CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On August 11, 2022, Choice Hotels International, Inc. (“Choice” or the “Company”, or “we”, “us”, “our”) completed its previously announced acquisition (the “Transaction”) of (1) all of the issued and outstanding shares of Radisson Hospitality, Inc. (“Radisson Americas”) and (2) certain trademarks held by Radisson Hospitality Belgium BV/SRL (“Radisson Belgium”) covering (i) the United States of America and its territories, namely Guam, American Samoa, Northern Mariana Islands, Puerto Rico and the U.S. Virgin Islands; (ii) all countries located on the continents of North America and South America; and (iii) all countries and territories located in the Caribbean (the “Radisson IP”; with Radisson Americas and the Radisson IP collectively referred to as “Radisson”), pursuant to a Share Sale and Purchase Agreement (the “Purchase Agreement”). Pursuant to the Purchase Agreement, Choice acquired Radisson for cash consideration of $675 million, subject to closing adjustments. The Transaction was funded through cash on hand and proceeds from drawing on a pre-existing revolving credit facility.
The unaudited pro forma condensed combined financial information contained herein sets forth the following:
•The historical consolidated financial information of Choice, as of and for the three months ended March 31, 2022 (unaudited), derived from Choice’s unaudited consolidated financial statements; and for the year ended December 31, 2021, derived from Choice’s audited consolidated financial statements;
•The historical condensed combined financial information of Radisson, adjusted to reflect certain reclassifications to conform the financial statement presentation with that of Choice, as of and for the three months ended March 31, 2022 (unaudited), derived from Radisson’s unaudited condensed combined financial statements; and for the year ended December 31, 2021, derived from Radisson’s audited combined financial statements;
•Pro forma adjustments to give effect to the Transaction on the pro forma condensed combined balance sheet as of March 31, 2022, as if the Transaction closed March 31, 2022; and
•Pro forma adjustments to give effect to the Transaction on the pro forma condensed combined statements of income (loss) for the year ended December 31, 2021 and three months ended March 31, 2022, as if the Transaction closed January 1, 2021.
This unaudited pro forma condensed combined financial information should be read in conjunction with:
•Choice’s audited consolidated financial statements and related notes thereto, for the year ended December 31, 2021, included in Choice’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 24, 2022;
•Choice’s unaudited consolidated financial statements and related notes thereto, as of and for the three months ended March 31, 2022, included in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, as filed with the SEC on May 10, 2022;
•Radisson’s audited combined financial statements and related notes thereto, for the year ended December 31, 2021, and unaudited condensed combined financial statements and related notes thereto, as of and for the three months ended March 31, 2022, which are included herewith as Exhibits 99.1 and 99.2, respectively, to this Current Report on Form 8-K/A.
The unaudited pro forma condensed combined financial information has been prepared in accordance with Securities and Exchange Commission’s (“SEC”) Article 11, Pro Forma Financial Information (“Article 11”), under Regulation S-X of the Exchange Act, giving effect to the application of the acquisition method of accounting, as promulgated by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”), and the related financing necessary to effectuate the Transaction. ASC 805 requires, among other things, that under the acquisition method of accounting, the acquired assets and assumed liabilities be recognized at their acquisition-date fair value, using the fair value concepts as defined in ASC Topic 820, Fair Value Measurement (“ASC 820”).
At this time, the accounting for the Transaction is ongoing, and the amounts and adjustments presented herein are provisional, as the purchase accounting is not final. Additionally, the allocation of purchase price to the acquired assets and assumed liabilities of Radisson was based on preliminary estimates of fair value, determined through discussions with Radisson management and valuation studies performed by independent third-party valuation experts. Accordingly, the final purchase accounting adjustments may differ materially from the preliminary unaudited adjustments presented herein. The preliminary estimates are based on the best information available as of the date of this filing and include certain assumptions that the Company believes are reasonable under the circumstances.
The unaudited pro forma condensed combined financial information should be read in conjunction with the notes herein, is for informational purposes only, is not intended to represent nor be indicative of actual results of operations or financial position of Choice or Radisson had the Transaction been completed on the dates assumed, nor should it be considered indicative of future consolidated results of operations or financial position. Furthermore, while the unaudited pro forma condensed combined financial information does give effect to the costs incurred to effectuate the Transaction, it does not give effect to any anticipated synergies, operating efficiencies or cost savings that may be a result of the Transaction.
