-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BPfMlZDfkaJtp19UmRkOkV/2kugOMHdU4inn5n977T81cud4V3694cqakFp/07G0 JM18tC0/Z5PCgpbI0fMikQ== 0000950152-96-004197.txt : 19960816 0000950152-96-004197.hdr.sgml : 19960816 ACCESSION NUMBER: 0000950152-96-004197 CONFORMED SUBMISSION TYPE: S-11/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19960814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOYKIN LODGING TRUST INC CENTRAL INDEX KEY: 0001015859 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-11/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-06341 FILM NUMBER: 96615461 BUSINESS ADDRESS: STREET 1: 1500 TERMINAL TOWER STREET 2: 50 PUBLIC SQUARE CITY: CLEVELAND STATE: OH ZIP: 44113 BUSINESS PHONE: 2162416375 MAIL ADDRESS: STREET 1: 1500 TERMINAL TOWER STREET 2: 50 PUBLIC SQUARE CITY: CLEVELAND STATE: OH ZIP: 44113 S-11/A 1 BOYKIN MANAGEMENT S-11/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 1996 REGISTRATION NO. 333-6341 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-11 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ BOYKIN LODGING COMPANY (Exact name of registrant as specified in its governing instruments) ------------------------ TERMINAL TOWER, SUITE 1500 50 PUBLIC SQUARE CLEVELAND, OHIO 44113-2258 (216) 241-6375 (Address of principal executive offices) ------------------------ ROBERT W. BOYKIN TERMINAL TOWER, SUITE 1500 50 PUBLIC SQUARE CLEVELAND, OHIO 44113-2258 (216) 241-6375 (Name and address of agent for service) ------------------------ Copies to: ALBERT T. ADAMS, ESQ. BRUCE M. MONTGOMERIE, ESQ. ROBERT A. WEIBLE, ESQ. WILLKIE FARR & GALLAGHER BAKER & HOSTETLER ONE CITICORP CENTER 3200 NATIONAL CITY CENTER 153 EAST 53RD STREET CLEVELAND, OHIO 44114-3485 NEW YORK, NEW YORK 10022-4677 (216) 621-0200 (212) 821-8000
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. ------------------------ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ________________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / __________________________________________________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ___________________________________________ ------------------------
CALCULATION OF REGISTRATION FEE ================================================================================================= PROPOSED PROPOSED MAXIMUM MAXIMUM AGGREGATE AMOUNT OF TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE OFFERING REGISTRATION BEING REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE - ------------------------------------------------------------------------------------------------- Common Shares, without par value........................ 9,056,250 $22.00 $199,237,500 $68,703 ================================================================================================= (1) Includes up to 1,181,250 shares which may be purchased by the Underwriters to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c).
------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. 2 CROSS REFERENCE SHEET PURSUANT TO RULE 501(A) OF REGULATION S-K
ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS --------------------------------------------- ----------------------------------------- 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus..... Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus................................. Inside Cover Page; Outside Back Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............... Outside Front Cover Page; Prospectus Summary; Risk Factors; Policies and Objectives With Respect to Certain Activities; Shares Available for Future Sale 4. Determination of Offering Price.............. Outside Front Cover Page; Underwriting 5. Dilution..................................... Dilution 6. Selling Security Holders..................... Not Applicable 7. Plan of Distribution......................... Outside Front Cover Page; Underwriting 8. Use of Proceeds.............................. Use of Proceeds 9. Selected Financial Data...................... Selected Financial Information 10. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. Management's Discussion and Analysis of Financial Condition and Results of Operations 11. General Information as to Registrant......... Prospectus Summary; Management; Business and Properties 12. Policy With Respect to Certain Activities.... Prospectus Summary; Policies and Objectives with Respect to Certain Activities 13. Investment Policies of Registrant............ Prospectus Summary; Policies and Objectives with Respect to Certain Activities; Business and Properties 14. Description of Real Estate................... Prospectus Summary; Business and Properties 15. Operating Data............................... Business and Properties 16. Tax Treatment of Registrant and its Security Holders.................................... Prospectus Summary; Federal Income Tax Considerations 17. Market Price of and Dividends on the Registrant's Common Equity and Related Shareholder Matters........................ Not Applicable 18. Description of Registrant's Securities....... Capital Stock of the Company 19. Legal Proceedings............................ Business and Properties -- Legal Proceedings 20. Security Ownership of Certain Beneficial Owners and Management...................... Principal Shareholders of the Company 21. Directors and Executive Officers............. Management 22. Executive Compensation....................... Management 23. Certain Relationships and Related Transactions............................... Prospectus Summary; Business and Properties; Management; Certain Transactions 24. Selection, Management and Custody of Registrant's Investments................... Outside Front Cover Page; Prospectus Summary; Business and Properties; Management; Policies and Objectives with Respect to Certain Activities 25. Policies With Respect to Certain Transactions............................... Risk Factors; Policies and Objectives with Respect to Certain Activities 26. Limitations of Liability..................... Capital Stock of the Company 27. Financial Statements and Information......... Prospectus Summary; Selected Financial Information; Financial Statements 28. Interests of Named Experts and Counsel....... Legal Matters; Experts 29. Disclosure of Commission Position on Indemnification for Securities Act Liabilities................................ Not Applicable
3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. Subject to Completion, dated August 14, 1996 PROSPECTUS 7,875,000 COMMON SHARES BOYKIN LODGING COMPANY Boykin Lodging Company (the "Company") was formed to continue and expand the hotel ownership, acquisition, redevelopment and repositioning operations of Boykin Management Company and its affiliates (collectively, the "Boykin Group"). The Company will own nine national franchise hotels, all managed by the Boykin Group, containing a total of 2,408 rooms located in California, Florida, New York, North Carolina and Ohio (the "Initial Hotels") upon completion of this offering (the "Offering"). The Company's operations will focus on the ownership of full-service hotels that serve both business and leisure travelers under franchise agreements with Marriott, Radisson, Holiday Inn and other national franchisors. The Company will operate as a self-administered equity real estate investment trust (a "REIT"). The Initial Hotels will be leased to Boykin Management Company Limited Liability Company (the "Initial Lessee"), which is owned by Robert W. Boykin and John E. Boykin, pursuant to leases (the "Percentage Leases") designed to allow the Company to achieve substantial participation in the future revenue growth generated by the Initial Hotels. The Company intends to lease its hotel properties to the Initial Lessee and other selected operating companies. The Company intends to pay regular quarterly dividends, initially at a rate of $ per share per annum, beginning with a prorated dividend for the quarter ending September 30, 1996. All of the common shares, without par value (the "Common Shares"), offered hereby are being offered by the Company. Upon completion of the Offering, the Common Shares offered hereby will represent 84.1% of the fully diluted equity of the Company. Members of management and other Boykin Group Affiliates will own approximately 14.4% of the equity of the Company in the form of interests exchangeable for Common Shares. Prior to the Offering, there has been no public market for the Common Shares. Application has been made to list the Common Shares on the New York Stock Exchange under the symbol "BOY". It is currently anticipated that the initial public offering price per Common Share will be $22.00. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON SHARES, INCLUDING: - dependence of the Company on Robert W. Boykin and other key personnel; - dependence of the Company on lessees for its operating income; - risks affecting the hotel industry generally and the Company's hotels specifically, including potential loss of franchises and risks arising from requirements imposed by franchisors; - conflicts of interest between the Company and certain of its Affiliates, including lack of independent appraisals for the Initial Hotels and lack of arm's-length negotiations in connection with the formation of the Company; - risks associated with the leasing, acquisition and development of real property; - the Company's lack of operating history and lack of experience in operating in accordance with the requirements for maintaining its qualification as a REIT; - adverse tax consequences if the Company fails to qualify as a REIT; and - limitations on shareholders' ability to change control of the Company, including restriction of ownership of Common Shares by any single person to 9.0% of the outstanding shares. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNTS(1) COMPANY(2) - --------------------------------------------------------------------------------------------------------- Per Share $ $ $ - --------------------------------------------------------------------------------------------------------- Total(3) $ $ $ - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- (1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities arising under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses, estimated at $2,250,000, payable by the Company. (3) The Company has granted the Underwriters a 30-day option to purchase up to additional Common Shares solely to cover over-allotments, if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively.
------------------------ The Common Shares are offered by the several Underwriters named herein, subject to prior sale, withdrawal, cancellation or modification of the offer without notice, to delivery to and acceptance by the Underwriters and to certain further conditions. It is expected that certificates for the Common Shares offered hereby will be available for delivery on or about , 1996 at the offices of Lehman Brothers Inc., New York, New York. ------------------------ LEHMAN BROTHERS ALEX. BROWN & SONS INCORPORATED DEAN WITTER REYNOLDS INC. A.G. EDWARDS & SONS, INC. EVEREN SECURITIES, INC. MCDONALD & COMPANY , 1996 SECURITIES, INC. 4 [INSIDE FRONT COVER] [Reserved for Photos] THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 5 TABLE OF CONTENTS
PAGE ---- PROSPECTUS SUMMARY................... 1 The Company..................... 1 The Initial Lessee.............. 3 Additional Lessees.............. 4 Risk Factors.................... 4 The Initial Hotels.............. 6 Business Objectives and Strategies.................... 7 Formation Transactions.......... 9 Organizational Chart............ 10 Summary Financial Information... 11 Distributions................... 16 Tax Status of The Company....... 16 The Offering.................... 17 RISK FACTORS......................... 18 Dependence on Key Personnel..... 18 Control by Boykin Group and Lack of Shareholder Control........ 18 Dependence on Lessees........... 19 Hotel Industry Risks............ 19 Conflicts of Interest........... 21 Lack of Independent Appraisals and Arm's-Length Negotiations.................. 22 Affiliates' Benefits From the Formation..................... 22 Real Estate Investment Risks.... 22 The Company's Lack of Operating History....................... 24 Potential Adverse Effect on the Value of the Common Shares of Fluctuations in Interest Rates or Equity Markets............. 24 Potential Environmental Liability..................... 24 Tax Risks....................... 25 Anti-Takeover Effect of Ownership Limit............... 27 No Limitation on Debt; Ability to Issue Preferred Shares..... 27 Dilution........................ 27 Absence of Prior Public Market for Common Shares............. 28 Limitations on Ownership of Common Shares................. 28 Risk of High Distribution Payout Percentage.................... 28 Board's Ability to Change Policies...................... 28 Effect on Market Price of Shares Available for Future Sale..... 28 ERISA........................... 28 THE COMPANY.......................... 29 General......................... 29 Business Objectives and Strategies.................... 31 LESSEES.............................. 34 The Initial Lessee.............. 34 Additional Lessees.............. 35 USE OF PROCEEDS...................... 36 DISTRIBUTION POLICY.................. 37 PAGE ---- CAPITALIZATION....................... 39 DILUTION............................. 40 SELECTED FINANCIAL INFORMATION....... 41 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................... 47 Overview........................ 47 General......................... 47 Pro Forma Results of Operations for the Consolidated Company....................... 47 Results of Operations of the Initial Hotels (Excluding Lake Norman Hotels)................ 47 Liquidity and Capital Resources..................... 50 Inflation....................... 51 Seasonality..................... 52 BUSINESS AND PROPERTIES.............. 53 The Hotel Industry.............. 53 The Initial Hotels.............. 54 The Percentage Leases........... 59 Franchise Agreements............ 62 Excluded Properties............. 64 Other Activities................ 64 Employees....................... 65 Environmental Matters........... 65 Competition..................... 66 Tax Depreciation................ 66 The Intercompany Convertible Note.......................... 66 Legal Proceedings............... 67 POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES.............. 67 Investment Policies............. 67 Financing....................... 68 Policies with Respect to Certain Other Activities.............. 68 Conflict of Interest Policy..... 68 THE FORMATION........................ 69 MANAGEMENT........................... 71 Company Directors and Executive Officers...................... 71 Audit Committee................. 72 Compensation Committee.......... 72 Liability and Indemnification of Directors and Officers........ 72 Executive Compensation.......... 73 Employment Contracts............ 73 Registration Rights............. 74 Compensation of Directors....... 74 Directors' Deferred Compensation Plan.......................... 74 Long-Term Incentive Plan........ 74 Initial Lessee Directors and Officers...................... 75 CERTAIN TRANSACTIONS................. 76
i 6
PAGE ---- PRINCIPAL SHAREHOLDERS OF THE COMPANY............................ 77 CAPITAL STOCK OF THE COMPANY......... 78 General......................... 78 Common Shares................... 78 Preferred Shares................ 79 Restrictions on Transfer........ 79 Ohio Anti-Takeover Provisions... 80 THE PARTNERSHIP...................... 80 Management...................... 80 Transferability of Interests.... 81 Capital Contributions........... 81 Exchange Rights................. 81 Tax Matters; Profits and Losses........................ 82 Operations...................... 82 Distributions................... 82 Term............................ 82 SHARES AVAILABLE FOR FUTURE SALE..... 82 FEDERAL INCOME TAX CONSIDERATIONS.... 83 General......................... 83 Taxation of the Company as a REIT.......................... 84 PAGE ---- Requirements for Qualification as a REIT..................... 84 Tax Aspects of the Company's Investment in the Operating Partnership................... 90 Taxation of Taxable Domestic Shareholders.................. 93 Taxation of Tax-Exempt Shareholders.................. 94 Taxation of Foreign Shareholders.................. 94 Other Tax Considerations........ 95 ERISA CONSIDERATIONS................. 95 UNDERWRITING......................... 97 EXPERTS.............................. 98 LEGAL MATTERS........................ 98 ADDITIONAL INFORMATION............... 99 GLOSSARY............................. 100 INDEX TO FINANCIAL STATEMENTS........ F-1
ii 7 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial information and statements, and the notes thereto, appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in "Risk Factors." Unless otherwise indicated, the information contained in this Prospectus assumes (i) an initial offering price of $22.00 per Common Share; (ii) that the Underwriters' over-allotment option is not exercised; (iii) that the units of limited partnership interest ("Units") in Boykin Hotel Properties, L.P., an Ohio limited partnership which will own the Company's initial hotel properties (the "Partnership"), that are outstanding on the date the Offering is consummated are exchanged for Common Shares on a one-for-one basis; (iv) that an intercompany convertible note payable to the Company which is convertible into equity interests in the Partnership is so converted; and (v) that options granted to directors and officers of the Company for the purchase of Common Shares are not exercised. Unless otherwise indicated or the context otherwise requires, as used in this Prospectus (a) "COMPANY" means Boykin Lodging Company and its subsidiaries on a consolidated basis (including the Partnership); (b) "INITIAL LESSEE" means Boykin Management Company Limited Liability Company; (c) "INITIAL HOTELS" means the nine initial hotels owned by the Company, each of which is a full-service or limited-service national franchise hotel; (d) "BOYKIN MANAGEMENT" means Boykin Management Company; (e) "BOYKIN GROUP" means Boykin Management and its Affiliates, and (f) "BOYKIN GROUP AFFILIATE" means Boykin Management or any Affiliate of Boykin Management. See "Glossary" for the definitions of certain other terms used in this Prospectus. THE COMPANY The Company was formed to continue and expand the hotel ownership, acquisition, redevelopment and repositioning activities of the Boykin Group and will operate as a self-administered equity real estate investment trust (a "REIT"). Upon completion of the Offering and Formation Transactions described herein, the Company will own nine hotels with a total of 2,408 guest rooms. The Initial Hotels are operated under franchise license agreements with premiere nationally-recognized hotel chains, including Marriott, Radisson, Holiday Inn, Quality Suites, and Hampton Inns. Serving both business and leisure travelers, the Initial Hotels are geographically diversified and are located in Berkeley, California; Buffalo, New York; Cleveland and Columbus, Ohio; Charlotte, North Carolina; and Ft. Myers and Melbourne, Florida. The Initial Hotels include eight full-service hotels and one limited-service hotel, all of which compete in the upscale to moderate price segment of the hospitality market. For the twelve months ended June 30, 1996, the Initial Hotels had an average occupancy rate of 76.2%, an average daily room rate ("ADR") of $87.62 and an average room revenue per available room night ("REVPAR") of $66.74. The Boykin Group developed and has owned and managed seven of the Initial Hotels since their opening. The Company will capitalize on the substantial hotel operating, development, acquisition and transactional experience of its management and the Boykin Group. The Boykin Group was founded in 1959, and was one of the first franchisees of Marriott Hotels and an early franchisee of Howard Johnson's Hotels. Since its founding, the Boykin Group has developed 13 full-service hotels containing a total of 3,085 rooms and has owned or managed 36 properties containing a total of 6,943 rooms. Robert W. Boykin, the President and Chief Executive Officer of the Company, has over 27 years of experience in the hotel industry, all with the Boykin Group. Raymond P. Heitland, the Company's Chief Financial Officer, has 26 years of industry experience and tenure with the Boykin Group. Mark L. Bishop, the Company's Senior Vice President -- Acquisitions and Development, has 18 years of industry experience. During the past 10 years, the Company's officers have directly overseen the acquisition, disposition, recapitalization, development and repositioning of approximately $750 million of hotel assets throughout the United States. Upon completion of the Offering, Company management and other Boykin Group Affiliates will own approximately 14.4% of the outstanding equity of the Company. Each Boykin Group Affiliate will conduct all future hotel acquisition, development and ownership activities only through the Company, except for any separate activity to which the Company consents. 1 8 The Company will focus on maximizing cash flow from both the Initial Hotels and acquired hotels through the implementation of the active asset management strategies of the Boykin Group. The current and the historical performance of the Initial Hotels have exceeded industry averages. During the five year period ended December 31, 1995, the Initial Hotels generated REVPAR that exceeded the REVPAR of their local competing hotels (in each market, four to seven competitors as currently defined by Boykin Management for property and personnel performance evaluation purposes) by 16% on average and exceeded the U.S. average REVPAR for upscale/moderate full-service hotels by 26%. In 1991, a year generally considered weak in the hotel industry, the REVPAR of the Initial Hotels exceeded the REVPAR of their local competing hotels by over 19% and exceeded the U.S. average REVPAR for upscale/moderate full-service hotels by over 29%. Over the three year and five year periods ended December 31, 1995 the aggregate revenues of the Initial Hotels increased at a compound annual rate of 4.4% and 3.6% per year, and earnings before interest, income taxes, depreciation, amortization and unusual and extraordinary items ("EBITDA") from the Initial Hotels increased at a compound average growth rate of 13.4% and 9.8% per year, respectively. The following table compares average occupancy, ADR and REVPAR for the Initial Hotels with that for their local competition for the periods indicated.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------- ------------------ 1991 1992 1993 1994 1995 1995 1996 ------ ------ ------ ------ ------ ------- ------- OCCUPANCY RATE Initial Hotels(1)..................... 69.9% 71.6% 72.6% 74.7% 74.9% 74.2% 76.8% Local Competition(2).................. 66.3% 68.7% 70.3% 71.6% 72.1% 71.9% 73.2% ADR Initial Hotels(1)..................... $75.83 $75.45 $75.50 $79.27 $85.47 $84.82 $89.03 Local Competition(2).................. $67.37 $68.02 $69.51 $71.39 $75.45 $75.31 $80.45 REVPAR Initial Hotels(1)..................... $52.97 $54.05 $54.80 $59.24 $63.98 $62.93 $68.35 Local Competition(2).................. $44.68 $46.75 $48.89 $51.12 $54.39 $54.15 $58.90
