CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company previously had entered into a $300 million competitive advance and multi-currency revolving credit facility (the “Old Credit Facility”) provided by a group of 13 banks. Borrowings under the Old Credit Facility were at one of several rates including LIBOR plus 0.875% to 2.0%, based upon a defined financial ratio and the loan type. The Old Credit Facility required the Company to pay annual fees of 1/10 of 1% to 1/3 of 1%, based upon a defined financial ratio of the total loan commitment.

On May 1, 1998, the Company issued $100 million of senior unsecured notes (the “Notes”) at a discount of $0.6 million, bearing a coupon rate of 7.13% with an effective rate of 7.22%. The Notes will mature on May 1, 2008. Interest on the Notes are paid semi-annually. The Company used the net proceeds from the offering of approximately $99 million to repay amounts outstanding under the Old Credit Facility.

On May 31, 2001, the Company’s $15 million line of credit expired.

On December 3, 1999, the Company entered into an interest rate swap agreement with a notional amount of $115 million to fix certain of its variable rate debt in order to reduce the Company’s exposure to fluctuations in interest rates. The interest rate differential to be paid or received on the interest rate swap agreement is accrued as interest rates change and is recognized as an adjustment to interest expense. On average at December 31, 1999, the interest rate swap agreement had a life of two months with a fixed rate of 5.85% and variable rate of 6.12%, and a fair market valuation of approximately $0.1 million. On March 3, 2000, the interest rate swap agreement was settled for approximately $0.1 million. In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, the Company reclassified a deferred gain totaling $0.7 million from prior year hedging activity to other comprehensive income during 2001.

11. Foreign Operations

The Company accounts for foreign currency translation in accordance with SFAS No. 52, “Foreign Currency Translation.” Revenues generated by foreign operations for the years ended December 31, 2001, 2000 and 1999 were $5.2 million, $5.3 million and $6.9 million (exclusive of $2.5 million of foreign dividends), respectively. The Company’s foreign operations had net (loss) income of $(35.2 million), $(12.3 million) and $1.0 million for the years ended December 31, 2001, 2000 and 1999, respectively.