Company Information and Significant Accounting Policies (restated)

The accompanying unaudited consolidated financial statements of Choice Hotels International, Inc. and subsidiaries (together the “Company”) have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly present our financial position and results of operations. Except as otherwise disclosed, all adjustments are of a normal recurring nature.

Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The Company believes the disclosures made are adequate to make the information presented not misleading.

The consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2012 and notes thereto included in the Company’s Form 10-K/A, filed with the SEC on November 3, 2014 (the “10-K/A”). Interim results are not necessarily indicative of the entire year results. All inter-company transactions and balances between Choice Hotels International, Inc. and its subsidiaries have been eliminated in consolidation.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revision to Prior Period Financial Statements -- Cash Flow Presentation

In connection with the preparation of the consolidated financial statements for the second quarter of 2013, a misapplication of GAAP was identified related to the presentation of cash flows pursuant to forgivable notes receivable. Previously, the Company applied Accounting Standards Codification ("ASC") 230 "Statement of Cash Flows" paragraphs 12 and 13 when reporting cash outflows and cash collections related to these notes receivable and as a result reported these items as cash flows from investing activities. In second quarter of 2013 and the following periods, the Company has revised its presentation of these cash flows in accordance with ASC 230 paragraphs 22 and 23 to reclassify them to operating activities on the Company's Consolidated Statements of Cash Flows.

In conjunction with brand and development programs, the Company issues forgivable notes receivable to qualifying franchisees for property improvements and other purposes. Under the terms of the forgivable promissory notes, the Company ratably reduces the outstanding principal balance and related interest over the term of the loan contingent upon the franchisee remaining within the franchise system and operating in accordance with the terms of the franchise agreement including credit, quality and brand standards. Therefore, the predominant reduction of these notes receivable is through non-cash operating expenses and not cash collections of note receivable amounts. As a result, the Company revised the cash flow classification of these forgivable notes receivable from investing activities to operating activities.

In accordance with ASC 250 (SEC's Staff Accounting Bulletin 99, "Materiality"), the Company assessed the materiality of the misapplication of GAAP and concluded that the reclassification of these cash flows was not material to any of its previously issued annual or interim financial statements. In accordance with the accounting guidance in ASC 250 (SEC Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements"), the Company has revised its previously issued financial statements to correct the presentation of these cash flows in both the current and future quarterly and annual filings beginning with the financial statements in the Quarterly Report on Form 10-Q filed on August 9, 2013 for the quarterly period ended June 30, 2013. These revisions did not impact the Company's previously reported net income, comprehensive income, assets, liabilities or shareholders' deficit.

The following tables present the effect of the correction of the classification of the cash flows related to forgivable notes receivable on selected line items included in the Company's Consolidated Statements of Cash Flows for all periods affected:



	Year Ended December 31, 2012									Year Ended December 31, 2011									Year Ended December 31, 2010
	(In thousands)
	As Previously Reported			Adjustment			As Revised			As Previously Reported			Adjustment			As Revised			As Previously Reported			Adjustment			As Revised
Forgivable notes receivable, net	$	—		$	(10,898	)	$	(10,898	)	$	—		$	(3,475	)	$	(3,475	)	$	—		$	(1,120	)	$	(1,120	)
Net cash provided by operating activities	161,020			(10,898		)	150,122			134,844			(3,475		)	131,369			144,935			(1,120		)	143,815
Issuance of mezzanine and other notes receivable	(34,925		)	11,189			(23,736		)	(12,766		)	3,539			(9,227		)	(11,786		)	1,203			(10,583		)
Collections of mezzanine and other notes receivable	3,561			(291		)	3,270			4,754			(64		)	4,690			5,083			(83		)	5,000
Net cash used in investing activities	(57,999		)	10,898			(47,101		)	(23,804		)	3,475			(20,329		)	(32,155		)	1,120			(31,035		)



	Three Months Ended March 31, 2013									Three Months Ended March 31, 2012
	(In thousands)
	As Previously Reported			Adjustment			As Revised			As Previously Reported			Adjustment			As Revised
Forgivable notes receivable, net	$	—		$	(1,729	)	$	(1,729	)	$	—		$	(475	)	$	(475	)
Net cash provided by operating activities	1,874			(1,729		)	145			4,412			(475		)	3,937
Issuance of mezzanine and other notes receivable	(1,729		)	1,729			—			(3,719		)	583			(3,136		)
Collections of mezzanine and other notes receivable	19			—			19			151			(108		)	43
Net cash used in investing activities	(13,816		)	1,729			(12,087		)	(1,496		)	475			(1,021		)



