EXHIBIT 2
FOUR SEASONS HOTELS INC.
FORM 51-102F1
MANAGEMENT'S DISCUSSION AND ANALYSIS
MARCH 14, 2005
TABLE OF CONTENTS
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OVERVIEW AND OBJECTIVES........................................................1
OPERATIONAL AND FINANCIAL REVIEW AND ANALYSIS..................................4
Overview....................................................................4
Management Operations....................................................4
Ownership and Corporate Operations.......................................5
Results of Operations.......................................................6
Management Operations....................................................6
Ownership and Corporate Operations......................................10
Other Income/Expense, Net...............................................12
Net Interest Income/Expense.............................................14
Income Tax Expense......................................................14
Stock Option Expense....................................................14
Net Earnings and Earnings per Share.....................................14
TWO-YEAR SUMMARY BY QUARTER...................................................15
BALANCE SHEET REVIEW AND ANALYSIS.............................................16
Corporate Strategy Relating to Investments.................................16
Long-Term Receivables......................................................16
Investments in Hotel Partnerships and Corporations.........................16
Consolidated Hotel Ownership Interests..................................16
Other Hotel, Resort and Residence Club Ownership Interests..............16
Investment in Management Contracts.........................................17
Fixed Assets...............................................................17
LIQUIDITY AND CAPITAL RESOURCES...............................................19
Contractual Obligations....................................................19
Convertible Notes..........................................................20
Retirement Plan Commitments................................................21
Lease Commitments - Consolidated Hotels....................................21
Cash from Operations.......................................................21
Financing Activities .....................................................22
Investing Activities.......................................................22
Long-Term Receivables...................................................22
Investments in Hotel Partnerships and Corporations......................22
Investment in Management Contracts......................................23
Fixed Assets............................................................23
Outstanding Share Data.....................................................23
FINANCIAL INSTRUMENTS.........................................................24
Foreign Exchange Forward Contracts.........................................24
Other Financial Instruments................................................24
Fair Value of Financial Instruments........................................24
OFF-BALANCE SHEET ARRANGEMENTS................................................26
Guarantees and Commitments.................................................26
Indemnities................................................................26
Disposition Indemnification Arrangements................................26
Director and Officer Indemnification Arrangements.......................26
Other Indemnification Arrangements......................................26
LOOKING AHEAD.................................................................28
FOUR SEASONS PORTFOLIO........................................................30
Description of Hotels, Resorts and Residence Clubs.........................30
Properties under Construction or Development...............................33
THREE-YEAR REVIEW.............................................................35
OPERATING RISKS...............................................................37
Geopolitical, Economic and Lodging Industry Conditions.....................37
Competition................................................................38
(i)
Dependence on Management Agreements........................................38
Dependence on Property Owners..............................................39
Risk Associated with Expansion, Growth and New Construction................39
Investments in and Advances to Managed and Owned Properties................40
Debt Rating Risks..........................................................40
Government Regulation......................................................40
Political Risk.............................................................41
Insurance..................................................................41
Legal Proceedings..........................................................42
Currency Exposure..........................................................42
Seasonality................................................................42
Intellectual Property......................................................43
Risks Associated with Residence Club Business..............................43
Dependence on Key Employees................................................43
CRITICAL ACCOUNTING POLICIES AND ESTIMATES....................................44
Recoverability of Investments..............................................45
Fixed Assets...............................................................45
Retirement Plan............................................................46
Income Taxes...............................................................46
IMPACT ON 2004 OF RECENTLY ISSUED CANADIAN ACCOUNTING STANDARDS...............47
RECENT CANADIAN ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED...............47
Consolidation of Variable Interest Entities................................47
Temporary Controlled Subsidiaries..........................................47
ADDITIONAL INFORMATION........................................................48
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FORWARD-LOOKING STATEMENTS
This document contains "forward-looking statements" within the meaning of
federal securities laws, including RevPAR, profit margin and earnings trends;
statements concerning the number of lodging properties expected to be added in
this and future years; expected investment spending; and similar statements
concerning anticipated future events, results, circumstances, performance or
expectations that are not historical facts. These statements are not guarantees
of future performance and are subject to numerous risks and uncertainties,
including those described in our annual information form and in this document.
Those risks and uncertainties include adverse factors generally encountered in
the lodging industry; the risks associated with world events, including war,
terrorism, international conflicts, natural disasters, extreme weather
conditions, and infectious diseases; general economic conditions, supply and
demand changes for hotel rooms and residential properties, competitive
conditions in the lodging industry, relationships with clients and property
owners, currency fluctuations and the availability of capital to finance growth.
Many of these risks and uncertainties can affect our actual results and could
cause our actual results to differ materially from those expressed or implied in
any forward-looking statement made by us or on our behalf. All forward-looking
statements in this document are qualified by these cautionary statements. These
statements are made as of the date of this document and, except as required by
applicable law, we undertake no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise.
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ALL AMOUNTS REFERRED TO IN THIS DOCUMENT ARE IN CANADIAN DOLLARS UNLESS
OTHERWISE NOTED. OUR FINANCIAL STATEMENTS ARE PREPARED IN ACCORDANCE WITH
CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
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(ii)
OVERVIEW AND OBJECTIVES
Four Seasons principal business is the management of luxury hotels,
resorts and serviced and branded residential projects whose target customers are
primarily luxury business travelers, corporate and incentive groups and
discerning leisure travelers. Our urban hotels and residential projects
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. Many of our urban locations also appeal to the luxury leisure
traveler. Our luxury resorts and residential projects are located in world-class
leisure destinations and provide extensive recreational and meeting facilities
to attract upscale leisure travelers and groups.
2004 was the first full year since 2000 that travel demand improved in
virtually all regions of the world. From 2001 through the latter part of 2003,
the travel industry worldwide operated in a challenging environment due to acts
of terrorism, the war in Iraq and infectious diseases. The impact of these
factors, in addition to a weak global economic environment, had a significant
negative impact on travel demand throughout the world. Improvement in the US
travel trend started late in the second quarter of 2003 and by the end of 2003
had expanded to each of the regions in which we operate, with both leisure and
business travel trends improving. In 2004, all of the regions in which we manage
properties posted RevPAR(1) gains. Overall, year-over-year RevPAR gains in 2004
were robust, reflecting both occupancy and achieved room rate improvements.
Revenues at our properties improved in 2004. However, industry-wide cost
pressures (including increased costs for workers' compensation, health benefits
and energy) affected the profitability of our managed properties, particularly
in the US. We have sought to control and manage the cost increases, and we were
able to maintain our industry-wide leadership in gross operating margin(2)
performance, which remains an important business objective.
In addition, volatility in several of the world's major foreign
currencies, including the US and Canadian dollar (the US dollar depreciated 6.9%
in 2004 relative to the Canadian dollar), pound sterling, Euro and Australian
dollar, continued throughout 2004. As a global company, we operate in 28
countries around the world. While many of our financial commitments are in other
currencies (predominantly US dollars), we report our earnings in Canadian
dollars. During 2004, the impact of the translation of our US dollar-denominated
management fee revenues into Canadian dollars had a negative impact on our
reported earnings (see "Operational and Financial Review and Analysis -- Results
of Operations -- Management Operations -- Revenues"). However, from an economic
perspective we are in a balanced position as the US dollar-denominated
management fees are used to fund US dollar expenses such as interest, and to
fund our US dollar investment obligations, including a number of our
international projects.
We were pleased with the growth in our management business in 2004, with
management earnings before other operating items increasing over 27% to $101
million in 2004. In addition, hotel ownership and corporate operations losses,
which includes our leasehold interests in Vancouver and New York (The Pierre)
and corporate administration and compliance costs, declined by 28% to $21.6
million. One of our objectives has been to reduce our exposure to our leased
hotels. In 2004, we ceased to lease and manage Four Seasons Hotel Berlin.
Although operating earnings in both New York and Vancouver improved, both hotels
generated losses in 2004. The Pierre had committed a large portion of its rooms
to
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1 RevPAR is defined as average room revenue per available room. RevPAR 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.
2 Gross operating margin represents gross operating profit as a percentage
of gross operating revenue.
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conference business in the last half of 2004. The room rates on this business
were negotiated prior to the strong improvement in travel demand in New York,
and as a result, The Pierre's achieved room rates increased more modestly than
might otherwise have been possible in this stronger demand environment. Travel
demand in Vancouver remained weak relative to most North American markets, in
part as a result of lower than normal US travel to the market as a result of the
strong Canadian dollar. We remain focused on reducing our exposure to these
assets and continue to take steps to improve the operating performance of these
assets. Corporate administration and compliance costs increased in 2004
primarily as a result of increased time expended by management and consulting
expenses in connection with meeting the requirements of the Sarbanes-Oxley Act
of 2002 and other recent US and Canadian regulatory requirements.
Also during 2004, we sold all of our investment in Four Seasons Resort
Whistler, the majority of our 8% investment in Four Seasons Hotel Amman and all
of our ownership interest in land relating to Four Seasons Resort Scottsdale at
Troon North. In addition, several of our properties under management, including
Four Seasons Resort Santa Barbara, Four Seasons Resort Scottsdale at Troon
North, Four Seasons Hotel Washington D.C., The Regent Beverly Wilshire and Four
Seasons Hotel Boston, were undergoing extensive renovation programs.
During 2004, we signed more letters of intent relating to new Four Seasons
hotels and resorts than we have ever achieved in any single year. In 2004, we
opened new Four Seasons hotels and resorts in Budapest, Provence, Whistler,
Cairo and Costa Rica. We also continued to focus on the customer service
experience that we believe has allowed us to maintain or improve our achieved
room rates. We believe that this focus on service and maintaining vigilance over
room rates positions us well for continuing to increase RevPAR in the current
economic environment.
We also continued to focus our attention in 2004 on the management of our
working capital position, new investments and re-positioning certain of our
existing investments and loan positions. Once again we met our objectives of
funding new and enhanced management agreements through cash generated by
operations and reducing the losses from our hotel ownership and corporate
operations. Our cash and cash equivalents increased to $272.5 million at
year-end, more than a $100 million increase over December 31, 2003. As a result,
we continued to realize our objective of maintaining a strong liquidity position
and an investment-grade balance sheet.
Our key financial and growth objectives over the long term are:
o Maintain and enhance our RevPAR growth and the operating profits of
the hotels and resorts that we manage.
o Achieve growth of the Four Seasons portfolio through the addition of
new hotels and resorts and selected luxury branded residential
projects.
o Achieve an average return on capital employed of at least 10% over
our long-term cost of capital.
o Achieve, on average, compounded earnings per share growth of 20% per
annum over the long term.
o Generate at least 90% of our earnings from our management business.
o Maintain a strong balance sheet and a low cost of capital.
o Deploy the majority of our annual operating cash flow to obtain
and enhance management opportunities that expand the Four Seasons
brand.
o Identify and pursue opportunities that allow us to maintain high
profit margins in our management operations.
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o Maintain tax efficiency.
o Divest equity investments or advances when appropriate opportunities
arise, to allow previously committed capital to be made available for
investments related to new or enhanced management or royalty
opportunities.
o Maintain a prudent risk profile on the investment of cash and cash
equivalents.
In achieving our financial and growth objectives we seek to balance any
associated risk, including continuing to obtain and enhance long-term management
agreements, limiting investments we may make, obtaining premium returns in
certain circumstances, and obtaining appropriate levels of insurance. See
"Operating Risks" for a description of the risks inherent in our business.
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OPERATIONAL AND FINANCIAL REVIEW AND ANALYSIS
OVERVIEW
We have two operating segments: management operations and ownership and
corporate operations. Revenues from management operations and ownership and
corporate operations as a percentage of consolidated revenues and earnings
before other operating items(3) from the two segments are summarized below.
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2004 2003
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As a percentage of consolidated revenues:
Revenues from management operations 64.3% 62.4%
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Revenues from ownership and corporate operations 37.3 39.3
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Distributions from hotel investments 0.1 0.1
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Fees paid by ownership and corporate (1.7) (1.8)
operations to management operations
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100.0% 100.0%
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As a percentage of consolidated earnings before other
operating items:
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Management operations 127.2% 160.8%
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Ownership and corporate operations (27.2) (60.8)
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100.0% 100.0%
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MANAGEMENT OPERATIONS
We are principally a management company, and the majority of our earnings
come from our management services business. 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 that we manage on behalf of the
owners, including sales and marketing, advertising, reservations, accounting,
purchasing, budgeting and the hiring, training and supervising of staff. In
addition, we generally provide strategic management services, including
developing and implementing sales, marketing and advertising strategies,
operating a central reservations system, recommending information technology
systems and developing certain database applications, assisting with sourcing
the financing and development of new hotels and resorts, providing advice with
respect to the design and construction of new or renovated hotels and resorts,
assisting with the refurbishment of hotels and resorts, and providing a
centralized purchasing system for goods. For providing these management
services, we generally receive a variety of fees, including a base fee, an
incentive fee, a sales and marketing charge, an advertising charge, a
reservation charge, and purchasing and pre-opening fees. The base fee usually is
calculated as a percentage of the total revenues of each hotel and resort that
we manage, and the incentive fee (which we are entitled to
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3 Earnings before other operating items is equal to net earnings plus (i)
income tax expense plus (ii) interest expense less (iii) interest income
plus (iv) other expense less (v) other income plus (vi) depreciation and
amortization. Earnings before other operating items is not intended to
represent cash flow from operations, as defined by Canadian generally
accepted accounting principles ("GAAP"), and earnings before other
operating items should not be considered as an alternative to net
earnings, cash flow from operations or any other measure of performance
prescribed by GAAP. Our earnings before other operating items may also not
be comparable to earnings before other operating items used by other
companies, which may be calculated differently. We consider earnings
before other operating 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. Earnings
before other operating items is also used by investors, analysts and our
lenders as a measure of our financial performance.