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro Forma Adjustments
Choice
Radisson
Historical, as
Historical, as
Financing
Transaction
Reclassified
Reclassified
Adjustments
Adjustments
Pro Forma
(Note 2)
(Note 2)
(Note 4)
(Note 5)
Combined
REVENUES
Royalty, licensing and management fees
$
90,739
$
11,389
$
—
$
—
$
102,128
Initial franchise fees
8,402
736
—
—
9,138
Procurement services
11,683
821
—
—
12,504
Owned hotels
12,037
10,691
—
—
22,728
Other
8,229
2,362
—
(635)
(c)(d)
9,956
Other revenues from franchised and managed properties
126,637
28,359
—
19
(c)
155,015
Total revenues
257,727
54,358
—
(616)
311,469
OPERATING EXPENSES
Selling, general and administrative
30,324
14,733
—
(474)
(c)(d)(f)
44,583
Depreciation and amortization
6,231
8,511
—
(3,278)
(c)(e)(g)
11,464
Owned hotels
8,154
9,758
—
(181)
(f)
17,731
Other expenses from franchised and managed properties
113,650
26,325
—
1,252
(e)
141,227
Total operating expenses
158,359
59,327
—
(2,681)
215,005
Gain on sale of business and assets, net
29
—
29
Operating income (loss)
99,397
(4,969)
—
2,065
96,493
OTHER INCOME AND EXPENSES, NET
Interest expense
11,470
1,934
1,663
(c)
(632)
(i)(l)
14,435
Interest income
(1,280)
(200)
—
—
(1,480)
Other (gains) losses
1,716
(787)
—
—
929
Equity in net loss (gain) of affiliates
(244)
—
—
—
(244)
Total other income and expenses, net
11,662
947
1,663
(632)
13,640
Income (loss) before income taxes
87,735
(5,916)
(1,663)
2,697
82,853
Income tax expense
20,344
300
(409)
(1,082)
(o)
19,153
Net income (loss)
$
67,391
$
(6,216)
$
(1,254)
$
3,779
$
63,700
Basic earnings per share
$
1.21
$
—
$
1.14
Diluted earnings per share
$
1.20
$
—
$
1.13
See accompanying notes to the unaudited pro forma condensed combined financial information.
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 2021
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro Forma Adjustments
Choice
Radisson
Historical, as
Historical, as
Financing
Transaction
Reclassified
Reclassified
Adjustments
Adjustments
Pro Forma
(Note 2)
(Note 2)
(Note 4)
(Note 5)
Combined
REVENUES
Royalty, licensing and management fees
$
397,218
$
45,574
$
—
$
—
$
442,792
Initial franchise fees
26,342
2,692
—
—
29,034
Procurement services
50,393
2,590
—
—
52,983
Owned hotels
37,833
33,339
—
—
71,172
Other
28,669
14,337
—
(2,522)
(c)(d)
40,484
Other revenues from franchised and managed properties
528,843
98,605
—
74
(c)
627,522
Total revenues
1,069,298
197,137
—
(2,448)
1,263,987
OPERATING EXPENSES
Selling, general and administrative
145,623
78,459
—
21,626
(c)(d)(f)(k)
245,708
Depreciation and amortization
24,773
29,013
—
(7,790)
(c)(e)(g)
45,996
Owned hotels
24,754
30,858
—
(55)
(f)
55,557
Other expenses from franchised and managed properties
444,946
105,144
—
5,015
(e)
555,105
Total operating expenses
640,096
243,474
—
18,796
902,366
Impairment of long-lived assets
(282)
—
—
—
(282)
Gain on sale of asset
13
—
—
—
13
Operating income (loss)
428,933
(46,337)
—
(21,244)
361,352
OTHER INCOME AND EXPENSES, NET
Interest expense
46,680
10,914
6,746
(c)
(2,769)
(i)(l)
61,571
Interest income
(4,981)
(2,071)
—
—
(7,052)
Other gains, net
(5,134)
(3,664)
—
—
(8,798)
Equity in net loss of affiliates
15,876
—
—
—
15,876
Total other income and expenses, net
52,441
5,179
6,746
(2,769)
61,597
Income (loss) before income taxes
376,492
(51,516)
(6,746)
(18,475)
299,755
Income tax expense
87,535
405
(1,660)
(17,307)
(o)
68,973
Net income (loss)
$
288,957
$
(51,921)
$
(5,086)
$
(1,168)
$
230,782
Basic earnings per share
$
5.20
$
—
$
4.15
Diluted earnings per share
$
5.15
$
—
$
4.11
See accompanying notes to the unaudited pro forma condensed combined financial information.
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2022
(IN THOUSANDS)
Pro Forma Adjustments
Radisson
Historical, as
Financing
Transaction
Choice
Reclassified
Adjustments
Adjustments
Pro Forma
Historical
(Note 2)
(Note 4)
(Note 5)
Combined
ASSETS
Current assets
Cash and cash equivalents
$
527,209
$
161,615
$
175,000
(a)
$
(743,852)
(a)(c)(l)(m)
$
119,972
Restricted cash
—
10,915
—
—
10,915
Accounts receivable, net
175,051
33,108
—
(313)
(c)(h)
207,846
Income taxes receivable
4,211
—
—
—
4,211
Notes receivable, net
54,746
6,314
—
—
61,060
Prepaid expenses and other current assets
26,801
12,997
—
(469)
(c)(d)
39,329
Total current assets
788,018
224,949
175,000
(744,634)
443,333
Property and equipment, at cost (net)
394,950
118,702
—
6,739
(c)(e)
520,391
Operating lease right-of-use assets
31,869
88,490
—
(46,175)
(f)
74,184
Goodwill
159,196
—
—
75,964
(b)
235,160
Intangible assets, net
311,079
282,775
—
165,725
(d)(g)
759,579
Notes receivable, net
67,649
5,166
—
(835)
(h)
71,980
Investments, employee benefit plans, at fair value
34,173
—
—
—
34,173
Investments in affiliates
28,126
149
—
322
(j)
28,597
Deferred income taxes
71,795
—
—
3,972
(o)
75,767
Other assets
85,173
7,481
(2,134)
(b)
(4,328)
(d)(i)
86,192
Total assets
$
1,972,028
$
727,712
$
