4. Franchise Rights

Franchise rights are intangible assets and represent an allocation in purchase accounting for the value of long-term franchise contracts. As of December 31, 2000, the net balance is associated with the Econo Lodge acquisition made in fiscal year 1991. Franchise rights acquired are amortized over an average life of 15 years. Amortization expense for the years ended December 31, 2000, 1999 and 1998 amounted to $3.9 million, $4.3 million and $3.8 million, respectively. Franchise rights are net of accumulated amortization of $26.9 million and $23.0 million at December 31, 2000 and 1999, respectively.

The Company periodically assesses the amortization lives of its franchise rights. Effective January 1, 1998, the Company changed its estimate of the useful life of Econo Lodge franchise rights to a 17 year period and Rodeway franchise rights to a 3 year period to more closely match the remaining estimated contract lives of franchise contracts acquired in 1991.

5. Investment in Friendly

As of December 31, 2000, the Company had 1,083,333 shares of common stock and 23,624,742 shares of 5.75% convertible preferred stock in Friendly Hotels plc (“Friendly”), the Company’s master franchisor for the United Kingdom, Ireland and continental Europe. The preferred shares were convertible for one new Friendly common share for every 150p nominal of the preferred convertible shares.

The Company has the right to appoint three directors to the board of Friendly. Given the Company’s ability to exercise significant influence over the operations of Friendly, the equity method of accounting is applied.

Friendly holds the master franchise rights for the Company’s Comfort, Quality and Clarion brand hotels in the United Kingdom, Ireland and throughout Europe (with the exception of Scandinavia) for a 10-year period. In exchange, the Company received Friendly common stock and was to receive from Friendly, $8.0 million payable in eight equal annual installments.

On December 21, 2000, Friendly announced a comprehensive restructuring program to strengthen its balance sheet and improve its operations. Elements of the restructuring program include a revaluation of its real estate portfolio, disposal of non-core assets, renegotiations of certain commercial arrangements with the Company, and a future strategy focused on growth of its franchising business. To improve Friendly’s competitive position in Europe, the Company has agreed to forgive and waive certain royalty fees due over the next five years, waive the five remaining annual installments of the master franchise agreement and to provide Friendly with a letter of credit in an amount up to £7.8 million (approximately US $11.4 million) to guarantee additional credit facilities from Friendly’s banks. The Company’s letter of credit will be secured by substantially all of Friendly’s assets in France and Germany, valued in excess of £8.2 million (approximately US $12.0 million). In consideration for this support, Friendly will reduce the conversion rate from 150p for each of Choice’s convertible preferred shares to 60p for each convertible preferred share. Other modifications to the Company’s convertible preferred shares will include a change in the dividend rate from 5.75% (payable in cash) to 2% per annum, if payable in additional convertible preferred shares. Friendly may alternatively elect to pay cash dividends at the rate of 3.5% per annum up until January 30, 2013 and thereafter at the rate of 5.75%. In addition, accrued dividends due to the Company as of February 7, 2001 will be converted to additional convertible preferred shares of Friendly. The effect of this change in conversion price together with the conversion of dividend arrearage to additional convertible preferred shares of Friendly is to increase the Company’s fully diluted ownership in Friendly from the current level of 44% to approximately 69%. Friendly will be granted an option to settle the deferred consideration of $4.0 million pursuant to a January, 1998 transaction, in additional convertible preferred shares. In the event that Friendly settles this obligation before maturity, the amount payable shall be discounted at a rate of 10% per annum. Due to the restructuring program, the Company has recorded an equity loss on Friendly of $12.1 million in accordance with Emerging Issues Task Force (“EITF”) No. 99-10, “Percentage Used to Determine the Amount of Equity Method Losses.” Going forward, the EITF No. 99-10 requires the Company to recognize changes in Friendly’s hypothetical liquidated book value as an equity adjustment to the Company’s recorded investment.