1997 Annual Report - Four Seasons Hotels and Resorts

ANNUAL INFORMATION FORM(continued)O P E R A T I N GR I S K SThe anticipated 1998 hotel management operating results, hotel ownership results, depreciation and amortization, netinterest expense, income tax expense, operating cash flow, fixed asset additions and improvements, investments in andadvances to managed and owned hotels, long-term receivables and total capital spending, amongst others, all morethoroughly described above, are subject to many risks and uncertainties including those discussed below.Significant risks associated with Four Seasons’ operations are summarized below:Lodging Industry ConditionsFour Seasons focuses exclusively on the luxury segment of the hotel industry, which is subject to operating risks inherent inthe lodging industry. These risks include, among other things, changes in general and local economic conditions, periodicoverbuilding in the industry or a specific market, varying levels of demand for rooms and related services (including foodand beverage and function space), competition from other hotels, changes in travel patterns, the recurring need forrenovation, refurbishment and improvement of hotel properties, changes in wages, prices, construction and maintenancecosts that may result from inflation, government regulations and changes in interest rates, the availability of financing foroperating or capital requirements, natural disasters, extreme weather conditions, labour disputes, political instability andterrorism and their effects on travel. The industry also is subject to seasonal fluctuations, resulting in variances in theCorporation’s quarterly fee revenues and operating results. Four Seasons operates luxury hotels and resorts in many areasof the world and its revenues are dependent upon the revenues of individual hotels and resorts derived from all sources.The above-listed conditions can from time to time have a major adverse impact upon individual hotels or particular regions.A prolonged period of economic recession would materially and adversely affect the Corporation’s results of operations.CompetitionThe luxury segment of the hotel industry is subject to intense competition, both for guests and for the acquisition ofnew management contracts. Competition for guests arises primarily from luxury hotel chains, individual luxury hotelsand resorts and a limited number of luxury properties operated by larger hotel chains. That competition is based on brandname recognition, location, room rates and quality of service and accommodations. Demographic, geographic and otherchanges in specific market conditions could materially and adversely affect the convenience or desirability of the localesin which hotels and resorts that are managed by Four Seasons are located.Four Seasons competes for hotel management opportunities with other hotel operators. Four Seasons believes that itsability to obtain management agreements is based primarily on the value and quality of its management services, brandname recognition and the economic advantages to the hotel owner of retaining Four Seasons’ management services andusing its brand names. Four Seasons also believes that an owner’s assessment of the economic advantages of retainingFour Seasons’ management services and using its brand names is, in part, a function of the success of the hotels currentlyunder management by Four Seasons. Competitive factors also include relationships with hotel owners and investors,marketing support, reservation system capacity and the ability to make investments that may be necessary to obtainmanagement contracts. Four Seasons’ failure to compete successfully for expansion opportunities or to attract and maintainrelationships with investors who currently own hotels could materially and adversely affect its results of operations.Dependence on Management AgreementsManagement agreements expire or are acquired, terminated or renegotiated in the ordinary course. Failure to obtainnew management agreements or maintain existing management agreements could materially and adversely affect theCorporation’s results of operations. Four Seasons manages hotels for various hotel owners subject to the terms of eachhotel’s management agreement. Those agreements generally can be terminated by the non-defaulting party upon defaultin payment or unremedied failure to comply with the terms of the agreement. Most of the management agreements aresubject to performance tests that, if not met, could allow the agreement to be terminated by the owner prior to theexpiration of its term. The failure to maintain the standards specified in the agreement or to meet the other terms and42Four Seasons Hotels Inc.