1998 Annual Report - Four Seasons Hotels and Resorts

generated from hotel ownership operations was $10.7 million higher in 1997 than in 1996, primarily as a result ofimproved hotel ownership earnings in 1997. Net interest paid decreased by $10 million in 1997, as compared to 1996, dueto lower debt levels and interest rates and an increase in interest income in 1997. The working capital increase was partiallyoffset by a change in non-cash working capital of $7.4 million in 1997, as compared to 1996.Operating cash flow is expected to increase to more than $90 million in 1999. The Corporation expects that more than80% of the cash generated from operations in 1999 will be expended to generate new revenue streams, as outlined above.Fixed Asset Additions and ImprovementsOwners of hotels managed by Four Seasons are contractually responsible for funding the capital requirements of the hotels,including major guest room and common area renovations, and for maintaining capital reserves to fund ongoing annualmaintenance capital expenditures required by the management agreements. The owners annually spend an average of 4% ofgross revenues of the hotels on capital expenditures to maintain properties at the Four Seasons standard (other than in newlyconstructed or recently renovated properties where the annual amounts generally range from 1% to 2% in the years ofoperation following opening and major refurbishment). Additional funds are made available for special capital projects asrequired to maintain the luxury standards specified in the Four Seasons’ hotel management agreements. Capital expendituresare funded primarily by working capital generated from hotel operations and through advances from the hotel owners.Four Seasons’ share of these capital expenditures was $13.9 million, $10.5 million and $1.3 million in 1998, 1997,and 1996, respectively, for its consolidated hotels and corporate offices. The increase as compared to 1997, relatedprimarily to the expansion of the corporate office in Toronto. The significant increase in capital expenditures in 1997, ascompared to 1996, related primarily to the consolidation of The Pierre in New York and the Four Seasons HotelVancouver in 1997. Four Seasons’ share of capital expenditures was immaterial for those hotels in which Four Seasonshas a minority equity interest or pursuant to management contract obligations.For 1999, Four Seasons has budgeted capital expenditures of approximately $13 million in its consolidated hotels andcorporate offices.Investments in and Advances to Managed and Owned HotelsAs discussed above, in order to secure a new management agreement or to improve an existing management agreement,the Corporation may at times make a loan or a minority investment. The loan or investment will only be made in order toexpand its management business and where the overall economic return to Four Seasons justifies the investment and riskprofile. Depending on the nature of the loan or investment, it will be characterized as “Investments in hotel partnershipand corporations,” an “Investment in management contracts,” or “Long-term receivables.”Investments in and Advances to Managed and Owned HotelsDuring 1998, the Corporation invested (i) $8.8 million in a hotel under construction in Prague, in which it has a 66.7%interest, (ii) $0.9 million ($2.7 million in 1996) in a resort and vacation ownership project in Scottsdale, in which it has a4.7% equity interest and a 65.8% voting interest, (iii) $2.0 million in 1998 ($4.7 million in 1997) in a resort and vacationownership project under construction in Punta Mita, Mexico, in which it has a 30.8% interest, and (iv) $0.6 million($1.2 million in 1997) in the related golf club in which it has a 12.3% interest. The Corporation is currently in discussionswith potential new investors with the intent to reduce its equity interests in the Prague and Scottsdale projects prior to orupon completion of construction.45Four Seasons Hotels Inc.