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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-K/A(Amendment No. 1)
x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 27, 2016 . or
oo Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number 001-36074
ClubCorp Holdings, Inc.(Exact name of registrant as specified in its charter)
Nevada 20-5818205(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
3030 LBJ Freeway, Suite 600
Dallas, Texas 75234(Address of principal executive offices) (Zip Code)
(972) 243-6191(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registeredCommon Stock, $0.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes xNo o Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes oNo x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes xNo o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”,“accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer o
Non-accelerated filer o Smaller reporting company o(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x The aggregate market value of the voting common equity held by non-affiliates of the registrant, based on the closing price of $12.58 per share as reported on June 14, 2016 (the last business
day of the registrant’s most recently completed second fiscal quarter) was $801,156,809 .
As of March 21, 2017, the registrant had 65,752,114 shares of common stock outstanding, with a par value of $0.01.
DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive Proxy Statement for its 2016 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days of December 27,
2016 are incorporated by reference herein into Part III, Items 10 through 14, of this Annual Report.
EXPLANATORY NOTE — AMENDMENT
ClubCorp Holdings, Inc. (the “Company”) is filing this Amendment No. 1 on Form 10-K/A (this “Form 10-K/A”) to amend Part IV, “Item 15. Exhibits and Financial Statement Schedules”of its Annual Report on Form 10-K (the “Form 10-K”) for the fiscal year ended December 27, 2016 in order to, pursuant to Rule 3-09 of Regulation S-X under the Securities Exchange Act of 1934,as amended (the “Exchange Act”), include the financial statements and related notes of Avendra, LLC (“Avendra”), an unconsolidated joint venture in which the Company holds a 10% equityownership interest.
Rule 3-09 of Regulation S-X provides that if a 50%-or-less-owned person accounted for by the equity method meets the first or third condition of the significant subsidiary tests set forth inRule 1-02(w), substituting 20% for 10%, separate financial statements for such 50%-or-less-owned person shall be filed. Such financial statements are required to be audited only for the years inwhich such person met such test. If the 50%-or-less-owned person is not an accelerated filer, the required financial statements may be filed as an amendment to the report.
Avendra met the significant subsidiary test described above for the Company’s fiscal years ended December 27, 2016 and December 29, 2015 and is not an accelerated filer. The Companyhas included in this Form 10-K/A the required audited financial statements for Avendra’s corresponding fiscal years ended December 31, 2016 and December 31, 2015. Avendra did not meet thesignificance test for the Company's fiscal year ended December 30, 2014; therefore, Avendra financial statements are required to be included for that fiscal year but are not required to be audited. Assuch, only the financial statements for the years ended December 27, 2016 and December 29, 2015 are audited.
Part II, “Item 9B. Other Information” is being amended to include the description of the 2017 Short Term Incentive Plan that was approved by the Compensation Committee of theCompany's Board of Directors on March 27, 2017.
Part IV, “Item 15. Exhibits and Financial Statement Schedules” is also being amended by this Form 10-K/A to include the Avendra financial statements and the related report of KPMGLLP, Avendra’s independent accountants (“KPMG”) as Exhibits 99.1 and 99.2, to file KPMG’s consent of independent accountants related to its opinion contained in this filing as Exhibit 23.2 andto file certifications of officers of the Company under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1, 31.2, 32.1 and 32.2. This Form 10-K/A does not otherwise update oramend any other items or disclosures in the Form 10-K and does not otherwise reflect events occurring after the original filing date of the Form 10-K. Accordingly, this Form 10-K/A should be readin conjunction with the Company’s filings with the Securities and Exchange Commission subsequent to the original filing date of the Form 10-K. In accordance with Rule 12b-15 of the ExchangeAct, the text of the amended items (Item 9B and Item 15) is set forth in its entirety in the attached pages hereto.
ITEM 9B. OTHER INFORMATION
2017 Short Term Incentive Plan
On March 27, 2017, our Compensation Committee (the “Committee”) of the Board of Directors of the Company approved a 2017 Short Term Incentive Plan (“2017 STI Plan”), in whichour Named Executive Officers (or “NEOs”) and other employees are eligible to participate. Under the 2017 STI Plan, the Committee made a grant to each NEO in an initial amount expressed as apercentage of his or her base salary (the “Initial Grant Amount”). The Initial Grant Amount for each of Mr. Affeldt and Mr. Burnett is 100% of their respective salaries, and the Initial Grant Amountfor Mr. McClellan is 75% of his salary. The Initial Grant Amount for each other NEO is 65% of his or her respective salary. Each grant under the 2017 STI Plan is subject to the continuedemployment of the participant on the payment date and to a minimum Adjusted EBITDA threshold that must be attained before any awards will be paid.
With respect to the Initial Grant Amount, 60% of such amount (the “Performance-Based Amount”) is subject to downward or upward adjustment based upon our actual Adjusted EBITDAresults (40% of the Initial Grant Amount) and our actual dues revenue (20% of the Initial Grant Amount) for fiscal year 2017 in comparison to budgeted Adjusted EBITDA and budgeted duesrevenue for fiscal year 2017. If actual Adjusted EBITDA is at least 95% of budgeted Adjusted EBITDA for fiscal year 2017, the NEO will receive between 50% and 200% of the Performance-BasedAmount depending on the actual Adjusted EBTIDA and dues revenue results for fiscal year 2017, with the Performance-Based Amount paying out at no more than 200% if the actual AdjustedEBITDA and dues revenue results for fiscal year 2017 are 130% or more of the respective budget. The remaining 40% of the Initial Grant Amount may be paid, adjusted downward or upward, orwithheld at the discretion of the Committee based on the NEO’s personal performance. Awards, if any, will be paid in cash after completion of the audit of the Company's financial statements for thefiscal year ending December 26, 2017 in the first quarter of the following year.
The above description of the 2017 STI Plan is qualified in its entirety by reference to the 2017 STI Plan filed as Exhibit 10.42 to this Form 10-K/A and incorporated herein by reference.
PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report
3. Exhibits
The exhibits listed below are incorporated herein by reference to prior form of filings by Registrant or its affiliates or are included as exhibits in this Form 10-K/A.
Exhibit No. Description of Exhibit
3.1 (a)
Form of Amended and Restated Articles of Incorporation of ClubCorp Holdings, Inc. (Incorporated by reference to Exhibit 3.1(a) to Amendment No. 1 to the Form S-1filed by ClubCorp Holdings, Inc. on August 6, 2013)
3.1 (b)
Form of Amended and Restated Bylaws of ClubCorp Holdings, Inc. (Incorporated by reference to Exhibit 3.1(b) to Amendment No. 1 to the Form S-1 filed byClubCorp Holdings, Inc. on August 6, 2013)
4.1
Indenture, dated as of December 15, 2015, by and among ClubCorp Club Operations, Inc., the subsidiary guarantors party thereto and Wilmington Trust, NationalAssociation, as trustee. (Incorporated by reference to Exhibit 4.1 on Form 8-K filed by ClubCorp Holdings, Inc. on December 15, 2015)
4.2
Form of 8.25% Senior Note due December 15, 2015 (included in Exhibit 4.1). (Incorporated by reference to Exhibit 4.2 on Form 8-K filed by ClubCorp Holdings, Inc.on December 15, 2015)
10.1 † Long Term Incentive Plan (Incorporated by reference to Exhibit 10.7 on Form S-4 filed by ClubCorp Club Operations, Inc. on March 28, 2011)
10.2
Credit Agreement dated as of November 30, 2010 among CCA Club Operations Holdings, LLC, ClubCorp Club Operations, Inc. as Borrower, Citicorp North America,Inc. as Administrative Agent, Swing Line Lender and L/C Issuer, the other lenders party thereto and Citigroup Global Markets Inc. as Sole Arranger and SoleBookrunner (Incorporated by reference to Exhibit 10.8 on Form S-4 filed by ClubCorp Club Operations, Inc. on March 28, 2011)
10.3
Guaranty and Security Agreement dated as of November 30, 2010 among ClubCorp Club Operations, Inc., each other Grantor from time to time party thereto andCiticorp North America, Inc., as Administrative Agent (Incorporated by reference to Exhibit 10.9 on Form S-4 filed by ClubCorp Club Operations, Inc. on March 28,2011)
10.4
Form of Indemnification Agreement between ClubCorp Holdings, Inc. and its directors and officers (Incorporated by reference to Exhibit 10.9 to Amendment No. 1 tothe Form S-1 filed by ClubCorp Holdings, Inc. on August 6, 2013)
10.5 † ClubCorp Holdings, Inc. Amended and Restated 2012 Stock Award Plan (Incorporated by reference to Exhibit 10.10 to Amendment No. 2 to the Form S-1 filed byClubCorp Holdings, Inc. on August 26, 2013)
10.6 † Form of Restricted Stock Unit Agreement under ClubCorp Holdings, Inc. 2012 Stock Award Plan (Incorporated by reference to Exhibit 10.12 on Form 10-K filed byClubCorp Club Operations, Inc. on March 26, 2012)
10.7 † Form of Performance Restricted Stock Unit Agreement under ClubCorp Holdings, Inc. 2012 Stock Award Plan (Incorporated by reference to Exhibit 10.1 on Form 8-Kfiled by ClubCorp Holdings, Inc. on February 13, 2014)
10.8
Amendment No. 1, dated as of November 16, 2012, to the Credit Agreement dated as of November 30, 2010 among CCA Club Operations Holdings, LLC, ClubCorpClub Operations, Inc. as Borrower, Citicorp North America, Inc. as Administrative Agent, Swing Line Lender and L/C Issuer, the other lenders party thereto andCitigroup Global Markets Inc. as Sole Arranger and Sole Bookrunner (Incorporated by reference to Exhibit 10.1 on Form 8-K filed by ClubCorp Club Operations, Inc.on November 16, 2012)
10.9
Joinder Agreement, dated as of January 16, 2013, by and between ClubCorp NV I, LLC, a Nevada limited liability company; ClubCorp NV II, LLC, a Nevada limitedliability company; ClubCorp NV III, LLC, a Nevada limited liability company; ClubCorp NV IV, LLC, a Nevada limited liability company; and ClubCorp NV V, LLC,a Nevada limited liability company and Citicorp North America, Inc., as administrative agent and collateral agent (Incorporated by reference to Exhibit 10.1 on Form 8-K filed by ClubCorp Club Operations, Inc. on January 22, 2013)
10.10
Pledge Amendment, dated as of January 16, 2013, by and between ClubCorp USA, Inc. and Citicorp North America, Inc., as administrative agent and collateral agent(Incorporated by reference to Exhibit 10.2 on Form 8-K filed by ClubCorp Club Operations, Inc. on January 22, 2013)
10.11
Amendment No. 2, dated as of July 24, 2013, to the Credit Agreement dated as of November 30, 2010 among CCA Club Operations Holdings, LLC, ClubCorp ClubOperations, Inc. as Borrower, Citicorp North America, Inc. as Administrative Agent, Swing Line Lender and L/C Issuer, the other lenders party thereto and CitigroupGlobal Markets Inc. as Sole Arranger and Sole Bookrunner (Incorporated by reference to Exhibit 10.3 on Form 10‑Q filed by ClubCorp Club Operations, Inc. onJuly 26, 2013)
10.12
Amendment No. 3, dated as of August 30, 2013, to the Credit Agreement dated as of November 30, 2010 among CCA Club Operations Holdings, LLC, ClubCorp ClubOperations, Inc. as Borrower, Citicorp North America, Inc. as Administrative Agent, Swing Line Lender and L/C Issuer, the other lenders party thereto and CitigroupGlobal Markets Inc. as Sole Arranger and Sole Bookrunner. (Incorporated by reference to Exhibit 10.18 on Form 10-K filed by ClubCorp Holdings, Inc. on March 21,2014)
10.13 † Form of Restricted Stock Agreement (Incorporated by reference to Exhibit 10.17 to Amendment No. 1 to the Form S-1 filed by ClubCorp Holdings, Inc. on August 6,2013)
10.14 † Form of Nonqualified Stock Option Agreement (Incorporated by reference to Exhibit 10.18 to Amendment No. 1 to the Form S-1 filed by ClubCorp Holdings, Inc. onAugust 6, 2013)
10.15
Form of Registration Rights Agreement between ClubCorp Holdings, Inc. and certain of its stockholders (Incorporated by reference to Exhibit 10.19 to Amendment No.1 to the Form S-1 filed by ClubCorp Holdings, Inc. on August 6, 2013)
10.16
