Condensed Consolidating Financial Statements

The Company’s Senior Notes due 2020 and 2022 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 Three Months Ended September 30, 2012

(Unaudited, in Thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
REVENUES:
Royalty fees	$	74,186		$	16,347		$	22,925		$	(32,613	)	$	80,845
Initial franchise and relicensing fees	2,996			—			251			—			3,247
Procurement services	3,489			—			350			—			3,839
Marketing and reservation	109,793			90,986			4,783			(86,500		)	119,062
Other items, net	1,991			1,238			191			—			3,420
Total revenues	192,455			108,571			28,500			(119,113		)	210,413
OPERATING EXPENSES:
Selling, general and administrative	39,781			19,525			(3,523		)	(32,613		)	23,170
Marketing and reservation	111,831			89,498			4,233			(86,500		)	119,062
Other items, net	706			2,018			204			—			2,928
Total operating expenses	152,318			111,041			914			(119,113		)	145,160
Operating income (loss)	40,137			(2,470		)	27,586			—			65,253
OTHER INCOME AND EXPENSES, NET:
Interest expense	11,005			(839		)	—			—			10,166
Equity in earnings of consolidated subsidiaries	(27,029		)	—			—			27,029			—
Other items, net	215			(511		)	(285		)	—			(581		)
Total other income and expenses, net	(15,809		)	(1,350		)	(285		)	27,029			9,585
Income (loss) before income taxes	55,946			(1,120		)	27,871			(27,029		)	55,668
Income taxes	11,569			(647		)	369			—			11,291
Net income (loss)	$	44,377		$	(473	)	$	27,502		$	(27,029	)	$	44,377

Choice Hotels International, Inc.

Condensed Consolidating Statement of Income

For the Three Months Ended September 30, 2011

(Unaudited, in Thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
REVENUES:
Royalty fees	$	69,968		$	20,112		$	8,481		$	(21,471	)	$	77,090
Initial franchise and relicensing fees	3,363			—			220			—			3,583
Procurement services	3,984			—			119			—			4,103
Marketing and reservation	91,827			89,219			4,803			(81,456		)	104,393
Other items, net	1,652			1,236			264			—			3,152
Total revenues	170,794			110,567			13,887			(102,927		)	192,321
OPERATING EXPENSES:
Selling, general and administrative	20,510			19,019			4,497			(21,471		)	22,555
Marketing and reservation	94,644			86,779			4,426			(81,456		)	104,393
Other items, net	703			2,044			226			—			2,973
Total operating expenses	115,857			107,842			9,149			(102,927		)	129,921
Operating income (loss)	54,937			2,725			4,738			—			62,400
OTHER INCOME AND EXPENSES, NET:
Interest expense	4,209			(984		)	3			—			3,228
Equity in earnings of consolidated subsidiaries	(5,186		)	—			—			5,186			—
Other items, net	(153		)	2,646			(287		)	—			2,206
Total other income and expenses, net	(1,130		)	1,662			(284		)	5,186			5,434
Income (loss) before income taxes	56,067			1,063			5,022			(5,186		)	56,966
Income taxes	13,765			533			366			—			14,664
Net income (loss)	$	42,302		$	530		$	4,656		$	(5,186	)	$	42,302

Choice Hotels International, Inc.

