1998 Annual Report - Four Seasons Hotels and Resorts

ANNUAL INFORMATION FORM(continued)M ANAGEMENT’ S D ISCUSSION AND A NALYSISGeneral and Administrative ExpensesGeneral and administrative expenses increased by $3.3 million or 8.4% in 1997, as compared to 1996, due to increasing stafflevels, certain regional moves necessary to allow for the Corporation’s expansion into Europe, the Middle East and India, andas a result of the incentives earned by management in respect of the financial performance of the Corporation in 1997.Hotel Management EarningsAs a result of the changes in fee revenues and expenses discussed above, the Corporation’s hotel management earningsincreased by $8.0 million or 14.3% to $63.7 million in 1997. Hotel management earnings represented 80.5% of theCorporation’s earnings before other operating items in 1997, as compared with 86.2% in 1996. The decrease was due tothe consolidation of the Corporation’s 100% leasehold interests in The Pierre in New York and the Four Seasons HotelVancouver in 1997.Hotel Ownership OperationsHotel ownership earnings in 1997 increased 73.0% to $15.4 million, as compared to $8.9 million in 1996. The increase inhotel ownership earnings was attributable to the inclusion of the 100% leasehold interests in The Pierre in New York andthe Four Seasons Hotel Vancouver with effect from December 30, 1996, and the strong operating conditions in the NewYork, Chicago and Vancouver markets. This improved operating performance was offset by a decrease in distributionsfrom the Corporation’s 25% interest in The Regent Hong Kong, caused by weakness in the operations of the hotel due toa significant decline in demand in that market during the last six months of 1997. This reduction in demand is a resultof the combined effects of local conditions and the economic downturn experienced in a number of Asian markets.As a result, the distributable earnings from the hotel decreased from $9.2 million in 1996 to $6.0 million in 1997.Other ItemsDepreciation and AmortizationDepreciation and amortization expense in 1997 was $15.8 million, as compared to $14.0 million in 1996. This increase of12.6% is attributable primarily to the consolidation of The Pierre in New York and the Four Seasons Hotel Vancouver in 1997.Loss on Repurchase of DebtDuring 1997, the Corporation repurchased US$101.5 million of its 9 1 /8% Notes which resulted in an accounting loss of$12.0 million (see note 10(c) to the consolidated financial statements).Net Interest ExpenseNet interest expense in 1997 declined 52.4% to $8.9 million from $18.8 million in 1996. This decrease is attributable to:(i) lower debt levels, (ii) lower interest rates (Four Seasons’ weighted average cost of debt in 1997 was 8.4%, as compared to8.6% in 1996) as a result of the replacement of the 9 1 /8% Notes in mid-1997 with 6% debentures (the weighted average costof debt on a full-year basis after the replacement was approximately 7%), and (iii) increased interest income primarily fromcash reserves, together with the interest income from the loan made in 1997 to the owner of the Hôtel George V in Paris.42Four Seasons Hotels Inc.