(1) Source: Company-provided information. (2) Source: Smith Travel Research (reports dated August 1 and 5, 1996). Smith Travel Research is not associated in any way with the Company or any of its Affiliates and has not provided any form of assistance in connection with the Offering. Local Competition includes Initial Hotels and four to seven competitors in each market, as currently defined by Boykin Management for property and personnel performance evaluation purposes and used for all periods shown. Boykin Management's consistently-applied criteria for defining each hotel's competitive set include comparability of location, target customers, rates, and level of service provided. See the table under "The Company -- General -- Historical Performance" for comparative information regarding all upscale/moderate hotels and all U.S. hotels, and "Business and Properties -- The Initial Hotels -- General." Management believes that, while the lodging industry as a whole is benefiting from an improved supply/demand dynamic, the greatest opportunities for revenue growth and profitability will arise from skillful management of hotel properties. An integral element of this management is the continuous evaluation of each hotel's position in its market and the implementation, as necessary, of changes in franchise, theme and customer focus to maximize the continuing returns from the hotel. The Company attributes the excellent performance of the Initial Hotels to the successful implementation of this asset management strategy. The Company also intends to achieve a significant part of its growth through the acquisition, redevelopment and repositioning of additional full-service hotels. The Company has obtained a commitment for a $75 million credit facility (the "Credit Facility") for acquiring additional hotels without financing contingencies, and will have no outstanding indebtedness upon completion of the Offering. The Company believes that there are full-service hotel properties that can be acquired at a discount to replacement cost, and that many of these properties are located in areas of increasing demand. The Company further believes that the full-service segment of the market, in particular, has potential for improved performance as business and leisure travel continues to increase and demand rises at a faster rate than supply. 2 9 In order to qualify as a REIT, the Company may not operate hotels. The Company will lease its properties to established hotel operators pursuant to leases that will provide the Company with the greater of a base rental income or a percentage of revenues from operations. The Initial Hotels will be leased pursuant to such leases (the "Percentage Leases") to the Initial Lessee. The Company's structure is designed to accommodate multiple lessees, and the Company intends to aggressively pursue relationships with additional hotel operators that have successful operating histories and demonstrated management expertise. THE INITIAL LESSEE In connection with the Formation Transactions, Robert W. Boykin and John E. Boykin will form and indirectly own the Initial Lessee. The Initial Lessee will acquire and continue the 37-year hotel operation and management business of the Boykin Group and will operate the Initial Hotels under the Percentage Leases. The operations of the Boykin Group are fully integrated, with capabilities in all phases of development and management of hotel properties. As of June 30, 1996, the Boykin Group had approximately 2,400 employees and owned or managed 21 properties containing 4,354 rooms located throughout the United States. Because neither the Company nor the Initial Lessee will have to pay a separate hotel management company to manage the Initial Hotels, the Company believes it will obtain a higher rent than such added management arrangements would permit, thus maximizing the Company's Percentage Lease revenues. The Company believes that the Boykin Group's ability to achieve consistently above-average market penetration during various economic cycles positions the Company, through the Initial Lessee, to maximize its returns on the Initial Hotels. While the Initial Lessee will operate and manage hotels only under the Percentage Leases, its subsidiaries will continue hotel management activities for owners other than the Company, and the award-winning hotel interior design business and the hotel and restaurant food, beverage, supply and equipment purchasing business currently operated by the Boykin Group. The Company expects that these operations will be continued in part with a view to introducing the Company to acquisition opportunities. In addition, the income generated by the Initial Lessee and its subsidiaries will strengthen the Initial Lessee's ability to perform under the Percentage Leases. The Initial Lessee and its owners will have interests that conflict with the Company's interests in connection with the structuring and enforcement of the Percentage Leases and any other leases and agreements between the Company and the Initial Lessee, and in connection with activities that may maximize profits for the Initial Lessee without necessarily benefiting the Company. The Company and the Initial Lessee have agreed on several measures to align the interests of the Initial Lessee and its owners with the interests of the Company and its shareholders and to address these conflicts of interest: - The Initial Lessee's owners and certain other Boykin Group Affiliates will own approximately 14.3% of the Company following completion of the Offering in the form of Units exchangeable, at the Company's election, for Common Shares, and have agreed to retain these interests for at least three years following completion of the Offering; - Robert W. Boykin will resign from his positions with Boykin Management in connection with the Formation Transactions and will not hold office in the Initial Lessee, and neither John E. Boykin nor any other officer of the Initial Lessee will hold office in the Company; - Any distributions from the Initial Lessee (other than distributions to cover income taxes) during the first ten years after the Offering, and any net cash proceeds of any sale of the Initial Lessee within ten years after the Offering, will be used to purchase Units or Common Shares (subject to applicable ownership limitations) that must be held for at least two years from the purchase date; - The Initial Lessee's consolidated net worth on completion of the Formation Transactions will be approximately $3 million, and half of the Initial Lessee's consolidated earnings (after distributions to cover income taxes) during the first ten years after the Offering will be retained in the Initial Lessee and its subsidiaries until their consolidated net worth reaches 25% of the aggregate annual rent payments under the Percentage Leases (and will be retained thereafter during that period to maintain that level); 3 10 - Determinations to be made on behalf of the Company in connection with any conflict of interest involving any Boykin Group Affiliate will be made by the Company's Independent Directors; - Each Boykin Group Affiliate will conduct all future hotel acquisition, development and ownership activities only through the Company, except for any separate activity to which the Company consents; - Any change in control of the Initial Lessee without the prior written consent of the Company will constitute a default under the Percentage Leases; and - The Percentage Leases will contain cross-default provisions that will enhance the Company's ability to enforce strict compliance with each Percentage Lease. The Initial Lessee also intends to develop incentive compensation plans for its hotel-level and corporate-level senior executives which tie such compensation in part to the performance of the Company and in part to the performance of the Initial Hotels. Such plans may include awards of Company shares, options and other similar incentives. ADDITIONAL LESSEES The Company believes that having multiple tenants will facilitate meeting its growth objectives, and therefore intends to pursue relationships with additional lessees. The Company believes there are a number of capable hotel owner-operators who are undercapitalized and, therefore, unable to reposition their properties adequately, or are faced with a difficult financing environment because of today's increased equity requirements, and will be willing to engage in a sale and leaseback of their properties on terms that would allow both parties to participate in the improving fundamentals of the lodging industry. In addition, the Company believes certain national franchisors are willing to develop a relationship with the Company and may become additional lessees as a means of expanding their franchise systems. The Company believes that its management's long tenure and reputation in the hotel industry will provide the Company access to these acquisition opportunities and enable the Company to select hotel properties and lessees that will further its acquisition and growth strategies. RISK FACTORS An investment in the Common Shares involves various risks (see "Risk Factors"), including, among others: - Dependence on key personnel and control over the operations of the Company, the Partnership and the Initial Lessee by Robert and John Boykin; - Dependence on lessees for operating income, including risks that the lessees will become subject to liabilities relating to the Initial Hotels and hotel properties subsequently leased to them, risks of default resulting in the termination of franchise, liquor and other operating licenses, and risks associated with re-leasing hotel properties after a lessee default or other lease termination event; - The hotel industry generally and the Initial Hotels specifically; - Franchise relationships, including the possibility that a franchisor may impose various increased costs, exercise options to buy or lease properties, impose restrictions on the Company's or the Initial Lessee's ability to compete with other franchisor-affiliated hotels, potential loss of franchises on franchise defaults and the uncertainty and costs of renewing franchises upon their expiration; - Conflicts of interest between the Company and Boykin Group Affiliates, including risks associated with the lack of third party appraisals for the Initial Hotels and arm's-length negotiations in connection with the formation of the Company; - Receipt by Boykin Group Affiliates, including Robert and John Boykin, of substantial benefits from the Formation Transactions; 4 11 - The ownership, leasing, acquisition, development and expansion of hotel properties, including risks of changes in economic and real estate market conditions, changes in interest rates and the availability of financing, the impact of environmental laws, the ongoing need for capital improvements, and other factors beyond the Company's control; - The Company's lack of operating history and lack of experience in operating in accordance with the requirements for maintaining its qualification as a REIT, and taxation of the Company as a regular corporation if it fails to quality as a REIT; - Limitations on shareholders' ability to acquire or change control of the Company, including the restriction on ownership of Common Shares by any single person to 9.0% of the outstanding shares; - The absence of any contractual limitation on debt that the Company may incur; - Substantial and immediate dilution in the net tangible book value per Common Share to be experienced by the purchasers of Common Shares in the Offering (see "Dilution"); and - The absence of any public market for the Company's Common Shares prior to the Offering. 5 12 THE INITIAL HOTELS The following table sets forth certain information regarding the Initial Hotels:
AVERAGE DAILY RATE AVERAGE OCCUPANCY ---------------------------------- ----------------------------------------------- SIX MONTHS NUMBER YEARS ENDED: SIX MONTHS ENDED: YEARS ENDED: ENDED: OF --------------------- --------------------- --------------------- -------- PROPERTY/LOCATION ROOMS 12/31/94 12/31/95 6/30/95 6/30/96 12/31/94 12/31/95 6/30/95 - ---------------------------- ------ -------- -------- -------- -------- -------- -------- -------- Berkeley Marina Marriott 373 80.3% 81.1% 80.1% 85.4% $96.61 $100.03 $99.04 Berkeley, CA................ Buffalo Marriott 356 76.0% 73.4% 69.1% 71.3% $85.32 $ 91.79 $90.30 Buffalo, NY................. Cleveland Airport Marriott 375 70.9% 71.0% 67.3% 73.5% $81.99 $ 90.35 $89.47 Cleveland, OH............... Cleveland Marriott East 403 72.9% 72.7% 69.7% 72.1% $80.74 $ 89.54 $87.51 Cleveland, OH............... Columbus North Marriott 300 72.7% 71.9% 72.8% 75.6% $77.98 $ 85.20 $84.79 Columbus, OH................ Lake Norman Hampton Inn 117 75.8% 78.6% 79.9% 77.0% $45.70 $ 52.67 $49.16 Charlotte, NC............... Lake Norman Holiday Inn 119 73.0% 75.7% 75.1% 71.2% $54.13 $ 60.72 $57.46 Charlotte, NC............... Melbourne Quality Suites 208 78.1% 79.0% 84.7% 81.3% $72.98 $ 77.61 $78.50 Melbourne, FL............... Radisson Inn Sanibel Gateway 157 72.2% 76.3% 83.2% 88.8% $66.03 $ 66.12 $80.21 Fort Myers, FL.............. ------ Total....................... 2,408 ===== Weighted average............ 268 74.7% 74.9% 74.2% 76.8% $79.27 $ 85.47 $84.82 ROOM REVENUES PER AVAILABLE ROOM ----------------------------------------------- YEARS ENDED: SIX MONTHS ENDED --------------------- --------------------- PROPERTY/LOCATION 6/30/96 12/31/94 12/31/95 6/30/95 6/30/96 - ---------------------------- -------- -------- -------- -------- -------- Berkeley Marina Marriott $102.56 $77.54 $81.17 $79.36 $87.63 Berkeley, CA................ Buffalo Marriott $ 94.02 $64.85 $67.34 $62.39 $67.00 Buffalo, NY................. Cleveland Airport Marriott $ 89.87 $58.11 $64.11 $60.25 $66.02 Cleveland, OH............... Cleveland Marriott East $ 91.10 $58.90 $65.11 $60.98 $65.64 Cleveland, OH............... Columbus North Marriott $ 89.18 $56.68 $61.29 $61.71 $67.44 Columbus, OH................ Lake Norman Hampton Inn $ 61.63 $34.63 $41.40 $39.26 $47.45 Charlotte, NC............... Lake Norman Holiday Inn $ 68.41 $39.50 $45.96 $43.18 $48.74 Charlotte, NC............... Melbourne Quality Suites $ 82.26 $57.02 $61.34 $66.49 $66.91 Melbourne, FL............... Radisson Inn Sanibel Gateway $ 81.23 $47.71 $50.43 $66.77 $72.12 Fort Myers, FL.............. Total....................... Weighted average............ $ 89.03 $59.24 $63.98 $62.93 $68.35
6 13 BUSINESS OBJECTIVES AND STRATEGIES BUSINESS OBJECTIVES The Company's primary business objectives are to maximize current returns to shareholders through increases in cash flow available for distribution and to increase long-term total returns to shareholders through appreciation in value of the Common Shares. The Company will seek to achieve these objectives through participation in increased revenues from the Initial Hotels pursuant to the Percentage Leases and by selective acquisition, ownership, redevelopment, repositioning and expansion of additional hotel properties. The Company will seek to continue to invest in properties where the Company's established industry and marketing expertise and other resources will enable it to improve the acquired hotels' performance. BUSINESS STRATEGIES The Company's strategies to meet its objectives include (i) achieving revenue growth in the Initial Hotels, (ii) acquiring and leasing hotel and resort properties in the upscale and moderate markets on an accretive basis, (iii) strategically upgrading hotel properties, and (iv) expanding and developing additional hotel properties. Internal Growth. The Company believes that, based on historical operating results and the strength of the Company's management team, portfolio and markets, the Initial Hotels should provide the Company with the opportunity for cash flow growth through the Percentage Leases. Over the three year and five year periods ended December 31, 1995 the aggregate total revenues of the Initial Hotels increased at a compound annual rate of 4.4% and 3.6% per year, and EBITDA from the Initial Hotels increased at a compound average growth rate of 13.4% and 9.8% per year, respectively. The Company believes that the revenue and cash flow of the Initial Hotels will be maximized by intensive management and marketing. The Company intends to derive increased cash flow through the application of the Initial Lessee's operating strategies, which include the active management and balancing of room rates with forecasted room demand in order to maximize total hotel revenues (a system known as "yield management"). The Company believes that the Initial Lessee's continued commitment to customer service and the experience of its management team should position the Company to capitalize on the expected continued strength in the economy and improvement in the U.S. hotel market. The Company's objectives include enhancing its competitive market position through the continuation of a regular program of renovation and capital improvement. Acquisitions. The Company believes that attractive opportunities exist to acquire full-service hotels serving the upscale and moderate market segments of the lodging industry. The Company intends to concentrate its investment activities on hotel properties that are in one or more of the following categories: - Product Type -- Full-service commercial hotels, airport hotels, major tourist hotels and destination resorts in major markets and business centers; - Market Repositioning Opportunities -- Undervalued hotels whose performance can be significantly enhanced through new brand affiliations, implementation of new marketing strategies and effective yield management; - Redevelopment and Renovation Opportunities -- Hotels with sound operational fundamentals that, because of a lack of capital, require physical renovation or redevelopment to achieve their full performance potential; and - Portfolio Acquisitions -- Portfolios of hotels that result in geographic economies of scale or that may be leased back to qualified hotel operators as additional lessees, and that may benefit from the Company's repositioning and redevelopment experience and access to capital. As a result of the Company's management's successful transactional activities, which include approximately $750 million in hotel acquisition, disposition, recapitalization, renovation, development and repositioning over the last 10 years, the Company believes it possesses a competitive advantage in market knowledge, technical expertise and industry relationships that will enable it to continue successfully to implement its acquisition strategy on a national scale. Further, the Company believes it will benefit from its continuing 7 14 relationship with the Initial Lessee and from developing relationships with additional lessees who have a demonstrated history of managing hotel properties. As a public company, the Company expects to have access to a wide variety of financing sources to fund acquisitions, such as the ability to issue public and private debt, equity and hybrid securities, and the ability to utilize Units as consideration when cash is not appropriate for tax or other reasons. Additionally, the Credit Facility will enable the Company to contract for and complete the acquisition of additional hotels without financing contingencies. See "The Company -- Business Objectives and Strategies -- Financing Strategy" for a description of the terms of the credit facility. The Company's philosophy is to identify and actively seek hotel properties that can be associated with the brands that will lead the hospitality industry in REVPAR, such as Marriott, Radisson, Hilton, Hyatt, Westin, Omni, Doubletree, Sheraton, Holiday Inn and Quality Suites. The Company believes that it can maximize its market share and revenues by taking advantage of its orientation toward sales and marketing to identify the most effective branding and to leverage its brands with effective direct sales strategies. The Company expects to continue to affiliate with a number of different franchise companies in order to maximize the performance of its hotels by providing greater access to a broad base of national marketing and reservation systems and to mitigate the risks of franchise loss and franchise overlap. The Company will seek to maintain a geographically diversified hotel portfolio, and may also cluster hotels within certain primary markets in order to take advantage of operational and managerial economies of scale. The Company believes it has the capacity to acquire additional