Exhibit 99.1
FOUR SEASONS
HOTELS AND RESORTS
[GRAPHIC OMITTED]
NEWS
AUGUST 11, 2005 CONTACT: DOUGLAS L. LUDWIG
CHIEF FINANCIAL OFFICER
AND EXECUTIVE VICE PRESIDENT
(416) 441-4320
BARBARA HENDERSON
VICE PRESIDENT, CORPORATE FINANCE
(416) 441-4329
FOUR SEASONS HOTELS INC.
REPORTS SECOND QUARTER 2005 RESULTS
TORONTO, CANADA -- FOUR SEASONS HOTELS INC. (TSX SYMBOL "FSH.SV"; NYSE SYMBOL
"FS") today reported its results for the second quarter ended June 30, 2005.
As previously announced, effective the first quarter of 2005, we have adopted US
dollars as our reporting currency. All amounts disclosed in this news release
(including amounts for prior periods) are in US dollars unless otherwise
noted.(1)
HIGHLIGHTS OF THE SECOND QUARTER OF 2005
As described in greater detail in the accompanying Management's Discussion and
Analysis, for the three months ended June 30, 2005, in each case as compared to
the same period in 2004:
o RevPAR(2) of worldwide and US Core Hotels(3) increased 12.8% and
13.6%, respectively.
o Gross operating margins(4) at worldwide Core Hotels increased 270
basis points to 33.1% and increased 290 basis points to 30.7% at US
Core Hotels.
o Revenues under management increased 18.5%.
o Management fee revenues (excluding reimbursed costs(5) and the impact
of forward exchange contracts(6))(7) increased 16.0%, including
incentive fees which increased 36.7%.
o Net earnings were $15.8 million ($0.43 basic earnings per share and
$0.42 diluted earnings per share), as compared to net earnings of
$12.8 million ($0.36 basic earnings per share and $0.34 diluted
earnings per share).
1
"Luxury travel demand trends continue the strength shown over the past few
quarters in virtually all of our markets. The luxury segment continues to lead
the industry in occupancy and room rate improvements," said Douglas L. Ludwig,
Chief Financial Officer and Executive Vice President. "Some of this improvement
in hotel operating fundamentals may not be apparent in our management operations
earnings due to the further weakening of the US dollar, which has negatively
affected the pace of improvement in these earnings when expressed in US dollars.
The near-term outlook for continued improvement in demand and room rates is
encouraging."
Additionally, during the quarter:
o We finalized the sale of approximately 53% of our interest in Four
Seasons Hotel Shanghai, with the result that we now hold an interest
of approximately 10% in that property.
o We entered into a currency and interest rate swap related to our
convertible senior notes that is intended to reduce our net interest
costs over the near-term.
o Four Seasons Hotel Doha and Four Seasons Private Residences Whistler,
British Columbia opened.
REFINING THE PORTFOLIO
We have now completed the disposition of The Pierre, a significant milestone
toward our long-term strategic objective of reducing exposure to hotel ownership
and the associated volatile impact on earnings caused by, among other things,
business cycles, seasonality and event risks. This is the latest in a series of
refinements to the portfolio in the last several years aimed at improving our
financial position and strengthening the quality of our hotel management
portfolio through strategic divestitures and significant enhancements to
established hotels, as well as important new openings.
"Divesting of our ownership in The Pierre this year and Four Seasons Hotel
Berlin in 2004 reflects our focus on hotel management, which is our expertise,"
said Isadore Sharp, Chairman and Chief Executive Officer, Four Seasons Hotels
and Resorts.
During the second quarter, we agreed to a sale process for The Ritz-Carlton
Chicago. Upon completion of a sale, we will cease to manage that hotel and will
be entitled to receive payment in an amount that we believe will compensate us
for the value of our long-term management contract.
"The owner of The Ritz-Carlton Chicago is also the owner of Four Seasons Hotel
Chicago and plans to undertake significant enhancements to that hotel. This
change will give us the opportunity to reinforce the leadership position our
brand has long enjoyed in the Chicago market with a pre-eminent position for
Four Seasons Hotel Chicago," said Kathleen Taylor, President, Worldwide Business
Operations.
2
The owner of Four Seasons Hotel Newport Beach, The Irvine Company, has decided
to independently manage their hotel. Under the terms of this management
agreement, they would have the ability to make this change to their management
if they are prepared to change the use of the property for an extended period of
time. To avoid the disruption to guests and employees that would be caused by
such change of use, Four Seasons and the owner have agreed to a monetary
settlement satisfactory to both of them. The transition is scheduled to occur on
October 31, 2005.
"Although it is unusual for us to cease management of a property before the
contract term expires, we do consider opportunities to improve our market
position by leaving one property to pursue others in the same region," said Ms.
Taylor. "This strategy has worked well for us in destinations such as Hong Kong,
San Francisco and Seattle, which represent state of the art, landmark
properties."
"At the same time, Four Seasons presence in California continues to grow," said
Ms. Taylor, "soon with the introduction of new hotels in Silicon Valley and
Westlake Village, near Los Angeles. We are also seeing significant enhancement
to California properties which we manage, including the landmark Four Seasons
Resort, The Biltmore Santa Barbara and The Regent Beverly Wilshire in Los
Angeles.
The trend to significantly upgrade hotels under our management is reflected more
broadly throughout properties under our management. Hotels which have undergone,
or are in the process of undergoing, significant enhancement include Four
Seasons properties in New York, Washington, Boston, Scottsdale, Philadelphia,
Las Vegas and the Maldives. Projects recently added to the development pipeline
include properties in Toronto and Marrakech.
LOOKING AHEAD
Recent terrorist activity may cause further disruptions to travel patterns that
currently cannot be predicted, which in turn makes it more difficult to provide
RevPAR and gross operating margins guidance at this time. However, assuming the
travel trends that we experienced in 2004 and the first half of 2005 continue,
and based on current demand reflected in our reservation activity, we expect
RevPAR for worldwide Core Hotels in the third quarter of 2005 and the full year
2005 to increase by approximately 10% and approximately 11%, respectively, as
compared to the corresponding periods in 2004. We expect that this improvement
will result from occupancy and pricing improvements in all geographic regions.
If current trends continue, we expect gross operating margins of our worldwide
Core Hotels to increase more than 220 basis points for the full year of 2005, as
compared to the full year of 2004.
3
SECOND QUARTER OF 2005
MANAGEMENT'S DISCUSSION AND ANALYSIS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A") FOR THE THREE MONTHS AND SIX
MONTHS ENDED JUNE 30, 2005 IS PROVIDED AS OF AUGUST 10, 2005. 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, 2004 AND THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR THAT PERIOD. EXCEPT AS DISCLOSED IN THIS
MD&A AND THE MD&A FOR THE THREE MONTHS ENDED MARCH 31, 2005, AS OF AUGUST 10,
2005 THERE HAS BEEN NO MATERIAL CHANGE IN THE INFORMATION DISCLOSED IN THE MD&A
FOR THE YEAR ENDED DECEMBER 31, 2004. 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 8.
Effective for the quarter ended March 31, 2005, we have adopted the US dollar as
our reporting currency. We have not changed our functional currency, which
remains Canadian dollars, or the functional currencies of any of our
subsidiaries. All amounts disclosed in this MD&A (including amounts for prior
periods) are in US dollars unless otherwise noted.(1)
OPERATING ENVIRONMENT
SEASONALITY
Four Seasons 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. With the disposition of our
leasehold interest in The Pierre at the end of the second quarter of 2005 (as
discussed below under "Disposition of Hotel Investments"), we have substantially
reduced the exposure to seasonality in our ownership operations. It remains our
objective to further reduce our ownership exposure by modifying or restructuring
our leasehold interest in Four Seasons Hotel Vancouver, our only remaining
leasehold interest. There can be no assurance that acceptable alternative
arrangements can be found with respect to this hotel or as to the terms of any
such arrangements.
4
HOTEL OPERATING RESULTS
- -------------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 2005 Six months ended June 30, 2005
increase over increase over
three months ended June 30, 2004 six months ended June 30, 2004
(percentage change, on US dollar basis) (percentage change, on US dollar basis)
- -------------------------------------------------------------------------------------------------------------------------
REGION RevPAR Gross Operating Gross RevPAR Gross Operating Gross
Revenue (GOR) Operating Revenue (GOR) Operating
Profit (GOP) Profit (GOP)
- -------------------------------------------------------------------------------------------------------------------------
WORLDWIDE CORE HOTELS 12.8% 12.9% 22.7% 13.2% 12.2% 21.3%
- -------------------------------------------------------------------------------------------------------------------------
US CORE HOTELS 13.6% 12.2% 23.9% 13.0% 11.1% 21.4%
- -------------------------------------------------------------------------------------------------------------------------
OTHER AMERICAS/ 17.6% 19.5% 43.0% 18.4% 17.3% 32.8%
CARIBBEAN CORE HOTELS
- -------------------------------------------------------------------------------------------------------------------------
EUROPE CORE HOTELS 4.6% 6.7% 2.2% 5.0% 6.8% 2.4%
- -------------------------------------------------------------------------------------------------------------------------
MIDDLE EAST CORE HOTELS 28.3% 35.3% 65.5% 26.9% 34.0% 62.3%
- -------------------------------------------------------------------------------------------------------------------------
ASIA/PACIFIC CORE HOTELS 14.1% 11.5% 23.2% 16.4% 11.7% 20.6%
- -------------------------------------------------------------------------------------------------------------------------
Underlying these operating results:
o RevPAR for worldwide Core Hotels increased 12.8% in the second quarter of
2005, as compared to the same period in 2004, reflecting increased demand
and improvements in achieved room rates in most markets. Revenue
improvements and continued cost management efforts at the properties under
management resulted in the significant increases in gross operating profits
(an increase of 22.7% as compared to the second quarter of 2004) and gross
operating margins (an increase of 270 basis points as compared to the
second quarter of 2004), despite continued pressure on profitability due to
higher costs relating primarily to labour (including health care, benefits
and worker's compensation) and energy. Similar improvements were achieved
for the first six months of 2005, as compared to the same period in 2004,
with RevPAR for worldwide Core Hotels increasing 13.2%, gross operating
revenue improving 12.2%, gross operating profit increasing 21.3% and gross
operating margins increasing 230 basis points.
