| TORONTO, Nov. 4, 2004 - Four Seasons Hotels
Inc. (TSX Symbol "FSH.SV"; NYSE Symbol "FS") today reported its results
for the third quarter ended September 30, 2004.
2004 Third Quarter Overview
Financial Results:
As described in greater detail in the accompanying Management's Discussion
and Analysis for the three months ended September 30, 2004:
- RevPAR(1) of worldwide Core Hotels(2) increased
14.6%, on a US dollar
basis, as compared to the third
quarter of 2003.
- Gross operating margins(3) at worldwide Core
Hotels increased
230 basis points to 27.5%, as
compared to the third quarter of 2003.
Through the first nine months
of 2004, gross operating margins
increased 320 basis points, as
compared to the same period last year.
- Management fee revenues (excluding reimbursed
costs(4)) increased
26.8% to $36.5 million, as compared
to the third quarter of 2003.
- Incentive fee revenues increased 54%, as
compared to the third quarter
of 2003.
- Management earnings before other operating
items increased by 39.5% to
$26.3 million, as compared to
the third quarter of 2003.
- Management operations profit margin(5) (excluding
reimbursed costs)
increased 650 basis points to
71.9%, as compared to the third quarter
of 2003.
- Ownership results before other operating
items improved $3.1 million
to a loss of $6.4 million, as
compared to the third quarter of 2003.
- Earnings before other operating items increased
111.8% to
$19.9 million, as compared to
$9.4 million for the third quarter of
2003.
- Net losses were $11.1 million ($0.31 basic
and diluted loss per
share), as compared to net earnings
of $4.4 million ($0.13 basic
earnings per share and $0.12 diluted
earnings per share) for the third
quarter of 2003.
Included in the net losses are:
- Pre-tax loss related to
the redemption of the Liquid Yield
Option(TM) Notes
due 2029 (Zero Coupon - Subordinated) ("LYONs") of
$14.6 million
($0.41 per share)
- Pre-tax unrealized foreign
exchange loss of $4.5 million
($0.13 per share)
- Pre-tax non-cash loss
related to asset transactions of
$4.6 million
($0.13 per share)
Other:
- During the quarter, we sold the majority
of our investment in Four
Seasons Hotel Amman, all of our
equity investment in Four Seasons
Resort Whistler, settled our loan
receivable with respect to the
proposed Four Seasons project
in Sedona and terminated our lease
position in Four Seasons Hotel
Berlin. Combined proceeds from these
transactions were in excess of
$50 million and resulted in an overall
non-cash loss on disposition of
$4.7 million.
- We redeemed all of our LYONs on September
23, 2004 for cash of
US$215.5 million ($275.7 million).
- Four Seasons Hotel Cairo at Nile Plaza opened
on August 15, 2004. To
date in 2004, we have also added
properties in Costa Rica, Provence,
Budapest and Whistler to our portfolio
of hotels and resorts under
management.
"During the third quarter, luxury travel demand continued to improve
in the vast majority of our markets. We continue to achieve industry-leading
RevPAR and our profit margins are continuing to improve, particularly as
we realize higher achieved room rates," said Isadore Sharp, Chairman and
Chief Executive Officer. "As a result of adhering to our long-term corporate
strategy, we believe we are very well positioned in this environment where
luxury travel demand improvements are outpacing other sectors of the industry.
In addition, the geographic balance of our portfolio has been and is expected
to continue to allow us to capitalize on the improving travel demand that
we are now seeing on a global basis."
"In keeping with our strategy, during the third quarter we completed
the divestiture of our equity interest in Whistler and the majority of
our investment in Amman to repatriate the capital we had invested to secure
two long-term management agreements. In addition, we settled a loan to
Sedona and our lease interest in Berlin was terminated, which have allowed
us to divest these two targeted investments," commented Douglas L. Ludwig,
Chief Financial Officer and Executive Vice President. "During the quarter,
we also redeemed the convertible notes we had issued in September 1999,
allowing us to significantly lower our economic cost of debt, while also
maintaining what we believe is the strongest balance sheet in the lodging
industry."
"Four Seasons' growth program has excellent momentum with many great
opportunities being presented to us. During this year, we have signed eleven
letters of intent and opened five new properties," commented Kathleen Taylor,
President Worldwide Business Operations. "We have now added Dubai, Seattle
and two hotels in Moscow to our list of hotels under development. We are
also extremely pleased to be returning to the Seattle market so quickly,
and we believe our ability to do so is a clear demonstration of the strength
of the Four Seasons brand."
THIRD QUARTER OF 2004
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") for the three
months and nine months ended September 30, 2004 is provided as of November
3, 2004. It should be read in conjunction with the interim consolidated
financial statements for that period and the MD&A for the year ended
December 31, 2003 and the audited consolidated financial statements for
that period. Except as disclosed in this MD&A or the MD&A for the
three months ended March 31, 2004 and the three months ended June 30, 2004,
there has been no material change in the information disclosed in the MD&A
for the year ended December 31, 2003. A summary of consolidated revenues,
management earnings, ownership and corporate operations earnings and net
earnings for the past eight quarters can be found in note 6.
Operating Environment
Seasonality
Four Seasons hotels and resorts are affected by normally recurring seasonal
patterns and, for most of the properties, demand is usually lower in the
period from December through March than the remainder of the year. Typically,
the first quarter is the weakest quarter, and the fourth quarter is the
strongest quarter for the majority of the properties.
Our ownership operations are particularly affected by seasonal fluctuations,
with lower revenue, higher operating losses and lower cash flow in the
first quarter, as compared to the other quarters. As a result, ownership
operations usually incur an operating loss in the first quarter of each
year.
Management operations are also impacted by seasonal patterns, as revenues
are affected by the seasonality of hotel and resort revenues and operating
results. Urban hotels generally experience lower revenues and operating
results in the first quarter. However, this negative impact on management
revenues is offset, to some degree, by increased travel to our resorts
in the period.
|
Hotel Operating Results
-------------------------------------------------------------------------
Three months ended
Nine months ended
September 30, 2004
September 30, 2004
increase over
increase over
(decrease from)
(decrease from)
three months ended
nine months ended
September 30, 2003
September 30, 2003
(percentage change,
(percentage change,
on US dollar basis)
on US dollar basis)
-------------------------------------------------------------------------
Gross Gross
Gross Gross
Operating Operating
Operating Operating
Revenue Profit
Revenue Profit
Region
RevPAR (GOR) (GOP)
RevPAR (GOR) (GOP)
-------------------------------------------------------------------------
Worldwide Core
Hotels
14.6% 12.2% 22.3%
17.4% 15.7% 30.1%
-------------------------------------------------------------------------
US Core Hotels 8.2%
6.2% 7.4% 8.1%
6.9% 7.3%
-------------------------------------------------------------------------
Other Americas/
Caribbean Core
Hotels
15.9% 12.5% 30.5%
22.2% 20.7% 44.9%
-------------------------------------------------------------------------
Europe Core
Hotels
11.5% 12.5% 14.5%
23.4% 22.9% 35.7%
-------------------------------------------------------------------------
Middle East
Core Hotels
49.4% 49.1% 90.3%
73.0% 80.1% 211.5%
-------------------------------------------------------------------------
Asia/Pacific
Core Hotels
40.8% 28.5% 63.4%
42.9% 33.3% 84.1%
-------------------------------------------------------------------------
|
Underlying these operating results:
- Business and leisure travel demand improved
in the majority of the
markets in which we operate during
the three months and nine months
ended September 30, 2004. However,
for the first half of this year,
group meeting demand continued
to lag behind business and leisure
travel demand, and properties
that typically derive the larger portion
of their business from group travel
(including Aviara and the Ritz-
Carlton Chicago) experienced RevPAR
declines for the nine months ended
September 30, 2004, when compared
to the same period in 2003.
- The improvement in RevPAR at the US Core
Hotels in the third quarter
of 2004 over the same period in
2003 was the result of occupancy
improvements from 69.3% to 70.9%
and a 6.0% increase in achieved room
rate. Properties under management
in Atlanta, Boston, Hawaii, Los
Angeles (Regent Beverly Wilshire)
and Philadelphia performed
particularly well on a RevPAR
basis relative to the average for their
region. These markets benefited
from the increase in both business and
leisure travel demand. Hotels
under management in Florida experienced
RevPAR improvements well below
the average for the US, primarily as a
result of the negative impact
of the severe hurricane season on
travel. Gross operating profits
in US Core Hotels increased 7.4% in
the third quarter of 2004, as
compared to the same period in 2003.
While revenue under management
increased, some of this improvement was
offset by continued increases
in labour-related costs (particularly
health care) and costs of energy
and insurance. The 8.1% improvement
in RevPAR for the nine months
ended September 30, 2004 reflect the
same solid operating trends as
the quarterly results.
- In the Other Americas/Caribbean region, the
properties under
management in Toronto and Buenos
Aires experienced significant RevPAR
increases. Notwithstanding the
adverse impact of the severe hurricanes
on several properties in the Other
Americas/Caribbean region, in the
third quarter of 2004, occupancy
in the region increased to 67.2%
(from 60.0% for the same period
in 2003) and achieved room rates, on a
US dollar basis, increased 3.7%,
as compared to the third quarter of
2003. Gross operating profits
increased 30.5%, on a US dollar basis,
in particular as a result of strong
revenue improvements in Toronto
and Buenos Aires.
- The 22.2% RevPAR improvement in the Other
Americas/Caribbean region
for the nine months ended September
30, 2004, as compared to the same
period in 2003, reflecting the
recovery of the Canadian hotels from
the impact of SARS on travel demand
during 2003.
- The majority of the properties in the European
region also had RevPAR
improvements in the third quarter
of 2004, as compared to the third
quarter of 2003. While occupancy
in the European region was 63.1% for
the third quarter of 2004, as
compared to 65.1% in the same period in
2003 (primarily as a result of
declines in Four Seasons Hotel Ritz
Lisbon and Four Seasons Hotel
Istanbul), achieved room rates, on a US
dollar basis, increased 11.7%
in the three months ended
September 30, 2004, as compared
to the three months ended
September 30, 2003. Gross operating
profits increased 14.5% in the
third quarter of 2004, as compared
to the third quarter of 2003, with
the strongest improvements at
the hotels under management in Dublin
and Paris offsetting the weaker
operating results in Istanbul and
Lisbon.
- As a result of improved demand in the first
nine months of 2004, as
compared to the first nine months
of 2003 when the war in Iraq had a
significant negative impact on
travel, RevPAR for the European
properties for the nine months
ended September 30, 2004 increased
23.4%. The increase is the result
of occupancy improvements to 64%
from 59% and a 14% increase in
achieved room rates.
- All of the properties in the Middle East
region had significant RevPAR
improvements in the third quarter
of 2004, as compared to the third
quarter of 2003, as a result of
improved demand (occupancy in the
region increased to 75.1% from
54.7%) and higher rates during the
quarter (achieved room rates improved
9.3%, on a US dollar basis).
Gross operating profits increased
90.3% during the third quarter, as
compared to the same period last
year, reflecting the strong
profitability potential of this
region.
- RevPAR increased 73.0% in the Middle East
region for the nine months
ended September 30, 2004, as compared
to the same period in 2003 when
the war in Iraq had a significant
negative impact on travel.
- Properties under management in the Asia/Pacific
region realized a
significant improvement in demand
during the third quarter of 2004, as
compared to the same period in
2003. Occupancy increased to 71.7% for
the quarter (from 58.3% in the
same period in 2003), and achieved room
rates, on a US dollar basis, increased
15.8% in the third quarter of
2004, as compared to the same
period in 2003. All of the hotels under
management in the region had strong
gross operating profit
improvements as a result of revenue
growth.
- For the nine months ended September 30, 2004,
a large portion of the
42.9% increase in RevPAR at the
properties under management in the
Asia/Pacific region reflected
a recovery from the negative impact of
SARS in the region in 2003. In
most of the markets in the region,
demand has improved beyond budgeted
levels and the levels the region
was experiencing prior to the
SARS outbreak in 2003.