hotels without significantly increasing management and overhead expenses. The Boykin Group's recent purchase of the Lake Norman hotel properties exemplifies the strategies described above. The Company believes that those hotels' present franchise affiliations will enable the Company to maximize REVPAR in the local market. The hotels' purchase price represented a significant discount to their replacement costs, and the hotels' historical earnings represented an attractive yield on the purchase price. The Company believes that the Initial Lessee can increase the ADR and REVPAR of both hotels, and the Boykin Group has been implementing its yield management systems since the acquisition to achieve these results. REVPAR for the six months ended June 30, 1996 increased over REVPAR for the same period in 1995 by 21% for the Lake Norman Hampton Inn and by 13% for the Lake Norman Holiday Inn, with a resulting increase in pro forma Percentage Lease revenues. The Boykin Group also caused the Lake Norman hotels to implement a combined purchasing program, direct overflow business to each other and begin cross-training and sharing employees. The Company believes the economies gained from the clustering of the Lake Norman acquisitions, combined with the active yield management strategies employed by the Boykin Group at these hotels, has resulted in a significantly more attractive yield to the Company than that calculated based on their trailing operating performance at the time of the acquisitions. Renovation and Development. The Company believes that a regular program of capital improvements at the Initial Hotels, including replacement and refurbishment of FF&E, will maintain and enhance their competitiveness and maximize revenue growth under the Percentage Leases. During the fiscal years 1991 through 1995, approximately $18 million was spent on renovations and capital improvements at the Initial Hotels, including approximately $1.2 million for restoration of the Melbourne Quality Suites hotel following damage from Hurricane Erin in August 1995. This represents an average of approximately $1,400 per room per year (excluding the amount spent on the Melbourne property restoration, which was funded entirely from insurance proceeds). The Company will use approximately $3.5 million of the net proceeds of the Offering as its initial contribution to its capital expenditures fund (the "Capital Expenditures Fund"). The Percentage Leases require the Company to contribute to the Capital Expenditures Fund additional aggregate minimum reserves of 4% of total revenue of the Initial Hotels. For the 12-month period ended June 30, 1996, this reserve would have represented approximately 6.1% of room revenue and an average of approximately $1,400 per room. The Company intends to use the Capital Expenditures Fund for the replacement and refurbishment of FF&E and other capital expenditures (approximately $250,000 of which is required by franchisors) to maintain and enhance the competitive position of the Initial Hotels, although it may make other uses of amounts in the fund that it considers appropriate from time to time. See "The Company -- Business Objectives and Strategies -- Renovation Strategy," and "Business and Properties -- The Initial Hotels." The Boykin Group's experience in developing and renovating its properties will assist the Company in maintaining its properties' competitive edge in their respective markets. 8 15 The Company may develop additional full-service or upscale limited-service hotels on land that the Company acquires in its current geographic markets or on land contiguous to the Initial Hotels. The Company believes that selective development of hotels in its existing geographic markets would enable it to take advantage of operating efficiencies to generate attractive returns on investment. Financing Strategy. Upon completion of the Offering, the Company will have no outstanding debt. While its organizational documents contain no limitation on the amount of debt it may incur, the Company, subject to the discretion of the Board of Directors, intends to use the Credit Facility for acquisitions while maintaining a debt-to-total market capitalization ratio (measured at the time debt is incurred) of not more than 45%. The Company may from time to time re-evaluate its debt capitalization policy in light of economic conditions, relative costs of debt and equity capital, market values of its properties, acquisition, development and expansion opportunities, and other factors. FORMATION TRANSACTIONS The principal transactions in connection with the formation (the "Formation") of the Company as a REIT and the acquisition of the Initial Hotels by the Partnership (the "Formation Transactions") are as follows: - The Company was formed as an Ohio corporation in February 1996 and issued one Common Share to Raymond P. Heitland. - Upon completion of the Offering, the Company will contribute approximately $119 million of the net proceeds to the Partnership in exchange for an approximately 80.3% equity interest as the sole general partner of the Partnership, and will lend approximately $40 million of the net proceeds to the Partnership in exchange for a note (the "Intercompany Convertible Note") bearing interest initially at % per annum, which is convertible by the Company into equity interests in the Partnership based on the initial public offering price of the Common Shares. - After the Contributed Partnerships convey certain working capital assets and liabilities to the Initial Lessee, certain Boykin Group Affiliates, the Other Partners and the Boykin Associates will contribute their interests in the Contributed Partnerships to the Partnership and indemnify the Partnership against liabilities of the Contributed Partnerships other than the mortgage indebtedness to be discharged by the Partnership. The Partnership will thereby acquire a 100% ownership interest in all of the Initial Hotels for an aggregate of approximately 1.49 million Units (valued at approximately $32.8 million), approximately $9.2 million in cash, the repayment of approximately $8.0 million of existing indebtedness on the Initial Hotels, and the assumption of approximately $ million of mortgage indebtedness to be repaid from the proceeds of the Offering. See "Risk Factors -- Lack of Independent Appraisals and Arm's-Length Negotiations" for a discussion of the valuation matters considered in connection with the Formation Transactions. - The recipients of Units will have rights (generally not exercisable until the third anniversary of the closing of the Offering, in the case of the Boykin Group Affiliates and Boykin Associates) to exchange their Units for cash (the "Exchange Rights"), subject to the Company's right to issue Common Shares for those Units on a one-for-one basis. - The Partnership will use approximately $136.6 million to repay third-party mortgage indebtedness encumbering the Initial Hotels, approximately $3.5 million to create the Capital Expenditures Fund, and approximately $1.7 million for formation costs, working capital and other general partnership purposes. - Robert and John Boykin will form the Initial Lessee, which will succeed to the business of Boykin Management, and the Partnership will lease each Initial Hotel to the Initial Lessee pursuant to a Percentage Lease. - The Initial Lessee will assume the liquor licenses, franchise agreements and other licenses and permits and certain working capital liabilities of the Initial Hotels. 9 16 - Robert W. Boykin will resign from Boykin Management and become the Chairman, President and Chief Executive Officer of the Company and will enter into the employment agreement and be granted the stock options described under "Management -- Employment Agreements" and "Management -- Executive Compensation." The Formation Transactions benefits to the Boykin Group Affiliates, the Boykin Associates and the Other Partners, in addition to those described above, include: (i) increased cash distributions to recipients of Units from the operations of the Initial Hotels, because of the prepayment of mortgage debt; (ii) elimination of approximately $5.3 million of mortgage debt guaranties; (iii) the ability to exchange Units received in the Formation Transactions for cash or, at the Company's election, Common Shares with registration rights, which will be more liquid than their interests in the Initial Hotels; (iv) deferral of income tax by contributing their interests in the Contributed Partnerships; (v) repayment from the proceeds of the Offering of $3.1 million of loans made by Boykin Management to one of the Initial Hotels; (vi) realization of an immediate accretion in the net tangible book value of their investment in the Partnership of $52.55 per Unit (an aggregate accretion of $71.6 million; and (vii) receipt by Robert W. Boykin, Raymond P. Heitland and Mark L. Bishop of options to purchase 250,000, 75,000 and 75,000 Common Shares, respectively, under the Company's Long Term Incentive Plan. In addition, Robert and John Boykin will indirectly own all of the interests in the Initial Lessee, which will be entitled to all profits and cash flow from the Initial Hotels after payment of rent under the Percentage Leases and other operating expenses. ORGANIZATIONAL CHART As a result of the Offering and the Formation Transactions, the relationships among the Company, the Partnership, the Initial Hotels and the Initial Lessee will be as follows: [GRAPHIC] - --------------- (1) Assumes conversion of the Intercompany Convertible Note into general partnership interests. (2) Robert W. Boykin, John E. Boykin and Raymond P. Heitland will own 653,582, 552,038 and 9,682 Units, respectively (6.98%, 5.89% and less than 1.0%, respectively, of the Company, assuming conversion of those Units into Common Shares). See "Principal Shareholders of the Company." (3) Robert W. Boykin and John E. Boykin are the sole beneficial owners of Boykin Management Company Limited Liability Company. 10 17 SUMMARY FINANCIAL INFORMATION The following table sets forth unaudited summary pro forma consolidated financial information for the Company, unaudited summary pro forma financial information for the Initial Lessee and summary combined historical financial information for the Initial Hotels, which are presented as the Initial Hotels (Excluding Lake Norman Hotels), and the Lake Norman Hotels. This information should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this Prospectus. The pro forma operating information for the Company and for the Initial Lessee is presented as if the Offering, the Formation Transactions and the beginning of the relevant lease year had occurred on January 1, 1995. The pro forma balance sheet data is presented as if the Offering and the Formation Transactions had occurred on June 30, 1996. BOYKIN LODGING COMPANY SUMMARY CONSOLIDATED PRO FORMA FINANCIAL DATA (1) (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30,(2) YEAR ENDED TWELVE MONTHS ------------------- DECEMBER 31, 1995(2) ENDED JUNE 30, 1996(2) 1995 1996 -------------------- ---------------------- ------- ------- OPERATING DATA: Percentage Lease revenue(3)... $ 25,521 $ 27,166 $12,277 $13,922 ---------- ---------- ------- ------- Depreciation.................. 9,544 9,544 4,772 4,772 Real estate and personal property taxes, property and casualty insurance and ground rent................ 3,893 3,935 1,973 2,015 General and administrative(4).......... 1,450 1,450 725 725 Minority Interest(5).......... 1,691 1,946 764 1,019 ---------- ---------- ------- ------- Total Expenses and Minority Interest................... 16,578 16,875 8,234 8,531 ---------- ---------- ------- ------- Net income attributable to Common Shares.............. $ 8,943 $ 10,291 $ 4,043 $ 5,391 ========== ========== ======= ======= Net Income per Common Share... $ 1.14 $ 1.31 $ .51 $ .68 Weighted average number of Common Shares outstanding................ 7,875 7,875 7,875 7,875 OTHER DATA: Funds From Operations(6)...... $ 20,178 $ 21,781 $ 9,579 $11,182 Additions to Capital Expenditures Fund(7)....... (3,373) (3,492) (1,654) (1,773) Cash Available For Distribution(8)............ 16,805 18,289 7,925 9,409 Distributions(9).............. Number of Common Shares and Units outstanding.......... 9,365 9,365 9,365 9,365
AT JUNE 30, 1996(2) ---------------------- BALANCE SHEET DATA: Investment in hotel properties, net............ $115,990 Total assets.................. 120,894 Total debt.................... -0- Minority interest in Partnership................ 18,906 Shareholders' equity.......... 99,997
11 18 INITIAL LESSEE SUMMARY PRO FORMA FINANCIAL DATA(1) (UNAUDITED, AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,(2) YEAR ENDED TWELVE MONTHS ------------------- DECEMBER 31, 1995(2) ENDED JUNE 30, 1996(2) 1995 1996 -------------------- ---------------------- ------- ------- OPERATING DATA: Room revenue.................. $ 54,785 $ 57,298 $27,398 $29,911 Food and beverage revenue..... 23,643 23,980 11,711 12,048 Other revenue -- Initial Hotels..................... 4,643 4,760 2,237 2,354 ---------- ---------- ------- ------- Total revenues of Initial Hotels................... 83,071 86,038 41,346 44,313 Other revenue -- Initial Lessee..................... 2,051 2,270 1,042 1,355 ---------- ---------- ------- ------- Total revenues............. 85,122 88,308 42,388 45,668 ---------- ---------- ------- ------- Operating expenses............ 56,601 58,315 28,090 29,899 Cost of goods sold of Initial Lessee..................... 1,254 1,438 511 756 Percentage Lease payments(3)................ 25,521 27,166 12,277 13,922 ---------- ---------- ------- ------- Total expenses............. 83,376 86,919 40,878 44,577 ---------- ---------- ------- ------- Income before extraordinary items...................... $ 1,746 $ 1,389 $ 1,510 $ 1,091 ========== ========== ======= =======
AT JUNE 30, 1996(2) ----------------------- BALANCE SHEET DATA: Cash and cash equivalents...... $ 3,833 Total assets................... 11,429 Equity......................... 3,000
12 19 INITIAL HOTELS (EXCLUDING LAKE NORMAN HOTELS) SUMMARY COMBINED HISTORICAL FINANCIAL DATA (UNAUDITED, AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,(2) JUNE 30,(2) -------------------------------------------------------- ------------------- 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- ------- -------- OPERATING DATA: Room revenue................ $ 42,645 $ 45,200 $ 45,753 $ 48,652 $ 50,730 $25,631 $ 27,845 Food and beverage revenue... 21,791 22,514 22,357 22,811 22,984 11,411 11,763 Other revenue............... 3,334 3,634 3,977 4,092 4,490 2,159 2,266 -------- -------- -------- -------- -------- ------- -------- Total revenues............ 67,770 71,348 72,087 75,555 78,204 39,201 41,874 -------- -------- -------- -------- -------- ------- -------- Departmental and other expenses.................. 51,321 52,248 53,242 53,967 54,629 27,161 28,864 Real estate and personal property taxes, insurance and rent.................. 2,534 2,988 3,112 3,329 3,579 1,818 1,863 Depreciation and amortization.............. 5,663 5,822 5,822 5,690 6,545 2,990 3,528 Interest expense............ 12,557 12,997 12,375 12,397 14,169 6,452 7,367 Gain on property insurance recovery.................. -- -- -- -- (670) -- -- -------- -------- -------- -------- -------- ------- -------- Income (loss) before extraordinary items....... (4,305) (2,707) (2,464) 172 (48) 780 252 Extraordinary item -- gain (loss) on early extinguishment of debt.... -- -- -- -- 556 556 (1,315) -------- -------- -------- -------- -------- ------- -------- Net income (loss)......... $ (4,305) $ (2,707) $ (2,464) $ 172 $ 508 $ 1,336 $ (1,063) ========= ========= ========= ========= ========= ======== ========= BALANCE SHEET DATA: Investment in hotel properties, net........... $ 66,238 $ 62,497 $ 59,457 $ 58,527 $ 70,577 N/A $ 68,204 Total assets................ 74,380 70,823 68,757 68,688 83,332 N/A 83,421 Mortgage notes payable...... 114,132 113,333 112,660 111,788 122,203 N/A 123,726 Total partners' deficit..... (61,256) (64,458) (66,795) (67,197) (56,260) N/A (57,192) CASH FLOW DATA: Net cash provided by operating activities...... N/A N/A $ 3,723 $ 7,700 $ 7,175 $ 5,853 $ 3,326 Net cash used for investing activities................ N/A N/A (2,771) (4,746) (4,244) (2,006) (1,546) Net cash used for financing activities................ N/A N/A (635) (1,488) (4,018) (3,287) (842) OTHER DATA: EBITDA(10).................. $ 13,915 $ 16,112 $ 15,733 $ 18,259 $ 19,996 $10,222 $ 11,147
13 20 LAKE NORMAN HOTELS SUMMARY COMBINED HISTORICAL FINANCIAL DATA (UNAUDITED, AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,(2) JUNE 30,(11) ---------------------------------------------- ----------------- 1991 1992 1993 1994 1995 1995 1996 ------ ------ ------ ------ ------ ------ ------- OPERATING DATA: Room revenue.................. $2,643 $2,596 $2,764 $3,200 $3,764 $1,767 $ 2,066 Food and beverage revenue(12)................ 612 681 300 -- -- -- 223 Other revenue................. 117 132 149 153 124 78 88 ------ ------ ------ ------ ------ ------ ------- Total revenues........ 3,372 3,409 3,213 3,353 3,888 1,845 2,377 ------ ------ ------ ------ ------ ------ ------- Departmental and other expenses................... 2,485 2,605 2,224 2,096 2,437 1,244 1,580 Real estate and personal property taxes, insurance and rent................... 125 130 129 96 106 55 52 Depreciation and amortization............... 601 606 577 523 466 289 289 Interest expense.............. 507 401 289 326 415 759 759 ------ ------ ------ ------ ------ ------ ------- Net income (loss)..... $ (346) $ (333) $ (6) $ 312 $ 464 $ (502) $ (303) ====== ====== ====== ====== ====== ====== ======= BALANCE SHEET DATA: Investment in hotel properties, net............ $7,268 $6,807 $6,276 $5,888 $5,739 N/A $ 9,438 Total assets.................. 7,803 7,218 6,846 6,452 6,229 N/A 10,465 Mortgage notes payable........ 6,050 5,860 5,595 5,318 5,057 N/A 9,618 Total partners' equity........ 1,372 988 982 894 938 N/A 456 CASH FLOW DATA: Net cash provided by (used for) operating activities................. N/A N/A $ 477 $ 804 $ 938 $ (54) $ 155 Net cash used for investing activities................. N/A N/A (30) (129) (311) (247) (51) Net cash used for financing activities................. N/A N/A (265) (677) (681) (43) (49) OTHER DATA: EBITDA(10).................... $ 762 $ 674 $ 860 $1,161 $1,345 $ 546 $ 745 - --------------- 1. The pro forma information does not purport to represent what the Company's or the Initial Lessee's financial position or results of operations would actually have been if the consummation of the Formation Transactions had, in fact, occurred on such dates, or to project the Company's or the Initial Lessee's financial position or results of operations at any future date or for any future period. 2. Eight of the Initial Hotels utilize December 31 as year-end for financial reporting purposes and one of the Initial Hotels utilizes a September 30 fiscal year-end. For pro forma purposes, adjustments have been made to conform the year-ends of all the Initial Hotels to stated periods shown. For historical financial reporting purposes of the Initial Hotels (Excluding the Lake Norman Hotels), for the five years ended December 31, 1995, the September 30 financial data of the Initial Hotel having a September 30 fiscal year end have been combined with the December 31, 1995 financial data of the other Initial Hotels. For the twelve months ended June 30, 1996 and six month periods ended June 30, 1995 and 1996, the financial data of the hotel with the September 30 year end have been combined using the same month and periods as the other eight hotels. In the opinion of management, the impact of using the different interim period ends is not material. 3. Represents lease payments from the Initial Lessee to the Partnership calculated on a pro forma basis by applying the rent provisions in the Percentage Leases to the historical revenues of the Initial Hotels for the period indicated, including for the Melbourne Quality Suites Inn an additional $725 of rent for the year ended December 31, 1995 and the 12 months ended June 30, 1996, required under the rental interruption
14 21 insurance provision of the Percentage Lease agreements. The rent formula utilized in computing the pro forma Percentage Lease revenue and expense includes, for the calendar year 1995, an adjustment to reduce the threshold revenue amounts in the Percentage Lease formulas by the 2.5% increase in the Consumer Price Index for that year. 4. Estimated at $1.45 million annually for salaries, professional fees, directors' and officers' insurance, directors fees and expenses and other general and administrative expenses associated with being a public company. 5. Calculated as 15.9% of the income before minority interest. 6. Represents Funds From Operations of the Company, on a consolidated basis. The following table computes Funds From Operations for the twelve months ended June 30, 1996 under the newly adopted National Association of Real Estate Investment Trusts ("NAREIT") definition. Funds From Operations consists of income (loss) before minority interest (computed in accordance with generally accepted accounting principles) excluding gains (losses) from debt restructuring and sales of property (including furniture and equipment) plus real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures. Industry analysts consider Funds From Operations to be an appropriate measure of the performance of an equity REIT. Funds From Operations should not be considered as a basis for computing distributions or as an alternative (i) to net income or other measurements under generally accepted accounting principles, as an indicator of operating performance, or (ii) to cash flows from operating, investing, or financing activities, as a measure of liquidity. Funds From Operations does not reflect cash expenditures for capital improvements or principal amortization of indebtedness on the Initial Hotels.
