Exhibit 99.2
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) Three months ended Nine months ended
(In thousands of US dollars September 30, September 30,
except per share amounts) 2006 2005 2006 2005
-------------------------------------------------------------------------
Revenues:
Hotel management fees $ 27,193 $ 22,531 $ 90,623 $ 75,602
Other fees 3,568 3,471 13,305 9,991
Hotel ownership revenues 8,781 9,749 24,741 57,970
Reimbursed costs 18,675 16,453 54,990 46,277
-----------------------------------------------
58,217 52,204 183,659 189,840
-----------------------------------------------
Expenses:
General and
administrative expenses (15,166) (15,625) (44,067) (41,495)
Hotel ownership cost of
sales and expenses (7,764) (8,417) (23,814) (58,189)
Reimbursed costs (18,675) (16,453) (54,990) (46,277)
-----------------------------------------------
(41,605) (40,495) (122,871) (145,961)
-----------------------------------------------
Operating earnings before
other items 16,612 11,709 60,788 43,879
Depreciation and
amortization (4,433) (2,575) (9,875) (8,512)
Other income (expenses),
net (note 4) 632 (21,064) (6,995) (32,419)
Interest income 5,823 3,974 15,922 11,590
Interest expense (3,601) (2,766) (11,359) (8,401)
-----------------------------------------------
Earnings (loss) before
income taxes 15,033 (10,722) 48,481 6,137
-----------------------------------------------
Income tax recovery
(expense) (note 5):
Current (3,155) 2,925 (10,169) (389)
Future (937) (3,644) (4,904) 3,799
-----------------------------------------------
(4,092) (719) (15,073) 3,410
-----------------------------------------------
Net earnings (loss) $ 10,941 $ (11,441) $ 33,408 $ 9,547
-----------------------------------------------
-----------------------------------------------
Basic earnings (loss)
per share (note 3(a)) $ 0.30 $ (0.31) $ 0.91 $ 0.26
-----------------------------------------------
-----------------------------------------------
Diluted earnings (loss)
per share (note 3(a)) $ 0.29 $ (0.31) $ 0.89 $ 0.25
-----------------------------------------------
-----------------------------------------------
See accompanying notes to consolidated financial statements.
FOUR SEASONS HOTELS INC.
CONSOLIDATED BALANCE SHEETS
As at As at
(Unaudited) September 30, December 31,
(In thousands of US dollars) 2006 2005
-------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 254,242 $ 242,178
Receivables 66,118 69,690
Inventory 3,476 7,326
Prepaid expenses 3,067 2,950
--------------------------
326,903 322,144
Long-term receivables 201,702 175,374
Investments in hotel partnerships and
corporations (note 2) 89,012 99,928
Fixed assets 80,551 64,850
Investment in management contracts (note 2) 192,297 164,932
Investment in trademarks and trade names 4,344 4,210
Future income tax assets 10,104 14,439
Other assets 51,432 34,324
--------------------------
$ 956,345 $ 880,201
--------------------------
--------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 57,450 $ 54,797
Long-term obligations due within one year 1,881 4,853
--------------------------
59,331 59,650
Long-term obligations 290,039 273,825
Shareholders' equity (note 3):
Capital stock 256,115 250,430
Convertible notes 36,920 36,920
Contributed surplus 13,104 10,861
Retained earnings 192,441 160,741
Equity adjustment from foreign currency
translation 108,395 87,774
--------------------------
606,975 546,726
--------------------------
$ 956,345 $ 880,201
--------------------------
--------------------------
See accompanying notes to consolidated financial statements.
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended Nine months ended
(Unaudited) September 30, September 30,
(In thousands of US dollars) 2006 2005 2006 2005
-------------------------------------------------------------------------
Operating activities:
Net earnings (loss) $ 10,941 $ (11,441) $ 33,408 $ 9,547
Items not affecting
cash:
Stock-based
compensation expense 556 486 1,642 1,494
Depreciation and
amortization 4,433 2,575 9,875 8,512
Other (income)
expenses, net (632) 21,064 6,995 32,419
Future income tax
(recovery) expense 937 3,644 4,904 (3,799)
Other 220 959 1,189 1,487
Changes in non-cash
working capital 13,490 (232) (482) (13,276)
-----------------------------------------------
Cash provided by
operating activities 29,945 17,055 57,531 36,384
-----------------------------------------------
Investing activities:
Advances of long-term
receivables (3,837) (4,633) (21,781) (38,649)
Receipt of long-term
receivables 4,367 126 14,436 19,402
Investments in hotel
partnerships and
corporations (2,497) (1,368) (700) (10,813)
Disposal of hotel
partnerships and
corporations - - 707 12,672
Purchase of fixed assets (6,291) (4,761) (16,148) (12,821)
Investments in
trademarks, trade names
and management contracts (2,227) (202) (16,851) (675)
Other assets (924) (1,042) (6,526) (7,902)
-----------------------------------------------
Cash used in investing
activities (11,409) (11,880) (46,863) (38,786)
-----------------------------------------------
Financing activities:
Long-term obligations,
including current
portion (231) 278 (2,776) (1,220)
Issuance of shares 277 156 5,636 6,992
Dividends paid (1,721) (1,584) (3,378) (3,142)
-----------------------------------------------
Cash provided by (used in)
financing activities (1,675) (1,150) (518) 2,630
-----------------------------------------------
Increase in cash and cash
equivalents 16,861 4,025 10,150 228
Increase (decrease) in
cash and cash equivalents
due to unrealized foreign
exchange gain (loss) 570 (1,189) 1,914 (5,133)
Cash and cash equivalents,
beginning of period 236,811 218,636 242,178 226,377
-----------------------------------------------
Cash and cash equivalents,
end of period $ 254,242 $ 221,472 $ 254,242 $ 221,472
-----------------------------------------------
-----------------------------------------------
Supplementary information:
Interest received $ 3,977 $ 2,772 $ 13,125 $ 10,449
Interest paid (3,333) (1,754) (6,071) (4,916)
Income taxes received
(paid) 876 (1,442) (2,125) (6,897)
See accompanying notes to consolidated financial statements.
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Nine months ended
(Unaudited) September 30,
(In thousands of US dollars) 2006 2005
-------------------------------------------------------------------------
Retained earnings, beginning of period $ 160,741 $ 192,129
Net earnings 33,408 9,547
Dividends declared (1,708) (1,537)
-------------------------
Retained earnings, end of period $ 192,441 $ 200,139
-------------------------
-------------------------
See accompanying notes to consolidated financial statements.
FOUR SEASONS HOTELS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of US dollars except per share amounts)
-------------------------------------------------------------------------
In these interim consolidated financial statements, the words, "we",
"us", "our", and other similar words are references to Four Seasons
Hotels Inc.("FSHI") and its consolidated subsidiaries. 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 our most recently
prepared annual consolidated financial statements for the year ended
December 31, 2005.
1. Significant accounting policies:
The significant accounting policies used in preparing these interim
consolidated financial statements are consistent with those used in
preparing our annual consolidated financial statements for the year
ended December 31, 2005, except as disclosed below:
(a) Non-monetary transactions:
In June 2005, The Canadian Institute of Chartered Accountants
("CICA") issued Section 3831, "Non-Monetary Transactions", which
introduces new requirements for non-monetary transactions
initiated on or after January 1, 2006. The amended requirements
will result in non-monetary transactions being measured at fair
values unless certain criteria are met, in which case, the
transaction is measured at carrying value. The implementation of
Section 3831, on a prospective basis for transactions initiated
on or after January 1, 2006, did not have any impact on our
consolidated financial statements for the three months and nine
months ended September 30, 2006.
(b) Financial instruments:
In January 2005, the CICA issued Section 1530 "Comprehensive
Income", Section 3855 "Financial Instruments - Recognition and
Measurement", and Section 3865 "Hedges". These standards are
effective for fiscal years beginning on or after October 1, 2006.
