Attached files
| file | filename |
|---|---|
| EX-99.3 - EXHIBIT 99.3 - CHOICE HOTELS INTERNATIONAL INC /DE | exhibit993whfsfinancials.htm |
| EX-99.1 - EXHIBIT 99.1 - CHOICE HOTELS INTERNATIONAL INC /DE | exhibit991proforma.htm |
| EX-23.1 - EXHIBIT 23.1 - CHOICE HOTELS INTERNATIONAL INC /DE | exhibit231.htm |
| 8-K - 8-K - CHOICE HOTELS INTERNATIONAL INC /DE | chh330188-k.htm |
Exhibit 99.2
OPERATING UNIT FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
WOODSPRING HOTELS FRANCHISE
SERVICES
December 31, 2016
Contents
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
OPERATING UNIT FINANCIAL STATEMENTS
BALANCE SHEET 3
STATEMENT OF EARNINGS 5
STATEMENT OF OPERATING UNIT’S DEFICIT 6
STATEMENT OF CASH FLOWS 7
NOTES TO FINANCIAL STATEMENTS 8
Grant Thornton LLP
200 South Sixth Street, Suite 1400
Minneapolis, MN 55402-1434
T 612.332.0001
F 612.332.8361
www.GrantThornton.com
Grant Thornton LLP
U.S. member firm of Grant Thornton International Ltd
Board of Directors
WoodSpring Hotels Holdings LLC
We have audited the accompanying operating unit financial statements of WoodSpring Hotels
Franchise Services (the “Company”), which comprise the operating unit balance sheet as of
December 31, 2016, and the related operating unit statements of earnings, operating unit’s deficit,
and cash flows for the year then ended, and the related notes to the financial statements.
Management’s responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these operating unit
financial statements in accordance with accounting principles generally accepted in the United
States of America; this includes the design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of operating unit financial statements that are
free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these operating unit financial statements based on
our audit. We conducted our audit in accordance with auditing standards generally accepted in
the United States of America. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the operating unit financial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the operating unit financial statements. The procedures selected depend on the
auditor’s judgment, including the assessment of the risks of material misstatement of the
operating unit financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the operating unit financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit
also includes evaluating the appropriateness of accounting policies used and the reasonableness
of significant accounting estimates made by management, as well as evaluating the overall
presentation of the operating unit financial statements.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Grant Thornton LLP
U.S. member firm of Grant Thornton International Ltd
2
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the operating unit financial statements referred to above present fairly, in all
material respects, the financial position of WoodSpring Hotels Franchise Services as of
December 31, 2016, and the results of its operations and its cash flows for the year then ended
in accordance with accounting principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
December 15, 2017
3
CURRENT ASSETS
Cash 384,815$
Accounts receivable, net 730,464
Related party receivables 466,161
Prepaid expenses and other 33,279
Deferred expenses 217,460
Total current assets 1,832,179
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment 2,458,754
Less accumulated depreciation 1,478,556
Total furniture, fixtures and equipment, net 980,198
OTHER ASSETS
Deferred expenses 1,900,813
Marketing fund advances 3,304,384
Other 68,224
5,273,421
8,085,798$
The accompanying notes are an integral part of this statement.
WoodSpring Hotels Franchise Services
OPERATING UNIT BALANCE SHEET
December 31, 2016
ASSETS
4
CURRENT LIABILITIES
Accounts payable 677,427$
Related party payables 44,518
Deferred franchise and development fees 847,600
Accrued compensation 1,446,285
Total current liabilities 3,015,830
LONG-TERM LIABILITIES
Deferred franchise and development fees, net of current portion 6,676,625
Total long-term liabilities 6,676,625
CONTINGENCIES
OPERATING UNIT’S DEFICIT (1,606,657)
8,085,798$
LIABILITIES AND OPERATING UNIT’S DEFICIT
WoodSpring Hotels Franchise Services
OPERATING UNIT BALANCE SHEET
December 31, 2016
5
Revenue
Franchise royalty fees 13,773,702$
Franchise marketing fund fees 5,971,590
Franchise license fees 2,264,725
Call center reservation service fees 847,874
Sponsorship revenue 850,065
Other services and fees 741,195
Total revenue 24,449,151
Operating costs and expenses
Salaries and benefits 8,421,480
General and administrative 935,955
Professional fees 1,285,179
Travel expense 1,226,378
Marketing expense 2,653,082
Maintenance and operations 2,164
Utilities expense 140,006
Property taxes 309
Insurance 45,571
Depreciation 230,531
Corporate overhead expense allocation 2,565,065
Total operating expenses 17,505,720
Operating income 6,943,431
Other expense 105,465
Net income 6,837,966$
The accompanying notes are an integral part of this statement.