Amendment No. 4, dated as of February 21, 2014, to the Credit Agreement dated as of November 30, 2010 among CCA Club Operations Holdings, LLC, ClubCorpClub Operations, Inc. as Borrower, Citicorp North America, Inc. as Administrative Agent, Swing Line Lender and L/C Issuer, the other lenders party thereto andCitigroup Global Markets Inc. as Sole Arranger and Sole Bookrunner. (Incorporated by reference to Exhibit 10.22 on Form 10-K filed by ClubCorp Holdings, Inc. onMarch 21, 2014)
10.17 † 2014 Short Term Incentive Plan (Incorporated by reference to Exhibit 10.23 on Form 10-K filed by ClubCorp Holdings, Inc. on March 21, 2014)10.18
Joinder Agreement, dated as of March 21, 2014, by and between ClubCorp NV VI, LLC, a Nevada limited liability company; ClubCorp NV VII, LLC, a Nevada limitedliability company; ClubCorp NV VIII, LLC, a Nevada limited liability company; ClubCorp NV IX, LLC, a Nevada limited liability company; and ClubCorp NV X,LLC, a Nevada limited liability company and Citicorp North America, Inc., as administrative agent and collateral agent (Incorporated by reference to Exhibit 10.23 onForm 10-K filed by ClubCorp Holdings, Inc. on March 21, 2014)
10.19
Pledge Amendment, dated as of March 21, 2014, by and between ClubCorp USA, Inc. and Citicorp North America, Inc., as administrative agent and collateral agent(Incorporated by reference to Exhibit 10.25 on Form 10-K filed by ClubCorp Holdings, Inc. on March 21, 2014)
10.20
Amendment No. 5, dated as of April 7, 2014, to the Credit Agreement dated as of November 30, 2010 among CCA Club Operations Holdings, LLC, ClubCorp ClubOperations, Inc. as Borrower, Citicorp North America, Inc. as Administrative Agent, Swing Line Lender and L/C Issuer, the other lenders party thereto and CitigroupGlobal Markets Inc. as Sole Arranger and Sole Bookrunner (Incorporated by reference to Exhibit 10.1 on Form 8-K filed by ClubCorp Holdings, Inc. on April 11, 2014)
10.21
Amendment No. 6, dated as of September 30, 2014, to the Credit Agreement dated as of November 30, 2010 among CCA Club Operations Holdings, LLC, ClubCorpClub Operations, Inc. as Borrower, Citicorp North America, Inc. as Administrative Agent, Swing Line Lender and L/C Issuer, the other lenders party thereto andCitigroup Global Markets Inc. as Sole Arranger and Sole Bookrunner (Incorporated by reference to Exhibit 10.1 on Form 8-K filed by ClubCorp Holdings, Inc. onOctober 3, 2014)
10.22
Joinder Agreement, dated as of September 30, 2014, by ClubCorp, Inc., a Delaware corporation (the "Borrower") and the Affiliates of the Borrower from time to timeparty thereto as Grantors in favor of Citicorp North America, Inc., as administrative agent and collateral agent for the Secured Parties referred to therein (Incorporatedby reference to Exhibit 10.2 on Form 8-K filed by ClubCorp Holdings, Inc. on October 3, 2014)
10.23
Pledge Agreement, dated as of September 30, 2014, by ClubCorp, Inc., a Delaware corporation (the "Borrower") the undersigned Grantor and the other Affiliates of theBorrower from time to time party thereto as Grantors in favor of Citicorp North America, Inc., as administrative agent and collateral agent for the Secured Partiesreferred to therein (Incorporated by reference to Exhibit 10.3 on Form 8-K filed by ClubCorp Holdings, Inc. on October 3, 2014)
10.24
Equity Purchase Agreement by and among ClubCorp USA, Inc., Sequoia Golf Holdings LLC, Parthenon-Sequoia LTD., Parthenon Investors II, L.P., J&R Founders'Fund II, L.P., PCIP Investors and The Other Members of Sequoia Golf Holdings LLC, dated as of August 13, 2014 (Incorporated by reference to Exhibit 10.5 onForm 10‑Q filed by ClubCorp Holdings, Inc. on October 16, 2014)
10.25 † 2015 Short Term Incentive Plan (Incorporated by reference to Exhibit 10.26 on Form 10-K filed by ClubCorp Holdings, Inc. on March 12, 2015)10.26 † Form of Amended Performance Restricted Stock Unit Agreement under ClubCorp Holdings, Inc. 2012 Stock Award Plan (Incorporated by reference to Exhibit 10.2 on
Form 8-K filed by ClubCorp Holdings, Inc. on February 6, 2015)
10.27 † Form of Amended and Restated Performance Restricted Stock Unit Agreement for awards granted on February 7, 2014 under ClubCorp Holdings, Inc. 2012 StockAward Plan (Incorporated by reference to Exhibit 10.28 on Form 10-K filed by ClubCorp Holdings, Inc. on March 12, 2015)
10.28 † Form of Amended Performance Restricted Stock Unit Agreement under ClubCorp Holdings, Inc. 2012 Stock Award Plan (Incorporated by reference to Exhibit 10.2 onForm 8-K filed by ClubCorp Holdings, Inc. on February 6, 2015)
10.29 † Form of Amended and Restated Performance Restricted Stock Unit Agreement for awards granted on February 7, 2014 under ClubCorp Holdings, Inc. 2012 StockAward Plan (Incorporated by reference to Exhibit 10.28 on Form 10-K filed by ClubCorp Holdings, Inc. on March 12, 2015)
10.30
Amendment No. 7, dated as of May 28, 2015, to the Credit Agreement dated as of November 30, 2010 among CCA Club Operations Holdings, LLC, ClubCorp ClubOperations, Inc. as Borrower, Citicorp North America, Inc. as Administrative Agent, Swing Line Lender and L/C Issuer, the other lenders party thereto and Citigroup Global Markets Inc. as Sole Arranger and Sole Bookrunner (Incorporated by reference to Exhibit 10.1 on Form 8-K filed by ClubCorp Holdings,Inc. on May 28, 2015)
10.31
Amendment No. 8, dated as of December 15, 2015, to the Credit Agreement dated as of November 30, 2010 among CCA Club Operations Holdings, LLC, ClubCorpClub Operations, Inc. as Borrower, Citicorp North America, Inc. as Administrative Agent, Swing Line Lender and L/C Issuer, the other lenders party thereto and Citigroup Global Markets Inc. as Sole Arranger and Sole Bookrunner (Incorporated by reference to Exhibit 10.1 on Form 8-K filed by ClubCorp Holdings,Inc. on December 15, 2015)
10.32 † Severance Payment and Release Agreement, dated January 7, 2016, between James Walters and ClubCorp USA, Inc., an indirect subsidiary of ClubCorp Holdings, Inc.(Incorporated by reference to Exhibit 10.1 on Form 8-K filed by ClubCorp Holdings, Inc. on January 8, 2016)
10.33
Amendment No. 9, dated as of January 26, 2016, to the Credit Agreement dated as of November 30, 2010 among CCA Club Operations Holdings, LLC, ClubCorp ClubOperations, Inc. as Borrower, Citicorp North America, Inc. as Administrative Agent, Swing Line Lender and L/C Issuer, the other lenders party thereto and Citigroup Global Markets Inc. as Sole Arranger and Sole Bookrunner (Incorporated by reference to Exhibit 10.1 on Form 8-K filed by ClubCorp Holdings,Inc. on January 26, 2016)
10.34 † Form of Adjusted EBITDA-Based Performance Restricted Stock Unit Agreement under ClubCorp Holdings, Inc. 2012 Stock Award Plan (Incorporated by reference toExhibit 10.34 on Form 10-K filed by ClubCorp Holdings, Inc. on February 29, 2016)
10.35 † 2016 Short Term Incentive Plan (Incorporated by reference to Exhibit 10.35 on Form 10-K filed by ClubCorp Holdings, Inc. on February 29, 2016)10.36 † Form of Adjusted EBITDA-Based Performance Restricted Stock Unit Agreement under ClubCorp Holdings, Inc. 2012 Stock Award Plan (Incorporated by reference to
Exhibit 10.36 on Form 10-K/A filed by ClubCorp Holdings, Inc. on March 30, 2016)10.37
Amendment No. 10, dated as of September 30, 2016, to the Credit Agreement dated as of November 30, 2010 among CCA Club Operations Holdings, LLC, ClubCorpClub Operations, Inc. as Borrower, Citicorp North America, Inc. as Administrative Agent, Swing Line Lender and L/C Issuer, the other lenders party thereto andCitigroup Global Markets Inc. as Sole Arranger and Sole Bookrunner. (Incorporated by reference to Exhibit 10.1 on Form 10-Q filed by ClubCorp Holdings, Inc. onOctober 13, 2016)
10.38 † Change in Control Severance Agreement, dated as of January 24, 2017, between Eric L. Affeldt and ClubCorp Holdings, Inc. (Incorporated by reference to Exhibit10.38 on Form 10-K filed by ClubCorp Holdings, Inc. on February 27, 2017)
10.39 † Change in Control Severance Agreement, dated as of January 24, 2017, between Curtis D. McClellan and ClubCorp Holdings, Inc. (Incorporated by reference to Exhibit10.39 on Form 10-K filed by ClubCorp Holdings, Inc. on February 27, 2017)
10.40 † Change in Control Severance Agreement, dated as of January 24, 2017, between Mark A. Burnett and ClubCorp Holdings, Inc. (Incorporated by reference to Exhibit10.40 on Form 10-K filed by ClubCorp Holdings, Inc. on February 27, 2017)
10.41 † Change in Control Severance Agreement, dated as of January 24, 2017, between Ingrid, J. Keiser and ClubCorp Holdings, Inc. (Incorporated by reference to Exhibit10.41 on Form 10-K filed by ClubCorp Holdings, Inc. on February 27, 2017)
10.42 † Form of Performance Restricted Stock Unit Agreement under ClubCorp Holdings, Inc. 2012 Stock Award Plan (Incorporated by reference to Exhibit 10.1 on Form 8-Kfiled by ClubCorp Holdings, Inc. on February 10, 2017)
10.43 † 2017 Short Term Incentive Plan11 Statement of Computation of Per Share Earnings (Included in Part II, Item 8: “Financial Statements” of the annual report on Form 10-K filed on February 27, 2017)21 Subsidiaries of the Registrant (Incorporated by reference to Exhibit 21 on Form 10-K filed by ClubCorp Holdings, Inc. on February 27, 2017)
23.1 Consent of Deloitte & Touche LLP (Incorporated by reference to Exhibit 23.1 on Form 10-K filed by ClubCorp Holdings, Inc. on February 27, 2017)23.2 Consent of KPMG LLP relating to the financial statements of Avendra, LLC31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to §302 of the Sarbanes-Oxley Actof 2002
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to §302 of the Sarbanes-Oxley Actof 2002
32.1 Certifications of Chief Executive Officer pursuant to 18 U.S.C. §1350*32.2 Certifications of Chief Financial Officer pursuant to 18 U.S.C. §1350*99.1 Financial statements of Avendra, LLC for the fiscal year ended December 31, 2016 and December 31, 201599.2 Financial statements of Avendra, LLC for the fiscal years ended December 31, 2014 and December 31, 2013101
The following information from the Company's annual report on Form 10-K for the fiscal year ended December 27, 2016 formatted in eXtensible Business ReportingLanguage: (i) Consolidated statements of operations as of December 27, 2016, December 29, 2015 and December 30, 2014; (ii) Consolidated statements ofcomprehensive income (loss) as of December 27, 2016, December 29, 2015 and December 30, 2014; (iii) Consolidated balance sheets as of December 27, 2016 andDecember 29, 2015; (iv) Consolidated statements of cash flows as of December 27, 2016, December 29, 2015 and December 30, 2014; (v) Consolidated statements ofchanges in equity as of December 27, 2016, December 29, 2015 and December 30, 2014 and (vi) Notes to the consolidated financial statements. (Incorporated byreference to Exhibit 101 on Form 10-K filed by ClubCorp Holdings, Inc. on February 27, 2017)
______________________________
* Exhibit is furnished rather than filed, and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.
† Indicates management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 27, 2017
/s/ Eric L. Affeldt
Eric L. Affeldt
Chief Executive Officer and Director (Principal Executive Officer)
Date: March 27, 2017
/s/ Curtis D. McClellan
Curtis D. McClellan
Chief Financial Officer and Treasurer (Principal Financial Officer)
Date: March 27, 2017
/s/ Todd M. Dupuis
Todd M. Dupuis
Chief Accounting Officer (Principal Accounting Officer)
Date: March 27, 2017
/s/ John A. Beckert
John A. Beckert, Director
Date: March 27, 2017
/s/ Douglas H. Brooks
Douglas H. Brooks, Director
Date: March 27, 2017
/s/ Louis J. Grabowsky
Louis J. Grabowsky, Director
Date: March 27, 2017
/s/ Janet E. Grove
Janet E. Grove, Director
Date: March 27, 2017
/s/ Margaret M. Spellings
Margaret M. Spellings, Director
Date: March 27, 2017
/s/ William E. Sullivan
William E. Sullivan, Director
Date: March 27, 2017
/s/ Arthur J. Lamb, III
Arthur J. Lamb, III, Director
2017 Short Term Incentive Plan
IntroductionCongratulations on your participation in the 2017 Short Term Incentive Plan ("Plan"). The purpose of this Plan is to provide a mechanism to meaningfullyreward you for contributing to the Company's success.
This Plan has three components:
• Company Adjusted EBITDA Performance as compared to Company Adjusted EBITDA as established in the Budget;
• Company Dues Revenue Performance as compared to Company Dues Revenue as established in the Budget; and
• Discretionary.
By working to impact Company Adjusted EBITDA Performance and Company Dues Revenue Performance, you contribute to the success of the Companyand your professional and financial success.
Amounts which may be payable under the Plan are divided among the three components as follows:
Incentive Plan Components Plan Component Percentages
Company Adjusted EBITDA Performance 40%Dues Revenue Performance 20%Discretionary 40%
Unless otherwise determined by the Committee at its sole discretion, no amount shall be payable under the Plan in the event that the Company AdjustedEBITDA Performance for 2017 is less than the Company Adjusted EBITDA Minimum.
