TORONTO, March 12 /PRNewswire-FirstCall/ -- Four Seasons Hotels
Inc. (TSX Symbol "FSH"; NYSE Symbol "FS") today released its
results for the three months ended and year ended December 31,
2006. The attached 2006 Management's Discussion and Analysis for
the year ended December 31, 2006 and unaudited consolidated
financial statements for the three months ended and year ended
December 31, 2006 form a part of this news release. The Company's
2006 Management's Discussion and Analysis, audited consolidated
financial statements for the years ended December 31, 2006 and 2005
and audited reconciliation to United States generally accepted
accounting principles for the years ended December 31, 2006 and
2005 are available on the Company's website at
http://www.fourseasons.com/. In addition, these documents will be
available at the Canadian SEDAR website at http://www.sedar.com/
and at the U.S. Securities and Exchange Commission's website at
http://www.sec.gov/. Endnotes can be found at the end of this news
release. Highlights of the Three Months ended and Year ended
December 31, 2006(A) As more fully disclosed in the Company's
unaudited consolidated financial statements and Management's
Discussion and Analysis, for the three months ended and year ended
December 31, 2006, as compared to the same periods in 2005: Hotel
and Resort Operating Results: - For the three months ended December
31, 2006, RevPAR(B) increased at our worldwide Core Hotels(C) by
13.9% and at our US Core Hotels by 8.4%. For the year ended
December 31, 2006, RevPAR increased at our worldwide Core Hotels by
11.8% and at our US Core Hotels by 10.2%. - For the three months
ended December 31, 2006, gross operating margins(D) increased at
our worldwide Core Hotels by 310 basis points to 32.5%, and at our
US Core Hotels, gross operating margins increased by 190 basis
points to 30.2%. For the year ended December 31, 2006, gross
operating margins increased at our worldwide Core Hotels by 220
basis points to 32.4%, and at our US Core Hotels gross operating
margins increased by 180 basis points to 30.4%. - For the three
months ended December 31, 2006, revenues under management increased
18.5% to $801.6 million from $676.7 million. For the year ended
December 31, 2006, revenues under management increased 15.0% to
$2.9 billion from $2.6 billion. Company Operating Results: - At
December 31, 2006, we had approximately 18,025 rooms under
management, as compared to approximately 17,300 rooms at December
31, 2005. - As a result of improved results at properties under our
management and, to a lesser extent, an increase in the number of
rooms under management, hotel management fees increased 31.7% in
the three months ended December 31, 2006. For the year ended
December 31, 2006, hotel management fees increased 22.8%. - Base
fees increased 16.6% to $22.4 million in the three months ended
December 31, 2006 and 13.7% to $83.8 million for the year ended
December 31, 2006, principally as a result of RevPAR improvements
at our worldwide Core Hotels and the contribution from recently
opened properties under management. - As a result of improved
profitability and the addition of new properties under our
management, incentive fees increased 79.9% to $10.8 million for the
three months ended December 31, 2006 and 47.7% to $40.0 million for
the year ended December 31, 2006. - Other fees improved 3.9% for
the three months ended December 31, 2006 to $4.2 million and
improved 24.7% to $17.5 million for the year ended December 31,
2006, primarily as a result of an increase in branded residential
royalty fees, which vary from period to period based on, among
other things, the volume of sales closing in those periods; these
fluctuations may be significant. - General and administrative
expenses increased 10.3% to $18.4 million for the three months
ended December 31, 2006, and 7.4% to $62.4 million for the year
ended December 31, 2006. - Operating earnings before other items(E)
increased 57.8% to $19.3 million for the three months ended
December 31, 2006, and 42.7% to $80.1 million for the year ended
December 31, 2006. - For the three months ended December 31, 2006,
net earnings were $16.9 million ($0.45 basic earnings per share and
$0.44 diluted earnings per share), compared to a net loss of $37.8
million ($1.03 basic and diluted loss per share) for the three
months ended December 31, 2005. For the three months ended December
31, 2005, net loss included foreign exchange losses, asset
provisions and write downs, and expenses related to the conversion
of a defined benefit plan to a defined contribution retirement plan
totaling approximately $56.8 million. - For the year ended December
31, 2006, net earnings were $50.3 million ($1.36 basic earnings per
share and $1.33 diluted earnings per share), as compared to net
loss of $28.2 million for the same period in 2005 ($0.77 basic and
diluted loss per share). For the year ended December 31, 2005, net
loss included foreign exchange losses, asset provisions and write
downs, and expenses related to the conversion of a defined
contribution retirement plan totaling approximately $89.2 million.
Going Private Transaction On February 12, 2007, the Company
announced that it has entered into a definitive acquisition
agreement to implement the previously announced proposal to take
the Company private at a price of $82.00 cash per Limited Voting
Share. Following completion of the transaction, Four Seasons would
be owned by affiliates of Cascade Investment, L.L.C. (an entity
owned by William H. Gates III), Kingdom Hotels International (a
company owned by a trust created for the benefit of His Royal
Highness Prince Alwaleed Bin Talal Bin Abdulaziz Alsaud and his
family), and Isadore Sharp. A meeting of shareholders to consider
the proposed transaction is anticipated to take place in April
2007, in Toronto. A management information circular relating to
that meeting is currently expected to be mailed on or about the
week of March 12, 2007, to shareholders of record on February 28,
2007, and has been filed with the United States Securities and
Exchange Commission and the Canadian Securities Administrators. It
is anticipated that the transaction, if approved by shareholders,
will be completed in the second quarter of 2007. Endnotes
---------------------- (A) All amounts disclosed in this news
release are in US dollars unless otherwise noted. (B) RevPAR is
defined as average room revenue per available room. It is a
non-GAAP financial measure and does not have any standardized
meaning prescribed by GAAP. It is, therefore, unlikely to be
comparable to similar measures presented by other issuers. We use
RevPAR because it is a commonly used indicator of market
performance for hotels and resorts and represents the combination
of the average daily room rate and the average occupancy rate
achieved during the period. RevPAR does not include food and
beverage or other ancillary revenues generated by a hotel or
resort. RevPAR is the most commonly used measure in the lodging
industry to measure the period-over-period performance of
comparable properties. Our calculation of RevPAR may be different
than the calculation used by other lodging companies. (C) The term
"Core Hotels" means hotels and resorts under management for the
full year of both 2006 and 2005. However, if a "Core Hotel" has
undergone or is undergoing an extensive renovation program in one
of those years that materially affects the operation of the
property in that year, it ceases to be included as a "Core Hotel"
in either year. Changes from the 2005/2004 Core Hotels are the
additions of Four Seasons Resort Scottsdale at Troon North, Four
Seasons Resort Whistler, Four Seasons Resort Costa Rica at
Peninsula Papagayo, Four Seasons Hotel Gresham Palace Budapest,
Four Seasons Resort Provence at Terre Blanche and Four Seasons
Hotel Cairo at Nile Plaza, and the deletion of The Regent Kuala
Lumpur. (D) Gross operating margin represents gross operating
profit as a percentage of gross operating revenue. (E) Operating
earnings before other items is equal to net earnings (loss), plus
(i) income tax expense less (ii) income tax recovery plus (iii)
interest expense less (iv) interest income plus (v) other expenses
less (vi) other income plus (vii) depreciation and amortization.
