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.⁽¹⁾ 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, 2015

(Unaudited, in thousands)



	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
REVENUES:
Royalty fees	$	84,572		$	28,786	$	8,660		$	(32,089	)	$	89,929
Initial franchise and relicensing fees	6,040			—		130			—			6,170
Procurement services	6,012			—		259			—			6,271
Marketing and reservation	123,775			126,547		4,142			(120,001		)	134,463
Other	3,377			3		1,313			—			4,693
Total revenues	223,776			155,336		14,504			(152,090		)	241,526
OPERATING EXPENSES:
Selling, general and administrative	32,846			25,603		3,792			(32,089		)	30,152
Marketing and reservation	129,268			121,690		3,506			(120,001		)	134,463
Depreciation and amortization	602			2,044		462			—			3,108
Total operating expenses	162,716			149,337		7,760			(152,090		)	167,723
Operating income	61,060			5,999		6,744			—			73,803
OTHER INCOME AND EXPENSES, NET:
Interest expense	10,682			1		138			—			10,821
Equity in earnings of consolidated subsidiaries	(9,350		)	84		—			9,266			—
Other items, net	(76		)	1,260		(470		)	—			714
Total other income and expenses, net	1,256			1,345		(332		)	9,266			11,535
Income from continuing operations before income taxes	59,804			4,654		7,076			(9,266		)	62,268
Income taxes	18,385			1,853		611			—			20,849
Income from continuing operations, net of income taxes	41,419			2,801		6,465			(9,266		)	41,419
Income from discontinued operations, net of income taxes	—			—		—			—			—
Net income	$	41,419		$	2,801	$	6,465		$	(9,266	)	$	41,419

⁽¹⁾ On July 21, 2015, the Company refinanced its existing $350 million senior secured credit facility ("Old Credit Facility") by entering into a new senior unsecured revolving credit agreement ("New Credit Facility"). As a result of this refinancing, certain guarantor subsidiaries under the Old Credit Facility have been released as a guarantor under the New Credit Facility. As a result, the following condensed consolidating financial statements for the prior year periods have been reclassified to reflect the current guarantors under the New Credit Facility.

Choice Hotels International, Inc.

Condensed Consolidating Statement of Income

For the Three Months Ended September 30, 2014

(Unaudited, in thousands)



	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
REVENUES:
Royalty fees	$	79,326		$	28,799	$	10,829		$	(32,863	)	$	86,091
Initial franchise and relicensing fees	4,125			—		174			—			4,299
Procurement services	5,215			—		280			—			5,495
Marketing and reservation	104,093			106,438		4,981			(99,859		)	115,653
Other	3,500			2		128			—			3,630
Total revenues	196,259			135,239		16,392			(132,722		)	215,168
OPERATING EXPENSES:
Selling, general and administrative	33,301			26,249		3,549			(32,863		)	30,236
Marketing and reservation	109,086			102,108		4,318			(99,859		)	115,653
Depreciation and amortization	765			1,383		145			—			2,293
Total operating expenses	143,152			129,740		8,012			(132,722		)	148,182
Operating income	53,107			5,499		8,380			—			66,986
OTHER INCOME AND EXPENSES, NET:
Interest expense	10,485			1		9			—			10,495
Equity in earnings of consolidated subsidiaries	(10,760		)	607		—			10,153			—
Other items, net	(263		)	410		386			—			533
Total other income and expenses, net	(538		)	1,018		395			10,153			11,028
Income from continuing operations before income taxes	53,645			4,481		7,985			(10,153		)	55,958
Income taxes	14,280			2,562		(300		)	—			16,542
Income from continuing operations, net of income taxes	39,365			1,919		8,285			(10,153		)	39,416
Income from discontinued operations, net of income taxes	—			—		(51		)	—			(51		)
Net income	$	39,365		$	1,919	$	8,234		$	(10,153	)	$	39,365

Choice Hotels International, Inc.

Condensed Consolidating Statement of Income

For the Nine Months Ended September 30, 2015

(Unaudited, in thousands)



