Choice Hotels International, Inc. and Subsidiaries

Depreciation and Amortization: Depreciation and amortization increased to $4.0 million for the seven months ended December 31, 1997 from $3.2 million for the seven months ended December 31, 1996. The increase was prima-rily due to capital improvements to the Company’s financial and billing information systems.

Liquidity and Capital Resources

Net cash provided by operating activities was $79.5 million for the year ended December 31, 1999, an increase of $34.9 million from $44.6 million for the year ended December 31, 1998. The improvement in cash provided was primarily due to improvements in operating income and management of working capital. As of December 31, 1999, the total long-term debt outstanding for the Company was $307 million.

Cash used in investing activities for the years ended December 31, 1999 and 1998, the seven months ended December 31, 1997 and the fiscal year ended May 31, 1997 was $50.5 million, $14.7 million, $149.7 million and $16.9 million, respectively. Investment in property and equipment includes renovations to the Company’s corporate headquarters (including a franchisee learning and training center) and installation of systemwide property and yield management systems. During the years ended December 31, 1999 and 1998, the seven months ended December 31, 1997 and the fiscal year ended May 31, 1997, capital expenditures totaled $30.6 million, $17.5 million, $7.3 million and $10.6 million, respectively. Capital expenditures in prior years include amounts for computer hardware; financial, property and yield management, and reservation systems; and European hotel capital improvements.

The Company made advances to the marketing and reservation funds totaling $15.1 million in Calendar 1999. The advances are associated with a system-wide property and yield management systems implementation, the timing of expenditures associated with specific brand initiatives of the marketing fund and the recognition of costs and the timing of payments received from franchisees in conjunction with the Company’s frequency stay program. The Company has the ability under existing franchise agreements and expects to recover these advances through future marketing and reservation fees. The company expects $15.0 to $20.0 million of increases in advances to the marketing and reservation funds in Calendar 2000 due to the continued property and yield management systems implementation and expenditures associated with specific brand initiatives.

On October 15, 1997, the Company funded a $115 million, five year Subordinated Term Note to Sunburst with an initial simple interest rate of 11% per annum. In connection with the amendment of the strategic alliance agreement (as defined in the Notes to the Consolidated Financial Statements), effective October 15, 2000 interest payable shall accrue at a rate of 11% per annum compounded daily. The Company implemented this amendment prospectively beginning on January 1, 1999 and has recognized interest on the outstanding principal and accrued interest amounts at an effective rate of 10.58%. The note is payable in full, along with accrued interest, on October 15, 2002. Total interest accrued at December 31, 1999 and 1998 was $27.0 million and $12.8 million, respectively.

Financing cash flows relate primarily to the Company’s borrowings under its credit lines and treasury stock purchases. On October 15, 1997, the Company entered into a five-year $300 million competitive advance and multi-currency revolving credit facility. The credit facility provides for a term loan of $150 million and a revolving credit facility of $150 million, $50 million of which is available in foreign currency borrowings. At the time of the Sunburst Distribution, the Company borrowed $150 million under the term loan and $140 million under the revolving credit facility, the proceeds of which were used to fund the $115 million Sunburst note and to refinance existing indebtedness. As of December 31, 1999, the Company had $112.5 million of term loans outstanding and $82 million of revolving loans. The term loan is payable over five years, $32.5 million of which is due in 2000. The credit facility includes customary financial and other covenants that require the maintenance of certain ratios including maximum leverage, minimum net worth and interest coverage and restrict the Company’s ability to make certain investments, repurchase stock, incur debt and dispose of assets. At the Company’s option, the interest rate may be based on LIBOR, a certificate of deposit rate or an alternate base rate (as defined) plus a facility fee percentage. The rate is determined based on the Company’s consolidated leverage ratio at the time of borrowing.

On May 1, 1998, the Company completed a $100 million senior unsecured note offering (“the Notes”), bearing a coupon rate of 7.13% with an effective rate of 7.22%. The Notes will mature on May 1, 2008, with interest on the Notes to be paid semi-annually. The Company used the net proceeds from the offering of approximately $99 million to repay amounts outstanding under the Company’s $300 million competitive advance and multi-currency revolving credit facility.