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receive at the majority of the properties we manage) typically is calculated
based on the profitability of the hotel or resort.
General and administrative expenses for management operations are incurred
by us to provide these 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. The sales, marketing, advertising and central reservation
expenses, which are generally funded by sales and marketing, advertising and
reservation charges, are incurred on a cost-recovery basis to us and are a
function of the number of hotels and resorts we manage. Excluding the sales and
marketing, advertising and reservations expenses, our other general and
administrative expenses are generally relatively stable year-over-year. As a
result, in an improved economic environment, we should derive increases in our
management operating margin(4) from increases in management fees generated from
existing agreements and the addition of new management contracts. For a
three-year review of management operating margin and other data, see "Three-Year
Review".
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 addition, we oversee the
sales and marketing of the Residence Club interests and are responsible for the
branding of Four Seasons serviced and branded residential projects. For these
services, we receive fees based generally on a percentage of the gross selling
price of the residential interests.
OWNERSHIP AND CORPORATE OPERATIONS
Our earnings from ownership and corporate operations include the
consolidated results of our 100% leasehold interests in The Pierre in New York
and Four Seasons Hotel Vancouver. In September 2004, the landlord terminated our
lease of Four Seasons Hotel Berlin, and we ceased managing the hotel, which
reduced the number of hotels under leasehold by us to two. In addition, we
include in ownership and corporate operations profit distributions from our
other ownership interests and corporate overhead expenses not related to the
management business. Other ownership interests are discussed under "Balance
Sheet Review and Analysis -- Investments in Hotel Partnerships and Corporations
- -- Other Hotel, Resort and Residence Club Ownership Interests".
Our investment strategy is not to hold any additional majority
investments, other than on a temporary basis while we seek to sell that majority
interest. However, The Pierre in New York and Four Seasons Hotel Vancouver are
long-term leasehold interests that were established at an earlier stage in our
development. We continue to review our options in respect of The Pierre and Four
Seasons Hotel Vancouver to determine what, if any, alternatives may be available
to modify or restructure our operations of, or investments in, these hotels.
There can be no assurance that acceptable alternative arrangements can be found
with respect to either of these hotels or as to the terms of any such
alternative arrangements.
We have leased and managed The Pierre in New York since 1981. The lease on
The Pierre expires in 2012 and is renewable at our option for an additional 10
years. We have leased and managed Four Seasons Hotel Vancouver since 1976. The
lease on Four Seasons Hotel Vancouver expires in 2020 and is renewable at our
option for an additional 15 years.
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4 Management operating margin represents management earnings before other
operating items, as a percentage of management revenues, excluding
reimbursed costs.
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RESULTS OF OPERATIONS
MANAGEMENT OPERATIONS
REVENUES
Our fees, including 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 usually calculated as a percentage of total revenue
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 of room revenue. Our
incentive fees are typically tied to the profitability of each property that we
manage. Gross operating profit changes provide an indication of the change in
each property's profitability. Typically in a Four Seasons branded residential
project, we earn a fee which is normally calculated on the basis of the selling
price of the residential property. These fees are typically only earned on the
initial sale of the residential property. On an ongoing basis, we receive a fee
for our annual management and oversight of the residential property.
Overall gross operating margins at the hotels and resorts we manage
continued to be constrained in 2004 as increased costs related to workers'
compensation, health benefits and energy have not been completely offset by
RevPAR improvements. We expect that further significant cost increases,
particularly relating to energy and workers' compensation, will continue to put
pressure on gross operating profit performance in 2005.
For the full year 2004, RevPAR of our worldwide Core Hotels(5), on a US
dollar basis, increased 15.5%, as compared to 2003, which reflects improvements
in each of the regions in which we manage hotels and resorts. We believe this
reflects the continuation of a broader recovery in travel demand. Consistent
with industry practices, we track RevPAR on a US dollar basis. RevPAR increased
by 10.7%, on a US dollar basis, for the quarter ended December 31, 2004, as
compared to the same period in 2003, for our worldwide Core Hotels.
Gross operating revenues of our worldwide Core Hotels, on a US dollar
basis, increased 14.2% for the full year 2004 compared to 2003. Gross operating
margins of our worldwide Core Hotels improved 240 basis points on a full year
basis from 26.9% in 2003 to 29.3% in 2004. Gross operating margins of our
worldwide Core Hotels were maintained at 29.5% in the fourth quarter of 2004, as
compared to 29.4% in the same period in 2003.
In the second quarter of 2004, we began reporting the Europe and Middle
East segments as two separate segments and, as a result, we currently report in
five geographic sectors: the United States, Other Americas/Caribbean, Europe,
Middle East and Asia/Pacific. With respect to our Core Hotels, the United States
represents the most significant geographic area to us, with 54.8% of revenues
under management for the full year 2004, followed by Asia/Pacific (17.1%),
Europe (15.1%), Other Americas/Caribbean (10.2%) and the Middle East (2.8%). The
following tables highlight our results of operations for our Core Hotels in each
of these regions.
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5 The term "Core Hotels" means hotels and resorts under management for the
full year of both 2004 and 2003. 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
2003/2002 Core Hotels are the additions of Four Seasons Hotel Amman, Four
Seasons Resort Sharm el Sheikh, Four Seasons Hotel Shanghai and Four
Seasons Hotel Tokyo at Marunouchi and the deletion of Four Seasons Hotel
Berlin, Four Seasons Resort Santa Barbara, Four Seasons Resort Scottsdale
at Troon North and Four Seasons Hotel Washington, D.C., the last three of
which are undergoing extensive renovation programs that began in 2004.
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2004 increase over (decrease from) 2003
MARKET (percentage change, on a US dollar basis)
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Gross Operating Gross Operating
UNITED STATES RevPAR Revenue (GOR) Profit (GOP)
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FOURTH
QUARTER 10.6% 9.7% 13.5%
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FULL YEAR 8.7% 7.6% 8.9%
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Virtually all the US Core Hotels under management realized RevPAR
improvements in both the fourth quarter and full year of 2004. The
8.7% improvement in RevPAR at the US Core Hotels for the full year
of 2004, as compared to 2003, was the result of occupancy
improvements from 68.1% to 70.5% and a 5% increase in achieved
room rate. Exceptions for the full year 2004 were Four Seasons
Resort Aviara and The Ritz-Carlton Chicago, both of which were
affected by a decrease in group travel to those areas. Hotels and
resorts under management in Los Angeles, New York, Palm Beach, and
Boston, amongst others, outperformed the average RevPAR
improvement of the Core Hotels in the region. On a full-year basis
in 2004, gross operating margins for the region remained at
approximately the same level as 2003, as cost increases,
particularly related to energy, health care and workers'
compensation, continued to absorb some of the RevPAR improvement.
Exceptions to the RevPAR trend in this region for the fourth
quarter included Four Seasons Hotel San Francisco, where a
city-wide labour dispute during the quarter disrupted travel to
that market, and Houston, where the area is absorbing significant
new hotel room supply. Hotels under management in Las Vegas, Los
Angeles, New York and Philadelphia, amongst others, outperformed
the average RevPAR improvement of the Core Hotels in the region,
while hotels under management in Dallas and The Ritz-Carlton
Chicago had more modest RevPAR gains. Gross operating margins for
the region improved 90 basis points for the fourth quarter of
2004, as compared to the fourth quarter of 2003.
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2004 increase over (decrease from) 2003
MARKET (percentage change, on a US dollar basis)
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OTHER
AMERICAS/ Gross Operating Gross Operating
CARIBBEAN RevPAR Revenue (GOR) Profit (GOP)
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FOURTH
QUARTER 7.7% 6.2% (1.1%)
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FULL YEAR 18.2% 16.5% 30.2%
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RevPAR for the Other Americas/Caribbean region improved 18.2% for
the full year of 2004, as compared to 2003, as a result of an 810
basis point increase in occupancy and a 5.7% increase in achieved
room rate (6.6% increase in achieved room rate on a local currency
basis). RevPAR improvements were also seen at Four Seasons Hotel
Toronto and Four Seasons Hotel Vancouver, reflecting the recovery
from the negative impact of Severe Acute Respiratory Syndrome
(SARS) in 2003. All of the properties in the region experienced
occupancy improvements, particularly Four Seasons Hotel Buenos
Aires and Four Seasons Resort Carmelo. As a result of the
increases in occupancy and gross operating revenues, gross
operating margins improved 310 basis points from 26.7% in 2003 to
29.8% in 2004.
Strong RevPAR improvements in the fourth quarter of 2004 at the
hotels under management in South America helped to boost the
average RevPAR improvement in the Other Americas/Caribbean region,
as RevPAR for the other hotels in the region
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remained relatively unchanged from the fourth quarter of 2003.
Gross operating margins in the region decreased 200 basis points
as improvements in South America were offset by declines elsewhere
in the region, in particular in Nevis. Gross operating margins in
Nevis were unusually high in the fourth quarter of 2003 as a
result of the accrual by the resort of revenue related to coastal
levies from the government in that period.
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2004 increase over (decrease from) 2003
MARKET (percentage change, on a US dollar basis)
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Gross Operating Gross Operating
EUROPE RevPAR Revenue (GOR) Profit (GOP)
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FOURTH
QUARTER 12.7% 17.1% 20.1%
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FULL YEAR 20.6% 21.3% 31.6%
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On a full-year basis, the improvement in RevPAR, on both a US
dollar basis and a local currency basis, in 2004 from 2003 in the
European region was partially due to the significant negative
impact that the war in Iraq had on travel in 2003. The 31.6%
increase in gross operating profits for the region was largely
attributed to the higher occupancy and achieved room rates at the
hotels under management in Dublin, Paris and London.
For the fourth quarter of 2004, RevPAR increases, on both a US
dollar basis and a local currency basis, in the European region
reflected strong operating results at the hotels under management
in Paris and London, primarily driven by achieved room rate
improvements. Gross operating profits for the region as a whole
increased, on both a US dollar basis and a local currency basis,
primarily due to the performance at the hotels in Paris and
London.
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2004 increase over (decrease from) 2003
MARKET (percentage change, on a US dollar basis)
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Gross Operating Gross Operating
MIDDLE EAST RevPAR Revenue (GOR) Profit (GOP)
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FOURTH
QUARTER 12.3% 15.3% 9.0%
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FULL YEAR 52.9% 58.3% 120.6%
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Occupancy at the Middle East Core Hotels improved on a full-year
basis from 47.7% in 2003 to 70.5% in 2004, which when combined
with a 7.5% increase in achieved room rates, resulted in a 52.9%
increase in RevPAR. The increases in occupancy and achieved room
rates in 2004, as compared to 2003, were primarily attributable
to the significant negative impact that the war in Iraq had on
travel to the region in 2003, and the ongoing stabilization of
Four Seasons Hotel Amman and Four Seasons Resort Sharm el Sheikh,
which were added to the Core Hotels in 2004. On a local currency
basis, achieved room rates increased 11.6% on a full-year basis,
resulting in a 58.7% improvement in RevPAR. In 2004, gross
operating profits for the region demonstrated the strong
profitability in the region with a 120.6% improvement over 2003.
RevPAR improvements in the fourth quarter of 2004 at the Middle
East Core Hotels were primarily driven by increased occupancy at
our properties in Amman and Sharm el Sheikh. Although gross
operating margins in the region declined slightly in the quarter,
as a result of a decline at Four Seasons Hotel Cairo at The First
Residence, gross operating profits increased 9%, as compared to
the same period in 2003, primarily as a result of a larger
contribution from Four Seasons Hotel Amman. In the fourth quarter
of 2003, Four Seasons Hotel Cairo at The First Residence
benefited from a one-time adjustment to the shared cost
allocations for prior periods made by the owner of this mixed-use
project. These adjustments had a positive effect on the profit
margin and incentive management fees in the fourth quarter of
2003.
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2004 increase over (decrease from) 2003
MARKET (percentage change, on a US dollar basis)
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Gross Operating Gross Operating
ASIA/PACIFIC RevPAR Revenue (GOR) Profit (GOP)
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FOURTH
QUARTER 10.8% 7.6% 4.6%
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FULL YEAR 31.9% 24.8% 48.6%
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In 2004, on a full-year basis, a large portion of the 31.9%
increase in RevPAR at the properties under management in the
Asia/Pacific region reflected a recovery from the negative impact
of SARS in the region in 2003. This was particularly so in our
properties in Shanghai and Singapore. In addition, the properties
in Bali continued to improve after the lingering impact of
terrorist attacks on that island in October of 2002. Gross
operating profits increased 48.6% and 45.2% on a US dollar and
local currency basis, respectively, due to the RevPAR
improvements at all of the hotels and resorts under management in
the region.
The majority of the hotels under management in the Asia/Pacific
region had strong RevPAR improvements for the fourth quarter of
2004. Exceptions were the hotels in Sydney, Tokyo at Chinzan-so
and Kuala Lumpur, which experienced modestly lower occupancy in
the fourth quarter of 2004, as compared to the same period in
2003. The hotels under management in Bali, Bangkok, Shanghai and
Tokyo at Marunouchi had very strong RevPAR improvements as a
result of both occupancy and achieved room rate gains. Gross
operating profits increased modestly, on both a US dollar basis
and local currency basis, reflecting these RevPAR improvements.
Due to the tsunami in Southeast Asia on December 26, 2004, Four
Seasons Resort Maldives at Kuda Huraa was closed; however, there
was no material financial impact on the other Four Seasons
properties in the Asia/Pacific region.