o Virtually all of the US Core Hotels under management realized improvements
in RevPAR and gross operating profits in the second quarter of 2005, as
compared to the same period in 2004, resulting in a 13.6% and 23.9%
increase in RevPAR and gross operating profits, respectively. The only
exception was Four Seasons Hotel Houston, which continues to experience
pressure on rates due to increased supply in that market. Properties under
management in Miami, New York, Jackson Hole, Chicago and Philadelphia
realized particularly strong improvements in RevPAR and gross operating
profits, relative to the average for the region. For the six months ended
June 30, 2005,
5
RevPAR increased 13.0%, primarily as a result of a 460 basis point increase
in occupancy and a 6.0% increase in achieved room rates, and gross
operating profits increased 21.4%.
o The Other Americas/Caribbean Core Hotels experienced improved demand and
higher achieved room rates, resulting in a RevPAR improvement of 17.6% in
the second quarter of 2005, as compared to the second quarter of 2004. Also
in the second quarter of 2005, gross operating profits and gross operating
margins increased 43.0% and 510 basis points, respectively, which was
primarily attributable to strong improvements at the properties under
management in Exuma and Buenos Aires. For the six months ended June 30,
2005, the 18.4% improvement in RevPAR was mainly driven by a 7.7% increase
in achieved room rates.
o For the second quarter of 2005, RevPAR in the Europe Core Hotels increased
4.6%, reflecting strong operating results at the hotels under management in
Istanbul, Milan, Paris, and Prague relative to the other hotels in the
region. The hotel under management in Lisbon continued to experience
relatively large RevPAR and gross operating profit declines in the quarter
due to lower corporate and group demand, as well as additional pressure on
rates in that market. Gross operating margins declined 180 basis points in
the second quarter of 2005, as compared to the same period in 2004, as
overall demand in Europe continued to lag behind the other regions in which
we manage hotels and resorts, in part as a result of a more highly valued
Euro relative to the US dollar. For the six months ended June 30, 2005,
RevPAR increased 5.0%. However, the operating results of hotels under
management in Lisbon and Canary Wharf remained lower relative to the other
hotels in the region, primarily due to lower corporate and group demand
and, in the case of Canary Wharf, new supply coming into the market. While
there was a moderate 2.4% increase in gross operating profits, gross
operating margins declined 140 basis points to 34.0% in the first six
months of 2005, as compared to the first six months of 2004.
o RevPAR improvements in the second quarter of 2005 at the Middle East Core
Hotels were primarily driven by an 18.3% increase in achieved room rates,
as compared to the same period in 2004. Virtually all of the properties in
the region experienced improved demand during the second quarter and for
the first six months of 2005, as compared to the same periods in the prior
year. The Middle East Core Hotels achieved a 65.5% improvement in gross
operating profits and an 860 basis points increase in gross operating
margins in the second quarter of 2005, as compared to the same period in
2004. For the first six months of 2005, RevPAR for the Middle East Core
Hotels improved 26.9% and gross operating margins increased 830 basis
points, as compared to the same period in 2004.
o Asia/Pacific Core Hotels had a 14.1% RevPAR improvement in the second
quarter of 2005, as compared to the same period in 2004, which was
primarily driven by a 6.7% increase in achieved room rates. Gross operating
margins and gross operating profits in the second quarter of 2005 improved
310 basis points and 23.2%, respectively, compared to the same period in
2004. In particular, properties in Jakarta, Singapore and Shanghai had
strong improvements in both RevPAR and gross operating profits. For the
first six months of 2005, RevPAR improved 16.4%, as compared to the same
period in 2004,
6
reflecting a 470 basis point improvement in occupancy and a 6.7% increase
in achieved room rates.
FINANCIAL REVIEW AND ANALYSIS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO THREE MONTHS AND SIX
MONTHS ENDED JUNE 30, 2004
MANAGEMENT OPERATIONS
For the three months ended June 30, 2005, management fee revenues (excluding
reimbursed costs and the $2.8 million impact of forward exchange contracts)
increased 16.0% ($4.5 million) to $32.3 million, as compared to $27.8 million in
the second quarter of 2004. Management fee revenues (including reimbursed costs
and the impact of forward exchange contracts) increased 9.2% ($4.1 million) to
$48.3 million in the second quarter of 2005, as compared to $44.2 million in the
second quarter of 2004.
For the six months ended June 30, 2005, management fee revenues (excluding
reimbursed costs and the $5.5 million impact of forward exchange contracts)
increased 21.6% ($10.9 million) to $61.3 million, as compared to $50.4 million
in the same period in 2004. Management fee revenues (including reimbursed costs
and the impact of forward exchange contracts) increased 12.2% ($10.0 million) to
$91.9 million in the six months ended June 30, 2005, as compared to $81.9
million in the same period in 2004.
For the three months and six months ended June 30, 2005, reimbursed costs
increased $2.4 million and $4.7 million, respectively, as compared to the
corresponding periods in 2004. The increase was attributable to more properties
opening and being under development compared to the same periods in 2004.
The increases in management fee revenues for the three months and six months
ended June 30, 2005 noted above were the result of the improvement in revenues
under management stemming from RevPAR and other revenue increases at the
worldwide Core Hotels.
Excluding the impact of forward exchange contracts, incentive fees increased
36.7% and 40.6% in the three months and six months ended June 30, 2005,
respectively, as compared to the same periods in 2004. Including the impact of
forward exchange contracts, incentive fees increased 29.6% and 31.1% in the
three months and six months ended June 30, 2005, respectively, as compared to
the same periods in 2004. 42 of the hotels and resorts under management accrued
incentive fees during these periods, as compared to 36 and 37 during the
corresponding periods last year. The increase in incentive fees was attributable
primarily to the improvement in gross operating profit at the properties under
management in each of the geographic regions in which we operate. All six of our
properties under management in the Middle East accrued incentive fees during the
second quarter and first six months of 2005, as compared to two and three in the
same periods in 2004.
7
Despite the strong operating fundamentals in the second quarter, management fee
revenue growth was more modest due to foreign exchange currency fluctuations and
lower residential fees earned in the second quarter of 2005, as compared to the
second quarter of 2004. The $1.2 million decline in residential fees is
primarily attributable to no residential royalty fees in respect of our projects
in Whistler, Miami and Jackson Hole being earned in the second quarter of 2005,
as compared to the same period in 2004. The limited number and size of our
residential projects and their specialized target market make it difficult to
predict the timing of sales and the resulting royalty fees that may be earned.
As a result, it will continue to be difficult to predict the timing of fee
revenues from our residential business.
Several of the hotels and resorts under our management are and will be
undergoing significant renovations during this year. We expect the majority of
the renovations at Four Seasons properties in Washington, Las Vegas and the
Maldives to be completed by the end of 2005. Significant renovation programs at
other hotels under management, including Boston, Santa Barbara, Philadelphia and
The Regent Beverly Wilshire are expected to be substantially completed in 2006.
Based on the scheduling and staging of these renovations, we expect these
programs to have some, but not a material, effect on fee revenues in the last
two quarters of 2005.
General and administrative expenses (excluding reimbursed costs) increased 12.0%
to $9.5 million in the second quarter of 2005, as compared to $8.4 million for
the same period in 2004. Including reimbursed costs, general and administrative
expenses increased 15.6% to $25.5 million in the second quarter of 2005, as
compared to $22.1 million for the same period in 2004.
The majority of these costs are in Canadian dollars and, accordingly, a
substantial portion of this increase is attributable to the US dollar having
declined relative to the Canadian dollar since the second quarter of 2004. On a
Canadian dollar basis, general and administrative expenses (excluding reimbursed
costs) increased 2.6% during the quarter, as compared to the same period last
year. The modest increase in these costs related primarily to an increase in the
number of employees at our corporate offices to handle the significant unit
growth in our portfolio, which was offset somewhat by a reduction in certain
costs, including relatively low travel costs during the second quarter.
General and administrative expenses (excluding reimbursed costs) increased 15.1%
to $19.2 million in the first six months of 2005, as compared to $16.7 million
in the same period in 2004. General and administrative expenses (including
reimbursed costs) increased 16.8% to $49.8 million in the first six months of
2005, as compared to $42.6 million in the same period in 2004. On a Canadian
dollar basis, general and administrative expenses (excluding reimbursed costs)
increased 6.2% during the first half of 2005, as compared to the same period
last year. The increase in these costs related primarily to an increase in the
number of employees at our corporate offices to handle the significant unit
growth in our portfolio and to cost of living increases for corporate employees
that were implemented at the beginning of 2005.
As a result of the items described above, our management operations earnings
before other operating items (excluding reimbursed costs and the impact of
forward exchange contracts) for the second quarter of 2005 increased 17.8% to
$22.8 million, as compared to $19.3 million in the
8
second quarter of 2004. Our management operations profit margin(9) (excluding
reimbursed costs and the impact of forward exchange contracts) increased 110
basis points to 70.7% in the second quarter of 2005, as compared to 69.6% in the
second quarter of 2004.
For the six months ended June 30, 2005, our management operations earnings
before other operating items (excluding reimbursed costs and the impact of
forward exchange contracts) increased 24.8% to $42.1 million, as compared to
$33.7 million for the same period in 2004. Our management operations profit
margin (excluding reimbursed costs and the impact of forward exchange contracts)
increased to 68.7% for the six months ended June 30, 2005, as compared to 66.9%
for the six months ended June 30, 2004.
Our management operations earnings before other operating items (including
reimbursed costs and the impact of forward exchange contracts) for the three
months ended June 30, 2005 remained relatively unchanged at $22.8 million,
compared to $22.1 million for the same period in 2004. For the six months ended
June 30, 2005, our management operations earnings before other operating items
(including reimbursed costs and the impact of forward exchange contracts)
increased 7.3% to $42.1 million, as compared to $39.2 million in the same period
in 2004. Our management operations profit margin (including reimbursed costs and
the impact of forward exchange contracts) was 47.2% in the second quarter of
2005, as compared to 50.1% in the second quarter of 2004 and 45.8% for the six
months ended June 30, 2005, as compared to 47.9% for the same period in 2004.
