Attached files
| file | filename |
|---|---|
| EX-99.2 - EXHIBIT 99.2 - CHOICE HOTELS INTERNATIONAL INC /DE | exhibit992whfsfinancials.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 99.3
CONDENSED INTERIM OPERATING UNIT
FINANCIAL STATEMENTS
WOODSPRING HOTELS FRANCHISE
SERVICES
September 30, 2017 and 2016
Contents
Page
CONDENSED INTERIM OPERATING UNIT FINANCIAL STATEMENTS
BALANCE SHEETS 1
STATEMENTS OF EARNINGS 3
STATEMENT OF OPERATING UNIT’S EQUITY (DEFICIT) 4
STATEMENTS OF CASH FLOWS 5
NOTES TO FINANCIAL STATEMENTS 6
1
September 30, 2017 December 31, 2016
(Unaudited)
CURRENT ASSETS
Cash 739,682$ 384,815$
Accounts receivable, net 1,416,094 730,464
Related party receivables 862,907 466,161
Prepaid expenses and other 37,304 33,279
Deferred expenses 357,313 217,460
Forgiveable notes receivable, current portion 233,606 -
Total current assets 3,646,906 1,832,179
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment 2,541,666 2,458,754
Less accumulated depreciation 1,702,253 1,478,556
Total furniture, fixtures and equipment, net 839,413 980,198
OTHER ASSETS
Deferred expenses 1,824,265 1,900,813
Marketing fund advances 3,318,183 3,304,384
Other 932,465 68,224
6,074,913 5,273,421
10,561,232$ 8,085,798$
The accompanying notes are an integral part of these statements.
WoodSpring Hotels Franchise Services
CONDENSED INTERIM OPERATING UNIT BALANCE SHEETS
ASSETS
2
September 30, 2017 December 31, 2016
(Unaudited)
CURRENT LIABILITIES
Accounts payable 363,996$ 677,427$
Amounts due to related parties 18,677 44,518
Deferred franchise and development fees 947,200 847,600
Accrued compensation 833,653 1,446,285
Other accrued expenses 626,537 -
Total current liabilities 2,790,063 3,015,830
LONG-TERM LIABILITIES
Deferred franchise and development fees, net of current portion 6,471,225 6,676,625
Total long-term liabilities 6,471,225 6,676,625
CONTINGENCIES
OPERATING UNIT’S EQUITY (DEFICIT) 1,299,944 (1,606,657)
10,561,232$ 8,085,798$
LIABILITIES AND OPERATING UNIT’S EQUITY (DEFICIT)
WoodSpring Hotels Franchise Services
CONDENSED INTERIM OPERATING UNIT BALANCE SHEETS
3
2017 2016
Revenue
Franchise royalty fees 12,222,181$ 10,368,392$
Franchise marketing fund fees 6,091,815 5,053,430
Franchise license fees 850,800 1,091,250
Call center reservation service fees 935,619 633,244
Other services and fees 784,147 620,439
Sponsorship revenue 1,051,003 850,065
Total revenue 21,935,565 18,616,820
Operating costs and expenses
Salaries and benefits 5,710,629 6,266,152
General and administrative 617,938 745,906
Professional fees 777,240 1,072,004
Travel expense 1,016,311 911,160
Marketing expense 3,747,581 2,249,968
Maintenance and operations 2,210 1,938
Utilities expense 148,144 94,911
Property taxes - 309
Insurance 57,127 32,050
Depreciation 223,698 144,413
Corporate overhead expense allocation 2,277,967 1,880,392
Total operating expenses 14,578,845 13,399,203
Operating income 7,356,720 5,217,617
Other expense 20,294 105,466
Net income 7,336,426$ 5,112,151$
The accompanying notes are an integral part of these statements.
(unaudited)
Nine months ended September 30,
WoodSpring Hotels Franchise Services
CONDENSED INTERIM OPERATING UNIT STATEMENTS OF EARNINGS
4
Balance January 1, 2017 (1,606,657)$
Contributions 990,000
Distributions (6,000,000)
Corporate overhead expense allocation settled via deemed contribution 2,277,967
Royalty fees from related parties settled via deemed distribution (1,697,792)
Net income for the period 7,336,426
Balance September 30, 2017 1,299,944$
The accompanying notes are an integral part of this statement.
