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 wholly 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.

As described in Note 1 to the Company's Consolidated Financial Statements, the condensed consolidating statements of cash flows for the years ended December 31, 2012 and 2011 have been revised from prior filings to reflect the reclassification of certain operating and investing cash flows related to the misapplication of GAAP to the presentation of cash flows from the Company's forgivable notes receivable. The following tables present the effect of the correction on select line items included in the Parent and Guarantor's Condensed Consolidating Statement of Cash Flows for the years ended December 31, 2012 and 2011:



	Year Ended December 31, 2012
	Parent									Guarantor
	(In thousands)
	As Previously Reported			Adjustment			As Revised			As Previously Reported			Adjustment			As Revised
Net cash provided by operating activities	$	90,690		$	(2	)	$	90,688		$	29,087		$	(10,896	)	$	18,191
Investing Activities:
Issuance of mezzanine and other notes receivable	(23,737		)	1			(23,736		)	(11,188		)	11,188			—
Collections of mezzanine and other notes receivable	3,269			1			3,270			292			(292		)	—
Net cash used in investing activities	(28,305		)	2			(28,303		)	(29,756		)	10,896			(18,860		)



	Year Ended December 31, 2011
	Parent									Guarantor
	(In thousands)
	As Previously Reported			Adjustment			As Revised			As Previously Reported			Adjustment			As Revised
Net cash provided by operating activities	$	120,964		$	(114	)	$	120,850		$	(7,122	)	$	(3,361	)	$	(10,483	)
Investing Activities:
Issuance of mezzanine and other notes receivable	(9,341		)	114			(9,227		)	(3,425		)	3,425			—
Collections of mezzanine and other notes receivable	4,690			—			4,690			64			(64		)	—
Net cash used in investing activities	(6,406		)	114			(6,292		)	(12,019		)	3,361			(8,658		)

The Company assessed the materiality of the revisions noted above and concluded that they are not material to any of its previously issued annual or interim condensed consolidating financial statements.

The condensed consolidated statements of income for the years ended December 31, 2013, 2012 and 2011 have also been recast to account for discontinued operations as discussed in Note 27 "Discontinued Operations".

Choice Hotels International, Inc.

Condensed Consolidating Statement of Income

For the Year Ended December 31, 2013

(In thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
REVENUES:
Royalty fees	$	243,272		$	112,215		$	43,967		$	(131,642	)	$	267,812
Initial franchise and relicensing fees	17,432			—			1,254			—			18,686
Procurement services	19,864			—			804			—			20,668
Marketing and reservation	362,459			350,134			19,327			(324,287		)	407,633
Other items, net	8,834			—			1,017			—			9,851
Total revenues	651,861			462,349			66,369			(455,929		)	724,650
OPERATING EXPENSES:
Selling, general and administrative	128,966			100,900			13,489			(131,642		)	111,713
Marketing and reservation	377,884			336,498			17,538			(324,287		)	407,633
Other items, net	3,100			5,087			869			—			9,056
Total operating expenses	509,950			442,485			31,896			(455,929		)	528,402
Operating income	141,911			19,864			34,473			—			196,248
OTHER INCOME AND EXPENSES, NET:
Interest expense	42,418			113			6			—			42,537
Equity in earnings of consolidated subsidiaries	(47,362		)	—			—			47,362			—
Other items, net	(2,406		)	(1,532		)	(1,023		)	—			(4,961		)
Other income and expenses, net	(7,350		)	(1,419		)	(1,017		)	47,362			37,576
Income from continuing operations before taxes	149,261			21,283			35,490			(47,362		)	158,672
Income taxes	35,552			8,897			873			—			45,322
Income from from continuing operations, net of income taxes	113,709			12,386			34,617			(47,362		)	113,350
Income from discontinued operations, net of income taxes	—			359			—			—			359
Net income	$	113,709		$	12,745		$	34,617		$	(47,362	)	$	113,709

Choice Hotels International, Inc.

