the obligations necessary for the operation of the hotel, including the sublease payments, to the extent the majority shareholder makes payment of its proportionate share of such amounts. The Corporation has not been required either to make payment of any amount of rent under the FS Lease that has not first been paid to the Corporation under the sublease or to fund any amounts under the terms of the ownership arrangements relating to the Sub-Tenant. Historically, hotel operating cash flow has been more than sufficient to meet the rent obligation. In the event of a non-payment of rent under the sublease, the Corporation would be entitled to forfeit the sublease. The ongoing management of the hotel by the Corporation is subject to a non-disturbance agreement with the senior lender of the Sub-Tenant. Future minimum lease payments of the hotel, exclusive of any contingent rentals and occupancy costs, are as follows:
|
| | | | | | |
| 2006 | | $ | 6,790 | |
| 2007 | | | 6,876 | |
| 2008 | | | 6,883 | |
| 2009 | | | 6,883 | |
| 2010 | | | 6,883 | |
| Subsequent to 2010 | | | 296,551 | |
| | | | | |
| | | $ | 330,866 | |
|
40
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 15. | Commitments and contingencies (continued): |
| | |
| (b) | Retirement benefit plan commitments: |
The Corporation maintains an unfunded multi-employer, non-contributory, defined benefit retirement plan on behalf of the Corporation and the owners of certain managed properties. This plan provides retirement benefits for certain senior executives of the Corporation, as well as for hotel and resort general managers, based on years and level of service and annual salary.
During 2005, the Corporation transitioned the majority of its senior executives and hotel and resort general managers from this unfunded defined benefit retirement plan to a fully funded retirement plan based on a defined contribution format. The change in the retirement plan was made to improve the certainty and predictability related to the cost of the retirement benefits.
The transition to this defined contribution retirement plan resulted in a cash funding by the Corporation in 2005 of $36,029 and a pre-tax accounting charge of $35,467, which is recorded in ‘‘Other expense, net’’. During the year ended December 31, 2005, the Corporation incurred a pension expense of $2,243 related to the defined contribution retirement plan.
The Corporation continues to maintain the unfunded multi-employer, 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 its managed properties. As at December 31, 2005, the Corporation has an accrued defined benefit liability of $25,843 in respect of this plan, which is included in ‘‘Long-term obligations’’. This accrued defined benefit liability excludes the defined benefit obligation of the owner of the two managed properties for their current general managers.
41
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 15. | Commitments and contingencies (continued): |
The measurement date for the accrued benefit obligation was December 31, 2005 (2004 - - December 31, 2004). The Corporation uses the corridor method to amortize actuarial gains and losses (such as changes in actuarial assumptions and experience gains and losses). Under the corridor method, amortization is recorded only if the accumulated net actuarial gains or losses exceed 10% of the accrued benefit obligation.
The transition to the defined contribution retirement plan results in both a curtailment and a settlement of defined benefit obligations and the Corporation accounts for the curtailment before it accounts for the settlement. The Corporation amortizes past service costs from plan amendments on a straight-line basis over the expected average remaining service period of employees who were active on the day of the amendment.
Information relating to the defined benefit retirement plan for the years ended December 31, 2005 and 2004 based on projections of employees' compensation levels to the date of retirement were as follows:
|
| | | | | | | | | | |
| | | | 2005 | | | | 2004 | |
| Accrued benefit obligation, beginning of year | | $ | 58,702 | | | $ | 46,942 | |
| Change in accrued benefit obligation: | | | | | | | | |
| Service cost | | | 1,927 | | | | 1,715 | |
| Past service cost | | | 3,507 | | | | – | |
| Interest cost | | | 3,401 | | | | 3,257 | |
| Benefits paid | | | (1,129 | ) | | | (1,121 | ) |
| Actuarial loss | | | 15,712 | | | | 3,824 | |
| Curtailment | | | (14,720 | ) | | | – | |
| Plan settlement | | | (37,834 | ) | | | – | |
| Foreign currency exchange rate changes | | | 1,811 | | | | 4,085 | |
| Accrued benefit obligation, end of year | | | 31,377 | | | | 58,702 | |
| Unamortized past service cost | | | (1,040 | ) | | | – | |
| Unamortized actuarial loss for changes in assumptions | | | (4,099 | ) | | | (9,060 | ) |
| Accrued benefit liability, end of year, before allocation | | | 26,238 | | | | 49,642 | |
| Portion allocated to managed properties | | | (395 | ) | | | (22,379 | ) |
| | | | | | | | | |
| Accrued benefit liability, end of year, after allocation | | $ | 25,843 | | | $ | 27,263 | |
|
42
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 15. | Commitments and contingencies (continued): |
Under the defined benefit retirement plan, the benefits expected to be paid in each of the next five years, and in the aggregate for the five fiscal years thereafter, to retired employees of the Corporation, including benefits attributable to estimated future employee service, are approximately: 2006 - $1,200; 2007 - $1,500; 2008 - $1,600; 2009 - $1,700; 2010 - $3,000; 2011 to 2015 - $13,400.