Financial Review and Analysis
Three months ended September 30, 2004 compared to three months ended
September 30, 2003
Management Operations
Management fee revenues (excluding reimbursed costs) increased 26.8%
to $36.5 million in the three months ended September 30, 2004, as compared
to $28.8 million in the same period last year. This increase was the result
of the improvement in revenues under management resulting from RevPAR and
other revenue increases at the Core Hotels under management, and an increase
in fees from recently opened hotels, as well as residential projects in
Great Exuma, San Francisco and Whistler. Partially offsetting the management
fee increase arising from operating improvements was the impact of the
severe hurricane season in the Caribbean and Florida, which contributed
to a reduction of approximately $700,000 in management fees from the affected
properties in Palm Beach, Miami, Great Exuma and Nevis.
Incentive fee revenues increased 54% in the three months ended September
30, 2004, as compared to the same period in 2003, with 33 of the hotels
and resorts under management accruing incentive fees in 2004, as compared
to 26 during the same period last year. The increase in incentive fees
was attributable to the improvement in gross operating profits at the properties
under management in each of the geographic regions in which we operate.
However, hurricane activity in the third quarter had a significant negative
impact on incentive fees.
General and administrative expenses (excluding reimbursed costs) increased
2.9% to $10.3 million in the third quarter of 2004 from $10.0 million for
the same period in 2003.
As a result of the items described above, our management earnings before
other operating items for the third quarter of 2004 increased to $26.3
million, as compared to $18.8 million in the third quarter of 2003. Our
management operations profit margin (excluding reimbursed costs) increased
to 71.9% in the third quarter of 2004, as compared to 65.4% in the third
quarter of 2003.
Ownership and Corporate Operations(7)
Operating results from ownership and corporate operations before other
operating items improved $3.1 million (32.7%) to a loss of $6.4 million
in the third quarter of 2004, as compared to a loss of $9.4 million in
the third quarter of 2003.
The operating results at The Pierre improved $877,000 to a loss of $3.9
million in the third quarter of 2004, as compared to the same period last
year. RevPAR at The Pierre increased 7.2% in the third quarter of 2004,
as compared to the same period in 2003. The Pierre had committed a large
portion of its rooms to conference business during the third quarter of
2004. The room rates on this business were negotiated prior to the strong
improvement in travel demand in New York and, as a result, The Pierre's
achieved room rates increased more modestly than might otherwise have been
possible in this stronger demand environment.
RevPAR at Four Seasons Hotel Vancouver increased 5.4% during the third
quarter of 2004, as compared to the same period in 2003, as a result of
occupancy improvements. Operating results at that hotel improved approximately
$500,000 to earnings of $1.0 million in the third quarter of 2004, as compared
to the same period last year.
On September 26, 2004, the landlord terminated our lease of Four Seasons
Hotel Berlin, and we ceased managing the hotel. Since reaching our maximum
funding obligation of the stipulated minimum lease payments at Four Seasons
Hotel Berlin in August of 2003, the lease payments have been limited to
the cash flow generated by the hotel. This resulted in a decline of $2
million in the operating loss from Four Seasons Hotel Berlin to nil in
the third quarter of 2004, as compared to the same period last year.
We continue to review our options in respect of The Pierre and Four
Seasons Hotel Vancouver to determine what, if any, alternatives may be
available to modify or restructure our operations of, or investments in,
these hotels. There can be no assurance that acceptable alternative arrangements
can be found with respect to either of these hotels or what the terms of
any such alternative arrangements would be.
Other Expense
Other expense for the third quarter of 2004 was $23.7 million, as compared
to $920,000 for the same period in 2003. Other expense was principally
comprised of the costs associated with our redemption of our LYONs, a loss
associated with foreign exchange and non-cash losses related to disposition
of two hotel investments and settlement of a loan receivable.
Redemption of the LYONs
During the third quarter of 2004, we redeemed all of our LYONs for US$328.73
cash per US$1,000 principal amount at maturity (the redemption price being
the issue price plus interest that was accrued but unpaid to but excluding
September 23, 2004) for an aggregate payment of US$215.5 million ($275.7
million).
In accordance with Canadian generally accepted accounting principles
("GAAP"), we allocated the consideration paid on the redemption to the
liability and equity components of the LYONs based on their relative fair
values at the date of redemption. We recognized a pre-tax accounting loss
of approximately $14.6 million related to the debt component of the LYONs
(representing the difference between the carrying value of the debt component
and the relative fair value of the debt component and calculated at the
present value of the amount due on maturity, using an assumed 25-year interest
rate of 8.474% per annum, compounding semi-annually). This loss was recorded
in the statement of operations in the third quarter. In addition, as previously
disclosed, we recognized a pre-tax accounting gain on the redemption of
the equity component of the LYONs of approximately $8.1 million. This gain
was recorded in contributed surplus in the third quarter. The tax impact
of the redemption of both the liability and equity components of the LYONs
was a decrease to future income tax assets and a decrease to contributed
surplus of $4.1 million. The net after-tax negative impact on shareholders'
equity from the redemption of the debt and equity components of the LYONs
is approximately $10.6 million.
Foreign Exchange
Other expense for the third quarter of 2004 also includes an unrealized
$4.5 million foreign exchange loss, compared to a $323,000 foreign exchange
gain for the same period in 2003. These foreign exchange gains and losses
arose from the translation to Canadian dollars at current exchange rates
at the end of each month of our non-Canadian dollar-denominated net monetary
assets that are not included in our designated self-sustaining subsidiaries,
and local currency foreign exchange gains and losses on net monetary assets
incurred by our designated foreign self-sustaining subsidiaries. Net monetary
assets are the sum of our foreign currency-denominated monetary assets
and liabilities, which consist primarily of cash and cash equivalents,
accounts receivable, long-term receivables and long-term obligations, as
determined under Canadian GAAP.
Disposition of Hotel Investments/Settlement of Loan Receivable
During the third quarter of 2004, we sold the majority of our investment
in Four Seasons Hotel Amman, all of our investment in Four Seasons Resort
Whistler and settled our loan receivable from Sedona, resulting in a total
net loss of $4.4 million. The majority of the loss was related to the settlement
of the loan receivable from Sedona and for legal costs incurred to finalize
the dispositions. Our initial involvement in Sedona started in early 2001
in anticipation of the development and completion of a large residential
and golf community. The arrangements for the financing for the project
have not been completed by the developer and it is now clear that the project
will not come to fruition as a Four Seasons property.
Also included in other expense during the third quarter of 2003 were
legal and other enforcement costs of $1.2 million in connection with the
disputes with the owners of Four Seasons hotels in Caracas and Seattle.
The Seattle dispute was settled in July 2003. Although the dispute with
the owner of the Caracas hotel is outstanding, future expenses associated
with the Caracas dispute are not expected to be significant. These disputes
are more fully described in the MD&A for the year ended December 31,
2003.
Net Interest Income/Expense
During the third quarter of 2004, we had net interest expense of $133,000,
as compared to net interest income of $1 million in the third quarter of
2003. Net interest expense is a combination of $4.9 million in interest
income and $5 million in interest expense in the third quarter of 2004,
as compared to $3.8 million and $2.8 million, respectively, for the same
period in 2003. The increase in interest income is primarily attributable
to higher interest income from increased cash and cash equivalents during
the third quarter of 2004 as a result of the issuance of convertible senior
notes in June 2004, the proceeds of which were used to redeem the LYONs
late in September 2004. The increase in interest expense is primarily attributable
to the higher interest costs relating to the convertible senior notes issued
in June 2004. The new convertible senior notes were allocated to debt in
the amount of $288.9 million and $50.4 million to equity at the time of
issuance, as compared to $68.9 million to debt and $178.6 million to equity
with the LYONs at the time of issuance. For Canadian GAAP purposes, the
effective interest rate on the convertible senior notes issued in June
2004 is 5.33%. The interest rate for Canadian GAAP purposes on the LYONs
was 9.2%.
Income Tax Expense
Our income tax expense during the third quarter of 2004 was $3.2 million,
as compared to an income tax expense of $1.5 million (effective tax rate
of 25.5%) in the third quarter of 2003. The variation from our expected
24% tax rate is the result of certain items not being tax effected, including
the non- taxable amounts related to the redemption of the LYONs in 2004
and, in both periods, a portion of the unrealized foreign exchange gains
and losses, since they will never be realized for tax purposes. In addition,
stock option expense is not deductible for Canadian tax purposes and, as
such, is not tax effected. In 2004, the impact of these items was partially
offset by a reduction in the tax rate related to the utilization of certain
losses, which previously had not been recorded.
Net Earnings/Loss and Earnings/Loss per Share
Net loss for the quarter ended September 30, 2004 was $11.1 million
($0.31 basic and diluted loss per share), as compared to net earnings of
$4.4 million ($0.13 basic earnings per share and $0.12 diluted earnings
per share) for the quarter ended September 30, 2003.
Nine months ended September 30, 2004 compared to nine months ended
September 30, 2003
Management Operations
Management fee revenues (excluding reimbursed costs) increased 27.4%,
or $24 million, to $111.5 million in the nine months ended September 30,
2004, as compared to $87.5 million in the same period last year. This increase
was the result of the improvement in revenues under management resulting
from RevPAR and other revenue increases at the Core Hotels under management
and an increase in fees from recently opened hotels.
Incentive fee revenues increased 50.2% in the nine months ended September
30, 2004, as compared to the same period in 2003, with 36 of the hotels
and resorts under management accruing incentive fees in 2004, as compared
to 31 during the same period last year. The increase in incentive fees
was attributable to the improvement in gross operating profits at the properties
under management in each of the geographic regions in which we operate.
However, hurricane activity in the third quarter had a significant negative
impact on incentive fees.
General and administrative expenses (excluding reimbursed costs) increased
to $32.6 million for the nine months ended September 30, 2004 from $28.6
million for the same period in 2003. During the first nine months of 2004,
as a result of the improved economic and business environment, we held
several regional and company-wide management meetings, some of which had
been postponed for the past three years. The cost of these meetings, together
with management compensation relating to profit participation that was
accrued during the first nine months of 2004 and for which there was not
a similar entitlement in 2003, accounted for approximately $2.2 million
of the increase.
As a result of the items described above, our management earnings before
other operating items for the nine months ended September 30, 2004 increased
34% to $78.9 million, as compared to $58.9 million for the nine months
ended September 30, 2003. Our management operations profit margin (excluding
reimbursed costs) increased to 70.8% for the first nine months of 2004,
as compared to 67.3% for the same period last year.
Ownership and Corporate Operations
Operating results from ownership and corporate operations before other
operating items improved $10.3 million (36.6%) to a loss of $17.8 million
in the nine months ended September 30, 2004, as compared to a loss of $28.1
million for the same period in 2003.
RevPAR at The Pierre increased 17.7%, primarily as a result of a 9.6
percentage point improvement in occupancy in the first nine months of 2004,
as compared to the same period in 2003, reflecting higher travel demand
in New York. As a result, the operating results at The Pierre improved
$4.8 million in the first nine months of 2004, as compared to the same
period last year.
RevPAR at Four Seasons Hotel Vancouver increased 11.2% during the first
nine months of 2004, as compared to the same period in 2003. As a result,
the operating results at that hotel improved $1.4 million in the first
nine months of 2004, as compared to the same period last year.
On September 26, 2004, the landlord terminated our lease of Four Seasons
Hotel Berlin, and we ceased managing the hotel. Since reaching our maximum
funding obligation of the stipulated minimum lease payments at Four Seasons
Hotel Berlin in August of 2003, the lease payments have been limited to
the cash flow generated by the hotel. The decline of $5.1 million in the
operating loss from Four Seasons Hotel Berlin to nil was primarily due
to the reduced lease payments in the first nine months of 2004, as compared
to the same period last year.
Other Expense
Other expense for the nine months ended September 30, 2004 was $22.3
million, as compared to an expense of $26 million for the same period in
2003.
Redemption of the LYONs
As discussed above, during the third quarter we redeemed all of our
LYONs for US$328.73 cash per US$1,000 principal amount at maturity (the
redemption price being the issue price plus interest that was accrued but
unpaid to but excluding September 23, 2004) for an aggregate payment of
US$215.5 million ($275.7 million). Other expense for the nine months ended
September 30, 2004 includes a loss of $14.6 million related to the redemption.
