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.

Choice Hotels International, Inc.

Condensed Consolidating Statement of Income

For the Three Months Ended September 30, 2016

(Unaudited, in thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
REVENUES:
Royalty fees	$	90,462		$	32,059		$	12,090		$	(38,497	)	$	96,114
Initial franchise and relicensing fees	6,187			—			97			—			6,284
Procurement services	7,344			—			271			—			7,615
Marketing and reservation system	140,792			99,595			4,771			(93,140		)	152,018
Other	3,443			75			2,305			(277		)	5,546
Total revenues	248,228			131,729			19,534			(131,914		)	267,577
OPERATING EXPENSES:
Selling, general and administrative	38,876			28,591			5,664			(38,774		)	34,357
Depreciation and amortization	467			1,910			609			—			2,986
Marketing and reservation system	143,920			97,018			4,220			(93,140		)	152,018
Total operating expenses	183,263			127,519			10,493			(131,914		)	189,361
Gain on sale of assets, net	—			—			402			—			402
Operating income	64,965			4,210			9,443			—			78,618
OTHER INCOME AND EXPENSES, NET:
Interest expense	11,006			1			143			—			11,150
Other items, net	(234		)	(1,150		)	(1,348		)	—			(2,732		)
Equity in earnings of consolidated subsidiaries	(13,548		)	(166		)	—			13,714			—
Total other income and expenses, net	(2,776		)	(1,315		)	(1,205		)	13,714			8,418
Income before income taxes	67,741			5,525			10,648			(13,714		)	70,200
Income taxes	20,176			2,169			290			—			22,635
Net income	$	47,565		$	3,356		$	10,358		$	(13,714	)	$	47,565

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 system	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
Depreciation and amortization	602			2,044		462			—			3,108
Marketing and reservation system	129,268			121,690		3,506			(120,001		)	134,463
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
Other items, net	(76		)	1,260		(470		)	—			714
Equity in earnings of consolidated subsidiaries	(9,350		)	84		—			9,266			—
Total other income and expenses, net	1,256			1,345		(332		)	9,266			11,535
Income before income taxes	59,804			4,654		7,076			(9,266		)	62,268
Income taxes	18,385			1,853		611			—			20,849
Net income	$	41,419		$	2,801	$	6,465		$	(9,266	)	$	41,419

Choice Hotels International, Inc.

Condensed Consolidating Statement of Income

For the Nine Months Ended September 30, 2016

(Unaudited, in thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
REVENUES:
Royalty fees	$	231,717		$	109,172		$	31,110		$	(124,831	)	$	247,168
Initial franchise and relicensing fees	16,741			—			405			—			17,146
Procurement services	23,088			—			631			—			23,719
Marketing and reservation system	380,153			344,161			12,322			(324,443		)	412,193
Other	10,039			212			6,707			(738		)	16,220
Total revenues	661,738			453,545			51,175			(450,012		)	716,446
OPERATING EXPENSES:
Selling, general and administrative	120,804			98,125			16,155			(125,569		)	109,515
Depreciation and amortization	1,314			5,596			1,797			—			8,707
Marketing and reservation system	394,059			330,959			11,618			(324,443		)	412,193
Total operating expenses	516,177			434,680			29,570			(450,012		)	530,415
Gain on sale of assets, net	—			—			402			—			402
Operating income	145,561			18,865			22,007			—			186,433
OTHER INCOME AND EXPENSES, NET:
Interest expense	33,036			1			429			—			33,466
Other items, net	(1,082		)	(319		)	(1,820		)	—			(3,221		)
Equity in earnings of consolidated subsidiaries	(36,053		)	409			—			35,644			—
Total other income and expenses, net	(4,099		)	91			(1,391		)	35,644			30,245
Income before income taxes	149,660			18,774			23,398			(35,644		)	156,188
Income taxes	42,110			6,366			162			—			48,638
Net income	$	107,550		$	12,408		$	23,236		$	(35,644	)	$	107,550

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 system	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
Depreciation and amortization	2,170			5,701		922			—			8,793
Marketing and reservation system	349,040			328,118		10,468			(321,328		)	366,298
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
Other items, net	(622		)	732		(224		)	—			(114		)
Equity in earnings of consolidated subsidiaries	(31,215		)	462		—			30,753			—
Total other income and expenses, net	(176		)	1,196		170			30,753			31,943
Income before income taxes	138,807			16,606		21,521			(30,753		)	146,181
Income taxes	39,981			7,343		31			—			47,355
Net income	$	98,826		$	9,263	$	21,490		$	(30,753	)	$	98,826

Choice Hotels International, Inc.