Incentive Plan Components
Company Adjusted EBITDA PerformanceThis Plan component is based on the Company Adjusted EBITDA Performance results compared to the Company Adjusted EBITDA as established in theBudget. Subject to the terms and conditions contained herein, in the event that Company Adjusted EBITDA Performance for a Participant is at least 95% ofBudget, the Participant shall be eligible to receive this Plan component percentage based on the Participant Target Incentive in accordance with thefollowing table:
Company Adjusted EBITDA Performance % of Participant Target IncentiveLess than 95% 0%
95% 50%96% 60%97% 70%98% 80%99% 90%100% 100%101% 107%102% 113%103% 120%104% 127%
105% 133%106% 140%107% 147%108% 153%109% 160%110% 167%111% 173%112% 180%113% 187%114% 193%115% 200%116% 200%117% 200%118% 200%119% 200%120% 200%121% 200%122% 200%123% 200%124% 200%125% 200%126% 200%127% 200%128% 200%129% 200%
130% or greater 200%
Company Dues Revenue PerformanceThis Plan component is based on the Company Dues Revenue Performance results compared to the Company Dues Revenue as established in theBudget. Subject to the terms and conditions contained herein, in the event that Company Dues Revenue Performance for a Participant is at least 95% ofBudget, the Participant shall be eligible to receive this Plan component percentage based on the Participant Target Incentive in accordance with thefollowing table:
Company Dues Revenue Performance % of Participant Target IncentiveLess than 95% 0%
95% 50%96% 60%97% 70%98% 80%99% 90%100% 100%101% 107%102% 113%103% 120%104% 127%105% 133%106% 140%107% 147%108% 153%109% 160%110% 167%111% 173%112% 180%113% 187%114% 193%115% 200%116% 200%117% 200%118% 200%119% 200%120% 200%121% 200%
122% 200%123% 200%124% 200%125% 200%126% 200%127% 200%128% 200%129% 200%
130% or greater 200%
For Example, a Participant would be eligible for an Award for this Plan component based on the following details: Actual Eligible Earnings = $250,000 Participant Target Incentive = up to 50% (50% of Participant Maximum Incentive) of Actual Eligible Earnings at 100% Budget achievementParticipant Maximum Incentive = 100% ($250,000) of Actual Eligible Earnings Plan components = Company Adjusted EBITDA Performance = 40%, Company Dues Revenue Performance = 20% & Discretionary = 40% Company Adjusted EBITDA Minimum is satisfied Company Adjusted EBITDA Performance for 2017 = 100% Budget achievement Earned Company Adjusted EBITDA Performance component = $50,000 ($250,000 x 50% Participant Target Incentive x 40% Company Adjusted EBITDAPerformance component percentage x 100% [for achieving 100% of Company Adjusted EBITDA Performance])Company Dues Revenue Performance for 2017 = 100% Budget achievement Earned Company Dues Revenue Performance component = $25,000 ($250,000 x 50% Participant Target Incentive x 20% Company Dues RevenuePerformance component percentage x 100% [for achieving 100% of Company Dues Revenue Performance])
DiscretionaryThis Plan component is based upon the sole discretion of the Committee which may take into consideration personal performance in determining whatAward is made for 2017.
General Plan Policies & Procedures
Eligibility• Employee Partners can be Participants as approved by the Committee to be a Participant. A Participant’s Incentive opportunity shall be set forth in
the Participant’s offer letter which may be modified from time-to-time by the Committee at its sole discretion.
• A Participant must be employed by the Company for at least 3 months to be eligible to receive an Award. An Employee Partner who is otherwiseeligible but who has been employed for less than all of 2017 will be eligible for an Award based upon Actual Eligible Earnings for the CompanyAdjusted EBITDA Performance and Company Dues Revenue Performance for the full 2017 fiscal year.
• If a Participant is newly hired, promoted or transferred to a new incentive eligible position during the year, any Award will be calculated based on theActual Eligible Earnings earned in each eligible position.
• A Participant’s termination of employment (voluntary or involuntary) for any reason before the date on which an Award is paid by the Company willresult in forfeiture of the Award. In addition, any Participant who is reassigned or demoted to another position that is not eligible for this Plan duringthe Company’s 2017 fiscal year will no longer be eligible for an Award pursuant to this Plan.
• Awards will be calculated based on the Actual Eligible Earnings for the applicable incentive eligible position of each Participant for the CompanyAdjusted EBITDA Performance and Company Dues Revenue Performance for the full 2017 fiscal year.
AwardsRegardless of whether any performance factors or measures are met, any amounts which may be awarded at the Committee’s discretion will be subject tothe issuance of the financial audit for the Company’s 2017 fiscal year. The Committee shall have the discretion of whether any amount may be payable afterthe Committee has determined whether the Company Adjusted EBITDA Minimum has been satisfied. No amount shall be payable if the Company AdjustedEBITDA Minimum is not satisfied. In all events, any amounts which may be paid are subject to applicable withholding and other payroll taxes. Any Awardwill be automatically forfeited if the Participant is not employed at the time of payment. Notwithstanding the foregoing, a Participant who is on a Family andMedical Leave Act leave or Uniformed Services Employment and Reemployment Rights Act leave on the date of payment of the Award shall be treated asemployed on said date.
AdministrationThe Committee shall have sole authority to determine whether any amount will be awarded under this Plan or under any Award issued under this Plan. TheCommittee reserves the right to reduce or eliminate this Plan and any Award, including the determination to cancel an Award that may be grantedhereunder at any time at its sole discretion. All decisions of the Committee shall be final and conclusive and without liability to any person. The Committeemay decide, at its sole discretion, that no amount may be paid hereunder should the Committee determine that the circumstances warrant either as a resultof a Participant's performance or other actions, or, with respect to the overall condition (financial or otherwise) of the Company. No amount shall be setaside in a trust or otherwise segregated to fund the payment of any Award hereunder.
Adjustments Upon Certain EventsThe Company Adjusted EBITDA Minimum is established with respect to the entities comprising the Company Group and the Company Adjusted EBITDAMinimum must be met by such Company Group. In the event any new properties or if entities are acquired or added to the Company Group after the firstday of the 2017 Fiscal year, the Committee may adjust the Budget with respect to each such added property or entities within 90 days of the closing of suchacquisition in order to adjust the Company Adjusted EBITDA Minimum for the budgeted performance of such properties/entities. The Committee may, at itssole discretion and without liability to any person, adjust the Company Adjusted EBITDA Minimum to consider any new or added entities or Clubs, if any, asit deems appropriate at its sole discretion, including with respect to establishing performance factors and measures with respect to such addition, providedsuch performance features or measures are established within 90 days of the addition.
No Right to Employment or Awards; No Transferability of AwardsInformation contained in this Plan and any other communications made by management do not constitute an implied or expressed contract or bindingagreement between the Company and any Participant. The granting of an Award shall impose no obligation on the Company or any Subsidiary to continuethe employment of a Participant and shall not lessen or affect the Company's or Subsidiary's right to terminate the employment of such Participant. NoParticipant or other person shall have any claim to any term of employment by reason of any Award or this Plan and all employment shall continue to beemployment at will. No Participant or other person shall have any claim to be granted any Award or be vested in any Award at any time, and there is noobligation for uniformity of treatment of Participants. The terms and conditions of Awards and the Committee's determinations and interpretations withrespect thereto need not be the same with respect to each Participant (whether or not such Participants are similarly situated). Any Award shall be personalto the Participant and is not assignable or subject to voluntary or involuntary alienation, sale or transfer by the Participant to any beneficiary or otherwise.
Amendments; Termination; InterpretationNotwithstanding that the Company Adjusted EBITDA Minimum may have been met, the Committee reserves the right, at its sole discretion, to change,modify, alter or eliminate this Plan and any Award or payment which may be paid at any time, regardless of whether any performance factors or measuresare met. Without limiting the generality of the foregoing, to the extent applicable, notwithstanding anything herein to the contrary, this Plan and any Awardsgranted hereunder shall be interpreted in accordance with the laws of the State of Texas, and, if applicable, Section 409A of the Internal Revenue Code andDepartment of Treasury regulations and other interpretative guidance issued thereunder, including without limitation any such regulations or other guidancethat may be issued (“Section 409A”). Notwithstanding any provision herein to the contrary, in the event Section 409A is applicable to any Award issuedhereunder and the Committee determines that any amounts which may be paid hereunder will be taxable to a Participant and not in compliance withSection 409A prior to payment to such Participant of such amount, the Company may (i) adopt such amendments and appropriate policies and procedures,including amendments and policies with retroactive effect, that the Committee determines necessary or appropriate to preserve the intended tax treatmentof any Award paid hereunder and/or (ii) take such other actions as the Committee determines necessary or appropriate to comply with the requirements ofSection 409A.
This document supersedes all prior incentive compensation plans or agreements regarding the subject matter of this Plan, each of which is of no furtherforce and effect.
Important Terminology"Actual Eligible Earnings" means base pay, vacation, jury duty and other categories if part of regular wages (e.g. service charge pay outs) paid during theincentive period for the eligible positions. It does not include incentive/bonus awards, tips, discretionary bonuses, commissions, relocation or other pay notconsidered as part of regular wages.
"Adjusted EBITDA" means, on a consolidated basis, earnings before interest, taxes, depreciation, and amortization and may be adjusted further by theCommittee at its sole discretion for certain items, including without limitation impairments and write-offs, gains or losses due to divested operations, othersimilar events or other non-recurring events.
“Adjusted EBITDA Performance" means the Adjusted EBITDA achieved by the Company Group as determined by the Committee. Adjusted EBITDAPerformance will be based on pre-bonus expenses.
"Award" means the amount awarded to a Participant based upon the Actual Eligible Earnings and the amounts calculated under this Plan which may, at theCommittee’s discretion, be paid to such Participant. Awards may contain such other terms and conditions as determined by the Committee at its solediscretion.
“Base Dues” means , on a consolidated basis, the revenue generated from the periodic payment of dues for all membership types excluding “O.N.E.”,“Signature Gold” and other upgrades as determined by the Committee.
"Budget" means the 2017 budgeted amount for Adjusted EBITDA as determined by the Committee for the Company Group.
"Club" means a business, sports, alumni, golf or country Club of the Company or its Subsidiaries as determined by the Committee.
"Committee" means the Compensation Committee of the Company as designated by the Board of Directors of the Company.
"Company" means ClubCorp Club Holdings, Inc., a Nevada corporation.
“Company Adjusted EBITDA Minimum” means 95% of EBITDA Budget for the Company Group. Such amount shall be subject to adjustment as determinedby the Committee, as set forth under “Adjustments Upon Certain Events”.
“Company Adjusted EBITDA Performance” means the aggregate Adjusted EBITDA for the Company Group as determined by the Committee.
“Company Group” shall mean the entities included in the Company’s Adjusted EBITDA and Company Dues Revenue results, on a consolidated basis, andwhich were part of the Company Group for the entire fiscal year of the Company.
“Dues Revenue” means , on a consolidated basis, Base Dues net of contra, write offs and other adjustments as stated on the statement of operations.
“Dues Revenue Performance” means the actual Dues Revenue results relative to the Budget for the Company Group as determined by the Committee.
"Participant" means an Employee Partner employed by the Company or a Subsidiary who is designated by the Committee to be eligible to receive anAward.
“Participant Incentive” means the percentage of Actual Eligible Earnings the Participant receives in an Award.
“Participant Maximum Incentive” means the maximum percentage of Actual Eligible Earnings the Participant may receive in an Award.
“Participant Target Incentive” means up to 50% of the Participant Maximum Incentive at 100% of Budget achievement.
“Subsidiary" means a direct or indirect subsidiary of the Company as determined by the Committee.
2017 SHORT TERM INCENTIVE PLAN RECEIPT
By my signature, I acknowledge that:
I have received a copy of the 2017 Short Term Incentive Plan document and understand that I am subject to the terms and conditions of the 2017 Short Term IncentivePlan. I further understand that it is my responsibility to read the 2017 Short Term Incentive Plan and ask my Manager or Vice President of People Strategy any questionsthat I may have.
_____________________________________ _______________________________
Name of Employee Partner (please print) Name of Department
_____________________________________ ________________________________
Signature of Employee Partner Date Signed
cc: Employee file
4821-6590-1101v.1 55899-1 2/3/2017
(Corporate-EVP) Page 1
Consent of Independent Auditors
The Board of Managers Avendra, LLC:
We consent to the incorporation by reference in the registration statement (No. 333-191335) on Form S-8 of ClubCorp Holdings, Inc. of our report dated March 24, 2017,with respect to the consolidated balance sheets of Avendra, LLC as of December 31, 2016 and 2015, and the related consolidated statements of operations andcomprehensive income, members’ deficit, and cash flows for the years then ended, which report appears in the December 27, 2016 annual report amendment no. 1 on Form10‑K/A of ClubCorp Holdings, Inc.
