1998 Annual Report - Four Seasons Hotels and Resorts

H O T E L M A N A G E M E N T O P E R A T I O N SManagement AgreementsFour Seasons generally supervises all of its hotels pursuant to separate management agreements or, in the case of threehotels lease agreements, with third-party hotel owners. Under its management agreements, Four Seasons generallyoversees all aspects of the day-to-day operations of each hotel on behalf of the hotel owner, including hiring, trainingand supervising staff, maintaining sales and marketing efforts, providing hotel accounting, purchasing and budgetingfunctions, providing support for management information systems and applications and providing for the safekeeping,repair and maintenance of the physical assets. Four Seasons performs these services within the guidelines contained inannual operating and capital plans that are submitted to the owners of the hotels during the last quarter of the precedingyear for their review and approval. For these services, Four Seasons generally earns a number of fees including a base feeequal to a percentage of hotel gross operating revenue, and incentive fees based on certain operating results of the hotel.Four Seasons provides centralized reservations services, worldwide sales offices, marketing programs and advertisingservices to the Four Seasons hotels under its management and supplementary sales support to the Regent hotels which itmanages. All other marketing and reservation services for Regent are provided by Carlson. 9Four Seasons also provides a centralized purchasing system for goods to maintain uniform quality and to controlhotel operating costs at all the Four Seasons hotels and certain Regent hotels. In return for this service, Four Seasonsreceives a fee calculated as a percentage of the cost of goods purchased.Although the owners generally are responsible for financing and managing the development of hotels, Four Seasonstypically plays a significant pre-opening role. Four Seasons provides advice with respect to the design and constructionspecifications of hotels during the development stage to ensure that they meet Four Seasons’ standards. Four Seasons earnsa variety of fees for these pre-opening services. Four Seasons may also assist owners in connection with the refurbishmentof hotels in return for which it earns a refurbishing fee.Under the Corporation’s management agreements, the hotel owner is responsible for the funding of the hotel’s capitalexpenditures and working capital requirements, including the salaries and benefits of all hotel employees. The hotel ownertypically is required to set aside a percentage of hotel revenue as a capital reserve for the hotel. Such percentages typicallyrange from 3% to 5% of hotel gross operating revenues. Four Seasons proposes an operating plan and capital expenditurebudget to the hotel owner for approval on an annual basis. All structural changes, major refurbishing programs and majorrepairs require the separate approval of hotel owners prior to implementation by Four Seasons.Total fee revenues are geographically diversified around the world, with only North America as a geographic segmentcontributing in excess of 40% of all feerevenues in 1998 (70% in 1998 as comparedGlobal Distribution of Management Fee Revenues to 69% in 1997). The diversification of fee(percentage)revenues has increased significantly over the19911998past seven years. With the opening of hotelsand resorts under construction anddevelopment, the Corporation expects greaterEuropediversification of fee revenues over the nextAsia Pacificfive years.North America9 See “Regent Joint Venture” on page 18.23Four Seasons Hotels Inc.