Operating earnings before other items is a non-GAAP financial
measure and does not have any standardized meaning prescribed by
GAAP. It is, therefore, unlikely to be comparable to similar
measures presented by other issuers. We consider operating earnings
before other items to be a meaningful indicator of operations and
use it as a measure to assess our operating performance. It is
included because we believe it can be useful in measuring our
ability to service debt, fund capital expenditures and expand our
business. Operating earnings before other items is also used by
investors, analysts and our lenders as a measure of our financial
performance. This document contains "forward-looking statements"
within the meaning of applicable securities laws, including RevPAR,
profit margin and earning trends; statements concerning the number
of lodging properties expected to be added in this and future
years; expected investment spending; similar statements concerning
anticipated future events, results, circumstances, performance or
expectations that are not historical facts; and statements relating
to the proposal to take Four Seasons Hotels Inc. private and
anticipated financial results. Various factors and assumptions were
applied or taken into consideration in arriving at these
statements, which do not take into account the effect that
non-recurring or other special items announced after the statements
are made may have on our business. These statements are not
guarantees of future performance and, accordingly, you are
cautioned not to place undue reliance on these statements. These
statements are subject to numerous risks and uncertainties,
including those described in our annual information form and in
this document. (See discussion under "Operating Risks" in our
Annual Information Form at page 17, and in our Management's
Discussion and Analysis for the year ended December 31, 2006 at
page 55.) 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, fluctuations in
relative exchange rates of various currencies, supply and demand
changes for hotel rooms and residential properties, competitive
conditions in the lodging industry, the risks associated with our
ability to maintain and renew management agreements and expand the
portfolio of properties that we manage, relationships with clients
and property owners 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. In addition, actual results and
developments relating to the proposal may differ materially from
those contemplated by the statements herein, due to, among other
things, the risks that the parties will not proceed with the
transaction, that the terms of the transaction will differ from
those that currently are contemplated, and that the transaction
will not be successfully completed for any reason (including the
failure to obtain the required approvals or clearances from
regulatory authorities and the timing of completion). 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. Additionally, we undertake no
obligation to comment on analyses, expectations or statements made
by third parties in respect of Four Seasons Hotels Inc., its
financial or operating results or its securities or any of the
properties that we manage or in which we may have an interest. FOUR
SEASONS HOTELS INC. CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) Three months ended Years ended (In thousands of US
dollars December 31, December 31, except per share amounts) 2006
2005 2006 2005
-------------------------------------------------------------------------
Revenues: Hotel management fees $ 33,243 $ 25,239 $ 123,866 $
100,841 Other fees 4,216 4,057 17,521 14,048 Hotel ownership
revenues 8,633 7,505 33,374 65,475 Reimbursed costs 23,674 21,697
78,664 67,974 -------------------------------------------- 69,766
58,498 253,425 248,338 --------------------------------------------
Expenses: General and administrative expenses (18,361) (16,653)
(62,428) (58,148) Hotel ownership cost of sales and expenses
(8,398) (7,897) (32,212) (66,086) Reimbursed costs (23,674)
(21,697) (78,664) (67,974)
-------------------------------------------- (50,433) (46,247)
(173,304) (192,208) --------------------------------------------
Operating earnings before other items 19,333 12,251 80,121 56,130
Depreciation and amortization (4,723) (2,675) (14,598) (11,187)
Other income (expenses), net (note 5) 3,184 (56,789) (3,811)
(89,208) Interest income 6,483 5,156 22,405 16,746 Interest expense
(3,551) (3,144) (14,910) (11,545)
-------------------------------------------- Earnings (loss) before
income taxes 20,726 (45,201) 69,207 (39,064)
-------------------------------------------- Income tax recovery
(expense) (note 6): Current (3,246) (1,523) (13,415) (1,912) Future
(601) 8,954 (5,505) 12,753
-------------------------------------------- (3,847) 7,431 (18,920)
10,841 -------------------------------------------- Net earnings
(loss) $ 16,879 $ (37,770) $ 50,287 $ (28,223)
--------------------------------------------
-------------------------------------------- Basic earnings (loss)
per share (note 4(a)) $ 0.45 $ (1.03) $ 1.36 $ (0.77)
--------------------------------------------
-------------------------------------------- Diluted earnings
(loss) per share (note 4(a)) $ 0.44 $ (1.03) $ 1.33 $ (0.77)
--------------------------------------------
-------------------------------------------- See accompanying notes
to consolidated financial statements. FOUR SEASONS HOTELS INC.
CONSOLIDATED BALANCE SHEETS As at As at (Unaudited) December 31,
December 31, (In thousands of US dollars) 2006 2005
-------------------------------------------------------------------------
ASSETS Current assets: Cash and cash equivalents $ 358,949 $
242,178 Receivables 67,397 69,690 Inventory 6,096 7,326 Prepaid
expenses 3,346 2,950 --------------------------- 435,788 322,144
Long-term receivables 153,224 175,374 Investments in hotel
partnerships and corporations (note 2) 65,552 99,928 Fixed assets
81,490 64,850 Investment in management contracts 187,861 164,932
Investment in trademarks 4,224 4,210 Future income tax assets 9,099
14,439 Other assets 54,729 34,324 --------------------------- $
991,967 $ 880,201 ---------------------------
--------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities: Accounts payable and accrued liabilities $
74,307 $ 54,797 Long-term obligations due within one year 2,350
4,853 --------------------------- 76,657 59,650 Long-term
obligations (note 3) 266,835 273,825 Shareholders' equity (note 4):
Capital stock 287,576 250,430 Convertible notes 36,920 36,920
Contributed surplus 11,881 10,861 Retained earnings 207,600 160,741
Equity adjustment from foreign currency translation 104,498 87,774
--------------------------- 648,475 546,726 Subsequent event (note
10) --------------------------- $ 991,967 $ 880,201
--------------------------- --------------------------- See
accompanying notes to consolidated financial statements. FOUR
SEASONS HOTELS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Three
months ended Years ended (Unaudited) December 31, December 31, (In
thousands of US dollars) 2006 2005 2006 2005
-------------------------------------------------------------------------
Cash provided by (used in): Operating activities: Net earnings
(loss) $ 16,879 $ (37,770) $ 50,287 $ (28,223) Items not affecting
cash: Stock-based compensation expense 3,613 839 5,255 2,333
Depreciation and amortization 4,723 2,675 14,598 11,187 Foreign
exchange loss (gain) (7,976) 4,778 (1,343) 24,632 Gain on
disposition of assets (620) (9,015) (620) (3,175) Loss on
retirement benefit plan transition - 35,467 - 35,467 Provision for
loss 2,712 25,559 3,074 32,284 Future income tax expense (recovery)
601 (8,954) 5,505 (12,753) Other 102 3,482 1,291 4,969 Amount paid
relating to partial termination of currency and interest rate swap
(note 3) (21,000) - (21,000) - Amount paid relating to retirement
benefit plan transition - (36,029) - (36,029) Changes in non-cash
working capital 21,407 9,061 20,925 (4,215)
-------------------------------------------- Cash provided by (used
in) operating activities 20,441 (9,907) 77,972 26,477
-------------------------------------------- Investing activities:
Advances of long-term receivables (3,787) (6,216) (25,568) (44,865)
Receipt of long-term receivables 50,900 15,159 65,336 34,561
Investments in hotel partnerships and corporations 510 2,081 (190)
(8,732) Disposal of hotel partnerships and corporations 15,873
11,935 16,580 24,607 Purchase of fixed assets (6,034) (5,885)
(22,182) (18,706) Investments in trademarks and management
contracts (655) 11,148 (17,506) 10,473 Other assets (3,357) 288
(9,883) (7,614) -------------------------------------------- Cash
provided by (used in) investing activities 53,450 28,510 6,587
(10,276) -------------------------------------------- Financing
activities: Long-term obligations, including current portion (323)
1,259 (3,099) 39 Issuance of shares 30,669 54 36,305 7,046
Dividends paid - - (3,378) (3,142)
-------------------------------------------- Cash provided by
financing activities 30,346 1,313 29,828 3,943
-------------------------------------------- Increase in cash and
cash equivalents 104,237 19,916 114,387 20,144 Increase (decrease)
in cash and cash equivalents due to unrealized foreign exchange
gain (loss) 470 790 2,384 (4,343) Cash and cash equivalents,
beginning of period 254,242 221,472 242,178 226,377
-------------------------------------------- Cash and cash
equivalents, end of period $ 358,949 $ 242,178 $ 358,949 $ 242,178
--------------------------------------------
-------------------------------------------- Supplementary
information: Interest received $ 8,061 $ 8,127 $ 21,186 $ 18,576
Interest paid (101) (140) (6,172) (5,056) Income taxes received
(paid), net 1,146 521 (979) (6,376) See accompanying notes to
consolidated financial statements. FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (Unaudited) Years
ended December 31, (In thousands of US dollars) 2006 2005
-------------------------------------------------------------------------
Retained earnings, beginning of year $ 160,741 $ 192,129 Net
earnings (loss) 50,287 (28,223) Dividends declared (3,428) (3,165)
--------------------------- Retained earnings, end of year $
207,600 $ 160,741 ---------------------------
--------------------------- See accompanying notes to consolidated
financial statements. FOUR SEASONS HOTELS INC. NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands of US
dollars except per share amounts)
-------------------------------------------------------------------------
In these interim consolidated financial statements, the words,
"we", "us", "our", and other similar words are references to Four
Seasons Hotels Inc. ("FSHI") and its consolidated subsidiaries.
