NEWS
[FOUR SEASONS HOTELS INC. LOGO]
AUGUST 10, 2004 CONTACTS: DOUGLAS L. LUDWIG
CHIEF FINANCIAL OFFICER AND
EXECUTIVE VICE PRESIDENT
(416) 441-4320
BARBARA HENDERSON
VICE PRESIDENT
TAXATION AND INVESTOR RELATIONS
(416) 441-4329
FOUR SEASONS HOTELS INC.
REPORTS SECOND QUARTER 2004 RESULTS
TORONTO, CANADA --- 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:
o 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.
o 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.
o Earnings before other operating items increased 89% to $28.3 million,
as compared to $15.0 million for the second quarter of 2003.
o RevPAR(2) of worldwide Core Hotels(3) increased 22.7%, on a US dollar
basis.
o Gross operating margins(4) at worldwide Core Hotels increased 3.8
percentage points to 31.2%, as compared to the second quarter of 2003.
-1-
o Management fee revenues (excluding reimbursed costs(5)) increased 41.6%
to $41.5 million, as compared to the second quarter of 2003.
o Incentive fees increased 72.7%, as compared to the second quarter of
2003.
o Management operations profit margin(6) (excluding reimbursed costs)
increased 2.7 percentage points to 72.4%, as compared to the second
quarter of 2003.
o Ownership results improved $3.7 million, as compared to the second
quarter of 2003.
OTHER:
o 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.
o 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.
o 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."
-2-
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.
-3-
HOTEL OPERATING RESULTS
- -----------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 2004 Six months ended June 30, 2004
increase over (decrease from) increase over (decrease from)
three months ended June 30, 2003 six months ended June 30, 2003
(percentage change, on US dollar basis) (percentage change, 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 30.9% 28.7% 61.4% 25.0% 24.4% 49.3%
CORE HOTELS
- -----------------------------------------------------------------------------------------------------------------------
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:
o 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.
o 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.
o 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.
o 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
-4-
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.
o 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.
o 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.
o 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.
o 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
-5-
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.
-6-
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.
-7-
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
-8-
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.
-9-
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.
-10-
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 are 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).
-11-
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
-12-
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.
-13-
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.
-14-
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
-15-
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
-16-
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
-17-
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.
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.
-18-
- -----------------------------------
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* 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
=============================================================
*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.
-19-
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* 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 $19,569 $20,450 $18,842 $20,661
items
- ----------------------------------------------------------------------------------------------------------------------
* 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 except per
share amounts) Second Quarter First Quarter Fourth Quarter Third Quarter
- ----------------------- ----------------------- ------------------------ ---------------------- ----------------------
2004 2003(a) 2004 2003(a) 2003(a) 2002 2003(a) 2002
- ----------------------- ------------ ---------- ------------ ----------- ----------- ---------- ----------- ----------
Consolidated revenues(b) $97.0 $80.8 $75.3 $72.4 $87.9 $92.9 $72.6 $76.1
- ----------------------- ------------ ---------- ------------ ----------- ----------- ---------- ----------- ----------
Earnings (loss)
before other
operating items:
- ----------------------- ------------ ---------- ------------ ----------- ----------- ---------- ----------- ----------
Management 30.1 20.5 22.5 19.6 20.7 21.6 18.8 15.5
operations
- ----------------------- ------------ ---------- ------------ ----------- ----------- ---------- ----------- ----------
Ownership and (1.7) (5.5) (9.7) (13.2) (2.0) (4.6) (9.4) (6.6)
corporate operations
- ----------------------- ------------ ---------- ------------ ----------- ----------- ---------- ----------- ----------
Net earnings (loss):
- ----------------------- ------------ ---------- ------------ ----------- ----------- ---------- ----------- ----------
Total $17.3 $(1.4) $11.5 $(9.3) $11.7 $ 7.6 $4.4 $(12.3)
- ----------------------- ------------ ---------- ------------ ----------- ----------- ---------- ----------- ----------
Basic earnings $0.49 $(0.04) $0.33 $(0.27) $0.33 $ 0.22 $0.13 $(0.35)
(loss) per share(c)
- ----------------------- ------------ ---------- ------------ ----------- ----------- ---------- ----------- ----------
Diluted earnings $0.46 $(0.04) $0.31 $(0.27) $0.32 $ 0.22 $0.12 $(0.35)
(loss) per share(c)
- ----------------------- ------------ ---------- ------------ ----------- ----------- ---------- ----------- ----------
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
-20-
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. These statements are not guarantees
of future performance and are subject to numerous risks and uncertainties,
including those described in our annual information form and management's
discussions and analysis. Those risks and uncertainties include the rate and
extent of the current economic recovery and the rate and extent of the lodging
industry's recovery from the terrorist attacks of September 11, 2001 and
subsequent terrorist attacks, Severe Acute Respiratory Syndrome (SARS), the
civil unrest in Iraq and elsewhere, supply and demand changes for hotel rooms
and residential properties, competitive conditions in the lodging industry,
relationships with clients and property owners, and the availability of capital
to finance growth. Many of these risks and uncertainties can affect our actual
results and could cause our actual results to differ materially from those
expressed or implied in any forward-looking statement made by us or on our
behalf. All forward-looking statements in this news release are qualified by
these cautionary statements. These statements are made as of the date of this
news release and, except as required by applicable law, we undertake no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.