TWELVE MONTHS ENDED JUNE 30, 1996 ------------------- Net income............................................. $10,291 Minority interest...................................... 1,946 Depreciation........................................... 9,544 ---------- Funds From Operations.................................. $21,781 ==========
7. Represents additions to the Capital Expenditures Fund calculated as 4% of total revenue of the Initial Hotels, adjusted for $1,261 of additional revenues at the Melbourne Quality Suites for the year ended December 31, 1995 and the twelve months ended June 30, 1996 as required under the rental interruption insurance provision of the Percentage Leases. 8. Calculated as Funds From Operations less additions to the Capital Expenditures Fund. 9. Represents estimated initial dividends to be paid based on the initial dividend rate of $ per share and an aggregate of 9,365 Common Shares and Units outstanding. 10. Represents income (loss) before extraordinary items, excluding depreciation and amortization, interest expense and gain on property insurance recovery. 11. The Summary Combined Historical Operating Data, Cash Flow Data and Other Data for the Lake Norman Hotels for the six months ended June 30, 1995 and 1996 are presented on a pro forma basis, making necessary pro forma adjustments to the historical operating results to reflect additional depreciation expense associated with the purchase accounting writeup to the investment in hotel properties, the additional interest expense associated with the acquisition indebtedness and an increase in management fee expense. 12. From August 1993 until February 1996, the catering, meeting, lounge and restaurant facilities of the Lake Norman Holiday Inn were operated by a third party operator. In February 1996, when a Boykin Group Affiliate purchased the hotel facility, it also purchased the food and beverage business assets of this operator. 15 22 DISTRIBUTIONS The Company intends to make regular quarterly distributions to holders of Common Shares initially equal to $0. per share ($ per share on an annual basis), which would represent approximately 95% of the Company's pro forma Cash Available for Distribution for the twelve months ending June 30, 1996. The distribution for the period commencing on the completion of the Offering and ending September 30, 1996 is expected to be a pro rata portion of the initial quarterly distribution. The Company does not intend to change its estimated initial distribution per share if the Underwriters' over-allotment option is exercised. The statements in this paragraph are forward-looking statements involving certain risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Factors that might cause such differences are discussed elsewhere in this Prospectus. See "Distribution Policy" for information regarding the basis for the Company's estimates, and "Risk Factors." The declaration and payment of any distributions by the Company will be at the discretion of the Company's Board of Directors and will depend on, among other things, the Company's receipt of cash distributions from the Partnership, the Company's level of indebtedness, any contractual restrictions, and other factors considered relevant by the Board. The level of the Partnership's cash distributions will be determined by the Partnership in light of its cash needs, including its requirements for investing and financing activities and other anticipated cash needs. The Partnership's principal source of revenue initially will be payments of rent by the Initial Lessee under the Percentage Leases. See "Risk Factors -- Hotel Industry Risks -- Seasonality" for a discussion of the effect of the seasonal nature of hotel revenues on the Company's receipt of rent payments from the Initial Lessee. TAX STATUS OF THE COMPANY The Company intends to elect to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with its taxable year ending December 31, 1996. If the Company qualifies as a REIT, under current Federal income tax laws the Company generally will not be subject to federal income tax on income it distributes to shareholders as long as it distributes at least 95% of its REIT taxable income currently and satisfies a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to Federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates, which would effectively impose on the Company's shareholders the "double taxation" that generally results from investment in a corporation. The Company will receive an opinion of its counsel in connection with the closing of the Offering to the effect that, based on certain representations made by the Company and certain assumptions, the Company will be organized in conformity with the requirements for qualification as a REIT under the Code and that the method of operation of the Company and the Operating Partnership will permit the Company to continue to so qualify for its current and future taxable years. See "Risk Factors -- Tax Risks -- Failure to Qualify as a REIT" and "Federal Income Tax Considerations." Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and will be subject to Federal and state income taxes and may be subject to excise taxes on its undistributed income. 16 23 THE OFFERING All Common Shares offered hereby are being offered by the Company. Common Shares offered:............................. 7,875,000 shares(1) Common Shares and Units to be outstanding after the Offering......................................... 9,365,000 shares(2) Use of Proceeds:................................... Acquisition of the Initial Hotels; repayment of mortgage indebtedness relating to the Initial Hotels (including prepayment penalties); repayment of loans made by Boykin Management and by certain Other Partners to one of the Initial Hotels; contribution to the Capital Expenditures Fund; and formation costs, working capital and other general purposes. See "Use of Proceeds." Proposed New York Stock Exchange symbol............ BOY - --------------- (1) Assumes the Underwriters' over-allotment option is not exercised. (2) Includes 1,490,000 shares issuable on exchange of 1,490,000 Units. Does not give effect to the 1,000,000 Common Shares issuable under the Company's Long Term Incentive Plan or to the Common Shares subject to the options covering 25,000 Common Shares to be granted to the Company's Independent Directors upon completion of the Offering. See "Management -- Long-Term Incentive Plan" and "-- Compensation of Directors."
17 24 RISK FACTORS This Prospectus contains statements that constitute forward-looking statements. Those statements appear in a number of places in this Prospectus and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to (i) the declaration or payments of dividends; (ii) the leasing, management or operation of the Initial Hotels and of hotels to be acquired; (iii) the adequacy of reserves for renovation and refurbishment; (iv) potential acquisitions by the Company; (v) the use of the proceeds of the Offering; (vi) the Company's financing plans; (vii) the Company's policies regarding investments, dispositions, financings, conflicts of interest and other matters; (viii) the Company's qualification and continued qualification as a REIT; and (ix) trends affecting the Company's or any hotel's financial condition or results of operations. Prospective investors are cautioned that any such forward-looking statement is not a guarantee of future performance and involves risks and uncertainties, and that actual results may differ materially from those in the forward-looking statement as a result of various factors. The accompanying information contained in this Prospectus, including without limitation the information set forth below and the information under the headings "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Policies and Objectives with Respect to Certain Activities" and "Federal Income Tax Considerations," identifies important factors that could cause such differences. With respect to any such forward-looking statement that includes a statement of its underlying assumptions or bases, the Company cautions that, while it believes such assumptions or bases to be reasonable and has formed them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material depending on the circumstances. When, in any forward-looking statement, the Company, or its management, expresses an expectation or belief as to future results, that expectation or belief is expressed in good faith and is believed to have a reasonable basis, but there can be no assurance that the stated expectation or belief will result or be achieved or accomplished. Accordingly, prospective investors should carefully consider, among other factors, the matters described below, each of which could have adverse consequences to the Company and adversely affect the value of the Common Shares. DEPENDENCE ON KEY PERSONNEL The Company is dependent on the efforts of Robert W. Boykin, Chairman, President and Chief Executive Officer, Raymond P. Heitland, Chief Financial Officer and Treasurer, and Mark L. Bishop, Senior Vice President -- Acquisitions and Development. The loss of the services of any of these executive officers could have a material adverse effect on the performance of the Company. The Company does not maintain a "key-man" life insurance policy with respect to any executive officer. CONTROL BY BOYKIN GROUP AND LACK OF SHAREHOLDER CONTROL Upon completion of the Offering, Robert and John Boykin (who are brothers) will have the ability to acquire in the aggregate approximately 12.9% of the Company through their direct or indirect ownership of Units that they may exchange for Common Shares on a one-for-one-basis (subject to the Company's right to pay cash in lieu of issuing shares), commencing on the third anniversary of the closing of the Offering. Robert Boykin will also have significant control over the operations of the Company as a result of his senior management position with the Company. Robert and John Boykin will have significant control over the operations of the Initial Lessee as a result of their ownership interests and directorships in the Initial Lessee and John Boykin's senior management position with the Initial Lessee. See "Lessees -- The Initial Lessee" and "Management." Accordingly, Robert and John Boykin and their Affiliates will have substantial influence over the Company, which influence may not necessarily be consistent with the interests of other shareholders. The investment and financing policies of the Company and its policies with respect to certain other activities, including its growth, capitalization, distributions, REIT status and operating policies, are determined by the Board of Directors. These policies may be changed from time to time at the discretion of the Board of Directors without a vote of the shareholders of the Company, although the Board of Directors has 18 25 no present intention to make any such change. Any such change could be detrimental to the value of the shareholders' interests in the Company. DEPENDENCE ON LESSEES The Company will lease the Initial Hotels to the Initial Lessee under the Percentage Leases and expects to lease any hotels acquired after completion of the Offering to the Initial Lessee or to other lessees under similar leases. As a result, the Company will be dependent on lessees for all of its operating income. The Initial Lessee may be subject to obligations to and possible claims of third parties arising out of its subsidiaries' separate operating activities. See "The Lessees -- The Initial Lessee." The incurrence of any such liabilities could have a material adverse effect on the Initial Lessee's ability to perform under the Percentage Leases and any other leases between the Company and the Initial Lessee. The Initial Lessee's obligations under the Percentage Leases are unsecured. Each lessee is expected to hold in its name the franchise licenses, liquor licenses and other operating licenses and permits relating to the hotels leased to it. On a default by a lessee resulting in the termination of any Percentage Lease or other lease, the franchise license, liquor licenses and operating licenses and permits held by the lessee with respect to the affected property will not devolve automatically on a successor operator designated by the Company, and the process of transferring those licenses and permits to a successor operator may be costly and time-consuming. Furthermore, any default by a lessee under any such franchise license, liquor license or operating license or permit could result in the loss or suspension of that license or permit. The Company may be adversely affected as a result of any loss, suspension or delay in reinstating or transferring any such license or permit. If the Company terminates any Percentage Lease or other lease following a default by a lessee, the Company will have to re-lease the affected property in order to maintain its qualification as a REIT. There can be no assurance that the Company would be able to do so on terms substantially similar to those contained in the terminated lease. The Company also may have to incur substantial expenditures in connection with any such re-leasing. Moreover, in the event of a bankruptcy of a lessee, the Company's ability to re-lease the affected hotels or recover damages based on the default under or rejection of the relevant leases by the lessee would be adversely affected. With respect to any hotel property acquired by the Company following the Offering, the Company will seek to enter into a lease with the Initial Lessee or another lessee on terms substantially similar to the Percentage Leases. The inability to conclude any such lease or any lease with a different lessee, or any delay in establishing the terms thereof, could adversely affect the Company's ability to expand its portfolio of properties. HOTEL INDUSTRY RISKS Operating Risks. The Company's hotel properties will be subject to all operating risks common to the hotel industry. These risks include, among other things, competition from other hotels; overbuilding in the hotel industry, which has adversely affected occupancy and room rates; increases in operating costs attributable to inflation and other factors, which increases have not consistently been, and may not necessarily in the future be, offset by increased room rates; significant dependence on business and commercial travelers and tourism; increases in energy costs and other expenses of travel; and adverse effects of general and local economic conditions. The Company's hotel properties are also subject to risks associated with food and beverage operations and risks presented by governmental regulations and authorities, particularly with respect to liquor licenses, which could result in interruptions in food and beverage operations. These factors could adversely affect a lessee's ability to make lease payments and therefore the Company's ability to make expected distributions to shareholders. Competition. The Company's hotel properties will compete with other hotel properties in their geographic markets. The Company may also be competing for investment opportunities with entities that have substantially greater financial resources than the Company. These entities may generally be able to accept more risk than the Company can prudently manage, including risks with respect to the creditworthiness of 19 26 entities in which investments may be made or risks attendant to a geographic concentration of investments. Competition may generally reduce the number of suitable investment opportunities offered to the Company and increase the bargaining power of property owners seeking to sell. Investment in Single Industry. The Company's current strategy is to acquire interests in hotel properties. The Company does not expect to seek to diversify its real estate investments, and will therefore be subject to risks inherent in investments in a single industry. Seasonality. The hotel industry is seasonal. Generally, hotel revenues are greater in the second and third quarters than in the first and fourth quarters. While the Initial Hotels in Florida generate comparatively greater revenues from January through April than the other Initial Hotels, the Initial Hotels continue to experience this quarterly effect on an aggregate basis. This effect can be expected to cause quarterly fluctuations in the Company's lease revenues. Notwithstanding these fluctuations, the Company does not expect this seasonality to affect its quarterly dividend payments. Limited Number of Hotels; Geographic Concentration. The Company initially will own nine hotels, two of which, containing approximately 32% of the rooms of the Initial Hotels, are in the Cleveland, Ohio market. Significant adverse changes in the operating results of any of the Initial Hotels, or in economic conditions in any of the Company's markets, could have a material adverse effect on lease revenues and on the Company's ability to make expected distributions to its shareholders. Franchise Risks. The Initial Hotels are subject to franchise agreements. The Company expects that hotels that it may acquire will also be subject to franchise agreements. The failure of an Initial Hotel, the Company, the Initial Lessee or another Company lessee to meet standards imposed by a franchisor or otherwise to adhere to a franchise agreement could result in the loss or cancellation of the franchise agreement. A franchisor also could condition the continuation of a franchise agreement on the completion of capital improvements that the Company determines are unwarranted in light of economic conditions. In that event, the Company may elect to allow a franchise agreement to lapse. If any franchise is terminated or expires, the Company and the lessee may seek to obtain a suitable replacement franchise or to operate the affected property independently of a franchise agreement. The loss of a franchise could have a material adverse effect on the operations or the underlying value of the hotel covered by the franchise because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor. In addition, a franchisor may seek to impose a charge as a condition to consenting to a proposed sale or lease of a hotel property. The Percentage Leases require the Initial Lessee to cooperate with the Company in its efforts to effect relevant sales and leases without incurring such charges. The franchise agreements with Marriott governing five of the Initial Hotels contain a provision requiring the franchisee, on receiving a bona fide offer to buy the related Initial Hotel, to give the franchisor the option to buy that hotel on the same terms as are contained in that offer. These agreements also require Marriott's consent to the sale of the hotel and, subject to certain conditions, to the incurrence and refinancing of indebtedness secured by the hotel, which Marriott may not unreasonably withhold. These provisions may inhibit the Company's ability to sell the hotels. The Marriott Franchise Agreements also require the Company, upon a default under the franchise agreement by the Initial Lessee, (i) to arrange for a replacement lessee, acceptable to Marriott, for the remainder of the franchise term, and (ii) to guarantee the performance of certain obligations of the Initial Lessee, including the payment of specified fees, the making of required renovations and other capital improvements, the replacement of FF&E and certain equipment and materials, the maintenance of insurance, and certain other obligations relating to the maintenance of the Marriott system's standards. Renovation and Capital Improvements Requirements. Hotel properties require continuing renovation and capital improvements, including periodic refurbishment and replacement of FF&E, to remain competitive. While the Company will maintain the Capital Expenditures Fund to fund such renovations and improvements, required expenditures could exceed the Company's expectations. If that occurs, the incremental costs could adversely affect Cash Available for Distribution. In addition, renovations and other capital improvements 20 27 entail certain risks, including environmental risks, construction cost overruns and delays, and unanticipated downturns in demand or unanticipated emergence of competition in the affected market. CONFLICTS OF INTEREST Conflicts Between Initial Lessee's Interests and Company's Interests. Robert and John Boykin will derive benefits from the operation of the Initial Hotels by the Initial Lessee. Accordingly, they have faced conflicts of interest in connection with the structuring of the Percentage Leases and may face such conflicts upon renewals thereof. They will also face conflicts of interest in connection with the structuring of leases for hotels the Company may acquire in the future and lease to the Initial Lessee and in operating the Initial Hotels and such other acquired hotels in a manner that may maximize profits for the Initial Lessee without necessarily benefiting the Company. Determinations to be made on behalf of the Company in connection with any such conflict will be subject to the approval of the Company's Independent Directors. See "Policies and Objectives with Respect to Certain Activities -- Conflict of Interest Policy." Differing Consequences of Sale of Hotels. Unlike public shareholders purchasing Common Shares in the Offering, certain Boykin Group Affiliates will own interests in the Partnership in addition to Common Shares. As a result, the sale of the Initial Hotels by the Partnership may result in different and more adverse tax consequences to these Boykin Group Affiliates than would be experienced by the Company and the public shareholders, and they may seek to influence the Company not to sell an Initial Hotel even though that sale might otherwise be financially advantageous to the Company and the public shareholders. In addition, if the Company sells an Initial Hotel to a non-Affiliate and terminates the related Percentage Lease in connection therewith, the Company must pay the Initial Lessee the fair market value of its leasehold interest in the remaining term of that Percentage Lease. Conflicting Interests in Enforcement of Terms of Certain Agreements; Time Allocation Conflicts. Robert W. Boykin will have a conflict of interest with respect to his obligations as an executive officer and director of the Company to enforce the terms of certain agreements being entered into in connection with the Formation, including the Percentage Leases, his and certain Boykin Group Affiliates' noncompetition agreements with the Company, the agreements relating to the conveyance to the Company of the Initial Hotels and certain related assets, and the Intercompany Convertible Note. Any failure to enforce the material terms of any of these agreements, including the indemnification provisions for breaches of representations and warranties contained in the agreements governing the contribution of the Initial Hotels, could have a material adverse effect on the Company. Mr. Boykin, who will be an officer and director of the Company and a director of the Initial Lessee, may also face conflicts of interest with respect to the allocation of his time and resources. See "Policies and Objectives with Respect to Certain Activities -- Conflict of Interest Policy." Affiliates' Participation in Other Activities. At the time of the Formation Transactions, subsidiaries of the Initial Lessee will acquire and continue the third-party hotel management, interior design and purchasing services businesses of Boykin Management. John E. Boykin will serve as the initial Secretary of the subsidiaries. The subsidiaries initially will manage 12 hotels, none of which is owned by the Company, Boykin Management or any other Boykin Group Affiliate. Three of these hotels are Hampton Inns in the Chicago, Illinois area, containing an aggregate of 366 rooms. These hotels are owned by an insurance company and have been managed by Boykin Management since December 1995. Another of these hotels is the 400-room Hanalei Best Western Hotel, in San Diego, California. The Boykin Group has managed this property, which is owned by another insurance company, since 1992. The remaining eight managed hotels, which Boykin Management has managed since February 1996 on behalf of an institutional investor, contain an aggregate of 1,154 rooms and are located in Santa Barbara County and Ventura County, California. William, Robert and John Boykin hold interests in a joint venture formed to purchase, other than for hotel purposes, a six-acre parcel in the immediate vicinity of the Buffalo Marriott Hotel. The Company and the joint venture have entered into an agreement that provides for certain cross-easements between the properties and provides that the land will contain specific deed restrictions to prevent the development of any hotel thereon. 