EXHIBIT 99.2
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
(UNAUDITED) MARCH 31,
(IN THOUSANDS OF US DOLLARS EXCEPT PER SHARE AMOUNTS) 2005 2004
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CONSOLIDATED REVENUES (NOTE 4) $ 63,097 $ 57,121
=========================
MANAGEMENT OPERATIONS
REVENUES:
Fee revenues (note 4(a)) $ 29,027 $ 25,327
Reimbursed costs 14,544 12,319
------------------------
43,571 37,646
------------------------
EXPENSES:
General and administrative expenses (9,734) (8,238)
Reimbursed costs (14,544) (12,319)
------------------------
(24,278) (20,557)
------------------------
19,293 17,089
------------------------
OWNERSHIP AND CORPORATE OPERATIONS
REVENUES 20,517 20,332
EXPENSES:
Cost of sales and expenses (26,351) (26,854)
Fees to Management Operations (991) (857)
------------------------
(6,825) (7,379)
------------------------
EARNINGS BEFORE OTHER OPERATING ITEMS 12,468 9,710
DEPRECIATION AND AMORTIZATION (3,029) (2,751)
OTHER INCOME (EXPENSE), NET (NOTES 4(A) AND 5) (2,710) 3,279
------------------------
EARNINGS FROM OPERATIONS 6,729 10,238
INTEREST INCOME, NET 382 871
------------------------
EARNINGS BEFORE INCOME TAXES 7,111 11,109
------------------------
INCOME TAX EXPENSE:
Current (1,924) (2,116)
Future 15 (288)
------------------------
(1,909) (2,404)
------------------------
NET EARNINGS $ 5,202 $ 8,705
========================
BASIC EARNINGS PER SHARE (NOTE 3(A)) $ 0.14 $ 0.25
========================
DILUTED EARNINGS PER SHARE (NOTE 3(A)) $ 0.14 $ 0.24
========================
See accompanying notes to consolidated financial statements.
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FOUR SEASONS HOTELS INC.
CONSOLIDATED BALANCE SHEETS
AS AT AS AT
(UNAUDITED) MARCH 31, DECEMBER 31,
(IN THOUSANDS OF US DOLLARS) 2005 2004
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 198,164 $ 226,377
Receivables 79,940 81,541
Inventory 1,418 1,439
Prepaid expenses 5,564 2,981
---------------------------
285,086 312,338
LONG-TERM RECEIVABLES 198,180 179,060
INVESTMENTS IN HOTEL PARTNERSHIPS AND
CORPORATIONS 129,967 131,338
FIXED ASSETS 61,963 59,939
INVESTMENT IN MANAGEMENT CONTRACTS 177,512 181,273
INVESTMENT IN TRADEMARKS AND TRADE NAMES 4,363 4,424
FUTURE INCOME TAX ASSETS 3,707 3,711
OTHER ASSETS 28,855 30,064
---------------------------
$ 889,633 $ 902,147
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 47,492 $ 60,415
Long-term obligations due within one year 3,744 3,766
---------------------------
51,236 64,181
LONG-TERM OBLIGATIONS (NOTE 2) 254,893 253,066
SHAREHOLDERS' EQUITY (NOTE 3):
Capital stock 248,995 248,980
Convertible notes 36,920 36,920
Contributed surplus 8,581 8,088
Retained earnings 197,331 192,129
Equity adjustment from foreign currency
translation 91,677 98,783
---------------------------
583,504 584,900
---------------------------
SUBSEQUENT EVENTS (NOTES 5 AND 9)
$ 889,633 $ 902,147
===========================
See accompanying notes to consolidated financial statements.