Condensed Consolidating Statement of Income

For the Year Ended December 31, 2012

(In thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
REVENUES:
Royalty fees	$	236,269		$	97,881		$	54,420		$	(126,890	)	$	261,680
Initial franchise and relicensing fees	13,727			—			476			—			14,203
Procurement services	17,152			—			810			—			17,962
Marketing and reservation	343,566			335,869			19,900			(309,657		)	389,678
Other items, net	8,363			—			842			—			9,205
Total revenues	619,077			433,750			76,448			(436,547		)	692,728
OPERATING EXPENSES:
Selling, general and administrative	130,709			89,122			8,938			(126,890		)	101,879
Marketing and reservation	350,573			326,865			18,036			(305,796		)	389,678
Other items, net	2,832			3,852			1,007			—			7,691
Total operating expenses	484,114			419,839			27,981			(432,686		)	499,248
Operating income	134,963			13,911			48,467			(3,861		)	193,480
OTHER INCOME AND EXPENSES, NET:
Interest expense	31,041			—			9			(3,861		)	27,189
Equity in earnings of consolidated subsidiaries	(56,246		)	—			—			56,246			—
Other items, net	(551		)	(1,995		)	(669		)	—			(3,215		)
Other income and expenses, net	(25,756		)	(1,995		)	(660		)	52,385			23,974
Income from continuing operations before income taxes	160,719			15,906			49,127			(56,246		)	169,506
Income taxes	39,106			6,769			2,353			—			48,228
Income from continuing operations, net of income taxes	121,613			9,137			46,774			(56,246		)	121,278
Income from discontinued operations, net of income taxes	—			335			—			—			335
Net income	$	121,613		$	9,472		$	46,774		$	(56,246	)	$	121,613

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	$	220,676		$	104,898		$	32,749	$	(111,848	)	$	246,475
Initial franchise and relicensing fees	13,439			—			613		—			14,052
Procurement services	17,619			—			492		—			18,111
Marketing and reservation	303,335			330,372			18,592		(298,147		)	354,152
Other items, net	6,341			—			1,471		—			7,812
Total revenues	561,410			435,270			53,917		(409,995		)	640,602
OPERATING EXPENSES:
Selling, general and administrative	107,552			92,887			17,845		(111,848		)	106,436
Marketing and reservation	315,245			319,818			17,236		(298,147		)	354,152
Other items, net	2,824			3,789			884		—			7,497
Total operating expenses	425,621			416,494			35,965		(409,995		)	468,085
Operating income	135,789			18,776			17,952		—			172,517
OTHER INCOME AND EXPENSES, NET:
Interest expense	16,815			(3,886		)	10		—			12,939
Equity in earnings of consolidated subsidiaries	(30,695		)	—			—		30,695			—
Other items, net	(789		)	647			1,009		—			867
Other income and expenses, net	(14,669		)	(3,239		)	1,019		30,695			13,806
Income from continuing operations before income taxes	150,458			22,015			16,933		(30,695		)	158,711
Income taxes	39,397			7,888			593		—			47,878
Income from continuing operations, net of income taxes	111,061			14,127			16,340		(30,695		)	110,833
Income from discontinued operations, net of income taxes	—			228			—		—			228
Net income	$	111,061		$	14,355		$	16,340	$	(30,695	)	$	111,061

Choice Hotels International, Inc.

Condensed Consolidating Statement of Comprehensive Income

For the Year Ended December 31, 2013

(In thousands)



	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated

Net income	$	113,709		$	12,745	$	34,617		$	(47,362	)	$	113,709
Other comprehensive income (loss), net of tax:
Amortization of loss on cash flow hedge	862			—		—			—			862
Foreign currency translation adjustment	(2,863		)	—		(2,863		)	2,863			(2,863		)
Other comprehensive income (loss), net of tax	(2,001		)	—		(2,863		)	2,863			(2,001		)
Comprehensive income	$	111,708		$	12,745	$	31,754		$	(44,499	)	$	111,708

Choice Hotels International, Inc.