(unaudited)
WoodSpring Hotels Franchise Services
CONDENSED INTERIM STATEMENT OF OPERATING UNIT’S EQUITY (DEFICIT)
Nine months ended September 30, 2017
5
2017 2016
Cash flows from operating activities
Net income 7,336,426$ 5,112,151$
Adjustments to reconcile net income to cash
provided by operating activities
Depreciation 223,698 144,413
Corporate overhead expense allocation settled via
deemed contribution 2,277,967 1,880,392
Royalty fees from related parties settled via deemed distribution (1,697,792) (3,734,963)
Net change in operating assets and liabilities
Accounts receivable (685,630) (402,412)
Related party receivables (396,746) (503,847)
Prepaid expenses and other (1,101,872) (52,267)
Deferred expenses (63,305) (65,698)
Marketing fund advances (13,799) (903,480)
Accounts payable (313,431) (243,638)
Amounts due to related parties (25,841) (32,696)
Deferred franchise license revenue (105,800) (84,250)
Accrued compensation and deferred compensation (612,632) (181,251)
Other accrued expenses 626,537 25,222
Net cash provided by operating activities 5,447,780 957,676
Cash flows from investing activities
Purchases of property and equipment (82,913) (215,126)
Net cash used in investing activities (82,913) (215,126)
Cash flows from financing activities
Capital contributions 990,000 3,938,000
Distributions (6,000,000) (4,943,000)
Net cash used in financing activities (5,010,000) (1,005,000)
Net increase (decrease) in cash 354,867 (262,450)
Cash, beginning of period 384,815 268,497
Cash, end of period 739,682$ 6,047$
The accompanying notes are an integral part of these statements.
(unaudited)
WoodSpring Hotels Franchise Services
CONDENSED INTERIM OPERATING UNIT STATEMENTS OF CASH FLOWS
Nine months ended September 30,
WoodSpring Hotels Franchise Services
NOTES TO CONDENSED INTERIM OPERATING UNIT FINANCIAL STATEMENTS
September 30, 2017 and 2016
(Unaudited)
6
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (“US GAAP”), and with the accounting policies
described in the Company’s financial statements for the year ended December 31, 2016 (“2016 Audited
Financial Statements”). Certain information and note disclosures normally included in our annual financial
statements prepared in accordance with US GAAP have been condensed or omitted, although we believe
that the disclosures included are adequate to enable a reasonable understanding of the information presented.
The unaudited interim condensed operating unit financial statements and the accompanying notes (the
“Interim Statements”) reflect all adjustments, which are, in the opinion of management, necessary to present
fairly our results of operations, financial position and cash flows for the periods presented. The Interim
Statements should be read in conjunction with the 2016 Audited Financial Statements. Interim results of
operations are not necessarily indicative of results that may be expected for future interim periods or for the
entire year ending December 31, 2017.
NOTE B - 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 nine months ended September 30,
2017 2016
Parent-owned hotels
In operation, beginning of period 95 88
Opened 3 1
Acquired - 3
In operation, end of period 98 92
Franchised hotels
In operation, beginning of period 125 115
Opened 7 12
Acquired by Parent - (3)
Terminated - (1)
In operation, end of period 132 123
WoodSpring Hotels Franchise Services
NOTES TO CONDENSED INTERIM OPERATING UNIT FINANCIAL STATEMENTS - CONTINUED
September 30, 2017 and 2016
(Unaudited)
7
NOTE B - SIGNIFICANT ACCOUNTING POLICIES - Continued
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 D 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 to/from
various subsidiaries of the Parent have been reflected as due to/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.
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 $23,307 and $67,728 at September 30, 2017 and December 31, 2016, respectively.
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 non-current portion of forgivable
notes receivable are included in other assets on the accompanying balance sheets with balances of $927,404
and $52,510 at September 30, 2017 and December 31, 2016, respectively.
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.
WoodSpring Hotels Franchise Services
NOTES TO CONDENSED INTERIM OPERATING UNIT FINANCIAL STATEMENTS - CONTINUED
September 30, 2017 and 2016
(Unaudited)
8
NOTE B - SIGNIFICANT ACCOUNTING POLICIES - Continued
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 B8). 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.
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 $40,000 and $30,000 for the nine
month periods ended September 30, 2017 and 2016, respectively. 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 nine month periods ending September
30, 2017 and 2016 were $271,635 and $222,885, respectively.
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.
WoodSpring Hotels Franchise Services
NOTES TO CONDENSED INTERIM OPERATING UNIT FINANCIAL STATEMENTS - CONTINUED
September 30, 2017 and 2016
(Unaudited)
9
NOTE B - SIGNIFICANT ACCOUNTING POLICIES - Continued
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
September 30, 2017, the Company does not have a liability for unrecognized tax benefits.
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 C - 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 nine month periods ended September 30, 2017 and 2016 follows:
2017 2016
Franchise royalty fees $ 5,194,809 $ 4,434,825
Franchise marketing fund fees 2,591,327 2,156,773
Call center reservation service fees 519,789 462,959
Other revenue and fees 245,581 160,099
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 $107,349,507 as of September 30, 2017. The
guarantees cover debt with maturity dates ranging from December 2017 to April 2038. The Parent is in
compliance with its debt covenants at September 30, 2017 (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 CONDENSED INTERIM OPERATING UNIT FINANCIAL STATEMENTS - CONTINUED
September 30, 2017 and 2016
(Unaudited)
10
NOTE D - 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 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.