	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
REVENUES:
Royalty fees	$	217,723		$	99,306	$	30,364		$	(113,850	)	$	233,543
Initial franchise and relicensing fees	17,160			—		543			—			17,703
Procurement services	19,118			—		549			—			19,667
Marketing and reservation	334,638			341,274		11,714			(321,328		)	366,298
Other	9,452			3		2,261			—			11,716
Total revenues	598,091			440,583		45,431			(435,178		)	648,927
OPERATING EXPENSES:
Selling, general and administrative	108,250			88,962		12,350			(113,850		)	95,712
Marketing and reservation	349,040			328,118		10,468			(321,328		)	366,298
Depreciation and amortization	2,170			5,701		922			—			8,793
Total operating expenses	459,460			422,781		23,740			(435,178		)	470,803
Operating income	138,631			17,802		21,691			—			178,124
OTHER INCOME AND EXPENSES, NET:
Interest expense	31,661			2		394			—			32,057
Equity in earnings of consolidated subsidiaries	(31,215		)	462		—			30,753			—
Other items, net	(622		)	732		(224		)	—			(114		)
Total other income and expenses, net	(176		)	1,196		170			30,753			31,943
Income from continuing operations before income taxes	138,807			16,606		21,521			(30,753		)	146,181
Income taxes	39,981			7,343		31			—			47,355
Income from continuing operations, net of income taxes	98,826			9,263		21,490			(30,753		)	98,826
Income from discontinued operations, net of income taxes	—			—		—			—			—
Net income	$	98,826		$	9,263	$	21,490		$	(30,753	)	$	98,826

Choice Hotels International, Inc.

Condensed Consolidating Statement of Income

For the Nine Months Ended September 30, 2014

(Unaudited, in thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations			Consolidated
REVENUES:
Royalty fees	$	203,411		$	89,773		$	33,711	$	(104,594	)	$	222,301
Initial franchise and relicensing fees	12,144			—			617		—			12,761
Procurement services	17,688			—			605		—			18,293
Marketing and reservation	275,203			274,638			14,150		(254,966		)	309,025
Other	9,798			3			387		—			10,188
Total revenues	518,244			364,414			49,470		(359,560		)	572,568
OPERATING EXPENSES:
Selling, general and administrative	101,012			81,806			10,105		(104,594		)	88,329
Marketing and reservation	286,903			263,710			13,378		(254,966		)	309,025
Depreciation and amortization	2,272			4,117			514		—			6,903
Total operating expenses	390,187			349,633			23,997		(359,560		)	404,257
Operating income	128,057			14,781			25,473		—			168,311
OTHER INCOME AND EXPENSES, NET:
Interest expense	31,356			3			17		—			31,376
Equity in earnings of consolidated subsidiaries	(34,874		)	(1,068		)	—		35,942			—
Other items, net	(988		)	(107		)	310		—			(785		)
Total other income and expenses, net	(4,506		)	(1,172		)	327		35,942			30,591
Income from continuing operations before income taxes	132,563			15,953			25,146		(35,942		)	137,720
Income taxes	34,688			6,746			122		—			41,556
Income from continuing operations, net of income taxes	97,875			9,207			25,024		(35,942		)	96,164
Income from discontinued operations, net of income taxes	—			—			1,711		—			1,711
Net income	$	97,875		$	9,207		$	26,735	$	(35,942	)	$	97,875

Choice Hotels International, Inc.

Condensed Consolidating Statement of Comprehensive Income

For the Three Months Ended September 30, 2015

(Unaudited, in thousands)



	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net income	$	41,419		$	2,801	$	6,465		$	(9,266	)	$	41,419
Other comprehensive income (loss), net of tax:
Amortization of loss on cash flow hedge	215			—		—			—			215
Foreign currency translation adjustment	(951		)	—		(951		)	951			(951		)
Other comprehensive income (loss), net of tax	(736		)	—		(951		)	951			(736		)
Comprehensive income	$	40,683		$	2,801	$	5,514		$	(8,315	)	$	40,683

Choice Hotels International, Inc.

Condensed Consolidating Statement of Comprehensive Income

For the Three Months Ended September 30, 2014

(Unaudited, in thousands)



	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated

Net income	$	39,365		$	1,919	$	8,234		$	(10,153	)	$	39,365
Other comprehensive income (loss), net of tax:
Amortization of loss on cash flow hedge	215			—		—			—			215
Foreign currency translation adjustment	(1,387		)	—		(1,387		)	1,387			(1,387		)
Other comprehensive income (loss), net of tax	(1,172		)	—		(1,387		)	1,387			(1,172		)
Comprehensive income	$	38,193		$	1,919	$	6,847		$	(8,766	)	$	38,193

Choice Hotels International, Inc.

Condensed Consolidating Statement of Comprehensive Income

For the Nine Months Ended September 30, 2015

(Unaudited, in thousands)



	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net income	$	98,826		$	9,263	$	21,490		$	(30,753	)	$	98,826
Other comprehensive income (loss), net of tax:
Amortization of loss on cash flow hedge	646			—		—			—			646
Foreign currency translation adjustment	(2,223		)	—		(2,223		)	2,223			(2,223		)
Other comprehensive income (loss), net of tax	(1,577		)	—		(2,223		)	2,223			(1,577		)
Comprehensive income	$	97,249		$	9,263	$	19,267		$	(28,530	)	$	97,249

Choice Hotels International, Inc.