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FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF CASH PROVIDED BY OPERATIONS
THREE MONTHS ENDED
(UNAUDITED) MARCH 31,
(IN THOUSANDS OF US DOLLARS) 2005 2004
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CASH PROVIDED BY (USED IN) OPERATIONS:
MANAGEMENT OPERATIONS
EARNINGS BEFORE OTHER OPERATING ITEMS $ 19,293 $ 17,089
ITEMS NOT REQUIRING AN OUTLAY OF FUNDS 585 390
--------------------------
WORKING CAPITAL PROVIDED BY
MANAGEMENT OPERATIONS 19,878 17,479
--------------------------
OWNERSHIP AND CORPORATE OPERATIONS
LOSS BEFORE OTHER OPERATING ITEMS (6,825) (7,379)
ITEMS NOT REQUIRING AN OUTLAY OF FUNDS 276 165
--------------------------
WORKING CAPITAL USED IN
OWNERSHIP AND CORPORATE OPERATIONS (6,549) (7,214)
--------------------------
13,329 10,265
INTEREST RECEIVED, NET 1,667 2,831
CURRENT INCOME TAX PAID (3,106) (164)
CHANGE IN NON-CASH WORKING CAPITAL (16,413) (8,762)
OTHER (113) (447)
--------------------------
CASH PROVIDED BY (USED IN) OPERATIONS $ (4,636) $ 3,723
==========================
See accompanying notes to consolidated financial statements.
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FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
(UNAUDITED) MARCH 31,
(IN THOUSANDS OF US DOLLARS) 2005 2004
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CASH PROVIDED BY (USED IN):
OPERATIONS: $ (4,636) $ 3,723
---------------------------
FINANCING:
Long-term obligations including
current portion 132 88
Issuance of shares 5,617 3,060
Dividends paid (1,558) (1,391)
---------------------------
CASH PROVIDED BY FINANCING 4,191 1,757
---------------------------
CAPITAL INVESTMENTS:
Long-term receivables (20,465) 665
Hotel investments (7,180) (970)
Disposal of hotel investment (note 5) 5,346 --
Fixed assets (3,607) (3,308)
Investments in trademarks and trade
names and management contracts (131) (278)
Other assets (51) (842)
---------------------------
CASH USED IN CAPITAL INVESTMENTS (26,088) (4,733)
---------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (26,533) 747
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
DUE TO UNREALIZED FOREIGN EXCHANGE GAIN (LOSS) (1,680) 133
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 226,377 132,099
---------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 198,164 $132,979
===========================
See accompanying notes to consolidated financial statements.
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FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
THREE MONTHS ENDED
(UNAUDITED) MARCH 31,
(IN THOUSANDS OF US DOLLARS) 2005 2004
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RETAINED EARNINGS, BEGINNING OF PERIOD $ 192,129 $ 169,364
NET EARNINGS 5,202 8,705
---------------------------
RETAINED EARNINGS, END OF PERIOD $ 197,331 $ 178,069
===========================
See accompanying notes to consolidated financial statements.
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FOUR SEASONS HOTELS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS OF US DOLLARS EXCEPT SHARE AMOUNTS)
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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 most recently prepared annual consolidated financial
statements for the year ended December 31, 2004.
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, 2004, except
as disclosed below:
(A) CHANGE IN REPORTING CURRENCY:
We have historically prepared our consolidated financial statements in
Canadian dollars. Effective for the three months ended March 31, 2005, we
have adopted US dollars as our reporting currency. With the majority of our
management fee revenues in US dollars, reporting in US dollars should
reduce the volatility on reported results relating to the impact of
fluctuations in the rate of exchange between the US and Canadian dollar
relating to these revenues and, as a result, we believe it will provide our
financial statement users with more meaningful information. We have not
changed the functional currency of Four Seasons Hotels Inc., which remains
Canadian dollars, or the functional currencies of any of its subsidiaries.
The consolidated financial statements in Canadian dollars have been
translated to US dollars using the foreign exchange rates applicable at
each balance sheet date for assets and liabilities, and the weighted
average exchange rates of the corresponding quarters for the consolidated
statements of operations, consolidated statements of cash provided by
operations and consolidated statements of cash flows. Equity transactions
have been translated to US dollars at the historical exchange rates with
opening equity accounts on January 1, 2003 translated at the exchange rate
on that date. Any resulting exchange gain or loss was charged or credited
to "Equity adjustment from foreign currency translation" included as a
separate component of shareholders' equity.
(B) VARIABLE INTEREST ENTITIES:
The Canadian Institute of Chartered Accountants ("CICA") issued Accounting
Guideline No. 15, "Consolidation of Variable Interest Entities" ("AcG-15"),
which establishes criteria to identify variable interest entities ("VIE")
and the primary beneficiary of such entities. Entities that qualify as VIEs
must be consolidated by their primary beneficiary. Effective January 1,
2005, we adopted AcG-15 and have concluded that we do not have to
consolidate any interest under AcG-15.