- --------------------------------------------------------------------------------
Total revenues of all managed hotels and resorts were approximately $2.9
billion (US$2.2 billion) for the full year 2004 ($2.6 billion (US$1.8 billion)
in 2003). Hotel and resort revenues increased in 2004, compared to 2003, due to
general improvements in travel trends and an increase in revenues from recently
opened hotels and resorts.
Total management revenues increased $22.7 million or 11.6% to $218.5
million for the full year 2004, as compared to $195.8 million in 2003 and 1.2%
to $54.1 million for the quarter ended December 31, 2004, as compared to $53.5
million for the same period in 2003. The increase was partially attributable to
an improvement in fees of $11.2 million for the full year 2004 from recently
opened hotels and resorts, including Whistler, Great Exuma, Miami and Jackson
Hole. The decline of the US dollar relative to the Canadian dollar did not have
a material impact on our US dollar-denominated management fee revenues for the
full year due to the forward currency contracts then in place. The foreign
exchange gains on these contracts of $14.6 million, which were deferred prior to
January 1, 2004, were recognized in 2004 as an increase of fee revenues over the
course of the year and no further contracts that would give rise to a similar
gain have been entered into subsequently.
Incentive fees are calculated based on the profits of the hotel or resort
under management as determined in accordance with the relevant management
agreement. For the full year 2004, incentive fees increased $7.1 million to
$28.0 million, as compared to $20.9 million for 2003. Incentive fees contributed
12.8% of the total management revenues for the full year 2004, as compared to
10.7% for the full year 2003. The increase in incentive fees was primarily
attributable to the higher levels of profitability at virtually all of our
properties under management, including Shanghai, New York, Philadelphia and Las
Vegas. For the quarter ended December 31, 2004, incentive fees were essentially
unchanged from the same period in 2003. Incentive fees were negatively affected
during the fourth quarter of 2004 as the result of the translation of US
dollar-denominated incentive fees into Canadian dollars, and by greater
compensation costs incurred at the hotels and resorts and accrued during the
fourth quarter. This increased compensation expense resulted from the majority
of the hotels and resorts exceeding their business plans in 2004, which
triggered greater profit participation for the employees than had been
- 9 -
incurred in 2003. In addition, certain expenditures that were incurred at some
of the hotels and resorts under management during December 2004 to improve
longer-term profitability also resulted in reduced incentive fees. This included
capital programs that negatively affected operations in the fourth quarter of
2004 at certain properties.
Incentive fees were earned from 35 of our 63 hotels and resorts under
management for the full year 2004, as compared to 33 of our 60 hotels and
resorts under management in 2003.
GENERAL AND ADMINISTRATIVE EXPENSES
For the full year 2004, general and administrative expenses (including
reimbursed costs of $72.7 million) remained relatively unchanged, increasing
1.0% to $117.5 million, as compared to $116.3 million (including reimbursed
costs of $75.3 million) in 2003.
For the fourth quarter of 2004, general and administrative expenses
(including reimbursed costs of $19.7 million) decreased $0.9 million to $31.9
million, as compared to $32.8 million (including reimbursed costs of $20.4
million) for the same period in 2003. As described above under "Management
Operations", reimbursed costs are incurred on a cost recovery basis to us and,
as a result, we analyze general and administrative expenses excluding reimbursed
costs.
General and administrative expenses (excluding reimbursed costs) increased
9.2% to $44.8 million for the year ended December 31, 2004, as compared to the
year ended December 31, 2003. General and administrative expenses (excluding
reimbursed costs) decreased 1.6% to $12.2 million in the fourth quarter of 2004,
from $12.4 million for the same period in 2003. During 2004, as a result of the
improved economic and business environment, we held several regional and
company-wide management meetings, some of which had been postponed for the past
three years. The cost of these meetings together with management compensation
relating to profit participation accounted for over 75% of the increase in the
full-year general and administrative expenses (excluding reimbursed costs). This
management compensation cost was accrued throughout 2004 and there was not a
similar entitlement in 2003.
MANAGEMENT EARNINGS
As a result of the items described above, management earnings before other
operating items increased to $101.0 million for the year ended December 31,
2004, as compared to $79.5 million in 2003. For the fourth quarter of 2004,
management earnings before other operating items increased to $22.2 million, as
compared to $20.7 million in 2003.
OWNERSHIP AND CORPORATE OPERATIONS
Operating losses from ownership and corporate operations before other
operating items for the full year 2004 declined $8.4 million to a loss of $21.6
million, as compared to a loss of $30.1 million in 2003. The decreased loss for
the year was primarily attributable to a decrease in operating losses at The
Pierre in New York of $5.6 million and at Four Seasons Hotel Vancouver of $1.7
million. In addition, the termination of our lease and management of Four
Seasons Hotel Berlin resulted in a $3.8 million reduction in ownership losses
for the year. In the fourth quarter of 2004, operating losses from ownership and
corporate operations before other operating items were $3.8 million, as compared
to ownership and corporate operations losses before other operating items of
$2.0 million in the fourth quarter of 2003. The majority of the increase in
ownership and corporate operations losses for the quarter was attributable to a
reversal of lease costs at Four Seasons Berlin in 2003, which is discussed
below, and increased expenses related to compliance costs, including internal
control documentation and other processes related to the Sarbanes-Oxley Act of
2002 and other recent US and Canadian requirements.
- 10 -
THE PIERRE
For the year ended December 31, 2004, RevPAR at The Pierre increased
14.6%, as a result of both occupancy and room rate gains, as compared to 2003,
reflecting higher travel demand in New York. As a result, the operating results
at The Pierre improved $5.6 million to a loss of $4.2 million in 2004, as
compared to 2003. Operating earnings at The Pierre improved $0.8 million to $1.7
million in the fourth quarter of 2004, as compared to $0.9 million in the same
period last year. RevPAR at The Pierre increased 8.5% in the fourth quarter of
2004, as compared to the same period in 2003. The Pierre had committed a large
portion of its rooms to conference business during the fourth quarter of 2004.
The room rates on this business were negotiated prior to the strong improvement
in travel demand in New York and, as a result, The Pierre's achieved room rates
increased more modestly than might otherwise have been possible in this stronger
demand environment.
FOUR SEASONS HOTEL VANCOUVER
RevPAR at Four Seasons Hotel Vancouver increased 8.7% for the year ended
December 31, 2004, as compared to 2003, as a result of occupancy improvements.
Consequently, the operating results at that hotel improved $1.7 million to a
loss of $2.8 million in 2004, as compared to 2003. During the fourth quarter of
2004, RevPAR at Four Seasons Hotel Vancouver remained unchanged, as compared to
the same period in 2003. Operating results at that hotel improved approximately
$0.3 million to a loss of $1 million in the fourth quarter of 2004, as compared
to the same period last year.
BERLIN
In September 2004, the landlord terminated our lease of Four Seasons Hotel
Berlin, and we ceased managing the hotel. Since reaching our maximum funding
obligation of the stipulated minimum lease payments at Four Seasons Hotel Berlin
in August of 2003, the lease payments had been limited to the cash flow
generated by the hotel. On a full-year basis, 2004 operating earnings were nil
as compared to an operating loss of $3.8 million for the same period in 2003.
During the fourth quarter of 2003, lease payments that had been accrued beyond
cash flow generated by the hotel were reversed, resulting in $0.8 million of
operating earnings in that period. During the fourth quarter of 2004, operating
results were nil, resulting in a decline of $1.4 million compared to the same
period last year.
COMPLIANCE COSTS
As a result of the substantive changes to governance and disclosure
requirements applicable to public companies in the US and Canada, we have
incurred and expect to continue to incur, increased costs relating to both
internal compliance functions and third party services. Although we cannot
assess the potential amount of those costs, experience in the US suggests that
they may be significant, particularly in the context of the historic levels of
our general and corporate administrative expenses. A portion of these increased
corporate administrative expenses will be allocable to our ownership and
corporate operations.
OTHER
Our ownership interest in 12 other Four Seasons hotels and resorts that
are open and under management and our ownership interest in three Residence
Clubs are accounted for on a cost basis. In 2004 and 2003, we received $0.4
million and $0.2 million of cash distributions, respectively, from one of these
hotel and resort ownership interests.
- 11 -
OTHER INCOME/EXPENSE, NET
For the full year 2004, other expense, net was $16.1 million, as compared
to $25.8 million in 2003. For the fourth quarter of 2004, other income, net was
$6.2 million, as compared to $0.2 million for the same period in 2003.
- --------------------------------------------------------------------------------
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
- --------------------------------------------------------------------------------
(IN MILLIONS OF DOLLARS) 2004 2003 2004 2003
- --------------------------------------------------------------------------------
Loss on redemption of Liquid $(14.6) $ -- $ -- $ --
Yield Option Notes ("LYONs")
- --------------------------------------------------------------------------------
Foreign exchange gain (loss) 3.6 (14.7) 6.4 2.5
- --------------------------------------------------------------------------------
Other(1) (5.1) (11.1) (0.2) (2.3)
- --------------------------------------------------------------------------------
Other income (expense), net $(16.1) $(25.8) $ 6.2 $ 0.2
- ---------------------------------------------===================================
1 Includes legal and enforcement costs relating to Four Seasons hotels in
Caracas and Seattle (2004 and 2003), loss on disposal of investments and
settlement of loan receivable from Sedona (2004), recoveries on items
previously provided for (2004 and 2003) and the writedown of Four Seasons
Hotel Berlin (2003).
REDEMPTION OF THE LIQUID YIELD OPTION NOTES ("LYONs")
Included in other expense, net for 2004 was a loss of $14.6 million
related to the redemption of the LYONs during the third quarter of 2004. As
discussed below under "Financing Activities", we redeemed all of our LYONs for
US$328.73 cash per US$1,000 principal amount at maturity (the redemption price
being the issue price plus interest that was accrued but unpaid to but excluding
September 23, 2004) for an aggregate payment of US$215.5 million ($275.7
million).
FOREIGN EXCHANGE
Other expense, net for the full year 2004 includes a $3.6 million net
foreign exchange gain, as compared to a $14.7 million net foreign exchange loss
for 2003. Other income, net for the fourth quarter of 2004 includes a $6.4
million net foreign exchange gain, compared to a $2.5 million net foreign
exchange gain for the same period in 2003. These foreign exchange gains and
losses arose from the translation to Canadian dollars at current exchange rates
at the end of each month of our non-Canadian dollar-denominated net monetary
assets which are not included in our designated self-sustaining subsidiaries;
they also reflect local currency foreign exchange gains and losses on net
monetary assets incurred by our designated foreign self-sustaining subsidiaries.
Net monetary assets are the sum of our foreign currency-denominated monetary
assets and liabilities, which consist primarily of cash and cash equivalents,
accounts receivable, long-term receivables and long-term obligations, as
determined under Canadian GAAP.
The Canadian dollar strengthened by 6.9% (8.9(cent)) during 2004 against
the US dollar, causing the majority of the net foreign exchange gain for
accounting purposes in 2004, due to our net monetary US dollar liability
position in 2004.
The following table sets out the exchange rates obtained from the Bank of
Canada:
- --------------------------------------------------------------------------------
AS AT AS AT AVERAGE
DECEMBER 31, DECEMBER 31, DURING
2003 2004 2004
- --------------------------------------------------------------------------------
US dollar to Canadian $1.00 0.7738 0.8308 0.7683
- --------------------------------------------------------------------------------
Pound sterling to Canadian $1.00 0.4335 0.4336 0.4194
- --------------------------------------------------------------------------------
- 12 -
- --------------------------------------------------------------------------------
Euro to Canadian $1.00 0.6143 0.6138 0.6185
- --------------------------------------------------------------------------------
Australian dollar to US $1.00 1.3280 1.2821 1.2471
- --------------------------------------------------------------------------------
OTHER
Included in other expense, net during the year ended December 31, 2004,
was a net loss of $4.6 million related to the sale of all of our investment in
Four Seasons Resort Whistler, the majority of our 8% investment in Four Seasons
Hotel Amman and all of our ownership interest in land relating to Four Seasons
Resort Scottsdale at Troon North, and costs related to our exit from our
proposed project in Sedona. The majority of the loss was related to the
settlement of our loan receivable from Sedona and for legal costs incurred to
finalize the dispositions. Included in other expense, net during the year ended
December 31, 2003 were legal and enforcement costs of $9.5 million in connection
with disputes with the owners of the Four Seasons hotels in Caracas and Seattle,
which are described below. We also wrote down our fixed asset investment in Four
Seasons Hotel Berlin to nil in the fourth quarter of 2003, resulting in a $3.2
million expense.
FOUR SEASONS OLYMPIC HOTEL SEATTLE. During the second quarter of 2003, we
settled our disagreement with the owner of Four Seasons Olympic Hotel Seattle,
which was subject to arbitration, concerning the management of the hotel. Under
the settlement, we concluded our management of Four Seasons Olympic Hotel
Seattle upon the sale of the hotel, which occurred on August 1, 2003. On closing
of the sale of the hotel, we received an initial payment, which included our
share of the sale proceeds as a result of our minority ownership interest in the
hotel. We will also receive annual payments over the next several years that are
not materially different from the fees that we would have otherwise earned
during this period under our previous management agreement for that property. We
believe that a fair and equitable settlement was reached and that the payments
under the settlement agreement, a portion of which was reflected in net earnings
during 2004 and 2003, will, in aggregate, compensate us for the near-term value
of our management agreement. During 2004, we signed a letter of intent for a new
Four Seasons property in Seattle, which is expected to open after 2006.
