**As
filed with the Securities and Exchange Commission on March 29,
2005**
 
 
  **SECURITIES
AND EXCHANGE COMMISSION**
 Washington,
D.C. 20549
 3⁄4 3⁄4 3⁄4 3⁄4
 **FORM
40-F**
 (Check
One)
 o
    Registration
      Statement pursuant to Section 12 of the Securities Exchange Act of
      1934orn
    Annual
      Report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
      of 1934
      For
      the fiscal year ended December 31, 2004
 
 Commission
file number 1-14574
 
 **FAIRMONT
HOTELS & RESORTS INC.**
 (Exact
Name of Registrant as Specified in its Charter)
 
 **CANADA**
    
    **7011**
    
    **98-0161783**(Province
      or Other Jurisdiction of Incorporation or Organization)
    
    (Primary
      Standard Industrial Classification Code Number)
    
    (I.R.S.
      Employer Identification Number, if
applicable)
 
 **100
Wellington St., W., Suite 1600, TD Center, Toronto, Ontario, Canada M5K 1B7,**
 **(416)
874-2600**
 (Address
and Telephone Number of Registrant’s Principal Executive Offices)
  
 **CT
Corporation System, 1025 Vermont Avenue, N.W., Washington, D.C.
20005**
 **(800)
955-5219**
 (Name,
Address (Including Zip Code) and Telephone Number (Including Area
Code)
 of Agent
for Service in the United States)
  3⁄4 3⁄4 3⁄4 3⁄4 3⁄4 3⁄4 3⁄4 3⁄4 3⁄4 3⁄4 3⁄4 3⁄4 3⁄4 3⁄4 3⁄4
 Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
 **Common
      Shares without nominal or par value**
      (Title
      of Each Class)
    **The
      New York Stock Exchange**
      **Toronto
      Stock Exchange**
      (Name
      of Each Exchange on which Registered)
 
 Securities
registered or to be registered pursuant to Section 12(g) of the Act: **None**
 
 Securities
for which there is a reporting obligation pursuant to Section 15(d) of the Act: **None**
 
 For
annual reports, indicate by check mark the information filed with this
form:
 
 n Annual
Information Form  n  Audited
Annual Financial Statements
 
 Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report.
 **As
of December 31, 2004 there were 76,393,348 Common Shares issued and
outstanding**
 
 Indicate
by check mark whether the registrant by filing the information contained in this
form is also thereby furnishing the information to the Commission pursuant to
Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the “Exchange Act”).
If “Yes” is marked, indicate the file number assigned to the registrant in
connection with such rule.
 
 Yes  o  82 -
_______    No n
 
 Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
report(s); and (2) has been subject to such filing requirements for the past 90
days.
 
 Yes n      No o
 
 
 
  
   **Information
to be Filed on This Form.**
  **Exhibit**
    
    **Description**A
    
    2004
      Annual Information Form.B
    
    Audited
      Consolidated Financial Statements, including consolidated balance sheets
      as at December 31, 2004 and 2003 and consolidated statements of income,
      retained earnings (deficit), and cash flows for each of the years in the
      three-year period ended December 31, 2004 (including a reconciliation to
      US GAAP at Note 25).C
    
    2004
      Management Discussion and Analysis.D
    
    Consent
      of Independent Accountants.E
    
    Certifications
      Required by Rule 13a-14 of the Securities Exchange Act of
      1934.F
    
    Section
      906 certification of William R. Fatt, Chief Executive Officer and John A.
      Carnella, Chief Financial Officer.
 
 * * * * *
 
 **Disclosure
Controls and Procedures**
  Disclosure
controls and procedures are defined by the Securities and Exchange Commission as
those controls and procedures that are designed to ensure that information
required to be disclosed in our filings under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission rules and forms. As of
December 31, 2004, an evaluation was carried out under the supervision of and
with the participation of the Company’s management, including the principal
executive officer and principal financial officer, of the effectiveness of the
Company’s disclosure controls and procedures. Based on that evaluation, our
principal executive officer and principal financial officer have determined that
such disclosure controls and procedures are effective.
  The
Company is also reviewing its internal controls over financial reporting in
preparation for the reporting and attestation requirements of Section 404 of the
Sarbanes-Oxley Act of 2002 becoming effective with respect to the Company. In
connection with such review, modifications to the Company’s disclosure controls
and procedures and internal controls over financial reporting may, as
appropriate, be made in the future.
  **Changes
in Internal Control Over Financial Reporting**
  During
the period covered by this report, there were no changes in internal control
over financial reporting that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial
reporting.
  2
 **Code
of Ethics for Principal Executive Officer and Senior Financial
Officers**
  The
Company has adopted a Code of Ethics that applies to all employees, including
the Company’s principal executive officer, principal financial officer,
principal accounting officer or controller, and persons performing similar
functions. This code is available on the Company’s web site at www.fairmont.com
and in print to any shareholder who requests it. All amendments to the code, and
all waivers of the code with respect to any of the principal executive or
financial officers covered by it, will be posted on the Company’s web site and
provided in print to any shareholder who requests them.
  **Audit
Committee**
  *Identification
of Audit Committee*
  The
Company has a separately-designated standing audit committee. The following
directors are members of the Audit Committee: Stephen E. Bachand, Karen M. Rose,
John L. Sharpe, L. Peter Sharpe and Robert S. Singer. Each of these directors
has been determined by the board to be independent and financially literate as
those terms are defined by the New York Stock Exchange for audit committee
members.
  *Audit
Committee Financial Expert*
  The
Company’s board of directors has determined that Robert S. Singer meets the
requirements of an audit committee financial expert.
  **Principal
Accounting Fees and Services**
  Following
is a summary of professional services provided by the Company’s principal
auditors, PricewaterhouseCoopers LLP, during the years ended December 31, 2003
and 2004, and the related fees:
  2003
    
    
    2004Audit
      fees
    
    $
    523,300
    
    $
    847,000Audit
      related fees
    
    
    93,700
    
    
    435,000Tax
      fees
    
    
    732,500
    
    
    899,000All
      other fees
    
    
    173,800
    
    
    18,000Total
    
    $
    1,523,300
    
    $
    2,199,000
 
 *Audit
fees*
  Audit
fees were for professional services rendered by PricewaterhouseCoopers LLP for
the audit of the annual consolidated financial statements, the review of
quarterly interim financial statements, for the audit of consolidated financial
statements of certain subsidiary corporations and advice to the Company with
respect to the requirements of the Sarbanes-Oxley Act of 2002.
  *Audit
related fees*
  Audit
related fees include professional services rendered by PricewaterhouseCoopers
LLP in the following areas: accounting and auditing consultations and technical
research.
  3
 *Tax
fees*
  Tax fees
include assistance rendered to the Company in connection with various tax issues
in Canada, the United States and internationally.
  *All
other fees*
  Other
fees include translation services and special reports.
  *Pre-approval
Policies and Procedures*
  All
services provided by PricewaterhouseCoopers LLP are approved by the Audit
Committee in advance of the services being performed. The Audit Committee has
considered and determined the compatibility of the non-audit services provided
by the Company’s principal auditors with auditor independence.
  **Off-Balance
Sheet Arrangements**
  The
Company has no off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on the registrant’s financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
investors.
  **Contractual
Obligations**
  Reference
is made to the table captioned “Contractual Obligations” included in the section
titled “Liquidity” in the 2004 Management Discussion and Analysis attached as an
exhibit hereto.
  **Undertaking**
  Registrant
undertakes to make available, in person or by telephone, representatives to
respond to inquiries made by the Commission staff, and to furnish promptly, when
requested to do so by the Commission staff, information relating to: the
securities registered pursuant to Form 40-F; the securities in relation to which
the obligation to file an annual report on Form 40-F arises; or transactions in
said securities.
  **Consent
to Service of Process**
  The
Registrant has previously filed with the Commission a written irrevocable
consent and power of attorney on Form F-X.
   4
  **Signatures**
  Pursuant
to the requirements of the Exchange Act, the registrant certifies that it meets
all of the requirements for filing on Form 40-F and has duly caused this annual
report to be signed on its behalf by the undersigned, thereto duly
authorized.
  **FAIRMONT HOTELS
      & RESORTS INC.**Date: March 29,
2005
    By:
    /s/ Terence P. BadourTerence P. BadourExecutive
      Vice President,
      Law and Administration and
      Corporate Secretary
    5
   **Exhibit
A**
 **2004
Annual Information Form**
 
 
  **FAIRMONT
HOTELS & RESORTS INC.**
  **ANNUAL
INFORMATION FORM**
  
  **March
28, 2005**
     
  
  
 
  **TABLE
OF CONTENTS**
  
  **Page
      Reference****Annual**
      **Information
      Form**
    
    **Management
      Proxy Circular**
      **(Incorporated**
      **by
      Reference)**
    
    **Annual
      Report**
      **(Incorporated
      by Reference)**CORPORATE
      STRUCTURE
    3GENERAL
      DEVELOPMENT OF THE BUSINESS
    4
    
    
    
    23,
      37DESCRIPTION
      OF THE BUSINESS
    6
    
    
    
    6-15,
      42-43,90-91RISK
      FACTORS
    12DESCRIPTION
      OF CAPITAL STRUCTURE, DIVIDEND POLICY AND MARKET FOR
      SECURITIES
    17DIRECTORS
      AND EXECUTIVE OFFICERS
    19
    
    5-8,
      9TRANSFER
      AGENT AND REGISTRAR
    
    
    
    
    92MATERIAL
      CONTRACTS
    21LEGAL
      PROCEEDINGS
    21INTERESTS
      OF EXPERTS
    21ADDITIONAL
      INFORMATION
    21
 
 ______________
 (1)
    In
      this Annual Information Form, all dollar amounts are in United States
      dollars unless stated otherwise.
 (2)
    In
      this Annual Information Form, information is given as at December 31, 2004
      unless stated otherwise.
 (3)
    Parts of the 2004 Annual Report for the year ended
      December 31, 2004 and the 2005 Management Proxy Circular dated March 1,
      2005 ofFairmont
      Hotels & Resorts Inc. are incorporated by reference into this Annual
      Information Form.
  **FORWARD-LOOKING
INFORMATION**
  This
Annual Information Form contains certain forward-looking statements within the
meaning of the *Private
Securities Litigation Reform Act of 1995* (United
States) relating, but not limited, to Fairmont Hotels & Resorts Inc. and its
subsidiaries’ (“FHR” or the “Corporation”) operations, anticipated financial
performance, business prospects and strategies. Forward-looking information
typically contains statements with words such as “anticipate”, “believe”,
“expect”, “plan” or similar words suggesting future outcomes.
  Readers
are cautioned not to place undue reliance on forward-looking information because
it is possible that predictions, forecasts, projections and other forms of
forward-looking information will not be achieved by FHR. By its nature, the
Corporation’s forward-looking information involves numerous assumptions,
inherent risks and uncertainties including, but not limited to, the following
factors: adverse factors generally encountered in the lodging industry; the
risks associated with global events including war, terrorism, international
conflicts and contagious illness outbreaks; the seasonality of FHR’s business
and operations; the risks associated with real estate investments; failure to
obtain new or maintain existing management contracts; FHR’s acquisition,
expansion and development strategy being less successful than expected; FHR’s
ability to obtain capital to finance the growth of its business; debt financing
risks; potential covenants in FHR’s financing agreements limiting its
discretion; the risks associated with potential
liabilities arising from future claims against Canadian Pacific
Limited; liquidity limitations; currency fluctuations; significant regulation of the
lodging industry; the risks associated with environmental regulation; the impact
of extreme weather conditions and natural disasters; significant competition;
the potential negative effects of strikes and work stoppages; the risks
associated with our internal control over financial reporting being considered
ineffective by regulatory authorities; vacation ownership is subject to
extensive regulation; and the inability of FHR to assure investors that a
judgment of a United States court for liabilities under U.S. securities laws
would be enforceable in Canada, or that an original action can be brought in
Canada by investors for liabilities under U.S. securities laws.
  2
 The
Corporation undertakes no obligation to update publicly or otherwise revise any
forward-looking information, whether as a result of new information, future
events or otherwise, or the foregoing list of fact ors
affecting such information.
  **CURRENCY
EXCHANGE RATES**
 
 Except
where otherwise indicated, all dollar amounts used in this Annual Information
Form are expressed in United States dollars and “$” and US$ means United States
dollars. The following table sets out: (i) the noon rates of exchange for the
United States dollar, expressed in United States dollars per Canadian dollar, in
effect at the end of the periods indicated; (ii) the average noon exchange rates
for these periods; and (iii) the high and low exchange rates during these
periods, based on the rates quoted by the Bank of Canada.
  ****
    
    
    
    **Years
      ended December 31****U.S.
      Dollar per Canadian Dollar**
    
    **January
      1, 2005**
      **through**
      **March
      28, 2005**
    
    **2004**
    
    **2003**
    
    **2002**Noon
      rate at end of period
    
    US$0.8173
    
    US$0.8308
    
    US$0.7738
    
    US$0.6331Average
      noon rate for period
    
    US$0.8147
    
    0.7683
    
    0.7135
    
    0.6368High
      for period
    
    US$0.8342
    
    0.8493
    
    0.7738
    
    0.6598Low
      for period
    
    US$0.7958
    
    0.7159
    
    0.6350
    
    0.6179
  On March
28, 2005, the rate of exchange based on the noon rate as quoted by the Bank of
Canada was US$0.8173 .
  **CORPORATE
STRUCTURE**
  The
issuer’s full corporate name is Fairmont Hotels & Resorts Inc. FHR is
incorporated under the *Canada
Business Corporations Act* . The
Corporation’s head office is located at 100 Wellington Street West, Canadian
Pacific Tower, Toronto-Dominion Centre, Suite 1600, Toronto, Ontario M5K
1B7.
  The
articles of the Corporation provide for authorized capital of an unlimited
number of common shares, an unlimited number of first preferred shares and an
unlimited number of second preferred shares.
   3
   The
intercorporate relationships among FHR, its principal subsidiaries and Legacy
Hotels Real Estate Investment Trust (“Legacy”) are depicted in the diagram
below.
 
 ________________
 (1)
    FHRPI
      holds FHR’s interests in the Southtown lands located in Toronto, Ontario
      and the Coal Harbour lands located in Vancouver, British Columbia. See
      “Real Estate Activities - Land Holdings.”
 (2)
    Legacy is an unincorporated closed-end real estate
      investment trust formed under the laws of the Province of
    Alberta.
  **GENERAL
DEVELOPMENT OF THE BUSINESS**
  FHR has
operated and owned hotels and resorts for over 117 years. Until September 2001,
the Corporation was known as Canadian Pacific Limited (“CPL”). Effective October
1, 2001, pursuant to the plan of arrangement approved by the shareholders of CPL
and by the court, CPL completed a major reorganization (the “Arrangement”),
which divided CPL into five new public companies - Canadian Pacific Railway
Limited, CP Ships Limited, PanCanadian Energy Corporation and Fording Inc.,
while retaining its investment in Canadian Pacific Hotels & Resorts Inc.
which has since been renamed FHR Holdings Inc. (“FHRHI”).
  In 1997,
FHRHI was a Canadian hotel management and ownership business with 25 properties,
with approximately 11,000 guestrooms and one luxury brand, Canadian Pacific
Hotels. The portfolio was primarily a combination of FHR’s original Canadian
Pacific properties and seven hotels purchased from Canadian National Railway Co.
in 1988. In November 1997, FHR sold 11 city center business hotels to Legacy
concurrent with Legacy’s commencement of operations and initial public offering.
FHR acquired an approximate 33% interest in Legacy under this offering. In 1998,
FHR purchased Delta, which at the time had 27 hotels and 10,000 guestrooms under
management or franchise. Also in 1998, FHR purchased the Princess hotel
portfolio, a group of seven warm weather resorts in Mexico, Bermuda, Barbados
and the United States.
  4
 In
October 1999, Fairmont was created through the combination of FHR’s luxury hotel
management business with that of Fairmont Hotel Management L.P. (“Fairmont
L.P.”), a U.S. based luxury hotel manager. Fairmont immediately became the
largest luxury hotel management company in North America, as measured by the
number of rooms under management. FHR contributed management contracts for 27
luxury properties while Fairmont L.P. contributed management contracts for seven
hotels in key United States gateway cities and all rights to the Fairmont brand.
This acquisition provided FHR with an international luxury brand under which it
now operates its world-class hotels and its luxury hotel management
business.
  For
information regarding FHR’s outlook for the 2005 fiscal year, see page 37 of the
2004 Annual Report, which page is incorporated herein by reference.
  **Significant
Acquisitions**
  In
January 2001, FHR acquired the remaining 51% of its Barbados hotels, The
Fairmont Royal Pavilion and The Fairmont Glitter Bay for approximately $20
million. In February 2001, FHR acquired The Fairmont Kea Lani Maui on the Wailea
coast in Maui, Hawaii for approximately $215 million. In July 2001, FHR
purchased a 50% equity interest in The Fairmont Copley Plaza Boston for $21
million in cash from interests controlled by Prince Alwaleed Bin Talal Bin
Abdulaziz Al Saud (“Prince Alwaleed”). In February 2003, FHR acquired the
remaining 50% equity interest controlled by Prince Alwaleed. The total purchase
price for 100% of The Fairmont Copley Plaza Boston was approximately $117
million and was satisfied by the issuance of one million common shares, the
assumption of a mortgage at $64.5 million and cash paid of $30.7 million. In
November 2001, FHR made a $29 million investment to secure the management
contract and a 14.5% equity interest in The Fairmont Dubai, which opened in
February 2002. Subsequently, $7 million of this investment was allocated to
another management contract on similar terms for a property that will be built
in Abu Dhabi, United Arab Emirates. In addition, a further $7 million will be
repaid to FHR if a third management contract is not provided by January
2008.
  In
September 2002, FHR acquired the 16.5% interest in Fairmont held by a subsidiary
of Kingdom Hotels (USA), Ltd. (“Kingdom”), an affiliate of a trust created by
Prince Alwaleed. In consideration for the shares of Fairmont, FHR issued
2,875,000 shares to Kingdom, equivalent to approximately 3.7% of FHR’s issued
and outstanding shares. As a result of this transaction, FHR increased its
controlling interest in Fairmont to 83.5%. In August 2004, FHR purchased the
remaining 16.5% of outstanding shares of Fairmont from Maritz, Wolff & Co.,
one of the original owners of Fairmont L.P., for approximately $70 million in
cash. FHR now owns 100% of Fairmont.
  In
September 2002, FHR invested $8 million for a 19.9% interest in The Fairmont
Sonoma Mission Inn & Spa in Sonoma County California and secured a long-term
management contract for the property. FHR has committed to advance a loan of $10
million on arms-length commercial terms to this hotel. In December 2002, FHR
acquired The Fairmont Orchid, Hawaii for approximately $140
million.
  In April
2004, FHR entered into an agreement to invest $10 million for a 19.9% interest
in The Fairmont Mayakoba, Riviera Maya and a management contract. The resort
will be managed by Fairmont under a long-term management contract.
  In
December 2004, FHR invested $19.8 million in cash for a 25% interest in a
partnership with Kingdom Hotels and the Bank of Scotland and a management
contract. The partnership FHR European Ventures LLP, purchased the Monte Carlo
Grand Hotel in Monaco in December 2004. The property is being managed by
Fairmont under a long-term management contract.
  In
December 2004, FHR invested $10 million for an approximate 14% equity interest
in an entity named Nile City for Hotels and Tourism and a management contract.
Nile City for Hotels and Tourism retains the investment in a hotel property that
is being constructed in Cairo, Egypt. The hotel will be managed by Fairmont
under a long-term management contract.
  5
 **Significant
Dispositions**
  In
February 2001, FHR sold The Fairmont Empress in Victoria, British Columbia and
Fairmont Le Château Frontenac in Quebec City, Quebec to Legacy for approximately
$200 million, while retaining the long-term management contracts, each of which
had a remaining term of 49 years at the time of sale.
  In July
2004, FHR sold The Fairmont Kea Lani Maui for cash proceeds of $355 million. The
resort will continue to be managed by Fairmont under a long-term management
contract.
  In July
2004, FHR sold The Fairmont Glitter Bay for cash proceeds of approximately $31.7
million. The resort will continue to be managed by Fairmont under a long-term
management contract.
  In
September 2004, FHR sold 12 million units of Legacy for $63 million in cash. The
sale decreased FHR’s equity investment in Legacy to 23.7%.
  **DESCRIPTION
OF THE BUSINESS**
 
