CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Summarized unaudited income statement data for Friendly is as follows:

On February 21, 2002, Friendly announced that it had been unable to find an acceptable buyer for its business and would terminate such efforts at this time. Given the bid period termination and the adverse economic conditions of Friendly, the Company disposed of its entire preferred and common equity interest in Friendly on March 20, 2002 and immediately relinquished its three seats on Friendly’s board of directors. Accordingly, the Company reduced its investment in Friendly to zero through a $22.7 million charge to reflect the permanent impairment of this asset as of December 31, 2001.

6. Receivable from Marketing and Reservation Funds

The Company’s franchise agreements require the payment of franchise fees which include marketing and reservation fees. Using the marketing and reservation fees it assesses against the current franchisees comprising its various hotel brand systems, the Company is obligated under the franchise agreements to provide marketing and reservation services appropriate for the successful operation of these various systems. In discharging its obligation to provide sufficient and appropriate marketing and reservation services, the Company has the right to expend funds in an amount reasonably necessary to ensure the provision of such services, whether or not such amount is currently available to the Company in the marketing and reservation funds for reimbursement. The franchise agreements provide the Company the right to advance monies to these funds when the needs of the system surpass the balances currently available.

The receivable from marketing and reservation funds at December 31, 2001 and 2000 was $49.4 and $57.8 million, respectively. Under the terms of these agreements, the Company has the legally enforceable right to assess and collect from its current franchisees fees sufficient to pay for the marketing and reservation services the Company has procured for the benefit of the franchise system, including fees to reimburse the Company for past services rendered. The Company has the contractual authority to require that the franchisees in the system at any given point repay any deficits in the funds to reimburse the Company for any advance. Advances to the marketing and reservation funds made by the Company are the legally enforceable obligation of the constituents of the Company’s franchise system, and those constituents are legally obliged to pay any assessment the Company imposes on its franchisees to obtain reimbursement regardless of whether those constituents continue to generate gross room revenue.

7. Transactions with Sunburst

Effective October 15, 1997, Choice Hotels International, Inc. (“CHI”), which at that point included both the franchising business and owned hotel business, separated the businesses via spin-off of the Company (the “Sunburst Distribution”). CHI changed its name to Sunburst Hospitality Corporation (referred to hereafter as “Sunburst”). As part of the spin-off, Sunburst and the Company entered into a strategic alliance agreement, which was amended in December 1998 and September 2000. Among other things, the strategic alliance agreement provides for (i) certain commitments by Sunburst for the development of MainStay Suites hotels; (ii) special procedures associated with liquidated damages; and (iii) predetermined franchise fee credits based on operating performance. The strategic alliance agreement extends through October 15, 2002 as it relates to development commitments. Liquidated damage and franchise fee credit provisions extend through the life of existing franchise agreements.