Annual Report by a Canadian Issuer — Form 40-F Filing Table of Contents
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MANAGEMENT'S
RESPONSIBILITY FOR FINANCIAL REPORTING
The
accompanying Consolidated Financial Statements of Four Seasons Hotels Inc.
as at
and for the years ended December 31, 2006 and 2005 were prepared by management,
which is responsible for the integrity and fairness of the information
presented, including the selection of appropriate accounting principles and
the
determination of certain amounts in these statements that are based on estimates
and judgments. These Consolidated Financial Statements were prepared in
accordance with Canadian generally accepted accounting principles. Management
has also prepared the related Reconciliation to United States Generally Accepted
Accounting Principles and the financial information presented throughout our
Management’s Discussion and Analysis for the year ended December 31, 2006 and
has ensured that it is consistent with the Consolidated Financial
Statements.
In
discharging our responsibility for the integrity and fairness of the
Consolidated Financial Statements and for the accounting systems from which
they
are derived, management maintains the necessary system of internal controls
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external reporting
purposes in accordance with Canadian generally accepted accounting principles.
These controls include quality standards in hiring and training of employees,
policies and procedures manuals, a corporate code of conduct, conflict of
interest rules and accountability for performance within appropriate and
well-defined areas of responsibility. The system of internal controls is further
supported by an internal audit department. Even an effective system of internal
controls, no matter how well designed, has inherent limitations. Management
has
assessed the effectiveness as at December 31, 2006 of disclosure controls and
procedures and internal control over financial reporting and has reported its
conclusions in our Management's Discussion and Analysis.
The
Board of Directors is responsible for overseeing management in performance
of
its responsibilities for financial reporting and is ultimately responsible
for
approving the Consolidated Financial Statements and the Management's Discussion
and Analysis. The Board carries out this responsibility principally through
its
Audit Committee, which is comprised entirely of independent directors. As part
of its mandate, the Audit Committee meets with the independent auditors and
the
internal auditors (who both have direct access to the Audit Committee,
independent of management) and with management. The Audit Committee reviews
the
Consolidated Financial Statements and the Management's Discussion and Analysis
and recommends them to the Board for approval.
The
Consolidated Financial Statements have been audited by KPMG LLP, the independent
auditors recommended by the Audit Committee and appointed by the shareholders,
in accordance with Canadian generally accepted accounting standards, and their
report follows. KPMG LLP has, and has had, full and free access to the Audit
Committee to discuss audit, financial reporting and related
matters.
We
have
audited the consolidated balance sheets of Four Seasons Hotels Inc. as at
December 31, 2006 and 2005 and the consolidated statements of operations,
retained earnings and cash flowsfor
the
years then ended. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with Canadian generally accepted auditing
standards. With respect to the consolidated financial statements for the year
ended December 31, 2006, we also conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement.
An
audit includes examining, on a test basis, evidence supporting the amounts
and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well
as evaluating the overall financial statement presentation.
In
our
opinion, these consolidated financial statements present fairly, in all material
respects, the financial position of the Corporation as at December 31, 2006
and
2005 and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting
principles.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Corporation’s internal
control over financial reporting as of December 31, 2006, based on the criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO), and our report
dated March 9, 2007 expressed an unqualified opinion on management’s assessment
of, and the effective operation of, internal control over financial
reporting.
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors of Four Seasons Hotels Inc.
We
have
audited management's assessment, included in Management’s Annual Report on
Internal Control over Financial Reporting,
that
Four Seasons Hotels Inc. maintained effective internal control over financial
reporting as of December 31, 2006, based on the criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).The
Corporation's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness
of
internal control over financial reporting. Our responsibility is to express
an
opinion on management's assessment and an opinion on the effectiveness of the
Corporation’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
corporation's internal control over financial reporting is a process designed
to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A corporation's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the corporation;
(2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the corporation
are
being made only in accordance with authorizations of management and directors
of
the corporation; and (3) provide reasonable assurance regarding prevention
or
timely detection of unauthorized acquisition, use, or disposition of the
corporation’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management's assessment that the Corporationmaintained
effective internal control over financial reporting as of December 31, 2006,
is
fairly stated, in all material respects, based on the criteria established
in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, the
Corporationmaintained,
in all material respects, effective internal control over financial reporting
as
of December 31, 2006, based on the criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We
also
have conducted our audits on the consolidated financial statements in accordance
with Canadian generally accepted auditing standards. With respect to the year
ended December 31, 2006, we also have conducted our audit in accordance with
the
standards of the Public Company Accounting Oversight Board (United
States).Our
report dated March 9, 2007expressed
an unqualified opinion on thoseconsolidatedfinancial
statements.
(In
thousands of US dollars except per share amounts)
Four
Seasons Hotels Inc. ("FSHI")
is
incorporated under the Ontario Business Corporations Act and, through its
subsidiaries, is engaged in the management of, and the investment in, hotels,
resorts and branded residential projects throughout the world. In these
consolidated financial statements, FSHI and its subsidiaries are collectively
referred to as the "Corporation".
At
December 31, 2006, the Corporation managed 73 properties and had various
projects under construction or development, of which the Corporation had an
equity interest in 10 properties under management and one project under
construction.
1.Significant
accounting policies:
The
Corporation's accounting policies and its standards of financial disclosure
comply with Canadian generally accepted accounting principles.
The
significant accounting policies are summarized below:
(a)Reporting
currency:
The
Corporation has historically prepared its consolidated financial statements
in
Canadian dollars ("C$"). Effective January 1, 2005, the Corporation adopted
US
dollars as its reporting currency. There were no changes in the functional
currency of FSHI, which remains Canadian dollars, or the functional currencies
of any of its subsidiaries.
(b)Principles
of consolidation:
The
Corporation consolidates all of its wholly-owned subsidiaries, including its
primary operating subsidiaries - Four Seasons Hotels Limited ("FSHL"), Four
Seasons Hotels and Resorts Asia Pacific Pte Ltd. and Four Seasons Hotels and
Resorts B.V.
The
Corporation consolidates its 100% leasehold interest in Four Seasons Hotel
Vancouver and, until the disposition of the lease on June 30, 2005, the
Corporation also consolidated its 100% leasehold interest in The Pierre in
New
York.
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Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
1.Significant
accounting policies (continued):
(c)Translation
of foreign currencies and derivative financial
instruments:
Foreign
currency balances of the Corporation and of foreign operations designated as
integrated are translated into domestic currencies at the rates of exchange
on
the balance sheet date for monetary items and at the rates of exchange on the
date of transaction for non-monetary items. The resulting translation gains
or
losses are included in the determination of net earnings (loss).
Revenues
and expenses denominated in foreign currencies are translated at the rates
of
exchange on the dates of the transactions.
The
financial statements of foreign investments designated as self-sustaining
operations are translated into Canadian dollars as follows:
(i) Assets
and liabilities at rates of exchange on the balance sheet date; and
(ii) Revenue
and expense items at average rates of exchange in effect during the
year.
The
resulting exchange gains and losses are deferred and included in a separate
component of shareholders' equity. A gain or loss equivalent to a proportionate
amount of the exchange gains and losses accumulated in the separate component
of
shareholders' equity is recognized in income when there has been a reduction
in
the net investment resulting from a sale of part or all of the Corporation's
interest in the foreign operation, or a reduction in the shareholders' equity
of
the foreign operation as a result of dividend distributions or other capital
transactions.
The
exchange gains and losses resulting from translating the Corporation's financial
statements in Canadian dollars to US dollars are included in a separate
component of shareholders' equity (note 1(a)).
Derivative
financial instruments are used by the Corporation in the management of its
foreign currency exposures and its interest rate risk, when it is deemed
appropriate. The Corporation does not use derivative financial instruments
for
trading or speculative purposes.
