Condensed Consolidating Financial Statements

The Company’s 2010 and 2012 Senior Notes are guaranteed jointly, severally, fully and unconditionally, subject to certain customary limitations, by certain of the Company’s 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.

The condensed consolidating financial statements have been restated for the three and six months ended June 30, 2013 and the consolidated balance sheet as of December 31, 2013 has been revised from previously issued interim and annual financial statements to reflect the correction of an error discussed in Note 1 under the heading "Revision to Prior Annual Financial Statements and Restatement of Prior Interim Financial Statements" and other immaterial errors. In addition, the condensed consolidating statements of income for the three and six months ended June 30, 2013 have been reclassifed to account for discontinued operations as discussed in Note 17, "Discontinued Operations".

Choice Hotels International, Inc.

Condensed Consolidating Statement of Income

For the Three Months Ended June 30, 2014

(Unaudited, in thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
REVENUES:
Royalty fees	$	71,090		$	36,759		$	12,360		$	(42,539	)	$	77,670
Initial franchise and relicensing fees	4,435			—			287			—			4,722
Procurement services	7,842			—			178			—			8,020
Marketing and reservation	92,289			94,301			5,034			(87,858		)	103,766
Other	3,342			1			143			—			3,486
Total revenues	178,998			131,061			18,002			(130,397		)	197,664
OPERATING EXPENSES:
Selling, general and administrative	37,137			33,503			3,312			(42,539		)	31,413
Marketing and reservation	96,232			90,658			4,734			(87,858		)	103,766
Depreciation and amortization	756			1,416			160			—			2,332
Total operating expenses	134,125			125,577			8,206			(130,397		)	137,511
Operating income	44,873			5,484			9,796			—			60,153
OTHER INCOME AND EXPENSES, NET:
Interest expense	10,703			1			6			—			10,710
Equity in earnings of consolidated subsidiaries	(13,188		)	(11		)	—			13,199			—
Other items, net	(297		)	(450		)	(44		)	—			(791		)
Total other income and expenses, net	(2,782		)	(460		)	(38		)	13,199			9,919
Income from continuing operations before income taxes	47,655			5,944			9,834			(13,199		)	50,234
Income taxes	12,255			2,380			320			—			14,955
Income from continuing operations, net of income taxes	35,400			3,564			9,514			(13,199		)	35,279
Income from discontinued operations, net of income taxes	—			121			—			—			121
Net income	$	35,400		$	3,685		$	9,514		$	(13,199	)	$	35,400

Choice Hotels International, Inc.

Condensed Consolidating Statement of Income

For the Three Months Ended June 30, 2013 (Restated)

(Unaudited, in thousands)



	Parent (Restated)			Guarantor Subsidiaries (Restated)		Non-Guarantor Subsidiaries (Restated)			Eliminations (Restated)			Consolidated (Restated)
REVENUES:
Royalty fees	$	66,228		$	35,111	$	11,191		$	(39,892	)	$	72,638
Initial franchise and relicensing fees	4,087			—		329			—			4,416
Procurement services	7,384			—		162			—			7,546
Marketing and reservation	92,381			94,569		5,037			(87,915		)	104,072
Other	2,015			—		243			—			2,258
Total revenues	172,095			129,680		16,962			(127,807		)	190,930
OPERATING EXPENSES:
Selling, general and administrative	35,121			31,394		3,108			(39,892		)	29,731
Marketing and reservation	96,364			91,251		4,372			(87,915		)	104,072
Depreciation and amortization	759			1,426		203			—			2,388
Total operating expenses	132,244			124,071		7,683			(127,807		)	136,191
Operating income	39,851			5,609		9,279			—			54,739
OTHER INCOME AND EXPENSES, NET:
Interest expense	10,783			17		7			—			10,807
Equity in earnings of consolidated subsidiaries	(13,215		)	—		—			13,215			—
Other items, net	(564		)	147		(155		)	—			(572		)
Total other income and expenses, net	(2,996		)	164		(148		)	13,215			10,235
Income from continuing operations before income tax	42,847			5,445		9,427			(13,215		)	44,504
Income taxes	11,040			2,222		(382		)	—			12,880
Income from continuing operations, net of income taxes	31,807			3,223		9,809			(13,215		)	31,624
Income from discontinued operations, net of income taxes	—			183		—			—			183
Net income	$	31,807		$	3,406	$	9,809		$	(13,215	)	$	31,807

Choice Hotels International, Inc.