OWNERSHIP AND CORPORATE OPERATIONS(10)
In the second quarter of 2005, operating results from ownership and corporate
operations before other operating items were a loss of $2.3 million, as compared
to a loss of $1.3 million in the second quarter of 2004.
For the six months ended June 30, 2005, operating results from ownership and
corporate operations before other operating items were a loss of $9.1 million,
as compared to a loss of $8.7 million for the same period in 2004.
CORPORATE COSTS, INCLUDING COMPLIANCE COSTS
For the three months and six months ended June 30, 2005, our corporate and
compliance costs, including the ongoing implementation of the substantive
changes to governance and disclosure requirements applicable to public companies
in the US and Canada and other public company costs, increased $0.8 million and
$0.7 million to $3.1 million and $5.4 million, respectively, as compared to $2.3
million and $4.7 million for the respective periods in 2004. The majority of
these costs are in Canadian dollars and, accordingly, some of the increase is
attributable to the US dollar having declined relative to the Canadian dollar
since the second quarter of 2004. On a constant currency basis, corporate and
compliance costs for the three months and six months ended June 30, 2005
increased $0.5 million and $0.2 million, respectively, as compared to the
corresponding periods in 2004.
9
THE PIERRE
In June 2005, Four Seasons disposed of its interest in The Pierre and ceased
managing the property on June 30, 2005.(11) Further details on the disposition
of this investment are discussed below under "Disposition of Hotel Investments".
RevPAR at The Pierre increased 17.4% in the second quarter of 2005, as compared
to the same period in 2004, as a result of a 4.4% improvement in occupancy and
an 11.5% increase in achieved room rates. These increases reflected the higher
travel demand in New York, particularly in leisure travel, during the quarter.
As a result, operating results at The Pierre improved by $0.2 million to
earnings of $1.2 million in the second quarter of 2005, as compared to earnings
of $1.0 million in second quarter of 2004.
RevPAR at The Pierre increased 20.1% in the first six months of 2005, as
compared to the same period in 2004, as a result of a 6.5% improvement in
occupancy and a 10.6% increase in achieved room rates. As a result, operating
results at The Pierre improved by $0.7 million to a loss of $0.8 million in the
first six months of 2005, as compared to a loss of $1.5 million in the first six
months of 2004.
FOUR SEASONS HOTEL VANCOUVER
RevPAR at Four Seasons Hotel Vancouver decreased 1.6% for the three months ended
June 30, 2005, as compared to the same period in 2004, primarily as the result
of slight declines in occupancy and achieved room rates. Operating results at
the hotel remained relatively unchanged with a loss of $0.2 million in both the
second quarter of 2005 and 2004.
RevPAR at Four Seasons Hotel Vancouver increased 3.0% in the six months ended
June 30, 2005, as compared to the same period in 2004, primarily as the result
of an improvement in occupancy, partially offset by a modest decrease in
achieved room rates. Operating results at the hotel remained relatively flat,
with a loss of $2.4 million in the first half of 2005, as compared to a loss of
$2.2 million in the first half of 2004, mainly due to an offsetting reduction in
banquet revenue.
We are continuing to review options in respect of Four Seasons Hotel Vancouver
to determine what, if any, alternatives may be available to modify or
restructure our operation of, or investment in, this hotel. There can be no
assurance that acceptable alternative arrangements can be found with respect to
this hotel or as to the terms of any such alternative arrangements.
OTHER INCOME/EXPENSE, NET
Other expense, net for the second quarter of 2005 was $8.6 million, as compared
to other expense, net of $2.2 million for the same period in 2004. Other
expense, net for the six months ended June 30, 2005 was $11.4 million, as
compared to other income, net of $1.1 million for the same period in 2004.
10
DISPOSITION OF HOTEL INVESTMENTS
In April 2005, we sold approximately 53% of our equity interest in Four Seasons
Hotel Shanghai for gross proceeds of $9.5 million (cash of $4.2 million and a
loan receivable of $5.3 million), which approximated book value, and reduced our
interest in the hotel 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 $1.9 million for the three months ended March 31, 2005.
On June 30, 2005, we finalized the assignment of our leases and the sale of the
related assets in The Pierre for net proceeds of $4.5 million. The net book
value of our assets in The Pierre was $7.8 million and, after deducting
disposition costs, we recorded a loss on sale of $5.0 million. We also recorded
a tax benefit in connection with the sale of $9.2 million, which is discussed
further under "Income Tax Expense" below.
As part of the sale of The Pierre, in accordance with statutory provisions, the
purchaser agreed to assume a portion of our contribution history with a
multi-employer pension fund for the unionized hotel employees (the "NYC
Pension"). This permitted us to withdraw from the NYC Pension without incurring
a withdrawal liability estimated at $10.7 million. In certain limited
circumstances, as a part of our agreement, we may be required to pay a portion
of the purchaser's withdrawal liability, if any.
We believe that the likelihood of our being required to make a payment is
remote, and have not recorded any amount as at June 30, 2005 in respect of a
potential NYC Pension withdrawal liability. For further details, please see note
5 to our interim consolidated financial statements for the three months and six
months ended June 30, 2005.
FOREIGN EXCHANGE
Other expense for the second quarter of 2005 included a $3.3 million foreign
exchange loss, as compared to a $2.2 million foreign exchange loss for the same
period in 2004. Other expense for the six months ended June 30, 2005 included a
$3.7 million foreign exchange loss, as compared to a $1.3 million foreign
exchange gain for the same period in 2004.
Foreign exchange gains and losses arose primarily from the translation to
Canadian dollars (using current exchange rates at the end of each quarter) of
our foreign currency-denominated net monetary assets, which are not included in
our designated foreign self-sustaining subsidiaries. They also reflected local
currency foreign exchange gains and losses on net monetary assets incurred by
our designated foreign self-sustaining subsidiaries. Net monetary assets is the
difference between our foreign currency-denominated monetary assets and our
foreign currency-denominated monetary liabilities, and consists primarily of
cash and cash equivalents, accounts receivable, long-term receivables and
long-term obligations, as determined under Canadian generally accepted
accounting principles ("GAAP"). As a result of the currency swap relating to our
convertible senior notes which is described below, our net US dollar asset
position increased significantly during the second quarter of 2005. This
combined with the strengthening of the Canadian dollar relative to the US dollar
resulted in the foreign exchange loss during the second quarter of 2005.
11
Ongoing fluctuations in rates of exchange between currencies will likely result
in future foreign exchange gains or losses. Although we have engaged in hedging
activities in the past, we do not anticipate entering into any hedging
arrangements in the near-term due to the continued volatility of many foreign
currencies (and in particular the US dollar) and the associated costs of these
arrangements.
NET INTEREST INCOME
During the second quarter of 2005, we had net interest income of $0.8 million,
as compared to $0.5 million in the second quarter of 2004. Net interest income
is a combination of approximately $3.7 million in interest income and
approximately $2.9 million in interest expense in the second quarter of 2005, as
compared to $2.8 million and $2.3 million, respectively, for the same period in
2004. The increase in interest income for the second quarter of 2005, as
compared to the same period in 2004, was primarily attributable to increased
cash and cash equivalents as a result of the issuance of our convertible senior
notes in June 2004 and higher deposit interest rates.
During the six months ended June 30, 2005, we had net interest income of $1.2
million, as compared to $1.4 million in the six months ended June 30, 2004. Net
interest income is a combination of approximately $7.6 million in interest
income and approximately $6.4 million in interest expense in the first six
months of 2005, as compared to $6.0 million and $4.6 million, respectively, for
the same period in 2004. The increase in interest income for the six months
ended June 30, 2005, as compared to the same period in 2004, was primarily
attributable to increased cash and cash equivalents and higher deposit interest
rates, as well as new loans to certain properties under our management.
The increase in interest expense was attributable, in part, to the variance in
interest expense relating to the convertible senior notes issued during the
second quarter of 2004, as compared to the interest costs relating to our
previously outstanding Liquid Yield Option Notes ("LYONs") during 2004. For
accounting purposes, the convertible senior notes are bifurcated into debt and
equity components under Canadian GAAP, and a notional interest rate is applied
to the portion that is allocated to the debt component. Although the interest
rate that is applied to the convertible senior notes is lower than the rate
applied to the LYONs, a larger component of the convertible senior notes is
allocated to debt than was the case with the LYONs. As a result, for accounting
purposes, the interest expense associated with the convertible senior notes is
higher than was the case for the LYONs.
As discussed below in "Liquidity and Capital Resources", we have entered into
currency and interest rate swap arrangements relating to the convertible senior
notes. Taking into account the amortization of the gain on a terminated swap and
the existing swap, the effective interest rate on the convertible senior notes
in the second quarter of 2005 was approximately 3.4%, which represents $1.8
million of interest expense for that period. For the six months ended June 30,
2005, the effective interest rate on the convertible senior notes was
approximately 4.0%, which represents $4.3 million of interest expense for the
six months.
12
Interest expense also includes amounts relating to financing fees and to our
international retirement plan.
INCOME TAX EXPENSE
Our effective tax rates for the three months and six months ended June 30, 2005,
prior to considering the impact of our sale of The Pierre, were 19.3% and 22.6%,
respectively, as compared to effective tax rates of 22.5% and 22.2% for the
respective periods in 2004. The variation from our expected 24% tax rate is the
result of certain items not being tax effected, including a portion of the
foreign exchange gains and losses, since they will never be realized for tax
purposes. Excluding these items and prior to considering the tax impact of our
sale of The Pierre, our tax rate would have been our expected 24%.
As a result of disposing of The Pierre, we realized a tax benefit of
approximately $6.4 million on the disposition of the fixed assets, which
included significant leasehold improvements. In addition to the ordinary tax
loss on the fixed assets, we will incur a capital loss on the dissolution of the
partnership that operated The Pierre, which will result in a tax benefit of
approximately $2.8 million.
NET EARNINGS AND EARNINGS PER SHARE
For the reasons outlined above, net earnings for the quarter ended June 30, 2005
were $15.8 million ($0.43 basic earnings per share and $0.42 diluted earnings
per share), as compared to net earnings of $12.8 million ($0.36 basic earnings
per share and $0.34 diluted earnings per share) for the quarter ended June 30,
2004.