Condensed Consolidating Statement of Income

For the Nine Months Ended September 30, 2012

(Unaudited, in Thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
REVENUES:
Royalty fees	$	175,862		$	68,622		$	39,781		$	(89,503	)	$	194,762
Initial franchise and relicensing fees	8,459			—			494			—			8,953
Procurement services	13,349			—			641			—			13,990
Marketing and reservation	252,951			248,011			13,892			(230,230		)	284,624
Other items, net	6,958			3,440			476			—			10,874
Total revenues	457,579			320,073			55,284			(319,733		)	513,203
OPERATING EXPENSES:
Selling, general and administrative	92,804			63,544			5,228			(89,503		)	72,073
Marketing and reservation	256,936			244,861			13,057			(230,230		)	284,624
Other items, net	2,117			5,856			625			—			8,598
Total operating expenses	351,857			314,261			18,910			(319,733		)	365,295
Operating income (loss)	105,722			5,812			36,374			—			147,908
OTHER INCOME AND EXPENSES, NET:
Interest expense	19,731			(2,914		)	6			—			16,823
Equity in earnings of consolidated subsidiaries	(42,075		)	—			—			42,075			—
Other items, net	(274		)	(2,137		)	(344		)	—			(2,755		)
Total other income and expenses, net	(22,618		)	(5,051		)	(338		)	42,075			14,068
Income (loss) before income taxes	128,340			10,863			36,712			(42,075		)	133,840
Income taxes	32,104			4,663			837			—			37,604
Net income (loss)	$	96,236		$	6,200		$	35,875		$	(42,075	)	$	96,236

Choice Hotels International, Inc.

Condensed Consolidating Statement of Income

For the Nine Months Ended September 30, 2011

(Unaudited, in Thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations			Consolidated
REVENUES:
Royalty fees	$	163,639		$	73,930		$	23,227	$	(78,292	)	$	182,504
Initial franchise and relicensing fees	8,550			—			533		—			9,083
Procurement services	13,706			—			331		—			14,037
Marketing and reservation	220,512			245,302			13,292		(220,914		)	258,192
Other items, net	4,692			3,173			1,222		—			9,087
Total revenues	411,099			322,405			38,605		(299,206		)	472,903
OPERATING EXPENSES:
Selling, general and administrative	72,589			65,805			12,839		(78,292		)	72,941
Marketing and reservation	228,660			237,509			12,937		(220,914		)	258,192
Other items, net	2,117			5,787			665		—			8,569
Total operating expenses	303,366			309,101			26,441		(299,206		)	339,702
Operating income (loss)	107,733			13,304			12,164		—			133,201
OTHER INCOME AND EXPENSES, NET:
Interest expense	12,612			(2,900		)	7		—			9,719
Equity earnings of consolidated subsidiaries	(19,056		)	—			—		19,056			—
Other items, net	(558		)	1,884			1,153		—			2,479
Total other income and expenses, net	(7,002		)	(1,016		)	1,160		19,056			12,198
Income (loss) before income taxes	114,735			14,320			11,004		(19,056		)	121,003
Income taxes	29,125			5,826			442		—			35,393
Net income (loss)	$	85,610		$	8,494		$	10,562	$	(19,056	)	$	85,610

Choice Hotels International, Inc.

Condensed Consolidating Statement of Comprehensive Income

For the Three Months Ended September 30, 2012

(Unaudited, in Thousands)



	Parent		Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations			Consolidated

Net income (loss)	$	44,377	$	(473	)	$	27,502	$	(27,029	)	$	44,377
Other comprehensive income (loss), net of tax:
Amortization of loss on cash flow hedge	215		—			—		—			215
Foreign currency translation adjustment, net	1		1			207		2			211
Amortization of pension related costs, net of tax:
Actuarial loss	—		20			—		—			20
Other comprehensive income, net of tax	216		21			207		2			446
Comprehensive income (loss)	$	44,593	$	(452	)	$	27,709	$	(27,027	)	$	44,823

Choice Hotels International, Inc.

Condensed Consolidating Statement of Comprehensive Income

For the Three Months Ended September 30, 2011

(Unaudited, in Thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated

Net income (loss)	$	42,302		$	530		$	4,656		$	(5,186	)	$	42,302
Other comprehensive income (loss), net of tax:
Amortization of loss on cash flow hedge	215			—			—			—			215
Foreign currency translation adjustment, net	(15		)	(93		)	(1,078		)	19			(1,167		)
Other comprehensive income (loss), net of tax	200			(93		)	(1,078		)	19			(952		)
Comprehensive income (loss)	$	42,502		$	437		$	3,578		$	(5,167	)	$	41,350

Choice Hotels International, Inc.

