Management’s Discussion and Analysis (Continued)

Franchise Revenues. Net franchise revenues were $166.2 million for the year ended December 31, 2000 and $157.7 million for the year ended December 31, 1999. Royalties increased $9.0 million to $137.7 million from $128.7 million in 2000, an increase of 7.0%. The increase in royalties is attributable to a 3.2% increase in the number of domestic franchised hotel rooms, an increase in the effective royalty rate of the domestic hotel system to 3.85% from 3.80%, and an improvement in domestic RevPAR of 4.4%. Domestic initial fee revenue generated from franchise contracts signed was $6.4 million down from $9.6 million in 1999. Total domestic franchise agreements signed in 2000 were 298, a decline from 318 total agreements executed in 1999. The number of domestic rooms added declined to 24,582 in 2000 from 26,731 in 1999. An increasingly competitive hotel franchising environment, coupled with stricter hotel brand standards being enforced by the Company, contributed to the decline in the total franchise agreements signed in the period. Revenues generated from partner service relationships increased to $10.3 million from $9.1 million in 1999 related primarily to revenues earned from increased financial service programs available to franchisees.

The number of domestic rooms on-line increased to 265,962 from 258,120, an increase of 3.0% for the year ended December 31, 2000. For 2000, the total number of domestic hotels on-line grew 3.9% to 3,244 from 3,123 for 1999. International rooms on-line increased to 84,389 as of December 31, 2000 from 80,134, an increase of 5.3%. The total number of international hotels on-line increased to 1,148 from 1,125, an increase of 2.0% for the year ended December 31, 2000. As of December 31, 2000, the Company had 493 franchised hotels with 39,539 rooms either in design or under construction in its domestic system. The Company has an additional 210 franchised hotels with 21,388 rooms under development in its international system as of December 31, 2000.

Franchise Expenses. Selling, general and administrative expenses were $57.2 million for the year ended December 31, 2000, an increase of $1.3 million from the year ended December 31, 1999 total of $55.9 million. As a percentage of net franchise revenues, selling, general and administrative expenses declined to 34.4% in 2000 from 35.4% in 1999. This decline, which increased franchising margins from 64.6% to 65.6%, was largely due to cost control initiatives from the 2000 restructuring and the economies of scale generated from operating a larger franchisee base.

Marketing and Reservations. The total marketing and reservation fees received by the Company were $185.4 million and $162.6 million for the years ended December 31, 2000 and December 31, 1999, respectively. Depreciation and amortization charged to the marketing and reservation funds was $10.5 million and $9.6 million for the years ended December 31, 2000 and 1999, respectively. Interest expense incurred by the reservation fund was $4.8 million and $3.3 million for the years ended December 31, 2000 and 1999, respectively. As of December 31, 2000, the Company’s balance sheet includes a receivable of $57.8 million related to advances made to the marketing and reservation funds. As of December 31, 1999, the Company’s balance sheet includes a receivable of $32.8 million related to advances made to the marketing and reservation funds. Advances to the marketing and reservation funds represent the legal obligation of the franchise system and the Company has the legal right to demand repayment at any point.

Product Sales. In the fourth quarter of 1998, the Company discontinued its group-purchasing program as previously operated. The group purchasing program utilized bulk purchases to obtain favorable pricing from third party vendors for franchisees ordering similar products. The Company acted as a clearinghouse between the franchisee and the vendor, and orders were shipped directly to the franchisee. Sales made to franchisees through the Company’s group purchasing program were $3.9 million during the year ended December 31, 1999, with product cost of sales of $3.9 million.

Depreciation and Amortization. Depreciation and amortization increased to $11.6 million in the year ended December 31, 2000 from $7.7 million in the corresponding period in 1999. This increase was primarily attributable to new computer systems installations and corporate office renovations.

Friendly. The Company’s investment in Friendly resulted in a $12.1 million equity loss in the year ended December 31, 2000, associated with Friendly’s comprehensive restructuring program. December 31, 1999 results also included $12.1 million in dividend income from Friendly.