Foreign Exchange
Also included in other expense for the nine months ended September 30,
2004 is an unrealized $2.8 million foreign exchange loss, compared to a
$17.2 million foreign exchange loss for the same period in 2003. These
foreign exchange losses arose from the translation to Canadian dollars
at current exchange rates at the end of each month of our non-Canadian
dollar-denominated net monetary assets that are not included in our designated
self-sustaining subsidiaries, and local currency foreign exchange gains
and losses on net monetary assets incurred by our designated foreign self-sustaining
subsidiaries. Net monetary assets are the sum of our foreign currency-denominated
monetary assets and liabilities, which consist primarily of cash and cash
equivalents, accounts receivable, long-term receivables and long-term obligations,
as determined under Canadian GAAP.
Disposition of Hotel Investments/Settlement of Loan Receivable
During the third quarter, we sold the majority of our investment in
Four Seasons Hotel Amman, all of our investment in Four Seasons Resort
Whistler and settled our loan receivable from Sedona, resulting in a total
net loss of $4.4 million. The majority of the loss was related to the settlement
of the loan receivable from Sedona and legal costs incurred to finalize
the transactions.
Also included in other expense for the nine months ended September 30,
2004 were legal and other enforcement costs of $273,000 that were incurred
in the first nine months of this year in connection with the disputes with
the owners of Four Seasons hotels in Caracas and Seattle, as compared to
costs of $8.7 million for the same period in 2003. The Seattle dispute
was settled in July 2003. Although the dispute with the owner of the Caracas
hotel is outstanding, future expenses associated with the Caracas dispute
are not expected to be significant. These disputes are more fully described
in the MD&A for the year ended December 31, 2003.
Net Interest Income
During the nine months ended September 30, 2004, we had net interest
income of $1.7 million, as compared to $2.4 million in the same period
in 2003. Net interest income is a combination of $12.8 million in interest
income and $11.1 million in interest expense in the first nine months of
2004, as compared to $10.6 million and $8.2 million, respectively, for
the same period in 2003. The increase in interest income is primarily attributable
to higher interest income from new loans to managed properties and from
increased cash and cash equivalents during the third quarter of 2004 as
a result of the issuance of the convertible senior notes in June 2004 as
discussed above. The increase in interest expense is primarily attributable
to higher interest costs relating to having both the LYONs and the convertible
senior notes issued in June 2004 outstanding for most of the third quarter
of 2004. For Canadian GAAP purposes, the effective interest rate on the
convertible senior notes issued in June 2004 is 5.33%. The interest rate
for Canadian GAAP purposes on the LYONs was 9.2%.
Income Tax Expense
Our income tax expense during the first nine months of 2004 was $11.4
million (effective tax rate of 39.3%), as compared to an income tax expense
of $2.1 million in the same period in 2003. The variation from our expected
24% tax rate is the result of certain items not being tax effected, including
the non-taxable amounts related to the redemption of the LYONs in 2004
and, in both periods, a portion of the unrealized foreign exchange gains
and losses, since they will never be realized for tax purposes. In addition,
stock option expense is not deductible for Canadian tax purposes and, as
such, is not tax effected. The impact of these items in 2004 was partially
offset by a reduction in the tax rate related to the utilization of certain
losses, which previously had not been recorded.
Net Earnings/Loss and Earnings/Loss per Share
Net earnings for the nine months ended September 30, 2004 were $17.7
million ($0.50 basic earnings per share and $0.48 diluted earnings per
share), as compared to a net loss of $6.3 million ($0.18 basic and diluted
loss per share) for the nine months ended September 30, 2003.
Liquidity and Capital Resources
Financing Activities
During 1999, we issued LYONs for US$655.5 million principal amount at
maturity (September 23, 2029) for gross proceeds of US$172.5 million. The
net proceeds of the issuance, after deducting offering expenses and underwriters'
commission, were US$166 million. We were entitled to redeem the LYONs commencing
in September 2004 for cash equal to the issue price plus accrued interest
calculated at 4 1/2% per annum. As discussed above in "Other Expense",
during the third quarter of 2004, we exercised this right and redeemed
all of our LYONs for US$328.73 cash per US$1,000 principal amount at maturity
(the redemption price being the issue price plus interest that was accrued
but unpaid to but excluding September 23, 2004) for an aggregate payment
of US$215.5 million ($275.7 million).
During the second quarter of 2004, we issued US$250 million ($341.1
million) (principal amount) convertible senior notes. We used a majority
of the net proceeds from the sale of the convertible senior notes to repay
the LYONs and intend to use the remainder for general corporate purposes,
including the making of investments in, or advances in respect of properties
with a view to obtaining new management agreements or enhancing existing
management agreements. These convertible senior notes bear interest at
the rate of 1.875% per annum (payable semi-annually in arrears on January
30 and July 30 to holders of record on January 15 and July 15, beginning
January 30, 2005) and will mature on July 30, 2024, unless earlier redeemed
or repurchased. The convertible senior notes are convertible into our Limited
Voting Shares at an initial conversion rate of 13.9581 shares per US$1,000
principal amount (equal to a conversion price of approximately US$71.64
($90.55) per Limited Voting Share), subject to adjustments in certain events,
only when (i) the closing price of the Limited Voting Shares measured over
a specified number of trading days is more than 130% of the conversion
price, (ii) the market price of a convertible senior note measured over
a specified number of trading days is less than 95% of the closing sale
price of the Limited Voting Shares into which they may be converted, (iii)
we call the convertible senior notes for redemption, or (iv) specified
corporate transactions or a "fundamental change" occur. Holders of the
convertible senior notes will have the right to require us to purchase
the convertible senior notes on July 30, 2009, July 30, 2014 and July 30,
2019 and in connection with certain events. Subject to conversion rights,
we will have the right to redeem the convertible senior notes for their
principal amount, plus any accrued and unpaid interest, beginning August
4, 2009.
In accordance with Canadian GAAP, the convertible senior notes are bifurcated
on our financial statements into a debt component (representing the principal
value of a bond of US$211.8 million ($288.9 million), which was estimated
based on the present value of a US$250 million ($341.1 million) bond maturing
in 2009, yielding 5.33% per annum, compounded semi-annually, and paying
a coupon of 1.875% per annum) and an equity component (representing the
value of the conversion feature of the convertible senior notes).
In connection with the offering of the convertible senior notes, we
entered into a five-year interest rate swap with an initial notional amount
of US$211.8 million ($288.9 million), pursuant to which we agreed to receive
interest at a fixed rate of 5.33% per year and pay interest at six-month
LIBOR, in arrears, plus 0.4904%. In October 2004, we terminated the interest
rate swap agreement and received proceeds of US$9 million ($11.3 million).
The book value of the interest rate swap as at September 30, 2004 was approximately
$2.1 million. The recognition of the resulting gain will be deferred and
will be amortized over the next 4.75 years, which would have been the remaining
swap term. This will result in an effective interest rate for accounting
purposes of 4.6% for 2005. Taking into account the net present value of
the termination of the swap, including the $9.2 million gain, the economic
interest cost associated with the convertible senior notes is less than
1%.
In September 2004, our existing bank credit facility was amended by
extending the maturity date from June 2005 to September 2007 and by removing
the requirement to maintain a minimum cash balance of at least $75 million
in our account with the agent of the facility. In November 2004, we finalized
a new committed bank credit facility of US$125 million ($158.1 million),
which expires September 2007, and replaces the credit facility of US$100
million ($126.4 million). As at September 30, 2004, no amounts were borrowed
under the credit facility. However, approximately US$14 million ($17.4
million) of letters of credit were issued under the facility. No amounts
have been drawn under these letters of credit. We believe that, absent
unusual opportunities, this bank credit facility, when combined with cash
on hand and internally generated cash flow, should be more than adequate
to allow us to finance our normal operating needs and anticipated investment
commitments related to our current growth objectives.
Cash and cash equivalents were $232.9 million as at September 30, 2004,
as compared to $170.7 million as at December 31, 2003.
Long-term obligations (as determined under Canadian GAAP) increased
from $120.1 million as at December 31, 2003 to $304.7 million as at September
30, 2004, primarily as a result of the issue of the convertible senior
notes in the second quarter, net of the redemption of the LYONs in the
third quarter and foreign exchange translation.
-------------------------------------------------------------------------
Long-term obligations
(in Canadian dollars)
September 30, 2004 December 31, 2003
-------------------------------------------------------------------------
LYONs
-- $88.0 million
-------------------------------------------------------------------------
Convertible senior notes
$270.0 million
--
-------------------------------------------------------------------------
Other
$34.7 million
$32.1 million
-------------------------------------------------------------------------
$304.7 million $120.1
million
-------------------------------------------------------------------------
Contractual Obligations and Other Commitments
We have provided certain guarantees and have other commitments in connection
with properties under our management totalling a maximum of $28.5 million.
These contractual obligations and other commitments are more fully described
in the MD&A for the year ended December 31, 2003. Other than the issuance
of convertible senior notes issued in June 2004 and due 2024 and the redemption
of LYONS during the third quarter of 2004 (both of which are discussed
above), funding relating to our management opportunities described under
"Financing Activities" above and "Investing/Divesting Activities" below
and the termination of the lease of Four Seasons Hotel Berlin as discussed
above in "Ownership and Corporate Operations", we do not anticipate any
further material change in respect of these commitments over the remainder
of the current year.
Cash From Operations
During the three months and nine months ended September 30, 2004, we
used cash of $16 million in operations and generated cash of $17.6 million
from operations, respectively, as compared to generating cash of $7.2 million
and $44.1 million, respectively, for the same periods in 2003.
The decrease in cash from operations of $23.2 million in the third quarter
of 2004 relates primarily to the $33.1 million interest payment on the
redemption of the LYONs. The LYONs were a zero-pay note. Interest was accreted
from the date of issuance in September 1999 until redemption in September
2004. On redemption, the $33.1 million of interest that was accreted was
paid. The decrease in cash from operations also relates to an increase
in working capital of $2.1 million, partially offset by an increase in
cash contributed by management operations of $7.6 million, a decrease in
cash used in ownership and corporate operations of $3.3 million and a decrease
in legal and enforcement costs paid of $2.4 million.
The decrease in cash from operations of $26.5 million in the first nine
months of 2004 relates primarily to the cash applied to the interest accreted
for accounting purposes of $33.1 million relating to the redemption of
the LYONs in the third quarter of 2004 and an increase in working capital
of $29.6 million, primarily as a result of an income tax refund received
in the first nine months of 2003, an increase in the accrual related to
incentive fee improvements and improved fees from residential projects,
partially offset by an increase in cash contributed by management operations
of $20.5 million, a decrease in cash used in ownership and corporate operations
of $10.9 million and a decrease in legal and enforcement costs paid of
$7.5 million.
Investing/Divesting Activities
Part of our business strategy is to invest available cash to obtain
management agreements or enhance existing management arrangements. These
investments in, or advances in respect of or to owners of, properties are
made where we believe that the overall economic return to Four Seasons
justifies the investment or advance.
During the first nine months of 2004, we funded $85.1 million in such
management opportunities, including amounts advanced as loans receivable
and investments in hotel properties such as Hampshire, Whistler, Palo Alto,
Jackson Hole and Exuma. This level of investment was consistent with our
business plan, with the investments being made to secure new long-term
management agreements or to enhance existing management arrangements.
As described above, during the third quarter of 2004,we sold the majority
of our 8% ownership interest in Four Seasons Hotel Amman, all of our ownership
interest in Four Seasons Resort Whistler and settled our loan receivable
from Sedona. On a combined basis, we received proceeds of approximately
$55 million and realized a loss of approximately $4.4 million.
During the remaining three months of 2004, we expect to fund approximately
$25 million in respect of investments in, or advances to, various projects,
including additional funding in Exuma, Hampshire, Damascus, Washington,
Geneva and the expansion of corporate office facilities.