	Six Months Ended June 30, 2012									Nine Months Ended September 30, 2012
	(In thousands)
	As Previously Reported			Adjustment			As Revised			As Previously Reported			Adjustment			As Revised
Forgivable notes receivable, net	$	—		$	(1,537	)	$	(1,537	)	$	—		$	(2,853	)	$	(2,853	)
Net cash provided by operating activities	37,802			(1,537		)	36,265			121,276			(2,853		)	118,423
Issuance of mezzanine and other notes receivable	(5,820		)	1,684			(4,136		)	(7,305		)	3,069			(4,236		)
Collections of mezzanine and other notes receivable	210			(147		)	63			326			(216		)	110
Net cash used in investing activities	(10,387		)	1,537			(8,850		)	(19,562		)	2,853			(16,709		)

Revision to Prior Annual Financial Statements and Restatement of Prior Interim Financial Statements

In connection with the preparation of the consolidated financial statements for the second quarter of 2014, the Company reviewed its accounting policies and practices, including the historical practice of reporting royalty and certain marketing and reservation fees one month in arrears as compared to when the gross room revenues (on which the fees are based) are earned by the Company's franchisees. The Company previously determined that the impact of the revenue recognition timing related to these revenues on its annual financial statements was not material and therefore reported these revenues one month in arrears despite the fact that these fees meet the definition of being earned and realizable in the same period that the underlying gross room revenues are earned by its franchisees. However, the Company reassessed the impact of reporting these revenues one month in arrears on interim periods and determined that this revenue recognition practice, which was not in accordance with GAAP, was material to interim periods due to the seasonality of the Company's business. As a result, the Company has corrected its revenue recognition method to recognize royalty and certain marketing and reservation system fees as revenue in the same period as the gross room revenues are earned by its franchisees.

In accordance with ASC 250 (SEC's Staff Accounting Bulletin 99, "Materiality"), the Company assessed the materiality of the misapplication of GAAP and concluded that the restatement of revenues was not material to any of its previously issued annual financial statements but was material to certain interim periods. In accordance with the accounting guidance in ASC 250 (SEC Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements"), the Company restated its previously issued interim financial statements for the periods ended June 30, 2013, March 31, 2014 and 2013, and September 30, 2013 and 2012 through the filing of amended quarterly filings on Form 10-Q. In addition, the Company has revised its previously issued audited financial statements for the years ended December 31, 2011, 2012, and 2013 to correct the presentation of revenues and amend its report on internal control over financial reporting.

The following tables present the effect of this and other immaterial errors for the financial statement line items impacted in the affected periods included within these interim financial statements.

Consolidated Statements of Income



	Three Months Ended September 30, 2013										Nine Months Ended September 30, 2013
	As Previously Reported		Discontinued Operations			Adjustment			As Restated		As Previously Reported		Discontinued Operations			Adjustment			As Restated
	(in thousands, except per share amounts)
Royalty fees	$	83,107	$	—		$	(3,647	)	$	79,460	$	201,222	$	—		$	6,984		$	208,206
Marketing and reservation revenues	126,296		—			(1,487		)	124,809		302,381		—			8,823			311,204
Hotel operations	1,310		(1,310		)	—			—		3,600		(3,600		)	—			—
Total revenues	223,162		(1,310		)	(5,134		)	216,718		543,612		(3,600		)	15,807			555,819

Selling, general and administrative	26,982		—			(573		)	26,409		84,078		—			(1,270		)	82,808
Depreciation and amortization	2,379		(127		)	20			2,272		7,074		(393		)	20			6,701
Marketing and reservation expenses	126,296		—			(1,487		)	124,809		302,381		—			8,823			311,204
Hotel operations	956		(956		)	—			—		2,742		(2,742		)	—			—
Total operating expenses	156,613		(1,083		)	(2,040		)	153,490		396,275		(3,135		)	7,573			400,713

Operating income	66,549		(227		)	(3,094		)	63,228		147,337		(465		)	8,234			155,106