Condensed Consolidating Statement of Income

For the Six Months Ended June 30, 2014

(Unaudited, in thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated

REVENUES:
Royalty fees	$	124,085		$	60,974		$	22,882		$	(71,731	)	$	136,210
Initial franchise and relicensing fees	8,019			—			443			—			8,462
Procurement services	12,473			—			325			—			12,798
Marketing and reservation	171,110			168,200			9,169			(155,107		)	193,372
Other	6,298			1			259			—			6,558
Total revenues	321,985			229,175			33,078			(226,838		)	357,400
OPERATING EXPENSES:
Selling, general and administrative	67,711			55,594			6,519			(71,731		)	58,093
Marketing and reservation	177,817			161,602			9,060			(155,107		)	193,372
Depreciation and amortization	1,507			2,734			369			—			4,610
Total operating expenses	247,035			219,930			15,948			(226,838		)	256,075
Operating income	74,950			9,245			17,130			—			101,325
OTHER INCOME AND EXPENSES, NET:
Interest expense	20,871			2			8			—			20,881
Equity in earnings of consolidated subsidiaries	(24,114		)	50			—			24,064			—
Other items, net	(725		)	(517		)	(76		)				(1,318		)
Total other income and expenses, net	(3,968		)	(465		)	(68		)	24,064			19,563
Income from continuing operations before income taxes	78,918			9,710			17,198			(24,064		)	81,762
Income taxes	20,408			4,184			422			—			25,014
Income from continuing operations, net of income taxes	58,510			5,526			16,776			(24,064		)	56,748
Income from discontinued operations, net of income taxes	—			1,762			—			—			1,762
Net income	$	58,510		$	7,288		$	16,776		$	(24,064	)	$	58,510

Choice Hotels International, Inc.

Condensed Consolidating Statement of Income

For the Six Months Ended June 30, 2013 (Restated)

(Unaudited, in thousands)



	Parent (Restated)			Guarantor Subsidiaries (Restated)			Non-Guarantor Subsidiaries (Restated)			Eliminations (Restated)			Consolidated (Restated)

REVENUES:
Royalty fees	$	116,644		$	59,316		$	20,578		$	(67,792	)	$	128,746
Initial franchise and relicensing fees	7,655			—			538			—			8,193
Procurement services	11,184			—			312			—			11,496
Marketing and reservation	163,426			170,732			9,584			(157,347		)	186,395
Other	3,803			—			468			—			4,271
Total revenues	302,712			230,048			31,480			(225,139		)	339,101
OPERATING EXPENSES:
Selling, general and administrative	64,405			53,382			6,404			(67,792		)	56,399
Marketing and reservation	169,956			164,413			9,373			(157,347		)	186,395
Depreciation and amortization	1,473			2,553			403			—			4,429
Total operating expenses	235,834			220,348			16,180			(225,139		)	247,223
Operating income	66,878			9,700			15,300			—			91,878
OTHER INCOME AND EXPENSES, NET:
Interest expense	21,519			50			8			—			21,577
Equity in earnings of consolidated subsidiaries	(21,660		)	—			—			21,660			—
Other items, net	(1,112		)	(564		)	(109		)	—			(1,785		)
Total other income and expenses, net	(1,253		)	(514		)	(101		)	21,660			19,792
Income from continuing operations before income taxes	68,131			10,214			15,401			(21,660		)	72,086
Income taxes (benefit)	16,581			4,300			(195		)	—			20,686
Income from continuing operations, net of income taxes	51,550			5,914			15,596			(21,660		)	51,400
Income from discontinued operations, net of income taxes	—			150			—			—			150
Net income	$	51,550		$	6,064		$	15,596		$	(21,660	)	$	51,550

Choice Hotels International, Inc.

