TORONTO, Feb. 27, 2004 - Four Seasons Hotels
Inc. (TSX Symbol "FSH"; NYSE Symbol "FS") today reported its results for
the fourth quarter of 2003 and for the year ended December 31, 2003.
"2003 ended very differently than it began," said Isadore Sharp, Chairman
and Chief Executive Officer. "The second half of the year saw an upswing
in travel demand, as signs of economic recovery became clearer, while during
the first half of the year travel was severely disrupted as a result of
war, terrorism, SARS and economic uncertainty. The Company's 2003 financial
results reflect that environment. As travel demand trends continue to improve,
we anticipate a stronger financial performance in 2004."
Net earnings for the quarter ended December 31, 2003 were $11.7 million
($0.33 basic earnings per share and $0.32 diluted earnings per share),
as compared to $7.6 million ($0.22 basic and diluted earnings per share)
for the quarter ended December 31, 2002.
For the year ended December 31, 2003, net earnings were $5.4 million
($0.15 basic and diluted earnings per share), as compared to $21.2 million
($0.61 basic earnings per share and $0.59 diluted earnings per share) for
the year ended December 31, 2002.
The decline in net earnings for the year ended December 31, 2003, as
compared to the year ended December 31, 2002, is attributable primarily
to a non-cash, unrealized foreign exchange loss for accounting purposes
(in contrast to a non-cash, unrealized foreign exchange gain in 2002),
increased losses from ownership operations and a write-down of the Company's
fixed asset investment in Four Seasons Hotel Berlin, which losses and write-downs
were offset by lower legal and enforcement costs relating to the disputes
with the owners of the hotels in Seattle and Caracas in 2003 as compared
to those costs in the prior year. The financial results for 2002 also were
affected by asset impairment charges relating to the Company's investments
in Four Seasons hotels in Caracas and Sydney.
Excluding these items (other than losses from ownership operations),
adjusted(1) net earnings for the year ended December 31, 2003 were $28.5
million ($0.81 basic earnings per share and $0.79 diluted earnings per
share), as compared to adjusted(1) net earnings for the year ended December
31, 2002 of $38.6 million ($1.10 basic earnings per share and $1.07 diluted
earnings per share).
Cash flow from operations improved by $12.3 million to $21.9 million
in the fourth quarter of 2003, as compared to $9.6 million in the same
period in 2002 ($0.62 per share in the fourth quarter of 2003, as compared
to $0.27 per share in the same period in 2002). For the year ended December
31, 2003, cash flow from operations also improved to $66 million, as compared
to $41.8 million in the same period in 2002 ($1.89 per share for the year
ended December 31 2003, as compared to $1.19 per share in the same period
in 2002).
"2003 was the third, and we hope last, year of a very difficult period
for the lodging industry. We are pleased that our management business showed
continued resiliency, and that we were able to come out of this cycle in
a strong position financially and operationally," said Douglas L. Ludwig,
Chief Financial Officer and Executive Vice President. "Despite the extremely
challenging operating conditions in 2003, we achieved a 58% improvement
in cash flow from operations, generating $66 million. We have maintained
our balance sheet strength, and have been able to continue to meet our
objective of funding new management opportunities with cash generated by
our existing management business."
OPERATING ENVIRONMENT
The Company continues to operate at or above market occupancy levels
in most of its locations. Maintaining superior product and service levels
has allowed the Company to generally maintain, and in some cases improve,
its room rates. During the Company's negotiations with corporate accounts
for 2004, overall rates were in line with or, in some cases, slightly better
than those negotiated rates for 2003. The Company currently expects its
full year achieved room rates in 2004 to be near the 2003 levels.
Four Seasons' customer base consists of business travellers, corporate
groups and leisure travellers. Over the past three years, travel demand
was negatively affected as the lodging industry dealt with the impact of
terrorism, war, a weak economy and Severe Acute Respiratory Syndrome (SARS).
Economic indicators suggest that the US economy began to show signs of
recovery in mid-2003 and continued to recover further during the fourth
quarter of 2003. Concurrently, business travel demand improved in many
US and international markets, although it remains below levels achieved
prior to 2001, which marked the beginning of the current downturn in travel
demand. Notwithstanding the improvement in demand, both business and leisure
travel is generally still being booked on a short lead-time.
The recovery in non-room related revenues at the hotels and resorts
are lagging behind the recovery seen in room revenues. This pattern is
consistent with prior economic cycles during which other ancillary revenues,
including food, beverage and catering, recovered further into the economic
recovery than room revenue.
Overall gross operating margins(2) at the hotels under management continued
to be constrained as increased costs related to labour, workers compensation,
health benefits, energy and insurance have not been completely offset by
RevPAR(3) improvements. The Company expects that further significant cost
increases, particularly relating to energy, insurance and workers compensation,
will continue to put pressure on gross operating profit performance in
2004. For gross operating margins to remain at the same level as those
realized in 2003, the Company estimates that RevPAR will need to increase
by 4% to 5% in 2004. This level of RevPAR growth in 2004 is within the
range of lodging industry experts' forecasts for 2004 of 3% to 6% improvements.
Please see the accompanying "Summary of Hotel Operating Data" for regional
RevPAR and gross operating margin statistics by geographic region.
Worldwide Core Hotels
The 11.9% increase in RevPAR, on a US dollar basis, for the quarter
ended December 31, 2003, as compared to the same period in 2002, for the
Company's worldwide Core Hotels(4) reflects improvements in each of the
regions in which the Company manages hotels and resorts. This is the first
quarter since the middle of 2000 that all regions have experienced improved
operating trends, on a US dollar basis; and the Company believes this reflects
the beginning of a broader recovery in travel demand. As a result of the
cost pressures noted above, gross operating margin for worldwide Core Hotels
increased modestly from 27.8% in the fourth quarter of 2002 to 28.4% in
the same period in 2003.
For the full year 2003, RevPAR of worldwide Core Hotels, on a US dollar
basis, increased 2%, as compared to 2002. On a local currency basis, RevPAR
of worldwide Core Hotels was essentially flat. On a full year basis, RevPAR
performance varied significantly among regions, with the US outperforming
the other regions. The full year occupancy decline in 2003, as compared
to 2002, for worldwide Core Hotels was attributable principally to lower
occupancy levels in the first half of the year, which was caused for the
most part by travel disruption relating to the war, terrorism, SARS and
lower demand related to a weak economy. This decline in occupancy was offset
partially by a 4.3% increase, on a US dollar basis, in average daily room
rate for the full year 2003, as compared to the same period in 2002. On
a local currency basis, average room rates for worldwide Core Hotels increased
1.4%.
US Core Hotels
With the exception of Chicago, Philadelphia, Atlanta and Aviara, the
US Core Hotels had RevPAR improvements in the quarter ended December 31,
2003, as compared to the same period in 2002. However, even the properties
under management in these four locations continued to take more than their
fair revenue market share(5) of business during the fourth quarter. The
more modest improvement in RevPAR of 2.9% at the US Core Hotels in 2003,
as compared to 2002 on a full year basis, reflects strong improvements
in RevPAR in the last half of the year as increased travel demand offset
weaker results in the first half of 2003. Exceptions to this improvement
in RevPAR were Houston, Boston, Chicago, Washington and, to a lesser extent,
New York, which did not have the same occupancy improvements as other markets,
in part, because of increased supply in, and reduced convention traffic
to, these cities.
Gross operating margins at the US Core Hotels were essentially flat
in the fourth quarter of 2003, as compared to the same period in 2002,
as increased labour, workers compensation, health benefits, energy and
insurance costs negatively affected flow-through. On a full-year basis,
the impact of these increased costs on gross operating margins was more
significant, due to the weaker revenue growth at the hotels in the first
half of 2003.
Europe/Middle East Core Hotels
With the exception of hotels under management in Paris and Istanbul,
the Core Hotels under management in Europe/Middle East had occupancy improvements
in the fourth quarter of 2003, as compared to the fourth quarter of 2002.
Travel demand in Istanbul was negatively affected by the terrorist attacks
in that market in early November. Four Seasons Hotel George V Paris experienced
solid results with occupancy in excess of the average for the region, but
realized an occupancy decline for the fourth quarter on a year-over-year
basis. This hotel experienced an exceptional fourth quarter in 2002 as
occupancy levels in October 2002 were almost 90%.