Year ended December 31, 2016
WoodSpring Hotels Franchise Services
OPERATING UNIT STATEMENT OF EARNINGS
6
Balance January 1, 2016 (5,077,040)$
Contributions 4,318,000
Distributions (6,088,000)
Corporate overhead expense allocation settled via deemed contribution 2,565,065
Royalty fees from related parties settled via deemed distribution (4,162,648)
Net income for the year 6,837,966
Balance December 31, 2016 (1,606,657)$
The accompanying notes are an integral part of this statement.
WoodSpring Hotels Franchise Services
STATEMENT OF OPERATING UNIT’S DEFICIT
Year ended December 31, 2016
7
Cash flows from operating activities
Net income 6,837,966$
Adjustments to reconcile net income to cash
provided by operating activities
Corporate overhead expense allocation settled via deemed contribution 2,565,065
Royalty fees from related parties settled via deemed distribution (4,162,648)
Depreciation 230,531
Net change in operating assets and liabilities
Accounts receivable (58,681)
Related party receivables (340,073)
Prepaid expenses and other (80,650)
Deferred expenses 103,177
Marketing fund advances (1,609,783)
Accounts payable 16,522
Related party payables 11,822
Deferred franchise license revenue (1,042,725)
Accrued compensation 207,150
Other accrued expenses (307,382)
Net cash provided by operating activities 2,370,291
Cash flows from investing activities
Purchases of furniture, fixtures and equipment (483,973)
Net cash used in investing activities (483,973)
Cash flows from financing activities
Capital contributions 4,318,000
Distributions (6,088,000)
Net cash used in financing activities (1,770,000)
Net increase in cash 116,318
Cash, beginning of year 268,497
Cash, end of year 384,815$
The accompanying notes are an integral part of this statement.
WoodSpring Hotels Franchise Services
OPERATING UNIT STATEMENT OF CASH FLOWS
Year ended December 31, 2016
WoodSpring Hotels Franchise Services
NOTES TO OPERATING UNIT FINANCIAL STATEMENTS
December 31, 2016
8
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
1. Organization
The accompanying operating unit financial statements include the carved out accounts of a franchising
business of WoodSpring Hotels Holdings, LLC (the “Parent”). These operating unit financial statements
contain the accounts of WoodSpring Hotels Franchise Services LLC (“WHFS”) which is a wholly-owned
subsidiary of the Parent (the “Company”). The Company’s primary activity involves selling franchise licenses
to establish hotels under the name of “WoodSpring Suites,” and providing franchise support services to
those hotels as well as “Value Place” hotels. The Company sells franchise licenses and receives royalties in
support of franchise operations. The Company provides services to hotels that are owned and operated by
the Parent or its subsidiaries as well as independently-owned franchised hotels.
The following schedule reflects hotel activity during the year ended December 31, 2016:
Parent-owned hotels
In operation, beginning of year 88
Opened 4
Acquired 3
In operation, end of year 95
Franchised hotels
In operation, beginning of year 115
Opened 15
Acquired by Parent (3)
Terminated (2)
In operation, end of year 125
2. Principles of the carve-out
The operating unit financial statements include the accounts of WHFS with certain adjustments made
related to 1) corporate allocations as described in Note C that provide an estimate of all the costs of doing
business as a separate operating unit and 2) including all franchise royalties for Parent-owned locations. All
significant intercompany balances and transactions have been eliminated. However, balances due from
various subsidiaries of the Parent have been reflected as due from related parties if the balance is expected
to be settled in cash within the next year.
3. Concentration of credit risk
The Company’s financial instruments exposed to concentration of credit risk consist primarily of cash and
accounts receivable. The Company primarily places its funds in business accounts at high credit quality
financial institutions, and at times, the funds held in financial institutions may be in excess of the federal
deposit insurance coverage limit.
