Condensed Consolidating Financial Statements

Effective August 2010, the Company’s Senior Notes are guaranteed jointly, severally, fully and unconditionally, subject to certain customary limitations, by eight 100%-owned domestic subsidiaries. There are no legal or regulatory restrictions on the payment of dividends to Choice Hotels International, Inc. from subsidiaries that do not guarantee the Senior Notes. As a result of the guarantee arrangements, the following condensed consolidating financial statements are presented. Investments in subsidiaries are accounted for under the equity method of accounting.

Choice Hotels International, Inc.

Condensed Consolidating Statement of Income

For the Year Ended December 31, 2011

(In thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations			Consolidated
REVENUES:
Royalty fees	$	219,699		$	104,898		$	34,491	$	(111,848	)	$	247,240
Initial franchise and relicensing fees	13,439			—			118		—			13,557
Procurement services	17,619			—			—		—			17,619
Marketing and reservation	298,797			329,831			18,555		(298,147		)	349,036
Other items, net	6,341			4,356			644		—			11,341
Total revenues	555,895			439,085			53,808		(409,995		)	638,793
OPERATING EXPENSES:
Selling, general and administrative	107,520			92,887			17,845		(111,848		)	106,404
Marketing and reservation	310,677			319,270			17,236		(298,147		)	349,036
Other items, net	2,824			7,782			884		—			11,490
Total operating expenses	421,021			419,939			35,965		(409,995		)	466,930
Operating income	134,874			19,146			17,843		—			171,863
OTHER INCOME AND EXPENSES, NET:
Interest expense	16,815			(3,886		)	10		—			12,939
Equity in earnings of consolidated subsidiaries	(30,595		)	—			—		30,595			0
Other items, net	(789		)	647			1,009		—			867
Total other income and expenses, net	(14,569		)	(3,239		)	1,019		30,595			13,806
Income before income taxes	149,443			22,385			16,824		(30,595		)	158,057
Income taxes	39,047			8,023			591		—			47,661
Net income	$	110,396		$	14,362		$	16,233	$	(30,595	)	$	110,396

Choice Hotels International, Inc.

Condensed Consolidating Statement of Income

For the Year Ended December 31, 2010

(In thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
REVENUES:
Royalty fees	$	205,668		$	94,649		$	30,035		$	(100,256	)	$	230,096
Initial franchise and relicensing fees	9,295			—			—			—			9,295
Procurement services	17,207			—			—			—			17,207
Marketing and reservation	283,769			312,882			16,349			(283,754		)	329,246
Other items, net	6,028			4,038			166			—			10,232
Total revenues	521,967			411,569			46,550			(384,010		)	596,076
OPERATING EXPENSES:
Selling, general and administrative	96,451			83,162			15,183			(100,256		)	94,540
Marketing and reservation	298,416			300,159			14,425			(283,754		)	329,246
Other items, net	3,578			7,138			812			—			11,528
Total operating expenses	398,445			390,459			30,420			(384,010		)	435,314
Operating income	123,522			21,110			16,130			—			160,762
OTHER INCOME AND EXPENSES, NET:
Interest expense	7,626			(952		)	6			—			6,680
Equity in earnings of consolidated subsidiaries	(37,079		)	—			—			37,079			0
Other items, net	(501		)	(2,110		)	(1,518		)	—			(4,129		)
Total other income and expenses, net	(29,954		)	(3,062		)	(1,512		)	37,079			2,551
Income before income taxes	153,476			24,172			17,642			(37,079		)	158,211
Income taxes	46,035			3,113			1,622			—			50,770
Net income	$	107,441		$	21,059		$	16,020		$	(37,079	)	$	107,441

Choice Hotels International, Inc.

Condensed Consolidating Statement of Income

For the Year Ended December 31, 2009

(In thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
REVENUES:
Royalty fees	$	195,893		$	98,942		$	25,608		$	(102,459	)	$	217,984
Initial franchise and relicensing fees	12,916			—			—			—			12,916
Procurement services	17,598			—			—			—			17,598
Marketing and reservation	260,385			311,756			14,336			(281,098		)	305,379
Other items, net	5,535			4,139			627			—			10,301
Total revenues	492,327			414,837			40,571			(383,557		)	564,178
OPERATING EXPENSES:
Selling, general and administrative	98,885			89,809			13,002			(102,459		)	99,237
Marketing and reservation	275,156			297,883			13,438			(281,098		)	305,379
Other items, net	3,679			7,111			699			—			11,489
Total operating expenses	377,720			394,803			27,139			(383,557		)	416,105
Operating income	114,607			20,034			13,432			—			148,073
OTHER INCOME AND EXPENSES, NET:
Interest expense	4,730			(265		)	(8		)	(43		)	4,414
Equity in earnings of consolidated subsidiaries	(27,976		)	—			—			27,976			—
Other items, net	(263		)	(5,597		)	(1,158		)	43			(6,975		)
Total other income and expenses, net	(23,509		)	(5,862		)	(1,166		)	27,976			(2,561		)
Income before income taxes	138,116			25,896			14,598			(27,976		)	150,634
Income taxes	39,866			10,875			1,643			—			52,384
Net income	$	98,250		$	15,021		$	12,955		$	(27,976	)	$	98,250

Choice Hotels International, Inc.