(C) INVESTMENTS IN HOTEL PARTNERSHIPS AND CORPORATIONS:
In conjunction with the issuance of Section 3475, "Disposal of Long-Lived
Assets and Discontinued Operations", the CICA eliminated the exception from
consolidation for a temporary controlled subsidiary. Beginning January 1,
2005, we were required to either equity account or consolidate our
temporary investments in which we have over a 20% equity interest. In March
2005, we sold the majority of our equity interest in Four Seasons Residence
Club Scottsdale at Troon North (note 5), and in April 2005, we sold the
majority of our equity interest in Four Seasons Hotel Shanghai. As a result
of the sales, our equity
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interests in each property was reduced to less than 20%. The change in
accounting for these temporary investments did not have a material impact
on our consolidated financial statements for the three months ended March
31, 2005.
2. BANK CREDIT FACILITY:
We have a committed bank credit facility of $125,000, which expires in September
2007. As at March 31, 2005, no amounts were borrowed under this credit facility.
However, approximately $10,900 of letters of credit were issued under this
credit facility as at March 31, 2005. No amounts have been drawn under these
letters of credit.
3. SHAREHOLDERS' EQUITY:
As at March 31, 2005, we have outstanding Variable Multiple Voting Shares
("VMVS") of 3,725,698, outstanding Limited Voting Shares ("LVS") of 32,883,188
and outstanding stock options of 4,575,143 (weighted average exercise price of
C$59.33 ($49.05)).
(A) EARNINGS PER SHARE:
A reconciliation of the net earnings and weighted average number of VMVS
and LVS used to calculate basic and diluted earnings per share is as
follows:
THREE MONTHS ENDED
(UNAUDITED) MARCH 31,
(IN THOUSANDS OF US DOLLARS) 2005 2004
-----------------------------------------------------------------------------------------------
NET EARNINGS SHARES NET EARNINGS SHARES
-----------------------------------------------------------------------------------------------
Basic Earnings Per Share Amounts $ 5,202 36,608,763 $ 8,705 35,289,622
Effect of Assumed Dilutive Conversions:
Stock Option Plan -- 1,535,543 -- 1,435,122
------------------------------------------------------------------------------------------------
Diluted Earnings Per Share Amounts $ 5,202 38,144,306 $ 8,705 36,724,744
================================================================================================
The diluted earnings per share calculation excluded the effect of the
assumed conversions of 9,000 stock options to LVS, under our stock option
plan, during the three months ended March 31, 2005 (2004 - 1,407,796 stock
options), as the inclusion of these conversions would have resulted in an
anti-dilutive effect. There was no dilution relating to the convertible
senior notes issued in 2004, as the contingent conversion price was not
reached during the period. In addition, the dilution relating to the
conversion of our convertible notes (issued in 1999 and redeemed in
September 2004) to 3,463,155 LVS, by application of the "if-converted
method", has been excluded from the calculation as the inclusion of this
conversion would have resulted in an anti-dilutive effect for the three
months ended March 31, 2004.
(B) STOCK-BASED COMPENSATION:
We use the fair value-based method to account for 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.
There were no stock options granted in the three months ended March 31,
2005. The fair value of stock options granted in the three months ended
March 31, 2004 was estimated using the Black-Scholes option pricing model
with the following assumptions: risk-free interest rates ranging from 2.96%
to 3.81%; semi-annual dividend per LVS of C$0.055; volatility factor of the
expected market price of our LVS of 30%; and expected lives of the options
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 ended March 31, 2004, the weighted average fair value of the
options at the grant dates was C$27.00 ($20.49). For purposes of stock
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option expense and pro forma disclosures, the estimated fair value of the
options is amortized to compensation expense over the options' vesting
period.