Condensed Consolidating Statement of Comprehensive Income

For the Nine Months Ended September 30, 2014

(Unaudited, in thousands)



	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net income	$	97,875		$	9,207	$	26,735		$	(35,942	)	$	97,875
Other comprehensive income (loss), net of tax:
Amortization of loss on cash flow hedge	646			—		—			—			646
Foreign currency translation adjustment	(357		)	—		(357		)	357			(357		)
Other comprehensive income (loss), net of tax	289			—		(357		)	357			289
Comprehensive income	$	98,164		$	9,207	$	26,378		$	(35,585	)	$	98,164

Choice Hotels International, Inc.

Condensed Consolidating Balance Sheet

As of September 30, 2015

(Unaudited, in thousands)



	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Cash and cash equivalents	$	19,177		$	27	$	180,057	$	—		$	199,261
Receivables, net	104,091			1,880		8,652		—			114,623
Other current assets	8,625			37,707		3,517		(4,200		)	45,649
Total current assets	131,893			39,614		192,226		(4,200		)	359,533
Property and equipment, at cost, net	34,886			34,550		17,350		—			86,786
Goodwill	60,620			5,193		13,682		—			79,495
Franchise rights and other identifiable intangibles, net	2,932			1,014		8,235		—			12,181
Notes receivable, net of allowances	17,040			38,078		18,638		—			73,756
Investments, employee benefit plans, at fair value	—			17,102		—		—			17,102
Investment in affiliates	458,664			45,605		—		(504,269		)	—
Advances to affiliates	27,870			219,053		11,738		(258,661		)	—
Deferred income taxes	13,279			7,731		—		(1,111		)	19,899
Other assets	—			23,969		40,041		—			64,010
Total assets	$	747,184		$	431,909	$	301,910	$	(768,241	)	$	712,762
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Accounts payable	$	13,611		$	42,987	$	3,324	$	—		$	59,922
Accrued expenses	19,367			27,177		4,139		—			50,683
Deferred revenue	8,742			58,868		829		—			68,439
Current portion of long-term debt	—			611		1,095		—			1,706
Deferred compensation and retirement plan obligations	—			174		—		—			174
Other current liabilities	—			14,394		—		(4,200		)	10,194
Total current liabilities	41,720			144,211		9,387		(4,200		)	191,118
Long-term debt	801,804			3,712		10,342		—			815,858
Deferred compensation and retirement plan obligations	—			22,134		11		—			22,145
Advances from affiliates	247,162			6,783		4,716		(258,661		)	—
Deferred income taxes	—			—		2,905		(1,111		)	1,794
Other liabilities	57,141			17,139		8,210		—			82,490
Total liabilities	1,147,827			193,979		35,571		(263,972		)	1,113,405
Total shareholders’ (deficit) equity	(400,643		)	237,930		266,339		(504,269		)	(400,643		)
Total liabilities and shareholders’ deficit	$	747,184		$	431,909	$	301,910	$	(768,241	)	$	712,762

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	23,027			33,585		1,373		(15,256		)	42,729
Total current assets	130,512			34,804		199,229		(15,256		)	349,289
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
Investment in affiliates	424,600			39,231		—		(463,831		)	—
Advances to affiliates	15,670			213,303		20,341		(249,314		)	—
Deferred income taxes	9,418			10,429		699		—			20,546
Other assets	—			23,891		34,177		—			58,068
Total assets	$	682,347		$	411,439	$	272,532	$	(728,401	)	$	637,917
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Accounts payable	$	15,588		$	37,924	$	3,612	$	—		$	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 and retirement plan obligations	—			628		—		—			628
Other current liabilities	—			14,850		491		(15,256		)	85
Total current liabilities	64,024			144,108		7,222		(15,256		)	200,098
Long-term debt	758,407			3,966		10,356		—			772,729
Deferred compensation and retirement plan obligations	—			23,978		9		—			23,987
Advances from affiliates	237,973			344		10,997		(249,314		)	—
Other liabilities	50,744			16,116		3,044		—			69,904
Total liabilities	1,111,148			188,512		31,628		(264,570		)	1,066,718
Total shareholders’ (deficit) equity	(428,801		)	222,927		240,904		(463,831		)	(428,801		)
Total liabilities and shareholders' deficit	$	682,347		$	411,439	$	272,532	$	(728,401	)	$	637,917

Choice Hotels International, Inc.

