| TORONTO, Aug. 10, 2004 - Four Seasons Hotels Inc. (TSX Symbol "FSH";
NYSE Symbol "FS") today reported its results for the second quarter ended
June 30, 2004.
2004 Second Quarter Overview
Financial Results:
As described in greater detail in the accompanying Management's Discussion
and Analysis for the three months ended June 30, 2004:
-
Net earnings were $17.3 million ($0.49 basic earnings per share and $0.46
diluted earnings per share), as compared to a net loss of $1.4 million
($0.04 basic and diluted loss per share) for the second quarter of 2003.
-
Adjusted(1) net earnings increased 118% to $19.2 million ($0.54 basic adjusted
earnings per share and $0.51 diluted adjusted earnings per share), as compared
to adjusted net earnings of $8.8 million ($0.25 basic and diluted adjusted
earnings per share) for the second quarter of 2003.
-
Earnings before other operating items increased 89% to $28.3 million, as
compared to $15.0 million for the second quarter of 2003.
-
RevPAR(2) of worldwide Core Hotels(3) increased 22.7%, on a US dollar basis.
-
Gross operating margins(4) at worldwide Core Hotels increased 3.8 percentage
points to 31.2%, as compared to the second quarter of 2003.
-
Management fee revenues (excluding reimbursed costs(5)) increased 41.6%
to $41.5 million, as compared to the second quarter of 2003.
-
Incentive fees increased 72.7%, as compared to the second quarter of 2003.
-
Management operations profit margin(6) (excluding reimbursed costs) increased
2.7 percentage points to 72.4%, as compared to the second quarter of 2003.
-
Ownership results improved $3.7 million, as compared to the second quarter
of 2003.
Other:
-
In July 2004, we sold our 8% interest in Four Seasons Hotel Amman and our
100% interest in Four Seasons Resort Whistler for combined proceeds of
approximately $47 million.
-
We have determined that, in the absence of unusual circumstances, we will
redeem all of the convertible notes due September 2029 that are outstanding
on September 23, 2004 for cash.
-
Four Seasons Hotel Gresham Palace Budapest and Four Seasons Resort Whistler
opened during the quarter and, as expected, we have been given notice of
termination by the landlord under the lease at Four Seasons Hotel Berlin.
Upon the transfer of the lease to a new lessee, the number of hotels under
leasehold by Four Seasons will be reduced to two.
"Our second quarter financial results reflect the continued recovery in
business and leisure travel demand. This recovery, together with the contribution
of ten new Four Seasons managed properties over the past 24 months, translated
into a 47% increase in our management earnings in the second quarter, as
compared to the same period in the previous year," said Isadore Sharp,
Chairman and Chief Executive Officer. "We expect the contribution in management
earnings from new Four Seasons managed properties to continue to increase.
This year, we have opened four new Four Seasons properties, bringing the
total number of Four Seasons properties under management to 63, and we
expect to open another eleven projects over the
next 18 months."
"We are pleased that we are at the point in the recovery cycle where
we are starting to see improving profitability at the hotels and resorts,
resulting in an increase in our incentive fees of over 72% in the quarter,
as compared to the second quarter last year," commented Douglas L. Ludwig,
Chief Financial Officer and Executive Vice President. "We are continuing
to focus our efforts on providing our exceptional service and on pricing
improvements, which should lead to further profit margin expansion at the
properties under our management and improved returns to our property owners
and to our incentive fee participation."
SECOND QUARTER OF 2004
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") for the three
months and six months ended June 30, 2004 is provided as of August 9, 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, 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 7.
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 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 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
Six months ended
June 30, 2004
June 30, 2004
increase over
increase over
(decrease from)
(decrease from)
three months ended
six months ended
June 30, 2003
June 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
22.7% 19.5% 35.8%
18.4% 17.2% 33.3%
US Core Hotels
8.1% 6.6% 4.9%
8.3% 7.6% 8.6%
Other Americas/
Caribbean Core
Hotels
30.9% 28.7% 61.4%
25.0% 24.4% 49.3%
Europe Core Hotels
30.9% 27.9% 43.4%
29.3% 27.8% 47.8%
Middle East Core
Hotels
111.4% 106.6% 376.7% 91.0%
102.8% 372.8%
Asia/Pacific Core
Hotels
96.7% 64.8% 307.8% 44.4%
35.9% 97.1% |
Underlying these operating results:
-
Business and leisure travel demand improved in the majority of the markets
in which we operate. Group meetings demand continued to lag behind business
and leisure travel demand in the quarter, and properties that typically
derive the larger portion of their business from group travel (including
Aviara and the Ritz-Carlton Chicago) experienced RevPAR declines. Excluding
the properties in Aviara and Chicago, RevPAR in the US would have increased
11.4% in the second quarter of 2004, as compared to the same period in
2003 (11.9% for the six months ended June 30, 2004, as compared to the
same period in 2003). For the second quarter of 2004, the 11.4% RevPAR
improvement is the result of a 3.5 percentage point increase in occupancy
and a 6.2% increase in achieved room rates, as compared to the same period
in 2003.
-
Properties under management in Boston, Los Angeles, San Francisco, New
York and Palm Beach 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.
-
In the Other Americas/Caribbean region, the properties under management
in Toronto and Vancouver experienced a significant RevPAR increase, reflecting
a recovery from the negative impact of Severe Acute Respiratory Syndrome
("SARS") in those markets in 2003. In the second quarter of 2004, occupancy
in the region increased to 66.9% (from 51.1% in 2003) and achieved room
rates increased 4.8%, as compared to the second quarter of 2003.
-
With the exception of Berlin, all of the properties in the European region
had solid RevPAR improvements as a result of improved demand in the quarter,
as compared to the first half of 2003 when the war in Iraq had a significant
negative impact on travel. Occupancy in the European region (including
Berlin) increased to 66.3% for the quarter (from 58.1% in the same period
in 2003) and achieved room rates increased 15.4% in the three months ended
June 30, 2004, as compared to the three months ended June 30, 2003.
-
All of the properties in the Middle East region had significant RevPAR
improvements as a result of improved demand and higher rates during the
quarter, as compared to the first half of 2003 when the war in Iraq had
a significant negative impact on travel. For the second quarter of 2004,
occupancy in the region increased to 69.5% from 36.4%, and achieved room
rates improved 13.9%, as compared to the second quarter of 2003.
-
The significant increase in RevPAR at the properties under management in
Asia/Pacific in 2004 reflects 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. Occupancy increased to 66.7% for the
quarter (from 35.5% in the same period in 2003) and achieved room rates
increased 10.2% in the second quarter of 2004, as compared to the same
period in 2003.
-
Growth in revenues other than room revenues increased at a somewhat lower
rate than RevPAR, particularly in the Asia/Pacific region. This pattern
is consistent with other previous economic recoveries when ancillary revenues
typically had a six to nine month lag to RevPAR improvements. Recovery
in travel demand in the Asia/Pacific region began in late 2003 and it was
the last region to experience improvements.
-
The significant increase in gross operating margins was attributable to
revenue improvements and cost management efforts at all our properties.
