Exhibit 2
Pages 11-13
Affiliated-Party Management Agreements
HPI. Pursuant to the Restructuring, the Company transferred all of its
real estate interests (except certain of its joint venture interests) to HPI and
entered into the HPI Management Agreement to manage HPI's 42 owned and leased
hotels (including one hotel currently under development) for a term of 25 years.
The Company has the right to renew the HPI Management Agreement for each hotel
for three successive ten-year periods. However, for 35 hotels subject to the
HPI Management Agreement which are not owned by HPI, the Company's right to
manage such hotels is subject to the terms of the underlying leases, a
substantial number of which have remaining terms of less than 25 years. The
hotels managed pursuant to the HPI Management Agreement represented
approximately 38% of all of the hotels managed by the Company as of June 30,
1996. The HPI Management Agreement generated management and marketing fees of
$20.7 million in fiscal 1996 and $18.2 million in fiscal 1995, which represented
16.1% and 15.6%, respectively, of the Company's revenue in such periods.
CTF. A subsidiary of the Company has entered into the CTF Management
Agreement which expires in 2015 to manage 23 luxury CTF properties. Dr. Henry
Cheng Kar-Shun, the Company's Chairman ("Dr. Cheng") and members of Dr. Cheng's
family (collectively with Dr. Cheng, the "Cheng Family") control CTF. Pursuant
to the CTF Management Agreement, the Company assumed the responsibility for the
hotel management obligations of the CTF hotel management subsidiary arising
under its separate hotel management agreements, some of which have shorter terms
than the CTF Management Agreement, with other CTF subsidiaries and unaffiliated
parties owning or holding long-term leasehold interest in the hotels.
Accordingly, the Company's management rights to the CTF properties are subject
to the continuing financial viability of such CTF subsidiaries and, to the
satisfactory performance of the terms of the underlying management agreements,
and, in the case of six hotels, to the timely payment by CTF subsidiaries of
underlying lease obligations to unaffiliated parties. The CTF Management
Agreement generated management and marketing fees of $35.9 million in fiscal
1996 and $33.2 million in fiscal 1995, which represented 28.0% and 28.4%,
respectively, of the Company's revenues in such periods. Upon the expiration of
the CTF Management Agreement in 2015, and pursuant to the Strategic Alliance
Agreement (as defined in "Item 13--Interest Of Management In Certain
Transactions"), the Company will have a right of first refusal with respect to
the management of the CTF properties then owned or leased by CTF.
Exclusive License Agreements
HFS Exclusive License Agreement
The Company has licensed the Ramada service mark and related marks, Ramada
brands, logos and franchise system for hotel lodging products pursuant to the
HFS Exclusive License Agreement (the "HFS Agreement") between Franchise Systems
Holdings, Inc., an indirect wholly-owned subsidiary of the Company, and Ramada
Franchise Systems, Inc. ("RFS"), a wholly-owned subsidiary of HFS. The HFS
Agreement allows RFS to license the Ramada marks to hotel owners in the United
States. As of June 30, 1996, there were approximately 831 Ramada hotels
franchised by HFS (including three Ramada hotels managed by the Company). Fee
income from the HFS Agreement and additional agreements between the Company and
RFS described below totaled $20.7 million in fiscal 1996 and $17.9 million in
fiscal 1995, which represented 16.1% and 15.3%, respectively, of the Company's
revenues in such periods.
The HFS Agreement has an initial term of 35 years, commencing on December
20, 1989 and terminating on March 31, 2024. At the end of the initial term, RFS
must either (i) extend the HFS Agreement for a period of five years (April 1,
2024 to March 31, 2029) or (ii) purchase the U.S. Ramada marks for an amount
equal to the greater of (a)
$56,000,000 or (b) the fair market value of the Ramada marks at such date (as
agreed by the parties to the HFS Agreement or as determined by an independent
appraiser).
The HFS Agreement requires that RFS pay to the Company a fee consisting of
(i) a license fee ranging from $15 million for each year beginning April 1, 1991
and increasing in several steps to $20 million for each year beginning on or
after April 1, 1998, plus (ii) the excess, if any, of 1% of the aggregate annual
gross room sales of Ramada franchises over an amount provided under schedules
for each year and (iii) the amount of license fees actually payable pursuant to
contracts and agreements relating to facilities the gross revenue of which are
excluded from the calculation of gross room sales. Fees are payable quarterly,
in advance. HFS has guaranteed certain of RFS's obligations under the HFS
Agreement. The HFS Agreement is included as an exhibit to this Annual Report.