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended September 30, 2015

(Unaudited, in thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net cash provided by operating activities	$	67,585		$	5,935		$	25,910		$	(657	)	$	98,773
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment	(16,114		)	(5,342		)	(354		)	—			(21,810		)
Proceeds from sales of assets	93			4,661			1,593			—			6,347
Acquisition, net of cash acquired	—			—			(13,269		)	—			(13,269		)
Contributions to equity method investments	—			(2,771		)	(1,040		)	—			(3,811		)
Distributions from equity method investments	—			—			270			—			270
Purchases of investments, employee benefit plans	—			(2,977		)	—			—			(2,977		)
Proceeds from sales of investments, employee benefit plans	—			2,920			—			—			2,920
Issuance of mezzanine and other notes receivable	(7,253		)	—			(18,000		)	—			(25,253		)
Collections of mezzanine and other notes receivable	3,697			—			—			—			3,697
Advances to and investment in affiliates				(8,960		)	—			8,960			—
Divestment in affiliates				2,122			—			(2,122		)	—
Other items, net	(445		)	—			(8,767		)	—			(9,212		)
Net cash used by investing activities	(20,022		)	(10,347		)	(39,567		)	6,838			(63,098		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings pursuant to revolving credit facilities	162,000			—			32			—			162,032
Proceeds from the issuance of long-term debt	—			176			—			—			176
Debt issuance costs	(2,169		)	—			—			—			(2,169		)
Principal payments on long-term debt	(129,375		)	(537		)	(282		)	—			(130,194		)
Purchases of treasury stock	(56,450		)	—			—			—			(56,450		)
Dividends paid	(34,173		)	—			(657		)	657			(34,173		)
Excess tax benefits from stock-based compensation	110			4,775			—			—			4,885
Proceeds from contributions from affiliates	—			—			8,960			(8,960		)	—
Distributions to affiliates	—			—			(2,122		)	2,122			—
Proceeds from exercise of stock options	6,381			—			—			—			6,381
Net cash provided (used) by financing activities	(53,676		)	4,414			5,931			(6,181		)	(49,512		)
Net change in cash and cash equivalents	(6,113		)	2			(7,726		)	—			(13,837		)
Effect of foreign exchange rate changes on cash and cash equivalents	—			—			(1,781		)	—			(1,781		)
Cash and cash equivalents at beginning of period	25,290			25			189,564			—			214,879
Cash and cash equivalents at end of period	$	19,177		$	27		$	180,057		$	—		$	199,261

Choice Hotels International, Inc.

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended September 30, 2014

(Unaudited, in thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net cash provided by operating activities	$	111,851		$	14,815		$	12,369		$	(657	)	$	138,378
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment	(5,138		)	(6,324		)	(424		)	—			(11,886		)
Proceeds from sales of assets	27			516			15,069			—			15,612
Contributions to equity method investments	—			(8,800		)	(5,562		)	—			(14,362		)
Purchases of investments, employee benefit plans	—			(1,520		)	—			—			(1,520		)
Proceeds from sales of investments, employee benefit plans	—			966			—			—			966
Issuance of mezzanine and other notes receivable	(3,340		)	—			—			—			(3,340		)
Collections of mezzanine and other notes receivable	9,832			—			—			—			9,832
Advances to and investments in affiliates	(1,000		)	(4,740		)	—			5,740			—
Divestment in affiliates	—			3,426			—			(3,426		)	—
Other items, net	(446		)	—			(146		)	—			(592		)
Net cash provided (used) in investing activities	(65		)	(16,476		)	8,937			2,314			(5,290		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt	(6,563		)	(523		)	(24		)	—			(7,110		)
Proceeds from the issuance of long-term debt	—			176			50			—			226
Proceeds from contributions from affiliates	—			—			5,740			(5,740		)	—
Purchases of treasury stock	(23,757		)	—			—			—			(23,757		)
Dividends paid	(32,767		)	—			(657		)	657			(32,767		)
Excess tax benefits from stock-based compensation	289			2,008			—			—			2,297
Distributions to affiliates	—			—			(3,426		)	3,426			—
Proceeds from exercise of stock options	4,984			—			—			—			4,984
Net cash provided (used) by financing activities	(57,814		)	1,661			1,683			(1,657		)	(56,127		)
Net change in cash and cash equivalents	53,972			—			22,989			—			76,961
Effect of foreign exchange rate changes on cash and cash equivalents	—			—			(364		)	—			(364		)
Cash and cash equivalents at beginning of period	9,785			19			157,991			—			167,795
Cash and cash equivalents at end of period	$	63,757		$	19		$	180,616		$	—		$	244,392