FOUR SEASONS HOTEL CARACAS. We are in a dispute with the owner of Four
Seasons Hotel Caracas regarding a variety of matters relating to the completion
and ongoing operation of the hotel, including the default of a US$5 million loan
owed to us. During the second quarter of 2003, we received a judgment in the
legal proceedings against the owner, which involved the protection of our
proprietary materials. The court found against the owner on all matters,
including illegal computer "hacking" and unlawful and unauthorized use of our
proprietary information, and ordered that the owner pay to us damages totalling
US$4.9 million, plus legal costs and expenses of US$1.4 million. The owner has
appealed the judgment from the legal proceeding, but execution has not been
stayed pending appeal. We are moving to enforce the judgment from the legal
proceeding against the owner, but have not recorded any receivable arising from
the judgment as at December 31, 2004. In addition, the arbitration hearing in
respect of the other contractual breaches of the management contract by the
owner was completed during the third quarter of 2003 and the tribunal declared
that the owner had failed to perform all of its obligations under our management
agreements, including, without limitation, its obligation to complete the hotel
as a world-class luxury hotel and to allow us to manage the hotel free from
unlawful interference of the owner. The arbitration tribunal awarded damages
totalling approximately US$8 million ($9.6 million), plus arbitration fees and
expenses of approximately US$240,000 ($290,000). The owner has challenged the
enforcement of the decision from the arbitration tribunal. We have not recorded
any receivables arising from the decision as at December 31, 2004.
- 13 -
NET INTEREST INCOME/EXPENSE
For the year ended December 31, 2004, we had net interest income of $1.5
million, as compared to $3.4 million in 2003. Net interest income is a
combination of $16.9 million in interest income and $15.4 million in interest
expense in 2004, as compared to $14.4 million and $11 million, respectively, for
2003. During the fourth quarter of 2004, we had net interest expense of
$187,000, as compared to net interest income of $962,000 in the fourth quarter
of 2003. Net interest expense is a combination of $4.1 million in interest
income and $4.3 million in interest expense in the fourth quarter of 2004, as
compared to $3.7 million and $2.8 million, respectively, for the same period in
2003.
The increase in interest income for the full year 2004, as compared to the
same period in 2003, was primarily attributable to increased cash and cash
equivalents as a result of the issuance of our convertible senior notes in June
2004. The increase in interest expense was primarily attributable to the
variance in interest costs relating to the convertible senior notes issued
during the second quarter of 2004, as compared to the interest costs relating to
the LYONs during 2003. As discussed below in "Liquidity and Capital Resources",
although the convertible senior notes have a 1.875% interest rate attached to
them, for accounting purposes the convertible senior notes are bifurcated into
debt and equity components, and a notional interest rate is applied to the
portion that is allocated to debt. While the notional interest rate of 5.33%
that is applied to the debt component of the convertible senior notes (as
described under "Financing Activities") is lower than the notional rate of 9.2%
that was applied to the LYONs, a larger component of the convertible senior
notes is allocated to debt than was the case with the LYONs. As a result, for
accounting purposes the interest expense associated with the convertible senior
notes is higher than was the case for the LYONs.
INCOME TAX EXPENSE
Our income tax expense during the full year and fourth quarter of 2004 was
$16.3 million and $4.9 million, respectively, (effective tax rate of 32.9% and
23.9%, respectively), as compared to an income tax expense of $6.6 million
(effective tax rate of 55.2%) and $4.5 million (effective tax rate of 27.9%),
respectively, for the same periods in 2003.
The variation from our expected 24% tax rate is the result of certain
items not being tax effected, including the non-taxable amounts related to the
redemption of the LYONs in 2004 and, in 2004 and 2003, a portion of the foreign
exchange gains and losses, since they will never be realized for tax purposes.
In addition, stock option expense is not deductible for Canadian tax purposes
and, as such, is not tax effected. In 2004, the impact of these items was
partially offset by a reduction in the tax rate related to the utilization of
certain losses, which previously had not been recorded. Excluding these items,
our tax rate would have been our expected 24%.
STOCK OPTION EXPENSE
Stock option expense for the full year 2004 was $2.1 million ($892,000
allocated to Management Operations and $1.2 million allocated to Ownership and
Corporate Operations), as compared to $893,000 for 2003 ($426,000 allocated
Management Operations and $467,000 allocated to Ownership and Corporate
Operations).
We have reviewed the structure of the compensation program and, in
particular, the use of stock options as the principal element of long-term
incentives. We intend to modify the long-term incentive component of the
compensation program to significantly reduce the role of stock options and are
finalizing our recommendations in respect of the structure of the plan that
would replace the current stock option plan.
NET EARNINGS AND EARNINGS PER SHARE
Net earnings for the year ended December 31, 2004 were $33.2 million
($0.93 basic earnings per share and $0.89 diluted earnings per share), as
compared to net earnings of $5.4 million ($0.15 basic and diluted earnings per
share) for the year ended December 31, 2003. Net earnings for the quarter ended
December 31, 2004 were $15.6 million ($0.43 basic earnings per share and $0.41
diluted earnings per share), as compared to net earnings of $11.7 million ($0.33
basic earnings per share and $0.32 diluted earnings per share) for the quarter
ended December 31, 2003.
- 14 -
TWO-YEAR SUMMARY BY QUARTER
- --------------------------------------------------------------------------------
(IN MILLIONS OF
DOLLARS EXCEPT
PER SHARE FOURTH THIRD SECOND FIRST
AMOUNTS) QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------
2004 2003 2004 2003 2004 2003 2004 2003
- --------------------------------------------------------------------------------
Consolidated $84.8 $87.9 $82.7 $72.6 $97.0 $ 80.8 $75.3 $72.4
revenues
- --------------------------------------------------------------------------------
Earnings (loss) before
other operating items:
- --------------------------------------------------------------------------------
Management 22.2 20.7 26.3 18.8 30.1 20.5 22.5 19.6
operations
- --------------------------------------------------------------------------------
Ownership (3.8) (2.0) (6.4) (9.4) (1.7) (5.5) (9.7) (13.2)
and corporate
operations
- --------------------------------------------------------------------------------
Net earnings (loss):
- --------------------------------------------------------------------------------
Total $15.6 $11.7 $(11.1) $4.4 $17.3 $(1.4) $11.5 $(9.3)
- --------------------------------------------------------------------------------
Basic earnings $0.43 $0.33 $(0.31) $0.13 $0.49 $(0.04) $0.33 $(0.27)
(loss) per
share(1)
- --------------------------------------------------------------------------------
Diluted $0.41 $0.32 $(0.31) $0.12 $0.46 $(0.04) $0.31 $(0.27)
earnings
(loss) per
share(1)
- --------------------------------------------------------------------------------
1 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.
As discussed under "Operating Risks -- Seasonality", our management and
ownership operations are seasonal in nature. In addition to the impact of
seasonality on our quarter-over-quarter operating results, net earnings each
quarter were impacted by the weakening US dollar against the Canadian dollar
over the course of 2004 (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
"Operational and Financial Review and Analysis -- Results of Operations -- Other
Income/Expense, Net"). The impact of certain of these items is highlighted in
the following table:
- --------------------------------------------------------------------------------
(IN MILLIONS OF FOURTH THIRD SECOND FIRST
DOLLARS) QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------
2004 2003 2004 2003 2004 2003 2004 2003
- --------------------------------------------------------------------------------
Loss on - - $(14.6) - - - - -
redemption of
LYONs
- --------------------------------------------------------------------------------
Foreign exchange
gain (loss) $6.4 $2.5 $(4.5) $0.3 $(3.0) $(9.2) $4.6 $(8.3)
- --------------------------------------------------------------------------------
Other(1) $(0.2) $(2.3) $(4.6) $(1.2) - $(2.9) $(0.3) $(4.6)
- --------------------------------------------------------------------------------
1 Includes legal and enforcement costs relating to Four Seasons hotels in
Caracas and Seattle (2004 and 2003), loss on disposal of investments and
settlement of loan receivable from Sedona (2004), recoveries on items
previously provided for (2004 and 2003) and the writedown of Four Seasons
Hotel Berlin (2003).
- 15 -
BALANCE SHEET REVIEW AND ANALYSIS
CORPORATE STRATEGY RELATING TO INVESTMENTS
An important part of our overall strategy is to maintain the strength of
our balance sheet. Accordingly, we intend to continue to be disciplined in the
allocation of our capital. We also intend to seek to dispose of certain of our
equity investments, which could contribute further cash and cash equivalents in
the near-term. 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. Investments in, or advances in respect of or
to owners of, properties will only be made where we believe that the overall
economic return to us will justify the investment or advance. In that context,
we also assess the long-term value that we anticipate that the investment will
contribute to our brand.
These investments and advances must meet our financial criteria, including
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. 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 investments to be able to have
our interest diluted if additional capital is required. Depending on the nature
of the investment or advance, it will be characterized on our consolidated
balance sheet as "Investments in hotel partnerships and corporations",
"Investment in management contracts" or "Long-term receivables".
As part of our ongoing balance sheet evaluation, we have reviewed our
significant investments and advances and have determined that no additional
provision was necessary during 2004 relating to impairment of the book value of
any of our investments or advances, which is discussed under "Operational and
Financial Review and Analysis -- Results of Operations -- Ownership and
Corporate Operations".
LONG-TERM RECEIVABLES
Included on our balance sheet as at December 31, 2004 is $215.5 million
(2003 - $197.6 million) of long-term receivables relating primarily to advances
in respect of, and to owners of, properties that we manage. Significant secured
and unsecured long-term receivables relate to our managed properties in London,
Hampshire, Sydney, Nevis and San Francisco.
INVESTMENTS IN HOTEL PARTNERSHIPS AND CORPORATIONS
CONSOLIDATED HOTEL OWNERSHIP INTERESTS
We have a 100% leasehold interest in each of The Pierre in New York and
Four Seasons Hotel Vancouver. Our lease was terminated and we ceased managing
Four Seasons Hotel Berlin in September 2004. See "Operational and Financial
Review and Analysis -- Overview -- Ownership and Corporate Operations". Our
consolidated financial statements reflect the consolidation of the balance
sheets of The Pierre in New York and Four Seasons Hotel Vancouver. There is no
third party debt associated with these leasehold interests.
OTHER HOTEL, RESORT AND RESIDENCE CLUB OWNERSHIP INTERESTS
For a listing of other hotels and resorts under management in which we
have equity investments, see "Four Seasons Portfolio -- Description of Hotels,
Resorts and Residence Clubs". During 2004, we
- 16 -
also funded a new equity investment in one of the hotels and resorts under
construction, Four Seasons Hotel Silicon Valley at East Palo Alto (15%), and
funded an additional equity investment in one property, Four Seasons Resort
Jackson Hole (10%).
In accordance with Canadian GAAP, we account for these other equity
investments on a cost basis because either the percentage ownership or the
structure does not give us significant influence over these investments, or the
investments were acquired before May 1, 2003 with the intention that they be
disposed of in the foreseeable future. Beginning January 1, 2005, we will be
required to either equity account or consolidate our investments in which we
have a greater than 20% ownership interest. In March 2005, we sold the majority
of our 71% equity interest in Four Seasons Residence Club Scottsdale at Troon
North for proceeds approximating book value. As a result of the sale, our equity
interest in Four Seasons Residence Club Scottsdale at Troon North is below 20%.
We continue to manage this property under a long-term management contract. We
are continuing to look at other divestment opportunities, including our
investment in Four Seasons Hotel Shanghai. The book value of other property
ownership interests was $158.1 million as at December 31, 2004 ($157.6 million
as at December 31, 2003). Based upon the current and budgeted operating cash
flow of each of these properties (adjusted for expected capital spending
requirements), we currently estimate that the net recoverable amount of each of
these investments at least approximates our book value. This valuation
determination was made subject to assumptions that are limited by, among other
things, the availability of reliable comparable data, and the uncertainty of
predictions concerning future events and results. Accordingly, by their nature,
estimates of recoverable amounts are subjective and do not necessarily result in
precise determinations. Should the underlying assumptions change, the estimated
recoverable amounts could change by a material amount.
Each of these other equity investments 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" and "Liquidity and Capital
Resources". For the year ended December 31, 2004, we earned fee revenues of
$35.3 million ($31.1 million in 2003) from our other equity investments. In
addition, we received distributions of $0.4 million ($0.2 million in 2003) from
certain of our ownership interests and funded $0.4 million in 2004 ($0.2 million
in 2003) as our share of cash flow distribution to, or cash flow shortfall from,
certain of our ownership interests in 2004.
INVESTMENT IN MANAGEMENT CONTRACTS
Included in our balance sheet as at December 31, 2004 is $218.2 million
(2003 - $203.7 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 management
contracts for Four Seasons Hotel George V Paris, Four Seasons Resort Scottsdale
at Troon North and Four Seasons Hotel Hampshire, and amounts advanced in the
context of improving the management contracts for Four Seasons Resort Nevis and
The Ritz-Carlton Hotel Chicago.
FIXED ASSETS
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
- 17 -
of capital expenditures in 2004 and 2003 was immaterial for those hotel
properties in which we have a minority equity interest or pursuant to management
contract obligations.
- 18 -
LIQUIDITY AND CAPITAL RESOURCES
As at December 31, 2004, our cash and cash equivalents were $272.5
million, as compared to $170.7 million as at December 31, 2003. 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.