Nonetheless, there was continued pressure on profit margins, particularly
in the US, due to higher costs related primarily to labour (including health
care, benefits and workers' compensation), energy and insurance. The most
significant improvements were realized in the Middle East and Asia/Pacific
regions and in particular, the properties in Amman, Cairo, Sharm el Sheikh,
Bali, Chiang Mai, Maldives, Shanghai and Singapore.
Financial Review and Analysis
Three months ended June 30, 2004 compared to three months ended June
30, 2003
Management Operations
Management fee revenues (excluding reimbursed costs) increased 41.6%,
or $12.2 million, to $41.5 million in the three months ended June 30, 2004,
as compared to $29.3 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 fees increased 72.7% in the three months ended June 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 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.
General and administrative expenses (excluding reimbursed costs) increased
to $11.5 million in the second quarter of 2004 from $8.9 million for the
same period in 2003. During the quarter, costs related to new development
and growth opportunities, including travel costs, increased approximately
$1 million. It is expected that a significant portion of these costs, which
relate to new management opportunities, will be allocated to the specific
projects. In addition, during the quarter, 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 second quarter
of 2004 and for which there was not a similar accrual in 2003, accounted
for approximately $700,000 of the quarterly increase.
As a result of the items described above, our management earnings before
other operating items for the second quarter of 2004 increased 47.1% to
$30.1 million, as compared to $20.5 million in the second quarter of 2003.
Our management operations profit margin (excluding reimbursed costs) increased
to 72.4% in the second quarter of 2004, as compared to 69.7% in the second
quarter of 2003.
Ownership and Corporate Operations(8)
Operating results from ownership and corporate operations before other
operating items improved $3.7 million (68%) to a loss of $1.7 million in
the second quarter of 2004, as compared to a loss of $5.4 million in the
second quarter of 2003.
RevPAR at The Pierre increased 20.1% primarily as a result of an 11.7
percentage point improvement in occupancy in the second quarter 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
$2 million in the second quarter of 2004, as compared to the same period
last year.
RevPAR at Four Seasons Hotel Vancouver increased 26% during the second
quarter of 2004, as compared to the same period in 2003. As a result, the
operating results at that hotel improved $761,000 in the second quarter
of 2004, as compared to the same period last year.
Since reaching our maximum funding obligation of the stipulated minimum
lease payments at Four Seasons Hotel Berlin in August of 2003, the lease
payments in 2004 have been limited to the cash flow generated by the hotel.
This resulted in a decline of $1.2 million in the operating loss from Four
Seasons Hotel Berlin in the second quarter of 2004, as compared to the
same period last year. We have been given notice of termination of the
lease of the hotel by the landlord. Based on the terms of the new lease
entered into by the landlord, as disclosed to us by the landlord, we will
not exercise our right of first offer in respect of the lease and, as a
result, we will likely cease managing the hotel before the end of the year.
The termination of the lease will result in the write-off of the net book
value of our investment in the hotel of approximately $1 million.
We continue to be in discussions with the landlords of The Pierre and
Four Seasons Hotel Vancouver to determine what, if any, alternatives may
be available to modify or restructure our investments in these hotels.
There can be no assurance that acceptable alternative arrangements will
be agreed upon with respect to any or all of these hotels or what the terms
of any such alternative arrangements would be.
Stock Option Expense
Stock option expense for the second quarter of 2004 was $494,000, as
compared to $144,000 for the same period in 2003. Stock option expense
is allocated between Management Operations ($206,000) and Ownership and
Corporate Operations ($288,000).
Other Expense
Other expense for the second quarter of 2004 was $3 million, as compared
to $12.1 million for the same period in 2003.
Other expense for the second quarter of 2004 was primarily a non-cash,
unrealized $3 million foreign exchange loss, compared to a $9.2 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 generally accepted accounting principles (GAAP).
Also included in other expense during the second quarter of 2003 were
legal and other enforcement costs of $2.9 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
During the second quarter of 2004, we had net interest income of $666,000,
as compared to $667,000 in the second quarter of 2003. Net interest income
is a combination of $3.9 million in interest income and $3.2 million in
interest expense in the second quarter of 2004, as compared to $3.3 million
and $2.6 million, respectively, for the same period in 2003. The increase
in interest income is primarily attributable to higher interest income
from loans to managed properties. The increase in interest expense is primarily
attributable to higher interest costs relating to the convertible notes
and convertible senior notes.
Income Tax Expense
Our tax expense during the second quarter of 2004 was $5 million (effective
tax rate of 22.5%), as compared to a tax recovery of $0.9 million in the
second quarter of 2003. The variation from our expected 24% tax rate is
the result of certain items not being tax effected, including 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.
Net Earnings and Earnings per Share
Net earnings for the quarter ended June 30, 2004 were $17.3 million
($0.49 basic earnings per share and $0.46 diluted earnings per share),
as compared to a net loss of $1.4 million ($0.04 basic and diluted loss
per share) for the quarter ended June 30, 2003. For the three months ended
June 30, 2004, diluted earnings per share was calculated using the number
of shares equal to the weighted average number of Variable Multiple Voting
Shares (3,832,172 shares; 2003 - 3,982,172 shares) and Limited Voting Shares
(31,652,702 shares; 2003 - 30,931,770 shares) outstanding during the three
months ended June 30, 2004, the number of Limited Voting Shares issuable
at that date pursuant to outstanding options, calculated pursuant to the
treasury stock method (1,494,286 shares; 2003 - nil shares), and the number
of Limited Voting Shares into which our outstanding convertible notes issued
in September 1999 and due 2029 could be converted (3,463,155 shares; 2003
- nil shares).
Six months ended June 30, 2004 compared to six months ended June
30, 2003
Management Operations
Management fee revenues (excluding reimbursed costs) increased 27.7%,
or $16.3 million, to $74.9 million in the six months ended June 30, 2004,
as compared to $58.6 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 fees increased 49.2% in the six months ended June 30, 2004,
as compared to the same period in 2003, with 37 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.
General and administrative expenses (excluding reimbursed costs) increased
to $22.3 million for the six months ended June 30, 2004 from $18.6 million
for the same period in 2003. During the first half of 2004, costs related
to new development and growth opportunities, including travel costs, increased
approximately $1 million. It is expected that a significant portion of
these costs, which relate to new management opportunities, will be allocated
to the specific projects. In addition, during the first six 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 six months of 2004 and for which there was not
similar entitlement in 2003, accounted for approximately $1.1 million of
the increase.
As a result of the items described above, our management earnings before
other operating items for the six months ended June 30, 2004 increased
31.4% to $52.6 million, as compared to $40.0 million for the six months
ended June 30, 2003. Our management operations profit margin (excluding
reimbursed costs) increased to 70.2% for the first six months of 2004,
as compared to 68.2% for the same period last year.
Ownership and Corporate Operations
Operating results from ownership and corporate operations before other
operating items improved $7.2 million (38.5%) to a loss of $11.5 million
in the six months ended June 30, 2004, as compared to a loss of $18.7 million
for the same period in 2003.
RevPAR at The Pierre increased 23.2% primarily as a result of a 13.3
percentage point improvement in occupancy in the first half 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 $3.9
million in the first six months of 2004, as compared to the same period
last year.
RevPAR at Four Seasons Hotel Vancouver increased 15.2% during the first
six months of 2004, as compared to the same period in 2003. As a result,
the operating results at that hotel improved $925,000 in the first six
months of 2004, as compared to the same period last year.
