Four Seasons Hotel (NYSE:FS)
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Four Seasons Hotels Inc. reports results for fourth quarter and year end 2003
TORONTO, Feb. 27 /PRNewswire-FirstCall/ -- 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 2004of 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 thequarter 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
middleof 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 to2002,
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.
RevPARfor 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 costin 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 60hotels 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'sobligation 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 HotelCaracas 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, andordered 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 foreignexchange 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 Canadiangenerally 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
Companyincurred 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 millionfor 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 sameperiod 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 allemployee 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 onthe 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 forfinancial
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 maturitydate 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 millionand 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 ofavailable
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 yearended 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 in2002. 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 andFour 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.
--------------------------
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. These statements are not guarantees
of future performance and are subject to numerous risks and uncertainties,
including those described in the Company's annual information form and
management's discussion and analysis. Those risks and uncertainties include the
rate and extent of the current economic recovery and the rate and extent of the
lodging industry's recovery from the terrorist attacks of September 11, 2001,
Severe Acute Respiratory Syndrome (SARS), the war in Iraq, supply and demand
changes for hotel rooms and residential properties, competitive conditions in
the lodgingindustry, relationships with clients and property owners, and the
availability of capital to finance growth. Many of these risks and uncertainties
can affect the Company's actual results and could cause the actual results to
differ materially from those expressed or implied in any forward-looking
statement made by, or on behalf of the Company. These statements are made as of
the date of this press release, and the Company undertakes no obligation to
publicly update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise.
--------------------------
The Company expects to hold a conference call today at 10:00 a.m. (Eastern
Standard Time).
To access the call dial: 1 (800) 428-5596 (U.S.A. and Canada)
1 (416) 641-6448 (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 21183362.
A live web cast will alsobe available by visiting
http://www.fourseasons.com/investor. This web cast will be archived for one
month following the call.
- - -
With a history spanning four decades and a portfolio that extends worldwide,
Four Seasons Hotels and Resorts is the world's leading operator of luxury
hotels, currently managing 61 properties in 29 countries. Four Seasons Resort
Costa Rica, the Company's first property in Costa Rica, opened January 17, 2004.
Four Seasons continues to grow, with more than 20 projects under construction or
development in choice locations around the world. In the first half of 2004, the
Company expects to open new properties in Budapest, Provence, Whistler, B.C. and
Hampshire, England. In addition to the recognition by Fortune as one of the 100
Best Companies to Work For for the seventh consecutive year, Four Seasons
continues to have more of its hotels designated as AAA Five Diamond properties
than any other hotel company and it has the most Mobil Five Star awards in the
industry. The Company is also consistently highly ranked in readers' surveys in
publications such as Conde Nast Traveler, Travel + Leisure, Institutional
Investor, Andrew Harper's Hideaway Report and the Zagat Survey. Information on
the Company and its 43 years ofachievement in the hospitality industry can be
accessed through the Four Seasons Web site at http://www.fourseasons.com/.
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
Currentassets:
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 contracts203,670 222,835
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 capitalprovided 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.
FOURSEASONS 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 respectof 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 withthe 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
subsidiariesenter 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 potentialliability 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 resortsin 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 definedas 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 averagedaily 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 thedate 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.
DATASOURCE: Four Seasons Hotels and Resorts
CONTACT: Douglas L. Ludwig, Chief Financial Officer, and Executive Vice
President, (416) 441-4320; Barbara Henderson, Vice President, Taxation and
Investor Relations, (416) 441-4329