Pro forma disclosure is required to show 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 ended March 31, 2005 and 2004, if we had applied the
fair value-based method to options granted from January 1, 2002 to December
31, 2002, our net earnings and basic and diluted earnings per share would
have been adjusted to the pro forma amounts indicated below:
(UNAUDITED) THREE MONTHS ENDED
(IN THOUSANDS OF US DOLLARS MARCH 31,
EXCEPT PER SHARE AMOUNTS) 2005 2004
---------------------------------------------------------------------------
Stock option expense included
in compensation expense $ (494) $ (313)
==========================
Net earnings, as reported $ 5,202 $ 8,705
Additional expense that would have been
recorded if all outstanding stock options
granted during 2002 had been expensed (691) (652)
--------------------------
Pro forma net earnings $ 4,511 8,053
--------------------------
Earnings per share:
Basic, as reported $ 0.14 $ 0.25
Basic, pro forma 0.12 0.23
Diluted, as reported 0.14 0.24
Diluted, pro forma 0.12 0.22
--------------------------
4. CONSOLIDATED REVENUES:
THREE MONTHS ENDED
(UNAUDITED) MARCH 31,
(IN THOUSANDS OF US DOLLARS) 2005 2004
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Revenues from Management Operations (A) $ 43,571 $ 37,646
Revenues from Ownership and
Corporate Operations 20,517 20,332
Fees from Ownership and Corporate
Operations to Management Operations (991) (857)
--------------------------
$ 63,097 $ 57,121
==========================
(A) Effective January 1, 2004, we ceased designating our US dollar forward
contracts as hedges of our US dollar fee revenues. These contracts were
entered into during 2002, and all of these contracts matured during 2004.
The foreign exchange gains on these contracts of $11,201, which were
deferred prior to January 1, 2004, were recognized in 2004 as an increase
of fee revenues over the course of the year. During the three months ended
March 31, 2004, we recognized $2,720 of the deferred gain in fee revenues.
We did not hedge any of our US dollar fee revenues during the three months
ended March 31, 2005. In addition, effective January 1, 2004, the US dollar
forward contracts were marked-to-market on a monthly basis with the
resulting changes in fair values being recorded as a foreign exchange gain
or loss and was included in other income (expense), net. This resulted in a
$428 foreign exchange loss for the three months ended March 31, 2004.
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5. OTHER INCOME (EXPENSE), NET:
Included in other income (expense), net for the three months ended March 31,
2005 is a net foreign exchange loss of $393 (2004 - net foreign exchange gain of
$3,513) 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 designated foreign self-sustaining subsidiaries.
In March 2005, we sold the majority of our equity interest in Four Seasons
Residence Club Scottsdale at Troon North for gross proceeds of $5,346, which
approximated book value. As a result of the sale, our equity interest in the
residence club was reduced to approximately 14%. Subsequent to March 31, 2005,
we sold approximately 53% of our equity interest in Four Seasons Hotel Shanghai,
which reduced our interest to approximately 10%. As a result of the sale, we
revalued this US dollar investment at March 31, 2005 at current exchange rates
and recorded a loss of $1,930, which is included in other income (expense), net,
during the three months ended March 31, 2005.
6. PENSION BENEFIT EXPENSE:
The pension benefit expense, after allocation to managed properties, for the
three months ended March 31, 2005 was $621 (2004 - $575).
7. GUARANTEES AND OTHER COMMITMENTS:
We have provided certain guarantees and have other similar commitments typically
made in connection with properties under our management totalling a maximum of
$40,900. These contractual obligations and other commitments are more fully
described in the consolidated financial statements for the year ended December
31, 2004. Since December 31, 2004, we have reduced one of our bank guarantees
and extended a new commitment to one property under our management, resulting in
a net decrease in guarantees and other commitments of $4,600.
8. SEASONALITY:
Our hotels and resorts are affected by normally recurring seasonal patterns and
demand is usually lower in the period from December through March than during
the remainder of the year for most of our urban properties. However, December
through March is typically a period of relatively strong demand at our resorts.
As a result, our management operations are affected by seasonal patterns, both
in terms of revenues and operating results. Urban hotels generally experience
lower revenues and operating results in the first quarter. This negative impact
on management revenues from those properties is offset to some degree by
increased travel to our resorts in the period.
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.
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9. CURRENCY AND INTEREST RATE SWAP:
In April 2005, we entered into a currency and interest rate swap agreement to
July 30, 2009, pursuant to which we have agreed to receive interest at a fixed
rate of 5.33% per annum on an initial notional amount of $215,842 and pay
interest at a floating rate of six-month Canadian Bankers Acceptance in arrears
plus 1.1% per annum on an initial notional amount of C$269.2 million. On July
30, 2009, we will pay C$311.8 million and receive $250,000 under the swap. We
have designated the swap as a fair value hedge of our convertible senior notes,
which were issued in 2004.
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