Comfort Inn 2002 Annual Report Download - page 46

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.
In January 2001, the Company provided Friendly, in association with Friendly’s restructuring (see Note 5 to
Consolidated Financial Statements), with a letter of credit in an amount up to £7.8 million (approximately
US$11.4 million) to guarantee additional credit facilities from Friendly’s banks. At December 31, 2001 and
2002, the balance was $7.6 million and $4.4 million, respectively. The balance available on the letter of credit
was reduced to £5.0 million (approximately US$7.3 million) during 2002. The letter of credit was terminated on
January 28, 2003.
The Company has a $3.0 million letter of credit issued as support for construction and permanent financing
of a Sleep Inn and MainStay Suites located in Atlanta, Georgia. The letter of credit expires in December 2003.
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, and (v) issuances of debt or equity securities. 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 a licensing agreements, (iv) financial institutions in credit facility arrangements, (v)
underwriters in debt or equity security issuances and (vi) other operating agreements. 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, 2002 and 2001 of $102.5 million and $95.9 million, respectively, based
on quoted market prices. The New Note from Sunburst has an approximate fair value of $42.7 and $40.5 million
at December 31, 2002 and 2001, respectively.
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