172,866
$
(543,250)
$
2,329,356
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable
$
89,826
$
5,116
$
—
$
(32)
(c)
$
94,910
Accrued expenses and other current liabilities
81,265
18,471
—
24,742
(c)(k)(m)
124,478
Deferred revenue
89,724
6,773
—
—
96,497
Current portion of long-term debt
216,486
70,744
25,000
(a)
(70,744)
(l)
241,486
Liability for guest loyalty program - current
86,212
3,729
—
—
89,941
Total current liabilities
563,513
104,833
25,000
(46,034)
647,312
Long-term debt
844,426
94,958
147,866
(a)(b)
(38,925)
(l)
1,048,325
Long-term deferred revenue
108,165
27,067
—
—
135,232
Deferred compensation and retirement plan obligations
38,893
12,379
—
—
51,272
Income taxes payable
20,642
304
—
(1,980)
(o)
18,966
Operating lease liabilities
32,549
109,723
—
(67,018)
(f)
75,254
Liability for guest loyalty program - noncurrent
42,350
10,698
—
—
53,048
Other liabilities
6,845
2,620
—
(1,949)
(c)
7,516
Total liabilities
1,657,383
362,582
172,866
(155,906)
2,036,925
Commitments and Contingencies
Common stock
951
—
—
—
951
Additional paid-in-capital
265,385
365,130
—
(365,130)
(n)
265,385
Accumulated other comprehensive loss
(4,708)
—
—
—
(4,708)
Treasury stock, at cost
(1,276,348)
—
—
—
(1,276,348)
Retained earnings
1,329,365
—
—
(22,214)
(k)(o)
1,307,151
Total shareholders’ equity
314,645
365,130
—
(387,344)
292,431
Total liabilities and shareholders’ equity
$
1,972,028
$
727,712
$
172,866
$
(543,250)
$
2,329,356
See accompanying notes to the unaudited pro forma condensed combined financial information.
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
1.Description of the Transaction and Basis of Presentation
On August 11, 2022, Choice completed its previously announced acquisition of Radisson. See Note 3 for further discussion of the determination of purchase price. To fund the Transaction, Choice drew $175,000 on the Company’s existing $600,000 unsecured credit facility (the “Revolver”), as further described in Note 4, and funded the remainder with cash on hand.
Choice has prepared the unaudited pro forma condensed combined financial information in accordance with Article 11 of SEC Regulation S-X, applying the acquisition method of accounting under ASC 805, with Choice as the acquirer and Radisson as the acquiree for accounting purposes. Pursuant to the guidance in ASC 805, the acquisition method of accounting requires the purchase price to be allocated to the acquisition-date fair values of the acquired assets and assumed liabilities, with any excess recorded as goodwill. To facilitate this allocation of purchase price and using the fair value concepts outlined in ASC 820, Choice has determined the preliminary fair value estimates of the acquired assets and assumed liabilities as of August 11, 2022, the date the Transaction closed. As of the date of this report, Choice has not yet completed certain detailed valuation procedures necessary to finalize these estimates of fair value and related purchase price allocation. The finalization of these estimates is expected to be complete when Choice files its annual report on Form 10-K for the year ended December 31, 2022. Differences between preliminary estimates and the final purchase price accounting may occur and could have a material impact on the unaudited pro forma condensed combined financial information.
The unaudited pro forma condensed combined financial information does not give effect to any expected cost savings, operating nor revenue synergies that may result from the Transaction, nor any costs required to achieve such synergies. It does, however, give effect to the costs incurred to effectuate the Transaction that had not yet been recorded as of the date of the unaudited pro forma condensed combined balance sheet. See Note 5 for further details.
During the preparation of the unaudited pro forma condensed combined financial information, Choice performed a preliminary review of Radisson’s accounting policies. Adjustments were necessary to certain of the accounting policies used to produce Radisson’s historical financial statements in order to conform to those of Choice. These amounts are disclosed in Note 5 below. Furthermore, certain reclassifications have been made in order to conform the historical financial statement presentation of Radisson with Choice. See Note 2 for detailed reclassification adjustments. Final review of Radisson’s accounting policies is ongoing and additional differences may be identified that, when conformed, could have a material impact on the unaudited pro forma condensed combined financial information.
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
2.Reclassification Adjustments
The following presents the impacts of certain reclassification adjustments made to the Choice historical financial statements, in order to align our historical financial statement presentation to our expected presentation for the go-forward combined company.