Condensed Consolidating Statement of Comprehensive Income

For the Three Months Ended September 30, 2016

(Unaudited, in thousands)



	Parent		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
Net income	$	47,565	$	3,356	$	10,358	$	(13,714	)	$	47,565
Other comprehensive income, net of tax:
Amortization of loss on cash flow hedge	215		—		—		—			215
Foreign currency translation adjustment	137		—		137		(137		)	137
Other comprehensive income (loss), net of tax	352		—		137		(137		)	352
Comprehensive income	$	47,917	$	3,356	$	10,495	$	(13,851	)	$	47,917

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, 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 Nine Months Ended September 30, 2016

(Unaudited, in thousands)



	Parent		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
Net income	$	107,550	$	12,408	$	23,236	$	(35,644	)	$	107,550
Other comprehensive income, net of tax:
Amortization of loss on cash flow hedge	646		—		—		—			646
Foreign currency translation adjustment	1,036		—		1,036		(1,036		)	1,036
Other comprehensive income, net of tax	1,682		—		1,036		(1,036		)	1,682
Comprehensive income	$	109,232	$	12,408	$	24,272	$	(36,680	)	$	109,232

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 Balance Sheet

As of September 30, 2016

(Unaudited, in thousands)



	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Cash and cash equivalents	$	18,530		$	589	$	186,834	$	—		$	205,953
Receivables, net	117,373			1,635		10,564		(150		)	129,422
Other current assets	8,712			33,814		3,868		(9,840		)	36,554
Total current assets	144,615			36,038		201,266		(9,990		)	371,929
Property and equipment, at cost, net	46,864			23,925		15,947		—			86,736
Goodwill	65,813			—		13,986		—			79,799
Franchise rights and other identifiable intangibles, net	4,027			—		7,516		—			11,543
Notes receivable, net of allowances	13,447			42,031		42,972		—			98,450
Investments, employee benefit plans, at fair value	—			16,414		—		—			16,414
Investment in affiliates	514,602			50,701		—		(565,303		)	—
Advances to affiliates	8,991			123,089		9,863		(141,943		)	—
Deferred income taxes	35,485			13,056		—		(1,539		)	47,002
Other assets	15,285			66,306		52,838		(26		)	134,403
Total assets	$	849,129		$	371,560	$	344,388	$	(718,801	)	$	846,276
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Accounts payable	$	21,041		$	35,440	$	4,032	$	(150	)	$	60,363
Accrued expenses and other current liabilities	46,091			35,938		3,586		(9,735		)	75,880
Deferred revenue	120,536			45		1,116		(105		)	121,592
Current portion of long-term debt	—			—		660		—			660
Total current liabilities	187,668			71,423		9,394		(9,990		)	258,495
Long-term debt	853,152			3,712		9,383		—			866,247
Deferred compensation and retirement plan obligations	—			20,880		10		—			20,890
Advances from affiliates	132,597			1,294		8,052		(141,943		)	—
Other liabilities	13,154			14,981		11,516		(1,565		)	38,086
Total liabilities	1,186,571			112,290		38,355		(153,498		)	1,183,718
Total shareholders’ (deficit) equity	(337,442		)	259,270		306,033		(565,303		)	(337,442		)
Total liabilities and shareholders’ deficit	$	849,129		$	371,560	$	344,388	$	(718,801	)	$	846,276

Choice Hotels International, Inc.

Condensed Consolidating Balance Sheet

As of December 31, 2015

(in thousands)