21 28 William J. Boykin, the retired Chairman of Boykin Management and the father of Robert and John Boykin, is developing a Hampton Inn on certain real property owned by him in Miami, Florida that is adjacent to a shopping center developed by him in 1989. The hotel is expected to open in the fall of 1996. No other Boykin Group Affiliate will have an interest in the development of this hotel, but the Company will have a right of first refusal to purchase the hotel if William J. Boykin elects to sell it. LACK OF INDEPENDENT APPRAISALS AND ARM'S-LENGTH NEGOTIATIONS No independent appraisals were obtained or arm's length negotiations conducted in connection with the formation of the Company. The terms of the contribution of the Initial Hotels to the Company were determined by the principals of the Boykin Group, who will receive an economic benefit as a result of these contributions. The Company believes it is appropriate to value the Company as a going concern, rather than with a view toward values that could be obtained from a liquidation of the Company or of the assets owned by the Company. Accordingly, the valuation of the Company has been determined based primarily on an estimate of the Company's Cash Available for Distribution, rather than on an asset-by-asset valuation based on historical costs or current market value. No assurance can be given that the value of the economic benefits received by the principals of the Boykin Group and other Boykin Group Affiliates in the formation of the Company accurately reflects the fair market value of the assets contributed by them to the Company. See "Certain Transactions" and "Underwriting." AFFILIATES' BENEFITS FROM THE FORMATION Certain Boykin Group Affiliates will receive the following benefits as a result of the Formation Transactions: (i) increased cash distributions from the operations of the Initial Hotels, because of the prepayment of mortgage debt; (ii) elimination of approximately $5.3 million of mortgage debt guaranties; (iii) the ability to exchange Units received in the Formation Transactions for cash or, at the Company's election, for Common Shares with registration rights, which will be more liquid than their interests in the Contributed Partnerships; (iv) deferral of income tax by contributing their interests in the Contributed Partnerships; (v) repayment from the proceeds of the Offering of approximately $3.1 million of loans made by Boykin Management for the benefit of one of the Initial Hotels; (vi) realization of an immediate accretion in the net tangible book value of their investment in the Partnership of $52.55 per Unit (for an aggregate accretion of $71.6 million); (vii) receipt by Robert W. Boykin of options to purchase an aggregate of 20,000 Common Shares under the Company's Long-Term Incentive Plan; and (viii) beneficial ownership of the Initial Lessee, which will be entitled to all profits and cash flow from the Initial Hotels after payment of rent under the Percentage Leases and other operating expenses. See "The Formation" for further discussion of the benefits to Boykin Group Affiliates from the Formation Transactions. REAL ESTATE INVESTMENT RISKS General. The Company's investments will be subject to varying degrees of risk generally incident to the ownership of real estate. These risks include, among others, changes in national, regional and local economic conditions, local real estate market conditions, changes in interest rates and in the availability, costs and terms of financing, the impact of present or future environmental legislation and compliance with environmental laws, the ongoing need for capital improvements, changes in real estate tax rates and other operating expenses, adverse changes in governmental laws and rules, the potential for uninsured or underinsured losses, adverse changes in zoning laws, and other factors beyond the control of the Company. Value and Illiquidity of Real Estate. Real estate investments are relatively illiquid. The Company's ability to vary its portfolio of hotels in response to changes in economic and other conditions will therefore be limited. In addition, certain significant expenditures associated with each equity investment (such as mortgage payments, real estate taxes and maintenance costs) are generally not reduced when circumstances cause a reduction in income from the investment. After completion of the Offering and the application of the proceeds therefrom as set forth under "Use of Proceeds," certain of the Initial Hotels may be mortgaged to secure the Credit Facility. See "The Company -- Business Objectives and Strategies -- Financing Strategy." 22 29 Uninsured and Underinsured Losses. The Percentage Leases require the Initial Lessee to maintain comprehensive insurance on each of the Initial Hotels, including loss of business income, liability, and employee dishonesty coverage. The Company is required to maintain building casualty insurance on each Initial Hotel. Management believes the Initial Hotels' coverage is of the type and amount, including coverage limits and deductibility provisions, customarily carried on similar properties. However, there are certain types of losses, generally of a catastrophic nature, such as earthquakes and floods, that may be uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of insured limits occur, the Company could lose its investment in the affected Initial Hotel as well as the anticipated future revenues from that hotel, while remaining obligated for any mortgage indebtedness or other financial obligations related to that hotel. Acquisition Risks. The Company intends to pursue acquisition of future hotels selectively. In undertaking these acquisitions, the Company will incur certain risks, including the expenditure of funds on, and the devotion of management's time to, transactions that may not come to fruition. Additional risks inherent in acquisitions include risks that the properties will not achieve anticipated occupancy levels or sustain anticipated room rate levels, and that judgments with respect to the cost of improvements to bring acquired properties to the Company's standards will prove inaccurate. In addition, the Company anticipates that new acquisitions will be financed under the Credit Facility or other forms of interim financing, resulting in the risk that permanent financing may not be available or may be available only on disadvantageous terms. If permanent financing is not available on acceptable terms, the Company may be forced to dispose of the affected property or other property on disadvantageous terms. Development and Redevelopment Risks. The Company may develop and redevelop hotels when it believes that doing so is consistent with its business strategies. While the Company's policies with respect to these activities are intended to limit some of the risks associated with those activities, new and continued project development will be subject to a number of risks, including that financing may not be available on favorable terms that construction costs of a property may exceed original estimates, that occupancy rates and ADR may not stabilize at anticipated levels, that financing may not be available on completion of construction, and that construction may not be completed on schedule. If the Company undertakes but elects not to proceed with a development or redevelopment opportunity, the costs associated therewith will ordinarily be charged against income for the current period. The Company continually attempts to improve its ability to evaluate projects in advance and to minimize the costs incurred before it acquires the properties that are the subject of contemplated development or redevelopment projects. These activities are also subject to risks relating to the inability to obtain, or delays in obtaining, the necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations. Property Tax Changes. Under the Percentage Leases, the Company will be responsible for the payment of real and personal property taxes and assessments. These taxes and assessments may increase or decrease as property tax rates change and as the properties are assessed or reassessed by taxing authorities. If property taxes increase or assessments are levied, the Company's ability to make distributions to its shareholders could be adversely affected. Costs of Compliance with Certain Laws. The Initial Hotels must comply with Title III of the Americans with Disabilities Act (the "ADA") to the extent that they are "public accommodations" or "commercial facilities" as defined in the ADA. Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants. The Company believes, based on an internal review, that the Initial Hotels comply in all material respects with the ADA and similar applicable state laws. If changes in these laws involve substantial expenditures or must be made on an accelerated basis, the Company's ability to make distributions to shareholders could be adversely affected. Risks Involved in Investments Through Joint Ventures and Other Entities. On commencement of the Offering, all of the Company's hotels will be owned solely by the Partnership. However, the Company may in the future invest as a co-venturer in a hotel property if it will have control of the operation of the joint venture assets. Any such investment may involve risks such as the possibility that the co-venturer may become bankrupt or have economic or business interests or goals that are inconsistent with the business interests or goals of the Company. 23 30 The Company may also invest in securities of other entities engaged in the ownership of hotels. Investments of this type may not entitle the Company to control the ownership and leasing of the underlying hotels or to control distributions therefrom, which may adversely affect the Company's ability to make distributions to its shareholders. Furthermore, the Company may be prevented from controlling an issuer of securities by the percentage limitations on the ownership of securities and the gross income tests for REIT qualification. See "Policies and Objectives with Respect to Certain Activities -- Investment Policies" and "Federal Income Tax Considerations -- Taxation of the Company as a REIT." Real Estate Financing Risks. Although the Company initially will have no debt outstanding, the Company expects to finance future acquisitions in part through the Credit Facility or other new debt financing. In doing so the Company will be subject to the risks normally associated with debt financing, including the risk that the Company's cash flow will be insufficient to meet required payments of principal and interest, the risk that the Company will not be able to refinance that indebtedness or that the terms of any such refinancing will not be as favorable as the terms of the existing indebtedness, and the risk that necessary capital expenditures for such purposes as renovations and other improvements cannot be financed on favorable terms, if at all. If the Company were unable to secure refinancing of any such indebtedness on acceptable terms, the Company might be forced to dispose of properties on disadvantageous terms, which could result in losses to the Company and could adversely affect the cash flow of the Company available for distribution. If the Company incurs variable rate mortgage indebtedness, an increase in interest rates could have an adverse effect on the Company's net income and Distributable Cash Flow. In addition, if a property is mortgaged to secure payment of indebtedness and the Company is unable to make mortgage payments, the property could be foreclosed upon by, or otherwise transferred to, the mortgagee with a consequent loss of income and asset value to the Company. The Credit Facility is expected to be secured by mortgages on several of the Initial Hotels. In addition, the Company's need to distribute 95% of its REIT taxable income in order to maintain its qualification as a REIT will limit its ability to rely on cash flow from operations to finance new development or acquisitions. As a result, if permanent debt or equity financing is not available on acceptable terms to refinance new development or acquisitions undertaken without permanent financing, further development activities or acquisitions may not be feasible. THE COMPANY'S LACK OF OPERATING HISTORY The Company is a newly formed corporation. Accordingly, the Company does not have any operating history or experience in operating in accordance with the requirements for maintaining its qualification as a REIT. POTENTIAL ADVERSE EFFECT ON THE VALUE OF THE COMMON SHARES OF FLUCTUATIONS IN INTEREST RATES OR EQUITY MARKETS The market price of equity securities of a publicly traded REIT is determined in part by the attractiveness of the yield from distributions on those securities in relation to prevailing interest rates. Accordingly, an increase in interest rates generally may lead purchasers of the Common Shares to demand a higher annual yield, which could adversely affect the market price of the Common Shares. Moreover, the market value of the Common Shares could be substantially and adversely affected by changes in general securities market conditions or fluctuations in the markets for equity securities. POTENTIAL ENVIRONMENTAL LIABILITY Under various federal, state and local laws, ordinances, and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on, under or in the property. This liability may be imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. Furthermore, a person that arranges for the disposal of a hazardous substance at another property or transports a hazardous substance for disposal or treatment at another property may be liable for the costs of removal or remediation of hazardous substances at that property, regardless whether that person owns or operates that property. The costs of any such remediation or removal may be substantial, and the presence of any such substance, or the failure promptly to 24 31 remediate any such substance, may adversely affect the property owner's ability to sell or lease the property or to borrow using it as collateral. Other federal, state and local laws, ordinances and regulations require abatement or removal of certain asbestos-containing materials in connection with demolition or certain renovations or remodeling, impose certain worker protection and notification requirements, and govern emissions of and exposure to asbestos fibers in the air. Other federal, state and local laws, ordinances and regulations and the common law impose on owners and operators certain requirements regarding conditions and activities that may affect human health or the environment. These conditions and activities include, for example, the presence of lead in drinking water, the presence of lead-containing paint in occupied structures, and the ownership or operation of underground storage tanks. Failure to comply with applicable requirements could result in difficulty in the lease or sale of any affected property or the imposition of monetary penalties, in addition to the costs required to achieve compliance and potential liability to third parties. The Company, the Partnership or the Initial Lessee, as the case may be, may be potentially liable for such costs or claims in connection with the ownership and operation of the Initial Hotels. Phase I environmental site assessments or assessment updates have been completed within the last 24 months on each Initial Hotel, and a Phase II assessment was conducted for one hotel in April 1996. These assessments did not reveal any environmental contamination or condition that the Company believes would have a material adverse effect on the Company's business, assets or results of operations, nor is the Company aware of any such contamination or condition. Nonetheless, it is possible that material environmental contamination or conditions exist of which the Company is unaware. No assurance can be given that (i) the assessments referred to above revealed all potential environmental liabilities, (ii) future or amended laws, ordinances or regulations, or more stringent interpretations or enforcement policies of existing environmental requirements, will not impose any material environmental liability or (iii) the environmental condition of the Initial Hotels has not been and will not be affected by changes in the condition of properties in the vicinity of the Initial Hotels or by the acts of third parties unrelated to the Company or the Partnership. See "Business and Properties -- Environmental Matters." TAX RISKS Failure to Qualify as a REIT. The Company intends to operate as a REIT under the Code, commencing with its initial taxable year ending December 31, 1996. The Company has not requested, and does not expect to request, a ruling from the IRS regarding its status as a REIT. Qualification as a REIT involves the application of technical and complex provisions of the Code for which there are only limited judicial or administrative interpretations. The determination of various factual matters and circumstances not entirely within the Company's control may affect its ability to qualify as a REIT, including default by a lessee under, and a termination of, an operating lease. In addition, no assurance can be given that legislation, regulations, administrative interpretations or court decisions will not significantly change the rules applicable to the Company with respect to its qualification as a REIT or the federal income tax consequences of such qualification. The Company will receive an opinion of Baker & Hostetler that, based on the assumption that the Percentage Leases, the Partnership Agreement, the Company's organizational documents, and all other documents to which the Company is a party will be complied with by all parties thereto, and based upon certain representations of the Company, the Company will qualify as a REIT under the Code. Investors should be aware, however, that opinions of counsel are not binding on the IRS or the courts. Both the opinion and the continued qualification of the Company as a REIT will depend on the Company's continuing ability to meet various requirements concerning, among other things, the ownership of its outstanding shares, the nature of its assets, the sources of its income, and the amount of its distributions to shareholders. See "Federal Income Tax Considerations -- Taxation of the Company as a REIT." If the Company were to fail to qualify as a REIT in any taxable year, the Company would not be allowed a deduction for distributions to shareholders in computing its taxable income and would be subject to federal income tax (including any applicable minimum tax) on its taxable income at regular corporate rates. Unless entitled to relief under certain Code provisions, the Company also would be disqualified from treatment as a REIT for the four taxable years following the year during which REIT qualification was lost. As a result, the 25 32 cash available for distribution to the shareholders could be reduced or eliminated for each of the years involved. Although the Company currently intends to operate in a manner designed to qualify it as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause the Board of Directors, with the consent of a majority of the shareholders, to revoke the REIT election. REIT Minimum Distribution Requirements. In order to qualify as a REIT, the Company generally will be required each year to distribute to its shareholders at least 95% of its net taxable income (excluding any net capital gain). Further, the Company will be subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by it with respect to any calendar year are less than the sum of 85% of its ordinary income plus 95% of its capital gain net income for that year plus amounts not distributed in prior years. The Company intends to make distributions to its shareholders to comply with the 95% distribution requirement and to avoid the nondeductible excise tax. The Company's income will consist primarily of its share of the income of the Partnership. The Company's cash available for distribution will consist primarily of cash distributions from the Partnership. Differences in timing between taxable income and receipt of cash available for distribution and the seasonality of the hospitality industry could require the Company, through the Partnership, to borrow funds on a short-term basis to meet the 95% distribution requirement and to avoid the nondeductible excise tax. Under certain circumstances, the Company may be required from time to time to accrue certain income items for tax purposes prior to their receipt in cash (for example, rent earned but not yet received). These differences in timing between the accrual of certain income items for tax purposes and the receipt thereof could cause the Company to have taxable income without sufficient cash to make the annual distributions required of a REIT under the Code. In such cases, the Company may be compelled to borrow funds or liquidate investments on terms that are disadvantageous to the Company in order to meet the distribution requirements. See "Federal Income Tax Considerations." Distributions by the Partnership will be determined by the Company's Board of Directors and will be dependent on a number of factors, including the amount of cash in the Partnership available for distribution, the Partnership's financial condition, any decision by the Board of Directors to reinvest funds rather than distributing such funds, the Partnership's capital expenditures, the annual distribution requirements under the REIT provisions of the Code, and any other factor the Board of Directors believes is relevant. See "Federal Income Tax Considerations -- Requirements for Qualification as a REIT -- Annual Distribution Requirements." Failure of the Partnership to Be Classified as a Partnership for Federal Income Tax Purposes: Impact on REIT Status. The Company will receive an opinion from Baker & Hostetler stating that the Partnership will be classified as a partnership for federal income tax purposes. If the IRS were to challenge successfully the tax status of the Partnership as a partnership for federal income tax purposes, the Partnership would be taxable as a corporation. In that event, because the value of the Company's ownership interest in the Partnership (i) constitutes more than 10% of the Partnership's voting securities and (ii) exceeds 5% of the Company's assets, the Company would cease to qualify as a REIT. Further, the imposition of a corporate-level tax on the Partnership would substantially reduce the amount of cash available for distribution to the Company and its shareholders. See "Federal Income Tax Considerations -- Tax Aspects of the Company's Investments in the Partnership." Tax on Net Income from Foreclosure Property. The Company will be subject to a tax at the highest rate applicable to corporations (currently 35%) on any "net income from foreclosure property." "Foreclosure property" is property acquired by the Company as a result of a foreclosure proceeding or by otherwise reducing such property to ownership by agreement or process of law. "Net income from foreclosure property" is the gross income derived during the taxable year from foreclosure property, less applicable deductions, but only to the extent such income does not qualify under the 75% income test and 95% income test. As a result of the rules with respect to foreclosure property, if the Initial Lessee defaults on its obligations under a Percentage Lease for an Initial Hotel, the Company terminates the Percentage Lease, and the Company is unable to find a replacement lessee for such Initial Hotel within 90 days of such foreclosure, gross income from hotel operations conducted by the Company from such Initial Hotel would cease to qualify for the 75% and 95% 26 33 gross income tests and, thus, the Company would fail to qualify as a REIT; however, although it is unclear under the Code, if the hotel operations were conducted by an independent contractor, it may be possible for the Initial Hotel to be foreclosure property for two years after such foreclosure (which period could be extended an additional four years) without the disqualifying the Company as a REIT. ANTI-TAKEOVER EFFECT OF OWNERSHIP LIMIT Generally prohibiting any shareholder from owning more than 9.0% of the Common Shares may (i) discourage a change in control of the Company, (ii) deter tender offers for the Common Shares, which may otherwise be attractive to the Company's shareholders, or (iii) limit the opportunity for shareholders to receive a premium for their Common Shares that may otherwise exist if an investor attempted to assemble a block of Common Shares in excess of 9.0% of the outstanding Common Shares or to effect a change in control of the Company. The ownership limitation exists to enable the Company to meet the REIT qualification requirement that not more than 50% in value of its outstanding shares be owned by five or fewer individuals, while providing the Company's Board of Directors the flexibility to allow an individual to own more than 10% of the Company's outstanding shares so long as that ownership will not violate other REIT qualification requirements. Certain tender offers and invitations for tenders for more than 10% of the Common Shares of the Company are also subject to certain advance filing and notification requirements under Section 1707.041 of the Ohio Revised Code. NO LIMITATION ON DEBT; ABILITY TO ISSUE PREFERRED SHARES While the Company will have no outstanding indebtedness on completion of the Offering, it has obtained a commitment for the Credit Facility from a lending syndicate led by Lehman Brothers Holdings, Inc., and may incur other indebtedness in the future. The Company currently has a policy of maintaining a ratio of debt-to-total market capitalization (i.e., total third-party debt of the Company as a percentage of the market value of issued and outstanding Common Shares, including Common Shares issuable on exchange of outstanding Units, plus total debt, measured at the time the debt is incurred) of not more than 45%. The Company's organizational documents, however, do not contain any limitation on the amount or percentage of indebtedness the Company may incur, and the Board of Directors could alter or eliminate the Company's current borrowing policy. If this policy were changed or eliminated, the Company could become more highly leveraged, resulting in an increase in debt service, which could adversely affect the Company's funds from operations and its ability to make expected distributions to its shareholders, and in an increased risk of default on the Company's obligations. The more leveraged a company is, the more likely it is that a decrease in cash flow would impair its ability to make debt service payments in the normal course of business. The Company's Articles of Incorporation authorize the Board of Directors to issue up to 5,000,000 preferred shares and to establish certain preferences and rights of any such shares issued. See "Description of Capital Stock -- Preferred Shares." While the Company has no current intention to issue any preferred shares, the issuance of any such shares with preferential dividend rights could diminish the cash available for distribution to the holders of Common Shares. In addition, the issuance of such shares could have the effect of delaying or preventing a change in control of the Company even if a change in control were in the shareholders' interest. The Initial Hotels mortgage indebtedness that is being prepaid in connection with the Offering includes an aggregate of approximately $67.2 million in principal and interest payable under loans from Lehman Brothers Holdings, Inc. to the Contributed Partnerships that own four of the Initial Hotels. See "Use of Proceeds." DILUTION Purchasers of the Common Shares will experience immediate and substantial dilution from the initial public offering price in the net tangible book value per share of the Common Shares. See "Dilution." Any exercise of options to purchase Common Shares at a price below the market price of the Common Shares at the time of exercise will also be dilutive. 