 **Overview**
  FHR is
one of North America’s leading managers of luxury hotels. FHR currently has 83
luxury and first-class hotels and resorts in its portfolio, representing more
than 33,000 rooms. An additional three properties are currently under
development. FHR has operated and owned hotels for over 117 years and currently
manages properties principally under the Fairmont and Delta brand names. For
additional information regarding FHR’s competitive strengths, see pages 10 to 11
of the 2004 Annual Report, which pages are incorporated herein by
reference.
  ***Hotel
Ownership***
  FHR has
real estate ownership interests ranging from approximately 15% to 100% in 23
properties. This distinctive collection of hotel properties is located primarily
in exclusive resort destinations or key North American gateway cities. All of
FHR’s hotel ownership interests are held directly or indirectly by FHR Real
Estate Corporation (“FHRREC”), with the exception of The Fairmont Chateau Lake
Louise, and the equity interest in The Fairmont Sonoma Mission Inn & Spa,
which are held by other subsidiaries of FHR. Fairmont manages the 20 luxury
properties and Delta manages the three first-class properties.
  The
majority of FHR’s income before interest, taxes, amortization, other income and
expenses and reorganization and corporate expenses (“EBITDA”) are generated by
its ownership operations. Approximately 54% of gross revenue from hotel
ownership is generated from room revenue and 33% is generated from food and
beverage services. Other revenue streams such as spa facilities, golf courses,
retail operations, parking and laundry, contribute the balance of revenues
earned by the owned properties.
  Approximately
65-70% of FHR’s EBITDA is generated by hotel ownership interest in 10 properties
in seven locations. The Fairmont Banff Springs and The Fairmont Chateau Lake
Louise, located in Banff National Park in the Canadian Rockies, are protected by
high barriers to entry since development in the park is controlled by the
Government of Canada. The Fairmont Chateau Whistler is in Whistler, British
Columbia, a year-round resort widely recognized as one of North America’s best
ski destinations. The Whistler hotel market is nearing full development
capacity, which will restrict new supply growth. The Fairmont Scottsdale
Princess is a Five Diamond hotel in the upper-upscale market in the growing
Scottsdale, Arizona market, which has recently experienced new hotel supply. The
Fairmont Hamilton Princess and The Fairmont Southampton are located in Bermuda,
where FHR enjoys favorable income tax treatment on its earnings. The Fairmont
Acapulco Princess and The Fairmont Pierre Marques in Acapulco, Mexico represent
an opportunity to create increases in the value of FHR’s portfolio through the
continuing development of these resorts. The Fairmont Orchid, Hawaii is located
in one of Hawaii’s most sought after locations. The Fairmont Copley Plaza in
Boston recently completed a major renovation program restoring the hotel to its
original grandeur.
  6
 ***Investment
in Legacy***
  FHR also
has an approximate 23.7% equity interest in Legacy, which owns 22 hotels across
Canada and two in the United States, all of which are managed by either Fairmont
or Delta. FHR accounts for its ownership interest in Legacy on an equity basis.
For further information regarding FHR’s transactions with Legacy, see pages 42
to 43 of the 2004 Annual Report, which pages are incorporated herein by
reference.
  ***Real
Estate Activities***
  ***Vacation
Ownership - Fairmont Heritage Place***
  Management
has launched a vacation ownership product, Fairmont Heritage Place, which it
believes will allow FHR to compete for new development opportunities and improve
its return on owned assets by better leveraging its existing hotel
infrastructure. Construction is underway for the second phase of FHR’s first
vacation ownership project, which is located in Acapulco, Mexico. Management has
also identified potential vacation ownership opportunities in Scottsdale,
Bermuda and Barbados.
  ***Land
Holdings***
  FHR also
holds other real estate assets, which consist primarily of the Southtown lands
in Toronto, Ontario and the Coal Harbour lands in Vancouver, British Columbia.
FHR owns 100% of the Toronto lands and a 75% interest in the Vancouver lands.
Currently there are no formal plans to build new hotels at these locations. FHR
expects to sell the remaining lands over the next four years.
  The
Southtown lands are located in the core of downtown Toronto between the
financial district and Lake Ontario and are in close proximity to Air Canada
Centre. More specifically, the site is located south of Union Station and north
of the Gardiner Expressway, primarily on both sides of York Street. To date, FHR
has disposed of two parcels of the Southtown lands and is party to ongoing
discussions with several prospective parties who have expressed interest in
purchasing certain of the remaining sites. The remaining seven parcels of land
are zoned for the development of 4.9 million square feet of hotel, office, and
residential uses.
  The Coal
Harbour lands in downtown Vancouver are located along the Burrard Inlet
waterfront, west of The Fairmont Waterfront Hotel and overlook the harbour and
Stanley Park. To date, FHR has sold all the land except for one site zoned for a
mixed hotel/residential development which would allow for the development of
800,000 square feet. A number of prospective parties have recently expressed an
interest in the hotel site.
  ***Management
Operations***
  FHR
manages hotels under two subsidiaries, Fairmont and Delta, each with their own
distinct brand identity. Under their respective management contracts, Fairmont
and Delta generally oversee all aspects of the day-to-day operations of each
property on behalf of the owner, including hiring, training and supervising
staff, maintaining sales and marketing efforts, providing accounting and
budgeting functions, providing support for management information systems and
applications and the safekeeping, repair and maintenance of the physical assets.
For these services, Fairmont and Delta earn a base fee, which is typically in
the range of 2.5% to 3.5% of a property’s gross revenues and can earn an
incentive fee based on the property achieving certain operating performance
targets.
  **Fairmont**
  Fairmont
is North America’s largest luxury hotel management company as measured by rooms
under management. Currently, Fairmont manages more than 22,000 rooms at 46
luxury properties in major city centers and resort destinations throughout
Canada, the United States, Mexico, Bermuda, Barbados, the United Arab Emirates,
the United Kingdom and Monaco. Fairmont caters to the luxury segment of the
market, which is sometimes referred to as four or five star. Luxury hotels are
full service properties offering an exceptional level of personalized service
and a complete range of amenities and facilities, including food and beverage
outlets, meeting rooms and recreational activities. The hotel staff to guest
ratio tends to be higher at luxury hotels in order to allow for more
personalized service.
  7
 Fairmont’s
incentive-based management contracts have an average remaining term of more than
40 years, which management believes are among the longest in the industry. In
2005, FHR expects about 30% of Fairmont’s management contracts to earn incentive
fees. Within the next one to two years, the majority of current contracts are
expected to earn incentive fees. Most of these contracts have set thresholds
that do not change over the life of the contract unless significant renovations
are made to the managed hotel. Fairmont participates in up to 30% of earnings
above the threshold on most of its management contracts.
  One of
Fairmont’s strengths is the diversity of its revenue base, which is relatively
balanced between individual and group travel and between business and leisure
travel. The individual or transient traveler is typically less price sensitive,
whereas the group travel business helps build occupancy in off-peak seasons,
providing stability in earnings. Business travel accounts for approximately half
of Fairmont’s revenues under management and the balance is derived from leisure
travel. Further diversification is provided to Fairmont as approximately 51% of
revenues are derived from city center locations and the balance from resort
properties. The resorts attract both corporate travelers for offsite retreats
and leisure customers who take advantage of the activities and amenities offered
by these locations.
  Fairmont
enjoys a considerable competitive advantage in the group business segment of the
industry over other luxury four or five star brands, due to its large meeting
facilities and greater number of guestrooms. Fairmont’s average number of rooms
per hotel is approximately 500, whereas Fairmont’s major competitors, including
Ritz-Carlton, Four Seasons, Sheraton Luxury Collection and Preferred Hotels and
Resorts, generally range between 200 to 330 rooms per hotel. See page 90 of the
2004 Annual Report, which page is incorporated herein by reference.
  Fairmont
has certain amenities and expertise in diverse areas that distinguish it in the
luxury sector. For example, its Fairmont Gold product has carved out a niche
that competes with other luxury hotels. This “ *hotel
within a hotel* ”,
typically one or two floors of a Fairmont property, has its own check-in desk,
lounge area, upgraded amenities in each guestroom and offers superior
personalized service. This product commands a higher rate and competes with the
upper end of the luxury hotel segment from both a service and room rate
perspective.
  Fairmont
also has resources dedicated to both golf and spa operations. FHR has operated
golf courses since 1911 and its courses, situated in some of North America’s
finest natural settings, are designed by some of the world’s foremost golf
course architects. Fairmont has considerable experience in golf course
management and maintenance and retail golf operations. FHR is Canada’s leading
operator of high-end resort golf courses.
  Fairmont
introduced its spa product, “Willow Stream The Spas At Fairmont”, with the
opening of Willow Stream the spa at The Fairmont Scottsdale Princess in December
2001. In 2002, Fairmont expanded its spa product to The Fairmont Empress, The
Fairmont Dubai, The Fairmont Southampton, The Fairmont Acapulco Princess and The
Fairmont Banff Springs. Fairmont converted the existing spa at The Turnberry
Isle Resort & Club in 2004.
  **Delta**
  Delta is
Canada’s largest first-class hotel management company, with over 11,000 rooms at
37 managed and franchised properties across Canada. See page 91 of the 2004
Annual Report, which page is incorporated herein by reference. Since FHR
acquired Delta in 1998, FHR has upgraded its portfolio of properties and
enhanced the reputation of the Delta brand. Delta strengthens FHR’s leadership
position in the Canadian marketplace, adds a complementary brand to its
portfolio and allows FHR to achieve significant economies of scale.
  8
 Delta’s
incentive-based management contracts have an average remaining term of more than
10 years. In 2005, approximately one-third of Delta’s managed hotels are
expected to earn incentive fees. Delta participates in up to 30% of earnings
above the threshold on some of its management contracts.
  Delta has
certain amenities and expertise in diverse areas that distinguish it in the
first-class sector. For example, Delta’s Signature Club combines the exclusive
use of a private lounge and upgraded guestrooms and amenities. Signature Club
guestrooms achieve premium rates, enabling Delta to increase revenues. Delta has
a strong regional sales network across Canada and is recognized for its brand
strength and property distribution within its marketplace. Delta’s major brand
competitors are Hilton, Radisson and Sheraton.
  **Fees
and Services**
  Under
their management contracts, Fairmont and Delta generally oversee all aspects of
the day-to-day operations of each property on behalf of the owner, including
hiring, training, and supervising staff, maintaining sales and marketing
efforts, providing accounting and budgeting functions, providing support for
management information systems and applications and providing for the
safekeeping, repair and maintenance of the physical assets. Fairmont and Delta
perform these services within the guidelines contained in the annual operating
and capital plans that are submitted to the owners of the properties during the
last quarter of the preceding year for their review and approval. For these
services, Fairmont and Delta typically earn a base fee calculated as a
percentage of a property’s gross revenues and may earn an incentive fee based on
certain operating results of the property.
  Fairmont
and Delta provide centralized reservation services, marketing and sales programs
and advertising services to properties under management. All of these services
are provided by Fairmont and Delta on a cost recovery basis.
  **Owners’
Responsibilities**
  Under
Fairmont and Delta’s management contracts, the hotel owner generally is
responsible for the funding of the hotel’s working capital requirements and
capital expenditures. Fairmont and Delta annually prepare an operating plan and
capital expenditure budget for the property owner to approve. All structural
changes, major refurbishing programs and major repairs require the separate
approval of a property owner prior to implementation by Fairmont or Delta. The
property owner also employs the hotel staff and pays their salaries, including
all benefits.
  **Capital
Improvements and Investments**
  FHR
maintains the high quality of its properties through an annual maintenance
program, which is funded by the owners of the properties. The annual maintenance
program is based on a percentage of revenues and generally ranges from 4% to 6%
of each property’s gross revenue. Other projects are undertaken in order to
maximize profits. During 2004, approximately $74 million was spent on
maintenance and improvements to the owned assets, the majority of which was
spent on profit-enhancing projects.
  **Marketing
and Guest Recognition Programs**
  FHR has
several e-commerce initiatives designed to assist in the optimization of asset
performance, including a direct web-based hotel and activity booking system, a
content management framework, sophisticated hotel search engines and marketing
campaign management and reporting systems. Fairmont has also re-engineered its
core systems to exploit the latest web-based technologies, which now operate
over the Internet to any location in the world. Fairmont has built a digital
infrastructure that interconnects its guestrooms, the employee base, the
Internet and all the traditional travel distribution channels.
  9
 As part
of the initiatives outlined above, FHR’s existing third party web-based systems
are being replaced with more sophisticated systems that will, among other
things, enable guests to plan their Fairmont experience on-line. The new system
includes a data warehouse which will capture the entire transaction history of
guests, which will be matched with profiles that can be developed on-line. The
resulting data can be leveraged to gain a larger share of guests’ spending and
enhance loyalty to the brand. Guests will be able to view Fairmont’s facilities
and book their rooms on-line, as well as arrange a variety of other activities
both off property and at the destination, including spa appointments and golf
tee times. This information will then become a part of a guest’s profile, making
it possible to offer tailored packages to that guest at his or her next on-line
session. Members of President’s Club, Fairmont’s guest recognition program, will
have access to their own secure area of the web site where they can update their
personal profiles. These enhanced profiles will then be communicated to
personnel at the hotel who will “customize” the guest’s stay. In addition, this
information will greatly enhance Fairmont’s ability to communicate with this
very important target group, ensuring that Fairmont provides the services that
these customers consider important. Fairmont currently has approximately 339,000
active President’s Club members, an increase of 36% over 2004. Delta Privilege,
a guest recognition membership program designed for frequent business travelers,
has approximately 80,000 active members, up 14% over 2004.
 
 **Seasonality
of Business**
  FHR’s
hotels are affected by normal recurring seasonal patterns. The Canadian and U.S.
city center properties tend to experience a slowdown in demand during the
December through March period. As a result, the majority of these properties
typically incur a loss in the first quarter of each year. This negative impact
on operations at the city center hotels is offset, to some degree, by increased
travel to FHR’s warm weather and ski resorts in these months and may, in the
future, be offset to a greater extent as FHR’s portfolio of resort properties
increases.
  **Environmental
Protection**
  Environmental
compliance programs are in place at all properties that FHR manages and owns. No
significant issues were identified at any of these properties as a result of the
annual environmental questionnaire completed by the hotels.
  As part
of the acquisition process of both the Princess Portfolio and Fairmont L.P.,
environmental assessments were reviewed for all hotels involved. Any removal or
containment of hazardous materials in these hotels is being carried out during
planned renovations of these properties. All of the properties purchased by
Legacy are required by its Declaration of Trust to have environmental
assessments.
  In
addition to compliance with regulations, FHR is a leader in promoting
environmentally sound business practices at its owned and managed hotels. In
1991, Fairmont's Green Partnership Phase I was introduced to lead the company to
a position of environmental stewardship. The first phase of the program focused
on property level improvements in the areas of waste management, energy
conservation, water conservation and purchasing practices. In 1998, Phase II of
the program emerged in response to the successes witnessed through the first
phase and extended to include the industrial composting of organic waste,
eco-friendly meeting options for guests, the donation of left-over food to food
banks and used soaps and amenities to charities, or their return to the
manufacturer for recycling.
  Committed
to setting the highest standard of environmentally responsible golf course
management across the continent, FHR takes a sensitive approach to the
stewardship of its recreational lands. In March 1997, The Fairmont Chateau
Whistler became FHR's first golf course to earn the prestigious Audubon
accreditation. In August 1999, The Fairmont Banff Springs also gained Audubon
accreditation, being only the 15 th course
in Canada and the 3rd in Alberta to achieve this status. Fairmont Le Château
Montebello and The Fairmont
Jasper Park Lodge are the most recent members of the FHR family to achieve this
prestigious title. It is FHR's goal to have all managed golf courses, including
those in Bermuda and Mexico, accredited as wildlife sanctuaries through Audubon
International.
 
 10
 **Human
Resources**
  FHR
currently employs or supervises more than 30,000 full-time and part-time
employees. FHR encourages a strong service-based culture among employees with
the goal of providing consistent, personalized service of an exceptional
standard. Fairmont has developed a series of programs designed to select, train
and motivate employees who will share its objective of ensuring that the
expectations of guests are consistently met and exceeded. Delta has its own
human resources training programs, which are similar to those at Fairmont.
  Fairmont
endeavors to ensure that it hires people that are most suited for the positions
offered by requiring each candidate to undergo a screening process that has been
developed by a well-known management consulting firm. FHR was selected by
Maclean’s magazine as Canada’s “Top 100 Employers” for a third consecutive year.
  Approximately
50% of the employees at FHR’s managed and owned hotels are members of collective
bargaining units. These employees are represented by 28 unions, with a total of
53 bargaining units. The agreements with the various bargaining units have
staggered expiry dates. In 2004, six Fairmont properties and one Delta hotel
successfully negotiated new labor contracts.
  **Intellectual
Property**
  FHR
believes that its brands are very important to its success. FHR has a
significant number of trade names, trademarks and service marks, including those
relating to Fairmont and those acquired as a result of its purchase of the Delta
and Princess portfolios. In addition, it is the owner of many Internet domain
names related to its brands. FHR vigorously defends its brands and spends
considerable time and resources in surveillance, registration, protection and
prosecution of infringers. The “Canadian Pacific” trademark and its derivatives
were transferred to Canadian Pacific Railway Company as part of the Arrangement,
however FHR has secured a perpetual, royalty-free license for its continued use
of these trademarks.
  **Insurance**
  All
hotels managed by FHR are insured against property damage, business interruption
and liability at the expense of the owner of the hotel. Under these policies,
FHR is also insured against loss of fee income in the event of a temporary
business interruption arising from an insured peril at any of the properties
that it manages. In addition, FHR obtains indemnities from the owners of the
properties that it manages in respect of damages caused by acts, omissions and
liabilities of the employees of the property or of FHR, other than damages
resulting from certain actions of FHR and certain senior management personnel.
FHR also maintains directors and officers liability insurance. FHR believes that
its insurance coverage is adequate. However, if FHR were held liable for amounts
exceeding the limits of its insurance coverage or for claims outside the scope
of that coverage, its business, results of operations and financial conditions
could be materially and adversely affected.
  11
 **FHR’s
Ownership Interests**
  FHR had a
beneficial interest in the following entities, which could be viewed as being
material to the Corporation:
  **Entity
      and Governing Jurisdiction**
    **FHR’s
      Beneficial Interest**Chateau
      Lake Louise Corporation (Nova Scotia)
    100%Chateau
      M.T. Inc. (Quebec)
    19.9%Chateau
      Whistler Resort Partnership (British Columbia)
    100%Conference
      Plaza Hotel Limited Partnership (British Columbia)
    34.8%Copley
      Plaza 2001 LLC (Delaware)
    100%CP
      Hotels (Barbados) Inc. (Barbados)
    100%CP
      Hotels (U.S.) 1998 Inc. (Delaware)
    100%CPH
      International Financing Rt. (Hungary)
    100%Delta
      Hotels Limited (Ontario)
    100%Fairmont
      Hotels Inc. (Canada)
    100%Fairmont
      Hotels & Resorts International Rt. (Hungary)
    100%FHIW
      Hotel Investments (U.S.) Inc. (Delaware)
    100%FHR
      Holdings Inc. (Canada).
    100%FHR
      (ML) Hotel Holdings LLC (Delaware)
    100%FHR
      Properties Inc. (Canada)
    100%FHR
      Real Estate Corporation (Canada)
    100%Hamilton
      Properties Limited (Bermuda)
    100%Impulsora
      de Revolcadero S.A. de C.V. (Mexico)
    100%Legacy
      Hotels Real Estate Investment Trust (Alberta)
    23.7%Manoir
      Richelieu Limited Partnership (Quebec)
    25%Organización
      Ideal, S.A. de C.V. (Mexico)
    100%Scottsdale
      Princess Partnership (Arizona)
    100%SMI
      Real Estate LLC (Delaware)
    19.9%Sun
      Peaks Hotel Limited Partnership (British Columbia)
    27.61%Westend
      Properties Limited (Bermuda)
    100%
   **RISK
FACTORS**
  FHR’s
operations are subject to risks that could cause future operating results to
differ significantly from our performance in the past. An event arising from
these risks could materially affect our business, prospects, financial
condition, results of operations or cash flows.
 
 **Our
operations and asset values are subject to adverse factors generally encountered
in the lodging industry.**
 We manage
and own hotels in both the luxury and first-class segments of the lodging
industry which subjects us to the operating risks inherent in the industry.
Besides the specific conditions discussed in more detail below, these risk
factors include:
 • Cyclical
downturns arising from changes in global, national and local economic
conditions;
 • Changes
in demand for rooms and related services caused by changes in popular travel
patterns;
 • The cost
and availability of air travel;
 • Occasional
oversupply of guest accommodations in our markets, which may adversely affect
occupancy and room rates;
 • Competition
from other luxury and first-class hotels and resorts;
 • Increases
in local taxes;
 • The
recurring need for the renovation, refurbishment and improvement of hotel and
resort properties;
 • Increases
in wages, prices, construction and maintenance costs that may result from
inflation, government regulations, changes in interest rates or currency
fluctuations;
 • The
availability of financing for operating or capital requirements;
 • The
relatively fixed nature of our property-level operating costs and
expenses;
 • Seasonal
variations in cash flow; and
 • Other
factors including war, international conflicts, terrorism, contagious illness
outbreaks, natural disasters, extreme weather conditions and labor shortages,
work stoppages or disputes.
 The
effect of these factors varies from hotel to hotel, depending on its location
and whether we own or manage the property.
 
 **Global
events have had an impact on our industry.**
 Our
business is highly dependent on global travel and anything that effects travel
generally or travel to a specific region or location that we operate in (or
derive business from) will affect our business. Various global events including
war, international conflicts, terrorism and contagious illness outbreaks (such
as SARS), or the perceived threat of these events, may cause disruption in
domestic and international travel. Recent global events have affected the
lodging industry and FHR’s results of operations and financial condition. Any
recurrence of these events would be damaging to our performance.
 
 12
 **Real
estate investments are subject to numerous risks.**
 We own
and lease hotels and are subject to the risks that generally relate to
investments in real property. The investment returns available from equity
investments in real estate depend on the income earned and capital appreciation.
We also have advanced loans or guaranteed the obligations of third parties, in
connection with entering into management contracts for certain hotels. Weak
operating income performance at these hotels could give rise to losses under
these loans and guarantees.
 
 There are
a variety of factors that affect income from properties and real estate values,
including government regulations, zoning, tax and eminent domain laws, interest
rates and the availability of financing. For example, new or existing zoning or
tax laws can make it more expensive and time-consuming to develop real property
or expand, modify or renovate properties. When interest rates increase, the cost
of acquiring, developing, expanding or renovating real property increases and
real property values may decrease as the number of potential buyers decreases.
Similarly, as financing becomes less available,  it
becomes more difficult both to acquire and to sell real property. Under eminent
domain laws, governments can expropriate or take real property for less than an
owner believes the property is worth. Any of these factors could have a material
adverse impact on the results of operations or financial condition, as well as
on our ability to make distributions to shareholders. In addition, as our hotel
real estate investments are in the luxury and first-class segments and include
some properties located outside of North America, they may be relatively
difficult to sell in a timely manner.
 
 Our
income would also be adversely affected if our properties do not generate
revenue sufficient to meet operating expenses, including debt service and
capital expenditures.
 
 **Failure
to obtain new or maintain existing management contracts could adversely affect
our results of operations.**
 Management
contracts expire or are acquired, terminated or renegotiated in the normal
course of business. We manage hotels for various third party hotel
owners  under the
terms of each property’s management contract. These contracts can generally be
terminated by the non-defaulting party upon default in payment or failure to
comply with the terms of the contract. Typically, our management contracts are
subject to economic performance tests. Failure to meet these tests, maintain
standards established in the contract or to meet other terms and conditions of a
contract could result in the loss or cancellation of a management contract prior
to the expiration of the term. Some management contracts can also be terminated
if the owner sells the property to a new owner that does not want to retain the
existing contract. In some cases we have made a financial investment in
connection with securing a management contract and that investment could be
impaired if the contract were to be cancelled or terminated.
 
 In many
jurisdictions, in the event of bankruptcy or insolvency proceedings, a hotel
management contract may be subject to termination or may not be enforceable
against a trustee in bankruptcy or other representative of the owner. In such
circumstances, the management company would generally have an unsecured claim
for breach of contract against the owner of the property or the estate. Further,
in the event of enforcement proceedings by a secured lender to a hotel, a
management contract may not be enforceable by us against the lender unless, to
the extent permitted by applicable bankruptcy or insolvency laws, the lender has
executed a non-disturbance agreement.
 
 **Our
acquisition, expansion and development strategy may be
unsuccessful.**
 We intend
to increase revenues and net income by securing new management agreements,
establishing strategic partnerships for new hotel development, acquiring more
properties and expanding existing properties. It is not possible to ensure that
future management or acquisition opportunities will exist on acceptable terms,
that any newly managed or acquired properties will be successfully integrated
into our operations or that we will fully realize the intended results of our
strategy. We cannot give assurance that we will be able to secure the necessary
financing with acceptable terms.
 
 13
 **There
can be no assurance that we will be able to obtain the necessary additional
capital to finance the growth of our business.**
 The
acquisition and expansion of hotels, as well as the ongoing renovations,
refurbishment and improvements required to maintain or upgrade existing
properties, are capital intensive. Such costs are funded from operating cash
flow and financings. The availability of future borrowings and access to the
capital markets for financing depends on prevailing market conditions and the
acceptability of financing terms offered. There can be no assurance that future
debt or equity financings will be available, or available on acceptable terms,
in an amount sufficient to fund our needs. In addition, an inability to obtain
financing for a project could cause cancellation or short-term interruption of
construction or development of projects.
 
 **We
are subject to a number of risks associated with debt
financing.**
 We are
subject to a number of risks associated with debt financing, including the risk
that cash flow from operations will be insufficient to meet required payments of
principal and interest or to support repayment at maturity. To the extent that
we maintain floating rate indebtedness, we are exposed to the risk that interest
rates will increase. In addition, the covenants contained in our loan and credit
facilities imposes limitations on our ability to acquire and dispose of assets
among other things.
 
 Moreover,
there can be no assurance that we will be able to repay or refinance existing
indebtedness when it matures or that the terms of refinancing will be favorable.
Our leverage may have important consequences. For example, our ability to obtain
additional financing for acquisitions, working capital, capital expenditures or
other purposes may be impaired or financing may not be available on favorable
terms. A substantial decrease in operating cash flow or an increase in expenses
could make it difficult for us to meet our debt service requirements and force
us to  modify
our operations. If we incur higher levels of debt than some of our competitors,
we will be placed at a competitive disadvantage.
 
 **Covenants
in our financing agreements could limit our discretion in operating our
businesses and could limit our ability to pay dividends.**
 Our
financing agreements contain covenants that include limits on the occurrence of
additional secured debt, limits on liens on property, minimum EBITDA to interest
coverage ratios, maximum debt to EBITDA ratios and limits on mergers, asset
sales and capital expenditures. Future financing agreements may contain similar
or more restrictive provisions and covenants. A default may occur if we fail to
comply with the restrictions in our financing agreements. A default could allow
creditors to accelerate the related debt as well as any other debt to which a
cross-acceleration or cross-default provision applies. A default could also
allow creditors to foreclose on the properties securing such debt or restrict
the payment of dividends. Credit facilities typically require the provision of
cash deposits, repayment of funds or cash flow sweeps when financial covenants
are not met.
 
 **We
are subject to potential liabilities arising from future claims against Canadian
Pacific Limited.**
 Our
predecessor corporation was Canadian Pacific Limited (“CPL”). When CPL
reorganized in 2001, each of the entities which resulted from that
reorganization indemnified us against any claims which arose prior to the
reorganization in their respective businesses. As the successor to CPL we may
become subject to potential liabilities arising from future claims against our
predecessor corporation, some of which may be subject to these indemnities and
others of which may arise out of our business. To the extent that material
liabilities in respect of these obligations arise and the scope of existing
indemnities in favor of CPL is insufficient, these liabilities could have an
adverse effect on our business.
 
 **We
are subject to certain potential liquidity limitations as a result of our
unfunded pension liabilities being backed by letters of
credit.**
 We are
subject to certain potential liquidity limitations as a result of our unfunded
pension liabilities being backed by letters of credit. We have issued letters of
credit in respect of our unfunded pension liabilities. These letters of credit
have been issued pursuant to the terms of our revolving credit facilities, with
the result that our available liquidity under such facilities has been reduced
by the amount of these letters of credit. As a result of this reduced liquidity,
there is a risk that should we need more liquidity than the amount available
under these facilities, we may not be able to access that liquidity quickly or
on favorable terms or at all. If this resulted in our being unable to fund our
ongoing obligations as they become due, this could have an adverse effect on our
business. In addition, the terms of our revolving credit facilities contain
financial covenants and other covenants that, if violated, could require
immediate repayment of amounts outstanding under the letters of credit in
respect of our unfunded pension liabilities.
 
 14
 **Currency
fluctuations may have a material adverse effect on our financial
statements.**
 We
currently have hotel management and ownership operations in eight countries:
Canada, the United States, Mexico, Bermuda, Barbados, the United Arab Emirates,
the United Kingdom and Monaco. We record financial results for the operations in
each country in the local currencies while reporting consolidated financial
results in U.S. dollars. As a result, our earnings and financial position are
affected by foreign exchange rate fluctuations, specifically changes in the
value of the U.S. dollar, through translation risk and transaction risk.
Translation risk is the risk that financial statements for a particular period,
or at a certain date, depend on the prevailing exchange rate of the local
currencies against the U.S. dollar. Transaction risk is the risk that the
exchange rate at which a transaction is initially recorded will be different
from the rate at which it is settled. We endeavor to match foreign currency
revenues, costs, assets and liabilities to provide a natural hedge against
translation and transaction risks. However, there can be no assurance that these
measures will be effective in the management of these risks.
 
 **Currency
fluctuations may have a material adverse effect on our
operations.**
 A
significant increase in the value of a currency in the countries where we
operate can have an adverse effect on demand for lodging at our hotels in those
countries. For example, the increase in the Canadian dollar compared to the U.S.
dollar in 2004 had a significant effect on U.S. travel to Canada while
encouraging Canadians to travel abroad.
 