These interim consolidated financial statements do not include all
disclosures required by Canadian generally accepted accounting
principles for annual financial statements and should be read in
conjunction with our most recently prepared annual consolidated
financial statements for the year ended December 31, 2005. 1.
Significant accounting policies: The significant accounting
policies used in preparing these interim consolidated financial
statements are consistent with those used in preparing our annual
consolidated financial statements for the year ended December 31,
2005, except as disclosed below: (a) Non-monetary transactions: In
June 2005, The Canadian Institute of Chartered Accountants ("CICA")
issued Section 3831, "Non-Monetary Transactions", which introduces
new requirements for non-monetary transactions initiated on or
after January 1, 2006. The amended requirements will result in
non-monetary transactions being measured at fair values unless
certain criteria are met, in which case, the transaction is
measured at carrying value. The implementation of Section 3831, on
a prospective basis for transactions initiated on or after January
1, 2006, did not have any impact on our consolidated financial
statements for the three months and the year ended December 31,
2006. (b) Financial instruments: In January 2005, the CICA issued
three new accounting standards related to financial instruments:
Section 3855, "Financial Instruments - Recognition and
Measurement", Section 3865, "Hedges", and Section 1530,
"Comprehensive Income". These new standards are effective for
fiscal years beginning on or after October 1, 2006. Section 3855
prescribes when a financial instrument is to be recognized on the
balance sheet and at what amount, and also specifies how financial
instrument gains and losses are to be presented. Section 3865
provides additional accounting treatments to Section 3855 for
entities, which choose to designate qualifying transactions as
hedges for accounting purposes, by specifying how hedge accounting
is applied and the required disclosures. It also defines a fair
value hedge, a cash flow hedge and a hedge of a net investment in a
self-sustaining foreign operation and provides guidance on how to
account for each. In addition, it requires that any ineffectiveness
in a hedging relationship be recorded immediately in income.
Section 1530 introduces a new requirement to present certain
revenues, expenses, gains and losses, which may include the impact
of certain financial instruments, that otherwise would not be
immediately recorded in income, in a statement of comprehensive
income with the same prominence as other statements that constitute
a complete set of financial statements. We are still assessing the
implications of these new standards and have not yet determined the
impact of the implementation of these standards on our 2007
consolidated financial statements. (c) Stock-based compensation: In
July 2006, the Emerging Issues Committee of the CICA issued
Abstract EIC-162, "Stock-Based Compensation for Employees Eligible
to Retire Before the Vesting Date", which requires compensation
cost to be recognized over the period from the grant date to the
date the employee becomes eligible to retire. The implementation of
EIC-162, on a retroactive basis from January 1, 2006, did not have
an impact on our consolidated financial statements for the three
months and year ended December 31, 2006. (d) Comparative figures:
Certain 2005 comparative figures have been reclassified to conform
with the financial statement presentation adopted for 2006. 2.
Hotel investment transaction: In February 2006, we exchanged our
equity interest in a property under our management for a management
contract enhancement of approximately the same fair value. No gain
or loss was recorded in connection with this transaction. 3.
Currency and interest rate swap: In December 2006, we terminated
80% of the notional amount of the currency component of our
currency and interest rate swap relating to the final exchange of
principal by making a payment of $21,000. The swap had been
designated as a fair value hedge of our convertible senior notes.
The book value of the terminated portion of the swap at the date of
termination was C$19.5 million ($16,980). The loss of C$4.6 million
($4,020) was deferred for accounting purposes and recorded in
"Other assets", and is being amortized over the period to July 30,
2009, which is the maturity date of the swap agreement. For the
three months and year ended December 31, 2006, $87 of the deferred
loss was amortized and recorded as a foreign exchange loss. Under
the amended swap, we will pay C$62.4 million and receive $50,000 on
July 30, 2009. There were no other changes to the original swap,
including the notional amounts relating to the exchange of
interest. As a result of the partial termination of the swap, we no
longer met all the conditions for designating the amended swap as a
fair value hedge of our convertible senior notes, and therefore
ceased hedge accounting as at this date. The unrealized loss
relating to the remaining notional amount of the currency component
of the swap of C$1.2 million ($1,005) and the unrealized loss
relating to the notional amount of the interest component of the
swap of C$2.1 million ($1,794) were deferred for accounting
purposes and recorded in "Other assets". These deferred losses are
being amortized over the period to July 30, 2009. For the three
months and year ended December 31, 2006, $22 of the deferred loss
relating to the currency component of the swap was amortized and
recorded as a foreign exchange loss and $39 of the deferred loss
relating to the interest component of the swap was amortized and
recorded as interest expense. The amended swap is being
marked-to-market on a monthly basis and accrued under "Long-term
obligations", with the resulting changes in fair values being
recognized in "Other expenses, net". For the three months and year
ended December 31, 2006, a gain of $752 was recognized on the
marked-to-market valuation. 4. Shareholders' equity: As at December
31, 2006, we have 3,725,698 outstanding Variable Multiple Voting
Shares ("VMVS"), 33,661,638 outstanding Limited Voting Shares
("LVS"), and 3,666,079 outstanding stock options (weighted average
exercise price of C$59.70 ($51.23)). (a) Earnings (loss) per share:
A reconciliation of the net earnings (loss) and weighted average
number of VMVS and LVS used to calculate basic and diluted earnings
(loss) per share is as follows: Three months ended December 31,
2006 2005
-------------------------------------------------------------------------
Net earnings Shares Net loss Shares
-------------------------------------------------------------------------
Basic earnings (loss) per share amounts $ 16,879 37,118,121 $
(37,770) 36,640,579 Effect of assumed dilutive conversions: Stock
option plan - 1,223,754 - -
------------------------------------------------ Diluted earnings
(loss) per share amounts $ 16,879 38,341,875 $ (37,770) 36,640,579
------------------------------------------------
------------------------------------------------ Years ended
December 31, 2006 2005
-------------------------------------------------------------------------
Net earnings Shares Net loss Shares
-------------------------------------------------------------------------
Basic earnings (loss) per share amounts $ 50,287 36,843,367 $
(28,223) 36,628,206 Effect of assumed dilutive conversions: Stock
option plan - 886,929 - -
------------------------------------------------ Diluted earnings
(loss) per share amounts $ 50,287 37,730,296 $ (28,223) 36,628,206
------------------------------------------------
------------------------------------------------ The diluted
earnings per share calculation excluded the effect of the assumed
conversions of 84,600 and 804,436 stock options to LVS, under our
stock option plan, during the three months and year ended December
31, 2006, respectively, as the inclusion of these options would
have resulted in an anti- dilutive effect. As we incurred a net
loss for the three months and year ended December 31, 2005, all
4,485,463 outstanding stock options were excluded from the
calculation of diluted loss per share for these periods. In
addition, the dilution relating to the assumed conversion of
convertible senior notes to 3,489,525 LVS has been excluded from
the calculation, as the inclusion of this conversion resulted in an
anti-dilutive effect for the three months and year ended December
31, 2006 and 2005. (b) Stock-based compensation: We use the fair
value-based method to account for all employee stock options
granted or modified on or after January 1, 2003. Accordingly,
options granted prior to that date continue to be accounted for
using the settlement method. Stock options to acquire 41,650 LVS
were granted in the year ended December 31, 2006 at a weighted
average exercise price of C$62.61 ($53.65). The fair value of stock
options granted in the year ended December 31, 2006 was estimated
using the Black- Scholes options pricing model with the following
assumptions: risk-free interest rates ranging from 4.09% to 4.17%;
semi- annual dividend per LVS of C$0.055; volatility factor of the
expected market price of our LVS of 27%; and expected lives of the
options ranging between four and seven years, depending on the
level of the employee who was granted stock options. For the
options granted in the year ended December 31, 2006, the weighted
average fair value of the options at the grant dates was C$21.49
($18.41). For purposes of stock option expense and pro forma
disclosures, the estimated fair value of the options is amortized
to compensation expense over the options' vesting period. There
were no stock options granted in the three months ended December
31, 2006 and the year ended December 31, 2005. Pro forma disclosure
is required to show the effect of the application of the fair
value-based method to employee stock options granted during 2002,