(signed) KPMG LLP
McLean, Virginia March 24, 2017
Exhibit 31.1
CERTIFICATION OF CEO PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14(A) OR15D-14(A) AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Eric L. Affeldt, certify that: 1. I have reviewed this annual report on Form 10-K/A of ClubCorp Holdings, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstancesunder which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations andcash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating tothe registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committeeof the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’sability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 27, 2017
/s/ Eric L. Affeldt
Eric L. Affeldt
Chief Executive Officer and Director(principal executive officer)
Exhibit 31.2
CERTIFICATION OF CFO PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14(A) OR15D-14(A) AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Curtis D. McClellan, certify that: 1. I have reviewed this annual report on Form 10-K/A of ClubCorp Holdings, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstancesunder which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations andcash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating tothe registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committeeof the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’sability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 27, 2017
/s/ Curtis D. McClellan
Curtis D. McClellan
Chief Financial Officer and Treasurer(principal financial officer)
Exhibit 32.1
CERTIFICATION OF CEO PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the annual report on Form 10-K/A of ClubCorp Holdings, Inc. (the “Company”) for the fiscal year ended December 27, 2016 , as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), I, Eric L. Affeldt, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods presented.
/s/ Eric L. Affeldt
Eric L. Affeldt
Chief Executive Officer and Director (principal executive officer)
Date: March 27, 2017
A signed original of this written statement required by Section 906 has been provided to ClubCorp Holdings, Inc. and will be retained by ClubCorp Holdings, Inc. and furnished to theSecurities and Exchange Commission or its staff upon request.
This Certification is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the registrant under the Securities Act of 1933,as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing.
Exhibit 32.2
CERTIFICATION OF CFO PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the annual report on Form 10-K/A of ClubCorp Holdings, Inc. (the “Company”) for the fiscal year ended December 27, 2016 , as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), I, Curtis D. McClellan, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods presented.
/s/ Curtis D. McClellan
Curtis D. McClellan
Chief Financial Officer and Treasurer(principal financial officer)
Date: March 27, 2017
A signed original of this written statement required by Section 906 has been provided to ClubCorp Holdings, Inc. and will be retained by ClubCorp Holdings, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.
This Certification is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the registrant under the Securities Act of1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Report), irrespective of any general incorporation language contained in suchfiling.
AVENDRA, LLC AND SUBSIDIARIES Consolidated Financial Statements December 31, 2016 and 2015 (With Independent Auditors’ Report Thereon)
KPMG LLP is a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG LLP 1676 International Drive McLean, VA 22102 Independent Auditors’ Report The Board of Managers Avendra, LLC: We have audited the accompanying consolidated financial statements of Avendra, LLC and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive income, members’ deficit, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits 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 consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Avendra, LLC and its subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended in accordance with U.S. generally accepted accounting principles. McLean, Virginia March 24, 2017
AVENDRA, LLC AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2016 and 2015 Assets 2016 2015 Current assets: Cash and cash equivalents $ 14,266,468 12,992,527 Accounts receivable, net 58,120,417 58,250,648 Restricted investments 1,050,954 1,760,492 Prepaid expenses and other current assets 2,732,524 1,988,723 Total current assets 76,170,363 74,992,390 Restricted investments, net of current portion 22,627,766 20,159,581 Property and equipment, net 6,902,637 8,189,672 Goodwill and intangible assets, net 20,160,887 20,761,799 Other assets 310,942 182,147 Total assets $ 126,172,595 124,285,589 Liabilities and Members’ Deficit Current liabilities: Note payable $ 6,861,111 4,750,000 Accounts payable and accrued expenses 4,801,607 6,048,221 Accrued compensation 8,673,606 8,231,503 Due to customers 35,651,809 38,323,612 Accrued incentive compensation 34,747,762 28,698,489 Total current liabilities 90,735,895 86,051,825 Note payable, net of current portion 17,416,667 23,750,000 Other long-term liabilities 30,186,994 29,275,018 Total liabilities 138,339,556 139,076,843 Commitments and contingencies Members’ deficit (12,166,961) (14,791,254) Total liabilities and members’ deficit $ 126,172,595 124,285,589 See accompanying notes to consolidated financial statements. 2
AVENDRA, LLC AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income Years ended December 31, 2016 and 2015 2016 2015 Revenue $ 127,318,110 114,425,772 Operating expenses: General and administrative 64,174,129 57,106,145 Depreciation and amortization 2,859,780 1,346,655 Total operating expenses 67,033,909 58,452,800 Income from operations 60,284,201 55,972,972 Other gain/(loss), net 937,709 (351,817) Income before income taxes 61,221,910 55,621,155 Provision for income taxes 552,006 95,559 Net income $ 60,669,904 55,525,596 Comprehensive income: Net income $ 60,669,904 55,525,596 Other comprehensive loss: Foreign currency translation adjustment (45,611) (412,464) Comprehensive income $ 60,624,293 55,113,132 See accompanying notes to consolidated financial statements. 3
AVENDRA, LLC AND SUBSIDIARIES Consolidated Statements of Members’ Deficit Years ended December 31, 2016 and 2015 Accumulated other Members’ Accumulated comprehensive capital deficit Sub-total income (loss) Total Balance at December 31, 2014 $ 6,974,743 (25,564,810) (18,590,067) (255,927) (18,845,994) Member distributions - (51,000,000) (51,000,000) - (51,000,000) Interest on loan due to AHI - (58,392) (58,392) - (58,392) Other comprehensive income (loss): Foreign currency translation adjustment - - - (412,464) (412,464) Net income - 55,525,596 55,525,596 - 55,525,596 Balance at December 31, 2015 6,974,743 (21,097,606) (14,122,863) (668,391) (14,791,254) Member distributions (58,000,000) (58,000,000) (58,000,000) Other comprehensive loss: Foreign currency translation adjustment - (45,611) (45,611) Net income 60,669,904 60,669,904 60,669,904 Balance at December 31, 2016 $ 6,974,743 (18,427,702) (11,452,959) (714,002) (12,166,961) See accompanying notes to consolidated financial statements. 4
AVENDRA, LLC AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2016 and 2015 2016 2015 Cash flows from operating activities: Net income $ 60,669,904 55,525,596 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,859,780 1,346,655 Other, net 48,549 19,086 Adjustments to provision for doubtful accounts 44,359 140,871 Unrealized (gain)/loss from investment in the deferred compensation plan (542,300) 1,532,263 Changes in assets and liabilities: Accounts receivable 85,514 (10,130,582) Restricted investments, prepaid expenses and other assets (2,088,944) (3,458,197) Accounts payable, accrued expenses, and accrued incentive compensation 5,199,510 (2,861,230) Other liabilities 911,976 3,285,400 Due to customers (2,671,803) 6,191,123 Net cash provided by operating activities 64,516,545 51,590,985 Cash flows from investing activities: Purchase of short-term held-to-maturity investments - (2,501,625) Maturities of short-term held-to-maturity investments - 12,003,500 Investment in BuyEfficient, less cash acquired - (25,452,910) Purchase of property and equipment (1,020,382) (919,331) Net cash used in investing activities (1,020,382) (16,870,366) Cash flows from financing activities: Payment on note to AHI - (2,513,700) Note payable (4,222,222) 28,500,000 Distributions to members (58,000,000) (51,000,000) Net cash used in financing activities (62,222,222) (25,013,700) Net increase in cash and cash equivalents 1,273,941 9,706,919 Cash and cash equivalents at beginning of year 12,992,527 3,285,608 Cash and cash equivalents at end of year $ 14,266,468 12,992,527 Supplemental cash flow information: Income taxes paid $ 544,088 214,217 Interest paid on loan to AHI - 63,700 See accompanying notes to consolidated financial statements. 5
AVENDRA, LLC AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2016 and 2015 6 (1) Summary of Significant Accounting Policies (a) Description of Business Avendra, LLC (Avendra or the Company) is a Delaware limited liability company under the terms of the Limited Liability Company Agreement of Avendra, LLC, as amended (the LLC Agreement). The Company is an independent hospitality procurement and supply chain organization that provides its customers with supply chain efficiencies and savings through aggregating purchasing volume, utilizing hospitality industry knowledge, and providing supply chain assurance services. The Company is 99.92% owned by a group of hotel and golf course management companies (the Founders) with the remaining 0.08% owned by current and former employees (collectively with the Founders referred to as Members). Avendra provides procurement services primarily for the hospitality industry throughout North America, Latin America, and the Caribbean. A large portion of the Company’s business is conducted with the Founders and their managed hotels and clubs (the Founder Properties). The Company has contracts and agreements with distributors and manufacturers covering the procurement of a broad range of merchandise and services. The Company’s customers are provided access to the pricing negotiated with the suppliers as part of these contracts. Except for the Company’s Avendra Replenishment, LLC subsidiary (Avendra Replenishment), the majority of the purchasing activities resulting from the Company’s contracts are conducted directly between the Company’s customers and the suppliers under terms negotiated by Avendra with those suppliers. The Company is not a direct party to these purchasing transactions and the Company does not maintain or purchase inventory. Avendra Replenishment was established to serve as an intermediary between the Company’s customers and certain suppliers for the procurement of operating equipment. Typically, these transactions are replacement equipment orders for individual hotels. In 2015, Avendra acquired BuyEfficient, LLC (BuyEfficient), a procurement service and eCommerce solution provider serving the hospitality industry, from Sunstone Hotel Investors, Inc. The acquisition allows the Company’s customers to leverage the purchasing power and service offerings of Avendra and BuyEfficient’s eCommerce technology platform. (b) Formation of the Company and Limitation on Liability Pursuant to the terms of the LLC agreement, nomember is personally liable for any debt, obligation, or liability of the Company. The LLC Agreement is perpetual in term, subject to the dissolution provisions provided in the LLC Agreement. The LLC Agreement provides certain preferences to the members in the event of dissolution, certain distributions of Company property, the incorporation of the Company, or an initial public offering, among other events. (c) Equity Transaction On November 30, 2010, Avendra Holdings, Inc. (AHI) redeemed its ownership in Avendra, LLC. AHI is owned by the Founders in proportions substantially equivalent to the Founders’ ownership in Avendra.
AVENDRA, LLC AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2016 and 2015 7 The sale of AHI’s ownership interest, for a total aggregate redemption price of $12,250,000, was payable in five equal installments on each anniversary of the agreement date commencing November 30, 2011 and ending November 30, 2015. In addition, interest on the principal amount accrued from the agreement date and was payable annually, in arrears, to AHI on each anniversary of the agreement date commencing November 30, 2011 at a fixed rate of 2.6% per annum. Due to the related party nature of the ownership of AHI and Avendra, the redemption amount and all interest associated with the note are reflected as a charge to equity. As of December 31, 2015, the note and interest were paid in full. In 2016, AHI’s Board of Directors and its Stockholders approved to dissolve AHI as the entity had not engaged in any meaningful business activity since the redemption. The Company filed a certificate of dissolution with the Delaware Secretary of State, satisfied any outstanding obligations, and distributed AHI’s remaining assets. (d) Principles of Consolidation The consolidated financial statements include the financial statements of Avendra, LLC and its three wholly owned subsidiaries, Avendra Canada, Inc., Avendra Replenishment, and BuyEfficient. All significant intercompany balances and transactions have been eliminated in consolidation. (e) Revenue Recognition The Company derives revenue from customers primarily in three forms: (1) service fees as a percentage of purchases made by the Company’s customers (Spend), with any supplier allowances in excess of negotiated fee amounts being returned to customers; or, (2) the retention of supplier allowances in lieu of a procurement fee, or (3) subsequent to the BuyEfficient acquisition, the Company derives an additional form of revenue from eCommerce fees as a percentage of customers’ Spend. The applicable form of revenue is delineated in the customer contracts. Revenue calculations are based on Spend. Revenue from service and eCommerce fees are recognized at the rate specified per customer contract in the period that Spend occurs. Revenue from allowances is recognized at the rate specified per product or service in each applicable supplier contract in the period that the associated Spend occurs. Spend information is based on reporting from suppliers. When Spend reports are not yet received, the Company estimates the Spend, allowances, and related revenue based on historical data orinformation provided by the supplier. The Company’s Avendra Replenishment subsidiary places orders on behalf of its customers, pays the supplier and assumes customer credit risk; however, the Company does not take title or possession of the related inventory, nor are any applicable product warranties the responsibility of Avendra. The Company applies a markup to the wholesale cost for each order and recognizes that markup as replenishment revenue when the related product is shipped to the customer from the vendor. Replenishment revenue is recognized net based on the mark-up. Certain suppliers prepay allowances in advance of completion of the related procurement process from which the allowances are derived. These prepayments are recorded as unearned allowances and recognized as revenue in the period in which the related purchases are made. The Company records these
AVENDRA, LLC AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2016 and 2015 8 amounts as unearned allowances in due to customers and other long-term liabilities in the accompanying consolidated balance sheets. Unearned allowances were approximately $657,000 and $650,000 for the years ended December 31, 2016 and 2015, respectively. (f) Cash and Cash Equivalents and Short-Term Investments The Company considers short-term, highly liquid investments with original maturities of three months or less to be cash equivalents. The Company’s internal investment policy is to maintain a weighted average maturity of U.S. Treasuries and GSE’s (Government-Sponsored Entities) of not more than 7.5 months. These short-term investments are classified as held-to-maturity securities and are reflected as current assets on the balance sheet. The purchases and maturities of these investments are presented gross in cash flow from investing activities. As of December 31, 2016 and 2015, the Company did not have any short-term investments. (g) Accounts Receivable Allowances are recognized and billed at the rate specified per product or service in each applicable supplier contract. Accounts receivable primarily represent billed and unbilled allowances due. Billed receivables are recorded at the invoiced amount. The majority of unbilled receivables represent amounts that were earned, but not invoiced at year end. Accounts receivable include certain amounts billed on behalf of customers whose service fees are based on a percentage of Spend. These amounts are excluded from revenue and a corresponding amount is reflected as a component of the due to customers’ liability. Accounts receivable from BuyEfficient consist primarily of eCommerce fees billed to customers based on a percentage of Spend through supplier contracts. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical and expected write-offs and based on customer and supplier specific circumstances. The Company reviews its allowance for doubtful accounts quarterly. Past due balances meeting certain criteria are reviewed individually for collectability. All other balances are reviewed on a pooled basis. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposurerelated to its customers. The Company also records a rebate realization reserve, which is the Company’s best estimate of the amount of probable adjustments based upon differences in allowance calculations between the Company and the supplier in the Company’s existing accounts receivable. Due to inherent complexities in the data accumulation, billing, and subsequent reconciliation processes, this reserve account adjusts aggregate receivables to the best estimate of net realizable value.