 **The
lodging industry is subject to significant regulation.**
 We are
subject to numerous laws and regulations in every jurisdiction in which we
operate, including those related to the preparation and sale of food and
beverages, such as health and liquor licensing laws. Our properties are also
subject to laws and regulations governing relationships with employees such as
those covering minimum wages, maximum working hours, overtime, working
conditions, hiring and terminating employees and work permits. Furthermore, the
success of our strategies to expand existing properties, acquire new properties
or to open  newly-constructed
properties is contingent upon, among other things, receipt of the required
licenses, permits and authorizations, including local land use permits, building
and zoning permits, health and safety permits and liquor licenses.
 
 Changes
or concessions required by regulatory authorities could involve significant
additional costs and delay or prevent completion of the construction or opening
of a project or could result in the loss of an existing license. As a result of
the geographic diversity of our businesses, these regulatory matters arise in a
number of jurisdictions, many of which have distinctive regulatory
regimes.
 
 Under the
United States’ Americans with Disabilities Act, or ADA, and similar state
legislation, all public accommodations in the U.S. are required to meet various
requirements related to access and use by disabled persons. If a U.S. court or
administrative agency determines that any of our U.S. hotels are not in
compliance with the ADA, the result could be a judicial or administrative order
requiring compliance, imposition of a fine or an award of damages to private
litigants, including possible class damages. We have responsibilities under the
ADA for both our owned and managed hotels in the United States. Under the
management agreements for our managed hotels in the U.S., costs associated with
the ADA are generally borne by the owner. However, any adverse rulings could
have an adverse effect on the fees we earn on such management
contracts.
  **Operations
are subject to laws and regulations relating to environmental
matters.**
 As the
current or previous owner or manager of a hotel, we could be liable for the
clean up of contamination and other remedial actions under various laws,
ordinances and regulations relating to environmental matters. These laws,
ordinances and regulations often impose liability without regard to whether the
owner or operator knew of, or was responsible for, the condition requiring the
environmental response.
 
 15
 The
presence of contamination from hazardous or toxic substances, or the failure to
remedy a contaminated property properly, may affect an owner’s ability to sell
or rent the property, to use the property for its intended purpose, or to use
the property as collateral when borrowing. In addition, as we arrange for the
disposal or treatment of hazardous or toxic substances, we may be liable for the
cost of removal or remediation of substances at the disposal or treatment
facility, regardless of whether the facility is or was owned or operated by us.
Environmental laws require abatement or removal of certain asbestos-containing
material in the event of damage, demolition or renovation. We have an asbestos
abatement program and continue to manage these materials in many of our
hotels.
 
 Laws and
regulations change over time and we may become subject to more stringent
environmental laws and regulations and face broader environmental liability
under common law. 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 or previously managed or owned, but such
liabilities may exist and may be material.
 
 **Operations
may be adversely affected by extreme weather conditions and the impact of
natural or other disasters.**
 We
operate properties in a variety of locations. Some of these properties
experience extreme weather conditions that can affect the hotels as well as
customer travel. From time to time, this can have a significant adverse
financial impact on our properties or the regions in which they are
located.  Properties
are also vulnerable to the effects of destructive forces, such as earthquakes,
hurricanes, fire, storms and flooding. For example, our properties in Bermuda
suffered extensive hurricane damage in September 2003 resulting in $9 million of
uninsured costs. Although our properties are insured against property damage,
damages resulting from acts of God or terrorism may exceed the limits of the
insurance coverage or be outside the scope of the coverage.
 
 **There
is a great deal of competition in the lodging industry.**
 There is
intense competition between the operators of luxury and first-class hotels to
attract guests. Competition for guests is based primarily on brand name
recognition, convenience of location, quality of the property, room rates and
the diversity and quality of food, services and amenities offered. Demographic,
political or other changes in one or more of our markets could adversely affect
the convenience or desirability of our properties. We also compete for
employees. We also compete for management contracts and acquisition
opportunities with other luxury and first-class hotel managers and owners who
may have substantially greater financial resources. This competition may have
the effect of reducing the number of investment opportunities available to us
and increasing our cost to acquire management contracts or
properties.
 
 **Our
ability to operate our properties may be adversely affected if our relationship
with employees were to deteriorate.**
 Relations
with employees in various countries, including approximately 14,000 employees
represented by 28 labor unions, could deteriorate due to disputes related to
such issues as wage or benefit levels or our response to changes in government
regulation of workers and the workplace. Our operations rely heavily on
employees, whether they are employed directly or supervised by Fairmont or
Delta, and the employees’ ability to provide high-quality personal service to
guests. Any labor shortage due to competitive pressures or stoppage caused by
disagreements with employees, including those represented by labor unions, could
adversely affect our ability to provide these services and could result in the
temporary closure of a particular hotel, reduce occupancy and room revenue or
potentially damage our reputation.
 
 **Our
internal control over financial reporting may not be considered effective, which
could result in possible regulatory sanctions and a decline in our share
price.**
 We will
be required to furnish a report on our internal control over financial reporting
with our Annual Report on Form 40-F for the fiscal year ending December 31,
2006. This internal control report will contain an assessment by our management
of the effectiveness of our internal control over financial reporting (including
the disclosure of any material weakness) and a statement that our independent
auditors have attested to and reported on management’s evaluation of such
internal controls. We are required to, among other things, maintain effective
disclosure controls and procedures and internal control over financial
reporting.
 
 16
 Ultimately,
our internal control over financial reporting may not be considered effective
if, among others things:
 ·
    any
      material weakness in our internal controls over financial reporting
      exists; or
 ·
    we
      fail to remediate assessed deficiencies.
 
 Due to
the number of controls to be examined, the complexity of the project, and the
subjectivity involved in determining the effectiveness of controls, we cannot be
certain that all of our controls will be considered effective by management or,
if considered effective by our management, that our auditors will agree with
such assessment.
 
 In
addition, we are required by law to certify each quarter as to the absence of
any material deficiency in our internal controls. If we are unable to assert
that our internal control over financial reporting is effective, or if our
auditors are unable to attest that our management’s report is fairly stated or
they are unable to express an opinion on our management’s evaluation, we could
be subject to regulatory sanctions and investors could lose confidence in the
accuracy and completeness of our financial reports, either of which could have
an adverse effect on the market price for our securities.
 
 **Vacation
ownership is subject to extensive regulation.**
 We are
developing and will operate vacation ownership resorts and are subject to
extensive government regulation in the jurisdictions where these resorts will be
located, marketed and sold. In addition, the laws of many jurisdictions in which
we may sell vacation property grant the purchaser the right to rescind the
purchase contract at any time within a statutory period. Although we believe
that we are in compliance with all the relevant laws and regulations related to
vacation ownership marketing, sales and operations, changes in those laws and
regulations or the determination by a regulatory authority that we are not in
compliance could adversely affect our results. If the purchaser of a property
defaults, we may not be able to recover all of the marketing, selling and
general and administrative costs related to the sale.
 
 **We
cannot assure investors that a judgment of a United States court for liabilities
under U.S. securities laws would be enforceable in Canada, or that an original
action can be brought in Canada by investors for liabilities under U.S.
securities laws.**
 We are a
Canadian corporation. A majority of our directors and officers are residents of
Canada and most of our assets and the assets of our directors and officers are
located outside the United States. As a result, it may be difficult for
investors to effect service of process within the  United
States on us or our directors and officers or enforce judgments obtained in U.S.
courts against FHR or our directors and officers based upon the civil liability
provision of U.S. federal or state securities laws. We have been advised by
counsel that there is doubt as to whether a judgment of a U.S. court based
solely upon the civil liability provision of U.S. federal or state securities
laws would be enforceable in Canada against FHR or our directors and officers.
There is also doubt as to whether an original action could be brought in Canada
against FHR or our directors and officers to enforce liabilities based solely
upon U.S. federal or state securities laws.
 
 
 **DESCRIPTION
OF CAPITAL STRUCTURE, DIVIDEND POLICY**
 **AND
MARKET FOR SECURITIES**
 
 **Description
of Share Capital**
  FHR’s
authorized capital consists of an unlimited number of common shares, an
unlimited number of first preferred shares and an unlimited number of second
preferred shares. Only common shares have been issued and are
outstanding.
  Shareholders
are entitled to receive notice of and to attend all annual and special meetings
of the shareholders of the Corporation and to one vote in respect of each share
held at all such meetings. The shareholders are entitled, at the discretion of
FHR’s board of directors, to receive out of any or all profits or surplus of FHR
properly available for the payment of dividends, any dividend declared by the
board and payable by FHR on the shares. The shareholders will participate
rateably in any distribution of the assets of FHR upon the liquidation,
dissolution or winding-up of FHR or other distribution of its assets among its
shareholders for the purpose of winding up its affairs. Such participation will
be subject to the rights, privileges, restrictions and conditions attached to
any securities of the Corporation issued and outstanding at such time, ranking
in priority to the shares upon liquidation, dissolution or winding-up of FHR.
  17
 **Convertible
Senior Notes**
  On
December 8, 2003, FHR issued $270.0 million aggregate principal amount of 3.75%
convertible senior notes due December 1, 2023, on a private placement basis, at
an issue price of $1,000 per note. Interest on the convertible notes is payable
semi-annually in arrears on June 1 and December 1 of each year. FHR may call the
convertible notes in exchange for cash after January 20, 2009 for a price equal
to 100% of the principal amount of convertible notes accrued plus unpaid
interest. Holders may put the convertible notes to FHR in exchange for cash on
January 20, 2009, December 1, 2013 and December 1, 2018 at a purchase price
equal to 100% of the principal amount of the convertible notes plus accrued and
unpaid interest. Upon the occurrence of certain prescribed conditions, holders
of the convertible notes will have the right to convert them to common shares at
an initial conversion price of approximately $37.73 per common share or 26.5041
common shares per $1,000 principal amount. The convertible notes are senior
unsecured obligations and rank equally with all existing and future unsecured
and unsubordinated indebtedness of FHR.
  **Dividend
Policy**
  FHR’s
board has established a policy to pay an annual dividend of $0.12 per share,
paid semi-annually. The payment of dividends by the Corporation will be
dependent upon the financial requirements of FHR to fund future growth, the
financial condition of the Corporation and other factors the board may consider
appropriate in the circumstances. There can be no assurance that a dividend will
be declared in any given year. The following table sets forth
dividends declared on the Corporation’s common shares in each of the last
three most recently completed fiscal years.
  **Dividends
      Per Share****2004**
    **2003**
    **2002**$0.10
    $0.07
    $0.05
  **Market
for Securities**
  The
shares are listed under the symbol “FHR” on the Toronto Stock Exchange (“TSX”)
and the New York Stock Exchange. The following table sets forth the reported
high and low closing prices and trading volumes of the common shares of FHR on
the TSX for the periods indicated.
  **Month**
    **High
      (Cdn$)**
    **Low
      (Cdn$)**
    **Volume
      Traded**2004/12
    42.73
    36.55
    2,953,1552004/11
    36.93
    34.27
    1,821,6192004/10
    35.81
    33.89
    1,642,5912004/09
    36.74
    33.55
    2,846,0912004/08
    35.47
    32.22
    3,481,7142004/07
    37.18
    33.84
    3,495,8992004/06
    36.84
    32.97
    3,890,6632004/05
    35.67
    32.52
    2,061,0842004/04
    36.97
    32.40
    2,703,0392004/03
    35.10
    32.12
    2,463,1462004/02
    35.45
    32.30
    2,800,4802004/01
    35.93
    33.31
    3,241,605
 
 18
 
 **DIRECTORS
AND EXECUTIVE** **OFFICERS**
 
 Information
regarding the Corporation’s directors as of March 28, 2005 can be found at pages
5 to 8 of FHR’s 2005 Management Proxy Circular dated March 1, 2005, which pages,
other than the paragraph on page 5 therein relating to Terence P. Badour who is
standing for election at FHR’s 2005 Annual Meeting of Shareholders on May 3,
2005, are incorporated herein by reference.
  The
following are FHR’s executive officers as at March 28, 2005:
  ***William
R. Fatt, Chief Executive Officer, Toronto, Ontario,
Canada***
 
 William
R. Fatt, 54, was appointed Chief Executive Officer and a director of FHR on
October 1, 2001. In January 1998, he was appointed Chairman and Chief Executive
Officer of FHRHI, positions he still holds. Up to October 1, 2001, he was
Executive Vice President of CPL. From 1990 to his appointment to FHRHI, Mr. Fatt
had been Chief Financial Officer of CPL. He is a Trustee and Vice Chairman of
Legacy. He is also a director of EnCana Corporation, Enbridge Inc., Sun Life
Financial Services of Canada Inc. and The Jim Pattison Group.
 
 ***Chris
J. Cahill, President and Chief Operating Officer, Oakville, Ontario,
Canada***
 
 Chris J.
Cahill, 51, was appointed President and Chief Operating Officer on October 1,
2001. In October 1999, he was appointed a director, President and Chief
Operating Officer of Fairmont, positions he still holds. He was appointed
President and Chief Operating Officer for FHRHI in January 1998, positions he
still holds. Before his appointment to the position of President and Chief
Operating Officer, Mr. Cahill held the position of Executive Vice President,
FHRHI, from 1995 to 1997.
 
 ***John
A. Carnella, Executive Vice President and Chief Financial Officer, Toronto,
Ontario, Canada***
 
 John A.
Carnella, 41, was appointed Executive Vice President and Chief Financial Officer
effective March 1, 2005. Prior to joining Fairmont, he held positions, including
Senior Vice President Finance and Treasurer, with Host Marriott Corporation from
1997.
 
 ***Terence
P. Badour, Executive Vice President, Law and Administration and Corporate
Secretary, Toronto, Ontario, Canada***
 
 Terence
P. Badour, 48, was appointed Senior Vice President, General Counsel and
Secretary on October 1, 2001 and assumed his current title in April 2003. He has
held various positions of increasing responsibility with Fairmont and its
subsidiaries since joining the organization in 1998. He is also Executive Vice
President and General Counsel of Legacy Hotels Real Estate Investment Trust.
 
 ***Michael
F. Glennie, Executive Vice President, Real Estate, Toronto, Ontario,
Canada***
 
 Michael
F. Glennie, 54, was appointed Executive Vice President, Real Estate on January
1, 2005. Prior to joining Fairmont, he served as President and Chief Executive
Officer of Ripplewood Lodging and President of Phoenix Resort Ltd., a
hospitality business focused on acquiring and operating hotels in Japan, from
2001. From 1998 to 2001, he was employed by Boca Resorts, Inc. as President of
the Boca Raton Resort & Club and Senior Vice President, Resort
Operations.
 
 ***John
M. Johnston, Executive Vice President, Europe & Middle East Division, Dubai,
United Arab Emirates***
 
 John M.
Johnston, 57, was appointed Executive Vice President on October 1, 2001. In
October 1999, he was appointed a director of Fairmont, a position he still
holds. He was appointed President of Delta in October 1998 following its
acquisition by FHRHI, a position he held until being appointed Chairman in
January 2003. From 1996 to 1998, Mr. Johnston served as Executive Vice President
Operations for Loews Hotels in New York, a hotel management company. From 1990
until 1996, Mr. Johnston was Vice-President, Asia for Four Seasons Hotels Inc.,
a hotel management company.
 
 19
 ***Thomas
W. Storey, Executive Vice President, Development, Toronto, Ontario,
Canada***
 ******
 Thomas W.
Storey, 48, was appointed Executive Vice President, Business Development and
Strategy on October 1, 2001. He joined the Corporation as Executive Vice
President, Business Development and Strategy in February 2001. Mr. Storey was
with Promus Hotels, a hotel management and ownership company, as Executive Vice
President Strategic Planning & Venture Operations from 1998 until 2000 and
Executive Vice President Marketing from 1997 to 1998. Prior to joining Promus
Hotels, he was Executive Vice President Sales and Marketing at Doubletree
Hotels.
  ***John
S. Williams, Executive Vice President, Operations, Toronto, Ontario,
Canada***
 
 John S.
Williams, 61, was appointed Executive Vice President, Operations on October 1,
2001. He was appointed Regional Vice President, British Columbia for FHRHI in
May 1995 and held the same position for Fairmont’s U.S. and Mexican hotels from
September 1998. Mr. Williams was appointed Executive Vice President, Operations
of Fairmont in August 2000, a position he still holds **.**
 
 ***Timothy
J. Aubrey, Senior Vice President, Finance, Willowdale, Ontario,
Canada***
 
 Timothy
J. Aubrey, 39, was appointed Senior Vice President, Finance in December 2002. He
has held various positions of increasing responsibility with FHR’s subsidiaries
since joining the organization in 1994 including Vice President, Technology of
Fairmont.
 
 **Additional
Disclosure for Directors and Officers**
 
 To the
knowledge of the Corporation, no director or executive officer of the
Corporation is or has been, in the last ten years, a director or executive
officer of an issuer that, while that person was acting in that capacity, (a)
was the subject of a cease trade order or similar order or an order that denied
the issuer access to any exemptions under Canadian securities legislation, for a
period of more than 30 consecutive days, (b) was subject to an event that
resulted, after that person ceased to be a director or executive officer, in the
issuer being the subject of a cease trade or similar order or an order that
denied the issuer access to any exemption under Canadian securities legislation,
for a period or more than 30 consecutive days, or (c) within a year of that
person ceasing to act in that capacity, became bankrupt, made a proposal under
any legislation relating to bankruptcy or insolvency or was subject to or
instituted any proceedings, arrangement or compromise with creditors or had a
receiver, receiver manager or trustee appointed to hold its assets except for
the following:
 
 Mr.
      Bachand was a director of Krystal Bond Inc. when it became subject to a
      cease trade order for failure to file financial statements on April 12,
      2002. It has since ceased to operate as a going
concern.
 
 Mr.
      Fatt was a director of Unitel Communications Inc. in 1995 when it made a
      filing pursuant to the*Companies’
      Creditors Arrangement Act*(Canada).
      He resigned from the Board in January 1996.
 
 Mr.
      O’Brien resigned as a director of Air Canada on November 26, 2003. On
      April 1, 2003, Air Canada obtained an order from the Ontario Superior
      Court of Justice providing creditor protection under the*Companies’
      Creditors Arrangement Act*(Canada).
      Air Canada also made a concurrent petition under Section 304 of the U.S.
      Bankruptcy Code.
 
 20
 **Shareholdings
of Directors and Executive Officers**
  The
directors and executive officers, as a group, beneficially own, either directly
or indirectly, or exercised control or direction over less than 1% of any class
of voting securities of the Corporation or those of any
subsidiaries.
  **Committees
of the Board**
  Information
regarding committees of the Board is incorporated herein by reference from page
9 of FHR’s 2005 Management Proxy Circular.
  **Material
Contracts**
  The
Corporation entered into an indenture dated December 8, 2003 with the Bank of
New York, as trustee, under which FHR may issue 3.75% convertible senior notes
due 2023 up to an aggregate principal amount of $270.0 million. See “Description
of Capital Structure, Dividend Policy and Market for Securities - Convertible
Senior Notes” for further information regarding the terms of these notes. A copy
of the indenture is available at www.sedar.com .
  **Legal
Proceedings**
  The
Corporation and its subsidiaries are engaged in legal proceedings arising in the
ordinary course of business. None of this litigation individually or in the
aggregate, however, is expected to have a material adverse effect on the
consolidated financial position or results of operations of FHR.
  **Interests
of Experts**
  The
Corporation’s auditors are PricewaterhouseCoopers LLP, Royal Trust Tower, Suite
3000, Toronto-Dominion Centre, 77 King Street West, Toronto, Ontario, M5K 1G8.
 The report of PricewaterhouseCoopers LLP on the Corporation’s consolidated
financial statements as at December 31, 2004 and December 31, 2003 and for each
of the years in the three-year period ended December 31, 2004 has been filed
under National Instrument 51-102 with those financial statements.  To the
best of their knowledge and belief, PricewaterhouseCoopers LLP and its partners
collectively own beneficially, directly or indirectly, less than 1% of the
Corporation’s outstanding common shares.
  **ADDITIONAL
INFORMATION**
  Additional
information about FHR is available on the Corporation’s web site at www.fairmont.com , on
SEDAR (System for Electronic Document Analysis and Retrieval) at www.sedar.com , and on
the U.S. Securities and Exchange web site at www.sec.gov/edgar .
  Additional
information, including directors’ and executive officers’ remuneration and
securities authorized for issuance under equity compensation plans is contained
in FHR’s 2005 Management Proxy Circular dated as of March 1, 2005 in connection
with its Annual Meeting of Shareholders to be held on May 3, 2005.
  Additional
financial information is provided in FHR’s consolidated financial statements and
Management’s Discussion and Analysis in the 2004 Annual Report of the
Corporation for its fiscal year ended December 31, 2004.
  
 21
  Copies of
the Annual Information Form, the 2005 Management Proxy Circular and the 2004
Annual Report of FHR may be obtained from:
  
  Fairmont
Hotels & Resorts Inc.
 Corporate
Secretary
 Canadian
Pacific Tower
 100
Wellington Street West
 Suite
1600, TD Centre
 P.O. Box
40, Toronto, Ontario, M5K 1B7
  With
respect to any document requested from FHR, FHR may require the payment of a
reasonable charge if the request is made by a person or company who is not a
security holder of FHR.
 22
   **Exhibit
B**
 **Audited
Consolidated Financial Statements**
 **Fairmont
Hotels & Resorts Inc.**
 Consolidated
Financial Statements
 **December
31, 2004**
 (in
millions of U.S. dollars)
 
 
  
  
 
 February
18, 2005
 
 **Auditors’
Report**
 
 **To
the Shareholders of**
 **Fairmont
Hotels & Resorts Inc.**
 
 
 We have
audited the consolidated balance sheets of **Fairmont
Hotels & Resorts Inc.** as at
December 31, 2004 and 2003 and the consolidated statements of income, retained
earnings and cash flows for each of the years in the three-year period ended
December 31, 2004. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
 We
conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.
 
 In our
opinion, these consolidated financial statements present fairly, in all material
respects, the financial position of **Fairmont
Hotels & Resorts Inc.** as at
December 31, 2004 and 2003 and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2004 in
accordance with Canadian generally accepted accounting principles.
  
 **Chartered
Accountants**
 
 Toronto,
Ontario
 
 
  February
18, 2005
 
 **Comments
by Auditors on Canada - United States Reporting
Differences**
 
 **To
the Shareholders of**
 **Fairmont
Hotels & Resorts Inc.**
 
 
 In the
United States, reporting standards for auditors require the addition of an
explanatory paragraph (following the opinion paragraph) when there are changes
in accounting principles that have a material effect on the comparability of the
Company’s financial statements such as the consolidation of variable interest
entities under United States generally accepted accounting principles as
described in note 25(5) to the consolidated financial statements. Our report to
the shareholders dated February 18, 2005 is expressed in accordance with
Canadian reporting standards which do not require a reference to such changes in
accounting principles in the auditors’ report when the changes are properly
accounted for and adequately disclosed in the financial statements.
 
 
 **Chartered
Accountants**
 
 Toronto,
Ontario
 
 **Fairmont
Hotels & Resorts Inc.**
 Consolidated
Balance Sheets
 **As
at December 31, 2004 and 2003** (in
millions of U.S. dollars)   **2004**
    
    
    **2003****$**
    
    
    **$****Assets****Current
      assets**Cash
      and cash equivalents
    
    
    **99.1**
    
    
    31.7Accounts
      receivable (net of allowance for doubtful accounts of $1.0; 2003 -
      $0.5)
    
    
    **90.2**
    
    
    64.1Inventory
    
    
    **15.5**
    
    
    14.2Prepaid
      expenses and other
    
    
    **11.2**
    
    
    24.6**216.0**
    
    
    134.6**Investments
      in partnerships and corporations**(note
      6)
    
    
    **90.7**
    
    
    53.1**Investment
      in Legacy Hotels Real Estate Investment Trust**(note
      7)
    
    
    **70.0**
    
    
    105.9**Non-hotel
      real estate**
    
    
    **100.3**
    
    
    95.1**Property
      and equipment**(note 8)
    
    
    **1,435.5**
    
    
    1,656.2**Goodwill**(note 9)
    
    
    **162.8**
    
    
    132.0**Intangible
      assets**(note 9)
    
    
    **245.0**
    
    
    216.7**Other assets and deferred charges**(note
      10)
    
    
    **82.3**
    
    
    109.4**2,402.6**
    
    
    2,503.0
 
 Approved by the Board of
Directors
  /s/
William R. FattDirector        /s/ Robert S.
SingerDirector 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  
  
 
 **Fairmont
Hotels & Resorts Inc.**
 Consolidated
Balance Sheets ... *continued*
 **As
at December 31, 2004 and 2003**
 (in
millions of U.S. dollars)
 
  
 **2004**
    
    
    **2003****$**
    
    
    **$****Liabilities****Current
      liabilities**Accounts
      payable
    
    
    **59.2**
    
    
    57.0Accrued
      liabilities
    
    
    **28.0**
    
    
    35.6Deposits
    
    
    **20.1**
    
    
    25.4Accrued
      employee benefits
    
    
    **16.6**
    
    
    3.3Taxes
      payable
    
    
    **35.3**
    
    
    21.2Dividends
      payable
    
    
    **4.6**
    
    
    3.2Current
      portion of long-term debt (note 11)
    
    
    **4.1**
    
    
    117.8**167.9**
    
    
    263.5**Long-term
      debt**(note
      11)
    
    
    **398.0**
    
    
    539.8**Other
      liabilities**
    
    
    **95.7**
    
    
    91.4**Future income taxes**(note 12)
    
    
    **90.6**
    
    
    62.4**752.2**
    
    
    957.1**Shareholders’
      Equity**(note
      13)**Common
      shares**
    
    
    **1,163.1**
    
    
    1,202.2**Other
      equity**
    
    
    **19.2**
    
    
    19.2**Treasury
      stock**
    
    
    **(5.6**
    **)**
    
    -**Contributed
      surplus**
    
    
    **142.4**
    
    
    142.3**Foreign
      currency translation adjustments**
    
    
    **142.1**
    
    
    104.1**Retained
      earnings**
    
    
    **189.2**
    
    
    78.1**1,650.4**
    
    
    1,545.9**2,402.6**
    
    
    2,503.0**Commitments,
      contingencies****and
      guarantees**(note 21)
 
 
  The
accompanying notes are an integral part of these consolidated financial
statements.
 