Although achieved average room rates for Europe/Middle East Core Hotels
in the fourth quarter of 2003 increased 10.6% on a US dollar basis, as
compared to the same period in 2002, on a local currency basis, achieved
average room rates were essentially unchanged. Rate improvements achieved
in certain hotels under management, including London, Lisbon and Dublin
were offset by modest rate declines at hotels under management in Paris
and Istanbul. On a local currency basis, RevPAR for the Europe/Middle East
Core Hotels increased 7.3% during the fourth quarter of 2003, as compared
to the same period in 2002. On both a US dollar basis and a local currency
basis, the Europe/Middle East Core Hotels' RevPAR improvement in 2003,
compared to the full year 2002, reflects the increases realized in the
last six months of 2003, offset by the weakness in travel demand experienced
in the first six months of the year, particularly in Cairo and Istanbul
where travel was affected primarily by the war in Iraq.
Gross operating margins in the region were essentially flat in the quarter,
as compared to the same period in 2002, as a result of increased energy
and labour costs. Gross operating margins declined for the full year, as
compared to 2002, as the impact of these cost increases was magnified by
weaker revenues in the first half of 2003.
Other Americas/Caribbean Core Hotels
During the fourth quarter of 2003, RevPAR of the Company's Core Hotels
in Other Americas/Caribbean increased 20.3% over the fourth quarter of
2002, on a US dollar basis, as a result of broad based demand improvement.
With the exception of Four Seasons Hotel Toronto, which is in a market
that is still recovering from the impact of SARS, all of the Core Hotels
under management in this region experienced occupancy gains. Although Vancouver
is also recovering from the impact of SARS, the fourth quarter is historically
a slower travel period for that market, and therefore the lingering effects
of SARS did not have the same impact as in Toronto, which historically
has strong demand in the fourth quarter relative to the rest of the year.
On a local currency basis, achieved room rates in the region increased
2.8%, as compared to the fourth quarter of 2002.
RevPAR for the full year 2003, as compared to 2002, on both a US dollar
basis and local currency basis, was essentially unchanged as the weaker
results in the first six months of 2003, resulting primarily from the impact
of SARS on travel demand for Toronto and Vancouver, were offset by the
stronger RevPAR results in the second half of the year.
Asia/Pacific Core Hotels
Virtually all of the hotels under the Company's management in the Asia/Pacific
region contributed to a RevPAR improvement for the region of 23.9% in the
fourth quarter of 2003, as compared to the same period in 2002, on a US
dollar basis, as travel demand in the region continued to improve. Demand
remained relatively weak in Bali as the impact of the terrorist event on
that island in October 2002 lingers. Full-year RevPAR declined 9.2% in
2003, as compared to 2002, on a US dollar basis, reflect the devastating
impact of SARS on that region in the first half of 2003. On a local currency
basis, RevPAR improved 12% in the fourth quarter and declined 15.6% for
the full year of 2003, as compared to the same periods in 2002.
Gross operating margins in the region improved from 35.1% in the fourth
quarter of 2002 to 37.4% in the same period in 2003, reflecting the relatively
low labour cost in the region and RevPAR improvements. Consistent with
the full year RevPAR declines, gross operating profits declined in the
full year.
"We are pleased that our properties are experiencing an improvement
in demand," said Wolf Hengst, President Worldwide Hotel Operations. "Many
of the hotels and resorts under our management are dealing with significant
increases in certain costs that are largely outside the control of management,
including labour, workers compensation, health benefits, energy and insurance.
However, assuming travel demand continues to improve, we believe revenue
improvements should help absorb these additional costs and we should begin
to see margin improvements over the course of this year."
MANAGEMENT OPERATIONS
Management revenues increased 3.2% to $40.6 million for the quarter
ended December 31, 2003, as compared to $39.3 million for the same period
in 2002. The increase in management revenues is attributable to an improvement
in fees from recently opened hotels and resorts including the Four Seasons
hotels in Amman, Riyadh, Shanghai and the addition of fees from the Four
Seasons resorts in Jackson Hole and Sharm el Sheik.
These improvements were offset by a decline of approximately $1.3 million
in fees related to currency conversion, as the Canadian dollar strengthened
primarily against the US dollar and pound sterling. In addition, incentive
fees declined approximately $1.3 million, primarily as a result of reduced
incentive fees from the US hotels (including Chicago and Philadelphia)
in the three months ended December 31, 2003, as compared to the same period
in 2002. Incentive fees are typically calculated based on the adjusted
gross operating profits of the hotels and resorts under management, and
the US hotels had reduced profitability as the hotels incurred additional
costs related primarily to labour, workers compensation, health benefits,
energy and insurance.
Management revenues increased 1.3% to $149.8 million for the year ended
December 31, 2003, as compared to $147.9 million for 2002. Increases in
management fees from new and recently opened hotels were offset by a currency-
related decline in fees of approximately $600,000 relating to US dollar,
Euro and pound sterling-denominated fees and reduced fees from the Company's
residential business. In addition, the Company's management incentive fees
decreased to $20.9 million for the year ended December 31, 2003, as compared
to $25.1 million in 2002. The Company earned incentive fees from 33 of
the 60 hotels and resorts under its management during 2003, as compared
to 33 of its 57 hotels and resorts in 2002. Incentive fees declined primarily
due to the lower levels of profitability at certain properties under management,
resulting from higher costs related primarily to labour, workers compensation,
health benefits, energy and insurance.
General and administrative expenses increased by 12.4% to $19.9 million
for the fourth quarter of 2003 and increased 6.6% to $70.2 million for
the year ended December 31, 2003, in each case as compared to the same
periods in 2002. A large portion of these increases in general and administrative
expenses in the fourth quarter ($1.1 million) and for the full year 2003
($1.8 million) was attributable to items relating to relocation and severance
and other atypical expenses at certain regional offices.
As a result of the items described above, management earnings before
other operating items decreased to $20.7 million in the fourth quarter
of 2003, as compared to $21.6 million in the fourth quarter of 2002, and
to $79.5 million for the year ended December 31, 2003, as compared to $82
million in 2002.
For the quarter ended December 31, 2003, the Company's management operations
profit margin(6) was 50.9%, as compared to 54.9% for the same period in
2002. For the year ended December 31, 2003, the Company's management operations
profit margin was 53.1%, as compared to 55.4% in 2002. Excluding the impact
of foreign currency on fee revenues described above (approximately $1.3
million in the quarter and $600,000 for the full year 2003) and the items
relating to relocation and severance ($1.1 million in the quarter and $2.1
million for the full year 2003), management operations profit margin would
have been 54.9% in the fourth quarter of 2003 and 54.7% for the full year
2003.
OWNERSHIP OPERATIONS(7)
In the fourth quarter of 2003, ownership losses before other operating
items were $2.0 million, as compared to ownership losses before other operating
items of $4.6 million in the fourth quarter of 2002. The improvement in
ownership losses is primarily attributable to the Company ceasing to accrue
rent expense for Four Seasons Hotel Berlin from August 2003, as discussed
below.
Ownership losses before other operating items were $30.1 million for
the year ended December 31, 2003, as compared to ownership losses before
other operating items of $19.6 million for the year ended December 31,
2002. The increase in the full year loss over the prior year is attributable
primarily to increased losses at The Pierre ($4.9 million) and Four Seasons
Hotel Vancouver ($3.2 million) and reduced distributions from other hotel
investments ($1.2 million).
Operating earnings at The Pierre were essentially flat in the fourth
quarter of 2003, as compared to the fourth quarter of 2002. Although the
hotel had RevPAR gains in the quarter driven by both occupancy and rate
improvements, as a result of increased costs and a modest decline in catering
revenues, earnings were essentially unchanged. For the full year ended
December 31, 2003, the increased losses were attributable primarily to
lower revenues from banqueting and ancillary revenues and higher labour,
workers compensation, health benefits, energy and insurance costs.
Operating losses at Four Seasons Hotel Vancouver were essentially unchanged
during the fourth quarter of 2003, as compared to the same period in 2002.
Primarily as a result of travel disruption relating to SARS, Four Seasons
Hotel Vancouver experienced weak operating conditions, with RevPAR, on
a local currency basis, declining 11.6% for the full year of 2003, as compared
to the same period in 2002, resulting in the operating loss at Four Seasons
Hotel Vancouver increasing by $3.2 million.
The Company's obligation to fund any stipulated minimum lease payments
at Four Seasons Hotel Berlin was limited to a maximum amount of approximately
euro 11 million and was supported by a letter of credit. The Company reached
its maximum funding obligation during the third quarter of 2003 and accordingly,
the letter of credit has been released. Since the Company ceased funding
shortfalls on the stipulated minimum lease payments, the lease payments
made have been limited to the cash flow generated by the hotel. As a result,
effective the first quarter of 2004, the landlord will be entitled to terminate
the lease.