27 34 ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON SHARES Prior to the Offering, there has been no public market for the Company's Common Shares. There can be no assurance that an active trading market will develop or be sustained following the Offering or that Common Shares may be resold at or above the initial public offering price. The initial public offering price will be determined through negotiations between the Company and the representatives of the Underwriters (the "Representatives") and may not be indicative of the market price of the Common Shares after the Offering. See "Underwriting." LIMITATIONS ON OWNERSHIP OF COMMON SHARES In order for the Company to maintain its qualification as a REIT, not more than 50% in value of the outstanding Shares of the Company may be owned, directly or indirectly, by five or fewer individuals. Accordingly, the Company's Articles of Incorporation prohibit ownership of more than 9.0% of the Common Shares by any single shareholder following completion of the Offering, with certain exceptions. The Board of Directors may waive this restriction if evidence satisfactory to it and to the Company's tax counsel is presented showing that ownership in excess of this limit will not jeopardize the Company's status as a REIT. See "Capital Stock of the Company -- Restrictions on Transfer." Accordingly, a holder of Common Shares may be prohibited from increasing his holdings of Common Shares. RISK OF HIGH DISTRIBUTION PAYOUT PERCENTAGE The Company's estimated annual distribution rate to shareholders is 95% of the Company's estimated Cash Available for Distribution for the twelve months ended June 30, 1996. See "Distribution Policy." Should actual Cash Available for Distribution be less than estimated Cash Available for Distribution, the Company may not be able to achieve and maintain its proposed initial distribution rate. BOARD'S ABILITY TO CHANGE POLICIES The principal policies of the Company, including its policies with respect to acquisitions, financing, growth, operations, debt capitalization and distributions, will be determined by its Board of Directors. The Board of Directors may amend or revise these and other policies from time to time without a vote of the shareholders of the Company. See "Policies and Objectives with Respect to Certain Activities." EFFECT ON MARKET PRICE OF SHARES AVAILABLE FOR FUTURE SALE No prediction can be made as to the effect, if any, that future sales, or the availability of Common Shares for future sale, by the Company or by its executive officers will have on the market price of the Common Shares prevailing from time to time. Sales of substantial amounts of Common Shares (including shares issued on the exercise of options), or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Shares. The Boykin Group Affiliates and Boykin Associates have agreed, subject to certain limited exceptions, not to offer, sell, contract to sell or otherwise dispose of any Common Shares for a period of three years after the date of this Prospectus. See "Shares Available for Future Sale" and "Underwriting." ERISA An investment in Common Shares may be an appropriate investment for a pension, profit sharing, retirement, welfare or other employee benefit plan subject to ERISA, depending upon the circumstances of the plan. In deciding whether to purchase Common Shares, a fiduciary of any such plan, in consultation with its advisors, should carefully consider its fiduciary responsibilities under ERISA, the prohibited transaction rules of ERISA and the Code, and the effect of the "plan asset" regulations issued by the U.S. Department of Labor. 28 35 THE COMPANY GENERAL The Company was formed to continue and expand the hotel ownership, acquisition, redevelopment and repositioning activities of the Boykin Group and will operate as a self-administered equity REIT. The Boykin Group was founded in 1959, and was one of the first franchisees of Marriott Hotels and an early franchisee of Howard Johnson's Hotels. Since its founding, the Boykin Group has developed 13 full-service hotels containing a total of 3,085 rooms and has owned or managed 36 properties containing a total of 6,943 rooms. Upon completion of the Offering and the Formation Transactions, the Company will own nine hotels with a total of 2,408 guest rooms. The Company's primary business strategies are to achieve revenue growth in the Initial Hotels, acquire and lease additional hotel and resort properties in the upscale and moderate markets on an accretive basis, strategically renovate and upgrade properties to maximize performance, and selectively expand and develop additional hotel properties. Quality of Initial Hotel Portfolio The Initial Hotels are operated under franchise license agreements with premiere nationally-recognized hotel chains, including Marriott, Radisson, Holiday Inn, Quality Suites, and Hampton Inns. Serving both business and leisure travelers, the Initial Hotels are geographically diversified and located in Berkeley, California; Buffalo, New York; Cleveland and Columbus, Ohio; Charlotte, North Carolina; and Ft. Myers and Melbourne, Florida. The Initial Hotels include eight full-service hotels and one limited-service hotel, all of which compete in the upscale to moderate price segment of the hospitality market. For the twelve months ended June 30, 1996, the Initial Hotels had an average occupancy rate of 76.2%, an ADR of $87.62 and a REVPAR of $66.74. The Boykin Group developed and has owned and managed seven of the Initial Hotels since their opening. Long-standing Management Team The Company will capitalize on the substantial hotel operating, development, acquisition and transactional experience of its management and the Boykin Group. Robert W. Boykin, President and Chief Executive Officer of the Company, has over 27 years of experience in the hotel industry, all with the Boykin Group. Raymond P. Heitland, the Company's Chief Financial Officer, has 26 years of industry experience and tenure with the Boykin Group. Mark L. Bishop, the Company's Senior Vice President -- Acquisitions and Development, has 18 years of industry experience. During the past 10 years, the Company's officers have directly overseen the acquisition, disposition, recapitalization, development and repositioning of approximately $750 million of hotel assets throughout the United States. Upon completion of the Offering, Company management and their affiliates will own approximately 14.4% of the outstanding equity of the Company. All future hotel acquisition, development and ownership activities of the Boykin Group will be conducted through the Company. Focus on Full-service Hotels The Company intends to achieve a significant part of its growth through the acquisition, redevelopment and repositioning of additional full-service hotels. The Company believes that there are full-service hotel properties that can be acquired at a discount to replacement cost, and that many of these properties are located in areas of increasing demand. The Company further believes that the full-service segment of the market, in particular, has potential for improved performance as business and leisure travel continues to increase and demand rises at a faster rate than supply. The Company expects no significant new supply of full-service hotels over the next several years because current costs do not justify new hotel construction. While the Company intends to maintain its focus on full-service hotels, it may also acquire upscale limited-service hotels in selected cases when doing so will further its strategic objectives. For example, when the Boykin Group acquired a Holiday Inn in February 1996, it also acquired a Hampton Inn located in close proximity to enable it to benefit from cross-over marketing and training and the operating efficiencies achievable through having multiple hotels in one geographic area. 29 36 Cash Flow Growth The Company will focus on maximizing cash flow from both the Initial Hotels and acquired hotels through the implementation of the active asset management strategies of the Boykin Group. The Company has demonstrated the ability to increase cash flow from the hotels which it owns. Over the three year and five year periods ended December 31, 1995, the aggregate revenues of the Initial Hotels increased at a compound annual rate of 4.4% and 3.6% per year, and EBITDA from the Initial Hotels increased at a compound average growth rate of 13.4% and 9.8% per year, respectively. The Company believes that it will have long-term financial stability as a result of its ownership of the Initial Hotels and the expected growth in its hotel portfolio. Historical Performance The current and the historical performance of the Initial Hotels has well exceeded the industry averages. During the five year period ended December 31, 1995, the Initial Hotels generated REVPAR that exceeded the REVPAR of their local competing hotels (in each market, six to eight competitors as currently defined by Boykin Management for performance evaluation purposes and compared over that period) by 16% on average and exceeded the U.S. average REVPAR for upscale/moderate full-service hotels by 26%. In 1991, a year generally considered weak in the hotel industry, REVPAR of the Initial Hotels exceeded the REVPAR of their local competing hotels by over 19% and exceeded the U.S. average REVPAR for upscale/moderate full-service hotels by over 29%. The following table compares average occupancy, ADR and REVPAR for the Initial Hotels with that for their local competition, all upscale/moderate U.S. hotels and all U.S. hotels for the periods indicated.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------- ------------------ 1991 1992 1993 1994 1995 1995 1996 ------ ------ ------ ------ ------ ------- ------- OCCUPANCY RATE Initial Hotels(1)..................... 69.9% 71.6% 72.6% 74.7% 74.9% 74.2% 76.8% Local Competition(2).................. 66.3% 68.7% 70.3% 71.6% 72.1% 71.9% 73.2% All U.S. Upscale/Moderate(2).......... 61.9% 63.2% 64.5% 66.1% 66.8% 66.1% 66.8% All U.S. Hotels(2).................... 60.6% 61.7% 63.0% 64.6% 65.3% 64.4% 65.3% ADR Initial Hotels(1)..................... $75.83 $75.45 $75.50 $79.27 $85.47 $84.82 $89.03 Local Competition(2).................. $67.37 $68.02 $69.51 $71.39 $75.45 $75.31 $80.45 All Upscale/Moderate(2)............... $66.46 $66.84 $68.83 $71.71 $75.32 $74.87 $79.85 All U.S. Hotels(2).................... $59.04 $59.92 $61.99 $64.34 $67.43 $67.22 $71.38 REVPAR Initial Hotels(1)..................... $52.97 $54.05 $54.80 $59.24 $63.98 $62.93 $68.35 Local Competition(2).................. $44.68 $46.75 $48.89 $51.12 $54.39 $54.15 $58.90 All Upscale/Moderate(2)............... $41.12 $42.27 $44.39 $47.39 $50.28 $49.50 $53.36 All U.S. Hotels(2).................... $35.80 $36.94 $39.04 $41.56 $44.04 $43.31 $46.62 - --------------- (1) Source: Company-provided information. (2) Source: Smith Travel Research (reports dated August 1 and 5, 1996). Smith Travel Research is not associated in any way with the Company or any of its Affiliates and has not provided any form of assistance in connection with the Offering. Local Competition includes Initial Hotels and six to eight competitors in each market, as currently defined by Boykin Management for performance evaluation purposes and consistently used for the periods shown.
Management believes that, while the lodging industry as a whole is benefiting from an improved supply/demand dynamic, the most significant advances in revenue growth and profitability will arise from skillful management of hotel properties. An integral element of this management is the continuous evaluation of each hotel's position in its market and the implementation, as necessary, of changes in franchise, theme and customer focus to maximize the continuing returns from the hotel. The Company attributes the excellent performance of the Initial Hotels to the successful implementation of this asset management strategy. 30 37 Access to Capital The Company has obtained a commitment for a $75 million Credit Facility for acquiring hotels without financing contingencies, and will have no outstanding indebtedness upon completion of the Offering. As a public company, the Company expects to have access to a wide variety of financing sources to fund acquisitions, such as the ability to issue public and private debt, equity and hybrid securities, and the ability to utilize Units as consideration when cash is not appropriate for tax or other reasons. While its organizational documents contain no limitation on the amount of debt it may incur, the Company, subject to the discretion of the Board of Directors, intends to maintain a debt-to-total market capitalization ratio (measured at the time debt is incurred) of not more than 45%. The Company may from time to time re-evaluate its debt capitalization policy in light of economic conditions, relative costs of debt and equity capital, market values of its properties, acquisition, development and expansion opportunities and other factors. BUSINESS OBJECTIVES AND STRATEGIES The Company's primary business objectives are to maximize current returns to shareholders through increases in cash flow available for distribution and to increase long-term total returns to shareholders through appreciation in value of the Common Shares. The Company will seek to achieve these objectives through participation in increased revenues from the Initial Hotels pursuant to the Percentage Leases and by selective acquisition, ownership, redevelopment, repositioning and expansion of additional hotel properties. The Company will seek to continue to invest in properties where the Company's established industry and marketing expertise enable it to improve the acquired hotels' performance. Internal Growth Strategy The Company believes that, based on historical operating results and the strength of the Company's management team, portfolio and markets, the Initial Hotels should provide the Company with the opportunity for cash flow growth through the Percentage Leases. The Company believes that the revenue and cash flow of the Initial Hotels will be maximized by intensive management and marketing. The Company intends to derive increased cash flow through the application of the Initial Lessee's operating strategies, which include the active management and balancing of room rates with forecasted room demand in order to maximize total hotel revenues (a system known as "yield management"). The Company believes that the Initial Lessee's continued commitment to customer service and the experience of its management team should position the Company to capitalize on the expected continued strength in the economy and improvement in the U.S. hotel market. The Company's objectives include enhancing its competitive market position through the continuation of a regular program of renovation and capital improvement. An example of the active yield management employed by the Boykin Group is its strategies during 1995 at the Cleveland Airport Marriott. The Boykin Group anticipated increased demand in the business transient sector and scaled back lower-rated contract rooms in order to maximize revenue. The result was an increase in room revenues in excess of $800,000 for calendar year 1995 over 1994, and a corresponding increase in REVPAR for the same period of 10.3%. See "Prospectus Summary -- The Initial Hotels" for information regarding the operating performance of the Initial Hotels. Acquisition Strategy The Company believes that attractive opportunities exist to acquire full-service hotels serving the upscale and moderate market segments of the lodging industry. The Company intends to concentrate its investment activities on hotel properties that are in one or more of the following categories: Product Type -- Full-service commercial hotels, airport hotels, major tourist hotels and destination resorts in major markets and business centers. Market Repositioning Opportunities -- Undervalued hotels whose occupancy, daily rates and overall revenues can be significantly enhanced through new brand affiliations, implementation of new marketing strategies and effective yield management. 31 38 Redevelopment and Renovation Opportunities -- Hotels with sound operational fundamentals that, because of a lack of capital, require physical renovation or redevelopment to achieve their full performance potential. Portfolio Acquisitions -- Portfolios of hotels which result in geographic economies of scale or which may be leased back to proven hotel operators as additional lessees, and that may benefit from the Company's repositioning and redevelopment experience and access to capital. As a result of the Company's management's successful transactional activities, the Company believes it possesses a competitive advantage in market knowledge, technical expertise and industry relationships that will enable it to continue to successfully implement its acquisition strategy on a national scale. Further, the Company believes it will benefit from its continuing relationship with the Initial Lessee and from developing relationships with additional lessees who have demonstrated ability to manage hotel properties. The Company's philosophy is to identify and actively seek hotel properties that can be associated with the brands that will lead the hospitality industry in REVPAR, such as Marriott, Radisson, Hilton, Hyatt, Westin, Omni, Doubletree, Sheraton, Holiday Inn and Quality Suites. The Company believes that it can maximize its market share and revenues by taking advantage of its orientation toward sales and marketing to identify the most effective branding and to leverage its brands with effective direct sales strategies. The Company expects to continue to affiliate with a number of different franchise companies in order to maximize the performance of its hotels by providing greater access to a broad base of national marketing and reservation systems and to mitigate the risks of franchise loss and franchise overlap. The Company will seek to maintain a geographically diversified hotel portfolio, and may also cluster hotels within certain primary markets in order to take advantage of operational and managerial economies of scale. The Company believes it has the capacity to acquire additional hotels without significantly increasing management and overhead expenses. The Boykin Group's recent purchase of the Lake Norman Holiday Inn and Lake Norman Hampton Inn exemplifies the strategies described above. The Company believes that those hotels' present franchise affiliations will enable the Company to maximize REVPAR in the local market. The hotels' purchase price represented a significant discount to replacement costs, and the hotels' historical earnings represented an attractive yield on the purchase price. The Company believes that the Initial Lessee can increase the ADR and REVPAR of both hotels, and the Boykin Group has been implementing its yield management systems since the acquisition to achieve these results. REVPAR for the six months ended June 30, 1996 increased over REVPAR for the same period in 1995 by 21% for the Lake Norman Hampton Inn and by 13% for the Lake Norman Holiday Inn, with a resulting increase in pro forma Percentage Lease revenues. The Boykin Group also took over the previously out-sourced food and beverage operations at the Lake Norman Holiday Inn, and is currently in the process of repositioning the food and beverage operations at the hotel in order to generate more business from hotel guests and to increase patronage of the restaurant and catering facilities by the local residents. The Boykin Group also caused the Lake Norman hotels to implement a combined purchasing program, direct overflow business to each other and begin cross-training and sharing employees. The Company believes the economies gained from the clustering of the Lake Norman acquisitions, combined with the active yield management strategies and product repositioning strategies employed by the Boykin Group at these hotels, has resulted in a significantly more attractive yield to the Company than that calculated based on their trailing operating performance at the time of the acquisitions. There can be no assurance that the Company will be able to acquire properties that meet its investment criteria or that have operations that can be successfully integrated with the operation of the Initial Hotels. Renovation Strategy The Company believes that a regular program of capital improvements at the Initial Hotels, including replacement and refurbishment of FF&E, will maintain and enhance their competitiveness and maximize revenue growth under the Percentage Leases. During the fiscal years 1991 through 1995, approximately $18 million was spent on renovations and capital improvements at the Initial Hotels, including approximately $1.2 million for the restoration of the Melbourne Quality Suites hotel following damage from Hurricane Erin in August 1995. This represents an average of approximately $1,400 per room per year (excluding the amount 32 39 spent on the Melbourne property restoration, which was funded entirely from insurance proceeds). The Company will use approximately $3.5 million of the net proceeds of the Offering as its initial contribution to the Capital Expenditures Fund. The Percentage Leases require the Company to contribute to the Capital Expenditures Fund additional aggregate minimum reserves of 4.0% of total revenue of the Initial Hotels. For the 12-month period ended June 30, 1996, this reserve would have represented approximately 6.1% of room revenue and an average of $1,400 per room. The Company intends to use the Capital Expenditures Fund for the replacement and refurbishment of FF&E and other capital expenditures (approximately $250,000 of which is required by franchisors) to maintain and enhance the competitive position of the Initial Hotels, although it may make other uses of amounts in the fund that it considers appropriate from time to time. The Company believes that the fund will be adequate to meet its continuing capital expenditure and FF&E needs for the Initial Hotels in light of their age and condition. The Boykin Group's experience in developing and renovating its properties will assist the Company in maintaining its properties' competitive edge in their respective markets. The following table sets forth information about the historical capital expenditures of the Initial Hotels for the five fiscal years ended December 31, 1995:
5 YEAR TOTAL CAPITAL 5 YEAR EXPENDITURES AVERAGE PER INITIAL HOTEL ROOMS (000'S) ROOM(1) - ------------------------------------------------- ----- ------------ ----------- Berkeley Marina Marriott......................... 373 $ 3,520 $ 1,900 Buffalo Marriott................................. 356 3,208 1,800 Cleveland Airport Marriott....................... 375 2,606 1,400 Cleveland Marriott East.......................... 403 2,611 1,300 Columbus North Marriott.......................... 300 2,961 2,000 Lake Norman Hampton Inn.......................... 117 329 600 Lake Norman Holiday Inn.......................... 119 286 500 Melbourne Quality Suites......................... 208 1,869 1,800(2) Radisson Inn Sanibel Gateway..................... 157 514 700 ----- -------- Total/Average.................................... 2,408 $ 17,904 $ 1,500(2) - --------------- (1) Rounded to the nearest $100 (2) Includes the amount spent on the Melbourne property restoration described in the paragraph preceding the table.