  
 
 **Fairmont
Hotels & Resorts Inc.**
 Consolidated
Statements of Retained Earnings
 **For
the years ended December 31, 2004, 2003 and 2002**
 (in
millions of U.S. dollars)
  
 **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$****Balance
      - Beginning of year**
    
    
    **78.1**
    
    
    38.5
    
    
    (19.6
    )**Net
      income**
    
    
    **155.8**
    
    
    50.7
    
    
    92.5**233.9**
    
    
    89.2
    
    
    72.9**Repurchase
      of common shares**(note
      13)
    
    
    **(36.9**
    **)**
    
    (5.5
    )
    
    (30.4
    )**Dividends**
    
    
    **(7.8**
    **)**
    
    (5.6
    )
    
    (4.0
    )**Balance
      - End of year**
    
    
    **189.2**
    
    
    78.1
    
    
    38.5
 
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  
  
 
 **Fairmont
Hotels & Resorts Inc.**
 Consolidated
Statements of Income
 **For
the years ended December 31, 2004, 2003 and 2002**
 (in
millions of U.S. dollars)
  
 **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$****Revenues**Hotel
      ownership operations (note 3(d))
    
    
    **654.1**
    
    
    584.9
    
    
    516.6Management
      operations
    
    
    **46.3**
    
    
    37.6
    
    
    36.1Real
      estate activities
    
    
    **31.0**
    
    
    36.3
    
    
    37.9**731.4**
    
    
    658.8
    
    
    590.6Other
      revenues from managed and franchised properties
    
    
    **37.3**
    
    
    32.6
    
    
    27.7**768.7**
    
    
    691.4
    
    
    618.3**Expenses**Hotel
      ownership operations (note 3(e))
    
    
    **474.8**
    
    
    448.8
    
    
    352.9Management
      operations
    
    
    **19.4**
    
    
    15.9
    
    
    11.3Real
      estate activities
    
    
    **25.2**
    
    
    25.8
    
    
    26.4General
      and administrative
    
    
    **29.6**
    
    
    16.5
    
    
    18.2Amortization
    
    
    **73.9**
    
    
    67.5
    
    
    52.4**622.9**
    
    
    574.5
    
    
    461.2Other
      expenses from managed and franchised properties
    
    
    **38.5**
    
    
    35.1
    
    
    28.9**661.4**
    
    
    609.6
    
    
    490.1**Income
      (loss) from equity investments**(note 15)
    
    
    **(0.2**
    **)**
    
    (6.9
    )
    
    17.7**Operating
      income**
    
    
    **107.1**
    
    
    74.9
    
    
    145.9**Other
      (income) expenses, net**(note 16)
    
    
    **-**
    
    
    2.1
    
    
    (2.7
    )**Interest
      expense, net**(note
      17)
    
    
    **33.1**
    
    
    33.6
    
    
    19.1**Gain
      on sales of investments and hotel assets**(notes 5 and 7)
    
    
    **(143.7**
    **)**
    
    -
    
    
    -**Income
      before income tax expense (recovery) and non-controlling
      interest**
    
    
    **217.7**
    
    
    39.2
    
    
    129.5**Income
      tax expense (recovery)**(note
      12)Current
    
    
    **54.4**
    
    
    12.8
    
    
    12.0Future
    
    
    **7.5**
    
    
    (24.3
    )
    
    23.8**61.9**
    
    
    (11.5
    )
    
    35.8**Non-controlling
      interest**
    
    
    **-**
    
    
    -
    
    
    1.2**Net
      income**
    
    
    **155.8**
    
    
    50.7
    
    
    92.5**Weighted
      average number of common shares outstanding**(in
      millions) (note 18)Basic
    
    
    **78.4**
    
    
    79.2
    
    
    78.4Diluted
    
    
    **79.2**
    
    
    80.0
    
    
    79.7**Basic
      earnings per common share**
    
    
    **1.99**
    
    
    0.64
    
    
    1.18**Diluted
      earnings per common share**
    
    
    **1.97**
    
    
    0.63
    
    
    1.16**Dividends
      declared per common share**
    
    
    **0.10**
    
    
    0.07
    
    
    0.05
 
 The accompanying notes are an integral part of these
consolidated financial statements.
  
  
 **Fairmont
Hotels & Resorts Inc.**
 Consolidated
Statements of Income
 **For
the years ended December 31, 2004, 2003 and 2002**
 (in
millions of U.S. dollars)
 **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$****Cash
      provided by (used in)****Operating
      activities**Net
      income
    
    
    **155.8**
    
    
    50.7
    
    
    92.5Items
      not affecting cashAmortization
      of property and equipment
    
    
    **70.8**
    
    
    64.8
    
    
    50.0Amortization
      of intangible assets
    
    
    **3.1**
    
    
    2.7
    
    
    2.4(Income)
      loss from equity investments
    
    
    **0.2**
    
    
    6.9
    
    
    (17.7
    )Future
      income taxes
    
    
    **7.5**
    
    
    (24.3
    )
    
    23.8Unrealized
      foreign exchange gain
    
    
    **(20.0**
    **)**
    
    -
    
    
    -Non-controlling
      interest
    
    
    **-**
    
    
    -
    
    
    1.2Gain
      on sales of investments and hotel assets
    
    
    **(143.7**
    **)**
    
    -
    
    
    -Other
    
    
    **5.9**
    
    
    (11.6
    )
    
    (22.3
    )Distributions
      from investments
    
    
    **7.1**
    
    
    6.7
    
    
    15.1Changes
      in non-hotel real estate
    
    
    **1.6**
    
    
    13.3
    
    
    6.9Changes
      in non-cash working capital items(note
      19)
    
    
    **(17.9**
    **)**
    
    (0.3
    )
    
    (10.5
    )**70.4**
    
    
    108.9
    
    
    141.4**Investing
      activities**Additions
      to property and equipment
    
    
    **(74.3**
    **)**
    
    (87.2
    )
    
    (84.3
    )Acquisitions,
      net of cash acquired (note 4)
    
    
    **-**
    
    
    6.0
    
    
    (136.0
    )Investments
      in partnerships and corporations (note 6)
    
    
    **(34.6**
    **)**
    
    (1.6
    )
    
    (8.9
    )Investment
      in Legacy Hotels Real Estate Investment Trust
    
    
    **-**
    
    
    -
    
    
    (37.8
    )Sales
      of investments and hotel assets(notes
      5 and 7)
    
    
    **442.7**
    
    
    -
    
    
    -Issuance
      of loans receivable
    
    
    **(7.0**
    **)**
    
    (31.3
    )
    
    -Collection
      of loans receivable
    
    
    **24.2**
    
    
    7.2
    
    
    -Investments
      in intangible assets
    
    
    **(3.2**
    **)**
    
    -
    
    
    -Other
    
    
    **-**
    
    
    -
    
    
    (1.0
    )**347.8**
    
    
    (106.9
    )
    
    (268.0
    )**Financing
      activities**Issuance
      of long-term debt
    
    
    **115.9**
    
    
    162.7
    
    
    238.4Repayment
      of long-term debt
    
    
    **(380.6**
    **)**
    
    (423.9
    )
    
    (43.9
    )Net
      proceeds from issuance of convertible notes
    
    
    **-**
    
    
    262.5
    
    
    -Proceeds
      from exercised stock options
    
    
    **2.9**
    
    
    1.0
    
    
    4.7Repurchase
      of common shares
    
    
    **(84.5**
    **)**
    
    (16.8
    )
    
    (73.2
    )Dividends
    
    
    **(6.4**
    **)**
    
    (4.8
    )
    
    (3.2
    )**(352.7**
    **)**
    
    (19.3
    )
    
    122.8Effect
      of exchange rate changes on cash and cash equivalents
    
    
    **1.9**
    
    
    -
    
    
    0.1**Increase
      (decrease) in cash and cash equivalents**
    
    
    **67.4**
    
    
    (17.3
    )
    
    (3.7
    )**Cash
      and cash equivalents - Beginning of year**
    
    
    **31.7**
    
    
    49.0
    
    
    52.7**Cash and cash equivalents - End of year**
    
    
    **99.1**
    
    
    31.7
    
    
    49.0
 
  The
accompanying notes are an integral part of these consolidated financial
statements.
  
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 **1**
    **Basis****of
      presentation**
  Fairmont
Hotels & Resorts Inc. (“FHR” or the “Company”) has operated and owned hotels
and resorts for 117 years
and currently manages properties, principally under the Fairmont and Delta
brands. As at December 31, 2004, FHR managed or franchised 82 luxury and
first-class hotels and resorts. FHR owns Fairmont Hotels Inc. (“Fairmont”),
which as at December 31, 2004, managed 45 luxury properties in major city
centers and key resort destinations throughout Canada, the United States,
Mexico, Bermuda, Barbados, Monaco and the United Arab Emirates. Delta Hotels
Limited (“Delta”), a wholly owned subsidiary of FHR, managed or franchised 37
Canadian hotels and resorts as at December 31, 2004. In addition to hotel and
resort management, as at December 31, 2004, FHR had hotel ownership interests
ranging from approximately 15% to 100% in 23 properties, operating in Canada,
the United States, Mexico, Bermuda, Barbados, Monaco and the United Arab
Emirates. FHR also has an approximate 24% equity interest in Legacy Hotels Real
Estate Investment Trust (“Legacy”) as at December 31, 2004, which owns 24 hotels
and resorts across Canada and the United States. FHR also owns real estate
properties that are suitable for either commercial or residential development,
and has a vacation ownership product.
  **2**
    **Summary
      of significant accounting policies**
  The
consolidated financial statements have been prepared in accordance with Canadian
generally accepted accounting principles (“GAAP”). The significant differences
between Canadian and U.S. GAAP, insofar as they apply to FHR, are described in
note 25.
  **Principles
of consolidation**
  The
Company’s consolidated financial statements include the consolidated accounts of
FHR and its wholly owned subsidiaries, FHR Holdings Inc. (“FHRHI”), FHR Real
Estate Corporation (“FHRREC”), Fairmont, Delta, and FHR Properties
Inc.
  **Foreign
currency translation**
 
 Foreign
currency assets and liabilities of FHR’s operations are translated at the rate
of exchange in effect at the balance sheet dates for monetary items and at the
historical exchange rates for non-monetary items. Foreign currency denominated
revenues and expenses are translated at the exchange rate in effect on the dates
of the related transactions. Gains and losses resulting from the translation of
assets and liabilities denominated in foreign currencies are included in
income.
  The
accounts of FHR and its self-sustaining subsidiaries, where the functional
currency is other than the U.S. dollar, are translated into U.S. dollars using
the year-end exchange rate for assets and liabilities and the average exchange
rates in effect for the year for revenues and expenses. Exchange gains or losses
arising from translation of such accounts are deferred and included in
shareholders’ equity as foreign currency translation adjustments.
  
  
 ****
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 **Cash
and cash equivalents**
 
 Cash
equivalents consist of short-term investments that are highly liquid and have
initial terms to maturity of three months or less.
  **Inventory**
 
 Inventory
is comprised of operating supplies including food and beverage, and is valued at
the lower of cost and replacement cost.
  **Long-term
investments**
 
 FHR
accounts for its investment in Legacy and its investments in partnerships and
corporations, which are not controlled but over which the Company has
significant influence, using the equity method. Investments in partnerships or
corporations over which it neither controls nor has significant influence are
accounted for using the cost method.
 
 **Non-hotel
real estate**
 
 Non-hotel
real estate consists of land held for sale and inventory costs for Fairmont
Heritage Place (“FHP”), the Company’s vacation ownership product.
 
 Investments
in land held for sale are valued at the lower of cost and net realizable value.
Expenditures directly related to non-hotel real estate, such as real estate
taxes and capital improvements, are capitalized.
 
 Inventory
costs for FHP include construction costs and ancillary costs related thereto.
The Company also capitalizes direct costs attributable to the sale of vacation
ownership interests (“VOIs”) until revenue recognition commences. If a sales
contract is cancelled, unrecoverable direct selling costs are expensed upon
cancellation.
  **Property and equipment**
 Property
and equipment are recorded at cost. The Company’s policy is to capitalize
betterments and replacements and interest incurred during the construction
period on new facilities and during the renovation period of major renovations
to existing facilities. Interest is capitalized, based on the borrowing rate of
debt related to the project, or if no specific financing is obtained, the
Company’s average cost of borrowing. Maintenance, repairs and minor
renewals and replacements are charged against income when incurred.
  Computer
system development costs for internal use software are capitalized to the extent
the project is expected to be of continuing benefit to the
Company.
  
 ****
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 
 (in
millions of U.S. dollars, except per share amounts)
 Amortization
is provided on a straight-line basis at rates designed to amortize the assets
over their estimated economic lives. The annual rates of amortization are as
follows:
 
 Buildings
    
    40
      yearsBuilding
      equipment
    
    17-25
      yearsFurniture,
      fixtures and equipment
    
    5-11
      yearsComputer
      software
    
    2-7
      yearsVehicles
    
    3-5
      yearsLeasehold
      improvements
    
    over
      the lesser of economic life and the lease term, including
      options
 
 **Goodwill
and intangible assets**
 
 Goodwill
represents the excess of purchase price over the fair value of identifiable
assets acquired in a purchase business combination. Intangible assets with
indefinite useful lives represent costs that have been allocated to brand names
and trademarks. Intangible assets with finite useful lives are costs that have
been allocated to management contracts acquired in the acquisitions of Delta and
Fairmont, as well as amounts paid to acquire or allocated to individual
management contracts.
 
 *Goodwill
and intangible assets with indefinite useful lives*
 
 Goodwill
and intangible assets with indefinite useful lives are not amortized but are
subject to impairment tests on at least an annual basis, and additionally,
whenever events and changes in circumstances suggest that the carrying amount
may not be recoverable. Impairment of goodwill is tested at the reporting unit
level by comparing the reporting unit’s carrying amount, including goodwill, to
the fair value of the reporting unit. The fair values of the reporting units are
estimated using a combination of the income or discounted cash flows approach
and the market approach, which utilizes comparable companies’ data. If the
carrying amount of the reporting unit exceeds its fair value, then a second step
is performed to measure the amount of impairment loss, if any. Any impairment
loss, measured as the amount by which the carrying value of the reporting unit’s
goodwill exceeds its fair value, would be expensed in the consolidated
statements of income. The impairment test for intangible assets with indefinite
useful lives consists of a comparison of the fair value of the intangible asset
with its carrying amount. When the carrying amount of the intangible asset
exceeds its fair value, an impairment loss is recognized for the
difference.
 
 *Intangible
assets with finite useful lives*
 
 Management
contracts acquired in a business combination or through investment interests in
companies are recorded at values that represent the estimated present value of
net cash flows that, on acquisition, are expected to be received over the
estimated lives of the contracts. Other acquired management contracts are
recorded at cost. Management contracts are amortized on a straight-line basis,
over the weighted average of the fixed, non-cancellable terms and certain
renewal periods of the underlying contracts, which range from 20 to 50 years.
Management reviews the amortization method and useful life estimates for these
intangible assets annually.
 
 
  
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 **Long-lived
assets**
 
 Effective
January 1, 2003, FHR adopted the recommendations of The Canadian Institute of
Chartered Accountants (“CICA”) with respect to accounting for the impairment of
long-lived assets. This standard requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Long-lived assets are
grouped at the lowest level for which identifiable cash flows are largely
independent, when testing for and measuring impairment. Under the standard, a
two-step process is used to assess the impairment of long-lived assets held for
use, with the first step determining when impairment is recognized and the
second step measuring the amount of the impairment. Impairment losses are
recognized when the carrying amounts of long-lived assets exceed the sum of the
undiscounted cash flows expected to result from their use and eventual
disposition and are measured as the amounts by which the long-lived assets’
carrying amounts exceed their fair values. Initial adoption of this standard did
not have an impact on FHR’s financial position, results of operations or cash
flows.
 
 Also
effective January 1, 2003, FHR adopted the CICA recommendations relating to the
disposal of long-lived assets and discontinued operations. Subject to certain
criteria, long-lived assets and any associated assets or liabilities that
management expects to dispose of by sale are reported separately on the
consolidated balance sheet and classified as held for sale. Assets held for sale
are measured at the lower of their carrying amounts and fair values less costs
to dispose and are no longer amortized. A component of FHR that is held for sale
is reported as a discontinued operation if the operations and cash flows of the
component will be eliminated from ongoing operations as a result of the sale and
FHR will not have a significant continuing involvement in the operations of the
component after the sale. Initial adoption of this standard did not have an
impact on FHR’s financial position, results of operations or cash
flows.
 
 **Asset
retirement obligations**
 
 Effective
January 1, 2003, FHR adopted the recommendations of the CICA with respect to
accounting for asset retirement obligations. This standard requires that the
fair value of a liability for an asset retirement obligation be recognized in
the year in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset and subsequently amortized over the
asset’s useful life. Adoption of this standard resulted in an increase of $0.7
to other liabilities and property and equipment as at January 1,
2003.
 ****
 **Income taxes**
  The
Company accounts for income taxes under the liability method. Under this method,
future income tax assets and liabilities are recognized based on differences
between the bases of assets and liabilities used for financial statement and
income tax purposes, using substantively enacted tax rates. The effect of
changes in income tax rates on future income tax assets and liabilities is
recognized in the year in which the change occurs. Valuation allowances are
recorded when it is more likely than not that a future income tax asset will not
be realized.
 
  
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 **Financial
instruments**
 
 Derivative
financial instruments such as swaps, options and forward contracts are used by
FHR in the management of its foreign currency and interest rate exposures. FHR’s
policy is to not use derivative financial instruments for trading or speculative
purposes.
 
 Derivative
financial instruments periodically qualify as a hedge for accounting purposes.
In such cases, at the inception of a hedge, FHR documents the relationship
between the hedging instruments and the hedged items. This process includes
linking the derivatives to specific assets and liabilities on the consolidated
balance sheet or to specific firm commitments or forecasted transactions. FHR
assesses the effectiveness of the hedge at the inception and throughout the
contract period by considering factors such as the term of the instrument, the
notional settlement amount of the derivative as compared to the dollar amount of
the item being hedged and any other applicable factors. At the end of each
period, FHR records any changes in fair value related to derivative instruments
that are no longer deemed to be effective hedging items or do not meet the
criteria for hedge accounting in the consolidated statements of
income.
 
 FHR
designates its interest rate instruments as hedges of the interest expense on
the underlying debt. Interest expense on the underlying debt is adjusted to
include the payments made or received under the interest rate instruments.
Foreign exchange translation gains or losses on foreign currency denominated
derivative financial instruments used to hedge anticipated foreign currency cash
flows are recognized as adjustments to revenues or expenses, as applicable, when
the cash flows are recorded.
 
 **Stock-based
compensation**
 
 Effective
January 1, 2003, the Company recognizes compensation expense for stock options
granted in the consolidated statements of income using the fair value based
method of accounting for all options issued on or after January 1, 2003.
Pro forma disclosures of net earnings and earnings per share, as if the fair
value based accounting method had been used to account for stock-based
compensation for any options granted before January 1, 2003 but on or after
January 1, 2002, are provided in note 14. Any cash paid by the employee on
the exercise of stock options is added to the stated value of common shares.
Compensation expense is recognized for share appreciation rights (“SARs”) for
the excess of the market value of a common share over the related option
price.
 
 **Revenue
recognition**
 
 Revenues
are derived from hotel operations for owned properties, management and incentive
fees, real estate sales and certain other revenues from properties managed or
franchised by FHR. Hotel ownership operations revenues are generated primarily
from room occupancy, and food and beverage services. Management fees comprise a
base fee, which is a percentage of the hotel’s revenues, and incentive fees,
which are generally based on hotel profitability. Revenue from real estate
activities represents the proceeds from sales of undeveloped lands that the
Company is holding for sale and sales of the Company’s VOIs. Other revenues from
managed properties include reimbursements for direct and indirect costs by the
hotel owners for the properties that are managed. These reimbursed expenditures
relate primarily to marketing and reservation services performed by the Company
under the terms of its hotel management and franchise agreements.
 
 Revenues
from hotel operations are recognized when services are provided and ultimate
collection is reasonably assured. Management fees, both base and incentive, and
other revenues from managed properties are recognized when performance hurdles
have been met, in accordance with the terms specified in the related management
agreements. Revenues from the sale of real estate are recognized once title has
transferred and collection of proceeds is reasonably assured. Revenues related
to the sale of VOIs are recognized when a minimum of 10% of the purchase price
of an interest has been received in cash, the period of cancellation with refund
has expired, receivables are deemed collectible, and certain minimum sales and
construction levels have been attained. Revenue related to projects still under
construction are recognized under the percentage-of-completion method. For sales
that do not meet these criteria, revenue is deferred.
 10
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 
 **Use
of estimates**
 
 The
preparation of financial statements and related disclosures in accordance with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, and
contingencies. Estimates are based on historical experience and on other
assumptions that are believed at the time to be reasonable under the
circumstances. The actual results may differ from those previously estimated.
Estimates are used when accounting for items and matters such as amortization,
goodwill and intangible asset impairment assessments, income taxes, employee
future benefits and contingencies.
  **Comparative
figures**
 
 Certain
of prior years’ comparative figures have been reclassified to conform with the
presentation adopted in 2004.
 
 **Changes
in accounting policies**
  **Hedging
relationships**
  Effective
January 1, 2004, FHR adopted CICA Accounting Guideline 13 (“AcG-13”), “Hedging
Relationships,” and Abstract No. 128 of the Emerging Issues Committee (“EIC”),
“Accounting for Trading, Speculative or Non-Hedging Derivative Financial
Instruments”(“EIC 128”). AcG-13 provides detailed guidance for the
identification, documentation, designation and effectiveness of hedges and also
the discontinuance of hedge accounting. EIC 128 requires that any derivative
financial instrument not designated within an AcG-13 compliant hedging
relationship be measured at fair value with changes in fair value recorded in
income. The initial adoption of this accounting guidance did not have an impact
on the Company’s consolidated financial statements.
  **Generally
accepted accounting principles and general standards of financial statement
presentation**
  Effective
January 1, 2004, the Company adopted the CICA Handbook section 1100, “Generally
Accepted Accounting Principles.” The section provides guidance on sources to
consult when selecting accounting policies and determining appropriate
disclosures when a matter is not dealt with explicitly in the primary sources of
GAAP. Upon adoption of this section, no changes to accounting principles or
financial statement presentation were required.
  