We have not yet determined the impact of implementation of these
standards on our consolidated financial statements.
(c) Comparative figures:
Certain 2005 comparative figures have been reclassified to
conform with the financial statement presentation adopted for
2006.
2. Hotel investment transaction:
In February 2006, we contributed our equity interest in a property
under our management in exchange for a management contract
enhancement of approximately the same fair value. No gain or loss was
recorded in connection with this transaction.
3. Shareholders' equity:
As at September 30, 2006, we have 3,725,698 outstanding Variable
Multiple Voting Shares ("VMVS"), 33,078,418 outstanding Limited
Voting Shares ("LVS"), and 4,289,343 outstanding stock options
(weighted average exercise price of C$59.82 ($53.55)).
(a) Earnings (loss) per share:
A reconciliation of the net earnings (loss) and weighted average
number of VMVS and LVS used to calculate basic and diluted
earnings (loss) per share is as follows:
Three months ended
September 30,
2006 2005
-----------------------------------------------------------------------
Net earnings Shares Net loss Shares
-----------------------------------------------------------------------
Basic earnings (loss)
per share amounts $ 10,941 36,799,139 $ (11,441) 36,638,577
Effect of assumed
dilutive conversions:
Stock option plan - 640,485 - -
------------------------------------------------
Diluted earnings (loss)
per share amounts $ 10,941 37,439,624 $ (11,441) 36,638,577
------------------------------------------------
------------------------------------------------
Nine months ended
September 30,
2006 2005
-----------------------------------------------------------------------
Net earnings Shares Net earnings Shares
-----------------------------------------------------------------------
Basic earnings per
share amounts $ 33,408 36,750,775 $ 9,547 36,624,036
Effect of assumed
dilutive conversions:
Stock option plan - 633,746 - 1,314,393
------------------------------------------------
Diluted earnings per
share amounts $ 33,408 37,384,521 $ 9,547 37,938,429
------------------------------------------------
------------------------------------------------
The diluted earnings (loss) per share calculation excluded the effect
of the assumed conversions of 1,461,976 stock options to LVS, under
our stock option plan, during the three months and nine months ended
September 30, 2006 (2005 - 4,540,843 and 693,056 stock options,
respectively), as the inclusion of these options would have resulted
in an anti-dilutive effect. As we incurred a net loss for the three
months ended September 30, 2005, all outstanding stock options were
excluded from the calculation of diluted loss per share for this
period. There was no dilution in 2006 and 2005 relating to our
convertible notes.
(b) Stock-based compensation:
We use the fair value-based method to account for all employee stock
options granted or modified on or after January 1, 2003. Accordingly,
options granted prior to that date continue to be accounted for using
the settlement method.
Stock options to acquire 41,650 LVS were granted in the nine months
ended September 30, 2006 at a weighted average exercise price of
C$62.61 ($53.65). The fair value of stock options granted in the nine
months ended September 30, 2006 was estimated using the Black-Scholes
options pricing model with the following assumptions: risk-free
interest rates ranging from 4.09% to 4.17%; semi-annual dividend per
LVS of C$0.055; volatility factor of the expected market price of our
LVS of 27%; and expected lives of the options ranging between four
and seven years, depending on the level of the employee who was
granted stock options. For the options granted in the nine months
ended September 30, 2006, the weighted average fair value of the
options at the grant dates was C$21.49 ($18.41). 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. There were no stock options granted in the
three months ended September 30, 2006 and the nine months ended
September 30, 2005.