|
| | | | | | | | | | |
| | | | 2005 | | | | 2004 | |
| Assumptions as of December 31: | | | | | | | | |
| Discount rates - benefit obligation | | | 4.75 | % | | | 6.00 | % |
| Discount rates - benefit expense | | | 6.00 | % | | | 6.50 | % |
| Rates of increase in compensation levels - benefit obligation | | | 4.00 | % | | | 3.00 | % |
| Rates of increase in compensation levels - benefit expense | | | 3.00 | % | | | 3.00 | % |
| | | | | | | | | |
| Components of defined benefit expense before allocation: | | | | | | | | |
| Service cost | | $ | 1,927 | | | $ | 1,715 | |
| Past service cost | | | 3,507 | | | | – | |
| Interest cost | | | 3,401 | | | | 3,257 | |
| Actuarial loss | | | 15,712 | | | | 3,824 | |
| Curtailment | | | (14,720 | ) | | | – | |
| Elements of employee future benefit costs before adjustments to recognize the long-term nature of employee future benefit costs | | | 9,827 | | | | 8,796 | |
| Difference between actuarial loss recognized for the year and actual actuarial loss on accrued benefit | | | (15,435 | ) | | | (3,625 | ) |
| Difference between amortization of past service costs for the year and actual plan amendments | | | (3,499 | ) | | | – | |
| Actuarial loss recognized on curtailment | | | 14,720 | | | | – | |
| Actuarial loss recognized on plan settlement | | | 5,930 | | | | – | |
| Past service cost recognized on curtailment | | | 2,467 | | | | – | |
| Defined benefit expense before allocation | | | 14,010 | | | | 5,171 | |
| Portion allocated to managed properties | | | (7,992 | ) | | | (2,802 | ) |
| | | | | | | | | |
| Defined benefit expense after allocation | | $ | 6,018 | | | $ | 2,369 | |
|
43
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 15. | Commitments and contingencies (continued): |
The Corporation's share of the defined benefit expense for the year ended December 31, 2005 of $6,018 (2004 - $2,369), includes pension expense of $2,001 (2004 - $2,369). In 2005, it also includes past service cost recognized on curtailment of $1,595, actuarial loss recognized on plan settlement of $1,497 and other costs of $925, all of which are included in ‘‘Loss on retirement benefit plan transition’’ (note 13(a)).
| | |
| (c) | Guarantees, commitments and indemnifications: |
| | |
| (i) | Guarantees and commitments: |
As at December 31, 2005, the Corporation had provided certain guarantees in connection with properties under its management. These include guarantees in respect of four projects totalling a maximum of approximately $18,500, as well as a guarantee of $300 for relocation costs for certain employees. The Corporation has lease guarantees in respect of Four Seasons Hotel London, which are more fully described in note 15(a)(ii), and Four Seasons Hotel Prague of approximately €0.8 million. To the extent it is called upon to honour any one of these guarantees, the Corporation generally has either the right to be repaid from hotel operations and/or has various forms of security or recourse to the owner of the property.
The Corporation also has four other commitments totalling approximately $16,000 to four properties under its management. In addition, during 2005, the Corporation assigned its leases 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 the Corporation's contribution history with a multi-employer pension fund for the unionized hotel employees (the ‘‘NYC Pension’’). This permitted the Corporation to withdraw from the NYC Pension without incurring a withdrawal liability estimated at $10,700.
If the purchaser withdraws as a result of the lease cancellation by the landlord in certain circumstances in 2008 or 2011, the Corporation has agreed to indemnify the purchaser for that portion of the withdrawal liability relating to their assumption of the Corporation’s contribution history. The amount of any potential future liability resulting from this indemnity is not determinable at this time as it would be based upon future events related to the NYC pension.
44
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 15. | Commitments and contingencies (continued): |
If the purchaser withdraws from the NYC Pension prior to 2011 in any circumstances other than those described above and does not pay its withdrawal liability, the Corporation remains secondarily liable for its withdrawal liability up to an amount of $10,700. The Corporation has been indemnified by the purchaser for any such liability.