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Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
1.Significant
accounting policies (continued):
The
Corporation documents all relationships between hedging instruments and hedged
items, as well as its risk management objective and strategy for undertaking
various hedge transactions. This process includes linking all derivatives that
are designated as hedges to specific assets and liabilities on the balance
sheet
or to specific firm commitments or forecasted transactions. The Corporation
also
assesses, both at the hedge's inception and on an ongoing basis, whether the
derivatives that are designated as hedges are highly effective in offsetting
changes in fair values or cash flows of hedged items.
The
Corporation enters into currency and interest rate swap agreements in order
to
reduce the variability to changes in the fair value of its long-term obligations
attributable to interest rate and exchange rate risks, when it is deemed
appropriate. These swap agreements require the periodic exchange of payments
and
the exchange of the notional principal amount on which the payments are based
at
the maturity of the agreement. If all the conditions for applying hedge
accounting are met, the Corporation designates its currency and interest rate
swaps as hedges of the underlying long-term obligation. Interest expense on
the
long-term obligation is adjusted to include amounts payable or receivable under
the swap agreements. Foreign exchange translation gains and losses on the
notional principal amount of the swap are accrued under "Long-term obligations"
on the balance sheet and recognized in "Other expenses, net", offsetting the
respective translation losses and gains recognized on the long-term obligation.
Realized
and unrealized gains or losses associated with derivative instruments, which
have been terminated or cease to be effective prior to maturity, are deferred
under other current or non-current assets or liabilities on the balance sheet
and recognized in income in the period in which the underlying hedged
transaction is recognized. In the event a designated hedged item is sold,
extinguished or matures prior to the termination of the related derivative
instrument, any realized or unrealized gain or loss on such derivative
instrument is recognized in income.
Derivative
financial instruments that are not designated as hedges are marked-to-market
on
a monthly basis with the resulting changes in fair values being recognized
in
“Other expenses, net”.
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Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
1.Significant
accounting policies (continued):
(d)Use
of estimates:
The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the year.
Actual results could differ from those estimates.
Estimates
are used when accounting for items such as asset impairment assessments, income
taxes, employee future benefits and contingencies.
The
most significant estimates that the Corporation is required to make relate
to
the recoverability of its investments in (i) long-term receivables, (ii) hotel
partnerships and corporations and (iii) management contracts.
The
estimated recoverable amounts of these investments usually depend upon 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 the effects of war, terrorism, competition from other
hotels, changes in travel patterns, and other factors that affect the
properties' gross operating revenue (which is the factor on which the
Corporation's base management and royalty fee revenues are normally based)
and
profits (which is the factor on which the Corporation's incentive fee revenues
are normally based).
The
estimates of recoverable amounts of these investments may also depend upon,
among other things, 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 the Corporation and other factors
affecting the profitability and saleability of the properties.
These
assumptions are limited by the availability of reliable comparable data, ongoing
geopolitical concerns and the uncertainty of predictions concerning future
events. 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.
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Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
1.Significant
accounting policies (continued):
(e)Cash
and cash equivalents:
The
Corporation's investments in cash and cash equivalents are highly liquid, with
original maturities of less than 90 days. These investments include bank
deposits, guaranteed investment certificates and money market funds held with
major financial institutions.
(f)Impairment
of long-term receivables:
The
Corporation measures 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. For impaired
long-term receivables, the Corporation establishes 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. The Corporation applies this impairment
policy individually to all long-term receivables in the portfolio and does
not
aggregate long-term receivables for the purpose of applying such policy. For
long-term receivables which are determined to be impaired, interest income
is
recognized on a cash basis.
(g)Investments
in hotel partnerships and corporations:
The
Corporation accounts for its investments in hotel partnerships and corporations
by the cost method when the percentage ownership and structure does not give
the
Corporation significant influence over these investments. Investments in hotel
partnerships and corporations, which are not controlled but over which the
Corporation has significant influence, are accounted for by the equity
method.
In
the
event of a decline in value of an investment in the equity of a hotel
partnership or corporation that is other than temporary, the investment is
written down to the estimated recoverable amount.
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Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
1.Significant
accounting policies (continued):
(h)Capital
assets:
Land,
buildings, furniture, fixtures, equipment and leasehold interests and
improvements are recorded at cost.
The
cost of acquiring or enhancing hotel management contracts is capitalized and
recorded as "Investment in management contracts".
The
cost of trademarks includes the cost of registering the "Four Seasons"
trademarks throughout the world.
(i)
Depreciation
and amortization:
Depreciation
of buildings is recorded on a straight-line basis over 40 years.
Depreciation
of furniture, fixtures and equipment is recorded on a straight-line basis at
rates which will fully depreciate the assets over their estimated useful lives.
The estimated composite useful lives for furniture, fixtures and equipment
range
from three to 15 years.
Amortization
of leasehold interests and improvements is recorded on a straight-line basis
over the terms of the leases.
The
costs allocated to trademarks, which do not have indefinite lives, are amortized
on a straight-line basis over their useful lives.
The
costs capitalized for hotel management contracts are amortized on a
straight-line basis over the terms of the contracts.
(ii) Impairment:
The
recoverability of the unamortized cost of capital assets is evaluated whenever
events or changes in circumstances indicate that the carrying amount of an
asset
may not be recoverable from future operations. The Corporation bases these
evaluations upon the projected future cash flows on an undiscounted basis.
If
the undiscounted future cash flows are insufficient to recover the remaining
net
book value, then an impairment charge is recognized equal to the amount by
which
the net book value exceeds the fair value of the asset.
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Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
1.Significant
accounting policies (continued):
(i)Deferred
charges:
The
Corporation defers legal, consulting, travel and other costs directly relating
to the negotiation, structuring and execution of new contracts relating to
projects, which in management's judgment, have a high probability of opening.
When the property is opened, these deferred charges are reclassified to
"Investment in management contracts". If the project is abandoned, any deferred
charges are written off. The deferred charges associated with new management
contracts developed by the Corporation are amortized on a straight-line basis,
generally over a 10-year period, commencing when the property is
opened.
(j)Accounting
for asset retirement obligations:
The
Corporation records the fair value of an asset retirement obligation as a
liability in the year in which it incurs a legal obligation associated with
the
retirement of tangible long-lived assets that result from the acquisition,
construction, development and/or normal use of the assets. The Corporation
also
records a corresponding asset that is depreciated or amortized over the life
of
the asset. Subsequent to the initial measurement of the asset retirement
obligation, the obligation will be adjusted at the end of each period to reflect
the passage of time and changes in the estimated future cash flows underlying
the obligation.
(k)Revenue
recognition:
The
total revenues of the Corporation include revenues earned from hotels, resorts
and branded residential projects under long-term management contracts, revenues
earned for the use of its brand name in connection with certain residential
projects, revenues generated by its consolidated leasehold hotel operations
and
distributions from its other hotel investments.
Hotel
management fees include base fees typically equal to a percentage of the gross
operating revenues of the managed hotels and resorts and incentive fees based
on
certain operating results of the managed hotels and resorts.
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Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
1.Significant
accounting policies (continued):
Other
fees include fees earned relating to the design, construction and fitting out
specifications of properties during the development stage and purchasing fees
earned, generally calculated as a percentage of the cost of goods purchased
by
the managed properties through the Corporation's centralized purchasing system.
It also includes royalty fees earned by the Corporation for the use of its
brand
name in connection with certain residential projects, which are generally based
on a percentage of the sale proceeds of the residences sold. In addition, the
Corporation also manages branded and serviced residential projects pursuant
to
management contracts under which it oversees 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.