For the reasons outlined above, net earnings for the six months ended June 30,
2005 were $21.0 million ($0.57 basic earnings per share and $0.55 diluted
earnings per share), as compared to net earnings of $21.5 million ($0.61 basic
earnings per share and $0.58 diluted earnings per share) for the six months
ended June 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITIES
During the second quarter of 2004, we issued $250 million principal amount of
convertible senior notes. For details relating to the terms of the convertible
senior notes, please refer to our MD&A for the year ended December 31, 2004.
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 $211.8 million as at June 18, 2004, which was estimated based on
the present value of a $250 million bond maturing in 2009, yielding 5.33% per
annum, compounded semi-annually, and paying interest at a rate of 1.875% per
annum) and an equity component of $39 million (representing the value of the
conversion feature of the convertible senior notes) as at June 18, 2004. For
further details,
13
see note 10(a) to our annual consolidated financial statements
for the year ended December 31, 2004.
In connection with the offering of the convertible senior notes, we entered into
a five-year interest rate swap agreement with an initial notional amount of
$211.8 million, pursuant to which we agreed to receive interest at a fixed rate
of 5.33% per year and pay interest at six-month LIBOR, in arrears, plus 0.4904%.
In October 2004, we terminated the interest rate swap agreement and received
proceeds of $9 million. The recognition of the resulting gain was deferred and
is being amortized through to July 30, 2009, which would have been the maturity
date of the swap.
In the second quarter of 2005, we entered into a new 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
$215.8 million (C$269.2 million) and pay interest at a floating rate of
six-month Canadian Bankers Acceptances ("BA") in arrears plus 1.1% per annum. On
July 30, 2009, we will pay C$311.8 million and receive $250 million under the
swap. We have designated the swap as a fair value hedge of our convertible
senior notes. This swap will allow us to take advantage of lower floating
interest rates, which should result in an economic and accounting savings of
approximately 136 basis points at current six-month BA rates, or approximately
$3.0 million on an annualized, pre-tax basis. This approximation will change as
BA rates change.
As at June 30, 2005, no amounts were borrowed under our $125 million bank credit
facility. However, approximately $4.0 million of letters of credit were issued
under that facility. No amounts have been drawn under these letters of credit.
We believe that, absent unusual opportunities or developments, this 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.
Our cash and cash equivalents were $218.6 million as at June 30, 2005, as
compared to $226.4 million as at December 31, 2004. The $7.8 million decrease in
cash and cash equivalents was primarily attributable to loans and other
investments made to properties under our management.
Long-term obligations (as determined under Canadian GAAP) increased from $256.8
million as at December 31, 2004 to $261.1 million as at June 30, 2005, primarily
as a result of the accretion of interest on the convertible senior notes.
CONTRACTUAL OBLIGATIONS 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
$47.0 million. These contractual obligations and other commitments are more
fully described in the MD&A for the year ended December 31, 2004. Since December
31, 2004, we have reduced two of our bank guarantees, reduced two of our other
commitments, and extended one new bank guarantee and two other commitments to
two properties under our management, resulting in a net increase in
14
guarantees and other commitments of $1.9 million. During the remainder of the
year, we expect to fund amounts relating to our management opportunities
described under "Investing/Divesting Activities" below. In addition, we expect
to fund approximately $21.0 million over the next 18 months in connection with
an expansion of our corporate office which is currently underway.
CASH FROM OPERATIONS
During the three months and six months ended June 30, 2005, we generated $23.9
million and $19.3 million, respectively, in cash from operations, as compared to
$21.1 million and $24.8 million, respectively, for the same periods in 2004.
The increase in cash from operations of $2.8 million in the second quarter of
2005 resulted primarily from a decrease in non-cash working capital of $2.6
million and an increase in net interest received of $1.5 million, partially
offset by an increase in income tax paid of $1.3 million.
The decrease in cash from operations of $5.5 million in the first six months of
2005 resulted primarily from an increase in non-cash working capital of $5.0
million, largely related to the settlement in the first quarter of 2005 of
incentive compensation accrued at December 31, 2004, and an increase in current
income tax paid of $4.2 million, partially offset by an increase in cash
contributed by management operations of $3.2 million.
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.
As described above under "Disposition of Hotel Investments", during the second
quarter of 2005, we sold approximately 53% of our equity interest in Four
Seasons Hotel Shanghai for gross proceeds of $9.5 million. We also finalized the
transfer of our leasehold interest and the sale of the related assets in The
Pierre for net proceeds of $4.5 million, leaving Four Seasons Hotel Vancouver as
our only leasehold interest. In addition to these items which occurred during
the second quarter of 2005, during the six months ended June 30, 2005, we also
received gross proceeds of $5.3 million from our sale of approximately 80% of
our equity interest in Four Seasons Residence Club Scottsdale at Troon North.
During the three and six months ended June 30, 2005, we were repaid $18.0
million and $19.1 million, respectively, in loans receivable, primarily from
Four Seasons Hotel San Francisco and Four Seasons Residence Club Scottsdale at
Troon North.
For the three months ended June 30, 2005, we funded $17.2 million to properties
under development or management, including amounts advanced as loans receivable
to properties in Geneva, Exuma, Buenos Aires, Budapest and Hampshire, as well as
minor equity investments in properties in Punta Mita and Palo Alto. For the six
months ended June 30, 2005, we funded
15
$44.6 million to properties under development or management, including amounts
advanced as loans receivable to properties in Toronto, Geneva, Exuma,
Washington, Buenos Aires, Scottsdale, Jackson Hole, Budapest and Hampshire, as
well as minor equity investments in properties in Damascus, Punta Mita and Palo
Alto. For the three months and six months ended June 30, 2005, we also funded a
total of $11.0 million and $14.2 million, respectively, in connection with an
expansion of our corporate office, which is currently underway, and our
commitment related to the Four Seasons Centre for the Performing Arts. These
levels of investment were consistent with our business plan.
During the remaining six months of 2005, we expect to fund up to $48.0 million
in respect of investments in, or advances in respect of or to owners of, various
projects, including properties in Buenos Aires, Punta Mita and Exuma, a new
resort in the Maldives and our project in Orlando, plus additional funding for
the property in Geneva and the expansion of our corporate office facilities.
In August 2005, we finalized an agreement with the owner of Four Seasons Hotel
Newport Beach pursuant to which, effective October 31, 2005, the owner
will begin to manage this property as an independent hotel. At the time of
transition, we will receive a payment in an amount that will exceed the net book
value of our investment in the management contract.
Over the remainder of this year, we anticipate receiving at least $50 million as
the result of repayment of investments made in certain of our managed
properties.
RETIREMENT BENEFIT PLAN
Since 1983, we have maintained a non-qualified, non-registered unfunded,
multi-employer, non-contributory "defined benefit" plan on behalf of the owners
of our managed properties and for our senior corporate employees. The current
plan provides supplemental retirement benefits for our senior corporate
executives as well as for our general managers and regional vice presidents
based on a formula that takes into account years and level of service and annual
salary. Our liability in connection with the current plan for our corporate
executives as at June 30, 2005 was $27.7 million.
Subject to approval of our Board, we are anticipating replacing the existing
plan later this year for the majority of the plan participants with a
fully-funded plan based on a "defined contribution" format, which should
increase the certainty and predictability of the costs of the retirement
benefits. The funding requirements relating to this new arrangement are
anticipated to be in the range of $35 million to $40 million at current exchange
rates. If a new plan is implemented this year on the basis of the structure
currently contemplated, at current exchange rates, we have estimated that the
transition would result in a one-time, after tax accounting loss in the range of
$20 million to $25 million. We do not expect that the proposed change will have
a significant impact on the ongoing annual pension cost. Our costs next year, in
respect of the contemplated new plan, are expected to be similar to the costs
incurred in 2004 for the current plan, increased by the cost of living and merit
salary increases of the participants.
16
LONG TERM INCENTIVE PLAN
Since 1986, long-term incentives have been provided to a large group of our
employees through stock options. Changes in the rules governing compensation,
including accounting rules and regulations related to stock options have caused
us to re-evaluate the use of stock options as the primary form of long-term
incentive to our employees. As a result of the re-evaluation, we have determined
to significantly reduce the use of stock options and are introducing a
restricted stock program. Under the restricted stock program, eligible employees
would be entitled to earn performance-based compensation, which will be used to
purchase shares on their behalf in the market. Subject to limited exceptions,
participants would not be able to dispose of those shares for a three-year
period. We expect the expense for the full year 2005 related to the restricted
stock program will be approximately $500,000.
OUTSTANDING SHARE DATA
- ----------------------------------------------------------------------- ---------------------------------------------
DESIGNATION OUTSTANDING AS AT AUGUST 3, 2005
- ----------------------------------------------------------------------- ---------------------------------------------
Variable Multiple Voting Shares(a) 3,725,698
- ----------------------------------------------------------------------- ---------------------------------------------
Limited Voting Shares 32,913,488
- ----------------------------------------------------------------------- ---------------------------------------------
Options to acquire Limited Voting Shares:
- ----------------------------------------------------------------------- ---------------------------------------------
Outstanding 4,540,843
- ----------------------------------------------------------------------- ---------------------------------------------
Exercisable 3,383,821
- ----------------------------------------------------------------------- ---------------------------------------------
Convertible Senior Notes issued June 2004 and due 2024(b) $250.05 million(c)
- ----------------------------------------------------------------------- ---------------------------------------------
<FN>
a) Convertible into Limited Voting Shares at any time at the option of the
holder on a one-for-one basis.
b) Details on the convertible senior notes are described more fully in our
annual MD&A for the year ended December 31, 2004.
c) This amount is equal to the issue price of the convertible senior notes
issued June 2004 and due 2024 plus accrued interest calculated at 1.875%
per annum.
</FN>
LOOKING AHEAD
Recent terrorist activity may cause further disruptions to travel patterns that
currently cannot be predicted, which in turn makes it more difficult to provide
RevPAR and gross operating margins guidance at this time. However, assuming the
travel trends that we experienced in 2004 and the first half of 2005 continue,
and based on current demand reflected in our reservation activity, we expect
RevPAR for worldwide Core Hotels in the third quarter of 2005 and the full year
2005 to increase by approximately 10% and approximately 11%, respectively, as
compared to the corresponding periods in 2004. We expect that this improvement
will result from occupancy and pricing improvements in all geographic regions.