Primarily as a result of not accruing the stipulated minimum lease payments
for Four Seasons Hotel Berlin during the fourth quarter of 2003, the operating
results from this hotel for that quarter improved by $2.9 million, as compared
to the fourth quarter of 2002. The benefit of the reduction in rent expense
was however reduced by lower revenues at the hotel, resulting from a significant
decline in occupancy for the full year 2003 (primarily as a result of new
supply in that market), as compared to 2002, and increased labour, heath
benefits, energy and insurance costs. The Company wrote down its fixed
asset investment in the hotel to nil in the fourth quarter of 2003, resulting
in a $3.2 million expense that is included in other operating items.
In 2004, the Company will continue to consolidate the revenue and expenses
of Four Seasons Hotel Berlin. However, the stipulated minimum lease payments
beyond what can be funded by the hotel's operation will not be paid or
accrued. As a result, the Company expects the earnings from Four Seasons
Hotel Berlin to be nil throughout the year.
The Company is in discussions with the landlords of The Pierre, Four
Seasons Hotel Berlin and Four Seasons Hotel Vancouver to determine what,
if any, alternatives may be available to change or restructure the Company's
investments in these hotels. There can be no assurance that acceptable
alternative arrangements will be agreed upon with respect to any or all
of these hotels.
OTHER INCOME/EXPENSE
Other income for the fourth quarter of 2003 was $178,000, as compared
to other expense of $2.8 million for the same period in 2002. For the full
year of 2003, other expense was $25.8 million, as compared to other expense
of $22.9 million in 2002.
Three months ended
Years ended
(Unaudited)
December 31, December
31,
(In millions of dollars)
2003 2002
2003 2002
-------------------------------------------------------------------------
Asset impairment charge, net
of recoveries(x)
$ (2.3) $ (1.9) $ (11.1)
$ (26.5)
Foreign exchange gain (loss)
2.5 0.5
(14.7) 5.0
Decline in value life
insurance policies
- (1.4)
- (1.4)
-------------------------------------------------------------------------
Other income (expense), net
$ 0.2 $ (2.8) $ (25.8)
$ (22.9)
-------------------------------------------------------------------------
(x) Includes legal and enforcement
costs relating to Caracas and Seattle
(2003 and
2002), asset impairment charge on Four Seasons Hotel Sydney
(2002) and
Four Seasons Hotel Caracas (2003 and 2002), writedown of
Four Seasons
Hotel Berlin (2003) and loss on sale of vacant land in
Toronto (2002),
net of recoveries on items previously provided for. |
Legal and Enforcement Costs
Included in other expenses during the fourth quarter of 2002 are legal
and enforcement costs of approximately $1.8 million incurred in connection
with the Company's disputes relating to the Four Seasons hotels in Caracas
and Seattle, which are described below. Included in other expense during
the year ended December 31, 2003 are legal and enforcement costs of $9.5
million in connection with the disputes with the owners of the Four Seasons
hotels in Caracas and Seattle. Other expense for the year ended December
31, 2002 includes an asset impairment charge for Four Seasons Hotel Caracas
and Four Seasons Hotel Sydney and legal and enforcement costs relating
to the Company's investments in Four Seasons Hotel Caracas and Four Seasons
Olympic Hotel Seattle which, in the aggregate, were $25 million.
Four Seasons Olympic Hotel Seattle
During the second quarter of 2003, the Company and the owner of Four
Seasons Olympic Hotel Seattle settled their disagreement, which was subject
to arbitration, concerning the management of the hotel. Under the settlement,
Four Seasons concluded its management of Four Seasons Olympic Hotel upon
the sale of the hotel, which occurred on August 1, 2003. On closing of
the sale of the hotel, the Company received an initial payment, which included
its share of the sale proceeds as a result of its minority ownership interest
in the hotel. The Company will also receive annual payments over the next
several years, subject to certain conditions being met, that are not materially
different from the fees that the Company would have otherwise earned during
this period under its previous management contract for that property. The
Company believes that a fair and equitable settlement has been reached
and that the payments under the settlement agreement will, in aggregate,
compensate it for the near-term value of its management contract as it
works to obtain a new management opportunity in Seattle. A portion of this
payment has been included in net earnings for 2003.
Four Seasons Hotel Caracas
The Company is in dispute with the owner of Four Seasons Hotel Caracas
regarding a variety of matters relating to the completion and ongoing operation
of the hotel, including the default of a US$5 million loan owed to the
Company. During the second quarter of 2003, the Company received a judgment
in the legal proceedings against the owner, which involved the protection
of its proprietary materials. The court found against the owner on all
matters, including illegal computer "hacking" and unlawful and unauthorized
use of the Company's proprietary information, and ordered that the owner
pay to the Company damages totalling US$4.9 million, plus legal costs and
expenses of US$1.4 million. The owner has appealed the judgment from the
legal proceeding, but has not stayed execution pending appeal. Therefore,
the Company is moving to enforce the judgment from the legal proceeding
against the owner, but has not recorded any receivable arising from the
judgment as at December 31, 2003. In addition, the arbitration hearing
in respect of the other contractual breaches of the management contract
by the owner was completed during the third quarter of 2003 and a decision
is pending.
Foreign Exchange Gain/Loss
Included in other income for the fourth quarter of 2003 is a foreign
exchange gain of $2.5 million. The foreign exchange gain is primarily due
to the translation of the Company's Australian dollars and pounds sterling
net monetary assets, as the Canadian dollar weakened relative to those
currencies during the quarter. This foreign exchange gain was partially
offset by foreign exchange losses on the translation of the Company's US-dollar
net monetary assets due to the strengthening of the Canadian dollar against
the US dollar, as discussed below.
Other expense for the full year 2003 also includes a $14.7 million non-cash,
unrealized foreign exchange loss, as compared to a $5.0 million non-cash,
unrealized foreign exchange gain for the same period in 2002. The non-cash,
unrealized foreign exchange loss for accounting purposes for the year ended
December 31, 2003 arose as the result of the translation to Canadian dollars
at the end of each month at current exchange rates of the Company's non-Canadian
dollar-denominated net monetary assets not included in the Company's designated
self-sustaining operations. Net monetary assets are the sum of the Company's
foreign currency-denominated assets and liabilities, which consist primarily
of cash and cash equivalents, accounts receivable, long-term receivables
and long-term obligations, as determined under Canadian generally accepted
accounting principles (GAAP).
From an economic perspective, the Company looks to offset its net monetary
asset position against the full obligation of its convertible notes. Under
Canadian GAAP, the convertible notes were allocated between long-term obligations
and shareholders' equity. At the time of issuance, the portion allocated
to long-term obligations and included in net monetary assets was US$46.7
million, and US$125.8 million was allocated to shareholders' equity. If
the portion of the convertible notes included in shareholders' equity was
revalued at the current exchange rates, which is not contemplated under
Canadian GAAP, the result of this revaluation would have been a non-cash,
unrealized foreign exchange gain for accounting purposes of $36.1 million
for the year ended December 31, 2003, more than offsetting the non-cash,
unrealized foreign exchange loss for accounting purposes otherwise recorded.
On this basis, the Company believes it has an appropriate economic hedge
of its net monetary assets and liabilities. For a further discussion of
the convertible notes see "Liquidity and Capital Resources" below.
The Canadian dollar strengthened by 18.2% (28.7 cents) during 2003 against
the US dollar, causing the majority of the non-cash, unrealized foreign
exchange loss for accounting purposes.
NET INTEREST INCOME/EXPENSE
The Company had net interest income of $962,000 in the fourth quarter
of 2003, as compared to net interest expense of $266,000 in the fourth
quarter of 2002. Net interest is a combination of $3.7 million interest
income and $2.8 million interest expense in the fourth quarter of 2003.
For the same period in 2002, interest income was $4.8 million, interest
expense was $3.3 million and the Company incurred a cost of $1.8 million
relating to the purchase of forward exchange contracts.
The decrease in interest income of $1.1 million is primarily due to
lower interest earned on loans to certain properties and lower interest
earned on short-term cash deposits in the fourth quarter of 2003, as compared
to the fourth quarter of 2002.
For the same reasons as discussed above for the fourth quarter, net
interest income for the year ended December 31, 2003 was $3.4 million,
as compared to $3.2 million for the same period in 2002. The components
of net interest income were interest income of $14.4 million and interest
expense of $11.1 million, partially offset by income relating to the purchase
of forward exchange contracts of $136,000 in 2003, as compared to $18.3
million, $11.6 million and an expense of $3.5 million, respectively, during
the same period in 2002.
