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, the balance was $7.6 million. The balance available on the letter of credit was reduced to £5.0 million (approximately US$7.3 million) during 2002.

From time to time, the Company establishes programs or helps franchisees obtain financing. One of the past programs was a “Construction to Permanent Financing” program under which Saloman Smith Barney together with Suburban Capital Markets, Inc. offered $100 million in financing per year to qualified franchises and the Company guaranteed such loans with a maximum guarantee amount of $10 million. At December 31, 2000, loans outstanding under this program were $6.0 million and the Company’s guarantee covered $3.0 million of these loans. In 2001, the $6.0 million loan was settled, removing the Company’s open guarantee of $3.0 million. The program had been terminated in 1999.

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 automatically renews for one year periods until either the Company or the financial institution elects to terminate the letter of credit.

20. FairValue of Financial Instruments

The balance sheet carrying amount of cash and cash equivalents and receivables approximate fair value due to the short term nature of these items. Long-term debt consists of bank loans and senior notes. Interest rates on bank loans adjust frequently based on current market rates; accordingly, the carrying amount of bank loans is equivalent to fair value. The $100 million unsecured senior notes have an approximate fair value at December 31, 2001 and 2000 of $95.9 million and $97.9 million, respectively, based on their current yield to maturity. The New Note from Sunburst has an approximate fair value of $40.5 million at December 31, 2001 and the Old Note from Sunburst had an approximate fair value of $139.4 million at December 31, 2000, respectively, based on its current yield to maturity.

21. Impact of Recently Issued Accounting Standards

The Company has adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” effective January 1, 2002, which updates accounting and reporting standards for the amortization of goodwill and recognition of other intangible assets. SFAS No. 142 requires goodwill to be assessed on at least an annual basis for impairment using a fair value basis. Because the Company operates in one reporting unit in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” and EITF 98-3, “Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business”, the fair value of the Company’s total assets are used to determine if goodwill may be impaired. According to SFAS No. 142, quoted market prices in active markets are the best evidence of fair value and shall be used as the basis for the measurement if available. The Company will no longer be required to record goodwill amortization expense of approximately $2.0 million per year and does not expect to recognize any impairment on its goodwill balances as a result of the adoption of SFAS No. 142. The Company will perform the initial assessment of the fair value of its goodwill balances during the first quarter of 2002.