Condensed Consolidating Statement of Comprehensive Income

For the Year Ended December 31, 2012

(In thousands)



	Parent		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated

Net income	$	121,613	$	9,472	$	46,774	$	(56,246	)	$	121,613
Other comprehensive income (loss), net of tax:
Amortization of loss on cash flow hedge	862		—		—		—			862
Foreign currency translation adjustment	237		5		224		(229		)	237
Amortization of pension related costs, net of tax:
Actuarial loss	80		80		—		(80		)	80
Settlement of pension plan	1,406		1,406		—		(1,406		)	1,406
Other comprehensive income (loss), net of tax	2,585		1,491		224		(1,715		)	2,585
Comprehensive income	$	124,198	$	10,963	$	46,998	$	(57,961	)	$	124,198

Choice Hotels International, Inc.

Condensed Consolidating Statement of Comprehensive Income

For the Year Ended December 31, 2011

(In thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net income	$	111,061		$	14,355		$	16,340		$	(30,695	)	$	111,061
Other comprehensive income (loss), net of tax:
Amortization of loss on cash flow hedge	862			—			—			—			862
Foreign currency translation adjustment	615			248			(1,604		)	1,356			615
Actuarial pension loss, net of tax	(1,086		)	(1,086		)	—			1,086			(1,086		)
Other comprehensive income (loss), net of tax	391			(838		)	(1,604		)	2,442			391
Comprehensive income	$	111,452		$	13,517		$	14,736		$	(28,253	)	$	111,452

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 reservations activities	5,844			—		—		—			5,844
Investments, employee benefit plans, at fair value	—			15,950		—		—			15,950
Investments 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	22,212			30,342		31,482		—			84,036
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 & 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 Balance Sheet

As of December 31, 2012

(In thousands)



	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Cash and cash equivalents	$	8,420		$	407	$	125,350	$	—		$	134,177
Receivables, net	70,011			1,920		8,068		—			79,999
Other current assets	44,899			23,495		3,528		(3,368		)	68,554
Total current assets	123,330			25,822		136,946		(3,368		)	282,730
Property and equipment, at cost, net	11,307			39,298		1,046		—			51,651
Goodwill	60,620			5,193		—		—			65,813
Franchise rights and other identifiable intangibles, net	8,669			2,715		2,089		—			13,473
Investments, employee benefit plans, at fair value	—			12,755		—		—			12,755
Investment in affiliates	331,416			26,194		—		(357,610		)	—
Advances to affiliates	14,252			206,770		13,479		(234,501		)	—
Advances, marketing and reservation activities	29,467			—		—		—			29,467
Deferred income taxes	—			10,367		599		(10,966		)	—
Other assets	32,085			18,925		25,003		—			76,013
Total assets	$	611,146		$	348,039	$	179,162	$	(606,445	)	$	531,902
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Accounts payable	$	5,930		$	28,525	$	4,259	$	—		$	38,714
Accrued expenses	18,582			34,576		2,394		—			55,552
Deferred revenue	17,239			53,081		834		—			71,154
Current portion of long-term debt	7,500			675		20		—			8,195
Deferred compensation & retirement plan obligations	—			2,522		—		—			2,522
Other current liabilities	—			2,047		1,321		(3,368		)	—
Total current liabilities	49,251			121,426		8,828		(3,368		)	176,137
Long-term debt	845,257			1,845		48		—			847,150
Deferred compensation & retirement plan obligations	—			20,390		9		—			20,399
Advances from affiliates	226,917			189		7,395		(234,501		)	—
Other liabilities	28,359			9,216		245		(10,966		)	26,854
Total liabilities	1,149,784			153,066		16,525		(248,835		)	1,070,540
Total shareholders’ (deficit) equity	(538,638		)	194,973		162,637		(357,610		)	(538,638		)
Total liabilities and shareholders’ deficit	$	611,146		$	348,039	$	179,162	$	(606,445	)	$	531,902

Choice Hotels International, Inc.