As discussed above, since reaching our maximum funding obligation of
the stipulated minimum lease payments at Four Seasons Hotel Berlin in August
of 2003, the lease payments in 2004 have been limited to the cash flow
generated by the hotel. This resulted in a decline of $3.1 million in the
operating loss from Four Seasons Hotel Berlin in the first six months of
2004.
Stock Option Expense
Stock option expense for the six months ended June 30, 2004 was $907,000,
as compared to $159,000 for the same period in 2003. Stock option expense
is allocated between Management Operations ($401,000) and Ownership and
Corporate Operations ($506,000).
Other Income (Expense)
Other income for the six months ended June 30, 2004 was $1.3 million,
as compared to an expense of $25 million for the same period in 2003.
Included in other income for the six months ended June 30, 2004 was
a non-cash, unrealized $1.7 million foreign exchange gain, as compared
to a $17.5 million foreign exchange loss for the same period in 2003.
Also included in other income for the six months ended June 30, 2004
were legal and other enforcement costs of $273,000 in connection with the
disputes with the owners of Four Seasons hotels in Caracas and Seattle,
as compared to costs of $7.5 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 six months ended June 30, 2004, we had net interest income
of $1.8 million, as compared to $1.3 million in the same period in 2003.
Net interest income is a combination of $7.9 million in interest income
and $6.1 million in interest expense in the first six months of 2004, as
compared to $6.8 million and $5.5 million, respectively, for the same period
in 2003. The increase in interest income is primarily attributable to higher
interest income from loans to managed properties. The increase in interest
expense is primarily attributable to higher interest costs relating to
the convertible notes and convertible senior notes.
Income Tax Expense
Our tax expense during the first six months of 2004 was $8.2 million
(effective tax rate of 22.2%), as compared to a tax recovery of $599,000
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 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.
Net Earnings and Earnings per Share
Net earnings for the six months ended June 30, 2004 were $28.8 million
($0.81 basic earnings per share and $0.78 diluted earnings per share),
as compared to a net loss of $10.7 million ($0.31 basic and diluted loss
per share) for the six months ended June 30, 2003. For the six months ended
June 30, 2004, diluted earnings per share was calculated using the number
of shares equal to the weighted average number of Variable Multiple Voting
Shares (3,832,172 shares; 2003 - 3,982,172 shares) and Limited Voting Shares
(31,553,977 shares; 2003 - 30,916,220 shares) outstanding during the six
months ended June 30, 2004, the number of Limited Voting Shares issuable
at that date pursuant to outstanding options, calculated pursuant to the
treasury stock method (1,467,988 shares; 2003 - nil shares), and the number
of Limited Voting Shares into which our outstanding convertible notes issued
in September 1999 and due 2029 could be converted (3,463,155 shares; 2003
- nil shares).
Liquidity and Capital Resources
Financing Activities
During the quarter, we issued US$250 million (principal amount) convertible
senior notes. We intend to use the net proceeds from the sale of the convertible
senior notes to repay outstanding indebtedness and for general corporate
purposes, including the making of investments in, or advances in respect
of or to owners 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 can
beare convertible into Limited Voting Shares of Four Seasons Hotels Inc.
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 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" has occurred. 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, which was estimated based on the present
value of a US$250 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, we have entered into a five-year interest
rate swap with an initial notional amount of US$211.8 million, pursuant
to which we have 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%. At
LIBOR of approximately 2.0% (the current six-month LIBOR), this swap arrangement
results in a net effective interest rate of approximately minus 0.96% per
year in respect of US$211.8 million of the principal amount of the convertible
senior notes or a payment of approximately US$2.0 million to us. This arrangement
will result in a net interest payment to us until LIBOR increases more
than approximately 100 basis points from the current level. For accounting
purposes, we treat the swap arrangement as a hedge of the interest related
to the debt component of the convertible senior notes, which will result
in an effective interest rate for accounting purposes of six-month LIBOR,
in arrears, plus 0.4904%, which is the swap interest rate.
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 are 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. Holders
of the convertible notes have conversion rights, which they can exercise
at any time before the maturity date or the date of redemption of the convertible
notes, pursuant to which they can require us to issue to them 5.284 Limited
Voting Shares for each US$1,000 principal amount of convertible notes.
The holders of convertible notes also can require us to repurchase the
convertible notes in September 2004 for an amount equal to the issue price
plus accrued interest calculated at 4 1/2% per annum. This right is also
available in September 2009 and September 2014. We have a choice of settling
our obligation, in connection with the conversion or purchase of the convertible
notes at the option of the holder, with cash or Limited Voting Shares.
As described above, we are entitled to redeem all or a portion of the
convertible notes at any time on or after September 23, 2004 for cash at
the issue price plus accrued interest (calculated at 4 1/2% per annum)
to the date of purchase. We have determined that, absent significant changes
in market circumstances, we will redeem all of the convertible notes that
are outstanding on September 23, 2004 for cash, which would require a cash
payment to the convertible note holders of approximately US$215.5 million,
assuming that none of the holders exercised their right to convert their
convertible notes before the redemption date. In accordance with Canadian
GAAP, we allocate the consideration paid on extinguishment of the convertible
notes to the liability and equity components based on their relative fair
values at the date of the redemption. Depending on interest rates at the
date of redemption, we expect to recognize a pre-tax accounting loss which
could be in the range of $44 million to $14 million related to the debt
component of the convertible notes (representing the difference between
the carrying value of the debt component and the allocated relative fair
value of the debt component - estimated as the present value of these zero-coupon
bonds, yielding an assumed 25-year interest rate ranging from 7.5% to 8.5%
per annum, compounding semi- annually). This loss will be recorded in the
statement of operations. In addition, at the interest rates noted above,
we expect to recognize a pre-tax accounting gain on the extinguishment
of the equity component of the convertible notes which could be in the
range of approximately $32 million to $2 million. The gain will be recorded
directly in retained earnings. The amount of the gain and loss is extremely
sensitive to interest rate changes. The expected net impact on retained
earnings from the extinguishment of both the debt and equity components
of the convertible notes would be a reduction of approximately $12 million,
although the US to Canadian dollar exchange rates will affect the net impact.
During the second quarter of 2004, we finalized a committed bank credit
facility of US$100 million which expires June 2005 and replaces credit
facilities of US$212.5 million. We have agreed to maintain a minimum cash
balance of at least $75 million in our account with the agent for the facility
while any liabilities are owing under the facility. As at June 30, 2004,
no amounts were borrowed under this credit facility. However, approximately
US$14 million of letters of credit are currently issued under those facilities.
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.
Primarily as a result of the completion of our offering of US$250 million
(principal amount) of convertible senior notes during the second quarter
of 2004 described above and including the $75 million described above,
our cash and cash equivalents were $467.2 million as at June 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 $413.4 million as at June
30, 2004, primarily as a result of the issue of the convertible senior
notes in the quarter, to accreted interest on our convertible notes (which
were issued in September 1999 and due 2029) and foreign exchange translation.
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 $29.8 million.