AVENDRA, LLC AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2016 and 2015 9 (h) Restricted Cash The Company records as restricted cash any cash that is restricted in its use by the Company’s executed contracts and is not immediately available for use. The Company did not have any restricted cash recorded on its balance sheet for the years ended December 31, 2016 and 2015. (i) Restricted Investments Total restricted investments were approximately $23,679,000 and $21,920,000 at December 31, 2016 and 2015, respectively. The restricted investments represent deferred compensation associated with the Unit Appreciation Right (UAR) program related to the Company’s cash dividends, in addition to salary and bonus deferrals by highly compensated employees (see note 6(b) and 6(c)). These amounts are invested in a range of funds including money market, bond, and equity mutual funds based on the employees’ elections. These investments are considered trading securities and are marked-to-market each month based on the change in the funds’ quoted market value. Any realized or unrealized gain/loss and any interest income are recognized in other gains/(losses) with an offsetting entry to employee costs, on the Company’s consolidated statements of operations and comprehensive income. These amounts are also recorded in restricted investments with an offsetting entry to accrued incentive compensation and other long-term liabilities on the Company’s consolidated balance sheets. For the year ended December 31, 2016, the Company recorded a net gain of approximately $1,118,000 and interest income of approximately $312,000, resulting in a net increase to employee cost of $1,430,000. For the year ended December 31, 2015, the Company recorded a net loss of approximately $588,000 and interest income of approximately $313,000, resulting in a net decrease to employee costs of approximately $275,000. (j) Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the following useful lives: Furniture and fixtures 5 years Computer equipment 3–5 years Computer software 5 years Leasehold improvements Shorter of useful life or remaining lease term (k) Goodwill The Company was formed in connection with the contribution of certain assets, which were recorded at fair value. As part of the transaction, the Company recorded goodwill representing the future economic benefits arising from otherassets acquired in a business combination that were not individually identified and separately recognized. The Company also recorded goodwill as part of its acquisition of BuyEfficient (see notes (7) and (8)).
AVENDRA, LLC AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2016 and 2015 10 The Company does not amortize goodwill; instead, it evaluates goodwill for impairment annually. In addition to the annual impairment evaluation, on an ongoing basis, the Company evaluates whether events or circumstances have occurred in the period subsequent to the annual impairment testing which indicate that it is more likely than not (i.e., more than 50%) an impairment loss has occurred. The Company has only one reporting unit; therefore, all goodwill is allocated to that one reporting unit. The Company performs its annual impairment testing as of December 31st by completing an assessment of qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. As of December 31, 2016, there have been no events up to the completion of the analysis or subsequent to the analysis that would indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying value. Total goodwill for the years ended December 31, 2016 and 2015 was $12,617,000 and $12,421,000, respectively, and is included in goodwill and intangible assets, net in the consolidated balance sheets. (l) Income Taxes The Company has elected limited liability company status and, as such, is not directly subject to U.S. federal and most state income taxes. Instead, the members are responsible for income taxes on their proportionate share of Avendra’s taxable income. Members are also entitled to a proportionate share of tax deductions and credits. Certain states do not recognize the limited liability company status, and accordingly, the Company is responsible for state income taxes in these states. Avendra Canada, Inc. is incorporated in Canada and is subject to taxes under Canadian tax regulations. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to uncertain tax positions in the provision for income taxes on the consolidated statements of operations and comprehensive income. The Company has assessed its tax positions as of December 31, 2016 and 2015. As of December 31, 2016 and 2015, the total amount accrued for uncertain tax positionsincluding interest and penalties is approximately $191,000 and $177,000, respectively, and is included in accounts payable and accrued expenses in the consolidated balance sheets. The provision for income taxes of approximately $552,000 and $95,600 for the years ended December 31, 2016 and 2015, respectively, relates primarily to those states which do not recognize the limited liability company status as well as amounts released for the Canadian deferred tax valuation allowance. There were no material deferred taxes as a result of these state income taxes; however, the Company has net operating loss carryforwards for Avendra Canada Inc. for the years ended December 31, 2016 and 2015, of approximately $227,000 and $930,000, respectively, in U.S. equivalents, which creates a deferred tax asset that expires on December 31, 2030. In the year ending December 31, 2015, the Company reversed part of its valuation allowance and recorded a matching reduction to its provision for income taxes of $55,000 to reflect the belief that results of operations in the future would only generate taxable income to realize part of the deferred tax asset. Due to increased revenue associated with a Member’s acquisition of a Canadian hotel chain, the Company
AVENDRA, LLC AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2016 and 2015 11 believes that results of future operations will generate sufficient taxable income to realize the full deferred tax asset. Accordingly, the Company reversed the remaining valuation allowance of $214,000 at December 31, 2016 and recorded the offsetting estimated utilization of the net operating loss. (m) Equity-Based Compensation Plans The Company has a unit appreciation rights (UAR) plan (see note 6(b)). The Company has elected to continue to apply the intrinsic-value-based method of measuring periodic compensation expense related to the UAR plan. Compensation expense is measured by the amount of appreciation of the rights in excess of the base price as determined by the enterprise value of the Company at year end, as approved by the Board of Managers. (n) Use of Estimates The preparation of the Company’s consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The estimates involve judgment with respect to, among other things, various future factors, which are difficult to predict and are beyond the control of the Company. Significant estimates include the allowance for doubtful accounts, enterprise value from equity-based compensation under the UAR Plan, and the amount of certain allowances to be received from suppliers for purchases made during the year. Accordingly, actual amounts could differ from these estimates. (o) Impairment of Long-Lived Assets The Company did not have any impairment of long-lived assets during the years ended December 31, 2016 and 2015. Long-lived assets, such as property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of an asset may not be recoverable. (p) Fair Value of Financial Instruments Management believes that the carrying values of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses, and other liabilities approximate fair values because of the short maturity of these financial instruments. In 2016 and 2015, Avendra entered into a credit agreement for a term loan for which the carrying value is reflected on the accompanying financial statements (see note (9)). (q) Foreign Currency Translation Thefunctional currency of the Company’s Canadian subsidiary is the Canadian dollar. Accordingly, all assets and liabilities of the subsidiary are translated using exchange rates in effect at the end of the period, and revenue and costs are translated using average exchange rates for the period. The related translation adjustments are reported in accumulated other comprehensive income (loss), included in the
AVENDRA, LLC AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2016 and 2015 12 consolidated statements of operations and comprehensive income and as a component of members’ deficit. Translation gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved are included in net income reported on the consolidated statements of operations and comprehensive income. (r) Recently Issued Accounting Standards In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or service. An entity also should disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The new standard is effective for the Company on January 1, 2018. The Company has not yet determined the effect of the new standard on its current policies for revenue recognition. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes FASB ASC Topic 840, Leases, and makes other conforming amendments to U.S. GAAP. ASU 2016-02 requires, among other changes to the lease accounting guidance, lessees to recognize most leases on-balance sheet via a right-of-use asset and lease liability, and additional qualitative and quantitative disclosures. ASU 2016-02 is effective for the Company for annual periods in fiscal years beginning after December 15, 2018, permits early adoption, and mandates a modified retrospective transition method. The Company is required to adopt ASU 2016-02 on January 1, 2019. While the Company expects ASU 2016-02 to add significant right-of-use assets and lease liabilities to the consolidated balances sheets, it is evaluating other effects that the new standard will have on the consolidated financial statements and whether to early adopt. (2) Related Party Transactions The Founder Procurement Services Agreements (PSAs) are the contracts with each Founder that is a customer outlining the terms of the procurement and supply chain services provided to the Founders and their managed hotels and clubs. The initial PSAs became effective in 2001 and have been renewed for multiple terms most recently on December 31, 2014 for a 4-year term expiringDecember 31, 2018. The Company had $23,058,000 due to the Founders and $1,700,000 due from the Founders at December 31, 2016. The Company had $24,446,000 due to the Founders and $2,100,000 due from the Founders at December 31, 2015. The due from amounts are included as a component of accounts receivable, net in the accompanying consolidated balance sheets. The due to amounts are included as a component of the due to customers’ liability in the accompanying consolidated balance sheets.
AVENDRA, LLC AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2016 and 2015 13 (3) Accounts Receivable The components of accounts receivable, net at December 31, 2016 and 2015 were as follows: Management believes that all unbilled accounts receivable, net of the realization reserve, will be collected within one year. (4) Property and Equipment The components of property and equipment, net at December 31, 2016 and 2015 were as follows: 2016 2015 Computer equipment $ 6,081,300 6,070,786 Computer software 15,354,346 14,885,513 Leasehold improvements 717,996 676,398 Furniture and fixtures 1,111,769 1,106,873 Total 23,265,411 22,739,570 Less accumulated depreciation and amortization (16,362,774) (14,549,898) $ 6,902,637 8,189,672 (5) Leases The Company is obligated under several noncancelable operating leases, primarily for office space and equipment, with original terms from three to eight years. These leases generally contain renewal options for periods ranging from three to five years, and require the Company to pay certain operating costs such as maintenance and insurance. Rental expense for operating leases during the years ended December 31, 2016 and 2015 was approximately $2,036,000 and $1,798,000, respectively. Effective December 2007, the Company renewed its headquarters lease for a 10-year term. The lease includes an improvement allowance of $1,048,950, which is reflected as a reduction to the total rent payments due under the lease and recognized on a straight-line basis over the term of the lease. In 2016, the Company entered into a new headquarters lease commencing on January 1, 2018 for a 97-month term. The lease is noncancelable and as such, is included in the future minimum lease payments, net of incentives. 2016 2015 Billed accounts receivable $ 12,614,557 14,009,799 Unbilled accounts receivable 42,540,553 39,980,632 Replenishment accounts receivable 3,575,221 4,912,890 Less: allowance for doubtful accounts/realization reserve (609,913) (652,673) $ 58,120,417 58,250,648
AVENDRA, LLC AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2016 and 2015 14 Future minimum lease payments under noncancelable operating leases with initial or remaining lease terms in excess of one year as of December 31, 2016 are: (6) Employee Benefit Plans (a) Unit Appreciation Rights (UAR) Plan In 2004, the Company approved the “2004 UAR Plan” to provide for the annual issuance of UAR’s to senior-level employees. In 2007, the Company, as approved by Avendra’s Compensation Committee, modified the 2004 UAR Plan to compensate UAR holders for the impact on the Company’s valuation of the periodic cash distributions that are made to its Members. In 2012, the Company approved a new “2012 UAR Plan,” which modified the methodology for valuing future grants to be based on growth in the year-end enterprise valuation only. Therefore, the compensation for the impact of the periodic cash distributions will no longer apply to grants under the 2012 plan. The actual fair value of the Company, as determined by a third party equity sale transaction or market valuation, might differ significantly from management’s internal December 31, 2016 and 2015 estimate of enterprise valuation. In 2016, under the 2012 UAR Plan, the Company issued 636,541 UAR’s with a base price of $10.49 and an effective date of June 30, 2016 for vesting purposes. In 2015, under the 2012 UAR Plan, the Company issued 733,357 UAR’s with a base price of $9.04 and an effective date of June 30, 2015 for vesting purposes. The rights vest over four years from the respective effective date. The rights issued prior to 2012, have an expiration date of 10 years after the grant date, and the rights issued in 2012 and thereafter have an expiration date of five years after the grant date. Compensation cost of approximately $13,073,000 and $13,994,000, respectively, has been recognized for outstanding UAR’s in the accompanying consolidated financial statements for the years ended December 31, 2016 and 2015. The compensation cost was based on an estimated fair value of the vested UAR’s, as determined by the Board of Managers, of the appreciation rights in excess of the base price of the right granted. As of December 31, 2016 and 2015, a short-term liability of approximately $34,748,000 and $28,698,000, and a long-term liability of approximately $5,531,000 and $6,653,000 respectively, have been recognized for the UAR plan under accrued incentive compensation current liabilities and other long-term liabilities in the consolidated balancesheets. 2017 $ 1,942,093 2018 1,209,116 2019 1,249,740 2020 1,300,341 2021 1,343,519 Thereafter 5,960,433 Total minimum lease payments $ 13,005,242
