1998 Annual Report - Four Seasons Hotels and Resorts

ANNUAL INFORMATION FORM(continued)M ANAGEMENT’ S D ISCUSSION AND A NALYSISEquity Financing and Debt RefinancingOn February 12, 1997, FSHI issued 4,370,000 Limited Voting Shares (“LVS”) for gross proceeds of $122.4 million. The netproceeds from the sale of the LVS, after deducting offering expenses and underwriters’ commission, were $113.7 million.The Corporation used the net proceeds of the offering to repay all its existing bank indebtedness, to fund a loan inconnection with acquiring the long-term management agreement for the Hôtel George V in Paris, for investment in newhotel management agreements, and for general working capital purposes. Coincident with the equity offering, theCorporation listed its shares on the New York Stock Exchange. These steps allowed the Corporation to increase itsshareholder value by diversifying its shareholder base, increasing liquidity and improving the financing alternatives availableto the Corporation.During 1997 and 1998, the Corporation repurchased its 9 1 /8% Notes (in 1998 US$6 million for US$6.2 million,in 1997 US$101.5 million for US$108.5 million). The repurchase in 1997 was funded by proceeds from cashreserves and the issue of $100 million unsecured five-year debentures due 2002, which bear interest at6% per annum. The balance of the Notes were repurchased in 1998 using cash on hand. The debt repurchasesresulted in an accounting loss of $0.4 million in 1998 and $12 million in 1997. As a result of the debt refinancing,the Corporation was able to significantly reduce its overall cost of capital and provide greater flexibility forfuture financings.Total debt, net of cash, declined from a peak level of approximately $373 million in June 1994 to $147 millionas at December 31, 1998. This reduction in debt was achieved through the application of asset sale proceeds,equity issuance proceeds, and cash generated by operations. As at December 31, 1998, approximately 62% (80%at December 31, 1997 and 63% at December 31, 1996) of Four Seasons’ long-term debt was at fixed interest rates.As at December 31, 1998, the Corporation had US$69 million available in undrawn committed bank facilities.The Corporation has a commitment from its principal banker to increase its availableOperating Cash Flow bank facilities by an additional US$100 million, which is expected to be finalized during($ millions)the first half of 1999. The Corporation believes that its bank operating credit facilities,when combined with internally generated cash flow, should allow it to finance allof its normal operating needs and commitments to new investments to achieve itsgrowth objectives.90807060096 97 98 99TargetOperating Cash FlowFor the year ended December 31, 1998, cash flow from operations was $75.0 million,compared to $64.8 million in 1997. The working capital generated from hotel managementoperations was $15.5 million higher in 1998 than in 1997, reflecting the improvement inhotel management earnings discussed above. Net interest paid decreased $7.6 million in 1998,as compared to 1997, due to lower interest rates and debt levels and an increase in interestincome in 1998. The working capital increase was partially offset by a reduction of workingcapital generated from hotel ownership operations of $9.5 million in 1998, as compared to1997, primarily as a result of lower hotel ownership earnings, and a change in non-cashworking capital of $3.7 million in 1998, as compared to 1997.Cash flow from operations was $64.8 million in 1997, as compared to $43.7 million in 1996. The working capitalgenerated from hotel management operations was $7.4 million higher in 1997 than in 1996. The working capital504030201044Four Seasons Hotels Inc.