Other than the issuance of convertible senior notes issued in June 2004
and due 2024 as discussed above and any payments that may be made in respect
of our outstanding convertible notes issued in September 1999 and due 2029
and funding relating to our management opportunities described under "Financing
Activities" and "Investing/Divesting Activities", we do not anticipate
any further material change in respect of these commitments over the remainder
of the current year. These contractual obligations and other commitments
are more fully described in the MD&A for the year ended December 31,
2003.
Cash From Operations
During the three months and six months ended June 30, 2004, we generated
$28.7 million and $33.6 million, respectively, from operations, as compared
to $15.1 million and $37.0 million, respectively, for the same periods
in 2003.
The increase in cash from operations of $13.6 million in the second
quarter of 2004 resulted primarily from an increase in cash contributed
by management operations of $9.9 million, a decrease in cash used in ownership
and corporate operations of $3.9 million and a decrease in legal and enforcement
costs paid of $4 million, partially offset by an increase in working capital
of $3.2 million, primarily relating to an increased accrual relating to
the incentive fee improvement.
The decrease in cash from operations of $3.4 million in the first six
months of 2004 resulted primarily from an increase in cash contributed
by management operations of $12.9 million, a decrease in cash used in ownership
and corporate operations of $7.6 million and a decrease in legal and enforcement
costs paid of $5.1 million, partially offset by an increase in working
capital of $27.5 million, primarily as a result of income tax refund received
in the first half of 2003 and an increase in the accrual related to improved
incentive fees.
Investing/Divesting Activities
Part of our business strategy is to invest a portion of 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 six months of 2004, we funded $71 million in such management
opportunities, including amounts advanced as loans receivable and investments
in hotel partnerships such as Hampshire, Whistler and Palo Alto. 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.
In July 2004, we sold our 8% interest in Four Seasons Hotel Amman and
our 100% interest in Four Seasons Resort Whistler (substantially all of
which was acquired during the quarter). On a combined basis, we received
proceeds of approximately $47 million, which approximated book value. We
continue to manage the properties under long-term management contracts.
During the remaining six months of 2004, we expect to fund approximately
$35 million in respect of investments in, or advances to, various projects,
including additional funding in Palo Alto, properties in Washington and
Geneva and the expansion of corporate office facilities.
|
Outstanding Share Data
Designation
Outstanding as at
August 5, 2004
Variable Multiple Voting Shares(a)
3,832,172
Limited Voting Shares
31,853,658
Options to acquire Limited Voting
Shares:
Outstanding
5,498,799
Exercisable
2,822,751
Convertible Notes issued September
1999
and due 2029(b)
US$214.2 million(c)
Convertible Senior Notes issued June
2004
and due 2024(d)
US$250.6 million(e)
(a) Convertible into Limited Voting
Shares at any time at the option of
the holder
on a one-for-one basis.
(b) Subject to adjustment in certain
circumstances, each US$1,000
principal
amount of notes is convertible, at the option of the
holder, into
5.284 Limited Voting Shares (3,463,155 Limited Voting
Shares in
aggregate). We have the right to acquire notes that are
tendered for
conversion for cash equal to the then fair market value
of the underlying
Limited Voting Shares.
(c) This amount is equal to the issue
price of the convertible notes
issued September
1999 and due 2029 plus accrued interest calculated
at 4.5% per
annum.
(d) Details on the convertible senior
notes are more fully described
under "Financing
Activites".
(e) 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 and second
quarter of 2004 and that we currently are observing, we expect RevPAR for
worldwide Core Hotels in the third quarter to increase more than 10%, as
compared to the same period last year. We expect that this improvement
will result from occupancy and pricing improvements in all geographic regions
in the third 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 decrease net earnings by $205,000 and $376,000, respectively, for the
three months and six months ended June 30, 2004 and to increase receivables
by $6.6 million and accounts payable and accrued liabilities by $7.2 million
as at June 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 second 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 a material impact on our interim 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 are 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.
For investments in hotel partnerships and corporations, we determine
if there is an impairment in value by reviewing periodic independent valuations
and the undiscounted cash flows of the related property. In the event of
a decline in value of the investment that is other than temporary, the
investment is written down to its estimated recoverable amount.
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
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 revenue 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 whether
some portion or all of the asset will not be realized. 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.
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands of
Three months ended Six months
ended
dollars except per
June 30,
June 30,
share amounts)
2004 2003
2004 2003
-------------------------------------------------------------------------
(restated -
(restated -
note 1(a))
note 1(a))
Consolidated revenues
(note 5)
$ 96,953 $ 80,758 $
172,231 $ 153,118
---------------------------------------------------
---------------------------------------------------
MANAGEMENT OPERATIONS
Revenues:
Fee revenues
$ 41,549 $ 29,351 $
74,926 $ 58,656
Reimbursed costs
(note 1(c))
18,517 18,571
34,752 37,022
---------------------------------------------------
60,066 47,922
109,678 95,678
---------------------------------------------------
Expenses:
General and
administrative
expenses
(11,469) (8,901)
(22,325) (18,637)
Reimbursed costs
(note 1(c))
(18,517) (18,571) (34,752)
(37,022)
---------------------------------------------------
(29,986) (27,472) (57,077)
(55,659)
---------------------------------------------------
30,080 20,450
52,601 40,019
---------------------------------------------------
OWNERSHIP AND
CORPORATE OPERATIONS
Revenues
38,185 34,415
64,980 60,193
Distributions from
hotel investments
398 --
398 --
Expenses:
Cost of sales and
expenses
(38,633) (38,295) (74,023)
(76,097)
Fees to Management
Operations
(1,696) (1,579)
(2,825) (2,753)
---------------------------------------------------
(1,746) (5,459) (11,470)
(18,657)
---------------------------------------------------
Earnings before other
operating items
28,334 14,991
41,131 21,362
Depreciation and
amortization
(3,619) (4,064)
(7,244) (7,774)
Other income (expense),
net (note 6)
(3,011) (12,133)
1,310 (25,041)
---------------------------------------------------
Earnings (loss) from
operations
21,704 (1,206)
35,197 (11,453)
Interest income, net
666 667
1,814 1,350
---------------------------------------------------
Earnings (loss) before
income taxes
22,370 (539)
37,011 (10,103)
---------------------------------------------------
Income tax recovery
(expense):
Current
(4,366) (1,759)
(7,154) 615
Future
(670) 884
(1,049) (1,214)
---------------------------------------------------
(5,036) (875)
(8,203) (599)
---------------------------------------------------
Net earnings (loss)
$ 17,334 $ (1,414) $
28,808 $ (10,702)
---------------------------------------------------
---------------------------------------------------
Basic earnings (loss)
per share (note 4)
$ 0.49 $ (0.04)
$ 0.81 $ (0.31)
---------------------------------------------------
---------------------------------------------------
Diluted earnings (loss)
per share (note 4)
$ 0.46 $ (0.04)
$ 0.78 $ (0.31)
---------------------------------------------------
---------------------------------------------------
See accompanying notes to consolidated
financial statements.
FOUR SEASONS HOTELS INC.