This summary does not purport to be a complete description and is qualified in
its entirety by reference to such exhibit.
RFS and the Company have entered into additional license agreements with
substantially the same terms and conditions as the HFS Agreement with respect to
the use of the Ramada Limited and Ramada Vacation Suites service marks and
related marks and logos. Ramada Limited hotels are limited- service hotels.
The additional license agreement for Ramada Limited hotels requires RFS to pay a
license fee to the Company of an amount equal to an aggregate of (i) 1.5% of the
gross room sales of each Ramada Limited hotel, plus (ii) 50% of the license fees
received from each Ramada Limited hotel in excess of 4% of the gross room sales
of the Ramada Limited hotel for such payment year. Ramada Vacation Suites are
interval ownership units, or timeshare properties. The Ramada Vacation Suites
license agreement requires RFS to pay a license fee to the Company of an amount
equal to 50% of the gross revenue collected by RFS with respect to the sale,
marketing and licensing of timeshares.
RFCI Exclusive License Agreement
The Company has exclusively licensed the use of the Ramada service mark and
related marks, brands, logos and franchise system for hotel lodging products in
Canada pursuant to the RFCI Exclusive License Agreement (the "RFCI Agreement").
The RFCI Agreement allows RFCI to franchise the Ramada marks to hotel facility
owners in Canada subject to the Company's quality standards. As of June 30,
1996, RFCI had franchised 38 Ramada hotels in Canada. Fees from the RFCI
Agreement totaled $0.5 million in fiscal 1996 and $0.7 million in fiscal 1995,
which represented 0.4% and 0.6%, respectively, of the Company's revenues in such
periods.
Item 2. DESCRIPTION OF PROPERTY.
The principal executive offices of the Company are located in Hong Kong and
are occupied pursuant to a lease with New World Development expiring in 1997.
In addition, the Company leases corporate office space for its other regional
divisions in Cleveland and Frankfurt pursuant to leases expiring in 2007 and
2005, respectively. In the United States, the Company leases office space for
regional operations in Phoenix and Miami. The Company leases space for its
international sales offices in New York, Chicago, Los Angeles, Washington, D.C.,
Melbourne, Tokyo, London and Paris. Many of these offices are located in hotels
managed by the Company. Management believes that these facilities are
sufficient to meet its present needs.
Item 3. LEGAL PROCEEDINGS.
In the ordinary course of its business, the Company is a party to
litigation regarding the operation of managed or franchised hotels, including
general tort lawsuits. The Company generally is indemnified by hotel owners for
lawsuits and damages against it in its capacity as hotel manager or franchiser.
The Company is currently not the subject of any legal actions which, if
determined adversely to the Company, would individually or in the aggregate have
a material effect on the Company's financial position and results of operations,
nor, to management's knowledge, is any such litigation threatened. See Note 18
to the Company's audited consolidated financial statements included elsewhere
herein.
In 1989, Simulnet East Associates, a New York limited partnership, brought
an action against a subsidiary of the Company for breach of contract in
connection with the provision of satellite television services to the Company's
hotels. In April, 1995 a jury returned a verdict for breach of contract in the
amount of approximately $10.2 million against the Company's subsidiary. The
District Court granted Simulnet's motion for interest, which as of June 30, 1995
increased the total judgment to $17.9 million. The Company's subsidiary has
appealed the decision to the ninth circuit court of appeals. As of October 1,
1996 there had been no decision on the appeal. As a result of the Restructuring,
the Company and its subsidiary have been indemnified against any loss incurred
in this case by HPI. The HPI indemnification of approximately $11.9 million as
of June 30, 1996 has been recorded by the Company as an amount receivable from
shareholder. HFS also has an obligation to indemnify the Company's subsidiary
for approximately 34% of the ultimate judgment which, as of June 30, 1996, was
approximately $6.0 million. The Company has recorded a liability for the full
$17.9 million judgment and the amount that HFS is obligated to pay is included
in other current assets.
Item 4. CONTROL OF REGISTRANT.