Condensed Consolidating Statement of Comprehensive Income

For the Three Months Ended June 30, 2014

(Unaudited, in thousands)



	Parent		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated

Net income	$	35,400	$	3,685	$	9,514	$	(13,199	)	$	35,400
Other comprehensive income (loss), net of tax:
Amortization of loss on cash flow hedge	216		—		—		—			216
Foreign currency translation adjustment	509		—		509		(509		)	509
Other comprehensive income (loss), net of tax	725		—		509		(509		)	725
Comprehensive income	$	36,125	$	3,685	$	10,023	$	(13,708	)	$	36,125

Choice Hotels International, Inc.

Condensed Consolidating Statement of Comprehensive Income

For the Three Months Ended June 30, 2013 (Restated)

(Unaudited, in thousands)



	Parent (Restated)			Guarantor Subsidiaries (Restated)		Non-Guarantor Subsidiaries (Restated)			Eliminations (Restated)			Consolidated (Restated)

Net income	$	31,807		$	3,406	$	9,809		$	(13,215	)	$	31,807
Other comprehensive income (loss), net of tax:
Amortization of loss on cash flow hedge	216			—		—			—			216
Foreign currency translation adjustment	(2,082		)	—		(2,082		)	2,082			(2,082		)
Other comprehensive income (loss), net of tax	(1,866		)	—		(2,082		)	2,082			(1,866		)
Comprehensive income	$	29,941		$	3,406	$	7,727		$	(11,133	)	$	29,941

Choice Hotels International, Inc.

Condensed Consolidating Statement of Comprehensive Income

For the Six Months Ended June 30, 2014

(Unaudited, in thousands)



	Parent		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated

Net income	$	58,510	$	7,288	$	16,776	$	(24,064	)	$	58,510
Other comprehensive income (loss), net of tax:
Amortization of loss on cash flow hedge	431		—		—		—			431
Foreign currency translation adjustment	1,030		—		1,030		(1,030		)	1,030
Other comprehensive income (loss), net of tax	1,461		—		1,030		(1,030		)	1,461
Comprehensive income	$	59,971	$	7,288	$	17,806	$	(25,094	)	$	59,971

Choice Hotels International, Inc.

Condensed Consolidating Statement of Comprehensive Income

For the Six Months Ended June 30, 2013 (Restated)

(Unaudited, in thousands)



	Parent (Restated)			Guarantor Subsidiaries (Restated)		Non-Guarantor Subsidiaries (Restated)			Eliminations (Restated)			Consolidated (Restated)

Net income	$	51,550		$	6,064	$	15,596		$	(21,660	)	$	51,550
Other comprehensive income (loss), net of tax:
Amortization of loss on cash flow hedge	431			—		—			—			431
Foreign currency translation adjustment	(2,327		)	—		(2,327		)	2,327			(2,327		)
Other comprehensive income (loss), net of tax	(1,896		)	—		(2,327		)	2,327			(1,896		)
Comprehensive income	$	49,654		$	6,064	$	13,269		$	(19,333	)	$	49,654

Choice Hotels International, Inc.

Condensed Consolidating Balance Sheet

As of June 30, 2014

(Unaudited, in thousands)