WoodSpring Hotels Franchise Services
NOTES TO OPERATING UNIT FINANCIAL STATEMENTS - CONTINUED
December 31, 2016
9
NOTE A - SIGNIFICANT ACCOUNTING POLICIES - Continued
4. Accounts receivable
Accounts receivable represent amounts due from certain related parties that are related through common
ownership and from franchisees for services performed and amounts due per the terms of the management
agreements and franchise license agreements. Accounts receivable are stated at amounts due net of an
allowance for doubtful accounts and are not collateralized. The allowance for doubtful accounts is established
by management based primarily on the age of the receivables and past Company experience. Past due
accounts determined not to be collectible by management are charged off to the allowance account. The
allowance for doubtful accounts was $67,728 at December 31, 2016.
5. Forgivable notes receivable
Notes receivable represent amounts due from franchisees related to an exterior signage program the
Company implemented for updating signage to reflect the new WoodSpring Suites brand. The Company
allowed the franchisees to finance a portion of the signage through promissory notes with the Company. The
Company intends to forgive the interest and principal balance ratably on an annual basis so long as the
franchisee is in compliance with certain terms outlined in the promissory notes. In accordance with the terms
of the promissory notes, the initial principal balance and related interest are ratably reduced over the term of
the loan on each anniversary date until the outstanding amounts are reduced to zero. The Company records
the reduction of the promissory notes through marketing expense. The forgivable notes receivable are
included in other assets on the accompanying balance sheet.
6. Furniture, fixtures and equipment
Furniture, fixtures and equipment are carried at cost. Depreciation is computed using the straight-line
method over the following estimated useful lives:
Furniture, fixtures and equipment 2 - 7 years
Normal repairs and maintenance are charged to expense as incurred; betterments and replacements are
capitalized.
7. Deferred expenses
Direct and incremental expenses incurred in the sale of initial franchise licenses are deferred along with the
related franchise license fees (see Note A8). The deferred expenses consist of commissions paid at the time
a franchise license is sold. Deferred expenses are recognized as an expense at the time the related fees are
recognized as income.
WoodSpring Hotels Franchise Services
NOTES TO OPERATING UNIT FINANCIAL STATEMENTS - CONTINUED
December 31, 2016
10
NOTE A - SIGNIFICANT ACCOUNTING POLICIES - Continued
8. Revenue recognition
Initial franchise license fees received for sales of licenses to establish WoodSpring Suites hotels for
independently-owned operations are deferred and recognized as income when either (1) substantially all initial
services required by the license agreement have been performed which is considered to be the date the hotel
opens or (2) the licensee agreement is terminated as a result of the failure to open a new hotel in the time
allowed per the agreement. Continuing franchise royalty fees for hotels operated by both the Parent and
independently-owned operations are calculated based on 5% of room revenue and reported in operations
when earned. Franchise marketing fund fees for hotels operated by both the Parent and independently-owned
operations are calculated based on 2.5% of room revenue with a maximum fee per hotel of $30,000 for the
year ended December 31, 2016. The franchise marketing fund fees are reported in operations when earned.
Other services such as call center reservation fees are recognized monthly as services are provided.
Sponsorship revenue is related to sponsor fees received from various vendors related to the annual franchise
conference. These fees are deferred until the conference occurs and recognized in operations when the
conference is held.
9. Advertising costs
Advertising costs are expensed as incurred. Advertising costs for the year ending December 31, 2016 was
$264,417.
10. Marketing fund
The Company maintains a marketing fund which is used by the Company for expenses associated with
providing marketing, advertising, central reservation systems and technology services for Parent owned and
independently franchised hotels. The Company is contractually obligated under its license agreements to
spend the marketing fund fees it collects, recorded as revenues in the statement of earnings, in accordance
with the franchise agreements. Marketing fund expenses incurred in excess of revenues related to
independently-owned franchised hotels are recorded as an asset, marketing fund advances, in the balance
sheet with a corresponding reduction in costs, and are expected to be recovered in subsequent years.
Marketing fund fees not expended in the current year are recorded as a liability in the Company’s balance
sheet and carried over to the next fiscal year or utilized to repay previous advances.
11. Income taxes
The accompanying financial statements do not include a provision for income taxes, with the exception of
certain state income taxes, because the Company is not a taxpaying entity. Each member includes their
proportionate share of the Company’s taxable income or loss in their individual tax returns.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the
position. The Company is generally no longer subject to examinations by income taxing authorities before
2013. The Company records interest and penalties on tax assessments as other expense. As of December 31,
2016, the Company does not have a liability for unrecognized tax benefits.