Outstanding Share Data
-------------------------------------------------------------------------
Designation
Outstanding as at November 1, 2004
-------------------------------------------------------------------------
Variable Multiple Voting Shares(a)
3,725,698
-------------------------------------------------------------------------
Limited Voting Shares
32,187,974
-------------------------------------------------------------------------
Options to acquire Limited Voting
Shares:
-------------------------------------------------------------------------
Outstanding
5,254,957
-------------------------------------------------------------------------
Exercisable
3,394,198
-------------------------------------------------------------------------
Convertible Senior Notes issued
US$251.8 million(c)
June 2004 and due 2024(b)
(Canadian equivalent $307.8 million)
-------------------------------------------------------------------------
(a) Convertible into Limited Voting
Shares at any time at the option of
the holder
on a one-for-one basis.
(b) Details on the convertible senior
notes are more fully described
under "Financing
Activities".
(c) This amount is equal to the issue
price of the convertible senior
notes issued
June 2004 and due 2024 plus accrued interest calculated
at 1.875%
per annum.
Looking Ahead
The MD&A for the year ended December 31, 2003 provided certain forward-
looking information regarding our expectations for 2004.
Based on the travel trends that we experienced in the first nine months
of 2004 and that we currently are observing, we expect RevPAR for worldwide
Core Hotels in the fourth quarter of 2004 to increase approximately 6%
to 7%, and 14% to 15% for the full year of 2004, both as compared to their
respective periods last year. We expect that this improvement will result
from occupancy and pricing improvements in all geographic regions in the
fourth quarter of 2004.
Changes in Accounting Policies
In December 2001, the Canadian Institute of Chartered Accountants ("CICA")
issued an accounting guideline relating to hedging relationships. The guideline
establishes requirements for the identification, documentation, designation
and effectiveness of hedging relationships and was effective for fiscal
years beginning on or after July 1, 2003. Effective January 1, 2004, we
ceased designating our US dollar forward contracts as hedges of our US
dollar revenues. These contracts were entered into during 2002, and all
of these contracts will mature during 2004. The foreign exchange gains
on these contracts of $14.6 million, which were deferred prior to January
1, 2004, will be recognized throughout 2004 as an increase of fee revenues.
Effective January 1, 2004, our US dollar forward contracts are being marked-to-market
on a monthly basis with the resulting changes in fair values being recorded
as a foreign exchange gain or loss. The impact of ceasing to designate
our US dollar forward contracts as hedges of our US dollar revenues was
to increase net earnings by $891,000 and $515,000, respectively, for the
three months and nine months ended September 30, 2004 and to increase receivables
by $4.4 million and accounts payable and accrued liabilities by $3.7 million
as at September 30, 2004.
As a result of adopting the CICA Section 1100, "Generally Accepted Accounting
Principles", which was issued in 2003 and was effective for 2004, we began
recording all reimbursed costs in revenue on a gross, rather than net,
basis. These costs include marketing, reservations, and advertising charges,
as well as the out-of-pocket expense charges, which we charge to properties
under management on a cost recovery basis. For the third quarter of 2003,
reimbursed costs have also been reclassified on a consistent basis and
included in revenues.
Effective January 1, 2004, we also adopted the following accounting
standards: Accounting for Asset Retirement Obligations, Impairment of Long-Lived
Assets, Revenue Recognition and Revenue Arrangements with Multiple Deliverables,
all of which are more fully described in the MD&A for the year ended
December 31, 2003. The application of these accounting treatments did not
have an impact on our interim consolidated financial statements. See also
note 1 to the interim consolidated financial statements.
Critical Accounting Estimates
Under Canadian GAAP, we are required to make estimates when we account
for and report assets, liabilities, revenues and expenses, and contingencies.
We are also required to evaluate the estimates that we use.
We base our estimates on past experience and other factors that we believe
are reasonable under the circumstances. Because this process of estimation
involves varying degrees of judgment and uncertainty, the amounts currently
reported in the financial statements could, in the future, prove to be
inaccurate.
We believe the following critical accounting estimates involve the more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Recoverability of Investments
Estimates are required to be used by management to assess the recoverability
of our investments in long-term receivables, hotel partnerships and corporations,
management contracts, and trademarks and trade names.
Long-term receivables are reviewed for impairment when significant events
or circumstances occur, including, but not limited to, the following: changes
in general economic trends, defaults in interest or principal payments,
deterioration in a borrower's financial condition or creditworthiness (including
severe losses in the current year or recent years), or a significant decline
in the value of the security underlying a loan. We measure the impairment
of long-term receivables based on the present value of expected future
cash flows (discounted at the original effective interest rate) or the
estimated fair value of the collateral. If an impairment exists, we establish
a specific allowance for doubtful long-term receivables for the difference
between the recorded investment and the present value of the expected future
cash flows or the estimated fair value of the collateral. We apply this
impairment policy individually to all long-term receivables and do not
aggregate long-term receivables for the purpose of applying this policy.
Investments in hotel partnerships and corporations are written down
to their estimated recoverable amount in the event of a decline in value
that is other than temporary.
Investments in management contracts and investments in trademarks and
trade names are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of investments in management contracts
or investments in trademarks and trade names may not be recoverable. Recoverability
is measured by a comparison of the carrying amount of the investment to
estimated undiscounted future cash flows expected to be generated by the
investment. If the carrying amount of the investment exceeds its estimated
undiscounted future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the investment exceeds its fair
value.
Estimates of recoverable amounts and future cash flows are based on
estimates of the profitability of the related managed properties, which,
in turn, depend upon assumptions regarding future conditions in the general
or local hospitality industry, including competition from other hotels,
changes in travel patterns, and other factors that affect the properties'
gross operating revenues and profits. Estimates of recoverable amounts
and future cash flows may also depend upon, among other things, periodic
independent valuations, assumptions regarding local real estate market
conditions, property and income taxes, interest rates and the availability,
cost and terms of financing, the impact of present or future legislation
or regulation, debt incurred by the properties that rank ahead of debt
owed to us, owners' termination rights under the terms of the management
agreements, disputes with owners, and other factors affecting the profitability
and salability of the properties and our investments.
These assumptions, estimates and evaluations are subject to the availability
of reliable comparable data, ongoing geopolitical concerns and the uncertainty
of predictions concerning future events. Accordingly, estimates of recoverable
amounts and future cash flows are subjective and may not ultimately be
achieved. Should the underlying circumstances change, the estimated recoverable
amounts and future cash flows could change by a material amount.
Income Taxes
We account for income taxes using the liability method and calculate
our income tax provision based on the expected tax treatment of transactions
recorded in our consolidated financial statements. Under this method, future
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. In determining the
current and future components of the tax provision, management interprets
tax legislation in a variety of jurisdictions and makes assumptions about
the expected timing of the reversal of future tax assets and liabilities.
If our interpretations differ from those of the tax authorities, enacted
tax rates change or the timing of reversals is not as anticipated, the
tax provision could materially increase or decrease in future periods.
In measuring the amount of future income tax assets and liabilities,
we are periodically required to develop estimates of the tax basis of assets
and liabilities. In circumstances where the applicable tax laws and regulations
are either unclear or subject to ongoing varying interpretations, changes
in these estimates could occur that could materially affect the amounts
of future income tax assets and liabilities recorded in our consolidated
financial statements. For the year ended December 31, 2003, the most significant
tax bases estimate that would be affected by differences in interpretation
of tax laws was the accumulated net operating losses carried forward of
$30.6 million.
For every material future tax asset, we evaluate the likelihood of realization
of some portion or all of the asset. This evaluation is based on, among
other things, expected levels of future taxable income and the pattern
and timing of reversals of temporary timing differences that give rise
to future tax assets and liabilities. If, based on the available evidence,
we determine that it is more likely than not (a likelihood of more than
50%) that all or some portion of a future tax asset will not be realized,
we record a valuation allowance against that asset. For the year ended
December 31, 2003, the future income tax asset was $13.2 million, net of
a valuation allowance of $3.0 million.
| Additional Information
Additional information about us (including our most recent
annual information form, MD&A and our audited financial statements
for the year ended December 31, 2003) is available on SEDAR at www.sedar.com.
1. RevPAR is defined as average
room revenue per available room. RevPAR
is a commonly
used indicator of market performance for hotels and
resorts and
represents the combination of the average daily room rate
per room occupied
and the average occupancy rate achieved during the
period. RevPAR
does not include food and beverage or other ancillary
revenues generated
by a hotel or resort. RevPAR is the most commonly
used measure
in the lodging industry to measure the period-over-
period performance
of comparable properties.
2. The term "Core Hotels" means
hotels and resorts under management for
the full year
of both 2004 and 2003. However, if a "Core Hotel" has
undergone
or is undergoing an extensive renovation program in one of
those years
that materially affects the operation of the property in
that year,
it ceases to be included as a "Core Hotel" in either year.
Changes from
the 2003/2002 Core Hotels are the additions of Four
Seasons Hotel
Amman, Four Seasons Resort Sharm el Sheikh, Four
Seasons Hotel
Shanghai and Four Seasons Hotel Tokyo at Marunouchi and
the deletion
of Four Seasons Hotel Berlin, Four Seasons Resort Santa
Barbara, Four
Seasons Resort Scottsdale at Troon North and Four
Seasons Hotel
Washington, DC, the last three of which are undergoing
extensive
renovation programs in 2004.
3. Gross operating margin represents
gross operating profit as a
percentage
of gross operating revenue.
4. The following table illustrates
the impact of adopting the new
accounting
standard (CICA Section 1100 - "Generally Accepted
Accounting
Principles", as it relates to the reimbursement of out-of-
pocket costs)
on a pro forma basis in the quarters for 2003 as if the
new standard
was applicable during that time.
-------------------------------------------------------------------------
2003
-------------------------------------------
(In thousands of Canadian
First Second Third
Fourth
dollars)
Quarter Quarter Quarter
Quarter
-------------------------------------------------------------------------
Revenues:
-------------------------------------------------------------------------
Fee revenues
$ 29,305 $ 29,351 $ 28,823 $ 33,052
-------------------------------------------------------------------------
Cost reimbursements
previously included
in
fee revenues(x)
6,925 7,381
7,395 7,525
-------------------------------------------------------------------------
Additional cost
reimbursements
11,526 11,190 10,469
12,892
-------------------------------------------------------------------------
Total revenues
47,756 47,922 46,687
53,469
-------------------------------------------------------------------------
Operating costs and expenses:
-------------------------------------------------------------------------
General and administrative
expenses
9,736 8,901
9,981 12,391
-------------------------------------------------------------------------
Reimbursed costs
18,451 18,571 17,864
20,417
-------------------------------------------------------------------------
Total expenses
28,187 27,472 27,845
32,808
-------------------------------------------------------------------------
Total earnings from Management
operations before other
operating items
$ 19,569 $ 20,450 $ 18,842 $ 20,661
-------------------------------------------------------------------------
(x) Marketing and reservation fees
were included in both fee revenues and
general and
administrative expenses in 2003 and earlier years.
5. The management operations
profit margin represents management
operations
earnings before other operating items, as a percent of
management
operations revenue, excluding reimbursed costs.
6. Eight Quarter Summary:
-------------------------------------------------------------------------
(In millions of Canadian
dollars except per
Third Quarter Second Quarter
share amounts)
2004 2003(a) 2004
2003(a)
-------------------------------------------------------------------------
Consolidated revenues(b)
$ 82.7 $ 72.6 $
97.0 $ 80.8
-------------------------------------------------------------------------
Earnings (loss) before other
operating items:
-------------------------------------------------------------------------
Management operations
26.3 18.8
30.1 20.5
-------------------------------------------------------------------------
Ownership and corporate
operations
(6.4) (9.4)
(1.7) (5.5)
-------------------------------------------------------------------------
Net earnings (loss):
-------------------------------------------------------------------------
Total
$ (11.1) $ 4.4 $
17.3 $ (1.4)
-------------------------------------------------------------------------
Basic earnings (loss)
per share(c)
$ (0.31) $ 0.13 $ 0.49
$ (0.04)
-------------------------------------------------------------------------
Diluted earnings (loss)
per share(c)
$ (0.31) $ 0.12 $ 0.46
$ (0.04)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(In millions of Canadian
dollars except per
share amounts)
First Quarter Fourth Quarter
-------------------------------------------------------------------------
2004 2003(a) 2003(a)
2002
-------------------------------------------------------------------------
Consolidated revenues(b)
$ 75.3 $ 72.4 $
87.9 $ 92.9
-------------------------------------------------------------------------
Earnings (loss) before other
operating items:
-------------------------------------------------------------------------
Management operations
22.5 19.6
20.7 21.6
-------------------------------------------------------------------------
Ownership and corporate
operations
(9.7) (13.2) (2.0)
(4.6)
-------------------------------------------------------------------------
Net earnings (loss):
-------------------------------------------------------------------------
Total
$ 11.5 $ (9.3) $
11.7 $ 7.6
-------------------------------------------------------------------------
Basic earnings (loss)
per share(c)
$ 0.33 $ (0.27) $ 0.33
$ 0.22
-------------------------------------------------------------------------
Diluted earnings (loss)
per share(c)
$ 0.31 $ (0.27) $ 0.32
$ 0.22
-------------------------------------------------------------------------
(a) In December 2003, the CICA amended
Section 3870 of its Handbook to
require entities
to account for employee stock options using the fair
value-based
method, beginning January 1, 2004. In accordance with one
of the transitional
alternatives permitted under amended Section
3870, in the
fourth quarter of 2003 we prospectively adopted the fair
value-based
method with respect to all employee stock options granted
on or after
January 1, 2003. Accordingly, options granted prior to
that date
continue to be accounted for using the settlement method,
and results
for each of the quarters in 2002 have not been restated.
