Comfort Inn 2004 Annual Report Download - page 50

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
19. Commitments and Contingencies
The Company is a defendant in a number of lawsuits arising in the ordinary course of business. In the
opinion of management and general counsel to the Company, the ultimate outcome of such litigation will not
have a material adverse effect on the Company’s business, financial position, results of operations or cash flows.
The Company has a $3.0 million letter of credit issued as support for construction and permanent financing
of a Sleep Inn and a MainStay Suites located in Atlanta, Georgia. No amounts were drawn against this letter of
credit as of December 31, 2004. The letter of credit expires in April 2005.
In the ordinary course of business, the Company enters into numerous agreements that contain standard
guarantees and indemnities whereby the Company indemnifies another party for breaches of representations and
warranties. Such guarantees or indemnifications are granted under various agreements, including those governing
(i) purchases or sales of assets or businesses, (ii) leases of real estate, (iii) licensing of trademarks, (iv) access to
credit facilities, (v) issuances of debt or equity securities, and (vi) other operating agreements. The guarantees or
indemnifications issued are for the benefit of the (i) buyers in sale agreements and sellers in purchase
agreements, (ii) landlords in lease contracts, (iii) franchisees in licensing agreements, (iv) financial institutions in
credit facility arrangements, and (v) underwriters in debt or equity security issuances. In addition, these parties
are also indemnified against any third party claim resulting from the transaction that is contemplated in the
underlying agreement. While some of these guarantees extend only for the duration of the underlying agreement,
many survive the expiration of the term of the agreement or extend into perpetuity (unless subject to a legal
statute of limitations). There are no specific limitations on the maximum potential amount of future payments
that the Company could be required to make under these guarantees, nor is the Company able to develop an
estimate of the maximum potential amount of future payments to be made under these guarantees as the
triggering events are not subject to predictability. With respect to certain of the aforementioned guarantees, such
as indemnifications of landlords against third party claims for the use of real estate property leased by the
Company, the Company maintains insurance coverage that mitigates any potential payments to be made.
20. Fair Value of Financial Instruments
The balance sheet carrying amount of cash and cash equivalents and receivables approximates fair value due
to the short-term nature of these items. Long-term debt consists of bank loans and senior notes. Interest rates on
the Company’s bank loans adjust frequently based on current market rates; accordingly, the carrying amount of
the Company’s bank loans approximates fair value. The $100 million unsecured senior notes have an
approximate fair value at December 31, 2004 and 2003 of $109.0 million and $111.7 million, respectively, based
on quoted market prices.
21. Related Party Transactions
During 2003 and 2002, the Company repurchased 1.0 million shares and 1.7 million shares of its common
stock at a total cost of $24.8 million and $41.7 million, respectively from the Company’s largest shareholder,
affiliates and related parties. No shares were repurchased from related parties during 2004. On March 10, 2005,
the Company purchased 0.1 million shares at a cost of $6.0 million from one of the Company’s largest
shareholders.
During 2004, the Company recognized stock compensation expense of approximately $0.3 million resulting
from acceleration of vesting of stock options and restricted stock held by a retiring board member who is a
member of the family of the Company’s largest shareholder.
The Company paid approximately $187,028 to and received approximately $121,040 from corporations
owned or controlled by family members of the Company’s largest shareholder related to the lease of personal and
real property during 2004. During 2003, the Company paid approximately $298,385 and received approximately
$121,040. During 2002, the Company paid approximately $41,000 and received approximately $104,000.
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