In November 2004, we finalized a new committed bank credit facility of
US$125 million ($150.5 million), which expires September 2007, and replaces a
credit facility of US$100 million ($120.4 million). As at December 31, 2004, no
amounts were borrowed under the credit facility. However, approximately US$10.9
million ($13.1 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
- --------------------------------------------------------------------------------
CONTRACTUAL PAYMENTS DUE BY PERIOD
OBLIGATIONS---------------------------------------------------------------------
(IN MILLIONS TOTAL LESS THAN 1 - 3 4 - 5 AFTER 5
OF DOLLARS) 1 YEAR YEARS YEARS YEARS
- --------------------------------------------------------------------------------
Convertible $303.9 $3.0 $ -- $300.9 $ --
Notes(1)
- --------------------------------------------------------------------------------
Operating 84.9 10.4 18.5 17.7 38.3
Leases(2)
- --------------------------------------------------------------------------------
Other 41.2 5.5 5.8 2.0 27.9
Long-Term
Obligations(3)
- --------------------------------------------------------------------------------
Total $430.0 $18.9 $24.3 $320.6 $66.2
Contractual
Obligations(4)
- --------------------------------------------------------------------------------
1 The amount represents the principal amount plus accrued interest at
December 31, 2004 of US$252.5 million. See "Convertible Notes".
2 This amount excludes the future minimum lease payments in connection with
Four Seasons Hotel London. See note 15(a) to our consolidated financial
statements.
3 This amount mainly includes pension obligations, which represent estimated
future benefit payments and are net of allocations to the properties, as
well as other long-term obligations.
4 This does not include the amounts that are disclosed as capital
commitments in the chart under "Four Seasons Portfolio -- Properties under
Construction or Development".
During 2003, we agreed to donate $20 million to the Canadian Opera Company
for its new opera house, which will be named the "Four Seasons Centre for the
Performing Arts". We believe that our association with this project, which is to
be built to world-class standards, should, among other things, enhance the
long-term value of our brand in a manner consistent with and complementary to
the brand recognition associated with the properties we manage. The commitment
is being funded in tranches tied to the development of the project over the next
several years. As at December 31, 2004, we had funded $7 million. The remaining
commitment of $13 million is included in other commitments under "Off-Balance
Sheet Arrangements -- Guarantees and Commitments".
- 19 -
CONVERTIBLE NOTES
During 1999, we issued LYONs for US$655.5 million principal amount at
maturity (September 23, 2029) for gross proceeds of US$172.5 million. We were
entitled to redeem the LYONs commencing in September 2004 for cash equal to the
issue price plus accrued interest calculated at 4 1/2% per annum. As discussed
above in "Other Income/Expense, Net", during the third quarter of 2004, we
exercised this right and redeemed all of our LYONs for US$328.73 cash per
US$1,000 principal amount at maturity (the redemption price being the issue
price plus interest that was accrued but unpaid to but excluding September 23,
2004) for an aggregate payment of US$215.5 million ($275.7 million).
During the second quarter of 2004, we issued US$250 million ($341.1
million) principal amount of convertible senior notes. We used a majority of the
net proceeds from the issuance of the convertible senior notes to repay the
LYONs and intend to use the remainder for general corporate purposes, including
the making of investments in, or advances in respect of or to owners of,
properties with a view to obtaining new management agreements or enhancing
existing management agreements. 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 US$1,000 principal amount (equal to a conversion price of
approximately US$71.64 ($86.23) 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. We will pay cash for any notes so purchased on July 30,
2009. Repurchase 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.
In accordance with Canadian GAAP, the convertible senior notes are
bifurcated on our financial statements into a debt component (representing the
principal value of a bond of US$211.8 million ($288.9 million), which was
estimated based on the present value of a US$250 million ($341.1 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 $50.4 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
US$211.8 million ($288.9 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 US$9 million ($11.3 million). The book value
of the interest rate swap at the date of termination was approximately $2
million. The recognition of the resulting gain was deferred and is being
amortized over the next 4.75 years, which would have been the remaining swap
term. This will result in an effective interest rate on the notes for accounting
purposes of 4.6% for 2005. Taking into account the net present value of the
termination of the swap, including the $9.3 million gain, the economic interest
cost associated with the convertible senior notes is less than 1%.
- 20 -
RETIREMENT PLAN COMMITMENTS
We maintain an unfunded, multi-employer, non-contributory, defined benefit
retirement plan on behalf of ourselves and the owners of most of our managed
properties. This plan provides retirement benefits for certain of our senior
executives as well as for hotel and resort general managers, based on years and
level of service and annual salary. The portion of the plan applicable to the
general managers is the responsibility of the owners of properties that such
general managers manage.
The accrued benefit liability of $32.8 million that is recorded on our
consolidated balance sheet in "Long-term obligations" as at December 31, 2004,
is net of an allocation to the properties that we manage for their share of the
accrued benefit liability in respect of the general managers of those
properties.
Since it was introduced, there have been a number of changes in the
environment in which the retirement plan operates that have resulted in the plan
no longer serving the purposes for which it was intended as effectively as it
did originally. We are in the process of refining the terms of a plan that we
would expect to replace the retirement plan and afford Four Seasons, the owners
of properties managed by Four Seasons and the participants in the plan enhanced
transparency and reduced uncertainty.
LEASE COMMITMENTS - CONSOLIDATED HOTELS
In addition to the obligations identified on our balance sheet as at
December 31, 2004, our two consolidated hotels (The Pierre in New York and Four
Seasons Hotel Vancouver) are leasehold interests subject to individual property
leases.
In September 2004, the landlord terminated our lease of Four Seasons Hotel
Berlin, and we ceased managing the hotel. Since reaching our maximum funding
obligation of the stipulated minimum lease payments at Four Seasons Hotel Berlin
in August of 2003, the lease payments had been limited to the cash flow
generated by the hotel.
The total annual lease obligations for The Pierre and Four Seasons Hotel
Vancouver represented annual payments of approximately $9.2 million in 2004 and
are expected to be approximately the same in 2005. These lease expenses are
treated as an expense of our Ownership and Corporate Operations on our
consolidated statement of operations.
CASH FROM OPERATIONS
During the three months and year ended December 31, 2004, we generated
cash of $39.7 million and $57.4 million from operations, respectively, as
compared to generating cash of $21.9 million and $66 million, respectively, for
the same periods in 2003.
The increase in cash from operations of $17.8 million in the fourth
quarter of 2004, as compared to the same period in 2003, resulted primarily from
the proceeds received on termination of the interest rate swap of $11.3 million,
a decrease in working capital of $3.3 million, an increase in current income tax
received of $3.2 million and an increase in cash contributed by management
operations of $1.7 million, partially offset by an increase in cash used in
ownership and corporate operations of $1.7 million.
The decrease in cash from operations of $8.6 million in 2004, as compared
to 2003, resulted primarily from the cash applied to the interest accreted for
accounting purposes of $33.1 million related to the redemption of the LYONs in
the third quarter of 2004 and an increase in working capital of $26.3 million
(primarily as a result of a larger income tax refund that was received in 2003
and an increase in the accrual related to incentive fee improvements and
improved fees from residential projects), partially offset by an increase in
cash contributed by management operations of $22.3 million, the proceeds
received on termination of the interest rate swap of $11.3 million, a decrease
in cash used in ownership and corporate operations of $9.2 million and a
decrease in legal and enforcement costs paid of $8.1 million (discussed under
"Operational and Financial Review and Analysis -- Results of Operations -- Other
Income/Expense, Net").
- 21 -
FINANCING ACTIVITIES (EXCLUDING CONVERTIBLE NOTES DISCUSSED ABOVE)
In 2004, we received proceeds of $42.8 million relating to the exercise of
options by employees to purchase 1,367,054 Limited Voting Shares, as compared to
option exercise proceeds of $7.7 million in 2003 relating to the purchase of
366,260 Limited Voting Shares.
We paid $3.8 million and $3.6 million in dividends during 2004 and 2003,
respectively, based on a dividend policy of $0.11 per Limited Voting Share and
$0.055 per Variable Multiple Voting Share per annum, paid semi-annually in
January and July. We do not expect to change our dividend policy in 2005.
INVESTING ACTIVITIES
LONG-TERM RECEIVABLES
In 2004 we advanced $33.0 million, in the aggregate, as long-term
receivables. These included: $22.0 million relating to Four Seasons Hotel
Hampshire, which opened in February 2005, $7.3 million relating to Four Seasons
Resort Scottsdale at Troon North and $2.4 million relating to Four Seasons
Resort Great Exuma at Emerald Bay.
In 2004, we were repaid $11.7 million, in the aggregate, of our long-term
receivables, of which the largest component is $7.7 million relating to the
settlement of our loan receivable from our proposed project in Sedona.
In 2003, we advanced $18.2 million, in the aggregate, as long-term
receivables. These included: $7.3 million relating to Four Seasons Resort Costa
Rica, which opened in 2004, $5.0 million relating to Four Seasons Residence Club
Scottsdale at Troon North, $2.7 million relating to Four Seasons Hotel Buenos
Aires and $2.3 million relating to the proposed development of a Four Seasons
Residence Club in Sedona, which was abandoned in 2004.
In 2003, we were repaid $11.8 million, in the aggregate, of our long-term
receivables. The largest component of this included: $4.6 million of our loan
relating to the renovation of Four Seasons Hotel Bangkok, $2.8 million of
deferred incentive fees and $1.8 million of a loan that had been written off in
a prior year.
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 $48.7
million in 2004 ($18.0 million in 2003). These 2004 investments included Four
Seasons Resort Whistler (which we subsequently sold in the third quarter of
2004), Four Seasons Hotel Silicon Valley at East Palo Alto (15%), and funding of
an additional equity investment in one opened property, Four Seasons Resort
Jackson Hole (10%). These investments were partially offset by the sale of the
majority of our 8% investment in Four Seasons Hotel Amman.
The 2003 investments included $7.7 million related to Four Seasons Resort
Costa Rica (which opened in January 2004), and $9.2 million related to Four
Seasons Resort and Residence Club Jackson Hole (which opened in December 2003).
In 2003, we also disposed of our equity interest in Four Seasons Olympic Hotel
Seattle and our investment in preferred shares relating to Four Seasons Hotel
London for total proceeds of $10.8 million. In addition, our 30.8% interest in
Four Seasons Residence Club in Punta Mita was reduced to 19% during 2003 as a
result of an investment in the project by a new shareholder.
- 22 -
INVESTMENT IN MANAGEMENT CONTRACTS
We invested $15.8 million, in aggregate, in management contracts in 2004
($1.8 million in 2003), including investments with respect to Four Seasons Hotel
Hampshire, Four Seasons Resort Whistler and Four Seasons Resort Costa Rica. In
2003 we invested $1.8 million which did not include significant investments in
any individual management contract.
FIXED ASSETS
Our capital expenditures were $8.4 million for the year ended December 31,
2004 and $2.9 million in the fourth quarter of 2004, as compared to $19.3
million and $13.9 million, respectively, for the same periods in 2003. In 2004,
we commenced construction on our corporate office expansion. During the fourth
quarter of 2003, we purchased land in Toronto for $11.2 million relating to our
corporate office expansion.
OUTSTANDING SHARE DATA
- --------------------------------------------------------------------------------
DESIGNATION OUTSTANDING AS AT MARCH 14, 2005
- --------------------------------------------------------------------------------
Variable Multiple Voting Shares(1) 3,725,698
- --------------------------------------------------------------------------------
Limited Voting Shares 32,883,188
- --------------------------------------------------------------------------------
Options to acquire Limited Voting Shares:
- --------------------------------------------------------------------------------
Outstanding 4,575,143
- --------------------------------------------------------------------------------
Exercisable 2,763,161
- --------------------------------------------------------------------------------
Convertible Senior Notes issued US$250.6 million(3)
June 2004 and due 2024(2) (Canadian equivalent $302.3 million)
- --------------------------------------------------------------------------------
1 Convertible into Limited Voting Shares at any time at the option of the
holder on a one-for-one basis.
2 The terms of the convertible senior notes are more fully described under
"Financing Activities".
3 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.
- 23 -
FINANCIAL INSTRUMENTS
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 derived in foreign
currencies (primarily US dollars) and expenditures we incur for our management
operations are denominated primarily in Canadian dollars, we enter into foreign
exchange forward contracts from time to time to protect ourselves in the event
of a strengthening Canadian currency. We estimate future foreign currency cash
flows on an ongoing basis, based on our projections of foreign
currency-denominated management fees and other transactions. We 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.
We enter into hedges of our foreign currency exposures on foreign
currency-denominated long-term receivables and other monetary assets by entering
into offsetting foreign exchange forward contracts, when we deem it appropriate.
As at December 31, 2004, we did not have any contracts of this nature
outstanding.
Foreign exchange translation gains and losses on foreign exchange forward
contracts used to hedge anticipated foreign currency-denominated revenues are
recognized as an adjustment of the revenues when the revenues are recorded, and
the portion of the premium or discount on the contract relating to the period
prior to recognition of the revenues is also recognized as an adjustment of the
revenues when they are recorded. The portion of the premium or discount on the
contract that relates to the resulting accounts receivable is amortized as an
adjustment of interest expense over the remaining term of the contract. Realized
and unrealized gains or losses associated with contracts, which have been
terminated or cease to be effective prior to maturity, are deferred under other
current or non-current assets or liabilities on our balance sheet and recognized
in income in the period in which the associated revenue is recognized.
OTHER FINANCIAL INSTRUMENTS
In addition to the foreign exchange forward contracts, we have the
following financial instruments at December 31, 2004: 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
- 24 -
value of our 2004 and 2003 convertible 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. 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) that 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 fair values of our financial instruments are as follows:
- --------------------------------------------------------------------------------
(IN MILLIONS OF DOLLARS) ESTIMATED FAIR VALUE CARRYING AMOUNT
- --------------------------------------------------------------------------------
2004:
- --------------------------------------------------------------------------------
Convertible senior notes(1) $(388.0) $(311.3)
- --------------------------------------------------------------------------------
2003:
- --------------------------------------------------------------------------------
Convertible notes(1) (289.0) (273.4)
- --------------------------------------------------------------------------------
Foreign exchange forward contracts 15.0 0.6
- --------------------------------------------------------------------------------
1 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 $1.8 million
in 2004 (2003 - $6.9 million), which are recorded in shareholders' equity.