If current trends continue, we expect gross operating margins of our worldwide
Core Hotels to increase more than 220 basis points for the full year of 2005, as
compared to the full year of 2004.
17
CHANGE IN REPORTING CURRENCY TO US DOLLARS
Effective the first quarter of 2005, we have adopted US dollars as our reporting
currency. All amounts disclosed in this MD&A (including amounts for prior
periods) are in US dollars unless otherwise noted.
The consolidated financial statements 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 flow. Equity transactions have been translated to US dollars
at the historical exchange rates for 2005 and 2004 with opening equity accounts
on January 1, 2004 translated at the exchange rate on that date. These exchange
rates are disclosed in notes 1 and 8. Any resulting exchange gain or loss was
charged or credited to "Equity adjustment from foreign currency translation",
which is included as a separate component of shareholders' equity.
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. As a result, while US dollar reporting will minimize the currency
fluctuations related to the majority of our US dollar management fee revenues,
it will not eliminate foreign currency fluctuations related to our management
fees in other currencies, or the majority of our management operations general
and administrative expenses, which are incurred in Canadian dollars. It will
also not eliminate foreign currency gains and losses related to unhedged net
monetary asset and liability positions.
CHANGES IN ACCOUNTING POLICIES
During the first six months of 2005, we adopted The Canadian Institute of
Chartered Accountants' ("CICA") new accounting standards on variable interest
entities and temporary controlled investments, as discussed in note 1 to the
interim consolidated financial statements. The adoption of these changes did not
have a material impact on our consolidated financial statements.
In June 2005, the Emerging Issues Committee of the CICA issued Abstract EIC-155,
"The Effect of Contingently Convertible Instruments on Diluted Earnings per
Share", which requires the application of the "if-converted method" to account
for the potential dilution relating to the conversion of contingently
convertible instruments, such as our convertible senior notes. EIC-155 will be
effective for periods beginning on or after October 1, 2005. If we had adopted
EIC-155 for the three months and six months ended June 30, 2005, there would
have been no additional dilution for either period.
18
ADDITIONAL INFORMATION
Additional information about us (including our most recent annual information
form, annual MD&A and our audited financial statements for the year ended
December 31, 2004) is available on SEDAR at www.sedar.com.
- ----------------------------------
1. The following Canadian/US dollar foreign exchange rates were used
to translate the specified periods:
------------------------------ -------------------------- -------------------------- ----------------------------
Average foreign exchange Average foreign exchange
rate used for Foreign exchange rate as rate used for Foreign exchange rate as
Second Quarter 2005 at June 30, 2005 Second Quarter 2004 at December 31, 2004
------------------------------ -------------------------- -------------------------- ----------------------------
------------------------------ -------------------------- -------------------------- ---------------------------
1.24401 1.23240 1.35860 1.20360
------------------------------ -------------------------- -------------------------- ----------------------------
2. RevPAR is defined as average room revenue per available room. It is a
non-GAAP measure. We use RevPAR because it is a commonly used indicator of
market performance for hotels and resorts and represents the combination of
the average daily room rate 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. Our calculation of RevPAR may be
different than the calculation used by other lodging companies.
3. The term "Core Hotels" means hotels and resorts under management for the
full year of both 2005 and 2004. 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 2004/2003
Core Hotels are the additions of Four Seasons Resort Jackson Hole, Four
Seasons Hotel Miami, Four Seasons Resort Great Exuma at Emerald Bay, Four
Seasons Hotel Prague, Four Seasons Hotel Riyadh and Four Seasons Hotel
Jakarta, and the deletions of Four Seasons Resort Maldives at Kuda Huraa
(due to its temporary closure caused by the tsunami) and The Pierre in New
York (due to its disposition on June 30, 2005).
4. Gross operating margin represents gross operating profit as a percentage of
gross operating revenue.
5. Reimbursed costs includes the reimbursement of all out-of-pocket costs,
including sales and marketing and advertising fees.
6. 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 $11.2 million, which were
deferred prior to January 1, 2004, were recognized in 2004 as an increase
of fee revenues over the course of the year. Foreign exchange gains on
forward exchange contracts were recorded as increases in management fee
revenues in the quarters of 2004 and 2003 as follows:
--------------------------------- ------------------- ------------------- ------------------ -------------------
(IN MILLIONS OF US DOLLARS) First Quarter Second Quarter Third Quarter Fourth Quarter
--------------------------------- ------------------- ------------------- ------------------ -------------------
--------------------------------- ------------------- ------------------- ------------------ -------------------
2004 $2.7 $2.8 $2.6 $3.1
--------------------------------- ------------------- ------------------- ------------------ -------------------
2003 $0.5 $1.5 $1.4 $2.3
--------------------------------- ------------------- ------------------- ------------------ -------------------
7. Including the reimbursed costs and forward exchange contracts, management
fee revenues increased 9.2%, or $4.1 million, to $48.3 million in the
second quarter of 2005, as compared to $44.2 million for the same period in
2004. We provide the information excluding the above items because the
foreign exchange contracts applied only to the period in 2004 and the
reimbursed costs have no net impact on earnings from management operations.
19
8. Eight Quarter Summary:
- ------------------------ ----------------------- ---------------------- ------------------------ ---------------------
(IN MILLIONS OF US
DOLLARS EXCEPT PER
SHARE AMOUNTS) Second Quarter First Quarter Fourth Quarter Third Quarter
- ------------------------ ----------------------- ---------------------- ------------------------ ---------------------
- ------------------------ ----------- ----------- ---------- ----------- ----------- ------------ --------- -----------
2005 2004 2005 2004 2004 2003(a) 2004 2003(a)
- ------------------------ ----------- ----------- ---------- ----------- ----------- ------------ --------- -----------
- ------------------------ ----------- ----------- ---------- ----------- ----------- ------------ --------- -----------
Consolidated revenues(b) $74.5 $71.4 $63.1 $57.1 $69.5 $66.8 $63.3 $52.6
- ------------------------ ----------- ----------- ---------- ----------- ----------- ------------ --------- -----------
Earnings (loss) before other operating items:
- ------------------------ ----------- ----------- ---------- ----------- ----------- ------------ --------- -----------
Management operations 22.8 22.1 19.3 17.1 18.2 15.7 20.1 13.7
- ------------------------ ----------- ----------- ---------- ----------- ----------- ------------ --------- -----------
Ownership and (2.3) (1.3) (6.8) (7.4) (3.1) (1.5) 4.9) (6.8)
corporate operations
- ------------------------ ----------- ----------- ---------- ----------- ----------- ------------ --------- -----------
Net earnings (loss):
- ------------------------ ----------- ----------- ---------- ----------- ----------- ------------ --------- -----------
Total $15.8 $12.8 $5.2 $8.7 $12.8 $8.9 $(8.5) $3.2
- ------------------------ ----------- ----------- ---------- ----------- ----------- ------------ --------- -----------
Basic earnings $0.43 $0.36 $0.14 $0.25 $0.35 $0.25 $(0.24) $0.09
(loss) per share(c)
- ------------------------ ----------- ----------- ---------- ----------- ----------- ------------ --------- -----------
Diluted earnings $0.42 $0.34 $0.14 $0.24 $0.34 $0.24 $(0.24) $0.09
(loss) per share(c)
- ------------------------ ----------- ----------- ---------- ----------- ----------- ------------ --------- -----------
- ----------------------------------------------------------------------------------------------------------------------
Average Canadian/US 1.24401 1.35860 1.22652 1.31785 1.22033 1.31550 1.30758 1.37927
foreign exchange rate
used for specified
quarter
- ------------------------ ----------- ----------- ---------- ----------- ----------- ------------ --------- -----------
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. In
accordance with the new standard, however, the reported results for
the first three quarters of 2003 are required to be restated. The
prospective application of adopting the fair value-based method
effective January 1, 2003 resulted in the following restatements:
Third Quarter and Fourth Quarter 2003 -- in each quarter, a decrease
in net earnings of $0.3 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:
Third Quarter 2003 - increase of $7.5 million; Fourth Quarter 2003 -
increase of $9.6 million.
20
Consolidated revenues is comprised of the following:
- --------------------- ---------------------- ------------------------- ----------------------- -----------------------
(IN MILLIONS OF US Second Quarter First Quarter Fourth Quarter Third Quarter
DOLLARS)
- --------------------- ---------------------- ------------------------- ----------------------- -----------------------
- --------------------- ----------- ---------- ------------- ----------- ----------- ----------- ------------ ----------
2005 2004 2005 2004 2004 2003 2004 2003
- --------------------- ----------- ---------- ------------- ----------- ----------- ----------- ------------ ----------
Revenues from $48.3 $44.2 $43.6 $37.6 $44.3 $40.6 $41.9 $33.8
Management
Operations
- --------------------- ----------- ---------- ------------- ----------- ----------- ----------- ------------ ----------
Revenues from
Ownership and 27.6 28.1 20.5 20.3 26.6 27.4 22.4 19.6
Corporate Operations
- --------------------- ----------- ---------- ------------- ----------- ----------- ----------- ------------ ----------
Distributions from 0.1 0.3 0.0 0.0 0.0 0.0 0.0 0.1
hotel investments
- --------------------- ----------- ---------- ------------- ----------- ----------- ----------- ------------ ----------
Fees from Ownership
and Corporate
Operations to (1.5) (1.2) (1.0) (0.9) (1.4) (1.2) (1.0) (0.9)
Management
Operations
- --------------------- ---------- ---------- ------------ ----------- ---------- ----------- ----------- ---------
$74.5 $71.4 $63.1 $57.1 $69.5 $66.8 $63.3 $52.6
- --------------------- ---------- ---------- ------------- ----------- ----------- ----------- ------------ ----------
c) Quarterly computations of per share amounts are made independently on
a quarter-by-quarter basis and may not equate to annual computations
of per share amounts.
9. The management operations profit margin represents management operations
earnings before other operating items, as a percent of management
operations revenue.
10. Included in ownership and corporate operations are the consolidated
revenues and expenses from our 100% leasehold interests in The Pierre in
New York, Four Seasons Hotel Vancouver and Four Seasons Hotel Berlin (until
the Berlin lease termination on September 26, 2004), distributions from
other ownership interests in properties that Four Seasons manages and
corporate overhead expenses related, in part, to these ownership interests.