* * *
-21-
We will hold a conference call to discuss the results today at 2:00 p.m.
(Eastern Daylight Time).
To access the call dial: 1 (800) 291-5032 (U.S.A. and Canada)
1 (416) 641-6700 (outside U.S.A. and Canada)
To access a replay of the call, which will be available for one week after the
call, dial: 1 (800) 558-5253, Reservation Number 21202175.
A live web cast will also be available by visiting
http://www.fourseasons.com/investor.
This web cast will be archived for one month following the call.
* * *
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. Four Seasons consistently ranks high in global awards and
accolades. In addition to having the most Mobil Five Star awards in the
industry, Four Seasons was included in FORTUNE magazine's "100 Best Companies To
Work For" for the seventh year in a row. We are also consistently highly ranked
in readers' surveys in publications such as CONDE NAST TRAVELER, TRAVEL +
LEISURE, INSTITUTIONAL INVESTOR, ANDREW HARPER'S HIDEAWAY REPORT, GALLIVANTER'S
GUIDE and the ZAGAT SURVEY. Information on the company and its 43 years of
achievement in the hospitality industry can be accessed through the Four Seasons
Web site at www.fourseasons.com.
-22-
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
(UNAUDITED) JUNE 30, JUNE 30,
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
(restated - note 1(a)) (restated - 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.
-23-
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.
-24-
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF CASH PROVIDED BY OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
(UNAUDITED) JUNE 30, JUNE 30,
(IN THOUSANDS OF 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.
-25-
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SIX MONTHS ENDED
(UNAUDITED) JUNE 30, JUNE 30,
(IN THOUSANDS OF 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.
-26-
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.
-27-
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)
-28-
and basic and diluted earnings (loss) per share would have been adjusted to
the pro forma amounts indicated below:
(Unaudited) THREE MONTHS ENDED SIX MONTHS ENDED
(In thousands of dollars JUNE 30, JUNE 30,
except per 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.
-29-
(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.
-30-
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
-31-
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).
-32-
A reconciliation of the net earnings (loss) and weighted average number of VMVS
and LVS used to calculate basic earnings (loss) per share and diluted earnings
(loss) per share is as follows:
THREE MONTHS ENDED
(UNAUDITED) JUNE 30,
(IN THOUSANDS 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
====================================================================================================================================
SIX MONTHS ENDED
(UNAUDITED) JUNE 30,
(IN THOUSANDS 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.
-33-
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 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 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 2004. 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.
-34-
FOUR SEASONS HOTELS INC.
SUMMARY OF HOTEL OPERATING DATA - CORE HOTELS<F1>
THREE MONTHS ENDED
JUNE 30,
(UNAUDITED) 2004 2003 Variance
- --------------------------------------------------------------------------------------------------------------------
WORLDWIDE
No. of Properties 51 51 --
No. of Rooms 13,460 13,460 --
Occupancy<F2> 69.8% 56.9% 12.9%
ADR<F3> - in US dollars $329 $303 8.5%
RevPAR<F4> - in US dollars $216 $176 22.7%
Gross operating margin<F5> 31.2% 27.4% 3.8%
UNITED STATES
No. of Properties 21 21 --
No. of Rooms 6,587 6,587 --
Occupancy<F2> 72.8% 70.4% 2.4%
ADR<F3> - in US dollars $342 $326 4.9%
RevPAR<F4> - in US dollars $250 $231 8.1%
Gross operating margin<F5> 28.4% 28.9% (0.5%)
OTHER AMERICAS/CARIBBEAN
No. of Properties 7 7 --
No. of Rooms 1,534 1534 --
Occupancy<F2> 66.9% 51.1% 15.8%
ADR<F3> - in US dollars $283 $270 4.8%
RevPAR<F4> - in US dollars $178 $136 30.9%
Gross operating margin<F5> 31.2% 24.9% 6.3%
EUROPE
No. of Properties 8 8 --
No. of Rooms 1,535 1,535 --
Occupancy<F2> 66.3% 58.1% 8.2%
ADR<F3> - in US dollars $520 $451 15.4%
RevPAR<F4> - in US dollars $356 $272 30.9%
Gross operating margin<F5> 38.4% 34.2% 4.2%
MIDDLE EAST
No. of Properties 3 3 --
No. of Rooms 598 598 --
Occupancy<F2> 69.5% 36.4% 33.1%
ADR<F3> - in US dollars $172 $151 13.9%
RevPAR<F4> - in US dollars $120 $57 111.4%
Gross operating margin<F5> 46.9% 20.3% 26.6%
ASIA/PACIFIC
No. of Properties 12 12 --
No. of Rooms 3,206 3,206 --
Occupancy<F2> 66.7% 35.5% 31.2%
ADR<F3> - in US dollars $243 $220 10.2%
RevPAR<F4> - in US dollars $117 $60 96.7%
Gross operating margin<F5> 31.4% 12.7% 18.7%
- ------------------------------------------------------------------------------
<FN>
<F1>
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.