- 25 -
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, 2004, we have provided certain guarantees and have
other commitments in connection with properties under our management. These
include guarantees in respect of four projects totalling a maximum of $24
million, as well as a $361,000 guarantee of relocation costs for certain
employees. We have lease commitments in respect of Four Seasons Hotel London, as
well as a lease commitment in respect of Four Seasons Hotel Prague, (see notes
15(a) and 15(c), respectively, to our consolidated financial statements). In
addition, we have four other commitments totalling $29.3 million, which includes
our donation to the Canadian Opera Company for the "Four Seasons Centre for the
Performing Arts", which is more fully described under "Contractual Obligations"
above, and the remaining three other commitments are to properties under our
management. We have also guaranteed certain obligations of various officers and
employees in the aggregate amount of $296,000, all of which were entered into
before 2002.
To the extent we are called upon to honour any one of these commitments,
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. We do
not anticipate funding any amount pursuant to these commitments during 2005,
with the exception of $7.0 million for the "Four Seasons Centre for the
Performing Arts", and $1.5 million relating to our other commitments. 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. In the context of two dispositions, we received
indemnity agreements in our favour for our guarantee obligations that remained
in place notwithstanding the disposition. We believe that the indemnification
agreements in our favour should fully indemnify us for any possible payment
under these existing guarantees.
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 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).
- 26 -
The terms of our 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 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.
- 27 -
LOOKING AHEAD
Our business plan objectives for 2005 continue to focus on those aspects
of the business that we believe provide the greatest potential for maximizing
shareholder value by, among other things, contributing to long-term cash flow
and enhancing our market position and brand, including continued opening of new
Four Seasons properties, maintaining and enhancing market share, maintaining
room rates and increasing the RevPAR and profitability of the properties we
manage.
In addition to Four Seasons Hotel Hampshire, which opened in February
2005, we expect to open five new hotels and resorts in 2005 or the early part of
2006. The average term of the management contracts for these five properties is
53 years, and these management contracts are expected to provide us with
significant long-term fee income. For a discussion of our capital commitments in
connection with these projects, see "Four Seasons Portfolio -- Properties under
Construction or Development".
We believe that maintaining room rates is one of the most important
factors in being well-positioned for the increase in travel demand that is
expected to occur with global economic recovery. Over the past four years, we
have been generally successful at increasing room rates from the levels achieved
in 2000 without sacrificing occupancy. During 2005, 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 ten Four
Seasons hotels and resorts that opened over the past 24 months and the five new
Four Seasons projects that are expected to open later in 2005 or early in 2006.
We expect that the improving economic environment should translate into
continued improvement in travel demand, particularly business travel. We also
expect that leisure travel demand, which overall has been more resilient in the
past few years than business travel, will remain stable. On a full-year basis,
we continue to expect our average daily room rates for 2005 to exceed the rates
achieved in 2004. We also expect our business model to perform at or above
industry levels consistent with past experience.
If the travel trends that we experienced in 2004 continue, we expect
RevPAR, on a US dollar basis, for worldwide Core Hotels in the first quarter of
2005 and the full year 2005 to increase by more than 10%, both as compared to
their respective periods in 2004. We expect that this improvement will result
from occupancy and pricing improvements in all geographic regions in 2005. If
current trends continue, we expect the full-year gross operating margins of our
worldwide Core Hotels to increase more than 200 basis points in 2005.
A part of our business strategy is to invest a portion of available cash
to obtain new management agreements or enhance existing management arrangements.
These investments or advances will only be made where we expect our overall
economic return to justify the investment or advance. In this context, we also
assess the long-term value that we anticipate that the investment or advance
will contribute to our brand. During the year ended December 31, 2004, we made
investments in a variety of projects, including Silicon Valley and Jackson Hole.
For the quarter and year ended December 31, 2004, we funded $8.5 million and
$93.6 million, respectively, in management opportunities, including amounts
advanced as loans receivable, investment in hotel partnerships and investment in
management contracts ($5.2 million and $42.6 million, respectively, for the same
periods in 2003). In 2005, we expect to fund approximately US$90 million in
respect of investments in, or advances to, various projects, including
- 28 -
Geneva and Damascus, plus additional funding in Buenos Aires and Exuma and the
expansion of corporate office facilities. We anticipate selling two or more
interests in properties during 2005, from which we expect to receive total
aggregate proceeds of approximately US$20 million. To this end, we sold the
majority of our 71% equity interest in Four Seasons Residence Club Scottsdale at
Troon North for proceeds approximating book value in March 2005.
- 29 -
FOUR SEASONS PORTFOLIO
DESCRIPTION OF HOTELS, RESORTS AND RESIDENCE CLUBS
The following table provides an overview of the properties that we
currently manage:
- --------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE
NUMBER OF EQUITY
ROOMS/UNITS INTEREST(1)
- --------------------------------------------------------------------------------
UNITED STATES
- --------------------------------------------------------------------------------
Four Seasons Hotel Atlanta, GEORGIA 244 --
- --------------------------------------------------------------------------------
Four Seasons Hotel Austin, TEXAS 291 --
- --------------------------------------------------------------------------------
Four Seasons Resort Aviara, CALIFORNIA 329 7.3%(2)
- --------------------------------------------------------------------------------
Four Seasons Residence Club Aviara, CALIFORNIA 120 7.3%(2)
- --------------------------------------------------------------------------------
The Regent Beverly Wilshire (Beverly Hills), 395 --
CALIFORNIA
- --------------------------------------------------------------------------------
Four Seasons Biltmore Resort (Santa Barbara), 213 --
CALIFORNIA
- --------------------------------------------------------------------------------
Four Seasons Hotel Boston, MASSACHUSETTS(3) 272 --
- --------------------------------------------------------------------------------
Four Seasons Hotel Chicago, ILLINOIS 343 --
- --------------------------------------------------------------------------------
The Ritz-Carlton Hotel Chicago, ILLINOIS 435 --
- --------------------------------------------------------------------------------
Four Seasons Hotel Houston, TEXAS(3) 404 --
- --------------------------------------------------------------------------------
Four Seasons Resort Hualalai at 243 --
Historic Ka'upulehu, HAWAII
- --------------------------------------------------------------------------------
Four Seasons Resort Jackson Hole, 146 10%(2),
WYOMING(3) (5)
- --------------------------------------------------------------------------------
Four Seasons Residence Club Jackson Hole, 16(4) 10%(2)
WYOMING
- --------------------------------------------------------------------------------
Four Seasons Resort and Club Dallas 357 --
at Las Colinas, TEXAS
- --------------------------------------------------------------------------------
Four Seasons Hotel Las Vegas, NEVADA 424 --
- --------------------------------------------------------------------------------
Four Seasons Hotel Los Angeles, CALIFORNIA 285 --(5)
- --------------------------------------------------------------------------------
Four Seasons Resort Maui at Wailea, HAWAII 377 --
- --------------------------------------------------------------------------------
Four Seasons Hotel Miami, FLORIDA 221 4.7%(2)
- --------------------------------------------------------------------------------
Four Seasons Hotel Newport Beach, CALIFORNIA 295 --
- --------------------------------------------------------------------------------
Four Seasons Hotel New York, NEW YORK 362 --
- --------------------------------------------------------------------------------
Four Seasons Resort Palm Beach, FLORIDA 210 --
- --------------------------------------------------------------------------------
Four Seasons Hotel Philadelphia, 364 --
PENNSYLVANIA
- --------------------------------------------------------------------------------
The Pierre in New York, NEW YORK 201(6) 100%(7)
- --------------------------------------------------------------------------------
Four Seasons Hotel San Francisco, 277 --
CALIFORNIA(3)
- --------------------------------------------------------------------------------
Four Seasons Resort Scottsdale at Troon North, 210 3.9%(2),
ARIZONA (5),(8)
- --------------------------------------------------------------------------------
Four Seasons Residence Club 44 14.2%(2),
Scottsdale at Troon North, ARIZONA (5)
- --------------------------------------------------------------------------------
Four Seasons Hotel Washington, 211 --
DISTRICT OF COLUMBIA
- --------------------------------------------------------------------------------
OTHER AMERICAS/CARIBBEAN
- --------------------------------------------------------------------------------
Four Seasons Hotel Buenos Aires, 165 --
ARGENTINA
- --------------------------------------------------------------------------------
Four Seasons Resort Carmelo, URUGUAY 44 --
- --------------------------------------------------------------------------------
Four Seasons Resort Costa Rica at 165 11.4%(7)
Peninsula Papagayo, COSTA RICA(3)
- --------------------------------------------------------------------------------
Four Seasons Resort Great Exuma at 183 --
Emerald Bay, THE BAHAMAS(3)
- --------------------------------------------------------------------------------
Four Seasons Hotel Mexico City, MEXICO 240 --
- --------------------------------------------------------------------------------
Four Seasons Resort Nevis, WEST INDIES(3) 196 --
- --------------------------------------------------------------------------------
Four Seasons Resort Punta Mita, MEXICO(3) 140 --
- --------------------------------------------------------------------------------
- 30 -
- --------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE
NUMBER OF EQUITY
ROOMS/UNITS INTEREST(1)
- --------------------------------------------------------------------------------
Four Seasons Hotel Toronto, ONTARIO, CANADA 380 --
- --------------------------------------------------------------------------------
Four Seasons Hotel Vancouver, BRITISH 376 100%(7)
COLUMBIA, CANADA
- --------------------------------------------------------------------------------
Four Seasons Resort Whistler, BRITISH 273 --(5)
COLUMBIA, CANADA
- --------------------------------------------------------------------------------
ASIA/PACIFIC
- --------------------------------------------------------------------------------
Four Seasons Resort Bali at Jimbaran 147 --
Bay, INDONESIA
- --------------------------------------------------------------------------------
Four Seasons Resort Bali at Sayan, 60 --
INDONESIA(3)
- --------------------------------------------------------------------------------
Four Seasons Hotel Bangkok, THAILAND 340 --
- --------------------------------------------------------------------------------
Four Seasons Resort Chiang Mai, THAILAND 80 --
- --------------------------------------------------------------------------------
Four Seasons Hotel Jakarta, INDONESIA(3) 365 2%(2),
(10)
- --------------------------------------------------------------------------------
The Regent Kuala Lumpur, MALAYSIA 468 --
- --------------------------------------------------------------------------------
Four Seasons Resort Maldives at Kuda Hurra, 106 --
MALDIVES
- --------------------------------------------------------------------------------
Four Seasons Hotel Shanghai, PEOPLE'S 439 21.2%(2),
REPUBLIC OF CHINA (5),(9)
- --------------------------------------------------------------------------------
Four Seasons Hotel Singapore, SINGAPORE 254 --
- --------------------------------------------------------------------------------
The Regent Singapore, SINGAPORE 441 --
- --------------------------------------------------------------------------------
Four Seasons Hotel Sydney, AUSTRALIA 531 15.2%(7)
- --------------------------------------------------------------------------------
Grand Formosa Regent Taipei, TAIWAN 538 --
- --------------------------------------------------------------------------------
Four Seasons Hotel Tokyo at Chinzan-so, 283 --
JAPAN
- --------------------------------------------------------------------------------
Four Seasons Hotel Tokyo at 57 --
Marunouchi, JAPAN
- --------------------------------------------------------------------------------
MIDDLE EAST
- --------------------------------------------------------------------------------
Four Seasons Hotel Amman, JORDAN 193 1.6%(2)
- --------------------------------------------------------------------------------
Four Seasons Hotel Cairo at The First 269 --
Residence, EGYPT(3)
- --------------------------------------------------------------------------------
Four Seasons Hotel Cairo at Nile Plaza, 365 7.8%(2)
EGYPT(3)
- --------------------------------------------------------------------------------
Four Seasons Hotel Riyadh, SAUDI ARABIA 249 --
- --------------------------------------------------------------------------------
Four Seasons Resort Sharm el Sheikh, 136 --
EGYPT(3)
- --------------------------------------------------------------------------------
EUROPE
- --------------------------------------------------------------------------------
Four Seasons Hotel Gresham Palace 179 18.3%(2)
Budapest, HUNGARY
- --------------------------------------------------------------------------------
Four Seasons Hotel Dublin, IRELAND 259 --
- --------------------------------------------------------------------------------
Four Seasons Hotel Hampshire, ENGLAND 133 --(5)
- --------------------------------------------------------------------------------
Four Seasons Hotel Istanbul, TURKEY 65 --(11)
- --------------------------------------------------------------------------------
Four Seasons Hotel The Ritz Lisbon, PORTUGAL 282 --
- --------------------------------------------------------------------------------
Four Seasons Hotel Canary Wharf, ENGLAND 142 --(12)
- --------------------------------------------------------------------------------
Four Seasons Hotel London, ENGLAND 220 12.5%(5),
(7),(13)
- --------------------------------------------------------------------------------
Four Seasons Hotel Milan, ITALY 118 --
- --------------------------------------------------------------------------------
Four Seasons Hotel George V Paris, 245 --
FRANCE
- --------------------------------------------------------------------------------
Four Seasons Hotel Prague, CZECH REPUBLIC 161 --(5)
- --------------------------------------------------------------------------------
Four Seasons Resort Provence at Terre 115 --
Blanche, FRANCE(3)
- ------------------------------------------------------------
1 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
economic return to us 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".
2 Freehold interest.
- 31 -
3 This project includes, or is expected to include, a Four Seasons Residence
Club or a Four Seasons branded residential component.