which were not accounted for using the fair value-based method. For
the three months and years ended December 31, 2006 and 2005, if we
had applied the fair value-based method to options granted during
2002, our net earnings (loss) and basic and diluted earnings (loss)
per share would have been adjusted to the pro forma amounts
indicated below: Three months ended Years ended December 31,
December 31, 2006 2005 2006 2005
-------------------------------------------------------------------------
Stock option expense included in compensation expense $ (664) $
(839) $ (2,305) $ (2,333)
--------------------------------------------
-------------------------------------------- Net earnings (loss),
as reported $ 16,879 $ (37,770) $ 50,287 $ (28,223) Decrease
(increase) in stock option expense that would have been recorded if
all stock options granted during 2002 had been expensed (625) 463
(2,579) (1,626) -------------------------------------------- Pro
forma net earnings (loss) $ 16,254 $ (37,307) $ 47,708 $ (29,849)
--------------------------------------------
-------------------------------------------- Earnings (loss) per
share: Basic, as reported $ 0.45 $ (1.03) $ 1.36 $ (0.77) Basic,
pro forma 0.44 (1.02) 1.29 (0.81) Diluted, as reported 0.44 (1.03)
1.33 (0.77) Diluted, pro forma 0.42 (1.02) 1.27 (0.81) 5. Other
income (expenses), net: Three months ended Years ended December 31,
December 31, 2006 2005 2006 2005
-------------------------------------------------------------------------
Costs related to pending arrangement transaction (note 10) $
(3,452) $ - $ (3,452) $ - Asset provisions and write-downs(a)
(2,712) (25,558) (3,074) (32,284) Foreign exchange gain (loss)(b)
7,976 (4,778) 1,343 (24,632) Unrealized swap derivative gain (note
3) 752 - 752 - Gain on disposition of assets(c) 620 9,014 620 3,175
Loss on retirement benefit plan transition - (35,467) - (35,467)
-------------------------------------------- $ 3,184 $ (56,789) $
(3,811) $ (89,208) --------------------------------------------
-------------------------------------------- (a) Asset provisions
and write-downs of $2,712 and $3,074 for the three months and year
ended December 31, 2006, respectively, relates primarily to a
write-down on investments in hotel partnerships and corporations.
Asset provisions and write-downs for the three months and year
ended December 31, 2005 includes a provision for loss of $8,829 on
long-term receivables, a write-down of $15,923 and $17,853,
respectively, on investments in hotel partnerships and
corporations, a write-down of $479 and $5,105, respectively, on
investment in management contracts and other provisions of $327 and
$497, respectively. (b) The foreign exchange gain (loss) in 2006
and 2005 related primarily to the foreign currency translation
gains and losses on unhedged net monetary asset and liability
positions, primarily in US dollars, euros, pounds sterling and
Australian dollars, and local currency foreign exchange gains and
losses on net monetary assets incurred by our designated foreign
self- sustaining subsidiaries. As at December 31, 2006, we have
foreign exchange forward contracts in place to sell forward $39,068
of US dollars to receive Canadian dollars at a weighted average
forward exchange rate of 1.11 Canadian dollars to a US dollar
maturing over the period to April 2008. All our foreign exchange
forward contracts are being marked-to-market on a monthly basis
with the resulting changes in fair values being recorded as a
foreign exchange gain or loss. This resulted in foreign exchange
loss of $1,813 and $544 being recorded in the three months and year
ended December 31, 2006, respectively (2005 - foreign exchange loss
of $127 for both periods). (c) Gain on disposition of assets for
the three months and year ended December 31, 2006 includes a net
gain of $620 (2005 - $9,892 and $9,337, respectively) on the
dispositions of investments in hotel partnerships and corporations
and the settlement of long-term receivables, and in 2005, also
included a gain on the exit from certain management contracts. For
the three months and year ended December 31, 2005, it also included
a loss of $878 and $6,162, respectively, on the assignment of
leases and the sale of related assets of The Pierre. 6. Income
taxes: During the three months and year ended December 31, 2006, we
did not record approximately $1,477 and $3,434, respectively, of a
tax benefit related to the foreign exchange losses, due to the
uncertainty associated with the utilization of these losses. In
connection with the disposition of The Pierre in June 2005, we
recorded an income tax benefit of approximately $9,400 for the year
ended December 31, 2005. 7. Pension expense: For the year ended
December 31, 2006, we incurred a pension expense of $1,816 (2005 -
$2,001) related to the defined benefit retirement plan and $2,160
(2005 - $2,243) related to the defined contribution retirement
plan. 8. Guarantees and commitments: We have provided certain
guarantees and have other similar commitments typically made in
connection with properties under our management. These contractual
obligations and other commitments are more fully described in the
consolidated financial statements for the year ended December 31,
2005. Since December 31, 2005, we have decreased our guarantees and
commitments by approximately $1,300. 9. Segmented information: Our
strategy is to focus on Management Operations rather than Ownership
Operations. Four Seasons Hotel Vancouver is our only remaining
hotel whose results we currently consolidate. As a result,
commencing January 1, 2006, corporate expenses are reflected as
general and administrative expenses in the consolidated statements
of operations for the three months and year ended December 31,
2006. Corporate expenses for the three months and year ended
December 31, 2005 that previously were included in our Ownership
Operations segment have been reclassified to the Management
Operations segment and included in general and administrative
expenses in the consolidated statements of operations. Three months
ended December 31, 2006 --------------------------------------
Management Ownership Operations Operations Total
-------------------------------------------------------------------------
Revenues: Hotel management fees $ 33,243 $ - $ 33,243 Other fees
4,216 - 4,216 -------------------------------------- 37,459 -
37,459 Hotel ownership revenues - 8,633 8,633 Reimbursed costs
23,674 - 23,674 -------------------------------------- 61,133 8,633
69,766 -------------------------------------- Expenses: General and
administrative expenses (18,361) - (18,361) Hotel ownership cost of
sales and expenses - (8,398) (8,398) Reimbursed costs (23,674) -
(23,674) -------------------------------------- (42,035) (8,398)
(50,433) -------------------------------------- Operating earnings
before other items $ 19,098 $ 235 $ 19,333
--------------------------------------
-------------------------------------- Three months ended December
31, 2005 -------------------------------------- Management
Ownership Operations Operations Total
-------------------------------------------------------------------------
Revenues: Hotel management fees $ 25,239 $ - $ 25,239 Other fees
4,057 - 4,057 -------------------------------------- 29,296 -
29,296 Hotel ownership revenues - 7,505 7,505 Reimbursed costs
21,697 - 21,697 -------------------------------------- 50,993 7,505
58,498 -------------------------------------- Expenses: General and
administrative expenses (16,653) - (16,653) Hotel ownership cost of
sales and expenses - (7,897) (7,897) Reimbursed costs (21,697) -
(21,697) -------------------------------------- (38,350) (7,897)
(46,247) -------------------------------------- Operating earnings
(loss) before other items $ 12,643 $ (392) $ 12,251
--------------------------------------
-------------------------------------- Year ended December 31, 2006
-------------------------------------- Management Ownership
Operations Operations Total
-------------------------------------------------------------------------
Revenues: Hotel management fees $ 123,866 $ - $ 123,866 Other fees
17,521 - 17,521 -------------------------------------- 141,387 -
141,387 Hotel ownership revenues - 33,374 33,374 Reimbursed costs
78,664 - 78,664 -------------------------------------- 220,051
33,374 253,425 -------------------------------------- Expenses:
General and administrative expenses (62,428) - (62,428) Hotel
ownership cost of sales and expenses - (32,212) (32,212) Reimbursed
costs (78,664) - (78,664) --------------------------------------
(141,092) (32,212) (173,304) --------------------------------------
Operating earnings before other items $ 78,959 $ 1,162 $ 80,121
--------------------------------------
-------------------------------------- Year ended December 31, 2005
-------------------------------------- Management Ownership
Operations Operations Total
-------------------------------------------------------------------------
Revenues: Hotel management fees $ 100,841 $ - $ 100,841 Other fees
14,048 - 14,048 -------------------------------------- 114,889 -
114,889 Hotel ownership revenues - 65,475 65,475 Reimbursed costs
67,974 - 67,974 -------------------------------------- 182,863
65,475 248,338 -------------------------------------- Expenses:
General and administrative expenses (58,148) - (58,148) Hotel
ownership cost of sales and expenses - (66,086) (66,086) Reimbursed
costs (67,974) - (67,974) --------------------------------------
(126,122) (66,086) (192,208) --------------------------------------
Operating earnings (loss) before other items $ 56,741 $ (611) $
56,130 --------------------------------------
-------------------------------------- 10. Subsequent event: On
February 12, 2007, we announced that we had entered into a
definitive acquisition agreement (the "Acquisition Agreement") to
implement a previously announced proposal to take FSHI private at a
price of $82.00 cash per LVS (the "Arrangement Transaction").