Condensed Consolidating Statement of Comprehensive Income

For the Nine Months Ended September 30, 2012

(Unaudited, in Thousands)



	Parent		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated

Net income (loss)	$	96,236	$	6,200	$	35,875	$	(42,075	)	$	96,236
Other comprehensive income (loss), net of tax:
Amortization of loss on cash flow hedge	646		—		—		—			646
Foreign currency translation adjustment, net	15		5		181		(10		)	191
Amortization of pension related costs, net of tax:
Actuarial loss	—		60		—		—			60
Other comprehensive income (loss), net of tax	661		65		181		(10		)	897
Comprehensive income (loss)	$	96,897	$	6,265	$	36,056	$	(42,085	)	$	97,133

Choice Hotels International, Inc.

Condensed Consolidating Statement of Comprehensive Income

For the Nine Months Ended September 30, 2011

(Unaudited, in Thousands)



	Parent		Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations			Consolidated

Net income (loss)	$	85,610	$	8,494		$	10,562	$	(19,056	)	$	85,610
Other comprehensive income (loss), net of tax:
Amortization of loss on cash flow hedge	646		—			—		—			646
Foreign currency translation adjustment, net	52		(76		)	17		(157		)	(164		)
Actuarial pension loss, net of tax	—		(10		)	—		—			(10		)
Other comprehensive income (loss), net of tax	698		(86		)	17		(157		)	472
Comprehensive income (loss)	$	86,308	$	8,408		$	10,579	$	(19,213	)	$	86,082

Choice Hotels International, Inc.

Condensed Consolidating Balance Sheet

As of September 30, 2012

(Unaudited, in thousands)



	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Cash and cash equivalents	$	4,240		$	275	$	110,549	$	—		$	115,064
Receivables, net	58,517			1,951		5,728		—			66,196
Other current assets	15,785			19,580		5,224		(7,172		)	33,417
Total current assets	78,542			21,806		121,501		(7,172		)	214,677
Property and equipment, at cost, net	12,336			39,398		1,088		—			52,822
Goodwill	60,620			5,193		193		—			66,006
Franchise rights and other identifiable intangibles, net	9,266			2,870		2,418		—			14,554
Receivable – marketing and reservation fees	46,249			—		—		—			46,249
Investments, employee benefit plans, at fair value	—			12,530		—		—			12,530
Investment in and advances to affiliates	326,926			237,234		14,044		(578,204		)	0
Deferred income taxes	—			29,132		318		(6,488		)	22,962
Other assets	23,559			13,257		16,455		—			53,271
Total assets	$	557,498		$	361,420	$	156,017	$	(591,864	)	$	483,071
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Accounts payable	$	9,851		$	30,019	$	4,375	$	—		$	44,245
Accrued expenses	19,555			21,892		2,092		—			43,539
Deferred revenue	21,455			54,643		851		—			76,949
Current portion of long-term debt	9,375			670		20		—			10,065
Deferred compensation & retirement plan obligations	—			17,870		—		—			17,870
Other current liabilities	6,813			14,720		145		(7,172		)	14,506
Total current liabilities	67,049			139,814		7,483		(7,172		)	207,174
Long-term debt	806,841			2,015		55		—			808,911
Deferred compensation & retirement plan obligations	—			19,984		8		—			19,992
Advances from affiliates	238,210			2,725		5,009		(245,944		)	—
Other liabilities	14,795			7,821		263		(6,488		)	16,391
Total liabilities	1,126,895			172,359		12,818		(259,604		)	1,052,468
Total shareholders’ (deficit) equity	(569,397		)	189,061		143,199		(332,260		)	(569,397		)
Total liabilities and shareholders’ deficit	$	557,498		$	361,420	$	156,017	$	(591,864	)	$	483,071