The
Corporation provides various other services, including central reservation
services, worldwide sales offices and marketing programs to managed properties,
and receives various charges calculated in accordance with the management
contracts. The central reservation service charges, corporate sales and
marketing charges and corporate advertising charges enable the Corporation
to
recover substantially all of the costs of providing these services. These
charges are included in reimbursed costs.
Fees
from management operations are recognized as revenue when the services have
been
rendered in accordance with the terms of each individual contract, the fees
are
non-refundable, the amount of the fees is fixed or determinable, and there
is
reasonable assurance that the fees are collectible. Incentive fees are accrued
as earned based on the profitability of the managed property, subject to the
terms of each individual contract. The Corporation accrues 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 contract
was
terminated at the relevant reporting date. Generally, on termination, the
Corporation's management contracts entitle the Corporation to receive incentive
fees up to the date of termination. If a property's profitability decreases
in a
subsequent interim period, the incentive fee accrued in a previous interim
period could be reduced or eliminated.
The
Corporation evaluates at the inception of a contract all deliverables to
determine whether they represent separate units of accounting. If they do,
the
consideration to be received by the Corporation under the contract is allocated
among the separate units of accounting based on their relative fair values
or,
where fair values for all deliverables are unavailable, based on the fair value
of the undelivered item.
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Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
1. Significant
accounting policies (continued):
Hotel
ownership revenues include revenues generated by the Corporation’s consolidated
leasehold hotel operations, which are recognized at the time of the sale or
rendering of services by the hotel. It also includes revenues recognized by
the
Corporation from other hotel investments, accounted for by the cost method,
when
profit distributions are receivable from the partnerships or
corporations.
(l)Stock-based
compensation and other stock-based payments:
Employee
stock options granted or modified on or after January 1, 2003 are accounted
for
using the fair value-based method. Under the fair value-based method,
compensation cost of a stock option is measured at fair value at the date of
grant and is expensed over the stock option's vesting period, with a
corresponding increase to contributed surplus. When these stock options are
exercised, the proceeds, together with the amount recorded in contributed
surplus, are recorded in capital stock. Stock options granted prior to January1, 2003 are accounted for using the settlement method.
Share
appreciation rights (“SARs”) granted pursuant to phantom equity agreements are
settled in cash. The total compensation cost of these SARs is measured based
on
the amount by which the quoted market price of Limited Voting Shares (“LVS”) of
FSHI exceeds the grant prices. Changes in the market price of LVS between the
grant date and measurement date result in changes to the total compensation
cost. Total compensation cost is amortized over the rights’ vesting period and
accrued as compensation expense. SARs vest over a maximum period of five years
and can be exercised over a maximum period of 10 years. The compensation expense
accrued for a right that is forfeited is adjusted by decreasing the compensation
expense in the period of forfeiture.
(m)Income
taxes:
The
Corporation uses the asset and liability method of accounting for future income
taxes. Under the asset and liability method, future income tax assets and
liabilities are determined based on "temporary differences" (differences between
the accounting basis and the tax basis of the assets and liabilities), and
are
measured using the currently enacted, or substantively enacted, tax rates and
laws expected to apply when these differences reverse. A valuation allowance
is
recorded against any future income tax asset if it is more likely than not
that
the asset will not be realized. Income tax expense or benefit is the sum of
the
Corporation's provision for current income taxes and the difference between
the
opening and ending balances of the future income tax assets and
liabilities.
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Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
1.Significant
accounting policies (continued):
(n)Changes
in accounting policies:
(i) 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
an
impact on the consolidated financial statements of the Corporation for the
year
ended December 31, 2006.
(ii) 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 October1, 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. The Corporation is still assessing the implications of these new
standards and has not yet determined the impact of the implementation of these
standards on its 2007 consolidated financial statements.
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Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
1.Significant
accounting policies (continued):
(iii)
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 the consolidated financial statements of the Corporation
for
the year ended December 31, 2006.
(o)
Comparative
figures:
Certain 2005 comparative figures have been reclassified to conform with the
financial statement presentation adopted for 2006.
2.Receivables:
2006
2005
Trade
accounts of consolidated hotel
$
1,389
$
1,526
Receivables
from hotel partnerships, affiliates and managed hotels
58,125
52,684
Taxes
receivable
1,733
6,647
Other
6,150
8,833
$
67,397
$
69,690
Receivables
at December 31, 2006 are recorded net of an allowance for doubtful accounts
of
$3,186 (2005 - $2,792). The net bad debt expense for the year ended December31,2006 was $237 (2005 - $18).
15
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Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
3.Long-term receivables (continued):
(a) Principal
and interest on the bond were payable annually every March out of 50% of the
available cash flow (as defined in the bond indenture) from Four Seasons
Hotel London. The bond was due from an affiliate of Kingdom Investments Inc.,
which is a shareholder of FSHI, and was secured by the affiliate's investment
in
the hotel. The principal and interest on the bond were fully repaid in December
2006.
(b) Principal
and interest on the loan were payable annually every March out of the other
50%
of the available cash flow from Four Seasons Hotel London (a). The loan was
due
from an affiliate of Kingdom Investments Inc. and was secured by the affiliate's
additional indirect interest in the hotel. The principal and interest on the
loan were fully repaid in December 2006.
(c) The
loans are due from affiliates of Kingdom Investments Inc.
(d) As
at
December 31, 2006 and 2005, the Corporation had fully provided for its $5,000
loan relating to Four Seasons Hotel Caracas, which is secured by a second
mortgage and registered against the hotel, and non-interest bearing advances
of
$1,887. The Corporation is in dispute with the owner of the hotel regarding
a
variety of matters relating to the completion and ongoing operation of the
hotel, including the default on the $5,000 loan. Formal notice of default was
given to the owner. The dispute was referred to arbitration and the arbitration
tribunal declared that the owner had failed to perform all of its obligations
under the Corporation's management agreements, including, without limitation,
its obligation to complete the hotel as a world-class luxury hotel and to allow
the Corporation to manage the hotel free from unlawful interference of the
owner. The arbitration tribunal awarded damages totalling approximately $8,000,
plus arbitration fees and expenses of approximately $240. The owner has
challenged the enforcement of the decision from the arbitration tribunal. The
Corporation has not recorded any receivables arising from the decision as at
December 31, 2006 and 2005.
In
addition, in 2003, the Corporation received judgment in its legal proceedings
against the owner, which involved the protection of its proprietary materials.
The court found against the owner on all matters, including illegal computer
"hacking" and unlawful and unauthorized use of the Corporation's proprietary
information, and ordered that the owner pay to the Corporation damages totalling
approximately $4,900, plus legal costs and expenses of approximately $1,400.
On
appeal by the owner, the judgement was reduced to $1,400, plus legal costs
and
expenses. The Corporation has not recorded any receivable arising from the
judgment as at December 31, 2006 and 2005.
17
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
3.Long-term
receivables (continued):
In
addition, the owner of the hotel received judgment against Four Seasons Caracas,
C.A., a wholly-owned Venezuelan subsidiary of FSHL, in the amount of $1,300
from
the Venezuelan Tenth Court of First Instance for alleged breaches of the
management agreement. The judgement was affirmed by the Sixth Superior Court,
but then remanded by the Venezuelan Supreme Court back to the Superior Court
for
reconsideration. The Superior Court has not yet conducted its reconsideration
of
the appeal of the judgment.