INCOME TAX EXPENSE
The Company's effective tax rate for the quarter ended December 31,
2003 was 27.9%, as compared to 24% for the same period in 2002. The Company's
effective tax rate for the year ended December 31, 2003 was 55.2%, as compared
to 24% in 2002. The increase in the tax rate in the fourth quarter and
full year of 2003 was due to a portion of the non-cash, unrealized foreign
exchange losses for accounting purposes not being tax-effected as it will
not be realized for tax purposes.
As a result of the regional office income generally being taxed at rates
lower than the Canadian statutory income tax rate, the Company expects
its income tax rate to be approximately 24% in 2004 on income other than
unusual items like foreign exchange gains and losses, which may have a
different tax treatment.
STOCK OPTION EXPENSE
Stock option expense for the fourth quarter and full year 2003 was $368,000
and $893,000, respectively, as compared to nil for the same periods in
2002.
The Canadian Institute Chartered Accountants Handbook Section 3870 -
Stock-based Compensation and Other Stock-based Payments was amended in
December 2003 to require entities to account for employee stock options
using the fair value-based method, beginning January 1, 2004. Under the
fair value- based method, compensation cost of an award is measured at
fair value at the date of grant and is expensed over the stock option's
vesting period, with a corresponding increase to contributed surplus. In
accordance with one of the transitional alternatives permitted under amended
Section 3870, the Company has adopted the fair value-based method prospectively
to all employee stock options granted on or after January 1, 2003. Options
granted prior to that date continue, as permitted by the new rules, to
be accounted for using the settlement method. Under the settlement method,
no compensation expense is recorded on the grant of stock options, and
consideration paid on the exercise of stock options or the purchase of
shares is recorded as capital stock.
The allocation of the full year stock option expense of $893,000 among
the four quarters of 2003 is as follows: first quarter (quarter ending
March 31, 2003) - $15,000, second quarter (quarter ending June 30, 2003)
- $144,000, third quarter (quarter ending September 30, 2003) - $366,000
and fourth quarter (quarter ending December 31, 2003) - $368,000. The quarterly
results to be reported in the Company's 2003 annual filing will reflect
this allocation.
LIQUIDITY AND CAPITAL RESOURCES
As at December 31, 2003, the Company's cash and cash equivalents were
$170.7 million, as compared to total cash and cash equivalents of $165
million as at December 31, 2002. A significant amount of the Company's
cash reserves are in US dollars and as a result, a large portion of the
Company's cash reserves showed a year-over-year decline when translated
to Canadian dollars for financial reporting purposes due to currency movements
during 2003.
Long-term obligations were $120.3 million as at December 31, 2003, as
compared to $129.1 million as at December 31, 2002. The Company's debt
position consists primarily of that portion of its convertible notes that
is characterized as debt for accounting purposes. The decrease in long-term
obligations was primarily due to the foreign currency translation of the
US dollar debt component of the convertible notes.
The Company is entitled to redeem its convertible notes commencing in
September 2004 for cash equal to the issue price plus accrued interest
calculated at 4 1/2% per annum. Holders of the notes have conversion rights,
which they can exercise at any time before the maturity date or date of
redemption of the notes, pursuant to which they can require the Company
to issue to them 5.284 Limited Voting Shares for each US$1,000 principal
amount of notes. The holders of notes also can require the Company to repurchase
the notes in September 2004 for an amount equal to the issue price plus
accrued interest calculated at 4 1/2% per annum. This right also may be
exercised in September 2009 and September 2014. The Company has a choice
of funding its obligation in connection with the conversion or purchase
of the notes at the option of the holder with cash or shares. The rights
of the Company and the noteholders relating to the convertible notes are
more fully described in the Company's 2002 Annual Report.
It is possible that the Company may redeem some or all of the notes,
especially if the current interest rate and general business environment
continues. A cash redemption in September 2004 of all outstanding notes
would require a cash payment to the noteholders of approximately US$215.5
million, assuming that the holders did not exercise their right to convert
their notes before the redemption date. If the Company redeems the notes,
it may replace the financing provided by the notes with a combination of
debt (which could be raised in various means, including bank lines and/or
the issuance of additional notes or convertible notes) and/or the utilization
of cash reserves.
CASH FLOW
During the fourth quarter of 2003, the Company generated $21.9 million
from operations, as compared to $9.6 million for the same period in 2002.
The increase in cash from operations of $12.3 million in 2003 resulted
primarily from a reduction in working capital of $9.3 million, a decrease
in cash used in ownership operations of $2.8 million and a decrease in
legal and enforcement costs paid in 2003 of $1.6 million, partially offset
by a decrease in cash contributed by management operations of $1.3 million.
The Company generated $66 million of cash from operations during the
year ended December 31, 2003, as compared to $41.8 million for the year
ended December 31, 2002. The increase in cash from operations of $24.2
million in 2003 resulted primarily from a reduction in working capital
of $33 million and a decrease in income tax paid in 2003 of $10.4 million,
partially offset by an increase in cash used in ownership operations of
$10 million, and an increase in legal and enforcement costs paid in 2003
of $4.5 million.
A part of the Company's business strategy is to invest a portion of
available cash to obtain new management agreements or enhance existing
management arrangements. These loans or investments will only be made where
the overall economic return to the Company is expected to justify the loan
or investment. During the year ended December 31, 2003, the Company made
investments in a variety of projects, including Costa Rica, Buenos Aires,
Jackson Hole, Whistler and Scottsdale Residence Club. For the quarter and
year ended December 31, 2003, the Company funded $5.2 million and $42.6
million, respectively, in management opportunities, including amounts advanced
as loans receivable, investment in hotel partnerships and investment in
management contracts ($26.7 million and $56 million, respectively, for
the same periods in 2002). The Company currently expects to fund in the
range of US$50 million to US$60 million in 2004 in management opportunities
such as Geneva, Hampshire and Palo Alto, which may be augmented by additional
investments in other properties if appropriate opportunities become available.
Total fixed asset expenditures were $13.9 million in the fourth quarter
of 2003 and $19.3 million for the year ended December 31, 2003, as compared
to $21.8 million and $31.1 million, respectively, for the same periods
in 2002. During the fourth quarter of 2003, the Company purchased land
for $11.2 million relating to its corporate office expansion. During the
fourth quarter of 2002, $17.6 million was expended by the Company in connection
with the purchase of land relating to its investment in its project in
Orlando, Florida.
During 2002, the Company generated $4.6 million from the disposition
of its interest in the Inn on the Park vacant land in Toronto. Also during
2002, the Company made normal course purchases of 337,600 of its Limited
Voting Shares through the facilities of The Toronto Stock Exchange and
the New York Stock Exchange for a total purchase price, including commissions,
of approximately $16.5 million ($7.7 million in the fourth quarter of 2002).
During 2003, the Company did not make any normal course purchases.
FOUR SEASONS PROPERTIES - RECENT AND EXPECTED OPENINGS
Over the past four months, the Company has added four new Four Seasons
hotels and resorts in Miami, Jackson Hole, Exuma and Costa Rica, as well
as adding a third Four Seasons Residence Club in Jackson Hole. Four Seasons
is continuing to expand its international presence with several new projects.
During the next 12 months, the Company expects to open new hotels and resorts
in Budapest, Hampshire (England), Cairo, Doha, Langkawi (Malaysia), Provence
(France), Whistler (British Columbia) and Lanai (Hawaii). A full list of
the Company's properties under construction or advanced development is
provided in a schedule attached to this press release. Recent additions
to the development list include two new projects in Lanai.
"The Four Seasons collection is continuing to expand. We have some great
recent additions to the Four Seasons portfolio, including our first mountain
resort in Jackson Hole, as well as Four Seasons Resort Great Exuma at Emerald
Bay and Four Seasons Resort Costa Rica. Each will offer an exceptional
destination resort experience," said Kathleen Taylor, President Worldwide
Business Operations. "We have a very busy year ahead of us as we expect
to open a record number of Four Seasons properties in one year, adding
nine exciting destinations to our network around the world."
LOOKING AHEAD
Travel trends have continued to improve early in the first quarter of
2004. Although January is a historically weak period for business travel,
the Company's worldwide RevPAR for the month increased nearly 8% on a US
dollar basis, as compared to January 2003. The Europe/Middle East segment
realized the strongest improvements in occupancy during January 2004. In
January, the Company continued to realize higher achieved room rates in
each of the geographic regions of operation. This is consistent with the
continued improvement in economic indicators for most of the major global
economies. At this time, the Company expect to see these positive demand
trends and pricing improvements continue through the first quarter of 2004.
The Company expects that the improving economic environment should translate
into continued improvement in travel demand, particularly business travel.