As of June 30, 1996, approximately 54.4% of the Company's outstanding
shares of Common Stock were held by the majority shareholder, Diamant Hotel
Investments N.V., a Netherlands Antilles limited liability company ("Diamant")
that is indirectly wholly-owned by certain New World Group Members. As a
result, New World Group Members, acting singly or together, control the Company
and have the power to elect all of its Managing Directors and to approve any
action requiring shareholder approval.
The Company's only outstanding equity securities are the shares of Common
Stock. The following table sets forth certain information regarding beneficial
ownership of the Company's shares of Common Stock as of June 30, 1996 by (i)
each person who is known by the Company to be the beneficial owner of more than
10% of the Company's shares of Common Stock and (ii) all Managing Directors and
executive officers of the Company, as a group.
10% Shareholders and Managing Shares of Common Percent of Common
Directors and Executive Officers Stock Owned(1) Stock Owned
----------------------------------------------------------------------
New World Development (2) 16,368,000 54.4%
Cheng Family (3) 18,053,846 60.0
All Managing Directors and
executive officers, as a group 18,402,432 61.1
(1) Unless otherwise indicated, the persons named in the table have sole voting
and investment power with respect to all the shares of Common Stock shown
as beneficially owned by them, subject to community property laws where
applicable and the information contained in this table and these notes.
The table does not include 800,000 shares issuable pursuant to stock
options granted to Managing Directors of the Company as of June 30, 1996,
which have not vested.
(2) All shares included as beneficially owned by New World Development are held
by Diamant. New World Development indirectly owns approximately 64% of
Diamant.
(3) The Shares included as beneficially owned by the Cheng Family include the
shares of Common Stock beneficially held by New World Development. Chow
Tai Fook Enterprises Limited ("CTFEL"), a closely-held Hong Kong
corporation controlled by the Cheng Family, owns approximately 38% of New
World Development. Dr. Cheng, the Company's Chairman, is the Managing
Director of New World Development.
Item 5. NATURE OF TRADING MARKET.
Renaissance Hotel Group N.V. common shares are listed for trading only on
the New York Stock Exchange under the trading symbol RHG. As of June 30, 1996,
the Company had approximately 14 shareholders of record in the United States.
Approximately 35.1% of the Company's outstanding shares of Common Stock are held
in the United States. The high and low sales prices of the Company's shares
since September 27, 1995, the date of its initial public offering, are listed
below:
1996 High Low
1st Quarter * 18 17
2nd Quarter 25 1/2 17 1/8
3rd Quarter 25 7/8 19 3/4
4th Quarter 22 5/8 19
* Represents the activity from the date of the Company's initial public
offering (September 27, 1995) through the end of the first quarter of fiscal
1996 (September 30, 1995.)
Item 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.
The Company is a limited liability company incorporated under the laws of
the Kingdom of The Netherlands ("The Netherlands"), and a majority of its
Managing Directors and executive officers reside outside the United States.
There are no governmental laws, decrees or regulations in The Netherlands that
restrict the export or import of capital, including, but not limited to, foreign
exchange controls, or that affect the remittance of dividends, interest or other
payments to non-resident holders of the registrants securities. There are no
limitations under Netherlands law or the Articles of Incorporation of the
Company on the right of nonresident or foreign persons to hold shares of Common
Stock. Each shareholder of record is entitled to one vote for each Common Stock
held, without cumulative voting, on every matter submitted to a vote of
shareholders of the Company.
Pages 27-29
Item 10. DIRECTORS AND OFFICERS OF REGISTRANT.
Responsibility for the management of the Company lies with the Board of
Managing Directors. The general meeting of shareholders of the Company appoints
the Managing Directors for one-year terms and grants each the title of Director
or Executive Director. The Board of Managing Directors, as a group, and each
Executive Director, individually, is authorized to represent and bind the
Company. Managing Directors serve until the expiration of their respective
terms or their resignation, death, removal or suspension, with or without cause,
by the shareholders of the Company.
The following table sets forth certain information regarding the members of
the Company's Board of Managing Directors and its executive officers. Some of
these persons are, or may serve as directors or executive officers of, New World
Group Members.