  
 ****
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 **Recently
issued accounting pronouncements**
  **Variable
interest entities**
  In June
2003, the CICA issued a new accounting guideline, Accounting Guideline 15
(“AcG-15”), which requires the consolidation of Variable Interest Entities
(“VIEs”) by the primary beneficiary. Revisions to this guideline were published
by the CICA in August 2004 to harmonize with the U.S. VIE accounting standard. A
VIE is an entity where:
  a)
    its
      equity investment at risk is insufficient to permit the entity to finance
      its activities without additional subordinated support from others and/or
      where certain essential characteristics of a controlling financial
      interest are not met; and
  b)
    it
      does not meet specified exemption criteria.
  The
primary beneficiary is the enterprise that will absorb or receive the majority
of the VIE’s expected losses, expected residual returns, or both. This guideline
is effective for the Company’s first quarter commencing January 1,
2005.
  AcG-15 is
adopted retroactively. The restatement of prior period financial statements is
encouraged, but not required.
  The
Company has reviewed the impact that this standard will have on its financial
statement presentation. Upon the initial adoption of this standard, no changes
to financial statement presentation are anticipated.
  **Liabilities
and equity**
  FHR will
adopt the CICA’s new accounting requirements on the classification of financial
instruments as liabilities or equity on January 1, 2005. The CICA amended
its disclosure requirements surrounding the presentation of financial
instruments that may be settled in cash or by an issuer’s own equity
instruments, at the issuer’s discretion, as liabilities. This amendment is
effective for periods beginning on or after November 1, 2004 with early
adoption encouraged. FHR will be implementing this change starting in 2005 and
it is not expected to impact the Company’s financial statements.
  **Determining
whether an arrangement contains a lease**
  The EIC
recently issued Abstract 150, “Determining whether an Arrangement Contains a
Lease” (“EIC 150”). An entity may enter into certain arrangements comprising a
transaction or a series of related transactions that does not take the legal
form of a lease but conveys a right to use a tangible asset (e.g., an item of
property, plant or equipment) in return for a payment or series of payments. The
Company is required to adopt the recommendations of EIC 150 if it enters into
affected transactions commencing December 9, 2004. To date, the Company has not
entered into any such transactions, but it is possible that future transactions
could be affected by this accounting standard.
 12
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
  **Financial
instruments - recognition and measurement, hedges, comprehensive income, and
equity**
  In
January 2005, the CICA released a new interrelated set of financial standards
relating to recognition and measurement of financial instruments, hedging
relationships and presentation of equity and comprehensive income. These
standards are an attempt to harmonize Canadian and U.S. GAAP with respect to
financial instruments and financial statement presentation. The Company will be
required to apply these standards no later than the fiscal year ending December
31, 2007. The Company has not yet fully studied the effect that adoption of
these standards will have on the consolidated financial statements. However,
adoption may eliminate certain reconciling items between Canadian and U.S. GAAP
described in note 25 to the consolidated financial statements.
  **3**
    **Segmented
      information**
  FHR has
five reportable segments in two core business activities, ownership and
management operations. The segments are hotel ownership, investment in Legacy,
real estate activities, Fairmont and Delta. Results of operations for individual
hotel properties have been aggregated into their respective reportable segments.
Hotel ownership consists of real estate interests ranging from approximately 15%
to 100% in 23 properties. The investment in Legacy consists of an
approximate 24% equity interest in Legacy, which owns 24 hotels and resorts
across Canada and the United States. Real estate activities consist primarily of
two undeveloped land blocks in Toronto and Vancouver and a vacation ownership
product. Fairmont is an international luxury hotel and resort management company
and Delta is a Canadian first-class hotel and resort management company. The
performance of all segments is evaluated by management primarily on earnings
before interest, taxes and amortization (“EBITDA”), which management defines as
income before interest, taxes, non-controlling interest, amortization, gain on
sales of investments and
hotel assets, and other (income) expenses, net. EBITDA includes income from
equity investments. Corporate general and administrative expenses, amortization,
other (income) expenses, net, interest, income taxes and non-controlling
interest are not allocated to the individual segments. Effective in the fourth
quarter of 2004, the Company reports Corporate general and administrative
expenses separately without allocation to the five reportable segments, which
was the case in previous years. Comparative figures have been reclassified to
conform to this presentation. All transactions among reporting segments are
conducted at fair market value.
 
  ****
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 The
following tables present revenues, EBITDA, total assets and capital expenditures
for FHR’s reportable segments:
 
 **2004******
    
    
    **Ownership**
    
    
    **Management**
    
    
    
    
    
    **Inter-****Hotel**
      **Ownership**
    
    
    **Legacy**
    
    
    **Real
      estate activities**
    
    
    **Fairmont**
    
    
    **Delta**
    
    
    **Corporate**
      **general**
      **and**
      **administrative**
    
    
    **segment
      elimination**
      **and
      other**
      **(a)**
    
    **Total****$**
    
    
    **$**
    
    
    **$**
    
    
    **$**
    
    
    **$**
    
    
    **$**
    
    
    **$**
    
    
    **$**Operating
      revenues (d)
    
    
    654.1
    
    
    -
    
    
    31.0
    
    
    54.6
    
    
    12.8
    
    
    -
    
    
    (21.1
    )
    
    **731.4**Other
      revenues from managed and franchised properties
    
    
    **-**
    
    
    -
    
    
    -
    
    
    27.7
    
    
    9.6
    
    
    **-**
    
    
    -
    
    
    **37.3****768.7**Income
      (loss) from investments and other
    
    
    1.9
    
    
    (2.1
    )
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    **(0.2**
    **)**EBITDA
      (b)
    
    
    160.1
    
    
    (2.1
    )
    
    5.8
    
    
    40.0
    
    
    8.0
    
    
    (29.6
    )
    
    (1.2
    )
    
    **181.0**Total
      assets (c)
    
    
    1,606.9
    
    
    70.0
    
    
    100.1
    
    
    919.6
    
    
    79.4
    
    
    -
    
    
    (373.4
    )
    
    **2,402.6**Capital
      expenditures
    
    
    70.1
    
    
    -
    
    
    -
    
    
    4.2
    
    
    -
    
    
    -
    
    
    -
    
    
    **74.3**
 
 **2003******
    
    
    **Ownership**
    
    
    **Management**
    
    
    
    
    
    **Inter-****Hotel**
      **Ownership**
    
    
    **Legacy**
    
    **Real
      estate activities**
    
    **Fairmont**
    
    **Delta**
    
    
    **Corporate**
      **general**
      **and**
      **administrative**
    
    
    **segment
      elimination**
      **and
      other**
      **(a)**
    
    **Total****$**
    
    
    **$**
    
    **$**
    
    **$**
    
    **$**
    
    
    **$**
    
    
    **$**
    
    **$**
 Operating
      revenues (d)
    
    
    584.9
    
    
    -
    
    
    36.3
    
    
    44.2
    
    
    11.7
    
    
    **-**
    
    
    (18.3
    )
    
    658.8Other
      revenues from managed and franchised properties
    
    
    **-**
    
    
    -
    
    
    -
    
    
    24.4
    
    
    8.2
    
    
    **-**
    
    
    -
    
    
    32.6691.4Income
      (loss) from investments and other
    
    
    1.7
    
    
    (8.6
    )
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (6.9
    )EBITDA
      (b)
    
    
    119.5
    
    
    (8.6
    )
    
    10.5
    
    
    31.3
    
    
    8.7
    
    
    (16.5
    )
    
    (2.5
    )
    
    142.4Total
      assets (c)
    
    
    1,916.5
    
    
    105.9
    
    
    101.8
    
    
    350.8
    
    
    75.8
    
    
    -
    
    
    (47.8
    )
    
    2,503.0Capital
      expenditures
    
    
    84.2
    
    
    -
    
    
    -
    
    
    3.0
    
    
    -
    
    
    -
    
    
    -
    
    
    87.2
 
 14
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 **2002****Ownership**
    
    
    **Management**
    
    
    
    
    
    **Inter-****Hotel**
      **Ownership**
    
    
    **Legacy**
    
    
    **Real
      estate activities**
    
    
    **Fairmont**
    
    
    **Delta**
    
    
    **Corporate**
      **general**
      **and**
      **administrative**
    
    
    **segment
      elimination**
      **and
      other**
      **(a)**
    
    **Total****$**
    
    
    **$**
    
    
    **$**
    
    
    **$**
    
    
    **$**
    
    
    **$**
    
    
    **$**
    
    **$**Operating
      revenues (d)
    
    
    516.6
    
    
    -
    
    
    37.9
    
    
    41.3
    
    
    11.4
    
    
    -
    
    
    (16.6
    )
    590.6Other
      revenues from managed and franchised properties
    
    
    -
    
    
    -
    
    
    -
    
    
    19.8
    
    
    7.9
    
    
    -
    
    
    -
    
    27.7618.3Income
      from investments and other
    
    
    11.3
    
    
    6.4
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    17.7EBITDA
      (b)
    
    
    158.4
    
    
    6.4
    
    
    11.5
    
    
    33.4
    
    
    8.1
    
    
    (18.2
    )
    
    (1.3
    )
    198.3Total assets (c)
    
    
    1,879.9
    
    
    96.4
    
    
    95.0
    
    
    285.8
    
    
    66.0
    
    
    -
    
    
    (200.1
    )
    2,223.0Capital
      expenditures
    
    
    80.1
    
    
    -
    
    
    -
    
    
    4.2
    
    
    -
    
    
    -
    
    
    -
    
    84.3
 
 (a)  Operating
revenues include management fees that are charged by Fairmont of $20.7 (2003 -
$18.0; 2002 - $16.3) and Delta of $0.4 (2003 - $0.3; 2002 - $0.3) to the hotel
ownership operations, which are eliminated on consolidation. EBITDA includes
expenses not reimbursed relating to marketing and reservation services performed
by FHR under the terms of its hotel management and franchise agreements. Total
assets have been reduced for the elimination of intersegment loans net of
corporate assets.
 
 (b) A
reconciliation of aggregate EBITDA of the reportable segments to FHR’s
consolidated net income is as follows:
 
 **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$**EBITDA
    
    
    181.0
    
    
    142.4
    
    
    198.3Amortization
    
    
    73.9
    
    
    67.5
    
    
    52.4Operating
      income
    
    
    107.1
    
    
    74.9
    
    
    145.9Less:Other
      (income) expenses, net
    
    
    -
    
    
    2.1
    
    
    (2.7
    )Interest
      expense, net
    
    
    33.1
    
    
    33.6
    
    
    19.1Gain
      on sales of investments and hotel assets
    
    
    (143.7
    )
    
    -
    
    
    -Income
      tax expense (recovery)
    
    
    61.9
    
    
    (11.5
    )
    
    35.8Non-controlling
      interest
    
    
    -
    
    
    -
    
    
    1.2Net
      income
    
    
    155.8
    
    
    50.7
    
    
    92.5
 (c)
    Hotel
      ownership assets include $88.3 (2003 - $48.5; 2002 - $64.7) of investments
      accounted for using the equity method.
  15
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 (d)
    A
      breakdown of the Company’s hotel ownership operations revenues are as
      follows:
 **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$**Rooms
      revenue
    
    
    **356.2**
    
    
    324.3
    
    
    288.6Food
      and beverage revenue
    
    
    **214.7**
    
    
    182.6
    
    
    158.1Other
    
    
    **83.2**
    
    
    78.0
    
    
    69.9**654.1**
    
    
    584.9
    
    
    516.6
 (e)
    Hotel
      ownership expenses have been reduced by business interruption insurance
      proceeds of $10.8 in 2004 and $9.7 in 2003 relating to the impact
      Hurricane Fabian had on FHR’s two Bermuda Hotels.
 
 **Geographical
information**
  **Revenues**
    
    
    **Property and
      equipment****2004**
    
    
    **2003**
    
    
    **2002**
    
    
    **2004**
    
    
    **2003****$**
    
    
    **$**
    
    
    **$**
    
    
    **$**
    
    
    **$**Canada
    
    
    **323.6**
    
    
    300.1
    
    
    289.8
    
    
    **540.6**
    
    
    520.6United
      States
    
    
    **249.6**
    
    
    241.9
    
    
    163.4
    
    
    **528.7**
    
    
    742.4Bermuda
    
    
    **98.2**
    
    
    77.8
    
    
    91.8
    
    
    **231.4**
    
    
    237.7Mexico
    
    
    **80.8**
    
    
    58.5
    
    
    58.5
    
    
    **103.4**
    
    
    104.1Other
      international
    
    
    **16.5**
    
    
    13.1
    
    
    14.8
    
    
    **31.4**
    
    
    51.4**768.7**
    
    
    691.4
    
    
    618.3
    
    
    **1,435.5**
    
    
    1,656.2
 
 ****
    
    
    **Goodwill**
    
    **Intangible
      assets****2004**
    
    
    **2003**
    
    
    **2004**
    
    
    **2003****$**
    
    
    **$**
    
    
    **$**
    
    
    **$**Canada
    
    
    **54.6**
    
    
    50.7
    
    
    **67.9**
    
    
    63.4United
      States
    
    
    **80.1**
    
    
    53.2
    
    
    **150.4**
    
    
    150.5Bermuda
    
    
    **16.3**
    
    
    16.3
    
    
    **2.8**
    
    
    2.8Mexico
    
    
    **11.8**
    
    
    11.8
    
    
    **5.3**
    
    
    -Other
      international
    
    
    **-**
    
    
    -
    
    
    **18.6**
    
    
    -**162.8**
    
    
    132.0
    
    
    **245.0**
    
    
    216.7
 
 Revenues
and assets are allocated to countries based upon the hotels’ geographic
locations. There were no other individual international countries comprising
greater than 10% of the total revenues or property and equipment, intangible
assets and goodwill of the Company as at December 31, 2004, 2003 or
2002.
 16
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
  **4**
    **Acquisitions**
  **Fairmont
Hotels Inc.**
 
 On August
23, 2004, FHR purchased the remaining 16.5% of outstanding shares of Fairmont
from Maritz, Wolff & Co. for $70.0 in cash. FHR now owns 100% of Fairmont.
Since 2002, the Company has been consolidating 100% of Fairmont, by previously
having recorded an obligation of $69.0 representing the minimum amount a
minority shareholder was entitled to receive under a put option. During the
year, FHR increased its previously reported goodwill and future income tax
balances by $16.7. As a result of this transaction, current portion of long-term
debt decreased by $69.0.
 
 On
September 23, 2002, FHR increased its investment in Fairmont to 83.5%,
through a share exchange with a subsidiary of Kingdom Hotels (USA), Ltd.
(“Kingdom”), an affiliate of a trust created by Prince Alwaleed Bin Talal Bin
Abdulaziz Al Saud. Kingdom exchanged its 16.5% interest in Fairmont for shares
of FHR. FHR
issued 2,875,000 common shares at $24.00 per share to Kingdom, equivalent to
approximately 3.7% of FHR’s issued and outstanding common shares at the time.
The acquisition was accounted for using the step purchase method. The results of
Fairmont continued to be included in the consolidated statements of income, and
the portion related to non-controlling interest was reduced to 16.5%. The
goodwill acquired relates to the Fairmont management operations
segment.
 
 **The
Fairmont Copley Plaza Boston**
 
 In
February 2003, FHR acquired the remaining 50% equity interest in The Fairmont
Copley Plaza Boston from entities controlled by Prince Alwaleed Bin Talal Bin
Abdulaziz Al Saud of Saudi Arabia in exchange for the issuance of one million
common shares and cash of $8.3. The total purchase price for 100% of The
Fairmont Copley Plaza Boston, including the 50% already owned, was approximately
$117.0 and was satisfied by the issuance of one million common shares at a fair
market value of $21.49 per share, the assumption of a mortgage at $64.5 and cash
paid of $30.7. FHR purchased the initial 50% equity interest in the hotel in
July 2001 for cash. The acquisition was accounted for using the step purchase
method, and 100% of the results of the hotel have been included in the
consolidated statements of income from February 10, 2003. The mortgage, secured
by substantially all assets and an assignment of auxiliary rents of The Fairmont
Copley Plaza Boston, is due on March 5, 2007 and bears interest at floating
rates based on LIBOR plus 225 basis points. FHR has entered into an interest
rate contract to cap the LIBOR rate at 7.0%.
 
 The total
cost of the hotel, including the 50% interest already owned, less cash acquired
of $14.8, has been allocated to the tangible assets acquired and liabilities
assumed on the basis of their respective estimated fair values on the
acquisition date, as follows:
 
 **$**Land
    
    
    
    25.1Building
    
    
    
    77.8Furniture,
      fixtures and equipment
    
    
    
    2.5Long-term
      debt
    
    
    
    (64.5)Current
      assets
    
    
    
    3.2Current
      liabilities
    
    
    
    (6.8)37.3
 
  
 ****Fairmont
Hotels & Resorts Inc.**
Notes to
Consolidated Financial Statements
(in
millions of U.S. dollars, except per share amounts)**
 **The Fairmont Orchid, Hawaii**
  On
December 17, 2002, the Company acquired the assets of The Orchid at Mauna
Lani in Hawaii. These assets were acquired for a purchase price of $140.0, plus
acquisition costs of approximately $1.5 less the assumption of a $5.5 working
capital deficit. The acquisition was accounted for using the purchase method,
and the results of the hotel have been included in the consolidated statements
of income from the date of acquisition.
 
 The
purchase prices of the 2002 acquisitions have been allocated to the assets
acquired and liabilities assumed on the basis of their respective estimated fair
values on the acquisition date. The purchase price allocations are as
follows:
 
 **The
      Fairmont Orchid, Hawaii**
    
    
    **Fairmont
      Hotels Inc.**
    
    
    **Total****$**
    
    
    **$**
    
    
    **$**Land
    
    
    25.3
    
    
    -
    
    
    25.3Building
    
    
    104.9
    
    
    -
    
    
    104.9Furniture,
      fixtures and equipment
    
    
    11.3
    
    
    -
    
    
    11.3Goodwill
    
    
    -
    
    
    16.7
    
    
    16.7Management
      contracts
    
    
    -
    
    
    4.1
    
    
    4.1Brand
      name
    
    
    -
    
    
    38.9
    
    
    38.9Non-controlling
      interest
    
    
    -
    
    
    26.2
    
    
    26.2Future
      income taxes
    
    
    -
    
    
    (16.7
    )
    
    (16.7
    )Working
      capital deficit assumed
    
    
    (5.5
    )
    
    -
    
    
    (5.5
    )136.0
    
    
    69.2
    
    
    205.2
 
 None of
the goodwill acquired is deductible for income tax purposes. The management
contracts are being amortized over a period of 40 years and the brand name is
not being amortized since it is considered to have an indefinite useful
life.
 
 **5**
    **Sales
      of investments and hotel assets**
  **The
Fairmont Kea Lani Maui**
  On July
15, 2004, FHR finalized the sale of The Fairmont Kea Lani Maui for cash proceeds
of $355.4. The mortgage of $120.0 on this property was repaid. FHR recognized a
gain of $67.8 on the sale, net of income taxes of $40.9. The resort is being
managed by Fairmont under a long-term management contract.
  **The
Fairmont Glitter Bay**
  On July
9, 2004, FHR finalized the sale of The Fairmont Glitter Bay for cash proceeds of
approximately $31.7. The mortgage of $5.2 on this property was repaid. FHR
recognized a non-taxable gain of $7.5 on the sale. The resort is being managed
by Fairmont under a long-term management contract.
 18
  **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
  **6**
    **Investments
      in partnerships and corporations**
  **2004**
    
    
    **2003****$**
    
    
    **$**Accounted
      for using the equity method
    
    
    88.3
    
    
    48.5Accounted
      for using the cost method
    
    
    2.4
    
    
    4.690.7
    
    
    53.1
 
 In
September 2002, FHR invested $8.0 for a 19.9% interest in The Fairmont Sonoma
Mission Inn & Spa. FHR committed to advance a loan of $10.0 on normal
commercial terms to this hotel and has advanced a total of $10.0 as at December
31, 2004. This investment is accounted for using the equity method.
  In April
2004, FHR finalized an agreement to invest $15.6 for a 14.5% interest in The
Fairmont Dubai. This investment is accounted for using the equity method due to
significant influence obtained through various contractual arrangements. Upon
finalization of this agreement, $15.6 was reclassified from “Other assets and
deferred charges” to “Investments in partnerships and corporations.” Also, $6.8
was reclassified from “Other assets and deferred charges” to “Intangible assets”
relating to a management contract for The Fairmont Abu Dhabi Resort &
Villas, a property being constructed in the United Arab Emirates. The resort
will be managed by Fairmont under a long-term management contract.
  In
December 2004, FHR invested $19.8 in cash for a 25% interest in a partnership
with Kingdom Hotels and the Bank of Scotland and a management contract. The
partnership, FHR European Ventures LLP, purchased the Monte Carlo Grand Hotel in
Monaco in December 2004. The investment is accounted for using the equity method
due to significant influence through contractual arrangements. The property is
being managed by Fairmont under a long-term management contract. Based on the
relative fair value of the management contract, approximately $7.1 of the $19.8
was allocated to intangible assets relating to the management
contract.
  In
December 2004, FHR invested $10.0 for an approximate 14% equity interest in an
entity named Nile City for Hotels and Tourism and a management contract. Nile
City for Hotels and Tourism retains the investment in a hotel property that is
being constructed in Cairo, Egypt. The investment is accounted for using the
equity method due to significant influence through contractual arrangements. The
resort will be managed by Fairmont under a long-term management contract. Based
on the relative fair value of the management contract, approximately $4.7 of the
$10.0 was allocated to intangible assets relating to the management
contract.
  FHR
entered into an agreement to invest $10.0 for a 19.9% interest in The Fairmont
Mayakoba, Riviera Maya and a management contract. This investment is accounted
for using the equity method due to significant influence through contractual
arrangements. The resort will be managed by Fairmont under a long-term
management contract. As at December 31, 2004, FHR had invested $4.3. Based on
the relative fair value of the management contract, approximately $2.8 was
allocated to intangible assets relating to the management contract.
 19
  **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
  **7**
    **Investment
      in Legacy Hotels Real Estate Investment
Trust**
  On
September 13, 2004, FHR sold 12,000,000 units of Legacy for $63.0 in cash and
recognized a gain of $27.5. The sale did not give rise to any taxes payable. The
sale of these units decreased FHR’s equity investment in Legacy to 23.7% from
35.2%.
  As at
December 31, 2004, the Company owned 9,939,143 (2003 - 21,939,143) units and all
14,700,000 (2003 - 14,700,000) exchangeable shares of a subsidiary
corporation of Legacy, representing a 23.7% ownership interest (2003 - 35.2%).
The Company accounts for its investment in Legacy under the equity method. The
exchangeable shares are entitled to a per share dividend equal to the ordinary
distribution by Legacy to its unitholders, less taxes payable by a subsidiary of
Legacy as a result of paying these dividends. After a minimum holding period of
five years, ending January 31, 2006, each exchangeable share is redeemable by
FHR at the fair market value of a Legacy unit. The redemption shall be satisfied
by the delivery of one unit for each share exchanged. The exchangeable shares
are tied to voting certificates issued by Legacy that are entitled to one vote
each under voting certificates at meetings of Legacy unitholders. Based on the
December 31, 2004 closing unit price of Legacy, the market value of the
Company’s investment in units and exchangeable shares was approximately $146.
The Company does not guarantee any of Legacy’s debt.
  The
Company holds options to acquire 2,962,224 units of Legacy at an exercise price
of Cdn$9.80 per unit. The options are fully vested, exercisable and expire in
2007.
  The
following selected consolidated financial information of Legacy has been
prepared in accordance with Canadian GAAP. The accounts have been translated to
U.S. dollars using the exchange rates in effect at December 31.
  **2004**
    
    
    **2003****$**
    
    
    **$****Assets**Current
      assets
    
    
    **73.2**
    
    
    62.1Property
      and equipment
    
    
    **1,471.4**
    
    
    1,423.2Other
      assets
    
    
    **54.5**
    
    
    49.1**1,599.1**
    
    
    1,534.4**Liabilities
      and Equity**Current
      liabilities
    
    
    **71.6**
    
    
    117.7Long-term
      debt
    
    
    **723.3**
    
    
    627.1Other
      liabilities
    
    
    **50.1**
    
    
    47.7Non-controlling
      interest
    
    
    **96.1**
    
    
    92.4Unitholders’
      interest
    
    
    **658.0**
    
    
    649.5**1,599.1**
    
    
    1,534.4
 20
  **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 
 Summarized
operating results of Legacy for the years ended December 31:
  **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$**Revenues
    
    
    **579.1**
    
    
    474.2
    
    
    412.5Operating
      expenses
    
    
    **397.3**
    
    
    336.3
    
    
    272.6Other
      expenses
    
    
    **134.****3**
    
    
    98.1
    
    
    76.2Interest
      expense, net
    
    
    **54.6**
    
    
    50.7
    
    
    31.0**58****6.2**
    
    
    485.1
    
    
    379.8Income
      (loss) before income taxes and non-controlling interest
    
    
    **(7.1**
    **)**
    
    (10.9
    )
    
    32.7Income
      tax recovery
    
    
    **(****5.5**
    ******)**
    
    (5.4
    )
    
    (4.2
    )Non-controlling
      interest
    
    
    **(0.2**
    **)**
    
    (0.8
    )
    
    6.5Net
      income (loss)
    
    
    **(1.****4**
    ******)**
    
    (4.7
    )
    
    30.4
 The
carrying value of the Company’s investment in Legacy differs from the Company’s
share of the underlying equity in net assets due to adjustments that are made to
conform Legacy’s accounting policies with those of the Company and an
unamortized gain related to the transfer of properties in previous years,
between the Company and Legacy.
 21
  **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
  **8**
    **Property
      and equipment**
  **2004****Cost**
    
    
    **Accumulated**
      **amortization**
    
    
    **Net****$**
    
    
    **$**
    
    
    **$**Land
      and land improvements
    
    
    180.2
    
    
    (0.9
    )
    
    179.3Buildings
      and leasehold improvements
    
    
    702.7
    
    
    (87.3
    )
    
    615.4Buildings
      on leased land
    
    
    592.4
    
    
    (124.6
    )
    
    467.8Furniture,
      fixtures and equipment
    
    
    357.9
    
    
    (196.9
    )
    
    161.0Construction-in-progress
    
    
    12.0
    
    
    -
    
    
    12.01,845.2
    
    
    (409.7
    )
    
    1,435.5
 
 **2003****Cost**
    
    
    **Accumulated**
      **amortization**
    
    
    **Net****$**
    
    
    **$**
    
    
    **$**Land
      and land improvements
    
    
    237.2
    
    
    (0.7
    )
    
    236.5Buildings
      and leasehold improvements
    
    
    830.7
    
    
    (82.2
    )
    
    748.5Buildings
      on leased land
    
    
    555.6
    
    
    (103.0
    )
    
    452.6Furniture,
      fixtures and equipment
    
    
    337.6
    
    
    (159.6
    )
    
    178.0Construction-in-progress
    
    
    40.6
    
    
    -
    
    
    40.62,001.7
    
    
    (345.5
    )
    
    1,656.2
 Interest
capitalized as a cost of property and equipment totalled $0.7 in 2004 (2003 -
$0.8; 2002 - $0.1).
  22
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
  **9**
    **Goodwill
      and intangible assets**
 
 **Goodwill
      by reportable segment**
   **Hotel
      ownership**
    
    
    **Legacy**
    
    
    **Real**
      **estate**
      **activities**
    
    
    **Fairmont**
    
    
    **Delta**
    
    
    **Total****$**
    
    
    **$**
    
    
    **$**
    
    
    **$**
    
    
    **$**
    
    
    **$**Balance
      as atJanuary 1,
      2003
    
    
    79.3
    
    
    -
    
    
    -
    
    
    23.9
    
    
    19.8
    
    
    123.0Currency
      translation
    
    
    4.7
    
    
    -
    
    
    -
    
    
    -
    
    
    4.3
    
    
    9.0Balance
      as at December 31, 2003
    
    
    84.0
    
    
    -
    
    
    -
    
    
    23.9
    
    
    24.1
    
    
    132.0Goodwill
      from business acquisition
    
    
    10.4
    
    
    -
    
    
    -
    
    
    16.7
    
    
    -
    
    
    27.1Currency
      translation
    
    
    2.0
    
    
    -
    
    
    -
    
    
    -
    
    
    1.7
    
    
    3.7Balance
      as at December 31, 2004
    
    
    96.4
    
    
    -
    
    
    -
    
    
    40.6
    
    
    25.8
    
    
    162.8
 
 **2004**
    
    
    **2003****$**
    
    
    **$**Intangible
      assets subject to amortizationManagement
      contracts (note 6)
    
    
    111.8
    
    
    82.6Accumulated
      amortization
    
    
    (19.3
    )
    
    (13.9
    )92.5
    
    
    68.7Intangible
      assets not subject to amortizationBrand
      names
    
    
    152.5
    
    
    148.0245.0
    
    
    216.7
 Intangible
assets subject to amortization are amortized on a straight-line basis over their
estimated useful lives, which range from 20 to 50 years. Amortization expense
related to intangible assets subject to amortization was $3.1 in 2004
(2003 - $2.7; 2002 - $2.4). Amortization expense relating to the above
intangible assets subject to amortization is expected to be $3.1 in each of the
fiscal years 2005 through 2009.
 23
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
  **10**
    **Other
      assets and deferred charges**
  **2004**
    
    
    **2003****$**
    
    
    **$**Long-term
      advances
    
    
    41.1
    
    
    72.8Pension
      asset
    
    
    21.8
    
    
    18.0Deferred
      charges
    
    
    15.7
    
    
    11.0Restricted
      cash
    
    
    **-**
    
    
    2.4Other
    
    
    3.7
    
    
    5.282.3
    
    
    109.4
 Long-term
advances bear interest at rates between three-month LIBOR plus 0.25% and
one-month LIBOR plus 4.5%. They mature between February 2008 and November
2009. A portion of the long-term advances will be forgiven if the Company
receives a hotel management contract from the loan holder prior to
 February
2008. Deferred charges consist primarily of deferred development costs
associated with potential management contracts and deferred debt issuance costs.
Restricted cash was used for certain capital expenditures.
 