Pro forma disclosure is required to show the effect of the
application of the fair value-based method to employee stock options
granted during 2002, which were not accounted for using the fair
value-based method. For the three months and nine months ended
September 30, 2006 and 2005, if we had applied the fair value-based
method to options granted during 2002, our net earnings (loss) and
basic and diluted earnings (loss) per share would have been adjusted
to the pro forma amounts indicated below:
Three months ended Nine months ended
September 30, September 30,
2006 2005 2006 2005
-------------------------------------------------------------------------
Stock-based compensation
expense $ (556) $ (486) $ (1,642) $ (1,494)
-------------------------------------------
-------------------------------------------
Net earnings (loss),
as reported $ 10,941 $ (11,441) $ 33,408 $ 9,547
Increase in stock-based
compensation expense that
would have been recorded if
all stock options granted
during 2002 had been expensed (650) (717) (1,954) (2,089)
-------------------------------------------
Pro forma net earnings (loss) $ 10,291 $ (12,158) $ 31,454 $ 7,458
-------------------------------------------
-------------------------------------------
Earnings (loss) per share:
Basic, as reported $ 0.30 $ (0.31) $ 0.91 $ 0.26
Basic, pro forma 0.28 (0.33) 0.86 0.20
Diluted, as reported 0.29 (0.31) 0.89 0.25
Diluted, pro forma 0.28 (0.33) 0.84 0.20
4. Other income (expenses), net:
Three months ended Nine months ended
September 30, September 30,
2006 2005 2006 2005
-------------------------------------------------------------------------
Foreign exchange gain (loss) $ 1,286 $ (16,172) $ (6,633) $ (19,854)
Asset provisions and
write downs (654) (4,624) (362) (6,725)
Loss on disposition of assets - (268) - (5,840)
-------------------------------------------
$ 632 $ (21,064) $ (6,995) $ (32,419)
-------------------------------------------
-------------------------------------------
The foreign exchange gain (loss) in 2006 and 2005 related primarily
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 local currency
foreign exchange gains and losses on net monetary assets incurred by
our designated foreign self-sustaining subsidiaries.
As at September 30, 2006, we have foreign exchange forward contracts
in place to sell forward $44,211 of US dollars to receive Canadian
dollars at a weighted average forward exchange rate of 1.114 Canadian
dollars to a US dollar maturing over the period to March 2008. All
our foreign exchange forward contracts are being marked-to-market on
a monthly basis with the resulting changes in fair values being
recorded as a foreign exchange gain or loss. This resulted in a $176
foreign exchange loss and $1,268 foreign exchange gain being recorded
in the three months and nine months ended September 30, 2006,
respectively. We did not sell forward US dollars during the nine
months ended September 30, 2005.
Subsequent to September 30, 2006, we have sold forward an additional
$3,543 of US dollars to receive Canadian dollars at a weighted
average forward exchange rate of 1.129 Canadian dollars to a US
dollar maturing over the period to April 2008.
5. Income taxes:
During the three months and nine months ended September 30, 2006, we
recorded an additional valuation allowance of $211 and $1,957
respectively, related to not recognizing a tax benefit on certain
foreign exchange losses, due to the uncertainty associated with the
utilization of these losses. This increased our income tax expense
for the three months and nine months ended September 30, 2006 by this
amount.
In connection with the disposition of The Pierre in June 2005, we
recorded an income tax benefit of approximately $9,200 for the nine
months ended September 30, 2005.
6. Pension expense:
The pension expense for the three months and nine months ended
September 30, 2006 was $855 and $2,681, respectively (2005 - $1,134
and $2,351, respectively).
7. Guarantees and commitments:
We have provided certain guarantees and have other similar
commitments typically made in connection with properties under our
management. These contractual obligations and other commitments are
more fully described in the consolidated financial statements for the
year ended December 31, 2005. Since December 31, 2005, we have
decreased our guarantees and commitments by approximately $1,300.
8. Segmented information:
Our strategy is to focus on hotel management rather than hotel
ownership. Four Seasons Hotel Vancouver is our only remaining hotel
whose results we consolidate. As a result, commencing January 1,
2006, corporate expenses are reflected in our results as general and
administrative expenses in the consolidated statements of operations
for the three months and nine months ended September 30, 2006.
