1997 Annual Report - Four Seasons Hotels and Resorts

ANNUAL INFORMATION FORM(continued)O PERATINGR ISKSFour Seasons generally obtains indemnities from the owners of the hotels that it manages in respect of these liabilities.The value of those indemnities is dependent upon the financial condition of the owners that have provided them.Political RiskFour Seasons currently manages and/or has an equity interest in hotels and resorts in 17 countries and currently hasdevelopment plans to open hotels and resorts in nine additional countries. In certain of these countries, from time to time,the related assets and revenues may be exposed to political risk.InsuranceAll hotels and resorts managed by Four Seasons are insured against property damage, business interruption and liabilityat the expense of the owner of the hotel. Under these policies Four Seasons also is insured against loss of fee income inthe event of a temporary business interruption at any of the hotels and resorts that it manages. In addition, Four Seasonsobtains indemnities from the owners of the hotels that it manages in respect of damages caused by acts, omissions andliabilities of the employees of the hotel or of Four Seasons, other than damages resulting from certain actions ofFour Seasons and certain senior management personnel. If Four Seasons were held liable for amounts exceeding thelimits of its insurance coverage or for claims outside the scope of that coverage, its business, results of operations andfinancial conditions could be materially and adversely affected.Currency ExposureFour Seasons has entered into management agreements with respect to hotels throughout the world and reports its results inCanadian dollars; however, its relevant currency risk is in US dollars, as more than half of its revenues and assets currently areUS dollar denominated or, in the case of fee revenues and dividend distributions from The Regent Hong Kong, are pegged tothe US dollar. In 1997, approximately 74% of the Corporation’s consolidated revenues were US dollar denominated or peggedto the US dollar, compared to 72% in 1996. Four Seasons manages this currency exposure through the use of forward foreignexchange contracts. As at December 31, 1997, Four Seasons had sold forward US$90.7 million under 14 forward contractsmaturing over a 14-month period. The Corporation earned 9% of its consolidated revenues in 1997 in 12 foreign currenciesnot pegged to the US dollar, compared to 22% in 13 foreign currencies in 1996; none of the revenues in these currenciesindividually exceeded 3% of Four Seasons’ consolidated revenues in 1997 or 1996.As a result of the recent economic crisis in parts of Asia, there has been public speculation that the Hong Kong dollarpeg to the US dollar could be altered or removed, potentially resulting in a significant devaluation of the Hong Kongdollar. Various senior Chinese government officials, including Hong Kong’s chief executive, Tung Chee Hwa, have onnumerous recent occasions countered the public speculation by emphasizing that the peg will remain in place at itscurrent value. The Corporation earned fees and dividends distributions of approximately HK$65.6 million (approximately$11.6 million) in 1997 from The Regent Hong Kong. A devaluation of the Hong Kong dollar could therefore resultin a material reduction in Canadian-dollar-reported earnings by the Corporation. To counteract the impact of anydevaluation in the Hong Kong dollar that may occur, the Corporation would, amongst other steps, price its hotel roomsin US dollars.Certain currencies are subject to exchange controls which, in practice, have never resulted in a restriction of thepayment of management fees to Four Seasons. In addition, certain of these currencies are not freely traded and arerelatively illiquid. To date, Four Seasons has not incurred any material losses resulting from an inability to convert theseforeign currencies at favourable exchange rates. Management attempts to minimize its foreign currency risk by monitoringits cash position, keeping fee receivables current, and monitoring the political and economic climate in each country.In certain hotels, the foreign currency risks are further mitigated by pricing room rates in US dollars.Asian Asset ExposureAs a result of the significant currency devaluations and economic downturn in parts of Asia, the Corporation has reassessed theestimated recoverable amounts of its assets located in, or related to, Asia. These assets consist primarily of the Corporation’s46Four Seasons Hotels Inc.