The Company expects to spend approximately $4.0 million on capital improvements at the Initial Hotels during the first twelve months after the Offering as part of its ongoing renovation and capital expenditures program. These expenditures will be funded from the $3.5 million of the net proceeds of the Offering and from funds contributed to the Capital Expenditures Fund from the Initial Hotels' revenues during that period. Some of the major ongoing capital expenditure items included in the capital expenditures program over the next 12 months are: renovation and refurbishment of lobby and public spaces, upgrading and redecorating the guest rooms including expanding the Marriott "room that works" concept and incorporating other amenities designed to meet the needs of today's business travelers, and repositioning of several hotel restaurants and lounges to increase both guest and local patronage. Development Strategy The Company may develop additional full-service or upscale limited-service hotels on land that the Company acquires in its current geographic markets or on land contiguous to the Initial Hotels. Full-service hotels may include hotels affiliated with Marriott, Radisson, Hilton, Hyatt, Westin, Omni, Doubletree, Sheraton, Holiday Inn and Quality Suites. Limited-service hotels may include Marriott Courtyard Hotels, Fairfield Inns, Residence Inns, Homewood Suites and Hampton Inns. The Company believes that selective development of hotels in its existing geographic markets would enable it to take advantage of operating efficiencies to generate attractive returns on investment. 33 40 Financing Strategy On completion of the Offering, the Company will have no outstanding debt. While its organizational documents contain no limitation on the amount of debt it may incur, the Company, subject to the discretion of the Board of Directors, intends to maintain a debt-to-total market capitalization ratio (measured at the time debt is incurred) of not more than 45%. The Company may from time to time re-evaluate its debt capitalization policy in light of economic conditions, relative costs of debt and equity capital, market values of its properties, acquisition, development and expansion opportunities, and other factors. The Company has obtained a commitment for the Credit Facility from Lehman Brothers Holdings, Inc. The commitment is contingent on, among other things, the closing of the Offering. The Company intends to use this facility to provide interim financing for property acquisitions and capital improvements in anticipation of long-term financing and to fund working capital requirements. The Credit Facility is expected to be secured by first mortgages on several of the Initial Hotels. Other On completion of the Offering, assuming the conversion of Intercompany Note and further assuming the Units have not been exchanged the Company will own approximately 84.1% of the equity interests in the Partnership and be its general partner, and the executive officers of the Company will own in the aggregate approximately 14.4% of the equity interests in the Company, directly or through ownership of Units. The Company's executive offices are located at Terminal Tower, Suite 1500, 50 Public Square, Cleveland, Ohio 44113, and its telephone number is (216) 241-6375. LESSEES THE INITIAL LESSEE In order to qualify as a REIT, the Company will not operate its hotels, but will lease its properties to established hotel operators pursuant to leases which will provide the Company with the greater of a base rental income or a percentage of revenues of operations. In connection with the Formation Transactions, Robert and John Boykin will form and indirectly own the Initial Lessee. The Initial Lessee will acquire and continue the 37-year hotel operation and management business of the Boykin Group and will operate the Initial Hotels under the Percentage Leases. The operations of the Boykin Group are fully integrated, with capabilities in all phases of development and management of hotel properties. As of June 30, 1996, the Boykin Group had approximately 2,400 employees and owned or managed 21 properties containing 4,354 rooms located throughout the United States. Because neither the Company nor the Initial Lessee will have to pay a separate hotel management company to manage the Initial Hotels, the Company believes it will obtain a higher rent than such added management arrangements would permit, thus maximizing the Company's Percentage Lease revenues. The Company believes that the Boykin Group's ability to achieve consistently above-average market penetration during various economic cycles positions the Company, through the Initial Lessee, to maximize its returns on the Initial Hotels. See "The Company -- General -- Strong Historical Performance." The Initial Lessee's core capabilities will be based on continued implementation of the Boykin Group's (i) commitment to superior customer service and satisfaction; (ii) sophisticated sales and marketing systems, including customer lead-generating and management incentive systems; (iii) effective personnel recruitment, selection, orientation, training and retention programs; (iv) comprehensive property operations and maintenance capabilities, including design, renovation management, energy conservation, purchasing and preventive maintenance; and (v) strong auditing, cash-handling, recordkeeping and information management systems and controls. While the Initial Lessee will operate and manage hotels only under the Percentage Leases, its subsidiaries will continue hotel management activities for owners other than the Company and the award-winning hotel interior design business and the hotel and restaurant food, beverage, supply and equipment purchasing business currently operated by the Boykin Group. The Company expects that these operations will be continued in part with a view to introducing the Company to acquisition opportunities. In addition, the income 34 41 generated by the Initial Lessee and its subsidiaries will strengthen the Initial Lessee's ability to perform under the Percentage Leases. The Initial Lessee intends to develop incentive compensation plans for its hotel-level and corporate-level senior executives which tie such compensation in part to the performance of the Company and in part to the performance of the Initial Hotels. Such plans may include awards of Company shares, options and other similar incentives. The Company and the Initial Lessee have agreed on several measures to align the interests of the Initial Lessee and its owners with the interests of the Company's shareholders and to minimize conflicts of interest between them: - The Initial Lessee's owners and certain other Boykin Group Affiliates will own approximately 14.3% of the Company following completion of the Offering in the form of Units exchangeable, at the Company's election, for Common Shares, and have agreed to retain these interests for at least three years following completion of the Offering; - Robert W. Boykin will resign from his positions with Boykin Management in connection with the Formation Transactions and will not hold office in the Initial Lessee, and neither John E. Boykin nor any other officer of the Initial Lessee will hold office in the Company; - Any distributions from the Initial Lessee (other than distributions to cover income taxes) during the first ten years after the Offering that are distributed to the Initial Lessee's owners, and any net cash proceeds of any sale of the Initial Lessee within ten years after the Offering, will be used to purchase Units or Common Shares (subject to applicable ownership limitations) that must be held for at least two years from the purchase date; - The Initial Lessee's and its subsidiaries' consolidated net worth on completion of the Formation Transactions will be approximately $3 million, and half of the Initial Lessee's and its subsidiaries' consolidated earnings (after distributions to cover income taxes) during the first ten years after the Offering will be retained in the Initial Lessee and its subsidiaries until their consolidated net worth reaches 25% of the aggregate annual rent payments under the Percentage Leases (and will be retained thereafter during that period to maintain that level); - Determinations to be made on behalf of the Company in connection with any conflict of interest involving any Boykin Group Affiliate will be made by the Company's independent directors; - Each Boykin Group Affiliate will conduct all future hotel acquisition, development and ownership activities only through the Company, except for any separate activity to which the Company expressly consents. - Any change in control of the Initial Lessee without the prior written consent of the Company will constitute a default under the Percentage Leases; and - The Percentage Leases will contain cross-default provisions that will enhance the Company's ability to enforce strict compliance with each Percentage Lease. ADDITIONAL LESSEES The Company believes that having multiple tenants will facilitate meeting its growth objectives, and therefore intends to pursue relationships with additional lessees. The Company believes there are a number of capable hotel owner-operators who are undercapitalized and, therefore, unable to reposition their properties adequately, or are faced with a difficult financing environment because of today's increased equity requirements, and will be willing to engage in a sale and leaseback of their properties on terms that would allow both parties to achieve participation in the improving fundamentals of the lodging industry. In addition, the Company believes certain national franchisors are willing to develop a relationship with the Company and may become additional lessees as a means of expanding their franchise systems. The Company believes that its management's long tenure and reputation in the hotel industry will provide the Company access to these 35 42 acquisition opportunities and enable the Company to select hotel properties and lessees that will further its acquisition and growth strategies. USE OF PROCEEDS The net proceeds to the Company from the Offering, after payment of expenses incurred in connection with the Offering, are estimated to be approximately $159.0 million ($183.2 million if the over-allotment option is exercised in full), based on an assumed initial public offering price of $22.00 per share. All of the net proceeds will be contributed by the Company to the Partnership in exchange for an approximately 84% equity interest in the Partnership (assuming conversion of the Intercompany Convertible Note). Assuming the Offering occurs in mid-September 1996, the Partnership will use the amounts contributed to it approximately as follows:
(IN MILLIONS) Repayment of third party mortgage indebtedness (including certain prepayment penalties).................................................. $ 136.6 Repayment of loans payable to Boykin Management.......................... 3.1 Purchase of interests held by certain Other Partners, and Boykin Associates, including repayment of advances and accrued interest thereon of $4.9 million................................................ 14.1 Deposit to Capital Expenditures Fund..................................... 3.5 Working capital, formation costs and general partnership purposes........ 1.7 --------- Total uses of proceeds................................................. $ 159.0 =========
If the over-allotment option is exercised in full, the additional net proceeds will be invested in the Partnership and used by it for general purposes, including possible future acquisitions of additional hotel properties. While the Company engages from time to time in discussions regarding potential acquisitions, it has not entered into any agreement as of the date of this Prospectus to make any such acquisition. Pending the described uses, the net proceeds may be invested in interest-bearing accounts and short-term interest-bearing securities that are consistent with the Company's intention to qualify for taxation as a REIT. These investments may include, for example, government and government agency securities, certificates of deposit, interest-bearing bank deposits, mortgage loan participations and shares of other real estate investment trusts. The mortgage indebtedness to be paid out of the net proceeds of the Offering matures at various times from June 1998 through October 2004 and bears interest at effective rates varying from 8.6% to 11.8% per year, as follows:
(DOLLARS IN MILLIONS) ------------------------------------- PRINCIPAL PREPAYMENT TOTAL TO INTEREST MATURITY INITIAL HOTEL BALANCE CHARGES BE PAID RATE DATE NOTES - -------------------------- --------- ---------- -------- -------- ----------------- ------ Berkeley Marina Marriott................ $ 28.5 $0.9 $ 29.4 9.8% June 1, 1998 (1) Buffalo Marriott.......... 14.2 0.3 14.5 8.6% February 1, 2001 (2) Cleveland Airport Marriott................ 19.0 0.6 19.6 9.8% June 1, 1998 (1) Cleveland Marriott East... 28.2 0.5 28.7 8.6% February 1, 2001 (2) Columbus North Marriott... 13.7 2.5 16.2 11.0% October 1, 2004 Columbus North Marriott... 3.1 3.1 10.0% (3) Columbus North Marriott... 4.9 4.9 10.0% (4) Lake Norman Hotels........ 9.5 0.6 10.1 11.8% February 8, 2001 (5) Melbourne Quality Suites.................. 12.8 0.4 13.2 9.8% June 1, 1998 (1) Radisson Inn Sanibel Gateway................. 4.8 0.1 4.9 9.8% June 1, 1998 (1) -------- ----- ------- Total........... $ 138.7 $5.9 $144.6
36 43 - --------------- (1) Payable to an affiliate of Lehman Brothers Inc. (2) Incurred within the last twelve months; proceeds were used to refinance outstanding indebtedness. See Note 3 of the Initial Hotels Excluding Lake Norman Hotels Notes to Combined Financial Statements. (3) Payable to Boykin Management; matures based on cash flow. (4) Payable to certain Other Partners; matures based on cash flow. (5) Incurred within the last twelve months; proceeds were used to fund the acquisition of the Lake Norman hotels. See Notes 3 and 4 of the Lake Norman Hotels Notes to Combined Financial Statements. The $3.1 million indebtedness payable to Boykin Management will be paid to the Initial Lessee, as Boykin Management's successor. The Initial Lessee will use approximately $1.5 million of the amount paid to it to repay a third party lender, and will use the remaining balance to pay income taxes arising from the Formation Transactions or for working capital purposes. Robert and John Boykin are the sole beneficial owners of the Initial Lessee. DISTRIBUTION POLICY The Company intends to make regular quarterly distributions to holders of Common Shares initially equal to $0. per share, which on an annual basis would equal $ per share and would represent approximately 95% of the Company's pro forma Cash Available for Distribution for the twelve months ending June 30, 1996. The distribution for the period commencing on the completion of the Offering and ending September 30, 1996 is expected to be a pro rata portion of the initial quarterly distribution. The Company intends to maintain its initial dividend rate for the first 12 months following the completion of the Offering, unless actual results of operations, economic conditions or other factors differ from the assumptions used in its estimate. The Company does not expect to change its estimated dividend rate per share if the Underwriters' over-allotment option is exercised. For Federal income tax purposes, distributions paid to shareholders may consist of ordinary income, capital gains, nontaxable returns of capital, or a combination thereof. Aggregate distributions for the 12 months following the closing of the Offering are expected to be greater than 95% of the Company's REIT taxable income. The estimated minimum distribution required for the Company to maintain REIT status, based on the Company's estimated revenues less expenses for the 12 months ended June 30, 1996, is $13,500,000. Distributions in excess of earnings and profits generally will be treated as nontaxable return of capital and, therefore, will result in a reduction of a shareholder's basis in the Common Shares, to the extent thereof, and thereafter as taxable gain. Those distributions will have the effect of deferring taxation until the sale of the shareholder's Common Shares. The Company will provide its shareholders an annual statement as to its designation of the taxability of distributions. The Company estimates that approximately 90% of the annual distribution to holders of Common Shares for 1996 will represent a return of capital for Federal income tax purposes. The Company's expectation reflects, among other things, the effect of nonrecurring penalties to be incurred in connection with the prepayment of certain debt at the time of the Formation Transactions. The Company anticipates that substantially all of the distributions in respect of 1997 will be taxable as dividends. 37 44 The following table sets forth certain pro forma financial information for the Partnership for the twelve months ended June 30, 1996, which was used to establish the expected initial distribution per share.
