Management’s Discussion and Analysis (Continued)

Interest and Other. Interest expense of $18.5 million in the year ended December 31, 2000 was up $2.1 million from $16.4 million in the year ended December 31, 1999 due to higher interest rates. Included in 2000 and 1999 results is approximately $15.2 million and $14.2 million, respectively, of interest income earned on the note receivable from Sunburst. In the year ended December 31, 2000, the Company recognized a $7.6 million loss associated with the monetization of $137.5 million of the Sunburst note.

Liquidity and Capital Resources

Net cash provided by operating activities was $101.7 million for the year ended December 31, 2001, an increase of $47.8 million from $53.9 million for the year ended December 31, 2000. The increase in cash provided was primarily due to repayments from the marketing and reservation funds and improved management of working capital. As of December 31, 2001, the total long-term debt outstanding for the Company was $281.3 million, $13.6 million of which matures in the next twelve months.

The Company realigned its corporate structure in November 2001 to increase its strategic focus on delivering value-added services to franchisees, including centralizing the Company’s franchise service and sales operations, consolidating its brand management functions and realigning its call center operations. The Company charged $1.3 million against the 2001 restructuring liability during the year ended December 31, 2001, and expects the remaining $4.6 million liability to be substantially paid in 2002. The Company also implemented a corporate-wide reorganization during 2000 to provide improved service and support to the Company’s franchisees and to create a more competitive overhead structure. The Company charged $4.8 million against the 2000 restructuring liability for the year ended December 31, 2001 and expects the remaining $0.3 million liability to be paid in 2002.

The Company received net cash repayments from the marketing and reservation funds totaling $20.3 million during the year ended December 31, 2001 and made net cash advances to the marketing and reservation funds totaling $14.5 million in the year ended December 31, 2000. The 2001 net repayments are associated with cost reductions from restructured operations, growth in fees from normal operations and increases in property and yield management fees. The 2000 net 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 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 from any advance. The Company expects the marketing and reservation funds to generate positive cash flows of approximately $20 million in 2002 due to cost reductions associated with restructured operations, programmed brand initiatives, growth in fees from normal operations and increases in property and yield management fees.

Cash provided by (utilized in) investing activities for the years ended December 31, 2001, 2000 and 1999, was $87.7 million, ($16.6 million) and ($36.0 million), respectively. During the years ended December 31, 2001, 2000 and 1999, capital expenditures totaled $13.5 million, $16.6 million, $30.6 million, respectively. Capital expenditures include the installation of system-wide property and yield management systems, upgrades to financial and reservation systems, computer hardware and renovations to the Company’s corporate headquarters (including a franchisee learning and training center).

On September 1, 2000, the Company monetized $16.3 million in principal and interest of the $115 million principal, five-year Subordinated Term Note (the “Old Note”) to Sunburst issued in October 1997. The Company received three MainStay Suites properties through the monetization transaction. The Old Note carried a simple interest rate of 11% per annum. In connection with the amendment of the strategic alliance agreement, effective October 15, 2000, interest payable accrued 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%. Total interest accrued at December 31, 2000 was $42.2 million. On January 5, 2001, the Company received from Sunburst $101.9 million and an 11 3/8% seven-year senior subordinated note (the “New Note”) in the amount of $35 million in payment of the Old Note (See Note 7 of Notes to Consolidated Financial Statements).