WoodSpring Hotels Franchise Services
NOTES TO OPERATING UNIT FINANCIAL STATEMENTS - CONTINUED
December 31, 2016
11
NOTE A - SIGNIFICANT ACCOUNTING POLICIES - Continued
12. Fair value of financial instruments
The carrying amounts of the Company’s financial instruments, including cash, accounts receivable, accounts
payable, and accrued liabilities, approximate fair value due to the short-term nature of these instruments.
13. Use of estimates
In preparing the financial statements in conformity with accounting principles generally accepted in the United
States of America, management is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
14. New accounting standards
Accounting Standards Update No. 2014-09 – Revenue from Contracts with Customers (ASU No. 2014-09)
becomes effective January 1, 2019 for the Company. The Company is still evaluating the potential impact of
ASU No. 2014-09 on the financial statements and disclosures, but believes there will be significant impact to
the Company’s reported revenue relating primarily to initial franchise license fees.
NOTE B - RELATED PARTY TRANSACTIONS
The Company provides services to entities that are related through common ownership. These services
primarily relate to the Parent’s ownership of hotels that are licensed and managed by the Company.
Related party revenue for the year ended December 31, 2016 follows:
Franchise royalty fees $ 5,909,099
Franchise marketing fund fees 2,559,671
Call center reservation service fees 591,984
Other revenue and fees 160,099
The Company also has related party receivables that primarily relate to the December fees that are paid the
following month.
The Parent and its subsidiaries (including the Company) guarantee certain debt obligations related to mortgages
payable and construction notes payable, totaling $64,097,441 as of December 31, 2016, including obligations
of $5,879,289 due in 2017. The guarantees cover debt with maturity dates ranging from December 2017 to
October 2026. The Parent is in compliance with its debt covenants at December 31, 2016 (after obtaining a
waiver from one lender), or the bank has allowed for self-cure of any technical defaults.
WoodSpring Hotels Franchise Services
NOTES TO OPERATING UNIT FINANCIAL STATEMENTS - CONTINUED
December 31, 2016
12
NOTE C - CORPORATE ALLOCATIONS
While many of the Company’s expenses, including employee salaries, are directly recorded in the accounts
of the Company, the Parent provides certain corporate services and functions that are recorded by the
Parent with no allocation of the expense to the various subsidiaries that benefit from the services.
Management performed an allocation of these corporate overhead costs and the Company has reflected
that allocation in the accompanying financial statements. The corporate overhead allocation includes such
costs as executive compensation and benefits, support staff compensation and benefits, deferred
compensation costs, travel expense, and professional fees. Management estimated the appropriate amount
to allocate based on their knowledge of how the Parent company executives and employees spent their time
supporting the Parent company and its subsidiaries in relation to their time spent supporting the business
needs related to the Company. The other allocated expenses were reviewed by management with judgement
to determine the appropriate amount to allocate to the Company based on their assessment of how much
the Company benefited from or utilized the associated service or function.
NOTE D - RETIREMENT PLANS
The Parent sponsors a 401(k) plan which the Company’s employees participate in. Under this 401(k) plan,
employees are eligible to participate once they have completed 90 days of service and attained the age of 21.
The Company makes matching contributions equal to 100% of each participant’s elective deferrals up to 4%
of the participant’s compensation. Total contributions to the plan were $136,211 during the year ended
December 31, 2016.
NOTE E - CONTINGENCIES
The Company is involved in claims and suits arising in the ordinary course of business. The Company is
vigorously defending its position related to the claims and suits against it and management believes the
litigation will not have a material effect on the financial statement of the Company. No accrual has been
recorded in the accompanying financial statements, as no amount of loss is considered more likely. The
Company is generally covered for the outstanding litigation with an insurance deductible of $100,000 per
claim.
NOTE F - SUBSEQUENT EVENTS
Effective December 15, 2017, WoodSpring Hotels Franchise Services LLC and the Parent signed a Unit
Purchase Agreement to sell the units of WoodSpring Hotels Franchise Services LLC for approximately
$231,250,000. The transaction is expected to close in early 2018.
The Company evaluated and disclosed subsequent events through December 15, 2017, which represents
the date the financial statements were available to be issued.