CHOICE
STATEMENT OF INCOME
RECLASSIFICATION ADJUSTMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2022
Choice
Choice
Reclassification
Historical, as
Historical
Adjustments
Reclassified
Combined Company Presentation
REVENUES
Royalty fees
$
90,739
$
(90,739)
(a)
$
—
—
90,739
(a)
90,739
Royalty, licensing and management fees
Initial franchise and relicensing fees
8,402
(8,402)
(b)
—
—
8,402
(b)
8,402
Initial franchise fees
Procurement services
11,683
—
11,683
Procurement services
Marketing and reservation system
126,637
(126,637)
(c)
—
Owned hotels
12,037
—
12,037
Owned hotels
Other
8,229
—
8,229
Other
—
126,637
(c)
126,637
Other revenues from franchised and managed properties
Total revenues
257,727
—
257,727
OPERATING EXPENSES
Selling, general and administrative
30,324
—
30,324
Selling, general and administrative
Depreciation and amortization
6,231
—
6,231
Depreciation and amortization
Marketing and reservation system
113,650
(113,650)
(d)
—
Owned hotels
8,154
—
8,154
Owned hotels
—
113,650
(d)
113,650
Other expenses from franchised and managed properties
Total operating expenses
158,359
—
158,359
Gain on sale of business and assets, net
29
—
29
Gain on sale of business and assets, net
Operating income
99,397
—
99,397
OTHER INCOME AND EXPENSES, NET
Interest expense
11,470
—
11,470
Interest expense
Interest income
(1,280)
—
(1,280)
Interest income
Other (gains) losses
1,716
—
1,716
Other (gains) losses
Equity in net (gain) loss of affiliates
(244)
—
(244)
Equity in net loss (gain) of affiliates
Total other income and expenses, net
11,662
—
11,662
Income before income taxes
87,735
—
87,735
Income tax expense
20,344
—
20,344
Income tax expense
Net income
$
67,391
$
—
$
67,391
Reclassification adjustments made to the Choice historical statement of income for the three months ended March 31, 2022:
(a) Represents a reclassification of Royalty fees to Royalty, licensing and management fees to align our historical presentation to our expected combined company presentation.
(b) Represents a reclassification of Initial franchise and relicensing fees to Initial franchise fees to align our historical presentation to our expected combined company presentation.
(c) Represents a reclassification of Marketing and reservation system revenue to Other revenues from franchised and managed properties to align our historical presentation to our expected combined company presentation.
(d) Represents a reclassification of Marketing and reservation system expense to Other expenses from franchised and managed properties to align our historical presentation to our expected combined company presentation.
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
CHOICE
STATEMENT OF INCOME
RECLASSIFICATION ADJUSTMENTS
FOR THE YEAR ENDED DECEMBER 31, 2021
Choice
Choice
Reclassification
Historical, as
Historical
Adjustments
Reclassified
Combined Company Presentation
REVENUES
Royalty fees
$
397,218
$
(397,218)
(a)
$
—
Royalty fees
—
397,218
(a)
397,218
Royalty, licensing and management fees
Initial franchise and relicensing fees
26,342
(26,342)
(b)
—
—
26,342
(b)
26,342
Initial franchise fees
Procurement services
50,393
—
50,393
Procurement services
Marketing and reservation system
528,843
(528,843)
(c)
—
Owned hotels
37,833
—
37,833
Owned hotels
Other
28,669
—
28,669
Other
—
528,843
(c)
528,843
Other revenues from franchised and managed properties
Total revenues
1,069,298
—
1,069,298
OPERATING EXPENSES
Selling, general and administrative
145,623
—
145,623
Selling, general and administrative
Depreciation and amortization
24,773
—
24,773
Depreciation and amortization
Marketing and reservation system
444,946
(444,946)
(d)
—
Owned hotels
24,754
—
24,754
Owned hotels
—
444,946
(d)
444,946
Other expenses from franchised and managed properties
Total operating expenses
640,096
—
640,096
Impairment of long-lived assets
(282)
—
(282)
Impairment of long-lived assets
Gain on sale of asset
13
—
13
Gain on sale of asset
Operating income
428,933
—
428,933
OTHER INCOME AND EXPENSES, NET
Interest expense
46,680
—
46,680
Interest expense
Interest income
(4,981)
—
(4,981)
Interest income
Other gains, net
(5,134)
—
(5,134)
Other gains, net
Equity in net loss of affiliates
15,876
—
15,876
Equity in net loss of affiliates
Total other income and expenses, net
52,441
—
52,441
Income before income taxes
376,492
—
376,492
Income tax expense
87,535
—
87,535
Income tax expense
Net income
$
288,957
$
—
$
288,957
Reclassification adjustments made to the Choice historical statement of income for the year ended December 31, 2021:
(a) Represents a reclassification of Royalty fees to Royalty, licensing and management fees to align our historical presentation to our expected combined company presentation.
(b) Represents a reclassification of Initial franchise and relicensing fees to Initial franchise fees to align our historical presentation to our expected combined company presentation.
(c) Represents a reclassification of Marketing and reservation system revenue to Other revenues from franchised and managed properties to align our historical presentation to our expected combined company presentation.
(d) Represents a reclassification of Marketing and reservation system expense to Other expenses from franchised and managed properties to align our historical presentation to our expected combined company presentation.
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
The following presents the impacts of certain reclassification adjustments made to the Radisson historical financial statements, in order to conform Radisson’s financial statement presentation to our expected presentation for the go-forward combined company.