The Company also expects that leisure travel demand, which overall has
been more resilient in the past few years than to business travel, will
remain stable. On a full-year basis, the Company continues to expect its
average daily room rates for 2004 to meet or exceed the rates achieved
in 2003. The Company also expects its business model to perform at or above
industry levels consistent with past experience. However, the Company is
not providing any specific guidance for earnings per share for 2004, or
any quarter thereof at this time.
CONCLUSION
"Four Seasons has enhanced its competitive position over the past three
years. Notwithstanding the very difficult operating conditions experienced
by the lodging industry, we maintained our strategic direction. We continued
to focus on our guests and the consistent and cost effective execution
of the finest service in the industry," said Isadore Sharp, Chairman and
Chief Executive Officer. "We believe that our commitment to this strategy
will benefit Four Seasons shareholders and the owners of the properties
that we manage as the lodging industry experiences the improved travel
demand that we have now begun to see."
--------------------------
1. Adjusted net earnings is
equal to net earnings (loss) plus (i)
foreign exchange
loss, less (ii) foreign exchange gain, plus (iii)
asset impairment
charge, plus (iv) loss on sale of hotel investment,
each tax-effected
as applicable. Adjusted net earnings, as calculated
by the Company,
may not be comparable to adjusted net earnings used
by other companies,
which may be calculated differently. In addition,
adjusted net
earnings is not intended to represent net earnings as
defined by
Canadian GAAP and should not be considered an alternative
to net earnings
or any other measure of performance prescribed by
Canadian GAAP.
It is included because the Company's management
believes it
can assist in the period-over-period comparability of the
Company's
financial performance.
A reconciliation
of net earnings to adjusted net earnings is
as follows:
Three months ended Years ended
(Unaudited)
December 31, December
31,
(In thousands
of dollars) 2003
2002 2003
2002
---------------------------------------------------------------------
Net earnings
$ 11,704 $ 7,637 $ 5,384
$ 21,231
Adjustments:
Foreign exchange loss
(gain)
(2,476) (510) 14,703
(5,036)
Net asset impairment
charge(x)
2,298 3,145 11,080
26,396
Loss on sale of hotel
investment
- 50
- 1,409
Restructuring change
- 91
- 91
Tax effect
of adjustments (552)
(666) (2,659) (5,486)
--------------------------------------------
Adjusted net
earnings $ 10,974 $ 9,747
$ 28,508 $ 38,605
--------------------------------------------
--------------------------------------------
Adjusted basic
earnings
per
share
$ 0.31 $ 0.28
$ 0.81 $ 1.10
--------------------------------------------
--------------------------------------------
Adjusted diluted
earnings
per share $
0.30 $ 0.28 $ 0.79
$ 1.07
--------------------------------------------
--------------------------------------------
(x) Includes
legal and enforcement costs.
2. Gross operating margin represents
gross operating profit as a percent
of gross operating
revenue.
3. RevPAR is defined as average
room revenue per available room. RevPAR
is a commonly
used indicator of market performance for hotels and
resorts and
represents the combination of the average daily room rate
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. The Company reports RevPAR as it is
the most commonly
used measure in the lodging industry to measure the
period-over-period
performance of comparable properties.
4. The term "Core Hotels" means
hotels and resorts under management for
the full year
of both 2003 and 2002. Changes from the 2002/2001 Core
Hotels are
the additions of Four Seasons Hotel San Francisco, Four
Seasons Hotel
Dublin, Four Seasons Hotel Buenos Aires and Four
Seasons Resort
Carmelo, and the deletion of Four Seasons Olympic
Hotel Seattle.
5. Fair revenue market share
as determined by Smith Travel Research,
which is based
on the RevPAR Index comparing the Company to a
competitive
set of peer companies determined by the Company.
6. The management operations
profit margin represents management
operations
earnings before other operating items, as a percent of
management
operations revenue.
7. Included in ownership operations
are the consolidated revenues and
expenses from
the Company's 100% leasehold interests in The Pierre in
New York,
Four Seasons Hotel Vancouver and Four Seasons Hotel Berlin,
distributions
from other ownership interests in properties that Four
Seasons manages
and corporate overhead expenses related, in part, to
these ownership
interests.
--------------------------
All dollar amounts referred to in this press release are
Canadian dollars unless otherwise noted. The financial statements are prepared
in accordance with Canadian generally accepted accounting principles.
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Years ended
(In thousands of dollars
December 31, December
31,
except per share amounts)
2003 2002
2003 2002
-------------------------------------------------------------------------
(Unaudited)(Unaudited)(Unaudited)
Consolidated revenues (note 4) $ 75,236
$ 76,935 $268,371 $284,674
-------------------------------------------
-------------------------------------------
MANAGEMENT OPERATIONS
Revenues
$ 40,577 $ 39,321 $149,756 $147,894
General and administrative
expenses
(19,916) (17,716) (70,234) (65,903)
-------------------------------------------
20,661 21,605 79,522
81,991
-------------------------------------------
OWNERSHIP OPERATIONS
Revenues
36,020 38,839 123,214
141,290
Distributions from hotel
investments
-- 503
153 1,321
Expenses:
Cost of sales and expenses
(36,637) (42,244) (148,684) (156,374)
Fees to Management Operations
(1,361) (1,728) (4,752)
(5,831)
-------------------------------------------
(1,978) (4,630) (30,069) (19,594)
-------------------------------------------
Earnings before other
operating items
18,683 16,975 49,453
62,397
Depreciation and amortization
(3,592) (3,885) (15,011) (14,837)
Other income (expense),
net (note 5)
178 (2,776) (25,783) (22,860)
-------------------------------------------
Earnings from operations
15,269 10,314 8,659
24,700
Interest income (expense), net
962 (266) 3,350
3,235
-------------------------------------------
Earnings before income taxes
16,231 10,048 12,009
27,935
-------------------------------------------
Income tax recovery (expense):
Current
(2,833) (3,793) (2,395)
(5,743)
Future
(1,924) 1,225 (4,460)
(1,118)
Increase in future income
tax assets
230 157
230 157
-------------------------------------------
(4,527) (2,411) (6,625)
(6,704)
-------------------------------------------
Net earnings
$ 11,704 $ 7,637 $ 5,384
$ 21,231
-------------------------------------------
-------------------------------------------
Basic earnings per share
(note 3)
$ 0.33 $ 0.22 $
0.15 $ 0.61
-------------------------------------------
-------------------------------------------
Diluted earnings per share
(note 3)
$ 0.32 $ 0.22 $
0.15 $ 0.59
-------------------------------------------
-------------------------------------------
See accompanying notes to consolidated
financial statements.
FOUR SEASONS HOTELS INC.
CONSOLIDATED BALANCE SHEETS
As at As at
December 31, December 31,
(In thousands of dollars)
2003
2002
-------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$170,725 $165,036
Receivables
88,636 106,361
Inventory
2,169 2,609
Prepaid expenses
3,780 4,718
--------------------------
265,310 278,724
Long-term receivables
197,635 207,106
Investments in hotel partnerships
and corporations
157,638 146,362
Fixed assets
75,789 74,593
Investment in management contracts
203,670 222,835
Investment in trademarks and trade
names 5,757
6,329
Future income tax assets
13,230 17,460
Other assets
27,631 37,982
--------------------------
$946,660 $991,391
--------------------------
--------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities $ 61,045
$ 61,129
Long-term obligations
due within one year 2,587
2,668
--------------------------
63,632 63,797
Long-term obligations (note 2)
117,521 126,386
Shareholders' equity (note 3):
Capital stock
329,274 321,601
Convertible notes
178,543 178,543
Contributed surplus
5,529 4,636
Retained earnings
265,754 264,016
Equity adjustment from
foreign
currency translation
(13,593) 32,412
--------------------------
765,507 801,208
--------------------------
$946,660 $991,391
--------------------------
--------------------------
See accompanying notes to consolidated
financial statements.
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF CASH PROVIDED
BY OPERATIONS
Three months ended Years ended
December 31, December
31,
(In thousands of dollars)
2003 2002
2003 2002
-------------------------------------------------------------------------
(Unaudited)(Unaudited)(Unaudited)
Cash provided by (used in)
operations:
MANAGEMENT OPERATIONS
Earnings before other
operating items
$ 20,661 $ 21,605 $ 79,522 $ 81,991
Items not requiring an
outlay of funds
377 732
1,476 1,805
-------------------------------------------
Working capital provided by
Management Operations
21,038 22,337 80,998
83,796
-------------------------------------------
OWNERSHIP OPERATIONS
Loss before other operating
items
(1,978) (4,630) (30,069) (19,594)
Items not requiring an
outlay of funds
189 --
467 --
-------------------------------------------
Working capital used in
Ownership Operations
(1,789) (4,630) (29,602) (19,594)
-------------------------------------------
19,249 17,707 51,396
64,202
Interest received, net
2,341 1,845 10,426
11,582
Current income tax paid
-- --
-- (10,374)
Change in non-cash working
capital
1,339 (7,997) 13,709
(19,293)
Other
(1,048) (1,988) (9,528)
(4,354)
-------------------------------------------
Cash provided by operations
$ 21,881 $ 9,567 $ 66,003 $ 41,763
-------------------------------------------
-------------------------------------------
See accompanying notes to consolidated
financial statements.