In accordance
with the new standard, however, the reported results
for the first
three quarters of 2003 are required to be restated. The
prospective
application of adopting the fair value-based method
effective
January 1, 2003 resulted in the following restatements: 1st
Quarter 2003
- no effect on net loss or basic and diluted loss per
share; 2nd
Quarter 2003 - increase in net loss of $0.1 million and no
effect on
basic and diluted loss per share; 3rd Quarter and 4th
Quarter 2003
- in each quarter, a decrease in net earnings of
$0.4 million
and a decrease in basic and diluted earnings per share
of $0.01 for
each quarter.
(b) As a result of adopting Section
1100, "Generally Accepted Accounting
Principles",
which was issued by the CICA in July 2003, and was
effective
January 1, 2004, we have included the reimbursement of all
out-of-pocket
expenses in both revenues and expenses, instead of
recording
certain reimbursed costs as a "net" amount. As a result of
this change,
consolidated revenues have been restated as follows: 1st
Quarter 2003
- increase of $11.3 million; 2nd Quarter 2003 - increase
of $10.9 million;
3rd Quarter 2003 - increase of $10.3 million; 4th
Quarter 2003
- increase of $12.6 million; 4th Quarter 2002 - increase
of $16.0 million.
Consolidated
revenues is comprised of the following:
-------------------------------------------------------------------------
Third Quarter Second Quarter
(In millions of Canadian
-------------------------------------------
dollars)
2004 2003
2004 2003
-------------------------------------------------------------------------
Revenues from Management
Operations
$ 54.8 $ 46.7 $
60.1 $ 47.9
-------------------------------------------------------------------------
Revenues from Ownership and
Corporate Operations
29.2 27.0
38.2 34.4
-------------------------------------------------------------------------
Distributions from hotel
investments
0.0 0.2
0.4 0.0
-------------------------------------------------------------------------
Fees from Ownership and
Corporate Operations to
Management Operations
(1.3) (1.3)
(1.7) (1.5)
-------------------------------------------------------------------------
$ 82.7 $ 72.6 $
97.0 $ 80.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
First Quarter Fourth Quarter
(In millions of Canadian
-------------------------------------------
dollars)
2004 2003
2003 2002
-------------------------------------------------------------------------
Revenues from Management
Operations
$ 49.6 $ 47.8 $
53.5 $ 55.3
-------------------------------------------------------------------------
Revenues from Ownership and
Corporate Operations
26.8 25.8
36.0 38.8
-------------------------------------------------------------------------
Distributions from hotel
investments
0.0 0.0
0.0 0.5
-------------------------------------------------------------------------
Fees from Ownership and
Corporate Operations to
Management Operations
(1.1) (1.2)
(1.6) (1.7)
-------------------------------------------------------------------------
$ 75.3 $ 72.4 $
87.9 $ 92.9
-------------------------------------------------------------------------
(c) Quarterly computations of per share
amounts are made independently on
a quarter-by-quarter
basis and may not be identical to annual
computations
of per share amounts.
7. Included in ownership and
corporate operations are the consolidated
revenues and
expenses from our 100% leasehold interests in The Pierre
in New York,
Four Seasons Hotel Vancouver and Four Seasons Hotel
Berlin (until
the lease termination on September 26, 2004),
distributions
from other ownership interests in properties that Four
Seasons manages
and corporate overhead expenses related, in part, to
these ownership
interests.
(+) (+) (+)
All dollar amounts referred to in this
news release are in Canadian
dollars unless otherwise noted. The
financial statements are prepared in
accordance with Canadian GAAP.
(+) (+) (+)
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands of Canadian
Three months ended Nine months ended
dollars except per
September 30, September
30,
share amounts)
2004 2003
2004 2003
-------------------------------------------------------------------------
(restated -
(restated -
note 1(a))
note 1(a))
Consolidated revenues (note 5) $ 82,715
$ 72,577 $254,946 $225,695
-------------------------------------------
-------------------------------------------
MANAGEMENT OPERATIONS
Revenues:
Fee revenues
$ 36,548 $ 28,823 $111,474 $ 87,479
Reimbursed costs (note
1(c)) 18,231 17,864
52,983 54,886
-------------------------------------------
54,779 46,687 164,457
142,365
-------------------------------------------
Expenses:
General and administrative
expenses
(10,272) (9,981) (32,597) (28,618)
Reimbursed costs (note
1(c)) (18,231) (17,864) (52,983)
(54,886)
-------------------------------------------
(28,503) (27,845) (85,580) (83,504)
-------------------------------------------
26,276 18,842 78,877
58,861
-------------------------------------------
OWNERSHIP AND CORPORATE
OPERATIONS
Revenues
29,267 27,001 94,247
87,194
Distributions from hotel
investments
-- 153
398 153
Expenses:
Cost of sales and expenses
(34,289) (35,324) (108,312) (111,421)
Fees to Management Operations
(1,331) (1,264) (4,156)
(4,017)
-------------------------------------------
(6,353) (9,434) (17,823) (28,091)
-------------------------------------------
Earnings before other
operating items
19,923 9,408 61,054
30,770
Depreciation and amortization
(4,056) (3,645) (11,300) (11,419)
Other expense, net (note 6)
(23,653) (920) (22,343)
(25,961)
-------------------------------------------
Earnings (loss) from
operations
(7,786) 4,843 27,411
(6,610)
Interest income (expense), net
(133) 1,038 1,681
2,388
-------------------------------------------
Earnings (loss) before
income taxes
(7,919) 5,881 29,092
(4,222)
-------------------------------------------
Income tax recovery (expense):
Current
476 (177) (6,678)
438
Future
(3,700) (1,322) (4,749)
(2,536)
-------------------------------------------
(3,224) (1,499) (11,427)
(2,098)
-------------------------------------------
Net earnings (loss)
$(11,143) $ 4,382 $ 17,665 $ (6,320)
-------------------------------------------
-------------------------------------------
Basic earnings (loss) per
share (note 4)
$ (0.31) $ 0.13 $ 0.50
$ (0.18)
-------------------------------------------
-------------------------------------------
Diluted earnings (loss) per
share (note 4)
$ (0.31) $ 0.12 $ 0.48
$ (0.18)
-------------------------------------------
-------------------------------------------
See accompanying notes to consolidated
financial statements.
FOUR SEASONS HOTELS INC.
CONSOLIDATED BALANCE SHEETS
As at As at
September 30, December 31,
(In thousands of Canadian dollars)
2004 2003
-------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$ 232,923 $ 170,725
Receivables (note 1(b))
107,132 88,636
Inventory
1,889 2,169
Prepaid expenses
3,428 3,780
---------------------------
345,372 265,310
Long-term receivables
202,613 197,635
Investments in hotel partnerships
and
corporations
160,250 157,638
Fixed assets
72,468 75,789
Investment in management contracts
219,280 203,670
Investment in trademarks and trade
names
5,482 5,757
Future income tax assets (note 3(b))
4,340 13,230
Other assets
30,775 27,631
---------------------------
$ 1,040,580 $ 946,660
---------------------------
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities
(note 1(b))
$ 70,871 $ 61,045
Long-term obligations
due within one year
2,425 2,587
---------------------------
73,296 63,632
Long-term obligations (notes 2 and
3)
302,323 117,521
Shareholders' equity (note 4):
Capital stock
347,302 329,274
Convertible notes (note
3)
50,373 178,543
Contributed surplus (note
3(b))
11,050 5,529
Retained earnings
281,562 265,754
Equity adjustment from
foreign currency
translation
(25,326) (13,593)
---------------------------
664,961 765,507
---------------------------
$ 1,040,580 $ 946,660
---------------------------
---------------------------
See accompanying notes to consolidated
financial statements.
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF CASH PROVIDED
BY OPERATIONS
(Unaudited)
Three months ended Nine months ended
(In thousands of Canadian
September 30, September
30,
dollars)
2004 2003
2004 2003
-------------------------------------------------------------------------
Cash provided by (used in)
operations:
MANAGEMENT OPERATIONS
Earnings before other
operating items
$ 26,276 $ 18,842 $ 78,877 $ 58,861
Items not requiring an outlay
of funds
620 450
1,615 1,099
-------------------------------------------
Working capital provided by
Management Operations
26,896 19,292 80,492
59,960
-------------------------------------------
OWNERSHIP AND CORPORATE
OPERATIONS
Loss before other operating
items
(6,353) (9,434) (17,823) (28,091)
Items not requiring an outlay
of funds
360 187
866 278
-------------------------------------------
Working capital used in
Ownership and Corporate
Operations
(5,993) (9,247) (16,957) (27,813)
-------------------------------------------
20,903 10,045 63,535
32,147
Interest received, net
2,599 2,817
8,165 8,085
Interest paid on redemption of
convertible notes (note 3(b))
(33,057) --
(33,057) --
Current income tax paid
(1,081) --
(2,785) --
Change in non-cash working
capital
(5,084) (3,012) (17,234)
12,370
Other
(286) (2,698) (999)
(8,480)
-------------------------------------------
Cash provided by (used in)
operations
$(16,006) $ 7,152 $ 17,625 $ 44,122
-------------------------------------------
-------------------------------------------
See accompanying notes to consolidated
financial statements.
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended Nine months ended
(In thousands of Canadian
September 30, September
30,
dollars)
2004 2003
2004 2003
-------------------------------------------------------------------------
Cash provided by (used in):
Operations:
$(16,006) $ 7,152 $ 17,625 $ 44,122
-------------------------------------------
Financing:
Long-term obligations
including current
portion (37)
(34) (19)
(64)
Issuance of shares
6,580 2,408 18,028
3,914
Issuance of convertible
notes (note 3(a))
-- --
329,273 --
Redemption of convertible
notes (note 3(b))
(242,644) -- (242,644)
--
Dividends paid
(1,857) (1,813) (3,690)
(3,622)
-------------------------------------------
Cash provided by (used in)
financing
(237,958) 561 100,948
228
-------------------------------------------
Capital investments:
Decrease in restricted
cash
(note 2)
75,000 --
-- --
Long-term receivables
9,568 2,605 (10,431)
(9,446)
Hotel investments (note
6) (8,082) (1,493)
(46,689) (7,902)
Disposal of hotel investments
47,043 1,529 47,043
1,529
Fixed assets
(2,945) (124) (5,414)
(5,400)
Investments in trademarks
and trade names
and
management contracts
(1,333) (924) (13,168)
(1,580)
Other assets
(1,477) (1,370) (3,799)
(4,860)
-------------------------------------------
Cash provided by (used in)
capital investments
117,774 223
(32,458) (27,659)
-------------------------------------------
Increase (decrease) in cash
and cash equivalents
(136,190) 7,936 86,115
16,691
Increase (decrease) in cash
and cash equivalents due to
unrealized foreign exchange
gain (loss)
(23,117) 530 (23,917)
(20,323)
Cash and cash equivalents,
beginning of period
392,230 152,938 170,725
165,036
-------------------------------------------
Cash and cash equivalents,
end of period
$232,923 $161,404 $232,923 $161,404
-------------------------------------------
-------------------------------------------
See accompanying notes to consolidated
financial statements.