AVENDRA, LLC AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2016 and 2015 15 UAR activity during the periods indicated is as follows: (b) Deferred Compensation Plan Effective December 16, 2003, the Company established a plan for the purpose of allowing highly compensated employees to defer certain compensation (Employee Contributions). The Company’s obligations to the participants are unsecured, and therefore, the participants are treated as general unsecured creditors. Participants are fully vested in the amounts in their respective deferred compensation accounts. Payments typically become payable upon separation from the Company in either a lump sum or equal installments over a 5-year period. The Deferred Compensation Plan (the Plan), Weighted Number of average 2004 UAR Plan: options base price Balance, December 31, 2014 5,649,443 $ 3.78 Granted - - Forfeited/canceled - - xercised (1,573,761) 3.23 Balance, December 31, 2015 4,075,682 $ 4.00 Granted - - Forfeited/canceled - - Exercised (605,542) 2.90 Balance, December 31, 2016 3,470,140 $ 4.19 Weighted Number of average 2012 UAR Plan: UAR's base price Balance, December 31, 2014 2,703,012 $ 7.12 733,357 9.04 (3,996) 9.04 (61 750 6 31 5 3 623 7 55 Granted 636,541 $10.49 Forfeited/canceled - - Exercised - - Balance, December 31, 2016 4,007,164 $ 8.01
AVENDRA, LLC AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2016 and 2015 16 under the 2004 UAR Plan, also provides UAR grantees with deferred compensation in respect to the cash distributions made to the Company’s Members (Employer Contributions). The 2004 UAR Plan provides a credit to UAR grantees for member cash distributions for outstanding grants issued prior to 2012. The UAR credit is determined by the amount of the cash distribution divided by the total units outstanding at the time of the distribution multiplied by the number of UAR’s outstanding. The cash contribution is made for vested UAR’s and is included in restricted investments on the Company’s consolidated financial statements. Upon separation from the Company, the vested amounts are payable to the UAR grantee within 90 days. In the Company’s consolidated financial statements, both the Employer and Employee Contributions to the Plan, as well as the related investment earnings, are recorded in assets as a restricted investment with an offsetting liability for the obligations to the Plan participants. For the years ended December 31, 2016 and 2015, the restricted investment and the liability each totaled approximately $23,679,000 and $21,920,000, of which approximately $1,051,000 and $1,760,000, respectively, were recorded as short-term for 2016 and 2015. The Employee Contributions and the vested portion of the Employer Contributions from its 2004 UAR Plan are in participant-directed brokerage accounts, and consist of money market, bond, and equity funds. The quoted market value of bond and equity funds is the unit of account used by the Company to measure these investments. Markets for Other Significant identical observable unobservable December 31, assets inputs inputs 2016 (Level 1) (Level 2) (Level 3) Financial assets investments: Fixed income and equities $ 23,678,720 23,678,720 — — Total $ 23,678,720 23,678,720 — — Markets for Other Significant identical observable unobservable December 31, assets inputs inputs 2015 (Level 1) (Level 2) (Level 3) Financial assets investments: Fixed income and equities $ 21,920,072 21,920,072 — — Total $ 21,920,072 21,920,072 — —
AVENDRA, LLC AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2016 and 2015 17 (c) 401(k) Plan The Company contributes to a 401(k) plan covering substantially all of its employees. Employer contributions are computed based on the employees’ qualifying compensation and totaled approximately $1,670,000 and $816,000 for the years ended December 31, 2016 and 2015, respectively. (d) Profit Sharing Program In 2015, the Company discontinued its Profit Sharing Incentive Program and replaced it with a 401(k) employer match effective January 1, 2016. Consequently, the Company did not recognize any expense for the years ended December 31, 2016 and 2015. The Company has an accrued liability for amounts awarded under this plan prior to 2015, but not yet vested and paid. For the years ended December 31, 2016 and 2015, the accrued liability was approximately $1,601,000 and $2,649,000, respectively, and is included in accrued compensation for the related short-term liability and in other long-term liabilities for the related long-term liability in the consolidated balance sheets. For the years ended December 31, 2016 and 2015, the short-term liability was $774,000 and $991,000, and the long-term liability was $827,000 and $1,658,000, respectively. (7) Acquisition On September 30, 2015, the Company acquired 100% of the membership interests and voting rights in BuyEfficient. The results of BuyEfficient’s operations have been included in the consolidated financial statements since that date. BuyEfficient is a procurement services and eCommerce solutions provider servicing the hospitality industry. The combined entity provides new opportunities whereby customers will now be able to leverage the purchasing power and service offerings of Avendra and the eCommerce technology platform provided by BuyEfficient. The goodwill of $12,284,000 arising from the acquisition relates to the increased customer base and purchasing volume. The purchase price was $26,500,000 and was paid in cash.
AVENDRA, LLC AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2016 and 2015 18 The following table summarizes the purchase price paid for BuyEfficient and the amounts of estimated fair value of assets assumed at the acquisition date. An adjustment was made in 2016 during the measurement period based on information obtained subsequent to the purchase price allocation which resulted in a reduction of $196,000 to the Property and equipment assets acquired. A corresponding entry was recorded to increase to Goodwill as noted in note (8) (b). The fair value of the acquired intangible assets of $8,540,000 as of September 30, 2015 is based on the final valuation report for those assets from a third party valuation expert. The acquired intangible assets of which are being amortized, have a weighted average useful life of 10 years. The intangible assets that make up that amount include customer relationships of $7,970,000 (10-year useful life) and the BuyEfficient trademark of $570,000 (indefinite useful life). As of Purchase Price: 9/30/2015 Cash $ 26,500,000 Less: Net working capital adjustment (521,802) Net Purchase Price $ 25,978,198 Acquisition related costs included in SG&A 634,413 Recognized amounts of indentifiable assets acquired: Cash and cash equivalents $ 525,288 Accounts receivable, net 1,333,725 Prepaid expenses 47,863 Other assets 1,100 Accounts payable and accrued expenses (1,627,172) Accrued payroll and employee benefits (777,027) Other current liabilities (25,579) Property and equipment 576,000 Int rnally Developed Software 5,100,000 Intangible assets 8,540,000 Total indentifiable net assets assumed 13,694,198 Goodwill 12,284,000 Total $ 25,978,198
AVENDRA, LLC AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2016 and 2015 19 (8) Goodwill and Other Intangible Assets (a) Acquired Intangible Assets In 2016, three strategic BuyEfficient customer agreements were terminated, which created a triggering event requiring a recoverability test to determine if the carrying amount of the Customer Relationship asset was recoverable. The Company completed an analysis using updated financial projections and determined that the sum of the undiscounted net cash flows estimated to be received over the remaining life of the customer relationship asset significantly exceed the asset’s carrying value of $6,974,000 and therefore, the value of the asset has not been impaired. December 31, 2016 Weighted average Gross Net amortization carrying Accumulated carrying period amount amortization amount Intangibl ssets Amortizing intangible assets: Customer Relationships 10 yrs $ 7,970,000 (996,250) 6,973,750 Indefinite-lived intangible assets: Trademark - 570,000 - 570,000 Total intangible assets $ 8,540,000 (996,250) 7,543,750 December 31, 2015 Weighted average Gross Net amortization carrying Accumulated carrying period amount amortization amount Intangible assets Amortizing : Customer Relationships 10 yrs $ 7,970,000 (199,250) 7,770,750 Indefinite-lived intangible assets: Trademark - 570,000 - 570,000 Total intangible assets $ 8,540,000 (199,250) 8,340,750
AVENDRA, LLC AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2016 and 2015 20 Aggregate amortization expense for amortizing intangible assets was $797,000 and $199,250 for December 31, 2016 and 2015, respectively. Estimated annual amortization expense for the next five years is estimated to be $797,000. (b) Goodwill In 2015, the Company recorded $12,284,000 in goodwill as part of the BuyEfficient acquisition including $300,000 for the value of the assembled and trained workforce acquired as part of the transaction. In 2016, the Company did not record any additions to goodwill. The Company recorded an adjustment of $196,000 to assets recorded as part of the purchase price allocation based on information obtained subsequent to the acquisition. A change to the amounts recorded for assets acquired, identifiable intangible assets, and liabilities assumed during the measurement period affects the amount of the purchase price allocated to goodwill. The Company has not recognized any goodwill impairments as of December 31, 2016 and 2015. (9) Long-term Debt Long-term debt at December 31, 2016 and 2015 consists of the following: In 2015, the Company entered into a five-year term loan for $28,500,000, bearing interest at LIBOR plus 1.20%. The loan repayment terms include interest only for the first six months, followed by 54 consecutive monthly installments of $528,000 principal plus interest beginning on May 1, 2016. The loan is secured by substantially all of the Company’s material assets. The Company will have annual maturities of its debt in years 2017 through 2019 of $6,861,000 and $3,694,000 in 2020. 2016 2015 Ba nce a f January 1 Gross goodwill $ 12,421,049 137,049 Goodwill acquired during the year - 12,284,000 Adjustment 196,088 - Impairment expense - - Net Goodwill as of December 31 $ 12,617,137 12,421,049 2016 2015 Fiv -year term loan, interest at LIBOR plus 1.20%, interest only for first six months, with final payment due October 1, 2020, secured by Company's material assets $ 24,277,778 28,500,000 Less: current installments (6,861,111) (4,750,000) Long-term debt, excluding current installments $ 17,416,667 23,750,000
AVENDRA, LLC AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2016 and 2015 21 The loan agreement contains covenants requiring the Company to maintain its assets and financial condition at levels and in accordance with standards acceptable to the bank, to provide financial reporting or notices of default, and to restrict changes in ownership control, additional indebtedness, and material investments in fixed assets, leases or guarantees. The Company was in compliance with the covenants at December 31, 2016 and 2015. (10) Legal Proceedings The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity. (11) Business and Credit Concentrations The Company operates primarily in the hospitality industry, and accordingly, a change in the overall demand for hotel rooms will lead to a corresponding change in the procurement needs of hotels, which could directly impact the amount of revenue earned by the Company. Lack of demand for hotel rooms and other events affecting the hospitality industry may significantly impact the Company’s future revenue streams. Alternatively, increased demand for hotel rooms may significantly positively impact the Company’s future revenue streams. For the years ended December 31, 2016 and 2015, approximately 23.0% and 24.0%, respectively, of the Company’s revenue was attributable to three major customers. Any significant decrease or increase in the amount of Spend for these customers may significantly impact the Company’s future revenue streams. The Company contracts with several hundred suppliers and is generally not dependent upon any one supplier to provide products or services to its customers. However, a limited number of the Company’s suppliers provide services that would be difficult to replace in the short term, should those suppliers cease to do business with the Company or cease to operate. Financial instruments that potentially subject the Company to credit risk include accounts receivable and cash and cash equivalents. The Company extends credit to customers for purchases through Avendra Replenishment on an unsecured basis in the normal course of business, and to date has not experienced significant losses on accounts receivable. The Company’s cash deposits often exceed federally insured limits. The Company has not experienced any losses inits depository accounts and management believes that the Company is not exposed to any significant credit risks involving depository relationships. (12) Subsequent Events The Company has evaluated events subsequent to the balance sheet date through March 24, 2017, the date the financial statements were available to be issued, and determined there have not been any events that have occurred that would require adjustments to or disclosure in the consolidated financial statements.