Condensed Consolidating Statement of Cash Flows

For the Year Ended December 31, 2013

(In thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net cash provided by operating activities	$	91,745		$	27,209		$	36,529		$	(1,570	)	$	153,913
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment	(5,167		)	(27,984		)	(246		)	—			(33,397		)
Equity method investments	—			(2,401		)	(3,284		)	—			(5,685		)
Issuance of mezzanine and other notes receivable	(1,095		)	—			—			—			(1,095		)
Collections of mezzanine and other notes receivable	9,748			—			—			—			9,748
Purchases of investments, employee benefit plans	—			(2,676		)	—			—			(2,676		)
Proceeds from sales of investments, employee benefit plans	—			4,168			—			—			4,168
Advances to and investments in affiliates	(1,000		)	(2,284		)	—			3,284			—
Other items, net	(485		)	—			—			—			(485		)
Net cash used in investing activities	2,001			(31,177		)	(3,530		)	3,284			(29,422		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments pursuant to revolving credit facilities	(57,000		)	—			—			—			(57,000		)
Principal payments on long-term debt	(7,500		)	(671		)	(33		)	—			(8,204		)
Proceeds from the issuance of long-term debt	—			3,360			—			—			3,360
Purchase of treasury stock	(3,965		)	—			—			—			(3,965		)
Excess tax benefits from stock-based compensation	19			1,441			—			—			1,460
Proceeds from exercise of stock options	8,864			—			—			—			8,864
Proceeds from contributions from affiliates	—			—			3,284			(3,284		)	—
Dividends paid	(32,799		)	—			(1,570		)	1,570			(32,799		)
Net cash provided from (used in) financing activities	(92,381		)	4,130			1,681			(1,714		)	(88,284		)
Net change in cash and cash equivalents	1,365			162			34,680			—			36,207
Effect of foreign exchange rate changes on cash and cash equivalents	—			—			(2,589		)	—			(2,589		)
Cash and cash equivalents at beginning of period	8,420			407			125,350			—			134,177
Cash and cash equivalents at end of period	$	9,785		$	569		$	157,441		$	—		$	167,795

Choice Hotels International, Inc.

Condensed Consolidating Statement of Cash Flows

For the Year Ended December 31, 2012

(In thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net cash provided by operating activities	$	90,688		$	18,191		$	41,243		$	—		$	150,122
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment	(7,404		)	(7,800		)	(239		)	—			(15,443		)
Equity method investments	—			—			(20,285		)	—			(20,285		)
Issuance of mezzanine and other notes receivable	(23,736		)	—			—			—			(23,736		)
Collections of mezzanine and other notes receivable	3,270			—			—			—			3,270
Purchases of investments, employee benefit plans	—			(1,697		)	—			—			(1,697		)
Proceeds from sales of investments, employee benefit plans	—			11,223			—			—			11,223
Advances to and investments in affiliates	—			(20,586		)	—			20,586			—
Other items, net	(433		)	—			—			—			(433		)
Net cash used in investing activities	(28,303		)	(18,860		)	(20,524		)	20,586			(47,101		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings pursuant to revolving credit facilities	57,000			—			—			—			57,000
Principal payments on long-term debt	(3,750		)	(653		)	(19		)	—			(4,422		)
Proceeds from the issuance of long-term debt	543,500			—			—			—			543,500
Purchase of treasury stock	(22,586		)	—			—			—			(22,586		)
Excess tax benefits from stock-based compensation	262			1,297			—			—			1,559
Debt issuance costs	(4,759		)	—			—			—			(4,759		)
Proceeds from exercise of stock options	7,090			—			—			—			7,090
Proceeds from contributions from affiliates	—			—			20,586			(20,586		)	—
Dividends paid	(654,092		)	—			—			—			(654,092		)
Net cash provided from (used in) financing activities	(77,335		)	644			20,567			(20,586		)	(76,710		)
Net change in cash and cash equivalents	(14,950		)	(25		)	41,286			—			26,311
Effect of foreign exchange rate changes on cash and cash equivalents	—			—			809			—			809
Cash and cash equivalents at beginning of period	23,370			432			83,255			—			107,057
Cash and cash equivalents at end of period	$	8,420		$	407		$	125,350		$	—		$	134,177

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 by (used in) operating activities	$	120,850		$	(10,483	)	$	21,002		$	—	$	131,369
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 mezzanine and other notes receivable	(9,227		)	—			—			—		(9,227		)
Collections of mezzanine and other notes receivable	4,690			—			—			—		4,690
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	—			644			—			—		644
Other items, net	(570		)	(10		)	16			—		(564		)
Net cash used in investing activities	(6,292		)	(8,658		)	(5,379		)	—		(20,329		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments pursuant to revolving credit facilities	(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