Corporate expenses for the three months and nine months ended
September 30, 2005 that previously were included in our Ownership
Operations segment have been reclassified to the Management
Operations segment and included in general and administrative
expenses in the consolidated statements of operations.
Three months ended
September 30, 2006
-----------------------------------
Management Ownership
Operations Operations Total
-------------------------------------------------------------------------
Revenues:
Hotel management fees $ 27,193 $ - $ 27,193
Other fees 3,568 - 3,568
-----------------------------------
30,761 - 30,761
Hotel ownership revenues - 8,781 8,781
Reimbursed costs 18,675 - 18,675
-----------------------------------
49,436 8,781 58,217
-----------------------------------
Expenses:
General and administrative expenses (15,166) - (15,166)
Hotel ownership cost of sales and
expenses - (7,764) (7,764)
Reimbursed costs (18,675) - (18,675)
-----------------------------------
(33,841) (7,764) (41,605)
-----------------------------------
Operating earnings before other items $ 15,595 $ 1,017 $ 16,612
-----------------------------------
-----------------------------------
Three months ended
September 30, 2005
-----------------------------------
Management Ownership
Operations Operations Total
-------------------------------------------------------------------------
Revenues:
Hotel management fees $ 22,531 $ - $ 22,531
Other fees 3,471 - 3,471
-----------------------------------
26,002 - 26,002
Hotel ownership revenues - 9,749 9,749
Reimbursed costs 16,453 - 16,453
-----------------------------------
42,455 9,749 52,204
-----------------------------------
Expenses:
General and administrative expenses (15,625) - (15,625)
Hotel ownership cost of sales and
expenses - (8,417) (8,417)
Reimbursed costs (16,453) - (16,453)
-----------------------------------
(32,078) (8,417) (40,495)
-----------------------------------
Operating earnings before other items $ 10,377 $ 1,332 $ 11,709
-----------------------------------
-----------------------------------
Nine months ended
September 30, 2006
-----------------------------------
Management Ownership
Operations Operations Total
-------------------------------------------------------------------------
Revenues:
Hotel management fees $ 90,623 $ - $ 90,623
Other fees 13,305 - 13,305
-----------------------------------
103,928 - 103,928
Hotel ownership revenues - 24,741 24,741
Reimbursed costs 54,990 - 54,990
-----------------------------------
158,918 24,741 183,659
-----------------------------------
Expenses:
General and administrative expenses (44,067) - (44,067)
Hotel ownership cost of sales and
expenses - (23,814) (23,814)
Reimbursed costs (54,990) - (54,990)
-----------------------------------
(99,057) (23,814) (122,871)
-----------------------------------
Operating earnings before other items $ 59,861 $ 927 $ 60,788
-----------------------------------
-----------------------------------
Nine months ended
September 30, 2005
-----------------------------------
Management Ownership
Operations Operations Total
-------------------------------------------------------------------------
Revenues:
Hotel management fees $ 75,602 $ - $ 75,602
Other fees 9,991 - 9,991
-----------------------------------
85,593 - 85,593
Hotel ownership revenues - 57,970 57,970
Reimbursed costs 46,277 - 46,277
-----------------------------------
131,870 57,970 189,840
-----------------------------------
Expenses:
General and administrative expenses (41,495) - (41,495)
Hotel ownership cost of sales and
expenses - (58,189) (58,189)
Reimbursed costs (46,277) - (46,277)
-----------------------------------
(87,772) (58,189) (145,961)
-----------------------------------
Operating earnings (loss) before
other items $ 44,098 $ (219) $ 43,879
-----------------------------------
-----------------------------------
9. Subsequent event:
On November 6, 2006, we announced that our Board of Directors had
received a proposal to pursue a transaction through which FSHI would
be taken private for $82.00 cash per LVS. The Board of Directors has
established a special committee of independent directors that will
consider the proposed transaction and make recommendations to the
Board. Although there is no certainty that the transaction
contemplated by the proposal, or any other transaction, will be
completed or the terms and conditions of any such transaction, some
of our arrangements and agreements may be impacted by certain terms
in those arrangements and agreements, including the following:
(a) Convertible senior notes:
Our convertible senior notes issued in 2004 are convertible into