(e) Changes
in the allowance for doubtful long-term receivables consist of:
2006
2005
Balance,
beginning of year
$
(23,102
)
$
(13,239
)
Additional
provisions
(1,748
)
(8,829
)
Settlement
of long-term receivables
7,950
-
Transfer
from receivables
-
(1,364
)
Conversion
to investment
1,600
-
Foreign
exchange gain (loss)
(1,726
)
330
Balance,
end of year
$
(17,026
)
$
(23,102
)
4.Investments
in hotel partnerships and corporations:
2006
2005
Operating
properties (notes 12(a) and 12(b))
$
63,634
$
91,020
Properties
under construction or development
1,918
8,908
$
65,552
$
99,928
In
February 2006, the Corporation exchanged its equity interest in a property
under
its management for a management contract enhancement of approximately the same
fair value. No gain or loss was recorded in connection with this
transaction.
18
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
8.Income
taxes (continued):
Income
tax recovery
(expense) varies from the amount computed by applying combined Canadian federal
and provincial tax rates to earnings (loss) before income taxes as
follows:
2006
2005
Earnings
(loss) before income taxes
$
69,207
$
(39,064
)
Items
not deductible (not subject to taxes)
15,167
(786
)
Earnings
(loss) subject to taxes
$
84,374
$
(39,850
)
Statutory
Canadian federal and provincial tax rate
34.73
%
34.66
%
Expected
income tax recovery (expense)
$
(29,303
)
$
13,812
Reduction
in tax due to lower foreign tax rates
16,590
6,421
Increase
in valuation allowance
(4,398
)
(7,711
)
Other
(1,809
)
(1,681
)
Income
tax recovery (expense)
$
(18,920
)
$
10,841
The
valuation allowance for the year ended December 31, 2006 was $13,640 (2005
-
$10,525), which results from potential limitations on the use of capital and
non-capital tax losses in Canada and certain foreign jurisdictions. In order
to
fully realize the future income tax assets, net of the valuation allowance,
of
$23,676, the Corporation will need to generate future taxable income of
approximately $68,000. Based upon projections of future taxable income over
the
years in which the future income tax assets are deductible, management believes
it is more likely than not that the Corporation will realize the benefits of
these deductible differences, net of the existing valuation allowance. The
amount of the future income tax assets considered realizable, however, could
be
reduced in the near term if estimated future taxable income during the
carryforward period is reduced.
21
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
8.Income
taxes (continued):
Future
income taxes arise from temporary differences in the basis of the Corporation's
assets and liabilities for tax and financial reporting purposes. Tax effects
of
these differences are as follows:
2006
2005
Future
income tax assets:
Investments
in
hotel partnerships and corporations
At
December 31, 2006, the Corporation had accumulated net operating losses
carried forward of approximately $56,500 (2005 - $43,013) for tax purposes,
which expire as follows:
2014
$
13,491
2015
34,937
2026
8,072
$
56,500
22
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
8.Income
taxes (continued):
In
2006
and 2005, the Corporation made no provision for income taxes, or additional
foreign taxes, on the cumulative unremitted earnings of foreign subsidiaries,
which were approximately $240,000 as at December 31, 2006 (2005 - $176,000),
because the Corporation did not intend to repatriate these earnings in the
foreseeable future. These earnings could become subject to additional taxes
if
remitted as dividends or if the Corporation sells its interests in the
affiliates. The Corporation cannot practically estimate the amount of additional
taxes that might be payable on the unremitted earnings.
9.Accounts
payable and accrued liabilities:
2006
2005
Trade
accounts payable
$
13,430
$
9,309
Payroll
and employee benefits (a)
25,958
20,234
Taxes
payable
7,749
4,476
Accrued
sales, marketing and advertising liabilities
6,370
4,030
Professional
fees
5,599
1,506
Dividends
payable
1,677
1,640
Other
accrued liabilities
13,524
13,602
$
74,307
$
54,797
(a) As
at
December 31, 2006, payroll and employee benefits include compensation expense
accrued of $2,950 (2005 - nil) relating to SARs granted pursuant to phantom
equity agreements.
23
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
10.Long-term
obligations:
2006
2005
Convertible
notes (a)
$
229,436
$
222,186
Deferred
gain
on termination of interest rate swap C$4.9 million (2005 - C$6.9
million)
(b)
4,231
5,871
Currency
and interest rate swap (c)
6,757
17,410
Accrued
benefit liability (note 14(b))
26,324
25,843
Other
long-term obligations
2,437
7,368
269,185
278,678
Less
amounts due within one year
(2,350
)
(4,853
)
$
266,835
$
273,825
(a)Convertible
notes:
In
June
2004, FSHI issued $250,000 principal amount of convertible senior notes. The
net
proceeds of the issuance, after deducting offering expenses and underwriters'
commission, were $241,332. These notes bear interest at the rate of 1.875%
per
annum (payable semi-annually in arrears on January 30 and July 30 to
holders of record on January 15 and July 15, beginning January 30,2005), and will mature on July 30, 2024, unless earlier redeemed or repurchased.
The notes are convertible into LVS of FSHI at an initial conversion rate of
13.9581 shares per each one thousand US dollar principal amount (equal to a
conversion price of approximately $71.64 per LVS, subject to adjustments in
certain events, in circumstances in which (i) the LVS 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 LVS into which they
may be converted for a specified period, (iii) FSHI calls the notes for
redemption, or (iv) specified corporate transactions or a "fundamental change"
occur. In connection with a "fundamental change" on or prior to July 30,2009, such as the implementation of a proposal to take FSHI private (note 17),
on conversion holders of notes will be entitled to receive additional LVS having
a value equal to the aggregate of the make whole premium they would have
received if the notes were purchased plus an amount equal to any accrued but
unpaid interest. FSHI may choose to settle conversion (including any make whole
premium) in LVS, cash or a combination of LVS and cash (at its
option).
24
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
10.Long-term
obligations (continued):
On
or
after August 4, 2009, FSHI may (at its option) redeem all or a portion of the
notes, in whole or in part, for cash at 100% of their principal amount, plus
any
accrued and unpaid interest. On each of July 30, 2009, 2014 and 2019, holders
may require FSHI to purchase all or a portion of their notes at 100% of their
principal amount, plus any accrued and unpaid interest. FSHI will pay cash
for
any notes so purchased on July 30, 2009. Repurchases made by FSHI on July 30,2014 and July 30, 2019 may be made (at its option) in cash, LVS or a combination
of cash and LVS.
Upon
the occurrence of certain designated events, FSHI will be required to make
an
offer to purchase the notes at 100% of their principal amount plus any accrued
and unpaid interest, and, in the case of a "fundamental change" that is also
a
"change of control" occurring on or before July 30, 2009, such as the
implementation of a proposal to take FSHI private (note 17), FSHI also will
pay
a make whole premium. FSHI may choose to pay the purchase price (including
any
make whole premium) for notes in respect of which its offer is accepted in
(at
its option) cash, LVS, securities of the surviving entity (if FSHI is not the
surviving corporation), or a combination of cash and shares or
securities.
In
accordance with Canadian generally accepted accounting principles, the notes
were bifurcated in the consolidated financial statements into a debt component
(representing the principal value of a bond of $211,754, which was estimated
based on the present value of a $250,000 bond maturing in 2009, yielding 5.33%
per annum, compounded semi-annually, and paying a coupon of 1.875% per annum)
and an equity component (representing the value of the conversion feature of
the
notes). Accordingly, net proceeds were allocated $211,754 to long-term
obligations and $36,920 to shareholders' equity. The offering expenses and
underwriters' commission of $7,019 relating to the debt component were recorded
in "Other assets". The debt component of the notes will increase for accounting
purposes at the compounded interest rate of 5.33%, less the coupon paid of
1.875% per annum.