Income from continuing operations before income taxes	57,592		(227		)	(3,094		)	54,271		118,588		(465		)	8,234			126,357
Income taxes	16,080		(84		)	(298		)	15,698		33,319		(172		)	3,237			36,384
Income from continuing operations, net of income taxes	41,512		(143		)	(2,796		)	38,573		85,269		(293		)	4,997			89,973

Basic earnings per share, continuing operations	$	0.71	$	—		$	(0.05	)	$	0.66	$	1.46	$	—		$	0.08		$	1.54
Diluted earnings per share, continuing operations	$	0.70	$	(0.01	)	$	(0.04	)	$	0.65	$	1.45	$	—		$	0.08		$	1.53



	Three Months Ended September 30, 2012										Nine Months Ended September 30, 2012
	As Previously Filed		Discontinued Operations			Adjustment			As Restated		As Previously Filed		Discontinued Operations			Adjustment		As Restated
	(in thousands, except per share amounts)
Royalty fees	$	80,845	$	—		$	(2,807	)	$	78,038	$	194,762	$	—		$	8,225	$	202,987
Marketing and reservation revenues	119,062		—			(1,097		)	117,965		284,624		—			9,721		294,345
Hotel operations	1,238		(1,238		)	—			—		3,440		(3,440		)	—		—
Total revenues	210,413		(1,238		)	(3,904		)	205,271		513,203		(3,440		)	17,946		527,709

Selling, general and administrative	23,170		—			(98		)	23,072		72,073		—			249		72,322
Depreciation and amortization	1,995		(135		)	—			1,860		5,989		(401		)	—		5,588
Marketing and reservation expenses	119,062		—			(1,097		)	117,965		284,624		—			9,721		294,345
Hotel operations	933		(933		)	—			—		2,609		(2,609		)	—		—
Total operating expenses	145,160		(1,068		)	(1,195		)	142,897		365,295		(3,010		)	9,970		372,255

Operating income	65,253		(170		)	(2,709		)	62,374		147,908		(430		)	7,976		155,454

Income from continuing operations before income taxes	55,668		(170		)	(2,709		)	52,789		133,840		(430		)	7,976		141,386
Income taxes	11,291		(63		)	(1,076		)	10,152		37,604		(160		)	3,303		40,747
Income from continuing operations, net of income taxes	44,377		(107		)	(1,633		)	42,637		96,236		(270		)	4,673		100,639

Basic earnings per share, continuing operations	$	0.77	$	—		$	(0.03	)	$	0.74	$	1.66	$	(0.01	)	$	0.08	$	1.73
Diluted earnings per share, continuing operations	$	0.76	$	—		$	(0.03	)	$	0.73	$	1.65	$	—		$	0.08	$	1.73



	Nine Months Ended September 30, 2013									Nine Months Ended September 30, 2012
	As Previously Filed			Adjustment			As Restated			As Previously Filed			Adjustment			As Restated
Consolidated Statement of Cash Flows	(in thousands)
Operating Activities
Net income	$	85,269		$	4,997		$	90,266		$	96,236		$	4,673		$	100,909
Depreciation and amortization	7,074			20			7,094			5,989			—			5,989
Provision for bad debts, net	2,054			210			2,264			1,802			249			2,051
Non-cash stock compensation and other charges	8,638			(3		)	8,635			7,306			—			7,306
Deferred income taxes	(4,118		)	3,767			(351		)	(1,627		)	2,772			1,145
Receivables	(13,699		)	(12,936		)	(26,635		)	(17,405		)	(14,856		)	(32,261		)
Advances to/from marketing and reservation activities, net	23,756			5,956			29,712			20,811			6,631			27,442
Income taxes payable/receivable	24,638			(531		)	24,107			12,786			531			13,317
Net cash provided by operating activities	105,009			1,480			106,489			118,423			—			118,423
Investing Activities
Investment in property and equipment	(26,442		)	(1,480		)	(27,922		)	(12,525		)	—			(12,525		)
Net cash used in investing activities	(28,350		)	(1,480		)	(29,830		)	(16,709		)	—			(16,709		)