RADISSON
STATEMENT OF OPERATIONS
RECLASSIFICATION ADJUSTMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2022
Radisson
Radisson
Reclassification
Historical, as
Historical
Adjustments
Reclassified
Combined Company Presentation
Revenue
$
54,358
$
(54,358)
(a)
$
—
—
11,389
(a)
11,389
Royalty. licensing and management fees
—
736
(a)
736
Initial franchise fees
—
821
(a)
821
Procurement services
—
10,691
(a)
10,691
Owned hotels
—
2,362
(a)
2,362
Other
—
28,359
(a)
28,359
Other revenues from franchised and managed properties
Total revenues
54,358
—
54,358
Costs and expenses
Owned hotel operating
9,758
—
9,758
Owned hotels
General and administrative
39,880
(25,147)
(b)(c)(e)
14,733
Selling, general and administrative
Depreciation and amortization
8,652
(141)
(b)
8,511
Depreciation and amortization
—
26,325
(b)
26,325
Other expenses from franchised and managed properties
Total costs and expenses
58,290
1,037
59,327
Loss from operations
(3,932)
(1,037)
(4,969)
Other (expense) income
Interest expense, net
(1,734)
1,734
(d)
—
—
(1,934)
(d)
(1,934)
Interest expense
—
200
(d)
200
Interest income
—
787
(c)
787
Other (gains) losses
Total other expense, net
(1,734)
787
(947)
Loss before taxes
(5,666)
(250)
(5,916)
Income tax expense
(550)
250
(e)
(300)
Income tax expense
Net loss
$
(6,216)
$
—
$
(6,216)
Reclassification adjustments made to the Radisson historical statement of operations for the three months ended March 31, 2022:
(a) Represents a reclassification of Revenue to align with our expected combined company presentation.
(b) Represents a reclassification from General and administrative and Depreciation and amortization to Other expenses from franchised and managed properties.
(c) Represents a reclassification from General and administrative to Other (gains) losses to align with our expected combined company presentation.
(d) Represents a reclassification from Interest expense, net to Interest expense and Interest income to align with our expected combined company presentation.
(e) Represents a reclassification from Income tax expense to Selling, general and administrative to align with our expected combined company presentation.
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
RADISSON
STATEMENT OF OPERATIONS
RECLASSIFICATION ADJUSTMENTS
FOR THE YEAR ENDED DECEMBER 31, 2021
Radisson
Radisson
Reclassification
Historical, as
Historical
Adjustments
Reclassified
Combined Company Presentation
Revenue
$
197,137
$
(197,137)
(a)
$
—
—
45,574
(a)
45,574
Royalty. licensing and management fees
—
2,692
(a)
2,692
Initial franchise fees
—
2,590
(a)
2,590
Procurement services
—
33,339
(a)
33,339
Owned hotels
—
14,337
(a)
14,337
Other
—
98,605
(a)
98,605
Other revenues from franchised and managed properties
Total revenues
197,137
—
197,137
Costs and expenses
Owned hotel operating
30,858
—
30,858
Owned hotels
General and administrative
179,110
(100,651)
(b)(c)(e)
78,459
Selling, general and administrative
Depreciation and amortization
29,648
(635)
(b)
29,013
Depreciation and amortization
—
105,144
(b)
105,144
Other expenses from franchised and managed properties
Total costs and expenses
239,616
3,858
243,474
Loss from operations
(42,479)
(3,858)
(46,337)
Other (expense) income
Interest expense, net
(8,843)
8,843
(d)
—
—
(10,914)
(d)
(10,914)
Interest expense
—
2,071
(d)
2,071
Interest income
—
3,664
(c)
3,664
Other gains, net
Total other expense, net
(8,843)
3,664
(5,179)
Loss before taxes
(51,322)
(194)
(51,516)
Income tax expense
(599)
194
(e)
(405)
Income tax expense
Net loss
$
(51,921)
$
—
$
(51,921)
Reclassification adjustments made to the Radisson historical statement of operations for the year ended December 31, 2021:
(a) Represents a reclassification of Revenue to align with our expected combined company presentation.
(b) Represents a reclassification from General and administrative and Depreciation and amortization to Other expenses from franchised and managed properties.
(c) Represents a reclassification from General and administrative to Other gains, net to align with our expected combined company presentation.
(d) Represents a reclassification from Interest expense, net to Interest expense and Interest income to align with our expected combined company presentation.
(e) Represents a reclassification from Income tax expense to Selling, general and administrative to align with our expected combined company presentation.
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
RADISSON
BALANCE SHEET
RECLASSIFICATION ADJUSTMENTS
AS OF MARCH 31, 2022
Radisson
Radisson
Reclassification
Historical, as
Historical
Adjustments
Reclassified
Combined Company Presentation
Assets
Current assets
Cash and equivalents
$
159,469
$
2,146
(a)
$
161,615
Cash and cash equivalents
—
10,915
(a)(b)
10,915
Restricted cash
Receivables (net of allowance)
33,108
—
33,108
Accounts receivable, net
—
6,314
(c)(d)
6,314
Notes receivable, net - current
Prepaid expenses and other
24,991
(11,994)
(b)(c)
12,997
Prepaid expenses and other current assets
Total current assets
217,568
7,381
224,949
Property, equipment, and improvements, net
118,702
—
118,702
Property and equipment, at cost (net)
Right of use assets
88,490
—
88,490
Operating lease right-of-use assets
Intangible assets, net
255,850
26,925
(d)
282,775
Intangible assets, net
Investments in uncombined affiliates
149
—
149
Investments in affiliates
Long-term notes receivable
30,411
(25,245)
(d)
5,166
Notes receivable, net
Other assets
16,542
(9,061)
(a)
7,481
Other assets
Total assets
$
727,712
$
—
$
727,712
Liabilities and Net parent investment
Current liabilities
Accounts payable
$
5,116
$
—
$
5,116
Accounts payable
Accrued liabilities
27,311
(8,840)
(e)(f)(g)
18,471
Accrued expenses and other current liabilities
Short-term notes payable
1,662
(1,662)
(e)
—
—
6,773
(f)
6,773
Deferred revenue
Long-term debt, current
70,744
—
70,744
Current portion of long-term debt
—
3,729
(g)
3,729
Liability for guest loyalty program - current
Income taxes payable
304
—
304
Income taxes payable
Total current liabilities
105,137
—
105,137
Long-term debt, net of current
52,106
42,852
(h)
94,958
Long-term debt
Long-term debt from related party
42,852
(42,852)
(h)
—
—
27,067
(i)
27,067
Long-term deferred revenue
—
12,379
(j)
12,379
Deferred compensation and retirement plan obligations
Lease liabilities
109,723
—
109,723
Operating lease liabilities
—
10,698
(k)
10,698
Liability for guest loyalty program - noncurrent
Other long-term liabilities
52,764
(50,144)
(i)(j)(k)
2,620
Other liabilities
Total liabilities
362,582
—
362,582
Net parent investment
365,130
—
365,130
Additional paid-in-capital
Total liabilities and net parent investment
$
727,712
$
—
$
727,712
Reclassification adjustments made to the Radisson historical balance sheet as of March 31, 2022:
(a) Represents a reclassification from Other assets to Cash and equivalents and Restricted cash.