(b)Interest
rate swap:
In
connection with the issuance of convertible senior notes, FSHI entered into
an
interest rate swap agreement to July 30, 2009 with an initial notional
amount of $211,754, pursuant to which FSHI had agreed to receive interest at
a
fixed rate of 5.33% per annum and pay interest at six-month LIBOR, in arrears,
plus 0.4904%. FSHI had designated the interest rate swap as a fair value hedge
of the notes. As a result, FSHI accounted for the payments under the interest
rate swap to the date of termination on an accrual basis, which resulted in
an
effective interest rate (for accounting purposes) on the hedged notes of
six-month LIBOR, in arrears, plus 0.4904%.
25
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
10.Long-term
obligations (continued):
In
October 2004, FSHI terminated the interest rate swap agreement and received
proceeds of $9,000. The book value of the interest rate swap at the date of
termination was C$2.0million
($1,617). The gain of C$9.3 million ($7,383) was deferred for accounting
purposes and is being amortized over the period to July 30, 2009, which would
have been the maturity date of the swap agreement. During 2006, C$2.0 million
($1,688) (2005 - C$1.9 million ($1,579)) of the deferred gain was
amortized and recorded as a reduction of interest expense.
(c)Currency
and interest rate swap:
In
April 2005, FSHI entered into a currency and interest rate swap agreement to
July 30, 2009, pursuant to which FSHI had agreed to receive interest at a fixed
rate of 5.33% per annum on an initial notional amount of $215,842 and pay
interest at a floating rate of six-month Canadian bankers' acceptance, in
arrears, plus 1.1% per annum on an initial notional amount of C$269.2 million.
The notional amount of the swap will increase semi-annually in conjunction
with
the increase in the debt component of the convertible senior notes. On July30,2009, FSHI had agreed to pay C$311.8 million and receive $250,000 under the
swap. FSHI had designated the swap as a fair value hedge of the convertible
senior notes. As a result, FSHI accounted for the payments under the interest
rate swap on an accrual basis, which resulted in an effective interest rate
(for
accounting purposes) on the hedged notes of six-month Canadian bankers'
acceptance, in arrears, plus 1.1%. In addition, foreign exchange translation
gains and losses on the notional amount of the swap were accrued on a monthly
basis under "Long-term obligations" on the balance sheet and recognized in
"Other expenses, net", offsetting the respective monthly translation losses
and
gains recognized on the convertible senior notes.
In
December 2006, FSHI terminated 80% of the notional amount of the currency
component of the swap relating to the final exchange of principal by making
a
payment of $21,000. 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. During 2006, $87 of the deferred loss was amortized
and recorded as a foreign exchange loss.
26
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
10.Long-term
obligations (continued):
Under
the amended swap, FSHI will pay C$62.4 million and receive $50,000 on July30,2009. 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, FSHI no longer met all the
conditions for designating the amended swap as a fair value hedge of the
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. During 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”. During 2006, a gain of $752 was recognized
on the marked-to-market valuation.
Pursuant
to a cross default provision, a default under the bank credit facility, in
turn,
would cause a default under the currency and interest rate swap agreement (notes
10(d) and 17).
(d)Bank
credit facility:
The
Corporation has a committed bank credit facility of $125,000, which expires
in
September 2007. Borrowings under this credit facility bear interest at LIBOR
plus a spread ranging between 0.875% and 2.25% in respect of LIBOR-based
borrowings (prime rate plus a spread ranging between nil and 1.25% in respect
of
prime rate borrowings), depending upon certain criteria specified in the loan
agreement. As at December 31, 2006 and 2005, no amounts were borrowed under
this
credit facility. However, approximately $1,600 of letters of credit were issued
under this credit facility as at December 31, 2006. No amounts have been drawn
under these letters of credit.
27
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
10.Long-term
obligations (continued):
The
bank credit facility contains certain covenants, which require the Corporation
to maintain certain financial ratios. In addition, the bank credit facility
contains additional covenants, which restrict the Corporation's ability to
borrow funds ranking superior to these obligations and to undertake certain
types of major transactions. The Corporation was in compliance with these
covenants during 2006 and 2005. In addition, the lenders may require repayment
of the bank credit facility on a change of control of FSHI
(note17).
(e)Interest
expense:
2006
2005
Interest
on long-term obligations
$
(14,434
)
$
(11,103
)
Other
interest expense
(476
)
(442
)
$
(14,910
)
$
(11,545
)
11.Shareholders'
equity:
(a)
Capital
stock:
Authorized:
3,725,698
Variable
Multiple Voting Shares ("VMVS"), entitling the holder to that number of votes
that results in the aggregate votes attaching to the VMVS, representing
approximately 65% of the votes attaching to the VMVS and the LVS, in aggregate,
which, at December 31, 2006, was 16.45 votes (2005 - 16.09 votes) per VMVS.
Changes in the number of votes attaching to the VMVS necessary to maintain
this
level will occur concurrently with the issue of additional LVS.
The
VMVS rank equally with the LVS as to distributions on liquidation, dissolution
or winding-up of FSHI.
Dividends declared and paid on the VMVS are in amounts per share equal to 50%
of
the dividends per share declared and paid on the LVS, regardless of whether
the
number of votes attaching to the VMVS is further increased.
28
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
11.Shareholders'
equity (continued):
VMVS
are convertible into LVS on a one-for-one basis at the option of the holder.
The
shares automatically convert into LVS upon any transfer outside of the family
of
Mr. Isadore Sharp, the Chief Executive Officer of FSHI, except a transfer of
a
majority of the shares to a purchaser who makes an equivalent offer to purchase
all outstanding VMVS and LVS.
Unlimited
LVS,
voting (one vote per share) and ranking equally with the VMVS as to
distributions on liquidation, dissolution or winding-up of FSHI.
Unlimited
First
Preference Shares and Second Preference Shares, issuable in series, non-voting
and ranking prior to all other shares with respect to payment of dividends
and
distributions on liquidation or winding-up of FSHI.
The
dividend rate, redemption and conversion rights, if any, are to be determined
prior to issuance by the directors of FSHI.
(In
thousands of US dollars except per share amounts)
11.Shareholders'
equity (continued):
Pursuant
to an agreement approved by the shareholders of FSHI at a special meeting held
on December 19, 1989, FSHI and its principal operating subsidiary, FSHL,
have agreed that FSHL will make a payment to Mr. Isadore Sharp on an
arm's-length sale of control of FSHI (note 17). The first portion of the payment
will be an amount equal to 5% of the product of (i) the total number of VMVS
and
LVS outstanding at the time of the sale, and (ii) the per share consideration
received by holders of LVS minus C$6.30. If the per share consideration received
by holders of LVS on the sale is equal to or more than 125% of the weighted
average price of LVS traded in board lots on The Toronto Stock Exchange during
the period commencing six months and ending one month before the first public
announcement of the sale, Mr. Sharp will be entitled to an additional payment
equal to 5% of the product of (i) the total number of VMVS and LVS outstanding
at the time of the sale, and (ii) the per share consideration received by
holders of LVS minus C$20.84.
The
right to receive the two payments may be transferred among members of Mr.
Sharp's family, their holding companies and trusts. Upon the death of Mr. Sharp,
the right to the payments passes to his legal or personal representatives,
heirs
or permitted assigns.
(b)Stock
option plan:
Under
the Corporation's stock option plan, eligible directors, executives and
employees may be granted options to acquire LVS at a price which is not less
than the weighted average price of board lots traded on The Toronto Stock
Exchange in the five trading days preceding the date of grant. The options
are
not transferable, have a term of 10 years, and generally vest in varying
proportions on the first, second, third, fourth and fifth anniversaries of
the
date of grant (note 17). All vested options must be exercised within specified
periods in the event of retirement, termination other than for cause (including
as a result of a change of control of FSHI),
incapacity or death of the director, executive or employee.