	As of September 30, 2013									As of December 31, 2012
	As Previously Reported			Adjustment			As Restated			As Previously Reported			Adjustment			As Revised
Consolidated Balance Sheets	(in thousands)
Receivables	$	62,605		$	40,282		$	102,887		$	52,270		$	27,729		$	79,999
Income taxes receivable	—			—			—			2,732			(531		)	2,201
Deferred income taxes	4,136			23,231			27,367			4,136			22,062			26,198
Total current assets	258,267			63,513			321,780			233,470			49,260			282,730
Property and equipment, at cost, net	65,540			1,460			67,000			51,651			—			51,651
Advances, marketing and reservation activities	32,564			(18,494		)	14,070			42,179			(12,712		)	29,467
Deferred income taxes	19,496			(19,496		)	—			15,418			(15,418		)	—
Total assets	555,709			26,983			582,692			510,772			21,130			531,902
Deferred income taxes	—			11,722			11,722			—			10,864			10,864
Total liabilities	1,040,433			11,722			1,052,155			1,059,676			10,864			1,070,540
Accumulated other comprehensive loss	(5,370		)	(3		)	(5,373		)	(4,216		)	—			(4,216		)
Retained earnings	325,005			15,264			340,269			272,260			10,266			282,526
Total shareholders' deficit	(484,724		)	15,261			(469,463		)	(548,904		)	10,266			(538,638		)

Discontinued Operations

In the first quarter of 2014, the Company's management approved a plan to dispose of the three Company owned Mainstay Suites hotels. As a result, the Company has reported the operations related to these three hotels as discontinued operations in this Amended Quarterly Report on Form 10-Q. The Company's results of operations for the prior year periods have been recast to account for these operations as discontinued. For additional information regarding discontinued operations, see Note 18, Discontinued Operations.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with a maturity of three months or less at the date of purchase to be cash equivalents. As of September 30, 2013 and December 31, 2012, $3.4 million and $5.0 million respectively, of book overdrafts representing outstanding checks in excess of funds on deposit are included in accounts payable in the accompanying consolidated balance sheets.

The Company maintains cash balances in domestic banks, which at times, may exceed the limits of amounts insured by the Federal Deposit Insurance Corporation. In addition, as of September 30, 2013, the Company maintains cash balances of $149.8 million in international banks which do not provide deposit insurance.

Recently Adopted Accounting Guidance

In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" (“ASU 2013-02”). This update requires companies to present either in a single note or parenthetically on the face of the financial statements the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. If a component is not required to be reclassified to net income in its entirety companies would instead cross reference to the related footnote for additional information. ASU 2013-02 became effective for interim and annual periods beginning after December 15, 2012 and the Company adopted this ASU during the first quarter of 2013. The Company has elected to present the required disclosures in a single note rather than on the face of the financial statement. See Note 8 for additional information.

Future Adoption of Recently Announced Accounting Guidance

In February 2013, the FASB issued ASU No. 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date” (“ASU 2013-04”). The ASU requires entities to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the following: (a) The amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (b) any additional amount the reporting entity expects to pay on behalf of its co-obligors. Required disclosures include a description of the joint-and-several arrangement and the total outstanding amount of the obligation for all joint parties. The ASU permits entities to aggregate disclosures (as opposed to providing separate disclosures for each joint-and-several obligation). ASU 2013-04 is effective for all interim and annual periods beginning after December 15, 2013. The ASU should be applied retrospectively to obligations with joint-and-several liabilities existing at the beginning of an entity's fiscal year of adoption. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this statement will have on its financial statement presentation, if any, and will adopt the provisions of this ASU on January 1, 2014.

In March 2013, the FASB issued ASU No. 2013-05, “Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity” (“ASU 2013-05”). ASU 2013-05 clarifies that when a reporting entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity, the parent is required to apply the guidance in ASC 830 "Foreign Currency Matters" Subtopic 830-30 to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The provisions of ASU 2013-05 are effective prospectively for reporting periods beginning after December 15, 2013. The Company does not currently believe that the adoption of this update will have a material impact on its financial statements and will adopt the provisions of this ASU on January 1, 2014.

In July 2013, the FASB issued ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" ("ASU 2013-11"). ASU 2013-11 requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss ("NOL") carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. The ASU does not require new recurring disclosures. The provisions of ASU 2013-11 are effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption and retrospective application are permitted. The Company does not currently believe that the adoption of this update will have a material impact on its financial statements and will adopt the provisions of this ASU on January 1, 2014.