(b) Represents a reclassification from Prepaid expenses and other to Restricted cash.
(c) Represents a reclassification of current notes receivable from Prepaid expenses and other to Notes receivables, net - current to align with our expected combined company presentation.
(d) Represents a reclassification from Notes receivable, net - current and Notes receivable, net to Intangible assets, net.
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(e) Represents a reclassification from Short-term notes payable to Accrued expenses and other current liabilities to align with our expected combined company presentation.
(f) Represents a reclassification from Accrued liabilities to Deferred revenue to align with our expected combined company presentation.
(g) Represents a reclassification from Accrued liabilities to Liability for guest loyalty program - current to align with our expected combined company presentation.
(h) Represents a reclassification from Long-term debt from related party to Long-term debt to align with our expected combined company presentation.
(i) Represents a reclassification from Other long-term liabilities to Long-term deferred revenue to align with our expected combined company presentation.
(j) Represents a reclassification from Other long-term liabilities to Deferred compensation and retirement plan obligations to align with our expected combined company presentation.
(k) Represents a reclassification from Other long-term liabilities to Liability for guest loyalty - noncurrent to align with our expected combined company presentation.
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
3. Preliminary Purchase Price and Resulting Allocation
As part of the acquisition method of accounting, the preliminary purchase price has been estimated to be $673,856, which includes the purchase price of $675,186, adjusted for Disclosed Leakage (as defined in the Purchase Agreement) and certain other prepaid expenses. This preliminary purchase price has been allocated to the acquired assets and assumed liabilities, based on their preliminary acquisition-date fair values, in accordance with ASC 805 and ASC 820. These preliminary fair values were determined using the best information available as of the date of this filing. The adjustments necessary to reflect the application of purchase accounting and recognition of the acquired assets and assumed liabilities at their acquisition-date fair value are further described in Note 5 below. As discussed in Note 1 herein, the finalization of these preliminary fair values, the preliminary purchase price and resulting allocation of such, is ongoing. Accordingly, the finalized amounts may differ from these preliminary amounts presented herein, and those differences may be material.
Assets acquired
Amount
Cash and cash equivalents
$
90,919
Restricted cash
10,915
Accounts receivable
32,795
Notes receivables (current)
6,314
Prepaid expenses and other current assets
12,528
Property and equipment
125,441
Operating lease right-of-use of assets
42,315
Intangible assets
448,500
Notes receivable (noncurrent)
4,331
Investment in affiliates
471
Deferred income taxes
3,972
Other assets
3,153
Total assets acquired
$
781,654
Liabilities assumed
Accounts payable
$
5,084
Accrued expenses and other current liabilities
18,319
Deferred revenue - current
6,773
Liability for guest loyalty program - current
3,729
Long-term debt
56,033
Long-term deferred revenue
27,067
Deferred compensation and retirement plan obligations
12,379
Income taxes payable
304
Operating lease liabilities
42,705
Liability for guest loyalty program - noncurrent
10,698
Other liabilities
671
Total liabilities assumed
$
183,762
Fair value of net assets acquired
$
597,892
Goodwill
75,964
Total purchase consideration
$
673,856
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
4.Pro Forma Financing Adjustments
a.In connection with the Transaction, the Company borrowed $175,000 against its Revolver, which has a maturity date of August 20, 2026, as noted within the Restated Senior Unsecured Revolving Credit Agreement (the “Restated Credit Agreement”) previously filed as Exhibit 10.1 to the Company’s Form 8-K dated August 20, 2018. The Revolver draw was comprised of $25,000 of swingline borrowings, $30,000 of Alternative Base Rate (as defined in the Restated Credit Agreement) borrowings, and $120,000 of additional borrowings.
b.Reflects the reclassification of unamortized financing costs related to the facility. Prior to the Revolver borrowings, these unamortized financing costs were presented within Other assets, in accordance with the Company’s accounting policy. As balances are drawn on the Revolver, the Company’s policy is to reclassify these amounts to present against the outstanding borrowings in the consolidated balance sheet.
c.Represents the incremental interest expense related to Revolver draw, as described in Note 4(a) above. The Revolver bears interest at a LIBOR-based rate plus applicable margin or, as noted in the Restated Credit Agreement, an alternative benchmark rate, if applicable. Accordingly, the $25,000 swingline borrowing bears interest at an aggregate 3.44%, the $30,000 Alternative Base Rate borrowing bears interest at an aggregate 5.55%, and the remaining $120,000 additional borrowing bears interest at an aggregate 3.44%. The aggregate, incremental interest recognized within the unaudited pro forma condensed combined statements of income (loss) is $1,663 and $6,746 for the three months ended March 31, 2022, and year ended December 31, 2021, respectively. A 1/8th percent change in the respective interest rates would result in an increase or decrease in interest expense of $55 and $222, for the three months ended March 31, 2022, and year ended December 31, 2021, respectively.
