The Company is one of the largest hotel franchisors in the world with 4,392 hotels open and 703 hotels under development as of December 31, 2000, representing 350,351 rooms open and 60,927 rooms under development in 43 countries. The Company franchises hotels under the Comfort, Quality, Econo Lodge, Sleep Inn, Clarion, Rodeway Inn and MainStay Suites brand names. The Company operates in all 50 states and the District of Columbia and 37 additional countries with 97% of its franchising revenue derived from hotels franchised in the United States.

The principal factors that affect the Company’s results are: growth in the number of hotels under franchise; occupancies and room rates achieved by the hotels under franchise; the effective royalty rate achieved; the number and relative mix of franchised hotels; and the Company’s ability to manage costs. The number of rooms at franchised properties and occupancies and room rates at those properties significantly affect the Company’s results because franchise royalty fees are based upon room revenues at franchised hotels. The key industry standard for measuring hotel operating performance is revenue per available room (RevPAR), which is calculated by multiplying the percentage of occupied rooms by the average daily room rate realized. The variable overhead costs associated with franchise system growth are substantially less than incremental royalty fees generated from new franchisees; therefore, the Company is able to capture a significant portion of those royalty fees as operating income.

Comparison of Calendar Year 2000 Operating Results
and Calendar Year 1999 Operating Results

The Company recorded net income of $42.4 million for the year ended December 31, 2000, a decrease of $14.8 million, compared to net income of $57.2 million for the year ended December 31, 1999. Operating income of $92.4 million in 2000 was $1.8 million under 1999 operating income of $94.2 million due to a restructuring charge of $5.6 million in 2000. A corporate-wide reorganization was implemented in 2000 to provide a more consistent service to franchisees, establish a centralized sales focus and create a more competitive overhead structure. Net income was further adversely affected in 2000 by a $7.4 million (net of taxes) equity loss in Friendly Hotels plc (“Friendly”) and a $4.6 million (net of taxes) loss on the subordinated term note (the “Note”) from Sunburst Hospitality Corporation (“Sunburst”). The Friendly equity loss was due to a comprehensive restructuring program at Friendly to strengthen its balance sheet and improve its operations. The Sunburst loss was attributed to two early payment transactions as the Company moved to monetize the note receivable.