The Corporation believes that the likelihood of it being required to make a payment is remote, and no amount has been recorded as at December 31, 2005 in respect of a potential NYC Pension withdrawal liability.
During 2006, the Corporation expects to fund $1,700 relating to one of these commitments. The Corporation's assessment of its potential liability for such matters could change as a result of, among other things, the associated risks and uncertainties.
| | |
| (ii) | Disposition indemnification arrangements: |
In connection with the sale of all or a part of its interest in a property, the Corporation and its subsidiaries may agree to indemnify 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 that interest. The nature of these indemnities prevents the calculation of an exact amount that may be payable to the indemnified parties.
45
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 15. | Commitments and contingencies (continued): |
(iii) Director and officer indemnification arrangements:
To the extent permitted by law, the Corporation and its subsidiaries 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 the request of the Corporation or its subsidiaries. The Corporation has purchased directors' and officers' liability insurance that may be available in respect of certain of these claims.
| | |
| (iv) | Other indemnification arrangements: |
In the ordinary course of their business, the Corporation and its subsidiaries 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 which arise in respect of tax or environmental matters).
The terms of the Corporation's indemnification provisions vary based on the contract, 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 the Corporation from making a reasonable estimate of the maximum potential amount the Corporation and its subsidiaries could be required to pay to counterparties. The Corporation believes that the likelihood that it or its subsidiaries would incur significant liability under these obligations is remote. Historically, the Corporation and its subsidiaries have not made any significant payments under such indemnification agreements. No amount has been recorded in the consolidated financial statements with respect to these indemnification provisions. The Corporation's assessment of its potential liability could change in the future as a result of currently unforeseen circumstances.
46
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
15. Commitments and contingencies (continued):
| | |
| (d) | Other commitments and contingencies: |
| | |
| (i) | In the ordinary course of its business, the Corporation is named as a defendant in legal proceedings resulting from incidents taking place at hotels owned or managed by it. The Corporation maintains comprehensive liability insurance and also requires hotel owners to maintain adequate insurance coverage. The Corporation believes such coverage to be of a nature and amount sufficient to ensure that it is adequately protected from suffering any material financial loss as a result of such claims. |
| | |
| (ii) | A number of the Corporation's management contracts are subject to certain performance tests which, if not met, could allow a contract to be terminated prior to its maturity. The Corporation generally has various rights to cure any such defaults to avoid termination. In addition, certain management contracts are terminable by the hotel owner on a defined change of control of FSHI. |
| | |
| (iii) | The Corporation is currently in dispute with the owner of Four Seasons Hotel Caracas (note 3(c)) over a variety of matters. |
47
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 16. | Fair values of financial instruments: |
The estimated fair value of a financial instrument is the amount at which the instrument could be exchanged in a current 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 significantly 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 the Corporation's convertible notes is based on market quotes obtained from one of the Corporation's financial advisors.
Other financial instruments held by the Corporation include long-term receivables due from owners of managed hotels (note 3). The Corporation does not have plans to sell these loans to third parties and expects to realize or settle them in the ordinary course of business. The fair values of these instruments cannot be reasonably estimated because no active and liquid market exists for these instruments, and a market rate of interest (for instruments having similar terms and characteristics) which is required to be used in estimation techniques, such as discounted cash flow analysis, cannot reasonably be determined due to the unusual terms of these instruments.
The Corporation enters into foreign exchange forward contracts that oblige it to buy or sell specific amounts of foreign currencies at set future dates at predetermined exchange rates. Because a significant portion of the Corporation's revenues is derived in foreign currencies (primarily US dollars) and expenditures incurred by the Corporation for its management operations are denominated primarily in Canadian dollars, the Corporation enters into such contracts from time to time to protect itself in the event of a strengthening Canadian currency. Management estimates future foreign currency cash flows on an ongoing basis, based on its projections of foreign currency-denominated management fees and other transactions. Management negotiates foreign exchange forward contracts in proportion to the magnitude and timing of these cash flows.
48
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 16. | Fair values of financial instruments (continued): |
As at December 31, 2005, the Corporation had sold forward $21,189 of US dollars to receive Canadian dollars at a weighted average forward exchange rate of 1.16, under 24 foreign exchange forward contracts, maturing over the period ending June 2006. There were no foreign exchange forward contracts outstanding as at December 31, 2004. The fair value of foreign exchange forward contracts is estimated from quotes obtained from the Corporation's counterparties for the same or similar financial instruments.