 **11**
    **Long-term
      debt**
  **2004**
    
    
    **2003****$**
    
    
    **$**3.75%
      convertible senior notes(1)
    
    
    254.7
    
    
    251.1Revolving
      credit facility, due March 2007(2)
    
    
    33.1
    
    
    -Revolving
      credit facility, due September 10, 2004(2)
    
    
    -
    
    
    40.5Revolving
      credit facility, due March 2005(2)
    
    
    -
    
    
    50.0Floating-rate
      mortgage, due March 1, 2006(3)
    
    
    -
    
    
    120.0Floating-rate
      mortgage, due March 5, 2007(4)
    
    
    63.9
    
    
    65.48.84%,
      notes, due August 1, 2016(5)
    
    
    50.4
    
    
    52.87.47%
      mortgage, due May 21, 2008(6)
    
    
    -
    
    
    5.5Fairmont
      put option(7)
    
    
    -
    
    
    69.0Other
    
    
    -
    
    
    3.3402.1
    
    
    657.6Less:
      Current portion of long-term debt
    
    
    4.1
    
    
    117.8398.0
    
    
    539.8
 (1)
    In
      2003, FHR issued $270.0 of convertible senior notes (“Convertible Notes”).
      The net proceeds of the issuance, after deducting offering expenses and
      underwriters’ commission were $262.5. The Convertible Notes were allocated
      between debt and equity elements and classified separately in the
      consolidated balance sheets. The debt element was calculated by
      discounting the stream of future payments of interest and principal at the
      prevailing market rate for a similar liability that does not have an
      associated conversion feature. Upon issuance, $250.8 was recorded as
      long-term debt with the balance recorded in other equity (note 13). The
      long-term debt amount will increase to the face value of the debt over a
      five-year period. The Convertible Notes mature on December 1, 2023
      and bear interest of 3.75% per annum. Interest on the Convertible Notes is
      payable semi-annually in arrears on June 1 and December 1 of
      each year. FHR may call the Convertible Notes in exchange for cash any
      time after January 20, 2009 for a price equal to 100% of the
      principal amount of Convertible Notes plus accrued and unpaid interest.
      Holders may put the Convertible Notes to FHR in exchange for cash on
      January 20, 2009, December 1, 2013 and 2018, at a purchase price
      equal to 100% of the principal amount of the Convertible Notes plus
      accrued and unpaid interest. Upon occurrence of certain prescribed
      conditions, holders of the Convertible Notes will have the right to
      convert them to common shares at an initial conversion price of
      approximately $37.73 per common share. The conversion price is subject to
      adjustment under certain circumstances. The Convertible Notes are senior
      unsecured obligations and rank equally with all existing and future
      unsecured and unsubordinated indebtedness of FHR. As required under the
      terms and conditions of the Convertible Notes, the debt and the common
      shares issuable upon conversion of the Convertible Notes were registered
      on Form F-10 with the United States Securities and Exchange Commission on
      April 6, 2004.
 
 24
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share
amounts)
 (2)
    The
      interest rate is floating and is calculated based on bankers’ acceptance,
      LIBOR or prime rate, plus a spread. The weighted average interest rate as
      at December 31, 2004 was 4.2%. These facilities are unsecured, and
      contain financial covenants with respect to debt levels and interest
      coverage. As at December 31, 2004, this balance included $40.0 of debt
      denominated in Canadian dollars.
 
 (3)
    The
      interest rate is the greater of 4.25% and LIBOR plus 310 basis points. FHR
      had entered into an interest rate contract to cap the LIBOR rate at 9.0%.
      The mortgage was secured by substantially all assets and an assignment of
      auxiliary rents of The Fairmont Kea Lani Maui.
 
 (4)
    The
      interest rate is floating and is based on LIBOR plus 2.25%. FHR has
      entered into an interest rate contract to cap the LIBOR rate at 7.0% until
      March 6, 2006. The mortgage is secured by substantially all of the
      property and equipment and assignment of auxiliary rents of The Fairmont
      Copley Plaza Boston, and is non-recourse to FHR except for approximately
      $31.8, which FHR has guaranteed until such time that certain financial
      covenants are met.
 
 (5)
    The
      8.84% notes are secured by substantially all property and equipment and
      assignment of rents of The Fairmont Scottsdale
Princess.
 
 (6)
    The
      7.47% mortgage was secured by substantially all property and equipment and
      a floating charge over other assets of The Fairmont Royal Pavilion and The
      Fairmont Glitter Bay.
 
 (7)
    A
      minority shareholder held shares in Fairmont with the ability to be put to
      FHR for $69.0 at any time prior to October 1,
2004.
 
 The
principal repayments pursuant to the loan agreements are as
follows:
 
 **$**2005
    
    4.12006
    
    4.32007
    
    97.12008
    
    3.42009
    
    3.7Thereafter
    
    289.5402.1
 
  
  
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)   **12**
    **Income
      taxes**
 The
provision for (recovery of) income taxes is as follows:
  **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$**Pre-tax
      incomeCanada
    
    
    **32.1**
    
    
    14.4
    
    
    84.7Foreign
    
    
    **185.6**
    
    
    24.8
    
    
    44.8**217.7**
    
    
    39.2
    
    
    129.5Current
      income tax expenseCanada
    
    
    **2.3**
    
    
    5.0
    
    
    7.2Foreign
    
    
    **52.1**
    
    
    7.8
    
    
    4.8**54.4**
    
    
    12.8
    
    
    12.0Future
      income tax expense (recovery)Canada
    
    
    **0.3**
    
    
    (25.9
    )
    
    20.3Foreign
    
    
    **7.2**
    
    
    1.6
    
    
    3.5**7.5**
    
    
    (24.3
    )
    
    23.8**61.9**
    
    
    (11.5
    )
    
    35.8
 The
Company’s effective income tax expense and the provision (recovery) reconciled
to the statutory tax rate is as follows:
 
 **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$**Provision
      (recovery) at Canadian statutory rates
    
    
    **80.5**
    
    
    14.5
    
    
    53.0Foreign
      tax rate differentials
    
    
    **(3.0**
    **)**
    
    (3.8
    )
    
    (4.6
    )Large
      corporations tax
    
    
    **1.4**
    
    
    1.6
    
    
    1.6Reduction
      in tax rates
    
    
    **(1.9**
    **)**
    
    0.4
    
    
    -Non-taxable
      income(1)
    
    
    **(19.8**
    **)**
    
    (1.5
    )
    
    (12.2
    )Other,
      including tax reassessments and provisions(2)
    
    
    **4.7**
    
    
    (22.7
    )
    
    (2.0
    )Income
      tax expense (recovery)
    
    
    **61.9**
    
    
    (11.5
    )
    
    35.8
 
 (1)
    Non-taxable
      income in 2004 includes the effect from the sale of Legacy units (note 7)
      and the sale of The Fairmont Glitter Bay (note
5).
  (2)
    A
      $24.4 recovery of future income taxes was recorded in 2003 as a result of
      a favourable tax reassessment.
  26
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 ****
 **Temporary
differences**
 
 The net
future income tax liability in the consolidated balance sheets is comprised of
the following:
 
 **2004**
    
    
    **2003****$**
    
    
    **$**Future
      income tax liabilitiesAmortizable
      property and intangibles
    
    
    **148.5**
    
    
    132.3Other
    
    
    **45.8**
    
    
    55.8Future
      income tax assetsTax
      loss carry-forwards
    
    
    **(103.7**
    **)**
    
    (125.7
    )Future
      income tax liability
    
    
    **90.6**
    
    
    62.4
 As at
December 31, 2004, the Company had the following tax loss carry-forwards
available to reduce future taxable income and capital gains:
 
 **Amount**
    
    
    **Future
      income tax assets**
    
    
    **Valuation
      allowance**
    
    
    **Net
      future income tax assets****$**
    
    
    **$**
    
    
    **$**
    
    
    **$**Non-capital
      lossesCanada
    
    
    255.9
    
    
    92.1
    
    
    (7.2
    )
    
    84.9United
      States
    
    
    -
    
    
    -
    
    
    -
    
    
    -Other
    
    
    0.8
    
    
    0.3
    
    
    (0.3
    )
    
    -256.7
    
    
    92.4
    
    
    (7.5
    )
    
    84.9Capital
      lossesCanada
    
    
    427.9
    
    
    77.0
    
    
    (58.2
    )
    
    18.8
 The
Company has non-capital losses expiring in the following years:
 
 **$**2005
    
    
    1.12006
    
    
    2.52007
    
    
    34.42008
    
    
    145.82009
    
    
    31.3Thereafter
    
    
    41.6256.7
 27
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 **13**
    **Shareholders’
      equity**
 
 The
Company’s articles of incorporation authorize the issuance of an unlimited
number of common shares and an unlimited number of first preferred shares and
second preferred shares. No preferred shares have been issued.
 
 **Common
shares**
 
 **2004**
    **2003**
    **2002****Number**
      **of**
      **shares**
    
    
    **Amount**
    
    
    **Number**
      **of**
      **shares**
    ****
      ****
      ****
      ****
    
    **Amount**
    
    
    **Number**
      **of**
      **shares**
    ****
      ****
      ****
      ****
    
    **Amount****(millions)**
    
    
    **$**
    
    
    **(millions**)****
    
    
    **$**
    
    
    **(millions**)****
    
    
    **$**Balance
      - January 1
    
    
    **79.1**
    
    
    **1,202.2**
    
    
    78.8
    
    
    1,191.5
    
    
    78.6
    
    
    1,162.4Issued
      under stock option plans
    
    
    **0.2**
    
    
    **2.9**
    
    
    -
    
    
    1.0
    
    
    0.3
    
    
    4.7Issued
      for purchase of The Fairmont Copley Plaza Boston (note 4)
    
    
    **-**
    
    
    **-**
    
    
    1.0
    
    
    21.0
    
    
    -
    
    
    -Issued
      to Kingdom for shares of Fairmont (note 4)
    
    
    **-**
    
    
    **-**
    
    
    -
    
    
    -
    
    
    2.9
    
    
    69.0Share
      repurchase plans
    
    
    **(2.9**
    **)**
    
    **(42.0**
    **)**
    
    (0.7
    )
    
    (11.3
    )
    
    (3.0
    )
    
    (44.6
    )Balance
      - December 31
    
    
    **76.4**
    
    
    **1,163.1**
    
    
    79.1
    
    
    1,202.2
    
    
    78.8
    
    
    1,191.5
 Under a
normal course issuer bid, the Company may repurchase for cancellation up to
approximately
 7.7
million, or 10%, of its outstanding common shares. The amounts and timing of
repurchases are at the Company’s discretion and, under the current program, can
be made until October 28, 2005 at prevailing market prices on the Toronto and
New York stock exchanges. The cost of the share repurchases have been accounted
for as follows:
 
 **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$**Common
      shares
    
    
    **42.0**
    
    
    11.3
    
    
    44.6Contributed
      surplus
    
    
    **-**
    
    
    -
    
    
    0.5Foreign
      currency translation adjustments
    
    
    **-**
    
    
    -
    
    
    (2.3
    )Treasury
      stock
    
    
    **5.6**
    
    
    -
    
    
    -Retained
      earnings
    
    
    **36.9**
    
    
    5.5
    
    
    30.4**84.5**
    
    
    16.8
    
    
    73.2
 
 As at
December 31, 2004, 166,100 shares were classified as Treasury stock as they were
repurchased prior to December 31, 2004 and cancelled in January
2005.
   28
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 **Other
equity**
 
 Upon the
occurrence of certain events, holders of the Convertible Notes (note 11) will
have the right to convert them to common shares at an initial conversion price
of approximately $37.73 per common share.
 
 The
Convertible Notes have been allocated between debt and equity elements and are
classified separately on the consolidated balance sheets. Upon issuance, $19.2
was recorded as other equity and $250.8 was recorded as long-term
debt.
 
 **Foreign
currency translation adjustments**
 
 **2004**
    
    
    **2003****$**
    
    
    **$**Balance
      - January 1
    
    
    104.1
    
    
    27.4Effect of exchange rate changes on non-U.S. dollar denominated net
      assets
    
    
    38.0
    
    
    76.7Balance
      - December 31
    
    
    142.1
    
    
    104.1
 **14**
    **Stock-based
      compensation**
  The
Company has a Key Employee Stock Option Plan (“KESOP”), whereby key officers,
employees and consultants of the Company may be granted options to purchase
common shares of FHR at a price per share not less than the market value of a
common share at the grant date. All options issued to date vest over a four-year
period, with 20% vesting at the end of each of the first three years and the
remaining 40% vesting after four years. Options expire ten years after the grant
date. In the event of a change in control of the Company, all outstanding
options are immediately exercisable.
 
 Simultaneously
with the grant of an option, the Company may also grant SARs at a rate of one
SAR for every two options issued. A SAR entitles the holder to receive payment
of an amount equal to the excess of the market value of a common share at the
exercise date of the SAR over the related option price. SARs may be exercised no
earlier than three years and no later than ten years after the grant date. The
exercise of a SAR will result in a reduction in the number of shares covered by
an option on a one-for-one basis. The exercise of an option results in a
reduction in the number of SARs on the basis of one SAR for each option
exercised in excess of 50% of the number of options issued with attached
SARs.
 
 As a
result of an agreement between FHR and the companies that were distributed
pursuant to the Company’s 2001 reorganization, the difference between the strike
price and the exercise price of SARs of the discontinued operations held by FHR
employees is recognized as an expense by FHR, while the difference between the
strike price and the exercise price of FHR SARs held by employees of the
discontinued operations is recovered from those companies.
 
 The
Company also has a Directors’ Stock Option Plan (“DSOP”) under which
non-employee directors of the Company are granted options to purchase common
shares of FHR at a price not less than the market value of the share at the
grant date. Each non-employee director received an initial grant of 8,000
options and receives an additional 4,000 options on an annual basis. Options are
immediately exercisable and expire ten years after the grant date. No options
were granted under this plan in 2004 (2003 - 40,000; 2002 - 40,000). In 2004,
options were substituted with deferred share units (“DSUs”). Each director
received a grant of 2,000 DSUs.
 29
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 
 As at
December 31, 2004, 2.2 million options were available for future grants under
the KESOP out of the 5.4 million options currently authorized, and 460,000
options were available for future grants under the DSOP out of the 592,000
options currently authorized.
 
 Details
of the stock options outstanding are as follows:
 
 **Number****of**
      **options**
      **(thousands)**
    
    
    **Weighted
      average exercise price**
      **Cdn$**Outstanding
      as at December 31, 2001
    
    
    3,721
    
    
    25.19Granted
    
    
    264
    
    
    38.63Exercised
    
    
    (295
    )
    
    24.22Cancelled
    
    
    (103
    )
    
    24.78Outstanding
      as at December 31, 2002
    
    
    3,587
    
    
    26.26Granted
    
    
    107
    
    
    32.34Exercised
    
    
    (74
    )
    
    18.08Cancelled
    
    
    (32
    )
    
    24.44Outstanding
      as at December 31, 2003
    
    
    3,588
    
    
    26.63Granted
    
    
    10
    
    
    33.68Exercised
    
    
    (150
    )
    
    24.01Cancelled
    
    
    (34
    )
    
    29.28Outstanding
      as at December 31, 2004
    
    
    3,414
    
    
    26.74Exercisable
      as atDecember
      31, 2002
    
    
    907
    
    
    22.24December
      31, 2003
    
    
    1,523
    
    
    24.98December
      31, 2004
    
    
    2,161
    
    
    25.92
 
 30
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 
 Details
as at December 31, 2004, of the stock options outstanding are as
follows:
 
 **Range
      of**
      **exercise
      prices**
      **Cdn$**
    
    
    **Number**
      **outstanding**
      **(thousands**)****
    ****
      ****
      ****
    
    **Weighted
      average remaining contractual**
      **life**
      **(years**)****
    ****
      ****
      ****
    
    **Weighted**
      **average**
      **exercise**
      **price**
      **Cdn$**
    
    
    **Number**
      **exercisable**
      **(thousands**)****
    ****
      ****
      ****
    
    **Weighted**
      **average**
      **exercise**
      **price**
      **Cdn$**$10.90
      to $11.96
    
    
    20
    
    
    0.4
    
    
    11.70
    
    
    20
    
    
    11.70$14.84
      to $20.09
    
    
    316
    
    
    4.2
    
    
    15.79
    
    
    316
    
    
    15.79$26.25
      to $37.93
    
    
    3,042
    
    
    6.9
    
    
    27.73
    
    
    1,789
    
    
    27.44$40.40
      to $49.30
    
    
    36
    
    
    7.3
    
    
    47.32
    
    
    36
    
    
    47.323,414
    
    
    6.7
    
    
    26.74
    
    
    2,161
    
    
    25.92
 During
2004, $2.6 (2003 - $(0.3); 2002 - $0.9) was expensed (recovered) for outstanding
SARs, and $0.1 (2003 - $0.4; 2002 - nil) was expensed relating to the issuance
of options. Contributed surplus increased by $0.1 (2003 - $0.4; 2002 - nil)
relating to the stock option expense in 2004.
 
 Assuming
FHR elected to recognize the cost of its stock-based compensation based on the
estimated fair value of stock options granted on or after January 1, 2002 and
before January 1, 2003, net income and basic and diluted earnings per share
would have been:
 
 **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$**Reported
      net income
    
    
    155.8
    
    
    50.7
    
    
    92.5Net
      income assuming fair value method used
    
    
    155.4
    
    
    50.1
    
    
    92.1Assuming
      fair value method usedBasic
      earnings per share
    
    
    1.98
    
    
    0.64
    
    
    1.17Diluted
      earnings per share
    
    
    1.96
    
    
    0.63
    
    
    1.16
 The
weighted average fair value of options granted during 2004 was Cdn$7.52 per
option (2003 - Cdn$10.12; 2002 - Cdn$12.73). The fair value of each option
granted was calculated at the respective grant date of each issuance using the
Black-Scholes option pricing model with the following weighted average
assumptions:
 
 **2004**
    
    
    **2003**
    
    
    **2002**Expected
      dividend yield
    
    
    0.2
    %
    
    0.3
    %
    
    0.2
    %Expected
      volatility
    
    
    26
    %
    
    36
    %
    
    41
    %Risk-free
      interest rate
    
    
    3.12
    %
    
    4.2
    %
    
    3.9
    %Expected
      option life in years
    
    
    3.3
    
    
    3.6
    
    
    3.4
 31
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 **15**
    **Income
      (loss) from equity investments**
  **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$**Equity
      income (loss)Partnerships
      and corporations
    
    
    **(0.6**
    **)**
    
    (1.1
    )
    
    2.8Legacy
    
    
    **(2.1**
    **)**
    
    (8.6
    )
    
    6.4Amortization
      of deferred gain on sale of property and equipment to
    Legacy
    
    
    **2.5**
    
    
    2.8
    
    
    8.5**(0.2**
    **)**
    
    (6.9
    )
    
    17.7
 **16**
    **Other
      (income) expenses, net**
  **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$**Foreign
      currency exchange loss
    
    
    **-**
    
    
    2.1
    
    
    -Corporate
      and other reorganization expenses
    
    
    **-**
    
    
    -
    
    
    2.2Other
    
    
    **-**
    
    
    -
    
    
    (4.9
    )****
    
    
    **-**
    
    
    2.1
    
    
    (2.7
    )
 Total
foreign currency losses (gains) included in net income were $1.9 (2003 - $4.5;
2002 - $(0.8)).
  Reorganization
expenses for 2002 include charges relating to SARs for former employees of
Canadian Pacific Limited (“CPL”).
  Corporate
expenses were costs associated with the corporate activities performed by CPL
for its subsidiaries, including FHRHI, prior to October 1, 2001. The
majority of these activities have been eliminated subsequent to October 1,
2001.
  **17**
    **Interest
      expense, net**
  **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$**Long-term
      debt
    
    
    **32.****4**
    
    
    22.1
    
    
    20.9Short-term
      debt
    
    
    **4.5**
    
    
    16.0
    
    
    1.2**36.9**
    
    
    38.1
    
    
    22.1LessInterest
      income
    
    
    **3.1**
    
    
    3.7
    
    
    2.9Interest
      capitalized
    
    
    **0.7**
    
    
    0.8
    
    
    0.1**33.1**
    
    
    33.6
    
    
    19.1
 
  32
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 **18**
    **Net
      income per common share**
  Basic net
income per common share is determined by dividing net income by the weighted
average number of common shares outstanding. Diluted net income per common share
reflects the potential dilutive effect of stock options granted under the
Company’s option plans, as determined under the treasury stock
method.
  **2004**
    
    
    **2003**
    
    
    **2002******
    
    
    **(millions)**
    
    
    **(millions**)****
    ****
    
    **(millions**)****
    ****Weighted
      average number of common shares outstanding - basic
    
    
    **78.4**
    
    
    79.2
    
    
    78.4Dilutive
      effect of stock options
    
    
    **0.8**
    
    
    0.8
    
    
    1.3Weighted
      average number of common shares outstanding - diluted
    
    
    **79.2**
    
    
    80.0
    
    
    79.7
 
 **19**
    **Supplemental
      cash flow disclosure**
  (a)
    Changes
      in non-cash working capital items related to
operations:
  **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$**Decrease
      (increase) in current assetsAccounts
      receivable
    
    
    **(22.7**
    **)**
    
    4.3
    
    
    1.5Inventory
    
    
    **(1.2**
    **)**
    
    -
    
    
    (0.6
    )Prepaid
      expenses and other
    
    
    **3.7**
    
    
    3.9
    
    
    (2.0
    )Increase
      (decrease) in current liabilitiesAccounts
      payable and accrued liabilities
    
    
    **(1.1**
    **)**
    
    (8.9
    )
    
    (12.6
    )Taxes
      payable
    
    
    **3.4**
    
    
    0.4
    
    
    3.2Increase
      in non-cash working capital balances related to operations
    
    
    **(17.9**
    **)**
    
    (0.3
    )
    
    (10.5
    )
 (b)
    Cash
      payments made during the year on account of:
  **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$**Interest
      paid
    
    
    **39.2**
    
    
    36.2
    
    
    25.3Income
      taxes paid
    
    
    **54.4**
    
    
    17.8
    
    
    21.8
 
 33
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
  (c)
    Non-cash
      investing and financing activities:
  **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$**Issuance
      of common shares on acquisitions
    