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, net	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
Receivable, marketing and reservation fees	54,014			—		—		—			54,014
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		)	—
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 and 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 Statement of Cash Flows

For the Nine Months Ended September 30, 2012

(Unaudited, in thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated

Net cash provided (used) by operating activities	$	87,073		$	(1,928	)	$	36,131		$	—	$	121,276

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment	(7,126		)	(5,217		)	(182		)	—		(12,525		)
Equity method investments	—			—			(9,454		)	—		(9,454		)
Issuance of notes receivable	(4,237		)	(3,068		)	—			—		(7,305		)
Collections of notes receivable	110			216			—			—		326
Purchases of investments, employee benefit plans	—			(1,191		)	—			—		(1,191		)
Proceeds from sales of investments, employee benefit plans	—			10,909			—			—		10,909
Other items, net	(322		)	—			—			—		(322		)

Net cash provided (used) by investing activities	(11,575		)	1,649			(9,636		)	—		(19,562		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings pursuant to revolving credit facilities	16,725			—			—			—		16,725
Proceeds from issuance of long-term debt	543,500			—			—			—		543,500
Repayments of long-term debt	—			(488		)	(14		)	—		(502		)
Purchase of treasury stock	(22,227		)	—			—			—		(22,227		)
Dividends paid	(632,751		)	—			—			—		(632,751		)
Excess tax benefits from stock-based compensation	183			610			—			—		793
Debt issuance costs	(4,753		)	—			—			—		(4,753		)
Proceeds from exercise of stock options	4,695			—			—			—		4,695
Net cash provided (used) by financing activities	(94,628		)	122			(14		)	—		(94,520		)
Net change in cash and cash equivalents	(19,130		)	(157		)	26,481			—		7,194
Effect of foreign exchange rate changes on cash and cash equivalents	—			—			813			—		813
Cash and cash equivalents at beginning of period	23,370			432			83,255			—		107,057

Cash and cash equivalents at end of period	$	4,240		$	275		$	110,549		$	—	$	115,064

Choice Hotels International, Inc.

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended September 30, 2011

(Unaudited, in Thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated

Net cash provided (used) by operating activities	$	96,333		$	(10,502	)	$	20,062		$	—	$	105,893

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment	(2,460		)	(5,395		)	(274		)	—		(8,129		)
Equity method investments	—			—			(3,600		)	—		(3,600		)
Issuance of notes receivable	(1,404		)	(2,916		)	—			—		(4,320		)
Collections of notes receivable	—			15			—			—		15
Purchases of investments, employee benefit plans	—			(1,051		)	—			—		(1,051		)
Proceeds from sales of investments, employee benefit plans	—			566			—			—		566
Other items, net	(289		)	(5		)	(18		)	—		(312		)

Net cash used in investing activities	(4,153		)	(8,786		)	(3,892		)	—		(16,831		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments pursuant to revolving credit facility	(200		)	—			—			—		(200		)
Proceeds from issuance of long-term debt	—			—			75			—		75
Repayments of long-term debt	—			(55		)	(19		)	—		(74		)
Purchase of treasury stock	(24,796		)	—			—			—		(24,796		)
Dividends paid	(32,923		)	—			—			—		(32,923		)
Excess tax benefits from stock-based compensation	38			1,070			—			—		1,108
Debt issuance costs	(2,356		)	—			—			—		(2,356		)
Proceeds from exercise of stock options	3,726			—			—			—		3,726

Net cash provided (used) by financing activities	(56,511		)	1,015			56			—		(55,440		)
Net change in cash and cash equivalents	35,669			(18,273		)	16,226			—		33,622
Effect of foreign exchange rate changes on cash and cash equivalents	—			—			(147		)	—		(147		)
Cash and cash equivalents at beginning of period	4,849			18,659			67,751			—		91,259
Cash and cash equivalents at end of period	$	40,518		$	386		$	83,830		$	—	$	124,734