30
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
Information
relating to stock options outstanding at December 31, 2006 was as
follows:
Options
outstanding
Options
exercisable
Weighted
Weighted
Weighted
average
average
average
Range
of
Options
remaining
exercise
Options
exercise
exercise
prices
outstanding
contractual
life
price
exercisable
price
C$28.10
- C$39.61
260,110
2.5
years
C$
33.91
224,990
C$
33.16
C$40.51
- C$50.23
1,143,094
2.9
years
47.46
998,974
47.44
C$53.28
- C$67.07
1,028,359
3.6
years
55.34
885,999
54.91
C$68.80
- C$84.00
654,200
5.4
years
73.38
329,900
75.64
C$86.97
- C$108.14
580,316
3.5
years
87.68
578,116
87.69
C$28.10
- C$108.14
3,666,079
3.6
years
C$
59.70
3,017,979
C$
59.36
The
Corporation uses the fair value-based method for all employee stock options
granted or modified on or after January 1, 2003. Stock options to acquire 41,650
LVS were granted in 2006 at a weighted average exercise price of C$62.61
($53.65). The fair value of stock options granted in 2006 was estimated using
a
Black-Scholes option 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 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 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 2005.
31
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
11. Shareholders'
equity (continued):
Pro
forma disclosure is required to show the effect of the application of the fair
value-based method to employee stock options granted during 2002, which were
not
accounted for using the fair value-based method. For the years ended December31, 2006 and 2005, if the Corporation had applied the fair value-based method
to
options granted during 2002, the Corporation's net earnings (loss) and basic
and
diluted earnings (loss) per share would have been reduced to the pro forma
amounts indicated below:
2006
2005
Stock
option expense included in compensation expense
$
(2,305
)
$
(2,333
)
Net
earnings (loss), as reported
$
50,287
$
(28,223
)
Additional
expense that would have been recorded if all outstanding stock options
granted during 2002 had been expensed
(2,579
)
(1,626
)
Pro
forma net earnings (loss)
$
47,708
$
(29,849
)
Earnings
(loss) per share:
Basic,
as reported
$
1.36
$
(0.77
)
Basic,
pro forma
1.29
(0.81
)
Diluted,
as
reported
1.33
(0.77
)
Diluted,
pro
forma
1.27
(0.81
)
(c)Contributed
surplus:
Changes
in contributed surplus for the years ended December 31, 2006 and 2005 were
as
follows:
2006
2005
Contributed
surplus, beginning of year
$
10,861
$
8,088
Stock
option expense (b)
2,305
2,333
Adjustment
relating to stock options exercised
(840
)
(5
)
Restricted
stock program
(445
)
445
Contributed
surplus, end of year
$
11,881
$
10,861
32
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
11.Shareholders'
equity (continued):
(d)
Earnings
(loss) per share:
Basic
earnings (loss) per share is calculated by dividing net earnings (loss) by
the
weighted average number of VMVS and LVS outstanding during the year. Potentially
issuable LVS are excluded from the calculation of basic earnings (loss) per
share, but are included in the calculation of diluted earnings (loss) per share
by application of the "treasury stock method", which takes into account the
dilution relating to LVS issuable under the Corporation's stock option plan,
and
by application of the "if-converted method", which takes into account the
potential dilution relating to the conversion of the Corporation's convertible
notes.
A
reconciliation of net earnings (loss) and the weighted average number of VMVS
and LVS used to calculate basic earnings (loss) per share and diluted earnings
(loss) per share is as follows:
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 (loss) per share calculation excluded the effect of the assumed
conversions of 804,436 stock options to LVS, under the Corporation's stock
option plan, during the year ended December 31, 2006, as the inclusion of these
conversions resulted in an anti-dilutive effect. As the Corporation
incurred a net loss for the year ended December 31, 2005, all 4,485,463
outstanding stock options were excluded from the calculation of diluted loss
per
share for 2005. 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 years ended December 31, 2006 and 2005.
33
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
11.Shareholders'
equity (continued):
(e) Equity adjustment from foreign currency
translation:
Changes
in equity adjustment from foreign currency translation for the years ended
December 31, 2006 and 2005 were as follows:
2006
2005
Balance,
beginning of year
$
87,774
$
98,783
Changes
in exchange rates used to translate the Corporation's net investment
in
foreign self-sustaining subsidiaries
19,040
(29,393
)
Changes
arising from US dollar reporting currency
(2,316
)
18,384
Balance,
end of year
$
104,498
$
87,774
12.Other
expenses, net:
2006
2005
Costs
related to pending arrangement transaction (note 17)
$
(3,452
)
$
-
Asset
provisions and write-downs (a)
(3,074
)
(32,284
)
Foreign
exchange gain (loss) (note 13)
1,343
(24,632
)
Unrealized
swap derivative gain (note 10(c))
752
-
Gain
on disposition of assets (b)
620
3,175
Loss
on retirement benefit plan transition (c) (note 14(b))
-
(35,467
)
$
(3,811
)
$
(89,208
)
(a) Asset
provisions and write-downs of $3,074 for the year ended December 31, 2006
relates primarily to a write-down on investments in hotel partnerships and
corporations. In 2005, it included a provision for loss of $8,829 on long-term
receivables, a write-down of $17,853 on investments in hotel partnerships and
corporations, a write-down of $5,105 on investment in management contracts
and
other provisions of $497.
34
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
12.Other
expenses, net (continued):
(b)
Gain
on disposition of assets for the year ended December 31, 2006 includes
a
net gain of $620 (2005 - net gain of $9,337) 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. In 2005, it also included a loss of
$6,162
on the assignment of leases and the sale of related assets of The
Pierre
(note 14(c)(i)).
(c) For
the
year ended December 31, 2005, loss on retirement benefit plan transition
includes past service costs recognized on curtailment of $1,595, actuarial
loss
recognized on plan settlement of $1,497, realignment of pension liability
between the Corporation and managed hotels and resorts of $12,331, costs
relating to settlement with employees of $10,321 and other settlement costs
of
$9,723.
13.Foreign
exchange gain (loss):
During
2006, the Corporation recorded a net foreign exchange gain of $1,343 (2005
- net
foreign exchange loss of $24,632), which is included in “Other expenses, net”.
The net foreign exchange gain in 2006 and the net foreign exchange loss in
2005
related primarily to the foreign currency translation gains and losses on
unhedged net monetary asset and liability positions, primarily in US dollars,
pounds sterling, euros and Australian dollars, and local currency foreign
exchange gains and losses on net monetary assets incurred by the Corporation’s
designated foreign self-sustaining subsidiaries.
As
at
December 31, 2006, the Corporation has 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 (2005 - $21,189 at a weighted average
forward exchange rate of 1.16 maturing over the period to June 2006). The
Corporation entered into these contracts to protect itself in the event of
a
strengthening Canadian currency as it relates to general and administrative
expenditures incurred by the Corporation, which are denominated primarily in
Canadian dollars. These foreign exchange forward contracts are being
marked-to-market on a monthly basis with the resulting changes in fair value
being recorded as a foreign exchange gain or loss. This resulted in a foreign
exchange loss of $544 being recorded in 2006 (2005 - foreign exchange loss
of
$127).
35
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
14.Commitments
and contingencies:
(a)Lease
commitments:
The
Corporation has entered into lease agreements for certain hotel properties
and
corporate offices for periods up to the year 2054.
(i) Future
minimum lease payments for Four Seasons Hotel Vancouver and certain corporate
offices (but exclusive of any contingent rentals, occupancy costs, and lease
commitments relating to Four Seasons Hotel London, which is discussed below),
are as follows:
2007
$
4,824
2008
3,815
2009
3,206
2010
3,012
2011
2,780
Subsequent
to 2011
20,266
$
37,903
(ii) The
Corporation is the tenant of the land and premises constituting Four Seasons
Hotel London pursuant to the terms of a lease (the "FS Lease") expiring on
January 28, 2054. The FS Lease is a continuing obligation which survived
the sale by the Corporation of its ownership interest in the hotel. The
Corporation is also a party to a sublease of the hotel with a third party
(the "Sub-Tenant") on whose behalf the Corporation manages the hotel.