Current
Position
Position with Held
Name Age the Company Since
- --------------------------------------------------------------------------------
Henry Cheng Kar-Shun(1) 49 Chairman and 1995
Director
William W.H. Doo(1) 51 Vice Chairman 1995
and Director
James K.C. Choi 48 Vice Chairman 1996
and Executive
Director
Michael Williams 56 Executive 1996
Director,
President and
Chief Executive Officer
Robert W. Olesen 39 Executive 1995
Director,
Executive Vice
President and Chief
Financial Officer
Erwin J. Rieck 53 Executive 1995
Director,
Managing
Director--
Europe
Thomas G. Stauffer 64 Executive 1995
Director,
President--
Americas
Andrew Wong Kwok Kin 50 Executive 1995
Director,
Executive
Director--
New World Hotels
J. Carter Beese, Jr. 40 Director 1996
W. Grant Gregory 55 Director 1996
Thomas Hsieh 64 Director 1996
(1) Dr. Cheng and Mr. Doo are brothers-in-law.
Item 11. COMPENSATION OF DIRECTORS AND OFFICERS.
Any Managing Director who is a New World Group Member or who is employed by
the Company will not receive compensation for service as a Managing Director.
Independent directors each receive an annual retainer of $40,000, and an
additional $10,000 is paid to the chairpersons of the Audit Committee and the
Compensation Committee. All Managing Directors are entitled to reimbursement of
their out-of-pocket expenses incurred in connection with their attendance at
meetings of the Board of Managing Directors or in the performance of their
duties as Managing Directors. No fees are paid to the Managing Directors for
their attendance at board meetings.
Executive officers of the Company receive compensation determined by the
Board of Managing Directors. For fiscal 1996, the aggregate compensation
accrued by the Company to all members of the Board of Managing Directors and
executive officers, as a group, was approximately $2.6 million. The Board of
Directors has adopted an incentive bonus plan in which all Executive Directors
of the Company participate. Each year, the Compensation Committee determines,
based upon the recommendation of the Chief Executive Officer, the level and
criteria for bonus awards for the upcoming year. For fiscal 1996, the Company
awarded bonuses to its Executive Directors aggregating approximately $0.9
million. The Company does not to disclose to its shareholders or otherwise make
available information regarding the compensation of its individual Managing
Directors or its executive officers.
Item 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.
In June 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Stock Plan") to attract, retain and motivate officers, key employees,
consultants and directors. An aggregate of 2,250,000 shares of Common Stock,
subject to adjustment for stock splits, stock dividends and similar events, has
been authorized for issuance upon exercise of options under the 1995 Stock Plan.
The Compensation Committee of the Board of Managing Directors administers the
1995 Stock Plan and determines to whom options are to be granted and the terms
and conditions thereof, including the number of shares and the period of
exercisability.
In September 1995, the Board of Managing Directors approved the following
grant of options for shares of Common Stock at an exercise price of $17.00 per
share, the initial offering price per share in the Company's initial public
offering, to the executive officers and other employees as follows:
Name Number of Shares
---------------------------------------------------------
James K.C. Choi 200,000
Robert W. Olesen 100,000
Erwin J. Rieck 100,000
Thomas G. Stauffer 100,000
Andrew Wong Kwok Kin 100,000
Other employees (34 individuals) 256,500
-------
856,500
In addition to the grant of options described above, the Compensation
Committee approved the grant of options for 200,000 shares of Common Stock to
Michael Williams, on May 22, 1996, upon his appointment as the Company's Chief
Executive Officer and President. These options have an exercise price of $22.50
per share, which was the fair market price as of the grant date.
The disinterested members of the Compensation Committee approved the
following grant of options for shares of Common Stock on July 10, 1996, at an
exercise price of $21.00 per share, the fair market price at the date of grant:
Name Number of Shares
---------------------------------------------------------
Henry Cheng Kar-Shun 300,000
William W.H. Doo 50,000
Thomas Hsieh 50,000
J. Carter Beese, Jr. 50,000
W. Grant Gregory 50,000
-------
500,000
On September 24, 1996, the Compensation Committee approved the following
grant of options for shares of Common Stock at an exercise price of $20.50 per
share, the fair market price at the date of grant:
Name Number of Shares
---------------------------------------------------------
Robert W. Olesen 25,000
Erwin J. Rieck 25,000
Andrew Wong Kwok Kin 25,000
Other employees (34 individuals) 163,000
-------
238,000
The balance of the shares reserved for issuance under the 1995 Stock Plan
will be available for future grants of options. All options vest in various
proportions over time and expire on the tenth anniversary of their respective
grant date.
Item 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
The agreements summarized below have been included as exhibits to this
Annual Report. The summaries do not purport to be complete descriptions of
these agreements and are qualified in their entirety by reference to such
exhibits.