Condensed Consolidating Balance Sheet

As of December 31, 2011

(In thousands)



	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Cash and cash equivalents	$	23,370		$	432	$	83,255	$	—		$	107,057
Receivables	44,620			2,407		5,985		—			53,012
Other current assets	12,190			25,997		5,226		(8,686		)	34,727
Total current assets	80,180			28,836		94,466		(8,686		)	194,796
Property and equipment, at cost, net	9,013			41,755		1,224		—			51,992
Goodwill	60,620			5,193		192		—			66,005
Franchise rights and other identifiable intangibles, net	11,061			3,334		2,860		—			17,255
Investments, employee benefit plans, at fair value	—			11,678		—		—			11,678
Investment in and advances to affiliates	285,996			235,571		8,323		(529,890		)	—
Receivable, marketing and reservation fees	54,014			—		—		—			54,014
Deferred income taxes	—			29,050		313		(6,698		)	22,665
Other assets	13,808			7,538		7,938		—			29,284
Total assets	$	514,692		$	362,955	$	115,316	$	(545,274	)	447,689
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Accounts payable	$	5,324		$	28,831	$	4,234	$	—		$	38,389
Accrued expenses	18,288			33,584		1,979		—			53,851
Deferred revenue	13,584			54,582		659		—			68,825
Current portion of long-term debt	—			654		19		—			673
Deferred compensation & retirement plan obligations	—			18,935		—		—			18,935
Other current liabilities	—			11,404		1,174		(8,686		)	3,892
Total current liabilities	37,196			147,990		8,065		(8,686		)	184,565
Long-term debt	249,443			2,519		70		—			252,032
Deferred compensation & retirement plan obligations	—			20,587		6		—			20,593
Advances from affiliates	239,903			468		9,853		(250,224		)	—
Other liabilities	13,711			9,027		20		(6,698		)	16,060
Total liabilities	540,253			180,591		18,014		(265,608		)	473,250
Total shareholders’ (deficit) equity	(25,561		)	182,364		97,302		(279,666		)	(25,561		)
Total liabilities and shareholders’ deficit	$	514,692		$	362,955	$	115,316	$	(545,274	)	$	447,689

Choice Hotels International, Inc.

Condensed Consolidating Balance Sheet

As of December 31, 2010

(In thousands)



	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Cash and cash equivalents	$	4,849		$	18,659	$	67,751	$	—		$	91,259
Receivables	40,160			2,055		5,423		—			47,638
Other current assets	5,193			19,616		6,444		(6,568		)	24,685
Total current assets	50,202			40,330		79,618		(6,568		)	163,582
Property and equipment, at cost, net	11,586			42,678		1,398		—			55,662
Goodwill	60,620			5,193		228		—			66,041
Franchise rights and other identifiable intangibles, net	13,315			3,953		3,557		—			20,825
Investments, employee benefit plans, at fair value	—			23,365		—		—			23,365
Investment in and advances to affiliates	251,245			186,045		7,338		(444,628		)	—
Receivable, marketing and reservation fees	42,507			—		—		—			42,507
Deferred income taxes	4,560			19,745		130		—			24,435
Other assets	7,339			7,366		600		—			15,305
Total assets	$	441,374		$	328,675	$	92,869	$	(451,196	)	$	411,722
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Accounts payable	$	5,700		$	31,475	$	3,993	$	—		$	41,168
Accrued expenses	19,257			26,890		1,671		—			47,818
Deferred revenue	14,070			52,256		996		—			67,322
Revolving credit facility	200			—		—		—			200
Current portion of long-term debt	—			403		17		—			420
Income taxes payable	9,395			—		2,297		(5,914		)	5,778
Other current liabilities	—			3,206		—		(654		)	2,552
Total current liabilities	48,622			114,230		8,974		(6,568		)	165,258
Long-term debt	249,379			2,137		38		—			251,554
Deferred compensation & retirement plan obligations	—			35,707		—		—			35,707
Advances from affiliates	192,077			1,097		10,137		(203,311		)	—
Other liabilities	9,367			7,880		27		—			17,274
Total liabilities	499,445			161,051		19,176		(209,879		)	469,793
Total shareholders’ (deficit) equity	(58,071		)	167,624		73,693		(241,317		)	(58,071		)
Total liabilities and shareholders’ deficit	$	441,374		$	328,675	$	92,869	$	(451,196	)	$	411,722

Choice Hotels International, Inc.