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended Years ended
December 31, December
31,
(In thousands of dollars)
2003 2002
2003 2002
-------------------------------------------------------------------------
(Unaudited)(Unaudited)(Unaudited)
Cash provided by (used in):
Operations:
$ 21,881 $ 9,567 $ 66,003 $ 41,763
-------------------------------------------
Financing:
Long-term obligations
including current
portion (136)
2,084 (200)
1,139
Issuance of shares
3,759 205
7,673 5,653
Repurchase of shares
-- (7,741)
-- (16,495)
Dividends paid
-- --
(3,622) (3,639)
-------------------------------------------
Cash provided by (used in)
financing
3,623 (5,452) 3,851
(13,342)
-------------------------------------------
Capital investments:
Long-term receivables
3,052 (5,816) (6,394)
(28,893)
Hotel investments
(678) (3,966) (8,580)
(9,451)
Disposal of hotel
investments
-- (249) 1,529
4,566
Purchase of fixed assets
(13,931) (21,801) (19,331) (31,085)
Investments in trademarks,
trade names and
management
contracts
(536) (239) (2,116)
(1,598)
Other assets
(321) 168 (5,181)
(7,809)
-------------------------------------------
Cash used in capital
investments
(12,414) (31,903) (40,073) (74,270)
-------------------------------------------
Increase (decrease) in cash
and cash equivalents
13,090 (27,788) 29,781
(45,849)
Increase (decrease) in cash
due to unrealized foreign
exchange gain (loss)
(3,769) (111) (24,092)
464
Cash and cash equivalents,
beginning of period
161,404 192,935 165,036
210,421
-------------------------------------------
Cash and cash equivalents,
end of period
$170,725 $165,036 $170,725 $165,036
-------------------------------------------
-------------------------------------------
See accompanying notes to consolidated
financial statements.
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF RETAINED
EARNINGS
Years ended
December 31,
(In thousands of dollars)
2003 2002
-------------------------------------------------------------------------
(Unaudited)
Retained earnings, beginning of period
$264,016 $259,253
Net earnings
5,384 21,231
Dividends declared
(3,646) (3,633)
Repurchase of shares
-- (12,835)
---------------------
Retained earnings, end of period
$265,754 $264,016
---------------------
---------------------
See accompanying notes to consolidated
financial statements.
FOUR SEASONS HOTELS INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(In thousands of dollars except share
amounts)
-------------------------------------------------------------------------
These interim consolidated financial
statements do not include all
disclosures required by Canadian generally
accepted accounting principles
for annual financial statements and
should be read in conjunction with
the Company's annual consolidated
financial statements for the year ended
December 31, 2002, except as disclosed
in note 6 below.
1. Significant accounting policies:
The significant accounting policies
used in preparing these interim
consolidated financial statements
are consistent with those used in
preparing the Company's annual consolidated
financial statements for the
year ended December 31, 2002, except
as disclosed in note 6.
2. Bank credit facilities:
In 2003, the Company increased availability
under its committed bank
credit facilities by US$12,500, and
now has facilities of US$212,500, of
which US$112,500 expires in April
2004 and US$100,000 expires in July
2004. No amounts have been borrowed
under these facilities to date;
however, US$28,100 in letters of credit
were issued but undrawn as at
December 31, 2003.
3. Shareholders' equity:
As at December 31, 2003, the Company
has outstanding Variable Multiple
Voting Shares ("VMVS") and Limited
Voting Shares ("LVS") of 35,241,592
and outstanding stock options of 5,836,897
(weighted average exercise
price of $53.91).
A reconciliation of the net earnings
and weighted average number of VMVS
and LVS used to calculate basic earnings
per share and diluted earnings
per share is as follows:
Three months ended
(Unaudited)
December 31,
(In thousands of dollars)
2003
2002
-------------------------------------------------------------------------
Net
Net
earnings Shares earnings
Shares
-------------------------------------------------------------------------
Basic earnings per share:
Net earnings and number
of shares
$11,704 35,146,473 $ 7,637 34,871,389
Effect of assumed dilutive
conversions:
Stock option plan
-- 1,489,773 --
--(x)
-------------------------------------------------------------------------
Diluted earnings per share:
Net earnings and number
of shares
$11,704 36,636,246 $ 7,637 34,871,389
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Years ended
(Unaudited)
December 31,
(In thousands of dollars)
2003
2002
-------------------------------------------------------------------------
Net
Net
earnings Shares earnings
Shares
-------------------------------------------------------------------------
Basic earnings per share:
Net earnings and number
of shares
$ 5,384 34,996,389 $21,231 35,051,619
Effect of assumed dilutive
conversions:
Stock option plan
-- 870,135
-- 1,118,953
-------------------------------------------------------------------------
Diluted earnings per share:
Net earnings and number
of shares
$ 5,384 35,866,524 $21,231 36,170,572
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(x) The effect of assumed conversions
to LVS under the Company's stock
option plan
was anti-dilutive and was therefore excluded from the
calculation
of diluted earnings per share.
4. Consolidated revenues:
Consolidated revenues for Four Seasons
Hotels Inc. comprise revenues from
Management Operations, revenues from
Ownership Operations and
distributions from hotel investments,
less fees from Ownership Operations
to Management Operations.
5. Other income (expense), net:
Included in other income (expense),
net for the three months and year
ended December 31, 2003 is a net foreign
exchange gain of $2,476 and a
net foreign exchange loss of $14,703
respectively (2002 - net foreign
exchange gain of $510 and $5,036,
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 the
Company's foreign self-sustaining
subsidiaries.
Also included in other income (expense),
net for the three months and
year ended December 31, 2003 are legal
and enforcement costs of $795 and
$9,475, respectively, in connection
with the disputes with the owners of
Four Seasons hotels in Caracas and
Seattle. These disputes are described
in detail in the Company's 2002 Annual
Report. During the three months
ended December 31, 2003, the Company
also wrote down its fixed asset
investment in Four Seasons Hotel Berlin
to nil, resulting in an expense
of $3,174. Other income (expense),
net for the three months and year
ended December 31, 2002 also included
an asset impairment charge and
legal and enforcement costs of $1,784
and $25,091, respectively, related
to the Company's investments in Four
Seasons Hotel Caracas, Four Seasons
Hotel Sydney and Four Seasons Olympic
Hotel Seattle.
6. Stock-based compensation and
other stock-based payments:
In 2002, as permitted by The Canadian
Institute of Chartered Accountants
("CICA") Handbook Section 3870, "Stock-based
Compensation and Other Stock-
based Payments", the Company opted
to apply the settlement method of
accounting for employee stock options.
Under the settlement method, no
compensation expense is recorded on
the grant of stock options to
employees to purchase Limited Voting
Shares, and consideration paid by
employees on the exercise of stock
options or the purchase of shares is
recorded as capital stock.
In December 2003, the CICA amended
Section 3870 to require entities to
account for employee stock options
using the fair value-based method,
beginning January 1, 2004. Under the
fair value-based method,
compensation cost of a stock option
is measured at fair value at the date
of grant and is expensed over the
stock option's vesting period, with a
corresponding increase to contributed
surplus. When these stock options
are exercised, the proceeds, together
with the amount recorded in
contributed surplus, are recorded
in capital stock.
In accordance with one of the transitional
alternatives permitted under
amended Section 3870, the Company
has prospectively adopted the fair
value-based method to all employee
stock options granted on or after
January 1, 2003. Accordingly, options
granted prior to that date continue
to be accounted for using the settlement
method, and results from the
year ended December 31, 2002 have
not been restated. For the three months
and year ended December 31, 2003,
the prospective application of adopting
the fair value-based method effective
January 1, 2003 resulted in a
decrease in net earnings of $368 and
$893, respectively, and a decrease
in both basic and diluted earnings
per share of $0.01 and a decrease in
basic earnings per share of $0.03
and a decrease in diluted earnings per
share of $0.02, respectively.