	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Cash and cash equivalents	$	13,529		$	19	$	179,893	$	—		$	193,441
Receivables, net	79,381			1,132		8,992		(153		)	89,352
Other current assets	19,029			14,176		5,331		(10,376		)	28,160
Total current assets	111,939			15,327		194,216		(10,529		)	310,953
Property and equipment, at cost, net	37,857			33,575		16,726		—			88,158
Goodwill	60,620			5,193		13,514		—			79,327
Franchise rights and other identifiable intangibles, net	2,965			1,013		7,970		—			11,948
Notes receivable, net of allowances	18,866			38,957		24,749		—			82,572
Investments, employee benefit plans, at fair value	—			17,674		—		—			17,674
Investment in affiliates	473,448			37,182		—		(510,630		)	—
Advances to affiliates	17,144			212,773		7,789		(237,706		)	—
Deferred income taxes	10,664			33,936		—		(2,166		)	42,434
Other assets	319			45,383		38,348		(106		)	83,944
Total assets	$	733,822		$	441,013	$	303,312	$	(761,137	)	$	717,010
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Accounts payable	$	12,359		$	48,238	$	3,987	$	(153	)	$	64,431
Accrued expenses and other current liabilities	29,099			45,601		6,378		(10,271		)	70,807
Deferred revenue	8,749			61,890		1,053		(105		)	71,587
Current portion of long-term debt	—			430		761		—			1,191
Total current liabilities	50,207			156,159		12,179		(10,529		)	208,016
Long-term debt	799,212			3,712		10,021		—			812,945
Deferred compensation and retirement plan obligations	—			22,849		10		—			22,859
Advances from affiliates	235,629			257		1,820		(237,706		)	—
Other liabilities	44,673			15,755		10,933		(2,272		)	69,089
Total liabilities	1,129,721			198,732		34,963		(250,507		)	1,112,909
Total shareholders’ (deficit) equity	(395,899		)	242,281		268,349		(510,630		)	(395,899		)
Total liabilities and shareholders' deficit	$	733,822		$	441,013	$	303,312	$	(761,137	)	$	717,010

Choice Hotels International, Inc.

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended September 30, 2016

(Unaudited, in thousands)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net cash provided (used) by operating activities	$	21,358		$	43,956		$	23,752		$	(657	)	$	88,409
Cash Flows From Investing Activities
Investment in property and equipment	(12,579		)	(4,749		)	(256		)	—			(17,584		)
Proceeds from sales of assets	—			—			8,360			—			8,360
Acquisitions of real estate	—			—			(25,263		)	—			(25,263		)
Business acquisition, net of cash acquired	—			—			(1,341		)	—			(1,341		)
Contributions to equity method investments	—			(24,128		)	(51		)	—			(24,179		)
Distributions from equity method investments	—			—			3,700			—			3,700
Purchases of investments, employee benefit plans	—			(1,430		)	—			—			(1,430		)
Proceeds from sales of investments, employee benefit plans	—			1,395			—			—			1,395
Issuance of mezzanine and other notes receivable	(5,306		)	—			(14,975		)	—			(20,281		)
Collections of mezzanine and other notes receivable	11,040			—			—			—			11,040
Advances to and investment in affiliates	—			(25,902		)	—			25,902			—
Divestment in affiliates	—			11,858			—			(11,858		)	—
Other items, net	(382		)	—			(40		)				(422		)
Net cash used by investing activities	(7,227		)	(42,956		)	(29,866		)	14,044			(66,005		)
Cash Flows from Financing Activities
Net borrowings pursuant to revolving credit facilities	53,000			—			(186		)	—			52,814
Debt issuance costs	(284		)	—			—			—			(284		)
Principal payments on long-term debt	—			(430		)	(406		)	—			(836		)
Purchases of treasury stock	(33,958		)	—			—			—			(33,958		)
Dividends paid	(34,690		)	—			(657		)	657			(34,690		)
Proceeds from contributions from affiliates	—			—			25,902			(25,902		)	—
Distributions to affiliates	—			—			(11,858		)	11,858			—
Proceeds from exercise of stock options	6,802			—			—			—			6,802
Net cash provided (used) by financing activities	(9,130		)	(430		)	12,795			(13,387		)	(10,152		)
Net change in cash and cash equivalents	5,001			570			6,681			—			12,252
Effect of foreign exchange rate changes on cash and cash equivalents	—			—			260			—			260
Cash and cash equivalents at beginning of period	13,529			19			179,893			—			193,441
Cash and cash equivalents at end of period	$	18,530		$	589		$	186,834		$	—		$	205,953

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	$	67,695		$	10,710		$	25,910		$	(657	)	$	103,658
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
Acquisitions of real estate				—			(8,767		)	—			(8,767		)
Business 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		)	—			—			—			(445		)
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	0			176			—			—			176
Debt issuance costs	(2,169		)	—			—			—			(2,169		)
Principal payments on long-term debt	(129,375		)	(537		)	(282		)	—			(130,194		)
Proceeds from contributions from affiliates	—			—			8,960			(8,960		)	—
Purchases of treasury stock	(56,450		)	—			—			—			(56,450		)
Dividends paid	(34,173		)	—			(657		)	657			(34,173		)
Distributions to affiliates	—			—			(2,122		)	2,122			—
Proceeds from exercise of stock options	6,381			—			—			—			6,381
Net cash provided (used) by financing activities	(53,786		)	(361		)	5,931			(6,181		)	(54,397		)
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