AVENDRA, LLC AND SUBSIDIARIES Unaudited Consolidated Financial Statements December 31, 2014 and 2013
AVENDRA, LLC AND SUBSIDIARIES Unaudited Consolidated Balance Sheets December 31, 2014 and 2013 Assets 2014 2013 Current assets: Cash and cash equivalents $ 3,285,608 7,388,958 Short-term investments 9,520,672 9,513,131 Accounts receivable, net 47,235,571 46,087,952 Restricted cash and investments 1,976,417 1,676,354 Prepaid expenses and other current assets 1,214,064 1,237,118 Total current assets 63,232,332 65,903,513 Restricted investments, net of current portion 18,943,406 30,969,210 Property and equipment, net 2,742,034 2,192,914 Goodwill and intangible assets 137,046 152,274 Other assets 31,123 22,450 Total assets $ 85,085,941 99,240,361 Liabilities and Members’ Deficit Current liabilities: Related party note payable $ 2,450,000 2,450,000 Accounts payable and accrued expenses 2,564,529 2,012,441 Accrued compensation 6,895,529 7,849,665 Due to customers 32,132,488 30,907,784 Accrued incentive compensation 33,899,771 29,043,471 Total current liabilities 77,942,317 72,263,361 Note payable, net of current portion — 2,450,000 Other long-term liabilities 25,989,618 36,523,101 Total liabilities 103,931,935 111,236,462 Commitments and contingencies Members’ deficit (18,845,994) (11,996,101) Total liabilities and members’ deficit $ 85,085,941 99,240,361 See accompanying notes to unaudited consolidated financial statements. 2
AVENDRA, LLC AND SUBSIDIARIES Unaudited Consolidated Statements of Operations and Comprehensive Income Years ended December 31, 2014 and 2013 2014 2013 Revenue $ 104,496,612 98,701,443 Operating expenses: General and administrative 59,648,077 56,194,814 Depreciation and amortization 791,462 1,428,089 Total operating expenses 60,439,539 57,622,903 Income from operations 44,057,073 41,078,540 Other gain, net 1,794,134 3,413,568 Income before income taxes 45,851,207 44,492,108 Provision for income taxes 315,926 294,534 Net income $ 45,535,281 44,197,574 Comprehensive income: Net income $ 45,535,281 44,197,574 Other comprehensive income (loss): Foreign currency translation adjustment (263,083) (143,250) Comprehensive income $ 45,272,198 44,054,325 See accompanying notes to unaudited consolidated financial statements. 3
AVENDRA, LLC AND SUBSIDIARIES Unaudited Consolidated Statements of Members’ Deficit Years ended December 31, 2014 and 2013 Accumulated other Members’ Accumulated comprehensive capital deficit Sub-total income (loss) Total Balance at December 31, 2012 $ 7,022,284 (10,989,781) (3,967,497) 150,405 (3,817,092) Member distributions — (52,000,000) (52,000,000) — (52,000,000) Interest on loan due to AHI — (185,792) (185,792) — (185,792) Buyback of membership units (47,541) — (47,541) — (47,541) Other comprehensive income (loss): Foreign currency translation adjustment — — — (143,250) (143,250) Net income — 44,197,574 44,197,574 — 44,197,574 Balance at December 31, 2013 6,974,743 (18,977,999) (12,003,256) 7,155 (11,996,101) Member distributions — (52,000,000) (52,000,000) — (52,000,000) Interest on loan due to AHI — (122,092) (122,092) — (122,092) Buyback of membership units — — — — Other comprehensive income (loss): Foreign currency translation adjustment — — — (263,082) (263,082) Net income — 45,535,281 45,535,281 — 45,535,281 Balance at December 31, 2014 $ 6,974,743 (25,564,810) (18,590,067) (255,927) (18,845,994) See accompanying notes to unaudited consolidated financial statements. 4
AVENDRA, LLC AND SUBSIDIARIES Unaudited Consolidated Statements of Cash Flows Years ended December 31, 2014 and 2013 2014 2013 Cash flows from operating activities: Net income $ 45,535,281 44,197,574 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 791,462 1,428,089 Other, net 67,689 117,949 Adjustments to provision for doubtful accounts 2,232 (80,774) Unrealized (gain)/loss from investment in the deferred compensation plan 200,330 (1,688,011) Changes in assets and liabilities: Accounts receivable (1,203,912) (696,573) Restricted cash (1,963,135) — Restricted investments, prepaid expenses and other assets 13,502,927 (8,762,763) Accounts payable, accrued expenses, and accrued incentive compensation 4,250,539 6,753,756 Other liabilities (10,511,088) 8,965,973 Due to customers 1,202,310 (1,559,108) Net cash provided by operating activities 51,874,635 48,676,112 Cash flows from investing activities: Purchase of short-term held-to-maturity investments (9,575,230) (9,531,011) Maturities of short-term held-to-maturity investments 9,500,000 10,000,000 Purchase of property and equipment (1,325,355) (1,278,804) Net cash used in investing activities (1,400,585) (809,815) Cash flows from financing activities: Issuance/(purchase) of membership units — (47,540) Payment on note to AHI (2,577,400) (2,641,100) Distributions to members (52,000,000) (52,000,000) Net cash used in financing activities (54,577,400) (54,688,640) Net decrease in cash and cash equivalents (4,103,350) (6,822,343) Cash and cash equivalents at beginning of year 7,388,958 14,211,301 Cash and cash equivalents at end of year $ 3,285,608 7,388,958 Supplemental cash flow information: Income taxes paid $ 184,183 180,155 Interest paid on loan to AHI 127,400 191,100 See accompanying notes to unaudited consolidated financial statements. 5
6 (1) Summary of Significant Accounting Policies (a) Description of Business Avendra, LLC (Avendra or the Company) is a Delaware limited liability company under the terms of the Limited Liability Company Agreement of Avendra, LLC, as amended (the LLC Agreement). The Company is an independent hospitality procurement and supply chain organization that provides its customers with supply chain efficiencies and savings through aggregating purchasing volume, utilizing hospitality industry knowledge, and providing supply chain assurance services. The Company is 99.92% owned by a group of hotel and golf course management companies with the remaining 0.08% owned by employees and former employees (collectively referred to as Members). Avendra provides procurement services primarily for the hospitality industry throughout North America, Latin America, and the Caribbean. A large portion of the Company’s business is conducted with the Founders and their managed hotels and clubs (the Founder Properties). The Company has contracts and agreements with distributors and manufacturers covering the procurement of a broad range of merchandise and services. The Company’s customers are provided access to the pricing negotiated with the suppliers as part of these contracts. Except for the Company’s Avendra Replenishment, LLC subsidiary (Avendra Replenishment), the majority of the purchasing activities resulting from the Company’s contracts are conducted directly between the Company’s customers and the suppliers under terms negotiated by Avendra with those suppliers. The Company is not a direct party to these purchasing transactions and the Company does not maintain or purchase inventory. Avendra Replenishment was established to serve as an intermediary between the Company’s customers and certain suppliers for the procurement of operating equipment. Typically, these transactions are replacement equipment orders for individual hotels. (b) Formation of the Company and Limitation on Liability Pursuant to the terms of the LLC agreement, no member is personally liable for any debt, obligation, or liability of the Company. The LLC Agreement is perpetual in term, subject to the dissolution provisions provided in the LLC Agreement. The LLC Agreement provides certain preferences to the members in the event of dissolution, certain distributions of Company property, the incorporation of the Company, or an initial public offering, among other events. (c) Equity Transaction On November 30, 2010, Avendra Holdings, Inc. (AHI) redeemed itsownership in Avendra, LLC. AHI is owned by the Founders in proportions substantially equivalent to the Founders’ ownership in Avendra. The sale of AHI’s ownership interest, for a total aggregate redemption price of $12,250,000, is payable in five equal installments on each anniversary of the agreement date commencing November 30, 2011 and ending November 30, 2015. In addition, interest on the principal amount accrues from the agreement date and is payable annually, in arrears, to AHI on each anniversary of the agreement date commencing November 30, 2011 at a fixed rate of 2.6% per annum. Avendra had a current note payable of $2,450,000 as of December 31, 2014, and a current note payable of $2,450,000 and a long-term note payable of $2,450,000 as of December 31, 2013. Due to the related party nature of the ownership of AHI and Avendra, the redemption amount and all interest associated with the note are reflected as a charge to equity.
7 (d) Principles of Consolidation The consolidated financial statements include the financial statements of Avendra, LLC and its two wholly owned subsidiaries, Avendra Canada, Inc. and Avendra Replenishment. All significant intercompany balances and transactions have been eliminated in consolidation. (e) Revenue Recognition The Company derives revenue from customers primarily in two forms: (1) service fees as a percentage of purchases made by the Company’s customers (Spend), with any supplier allowances in excess of negotiated fee amounts being returned to customers; or, (2) the retention of supplier allowances. The applicable form of revenue is delineated in the customer contracts. Revenue calculations are based on Spend. Revenue from service fees is recognized at the rate specified per customer contract in the period that Spend occurs. Revenue from allowances is recognized at the rate specified per product or service in each applicable supplier contract in the period that the associated Spend occurs. Spend information is based on reporting from suppliers. When Spend reports are not yet received, the Company estimates the Spend, allowances, and related revenue based on historical data or information provided by the supplier. The Company’s Avendra Replenishment subsidiary places orders on behalf of its customers, pays the supplier and assumes customer credit risk; however, the Company does not take title or possession of the related inventory, nor are any applicable product warranties the responsibility of Avendra. The Company applies a markup to the wholesale cost for each order and recognizes that markup as replenishment revenue when the related product is shipped to the customer from the vendor. Replenishment revenue is recognized net based on the mark-up. Certain suppliers prepay allowances in advance of completion of the related procurement process from which the allowances are derived. These prepayments are recorded as unearned allowances and recognized as revenue in the period in which the related purchases are made. The Company records these amounts as unearned allowances in due to customers and other long-term liabilities in the accompanying consolidated balance sheets. Unearned allowances were approximately $1,326,000 and $891,000 for the years ended December 31, 2014 and 2013, respectively. (f) Cash and Cash Equivalents and Short-Term Investments The Company considers short-term, highly liquid investments with original maturities of three months or less to be cash equivalents. The Company’s internal investment policyis to maintain a weighted average maturity of U.S. Treasuries and GSE’s (Government-Sponsored Entities) of not more than 7.5 months. These short-term investments are classified as held-to-maturity securities and are reflected as current assets on the balance sheet. The purchases and maturities of these investments are presented gross in cash flow from investing activities. (g) Accounts Receivable Allowances are recognized and billed at the rate specified per product or service in each applicable supplier contract. Accounts receivable primarily represent billed and unbilled allowances due. Billed receivables are recorded at the invoiced amount. The majority of unbilled receivables represent amounts that were earned, but not invoiced at year end. Accounts receivable include certain amounts billed on behalf of customers whose service fees are based on a percentage of Spend. These amounts are excluded from revenue and a corresponding amount is reflected as a component of the due to customers’ liability. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical and expected write-offs and based on customer specific
8 circumstances. The Company reviews its allowance for doubtful accounts quarterly. Past due balances meeting certain criteria are reviewed individually for collectability. All other balances are reviewed on a pooled basis. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers. The Company also records a rebate realization reserve, which is the Company’s best estimate of the amount of probable adjustments based upon differences in allowance calculations between the Company and the supplier in the Company’s existing accounts receivable. Due to inherent complexities in the data accumulation, billing, and subsequent reconciliation processes, this reserve account adjusts aggregate receivables to the best estimate of net realizable value. (h) Restricted Cash The Company records as restricted cash any cash that is restricted in its use by the Company’s executed contracts and is not immediately available for use. Restricted cash of approximately $1,963,000 as of December 31, 2014 was recorded on the Company’s balance sheet. The restricted cash consists of funding received as a result of an agreement entered into in 2014 where the Company is acting as a purchasing agent with respect to the purchases of pre-opening Operating Supplies and Equipment (OS&E) on behalf of a customer. The Company also records an offsetting liability for the OS&E ordered and due to suppliers once products are received. (i) Restricted Investments Total restricted investments were approximately $18,957,000 and $32,646,000 at December 31, 2014 and 2013, respectively. The restricted investments represent deferred compensation associated with the Unit Appreciation Right (UAR) program related to the Company’s cash dividends, in addition to salary and bonus deferrals by highly compensated employees (see note 6(b) and 6(c)). These amounts are invested in a range of funds including money market, high quality bond, and equity mutual funds based on the employees’ elections. These investments are considered trading securities and are marked-to-market each month based on the change in the funds’ quoted market value. Any realized or unrealized gain/loss and any interest income are recognized in Other gains from investments in the deferred compensation plans with an offsetting entry to employee costs, on the Company’s consolidated statements of operations and comprehensive income. These amounts are also recorded in restricted investments with an offsetting entry to accrued incentive compensation and other long-term liabilities on the Company’s consolidated balance sheets. For the years ended December 31, 2014 and 2013, the Company recorded a net gain of approximately $1,230,000 and $2,998,000, respectively, interest income of approximately $521,000 and $423,000, respectively, resulting in an increase to employee costs of approximately $1,751,000 and $3,421,000, respectively. (j) Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the following useful lives: Furniture and fixtures 5 years Computer equipment 3–5 years Computer software 5 years Leasehold improvements Shorter of useful life or remaining lease term
9 (k) Goodwill The Company was formed in connection with the contribution of certain assets, which were recorded at fair value. As part of the transaction, the Company recorded goodwill representing the future economic benefits arising from other assets acquired in a business combination that were not individually identified and separately recognized. In January 2014, FASB issued ASU No. 2014-02, Intangibles-Goodwill and Other (Topic 350): Accounting for Goodwill, a consensus of the Private Company Council (ASU 2014-02). This ASU allows an accounting alternative for the subsequent measurement of goodwill for all entities except for public business entities, not-for-profit entities and certain employee benefit plans. An entity within the scope of the amendments that elects the accounting alternative in this ASU should amortize goodwill on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates that another useful life is more appropriate. An entity that elects the accounting alternative is further required to make an accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level. Goodwill should be tested for impairment when a triggering event occurs that indicates that the fair value of an asset may be below its carrying amount. The disclosures required under this alternative are similar to existing U.S. GAAP. The accounting alternative, if elected, should be applied prospectively to goodwill existing as of the beginning of the period of adoption and to new goodwill recognized in annual periods beginning after December 15, 2014, and to interim periods within annual periods beginning after December 15, 2015. Effective January 1, 2014, the Company elected to adopt ASU 2014-02 and recorded goodwill amortization expense of $15,200 for the year ended December 31, 2014. Total goodwill for the years ended December 31, 2014 and 2013 was $137,000 and $152,000, respectively, and is included in other assets in the consolidated balance sheets. The Company will test goodwill for impairment at the entity level; however, no triggering events were identified during 2014. (l) Income Taxes The Company has elected limited liability company status and, as such, is not directly subject to U.S. federal and most state income taxes. Instead, the members are responsible for income taxes on their proportionate share of Avendra’s taxable income. Members are also entitled to a proportionate share of tax deductions and credits. Certain states do not recognize the limited liability company status, andaccordingly, the Company is responsible for state income taxes in these states. Avendra Canada, Inc. is incorporated in Canada and is subject to taxes under Canadian tax regulations. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to uncertain tax positions in the provision for income taxes on the consolidated statements of operations and comprehensive income. The Company has assessed its tax positions as of December 31, 2014. As of December 31, 2014 and 2013, the total amount accrued for uncertain tax positions including interest and penalties is approximately $167,000 and $157,000, respectively, and is included in accounts payable and accrued expenses in the consolidated balance sheets. The provision for income taxes of approximately $316,000 and $295,000 for the years ended December 31, 2014 and 2013, respectively, relates primarily to those states which do not recognize the limited liability company status. There were no material deferred taxes as a result of these state income taxes; however, the Company had net operating loss carryforwards for Avendra Canada Inc. for the years ended December 31, 2014 and 2013, of approximately $1,000,000 and $1,300,000, respectively, in U.S. equivalents, which creates a deferred tax asset that the Company has recorded.