The fair value of stock options granted
has been estimated using a Black-
Scholes option pricing model with
the following assumptions: risk-free
interest rates in 2003 ranging from
4.44% to 5.02% (2002 - 4.01% to
5.20%); semi-annual dividend per Limited
Voting Share in 2003 and 2002 of
$0.055; volatility factor of the expected
market price of the Company's
Limited Voting Shares in 2003 of 32%
(2002 - 47% to 50%); and expected
lives of the options in 2003 and 2002
ranging between four and seven
years, depending on the level of the
employee who was granted stock
options. For the options granted in
2003 and 2002, the weighted average
fair value of the options at the grant
dates were $18.46 and $33.76,
respectively. For purposes of stock
option expense and pro forma
disclosures, the estimated fair value
of the options is amortized to
compensation expense over the options'
vesting period.
Section 3870 requires pro forma disclosure
of the effect of the
application of the fair value-based
method to employee stock options
granted on or after January 1, 2002
and not accounted for using the fair
value-based method. For the three
months and years ended December 31,
2002 and 2003, if the Company had
applied the fair value- based method to
options granted from January 1, 2002
to December 31, 2002, the Company's
net earnings and basic and diluted
earnings per share would have been
reduced to the pro forma amounts indicated
below:
(Unaudited)
Three months ended Years ended
(In thousands of dollars
December 31, December
31,
except per share amounts)
2003 2002
2003 2002
-------------------------------------------------------------------------
Stock option expense included
in compensation expense
$ 368 $ --
$ 893 $ --
-------------------------------------------------------------------------
Net earnings, as reported
$ 11,704 $ 7,637 $ 5,384
$ 21,231
Additional expense that would
have been recorded if all
outstanding stock options
granted during 2002
had been expensed
863 832
3,450 1,790
-------------------------------------------------------------------------
Pro forma net earnings
$ 10,841 $ 6,805 $ 1,934
$ 19,441
-------------------------------------------------------------------------
Earnings per share:
Basic, as reported
$ 0.33 $ 0.22 $
0.15 $ 0.61
Basic, pro forma
0.31 0.20
0.06 0.55
Diluted, as reported
0.32 0.22
0.15 0.59
Diluted, pro forma
0.30 0.20
0.05 0.54
-------------------------------------------------------------------------
7. Guarantees, commitments and
indemnifications:
Guarantees and commitments
--------------------------
As at December 31, 2003, the Company
has provided certain guarantees and
has other commitments in connection
with the hotels under management.
These include three bank guarantees
in respect of three projects
totalling a maximum of $29,100. The
Company has lease commitments in
respect of Four Seasons Hotel London,
which are more fully described in
the Company's Annual Report, and Four
Seasons Hotel Prague of euro 718.
In addition, the Company has three
other commitments totalling $7,800.
The Company also has guaranteed certain
obligations of various directors,
officers and employees in the amount
of $384, all of which were entered
into before 2002.
To the extent it is called upon to
honour any one of these commitments,
the Company generally has either the
right to be repaid from hotel
operations and/or has various forms
of security or recourse to the owner
of the property. The Company does
not anticipate funding any amount
pursuant to these commitments during
2004 and no amount has been recorded
in the consolidated financial statements
in respect of these commitments.
The Company's assessment of its potential
liability for such matters
could change as a result of, among
other things, the associated risks and
uncertainties.
Disposition indemnification arrangements
In connection with the sale of all
or a part of its interest in a
property, the Company and its subsidiaries
may agree to indemnify against
claims relating to breaches of specific
covenants or representations and
warranties. The maximum amount of
the indemnification in these
transactions is generally limited
to the purchase price paid for that
interest. The nature of these indemnities
prevents the calculation of an
exact amount that may be payable to
the indemnified parties.
Also, in the case of two of the Company's
dispositions, the Company
received indemnity agreements in its
favour, for its existing guarantee
obligations related to the disposed
interest that have remained
outstanding notwithstanding the disposition.
The Company believes that
the indemnification agreements in
its favour will fully indemnify the
Company for any possible payment under
these existing guarantees.
Director and officer indemnification
arrangements
To the extent permitted by law, the
Company and its subsidiaries
indemnify individuals that are, or
have been, directors or officers
against certain claims that may be
made against them as a result of their
being, or having been, a director
or officer at the request of the
Company or its subsidiaries. The Company
has purchased directors' and
officers' liability insurance that
may be available in respect of certain
of these claims.
Other indemnification arrangements
In the ordinary course of their business,
the Company and its
subsidiaries enter into other agreements
with third parties that may
contain indemnification provisions
pursuant to which the parties to the
agreements agree to indemnify one
another if certain events occur (such
as, but not limited to, changes in
laws and regulations or as a result of
litigation claims or liabilities which
arise in respect of tax or
environmental matters).
The terms of the Company's indemnification
provisions vary based on the
contract, which (together with the
fact that any amounts that could be
payable would be dependent on the
outcome of future, contingent events,
the nature and likelihood of which
cannot be determined at this time)
precludes the Company from making
a reasonable estimate of the maximum
potential amount the Company and its
subsidiaries could be required to
pay to counterparties. The Company
believes that the likelihood that it
or its subsidiaries would incur significant
liability under these
obligations is remote. Historically,
the Company and its subsidiaries
have not made any significant payments
under such indemnifications. No
amount has been recorded in the consolidated
financial statements with
respect to these indemnification provisions.
The Company's assessment of
its potential liability could change
in the future as a result of
currently unforeseen circumstances.
Other commitments and contingencies
-----------------------------------
In the ordinary course of its business,
the Company is named as a
defendant in legal proceedings resulting
from incidents taking place at
hotels owned or managed by it. The
Company maintains comprehensive
liability insurance and also requires
hotel owners to maintain adequate
insurance coverage. The Company believes
such coverage to be of a nature
and amount sufficient to ensure that
it is adequately protected from
suffering any material financial loss
as a result of such claims.
8. Seasonality:
The Company's hotels and resorts are
affected by normally recurring
seasonal patterns and, for most of
the properties, demand is lower in
December through March than during
the remainder of the year. Typically,
the fourth quarter is the strongest
quarter for the majority of the
properties, although this was not
true in 2002 as a result of the
difficult economic environment and
geopolitical instability.
The Company's ownership operations
are particularly affected by seasonal
fluctuations, with lower revenue,
operating profit and cash flow in the
first quarter. As a result, ownership
operations typically incur an
operating loss in the first quarter
of each year.
Management operations are also impacted
by seasonal patterns, as fee
revenues are affected by the seasonality
of hotel and resort revenues and
operating results. Urban hotels generally
experience lower revenues and
operating results in the first quarter.
However, this negative impact on
management revenues is offset, to
some degree, by increased travel to the
Company's resorts in the period.
FOUR SEASONS HOTELS INC.
SUMMARY OF HOTEL OPERATING DATA -
CORE HOTELS(1)
Three months ended
December 31,
(Unaudited)
2003 2002 Variance
-------------------------------------------------------------------------
Worldwide
No. of Properties
48 48
--
No. of Rooms
12,870 12,870
--
Occupancy(2)
65.4% 61.3%
4.1%
ADR(3)
- in US dollars
$ 311 $ 296
4.9%
RevPAR(4)
- in US dollars
$ 203 $ 182
11.9%
Gross operating margin(5)
28.4% 27.8%
0.6%
United States
No. of Properties
22 22
--
No. of Rooms
6,798 6,798
--
Occupancy(2)
66.7% 64.3%
2.4%
ADR(3)
- in US dollars
$ 343 $ 335
2.5%
RevPAR(4)
- in US dollars
$ 229 $ 215
6.3%
Gross operating margin(5)
25.4% 26.0%
(0.6%)
Other Americas/Caribbean
No. of Properties
7 7
--
No. of Rooms
1,550 1,550
--
Occupancy(2)
59.6% 53.5%
6.1%
ADR(3)
- in US dollars
$ 281 $ 261
7.9%
RevPAR(4)
- in US dollars
$ 168 $ 139
20.3%
Gross operating margin(5)
29.5% 25.2%
4.3%
Europe/Middle East
No. of Properties
9 9
--
No. of Rooms
1,807 1,807
--
Occupancy(2)
59.8% 55.2%
4.6%
ADR(3)
- in US dollars
$ 426 $ 385
10.6%
RevPAR(4)
- in US dollars
$ 255 $ 213
19.8%
Gross operating margin(5)
30.8% 30.1%
0.7%
Asia/Pacific
No. of Properties
10 10
--
No. of Rooms
2,715 2,715
--
Occupancy(2)
69.2% 62.2%
7.0%
ADR(3)
- in US dollars
$ 182 $ 163
11.5%
RevPAR(4)
- in US dollars
$ 126 $ 102
23.9%
Gross operating margin(5)
37.4% 35.1%
2.3%
-------------------------------------
1. The term "Core Hotels" means
hotels and resorts under management for
the full year
of both 2003 and 2002. Changes from the 2002/2001 Core
Hotels are
the additions of Four Seasons Hotel San Francisco, Four
Seasons Hotel
Dublin, Four Seasons Hotel Buenos Aires and Four
Seasons Resort
Carmelo, and the deletion of Four Seasons Olympic
Hotel Seattle.