LVS (although at our option, we may make a cash payment in lieu of
all or some of those LVS) in certain circumstances, including upon
the occurrence of a "fundamental change", as defined in the
indenture pursuant to which the notes were issued. The proposal,
if completed, would result in a fundamental change occurring, in
which case a holder of notes would be able to surrender notes for
conversion and would be entitled to receive on conversion:
(i) If notes are surrendered for conversion in connection with the
fundamental change within the time period prescribed in the
indenture, the number of our LVS into which the notes would be
convertible (currently 13.9581 LVS per each one thousand US
dollar principal amount of notes), plus a make whole premium,
as defined in the indenture (estimated to be in the range of
$87.00 to $98.00 per each one thousand US dollar principal
amount of notes based on the proposed price of $82.00 per LVS
pursuant to the proposal and assuming that, if the proposal is
implemented, the effective date would be between January 1,
2007 and July 31, 2007), and an amount equal to any accrued
but unpaid interest to, but not including, the conversion
date; or
(ii) If notes are surrendered for conversion after the time period
prescribed in the indenture and after the fundamental change,
the consideration that the holder would have received if the
holder had held the number of LVS into which the converted
notes were convertible immediately before the fundamental
change ($1,144.56 per each one thousand US dollar principal
amount of notes, based on the $82.00 per LVS in the
transaction that has been proposed). In this circumstance, no
make whole premium would be payable.
The proposed transaction would constitute a "change in
control", as defined in the indenture, and as a result we
would be required to make an offer to repurchase the notes at
a purchase price equal to the principal amount of the notes
plus a make whole premium (as described above), and an amount
equal to any accrued and unpaid interest to, but not
including, the date of repurchase.
We have the right to satisfy the obligations in respect of
conversion in the circumstances described in (i) above, and in
respect of a repurchase of notes as described above, with LVS
(or other "applicable stock", as defined in the indenture, in
the case of repurchase of notes) or at our option cash or a
combination of LVS and cash.
Further information regarding the terms of our convertible
notes is set out in the indenture pursuant to which the notes
were issued.
(b) Long-term incentive arrangement:
Pursuant to an agreement approved by the shareholders of FSHI at a
special meeting in 1989, FSHI and its principal operating
subsidiary, Four Seasons Hotels Limited, have agreed to make a
cash payment to Mr. Isadore Sharp, the Chief Executive Officer of
FSHI, on an arms-length sale of control of FSHI. If the proposed
transaction is completed, Mr. Sharp would be entitled to realize
proceeds related to the incentive arrangement estimated to be
approximately $288,000 (based on a proposed price of $82.00 per
LVS pursuant to the proposal and assuming that at the time of the
completion of the proposed transaction approximately 41.1 million
LVS and VMVS and which includes LVS that may be issued upon the
exercise of previously granted stock options, were outstanding).
(c) Other arrangements and agreements:
Certain other arrangements and agreements are subject to "change
of control" provisions. These include the following:
(i) Under the terms of our current $125,000 bank credit facility,
a change of control triggers a default under the bank credit
facility, and if not waived, would require the repayment of
all amounts outstanding under this credit facility and would
also result in the termination of this credit facility. As at
September 30, 2006, no amounts were borrowed under this credit
facility, but approximately $1,600 of letters of credit were
issued under this credit facility.
(ii) Pursuant to a cross default provision, a default under the
bank credit facility in turn causes a default under our
currency and interest rate swap agreement. In such
circumstances, the counterparty to the swap agreement may
demand that the swap be terminated. As at September 30, 2006,
the net amount that would be required to be paid by FSHI to
the counterparty on termination was approximately $34,900 (of
which approximately $29,100 is included in long-term
obligations).
We are continuing to evaluate the potential impact, if any, of the
proposed transaction on our other agreements and arrangements.