CONSOLIDATED BALANCE SHEETS
As at As at
June 30, December 31,
(In thousands of dollars)
2004 2003
-------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
(note 2)
$ 467,230 $ 170,725
Receivables (note 1(b))
104,452 88,636
Inventory
1,972 2,169
Prepaid expenses
5,026 3,780
-------------------------
578,680 265,310
Long-term receivables
222,888 197,635
Investments in hotel partnerships
and corporations
199,702 157,638
Fixed assets
73,513 75,789
Investment in management contracts
219,343 203,670
Investment in trademarks and trade
names
5,662 5,757
Future income tax assets
12,181 13,230
Other assets
35,489 27,631
-------------------------
$1,347,458 $ 946,660
-------------------------
-------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities
(note 1(b))
$ 69,562 $ 61,045
Long-term obligations
due within one year
(notes 2 and 3)
2,531 2,587
-------------------------
72,093 63,632
Long-term obligations (notes 2 and
3)
410,915 117,521
Shareholders' equity (note 4):
Capital stock
340,722 329,274
Convertible notes (note
3)
228,916 178,543
Contributed surplus
6,436 5,529
Retained earnings
292,705 265,754
Equity adjustment from
foreign
currency translation
(4,329) (13,593)
-------------------------
864,450 765,507
-------------------------
$1,347,458 $ 946,660
-------------------------
-------------------------
See accompanying notes to consolidated
financial statements.
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF CASH PROVIDED
BY OPERATIONS
(Unaudited)
Three months ended Six months
ended
(In thousands of
June 30,
June 30,
dollars)
2004 2003
2004 2003
-------------------------------------------------------------------------
Cash provided by (used
in) operations:
MANAGEMENT OPERATIONS
Earnings before other
operating items
$ 30,080 $ 20,450 $
52,601 $ 40,019
Items not requiring an
outlay of funds
481 240
995 649
---------------------------------------------------
Working capital
provided by Management
Operations
30,561 20,690
53,596 40,668
---------------------------------------------------
OWNERSHIP AND CORPORATE
OPERATIONS
Loss before other
operating items
(1,746) (5,459) (11,470)
(18,657)
Items not requiring
an outlay of funds
288 82
506 91
---------------------------------------------------
Working capital used
in Ownership and
Corporate Operations
(1,458) (5,377) (10,964)
(18,566)
---------------------------------------------------
29,103 15,313
42,632 22,102
Interest received, net
1,834 1,372
5,566 5,268
Current income tax paid
(1,488) -
(1,704) -
Change in non-cash
working capital
(603) 2,639
(12,150) 15,382
Other
(124) (4,172)
(713) (5,782)
---------------------------------------------------
Cash provided by
operations
$ 28,722 $ 15,152 $
33,631 $ 36,970
---------------------------------------------------
---------------------------------------------------
See accompanying notes to consolidated
financial statements.
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended Six months
ended
(In thousands of
June 30,
June 30,
dollars)
2004 2003
2004 2003
-------------------------------------------------------------------------
Cash provided by
(used in):
Operations:
$ 28,722 $ 15,152 $
33,631 $ 36,970
---------------------------------------------------
Financing:
Long-term obligations
including current
portion
(98) (72)
18 (30)
Issuance of shares
7,416 1,375
11,448 1,506
Issuance of
convertible notes
(note 3(a))
329,273 --
329,273 --
Dividends paid
-- --
(1,833) (1,809)
---------------------------------------------------
Cash provided by
(used in) financing
336,591 1,303
338,906 (333)
---------------------------------------------------
Capital investments:
Increase in
restricted cash
(note 2)
(75,000) --
(75,000) --
Long-term
receivables
(20,875) (6,245)
(19,999) (12,051)
Hotel investments
(37,329) 1,959
(38,607) (6,409)
Fixed assets
1,890 (1,395)
(2,469) (5,276)
Investments in
trademarks and
trade names and
management
contracts
(11,468) (440)
(11,835) (656)
Other assets
(1,213) (889)
(2,322) (3,490)
---------------------------------------------------
Cash used in capital
investments
(143,995) (7,010) (150,232)
(27,882)
---------------------------------------------------
Increase in net cash
and cash equivalents
221,318 9,445
222,305 8,755
Decrease in net cash
and cash equivalents
due to unrealized
foreign exchange loss
(3,357) (10,707)
(800) (20,853)
Cash and cash
equivalents,
beginning of period
174,269 154,200
170,725 165,036
---------------------------------------------------
Net cash and cash
equivalents,
end of period
$ 392,230 $ 152,938 $ 392,230
$ 152,938
---------------------------------------------------
---------------------------------------------------
Supplemental
disclosure of net
cash and cash
equivalents:
Cash and cash
equivalents
$ 467,230 $ 152,938 $ 467,230
$ 152,938
Less restricted cash
(note 2)
(75,000) --
(75,000) --
---------------------------------------------------
Net cash and cash
equivalents
$ 392,230 $ 152,938 $ 392,230
$ 152,938
---------------------------------------------------
---------------------------------------------------
See accompanying notes to consolidated
financial statements.
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF RETAINED
EARNINGS
Six months ended
(Unaudited)
June 30,
(In thousands of dollars)
2004 2003
-------------------------------------------------------------------------
Retained earnings, beginning of period
$ 265,754 $ 264,016
Net earnings (loss)
28,808 (10,702)
Dividends declared
(1,857) (1,813)
-------------------------
Retained earnings, end of period
$ 292,705 $ 251,501
-------------------------
-------------------------
See accompanying notes to consolidated
financial statements.
FOUR SEASONS HOTELS INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(In thousands of 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 six months ended
June 30, 2003
have been restated. The impact of this change for the
three months
and six months ended June 30, 2004 was to decrease net
earnings by
$494 and $907, respectively (2003 - $144 and $159,
respectively),
and to decrease basic earnings per share by $0.01 and
$0.03, respectively
(2003 - increase basic loss per share by nil and
$0.01, respectively),
and to decrease diluted earnings per share by
$0.01 and
$0.02, respectively (2003 - increase diluted loss per share
by nil and
$0.01, respectively).
The fair value
of stock options granted in the three months and six
months ended
June 30, 2004 has been estimated using the Black-Scholes
option pricing
model with the following assumptions: risk-free
interest rates
ranging from 3.86% to 4.39% and 2.96% to 4.39%,
respectively
(2003 - 4.44% to 4.46% and 4.44% to 5.02%,
respectively);
semi-annual dividend per Limited Voting Share of
$0.055 for
both periods (2003 - $0.055 for both periods); volatility
factor of
the expected market price of our Limited Voting Shares of
28% and ranging
from 28% to 30%, respectively (2003 - 32% for both
periods);
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 three
months and
six months ended June 30, 2004, the weighted average fair
value of the
options at the grant dates was $24.85 and $25.35,
respectively
(2003 - $18.95 and $18.00, respectively). 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 six months ended
June 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 Three months ended
Six months ended
dollars
except per June 30,
June 30,
share
amounts) 2004
2003 2004
2003
---------------------------------------------------------------------
Stock option
expense
included
in compensation
expense
$ (494) $ (144)
$ (907) $ (159)
---------------------------------------------------
---------------------------------------------------
Net earnings
(loss),
as reported
$ 17,334 $ (1,414) $
28,808 $ (10,702)
Additional
expense
that
would have
been
recorded if
all
outstanding
stock
options
granted
during
2002
had been
expensed
(853) (863)
(1,712) (1,725)
---------------------------------------------------
Pro forma
net
earnings
(loss) $ 16,481 $ (2,277)
$ 27,096 $ (12,427)
---------------------------------------------------
Earnings (loss)
per
share:
Basic,
as reported $ 0.49
$ (0.04) $ 0.81
$ (0.31)
Basic,
pro forma
0.46 (0.07)
0.77 (0.36)
Diluted,
as reported
0.46 (0.04)
0.78 (0.31)
Diluted,
pro forma
0.44 (0.07)
0.74 (0.36)
---------------------------------------------------
(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 decrease
net earnings by $205 and $376, respectively, for the
three months
and six months ended June 30, 2004 and to increase
receivables
by $6,631 and accounts payable and accrued liabilities by
$7,165 as
at June 30, 2004.