<F2>
Occupancy percentage is defined as the total number of rooms occupied divided by the total number of rooms available.
<F3>
ADR is defined as average daily room rate.
<F4>
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.
<F5>
Gross operating margin represents gross operating profit as a percent of gross operating revenue.
</FN>
-35-
FOUR SEASONS HOTELS INC.
SUMMARY OF HOTEL OPERATING DATA - CORE HOTELS<F1>
SIX MONTHS ENDED
JUNE 30,
(UNAUDITED) 2004 2003 Variance
- --------------------------------------------------------------------------------------------------------------------
WORLDWIDE
No. of Properties 51 51 --
No. of Rooms 13,460 13,460 --
Occupancy<F2> 67.3% 58.7% 8.6%
ADR<F3> - in US dollars $332 $309 7.3%
RevPAR<F4> - in US dollars $210 $177 18.4%
Gross operating margin<F5> 29.7% 26.1% 3.6%
UNITED STATES
No. of Properties 21 21 --
No. of Rooms 6,587 6,587 --
Occupancy<F2> 70.4% 67.7% 2.7%
ADR<F3> - in US dollars $345 $331 4.1%
RevPAR<F4> - in US dollars $242 $224 8.3%
Gross operating margin<F5> 26.4% 26.1% 0.3%
OTHER AMERICAS/CARIBBEAN
No. of Properties 7 7 --
No. of Rooms 1,534 1,534 --
Occupancy<F2> 63.3% 52.4% 10.9%
ADR<F3> - in US dollars $315 $298 5.6%
RevPAR<F4> - in US dollars $192 $154 25.0%
Gross operating margin<F5> 33.8% 28.1% 5.7%
EUROPE
No. of Properties 8 8 --
No. of Rooms 1,535 1,535 --
Occupancy<F2> 61.9% 54.5% 7.4%
ADR<F3> - in US dollars $490 $425 15.4%
RevPAR<F4> - in US dollars $315 $243 29.3%
Gross operating margin<F5> 33.5% 28.9% 4.6%
MIDDLE EAST
No. of Properties 3 3 --
No. of Rooms 598 598 --
Occupancy<F2> 69.6% 37.1% 32.5%
ADR<F3> - in US dollars $173 $161 7.8%
RevPAR<F4> - in US dollars $122 $64 91.0%
Gross operating margin<F5> 48.0% 20.6% 27.4%
ASIA/PACIFIC
No. of Properties 12 12 --
No. of Rooms 3,206 3,206 --
Occupancy<F2> 65.2% 49.1% 16.1%
ADR<F3> - in US dollars $252 $237 6.5%
RevPAR<F4> - in US dollars $119 $82 44.4%
Gross operating margin<F5> 32.2% 22.2% 10.0%
- ------------------------------------------------------------------------------
<FN>
<F1>
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.
<F2>
Occupancy percentage is defined as the total number of rooms occupied divided by the total number of rooms available.
<F3>
ADR is defined as average daily room rate.
<F4>
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.
<F5>
Gross operating margin represents gross operating profit as a percent of gross operating revenue.
</FN>
-36-
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<F1> $ 776,939 $ 631,892 $ 1,475,650 $ 1,291,140
==================================================================
- ------------------------
<FN>
<F1>
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.
</FN>
-37-
FOUR SEASONS HOTELS INC.
SCHEDULED OPENING OF PROPERTIES UNDER CONSTRUCTION OR
IN ADVANCED STAGES OF DEVELOPMENT
HOTEL/RESORT/RESIDENCE CLUB AND LOCATION<F1>,<F2> APPROXIMATE
NUMBER OF ROOMS
SCHEDULED 2004/2005 OPENINGS
Four Seasons Hotel Beijing, China 325
Four Seasons Hotel Cairo at Nile Plaza, Egypt* 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* 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* 120
Four Seasons Hotel Baltimore, MD, USA* 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* 250
Four Seasons Residence Club Punta Mita, Mexico 35
* Expected to include a residential component.
- ------------------------
<FN>
<F1>
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.
<F2>
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.
</FN>
-38-