11. Depreciation and management fees related to The Pierre for the quarters of
2004 and first and second quarters of 2005.
----------------------------------------------- -------------------------------- -------------------------------
(IN MILLIONS OF US DOLLARS) Depreciation Management Fees, including
reimbursed costs
----------------------------------------------- -------------------------------- -------------------------------
----------------------------------------------- -------------------------------- -------------------------------
First Quarter 2004 $0.4 $0.5
----------------------------------------------- -------------------------------- -------------------------------
Second Quarter 2004 $0.5 $0.9
----------------------------------------------- -------------------------------- -------------------------------
Third Quarter 2004 $0.4 $0.5
----------------------------------------------- -------------------------------- -------------------------------
Fourth Quarter 2004 $0.5 $1.1
----------------------------------------------- -------------------------------- -------------------------------
Full Year 2004 $1.8 $3.0
----------------------------------------------- -------------------------------- -------------------------------
First Quarter 2005 $0.5 $0.7
----------------------------------------------- -------------------------------- -------------------------------
Second Quarter 2005 $0.4 $1.1
----------------------------------------------- -------------------------------- -------------------------------
* * *
All dollar amounts referred to in this news release are US dollars unless
otherwise noted. The financial statements are prepared in accordance with
Canadian generally accepted accounting principles.
* * *
21
This news release contains "forward-looking statements" within the meaning of
applicable 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 in this news
release. Those risks and uncertainties include adverse factors generally
encountered in the lodging industry; the risks associated with world events,
including war, terrorism, international conflicts, natural disasters, extreme
weather conditions, and infectious diseases; general economic conditions, supply
and demand changes for hotel rooms and residential properties, competitive
conditions in the lodging industry, relationships with clients and property
owners, currency fluctuations 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. Additionally, we undertake no obligation to comment
on analyses, expectations or statements made by third parties in respect of Four
Seasons, its financial or operating results or its securities or any of the
properties that we manage or in which we may have an interest.
* * *
We will hold a conference call today at 11 a.m. (Eastern Daylight Time) to
discuss the second quarter financial results. The details are:
To access the call dial: 1 (800) 289-6406 (U.S.A. and Canada)
1 (416) 641-6654 (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 21251495.
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.
# # #
Dedicated to continuous innovation and the highest standards of hospitality,
Four Seasons invented luxury for the modern traveller. From elegant surroundings
of the finest quality, to caring, highly personalised 24-hour service, Four
Seasons embodies a true home away from home for those who know and appreciate
the best. The deeply instilled Four Seasons culture is personified in its
employees - people who share a single focus and are inspired to offer great
service. Founded in 1960, Four Seasons has followed a targeted course of
expansion, opening
22
hotels in major city centers and desirable resort destinations around the world.
Currently with 65 hotels in 29 countries, and more than 20 properties under
development, Four Seasons will continue to lead luxury hospitality with
innovative enhancements, making business travel easier and leisure travel more
rewarding. For more information on Four Seasons, visit www.fourseasons.com.
23
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
(UNAUDITED) JUNE 30, JUNE 30,
(IN THOUSANDS OF US DOLLARS EXCEPT PER SHARE AMOUNTS) 2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED REVENUES (NOTE 4) $ 74,539 $ 71,363 $ 137,636 $ 128,484
====================================================================
MANAGEMENT OPERATIONS
REVENUES:
Fee revenues (note 4(a)) $ 32,241 $ 30,582 $ 61,268 $ 55,909
Reimbursed costs 16,058 13,630 30,602 25,949
--------------------------------------------------------------------
48,299 44,212 91,870 81,858
--------------------------------------------------------------------
EXPENSES:
General and administrative expenses (9,459) (8,442) (19,193) (16,680)
Reimbursed costs (16,058) (13,630) (30,602) (25,949)
--------------------------------------------------------------------
(25,517) (22,072) (49,795) (42,629)
--------------------------------------------------------------------
22,782 22,140 42,075 39,229
--------------------------------------------------------------------
OWNERSHIP AND CORPORATE OPERATIONS
REVENUES 27,572 28,106 48,089 48,438
DISTRIBUTIONS FROM HOTEL INVESTMENTS 132 293 132 293
EXPENSES:
Cost of sales and expenses (28,549) (28,436) (54,900) (55,290)
Fees to Management Operations (1,464) (1,248) (2,455) (2,105)
-------------------------------------------------------------------
(2,309) (1,285) (9,134) (8,664)
-------------------------------------------------------------------
EARNINGS BEFORE OTHER OPERATING ITEMS 20,473 20,855 32,941 30,565
DEPRECIATION AND AMORTIZATION (2,908) (2,664) (5,937) (5,415)
OTHER INCOME (EXPENSE), NET (NOTES 4(a)AND 5) (8,645) (2,216) (11,355) 1,063
-------------------------------------------------------------------
EARNINGS FROM OPERATIONS 8,920 15,975 15,649 26,213
INTEREST INCOME, NET 828 490 1,210 1,361
-------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 9,748 16,465 16,859 27,574
-------------------------------------------------------------------
INCOME TAX RECOVERY (EXPENSE):
Current (1,390) (3,214) (3,314) (5,330)
Future (note 5) 7,428 (493) 7,443 (781)
-------------------------------------------------------------------
6,038 (3,707) 4,129 (6,111)
-------------------------------------------------------------------
NET EARNINGS $ 15,786 $ 12,758 $ 20,988 $ 21,463
====================================================================
BASIC EARNINGS PER SHARE (NOTE 3(a)) $ 0.43 $ 0.36 $ 0.57 $ 0.61
====================================================================
DILUTED EARNINGS PER SHARE (NOTE 3(a)) $ 0.42 $ 0.34 $ 0.55 $ 0.58
====================================================================
See accompanying notes to consolidated financial statements.
24
FOUR SEASONS HOTELS INC.
CONSOLIDATED BALANCE SHEETS
AS AT As at
(UNAUDITED) JUNE 30, December 31,
(IN THOUSANDS OF US DOLLARS) 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 218,636 $ 226,377
Receivables 83,660 81,541
Inventory 1,028 1,439
Prepaid expenses 3,935 2,981
---------------------------------------
307,259 312,338
LONG-TERM RECEIVABLES 192,964 179,060
INVESTMENTS IN HOTEL PARTNERSHIPS AND CORPORATIONS 120,074 131,338
FIXED ASSETS 53,658 59,939
INVESTMENT IN MANAGEMENT CONTRACTS 171,652 181,273
INVESTMENT IN TRADEMARKS AND TRADE NAMES 4,241 4,424
FUTURE INCOME TAX ASSETS 11,136 3,711
OTHER ASSETS 34,378 30,064
---------------------------------------
$ 895,362 $ 902,147
=======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 48,544 $ 60,415
Long-term obligations due within one year 3,513 3,766
---------------------------------------
52,057 64,181
LONG-TERM OBLIGATIONS (NOTE 2) 257,593 253,066
SHAREHOLDERS' EQUITY (NOTE 3):
Capital stock 250,216 248,980
Convertible notes 36,920 36,920
Contributed surplus 9,095 8,088
Retained earnings 211,580 192,129
Equity adjustment from foreign currency translation 77,901 98,783
---------------------------------------
585,712 584,900
---------------------------------------
SUBSEQUENT EVENT (NOTE 9)
$ 895,362 $ 902,147
=======================================
See accompanying notes to consolidated financial statements.
25
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 US DOLLARS) 2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) OPERATIONS:
MANAGEMENT OPERATIONS
EARNINGS BEFORE OTHER OPERATING ITEMS $ 22,782 $ 22,140 $ 42,075 $ 39,229
ITEMS NOT REQUIRING AN OUTLAY OF FUNDS 504 354 1,089 744
------------------------------------------------------------------
WORKING CAPITAL PROVIDED BY
MANAGEMENT OPERATIONS 23,286 22,494 43,164 39,973
------------------------------------------------------------------
OWNERSHIP AND CORPORATE OPERATIONS
LOSS BEFORE OTHER OPERATING ITEMS (2,309) (1,285) (9,134) (8,664)
ITEMS NOT REQUIRING AN OUTLAY OF FUNDS 300 212 576 377
------------------------------------------------------------------
WORKING CAPITAL USED IN
OWNERSHIP AND CORPORATE OPERATIONS (2,009) (1,073) (8,558) (8,287)
------------------------------------------------------------------
21,277 21,421 34,606 31,686
INTEREST RECEIVED, NET 2,848 1,349 4,515 4,180
CURRENT INCOME TAX PAID (2,349) (1,095) (5,455) (1,259)
CHANGE IN NON-CASH WORKING CAPITAL 2,205 (444) (14,208) (9,206)
OTHER (16) (91) (129) (538)
------------------------------------------------------------------
CASH PROVIDED BY OPERATIONS $ 23,965 $ 21,140 $ 19,329 $ 24,863
==================================================================
See accompanying notes to consolidated financial statements.
26
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SIX MONTHS ENDED
(UNAUDITED) JUNE 30, JUNE 30,
(IN THOUSANDS OF US DOLLARS) 2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN):
OPERATIONS: $ 23,965 $ 21,140 $ 19,329 $ 24,863
-----------------------------------------------------------------------
FINANCING:
Issuance of convertible notes - 241,332 - 241,332
Other long-term obligations including
current portion (1,630) (72) (1,498) 16
Issuance of shares 1,219 5,459 6,836 8,519
Dividends paid - - (1,558) (1,391)
-----------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING (411) 246,719 3,780 248,476
-----------------------------------------------------------------------
CAPITAL INVESTMENTS:
Increase in restricted cash - (55,204) - (55,204)
Long-term receivables 5,725 (15,365) (14,740) (14,700)
Hotel investments (2,265) (27,476) (9,445) (28,446)
Disposal of hotel investments (note 5) 7,326 - 12,672 -
Purchase of fixed assets (4,453) 1,391 (8,060) (1,917)
Investments in trademarks and trade
names and management contracts (342) (8,441) (473) (8,719)
Other assets (6,809) (893) (6,860) (1,735)
-------------------------------------------------------------------------
CASH USED IN CAPITAL INVESTMENTS (818) (105,988) (26,906) (110,721)
-------------------------------------------------------------------------
INCREASE (DECREASE) IN NET
CASH AND CASH EQUIVALENTS 22,736 161,871 (3,797) 162,618
DECREASE IN NET CASH AND CASH
EQUIVALENTS DUE TO UNREALIZED FOREIGN
EXCHANGE LOSS (2,264) (2,228) (3,944) (2,095)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 198,164 132,979 226,377 132,099
-------------------------------------------------------------------------
NET CASH AND CASH EQUIVALENTS, END OF PERIOD $ 218,636 $ 292,622 $ 218,636 $ 292,622
=======================================================================
SUPPLEMENTAL DISCLOSURE OF NET CASH AND
CASH EQUIVALENTS:
Cash and cash equivalents $ 218,636 $ 348,575 $ 218,636 $ 348,575
Less restricted cash - (55,953) -- (55,953)
-----------------------------------------------------------------------
Net cash and cash equivalents $ 218,636 $ 292,622 $ 218,636 $ 292,622
=======================================================================
See accompanying notes to consolidated financial statements.