	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Cash and cash equivalents	$	38,962		$	111	$	172,469	$	—		$	211,542
Receivables, net	107,954			1,646		10,163		—			119,763
Other current assets	14,770			37,976		1,585		(633		)	53,698
Total current assets	161,686			39,733		184,217		(633		)	385,003
Property and equipment, at cost, net	18,500			38,796		942		—			58,238
Goodwill	60,620			5,193		—		—			65,813
Franchise rights and other identifiable intangibles, net	5,468			1,787		1,134		—			8,389
Notes receivable, net of allowances	12,047			20,936		1,509		—			34,492
Investments, employee benefit plans, at fair value	—			17,270		—		—			17,270
Investment in affiliates	403,500			31,233		—		(434,733		)	—
Advances to affiliates	13,060			216,916		11,338		(241,314		)	—
Deferred income taxes	—			9,895		917		(9,691		)	1,121
Other assets	8,296			14,806		35,014		—			58,116
Total assets	$	683,177		$	396,565	$	235,071	$	(686,371	)	$	628,442
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Accounts payable	$	7,513		$	39,178	$	4,201	$	—		$	50,892
Accrued expenses	28,591			21,635		2,172		—			52,398
Deferred revenue	6,794			59,811		760		—			67,365
Current portion of long-term debt	11,250			707		13		—			11,970
Deferred compensation and retirement plan obligations	—			579		—		—			579
Other current liabilities	4,572			13,520		—		(633		)	17,459
Total current liabilities	58,720			135,430		7,146		(633		)	200,663
Long-term debt	773,353			4,153		30		—			777,536
Deferred compensation & retirement plan obligations	—			23,250		10		—			23,260
Advances from affiliates	233,304			318		7,692		(241,314		)	—
Other liabilities	30,310			17,984		890		(9,691		)	39,493
Total liabilities	1,095,687			181,135		15,768		(251,638		)	1,040,952
Total shareholders’ (deficit) equity	(412,510		)	215,430		219,303		(434,733		)	(412,510		)
Total liabilities and shareholders’ deficit	$	683,177		$	396,565	$	235,071	$	(686,371	)	$	628,442

Choice Hotels International, Inc.

Condensed Consolidating Balance Sheet

As of December 31, 2013

(In thousands)



	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Cash and cash equivalents	$	9,785		$	569	$	157,441	$	—		$	167,795
Receivables, net	72,219			1,475		8,691		—			82,385
Other current assets	26,395			34,987		752		(5,340		)	56,794
Total current assets	108,399			37,031		166,884		(5,340		)	306,974
Property and equipment, at cost, net	11,087			55,963		802		—			67,852
Goodwill	60,620			5,193		—		—			65,813
Franchise rights and other identifiable intangibles, net	6,553			2,096		1,304		—			9,953
Advances, marketing and reservation activities	5,844			—		—		—			5,844
Notes receivable, net of allowances	13,257			17,158		1,457		—			31,872
Investments, employee benefit plans, at fair value	—			15,950		—		—			15,950
Investment in affiliates	376,712			28,312		—		(405,024		)	—
Advances to affiliates	14,198			189,833		10,896		(214,927		)	—
Deferred income taxes	—			10,710		871		(11,581		)	—
Other assets	8,955			13,184		30,025		—			52,164
Total assets	$	605,625		$	375,430	$	212,239	$	(636,872	)	$	556,422
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Accounts payable	$	6,276		$	30,778	$	4,609	$	—		$	41,663
Accrued expenses	28,215			26,503		1,907		—			56,625
Deferred revenue	7,065			53,414		709		—			61,188
Current portion of long-term debt	9,375			702		11		—			10,088
Deferred compensation and retirement plan obligations	—			2,492		—		—			2,492
Other current liabilities	—			7,401		221		(5,340		)	2,282
Total current liabilities	50,931			121,290		7,457		(5,340		)	174,338
Long-term debt	778,946			4,507		18		—			783,471
Deferred compensation & retirement plan obligations	—			22,520		7		—			22,527
Advances from affiliates	206,931			362		7,634		(214,927		)	—
Other liabilities	21,688			18,216		634		(11,581		)	28,957
Total liabilities	1,058,496			166,895		15,750		(231,848		)	1,009,293
Total shareholders’ (deficit) equity	(452,871		)	208,535		196,489		(405,024		)	(452,871		)
Total liabilities and shareholders' deficit	$	605,625		$	375,430	$	212,239	$	(636,872	)	$	556,422

Choice Hotels International, Inc.