4 Four Seasons Residence Club Jackson Hole, Wyoming may have up to 40 units
at full build out.
5 In addition to providing management services to this property, we have a
guarantee or other commitment in respect of this property. See "Off-Balance
Sheet Arrangements -- Guarantees and Commitments".
6 Includes approximately 30 cooperative suites leased from individual owners
and operated as hotel rooms.
7 Leasehold interest.
8 We have a preferred profits interest derived from previously existing
subordinated loans to the resort of approximately US$17.4 million in
aggregate plus a loan in the amount of US$6.0 million to an entity that
owns approximately 85% of the entity that owns the hotel.
9 We anticipate that we will reduce our equity interest through a sale to a
third party.
10 The Regent Jakarta was re-branded as Four Seasons Hotel Jakarta effective
July 14, 2004.
11 Subject to satisfaction of certain conditions, we may acquire an 18%
leasehold interest in conjunction with a proposed expansion and renovation
of Four Seasons Hotel Istanbul.
12 We have made a loan of (pound)3 million to the owner of the Four Seasons
Hotel Canary Wharf, which is convertible into an equity interest in the
hotel on the occurrence of certain events.
13 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. Indirectly, we now hold
a 12.5% ownership interest in the sub-tenant.
- 32 -
PROPERTIES UNDER CONSTRUCTION OR DEVELOPMENT
We currently have 26 properties under construction or development that are
to be operated under the Four Seasons name. We expect nine of those properties
to include a Residence Club or other residential branded component. The
following table provides an overview of these properties:
- --------------------------------------------------------------------------------
TOTAL CAPITAL
CAPITAL COMMITMENT
COMMITMENT NOT YET
AS AT FUNDED AS
MARCH 14, AT MARCH 14,
APPROXIMATE 2005 2005
HOTEL/RESORT/RESIDENCE CLUB NUMBER OF (IN (IN
AND LOCATION(1),(2) ROOMS/UNITS MILLIONS) MILLIONS)
- --------------------------------------------------------------------------------
SCHEDULED 2005/2006 OPENINGS
- --------------------------------------------------------------------------------
Four Seasons Hotel Alexandria, 125 -- --
EGYPT(3)
- --------------------------------------------------------------------------------
Four Seasons Hotel Damascus, 305 US$5 --
SYRIA
- --------------------------------------------------------------------------------
Four Seasons Hotel Doha, QATAR(3) 230 US$4(4) US$4
- --------------------------------------------------------------------------------
Four Seasons Hotel Florence, ITALY 120 (euro)10(4) (euro)10
- --------------------------------------------------------------------------------
Four Seasons Hotel Geneva, 100 US$19 US$15.4
SWITZERLAND
- --------------------------------------------------------------------------------
Four Seasons Hotel Hong Kong, 395 -- --
PEOPLE'S REPUBLIC OF CHINA(3)
- --------------------------------------------------------------------------------
Four Seasons Resort Lanai at 100 -- --
Koele, HAWAII, USA
- --------------------------------------------------------------------------------
Four Seasons Resort Lanai at 250 -- --
Manele Bay, HAWAII, USA
- --------------------------------------------------------------------------------
Four Seasons Resort Langkawi, 90 -- --
MALAYSIA
- --------------------------------------------------------------------------------
Four Seasons Resort Maldives at 115 US$4 US$4
Landaa Giraavaru, MALDIVES
- --------------------------------------------------------------------------------
Four Seasons Hotel Mumbai, INDIA 235 -- --
- --------------------------------------------------------------------------------
Four Seasons Residence Club 35 US$36.8 US$35.7
Punta Mita, MEXICO(5)
- --------------------------------------------------------------------------------
Four Seasons Hotel Silicon 200 US$6.7 US$0.8
Valley at East Palo Alto,
CALIFORNIA, USA
- --------------------------------------------------------------------------------
Four Seasons Private Residences 35 -- --
Whistler, BRITISH COLUMBIA,
CANADA(6)
- --------------------------------------------------------------------------------
BEYOND 2006
- --------------------------------------------------------------------------------
Four Seasons Hotel Baltimore, 200 US$5 US$5
MARYLAND, USA(3)
- --------------------------------------------------------------------------------
Four Seasons Hotel Beijing, 325 US$1 US$1
PEOPLE'S REPUBLIC OF CHINA
- --------------------------------------------------------------------------------
Four Seasons Hotel Beirut, 235 US$5 US$5
LEBANON
- --------------------------------------------------------------------------------
Four Seasons Resort Bora Bora, 105 US$6.5(4) US$6.5
FRENCH POLYNESIA
- --------------------------------------------------------------------------------
Four Seasons Hotel Dubai, UNITED 250 -- --
ARAB EMIRATES(3)
- --------------------------------------------------------------------------------
Four Seasons Hotel Istanbul at 170 US$12(7) US$10.5
the Bosphorus, TURKEY
- --------------------------------------------------------------------------------
Four Seasons Hotel Kuwait City, 225 -- --
KUWAIT
- --------------------------------------------------------------------------------
Four Seasons Hotel Moscow, 210 US$10 US$10
RUSSIA(3)
- --------------------------------------------------------------------------------
Four Seasons Hotel Moscow 80 US$5 US$5
Kamenny Island, RUSSIA(3)
- --------------------------------------------------------------------------------
- 33 -
- --------------------------------------------------------------------------------
TOTAL CAPITAL
CAPITAL COMMITMENT
COMMITMENT NOT YET
AS AT FUNDED AS
MARCH 14, AT MARCH 14,
APPROXIMATE 2005 2005
HOTEL/RESORT/RESIDENCE CLUB NUMBER OF (IN (IN
AND LOCATION(1),(2) ROOMS/UNITS MILLIONS) MILLIONS)
- --------------------------------------------------------------------------------
Four Seasons Resort Puerto Rico, 250 US$10 US$10
PUERTO RICO(3)
- --------------------------------------------------------------------------------
Four Seasons Hotel Seattle, 150 US$5 US$5
WASHINGTON, USA(3)
- --------------------------------------------------------------------------------
Four Seasons Resort Vail, 120 US$6 US$6
COLORADO, USA
- --------------------------------------------------------------------------------
1 Information concerning hotels, resorts and Residence Clubs or other
residential branded components under construction or under development is
based upon agreements and letters of intent and may change prior to the
completion of the project. We have estimated the dates of scheduled openings
based upon information provided by the various developers. There can be no
assurance that the dates of scheduled openings will be achieved, that
estimated capital commitments will not change or that these projects will be
completed. In particular, 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.
2 We have made an investment in Orlando, Florida, 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.
3 We expect this project to include a Four Seasons Residence Club and/or a Four
Seasons branded residential component.
4 All or a portion of the capital commitment is to be provided by way of an
operating deficit loan that may or may not be required to be funded. In the
case of Four Seasons Hotel Doha, Four Seasons Hotel Florence and Four Seasons
Resort Bora Bora, we do not expect the operating deficit loans that we are to
provide to exceed US $4 million, (euro)10 million and US$4 million,
respectively, if they are funded.
5 Four Seasons Residence Club Punta Mita remains under development adjacent to
Four Seasons Resort Punta Mita.
6 Four Seasons Private Residences Whistler are under development adjacent to
Four Seasons Resort Whistler.
7 This capital commitment relates to our purchase of an equity interest in Four
Seasons Hotel Istanbul at the Bosphorus as well as the existing Four Seasons
Hotel Istanbul.
- 34 -
THREE-YEAR REVIEW
- --------------------------------------------------------------------------------
(IN MILLIONS OF DOLLARS EXCEPT 2004 2003 2002(1)
PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA:
- --------------------------------------------------------------------------------
Consolidated revenues(2),(3) $339.8 $313.6 $339.1
- --------------------------------------------------------------------------------
Management operations:
- --------------------------------------------------------------------------------
Revenues (excluding reimbursed $145.8 $120.5 $118.7
costs(3))
- --------------------------------------------------------------------------------
Management earnings before 101.0 79.5 82.0
other operating items
- --------------------------------------------------------------------------------
Ownership and corporate
operations:
- --------------------------------------------------------------------------------
Revenues 126.7 123.2 141.3
- --------------------------------------------------------------------------------
Distribution from hotel 0.4 0.2 1.3
investments
- --------------------------------------------------------------------------------
Ownership and corporate loss (21.6) (30.1) (19.6)
before other operating items
- --------------------------------------------------------------------------------
Earnings before other operating 79.4 49.5 62.4
items(4)
- --------------------------------------------------------------------------------
Depreciation and amortization (15.3) (15.0) (14.8)
- --------------------------------------------------------------------------------
Other expense, net(5) (16.1) (25.8) (22.9)
- --------------------------------------------------------------------------------
Earnings from operations(6) 48.0 8.7 24.7
- --------------------------------------------------------------------------------
Interest income, net 1.5 3.4 3.2
- --------------------------------------------------------------------------------
Earnings before income taxes(7) 49.5 12.0 27.9
- --------------------------------------------------------------------------------
Income tax expense (16.3) (6.6) (6.7)
- --------------------------------------------------------------------------------
Net earnings $33.2 $5.4 $21.2
- --------------------------------------------------------------------------------
Earnings per share:
- --------------------------------------------------------------------------------
Basic $0.93 $0.15 $0.61
- --------------------------------------------------------------------------------
Diluted $0.89 $0.15 $0.59
- --------------------------------------------------------------------------------
Weighted average number of shares
(millions):
- --------------------------------------------------------------------------------
Limited Voting Shares 31.8 31.1 31.1
- --------------------------------------------------------------------------------
Variable Multiple Voting Shares 3.8 3.9 4.0
- --------------------------------------------------------------------------------
CASH FLOW DATA:
- --------------------------------------------------------------------------------
Cash provided by operations $57.4 $66.0 $41.8
- --------------------------------------------------------------------------------
Cash provided by (used in) 125.7 3.9 (13.3)
financing
- --------------------------------------------------------------------------------
Cash used in capital investments (54.9) (40.1) (74.3)
- --------------------------------------------------------------------------------
BALANCE SHEET DATA:
- --------------------------------------------------------------------------------
Cash and cash equivalents $272.5 $170.7 $165.0
- --------------------------------------------------------------------------------
Total assets 1,085.8 946.7 991.4
- --------------------------------------------------------------------------------
Long-term obligations 309.1 120.1 129.1
- --------------------------------------------------------------------------------
Shareholders' equity 704.0 765.5 801.2
- --------------------------------------------------------------------------------
OTHER DATA:
- --------------------------------------------------------------------------------
Total revenues of all managed $2,912.0 $2,600.4 $2,845.4
hotels and resorts(8)
- --------------------------------------------------------------------------------
Management operating margin(9) 69.3% 66.0% 69.0%
- --------------------------------------------------------------------------------
Management earnings before other 127.2% 160.8% 131.4%
operating items as a percentage
of earnings before other
operating items
- --------------------------------------------------------------------------------
Market price per share at $98.11 $66.33 $44.40
year-end
- --------------------------------------------------------------------------------
Cash dividends declared per share:
- --------------------------------------------------------------------------------
Limited Voting Shares $ 0.11 $0.11 $0.11
- --------------------------------------------------------------------------------
Variable Multiple Voting Shares $0.055 $0.055 $0.055
- --------------------------------------------------------------------------------
Shares outstanding (millions):
- --------------------------------------------------------------------------------
- 35 -
- --------------------------------------------------------------------------------
(IN MILLIONS OF DOLLARS EXCEPT 2004 2003 2002(1)
PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Limited Voting Shares 32.9 31.4 30.9
- --------------------------------------------------------------------------------
Variable Multiple Voting Shares 3.7 3.8 4.0
- --------------------------------------------------------------------------------
Market capitalization at year-end $3,591.7 $2,337.6 $1,548.5
- --------------------------------------------------------------------------------
Employees(10) 31,300 28,640 27,720
- --------------------------------------------------------------------------------
1 In December 2003, the Canadian Institute of Chartered Accountants ("CICA")
amended Section 3870 of its Handbook to require entities to account for
employee stock options using the fair value-based method, beginning
January 1, 2004. In accordance with one of the transitional alternatives
permitted under amended Section 3870, we have prospectively adopted the
fair value-based method to all employee stock options granted on or after
January 1, 2003. Accordingly, options granted prior to that date continue
to be accounted for using the settlement method, and results for the year
ended December 31, 2002 have not been restated. The prospective
application of adopting the fair value-based method effective January 1,
2003 resulted in a decrease in net earnings of $0.9 million and a decrease
in basic and diluted earnings per share of $0.03 and $0.02, respectively,
for the year ended December 31, 2003.
2 Consolidated revenues are comprised of revenues from management
operations, revenues from ownership and corporate operations and
distributions from hotel investments, less fees from ownership and
corporate operations to management operations.
3 As a result of adopting Section 1100, "Generally Accepted Accounting
Principles", which was issued by the CICA, and was effective January 1,
2004, we have included the reimbursement of all out-of-pocket expenses in
both revenues and expenses instead of recording certain reimbursed costs
as a "net" amount. The change in the accounting treatment of reimbursed
costs resulted in an increase in consolidated revenues for the year ended
December 31, 2004 of $41.3 million (2003 - $45.2 million; 2002 - $54.5
million), but did not have an impact on net earnings.
4 Earnings before other operating items is equal to net earnings plus (i)
income tax expense plus (ii) interest expense less (iii) interest income
plus (iv) other expense less (v) other income plus (vi) depreciation and
amortization. Earnings before other operating items 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
earnings before other operating items may also not be comparable to
earnings before other operating items used by other companies, which may
be calculated differently. We consider earnings before other operating
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. Earnings before other operating
items is also used by investors, analysts and our lenders as a measure of
our financial performance.