5.Pro Forma Transaction Accounting Adjustments
The below adjustments reflect the Company’s application of purchase accounting, pursuant to ASC 805 and ASC 820. The resulting impact of these adjustments, applicable to the acquired assets and assumed liabilities, are included in the purchase price allocation and determination of goodwill, as described in Note 3.
a.Reflects the consideration transferred at closing to acquire Radisson and effectuate the Transaction.
b.Reflects the goodwill recognized as a result of the preliminary purchase price allocation; refer to Note 3.
c.Reflects adjustments to remove the financial statement impacts of an entity comprised of the operations and financial condition of a hotel property previously divested by Radisson, which due to Radisson’s continued involvement via a long-term management agreement, and its interpretation of the relevant accounting guidance, Radisson had deferred the recognition of the sale. As a result, Radisson continued to consolidate the entity, eliminating the revenue from the related management agreement, and deferring the gain on sale. Choice has concluded it will not consolidate the hotel property post-acquisition and, pursuant to the Company’s interpretation and application of ASC Topic 606, Revenue with Contracts with Customers (“ASC 606”), will recognize the sale and ongoing revenue from the related management agreement. The below table presents the quantitative adjustments necessary to effectuate the aforementioned, included within both the unaudited pro forma condensed combined balance sheet and statements of income (loss):
As of
Adjustments impacting the pro forma balance sheet
March 31, 2022
Cash and cash equivalents
$
48
Accounts Receivables (net of allowance for credit losses)
(66)
Prepaid expenses and other current assets
(1)
Property and equipment, net
(1,737)
Accounts payable
(32)
Accrued expenses and other current liabilities
(152)
Other liabilities
(1,949)
Three Months
Year
Ended
Ended
Adjustments impacting the pro forma statements of income (loss)
March 31, 2022
December 31, 2021
Other revenues from franchised and managed properties
$
19
$
74
Other (revenue)
(266)
(1,417)
Selling, general and administrative
(418)
(1,422)
Depreciation and amortization
(17)
(70)
Total impact to net income
$
188
$
149
d.Reflects adjustments to remove Radisson’s historical unamortized deferred franchise sales commissions of $468 and $6,136, which were paid to sales personnel to source and secure customer contracts, from Prepaid expenses and other
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
current assets and Other assets, respectively. Corresponding adjustments of $161 and $837 were made to reduce Selling, general and administrative expense in the unaudited pro forma condensed combined statements of income (loss) for the three months ended March 31, 2022 and year ended December 31, 2021, respectively.
Additionally reflects adjustment to remove unamortized franchise agreement acquisition costs of $26,925, which were amounts paid to franchisees as an incentive to enter into new franchise agreements, from Intangible assets, net. Corresponding adjustments of $369 and $1,105 were made to reduce Other revenue in the unaudited pro forma condensed combined statements of income (loss) for the three months ended March 31, 2022 and year ended December 31, 2021, respectively.
These balances are removed as the acquisition-date fair value of these amounts is based on the expected future economic benefit to the Company, which is nil, consistent with the Company’s application of the FASB’s Accounting Standards Update 2021-08: Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.
e.Reflects the adjustment to record the acquired property and equipment assets at their preliminary fair value. As a result of this change in value, the unaudited pro forma condensed combined statements of income (loss) have also been adjusted to reflect the change in depreciation expense, which is based on Choice’s estimate of the remaining useful lives of these acquired assets.
The following table summarizes the preliminary fair value of the property and equipment assets acquired, their estimated useful lives, and the resulting depreciation expense:
Depreciation Expense
Estimated
Three Months
Year
Preliminary
Useful Life
Ended
Ended
Property and equipment
Fair Value
(years)
March 31, 2022
December 31, 2021
Land
$
7,159
N/A
N/A
N/A
Construction in progress
2,198
N/A
N/A
N/A
Building and leasehold improvements
94,866
24.4
997
4,042
Site improvements
586
23.1
6
26
Furniture, fixtures and equipment
8,394
3.9
538
2,183
Computer equipment and software
12,238
2.0
1,509
6,119
Total
125,441
3,050
12,370
Less: Historical Radisson Amounts(1)
116,965
1,840
8,664
Pro Forma Transaction Accounting Adjustment
$
8,476
$
1,210
$
3,706
(1) Adjusted to exclude Property and equipment amounts described in Note 5(c).
Of the above pro forma transaction accounting adjustments related to depreciation expense, $1,252 and $5,015 for the three months ended March 31, 2022 and year ended December 31, 2021, respectively, is recorded as an increase to Other expenses from franchised and managed hotels in the unaudited pro forma condensed combined statements of income (loss).
