CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

For facilities in progress, as assets are placed in service, they are transferred to appropriate fixed asset categories and depreciation begins. Depreciation expense for the years ended December 31, 2001, 2000 and 1999 was $4.6 million, $3.0 million and $1.7 million, respectively. Depreciation has been computed for financial reporting purposes using the straight-line method. A summary of the ranges of estimated useful lives upon which depreciation rates have been based follows:

Building and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-40 years
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3-20 years

3. Goodwill

Goodwill primarily represents an allocation of the excess purchase price of the stock of the Company over the recorded minority interest that was previously held by members of the Company's former management team. Goodwill is amortized on a straight-line basis over 40 years. Such amortization amounted to $2.2 million, $2.0 million and $2.0 million for the years ended December 31, 2001, 2000 and 1999, respectively. Goodwill is net of accumulated amortization of $14.3 million and $12.1 million at December 31, 2001 and 2000.

The Company adopted SFAS No. 142 on January 1, 2002, which requires goodwill to be assessed on at least an annual basis for impairment using a fair value basis.

4. Franchise Rights

Franchise rights are intangible assets and represent an allocation in purchase accounting for the value of long-term franchise contracts acquired. As of December 31, 2001 and 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, 2001, 2000 and 1999 amounted to $3.0 million, $3.9 million and $4.3 million, respectively. Franchise rights are net of accumulated amortization of $32.0 million and $29.0 million at December 31, 2000 and 1999, respectively. Under SFAS No. 142, franchise rights will continue to be amortized as they are intangibles with definite lives.

5. Investment in Friendly Hotels

As of December 31, 2001, the Company had 1,227,622 shares of common stock and 31,097,755 shares of 5.75% convertible preferred stock in Friendly Hotels PLC (currently known as C.H.E. Group PLC) ("Friendly"), the Company's master franchisor for the United Kingdom, Ireland and continental Europe.

The Company had three directors on the board of Friendly. Given the Company's ability to exercise significant influence over the operations of Friendly, the equity method of accounting was 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 January 19, 2001, the shareholders of Friendly approved a capital reorganization intended to provide Friendly with a stronger balance sheet and improve its operations. Pursuant to the capital reorganization, the Company waived certain royalty and marketing fees due from Friendly for the period between December 27, 1999 and December 31, 2005, waived the then five remaining annual installments of the master franchise agreement and provided Friendly with a £7.8 million (approximately US $11.4 million) secured letter of credit in consideration for, among other things, a reduction in the conversion price of the Company's convertible preferred shares from 150p to 60p. The letter of credit is secured by substantially all of Friendly's assets in France, valued in excess of £4.2 million (approximately US $6.1 million). Other modifications to the Company's convertible preferred shares 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 13, 2013 and thereafter at the rate of 5.75%. In addition, accrued dividends due to the Company as of February 7, 2001 were converted to additional convertible preferred shares of Friendly. As of December 31, 2001, Friendly had drawn £5.3 million (approximately US $7.7 million) of the available letter of credit and the balance available on the letter of credit was reduced to £5.0 million (approximately US $7.3 million) as of January 21, 2002. The letter of credit will expire on June 30, 2002.