Following completion of the Arrangement Transaction, FSHI would be
owned by affiliates of Cascade Investment, L.L.C. ("Cascade") (an
entity owned by William H. Gates III), Kingdom Hotels International
("Kingdom"), a company owned by a trust created for the benefit of
His Royal Highness Prince Alwaleed Bin Talal Bin Abdulaziz Alsaud
and his family, and Isadore Sharp (collectively the "Purchaser").
The Arrangement Transaction, which would be implemented by way of a
court-approved plan of arrangement under Ontario law, has been
approved unanimously by our Board of Directors (with interested
directors abstaining) following the report and favourable,
unanimous recommendation of the Special Committee of independent
directors. A meeting of shareholders to consider the Arrangement
Transaction is anticipated to take place in April 2007. It is
anticipated that the Arrangement Transaction, if approved by
shareholders, will be completed in the second quarter of 2007.
Pursuant to the Acquisition Agreement, FSHI agreed to certain
customary negative and affirmative covenants relating to the
operation of its business between the date of execution of the
Acquisition Agreement and the closing of the Arrangement
Transaction. FSHI and the Purchaser may terminate the Acquisition
Agreement by mutual written consent and abandon the Arrangement
Transaction at any time prior to the effective time. In addition,
either FSHI or the Purchaser (and, in certain circumstances, only
one of these parties) may terminate the Acquisition Agreement and
abandon the Arrangement Transaction any time prior to the effective
time of the Arrangement Transaction if certain specified events
occur. The Acquisition Agreement provides that FSHI will pay a
termination fee of $75,000 less any amounts actually paid or
required to be paid by FSHI to the Purchaser for reimbursement of
expenses (as described below) if the Acquisition Agreement is
terminated in certain circumstances. The Acquisition Agreement
provides that the Purchaser will pay to FSHI a termination fee of
$100,000 if the Acquisition Agreement is terminated in certain
circumstances. This obligation is guaranteed by Kingdom and
Cascade. The Acquisition Agreement also provides that FSHI will pay
to the Purchaser reasonable documented expenses of the Purchaser
and its affiliates incurred in connection with the transactions
contemplated by the Acquisition Agreement (up to a maximum of
$10,000) if the Acquisition Agreement is terminated in certain
circumstances. Although there is no certainty that the Arrangement
Transaction, or any other transaction, will be completed or the
timing of completion of the pending Arrangement Transaction, some
of our arrangements and agreements may be impacted by the pending
Arrangement Transaction, including the following: (a) Convertible
notes: The convertible senior notes issued by FSHI in 2004 are
convertible into LVS (although at our option, FSHI may make a cash
payment in lieu of all or some of those LVS) in certain
circumstances, including upon the occurrence of a "fundamental
change", as defined in the indenture pursuant to which the notes
were issued. The Arrangement Transaction, if completed, would
result in a fundamental change. As a result, holders may convert
the notes during the period from and after the tenth day prior to
the anticipated closing date of the Arrangement Transaction until
and including the close of business on the later of the tenth day
after the actual closing date and the thirtieth business day after
notice of an offer to repurchase the notes has been mailed, as
described below. Upon such conversion, holders of the notes would
be entitled to receive, subject to our right to make a cash payment
in lieu of some or all of the LVS that otherwise would be issued,
13.9581 LVS for each one thousand US dollar principal amount of
notes and an additional number of LVS equal to (a) the sum of a
make whole premium, and an amount equal to any accrued but unpaid
interest to, but not including, the conversion date, divided by (b)
the average of the closing sale price (or, in certain
circumstances, an average of bid and ask prices) of the LVS on the
New York Stock Exchange for the ten trading days before the
conversion date. If the Arrangement Transaction is completed, FSHI
will be required to make an offer to repurchase the notes at a
purchase price equal to the principal amount of the notes plus a
make whole premium (as described above), and an amount equal to any
accrued and unpaid interest to, but not including, the date of
repurchase. FSHI must make this offer by providing a notice to the
trustee and the holders of notes within 30 days of the completion
of the Arrangement Transaction. Further information regarding the
terms of our convertible senior notes is set out in the indenture
pursuant to which the notes were issued. (b) Long-term incentive
arrangement: Pursuant to an agreement approved by the shareholders
of FSHI in 1989, FSHI and its principal operating subsidiary, Four
Seasons Hotels Limited, agreed to make a cash payment to Mr.
Isadore Sharp, the Chief Executive Officer of FSHI, upon an arm's
length sale of control of FSHI. Under the plan of arrangement
through which the Arrangement Transaction will be implemented, Mr.
Sharp will receive the amount payable to him calculated in
accordance with this long-term incentive plan in full satisfaction
of all obligations to him under the plan. Based on an acquisition
price of $82.00 for each LVS and VMVS, and using the noon rate of
exchange as quoted by the Bank of Canada for the conversion of
Canadian dollars into United States dollars on March 9, 2007, Mr.