In June 2004,
we entered into an interest rate swap agreement that we
have designated
as a fair value hedge of the convertible notes issued
in the same
month (note 3(a)).
(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 six months
ended June
30, 2004 of $10,291 and $19,213, respectively (2003 -
$11,190 and
$22,716, respectively), but did not have an impact on net
earnings.
In addition, for the three months and six months ended June
30, 2003,
each of fee revenues and general and administrative
expenses included
certain other reimbursed costs of $7,381 and
$14,306, 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 six months ended June 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 six months ended June
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 six months ended June
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 six months ended June
30, 2004.
2. Bank credit facility:
In June 2004, we finalized a committed
bank credit facility of
US$100,000, which expires in June
2005 and replaces bank credit
facilities of US$212,500. As at June
30, 2004, no amounts were
borrowed under this credit facility.
However, approximately US$14,000
of letters of credit are currently
issued under this credit facility.
No amounts have been drawn under these
letters of credit. We have
agreed to maintain a minimum cash
balance of at least $75,000 in our
account with the agent for the facility
while any liabilities are
owing under this facility. As at June
30, 2004, cash and cash
equivalents includes this $75,000
of restricted cash.
3. Long-term obligations:
As at As at
June 30, December 31,
(In thousands
of dollars)
2004 2003
---------------------------------------------------------------------
(Unaudited)
Convertible
notes, issued in 2004(a)
$ 284,155 $ --
Convertible
notes, issued in 1999(b)
95,397 88,029
Accrued benefit
liability and other
obligations
33,894 32,079
-------------------------
413,446 120,108
Less amounts
due within one year
(2,531) (2,587)
-------------------------
$ 410,915 $ 117,521
-------------------------
-------------------------
(a) In June 2004, we issued US$250,000
(principal amount) convertible
senior notes.
The net proceeds of the issuance, after deducting
offering expenses
and underwriters' commission, were approximately
US$241,250.
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 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$211,754, which was estimated based on
the present
value of a US$250,000 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 (US$211,754) 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 have entered into an interest
rate swap
agreement to July 30, 2009 with an initial notional amount
of US$211,754,
pursuant to which we have 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 have designated the interest rate
swap as a
fair value hedge of the notes. As a result, we are
accounting
for the payments under the interest rate swap on an
accrual basis,
which results in an effective interest rate (for
accounting
purposes) on the hedged notes of six-month LIBOR in
arrears plus
0.4904%.
(b) During 1999, we issued US$655,519
principal amount at maturity
(September
23, 2029) of convertible notes for gross proceeds of
US$172,500.
The net proceeds of the issuance, after deducting
offering expenses
and underwriters' commission, were US$166,000. As
at June 30,
2004, our consolidated balance sheet includes $95,397
(US$71,170)
of convertible notes in long-term obligations and
$178,543 of
convertible notes in shareholders' equity. We are
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. Holders of the notes have conversion rights, which
they can exercise
at any time before the maturity date or date of
redemption
of the notes, pursuant to which they can require us to
issue to them
5.284 Limited Voting Shares for each one thousand US
dollar principal
amount of notes. The holders of notes also can
require us
to repurchase the notes in September 2004 for an amount
equal to the
issue price plus accrued interest calculated at 4 1/2%
per annum.
This right is also available in September 2009 and
September
2014. We have a choice of settling our obligation, in
connection
with the conversion or purchase of the notes at the option
of the holder,
with cash or Limited Voting Shares.
As described
above, we are entitled to redeem all or a portion of the
convertible
notes at any time on or after September 23, 2004 for cash
at the issue
price plus accrued interest (calculated at 4 1/2% per
annum) to
the date of purchase. A cash redemption on September 23,
2004 of all
the outstanding convertible notes would require a cash
payment to
the convertible note holders of approximately US$215,500,
assuming that
none of the holders exercised their right to convert
their convertible
notes before the redemption date. In accordance
with Canadian
GAAP, we allocate the consideration paid on
extinguishment
of the convertible notes to the liability and equity
components
based on their relative fair values at the date of the
redemption.
Depending on interest rates at the date of redemption, we
expect to
recognize a pre-tax accounting loss which could be in the
range of $44,000
to $14,000 related to the debt component of the
convertible
notes (representing the difference between the carrying
value of the
debt component and the allocated relative fair value of
the debt component
- estimated as the present value of these zero-
coupon bonds,
yielding an assumed 25-year interest rate ranging from
7.5% to 8.5%
per annum, compounding semi-annually). This loss will be
recorded in
the statement of operations. In addition, at the interest
rates noted
above, we expect to recognize a pre-tax accounting gain
on the extinguishment
of the equity component of the convertible
notes which
could be in the range of approximately $32,000 to $2,000.
The gain will
be recorded directly in retained earnings. The amount
of the gain
and loss is extremely sensitive to interest rate changes.
The expected
net impact on retained earnings from the extinguishment
of both the
debt and equity components of the convertible notes would
be a reduction
of approximately $12,000, although the US to Canadian
dollar exchange
rates will affect the net impact.
4. Shareholders' equity:
As at June 30, 2004, we have outstanding
Variable Multiple Voting Shares
("VMVS") of 3,832,172, outstanding
Limited Voting Shares ("LVS") of
31,840,458 and outstanding stock options
of 5,498,399 (weighted average
exercise price of $56.19).
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:
(Unaudited)
Three months ended
(In thousands
June 30,
of dollars)
2004
2003
---------------------------------------------------------------------
Net
earnings Shares
Net loss Shares
---------------------------------------------------------------------
Basic earnings
(loss)
per share:
Net earnings
(loss) $
17,334 35,484,874 $ (1,414) 34,913,942
Effect of
assumed
dilutive
conversions:
Stock option plan --
1,494,286 --
--
Convertible notes
(issued in 1999) 1,343 3,463,155
-- --
---------------------------------------------------------------------
Diluted earnings
(loss)
per share:
Net earnings
(loss) and
assumed dilutive
conversions $ 18,677 40,442,315
$ (1,414) 34,913,942
---------------------------------------------------------------------
---------------------------------------------------------------------
(Unaudited)
Six months ended
(In thousands
June 30,
of dollars)
2004
2003
---------------------------------------------------------------------
Net
earnings Shares
Net loss Shares
---------------------------------------------------------------------
Basic earnings
(loss)
per share:
Net earnings
(loss) $
28,808 35,386,149 $ (10,702) 34,898,392
Effect of
assumed
dilutive
conversions:
Stock option plan --
1,467,988 --
--
Convertible notes
(issued in 1999) 2,647 3,463,155
-- --
---------------------------------------------------------------------
Diluted earnings
(loss)
per share:
Net earnings
(loss) and
assumed dilutive
conversions $ 31,455 40,317,292
$ (10,702) 34,898,392
---------------------------------------------------------------------
---------------------------------------------------------------------
The diluted earnings (loss) per share
calculation excluded the effect of
the assumed conversions of 858,196
and 1,015,916 stock options to LVS,
under our stock option plan, during
the three months and six months ended
June 30, 2004, respectively (2003
- 6,072,700 and 6,072,700 stock
options, respectively), as the inclusion
of these conversions resulted in
an anti-dilutive effect. In addition,
the dilution relating to the
conversion of our convertible notes
(issued in 1999) (note 3(b)) to
3,463,155 LVS, by application of the
"if- converted method", has been
excluded from the calculation for
2003 as the inclusion of this
conversion resulted in an anti-dilutive
effect for the three months and
six months ended June 30, 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 period.