10 The Company believes it is unlikely that results of future operations will generate sufficient taxable income to realize the deferred tax asset. Accordingly, the Company has recorded a full valuation allowance at December 31, 2014 and 2013. (m) Equity-Based Compensation Plans The Company has a unit appreciation rights (UAR) plan (see note 6(b)). The Company has elected to continue to apply the intrinsic-value-based method of measuring periodic compensation expense related to the UAR plan. Compensation expense is measured by the amount of appreciation of the rights in excess of the base price as determined by the enterprise value of the Company at year end, as approved by the Board of Managers. (n) Use of Estimates The preparation of the Company’s consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The estimates involve judgment with respect to, among other things, various future factors, which are difficult to predict and are beyond the control of the Company. Significant estimates include the allowance for doubtful accounts, enterprise value from equity-based compensation under the UAR Plan, and the amount of certain allowances to be received from suppliers for purchases made during the year. Accordingly, actual amounts could differ from these estimates. (o) Impairment of Long-Lived Assets The Company did not have any impairment of long-lived assets during the years ended December 31, 2014 and 2013. Long-lived assets, such as property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of an asset may not be recoverable. (p) Fair Value of Financial Instruments Management believes that the carrying values of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses, and other liabilities approximate fair values because of the short maturity of these financial instruments. The AHI note payable is between related parties. Standard discounted cash flow models were used in determining the value of AHI’s ownership. The note payable balance at December 31, 2014 and 2013 represents the undiscounted contractual obligation under this note. (q) Foreign Currency Translation The functional currency of the Company’s Canadian subsidiary is the Canadiandollar. Accordingly, all assets and liabilities of the subsidiary are translated using exchange rates in effect at the end of the period, and revenue and costs are translated using average exchange rates for the period. The related translation adjustments are reported in accumulated other comprehensive income (loss), included in the consolidated statement of operations and comprehensive income and as a component of members’ deficit. Translation gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved are included in net income reported on the consolidated statements of operations and comprehensive income.
11 (2) Related Party Transactions The Founder Procurement Services Agreements (PSAs), effective from January 1, 2011 to December 31, 2014 were renewed on December 31, 2014 for a 4-year term expiring December 31, 2018. The Company had $18,225,000 and $18,678,000 due to Founders and $1,639,000 and $1,640,000 due from Founders at December 31, 2014 and 2013, respectively. The due from amounts are included as a component of accounts receivable, net in the accompanying consolidated balance sheets. The due to amounts are included as a component of the due to customers’ liability in the accompanying consolidated balance sheets. The Company had an outstanding balance on a note payable at December 31, 2014 and 2013, of $2,450,000 and $4,900,000, respectively, to AHI, a related party. See note 1(c). (3) Accounts Receivable The components of accounts receivable, net at December 31, 2014 and 2013 were as follows: 2014 2013 Billed accounts receivable $ 14,541,011 11,216,803 Unbilled accounts receivable 29,505,655 31,670,102 Replenishment accounts receivable 3,635,884 3,663,039 Less allowance for doubtful accounts/realization reserve (446,979) (461,992) $ 47,235,571 46,087,952 Management believes that all unbilled accounts receivable, net of the realization reserve, will be collected within one year. (4) Property and Equipment The components of property and equipment, net at December 31, 2014 and 2013 were as follows: 2014 2013 Computer quipment $ 5,832,144 4,911,543 Computer software 8,726,781 8,409,279 Leasehold improvements 634,949 634,949 Furniture and fixtures 1,056,227 1,035,179 Total 16,250,101 14,990,950 Less accumulated depreciation and amortization (13,508,067) (12,798,036) $ 2,742,034 2,192,914 (5) Leases The Company is obligated under several noncancelable operating leases, primarily for office space and equipment, with original terms from three to ten years. These leases generally contain renewal options for periods ranging from three to five years, and require the Company to pay certain operating costs such as maintenance and insurance. Rental expense for operating leases during the years ended December 31, 2014 and 2013 was approximately $1,736,000 and $1,683,000, respectively. Effective December 2007, the Company renewed its headquarters lease for a 10-year term. The lease includes an improvement allowance of $1,048,950, which is reflected as a reduction to the total rent payments due under the lease and recognized on a straight-line basis over the term of the lease.
12 Future minimum lease payments under noncancelable operating leases with initial or remaining lease terms in excess of one year as of December 31, 2014 are: 2015 $ 1,731,419 2016 1,763,914 2017 1,807,970 Thereafter — Total minimum lease payments $ 5,303,303 (6) Employee Benefit Plans (a) Unit Appreciation Rights Plan In 2004, the Company approved the “2004 UAR Plan” to provide for the annual issuance of UAR’s to senior-level employees. In 2007, the Company, as approved by Avendra’s Compensation Committee, modified the 2004 UAR Plan to compensate UAR holders for the impact on the Company’s valuation of the periodic cash distributions that are made to its Members. In 2012, the Company approved a new “2012 UAR Plan,” which modified the methodology for valuing future grants to be based on growth in the year-end enterprise valuation only. Therefore, the compensation for the impact of the periodic cash distributions will no longer apply to grants under the 2012 plan. The actual fair value of the Company, as determined by a third party equity sale transaction or market valuation, might differ significantly from management’s internal December 31, 2014 estimate of enterprise valuation. In 2014, under the 2012 UAR Plan, the Company issued 893,262 UAR’s with a weighted average base price of $7.96 and an effective date of June 30, 2014 for vesting purposes. In 2013, under the 2012 UAR Plan, the Company issued 874,000 UAR’s with a weighted average base price of $7.15 and an effective date of June 30, 2013 for vesting purposes. The rights vest over four years from the respective effective date. The rights issued prior to 2012, have an expiration date of 10 years after the grant date, and the rights issued in 2012 and thereafter have an expiration date of five years after the grant date. Compensation cost of approximately $17,470,000 and $13,380,000 has been recognized for outstanding UAR’s in the accompanying consolidated financial statements for the years ended December 31, 2014 and 2013, respectively. The compensation cost was based on an estimated fair value of the vested UAR’s, as determined by the Board of Managers, of the appreciation rights in excess of the base price of the right granted. As of December 31, 2014 and 2013, a short-term liability of approximately $33,900,000 and $29,043,000, respectively, and a long-term liability of approximately $3,132,000 and $1,482,000, respectively, have been recognized for the UAR plan under accrued incentive compensation current liabilities and other long-term liabilities in the consolidated balance sheets.
13 UAR activity during the periods indicated is as follows: Weighted Number of average UAR’s base price 2004 UAR Plan: Balance, December 31, 2012 6,243,193 $ 3.68 Granted — — Forfeited/canceled — — Exercised (187,250) 2.64 Balance, December 31, 2013 6,055,943 3.72 Granted — — Forfeited/canceled (11,750) 4.52 Exercised (394,750) 2.73 Balance, December 31, 2014 5,649,443 $ 3.78 Weighted Number of average UAR’s base price 2012 UAR Plan: Balance, December 31, 2012 1,010,000 $ 6.00 Granted 874,00 7.15 Forfeited/canceled (11,2 0) 6.31 Exercised — — Balance, December 31, 2013 1,872,750 6.70 Granted 893,262 7.96 Forfeited/canceled (63,000) 6.78 Exercised — — Balance, December 31, 2014 2,703,012 $ 7.12 (b) Deferred Compensation Plan Effective December 16, 2003, the Company established a plan for the purpose of allowing highly compensated employees to defer certain compensation (Employee Contributions). The Company’s obligations to the participants are unsecured, and therefore, the participants are treated as general unsecured creditors. Participants are fully vested in the amounts in their respective deferred compensation accounts. Payments typically become payable upon separation from the Company in either a lump sum or equal installments over a 5-year period. The Deferred Compensation Plan (the Plan), under the 2004 UAR Plan, also provides UAR grantees with deferred compensation in respect to the cash distributions made to the Company’s Members (Employer Contributions). The 2004 UAR Plan provides a credit to UAR grantees for member cash distributions for outstanding grants issued prior to 2012. The UAR credit is determined by the amount of the cash distribution divided by the total units outstanding at the time of the distribution multiplied by the number of UAR’s outstanding. The cash contribution is made for vested UAR’s and is included in restricted investments on the Company’s consolidated financial statements. Upon separation from the Company, the vested amounts are payable to the UAR grantee within 90 days. In the Company’s consolidated financial statements, both the Employer and Employee Contributions to the Plan, as well as the related investment earnings, are recorded in assets as a restricted
14 investment with an offsetting liability for the obligations to the Plan participants. For the years ended December 31, 2014 and 2013, the restricted investment and the liability each totaled approximately $18,957,000 and $32,646,000, respectively, of which approximately $13,000 and $1,676,000 were recorded as short-term for 2014 and 2013, respectively. The Employee Contributions and the vested portion of the Employer Contributions from its 2004 UAR Plan are in participant-directed brokerage accounts, and consist of money market, bond, and equity funds. The quoted market value of bond and equity funds is the unit of account used by the Company to measure these investments. Money market funds are valued at cost, which approximates fair value. Markets for Other Significant identical observable unobservable December 31, assets inputs inputs 2014 (Level 1) (Level 2) (Level 3) Financial assets investments: Money market $ 2,431,308 2,431,308 — — Fixed income and equities 16,525,380 16,525,380 Total $ 18,956,688 18,956,688 — — Markets for Other Significant identical observable unobservable December 31, assets inputs inputs 2013 (Level 1) (Level 2) (Level 3) Financial assets investments: Money market $ 3,935,971 3,935,971 — — Fixed income and equities 28,709,593 28,709,593 Total $ 32,645,564 32,645,564 — — (c) 401(k) Plan The Company contributes to a 401(k) plan covering substantially all of its employees. Employer contributions are computed based on the employees’ qualifying compensation and totaled approximately $723,000 and $705,000 for the years ended December 31, 2014 and 2013, respectively. (d) Profit Sharing Program Under the Company’s Profit Sharing Incentive Program, the Board of Managers determines each year what percent of net profit, if any, as defined by the Board of Managers, is to be allocated to this plan. The award vests 25% per year over four years and vested portions are paid annually. For 2014 and 2013, the Board of Managers approved a contribution equal to a 2.75% and 3% allocation, respectively, of net profit. For the years ended December 31, 2014 and 2013, expense of approximately $1,074,000 and $1,295,000, respectively, was recognized under this plan. The accrued liability for this plan for the years ended December 31, 2014 and 2013 was approximately $3,751,000 and $3,588,000, respectively and is included in accrued compensation for the related short-term liability and in other long-term liabilities for the related long-term liability in the consolidated balance sheets. For the yearsended December 31, 2014 and 2013, the short-term liability was $906,000 and $820,000, respectively, and the long-term liability was $2,845,000 and $2,768,000, respectively.
15 (7) Legal Proceedings The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity. (8) Business and Credit Concentrations The Company operates primarily in the hospitality industry, and accordingly, a change in the overall demand for hotel rooms will lead to a corresponding change in the procurement needs of hotels, which could directly impact the amount of revenue earned by the Company. Lack of demand for hotel rooms and other events affecting the hospitality industry may significantly impact the Company’s future revenue streams. Alternatively, increased demand for hotel rooms may significantly positively impact the Company’s future revenue streams. Also, during the year ended December 31, 2013, approximately 31% of the Company’s revenue was attributed to three major customers. One of the three major customers’ contracts was not renewed for 2014, but it did not have a significant impact on the Company’s earnings. For the year ended December 31, 2014, approximately 28.0% of the Company’s revenue was attributable to three major customers. Any significant decrease or increase in the amount of Spend for these customers may significantly impact the Company’s future revenue streams. The Company contracts with several hundred suppliers and is generally not dependent upon any one supplier to provide products or services to its customers. However, a limited number of the Company’s suppliers provide services that would be difficult to replace in the short term, should those suppliers cease to do business with the Company or cease to operate. Financial instruments that potentially subject the Company to credit risk include accounts receivable and cash and cash equivalents. The Company extends credit to customers for purchases through Avendra Replenishment on an unsecured basis in the normal course of business, and to date has not experienced significant losses on accounts receivable. The Company’s cash deposits often exceed federally insured limits. The Company has not experienced any losses in its depository accounts and management believes that the Company is not exposed to any significant credit risks involving depository relationships. (9) Subsequent Events The Company has evaluated events subsequent to the balance sheet date through April 20, 2015, the date the financial statements were available to beissued, and determined there have not been any events that have occurred that would require adjustments to or disclosure in the consolidated financial statements.