Currently, ₤3.9 million of annual rent is payable by the Sub-Tenant to the
Corporation pursuant to the sublease and is payable out of the operating
accounts of the hotel. The same amount of rent is payable by the Corporation
under the FS Lease.
36
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
14.Commitments
and contingencies (continued):
Historically,
hotel operating cash flow has been more than sufficient to meet the rent
obligation. The Corporation has not been required to make payment of any amount
of rent under the FS Lease that has not first been paid to the Corporation
under
the sublease. In the event of a non-payment of rent under the sublease, the
Sub-Tenant would forfeit the sublease. The ongoing management of the hotel
by
the Corporation is subject to a non-disturbance agreement with the senior lender
of the Sub-Tenant. Future minimum lease payments of the hotel, exclusive of
any
contingent rentals and occupancy costs, are as follows:
2007
$
7,828
2008
7,836
2009
7,836
2010
7,836
2011
7,836
Subsequent
to 2011
329,782
$
368,954
(b)
Retirement
benefit plan commitments:
The
Corporation maintains an unfunded multiemployer, non-contributory, defined
benefit retirement plan on behalf of the Corporation and the owners of certain
managed properties. This plan provides retirement benefits for certain senior
executives of the Corporation, as well as for hotel and resort general managers,
based on years and level of service and annual salary.
During
2005, the Corporation transitioned the majority of its senior executives and
hotel and resort general managers from this unfunded defined benefit retirement
plan to a fully funded retirement plan based on a defined contribution format.
The change in the retirement plan was made to improve the certainty and
predictability related to the cost of the retirement benefits.
37
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
14.Commitments
and contingencies (continued):
The
transition to this defined contribution retirement plan resulted in a cash
funding by the Corporation in 2005 of $36,029 and a pre-tax accounting charge
of
$35,467, which is recorded in "Other expenses, net". During the year ended
December 31, 2006, the Corporation incurred a pension expense of $2,160 (2005
-
$2,243) related to the defined contribution retirement plan.
The
Corporation continues to maintain the unfunded multiemployer, non-contributory,
defined benefit retirement plan on behalf of four active executives and 14
retired executives and general managers, as well as the owner of two of its
managed properties. As at December 31, 2006, the Corporation has an accrued
defined benefit liability of $26,324 (2005 - $25,843) in respect of this plan,
which is included in "Long-term obligations". This accrued defined benefit
liability excludes the defined benefit obligation of the owner of the two
managed properties for their current general managers.
The
measurement date for the accrued benefit obligation was December 31, 2006 (2005
- December 31, 2005). The Corporation uses the corridor method to amortize
actuarial gains and losses (such as changes in actuarial assumptions and
experience gains and losses). Under the corridor method, amortization is
recorded only if the accumulated net actuarial gains or losses exceed 10% of
the
accrued benefit obligation.
The
transition to the defined contribution retirement plan in 2005 resulted in
both
a curtailment and a settlement of defined benefit obligations and the
Corporation accounted for the curtailment before it accounted for the
settlement. The Corporation amortizes past service costs from plan amendments
on
a straight-line basis over the expected average remaining service period of
employees who were active on the day of the amendment.
38
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
14.Commitments
and contingencies (continued):
Information
relating to the defined benefit retirement plan for the years ended December31,2006 and 2005 based on projections of employees' compensation levels to the
date
of retirement were as follows:
2006
2005
Accrued
benefit obligation, beginning of year
$
31,377
$
58,702
Change
in accrued benefit obligation:
Service
cost
182
1,927
Past
service cost
-
3,507
Interest
cost
1,485
3,401
Benefits
paid
(1,331
)
(1,129
)
Actuarial
loss
(980
)
15,712
Curtailment
-
(14,720
)
Plan
settlement
-
(37,834
)
Foreign
currency exchange rate changes
29
1,811
Accrued
benefit obligation, end of year
30,762
31,377
Unamortized
past service cost
(953
)
(1,040
)
Unamortized
actuarial loss for changes in assumptions
(3,090
)
(4,099
)
Liability
belonging to managed properties
(395
)
(395
)
Accrued
benefit liability, end of year
$
26,324
$
25,843
Under
the defined benefit retirement plan, the benefits expected to be paid in each
of
the next five years, and in the aggregate for the five fiscal years thereafter,
to retired employees of the Corporation, including benefits attributable to
estimated future employee service, are approximately: 2007 - $1,300; 2008 -
$1,300; 2009 - $1,500; 2010 - $1,600; 2011 - $1,600; 2012 to 2016 -
$14,000.
39
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
14.Commitments
and contingencies (continued):
The
Corporation incurred a defined benefit expense for the year ended December31,2006 of $1,816 (2005 - $6,018). In 2005, defined benefit expense included past
service cost recognized on curtailment of $1,595, actuarial loss recognized
on
plan settlement of $1,497 and other costs of $925, all of which are included
in
"Loss on retirement benefit plan transition" (note 12(c)), and pension
expense of $2,001.
(c)
Guarantees,
commitments and indemnifications:
(i) Guarantees
and commitments:
As
at
December 31, 2006, the Corporation had provided certain guarantees in connection
with properties under its management. These include guarantees in respect of
four projects totalling a maximum of approximately $21,900, as well as a
guarantee of $300 for relocation costs for certain employees. The Corporation
has a lease guarantee in respect of Four Seasons Hotel Prague of approximately
€0.9 million. To the extent it is called upon to honour any one of these
guarantees, the Corporation generally has either the right to be repaid from
hotel operations and/or has various forms of security or recourse to the owner
of the property.
In
addition, in 2006, the Corporation also had four other commitments totalling
approximately $11,200 to four properties under its management. During 2005,
the
Corporation assigned its leases and sold the related assets of The Pierre.
As
part of the sale, in accordance with statutory provisions, the purchaser agreed
to assume a portion of the Corporation's contribution history with a
multiemployer pension fund for the unionized hotel employees (the "NYC
Pension"). This permitted the Corporation to withdraw from the NYC Pension
without incurring a withdrawal liability estimated at $10,700.
If
the
purchaser withdraws as a result of the lease cancellation by the landlord in
certain circumstances in 2008 or 2011, the Corporation has agreed to indemnify
the purchaser for that portion of the withdrawal liability relating to their
assumption of the Corporation's contribution history. The amount of any
potential future liability resulting from this indemnity is not determinable
at
this time as it would be based upon future events related to the NYC
Pension.
41
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
14.Commitments
and contingencies (continued):
If
the
purchaser withdraws from the NYC Pension prior to 2011 in any circumstances
other than those described above and does not pay its withdrawal liability,
the
Corporation remains secondarily liable for its withdrawal liability up to an
amount of $10,700. The Corporation has been indemnified by the purchaser for
any
such liability.
The
Corporation believes that the likelihood of it being required to make a payment
is remote, and no amount has been recorded as at December 31, 2006 in respect
of
a potential NYC Pension withdrawal liability.
The
Corporation does not expect to fund any of these commitments during 2007. The
Corporation's assessment of its potential liability for such matters could
change as a result of, among other things, the associated risks and
uncertainties.
(ii)
Disposition
indemnification arrangements:
In
connection with the sale of all or a part of its interest in a property, the
Corporation and its subsidiaries may agree to provide an indemnify against
claims relating to breaches of specific covenants or representations and
warranties. The maximum amount of the indemnification in these transactions
is
generally limited to the purchase price paid for the interest being purchased.
The nature of these indemnities prevents the calculation of an exact amount
that
may be payable to the indemnified parties.
(iii)
Director
and officer indemnification arrangements:
To
the
extent permitted by law, the Corporation and its subsidiaries indemnify
individuals that are, or have been, directors or officers against certain claims
that may be made against them as a result of their being, or having been, a
director or officer at the request of the Corporation or its subsidiaries.
The
Corporation has documented these indemnification arrangements in agreements
with
each of its directors and certain of its senior officers. The Corporation has
purchased directors' and officers' liability insurance that may be available
in
respect of certain of these claims.
42
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
14.Commitments
and contingencies (continued):
(iv) Other
indemnification arrangements:
In
the
ordinary course of their business, the Corporation and its subsidiaries enter
into other agreements with third parties that may contain indemnification
provisions pursuant to which the parties to the agreements agree to indemnify
one another if certain events occur (such as, but not limited to, changes in
laws and regulations or as a result of litigation claims or liabilities which
arise in respect of tax or environmental matters).
The
terms of the Corporation's indemnification provisions vary based on the
contract, which (together with the fact that any amounts that could be payable
would be dependent on the outcome of future, contingent events, the nature
and
likelihood of which cannot be determined at this time) precludes the Corporation
from making a reasonable estimate of the maximum potential amount the
Corporation and its subsidiaries could be required to pay to counterparties.
The
Corporation believes that the likelihood that it or its subsidiaries would
incur
significant liability under these obligations is remote. Historically, the
Corporation and its subsidiaries have not made any significant payments under
such indemnification agreements. No amount has been recorded in the consolidated
financial statements with respect to these indemnification provisions. The
Corporation's assessment of its potential liability could change in the future
as a result of currently unforeseen circumstances.
(d) Other
commitments and contingencies:
(i) In
the
ordinary course of its business, the Corporation is named as a defendant in
legal proceedings resulting from incidents taking place at hotels owned or
managed by it. The Corporation maintains comprehensive liability insurance
and
also requires hotel owners to maintain adequate insurance coverage. The
Corporation believes such coverage to be of a nature and amount sufficient
to
ensure that it is adequately protected from suffering any material financial
loss as a result of such claims.
(ii)
A
number of the Corporation's management contracts are subject to certain
performance tests which, if not met, could allow a contract to be terminated
prior to its maturity. The Corporation generally has various rights to cure
any
such defaults to avoid termination.
43
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
14.
Commitments
and contingencies (continued):
(iii) The
Corporation is currently in dispute with the owner of Four Seasons Hotel Caracas
(note 3(d)) over a variety of matters.
15.Fair
values of financial instruments:
The
estimated fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than a forced or liquidation sale. These estimates, although based on
the
relevant market information about the financial instrument, are subjective
in
nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
As
cash
equivalents, current receivables, current accounts payable and certain other
short-term financial instruments are all short-term in nature, their carrying
amounts approximate fair values.
The
fair value of the Corporation's convertible notes is based on market quotes
obtained from one of the Corporation's financial advisors.
Other
financial instruments held by the Corporation include long-term receivables
due
from owners of managed hotels (note 3). The Corporation does not have plans
to sell these loans to third parties and expects to realize or settle them
in
the ordinary course of business. There is no active and liquid market for these
instruments.
The
Corporation enters into foreign exchange forward contracts that oblige it to
buy
or sell specific amounts of foreign currencies at set future dates at
predetermined exchange rates. Because a significant portion of the Corporation's
revenues is derived in foreign currencies (primarily US dollars) and
expenditures incurred by the Corporation for its management operations are
denominated primarily in Canadian dollars, the Corporation enters into such
contracts from time to time to protect itself in the event of a strengthening
Canadian currency. Management estimates future foreign currency cash flows
on an
ongoing basis, based on its projections of foreign currency-denominated
management fees and other transactions. Management negotiates foreign exchange
forward contracts in proportion to the magnitude and timing of these cash
flows.
44
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
15.Fair
values of financial instruments (continued):
As
at
December 31, 2006, the Corporation had sold forward $39,068 of US dollars to
receive Canadian dollars at a weighted average forward exchange rate of 1.11,
under 125 foreign exchange forward contracts, maturing over the period ending
April 2008 (2005 - $21,189 at a weighted average forward exchange rate of 1.16,
under 24 forward contracts, maturing over the period ending June 2006). The
fair
value of foreign exchange forward contracts is estimated from quotes obtained
from the Corporation's counterparties for the same or similar financial
instruments.
The
fair values of financial instruments are as follows:
The
carrying amount of the convertible notes includes the amounts allocated
to
both long-term obligations and shareholders' equity. It excludes,
however,
the offering expenses and underwriters' commission related to the
shareholders' equity component of the notes of $1,326, which are
recorded
in "Shareholders' equity".
45
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
16.Segmented
information:
The
Corporation’s strategy is to focus on Management Operations rather than
Ownership Operations. Four Seasons Hotel Vancouver is its only remaining hotel
whose results the Corporation currently consolidates. As a result, commencing
January 1, 2006, corporate expenses are reflected as general and administrative
expenses in the consolidated statements of operations for the year ended
December 31, 2006. Corporate expenses for the year ended December 31, 2005
that
previously were included in its Ownership Operations segment have been
reclassified to its Management Operations segment and included in general and
administrative expenses in the consolidated statements of
operations.
(a)
Operating
earnings (loss) before other items:
Revenues
have been allocated to specific geographic segments based on the location of
each property.
2006
2005
Management
Ownership
Management
Ownership
Operations
Operations
Total
Operations
Operations
Total
Revenues:
United
States
$
62,582
$
2,589
$
65,171
$
54,301
$
35,539
$
89,840
Other
Americas/Caribbean
17,367
30,785
48,152
15,157
29,936
45,093
Europe
25,675
-
25,675
20,638
-
20,638
Asia/Pacific
19,147
-
19,147
14,643
-
14,643
Middle
East
16,616
-
16,616
10,150
-
10,150
141,387
33,374
174,761
114,889
65,475
180,364
Reimbursed
costs
78,664
-
78,664
67,974
-
67,974
220,051
33,374
253,425
182,863
65,475
248,338
Expenses:
General
and administrative expenses
(62,428
)
-
(62,428
)
(58,148
)
-
(58,148
)
Hotel
ownership cost of sales and expenses
-
(32,212
)
(32,212
)
-
(66,086
)
(66,086
)
Reimbursed
costs
(78,664
)
-
(78,664
)
(67,974
)
-
(67,974
)
(141,092
)
(32,212
)
(173,304
)
(126,122
)
(66,086
)
(192,208
)
Operating
earnings (loss) before other
items
$
78,959
$
1,162
$
80,121
$
56,741
$
(611
)
$
56,130
46
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
16.Segmented
information (continued):
(b)
Total
assets:
2006
2005
United
States
$
231,022
$
228,565
Other
Americas/Caribbean
408,281
359,536
Europe
234,888
203,004
Asia/Pacific
99,531
78,858
Middle
East
18,245
10,238
$
991,967
$
880,201
17.Subsequent
event:
On
February 12, 2007, the Corporation announced that it 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 the
Corporation’s 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.
47
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
17.Subsequent
event (continued):
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 the Corporation’s 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 its 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.
48
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
17.Subsequent
event (continued):
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 the 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, FSHL, 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).
49
FOUR
SEASONS HOTELS INC.
Notes
to Consolidated Financial Statements (continued)
(In
thousands of US dollars except per share amounts)
17.
Subsequent
event (continued):
(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, the Corporation 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.
50
Dates Referenced Herein and Documents Incorporated by Reference