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 per room occupied.
4. RevPAR is defined as average
room revenue per available room. RevPAR
is a commonly
used indicator of market performance for hotels and
resorts and
represents the combination of the average daily room rate
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. The Company reports RevPAR as it is
the most commonly
used measure in the lodging industry to measure the
period-over-period
performance of comparable properties.
5. Gross operating margin represents
gross operating profit as a percent
of gross operating
revenue.
FOUR SEASONS HOTELS INC.
SUMMARY OF HOTEL OPERATING DATA -
CORE HOTELS(1)
Years ended
December 31,
(Unaudited)
2003 2002 Variance
-------------------------------------------------------------------------
Worldwide
No. of Properties
48 48
--
No. of Rooms
12,870 12,870
--
Occupancy(2)
62.5% 63.9%
(1.4%)
ADR(3)
- in US dollars
$ 304 $ 292
4.3%
RevPAR(4)
- in US dollars
$ 190 $ 186
2.0%
Gross operating margin(5)
26.6% 29.3%
(2.7%)
United States
No. of Properties
22 22
--
No. of Rooms
6,798 6,798
--
Occupancy(2)
67.6% 66.6%
1.0%
ADR(3)
- in US dollars
$ 331 $ 327
1.3%
RevPAR(4)
- in US dollars
$ 224 $ 218
2.9%
Gross operating margin(5)
24.9% 27.3%
(2.4%)
Other Americas/Caribbean
No. of Properties
7 7
--
No. of Rooms
1,550 1,550
--
Occupancy(2)
56.1% 58.8%
(2.7%)
ADR(3)
- in US dollars
$ 271 $ 258
5.0%
RevPAR(4)
- in US dollars
$ 152 $ 152
0.2%
Gross operating margin(5)
26.7% 28.4%
(1.7%)
Europe/Middle East
No. of Properties
9 9
--
No. of Rooms
1,807 1,807
--
Occupancy(2)
56.4% 58.4%
(2.0%)
ADR(3)
- in US dollars
$ 422 $ 380
11.3%
RevPAR(4)
- in US dollars
$ 238 $ 222
7.5%
Gross operating margin(5)
31.3% 34.6%
(3.3%)
Asia/Pacific
No. of Properties
10 10
--
No. of Rooms
2,715 2,715
--
Occupancy(2)
57.5% 63.9%
(6.4%)
ADR(3)
- in US dollars
$ 165 $ 164
1.0%
RevPAR(4)
- in US dollars
$ 95 $ 105
(9.2%)
Gross operating margin(5)
29.2% 33.7%
(4.5%)
-------------------------------------
1. The term "Core Hotels" means
hotels and resorts under management for
the full year
of both 2003 and 2002. Changes from the 2002/2001 Core
Hotels are
the additions of Four Seasons Hotel San Francisco, Four
Seasons Hotel
Dublin, Four Seasons Hotel Buenos Aires and Four
Seasons Resort
Carmelo, and the deletion of Four Seasons Olympic
Hotel Seattle.
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 per room occupied.
4. RevPAR is defined as average
room revenue per available room. RevPAR
is a commonly
used indicator of market performance for hotels and
resorts and
represents the combination of the average daily room rate
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. The Company reports RevPAR as it is
the most commonly
used measure in the lodging industry to measure the
period-over-period
performance of comparable properties.
5. Gross operating margin represents
gross operating profit as a percent
of gross operating
revenue.
FOUR SEASONS HOTELS INC.
SUMMARY OF HOTEL OPERATING DATA - ALL
MANAGED HOTELS
As at
December 31,
(Unaudited)
2003 2002 Variance
-------------------------------------------------------------------------
Worldwide
No. of Properties
60(1) 57
3
No. of Rooms
15,760(1) 15,433 327
United States
No. of Properties
24 23
1
No. of Rooms
7,143 7,248
(105)
Other Americas/Caribbean
No. of Properties
9(1) 8
1
No. of Rooms
1,945(1) 1,762 183
Europe/Middle East
No. of Properties
13 12
1
No. of Rooms
2,553 2,304
249
Asia/Pacific
No. of Properties
14 14
--
No. of Rooms
4,119 4,119
--
1. Since December 31, 2003, the
Company has commenced management of Four
Seasons Resort
Costa Rica, which has 153 rooms and is not reflected
in this table.
FOUR SEASONS HOTELS INC.
REVENUES UNDER MANAGEMENT - ALL MANAGED
HOTELS
Three months ended Years
ended
(Unaudited)
December 31,
December 31,
(In thousands of dollars)
2003 2002
2003 2002
-------------------------------------------------------------------------
Revenues under
management(1)
$ 691,886 $ 752,776 $2,600,430 $2,845,361
------------------------------------------------
------------------------------------------------
--------------------------
1. Revenues under management
consist of rooms, food and beverage,
telephone
and other revenues of all the hotels and resorts which the
Company manages.
Approximately 69% of the fee revenues earned by the
Company were
calculated as a percentage of the total revenues under
management
of all hotels and resorts.
FOUR SEASONS HOTELS INC.
SCHEDULED OPENING OF PROPERTIES UNDER
CONSTRUCTION OR
IN ADVANCED STAGES OF DEVELOPMENT
Hotel/Resort/Residence Club and Location(1)(2)
Approximate
Number of Rooms
Scheduled 2004/2005 Openings
----------------------------
Four Seasons Hotel Gresham Palace
Budapest, Hungary
175
Four Seasons Hotel Nile Plaza, Cairo,
Egypt(x)
375
Four Seasons Hotel Damascus, Syria(x)
300
Four Seasons Hotel Doha, Qatar(x)
235
Four Seasons Hotel Geneva, Switzerland
110
Four Seasons Hotel Hampshire, England
135
Four Seasons Hotel Hong Kong, Hong
Kong(x)
390
Four Seasons Hotel Istanbul at the
Bosphorus, Turkey
170
Four Seasons Resort Lanai at Koele,
HI, USA
100
Four Seasons Resort Lanai at Manele
Bay, HI, USA
250
Four Seasons Resort Langkawi, Malaysia
90
Four Seasons Hotel Palo Alto, CA,
USA
200
Four Seasons Resort Provence at Terre
Blanche, France 115
Four Seasons Resort Whistler, B.C.,
Canada
270
Four Seasons Private Residences Whistler,
B.C., Canada 35
Beyond 2005
-----------
Four Seasons Hotel Alexandria, Egypt(x)
120
Four Seasons Hotel Baltimore, MD,
USA(x)
200
Four Seasons Hotel Beirut, Lebanon
230
Four Seasons Resort Bora Bora, French
Polynesia
100
Four Seasons Hotel Florence, Italy
115
Four Seasons Hotel Kuwait City, Kuwait
225
Four Seasons Hotel Mumbai, India
200
Four Seasons Resort Puerto Rico, Puerto
Rico(x)
250
Four Seasons Residence Club Punta
Mita, Mexico
35
(x) Expected to include a residential
component.
--------------------------
1. Information concerning hotels,
resorts and Residence Clubs under
construction
or under development is based upon agreements and
letters of
intent and may be subject to change prior to the
completion
of the project. The dates of scheduled openings have been
estimated
by management based upon information provided by the
various developers.
There can be no assurance that the date of
scheduled
opening will be achieved or that these projects will be
completed.
In particular, in the case where a property is scheduled
to open near
the end of a year, there is a greater possibility that
the year of
opening could be changed. The process and risks
associated
with the management of new properties are dealt with in
greater detail
in the Company's Annual Report.
2. The Company has made investments
in Orlando and Sedona at Seven
Canyons in
Arizona. The financing for these projects has not yet been
completed
and therefore scheduled opening dates cannot be established
at this time. |
This press release contains "forward-looking statements" within the
meaning of federal securities laws, including RevPAR, profit margin and
earning trends; statements concerning the number of lodging properties
expected to be added in this and future years; expected investment spending;
and similar statements concerning anticipated future events, results, circumstances,
performance or expectations that are not historical facts.
With a history spanning four decades and a portfolio that extends worldwide,
Four Seasons Hotels and Resorts is the world's leading operator of luxury
hotels, currently managing 61 properties in 29 countries.
|