The fair values of financial instruments are as follows:
|
| | | | | | | | | | |
| | | Estimated
fair value | | Carrying
amount |
| 2005: |
| Convertible notes, issued in 2004 (a) | | $ | (243,000 | ) | | $ | (260,432 | ) |
| Currency and interest rate swap (note 10 (a)) | | | (24,000 | ) | | | (17,129 | ) |
| Foreign exchange forward contracts | | | (127 | ) | | | (127 | ) |
| 2004: |
| Convertible notes, issued in 2004 (a) | | | (322,000 | ) | | | (253,562 | ) |
| | | | | | | | | |
|
| | |
| (a) | The carrying amount of the convertible 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 $1,326, which are recorded in ‘‘Shareholders' equity’’. |
49
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 17. | Segmented information: |
The Corporation has two distinct operating segments: Management Operations and Ownership Operations and Corporate Expenses. Under its Management Operations segment, the Corporation generally oversees, as agent for the property owner, all aspects of the day-to-day operations of the hotels and resorts that it manages on behalf of the owners, including sales and marketing, reservations, accounting, purchasing, budgeting and the hiring, training and supervising of staff. For providing these services, the Corporation typically receives a base fee calculated as a percentage of gross revenues of the hotel. In addition, the Corporation may receive incentive fees based on the operating performance of the hotels and resorts. Generally, the properties’ owners, and not the Corporation, fund substantially all capital expenditures and working capital of the hotels and resorts, including all employment and operating costs. This segment also includes the licensing and managing of branded residential projects. The Corporation is entitled to receive a royalty fee for the use of its brand name in connection with certain residential projects, which is generally based on a percentage of the sales proceeds of the residences sold. In addition, the Corporation receives a fee from the owners of interests in these residential projects for services provided in the ongoing management of these units.
Under its Ownership Operations and Corporate Expenses segment, the Corporation had an equity interest in 11 properties under management and three projects under construction as at December 31, 2005. Earnings are primarily derived from the consolidation of its wholly owned interest in one hotel (note 1(b)) and distributions from its other equity interests. Generally, the Ownership Operations and Corporate Expenses segment is subject to greater economic fluctuations than the Management Operations segment. Ownership earnings can be materially affected by, among other things, changes in travel patterns, local wage rate factors, the level of capital spending that is required to appropriately maintain and renew the properties, volatility of construction costs, the availability of property financing and changes in interest rates. The Corporation structures its ownership interests separately from its management interests so as to enable the Corporation to dispose of ownership interests as sale opportunities arise, without affecting its management interests.
50
FOUR SEASONS HOTELS INC.
Notes to Consolidated Financial Statements (continued)
Years ended December 31, 2005 and 2004
(In thousands of US dollars (note 1(a)) except per share amounts)
| |
| 17. | Segmented information (continued): |
| | |
| (a) | Consolidated revenues: |
Revenues have been allocated to specific geographic segments based on the location of each property.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2004 |
| | | Management
revenues | | Ownership
revenues
and
distributions | | Consolidated
revenues | | Management
revenues | | Ownership
revenues
and
distributions | | Consolidated
revenues |
| United States | | $55,554 | | $35,539 | | $91,093 | | $59,049 | | $61,880 | | $120,929 |
| Other Americas/Caribbean | | 16,214 | | 29,936 | | 46,150 | | 15,223 | | 24,471 | | 39,694 |
| Europe | | 20,638 | | – | | 20,638 | | 19,349 | | 11,378 | | 30,727 |
| Asia/Pacific | | 14,643 | | – | | 14,643 | | 13,383 | | – | | 13,383 |
| Middle East | | 10,150 | | – | | 10,150 | | 5,010 | | – | | 5,010 |
| | | 117,199 | | 65,475 | | 182,674 | | 112,014 | | 97,729 | | 209,743 |
| Reimbursed costs | | 69,051 | | – | | 69,051 | | 56,062 | | – | | 56,062 |
| Less intersegment revenues | | (3,387) | | – | | (3,387) | | (4,538) | | – | | (4,538) |
| | | | | | | | | | | | | |
| | | $182,863 | | $65,475 | | $248,338 | | $163,538 | | $97,729 | | $261,267 |
|
|
| | | | | | | | | | |
| | | | 2005 | | | | 2004 | |
| United States | | $ | 228,565 | | | $ | 276,175 | |
| Other Americas/Caribbean | | | 359,536 | | | | 326,465 | |
| Europe | | | 203,004 | | | | 191,565 | |
| Asia/Pacific | | | 78,858 | | | | 89,792 | |
| Middle East | | | 10,238 | | | | 18,150 | |
| | | | | | | | | |
| | | $ | 880,201 | | | $ | 902,147 | |
|
51