5. Consolidated revenues:
Consolidated revenues for Four Seasons
Hotels Inc. comprise revenues from
Management Operations, revenues from
Ownership and Corporate Operations
and distributions from hotel investments,
less fees from Ownership and
Corporate Operations to Management
Operations.
6. Other income (expense), net:
Included in other income (expense),
net for the three months and six
months ended June 30, 2004 is a net
foreign exchange loss of $2,969 and a
net foreign exchange gain of $1,661,
respectively (2003 - net foreign
exchange loss of $9,235 and $17,502,
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.
Also included in other income (expense),
net for the three months and six
months ended June 30, 2004 are legal
and enforcement costs of $56 and
$273, respectively (2003 - $2,889
and $7,500, 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 six months
ended June 30, 2004 was $760 and
$1,517, respectively (2003 - $704
and $1,366, respectively).
8. 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
Our ownership operations are particularly
affected by seasonal
fluctuations, with lower revenue,
higher operating losses and lower cash
flow in the first quarter. As a result,
ownership operations typically
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.
9. Subsequent events:
(a) In July 2004, we sold our 8% interest
in Four Seasons Hotel Amman
and our 100%
interest in Four Seasons Resort Whistler
(substantially
all of which was acquired during the three months
ended June
30, 2004). On a combined basis, we received proceeds
of approximately
$47,000, which approximated book value. We
continue to
manage the properties under long-term management
contracts.
(b) We have been given notice of termination
of the lease of Four
Seasons Hotel
Berlin by the landlord. Based on the terms of the
new lease
entered into by the landlord, as disclosed to us by the
landlord,
we will not exercise our right of first offer in
respect of
the lease and, as a result, we will likely cease
managing the
hotel before the end of the year. The termination
of the lease
will result in the write-off of the net book value
of our
investment in the hotel of approximately $1,000.
FOUR SEASONS HOTELS INC.
SUMMARY OF HOTEL OPERATING DATA - CORE HOTELS(1)
Three months ended
June 30,
(Unaudited)
2004 2003
Variance
Worldwide
No. of Properties
51 51
--
No. of Rooms
13,460 13,460
--
Occupancy(2)
69.8% 56.9%
12.9%
ADR(3)
- in US dollars $
329 $ 303
8.5%
RevPAR(4) - in US
dollars $
216 $ 176
22.7%
Gross operating margin(5)
31.2% 27.4%
3.8%
United States
No. of Properties
21 21
--
No. of Rooms
6,587 6,587
--
Occupancy(2)
72.8% 70.4%
2.4%
ADR(3)
- in US dollars $
342 $ 326
4.9%
RevPAR(4) - in US
dollars $
250 $ 231
8.1%
Gross operating margin(5)
28.4% 28.9%
(0.5%)
Other Americas/Caribbean
No. of Properties
7 7
--
No. of Rooms
1,534 1,534
--
Occupancy(2)
66.9% 51.1%
15.8%
ADR(3)
- in US dollars $
283 $ 270
4.8%
RevPAR(4) - in US
dollars $
178 $ 136
30.9%
Gross operating margin(5)
31.2% 24.9%
6.3%
Europe
No. of Properties
8 8
--
No. of Rooms
1,535 1,535
--
Occupancy(2)
66.3% 58.1%
8.2%
ADR(3)
- in US dollars $
520 $ 451
15.4%
RevPAR(4) - in US
dollars $
356 $ 272
30.9%
Gross operating margin(5)
38.4% 34.2%
4.2%
Middle East
No. of Properties
3 3
--
No. of Rooms
598 598
--
Occupancy(2)
69.5% 36.4%
33.1%
ADR(3)
- in US dollars $
172 $ 151
13.9%
RevPAR(4) - in US
dollars $
120 $ 57
111.4%
Gross operating margin(5)
46.9% 20.3%
26.6%
Asia/Pacific
No. of Properties
12 12
--
No. of Rooms
3,206 3,206
--
Occupancy(2)
66.7% 35.5%
31.2%
ADR(3)
- in US dollars $
243 $ 220
10.2%
RevPAR(4) - in US
dollars $
117 $ 60
96.7%
Gross operating margin(5)
31.4% 12.7%
18.7%
(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 Biltmore Resort (Santa Barbara),
which
is undergoing an extensive renovation program 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.
(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)
Six months ended
June 30,
(Unaudited)
2004 2003
Variance
Worldwide
No. of Properties
51 51
--
No. of Rooms
13,460 13,460
--
Occupancy(2)
67.3% 58.7%
8.6%
ADR(3)
- in US dollars $
332 $ 309
7.3%
RevPAR(4) - in US
dollars $
210 $ 177
18.4%
Gross operating margin(5)
29.7% 26.1%
3.6%
United States
No. of Properties
21 21
--
No. of Rooms
6,587 6,587
--
Occupancy(2)
70.4% 67.7%
2.7%
ADR(3)
- in US dollars $
345 $ 331
4.1%
RevPAR(4) - in US
dollars $
242 $ 224
8.3%
Gross operating margin(5)
26.4% 26.1%
0.3%
Other Americas/Caribbean
No. of Properties
7 7
--
No. of Rooms
1,534 1,534
--
Occupancy(2)
63.3% 52.4%
10.9%
ADR(3)
- in US dollars $
315 $ 298
5.6%
RevPAR(4) - in US
dollars $
192 $ 154
25.0%
Gross operating margin(5)
33.8% 28.1%
5.7%
Europe
No. of Properties
8 8
--
No. of Rooms
1,535 1,535
--
Occupancy(2)
61.9% 54.5%
7.4%
ADR(3)
- in US dollars $
490 $ 425
15.4%
RevPAR(4) - in US
dollars $
315 $ 243
29.3%
Gross operating margin(5)
33.5% 28.9%
4.6%
Middle East
No. of Properties
3 3
--
No. of Rooms
598 598
--
Occupancy(2)
69.6% 37.1%
32.5%
ADR(3)
- in US dollars $
173 $ 161
7.8%
RevPAR(4) - in US
dollars $
122 $ 64
91.0%
Gross operating margin(5)
48.0% 20.6%
27.4%
Asia/Pacific
No. of Properties
12 12
--
No. of Rooms
3,206 3,206
--
Occupancy(2)
65.2% 49.1%
16.1%
ADR(3)
- in US dollars $
252 $ 237
6.5%
RevPAR(4) - in US
dollars $
119 $ 82
44.4%
Gross operating margin(5)
32.2% 22.2%
10.0%
(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 Biltmore Resort
(Santa
Barbara), which is undergoing an extensive renovation program
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.