Sharp would receive approximately $289,000 in satisfaction of the
obligations to him under the long-term incentive plan. (c) Stock
options: On February 9, 2007, the vesting of a total of 616,980
unvested stock options (which excludes those outstanding options
with an unsatisfied performance condition) was accelerated for the
purpose of allowing these individuals to participate in respect of
such options in the Arrangement Transaction. If the Arrangement
Transaction is not completed, the vesting of the 616,980 stock
options will not be accelerated and the stock options will continue
to vest in accordance with their terms in existence prior to the
acceleration. Pursuant to the plan of arrangement in respect of the
Arrangement Transaction, any options that have not been exercised
prior to the effective time of the Arrangement Transaction will be
transferred by each holder thereof to FSHI without any further act
or formality in exchange for a cash amount equal to the excess, if
any, of (a) the product of the number of LVS underlying the options
held by such holder and $82.00, over (b) the sum of the exercise
prices for each LVS underlying the options held by such holder
(converted at the applicable foreign exchange rate). (d) Other
arrangements and agreements: Certain other arrangements and
agreements are subject to "change of control" provisions. These
include, among others, the following: (i) Under the terms of the
current $125,000 bank credit facility of FSHI, a change of control
triggers a default under the bank credit facility, and if not
waived, would require the repayment of all amounts outstanding
under this credit facility and would also result in the termination
of this credit facility. As at March 9, 2007, no amounts were
borrowed under this credit facility, but approximately $1,600 of
letters of credit were issued under this credit facility. (ii)
Pursuant to a cross default provision, a default under the bank
credit facility in turn would cause a default under FSHI's currency
and interest rate swap agreement. In such circumstances, the
counterparty to the swap agreement may demand that the swap be
terminated. As at March 9, 2007, the net amount that would be
required to be paid by FSHI to the counterparty on termination was
approximately $5,800. As at December 31, 2006, the estimated fair
value of the swap on that date of $6,757 is included in "Long-term
obligations". (e) Costs related to pending Arrangement Transaction:
In connection with the pending Arrangement Transaction, we incurred
costs of $3,452 in 2006 and expect to incur costs of approximately
$12,600 during 2007, primarily relating to legal fees, filing fees,
financial advisory, printing, proxy solicitation and consulting
services. FOUR SEASONS HOTELS INC. SUMMARY OF HOTEL OPERATING DATA
- CORE HOTELS(i) Three months ended December 31, (Unaudited) 2006
2005 Variance
-------------------------------------------------------------------------
Worldwide # of Properties 56 56 - # of Rooms 14,290 14,290 -
Occupancy(ii) 67.2% 66.1% 1.1pts. ADR(iii) $383.87 $342.97 11.9%
RevPAR(iv) $258.13 $226.61 13.9% Gross operating margin(v) 32.5%
29.4% 3.1pts. United States # of Properties 20 20 - # of Rooms
6,195 6,195 - Occupancy(ii) 70.3% 69.7% 0.6pts. ADR(iii) $423.52
$394.25 7.4% RevPAR(iv) $297.83 $274.83 8.4% Gross operating
margin(v) 30.2% 28.3% 1.9pts. Other Americas/Caribbean # of
Properties 10 10 - # of Rooms 2,165 2,165 - Occupancy(ii) 61.7%
60.3% 1.4pts. ADR(iii) $383.37 $342.22 12.0% RevPAR(iv) $236.60
$206.41 14.6% Gross operating margin(v) 26.7% 22.9% 3.8pts. Europe
# of Properties 10 10 - # of Rooms 1,720 1,720 - Occupancy(ii)
63.6% 61.3% 2.3pts. ADR(iii) $598.79 $497.32 20.4% RevPAR(iv)
$380.59 $304.68 24.9% Gross operating margin(v) 31.9% 29.6% 2.3pts.
Middle East # of Properties 5 5 - # of Rooms 1,215 1,215 -
Occupancy(ii) 66.5% 64.0% 2.5pts. ADR(iii) $287.72 $211.00 36.4%
RevPAR(iv) $191.42 $135.08 41.7% Gross operating margin(v) 50.9%
37.9% 13.0pts. Asia/Pacific # of Properties 11 11 - # of Rooms
2,995 2,995 - Occupancy(ii) 67.3% 66.5% 0.8pts. ADR(iii) $223.49
$202.13 10.6% RevPAR(iv) $150.37 $134.37 11.9% Gross operating
margin(v) 38.8% 36.3% 2.5pts.
-------------------------------------------------------------------------
(i) The term "Core Hotels" means hotels and resorts under
management for the full year of both 2006 and 2005. However, if a
"Core Hotel" has undergone or is undergoing an extensive renovation
program in one of those years that materially affects the operation
of the property in that year, it ceases to be included as a "Core
Hotel" in either year. Changes from the 2005/2004 Core Hotels are
the additions of Four Seasons Resort Scottsdale at Troon North,
Four Seasons Resort Whistler, Four Seasons Resort Costa Rica at
Peninsula Papagayo, Four Seasons Hotel Gresham Palace Budapest,
Four Seasons Resort Provence at Terre Blanche and Four Seasons
Hotel Cairo at Nile Plaza, and the deletion of The Regent Kuala
Lumpur. All room numbers in this table are approximate. (ii)
Occupancy percentage is defined as the total number of rooms
occupied divided by the total number of rooms available. (iii) ADR
is defined as average daily room rate per room occupied, calculated
as the weighted average for each region. In 2004 and 2005, ADR was
calculated as a straight average for each region. (iv) RevPAR is
defined as average room revenue per available room. It is a
non-GAAP financial measure and does not have any standardized
meaning prescribed by GAAP and is therefore unlikely to be
comparable to similar measures presented by other issuers. We use
RevPAR because it is a commonly used indicator of market
performance for hotels and resorts and represents the combination
of the average daily room rate and the average occupancy rate
achieved during the period. RevPAR does not include food and
beverage or other ancillary revenues generated by a hotel or
resort. RevPAR is the most commonly used measure in the lodging
industry to measure the period-over -period performance of
comparable properties. Our calculation of RevPAR may be different
than the calculation used by other lodging companies. (v) Gross
operating margin represents gross operating profit as a percentage
of gross operating revenue. FOUR SEASONS HOTELS INC. SUMMARY OF
HOTEL OPERATING DATA - CORE HOTELS(i) Years ended December 31,
(Unaudited) 2006 2005 Variance
-------------------------------------------------------------------------
Worldwide # of Properties 56 56 - # of Rooms 14,290 14,290 -
Occupancy(ii) 69.0% 68.3% 0.7pts. ADR(iii) $372.36 $336.59 10.6%
RevPAR(iv) $257.03 $229.80 11.8% Gross operating margin(v) 32.4%
30.2% 2.2pts. United States # of Properties 20 20 - # of Rooms
6,195 6,195 - Occupancy(ii) 73.6% 73.0% 0.6pts. ADR(iii) $406.03
$371.59 9.3% RevPAR(iv) $299.03 $271.32 10.2% Gross operating
margin(v) 30.4% 28.6% 1.8pts. Other Americas/Caribbean # of
Properties 10 10 - # of Rooms 2,165 2,165 - Occupancy(ii) 64.6%
64.4% 0.2pts. ADR(iii) $376.57 $335.58 12.2% RevPAR(iv) $243.33
$216.06 12.6% Gross operating margin(v) 27.8% 26.4% 1.4pts. Europe
# of Properties 10 10 - # of Rooms 1,720 1,720 - Occupancy(ii)
66.7% 62.6% 4.1pts. ADR(iii) $596.20 $534.37 11.6% RevPAR(iv)
$397.92 $334.70 18.9% Gross operating margin(v) 33.7% 31.5% 2.2pts.
Middle East # of Properties 5 5 - # of Rooms 1,215 1,215 -
Occupancy(ii) 69.3% 67.3% 2.0pts. ADR(iii) $258.31 $212.05 21.8%
RevPAR(iv) $178.90 $142.79 25.3% Gross operating margin(v) 50.5%
44.5% 6.0pts. Asia/Pacific # of Properties 11 11 - # of Rooms 2,995
2,995 - Occupancy(ii) 63.9% 65.0% (1.1)pts. ADR(iii) $211.36
$197.69 6.9% RevPAR(iv) $134.99 $128.57 5.0% Gross operating
margin(v) 34.8% 33.1% 1.7pts.
