CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

During 2001, Friendly settled a $4.0 million deferred consideration due to the Company through the issuance of 2,404,013 convertible preferred shares. The effect of the reduction in the conversion price together with the conversion of dividend arrearage to additional convertible preferred shares of Friendly and the settlement of the deferred consideration, both resulting in the issuance of convertible preferred shares, on a fully converted basis, the Company's ownership in Friendly would have been approximately 71%. Due to the restructuring program, the Company has recorded equity losses on Friendly of $16.4 million and $12.1 million for the years ended December 31, 2001 and 2000, respectively, in accordance with EITF 99-10, "Percentage Used to Determine the Amount of Equity Method Losses". Mid-year adverse fixed asset valuation adjustments due to a decline in economic conditions and incremental professional fees associated with the reorganization primarily account for the $16.4 million charge.

The Company recognized $2.2 million in preferred dividend income from the Friendly investment for the year ended December 31, 1999. As of December 31, 1999, accrued but unpaid preferred dividends were $5.8 million. No dividends were accrued during 2001 or 2000. The Company also recognized $1.1 million and $2.2 million in royalty revenue from Friendly for the years ended December 31, 2000 and 1999, respectively. The Company has waived its royalty fees from Friendly for the periods from 2001 through 2005 as part of Friendly's restructuring.

The Company owned approximately 5.4%, 5.4% and 5.3% of Friendly's outstanding ordinary shares at December 31, 2001, 2000 and 1999, respectively. The fair market value of the ordinary shares at December 31, 2001, 2000 and 1999 was $0.3 million, $0.7 million and $2.0 million, respectively. Summarized unaudited balance sheet data for Friendly is as follows: