FS Four Seasons Hotel

Investments in Hotel Partnerships and Corporations To fund capital requirements in properties in which we have an interest (primarily in properties under construction or development), we invested $3.0 million during the year ended December 31, 2006 to an existing hotel in which we have a 15% equity interest, and received cash of $2.8 million from another investment. In addition, we disposed of our investment in the properties in Four Seasons Hotel London, Four Seasons Resort Aviara and Four Seasons Hotel Sydney, and our remaining equity interest in Four Seasons Resort Scottsdale at Troon North, and received net cash proceeds in 2006 of $16.6 million. For the year ended December 31, 2005, investments of $8.7 million included Four Seasons Resort Jackson Hole and Four Seasons Hotel Silicon Valley at East Palo Alto, with our equity investments in these properties being 10% and 15%, respectively, at December 31, 2005. In 2005, we realized cash of $24.6 million, from the sales of approximately 53% of our equity interest in Four Seasons Hotel Shanghai, 80% of our equity interest in Four Seasons Residence Club Scottsdale at Troon North, and all of our interests in Four Seasons Hotel Cairo at Nile Plaza and Four Seasons Hotel Amman. During the three months ended December 31, 2006, we received cash of $0.5 million from one of our investments. In addition, we disposed of our investment in the properties in Four Seasons Hotel London, Four Seasons Resort Aviara and Four Seasons Hotel Sydney, and received net cash proceeds in 2006 of $15.9 million. During the three months ended December 31, 2005, on a net basis, we realized cash from the disposition of our investments of $14.0 million, reflecting the sale of our interests in Four Seasons Hotel Cairo at Nile Plaza and Four Seasons Hotel Amman, and the sale of a portion of our interest in Four Seasons Hotel Miami. Investment in Management Contracts For the year ended December 31, 2006, we funded an aggregate of $17.5 million related to our investment in management contracts. These included amounts funded to Four Seasons Hotel Austin, Four Seasons Hotel Singapore and Four Seasons Resort Maldives at Landaa Giraavaru. For the three months ended December 31, 2006, we funded an aggregate of $0.7 million, primarily related to our investment in management contracts. For the year ended and the three months ended December 31, 2005, we received total net proceeds of $10.5 million and $11.1 million, respectively, related to our investments in management contracts, including our property in Canary Wharf and our property in Newport Beach (which we ceased managing in October 2005). Of the amounts that were invested in management contracts during 2006 and 2005, there was no significant investment in any individual management contract. Fixed Assets Our capital expenditures were $22.2 million for the year ended December 31, 2006 and $6.0 million in the three months ended December 31, 2006, as compared to $18.7 million and $5.9 million, respectively, for the same periods in 2005. In 2004, we commenced construction on our Toronto corporate office expansion, which is scheduled to be completed during 2007. Capital expenditures related to this expansion were $20.9 million in 2006 and $14.7 million in 2005. Costs to complete the facility are estimated at $9.1 million and are expected to be fully incurred in 2007. During the three months ended December 31, 2006 and 2005, our capital expenditures were $6.0 million and $5.9 million, respectively, which primarily related to our Toronto corporate office expansion. Owners of properties that we manage are contractually responsible for funding the capital requirements of the properties, including guest room and common area renovations, and for maintaining capital reserves to fund ongoing annual maintenance capital expenditures required by the management agreements. The owners annually spend an average of between 3% and 5% of hotel gross revenues on capital expenditures to maintain properties at the Four Seasons standard (other than in newly constructed or recently renovated properties where the annual amounts generally range from 1% to 2% in the initial years of operation following opening and major refurbishment). Capital expenditures are funded primarily by working capital generated from property operations and through advances from the owners. Our share of capital expenditures in 2006 and 2005 was immaterial for the properties in which we have a minority equity interest or pursuant to management contract obligations. Financing Activities In 2006, we received proceeds of $36.3 million relating to the exercise of options by employees to purchase 746,310 Limited Voting Shares, as compared to option exercise proceeds of $7.0 million in 2005 relating to the purchase of 32,380 Limited Voting Shares. We paid $3.4 million and $3.1 million in dividends during 2006 and 2005, respectively, based on a dividend policy of C$0.11 per Limited Voting Share and C$0.055 per Variable Multiple Voting Share per annum, paid semi-annually in January and July. Outstanding Share Data ------------------------------------------------------------------------- Designation Outstanding as at March 9, 2007 ------------------------------------------------------------------------- Variable Multiple Voting Shares(i) 3,725,698 ------------------------------------------------------------------------- Limited Voting Shares 33,774,038 ------------------------------------------------------------------------- Options to acquire Limited Voting Shares(ii): ------------------------------------------------------------------------- Outstanding 3,548,799 ------------------------------------------------------------------------- Exercisable 2,904,419 ------------------------------------------------------------------------- Convertible Senior Notes issued June 2004 and due 2024(iii) $250.5 million(iv) ------------------------------------------------------------------------- (i) Convertible into Limited Voting Shares at any time at the option of the holder on a one-for-one basis. (ii) As disclosed in note 11(a) to our annual consolidated financial statements for the year ended December 31, 2006, pursuant to an agreement approved by the shareholders in 1989, Four Seasons has agreed to make a payment to Mr. Isadore Sharp on an arm's length sale of control of Four Seasons Hotels Inc. Please see the "Subsequent Event" section. (iii) The terms of the convertible senior notes are more fully described under "Liquidity and Capital Resources-Convertible Notes". (iv) This amount is equal to the issue price of the convertible senior notes issued in June 2004 and due 2024 plus accrued interest calculated at 1.875% per annum. Financial Instruments In January 2005, the CICA issued three new accounting standards related to financial instruments: Section 3855, "Financial Instruments - Recognition and Measurement", Section 3865, "Hedges", and Section 1530, "Comprehensive Income". These new standards are effective for fiscal years beginning on or after October 1, 2006. See description under "Recent Canadian Accounting Standards Issued but Not Yet Adopted". Foreign Exchange Forward Contracts We use derivative financial instruments in the management of our foreign currency exposures, when we believe it is appropriate. We do not use derivative financial instruments for trading or speculative purposes. Because a significant portion of our revenues is generated in foreign currencies (the most significant currency being the US dollar, our reporting currency) and the expenditures we incur for our management operations are denominated primarily in Canadian dollars, we enter into foreign exchange forward contracts from time to time as a hedge against foreign currency fluctuations. We estimate future foreign currency cash flows on an ongoing basis and enter into foreign exchange forward contracts in proportion to the magnitude and timing of these anticipated cash flows. For a description of foreign currency-related risks, see "Operating Risks - Currency Exposure". We are also subject to credit risks related to the counterparties to our foreign exchange forward contracts. As at December 31, 2006, we had foreign exchange forward contracts in place to sell forward $39.1 million of US dollars to receive Canadian dollars at a weighted average forward exchange rate of 1.11 Canadian dollars to a US dollar maturing over the period to April 2008. These foreign exchange forward contracts are marked-to-market each period, with the resulting changes in fair values being recorded as a foreign exchange gain or loss. As of December 31, 2006, the fair value of the outstanding contracts was a loss of $1.5 million and has been included in accounts payable and accrued liabilities on our consolidated balance sheet and in other expenses, net in our consolidated statements of operations. Currency and Interest Rate Swap In April 2005, we entered into a currency and interest rate swap agreement with a duration until July 30, 2009 pursuant to which we had agreed to receive interest at a fixed rate of 5.33% per annum on an initial notional amount of $215.8 million and pay interest at a floating rate of six-month Canadian Bankers Acceptances ("BA") in arrears plus 1.1% per annum on an initial notional amount of C$269.3 million. On July 30, 2009, we would pay C$311.8 million and receive $250.0 million under the swap. We had designated the swap as a fair value hedge of our convertible senior notes (see "Liquidity and Capital Resources - Convertible Notes" above). A liability of $17.1 million had been recorded in our accounts in 2005 related to the swap as a fair value hedge, offsetting the translation gain on the underlying debt obligation. Interest income and interest expense recognized on the swap agreement during 2005 was $8.0 million and C$8.3 million, respectively. As discussed in "Convertible Notes" above, in December 2006, we terminated 80% of the notional amount of the currency component of the swap relating to the final exchange of principal. The amended swap is being marked-to-market on a monthly basis and accrued under "Long-term obligations", with the resulting changes in fair values being recognized in "Other expenses, net". The fair value of the swap at December 31, 2006 was $6.8 million and has been accrued. During 2006, a gain of $0.8 million was recognized on the marked-to-market valuation. As part of the interest rate component of the swap agreement, we receive a fixed interest rate amount in exchange for our payment of a floating interest rate charge on the notional Canadian value of the swap. As a result, the amount we are obligated to pay is subject to changes in the six-month BA rate. By way of example, a 1% increase in the six-month BA rate would result in an increase in interest expense, on an annualized basis, of approximately C$2.9 million. Conversely, a 1% decrease in the six-month BA rate would result in a decrease in interest expense, on an annualized basis, of approximately C$2.9 million. We try to manage our exposure to changes in short-term interest rates by investing our available cash balances in short-term securities, to provide a partial offset to changes in interest expense, however, there can be no assurance that this practice, which is dependent upon cash balances available for investment and the short-term interest rate spreads between Canada and the US, will be effective. Other Financial Instruments In addition to the foreign exchange forward contracts and the currency and interest rate swap, we had the following financial instruments at December 31, 2006: cash equivalents (see "Liquidity and Capital Resources"), long-term receivables (see "Balance Sheet Review and Analysis - Long-Term Receivables"), convertible senior notes (see "Liquidity and Capital Resources - Convertible Notes") and short-term financial instruments, including current receivables and current accounts payable. Fair Value of Financial Instruments The estimated fair value of a financial instrument is the amount at which the instrument could be exchanged in a transaction between willing parties, other than a forced or liquidation sale. These estimates, although based on the relevant market information about the financial instrument, are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could materially affect the estimates. As cash equivalents, current receivables, current accounts payable and certain other short-term financial instruments are all short-term in nature, their carrying amounts approximate fair values. The fair value of our convertible senior notes is based on market quotes obtained from one of our financial advisors. The fair value of foreign exchange forward contracts is estimated from quotes obtained from our counterparties for the same or similar financial instruments. We do not have plans to sell loans receivable to third parties, and we expect to realize or settle them in the ordinary course of business. There is no active and liquid market for these instruments. The fair values of our financial instruments are as follows: ------------------------------------------------------------------------- Estimated Carrying (in millions of dollars) fair value amount ------------------------------------------------------------------------- 2006: ------------------------------------------------------------------------- Convertible senior notes(i) $ (307.5) $ (267.7) ------------------------------------------------------------------------- Currency and interest rate swap (6.8) (6.8) ------------------------------------------------------------------------- Foreign exchange forward contracts (1.5) (1.5) ------------------------------------------------------------------------- 2005: ------------------------------------------------------------------------- Convertible senior notes(i) $ (243.0) $ (260.4) ------------------------------------------------------------------------- Currency and interest rate swap (24.0) (17.1) ------------------------------------------------------------------------- Foreign exchange forward contracts (0.1) (0.1) ------------------------------------------------------------------------- (i) The carrying amount of the convertible senior notes includes the amounts allocated to both long-term obligations and shareholders' equity. It excludes, however, the offering expenses and underwriters' commission related to the shareholders' equity component of the notes of $1.3 million in each of 2006 and 2005, which are recorded in shareholders' equity. Off-Balance Sheet Arrangements In addition to the financial instruments discussed above we have various off-balance sheet arrangements, the most significant of which are discussed below. Guarantees and Commitments As at December 31, 2006, we had provided certain guarantees in connection with properties under our management. These include guarantees in respect of four projects totalling a maximum of approximately $21.9 million, as well as a guarantee of $0.3 million for relocation costs for certain employees. We have a lease guarantee in respect of Four Seasons Hotel Prague of approximately (euro)0.9 million (see note 14(c) to our consolidated financial statements). To the extent we are called upon to honour any one of these guarantees, we generally have either the right to be repaid from hotel operations and/or have various forms of security or recourse to the owner of the property. In addition, in 2006, we also had four other commitments totalling approximately $11.2 million to four properties under our management. During 2005, we assigned our lease and sold the related assets of The Pierre. As part of the sale, in accordance with statutory provisions, the purchaser agreed to assume a portion of our contribution history with a multiemployer pension fund for the unionized hotel employees (the "NYC Pension"). This permitted us to withdraw from the NYC Pension without incurring a withdrawal liability estimated at $10.7 million. In certain limited circumstances, as a part of our agreement, we may be required to pay a portion of the purchaser's withdrawal liability, if any. We believe that the likelihood of our being required to make a payment is remote, and no amount has been recorded as at December 31, 2006 in respect of a potential NYC Pension withdrawal liability. We do not expect to fund any of these guarantees or commitments during 2007. Our assessment of our potential liability for such matters could change as a result of, among other things, the associated risks and uncertainties. Indemnities Disposition Indemnification Arrangements In connection with the sale of all or a part of our interest in a property, we may agree to provide an indemnity against claims relating to breaches of specific covenants or representations and warranties. The maximum amount of the indemnification in these transactions is generally limited to the purchase price paid for the interest being purchased. The nature of these indemnities prevents the calculation of an exact amount that may be payable to the indemnified parties. Director and Officer Indemnification Arrangements To the extent permitted by law, we indemnify individuals that are, or have been, directors or officers against certain claims that may be made against them as a result of their being, or having been, a director or officer at our request. We have documented these indemnification arrangements in agreements with each of our directors and certain of our senior officers. We have purchased directors' and officers' liability insurance that may be available in respect of certain of these claims. Other Indemnification Arrangements In the ordinary course of our business, we enter into other agreements with third parties that may contain indemnification provisions pursuant to which the parties to the agreements agree to indemnify one another if certain events occur (such as, but not limited to, changes in laws and regulations or as a result of litigation claims or liabilities that arise in respect of tax or environmental matters). The terms of our indemnification provisions vary based on the contract, a fact which (together with the fact that any amounts that could be payable would be dependent on the outcome of future, contingent events, the nature and likelihood of which cannot be determined at this time) precludes us from making a reasonable estimate of the maximum potential amount we could be required to pay to counterparties. We believe that the likelihood that we would incur significant liability under these obligations is remote. Historically, we have not made any significant payments under such indemnification arrangements. No amount has been recorded in the consolidated financial statements with respect to these indemnification provisions. Our assessment of our potential liability could change in the future as a result of currently unforeseen circumstances. Looking Ahead Our business objectives for 2007 as a public company are to continue to focus on those aspects of our business that we believe provide the greatest potential for maximizing long-term shareholder value. New Openings In addition to Four Seasons Resort Koh Samui, which opened in February 2007, we expect to open 13 new hotels and resorts over the course of 2007 and 2008. The average term of the management contracts for these properties is 56 years, and these management contracts are expected to provide us with significant additional long-term fee income. During 2007, we expect to fund in the range of $50.0 million to $60.0 million in connection with obtaining new or enhancing existing management agreements. Service During 2007, we intend to maintain our focus on value to our guests by continuing to deliver our exceptional quality of service, while at the same time controlling costs. We also intend to focus on enhancing our premium service quality and rate premiums at each of the 12 Four Seasons hotels and resorts that opened over the past 24 months and the new Four Seasons projects that are expected to open in 2007. We expect that the strong economic environment should translate into continued strength in travel demand, particularly business travel. We also expect that leisure travel demand will remain strong. On a full-year basis, we expect our average daily room rates for 2007 to exceed the rates achieved in 2006. Operating Environment If the travel trends that we experienced in 2006 continue and exchange rates remain at current levels, we expect RevPAR, on a US dollar basis, for worldwide Core Hotels for the full year 2007 to increase in the range of 9% to 11%, as compared to 2006. We expect that this improvement will result from both occupancy and pricing improvements. If current trends continue, we expect the full-year gross operating margins of our worldwide Core Hotels to increase in the range of 175 to 200 basis points for the full year of 2007, as compared to the full year of 2006. Management Operations We expect full year hotel management fee revenues to grow in line with our full year RevPAR growth expectations for 2007. Assuming no significant changes to the US to Canadian dollar exchange rate, we expect our general and administrative expenses to increase in the range of 8% to 10% for the full year 2007 as compared to full year 2006. Subsequent Event Arrangement Transaction On February 12, 2007, we announced that we had entered into a definitive acquisition agreement (the "Acquisition Agreement") to implement a previously announced proposal to take FSHI private at a price of $82.00 cash per Limited Voting Share (the "Arrangement Transaction"). Following completion of the Arrangement Transaction, FSHI would be owned by affiliates of Cascade Investment, L.L.C. ("Cascade") (an entity owned by William H. Gates III), Kingdom Hotels International ("Kingdom"), a company owned by a trust created for the benefit of His Royal Highness Prince Alwaleed Bin Talal Bin Abdulaziz Alsaud and his family, and Isadore Sharp (collectively the "Purchaser"). The Arrangement Transaction, which would be implemented by way of a court-approved plan of arrangement under Ontario law, has been approved unanimously by our Board (with interested directors abstaining) following the report and favourable, unanimous recommendation of the Special Committee of independent directors. In doing so, our Board determined that the arrangement is fair to the shareholders of FSHI (other than Mr. Sharp, Kingdom, Cascade, their respective directors and senior officers and any other "related parties", "interested parties" and "joint actors") and in the best interests of FSHI and authorized the submission of the arrangement to shareholders of FSHI for their approval at a special meeting of shareholders. Our Board also has determined unanimously (with interested directors abstaining) to recommend to FSHI shareholders that they vote in favour of the transaction. As previously disclosed, upon completion of the Arrangement Transaction, Triples Holdings Limited (which is Mr. Sharp's family holding company) would hold a significant continuing interest in FSHI and Mr. Sharp would, as Chairman and Chief Executive Officer, continue to be directly involved in all aspects of the operations and the strategic direction of Four Seasons, which will remain headquartered in Toronto. If the Arrangement Transaction is completed, Mr. Sharp will be entitled to realize proceeds of approximately $289.0 million related to a long-term incentive agreement that was approved by FSHI's shareholders before it was put in place in 1989. (See "Description of Share Capital - Sale of Control Agreement" in our annual information form.) A meeting of shareholders to consider the Arrangement Transaction is anticipated to take place in April 2007. To be implemented, the Arrangement Transaction will require approval by two-thirds of the votes cast by holders of Limited Voting Shares, voting separately as a class, and approval by Triples, as the sole holder of the Variable Multiple Voting Shares, voting separately as a class. Kingdom, Cascade and Triples have agreed to vote their Limited Voting Shares and Variable Multiple Voting Shares to approve the arrangement. The Arrangement Transaction also will require approval by a simple majority of the votes cast by holders of Limited Voting Shares, other than Mr. Sharp, Kingdom, Cascade, their respective directors and senior officers and any other "related parties", "interested parties" and "joint actors". In addition, the Arrangement Transaction will require approval by the Ontario Superior Court of Justice. The Arrangement Transaction also will be subject to certain other customary conditions, including receipt of a limited number of regulatory approvals. The Arrangement Transaction is not subject to any financing condition, and FSHI has been advised that commitments for the required debt financing have been received. FSHI has received from Cascade and Kingdom a limited guaranty of certain obligations of the Purchaser. There are certain risks inherent in the Arrangement Transaction which are described in the management information circular prepared in connection with the special meeting of shareholders; a copy of which will be available as part of FSHI's public filings at http://www.sedar.com/ and http://www.sec.gov/. Among other things, there are risks that the parties will not proceed with the Arrangement Transaction, that the ultimate terms of completion of the Arrangement Transaction will differ from those that currently are contemplated, and that the Arrangement Transaction will not be successfully completed for any reason (including the failure to obtain the required approvals or clearances from regulatory authorities). Copies of the Acquisition Agreement and certain related documents have been filed with Canadian securities regulators and with the United States Securities and Exchange Commission and are available at the Canadian SEDAR website at http://www.sedar.com/ and at the U.S. Securities and Exchange Commission's website at http://www.sec.gov/. The management information circular in connection with the special meeting of shareholders to consider the Arrangement Transaction is expected to be mailed to shareholders on or about the week of March 12, 2007. The management information circular will also be available as part of FSHI's public filings at http://www.sedar.com/ and http://www.sec.gov/. It is anticipated that the Arrangement Transaction, if approved by shareholders, will be completed in the second quarter of 2007. Interim Operations Pursuant to the Acquisition Agreement, FSHI agreed to certain customary negative and affirmative covenants relating to the operation of the business between the date of execution of the Acquisition Agreement and the closing of the Arrangement Transaction. Termination of the Acquisition Agreement FSHI and the Purchaser may terminate the Acquisition Agreement by mutual written consent and abandon the Arrangement Transaction at any time prior to the effective time. In addition, either FSHI or the Purchaser (and, in certain circumstances, only one of these parties) may terminate the Acquisition Agreement and abandon the Arrangement Transaction any time prior to the effective time of the Arrangement Transaction if certain specified events occur. The Acquisition Agreement provides that FSHI will pay a termination fee of $75.0 million less any amounts actually paid or required to be paid by FSHI to the Purchaser for reimbursement of expenses (as described below) if the Acquisition Agreement is terminated in certain circumstances. The Acquisition Agreement provides that the Purchaser will pay to FSHI a termination fee of $100.0 million if the Acquisition Agreement is terminated in certain circumstances. This obligation is guaranteed by Kingdom and Cascade. The Acquisition Agreement also provides that FSHI will pay to the Purchaser reasonable documented expenses of the Purchaser and its affiliates incurred in connection with the transactions contemplated by the Acquisition Agreement (up to a maximum of $10.0 million) if the Acquisition Agreement is terminated in certain circumstances. Impact of Finalization of Arrangement Transaction Although there is no certainty that the Arrangement Transaction, or any other transaction, will be completed or the timing of completion of the pending Arrangement Transaction, some of our arrangements and agreements may be impacted by the pending Arrangement Transaction, including the following: 1) Convertible Senior Notes: If the Arrangement Transaction is completed, FSHI will be required to make an offer to repurchase the notes at a purchase price equal to the principal amount of the notes plus a make whole premium (as described above), and an amount equal to any accrued and unpaid interest to, but not including, the date of repurchase. FSHI must make this offer by providing a notice to the trustee and the holders of notes within 30 days of the completion of the Arrangement Transaction. For further information, please refer to the section "Convertible Notes". Further information regarding the terms of our convertible senior notes is set out in the indenture pursuant to which the notes were issued. 2) Long-Term Incentive Arrangement: Pursuant to an agreement approved by the shareholders of FSHI in 1989, FSHI and its principal operating subsidiary, Four Seasons Hotels Limited, agreed to make a cash payment to Mr. Isadore Sharp, the Chief Executive Officer of FSHI upon an arm's length sale of control of FSHI. Under the plan of arrangement through which the Arrangement Transaction will be implemented, Mr. Sharp will receive the amount payable to him calculated in accordance with this long-term incentive plan in full satisfaction of all obligations to him under the plan. Based on an acquisition price of $82.00 for each Limited Voting Share and Variable Multiple Voting Share, and using the noon rate of exchange as quoted by the Bank of Canada for the conversion of Canadian dollars into United States dollars on March 9, 2007, Mr. Sharp would receive approximately $289.0 million in satisfaction of the obligations to him under the long-term incentive plan. 3) Stock Options: On February 9, 2007, the vesting of a total of 616,980 unvested stock options (which excludes those outstanding options with an unsatisfied performance condition) was accelerated for the purpose of allowing these individuals to participate in respect of such options in the Arrangement Transaction. If the Arrangement Transaction is not completed, the vesting of the 616,980 stock options will not be accelerated and the stock options will continue to vest in accordance with their terms in existence prior to the acceleration. Pursuant to the plan of arrangement in respect of the Arrangement Transaction, any options that have not been exercised prior to the effective time of the Arrangement Transaction will be transferred by each holder thereof to FSHI without any further act or formality in exchange for a cash amount equal to the excess, if any, of (a) the product of the number of Limited Voting Shares underlying the options held by such holder and $82.00, over (b) the sum of the exercise prices for each Limited Voting Share underlying the options held by such holder (converted at the applicable foreign exchange rate). 4) Other Arrangements and Agreements: Certain other arrangements and agreements are subject to "change of control" provisions. These include, among others, the following: (a) Under the terms of our current $125.0 million bank credit facility, a change of control triggers a default under the bank credit facility, and if not waived, would require the repayment of all amounts outstanding under this credit facility and would also result in the termination of this credit facility. As at March 9, 2007, no amounts were borrowed under this credit facility, but approximately $1.6 million of letters of credit were issued under this credit facility. (b) Pursuant to a cross default provision, a default under the bank credit facility, in turn, would cause a default under our currency and interest rate swap agreement. In such circumstances, the counterparty to the swap agreement may demand that the swap be terminated. As at March 9, 2007, the net amount that would be required to be paid by FSHI to the counterparty on termination was approximately $5.8 million. As at December 31, 2006, the estimated fair value of the swap on that date of $6.8 million is included in "Long-term obligations". 5) Costs Related to Pending Arrangement Transaction In connection with the pending Arrangement Transaction, we incurred costs of $3.4 million in 2006 and expect to incur costs of approximately $12.6 million during 2007, primarily relating to legal fees, filing fees, financial advisory, printing, proxy solicitation and consulting services. Four Seasons Portfolio The properties that we manage are comprised of luxury hotels and resorts, many of which include a residential component, whose target customers are principally business travelers, corporate and incentive groups and discerning leisure travelers. Our urban hotels generally are centrally located in the commercial and financial districts of the world's leading cities in North America, South America, Asia, Europe and the Middle East. Our luxury resorts and serviced and branded residential projects are located in world-class leisure destinations and provide extensive recreational and meeting facilities to attract upscale leisure travelers and groups. Description of Hotels and Resorts The following table provides an overview of the properties that we currently manage, many of which include a residential component: ------------------------------------------------------------------------- Approximate Approximate Hotel/Resort and Location Number of Rooms Equity Interest(i) ------------------------------------------------------------------------- United States ------------------------------------------------------------------------- Four Seasons Hotel Atlanta, Georgia 245 - ------------------------------------------------------------------------- Four Seasons Hotel Austin, Texas 290 - ------------------------------------------------------------------------- Four Seasons Resort Aviara, California(ii) 330 - ------------------------------------------------------------------------- The Beverly Wilshire (Beverly Hills), California 395 - ------------------------------------------------------------------------- Four Seasons Biltmore Resort (Santa Barbara), California 205 - ------------------------------------------------------------------------- Four Seasons Hotel Boston, Massachusetts(ii) 275 - ------------------------------------------------------------------------- Four Seasons Hotel Chicago, Illinois 345 - ------------------------------------------------------------------------- The Ritz-Carlton Hotel Chicago, Illinois 435 - ------------------------------------------------------------------------- Four Seasons Resort and Club Dallas at Las Colinas, Texas 400 - ------------------------------------------------------------------------- Four Seasons Hotel Houston, Texas(ii) 405 - ------------------------------------------------------------------------- Four Seasons Resort Hualalai at Historic Ka'upulehu, Hawaii 245 - ------------------------------------------------------------------------- Four Seasons Resort Jackson Hole, Wyoming(ii) 125 -(iv) ------------------------------------------------------------------------- Four Seasons Resort Lana'i at Manele Bay, Hawaii 235 - ------------------------------------------------------------------------- Four Seasons Lana'i The Lodge at Koele, Hawaii 100 - ------------------------------------------------------------------------- Four Seasons Hotel Las Vegas, Nevada 425 - ------------------------------------------------------------------------- Four Seasons Hotel Los Angeles, California 285 -(iv) ------------------------------------------------------------------------- Four Seasons Resort Maui at Wailea, Hawaii 375 - ------------------------------------------------------------------------- Four Seasons Hotel Miami, Florida(ii) 220 4.7%(iii) ------------------------------------------------------------------------- Four Seasons Hotel New York, New York 370 - ------------------------------------------------------------------------- Four Seasons Resort Palm Beach, Florida 210 - ------------------------------------------------------------------------- Four Seasons Hotel Philadelphia, Pennsylvania 365 - ------------------------------------------------------------------------- Four Seasons Hotel San Francisco, California(ii) 275 - ------------------------------------------------------------------------- Four Seasons Resort Scottsdale at Troon North, Arizona(ii) 210 -(iv),(v) ------------------------------------------------------------------------- Four Seasons Hotel Silicon Valley at East Palo Alto, California 200 15%(iii) ------------------------------------------------------------------------- Four Seasons Hotel Washington, District of Columbia 210 - ------------------------------------------------------------------------- Four Seasons Hotel Westlake Village, California 270 - ------------------------------------------------------------------------- Other Americas/Caribbean ------------------------------------------------------------------------- Four Seasons Hotel Buenos Aires, Argentina 165 - ------------------------------------------------------------------------- Four Seasons Resort Carmelo, Uruguay(ii) 45 - ------------------------------------------------------------------------- Four Seasons Resort Costa Rica at Peninsula Papagayo, Costa Rica(ii) 155 11.4%(vi) ------------------------------------------------------------------------- Four Seasons Resort Great Exuma at Emerald Bay, The Bahamas(ii) 185 - ------------------------------------------------------------------------- Four Seasons Hotel Mexico City, Mexico 240 - ------------------------------------------------------------------------- Four Seasons Resort Nevis, West Indies(ii) 195 - ------------------------------------------------------------------------- Four Seasons Resort Punta Mita, Mexico(ii) 150 - ------------------------------------------------------------------------- Four Seasons Hotel Toronto, Ontario, Canada 380 - ------------------------------------------------------------------------- Four Seasons Hotel Vancouver, British Columbia, Canada 375 100%(vi) ------------------------------------------------------------------------- Four Seasons Resort Whistler, British Columbia, Canada(ii) 275 -(iv) ------------------------------------------------------------------------- Europe ------------------------------------------------------------------------- Four Seasons Hotel Gresham Palace Budapest, Hungary 180 18.3%(iii) ------------------------------------------------------------------------- Four Seasons Hotel Dublin, Ireland(ii) 195 - ------------------------------------------------------------------------- Four Seasons Hotel Geneva, Switzerland 105 - ------------------------------------------------------------------------- Four Seasons Hotel Hampshire, England 135 -(iv) ------------------------------------------------------------------------- Four Seasons Hotel Istanbul, Turkey 65 -(ix) ------------------------------------------------------------------------- Four Seasons Hotel The Ritz Lisbon, Portugal 280 - ------------------------------------------------------------------------- Four Seasons Hotel Canary Wharf, England 140 - ------------------------------------------------------------------------- Four Seasons Hotel London, England 220 -(iv),(x) ------------------------------------------------------------------------- Four Seasons Hotel Milan, Italy 120 - ------------------------------------------------------------------------- Four Seasons Hotel George V Paris, France 245 - ------------------------------------------------------------------------- Four Seasons Hotel Prague, Czech Republic 160 -(iv) ------------------------------------------------------------------------- Four Seasons Resort Provence at Terre Blanche, France(ii) 115 - ------------------------------------------------------------------------- Middle East ------------------------------------------------------------------------- Four Seasons Hotel Amman, Jordan 190 - ------------------------------------------------------------------------- Four Seasons Hotel Cairo at The First Residence, Egypt(ii) 270 - ------------------------------------------------------------------------- Four Seasons Hotel Cairo at Nile Plaza, Egypt(ii) 365 - ------------------------------------------------------------------------- Four Seasons Hotel Damascus, Syria(viii) 295 - ------------------------------------------------------------------------- Four Seasons Hotel Doha, Qatar 230 - ------------------------------------------------------------------------- Four Seasons Hotel Riyadh, Saudi Arabia 250 - ------------------------------------------------------------------------- Four Seasons Resort Sharm el Sheikh, Egypt(ii) 135 - ------------------------------------------------------------------------- Asia/Pacific ------------------------------------------------------------------------- Four Seasons Resort Bali at Jimbaran Bay, Indonesia(ii) 145 - ------------------------------------------------------------------------- Four Seasons Resort Bali at Sayan, Indonesia 60 - ------------------------------------------------------------------------- Four Seasons Hotel Bangkok, Thailand 355 - ------------------------------------------------------------------------- Four Seasons Resort Chiang Mai, Thailand 80 - ------------------------------------------------------------------------- Four Seasons Tented Camp, Golden Triangle, Thailand 15 - ------------------------------------------------------------------------- Four Seasons Hotel Hong Kong, Special Administrative Region of the People's Republic of China(ii) 400 - ------------------------------------------------------------------------- Four Seasons Hotel Jakarta, Indonesia(ii) 365 2%(iii) ------------------------------------------------------------------------- Four Seasons Resort Koh Samui, Thailand 65 - ------------------------------------------------------------------------- The Regent Kuala Lumpur, Malaysia(vii) 470 - ------------------------------------------------------------------------- Four Seasons Resort Langkawi, Malaysia 90 - ------------------------------------------------------------------------- Four Seasons Resort Maldives at Kuda Huraa, Maldives 95 - ------------------------------------------------------------------------- Four Seasons Resort Maldives at Landaa Giraavaru, Maldives 100 - ------------------------------------------------------------------------- Four Seasons Hotel Shanghai, People's Republic of China 440 10%(iii),(iv) ------------------------------------------------------------------------- Four Seasons Hotel Singapore, Singapore 255 - ------------------------------------------------------------------------- The Regent Singapore, Singapore 440 - ------------------------------------------------------------------------- Four Seasons Hotel Sydney, Australia 530 - ------------------------------------------------------------------------- Grand Formosa Regent Taipei, Taiwan 540 - ------------------------------------------------------------------------- Four Seasons Hotel Tokyo at Chinzan-so, Japan 285 - ------------------------------------------------------------------------- Four Seasons Hotel Tokyo at Marunouchi, Japan 55 - ------------------------------------------------------------------------- (i) In the ordinary course, we make investments in, or advances in respect of or to owners of, properties to obtain new management agreements or to enhance existing management agreements where we believe the overall returns will justify the investment or advance. We generally seek to limit our total long-term capital exposure to no more than 20% of the total equity required for a property. For a description of our investments in, or advances made in respect of or to owners, of properties and other commitments in respect of existing properties, including the equity investments listed in this chart, see "Balance Sheet Review and Analysis" and "Liquidity and Capital Resources" in Management's Discussion and Analysis. (ii) This project includes, or is expected to include, a Four Seasons branded residential component. (iii) Freehold interest. (iv) In addition to providing management services to this property, we have a guarantee or other off-balance sheet commitment in respect of this property. See "Off-Balance Sheet Arrangements" in Management's Discussion and Analysis. (v) We have a preferred profits interest derived from previously existing subordinated loans to the resort or property of approximately $17.4 million in aggregate plus a loan in the amount of $6.0 million to an entity that owns approximately 85% of the entity that owns the hotel. (vi) Leasehold interest. (vii) We have entered into an agreement to manage a new 140 room Four Seasons hotel in Kuala Lumpur and have reached agreement with the owner of the existing Kuala Lumpur hotel to transition out of managing that Regent property as of May 31, 2007. (viii) The Four Seasons Hotel Damascus is located in Damascus, Syria, a country that is on the U.S. list of state sponsors of terrorism and that is subject to U.S. regulations (including prohibitions on dealings with specified entities) and legislatively mandated penalties (including export sanctions and ineligibility to receive most forms of U.S. aid or to purchase U.S. military equipment). (ix) Subject to satisfaction of certain conditions, we may invest up to $4.08 million to acquire up to an 18% interest in conjunction with a proposed expansion and renovation of Four Seasons Hotel Istanbul and new management contract related to Four Seasons Hotel Istanbul at the Bosphorus. (x) Four Seasons Hotels Limited ("FSHL") is the tenant of the land and premises constituting Four Seasons Hotel London. FSHL has entered into a sublease of the hotel with the entity on whose behalf we manage the hotel. The annual rent payable by FSHL under the lease is the same as the annual rent that is payable by the sub-tenant pursuant to the sublease. Properties under Construction or Development We currently have 30 properties under construction or development that are to be operated under the Four Seasons name. We expect 20 of those properties to include a residential branded component. The following table provides an overview of these properties: ------------------------------------------------------------------------- Approximate Capital Hotel/Resort and Location(i),(ii) Number of Rooms Commitment(iii) ------------------------------------------------------------------------- Scheduled 2007/2008 Openings ------------------------------------------------------------------------- Four Seasons Hotel Alexandria, Egypt 125 ------------------------------------------------------------------------- Four Seasons Hotel Beijing, People's Republic of China 325 YES ------------------------------------------------------------------------- Four Seasons Hotel Beirut, Lebanon 235 YES ------------------------------------------------------------------------- Four Seasons Resort Bora Bora, French Polynesia(iv) 105 YES ------------------------------------------------------------------------- Four Seasons Hotel Florence, Italy 120 ------------------------------------------------------------------------- Four Seasons Hotel Hangzhou, People's Republic of China 100 ------------------------------------------------------------------------- Four Seasons Hotel Istanbul at the Bosphorus, Turkey 170 YES ------------------------------------------------------------------------- Four Seasons Hotel Macau, Special Administrative Region of the People's Republic of China(iv) 370 ------------------------------------------------------------------------- Four Seasons Resort Mauritius, Republic of Mauritius(iv) 120 YES ------------------------------------------------------------------------- Four Seasons Hotel Moscow, Russia(iv) 185 YES ------------------------------------------------------------------------- Four Seasons Hotel Mumbai, India(iv) 230 YES ------------------------------------------------------------------------- Four Seasons Hotel Seattle, Washington USA(iv) 150 YES ------------------------------------------------------------------------- Four Seasons Resort Seychelles, Seychelles(iv) 65 ------------------------------------------------------------------------- Beyond 2008 ------------------------------------------------------------------------- Four Seasons Hotel Bahrain, Bahrain 270 ------------------------------------------------------------------------- Four Seasons Hotel Baltimore, Maryland, USA(iv) 200 YES ------------------------------------------------------------------------- Four Seasons Resort Barbados, Barbados(iv) 120 ------------------------------------------------------------------------- Four Seasons Resort Cham Island, Vietnam 80 ------------------------------------------------------------------------- Four Seasons Hotel Doha at the Pearl, Qatar(iv) 250 YES ------------------------------------------------------------------------- Four Seasons Hotel Dubai, United Arab Emirates(iv) 375 ------------------------------------------------------------------------- Four Seasons Hotel Guangzhou, People's Republic of China(iv) 325 ------------------------------------------------------------------------- Four Seasons Hotel Kuala Lumpur, Malaysia(iv) 275 ------------------------------------------------------------------------- Four Seasons Hotel Kuwait, Kuwait 300 ------------------------------------------------------------------------- Four Seasons Hotel Marrakech, Morocco(iv) 140 YES ------------------------------------------------------------------------- Four Seasons Hotel Moscow Kamenny Island, Russia(iv) 80 YES ------------------------------------------------------------------------- Four Seasons Hotel New Orleans, Louisiana, USA(iv) 240 YES ------------------------------------------------------------------------- Four Seasons Resort Puerto Rico, Puerto Rico(iv) 250 YES ------------------------------------------------------------------------- Four Seasons Hotel Shanghai at Pudong, People's Republic of China(iv) 190 YES ------------------------------------------------------------------------- Four Seasons Hotel St. Petersburg, Russia 200 YES ------------------------------------------------------------------------- Four Seasons Hotel Toronto, Ontario, Canada(iv) 265 YES ------------------------------------------------------------------------- Four Seasons Resort Vail, Colorado, USA(iv) 120 YES ------------------------------------------------------------------------- (i) Information concerning hotels, resorts and residential projects under construction or under development is based upon agreements and letters of intent and may be subject to change prior to the completion of the project. The dates of scheduled openings have been estimated by management based upon information provided by the various developers. There can be no assurance that the date of scheduled opening will be achieved or that these projects will be completed. In particular, in the case where a property is scheduled to open near the end of a year, there is a greater possibility that the year of opening could be changed. The process and risks associated with the management of new properties are dealt with in greater detail under "Operating Risks". (ii) We have made an investment in Orlando, Florida, in which we expect to include a Four Seasons Residence Club and/or a Four Seasons branded residential component. The financing for this project has not yet been completed and therefore a scheduled opening date cannot be established at this time. (iii) The aggregate capital commitment for the properties indicated is $129.0 million, of which nothing has been funded and $24.1 million is expected to be funded in the remainder of 2007. These amounts include capital commitments in respect of Four Seasons branded residential projects under construction or development. (iv) We expect this project to include a Four Seasons branded residential component. Three-Year Review ------------------------------------------------------------------------- (In millions of dollars except per share amounts and unless otherwise noted) 2006 2005 2004 ------------------------------------------------------------------------- Statements of Operations Data: ------------------------------------------------------------------------- Total revenues $ 253.4 $ 248.3 $ 261.3 ------------------------------------------------------------------------- Management Operations: ------------------------------------------------------------------------- Fee revenues(i) $ 141.3 $ 114.8 $ 109.2 ------------------------------------------------------------------------- Management operating earnings before other items(ii),(iv) 78.9 56.7 61.6 ------------------------------------------------------------------------- Ownership Operations: ------------------------------------------------------------------------- Hotel ownership revenues 33.4 65.5 97.7 ------------------------------------------------------------------------- Ownership operating earnings (loss) before other items(iii),(iv) 1.2 (0.6) (2.2) ------------------------------------------------------------------------- Operating earnings before other items(v) 80.1 56.1 59.4 ------------------------------------------------------------------------- Depreciation and amortization (14.6) (11.2) (11.8) ------------------------------------------------------------------------- Other expenses, net(vi) (3.8) (89.2) (11.9) ------------------------------------------------------------------------- Interest income 22.4 16.8 13.0 ------------------------------------------------------------------------- Interest expense (14.9) (11.5) (10.4) ------------------------------------------------------------------------- Earnings (loss) before income taxes(vii) 69.2 (39.0) 38.3 ------------------------------------------------------------------------- Income tax recovery (expense) (18.9) 10.8 (12.6) ------------------------------------------------------------------------- Net earnings (loss) $ 50.3 $ (28.2) $ 25.7 ------------------------------------------------------------------------- Earnings (loss) per share: ------------------------------------------------------------------------- Basic $ 1.36 $ (0.77) $ 0.72 ------------------------------------------------------------------------- Diluted $ 1.33 $ (0.77) $ 0.69 ------------------------------------------------------------------------- Weighted average number of shares (millions): ------------------------------------------------------------------------- Limited Voting Shares 33.1 32.9 31.8 ------------------------------------------------------------------------- Variable Multiple Voting Shares 3.7 3.7 3.8 ------------------------------------------------------------------------- Cash Flow Data: ------------------------------------------------------------------------- Cash provided by operating activities $ 78.0 $ 26.5 $ 44.4 ------------------------------------------------------------------------- Cash provided by (used in) investing activities 6.6 (10.3) (41.2) ------------------------------------------------------------------------- Cash provided by financing activities 29.8 3.9 82.6 ------------------------------------------------------------------------- Balance Sheet Data: ------------------------------------------------------------------------- Cash and cash equivalents $ 358.9 $ 242.2 $ 226.4 ------------------------------------------------------------------------- Total assets 992.0 880.2 902.1 ------------------------------------------------------------------------- Long-term obligations 266.8 273.8 253.0 ------------------------------------------------------------------------- Shareholders' equity 648.5 546.7 584.9 ------------------------------------------------------------------------- Other Data: ------------------------------------------------------------------------- Total revenues of all managed hotels and resorts(viii) $ 2,943.8 $ 2,559.7 $ 2,240.9 ------------------------------------------------------------------------- Management operations profit margin (excluding reimbursed costs and the impact of foreign exchange forward contracts) 55.8% 49.4% 56.4% ------------------------------------------------------------------------- Market price per share at year-end (C$) $ 95.02 $ 57.84 $ 98.11 ------------------------------------------------------------------------- Cash dividends declared per share (C$): ------------------------------------------------------------------------- Limited Voting Shares $ 0.11 $ 0.11 $ 0.11 ------------------------------------------------------------------------- Variable Multiple Voting Shares $ 0.055 $ 0.055 $ 0.055 ------------------------------------------------------------------------- Shares outstanding (millions): ------------------------------------------------------------------------- Limited Voting Shares 33.7 32.9 32.9 ------------------------------------------------------------------------- Variable Multiple Voting Shares 3.7 3.7 3.7 ------------------------------------------------------------------------- Market capitalization at year-end (C$) $ 3,552.5 $ 2,119.3 $ 3,591.7 ------------------------------------------------------------------------- Employees(ix) 33,280 31,420 31,300 ------------------------------------------------------------------------- (i) Fee revenues are comprised of hotel management fees and other fees. (ii) Management operating earnings before other items are comprised of hotel management fees, other fees and reimbursed costs, less general and administrative expenses and reimbursed costs. (iii) Ownership operating earnings (loss) before other items is equal to hotel ownership revenues less hotel ownership cost of sales and expenses. (iv) Our strategy is to focus on Management Operations rather than Ownership Operations. Four Seasons Hotel Vancouver is our only remaining hotel whose results we currently consolidate. As a result, commencing January 1, 2006, corporate expenses are reflected in our results as general and administrative expenses in the consolidated statements of operations for the year ended December 31, 2006. Corporate expenses for the year ended December 31, 2005 and 2004 that previously were included in our Ownership Operations segment have been reclassified to our Management Operations segment and included in general and administrative expenses in our consolidated statements of operations. (v) Operating earnings before other items is equal to net earnings (loss) plus (i) income tax expense less (ii) income tax recovery plus (iii) interest expense less (iv) interest income plus (v) other expenses less (vi) other income plus (vii) depreciation and amortization. Operating earnings before other items is a non-GAAP measure and is not intended to represent cash flow from operations, as defined by Canadian GAAP, and it should not be considered as an alternative to net earnings, cash flow from operations or any other measure of performance prescribed by GAAP. Our operating earnings before other items may also not be comparable to operating earnings before other items used by other companies, which may be calculated differently. We consider operating earnings before other items to be a meaningful indicator of our operations and we use it as a measure to assess our operating performance. It is included because we believe it can be useful in measuring our ability to service debt, fund capital expenditures and expand our business. Operating earnings before other items is also used by investors, analysts and our lenders as a measure of our financial performance. (vi) Other expenses, net in 2004 is primarily attributable to an accounting loss incurred on the redemption of the Company's Liquid Yield Option Notes which were issued in 1999. (vii) Earnings (loss) before income taxes represent operating earnings before other items less (i) depreciation and amortization plus (ii) other income less (iii) other expenses plus (iv) interest income less (v) interest expense. (viii) Total revenues of all managed hotels and resorts consist of rooms, food and beverage, telephone and other revenues of all the hotels and resorts that we manage. (ix) We directly employ, and are financially responsible for, approximately 515 people at our various corporate offices, worldwide sales offices and central reservations office. Of these corporate employees, almost half are devoted to sales and marketing activities (including our worldwide reservations service), the cost of which is reimbursed by the hotels and resorts that we manage. In addition, there are approximately 32,800 employees located at the 74 hotels and resorts that we manage, many of which include a residential component. All costs relating to these property-based employees, including wages, salaries and health and insurance benefits, are the responsibility of the property owners and are generally paid out of the operating cash flow of the property. Operating Risks Our business is subject to many risks and uncertainties, including those discussed below. Geopolitical, Economic and Lodging Industry Conditions We focus exclusively on the luxury segment of the lodging industry, which is subject to operating risks inherent in the industry. These risks include, among other things: - changes in general, local and industry-specific economic and financial conditions, such as the airline industry, - periodic overbuilding in the industry or a specific market, - varying levels of demand for rooms and related services (including food and beverage and function space), - competition from other properties, - changes in travel patterns, - the recurring need for renovation, refurbishment and improvement of hotel and resort properties, - changes in wages, benefits, prices, construction and maintenance, insurance and operating costs that may result from inflation or otherwise, - government regulations, - changes in taxes and interest rates, - currency fluctuations, - the availability and cost of financing for operating or capital requirements, - natural disasters, - extreme weather conditions, - labour disputes, - infectious diseases, and - war, civil unrest, terrorism, international conflict and political instability. We operate and have interests in luxury hotels, resorts and serviced and branded residential projects in many areas of the world and our revenues are dependent upon the results of the individual properties. The conditions listed above can have, and have from time to time had, a significant adverse impact upon individual properties or particular regions. A period of economic recession or downturn in any of the world's primary outbound travel markets could materially and adversely affect, and have from time to time materially and adversely affected, our business, results of operations and financial condition, including fee revenue and ownership earnings. An economic downturn generally affects ownership results to a significantly greater degree than management results due to the high fixed costs associated with hotel ownership. Competition The luxury segment of the hotel and resort industry is subject to intense competition, both for guests and for the acquisition of new management agreements. Competition for guests arises primarily from other luxury hotel chains, individual luxury hotels and resorts and a limited number of luxury properties operated by larger hotel chains. That competition is primarily based on, among other things, brand name recognition, location, room rates and quality of service and accommodations. Demographic, geographic and other changes in specific market conditions could materially and adversely affect the convenience or desirability of the locales in which hotels and resorts that we manage are located. We compete for management opportunities with other operators of luxury hotels. We believe that our ability to obtain management agreements is based primarily on the value and quality of our management services, brand name recognition and the economic advantages to the hotel owner of retaining our management services and using our brand name. We also believe that an owner's assessment of the economic advantages of retaining our management services and using our brand name is, in part, a function of the success of the hotels and resorts currently under management by us. Competitive factors also include relationships with hotel owners and investors, marketing support, reservation system capacity and the ability to make investments that may be necessary to obtain management agreements. Our failure to compete successfully for expansion opportunities or to attract and maintain relationships with current hotel owners could materially and adversely affect our business, results of operations and financial condition. Dependence on Management Agreements Management agreements expire in the ordinary course, and may in certain circumstances be renegotiated and be subject to termination upon the occurrence of specified events. Failure to obtain new management agreements or maintain existing management agreements could materially and adversely affect our business, results of operations and financial condition. We manage hotels and resorts for various owners subject to the terms of each property's management agreements. Those agreements generally can be terminated by the non- defaulting party upon default in payment or unremedied failure to comply with the terms of the agreements unless, in most cases, such default or unremedied failure was caused by typical force majeure events. Most of the management agreements are subject to performance tests that, if not met, could allow the agreements to be terminated by the owner prior to the expiration of their respective terms. The failure to maintain the standards specified in the agreement or to meet the other terms and conditions of an agreement, including a performance test, could result in the loss or cancellation of a management agreement. Typically, but not in all cases, we have certain rights to cure a default to avoid termination. Substantially all of the management agreements include typical force majeure events, which, if they were to occur would prevent the termination of the management agreements. Some management agreements also can be terminated, subject in certain cases, to a payment to us, upon a change in use of the property or upon a sale by the owner to a new owner who does not wish to retain the existing agreement. In the event of bankruptcy involving a property and foreclosure, a management agreement may be terminated in most jurisdictions, unless the lender has executed a non-disturbance agreement that is enforceable under applicable bankruptcy laws. We generally have non-disturbance agreements with the lenders to owners of hotels and resorts that we manage. Where no non- disturbance agreement is in place or where it is not enforceable under applicable bankruptcy laws, the risk of loss of a management agreement increases where the owner incurs debt at the property level that cannot be serviced adequately. In some jurisdictions, particularly in the United States, management agreements have been construed by courts to create an agency relationship that is terminable by the owner, notwithstanding any provision of the agreement that purports to make the agreement not terminable under such circumstances. In such circumstances, we would generally have an unsecured claim for breach of contract against the owner of the hotel or its trustee in bankruptcy. Management agreements for hotels and resorts we manage have varying remaining terms (including extension periods that we may elect) and have remaining terms averaging of approximately 51 years. Renewal of management agreements at the end of their term is the subject of negotiation between us and the relevant owners. There can be no assurance that any particular management agreement or agreements will be renewed or with respect to the terms and conditions of any renewal. Dependence on Property Owners As a result of our strategic decision to focus on management as opposed to ownership of hotel and resort properties, our growth opportunities are dependent in part on our ability to establish and maintain satisfactory relationships and enhance those relationships with existing and new property owners. Those growth opportunities are also dependent on access to capital by these investors. In 2006, one owner had an ownership interest in a combination of hotels, resorts and serviced and branded residential properties managed by Four Seasons that represented in excess of 10% of our fee revenues from management operations. A failure by us to maintain satisfactory relationships with any owner or owners of a significant number of properties could have a material adverse effect on our business, results of operations and financial condition. Risk Associated with Expansion, Growth and New Construction An element of our business strategy is to increase the number of hotels and resorts under management. That expansion is dependent upon a number of factors, including the identification of appropriate management opportunities, competing successfully for the management agreements relating to those opportunities, availability of financing for new developments and timely completion of construction of new hotels and resorts (or the refurbishment of existing properties) that are, or are to be, managed by us. From time to time, the hotel industry has experienced periods during which financial institutions generally have been reluctant to provide financing for the construction of real estate properties, including hotels and resorts. There can be no assurance that we will be able to obtain financing for projects or that the terms on which such financing can be obtained will be acceptable to us. The inability to obtain financing for a project could cause cancellation of, or short-term interruption in, the progress or completion of properties under construction or development. Additionally, any construction project entails significant construction risks that could delay or result in a substantial increase in the cost of construction. The opening of newly constructed properties, in particular, is contingent upon, among other things, receipt of all required licences, permits and authorizations, including local land use permits, building and zoning permits, health and safety permits and liquor licences. Changes or concessions required by regulatory authorities could also involve significant additional costs and delays or prevent completion of construction or opening of a project. As a result of the global nature of our business, these regulatory matters arise in a number of jurisdictions, many of which have distinctive regulatory regimes. Investments in and Advances to Managed and Owned Properties We have made investments in, and/or advances in respect of or to owners of, hotels and resorts that we manage, to enable us to acquire the management agreements for those properties or to enhance the terms of those agreements. Currently, we hold an ownership interest in, or have made advances in respect of, 34 of the 74 hotels and resorts that we manage. We also have one remaining 100% leasehold interest in the Four Seasons Hotel Vancouver. We also have made, or expect to make in the near term, investments in, or advances in respect of or to owners of, 18 of the 30 properties under construction or development. The book value of total investments and advances as at December 31, 2006 was approximately $380 million. In addition to the risks associated with the operation of a hotel, we are subject to risks generally related to owning and leasing real estate in connection with these properties. These risks include, among others, adverse changes in general or local economic conditions, local real estate market conditions, property and income taxes, interest rates, the availability, cost and terms of financing, the financial stability of the property owner, liability for long-term lease obligations, the availability and costs of insurance coverage, the potential for uninsured casualty and other losses, the impact of present or future legislation or regulation (including those relating to the environment), adverse changes in zoning laws and other regulations, civil unrest, terrorism, war and political instability. In addition, these investments in real estate are relatively illiquid and our ability to dispose of our ownership interests, particularly our leasehold interests, in response to changes in economic or other conditions may be limited. Further, advances to owners of properties are typically subordinated and, in any event, may be subject to loss in the event of insolvency of the owner to which an advance was made. Any of these factors could result in material operating losses by us or a particular hotel or resort and possibly the whole or partial loss of our investment in the property or the inability to collect advances outstanding. Holding an interest in a hotel also introduces risks associated with funding of capital expenditures and incurring our proportionate share of any operating losses. Where cash and working capital reserves provided by hotel operations are insufficient, debt service, major repairs, renovations, refurbishments, alterations or other capital expenditures generally must be funded by the owners of the hotels and resorts, including us in some cases. Debt Rating Risks Our corporate rating is currently investment grade (BB+) as rated by Standard & Poor's. Our senior unsecured debt is currently rated by three debt rating agencies (Standard & Poor's: BBB-; Moody's: Baa3 with stable outlook; Dominion Bond Rating Service: BBB). In each case our rating is under review with the possibility of a down grade as a result of the implementation of the proposed Arrangement Transaction. A negative change in either global economic or political events may result in the rating agencies downgrading the rating and/or outlook for many of the lodging companies, including us, which would result in an increase in our borrowing costs. In addition, pricing of any amounts drawn under our syndicated bank credit facilities (which are undrawn but under which $1.6 million of letters of credit were issued at December 31, 2006) includes a spread to LIBOR ranging between 0.875% and 2.25%, depending upon the ratings from Standard & Poor's and Moody's and certain financial ratios. Government Regulation We are subject to laws, ordinances and regulations relating to, among other things, taxes, environmental matters, the preparation and sale of food and beverages, accessibility for disabled persons and general building and zoning requirements in the various jurisdictions in which we manage hotels and resorts. Owners and managers of hotels and resorts also may be subject to laws governing the relationship with employees, including minimum wage requirements, overtime, working conditions and work permit requirements. In addition, the properties we manage (and in, or in respect of which, we may have made advances or investments) may be located in countries (such as Syria), which may from time to time be subject to international trade restrictions, regulations or other forms of economic or political sanction. Compliance with these laws can affect the revenues and profits of properties managed by us or could materially and adversely affect our business, results of operations and financial condition. Four Seasons, as the current or previous owner or operator of certain hotels, could be liable for investigation and clean-up of contamination and other corrective or remedial action under various laws, ordinances and regulations relating to environmental matters. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the condition requiring environmental response and whether the party is currently or formerly the owner or manager of the property. The presence of contamination from hazardous or toxic substances, or the failure to properly remediate a contaminated property, may affect the ability to use the property for its intended purpose, to sell or rent the property, or to borrow using the property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances also may be liable for the cost of removal or remediation of substances at the disposal or treatment facility. In connection with the operation and ownership of various properties, we could be held liable for the cost of remedial action with respect to environmental matters. We are not aware of any potential material environmental liabilities for which we will be responsible with respect to any of the properties which we currently manage or previously managed. Pursuant to the management agreements to which we are a party, the owner is responsible for the costs and expenses of the employees at each hotel and for all costs, expenses and liabilities incurred in connection with the operation of the hotel, including compliance with government regulations. However, as the manager, we may be contingently liable for certain liabilities in respect of which we do not maintain insurance, including certain workers' compensation claims, environmental liabilities and, in respect of hotels in the United States, claims arising under the Americans with Disabilities Act. We generally obtain indemnities from the owners of the hotels that we manage in respect of these liabilities. The value of those indemnities is dependent upon, among other things, the financial condition of the owners who have provided them. Political Risk We currently manage and in some cases have an ownership interest in hotels and resorts in 31 countries and currently have development plans to open hotels and resorts in 13 additional countries around the