    
    **-**
    
    
    21.0
    
    
    69.0Acquisition
      of Legacy units under its distribution reinvestment plan
    
    
    **-**
    
    
    -
    
    
    3.4
 
 **20**
    **Employee
      future benefits**
  The
Company has defined benefit pension plans and other post-retirement plans,
primarily life insurance and health care coverage, for certain employees.
Pension benefits are based principally on years of service and compensation
rates near retirement. The costs of these defined benefit pension plans are
actuarially determined using the projected benefit method pro-rated on service
and management’s best estimate of expected plan investment performance, salary
escalation, retirement ages of employees and expected health care costs.
Market-related values are used for calculating the expected return on plan
assets. The projected benefit obligation is discounted using a market interest
rate at the end of the year on high-quality corporate debt
instruments.
  For
defined benefit pension plans, transitional assets and past service cost due to
changes in plan provisions are amortized on a straight-line basis over the
expected average remaining service life of employees covered by the various
plans. The portion of net actuarial gains and losses in excess of 10% of the
greater of the plan obligation and the fair value of plan assets is amortized on
a straight-line basis over the expected average remaining service life of the
employees covered by the plan. For the two supplemental plans, actuarial gains
and losses are taken into income immediately. For defined contribution plans,
pension costs equal the Company’s share of the contributions allocated to the
employees.
  The
Company uses a measurement date of December 31 for all of its pension and other
post-retirement benefits.
 34
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 **Benefit
obligations**
 
 **2004**
    
    
    **2003**
    
    
    **2002****Change
      in benefit obligation**
    
    
    **Pension**
    
    
    **Other**
    
    
    **Pension**
    
    
    **Other**
    
    
    **Pension**
    
    
    **Other****$**
    
    
    **$**
    
    
    **$**
    
    
    **$**
    
    
    **$**
    
    
    **$**Benefit
      obligation - January 1
    
    
    **102.7**
    
    
    **2.3**
    
    
    74.5
    
    
    -
    
    
    71.1
    
    
    -Service
      cost
    
    
    **2.8**
    
    
    **0.1**
    
    
    2.1
    
    
    0.1
    
    
    0.9
    
    
    -Interest
      cost
    
    
    **6.4**
    
    
    **0.1**
    
    
    5.7
    
    
    0.1
    
    
    4.1
    
    
    -Plan
      participants’ contributions
    
    
    **0.2**
    
    
    **-**
    
    
    0.2
    
    
    -
    
    
    0.2
    
    
    -Settlement
    
    
    **(2.6**
    **)**
    
    **-**
    
    
    -
    
    
    -
    
    
    -
    
    
    -Plan
      amendments
    
    
    **3.6**
    
    
    **-**
    
    
    1.4
    
    
    -
    
    
    -
    
    
    -Curtailment
    
    
    **(0.8**
    **)**
    
    **-**
    
    
    -
    
    
    -
    
    
    -
    
    
    -Actuarial
      loss
    
    
    **4.5**
    
    
    **0.3**
    
    
    3.8
    
    
    0.2
    
    
    7.4
    
    
    -Benefits
      paid
    
    
    **(7.3**
    **)**
    
    **(0.1**
    **)**
    
    (7.1
    )
    
    (0.1
    )
    
    (11.3
    )
    
    -Other
    
    
    **2.5**
    
    
    **-**
    
    
    5.7
    
    
    1.9
    
    
    1.3
    
    
    -Foreign
      currency exchange rate changes
    
    
    **7.7**
    
    
    **0.2**
    
    
    16.4
    
    
    0.1
    
    
    0.8
    
    
    -Benefit
      obligation - December 31
    
    
    **119.7**
    
    
    **2.9**
    
    
    102.7
    
    
    2.3
    
    
    74.5
    
    
    -
 The
weighted average assumptions used to determine end of year benefit obligations
are as follows:
 
 **2004**
    
    
    **2003**
    
    
    **2002****Pension**
      **%**
    
    
    **Other**
      **%**
    ****
      ****
    
    **Pension**
      **%**
    ****
      ****
    
    **Other**
      **%**
    ****
      ****
    
    **Pension**
      **%**
    ****
      ****
    
    **Other%**
    ****
      ****Discount
      rate
    
    
    **5.7**
    
    
    **5.8**
    
    
    6.0
    
    
    6.0
    
    
    6.5
    
    
    N/ARate
      of compensation increase
    
    
    **3.7**
    
    
    **N/A**
    
    
    3.5
    
    
    N/A
    
    
    3.5
    
    
    N/A
 A 14%
annual rate of increase in the per capita cost of covered health care benefits
was assumed for 2003 and 10% for 2004. The rate is then assumed to decrease
gradually to 5% by 2009 and remain at that level thereafter. Assumed health care
cost trend rates have a significant effect on the amounts reported for the
health care plans. A 1% change in assumed health care cost trend would have the
following effect for 2004:
 
 **1%
      increase**
      **$**
    
    
    **1%
      decrease**
      **$**Effect
      on post-retirement benefit obligation
    
    
    0.1
    
    
    (0.1
    )Effect
      on total service and interest cost
    
    
    -
    
    
    -
 
 35
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 **Plan
assets**
 
 **2004**
    
    
    **2003**
    
    
    **2002****Change
      in plan assets**
    
    
    **Pension**
    
    
    **Other**
    
    
    **Pension**
    
    
    **Other**
    
    
    **Pension**
    
    
    **Other****$**
    
    
    **$**
    
    
    **$**
    
    
    **$**
    
    
    **$**
    
    
    **$**Fair
      value - January 1
    
    
    **88.8**
    
    
    **-**
    
    
    72.8
    
    
    -
    
    
    86.9
    
    
    -Actual
      return on plan assets
    
    
    **13.0**
    
    
    **-**
    
    
    7.2
    
    
    -
    
    
    (4.1
    )
    
    -Employer
      contributions
    
    
    **2.8**
    
    
    **0.1**
    
    
    2.7
    
    
    0.1
    
    
    2.6
    
    
    -Plan
      participants’ contributions
    
    
    **0.2**
    
    
    **-**
    
    
    0.2
    
    
    -
    
    
    0.2
    
    
    -Settlement
    
    
    **(0.9**
    **)**
    
    **-**
    
    
    -
    
    
    -
    
    
    -
    
    
    -Benefits
      paid
    
    
    **(7.3**
    **)**
    
    **(0.1**
    **)**
    
    (7.1
    )
    
    (0.1
    )
    
    (11.3
    )
    
    -Transfer
      to defined contribution plan
    
    
    **(3.7**
    **)**
    
    **-**
    
    
    (3.5
    )
    
    -
    
    
    (2.2
    )
    
    -Other
    
    
    **2.4**
    
    
    **-**
    
    
    0.9
    
    
    -
    
    
    -
    
    
    -Foreign
      currency exchange rate changes
    
    
    **7.2**
    
    
    **-**
    
    
    15.6
    
    
    -
    
    
    0.7
    
    
    -Fair
      value - December 31
    
    
    **102.5**
    
    
    **-**
    
    
    88.8
    
    
    -
    
    
    72.8
    
    
    -
 The asset
allocation of the Company’s pension plan assets is as follows:
 
 **Target**
      **allocation**
    
    **Percentage
      of plan assets**
      **as
      at December 31,****Asset
      category**
    
    
    **2005**
    
    
    **2004**
    
    
    **2003**Cash
    
    
    0 -
      10
    %
    
    0
    %
    
    0
    %Debt
      securities
    
    
    30
      - 40
    %
    
    49
    %
    
    42
    %Equity
      securities
    
    
    50
      - 60
    %
    
    51
    %
    
    58
    %
 The
Company’s investment strategy is to maximize return at an appropriate level of
risk in order to minimize its long-term cash contributions and pension expenses.
The expected rate of return on pension plan assets was determined by using
long-term historic rates of returns for equities, bonds and cash weighted
according to the Company’s current investment allocation policies.
 
 Equity
securities include no common shares of FHR as at December 31, 2004 (2003 -
nil).
 36
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 ****
 **Funded
status**
 
 The
funded status, reconciled to the amounts reported on the consolidated balance
sheets as at December 31, is as follows:
 
 **2004**
    
    
    **2003****Pension**
    
    
    **Other**
    
    
    **Pension**
    
    
    **Other****$**
    
    
    **$**
    
    
    **$**
    
    
    **$**Fair
      value of plan assets
    
    
    **102.5**
    
    
    **-**
    
    
    88.8
    
    
    -Benefit
      obligation
    
    
    **(119.7**
    **)**
    
    **(2.9**
    **)**
    
    (102.7
    )
    
    (2.3
    )Funded
      status
    
    
    **(17.2**
    **)**
    
    **(2.9**
    **)**
    
    (13.9
    )
    
    (2.3
    )Unrecognized
      net actuarial loss
    
    
    **23.4**
    
    
    **0.5**
    
    
    25.2
    
    
    0.2Unrecognized
      prior service cost
    
    
    **6.7**
    
    
    **-**
    
    
    3.8
    
    
    -Unrecognized
      net transitional asset
    
    
    **(25.3**
    **)**
    
    **1.5**
    
    
    (26.9
    )
    
    1.5Valuation
      allowance
    
    
    **(1.8**
    **)**
    
    **-**
    
    
    (2.4
    )
    
    -Accrued
      benefit liability
    
    
    **(14.2**
    **)**
    
    **(0.9**
    **)**
    
    (14.2
    )
    
    (0.6
    )
 
 Amounts
recognized in the accompanying consolidated balances sheets:
 
 **2004**
    
    
    **2003****Pension**
    
    
    **Other**
    
    
    **Pension**
    
    
    **Other****$**
    
    
    **$**
    
    
    **$**
    
    
    **$**Other
      assets and deferred charges
    
    
    **23.6**
    
    
    **-**
    
    
    19.4
    
    
    -Other
      liabilities
    
    
    **(37.8**
    **)**
    
    **(0.9**
    **)**
    
    (33.6
    )
    
    (0.6
    )**(14.2**
    **)**
    
    **(0.9**
    **)**
    
    (14.2
    )
    
    (0.6
    )
 Included
in the above accrued benefit obligation and fair value of plan assets as at
December 31 are the following amounts in respect of plans that are not fully
funded:
 
 **2004**
    
    
    **2003****Pension**
    
    
    **Other**
    
    
    **Pension**
    
    
    **Other****$**
    
    
    **$**
    
    
    **$**
    
    
    **$**Accrued
      benefit obligation
    
    
    **73.8**
    
    
    **2.9**
    
    
    62.4
    
    
    2.3Fair
      value of plan assets
    
    
    **24.1**
    
    
    **-**
    
    
    21.3
    
    
    -Underfunded
      balance
    
    
    **49.7**
    
    
    **2.9**
    
    
    41.1
    
    
    2.3
 
 37
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 
 As at
December 31, 2004, the Company had issued letters of credit of $57.6 (2003
- $40.8) representing financial guarantees on the above unfunded pension
liabilities.
 
 **Funding
requirements**
 
 Employer
contributions in 2004 were $2.7 in respect of defined benefit pensions and $0.1
in respect of other benefits.
 
 The date
of the most recent funding valuation for the plurality of FHR’s registered plan
obligations is January 1, 2004. The next funding valuation for the
plurality of the registered plan obligations will be as of January 1,
2007.
 
 **Net
periodic cost (income)**
 
 Components
of the Company’s net periodic benefit costs related to the defined benefit
pension plans are as follows:
 
 ****
      **2004**
    
    
    ****
      **2003**
    
    
    ****
      **2002****$**
    
    
    **$**
    
    
    **$**Service
      cost
    
    
    **2.8**
    
    
    2.1
    
    
    0.9Interest
      on liabilities
    
    
    **6.4**
    
    
    5.7
    
    
    4.1Actual
      return on plan assets
    
    
    **(13.0**
    **)**
    
    (7.2
    )
    
    4.1Actuarial
      (gains) losses
    
    
    **4.5**
    
    
    3.8
    
    
    7.4Past
      service cost
    
    
    **3.3**
    
    
    1.4
    
    
    -Curtailment/settlement
    
    
    **0.1**
    
    
    -
    
    
    -Difference
      between actual and expected return
    
    
    **5.9**
    
    
    1.3
    
    
    (10.4
    )Difference
      between actual and recognized actuarial gains (losses) in
    year
    
    
    **(2.7**
    **)**
    
    (2.4
    )
    
    (4.4
    )Difference
      between actual and recognized past service costs in year
    
    
    **(2.7**
    **)**
    
    (0.9
    )
    
    0.2Amortization
      of net transion obligation (assets)
    
    
    **(4.0**
    **)**
    
    (3.5
    )
    
    (3.2
    )Increase
      (decrease) in valuation allowance
    
    
    **(0.7**
    **)**
    
    (0.3
    )
    
    (8.6
    )Other
      adjustments
    
    
    **(0.3**
    **)**
    
    4.6
    
    
    -**(0.4**
    **)**
    
    4.6
    
    
    (9.9
    )Weighted
      average assumptionsDiscount
      rate
    
    
    **5.7**
    **%**
    
    6.5
    %
    
    6.5
    %Expected
      return on plan assets
    
    
    **7.0**
    **%**
    
    7.5
    %
    
    7.5
    %Rate
      of compensation increase
    
    
    **3.7**
    **%**
    
    3.5
    %
    
    3.5
    %
 
 38
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 
 Components
of the Company’s net periodic benefit costs related to other post-retirement
benefits are as follows:
  **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$**Service
      cost
    
    
    **0.1**
    
    
    0.1
    
    
    -Interest
      cost
    
    
    **0.1**
    
    
    0.1
    
    
    -Amortization
    
    
    **0.1**
    
    
    0.1
    
    
    -Other
    
    
    **-**
    
    
    0.4
    
    
    -**0.3**
    
    
    0.7
    
    
    -Weighted
      average assumptionsDiscount
      rate
    
    
    **5.8**
    **%**
    
    6.5
    %
    
    N/AHealth
      care and other benefits cost trend rates (ultimate)
    
    
    **5.0**
    **%**
    
    5.0
    %
    
    N/A
 
 The
Company also has a defined benefit plan for certain retirees that is not
included in the above tables. This plan relates to former employees and retirees
of the Company and predecessor companies that were spun off in 2001. The plan is
in the process of being separated into two plans, one of which will be sponsored
by a third party. Once this separation occurs, it is the Company’s intention to
settle any remaining accrued benefit obligations through the purchase of a
non-participating insurance contract. The estimated fair value of plan assets is
approximately $112 (2003 - $104) and the projected benefit obligation related to
the Company’s portion of this plan is approximately $107 (2003 - $102) as at
December 31, 2004. There were no service costs recorded to the Company’s portion
of the plan in 2003 or 2004. The expected return on plan assets was greater than
the interest cost on the projected benefit obligation. The Company has not
recorded any prepaid or accrued benefit cost from this plan. For the years ended
December 31, 2004, 2003 and 2002, the service costs of the Company’s portion of
this plan were nil and the expected return on plan assets was greater than the
interest cost on the projected benefit obligation.
 
 FHR also
has defined contribution pension plans. The net expense for such plans, which
equals the Company’s required contribution, was $3.3, $2.8 and $1.3 in 2004,
2003 and 2002, respectively.
 
 **21**
    **Commitments,
      contingencies and guarantees**
  **Commitments**
 
 In 2004,
the Company entered into an agreement associated with The Fairmont Mayakoba,
Riviera Maya to commit $10.0 towards an investment in the hotel. As at December
31, 2004, FHR had invested $4.3 in the hotel.
 39
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 As at
December 31, 2004, contractual commitments in respect of capital expenditures
for wholly owned or leased hotels totalled approximately $9.7.
 
 The
Company leases certain land, buildings and equipment under operating leases.
Land leases represent ground leases for certain owned hotels and, in addition to
minimum rental payments, may require the payment of additional rents based on
varying percentages of revenue.
 
 Minimum
rentals for operating leases which expire on various dates are as
follows:
 
 **$**2005
    
    14.62006
    
    11.92007
    
    11.42008
    
    11.12009
    
    7.7Thereafter
    
    46.4103.1
 Rent
expense under operating leases amounted to $12.7 in 2004 (2003 - $11.7; 2002 -
$9.8).
 
 As at
December 31, 2004, unused committed lines of credit for short-term and long-term
financing, subject to periodic review, and with various maturities, amounted to
approximately $289 on which interest rates vary with bank prime or money market
rates. As at December 31, 2004, the Company had issued and undrawn letters
of credit of $77.7.
 
 **Contingencies**
 
 FHR is
subject to various claims and legal proceedings with respect to matters such as
governmental regulations, income taxes and actions arising out of the normal
course of business as a hotel operator. The Company has provided for certain
claims and, based on information presently available, management believes that
the existing accruals are sufficient. Recoveries expected to be received for
insured claims are included in accounts receivable. Any additional liability
that may result from these matters and any additional liabilities that may
result in connection with other claims are not expected to have a material
adverse effect on FHR’s financial position or results from
operations.
 
 **Guarantees**
  Significant
guarantees that have been provided to third parties include the
following:
  *Debt
guarantees*
  FHR has
provided guarantees totalling $12.4 related to debts incurred by certain hotels
in which FHR holds a minority equity interest. In the event that one of these
hotels fails to meet certain financial obligations, the lenders may draw upon
these guarantees. The terms of these guarantees are equal to the terms of the
related debts, which are all due on demand. FHR has collateral security on the
underlying hotel assets if the guarantees are drawn upon. No amounts have been
recorded in the consolidated financial statements for amounts that may be
potentially owed under these guarantees.
 40
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 **
 *Business
dispositions*
  In the
sale of all or a part of a business, FHR may agree to indemnify against claims
related to the period the business was owned by FHR, in the areas of tax and
environmental matters. The terms of such indemnification agreements are subject
to certain actions that are under the control of the acquirer and the amount of
the indemnification is not limited. The nature of these indemnification
agreements prevents FHR from estimating the maximum potential liability that it
could be required to pay to counterparties. FHR has accruals in its consolidated
financial statements of approximately $27 related to potential claims under the
indemnifications made.
  *Director
and officer indemnification agreements*
  FHR has
entered into indemnification agreements with its current and former directors
and officers to indemnify them, to the extent permitted by law, against any and
all charges, costs, expenses, amounts paid in settlement and damages incurred by
the directors and officers as a result of any lawsuit or any other judicial,
administrative or investigative proceeding in which the directors and officers
are sued as a result of their service. These indemnification claims are subject
to any statutory or other legal limitation period. The nature of the
indemnification agreements prevents FHR from making a reasonable estimate of the
maximum potential amount it could be required to pay to counterparties. FHR has
purchased directors’ and officers’ liability insurance. No amount has been
recorded in the financial statements with respect to these indemnification
agreements as no claims are outstanding at this date.
  *Other
indemnification agreements*
  In the
normal course of operations, FHR may provide indemnifications, other than those
listed above, to counterparties that would require FHR to compensate them for
costs incurred as a result of changes in laws and regulations or as a result of
litigation claims or statutory sanctions that may be suffered by the
counterparties as a consequence of a transaction. The terms of these
indemnification agreements will vary based upon the contracts. The nature of the
indemnification agreements prevents FHR from making a reasonable estimate of the
maximum potential amount it could be required to pay to counterparties. No
amount has been recorded in the consolidated financial statements with respect
to these indemnification agreements.
 41
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
  **22**
    **Risk
      management and financial instruments**
  Financial
instruments for which the Company’s carrying amounts differ from fair values are
summarized in the following table:
 
 **2004**
    
    
    **2003**
    
    
    **2002****Carrying**
      **amount**
    
    
    **Fair**
      **value**
    
    
    **Carrying**
      **amount**
    
    
    **Fair**
      **value**
    
    
    **Carrying**
      **amount**
    
    
    **Fair**
      **value****$**
    
    
    **$**
    
    
    **$**
    
    
    **$**
    
    
    **$**
    
    
    **$**Long-term
      debt
    
    
    **402.1**
    
    
    **440.1**
    
    
    657.6
    
    
    663.1
    
    
    535.5
    
    
    546.4Long-term
      advances
    
    
    **41.1**
    
    
    **41.1**
    
    
    72.8
    
    
    68.3
    
    
    57.1
    
    
    57.1
 
 The
Company has estimated the fair values of its financial instruments based on
appropriate valuation methodologies. However, considerable judgement is
necessary to develop these estimates. Accordingly, the estimates
presented herein are not necessarily indicative of what FHR could realize in a
current market exchange. The use of different assumptions or methodologies may
have a material effect on the estimated fair value amounts.
 
 The
following methods and assumptions were used to estimate the fair value of each
class of financial instrument:
  ·
    Short-term
      financial assets and liabilities are valued at their carrying amounts as
      presented in the consolidated balance sheets, which are reasonable
      estimates of fair values due to the relatively short period to maturity of
      these instruments.
  ·
    The
      fair value of long-term debt relating to mortgages is estimated based on
      the most favourable rates currently available to the Company for long-term
      borrowing with similar terms and conditions to those borrowings in place
      as at the consolidated balance sheet dates. The fair value of long-term
      debt relating to the Convertible Notes is based on their quoted market
      value as at the consolidated balance sheet dates.
  ·
    The
      fair value of long-term advances is estimated based on the most favourable
      rates currently available to the Company for long-term advances with
      similar terms and conditions to those advances in place as at the
      consolidated balance sheet dates.
  ·
    Forward
      foreign exchange contracts have been fair valued using the year-end
      foreign exchange rate, due to the relatively short period until
      settlement.
  ·
    As
      at December 31, 2003, the carrying amount of the Fairmont put option was
      considered equal to its fair value due to its relatively short exercise
      period.
 
 **Foreign
currency risk management**
  The
Company enters into forward foreign exchange contracts to partially offset the
potential of volatility of foreign exchange rates on foreign currency
denominated liabilities held in entities with a Canadian dollar functional
currency. As at December 31, 2004, the aggregate fair value of the outstanding
forward contracts was a liability of $2.8.
 42
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 **Interest
rate risk management**
  The
Company enters into interest rate cap contracts to partially manage interest
rate risk. As at December 31, 2004, FHR had outstanding, one interest rate
contract to cap LIBOR at 7.0% until March 6, 2006, on the mortgage secured by
The Fairmont Copley Plaza Boston. There is no asset or liability recorded with
respect to this contract. As at December 31, 2004, the fair market value of the
interest rate contract was nominal.
  **Credit
risk management**
  Credit
risk relates to cash and cash equivalents, accounts receivable balances and
long-term advances and results from the possibility that a counterparty defaults
on its contractual obligation to the Company. This risk is minimized since FHR
deals with banks having an appropriate credit rating, performs ongoing credit
evaluations of customers and counterparties and maintains allowances for
potential credit losses. FHR periodically extends credit in certain
circumstances to the owners of managed hotels when new management contracts are
signed.
  **23**
    **Related
      party transactions**
  In
August 2003 and December 2002, FHR entered into long-term incentive based
management contracts with Legacy for The Fairmont Olympic Hotel, Seattle and The
Fairmont Washington, D.C., respectively. Transactions under these arrangements
have been recorded at the exchange amount, which is the amount established and
agreed to by the related parties. In connection with FHR’s securing the
management contract on these properties, FHR has agreed to pay an aggregate
amount of $18.0 to Legacy over a three-year period. This amount has been
accounted for as an intangible asset and is being amortized over the lives of
the management contracts. The amortization expense is being applied to reduce
revenues from management operations. The current portion of the liability has
been recorded in accounts payable and accrued liabilities, while the long-term
portion has been recorded as other liabilities. As at December 31, 2004,
FHR has a liability due to Legacy of $3.5 in connection with these management
contracts.
 
 In
connection with Legacy’s acquisitions of The Fairmont Olympic Hotel, Seattle and
The Fairmont Washington, D.C., FHR entered into reciprocal loan agreements with
Legacy totalling $86.6. The loans mature in October 2008 and October 2013 and
bear interest at normal commercial rates payable quarterly in arrears. In the
event that either FHR or Legacy does not make its required interest or principal
payments, the other party is not required to make its payment either. If such
payment has already been made, it must be returned. The loans meet all the
requirements for the right of setoff and, as such are presented on a net basis
in the consolidated financial statements.
 
 Also, in
connection with the acquisition of The Fairmont Olympic Hotel, Seattle, FHR
received an acquisition advisory fee from Legacy of $0.7. This amount was
included in revenues from management operations in 2003.
 
 FHR had a
25% participation in the first mortgage on The Fairmont Olympic Hotel, Seattle
amounting to approximately $10.9 that was fully paid in 2004. In addition, as at
December 31, 2003, FHR had a receivable from Legacy of $8.7, which was
classified as a loan receivable. This loan was repaid in 2004.
 43
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 In the
ordinary course of business, FHR derives management fees and other revenues from
certain of its equity-owned investees that are subject to significant influence.
All of these management agreements are on normal commercial terms. Transactions
with these related parties are recorded at the exchange amount, which is based
on the consideration given for the service provided. Such transactions with
related parties for the years ended December 31 are summarized as
follows:
 
 **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$**Revenues
    
    
    **46.2**
    
    
    38.7
    
    
    35.8Accounts
      receivable as at December 31
    
    
    **3.0**
    
    
    2.6
    
    
    3.1
 **24**
    **Subsequent
      events**
  On
January 19, 2005, FHR entered into a long-term contract to manage The Savoy Hotel in
London, England. FHR had previously agreed to commit approximately
$63  ( £ 33.8) to
obtain the management contract and to partially fund the acquisition and capital expenditures
of the hotel pending the successful sale of the hotel to Bank of Scotland
Corporate and a company affiliated with His Royal Highness Prince Alwaleed Bin
Talal Bin Abdulaziz Al Saud. On January 19, 2005, FHR paid approximately $54
( £ 28.8) of
the total commitment. A significant portion
of this payment is a loan
receivable, which is due in 2015 and bears interest at 7.75%.
 
 **25**
    **United
      States accounting policies and reporting**
  **Canadian
and United States generally accepted accounting principles**
 
 The
consolidated financial statements of FHR have been prepared in accordance with
Canadian GAAP. The material differences affecting the Company between Canadian
GAAP and U.S. GAAP relating to measurement and recognition are explained below,
along with their effect on the Company’s consolidated financial
statements.
 
 The
following is a reconciliation of net income under Canadian GAAP to net income
under U.S. GAAP:
 
 **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$**Net
      income - Canadian GAAP
    
    
    **155.8**
    
    
    50.7
    
    
    92.5Increased
      (decreased) byPension(1)
    
    
    **(2.4**
    **)**
    
    (1.4
    )
    
    (1.4
    )Post-retirement
      benefits(2)
    
    
    **-**
    
    
    (0.7
    )
    
    -Stock-based
      compensation(3)
    
    
    **(0.3**
    **)**
    
    1.4
    
    
    0.6Convertible
      senior notes(4)
    
    
    **3.6**
    
    
    0.3
    
    
    -Variable
      interest entities(5)
    
    
    **-**
    
    
    (1.3
    )
    
    -Internal
      use software costs(6)
    
    
    **-**
    
    
    -
    
    
    (7.4
    )**156.7**
    
    
    49.0
    
    
    84.3Future
      income taxes on above items
    
    
    **(0.5**
    **)**
    
    1.2
    
    
    3.6Net
      income - U.S. GAAP
    
    
    **156.2**
    
    
    50.2
    
    
    87.9
 ****
 44
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 **Condensed
consolidated statements of income** (5)
 
 **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$**RevenuesHotel
      ownership operations
    
    
    **1,046.0**
    
    
    584.9
    
    
    516.6Management
      operations
    
    
    **29.9**
    
    
    37.6
    
    
    36.1Real
      estate activities
    
    
    **31.0**
    
    
    33.9
    
    
    31.9**1,106.9**
    
    
    656.4
    
    
    584.6Other
      revenues from managed and franchised properties
    
    
    **30.5**
    
    
    32.6
    
    
    27.7**1,137.4**
    
    
    689.0
    
    
    612.3ExpensesHotel
      ownership operations(1)(2)(3)
    
    
    **779.3**
    
    
    448.7
    
    
    352.9Management
      operations
    
    
    **19.4**
    
    
    15.9
    
    
    12.5Real
      estate activities
    
    
    **25.2**
    
    
    24.7
    
    
    26.2General
      and administrative
    
    
    **32.3**
    
    
    17.3
    
    
    19.6Depreciation
      and amortization
    
    
    **110.2**
    
    
    67.5
    
    
    59.8**966.4**
    
    
    574.1
    
    
    471.0Other
      expenses from managed and franchised properties
    
    
    **31.7**
    
    
    35.1
    
    
    27.7**998.1**
    
    
    609.2
    
    
    498.7Income
      (loss) from equity investments
    
    
    **(0.6**
    **)**
    
    (6.9
    )
    
    17.7Operating
      income
    
    
    **138.7**
    
    
    72.9
    
    
    131.3Other
      (income) expense, net(7)
    
    
    **-**
    
    
    2.1
    
    
    (9.1
    )Interest
      expense, net(4)
    
    
    **72.6**
    
    
    33.3
    
    
    19.1Gain
      on sales of investments and hotel assets
    
    
    **(143.7**
    **)**
    
    -
    
    
    -Income
      before income taxes (recovery) andnon-controlling
      interest
    
    
    **209.8**
    
    
    37.5
    
    
    121.3Income
      tax expense (recovery)
    
    
    **57.1**
    
    
    (12.7
    )
    
    32.2Non-controlling
      interest
    
    
    **(3.5**
    **)**
    
    -
    
    
    1.2Net
      income
    
    
    **156.2**
    
    
    50.2
    
    
    87.9
 ****
 45
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 **Condensed
consolidated statements of income** (5) *...continued*
 
 **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$**Basic
      earnings per common share
    
    
    **1.99**
    
    
    0.63
    
    
    1.12Diluted
      earnings per common share(10)
    
    
    **1.89**
    
    
    0.63
    
    
    1.10**Comprehensive
      income in accordance with U.S. GAAP**(8)Net
      income under U.S. GAAP
    
    
    **156.2**
    
    
    50.2
    
    
    87.9Other
      comprehensive income (loss)Foreign
      currency translation adjustments
    
    
    **38.0**
    
    
    76.7
    
    
    7.2Minimum
      pension liability adjustment
    
    
    **(6.8**
    **)**
    
    (4.4
    )
    
    -Deferred
      income taxes
    
    
    **2.7**
    
    
    1.6
    
    
    -Comprehensive
      income
    
    
    **190.1**
    
    
    124.1
    
    
    95.1
 
 **Condensed
consolidated balance sheets** (5)
 
 The
following shows the differences, increases (decreases) to account balances, had
the consolidated balance sheets been prepared under U.S. GAAP:
 
 **2004**
    
    
    **2003****$**
    
    
    **$**AssetsAccounts
      receivable
    
    
    **-**
    
    
    (0.9
    )Prepaid
      expenses and other
    
    
    **-**
    
    
    (0.6
    )Non-hotel
      real estate
    
    
    **-**
    
    
    1.7Intangible
      assets(2)
    
    
    **(4.8**
    **)**
    
    (4.5
    )Other
      assets and deferred charges(1)(9)
    
    
    **78.9**
    
    
    81.0**74.1**
    
    
    76.7Liabilities
      and shareholders’ equityDeposits
    
    
    -
    
    
    1.5Other
      liabilities(2)
    
    
    **7.8**
    
    
    5.6Long-term
      debt(4)(9)
    
    
    **101.9**
    
    
    105.5Deferred
      income taxes
    
    
    **(0.3**
    **)**
    
    (4.3
    )Shareholders’
      equityContributed
      surplus(3)
    
    
    **2.2**
    
    
    1.9Other
      equity(4)
    
    
    **(19.2**
    **)**
    
    (19.2
    )Foreign
      currency translation adjustments
    
    
    **(142.1**
    **)**
    
    (104.1
    )Retained
      earnings
    
    
    **(8.5**
    **)**
    
    (8.5
    )Accumulated
      other comprehensive income(8)
    
    
    **132.3**
    
    
    98.3**74.1**
    
    
    76.7
 
 46
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 **Condensed
consolidated statements of cash flows** (5)
 
 **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$**Cash
      provided by (used in)Operating
      activitiesNet
      income
    
    
    **156.2**
    
    
    50.2
    
    
    87.9Items
      not affecting cashDepreciation
      of property and equipment
    
    
    **107.1**
    
    
    64.8
    
    
    57.4Amortization
      of goodwill and intangible assets
    
    
    **3.1**
    
    
    2.7
    
    
    2.4(Income)
      loss from equity investments and other
    
    
    **0.6**
    
    
    6.9
    
    
    (17.7
    )Deferred
      income taxes
    
    
    **4.8**
    
    
    (25.5
    )
    
    20.2Unrealized
      foreign exchange gain
    
    
    **(20.0**
    **)**
    
    -
    
    
    -Non-controlling
      interest
    
    
    **(3.5**
    **)**
    
    -
    
    
    1.2Gain
      on sales of investments and hotel assets
    
    
    **(143.7**
    **)**
    
    -
    
    
    -Distributions
      from investments
    
    
    **4.9**
    
    
    6.7
    
    
    15.1Other
    
    
    **7.5**
    
    
    (10.8
    )
    
    (21.5
    )Changes
      in non-hotel real estate
    
    
    **1.6**
    
    
    11.6
    
    
    6.9Changes
      in non-cash working capital items
    
    
    **(17.6**
    **)**
    
    2.3
    
    
    (10.5
    )**101.0**
    
    
    108.9
    
    
    141.4Investing
      activitiesAdditions
      to property and equipment
    
    
    **(85.3**
    **)**
    
    (87.2
    )
    
    (84.3
    )Acquisitions,
      net of cash acquired
    
    
    **-**
    
    
    6.0
    
    
    (136.0
    )Investments
      in partnerships and corporations
    
    
    **(34.6**
    **)**
    
    (1.6
    )
    
    (46.7
    )Sales
      of investments and hotel assets
    
    
    **422.3**
    
    
    -
    
    
    -Issuance
      of loans receivable
    
    
    **(7.0**
    **)**
    
    (50.3
    )
    
    (67.6
    )Collection
      of loans receivable
    
    
    **15.5**
    
    
    7.2
    
    
    -Investments
      in intangible assets
    
    
    **(3.2**
    **)**
    
    -
    
    
    -Other
    
    
    **(13.1**
    **)**
    
    -
    
    
    (1.0
    )**294.6**
    
    
    (125.9
    )
    
    (335.6
    )
 ****
 47
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 **Condensed
consolidated statements of cash flows** ****** (5) ... *continued*
  **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$**Financing
      activitiesIssuance
      of long-term debt
    
    
    **145.7**
    
    
    181.7
    
    
    306.0Repayment
      of long-term debt
    
    
    **(398.6**
    **)**
    
    (423.9
    )
    
    (43.9
    )Proceeds
      from exercise of stock options
    
    
    **2.9**
    
    
    1.0
    
    
    4.7Repurchase
      of common shares
    
    
    **(84.5**
    **)**
    
    (16.8
    )
    
    (73.2
    )Issuance
      of convertible debentures
    
    
    **-**
    
    
    262.5
    
    
    -Dividends
    
    
    **(6.4**
    **)**
    
    (4.8
    )
    
    (3.2
    )Other
    
    
    **(3.8**
    **)**
    
    **-**
    
    
    -**(344.7**
    **)**
    
    (0.3
    )
    
    190.4Effect
      of exchange rate changes on cash and cash equivalents
    
    
    **1.9**
    
    
    -
    
    
    0.1Cash
      positionIncrease
      (decrease) in cash and cash equivalents
    
    
    **52.8**
    
    
    (17.3
    )
    
    (3.7
    )Cash
      and cash equivalents - Beginning of year
    
    
    **31.7**
    
    
    49.0
    
    
    52.7Cash
      and cash equivalents - Beginning of year on consolidation of Legacy(5)
    
    
    **14.6**
    
    
    -
    
    
    -Cash
      and cash equivalents - End of year
    
    
    **99.1**
    
    
    31.7
    
    
    49.0
 **(1)** **Pension
accounting**
 
 In
January 2000, the Company prospectively changed its Canadian GAAP accounting
policy for defined benefit pension plans. As a result of this change, all
unamortized gains and losses, including prior service costs, were accumulated
into a net transitional asset, which is being amortized into income over 11
years, the expected average remaining service life of the employees covered by
these plans. Under U.S. GAAP, there was no change in accounting policy and,
hence, there is no net transitional asset to be amortized. As a result, the
amount of unamortized actuarial gains and losses is different for U.S. and
Canadian GAAP.
 
 Under
Canadian GAAP, a valuation allowance has been provided for on certain pension
assets, whereas under U.S. GAAP, no valuation allowance has been
provided.
 
 Under
U.S. GAAP, the Company is required to record a minimum pension liability,
representing the unfunded accumulated benefit obligation. Accordingly, included
in both accrued liabilities and other assets under U.S. GAAP is an additional
amount, which cannot be recorded under Canadian GAAP.
 
 **(2)** **Post-retirement
benefits**
 
 Post-retirement
benefits are covered by the CICA recommendations for accounting for employee
future benefits. Consistent with accounting for post-retirement benefits, under
Canadian GAAP, the Company amortizes actuarial gains and losses over the average
employee service life when such gains and losses exceed 10% of the plan
obligation. Under Financial Accounting Standards Board (“FASB”) Statement No. 112,
“Employers’ Accounting for Post-employment Benefits,” such gains and losses are
included immediately in income.
 48
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 **(3)** **Stock-based
compensation**
 
 Under the
FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock
Compensation” (“FAS 44”), compensation expense using variable accounting must be
recorded if the intrinsic value of stock options is not exactly the same
immediately before and after an equity restructuring. In a prior year, FHR
underwent an equity restructuring, which resulted in replacement options in new
FHR stock having a different intrinsic value after the restructuring than prior
to the restructuring. Canadian GAAP does not require revaluation of these
options.
 
 Under
Canadian GAAP, effective January 1, 2003, the Company prospectively adopted the
new recommendations of the CICA with respect to accounting for stock-based
compensation. This standard requires that compensation expense be recognized in
the consolidated statements of income using the fair value based method for
stock options granted in 2003 onward. Under U.S. GAAP, the Company follows the
intrinsic value method of Opinion No. 25 of the Accounting Principles Board. No
stock-based compensation cost is reflected in net income under U.S. GAAP as all
options granted to employees under these plans have an exercise price equal to
the fair value of the underlying common stock on the date of grant.
 
 If the
methodology prescribed by FASB Statement No. 123, “Accounting for Stock-Based
Compensation” (“FAS 123”), had been adopted, pro forma results for the year
ended December 31 would have been as follows:
 
 **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$**U.S.
      GAAP net income, as reported
    
    
    **156.2**
    
    
    50.2
    
    
    87.9Increase
      in stock-based compensation if FAS 123 had been adopted
    
    
    **4.1**
    
    
    5.0
    
    
    6.0Adjusted
      net earnings
    
    
    **152.1**
    
    
    45.2
    
    
    81.9U.S. GAAP basic earnings per common shareAs
      reported
    
    
    **1.99**
    
    
    0.63
    
    
    1.12Adjusted
    
    
    **1.94**
    
    
    0.57
    
    
    1.04U.S.
      GAAP diluted earnings per common share(10)As
      reported
    
    
    **1.89**
    
    
    0.63
    
    
    1.10Adjusted
    
    
    **1.84**
    
    
    0.57
    
    
    1.03
 The
weighted average fair value of common share options granted in 2004 at the time
of grant was Cdn$7.52 (2003 - Cdn$10.12; 2002 - Cdn$12.73). The fair value
of common share options granted is estimated at the grant date using the
Black-Scholes option pricing model with the assumptions disclosed in
note 14. Pro forma stock-based compensation expense for a particular year
is not necessarily indicative of expenses to be incurred in future
years.
 49
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
  **(4)**
    **Convertible
      senior notes**
  Under
Canadian GAAP, obligations relating to the convertible senior notes have been
allocated between debt and equity elements and classified separately on the
consolidated balance sheets. The amount recorded in debt will increase by
accretion to the face value of the debt over a five-year period.
 
 Under
U.S. GAAP, the entire principal amount of the notes was recorded as long-term
debt upon inception and therefore, accretion of the long-term debt is not
required.
 
 **(5)**
    **Variable
      interest entities**
 
 In
January 2003, the FASB issued Financial Interpretation (“FIN”) 46,
“Consolidation of Variable Interest Entities (“VIEs”), in an effort to expand
and clarify existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
another entity. For U.S. GAAP, FIN 46 was effective immediately for all
enterprises with variable interests in VIEs created after January 31, 2003
and January 1, 2004 for all previously existing variable interest entities.
Under FIN 46, if an entity is determined to be a variable interest entity, it
must be consolidated by the enterprise that absorbs the majority of the entity’s
expected losses if they occur, receives a majority of the entity’s expected
residual returns if they occur, or both. On December 24, 2003, the FASB issued a
revised FIN 46, defined as FIN 46R.
 
 Commencing
January 1, 2004, for U.S. GAAP purposes, the Company was required to consolidate
the accounts of all VIEs for which it is the primary beneficiary, as required by
FIN 46R. For Canadian GAAP purposes the Company will adopt provisions similar to
FIN 46R commencing January 1, 2005. As a result, effective January 1, 2004, the
Company commenced consolidating the accounts of Legacy for U.S. GAAP purposes.
The Company also reviewed its other management agreements related to hotels that
the Company has no other investments in and concluded that such arrangements
were not variable interests since the Company is paid commensurate with the
services provided and on the same level as other operating liabilities and the
hotel owners retain the right to terminate arrangements. The consolidation of
Legacy commencing January 1, 2004 had no effect on the Company’s consolidated
net income or shareholders’ equity.
 
 On
September 13, 2004, FHR sold 12,000,000 units in Legacy reducing its ownership
interest to approximately 23.7%. After this disposition of units, FHR is no
longer the primary beneficiary of Legacy. The Company’s U.S. GAAP results of
operations include the consolidated results of Legacy from January 1, 2004 to
September 13, 2004, after which Legacy is being accounted for under the equity
method.
 
 **(6)**
    **Internal
      use software**
 
 Under
Canadian GAAP, computer system development costs for internal use software are
capitalized when the project is expected to be of continuing benefit to FHR and
otherwise expensed. U.S. GAAP standards require that certain costs of computer
software developed for internal use be capitalized and amortized.
 50
 **Fairmont
Hotels & Resorts Inc.**
 Notes to
Consolidated Financial Statements
 (in
millions of U.S. dollars, except per share amounts)
 
 **(7)**
    **Extinguishment
      of debt**
 
 In April
2002, the FASB issued Statement No. 145, “Rescission of FASB Statements Nos. 4,
44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections”
(“FAS 145”). This statement requires the reclassification of gains and
losses from the extinguishment of debt from extraordinary items to income from
continuing operations, in line with Canadian GAAP requirements.
 
 **(8)**
    **Comprehensive
      income**
 
 U.S. GAAP
requires the disclosure, as other comprehensive income, of changes in equity
during the period from transactions and other events from non-owner sources.
Canadian GAAP does not consider comprehensive income. Other comprehensive income
includes foreign currency translation adjustments and minimum pension liability
adjustments.
 
 **(9)**
    **Long-term
      advances and long-term debt**
 
 FHR and
Legacy have entered into reciprocal loan agreements, which, under Canadian GAAP,
meet all the requirements for a right of offset. Under Canadian GAAP, these
loans have been presented on a net basis in the consolidated balance sheets.
Under U.S. GAAP, these loans do not qualify for offsetting and are presented
separately on the consolidated balance sheets.
 
 **(10)**
    **Diluted
      earnings per common share**
 
 The
Emerging Issues Task Force has recently issued new accounting guidance, issue
04-08 (“EITF 04-08”), regarding the computation of diluted earnings per share.
This guidance requires the inclusion of contingently convertible debt securities
(note 11) with a market price trigger to be included in the computation of
diluted earnings per common share, as determined under the if-converted method.
Canadian GAAP has not issued similar guidance. EITF 04-08 is effective for
fiscal periods ending on or after December 15, 2004 with retrospective
restatement of previously reported earnings per share.
 
 **2004**
    
    
    **2003**
    
    
    **2002****$**
    
    
    **$**
    
    
    **$**U.S.
      GAAP net income, as reported
    
    
    **156.2**
    
    
    50.2
    
    
    87.9Interest
      expense adjustment
    
    
    **6.7**
    
    
    0.6
    
    
    -Adjusted
      net earnings
    
    
    **162.9**
    
    
    50.8
    
    
    87.9Canadian
      GAAP diluted common shares outstanding
    
    
    **79.2**
    
    
    80.0
    
    
    79.7Dilutive
      effect of contingently Convertible Notes
    
    
    **7.2**
    
    
    0.6
    
    
    -Adjusted
      diluted common shares
    
    
    **86.4**
    
    
    80.6
    
    
    79.7U.S.
      GAAP diluted earnings per common share
    
    
    **1.89**
    
    
    0.63
    
    
    79.7
 
  51
 **Exhibit
C**
 **Management’s
Discussion and Analysis**
 
                                                                                                                                            
  
    
   **Exhibit
D**
 **Consent
of Independent Accountants**
  
 **CONSENT
OF INDEPENDENT ACCOUNTANTS**
 
 
 We hereby
consent to the incorporation by reference in this Annual Report on Form 40-F of
Fairmont Hotels & Resorts Inc. of our Auditors’ Report and our Comments by
Auditors on Canada - United States Reporting Differences dated February 18, 2005
relating to its consolidated balance sheets as at December 31, 2004 and 2003 and
its consolidated statements of income, retained earnings and cash flows for each
of the years in the three-year period ended December 31, 2004, which appear in
this Annual Report on Form 40-F.
 
 
 /s/
PricewaterhouseCoopers LLP
 
 
 Chartered
Accountants
 
 Toronto,
Ontario
 
 February
18, 2005
    
   **Exhibit
E**
 **Certifications
Required by Rule 13a-14(a) of the Securities Exchange Act of
1934**
  I,
William R. Fatt, Chief Executive Officer of Fairmont Hotels & Resorts Inc.,
certify that:
  1.
    I
      have reviewed this annual report on Form 40-F of Fairmont Hotels &
      Resorts Inc.;
  2.
    Based
      on my knowledge, this report does not contain any untrue statement of a
      material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;
  3.
    Based
      on my knowledge, the financial statements, and other financial information
      included in this report, fairly present in all material respects the
      financial condition, results of operations and cash flows of the issuer as
      of, and for, the periods presented in this
report;
  4.
    The
      issuer’s other certifying officer(s) and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the issuer and
      have:
  (a)
    Designed
      such disclosure controls and procedures, or caused such disclosure
      controls and procedures to be designed under our supervision, to ensure
      that material information relating to the issuer, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this report is being
      prepared;
  (b)
    Evaluated
      the effectiveness of the issuer’s disclosure controls and procedures and
      presented in this report our conclusions about the effectiveness of the
      disclosure controls and procedures, as of the end of the period covered by
      this report based on such evaluation; and
  (c)
    Disclosed
      in this report any change in the issuer’s internal control over financial
      reporting that occurred during the period covered by the annual report
      that has materially affected, or is reasonably likely to materially
      affect, the issuer’s internal control over financial reporting;
      and
  5.
    The
      issuer’s other certifying officer and I have disclosed, based on our most
      recent evaluation of internal control over financial reporting, to the
      issuer’s auditors and the audit committee of issuer’s board of directors
      (or persons performing the equivalent
functions);
  (a)
    All
      significant deficiencies and material weakness in the design or operation
      of internal control over financial reporting which are reasonably likely
      to adversely affect the issuer’s ability to record, process, summarize and
      report financial information; and
   
  (b)
    Any
      fraud, whether or not material, that involves management or other
      employees who have a significant role in the issuer’s internal control
      over financial reporting.
  ****Date: March 29,
2005
    
    /s/ William R.
  FattWilliam R. FattChief Executive
  Officer
 
   E-2
  I, John
A. Carnella, Chief Financial Officer of Fairmont Hotels & Resorts Inc.,
certify that:
  1.
    I
      have reviewed this annual report on Form 40-F of Fairmont Hotels &
      Resorts Inc.;
  2.
    Based
      on my knowledge, this report does not contain any untrue statement of a
      material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;
  3.
    Based
      on my knowledge, the financial statements, and other financial information
      included in this report, fairly present in all material respects the
      financial condition, results of operations and cash flows of the issuer as
      of, and for, the periods presented in this
report;
  4.
    The
      issuer’s other certifying officer(s) and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the issuer and
      have:
  (a)
    Designed
      such disclosure controls and procedures, or caused such disclosure
      controls and procedures to be designed under our supervision, to ensure
      that material information relating to the issuer, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this report is being
      prepared;
  (b)
    Evaluated
      the effectiveness of the issuer’s disclosure controls and procedures and
      presented in this report our conclusions about the effectiveness of the
      disclosure controls and procedures, as of the end of the period covered by
      this report based on such evaluation; and
  (c)
    Disclosed
      in this report any change in the issuer’s internal control over financial
      reporting that occurred during the period covered by the annual report
      that has materially affected, or is reasonably likely to materially
      affect, the issuer’s internal control over financial reporting;
      and
  5.
    The
      issuer’s other certifying officer and I have disclosed, based on our most
      recent evaluation of internal control over financial reporting, to the
      issuer’s auditors and the audit committee of issuer’s board of directors
      (or persons performing the equivalent
function);
  (a)
    All
      significant deficiencies and material weakness in the design or operation
      of internal control over financial reporting which are reasonably likely
      to adversely affect the issuer’s ability to record, process, summarize and
      report financial information; and
   E-3
  (b)
    Any
      fraud, whether or not material, that involves management or other
      employees who have a significant role in the issuer’s internal control
      over financial reporting.
  ****Date: March 29,
2005
    
    /s/ John A.
  CarnellaJohn A. CarnellaChief Financial
  Officer
  E-4
   **Exhibit
F**
 **CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,**
 **as
enacted by Section 906 of the Sarbanes-Oxley act of 2002**
  In
connection with the Annual Report on Form 40-F of Fairmont Hotels & Resorts
Inc. (the “Company”) for the period ended December 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), we,
William R. Fatt, the Chief Executive Officer, and John A. Carnella, the Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
that:
  1.
    The
      Report fully complies with the requirements of section 13(a) or 15(d) of
      the Securities Exchange Act of 1934; and
  2.
    The
      information contained in the Report fairly presents, in all material
      respects, the financial condition and results of operations of the
      Company.
  ****Date: March 29,
2005
    
    /s/ William R.
  FattWilliam R. FattChief Executive Officer
  ****/s/ John A.
  CarnellaJohn A. CarnellaChief
      Financial Officer
  
 A signed
original of this written statement required by Section 906 has been provided to
Fairmont Hotels & Resorts Inc. and will be retained by Fairmont Hotels &
Resorts Inc. and furnished to the Securities and Exchange Commission or its
staff upon request.