In connection with the Company's transfer of its hotel real estate
leasehold and ownership interests in the Restructuring, the Company and HPI
entered into a framework agreement dated June 30, 1995. Pursuant to this
agreement, HPI has assumed and agreed to indemnify the Company against the
liabilities associated with the transferred real estate interests, including
contingent liabilities, taxes and contractual obligations.
Pursuant to the CTF Management Agreement, the Company manages 23 CTF
properties, and in connection with the Restructuring, the Company entered into
the HPI Management Agreement for the management of 42 hotels (including one
hotel currently under development). See "Item 1. Description of Business--
Management Agreements." Mr. Cheng has provided a personal unsecured guarantee in
favor of the Company to the effect that if any accrued fees or payments due
under the CTF Management Agreement to the Company are not ultimately paid by
CTF, he will pay those sums to the Company on demand.
New World Development; Chow Tai Fook Enterprises Limited, a New World Group
Member controlled by the Cheng Family ("CTFEL"); and the Company are parties to
an indemnification agreement (the "Indemnification Agreement") whereby New World
Development and CTFEL have severally agreed to indemnify the Company, each in
proportion to its ownership interest in NWHH, in respect of all liabilities
relating to the hotel leases and other real property transferred by the Company
to HPI in the Restructuring. In addition, New World Development and CTFEL have
agreed that, notwithstanding any transfer of their respective interests in HPI,
there will be no adjustment or reduction of their proportionate indemnity
obligations for a period of ten years from June 30, 1995. Pursuant to this
agreement, New World Development and CTFEL have agreed to cause HPI and its
subsidiaries owning or leasing hotels managed by the Company to remain solvent
for a period of ten years. The indemnity agreement remains in full force and
effect indefinitely.
The Company has entered into a Strategic Alliance Agreement with the New
World Group Members in respect of their ownership and operation of hotels
throughout the world. Pursuant to the Strategic Alliance Agreement, New World
Group Members have agreed to give the Company a right of first and last refusal
to manage any hotel controlled by them, to use reasonable best efforts to refer
to the Company all hotel management opportunities available to them with
respect to any hotel not controlled by them and to use their reasonable best
efforts to cause such opportunities to be made available to the Company, and to
give the Company a right of first negotiation with respect to any hotel interest
that they wish to sell or lease. New World Group Members also have agreed not to
compete with the Company in, and engage in the business of, the management or
operation of hotels, including through rendering management services to hotels,
resorts or other lodging facilities, franchising hotel and lodging operations,
and acquiring or developing hotel brand names or chains. The Strategic Alliance
Agreement became effective on August 29, 1995 and will continue until the later
of August 29, 2015 or such time as New World Group Members shall beneficially
own less than 20% of the Company's shares of Common Stock. As of June 30, 1996,
New World Development has developed 14 hotels in Asia, including nine New World
hotels, one Renaissance hotel and two Ramada hotels which are managed by the
Company and two hotels which are currently managed by unaffiliated parties. The
two hotels managed by unaffiliated parties will not be subject to the Strategic
Alliance Agreement. New World Development is constructing four additional New
World hotels in Asia. New World Development is one of the largest property
developers in Asia where it has local knowledge and contacts and is one of the
largest foreign owners of land use rights in China.
The Company believes that its management contracts and other agreements
with New World Group Members are on terms no less favorable to the Company than
those that could have been obtained from unaffiliated parties. The existing
agreements between the Company and New World Group Members may not be amended
without the approval of a majority of the Independent Directors of the Company.
In addition, the Board of Managing Directors has adopted a conflicts of interest
policy requiring that any transaction or agreement with a related party
involving aggregate consideration of more than $1.0 million, any amendment or
waiver of the agreements entered into with New World Group Members in connection
with the Restructuring, any compensation for services rendered by a New World
Group Member, and any loans, guarantees or indemnities granted to New World
Group Members be approved by a majority of the Independent Directors. The
conflicts of interest policy may not be altered without the consent of a
majority of the Independent Directors, and may not be repealed, so long as New
World Group Members own less than 95% of the Company's outstanding voting
securities or any Notes remain outstanding. An "Independent Director" means a
person who (i) is not a New World Group Member or any person controlled by, in
control of or under common control with a New World Group Member and (ii) does
not have an employment or consulting relationship with any New World Group
Member or the Company (except as a Managing Director).