These preliminary estimates of fair value and corresponding useful lives are still being finalized. Accordingly, a 10% change in the valuation of property and equipment assets would cause a corresponding increase or decrease in the balance of goodwill and would increase or decrease the annual depreciation expense by $1,237.
f.Reflects the remeasurement of Radisson’s operating lease liabilities, right-of-use assets and resulting lease expense, applying Choice’s accounting policies and incremental borrowing rate. Adjustments of $105 and $(309) were made to Selling, general and administrative and $(181) and $(55) to Owned hotels expense in the unaudited pro forma condensed combined statements of income for the three months ended March 31, 2022 and year ended December 31, 2021, respectively.
g.Reflects the adjustment to recognize the acquired intangible assets at their preliminary fair value. As a result of this adjustment, the unaudited pro forma condensed combined statements of income (loss) have also been adjusted to include the resulting incremental amortization expense, which is based on Choice’s estimate of the remaining useful lives of these acquired assets.
The following table summarizes the preliminary fair value of the acquired intangible assets, their estimated useful lives, and the resulting amortization expense:
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
Amortization Expense
Estimated
Three Months
Year
Preliminary
Useful Life
Ended
Ended
Identifiable intangible assets
Fair Value
(years)
March 31, 2022
December 31, 2021
Trade names
$
223,700
N/A
N/A
N/A
Franchise agreements
221,500
15.5
3,524
14,290
Management agreements
3,300
15.5
52
213
Total
448,500
3,576
14,503
Less: Historical Radisson Amounts(1)
255,850
6,795
20,914
Pro Forma Transaction Accounting Adjustment
$
192,650
$
(3,219)
$
(6,411)
(1) Adjusted to exclude amounts related to franchise agreement acquisition costs, described in Note 5(d).
These preliminary estimates of fair value and corresponding useful lives are still being finalized. Accordingly, a 10% change in the valuation of these assets would cause a corresponding increase or decrease in the balance of goodwill and would increase or decrease the annual amortization expense by $1,451.
h.Represents provisional adjustments required to align Radisson balances with Choice’s policy with respect to the application of ASC Topic 326, Financial Instruments – Credit Losses (“ASC 326”), which was adopted by Choice on January 1, 2020. Radisson, as a private company, was not required to adopt this standard prior to the Transaction. The unaudited pro forma condensed combined balance sheet as of March 31, 2022 includes a provisional adjustment to include expected credit losses of $835 related to Notes receivable and $247 related to Accounts receivable, to reflect the adoption of ASC 326.
i.Reflects adjustment of $1,808 to record an acquired interest rate cap agreement, which was secured by Radisson to hedge LIBOR-related interest rate risk on the assumed debt, at its acquisition-date fair value. Related adjustments of $15 and $24 were made to the unaudited pro forma condensed combined statements of income for the three months ended March 31, 2022 and year ended December 31, 2021, respectively, to remove historical amortization of the initial deferred premium. The fair value attributable to this agreement is entirely based on LIBOR, which increased substantially during the second and third quarters of 2022.
j.Reflects adjustment to record an equity investment in certain hotel assets at its acquisition-date fair value.
k.Reflects adjustments to record $24,194 of nonrecurring transaction costs incurred after and not yet recognized as of March 31, 2022.
l.Reflects the adjustment to remove certain third-party Radisson debt of $70,744, which was settled in cash prior to the Transaction. Additionally, reflects the adjustment to remove certain related-party debt of $42,852, which was not assumed as part of the Transaction. Lastly, reflects adjustment of $3,927 to recognize the debt assumed at its acquisition-date fair value. Corresponding adjustments of $617 and $2,745, were made to reduce Interest expense in the unaudited pro forma condensed combined statements of income (loss) for the three months ended March 31, 2022 and year ended December 31, 2021, respectively.
m.Reflects adjustment to record certain fees of $700 prepaid by Radisson’s former parent, through a reduction in cash consideration transferred at closing, related to transaction-related transition services to be provided by the Company.
n.Reflects the removal of Radisson historical equity balances.
o.To record the income tax effect of the pro forma adjustments, based on a blended foreign, federal, and state statutory rate of approximately 24.6%. The effective tax rate of the combined company could be significantly different than what is presented in these unaudited pro forma financial statements depending on post-acquisition activities, including legal entity restructuring and the geographical mix of taxable income.
p.No additional shares were issued in connection with the Transaction. Accordingly, the computation of basic and diluted earnings per share for the combined company is as follows:
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
Three Months
Year
Ended
Ended
(in thousands, except per share amounts)
March 31, 2022
December 31, 2021
Numerator:
Net income
$
63,700
$
230,782
Income allocated to participating securities
(305)
(896)
Net income available to common shareholders
$
63,395
$
229,886
Denominator:
Weighted average shares of common stock outstanding – basic
55,412
55,379
Basic earnings per share
$
1.14
$
4.15
Numerator:
Net income
$
63,700
$
230,782
Income allocated to participating securities
(305)
(896)
Net income available to common shareholders
$
63,395
$
229,886
Denominator:
Weighted average shares of common stock outstanding – basic
55,412
55,379
Dilutive effect of stock options and PVRSUs
642
504
Weighted average shares of common stock outstanding – diluted