world. In certain of these countries, from time to time, the related assets and revenues may be exposed to political and other risks associated with foreign investment. In some jurisdictions, at certain times, there may be a risk that we may have difficulty enforcing our contractual rights relating to our assets including our non-disturbance agreements and any security relating to our loan receivables if due process of law is not respected. Insurance Our management agreements require the hotels and resorts that we manage to be insured against property damage, business interruption and liability at the expense of the owner of the property. Under these policies we are also typically insured against loss of fee income in the event of a temporary business interruption at any of the hotels and resorts that we manage. We also maintain our own insurance coverage in respect of liability, in excess of that obtained at the property level. In addition, we obtain indemnities from the owners of the hotels and resorts that we manage in respect of damages caused by acts, omissions and liabilities of the employees of the property or of Four Seasons, other than damages resulting from certain actions of Four Seasons and certain senior management personnel. Insurance premiums are continuing to increase and underwriters are imposing increasingly restrictive terms and conditions. All lines of coverage generally have been affected; however, commercial properties generally continue to be the most difficult to insure. Exposures for terrorism, cyber perils and toxic mould are now common exclusions. If we were held liable for amounts exceeding the limits of our insurance coverage or for claims outside the scope of that coverage or if the indemnities were insufficient for any reason, including as a result of the owner's or indemnitor's financial condition, our business, results of operations and financial condition could be materially and adversely affected. Legal Proceedings In the ordinary course of our business, we are named as a defendant in legal proceedings resulting from incidents taking place at properties we manage or in which we have an ownership interest. We maintain comprehensive liability insurance and also require owners to maintain adequate insurance coverage as described above under "Insurance". We believe such coverage to generally be of a nature and amount sufficient to ensure that we are adequately protected from suffering material financial loss as a result of such claims. Currency Exposure We have entered into management agreements with respect to hotels throughout the world and accordingly, earn revenue and make investments and advances in many foreign currencies. Our most significant currency is US dollars, as approximately half of our revenues and assets currently are US dollar-denominated, as are the majority of our investment commitments. However, we incur the majority of our costs in Canadian dollars and our most significant liability (which is related to our convertible senior notes) is a Canadian dollar obligation. In 2005, we adopted US dollars as our reporting currency. This means that our Canadian dollar consolidated financial statements are translated into US dollars for reporting purposes. Our consolidated statements of operations, consolidated statements of cash provided by operations and consolidated statements of cash flow are translated using the weighted average exchange rates for the period, and assets and liabilities are converted from Canadian dollars into US dollars at the foreign exchange rate applicable at the balance sheet date. We have not changed our functional currency, which remains Canadian dollars, or the functional currencies of any of our subsidiaries. As a result, while US dollar reporting will minimize the currency fluctuations related to the majority of our US dollar management fee revenues, it will not eliminate the impact of foreign currency fluctuations related to our management fees in other currencies, or our general and administrative expenses, which are incurred primarily in Canadian dollars. It will also not eliminate foreign currency gains and losses related to un-hedged net monetary assets and liability positions. As such, our consolidated results will continue to include gains and losses related to foreign currency fluctuations. The impact of foreign currency gains and losses has been material in the past and could continue to be material in the future. We endeavour to match foreign currency revenues to costs and investment commitments to provide a natural hedge against currency fluctuations, although there can be no assurance that these measures will be effective in the management of those risks. We also endeavour to manage our currency exposure through, among other things, the use of foreign exchange forward contracts. As at December 31, 2006, we held $39.1 million in foreign exchange forward contracts for the sale of US dollars into Canadian dollars to meet our operating needs. In addition, certain currencies are subject to exchange controls or are not freely tradeable and as a result are relatively illiquid. We attempt to minimize our foreign currency risk by monitoring our cash position, keeping fee receivables current, monitoring the political and economic climate and considering whether to insure convertibility risk in each country in which we manage a property. In certain properties, the foreign currency risk is further mitigated by pricing room rates in US dollars. However, no assurances can be given as to whether our strategies relating to currency exposure will be successful or that foreign exchange fluctuations will not materially adversely affect our business, results of operations and financial condition. Seasonality/Quarterly Predictability Our hotels and resorts are generally affected by normally recurring seasonal patterns and, for most of the properties, demand is typically lower in December through March than during the remainder of the year. Management operations are seasonal in nature, as fee revenues are affected by the seasonality of hotel and resort revenues and operating results. Urban hotels generally experience lower revenues and operating results in the first quarter, which has a negative impact on management revenues. However, this negative impact on management revenues generally is offset, to some degree, by increased travel to resorts in that quarter and may be offset to a greater extent as the portfolio of resort properties that we manage increases. However, seasonality can be affected by specific local events that can cause, and from time to time have caused, unanticipated disruptions to the operations of certain of the properties we manage. In addition, certain management fees, in particular incentive fees and residential royalty fees, are difficult to predict both in terms of timing and amount and can be impacted to a greater extent than other elements of our business by economic cycles, interest rate levels and other external factors. Although the majority of our management fees are based on the total revenues of the properties we manage and as a result are easier to predict, fluctuations in our incentive fees and residential royalty fees can cause volatility in our earnings, particularly as measured from quarter to quarter. Our hotel ownership position is also affected by seasonal fluctuations, with lower revenue, operating profit and cash flow in the first quarter; ownership positions typically incur an operating loss in the first quarter of each year. Typically, the third quarter has been the strongest quarter for the Four Seasons Hotel Vancouver. Intellectual Property In the highly competitive service industry in which we operate, trademarks, service marks and logos are very important in the sales and marketing of those services. We have a significant number of trademarks, service marks and logos, and significant time and effort are expended each year on surveillance, registration and protection of our trademarks, service marks and logos. The loss or infringement of any of our trademarks, service marks or logos could have a material and adverse effect on our business, results of operations and financial condition. Risks Associated with the Four Seasons Branded Residential Business We currently license and manage Four Seasons branded residential projects, including whole ownership and fractional ownership, in many of our existing hotel and resort locations. We are expanding our presence in the luxury segment of the whole ownership and fractional ownership business with a number of other projects under development. Our ability to successfully develop and sell interests in the residential units that are built, and the various fees earned by us from each residential project, could be materially and adversely affected by one or any combination of the factors described in this "Operating Risks" section. Although we believe that we are in compliance in all material respects with applicable laws and regulations to which the marketing, sale and operation of Four Seasons branded residential projects are currently subject, changes in these requirements or a determination by a regulatory authority that we are not in compliance could materially and adversely affect our business, results of operations and financial condition. Dependence on Key Employees Our success depends in part on the continued service of our senior executives, who have an average tenure of approximately 23 years with Four Seasons. In particular, our senior management is responsible for the development and/or maintenance of ongoing relationships with new and existing investors in the properties that are managed by us. The unanticipated departure of individuals responsible for those relationships could have a material and adverse effect on, among other things, relationships affecting properties that are, or that may be, managed by us. Critical Accounting Estimates The significant accounting policies used by us in preparing our consolidated financial statements are described in note 1 to our consolidated financial statements and should be read to ensure a proper understanding and evaluation of the estimates and judgments made by management in preparing those financial statements. Our consolidated financial statements are prepared in accordance with Canadian GAAP. Under Canadian GAAP, we are also required to make estimates when we account for and report assets, liabilities, revenues and expenses, and contingencies. We are also required to evaluate the estimates that we use. We base our estimates on past experience and other factors that we believe are reasonable under the circumstances. Because this process of estimation involves varying degrees of judgment and uncertainty, the amounts currently reported in the financial statements could, in the future, prove to be inaccurate. We believe the following critical accounting estimates involve the more significant judgments and estimates used in the preparation of our consolidated financial statements. DATASOURCE: Four Seasons Hotels and Resorts CONTACT: PRNewswire - - 03/12/2007

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