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF RETAINED
EARNINGS
Nine months ended
(Unaudited)
September 30,
(In thousands of Canadian dollars)
2004 2003
-------------------------------------------------------------------------
Retained earnings, beginning of period
$ 265,754 $ 264,016
Net earnings (loss)
17,665 (6,320)
Dividends declared
(1,857) (1,813)
---------------------------
Retained earnings, end of period
$ 281,562 $ 255,883
---------------------------
---------------------------
See accompanying notes to consolidated
financial statements.
FIRST AND FINAL ADD - TO167 - Four Seasons Hotels Inc.
Earnings
Thursday November 4, 7:41 am ET
FOUR SEASONS HOTELS INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(In thousands of Canadian dollars
except share amounts)
-------------------------------------------------------------------------
In these interim consolidated financial
statements, the words "we", "us",
"our", and other similar words are
references to Four Seasons Hotels Inc.
and its consolidated subsidiaries.
These interim consolidated financial
statements do not include all disclosures
required by Canadian generally
accepted accounting principles ("GAAP")
for annual financial statements
and should be read in conjunction
with our annual consolidated financial
statements for the year ended December
31, 2003.
1. Significant accounting policies:
The significant accounting policies
used in preparing these interim
consolidated financial statements
are consistent with those used in
preparing our annual consolidated
financial statements for the year ended
December 31, 2003, except as disclosed
below:
(a) Stock-based compensation and other
stock-based payments:
In December
2003, the Canadian Institute of Chartered Accountants
("CICA") amended
Section 3870 to require entities to account for
employee stock
options using the fair value-based method, beginning
January 1,
2004. In accordance with one of the transitional
alternatives
permitted under amended Section 3870, we prospectively
adopted in
December 2003 the fair value-based method with respect to
all employee
stock options granted on or after January 1, 2003.
Accordingly,
options granted prior to that date continue to be
accounted
for using the settlement method. The prospective
application
of adopting the fair value-based method effective
January 1,
2003 has been applied retroactively in our consolidated
financial
statements, and amounts for the three months and nine
months ended
September 30, 2003 have been restated. The impact of
this change
for the three months and nine months ended
September
30, 2004 was to increase net loss by $595 and to decrease
net earnings
by $1,502, respectively (2003 - decrease net earnings by
$366 and increase
net loss by $525, respectively), and to increase
basic and
diluted loss per share by $0.01 and to decrease basic and
diluted earnings
per share by $0.04, respectively (2003 - decrease
basic and
diluted earnings per share by $0.01 and increase basic and
diluted loss
per share by $0.01, respectively).
The fair value
of stock options granted in the nine months ended
September
30, 2004 has been estimated using the Black-Scholes option
pricing model
with the following assumptions: risk-free interest
rates ranging
from 2.96% to 4.39% (2003 - 4.44% to 5.02%);
semi-annual
dividend per Limited Voting Share of $0.055
(2003 - $0.055);
volatility factor of the expected market price of
our Limited
Voting Shares ranging from 28% to 30% (2003 - 32%); and
expected lives
of the options in 2004 and 2003 ranging between four
and seven
years, depending on the level of the employee who was
granted stock
options. For the options granted in the nine months
ended September
30, 2004, the weighted average fair value of the
options at
the grant dates was $25.35 (2003 - $18.00). No stock
options were
granted during the three months ended September 30, 2004
and 2003.
For purposes of stock option expense and pro forma
disclosures,
the estimated fair value of the options is amortized to
compensation
expense over the options' vesting period.
Section 3870
requires pro forma disclosure of the effect of the
application
of the fair value-based method to employee stock options
granted on
or after January 1, 2002 and not accounted for using the
fair value-based
method. For the three months and nine months ended
September
30, 2004 and 2003, if we had applied the fair value-based
method to
options granted from January 1, 2002 to December 31, 2002,
our net earnings
(loss) and basic and diluted earnings (loss) per
share would
have been adjusted to the pro forma amounts indicated
below:
(Unaudited)
(In thousands
of Canadian Three months ended Nine months
ended
dollars
except
September 30, September
30,
per
share amounts) 2004
2003 2004
2003
---------------------------------------------------------------------
Stock option
expense
included
in compensation
expense
$ (595) $ (366) $ (1,502) $
(525)
------------------------------------------
------------------------------------------
Net earnings
(loss),
as reported
$(11,143) $ 4,382 $ 17,665 $ (6,320)
Additional
expense that
would
have been recorded
if all
outstanding stock
options
granted during
2002
had been expensed (848)
(862) (2,560) (2,587)
------------------------------------------
Pro forma
net earnings
(loss)
$(11,991) $ 3,520 $ 15,105 $ (8,907)
------------------------------------------
Earnings (loss)
per share:
Basic, as reported $ (0.31)
$ 0.13 $ 0.50 $ (0.18)
Basic, pro forma
(0.34) 0.10
0.43 (0.25)
Diluted, as reported (0.31)
0.12 0.48
(0.18)
Diluted, pro forma
(0.34) 0.10
0.41 (0.25)
------------------------------------------
(b) Hedging relationships:
In December
2001, the CICA issued an accounting guideline relating to
hedging relationships.
The guideline establishes requirements for the
identification,
documentation, designation and effectiveness of
hedging relationships
and was effective for fiscal years beginning on
or after July
1, 2003. Effective January 1, 2004, we ceased
designating
our US dollar forward contracts as hedges of our US
dollar revenues.
These contracts were entered into during 2002, and
all of these
contracts will mature during 2004. The foreign exchange
gains on these
contracts of $14,552, which were deferred prior to
January 1,
2004, are being recognized in 2004 as an increase of fee
revenues over
the course of the year. Effective January 1, 2004, our
US dollar
forward contracts are being marked-to-market on a monthly
basis with
the resulting changes in fair values being recorded as a
foreign exchange
gain or loss. The impact of ceasing to designate our
US dollar
forward contracts as hedges of our US dollar revenues was
to increase
net earnings by $891 and $515, respectively, for the
three months
and nine months ended September 30, 2004 and to increase
receivables
by $4,413 and accounts payable and accrued liabilities by
$3,731 as
at September 30, 2004.
In June 2004,
we entered into an interest rate swap agreement that we
designated
as a fair value hedge of the convertible notes issued in
the same month
(note 3(a)). In October 2004, we terminated the
interest rate
swap agreement (note 10).
(c) Reimbursed costs:
As a result
of adopting Section 1100, "Generally Accepted Accounting
Principles",
which was issued by the CICA in July 2003, and was
effective
January 1, 2004, we have included the reimbursement of all
out-of-pocket
expenses in both revenues and expenses instead of
recording
certain reimbursed costs as a "net" amount. The change in
the accounting
treatment of reimbursed costs resulted in an increase
of both revenues
and expenses for the three months and nine months
ended September
30, 2004 of $10,770 and $29,983, respectively
(2003 - $10,470
and $33,186, respectively), but did not have an
impact on
net earnings. In addition, for the three months and nine
months ended
September 30, 2003, each of fee revenues and general and
administrative
expenses included certain other reimbursed costs of
$7,394 and
$21,700, respectively. These have been reclassified to
reimbursed
costs in both revenues and expenses to conform with the
financial
statement presentation adopted in 2004.
(d) Impairment of long-lived assets:
In December
2002, the CICA issued Section 3063, "Impairment of
Long-Lived
Assets". This new section establishes standards for the
recognition,
measurement and disclosure of the impairment of
long-lived
assets, and replaces the write-down provisions of Section
3061, "Property,
Plant and Equipment". In accordance with Section
3063, long-lived
assets, such as property, plant and equipment and
purchased
intangibles subject to amortization, are reviewed for
impairment
whenever events or changes in circumstances indicate that
the carrying
amount of an asset may not be recoverable.
Recoverability
of assets to be held and used is measured by a
comparison
of the carrying amount of an asset to estimated
undiscounted
future cash flows expected to be generated by the asset.
If the carrying
amount of an asset exceeds its estimated future cash
flows, an
impairment charge is recognized equal to the amount by
which the
carrying amount of the asset exceeds the fair value of the
asset. The
implementation of Section 3063, effective January 1, 2004,
did not have
an impact on our consolidated financial statements for
the three
months and nine months ended September 30, 2004.
(e) Accounting for asset retirement
obligations:
In March 2003,
the CICA issued Section 3110, "Accounting for Asset
Retirement
Obligations". Section 3110 requires companies to record
the fair value
of an asset retirement obligation as a liability in
the year in
which they incur a legal obligation associated with the
retirement
of tangible long-lived assets that result from the
acquisition,
construction, development and/or normal use of the
assets. Companies
are also required to record a corresponding asset
that is depreciated
over the life of the asset. Subsequent to the
initial measurement
of the asset retirement obligation, the
obligation
will be adjusted at the end of each period to reflect the
passage of
time and changes in the estimated future cash flows
underlying
the obligation. The implementation of Section 3110,
effective
January 1, 2004, did not have an impact on our consolidated
financial
statements for the three months and nine months ended
September
30, 2004.
(f) Revenue recognition:
In December
2003, the Emerging Issues Committee ("EIC") of the CICA
issued Abstract
EIC-141, "Revenue Recognition", which provides
revenue recognition
guidance. The implementation of EIC-141,
effective
January 1, 2004, did not have an impact on our consolidated
financial
statements for the three months and nine months ended
September
30, 2004.
(g) Revenue arrangements with multiple
deliverables:
In December
2003, the EIC issued Abstract EIC-142, "Revenue
Arrangements
with Multiple Deliverables", which addresses accounting
for arrangements,
entered into after December 31, 2003, where an
enterprise
will perform multiple revenue generating activities. The
implementation
of EIC-142 did not have an impact on our consolidated
financial
statements for the three months and nine months ended
September
30, 2004.
2. Bank credit facility:
In June 2004, we finalized a committed
bank credit facility of
US$100 million ($126,400), which expires
in June 2005 and replaces bank
credit facilities of US$212.5 million
($268,600). As at
September 30, 2004, no amounts were
borrowed under this credit facility.
However, approximately US$14 million
($17,400) of letters of credit were
issued under this credit facility.
No amounts have been drawn under these
letters of credit. In September 2004,
the bank credit facility was
amended by extending the expiry date
to September 2007 and by removing
the requirement to maintain a minimum
cash balance of at least $75,000 in
our account with the agent of the
facility.
In November 2004, we finalized a new
committed bank credit facility of
US$125 million ($158,000), which expires
in September 2007, and replaces
the credit facility of US$100 million
($126,400).
3. Long-term obligations:
As at As at
September 30, December 31,
(In thousands of Canadian dollars)
2004 2003
-------------------------------------------------------------------------
(Unaudited)
Convertible notes, issued in 2004(a)
$ 270,023 $ --
Convertible notes, issued in 1999(b)
-- 88,029
Accrued benefit liability and other
obligations 34,725
32,079
--------------------------
304,748 120,108
Less amounts due within one year
(2,425) (2,587)
--------------------------
$ 302,323 $ 117,521
--------------------------
--------------------------
(a) In June 2004, we issued US$250
million ($341,100) (principal amount)
convertible
senior notes. The net proceeds of the issuance, after
deducting
offering expenses and underwriters' commission, were
approximately
US$241.3 million ($329,273). These notes bear interest
at the rate
of 1.875% per annum (payable semi-annually in arrears on
January 30
and July 30 to holders of record on January 15 and
July 15, beginning
January 30, 2005), and will mature on
July 30, 2024,
unless earlier redeemed or repurchased. The notes are
convertible
into Limited Voting Shares of Four Seasons Hotels Inc. at
an initial
conversion rate of 13.9581 shares per each one thousand
US dollar
principal amount (equal to a conversion price of
approximately
US$71.64 ($90.55) per Limited Voting Share), subject to
adjustments
in certain events, only when (i) the closing price of the
Limited Voting
Shares measured over a specified number of trading
days is more
than 130% of the conversion price, (ii) the market price
of a note
measured over a specified number of trading days is less
than 95% of
the closing sale price of the Limited Voting Shares into
which they
may be converted, (iii) we call the notes for redemption,
or (iv) certain
corporate transactions or a "fundamental change" has
occurred.
