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.

Choice Hotels International, Inc.

Condensed Consolidating Statement of Income

For the Year Ended December 31, 2014

(in thousands)



	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
REVENUES:
Royalty fees	$	262,540		$	121,295	$	44,357	$	(140,654	)	$	287,538
Initial franchise and relicensing fees	18,753			—		728		—			19,481
Procurement services	22,959			23		837		—			23,819
Marketing and reservation	367,726			369,359		18,783		(343,249		)	412,619
Other items, net	13,758			16		739		—			14,513
Total revenues	685,736			490,693		65,444		(483,903		)	757,970
OPERATING EXPENSES:
Selling, general and administrative	137,759			110,545		13,768		(140,654		)	121,418
Marketing and reservation	383,584			354,342		17,942		(343,249		)	412,619
Depreciation and amortization	3,038			5,679		648		—			9,365
Total operating expenses	524,381			470,566		32,358		(483,903		)	543,402
Operating income	161,355			20,127		33,086		—			214,568
OTHER INCOME AND EXPENSES, NET:
Interest expense	41,454			3		29		—			41,486
Equity in earnings of consolidated subsidiaries	(45,426		)	881		—		44,545			—
Other items, net	(1,465		)	567		222		—			(676		)
Other income and expenses, net	(5,437		)	1,451		251		44,545			40,810
Income from continuing operations before income taxes	166,792			18,676		32,835		(44,545		)	173,758
Income taxes	43,632			7,922		731		—			52,285
Income from from continuing operations, net of income taxes	123,160			10,754		32,104		(44,545		)	121,473
Income from discontinued operations, net of income taxes	—			1,687		—		—			1,687
Net income	$	123,160		$	12,441	$	32,104	$	(44,545	)	$	123,160

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
Depreciation and amortization	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 income taxes	149,261			21,283			35,490			(47,362		)	158,672
Income taxes	35,552			8,897			873			—			45,322
Income 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
Depreciation and amortization	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 Comprehensive Income

For the Year Ended December 31, 2014

(in thousands)



	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated

Net income	$	123,160		$	12,441	$	32,104		$	(44,545	)	$	123,160
Other comprehensive income (loss), net of tax:
Amortization of loss on cash flow hedge	861			—		—			—			861
Foreign currency translation adjustment	(1,615		)	—		(1,615		)	1,615			(1,615		)
Other comprehensive income (loss), net of tax	(754		)	—		(1,615		)	1,615			(754		)
Comprehensive income	$	122,406		$	12,441	$	30,489		$	(42,930	)	$	122,406

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 Balance Sheet

As of December 31, 2014

(in thousands)



	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Cash and cash equivalents	$	25,290		$	25	$	189,564	$	—		$	214,879
Receivables, net	82,195			1,194		8,292		—			91,681
Other current assets	25,152			33,585		1,875		(15,758		)	44,854
Total current assets	132,637			34,804		199,731		(15,758		)	351,414
Property and equipment, at cost, net	25,300			37,675		14,334		—			77,309
Goodwill	60,620			5,193		—		—			65,813
Franchise rights and other identifiable intangibles, net	4,380			1,479		3,053		—			8,912
Notes receivable, net of allowances	11,847			27,895		699		—			40,441
Investments, employee benefit plans, at fair value	—			17,539		—		—			17,539
Investments in affiliates	424,600			31,139		—		(455,739		)	—
Advances to affiliates	15,670			222,500		7,793		(245,963		)	—
Deferred income taxes	9,418			10,429		699		—			20,546
Other assets	7,228			23,891		34,177		—			65,296
Total assets	$	691,700		$	412,544	$	260,486	$	(717,460	)	$	647,270
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Accounts payable	$	15,588		$	37,970	$	3,566	$	—		$	57,124
Accrued expenses	28,719			32,649		2,162		—			63,530
Deferred revenue	8,467			57,339		576		—			66,382
Current portion of long-term debt	11,250			718		381		—			12,349
Deferred compensation & retirement plan obligations	—			628		—		—			628
Other current liabilities	—			15,843		—		(15,758		)	85
Total current liabilities	64,024			145,147		6,685		(15,758		)	200,098
Long-term debt	767,760			3,966		10,356		—			782,082
Deferred compensation & retirement plan obligations	—			23,978		9		—			23,987
Advances from affiliates	237,973			341		7,649		(245,963		)	—
Other liabilities	50,744			16,116		3,044		—			69,904
Total liabilities	1,120,501			189,548		27,743		(261,721		)	1,076,071
Total shareholders’ (deficit) equity	(428,801		)	222,996		232,743		(455,739		)	(428,801		)
Total liabilities and shareholders’ deficit	$	691,700		$	412,544	$	260,486	$	(717,460	)	$	647,270

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
Notes receivable, net of allowances	13,257			17,158		1,457		—			31,872
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	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 & 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 Year Ended December 31, 2014

(in thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net cash provided by operating activities	$	140,738		$	9,106		$	34,704		$	(657	)	$	183,891
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment	(11,234		)	(9,188		)	(524		)	—			(20,946		)
Proceeds from sale of assets	27			15,585			—			—			15,612
Equity method investments	—			(11,390		)	(6,399		)	—			(17,789		)
Issuance of mezzanine and other notes receivable	(3,340		)	—			—			—			(3,340		)
Collections of mezzanine and other notes receivable	11,289			—			—			—			11,289
Purchases of investments, employee benefit plans	—			(2,794		)	—			—			(2,794		)
Proceeds from sales of investments, employee benefit plans	—			964			—			—			964
Advances to and investments in affiliates	(1,000		)	(5,578		)	—			6,578			—
Other items, net	(496		)	(146		)	—			—			(642		)
Net cash used in investing activities	(4,754		)	(12,547		)	(6,923		)	6,578			(17,646		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt	(9,375		)	(701		)	(32		)	—			(10,108		)
Proceeds from the issuance of long-term debt	—			176			74			—			250
Purchase of treasury stock	(77,972		)	—			—			—			(77,972		)
Excess tax benefits from stock-based compensation	299			3,422			—			—			3,721
Proceeds from exercise of stock options	10,098			—			—			—			10,098
Proceeds from contributions from affiliates	—			—			6,578			(6,578		)	—
Dividends paid	(43,529		)	—			(657		)	657			(43,529		)
Net cash provided from (used in) financing activities	(120,479		)	2,897			5,963			(5,921		)	(117,540		)
Net change in cash and cash equivalents	15,505			(544		)	33,744			—			48,705
Effect of foreign exchange rate changes on cash and cash equivalents	—			—			(1,621		)	—			(1,621		)
Cash and cash equivalents at beginning of period	9,785			569			157,441			—			167,795
Cash and cash equivalents at end of period	$	25,290		$	25		$	189,564		$	—		$	214,879

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