-------------------------------------------------------------------------
(i) The term "Core Hotels" means hotels and resorts under
management for the full year of both 2006 and 2005. However, if a
"Core Hotel" has undergone or is undergoing an extensive renovation
program in one of those years that materially affects the operation
of the property in that year, it ceases to be included as a "Core
Hotel" in either year. Changes from the 2005/2004 Core Hotels are
the additions of Four Seasons Resort Scottsdale at Troon North,
Four Seasons Resort Whistler, Four Seasons Resort Costa Rica at
Peninsula Papagayo, Four Seasons Hotel Gresham Palace Budapest,
Four Seasons Resort Provence at Terre Blanche and Four Seasons
Hotel Cairo at Nile Plaza, and the deletion of The Regent Kuala
Lumpur. All room numbers in this table are approximate. (ii)
Occupancy percentage is defined as the total number of rooms
occupied divided by the total number of rooms available. (iii) ADR
is defined as average daily room rate per room occupied, calculated
as the weighted average for each region. In 2004 and 2005, ADR was
calculated as a straight average for each region. (iv) RevPAR is
defined as average room revenue per available room. It is a
non-GAAP financial measure and does not have any standardized
meaning prescribed by GAAP and is therefore unlikely to be
comparable to similar measures presented by other issuers. We use
RevPAR because it is a commonly used indicator of market
performance for hotels and resorts and represents the combination
of the average daily room rate and the average occupancy rate
achieved during the period. RevPAR does not include food and
beverage or other ancillary revenues generated by a hotel or
resort. RevPAR is the most commonly used measure in the lodging
industry to measure the period-over- period performance of
comparable properties. Our calculation of RevPAR may be different
than the calculation used by other lodging companies. (v) Gross
operating margin represents gross operating profit as a percentage
of gross operating revenue. FOUR SEASONS HOTELS INC. SUMMARY OF
HOTEL OPERATING DATA - ALL MANAGED HOTELS(i) As at December 31,
(Unaudited) 2006 2005 Variance
-------------------------------------------------------------------------
Worldwide # of Properties 73 68 5 # of Rooms 18,025 17,300 725
United States # of Properties 26 23 3 # of Rooms 7,445 6,845 600
Other Americas/Caribbean # of Properties 10 10 - # of Rooms 2,165
2,165 - Europe # of Properties 12 12 - # of Rooms 1,960 1,960 -
Middle East # of Properties 7 7 - # of Rooms 1,735 1,740 (5)
Asia/Pacific(ii) # of Properties 18 16 2 # of Rooms 4,720 4,590 130
-------------------------------------------------------------------------
(i) All room numbers in this table are approximate. (ii) Since
December 31, 2006, we have commenced management of Four Seasons
Resort Koh Samui, Thailand, which has 65 rooms. This property is
not reflected in this table. FOUR SEASONS HOTELS INC. REVENUES
UNDER MANAGEMENT - ALL MANAGED HOTELS (Unaudited) Three months
ended Years ended (In thousands of December 31, December 31, US
dollars) 2006 2005 2006 2005
-------------------------------------------------------------------------
Revenues under management(i) $ 801,612 $ 676,662 $2,943,795
$2,559,746 ------------------------------------------------
------------------------------------------------
-------------------------------------------------------------------------
(i) Revenues under management consist of rooms, food and beverage,
telephone and other revenues of all the hotels and resorts that we
manage. Approximately 59% of the fee revenues (excluding reimbursed
costs) we earned represented a percentage of the total revenues
under management of all hotels and resorts. FOUR SEASONS HOTELS
INC. SCHEDULED OPENING OF PROPERTIES UNDER CONSTRUCTION OR IN
ADVANCED STAGES OF DEVELOPMENT Approximate Number
Hotel/Resort/Residence Club and Location(i)(ii) of Rooms Scheduled
2007/2008 openings ---------------------------- Four Seasons Hotel
Alexandria, Egypt 125 Four Seasons Hotel Beijing, People's Republic
of China 325 Four Seasons Hotel Beirut, Lebanon 235 Four Seasons
Resort Bora Bora, French Polynesia(x) 105 Four Seasons Hotel
Florence, Italy 120 Four Seasons Hotel Hangzhou, People's Republic
of China 100 Four Seasons Hotel Istanbul at the Bosphorus, Turkey
170 Four Seasons Hotel Macau, Special Administrative Region 370 of
the People's Republic of China(x) Four Seasons Resort Mauritius,
Republic of Mauritius(x) 120 Four Seasons Hotel Moscow, Russia(x)
185 Four Seasons Hotel Mumbai, India(x) 230 Four Seasons Hotel
Seattle, Washington, USA(x) 150 Four Seasons Resort Seychelles,
Seychelles(x) 65 Beyond 2008 ----------- Four Seasons Hotel
Bahrain, Bahrain 270 Four Seasons Hotel Baltimore, Maryland, USA(x)
200 Four Seasons Resort Barbados, Barbados(x) 120 Four Seasons
Resort Cham Island, Vietnam 80 Four Seasons Hotel Doha at the
Pearl, Qatar(x) 250 Four Seasons Hotel Dubai, United Arab
Emirates(x) 375 Four Seasons Hotel Guangzhou, People's Republic of
China(x) 325 Four Seasons Hotel Kuala Lumpur, Malaysia(x) 275 Four
Seasons Hotel Kuwait, Kuwait 300 Four Seasons Hotel Marrakech,
Morocco(x) 140 Four Seasons Hotel Moscow Kamenny Island, Russia(x)
80 Four Seasons Hotel New Orleans, Louisiana, USA(x) 240 Four
Seasons Resort Puerto Rico, Puerto Rico(x) 250 Four Seasons Hotel
Shanghai at Pudong, People's 190 Republic of China(x) Four Seasons
Hotel St. Petersburg, Russia 200 Four Seasons Hotel Toronto,
Ontario, Canada(x) 265 Four Seasons Resort Vail, Colorado, USA(x)
120 (x) Expected to include a residential component.
--------------------------- (i) Information concerning hotels,
resorts and residential projects under construction or under
development is based upon agreements and letters of intent and may
be subject to change prior to the completion of the project. The
dates of scheduled openings have been estimated by management based
upon information provided by the various developers. There can be
no assurance that the date of scheduled opening will be achieved or
that these projects will be completed. In particular, in the case
where a property is scheduled to open near the end of a year, there
is a greater possibility that the year of opening could be changed.
The process and risks associated with the management of new
properties are dealt with in greater detail in the Operating Risks
sections of our 2006 Management Discussion and Analysis. (ii) We
have made an investment in Orlando, in which we expect to include a
Four Seasons Residence Club and/or a Four Seasons branded
residential component. The financing for this project has not yet
been completed and therefore a scheduled opening date cannot be
established at this time. FOUR SEASONS HOTELS INC. FORM 51-102F1
MANAGEMENT'S DISCUSSION AND ANALYSIS March 9, 2007
------------------ Forward-Looking Statements This document
contains "forward-looking statements" within the meaning of
applicable securities laws, including RevPAR, profit margin and
earning trends; statements concerning the number of lodging
properties expected to be added in this and future years; expected
investment spending; similar statements concerning anticipated
future events, results, circumstances, performance or expectations
that are not historical facts; and statements relating to the
proposal to take Four Seasons Hotels Inc. private and anticipated
financial results. Various factors and assumptions were applied or
taken into consideration in arriving at these statements, which do
not take into account the effect that non-recurring or other
special items announced after the statements are made may have on
our business. These statements are not guarantees of future
performance and, accordingly, you are cautioned not to place undue
reliance on these statements. These statements are subject to
numerous risks and uncertainties, including those described in our
annual information form and in this document. (See discussion under
"Operating Risks" at page 55.) 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, fluctuations in relative exchange rates of various
currencies, supply and demand changes for hotel rooms and
residential properties, competitive conditions in the lodging
industry, the risks associated with our ability to maintain and
renew management agreements and expand the portfolio of properties
that we manage, relationships with clients and property owners 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. In
addition, actual results and developments relating to the proposal
may differ materially from those contemplated by the statements
herein, due to, among other things, the risks that the parties will
not proceed with the transaction, that the terms of the transaction
will differ from those that currently are contemplated, and that
the transaction will not be successfully completed for any reason
(including the failure to obtain the required approvals or
clearances from regulatory authorities and the timing of
completion). 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. Additionally, we undertake
no obligation to comment on analyses, expectations or statements
made by third parties in respect of Four Seasons Hotels Inc.