27
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
SIX MONTHS ENDED
(UNAUDITED) JUNE 30,
(IN THOUSANDS OF US DOLLARS) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS, BEGINNING OF PERIOD $ 192,129 $ 169,364
NET EARNINGS 20,988 21,463
DIVIDENDS DECLARED (1,537) (1,367)
-----------------------------------------
RETAINED EARNINGS, END OF PERIOD $ 211,580 $ 189,460
=========================================
See accompanying notes to consolidated financial statements.
28
FOUR SEASONS HOTELS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS OF US DOLLARS EXCEPT PER 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 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, and in April 2005, we sold the majority of
our equity interest in Four Seasons Hotel Shanghai (note 5). As a result of
the sales, our equity
29
interests in each property were 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 and six
months ended June 30, 2005.
2. LONG-TERM OBLIGATIONS:
(a) BANK CREDIT FACILITY:
We have a committed bank credit facility of $125,000, which expires in
September 2007. As at June 30, 2005, no amounts were borrowed under this
credit facility. However, approximately $4,000 of letters of credit were
issued under this credit facility as at June 30, 2005. No amounts have been
drawn under these letters of credit.
(b) 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.
3. SHAREHOLDERS' EQUITY:
As at June 30, 2005, we have 3,725,698 outstanding Variable Multiple Voting
Shares ("VMVS"), 32,909,488 outstanding Limited Voting Shares ("LVS"), and
4,544,843 outstanding stock options (weighted average exercise price of C$59.32
($48.13)).
(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
JUNE 30,
2005 2004
- -----------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS SHARES Net Earnings Shares
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share amounts $ 15,786 36,624,440 $ 12,758 35,484,874
Effect of assumed dilutive conversions:
Stock option plan -- 1,325,607 -- 1,494,286
Convertible notes (issued in 1999
and redeemed in September 2004) -- -- 989 3,463,155
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share amounts $ 15,786 37,950,047 $ 13,747 40,442,315
===================================================================================================================================
30
SIX MONTHS ENDED
JUNE 30,
2005 2004
- -----------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS SHARES Net earnings Shares
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share amounts $ 20,988 36,616,645 $ 21,463 35,386,149
Effect of assumed dilutive conversions:
Stock option plan -- 1,454,426 -- 1,467,988
Convertible notes (issued in 1999
and redeemed in September 2004) -- -- 1,978 3,463,155
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share amounts $ 20,988 38,071,071 $ 23,441 40,317,292
===================================================================================================================================
The diluted earnings per share calculation excluded the effect of the
assumed conversions of 693,056 and 59,000 stock options to LVS, under our
stock option plan, during the three months and six months ended June 30,
2005, respectively (2004 - 858,196 and 1,015,916 stock options,
respectively), 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 June 2005, the Emerging Issues Committee of the CICA issued Abstract
EIC-155, "The Effect of Contingently Convertible Instruments on Diluted
Earnings per Share", which requires the application of the "if-converted
method" to account for the potential dilution relating to the conversion of
contingently convertible instruments, such as our convertible senior notes.
EIC-155 will be effective for periods beginning on or after October 1,
2005. If we had adopted EIC-155 for the three months and six months ended
June 30, 2005, there would have been no additional dilution for either
period.
(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 and six months
ended June 30, 2005. The fair value of stock options granted in the three
months and six months ended June 30, 2004 was 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; semi-annual dividend per LVS of C$0.055 for both periods;
volatility factor of the expected market price of our LVS of 28% and 28% to
30%, respectively; 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 and six months
ended June 30, 2004, the weighted average fair value of the options at the
grant dates was C$24.85 and C$25.35, respectively ($18.29 and $18.94,
respectively). For purposes of stock option expense and pro forma
disclosures, the estimated fair value of the options are 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 and six months ended June 30, 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:
31
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------------------------------
Stock option expense included
in compensation expense $ (515) $ (364) $ (1,008) $ (677)
=====================================================================
Net earnings, as reported $ 15,786 $ 12,758 $ 20,988 $ 21,463
Additional expense that would have been
recorded if all outstanding stock options
granted during 2002 had been expensed (681) (628) (1,372) (1,280)
---------------------------------------------------------------------
Pro forma net earnings $ 15,105 $ 12,130 $ 19,616 $ 20,183
---------------------------------------------------------------------
Earnings per share:
Basic, as reported $ 0.43 $ 0.36 $ 0.57 $ 0.61
Basic, pro forma 0.41 0.34 0.54 0.57
Diluted, as reported 0.42 0.34 0.55 0.58
Diluted, pro forma 0.40 0.32 0.52 0.55
---------------------------------------------------------------------
4. CONSOLIDATED REVENUES:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues from Management Operations (a) $ 48,299 $ 44,212 $ 91,870 $ 81,858
Revenues from Ownership and
Corporate Operations 27,572 28,106 48,089 48,438
Distributions from hotel investments 132 293 132 293
Fees from Ownership and Corporate
Operations to Management Operations (1,464) (1,248) (2,455) (2,105)
---------------------------------------------------------------------
$ 74,539 $ 71,363 $ 137,636 $ 128,484
=====================================================================
(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 and
six months ended June 30, 2004, we recognized $2,798 and $5,518,
respectively, of the deferred gain in fee revenues. We did not hedge any of
our US dollar fee revenues during the three months and six months ended
June 30, 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
$692 and $1,120 foreign exchange loss, respectively, for the three months
and six months ended June 30, 2004.
5. OTHER INCOME (EXPENSE), NET:
Included in other income (expense), net for the three months and six months
ended June 30, 2005 is a net foreign exchange loss of $3,289 and $3,682,
respectively (2004 - net foreign exchange loss of $2,185 and net foreign
exchange gain of $1,328, 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 designated
foreign self-sustaining subsidiaries.
32
On June 30, 2005, we finalized the assignment of our leases and the sale of the
related assets in The Pierre for net proceeds of $4,520. The net book value of
our assets in The Pierre was approximately $7,800 and, after deducting
disposition costs, we recorded a loss on sale of $5,023. As a result of the
sale, we also recorded a tax benefit of approximately $9,200, which is included
in future income tax recovery.
As part of the sale of The Pierre, in accordance with statutory provisions, the
purchaser agreed to assume a portion of our contribution history with a
multi-employer pension fund for the unionized hotel employees (the "NYC
Pension"). This permitted us to withdraw from the NYC Pension without incurring
a withdrawal liability estimated at $10,700.
If the purchaser withdraws as the result of the lease cancellation by the
landlord in certain circumstances in 2008 or 2011, we have agreed to indemnify
the purchaser for that portion of the withdrawal liability relating to their
assumption of our contribution history. The amount of any potential future
liability resulting from this indemnity is not determinable at this time as it
would be based upon future events related to the NYC Pension.
If the purchaser withdraws from the NYC Pension prior to 2011 in any
circumstances other than those described above and does not pay its withdrawal
liability, we remain secondarily liable for our withdrawal liability up to an
amount of $10,700. We have been indemnified by the purchaser for any such
liability.
We believe that the likelihood of our being required to make a payment is
remote, and have not recorded any amount as at June 30, 2005 in respect of a
potential NYC Pension withdrawal liability.
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%. In April 2005, we sold
approximately 53% of our equity interest in Four Seasons Hotel Shanghai for
gross proceeds of $9,500 (cash of $4,241 and a loan receivable of $5,259), which
approximated book value, and reduced our interest in the hotel 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 was 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 and six months ended June 30, 2005 was $596 and $1,217,
respectively (2004 - $559 and $1,134, respectively).
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
$47,000. 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 two of our bank guarantees,
reduced two of our other commitments, and extended one new bank guarantee and
two other commitments to two properties under our management, resulting in a net
increase in guarantees and other commitments of $1,900.
In addition, we expect to fund approximately $21,000 over the next 18 months in
connection with an expansion of our corporate office which is currently
underway.
33
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. With the disposition of our
leasehold interest in The Pierre at the end of the second quarter of 2005 (note
5), we have substantially reduced the exposure to seasonality in our ownership
operations.
9. SUBSEQUENT EVENT:
In August 2005, we finalized an agreement with the owner of Four Seasons Hotel
Newport Beach pursuant to which, effective October 31, 2005, the owner will
begin to manage this property as an independent hotel. At the time of
transition, we will receive a payment in an amount that will exceed the net book
value of our investment in the management contract.
34
FOUR SEASONS HOTELS INC.
SUMMARY OF HOTEL OPERATING DATA - CORE HOTELS(1)
THREE MONTHS ENDED
JUNE 30,
(UNAUDITED) 2005 2004 VARIANCE
- ------------------------------------------------------------------------------------------------------------------------------
WORLDWIDE
No. of Properties 52 52 --
No. of Rooms 13,802 13,802 --
Occupancy(2) 71.4% 67.5% 3.9pts.
ADR(3) - in US dollars $339 $320 5.8%
RevPAR(4) - in US dollars $232 $206 12.8%
Gross operating margin(5) 33.1% 30.4% 2.7pts.
UNITED STATES
No. of Properties 20 20 --
No. of Rooms 6,274 6,274 --
Occupancy(2) 76.3% 71.0% 5.3pts
ADR(3) - in US dollars $350 $331 5.7%
RevPAR(4) - in US dollars $271 $239 13.6%
Gross operating margin(5) 30.7% 27.8% 2.9pts.