Condensed Consolidating Statement of Cash Flows

For the Year Ended December 31, 2011

(In thousands)



	Parent				Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated
Net cash provided from (used in) operating activities	$	120,964			$	(7,122	)	$	21,002		$	—	$	134,844
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment	(2,839		)		(7,690		)	(395		)	—		(10,924		)
Equity method investments	—				—			(5,000		)	—		(5,000		)
Issuance of notes receivable	(9,341		)		(3,425		)	—			—		(12,766		)
Collection of notes receivable	4,690				64			—			—		4,754
Proceeds from sale of assets	1,654				—			—			—		1,654
Purchases of investments, employee benefit plans	—				(1,602		)	—			—		(1,602		)
Proceeds from sales of investments, employee benefit plans	—			0	644			—			—		644
Other items, net	(570		)		(10		)	16			—		(564		)
Net cash used in investing activities	(6,406		)		(12,019		)	(5,379		)	—		(23,804		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) pursuant to revolving credit facility	(200		)		—			—			—		(200		)
Principal payments on long-term debt	—				(275		)	(22		)	—		(297		)
Proceeds from the issuance of long-term debt	—				—			75			—		75
Purchase of treasury stock	(53,617		)		—			—			—		(53,617		)
Excess tax benefits from stock-based compensation	38				1,189			—			—		1,227
Debt issuance costs	(2,356		)		—			—			—		(2,356		)
Proceeds from exercise of stock options	3,845				—			—			—		3,845
Dividends paid	(43,747		)		—			—			—		(43,747		)
Net cash provided from (used in) financing activities	(96,037		)		914			53			—		(95,070		)
Net change in cash and cash equivalents	18,521				(18,227		)	15,676			—		15,970
Effect of foreign exchange rate changes on cash and cash equivalents	—				—			(172		)	—		(172		)
Cash and cash equivalents at beginning of period	4,849				18,659			67,751			—		91,259
Cash and cash equivalents at end of period	$	23,370			$	432		$	83,255		$	—	$	107,057

Choice Hotels International, Inc.

Condensed Consolidating Statement of Cash Flows

For the Year Ended December 31, 2010

(In thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated
Net cash provided from operating activities	$	99,871		$	41,607		$	3,457		$	—	$	144,935
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment	(1,448		)	(22,606		)	(314		)	—		(24,368		)
Acquisitions, net of cash acquired	0			0			(466		)	—		(466		)
Issuance of notes receivable	(10,583		)	(1,203		)	—			—		(11,786		)
Collections of notes receivable	5,000			83			—			—		5,083
Purchases of investments, employee benefit plans	—			(1,948		)	—			—		(1,948		)
Proceeds from sales of investments, employee benefit plans	—			1,649			—			—		1,649
Other items, net	(474		)	144			11			—		(319		)
Net cash used in investing activities	(7,505		)	(23,881		)	(769		)	—		(32,155		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt	247,733			—			—			—		247,733
Net repayments pursuant to revolving credit facility	(277,500		)	—			—			—		(277,500		)
Principal payments on long-term debt	—			—			(25		)	—		(25		)
Settlement of forward starting interest rate swap agreement	(8,663		)	—			—			—		(8,663		)
Purchase of treasury stock	(11,212		)	—			—			—		(11,212		)
Dividends paid	(43,808		)	—			—			—		(43,808		)
Other items, net	1,652			630			—			—		2,282
Net cash provided from (used in) in financing activities	(91,798		)	630			(25		)	—		(91,193		)
Net change in cash and cash equivalents	568			18,356			2,663			—		21,587
Effect of foreign exchange rate changes on cash and cash equivalents	—			—			1,802			—		1,802
Cash and cash equivalents at beginning of period	4,281			303			63,286			—		67,870
Cash and cash equivalents at end of period	$	4,849		$	18,659		$	67,751		$	—	$	91,259

Choice Hotels International, Inc.

Condensed Consolidating Statement of Cash Flows

For the Year Ended December 31, 2009

(In thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated
Net cash provided from (used in) operating activities	$	67,568		$	(8,344	)	$	52,992		$	—	$	112,216
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment	(5,602		)	(4,651		)	(882		)	—		(11,135		)
Issuance of notes receivable	(222		)	(1,773		)	—			—		(1,995		)
Purchases of investments, employee benefit plans	—			(3,854		)	—			—		(3,854		)
Proceeds from sales of investments, employee benefit plans	—			13,895			—			—		13,895
Collections of notes receivable	—			324			—					324
Other items, net	(598		)	(8		)	22			—		(584		)
Net cash provided from (used in) investing activities	(6,422		)	3,933			(860		)	—		(3,349		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments pursuant to revolving credit facility	(6,700		)	—			—			—		(6,700		)
Purchase of treasury stock	(59,128		)	—			—			—		(59,128		)
Excess tax benefits from stock-based compensation	1,345			4,489			—			—		5,834
Dividends paid	(44,274		)	—			—			—		(44,274		)
Proceeds from exercise of stock options	9,158			—			—			—		9,158
Net cash provided from (used in) financing activities	(99,599		)	4,489			—			—		(95,110		)
Net change in cash and cash equivalents	(38,453		)	78			52,132			—		13,757
Effect of foreign exchange rate changes on cash and cash equivalents	—			—			1,433			—		1,433
Cash and cash equivalents at beginning of period	42,734			225			9,721			—		52,680
Cash and cash equivalents at end of period	$	4,281		$	303		$	63,286		$	—	$	67,870