5 Other expense, net is comprised of foreign exchange gain/loss, gain/loss
on sale of investments, recovery of/provision for loss, legal and
enforcement costs and loss on redemption of LYONs.
6 Earnings from operations represent earnings before other operating items
less (i) depreciation and amortization plus (ii) other income less (iii)
other expense.
7 Earnings before income taxes represent earnings from operations plus (i)
interest income less (ii) interest expense.
8 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.
9 Management operating margin represents management earnings before other
operating items, as a percentage of management revenues, excluding
reimbursed costs.
10 We directly employ, and are financially responsible for, approximately 500
people at our various corporate offices, worldwide sales offices and
central reservations offices. In addition, there are approximately 30,800
employees located at the 63 hotels and resorts and three Residence Clubs
that we manage. 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.
- 36 -
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:
o changes in general, local and industry-specific economic and
financial conditions, such as the airline industry,
o periodic overbuilding in the industry or a specific market,
o varying levels of demand for rooms and related services (including
food and beverage and function space),
o competition from other properties,
o changes in travel patterns,
o the recurring need for renovation, refurbishment and improvement of
hotel and resort properties,
o changes in wages, benefits, prices, construction and maintenance,
insurance and operating costs that may result from inflation or
otherwise,
o government regulations,
o changes in taxes and interest rates,
o currency fluctuations,
o the availability and cost of financing for operating or capital
requirements,
o natural disasters,
o extreme weather conditions,
o labour disputes,
o infectious diseases, and
o war, civil unrest, terrorism, international conflict and political
instability.
We operate and own luxury hotels, resorts and other 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.
- 37 -
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 hotel operators. 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
to a payment to us if the property is sold 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 debt that
cannot be serviced adequately is incurred by the owner at the property level. 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
- 38 -
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 currently have
remaining terms (including extension periods at our election) averaging
approximately 52 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
2004, no owner had interests in any combination of hotels, resorts and serviced
and branded residential properties managed by Four Seasons that represented in
excess of 10% of our total consolidated revenues. 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.
- 39 -
INVESTMENTS IN AND ADVANCES TO MANAGED AND OWNED PROPERTIES
We have made investments in, and/or advances in respect of or to owners
of, several of the 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 or leasehold interest in, or have
made advances in respect of, 30 of the 64 hotels and resorts that we manage,
including a 100% leasehold interest in each of Four Seasons Hotel Vancouver and
The Pierre in New York. We also have made, or expect to make in the near term,
investments in, or advances in respect of or to owners of, 17 of the 26
properties under construction or development. In addition, we have an investment
in three Four Seasons Residence Club properties. The book value of total
investments and advances as at December 31, 2004 was approximately $564 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 equity
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 (BBB-) as rated by
Standard & Poor's. Our senior unsecured debt is currently rated by three debt
rating agencies (Standard & Poor's: BBB- with stable outlook; Moody's: Baa3 with
stable outlook; Dominion Bond Rating Services: BBB- with stable outlook). As a
result of current global economic and political events, it is possible that the
rating agencies may downgrade the rating and/or outlook for many of the lodging
companies, 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 US$10.9 million ($13.1 million) of
letters of credit were issued at December 31, 2004) 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
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relationship with employees, including minimum wage requirements, overtime,
working conditions and work permit requirements. Compliance with these laws can
affect the revenues and profits of hotels and resorts 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/or have an equity interest in hotels and resorts
in 28 countries and currently have development plans to open hotels and resorts
in nine 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
All hotels and resorts managed by us are required 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. In addition, we obtain indemnities from the
owners of the hotels and resorts that we manage in respect to 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. 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
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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.
Events of September 11, 2001 severely affected an already tightening insurance
market. Premiums have increased 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.
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 own or
manage. We maintain comprehensive liability insurance and also require owners to
maintain adequate insurance coverage. We believe such coverage to 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 record sales and liabilities in the local currencies
for many of these hotels. We report our results in Canadian dollars. However,
our most relevant currency risk is in US dollars, as more than half of our
revenues and assets currently are US dollar-denominated, as are the majority of
our long-term obligations and investment commitments. As a result, our results
and financial position are affected by foreign exchange rate fluctuations and,
most significantly, changes in the value of the US dollar through both
translation risk (which is the risk that financial statements for a particular
period or as of a certain date depend on the prevailing exchange rate of the
various currencies against the US dollar) and transaction risk (which is the
risk that the currency of costs and liabilities fluctuates in relation to the
currency of revenues and assets, which may materially and adversely affect our
business, results of operations and financial condition). With respect to the
translation risk, the fluctuations of currencies against the Canadian dollar can
be substantial, and our reported results could fluctuate materially and have
fluctuated materially as a result of foreign exchange fluctuations.
We endeavour to match foreign currency revenues to costs, liabilities and
investment commitments to provide a natural hedge against translation and
transaction risks, 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. 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 hotels, the foreign currency risks are 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
Our hotels and resorts are affected by normally recurring seasonal
patterns and, for most of the properties, demand is lower in December through
March than during the remainder of the year.
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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. In 2002,
this normal seasonality was also affected by the delayed recovery in the global
economy, and ongoing geopolitical concerns, which have continued to negatively
affect business travel on a global basis. In addition, specific local events can
cause, and from time to time have caused, unanticipated disruptions to the
operations of certain of our properties.
Our ownership operations are particularly 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 fourth quarter is the strongest quarter for
the majority of the hotels, although this was not true in 2001, as a result of
the terrorist attacks in the United States, nor in 2002, as a result of the
difficult economic environment and continued geopolitical instability.
INTELLECTUAL PROPERTY
In the highly competitive service industry in which we operate, trade
names, trademarks, service marks and logos are very important in the sales and
marketing of those services. We have a significant number of trade names,
trademarks, service marks and logos, and significant time and effort are
expended each year on surveillance, registration and protection of our trade
names, trademarks, service marks and logos. The loss or infringement of any of
our trade names, trademarks, service marks and logos could have a material and
adverse effect on our business, results of operations and financial condition.
RISKS ASSOCIATED WITH RESIDENCE CLUB BUSINESS
We currently operate three Residence Clubs. We are expanding our presence
in the luxury segment of the interval and fractional ownership industry, with a
number of other projects under development. Our ability to successfully develop
and sell interests in Residence Clubs that are built, and the various fees
earned by us from each Residence Club project, could be materially and adversely
affected by one or any combination of the factors described in this "Operating
Risks" section. Additionally, the laws of many jurisdictions in which we may
sell interests in our Residence Clubs grant purchasers the right to rescind the
purchase contract at any time within a statutory rescission period. Although we
believe that we are in compliance in all material respects with applicable laws
and regulations to which Residence Club marketing, sales and operations
currently are 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.
Additionally, if a purchaser of an ownership interest in a Residence Club
defaults, we may not recover the marketing, selling and general administrative
costs related to that sale.
DEPENDENCE ON KEY EMPLOYEES
Our success depends in part on the continued service of our senior
executives, who have an average of 22 years of experience with us. 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.
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CRITICAL ACCOUNTING POLICIES AND 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. We also prepare a reconciliation to United States
generally accepted accounting principles, which is included as note 18 to the
consolidated financial statements.
Although all of the policies identified in note 1 to the consolidated
financial statements are important in understanding the consolidated financial
statements, the policies discussed below are considered by management to be
central to understanding the financial statements because of the higher level of
measurement uncertainties involved in their application.
INVESTMENTS IN OTHER HOTEL PARTNERSHIPS AND CORPORATIONS (note 1(f) to the
consolidated financial statements) are cost accounted when, among other things,
we own less than a 20% interest in the project, we have no significant influence
or the investment was acquired prior to May 1, 2003 with the intention that it
be disposed of in the foreseeable future. Beginning January 1, 2005, we will be
required to either equity account or consolidate our investments with greater
than 20% ownership interest. See "Four Seasons Portfolio -- Description of
Hotels, Resorts and Residence Clubs" for our pro-rata share of these ownership
interests.
DEFERRED CHARGES are costs incurred during the negotiation, structuring
and execution of new contracts relating to projects that, in management's
judgment, have a high probability of opening, which are deferred and capitalized
on the balance sheet, as allowed under Canadian GAAP, and are expensed/amortized
when the property is opened (note 1(h) to the consolidated financial
statements).
REVENUE RECOGNITION: INCENTIVE FEES are accrued as earned based on the
profitability of the managed property, subject to the terms of each individual
management contract. We accrue incentive fees in interim consolidated financial
statements based upon the amount that would be due under the incentive fee
formula as if the relevant management agreement was terminated at the relevant
reporting date. Generally, on termination, our management contracts entitle us
to receive incentive fees earned up to the date of termination. However,
conditions in the general and local hospitality industry, competition from other
hotels, changes in travel patterns, and other factors can affect the property's
profitability in a subsequent interim period, reducing or eliminating the
incentive fee accrued in a previous interim period.
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.
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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, management contracts, and trademarks and trade names.
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.
Investments in management contracts and investments in trademarks and
trade names are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of investments in management
contracts or investments in trademarks and trade names 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 and future cash flows 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 and future cash flows 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 and our
investments.
These assumptions, estimates and evaluations are subject to the
availability of reliable comparable data, ongoing geopolitical concerns and the
uncertainty of predictions concerning future events. Accordingly, estimates of
recoverable amounts and future cash flows 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 interests in
each of The Pierre in New York and 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. As discussed above under
"Operational and Financial Review and Analysis - Overview - Ownership and
Corporate Operations", we continue to review our options in respect of The
Pierre and Four Seasons Hotel Vancouver to determine what, if any, alternatives
may be available to modify or restructure our operations of, or investments in,
these hotels.
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RETIREMENT PLAN
We maintain an unfunded, multi-employer, non-contributory, defined benefit
retirement plan on behalf of ourselves and the owners of most of our managed
properties (see "Retirement Plan Commitments" discussed above). The portion of
the plan applicable to the general managers is the responsibility of the owners
of properties that such general managers manage. The accrued benefit liability
of $32.8 million that is recorded on our balance sheet in "Long-term
obligations" as at December 31, 2004, is net of an allocation of $26.9 million
to the properties that we manage for their share of the accrued benefit
liability in respect of the general managers of those properties. Due to the
long-term nature of this 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, mortality and
the allocation to the properties that we manage. 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 15(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, 2004, 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 $25.4 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, 2004, the future
income tax asset was $4.5 million, net of a valuation allowance of $3.0 million.
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IMPACT ON 2004 OF RECENTLY ISSUED CANADIAN ACCOUNTING STANDARDS
The CICA issued Accounting Guideline No. 13, "Hedging Relationships",
which establishes requirements for the identification, documentation,
designation and effectiveness of hedging relationships and was effective for
fiscal years beginning on or after July 1, 2003. Effective January 1, 2004, we
ceased designating our US dollar forward contracts as hedges of our US dollar
revenues. These contracts were entered into during 2002, and all of these
contracts matured during 2004. The foreign exchange gains on these contracts of
$14.6 million, which were deferred prior to January 1, 2004, were recognized in
2004 as an increase of fee revenues over the course of the year. Effective
January 1, 2004, our US dollar 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. There was no impact on net earnings for the year
ended December 31, 2004 of ceasing to designate our US dollar forward contracts
as hedges of our US dollar revenues.
As a result of adopting the CICA Section 1100, "Generally Accepted
Accounting Principles", which was issued in 2003 and was effective for 2004, we
began recording all reimbursed costs in revenue on a gross, rather than net,
basis. These costs include marketing, reservations, and advertising charges, as
well as the out-of-pocket expense charges, which we charge to properties under
management on a cost recovery basis. For 2003, reimbursed costs have also been
reclassified on a consistent basis and included in revenues.
Effective January 1, 2004, we also adopted the following accounting
standards: Accounting for Asset Retirement Obligations, Impairment of Long-Lived
Assets, Revenue Recognition and Revenue Arrangements with Multiple Deliverables.
The application of these accounting treatments did not have an impact on our
annual consolidated financial statements.
RECENT CANADIAN ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In June 2003, the CICA issued Accounting Guideline No. 15, "Consolidation
of Variable Interest Entities" ("AcG-15"). AcG-15 establishes criteria to
identify variable interest entities ("VIE") and the primary beneficiary of such
entities. Entities that qualify as VIEs must be consolidated by their primary
beneficiary. All other holders of significant variable interests in a VIE must
disclose the nature, purpose, size and activity of the VIE as well as their
maximum exposure to losses as a result of involvement with a VIE. AcG-15 will be
effective for our fiscal periods beginning after December 31, 2004. Based on the
current interpretations and the analysis completed to date, we do not believe
that we will be required to consolidate any interest under AcG-15.
TEMPORARY CONTROLLED SUBSIDIARIES
In December 2002, in conjunction with the issuance of Section 3475,
"Disposal of Long-Lived Assets and Discontinued Operations," the CICA eliminated
the exception from consolidation for a temporary controlled subsidiary. This
change is effective for fiscal years beginning on or after October 1, 2004,
irrespective of when those investments occurred. Beginning January 1, 2005, we
will be required to either equity account or consolidate our investments in
which we have a greater than 20% ownership interest. In March 2005, we sold the
majority of our 71% equity interest in Four Seasons Residence Club Scottsdale at
Troon North for proceeds approximating book value. As a result of the sale, our
equity interest in Four Seasons Residence Club Scottsdale at Troon North is
below 20%. We continue to manage this property under a long-term management
contract. We anticipate that we will reduce our equity interest to below 20% in
Four Seasons Hotel Shanghai through disposition to a third party during 2005.
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ADDITIONAL INFORMATION
Additional information about us (including our most recent Annual
Information Form) is available on SEDAR at www.sedar.com.
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