In connection with a "fundamental change" on or prior to
July 30, 2009,
on conversion holders of notes will be entitled to
receive additional
Limited Voting Shares having a value equal to the
aggregate
of the make whole premium they would have received if the
notes were
purchased plus an amount equal to any accrued but unpaid
interest.
We may choose to settle conversion (including any make
whole premium)
in Limited Voting Shares, cash or a combination of
Limited Voting
Shares and cash (at our option).
On or after
August 4, 2009, we may (at our option) redeem all or a
portion of
the notes, in whole or in part, for cash at 100% of their
principal
amount, plus any accrued and unpaid interest. On each of
July 30, 2009,
2014 and 2019, holders may require us to purchase all
or a portion
of their notes at 100% of their principal amount, plus
any accrued
and unpaid interest. We will pay cash for any notes so
purchased
on July 30, 2009. Repurchases made on July 30, 2014 and
July 30, 2019,
may be made (at our option) in cash, Limited Voting
Shares or
a combination of cash and Limited Voting Shares. Upon the
occurrence
of certain designated events, we will be required to make
an offer to
purchase the notes at 100% of their principal amount plus
any accrued
and unpaid interest, and, in the case of a "fundamental
change" that
is also a "change of control" occurring on or before
July 30, 2009,
we also will pay a make whole premium. We may choose
to pay the
purchase price (including any make whole premium) for
notes in respect
of which our offer is accepted in (at our option)
cash, Limited
Voting Shares, securities of the surviving entity (if
Four Seasons
Hotels Inc. is not the surviving corporation), or a
combination
of cash and shares or securities.
In accordance
with Canadian GAAP, the notes are bifurcated on our
financial
statements into a debt component (representing the
principal
value of a bond of US$211.8 million ($288,918), which was
estimated
based on the present value of a US$250 million ($341,100)
bond maturing
in 2009, yielding 5.33% per annum, compounded
semi-annually,
and paying a coupon of 1.875% per annum) and an equity
component
(representing the value of the conversion feature of the
notes). Accordingly,
net proceeds have been allocated $288,918 to
long-term
obligations and $50,373 to shareholders' equity. The
offering expenses
and underwriters' commission of approximately
$10,018 relating
to the debt component, are recorded in other assets.
The debt component
of the notes will increase for accounting purposes
at the compounded
interest rate of 5.33%, less the coupon paid of
1.875% per
annum.
In connection
with the offering, we had entered into an interest rate
swap agreement
to July 30, 2009 with an initial notional amount of
US$211.8 million
($288,918), pursuant to which we had agreed to
receive interest
at a fixed rate of 5.33% per annum and pay interest
at six-month
LIBOR in arrears plus 0.4904%. We had designated the
interest rate
swap as a fair value hedge of the notes. As a result,
we were accounting
for the payments under the interest rate swap on
an accrual
basis, which resulted in an effective interest rate (for
accounting
purposes) on the hedged notes of six-month LIBOR in
arrears plus
0.4904%. In October 2004, we terminated the interest
rate swap
agreement (note 10).
(b) During 1999, we issued US$655.5
million principal amount at maturity
(September
23, 2029) of convertible notes for gross proceeds of
US$172.5 million.
The net proceeds of the issuance, after deducting
offering expenses
and underwriters' commission, were US$166 million.
We were entitled
to redeem the convertible notes commencing in
September
2004 for cash equal to the issue price plus accrued
interest calculated
at 4 1/2% per annum. In September 2004, we
redeemed for
cash all these convertible notes for US$328.73 per
US$1 thousand
principal amount at maturity (the redemption price
being the
issue price plus interest that was accrued but unpaid) for
an aggregate
payment of US$215.5 million ($275,701).
In accordance
with Canadian GAAP, we allocated the consideration paid
on the redemption
to the liability and equity components of the
convertible
notes based on their relative fair values at the date of
the redemption.
We recognized a pre-tax accounting loss of $14,611
related to
the debt component of the convertible notes (representing
the difference
between the carrying value of the debt component and
the relative
fair value of the debt component and calculated at the
present value
of the amount due on maturity, using an assumed 25-year
interest rate
of 8.474% per annum, compounding semi-annually). This
loss was recorded
in other expense, net in the consolidated
statements
of operations. In addition, at the interest rate noted
above, we
recognized a pre-tax accounting gain on the extinguishment
of the equity
component of the convertible notes of $8,160. The gain
was recorded
in contributed surplus. The tax impact of the redemption
of both the
liability and equity components of the convertible notes
was a decrease
to future income tax assets and a decrease to
contributed
surplus of $4,141. The net after-tax impact on
shareholders'
equity from the redemption of both the debt and equity
components
of the convertible notes was a reduction of $10,592.
In accordance
with Canadian GAAP, the cash paid on redemption of the
convertible
notes relating to the interest accreted from
September
1999 to September 2004, for accounting purposes, of
US$25.8 million
($33,057) on the convertible notes has been recorded
in the consolidated
statements of cash provided by operations. The
remaining
cash paid on redemption of US$189.7 million ($242,644) has
been recorded
under "Financing" in the consolidated statements of
cash flows.
4. Shareholders' equity:
As at September 30, 2004, we have outstanding
Variable Multiple Voting
Shares ("VMVS") of 3,725,698, outstanding
Limited Voting Shares ("LVS")
of 32,114,374 and outstanding stock
options of 5,331,957 (weighted
average exercise price of $56.71).
A reconciliation of the net earnings
(loss) and weighted average number
of VMVS and LVS used to calculate
basic earnings (loss) per share and
diluted earnings (loss) per share
is as follows:
Three months ended
(Unaudited)
September 30,
(In thousands of Canadian dollars)
2004
2003
-------------------------------------------------------------------------
Net
Net loss Shares earnings
Shares
-------------------------------------------------------------------------
Basic earnings (loss)
per share:
Net earnings (loss)
$(11,143) 35,709,555 $ 4,382 35,039,104
Effect of assumed dilutive
conversions:
Stock option plan
-- --
-- 1,565,639
-------------------------------------------------------------------------
Diluted earnings (loss)
per share:
Net earnings (loss) and
assumed dilutive
conversions
$(11,143) 35,709,555 $ 4,382 36,604,743
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine months ended
(Unaudited)
September 30,
(In thousands of Canadian dollars)
2004
2003
-------------------------------------------------------------------------
Net
earnings Shares Net loss
Shares
-------------------------------------------------------------------------
Basic earnings (loss)
per share:
Net earnings (loss)
$ 17,655 35,494,738 $ (6,320) 34,945,812
Effect of assumed dilutive
conversions:
Stock option plan
-- 1,510,044 --
--
-------------------------------------------------------------------------
Diluted earnings (loss)
per share:
Net earnings (loss) and
assumed dilutive
conversions
$ 17,665 37,004,782 $ (6,320) 34,945,812
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The diluted earnings (loss) per share
calculation excluded the effect of
the assumed conversions of 5,331,957
and 1,015,916 stock options to LVS,
under our stock option plan, during
the three months and nine months
ended September 30, 2004, respectively
(2003 - 1,383,041 and
5,953,345 stock options, respectively),
as the inclusion of these
conversions resulted in an anti-dilutive
effect. As we incurred a net
loss for the three months ended September
30, 2004 and for the nine
months ended September 30, 2003, all
stock options granted were excluded
from the calculation of diluted loss
per share. In addition, the dilution
relating to the conversion of our
convertible notes (issued in 1999 and
subsequently redeemed in 2004) (note
3(b)) to 3,463,155 LVS, by
application of the "if-converted method",
has been excluded from the
calculation for 2004 and 2003 as the
inclusion of this conversion
resulted in an anti-dilutive effect
for the three months and nine months
ended September 30, 2004 and 2003.
There was no dilution relating to the
convertible notes issued in 2004 (note
3(a)) as the contingent conversion
price was not reached during the periods.
5. Consolidated revenues:
Consolidated revenues for Four Seasons
Hotels Inc. is comprised of the
following:
(Unaudited)
Three months ended Nine months ended
(In thousands of
September 30, September
30,
Canadian dollars)
2004 2003
2004 2003
-------------------------------------------------------------------------
Revenues from Management
Operations
$ 54,779 $ 46,687 $164,457 $142,365
Revenues from Ownership and
Corporate Operations
29,267 27,001 94,247
87,194
Distribution from hotel
investments
-- 153
398 153
Fees from Ownership and
Corporate Operations to
Management Operations
(1,331) (1,264) (4,156)
(4,017)
-------------------------------------------
$ 82,715 $ 72,577 $254,946 $225,695
-------------------------------------------
-------------------------------------------
6. Other expense, net:
Included in other expense, net for
the three months and nine months ended
September 30, 2004 is the loss on
the redemption of the debt component of
our convertible notes (issued in 1999)
of $14,611 (note 3(b)).
In addition, other expense, net for
the three months and nine months
ended September 30, 2004 includes
a net foreign exchange loss of
$4,470 and $2,809, respectively (2003
- net foreign exchange gain of
$323 and a net foreign exchange loss
of $17,179, respectively) related to
the foreign currency translation gains
and losses on unhedged net
monetary asset and liability positions,
primarily in US dollars, euros,
pounds sterling and Australian dollars,
and foreign exchange gains and
losses incurred by our foreign self-sustaining
subsidiaries.
During the three months ended September
30, 2004, we sold the majority of
our investment in Four Seasons Hotel
Amman and all of our investment in
Four Seasons Resort Whistler for proceeds
of approximately $47,000 and
settled our loan receivable from Sedona,
resulting in a total net loss of
$4,434. The majority of the loss was
related to the settlement of the
loan receivable from Sedona and for
legal costs incurred to finalize the
dispositions.
Also included in other expense, net
for the three months and nine months
ended September 30, 2004 are legal
and enforcement costs of nil and $273,
respectively (2003 - $1,180 and $8,680
respectively), in connection with
the disputes with the owners of the
Four Seasons hotels in Caracas and
Seattle.
7. Pension benefit expense:
The pension benefit expense, after
allocation to managed properties, for
the three months and nine months ended
September 30, 2004 was $747 and
$2,264, respectively (2003 - $762
and $2,128, respectively).
8. Lease termination:
As at December 31, 2003, our total
lease commitments included future
minimum lease payments of approximately
euro 87 million ($142,005)
relating to Four Seasons Hotel Berlin.
On September 26, 2004, the
landlord terminated our lease of Four
Seasons Hotel Berlin, and we ceased
managing the hotel. As a result of
the lease termination, we no longer
have any lease commitments with respect
to the hotel.
9. Seasonality:
Our hotels and resorts are affected
by normally recurring seasonal
patterns and, for most of the properties,
demand is usually lower in the
period from December through March
compared to the remainder of the year.
Typically, the first quarter is the
weakest quarter and the fourth
quarter is the strongest quarter for
the majority of the properties.
Our ownership operations are particularly
affected by seasonal
fluctuations, with lower revenue,
higher operating losses and lower cash
flow in the first quarter, as compared
to other quarters. As a result,
ownership operations usually incur
an operating loss in the first quarter
of each year.
Management operations are also impacted
by seasonal patterns, as revenues
are affected by the seasonality of
hotel and resort revenues and
operating results. Urban hotels generally
experience lower revenues and
operating results in the first quarter,
as compared to other quarters.
However, this negative impact on management
revenues is offset, to some
degree, by increased travel to our
resorts in the period.
10. Subsequent event:
In October 2004, we terminated the
interest rate swap agreement and
received proceeds of US$9 million
($11,267). The book value of the
interest rate swap as at September
30, 2004 was approximately $2,100. The
gain of approximately $9,200 will
be deferred for accounting purposes and
will be amortized over the next 4.75
years, which would have been the
remaining swap term.
FOUR SEASONS HOTELS INC.
SUMMARY OF HOTEL OPERATING DATA -
CORE HOTELS(1)
Three months ended
September 30,
(Unaudited)
2004 2003 Variance
-------------------------------------------------------------------------
Worldwide
No. of Properties
48 48
--
No. of Rooms
12,783 12,783
--
Occupancy(2)
70.1% 64.3% 5.8pts.