(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 June 30,
(Unaudited)
2004 2003
Variance
Worldwide
No. of Properties
63 58
5
No. of Rooms
16,203 15,648
555
United States
No. of Properties
24 23
1
No. of Rooms
7,145 7,250
(105)
Other Americas/Caribbean
No. of Properties
10 8
2
No. of Rooms
2,112 1,746
366
Europe
No. of Properties
11 9
2
No. of Rooms
1,990 1,696
294
Middle East
No. of Properties
4 4
--
No. of Rooms
847 847
--
Asia/Pacific
No. of Properties
14 14
--
No. of Rooms
4,109 4,109
--
FOUR SEASONS HOTELS INC.
REVENUES UNDER MANAGEMENT - ALL MANAGED
HOTELS
Three months ended Six
months ended
(Unaudited)
June 30,
June 30,
(In thousands of dollars) 2004
2003 2004
2003
Revenues under
management(1)
$ 776,939 $ 631,892 $1,475,650
$1,291,140
(1) Revenues under management
consist of rooms, food and beverage,
telephone
and other revenues of all the hotels and resorts which we
manage.
Approximately 65% 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
Hotel/Resort/Residence Club and Location(1),(2)
Approximate
Number of Rooms
Scheduled 2004/2005 Openings
Four Seasons Hotel Beijing, China
325
Four Seasons Hotel Cairo at Nile Plaza,
Egypt(x)
375
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 Lanai at Koele,
HI, USA
100
Four Seasons Resort Lanai at Manele
Bay, HI, USA
250
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 Beirut, Lebanon
230
Four Seasons Resort Bora Bora, French
Polynesia
100
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 Hotel Mumbai, India
200
Four Seasons Resort Puerto Rico, Puerto
Rico(x)
250
Four Seasons Residence Club Punta
Mita, Mexico
35
(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. We have also made an investment in Sedona
at Seven
Canyons in Arizona in connection with a potential Residence
Club.
The developer is working on a plan to finalize that project,
however,
there is no certainty that it will come to fruition as a
Four
Seasons property or the potential impact of those plans on Four
Seasons'
investment.
SOURCE Four Seasons Hotels and Resorts
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. Adjusted net earnings is equal
to net earnings (loss) plus (i)
foreign exchange
loss, less (ii) foreign exchange gain, plus (iii)
asset impairment
charge, each tax-effected as applicable. Adjusted
net earnings,
as we calculate it, may not be comparable to adjusted
net earnings
used by other companies, which may be calculated
differently.
In addition, adjusted net earnings is not intended to
represent
net earnings as defined by Canadian GAAP and should not be
considered
an alternative to net earnings or any other measure of
performance
prescribed by Canadian GAAP. It is included because we
believe it
can assist in the period-over-period comparability of our
financial
performance.
A reconciliation
of net earnings (the nearest Canadian GAAP measure to adjusted net earnings)
to adjusted net earnings is as follows:
Three months ended Six months ended
(Unaudited)
June 30,
June 30,
(In thousands
of dollars) 2004
2003 2004
2003
Net earnings
(loss) $ 17,334 $
(1,414) $ 28,808 $(10,702)
Adjustments:
Foreign exchange loss
(gain)
2,969 9,235 (1,661)
17,502
Net asset impairment
charge(x)
42 2,898
351 7,539
Tax effect
of adjustments (1,174) (1,910)
(583) (3,024)
Adjusted net
earnings $ 19,171 $ 8,809
$ 26,915 $ 11,315
Adjusted basic
earnings
per
share
$ 0.54 $ 0.25 $
0.76 $ 0.32
------------------------------------------
------------------------------------------
Adjusted diluted
earnings
per
share
$ 0.51 $ 0.25 $
0.73 $ 0.32
------------------------------------------
------------------------------------------
(x) Includes
legal and enforcement costs.
2. 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.
3. 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 Biltmore Resort (Santa Barbara), which
is undergoing
an extensive renovation program in 2004.
4. Gross operating margin represents
gross operating profit as a
percentage
of gross operating revenue.
5. 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
First Second Third
Fourth
(In thousands
of dollars) Quarter Quarter
Quarter Quarter
Revenues:
Fee revenues
$ 29,305 $ 29,351 $ 28,822 $ 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 46,686
53,469
Operating
costs and
expenses:
General and administrative
expenses
9,736 8,901
9,980 12,391
Reimbursed costs
18,451 18,571 17,864
20,417
Total expenses
28,187 27,472 27,844
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.
6. The management operations
profit margin represents management
operations
earnings before other operating items, as a percent of
management
operations revenue, excluding reimbursed costs.
7. Eight Quarter Summary:
(In millions
of dollars Second Quarter
First Quarter
except
per share amounts) 2004 2003(a)
2004 2003(a)
Consolidated
revenues(b) $ 97.0 $ 80.8
$ 75.3 $ 72.4
Earnings (loss)
before
other
operating items:
Management operations 30.1
20.5 22.5
19.6
Ownership and corporate
operations
(1.7) (5.5)
(9.7) (13.2)
Net earnings
(loss):
Total
$ 17.3 $ (1.4) $
11.5 $ (9.3)
Basic earnings (loss)
per share(c)
$ 0.49 $ (0.04) $ 0.33
$ (0.27)
Diluted earnings (loss)
per share(c)
$ 0.46 $ (0.04) $ 0.31
$ (0.27)
(In millions
of dollars Fourth Quarter
Third Quarter
except
per share amounts) 2003(a) 2002
2003(a) 2002
Consolidated
revenues(b) $ 87.9 $ 92.9
$ 72.6 $ 76.1
Earnings (loss)
before
other
operating items:
Management operations 20.7
21.6 18.8
15.5
Ownership and corporate
operations
(2.0) (4.6)
(9.4) (6.6)
Net earnings
(loss):
Total
$ 11.7 $ 7.6 $
4.4 $ (12.3)
Basic earnings (loss)
per share(c)
$ 0.33 $ 0.22 $
0.13 $ (0.35)
Diluted earnings (loss)
per share(c)
$ 0.32 $ 0.22 $
0.12 $ (0.35)
(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; 3rd Quarter 2002 - increase of
$13.9 million; 4th Quarter 2002 - increase of $16.0 million.
(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.
8. 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, 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 Canadian dollars
unless otherwise noted. The financial statements are prepared in accordance
with Canadian generally accepted accounting principles.
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.
With a history spanning four decades and a portfolio that extends worldwide,
Four Seasons Hotels and Resorts is the world's leading operator of luxury
hotels, currently managing 63 properties in 29 countries. Four Seasons
Resort Whistler opened June 28, 2004, the company's first mountain resort
in Canada. Four Seasons continues to grow, with more than 20 projects under
construction or development in choice locations around the world. In the
next several months, we are scheduled to open new properties in Hampshire,
England; and Cairo at Nile Plaza, Egypt.
|