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended June 30, 2014

(Unaudited, in thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated

Net cash provided (used) by operating activities	$	53,132		$	(1,383	)	$	14,740		$	(657	)	$	65,832

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment	(1,797		)	(5,235		)	(282		)	—			(7,314		)
Proceeds from sales of assets	27			12,189			—			—			12,216
Equity method investments	—			(1,283		)	(5,663		)	—			(6,946		)
Purchases of investments, employee benefit plans	—			(1,220		)	—			—			(1,220		)
Proceeds from sales of investments, employee benefit plans	—			641			—			—			641
Issuance of mezzanine and other notes receivable	(2,223		)	—			—			—			(2,223		)
Collections of mezzanine and other notes receivable	9,743			—			—			—			9,743
Advances to and investments in affiliates	(1,000		)	(4,842		)	—			5,842			—
Other items, net	(296		)	—			—			—			(296		)
Net cash provided (used) in investing activities	4,454			250			(5,945		)	5,842			4,601

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt	(3,750		)	(349		)	(13		)	—			(4,112		)
Proceeds from the issuance of long-term debt	—			—			26			—			26
Proceeds from contributions from affiliates	—			—			5,842			(5,842		)	—
Purchases of treasury stock	(4,544		)	—			—			—			(4,544		)
Dividends paid	(21,957		)	—			(657		)	657			(21,957		)
Excess tax benefits from stock-based compensation	295			1,024			—			—			1,319
Proceeds from exercise of stock options	1,547			—			—			—			1,547
Net cash provided (used) by financing activities	(28,409		)	675			5,198			(5,185		)	(27,721		)
Net change in cash and cash equivalents	29,177			(458		)	13,993			—			42,712
Effect of foreign exchange rate changes on cash and cash equivalents	—			—			1,035			—			1,035
Cash and cash equivalents at beginning of period	9,785			569			157,441			—			167,795
Cash and cash equivalents at end of period	$	38,962		$	111		$	172,469		$	—		$	211,542

Choice Hotels International, Inc.

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended June 30, 2013 (Restated)

(Unaudited, in Thousands)



	Parent (Restated)			Guarantor Subsidiaries (Restated)			Non-Guarantor Subsidiaries (Restated)			Eliminations (Restated)			Consolidated (Restated)

Net cash provided (used) by operating activities	$	(3,139	)	$	15,698		$	17,708		$	(280	)	$	29,987

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment	(3,775		)	(18,135		)	(125		)	—			(22,035		)
Equity method investments	—			—			(1,851		)	—			(1,851		)
Purchases of investments, employee benefit plans	—			(1,580		)	—			—			(1,580		)
Proceeds from sales of investments, employee benefit plans	—			3,934			—			—			3,934
Collections of mezzanine and other notes receivable	201			—			—			—			201
Advances to and investments in affiliates	(1,000		)	(850		)	—			1,850			—
Other items, net	(304		)	—			—			—			(304		)
Net cash provided (used) in investing activities	(4,878		)	(16,631		)	(1,976		)	1,850			(21,635		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings pursuant to revolving credit facility	15,200			—			—			—			15,200
Principal payments on long-term debt	(3,750		)	(335		)	(10		)	—			(4,095		)
Purchases of treasury stock	(3,651		)	—			—			—			(3,651		)
Dividends paid	(11,261		)	—			—			—			(11,261		)
Excess tax benefits from stock-based compensation	20			1,126			—			—			1,146
Proceeds from contributions from affiliates	—			—			1,850			(1,850		)	—
Proceeds from exercise of stock options	5,973			—			—			—			5,973
Net cash provided (used) by financing activities	2,531			791			1,840			(1,850		)	3,312
Net change in cash and cash equivalents	(5,486		)	(142		)	17,572			(280		)	11,664
Effect of foreign exchange rate changes on cash and cash equivalents	—			—			(2,051		)	—			(2,051		)
Cash and cash equivalents at beginning of period	8,420			407			125,350			—			134,177
Cash and cash equivalents at end of period	$	2,934		$	265		$	140,871		$	(280	)	$	143,790