OTHER AMERICAS/CARIBBEAN
No. of Properties 8 8 --
No. of Rooms 1,724 1,724 --
Occupancy(2) 73.4% 67.4% 6.0pts.
ADR(3) - in US dollars $313 $300 4.4%
RevPAR(4) - in US dollars $225 $191 17.6%
Gross operating margin(5) 31.1% 26.0% 5.1pts.
EUROPE
No. of Properties 8 8 --
No. of Rooms 1,492 1,492 --
Occupancy(2) 69.6% 70.1% (0.5)pts.
ADR(3) - in US dollars $560 $538 4.1%
RevPAR(4) - in US dollars $402 $385 4.6%
Gross operating margin(5) 39.1% 40.9% (1.8)pts.
MIDDLE EAST
No. of Properties 4 4 --
No. of Rooms 847 847 --
Occupancy(2) 70.0% 65.4% 4.6pts.
ADR(3) - in US dollars $216 $183 18.3%
RevPAR(4) - in US dollars $152 $119 28.3%
Gross operating margin(5) 47.1% 38.5% 8.6pts.
ASIA/PACIFIC
No. of Properties 12 12 --
No. of Rooms 3,465 3,465 --
Occupancy(2) 62.8% 60.7% 2.1pts.
ADR(3) - in US dollars $230 $216 6.7%
RevPAR(4) - in US dollars $113 $99 14.1%
Gross operating margin(5) 32.3% 29.2% 3.1pts.
<FN>
- ----------------------------------------------------------------------------
1 The term "Core Hotels" means hotels and resorts under management for the
full year of both 2005 and 2004. 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 2004/2003
Core Hotels are the additions of Four Seasons Resort Jackson Hole, Four
Seasons Hotel Miami, Four Seasons Resort Great Exuma at Emerald Bay, Four
Seasons Hotel Prague, Four Seasons Hotel Riyadh and Four Seasons Hotel
Jakarta, and the deletions of Four Seasons Resort Maldives at Kuda Huraa
(due to its temporary closure caused by the tsunami) and The Pierre in New
York (due to its disposition on June 30, 2005).
2 Occupancy percentage is defined as the total number of rooms occupied
divided by the total number of rooms available.
3 ADR is defined as average daily room rate calculated as straight average
for each region.
4 RevPAR is defined as average room revenue per available room. It is a
non-GAAP measure. We use RevPAR because it is a commonly used indicator of
market performance for hotels and resorts and represents the combination of
the average daily room rate 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. Our calculation of RevPAR may be
different than the calculation used by other lodging companies.
5 Gross operating margin represents gross operating profit as a percentage of
gross operating revenue.
</FN>
35
FOUR SEASONS HOTELS INC.
SUMMARY OF HOTEL OPERATING DATA - CORE HOTELS(1)
SIX MONTHS ENDED
JUNE 30,
(UNAUDITED) 2005 2004 Variance
- ------------------------------------------------------------------------------------------------------------------------------
WORLDWIDE
No. of Properties 52 52 --
No. of Rooms 13,802 13,802 --
Occupancy(2) 69.2% 65.2% 4.0pts.
ADR(3) - in US dollars $349 $327 6.9%
RevPAR(4) - in US dollars $228 $201 13.2%
Gross operating margin(5) 31.5% 29.2% 2.3pts.
UNITED STATES
No. of Properties 20 20 --
No. of Rooms 6,274 6,274 --
Occupancy(2) 73.8% 69.2% 4.6pts.
ADR(3) - in US dollars $364 $343 6.0%
RevPAR(4) - in US dollars $266 $236 13.0%
Gross operating margin(5) 29.0% 26.6% 2.4pts.
OTHER AMERICAS/CARIBBEAN
No. of Properties 8 8 --
No. of Rooms 1,724 1,724 --
Occupancy(2) 69.2% 63.9% 5.3pts.
ADR(3) - in US dollars $364 $338 7.7%
RevPAR(4) - in US dollars $247 $208 18.4%
Gross operating margin(5) 33.6% 29.7% 3.9pts.
EUROPE
No. of Properties 8 8 --
No. of Rooms 1,492 1,492 --
Occupancy(2) 62.2% 64.0% (1.8)pts.
ADR(3) - in US dollars $533 $503 6.1%
RevPAR(4) - in US dollars $348 $331 5.0%
Gross operating margin(5) 34.0% 35.4% (1.4)pts.
MIDDLE EAST
No. of Properties 4 4 --
No. of Rooms 847 847 --
Occupancy(2) 71.3% 65.6% 5.7pts.
ADR(3) - in US dollars $218 $186 17.2%
RevPAR(4) - in US dollars $155 $122 26.9%
Gross operating margin(5) 47.5% 39.2% 8.3pts.
ASIA/PACIFIC
No. of Properties 12 12 --
No. of Rooms 3,465 3,465 --
Occupancy(2) 63.5% 58.8% 4.7pts.
ADR(3) - in US dollars $236 $222 6.7%
RevPAR(4) - in US dollars $115 $99 16.4%
Gross operating margin(5) 31.2% 28.9% 2.3pts.
<FN>
- ----------------------------------------------------------------------------
1 The term "Core Hotels" means hotels and resorts under management for the
full year of both 2005 and 2004. 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 2004/2003
Core Hotels are the additions of Four Seasons Resort Jackson Hole, Four
Seasons Hotel Miami, Four Seasons Resort Great Exuma at Emerald Bay, Four
Seasons Hotel Prague, Four Seasons Hotel Riyadh and Four Seasons Hotel
Jakarta, and the deletions of Four Seasons Resort Maldives at Kuda Huraa
(due to its temporary closure caused by the tsunami) and The Pierre in New
York (due to its disposition on June 30, 2005).
2 Occupancy percentage is defined as the total number of rooms occupied
divided by the total number of rooms available.
3 ADR is defined as average daily room rate calculated as straight average
for each region.
4 RevPAR is defined as average room revenue per available room. It is a
non-GAAP measure. We use RevPAR because it is a commonly used indicator of
market performance for hotels and resorts and represents the combination of
the average daily room rate 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. Our calculation of RevPAR may be
different than the calculation used by other lodging companies.
5 Gross operating margin represents gross operating profit as a percentage of
gross operating revenue.
</FN>
36
FOUR SEASONS HOTELS INC.
SUMMARY OF HOTEL OPERATING DATA - ALL MANAGED HOTELS
AS AT
JUNE 30,
(UNAUDITED) 2005 2004 Variance
- -------------------------------------------------------------------------------------------------------------------
WORLDWIDE
No. of Properties 661(1) 63 3
No. of Rooms 16,834(1) 16,217 617
UNITED STATES
No. of Properties 241(1) 24 --
No. of Rooms 7,109(1) 7,109 --
OTHER AMERICAS/CARIBBEAN
No. of Properties 10 10 --
No. of Rooms 2,162 2,162 --
EUROPE
No. of Properties 11 11 --
No. of Rooms 1,919 1,990 (71)
MIDDLE EAST
No. of Properties 6 4 2
No. of Rooms 1,444 847 597
ASIA/PACIFIC
No. of Properties 15 14 1
No. of Rooms 4,200 4,109 91
<FN>
- --------------------------------------------
1 Since June 30, 2005, we ceased management of The Pierre in New York, which had 201 rooms.
</FN>
FOUR SEASONS HOTELS INC.
REVENUES UNDER MANAGEMENT - ALL MANAGED HOTELS
THREE MONTHS ENDED SIX MONTHS ENDED
(UNAUDITED) JUNE 30, JUNE 30,
(IN THOUSANDS OF US DOLLARS) 2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------------------------------
REVENUES UNDER MANAGEMENT(1) $ 677,683 $ 571,869 $ 1,279,246 $ 1,102,059
=========================================================================
<FN>
- ----------------------------------
1 Revenues under management consist of rooms, food and beverage, telephone
and other revenues of all the hotels and resorts which we manage.
Approximately 66% 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(1)(2) APPROXIMATE
NUMBER OF
ROOMS
SCHEDULED 2005/2006 OPENINGS
Four Seasons Hotel Damascus, Syria 305
Four Seasons Hotel Geneva, Switzerland 100
Four Seasons Hotel Hong Kong, People's Republic of China* 395
Four Seasons Resort Lanai at Koele, HI, USA 100
Four Seasons Resort Lanai at Manele Bay, HI, USA 250
Four Seasons Resort Maldives at Landaa Giraavaru, Maldives 100
Four Seasons Hotel Mumbai, India* 235
Four Seasons Residence Club Punta Mita, Mexico 35
Four Seasons Hotel Silicon Valley at East Palo Alto, CA, USA 200
Four Seasons Hotel Westlake Village, California, USA 270
BEYOND 2006
Four Seasons Hotel Alexandria, Egypt* 125
Four Seasons Hotel Baltimore, MD, USA* 200
Four Seasons Hotel Beijing, People's Republic of China 325
Four Seasons Hotel Beirut, Lebanon 235
Four Seasons Resort Bora Bora, French Polynesia 105
Four Seasons Hotel Dubai, UAE* 300
Four Seasons Hotel Florence, Italy 120
Four Seasons Hotel Istanbul at the Bosphorus, Turkey 170
Four Seasons Hotel Kuwait City, Kuwait 225
Four Seasons Hotel Marrakech, Morocco* 140
Four Seasons Hotel Moscow, Russia* 210
Four Seasons Hotel Moscow Kamenny Island, Russia* 80
Four Seasons Resort Puerto Rico, Puerto Rico* 250
Four Seasons Hotel Seattle, WA, USA* 150
Four Seasons Hotel Toronto, Ontario, Canada* 265
Four Seasons Resort Vail, CO, USA* 120
* Expected to include a residential component.
<FN>
- --------
1 Information concerning hotels, resorts and Residence Clubs under
construction or under development is based upon agreements and letters of
intent and may be subject to change prior to the completion of the project.
The dates of scheduled openings have been estimated by management based
upon information provided by the various developers at the time of this
report. 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 2004 Annual Report.
2 We have made an investment in Orlando, in which we expect to include a Four
Seasons Residence Club and/or a Four Seasons branded residential component.
The financing for this project has not yet been completed and therefore a
scheduled opening date cannot be established at this time.
</FN>
38