("FSHI"), its financial or operating results or its securities or
any of the properties that we manage or in which we may have an
interest. ------------------ Arrangement Transaction On February
12, 2007, we announced that we had entered into a definitive
acquisition agreement (the "Acquisition Agreement") to implement a
previously announced proposal to take FSHI private at a price of
$82.00 cash per Limited Voting Share (the "Arrangement
Transaction"). Following completion of the transaction, FSHI would
be owned by affiliates of Cascade Investment, L.L.C. ("Cascade")
(an entity owned by William H. Gates III), Kingdom Hotels
International ("Kingdom"), a company owned by a trust created for
the benefit of His Royal Highness Prince Alwaleed Bin Talal Bin
Abdulaziz Alsaud and his family, and Isadore Sharp. The
transaction, which would be implemented by way of a court-approved
plan of arrangement under Ontario law, has been approved
unanimously by our Board (with interested directors abstaining)
following the report and favourable, unanimous recommendation of
the Special Committee of independent directors. In doing so, our
Board determined that the Arrangement Transaction is fair to the
shareholders of FSHI (other than Mr. Sharp, Kingdom, Cascade, their
respective directors and senior officers and any other "related
parties", "interested parties" and "joint actors") and in the best
interests of FSHI and authorized the submission of the Arrangement
Transaction to shareholders of FSHI for their approval at a special
meeting of shareholders. Our Board also has determined unanimously
(with interested directors abstaining) to recommend to FSHI
shareholders that they vote in favour of the Arrangement
Transaction. As previously disclosed, upon completion of the
Arrangement Transaction, Triples Holdings Limited (which is Mr.
Sharp's family holding company) would hold a significant continuing
interest in FSHI and Mr. Sharp would, as Chairman and Chief
Executive Officer, continue to be directly involved in all aspects
of the operations and the strategic direction of Four Seasons,
which will remain headquartered in Toronto. If the Arrangement
Transaction is completed, Mr. Sharp will be entitled to realize
proceeds of approximately $289 million related to a long-term
incentive agreement that was approved by FSHI's shareholders before
it was put in place in 1989. (See "Description of Share Capital -
Sale of Control Agreement" in our Annual Information Form.) A
meeting of shareholders to consider the Arrangement Transaction is
anticipated to take place in April 2007. To be implemented, the
Arrangement Transaction will require approval by two-thirds of the
votes cast by holders of Limited Voting Shares, voting separately
as a class, and approval by Triples, as the sole holder of the
Variable Multiple Voting Shares, voting separately as a class.
Kingdom, Cascade and Triples have agreed to vote their Limited
Voting Shares and Variable Multiple Voting Shares to approve the
Arrangement Transaction. The Arrangement Transaction also will
require approval by a simple majority of the votes cast by holders
of Limited Voting Shares, other than Mr. Sharp, Kingdom, Cascade,
their respective directors and senior officers and any other
"related parties", "interested parties" and "joint actors". In
addition, the Arrangement Transaction will require approval by the
Ontario Superior Court of Justice. The Arrangement Transaction also
will be subject to certain other customary conditions, including
receipt of a limited number of regulatory approvals. The
transaction is not subject to any financing condition, and FSHI has
been advised that commitments for the required debt financing have
been received. FSHI has received from Cascade and Kingdom a limited
guaranty of certain obligations of FS Acquisition Corp. (the
"Purchaser"), the newly-formed company that is the purchaser under
the Acquisition Agreement. There are certain risks inherent in the
Arrangement Transaction which are described in the management
information circular prepared in connection with the special
meeting of shareholders, a copy of which will be available as part
of FSHI's public filings at http://www.sedar.com/ and
http://www.sec.gov/. Among other things, there are risks that the
parties will not proceed with the Arrangement Transaction, that the
ultimate terms of the Arrangement Transaction will differ from
those that currently are contemplated, and that the Arrangement
Transaction will not be successfully completed for any reason
(including the failure to obtain the required approvals or
clearances from regulatory authorities). Copies of the Acquisition
Agreement and certain related documents have been filed with
Canadian securities regulators and with the United States
Securities and Exchange Commission and will be available at the
Canadian SEDAR website at http://www.sedar.com/ and at the U.S.
Securities and Exchange Commission's website at
http://www.sec.gov/. The management information circular in
connection with the special meeting of shareholders to consider the
Arrangement Transaction is currently expected to be mailed to
shareholders on or about the week of March 12, 2007. It is
anticipated that the Arrangement Transaction, if approved by
shareholders, will be completed in the second quarter of 2007.
Given the current Arrangement Transaction, it is likely there will
be no annual meeting and therefore no management information
circular in connection therewith. As a result, some of the items
usually included in the management information circular for the
annual meeting will instead be included in the annual information
form this year. ------------------ This Management's Discussion and
Analysis ("MD&A") for the year ended December 31, 2006 is
provided as of March 9, 2007. It should be read in conjunction with
the consolidated financial statements including the notes thereto
and the Annual Information Form for the year ended December 31,
2006. All amounts disclosed in this MD&A (including amounts for
prior periods) are in US dollars unless otherwise noted. Our
consolidated financial statements are prepared in accordance with
Canadian generally accepted accounting principles ("GAAP"). This
MD&A generally reflects the historical operations of FSHI as a
public entity and is generally drafted from the perspective of FSHI
as a continuing public entity. Endnotes can be found at the end of
this document. Business of Four Seasons Four Seasons is one of the
world's leading managers of luxury hotels and resorts. We endeavour
to offer business and leisure travelers the finest accommodations
and experiences beyond compare in each destination in which we
operate. Four Seasons has a portfolio of 74 luxury hotel and resort
properties (containing approximately 18,090 guest rooms), several
of which include a residential component. These properties are
operated primarily under the Four Seasons brand name in principal
cities and resort destinations in 31 countries in North America,
the Caribbean, Europe, Asia, Australia, the Middle East and South
America. In addition, 30 properties are under construction or
development around the world including properties in a further 13
countries. Of these, 20 new properties are to include a residential
component. Objectives Our core strategic goal as a public company
is to be recognized as the undisputed global leader in luxury
lodging. Supporting that goal are the following strategic
objectives: - Create guest experiences beyond compare so that we
are first choice for luxury travelers. - Maintain and enhance our
unique culture based on treating all others - partners, guests and
employees - the way we would want to be treated. - Provide economic
returns that are acceptable to our hotel owners to sustain our
portfolio and generate new opportunities. - Protect and enhance the
value of Four Seasons reputation and brand name globally. -
Generate premium shareholder returns over the long-term. Set out
below are key financial and growth objectives that have been and
continue to guide us as a public company: Revenue Growth: - Achieve
leading RevPAR(1) results in each of the hotels and resorts we
manage. - Produce leading profitability performance in each of the
hotels and resorts we manage. - Identify and secure new development
opportunities in destinations and locations that meet the needs of
our international guest base. - Successfully open an average of six
to eight new projects per year over the long-term. - Be the first
choice for existing and new capital partners for luxury hotel
development. - Generate top-tier management revenue growth through
improved results at properties under management and through the
addition of new properties under management. Cost Management: -
Control general and administrative expenses to increase operating
earnings before other items. - Minimize exposure to short-term
fluctuations in foreign exchange rates on operating results.
Capital Allocation: - Achieve over the long-term an average return
on capital employed in excess of our long-term cost of capital. -
Maintain a strong balance sheet and a low cost of capital. - Deploy
the majority of our annual operating cash flow to obtain and
enhance management opportunities that expand the Four Seasons brand
and further improve the overall liquidity of the Company. - Divest
equity investments or advances when appropriate opportunities
arise, to allow previously committed capital to be made available
for new investments or enhanced management or royalty
opportunities. - Maintain a prudent risk profile when investing our
cash. In achieving our key financial and growth objectives, we seek
to balance any associated risk. See "Operating Risks" for a
description of the risks inherent in our business. DATASOURCE: Four
Seasons Hotels and Resorts CONTACT: John Davison, Chief Financial
Officer, (416) 441-6714; Barbara Henderson, Senior Vice President,
Corporate Finance, (416) 441-4329
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