ADR(3)
- in US dollars
$318 $291
9.0%
RevPAR(4) - in US
dollars
$208 $181
14.6%
Gross operating margin(5)
27.5% 25.2% 2.3pts.
United States
No. of Properties
19 19
--
No. of Rooms
6,114 6,114
--
Occupancy(2)
70.9% 69.3% 1.6pts.
ADR(3)
- in US dollars
$335 $316
6.0%
RevPAR(4) - in US
dollars
$240 $221
8.2%
Gross operating margin(5)
23.0% 22.7% 0.3pts.
Other Americas/Caribbean
No. of Properties
7 7
--
No. of Rooms
1,534 1,534
--
Occupancy(2)
67.2% 60.0% 7.2pts.
ADR(3)
- in US dollars
$240 $231
3.7%
RevPAR(4) - in US
dollars
$155 $134
15.9%
Gross operating margin(5)
22.9% 19.7% 3.2pts.
Europe
No. of Properties
7 7
--
No. of Rooms
1,331 1,331
--
Occupancy(2)
63.1% 65.1% (0.2)pts.
ADR(3)
- in US dollars
$520 $465
11.7%
RevPAR(4) - in US
dollars
$352 $315
11.5%
Gross operating margin(5)
35.6% 35.0% 0.6pts.
Middle East
No. of Properties
3 3
--
No. of Rooms
598 598
--
Occupancy(2)
75.1% 54.7% 20.4pts.
ADR(3)
- in US dollars
$169 $155
9.3%
RevPAR(4) - in US
dollars
$127 $85
49.4%
Gross operating margin(5)
48.3% 37.8% 10.5pts.
Asia/Pacific
No. of Properties
12 12
--
No. of Rooms
3,206 3,206
--
Occupancy(2)
71.7% 58.3% 13.4pts.
ADR(3)
- in US dollars
$254 $219
15.8%
RevPAR(4) - in US
dollars
$129 $92
40.8%
Gross operating margin(5)
33.1% 26.0% 7.1pts.
---------------------------------------------------
(1) The term "Core Hotels" means hotels
and resorts under management for
the full year
of both 2004 and 2003. However, if a "Core Hotel" has
undergone
or is undergoing an extensive renovation program in one of
those years
that materially affects the operation of the property in
that year,
it ceases to be included as a "Core Hotel" in either year.
Changes from
the 2003/2002 Core Hotels are the additions of Four
Seasons Hotel
Amman, Four Seasons Resort Sharm el Sheikh, Four
Seasons Hotel
Shanghai and Four Seasons Hotel Tokyo at Marunouchi and
the deletion
of Four Seasons Hotel Berlin, Four Seasons Resort Santa
Barbara, Four
Seasons Resort Scottsdale at Troon North and Four
Seasons Hotel
Washington, DC, the last three of which are undergoing
extensive
renovation programs in 2004.
(2) Occupancy percentage is defined
as the total number of rooms occupied
divided by
the total number of rooms available.
(3) ADR is defined as average daily
room rate calculated as straight
average for
each region.
(4) RevPAR is defined as average room
revenue per available room. RevPAR
is a commonly
used indicator of market performance for hotels and
resorts and
represents the combination of the average daily room rate
per room occupied
and the average occupancy rate achieved during the
period. RevPAR
does not include food and beverage or other ancillary
revenues generated
by a hotel or resort. We report RevPAR as it is
the most commonly
used measure in the lodging industry to measure the
period-over-period
performance of comparable properties.
(5) Gross operating margin represents
gross operating profit as a percent
of gross operating
revenue.
FOUR SEASONS HOTELS INC.
SUMMARY OF HOTEL OPERATING DATA -
CORE HOTELS(1)
Nine months ended
September 30,
(Unaudited)
2004 2003 Variance
-------------------------------------------------------------------------
Worldwide
No. of Properties
48 48
--
No. of Rooms
12,783 12,783
--
Occupancy(2)
68.4% 60.5% 7.9pts.
ADR(3)
- in US dollars
$328 $303
8.2%
RevPAR(4) - in US
dollars
$209 $178
17.4%
Gross operating margin(5)
29.2% 26.0% 3.2pts.
United States
No. of Properties
19 19
--
No. of Rooms
6,114 6,114
--
Occupancy(2)
70.5% 68.4% 2.1pts.
ADR(3)
- in US dollars
$342 $326
4.9%
RevPAR(4) - in US
dollars
$241 $223
8.1%
Gross operating margin(5)
25.2% 25.1% 0.1pts.
Other Americas/Caribbean
No. of Properties
7 7
--
No. of Rooms
1,534 1,534
--
Occupancy(2)
64.6% 55.0% 9.6pts.
ADR(3)
- in US dollars
$294 $277
6.3%
RevPAR(4) - in US
dollars
$180 $147
22.2%
Gross operating margin(5)
30.7% 25.5% 5.2pts.
Europe
No. of Properties
7 7
--
No. of Rooms
1,331 1,331
--
Occupancy(2)
64.0% 59.0% 5.0pts.
ADR(3)
- in US dollars
$518 $454
14.0%
RevPAR(4) - in US
dollars
$345 $280
23.4%
Gross operating margin(5)
35.2% 31.9% 3.3pts.
Middle East
No. of Properties
3 3
--
No. of Rooms
598 598
--
Occupancy(2)
71.4% 43.4% 28.0pts.
ADR(3)
- in US dollars
$172 $157
9.0%
RevPAR(4) - in US
dollars
$124 $71
73.0%
Gross operating margin(5)
48.2% 27.9% 20.3pts.
Asia/Pacific
No. of Properties
12 12
--
No. of Rooms
3,206 3,206
--
Occupancy(2)
67.4% 52.2% 15.2pts.
ADR(3)
- in US dollars
$254 $230
10.0%
RevPAR(4) - in US
dollars
$122 $86
42.9%
Gross operating margin(5)
32.5% 23.5% 9.0pts.
---------------------------------------------------
(1) The term "Core Hotels" means hotels
and resorts under management for
the full year
of both 2004 and 2003. However, if a "Core Hotel" has
undergone
or is undergoing an extensive renovation program in one of
those years
that materially affects the operation of the property in
that year,
it ceases to be included as a "Core Hotel" in either year.
Changes from
the 2003/2002 Core Hotels are the additions of Four
Seasons Hotel
Amman, Four Seasons Resort Sharm el Sheikh, Four
Seasons Hotel
Shanghai and Four Seasons Hotel Tokyo at Marunouchi and
the deletion
of Four Seasons Hotel Berlin, Four Seasons Resort Santa
Barbara, Four
Seasons Resort Scottsdale at Troon North and Four
Seasons Hotel
Washington, DC, the last three of which are undergoing
extensive
renovation programs in 2004.
(2) Occupancy percentage is defined
as the total number of rooms occupied
divided by
the total number of rooms available.
(3) ADR is defined as average daily
room rate calculated as straight
average for
each region.
(4) RevPAR is defined as average room
revenue per available room. RevPAR
is a commonly
used indicator of market performance for hotels and
resorts and
represents the combination of the average daily room rate
per room occupied
and the average occupancy rate achieved during the
period. RevPAR
does not include food and beverage or other ancillary
revenues generated
by a hotel or resort. We report RevPAR as it is
the most commonly
used measure in the lodging industry to measure the
period-over-period
performance of comparable properties.
(5) Gross operating margin represents
gross operating profit as a percent
of gross operating
revenue.
FOUR SEASONS HOTELS INC.
SUMMARY OF HOTEL OPERATING DATA - ALL
MANAGED HOTELS
As at
September 30,
(Unaudited)
2004 2003 Variance
-------------------------------------------------------------------------
Worldwide
No. of Properties
63 57
6
No. of Rooms
16,365 15,198 1,167
United States
No. of Properties
24 22
2
No. of Rooms
7,145 6,800
345
Other Americas/Caribbean
No. of Properties
10 8
2
No. of Rooms
2,112 1,746
366
Europe
No. of Properties
10 9
1
No. of Rooms
1,786 1,696
90
Middle East
No. of Properties
5 4
1
No. of Rooms
1,213 847
366
Asia/Pacific
No. of Properties
14 14
--
No. of Rooms
4,109 4,109
--
FOUR SEASONS HOTELS INC.
REVENUES UNDER MANAGEMENT - ALL MANAGED
HOTELS
(Unaudited)
Three months ended Nine months ended
(In thousands of Canadian
September 30, September
30,
dollars)
2004 2003
2004 2003
-------------------------------------------------------------------------
Revenues under management
$ 698,298 $ 617,404 $2,173,948 $1,908,544
---------------------------------------------
---------------------------------------------
------------------------------------------------
(1) Revenues under management consist
of rooms, food and beverage,
telephone
and other revenues of all the hotels and resorts which we
manage. Approximately
68% of the fee revenues (excluding reimbursed
costs) we
earned were calculated as a percentage of the total
revenues under
management of all hotels and resorts.
FOUR SEASONS HOTELS INC.
SCHEDULED OPENING OF PROPERTIES UNDER
CONSTRUCTION OR
IN ADVANCED STAGES OF DEVELOPMENT
Approximate
Hotel/Resort/Residence Club and Location(1)(2)
Number of Rooms
Scheduled 2004/2005 Openings
----------------------------
Four Seasons Hotel Damascus, Syria
300
Four Seasons Hotel Doha, Qatar
235
Four Seasons Hotel Hampshire, England
135
Four Seasons Hotel Hong Kong, Hong
Kong(x)
390
Four Seasons Resort Langkawi, Malaysia
90
Four Seasons Hotel Palo Alto, CA,
USA
200
Four Seasons Private Residences Whistler,
B.C., Canada
35
Beyond 2005
-----------
Four Seasons Hotel Alexandria, Egypt(x)
120
Four Seasons Hotel Baltimore, MD,
USA(x)
200
Four Seasons Hotel Beijing, China
325
Four Seasons Hotel Beirut, Lebanon
230
Four Seasons Resort Bora Bora, French
Polynesia
100
Four Seasons Hotel Dubai, UAE(x)
250
Four Seasons Hotel Florence, Italy
115
Four Seasons Hotel Geneva, Switzerland
100
Four Seasons Hotel Istanbul at the
Bosphorus, Turkey
170
Four Seasons Hotel Kuwait City, Kuwait
225
Four Seasons Resort Lanai at Koele,
HI, USA
100
Four Seasons Resort Lanai at Manele
Bay, HI, USA
250
Four Seasons Hotel Moscow, Russia
210
Four Seasons Hotel Moscow (Kamenny
Island), Russia
80
Four Seasons Hotel Mumbai, India
200
Four Seasons Resort Puerto Rico, Puerto
Rico(x)
250
Four Seasons Residence Club Punta
Mita, Mexico
35
Four Seasons Hotel Seattle, WA, USA(x)
150
(x) Expected to include a residential
component.
-------------------------------------------------
(1) Information concerning hotels,
resorts and Residence Clubs under
construction
or under development is based upon agreements and
letters of
intent and may be subject to change prior to the
completion
of the project. The dates of scheduled openings have been
estimated
by management based upon information provided by the
various developers.
There can be no assurance that the date of
scheduled
opening will be achieved or that these projects will be
completed.
In particular, in the case where a property is scheduled
to open near
the end of a year, there is a greater possibility that
the year of
opening could be changed. The process and risks
associated
with the management of new properties are dealt with in
greater detail
in our 2003 Annual Report.
(2) We have made an investment in
Orlando, in which we expect to include
a Four Seasons
Residence Club and/or a Four Seasons branded
residential
component. The financing for this project has not yet
been completed
and therefore a scheduled opening date cannot be
established
at this time. |
This news release contains "forward-looking statements" within the meaning
of federal securities laws, including RevPAR, profit margin and earnings
trends; statements concerning the number of lodging properties expected
to be added in this and future years; expected investment spending; and
similar statements concerning anticipated future events results, circumstances,
performance or expectations that are not historical facts.
Four Seasons Hotels and Resorts is the world's most honoured hotel company.
Dedicated to continuous innovation and the highest standards of hospitality,
Four Seasons invented luxury for the modern traveller. |