TWELVE MONTHS ENDED JUNE 30, 1996 -------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Pro forma income before minority interest.................. $ 12,237 Depreciation............................................... 9,544 ---------- Pro forma Funds From Operations............................ $ 21,781 Additions to Capital Expenditures Fund..................... (3,492) ---------- Estimated Cash Available for Distribution(1)............... $ 18,289 ---------- Estimated initial annual distribution(2)................... $ Estimated initial annual distribution per share............ $ Estimated payout ratio of Cash Available for Distribution(3).......................................... 95% - --------------- (1) The amount of Cash Available for Distribution if the Partnership received only the Minimum Rent under the Percentage Leases is estimated to be $9,763. (2) Based on 7,875 Common Shares and 1,490 Units outstanding on completion of the Formation Transactions. Represents approximately 80% of Funds From Operations. Funds From Operations consists of income (loss) before minority interest (computed in accordance with generally accepted accounting principles) excluding gains (losses) from debt restructuring and sales of property (including furniture and equipment) plus real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures. Industry analysts consider Funds From Operations to be an appropriate measure of the performance of an equity REIT. Funds From Operations should not be considered as a basis for computing distributions or as an alternative (i) to net income or other measurements under generally accepted accounting principles, as an indicator of operating performance, or (ii) to cash flows from operating, investing, or financing activities, as a measure of liquidity. Funds From Operations does not reflect cash expenditures for capital improvements or principal amortization of indebtedness on the Initial Hotels. (3) Represents the anticipated initial aggregate annual distribution divided by estimated Cash Available for Distribution.
The primary source of proceeds to be used for distributions to shareholders is the Company's share of the rents due the Partnership pursuant to the Percentage Leases. The anticipated revenue may or may not be realized or collected. Accordingly, the statements set forth above with regard to distributions are forward-looking statements involving certain risks and uncertainties that could cause actual results to differ materially from those expressed in such statements. Important factors that could cause such different results include, but are not limited to, competition from other hotels, increases in operating costs, seasonality effects in hotel occupancy and revenues, and the potential loss of a franchise or liquor license in respect of any Initial Hotel or acquired hotel. See "Risk Factors." 38 45 CAPITALIZATION The following table sets forth as of June 30, 1996 (i) the historical combined capitalization of the Initial Hotels and (ii) the pro forma consolidated capitalization of the Company, as adjusted to give effect to the Formation Transactions and the use of the net proceeds as described under the caption "Use of Proceeds." The information set forth in the following table should be read in conjunction with the "Selected Financial Information," the pro forma consolidated financial statements of the Company, the historical combined financial statements of the Initial Hotels, and the discussion set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" included elsewhere in this Prospectus.
AS OF JUNE 30, 1996 ------------------------- INITIAL HOTELS COMPANY HISTORICAL PRO FORMA -------- ------------ (DOLLARS IN THOUSANDS) (UNAUDITED) Long-term debt............................................. $133,344 $ -- -------- ------------ Advances from partners..................................... 7,725 -- -------- ------------ Minority Interest(1)....................................... -- 18,906 -------- ------------ Shareholders' Equity/Partners' Deficit, Combined Initial Hotels................................................... (56,736) -- Preferred Shares, without par value, 5,000,000 shares authorized, none issued............................... -- -- Common Shares, without par value, 25,000,000 shares authorized, 7,875,000 shares issued and outstanding(2)........................................ -- -- Capital Surplus............................................ -- 106,815 Retained earnings(3)....................................... -- (6,818) -------- ---------- Total shareholders' equity (deficit)..................... (56,736) 99,997 -------- ---------- Total capitalization..................................... $ 84,333 $118,903 ======== ========== - --------------- (1) Assumes conversion of the Intercompany Convertible Note. (2) Excludes the exchange of 1,490,000 Units issued in the Formation Transactions for a like number of Common Shares. (3) Reflects estimated prepayment penalties and other fees of $4,508 on the anticipated repayment of long-term debt with a portion of the proceeds from the Offering, and the writeoff of deferred financing costs of $2,310.
39 46 DILUTION The expected initial public offering price per Common Share exceeds the pro forma net tangible book value per share. Therefore, the Boykin Group Affiliates who receive Units will realize an immediate increase in the net tangible book value of their Units, while purchasers of Common Shares sold in the Offering will realize an immediate and substantial dilution in the net tangible book value of their shares. Pro forma net tangible book value per share is determined by subtracting total liabilities from total tangible assets and dividing the remainder by the number of Common Shares and Units that will be outstanding after the Offering. The following table illustrates the dilution to purchasers of Common Shares sold in the Offering, based on an assumed initial public offering price of $22.00 per share. Assumed initial public offering price per Common Share(1)................................................. $22.00 Pro forma net tangible book value per share prior to the Offering(2).............................................. $(39.85) Increase in pro forma net tangible book value per Common Share and Unit attributable to purchases of Common Shares in the Offering.......................................... $ 52.55 ------- Pro forma net tangible book value per Common Share and Unit after the Offering and the Formation Transactions(3)..... $12.70 ------ Dilution per Common Share purchased in the Offering........ $ 9.30 ======
The following table sets forth (i) the number of Common Shares to be sold by the Company in the Offering, the total contributions to be paid to the Company by purchasers of Common Shares sold in the Offering (assuming an initial public offering price of $22.00 per share), the number of Common Shares outstanding and the number of Units to be issued in connection with the Formation Transactions; (ii) the net tangible book value as of June 30, 1996 of the assets contributed to the Company and the Partnership; and (iii) the net tangible book value of the average contribution per share and Unit based on total contributions.
SHARES ISSUED BY BOOK VALUE OF THE COMPANY TOTAL TANGIBLE AND UNITS ISSUED CONTRIBUTIONS TO TANGIBLE BOOK BY THE PARTNERSHIP THE COMPANY VALUE OF -------------------------- -------------------------- CONTRIBUTION NUMBER PERCENT AMOUNT PERCENT PER SHARE/UNIT -------------- ------- -------------- ------- -------------- (AMOUNTS IN THOUSANDS) Common Shares issued by the Company in the Offering......... 7,875 84.1% $173,250 145.7% $ 22.00(1) Units issued by the Partnership in the Formation Transactions...... 1,490 15.9% (59,380) (49.9%) $ (39.85)(4) Other............................. -- -- 5,033(5) 4.2% ------ ------- -------- ------- Total Common Shares and Units... 9,365 100% $118,903 100% $ 12.70 ====== ======= ======== ======= - --------------- (1) Before deducting underwriting discounts and estimated expenses of the Offering. (2) Pro forma net tangible book value prior to the Offering is determined by subtracting total liabilities from total tangible assets of the Initial Hotels divided by the total Units to be issued by the Partnership in the Formation Transactions. (3) Based on the total pro forma net tangible book value of the Company ($118,903) divided by the total Common Shares and Units outstanding after the Offering and Formation Transactions (9,365). Does not give effect to the 1,000 Common Shares issuable under the Company's Long Term Incentive Plan or to the Common Shares subject to the options covering 25 Common Shares to be granted to the Company's Independent Directors upon completion of the Offering. See "Management -- Long-Term Incentive Plan" and "-- Compensation of Directors." (4) Based on the net tangible book value of assets to be contributed to the Operating Partnership in the Formation Transactions.
40 47 (5) Represents the expenses of the Offering, net of the effects of the Formation Transactions. SELECTED FINANCIAL INFORMATION The following tables set forth (i) selected unaudited pro forma condensed consolidated financial information for the Company for the year ended December 31, 1995, and the twelve months ended June 30, 1996, and the six month periods ended June 30, 1995 and 1996; (ii) selected unaudited combined pro forma financial information for the Initial Lessee for the year ended December 31, 1995, the twelve months ended June 30, 1996, and the six month periods ended June 30, 1995 and 1996; (iii) selected combined historical financial and operating data of the Initial Hotels, which are presented as (a) the Initial Hotels (Excluding Lake Norman Hotels) for each of the years in the five-year period ended December 31, 1995, and the six months ended June 30, 1995 and 1996; and (b) selected combined historical financial and operating data of the Lake Norman Hotels for each of the years in the five-year period ended December 31, 1995 and the six months ended June 30, 1995 and 1996. The selected combined historical financial data for both the Initial Hotels (Excluding Lake Norman Hotels) and the Lake Norman Hotels for the three years ended December 31, 1995 have been derived from the historical financial statements audited by Arthur Andersen LLP, independent public accountants, whose reports with respect thereto are included elsewhere in this Prospectus. The selected combined historical financial data for each of the two years in the period ended December 31, 1992 are derived from unaudited financial statements. In the opinion of management, the unaudited financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information set forth therein. The pro forma statement of operations data is presented as if the Offering, the Formation Transactions, and the beginning of the relevant lease year had occurred on January 1, 1995 and, therefore, incorporates certain assumptions that are included in the Notes to the Pro Forma Condensed Consolidated Statements of Operations included elsewhere in this Prospectus. The pro forma operating information for the Initial Lessee is presented to reflect the pro forma operations of the Initial Lessee for the periods presented, which operations are the source of the Initial Lessee's Percentage Lease payments to the Partnership. The pro forma balance sheet data is presented as if the Formation Transactions had occurred on June 30, 1996. The following selected financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and all of the financial statements and notes thereto included elsewhere in this Prospectus. 41 48 BOYKIN LODGING COMPANY SELECTED PRO FORMA FINANCIAL DATA (1) (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
SIX MONTHS ENDED JUNE 30,(2) YEAR ENDED TWELVE MONTHS ------------------- DECEMBER 31, 1995(2) ENDED JUNE 30, 1996(2) 1995 1996 -------------------- ----------------------- ------- ------- OPERATING DATA: Percentage lease revenue(3)................ $ 25,521 $27,166 $12,277 $13,922 ------- ------- ------ ------ Depreciation................. 9,544 9,544 4,772 4,772 Real estate and personal property taxes, property and casualty insurance, and ground rent........... 3,893 3,935 1,973 2,015 General and administrative(4)......... 1,450 1,450 725 725 Minority interest(5)......... 1,691 1,946 764 1,019 ------- ------- ------ ------ Total expenses and minority interest.................. 16,578 16,875 8,234 8,531 ------- ------- ------ ------ Net income attributable to Common Shares............. $ 8,943 $10,291 $ 4,043 $ 5,391 ======= ======= ====== ====== Net income per Common Share.. $ 1.14 $ 1.31 $ .51 $ .68 Weighted average number of Common Shares outstanding............... 7,875 7,875 7,875 7,875 OTHER DATA: Funds From Operations(6)..... $ 20,178 $21,781 $ 9,579 $11,182 Additions to Capital Expenditures Fund(7)...... (3,373) (3,492) (1,654) (1,773) Cash Available for Distribution(8)........... 16,805 18,289 7,925 9,409 Distributions(9)............. Number of Common shares and Units outstanding......... 9,365 9,365 9,365 9,365
AT JUNE 30, 1996(2) ----------------------- BALANCE SHEET DATA: Investment in hotel properties, net......................... $ 115,990 Total assets................... 120,894 Total debt..................... -0- Minority interest in Partnership................. 18,906 Shareholders' equity........... 99,997
42 49 INITIAL LESSEE SELECTED PRO FORMA FINANCIAL DATA(1) (UNAUDITED, AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,(2) YEAR ENDED TWELVE MONTHS ----------------- DECEMBER 31, 1995(2) ENDED JUNE 30, 1996(2) 1995 1996 -------------------- ----------------------- ------- ------- OPERATING DATA: Room revenue....................... $ 54,785 $57,298 $27,398 $29,911 Food and beverage revenue.......... 23,643 23,980 11,711 12,048 Other revenue--Initial Hotels...... 4,643 4,760 2,237 2,354 ---------- ---------- ------- ------- Total revenues of Initial Hotels........................ 83,071 86,038 41,346 44,313 Other revenue--Initial Lessee...... 2,051 2,270 1,042 1,355 ---------- ---------- ------- ------- Total revenues.................. 85,122 88,308 42,388 45,668 ---------- ---------- ------- ------- Operating expenses................. 56,601 58,315 28,090 29,899 Cost of goods sold of Initial Lessee.......................... 1,254 1,438 511 756 Percentage Lease payments(3)....... 25,521 27,166 12,277 13,922 ---------- ---------- ------- ------- Total expenses.................. 83,376 86,919 40,878 44,577 ---------- ---------- ------- ------- Income before extraordinary items......................... $ 1,746 $ 1,389 $ 1,510 $ 1,091 ========== ========== ======= =======
AT JUNE 30, 1996(2) ----------------------- BALANCE SHEET DATA: Cash and cash equivalents.......... $ 3,833 Total assets....................... 11,429 Equity............................. 3,000
43 50 INITIAL HOTELS (EXCLUDING LAKE NORMAN HOTELS) SELECTED COMBINED HISTORICAL FINANCIAL DATA (UNAUDITED, AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,(2) JUNE 30,(2) ---------------------------------------------------- ------------------ 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- ------- -------- OPERATING DATA: Room revenue....................... $ 42,645 $ 45,200 $ 45,753 $ 48,652 $ 50,730 $25,631 $ 27,845 Food and beverage revenue.......... 21,791 22,514 22,357 22,811 22,984 11,411 11,763 Other revenue...................... 3,334 3,634 3,977 4,092 4,490 2,159 2,266 -------- -------- -------- -------- -------- ------- -------- Total revenues.............. 67,770 71,348 72,087 75,555 78,204 39,201 41,874 -------- -------- -------- -------- -------- ------- -------- Departmental and other expenses.... 51,321 52,248 53,242 53,967 54,629 27,161 28,864 Real estate and personal property taxes, insurance and rent........ 2,534 2,988 3,112 3,329 3,579 1,818 1,863 Depreciation and amortization...... 5,663 5,822 5,822 5,690 6,545 2,990 3,528 Interest expense................... 12,557 12,997 12,375 12,397 14,169 6,452 7,367 Gain on property insurance recovery......................... -- -- -- -- (670) -- -- -------- -------- -------- -------- -------- ------- -------- Income (loss) before extraordinary items.............................. (4,305) (2,707) (2,464) 172 (48) 780 252 Extraordinary item -- gain (loss) on early extinguishment of debt............................. -- -- -- -- 556 556 (1,315) -------- -------- -------- -------- -------- ------- -------- Net income (loss)........... $ (4,305) $ (2,707) $ (2,464) $ 172 $ 508 $ 1,336 $ (1,063) ========= ========= ========= ========= ========= ======== ========= BALANCE SHEET DATA: Investment in hotel properties, net.............................. $ 66,238 $ 62,497 $ 59,457 $ 58,527 $ 70,577 N/A $ 68,204 Total assets....................... 74,380 70,823 68,757 68,688 83,332 N/A 83,421 Mortgage notes payable............. 114,132 113,333 112,660 111,788 122,203 N/A 123,726 Total partners' deficit............ (61,256) (64,458) (66,795) (67,197) (56,260) N/A (57,192) CASH FLOW DATA: Net cash provided by operating activities....................... N/A N/A $ 3,723 $ 7,700 $ 7,175 $ 5,853 $ 3,326 Net cash used for investing activities....................... N/A N/A (2,771) (4,746) (4,244) (2,006) (1,546) Net cash used for financing activities....................... N/A N/A (635) (1,488) (4,018) (3,287) (842) OTHER DATA: EBITDA(10)......................... $ 13,915 $ 16,112 $ 15,733 $ 18,259 $ 19,996 $10,222 $ 11,147
44 51 LAKE NORMAN HOTELS SELECTED COMBINED HISTORICAL FINANCIAL DATA (UNAUDITED, AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30,(11) ---------------------------------------------------- ------------------- 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- -------- -------- OPERATING DATA: Room revenue...................... $ 2,643 $ 2,596 $ 2,764 $ 3,200 $ 3,764 $ 1,767 $ 2,066 Food and beverage revenue(12)..... 612 681 300 -- -- -- 223 Other revenue..................... 117 132 149 153 124 78 88 -------- -------- -------- -------- -------- -------- -------- Total revenues............. 3,372 3,409 3,213 3,353 3,888 1,845 2,377 -------- -------- -------- -------- -------- -------- -------- Departmental and other expenses... 2,485 2,605 2,224 2,096 2,437 1,244 1,580 Real estate and personal property taxes, insurance and rent....... 125 130 129 96 106 55 52 Depreciation and amortization..... 601 606 577 523 466 289 289 Interest expense.................. 507 401 289 326 415 759 759 -------- -------- -------- -------- -------- -------- -------- Net income (loss).......... $ (346) $ (333) $ (6) $ 312 $ 464 $ (502) $ (303) ========= ========= ========= ========= ========= ========= ========= BALANCE SHEET DATA: Investment in hotel properties, net............................. $ 7,268 $ 6,807 $ 6,276 $ 5,888 $ 5,739 N/A $ 9,438 Total assets...................... 7,803 7,218 6,846 6,452 6,229 N/A 10,465 Mortgage notes payable............ 6,050 5,860 5,595 5,318 5,057 N/A 9,618 Total partners' equity............ 1,372 988 982 894 938 N/A 456 CASH FLOW DATA: Net cash provided by (used for) operating activities............ N/A N/A $ 477 $ 804 $ 938 $ (54) $ 155 Net cash used for investing activities...................... N/A N/A (30) (129) (311) (247) (51) Net cash used for financing activities...................... N/A N/A (265) (677) (681) (43) (49) OTHER DATA: EBITDA(10)........................ $ 762 $ 674 $ 860 $ 1,161 $ 1,345 $ 546 $ 745 - --------------- 1. The pro forma information does not purport to represent what the Company's or the Initial Lessee's financial position or results of operations would actually have been if the consummation of the Formation Transactions had, in fact, occurred on such dates, or to project the Company's or the Initial Lessee's financial position or results of operations at any future date or for any future period. 2. Eight of the Initial Hotels utilize December 31 as year-end for financial reporting purposes and one of the Initial Hotels utilizes a September 30 fiscal year-end. For pro forma purposes, adjustments have been made to conform the year-ends of all the Initial Hotels to stated periods shown. For historical financial reporting purposes of the Initial Hotels (Excluding the Lake Norman Hotels), for the five years ended December 31, 1995, the September 30 financial data of the Initial Hotel having a September 30 fiscal year end have been combined with the December 31, 1995 financial data of the other Initial Hotels. For the twelve months ended June 30, 1996 and six month periods ended June 30, 1995 and 1996, the financial data of the hotel with the September 30 year end have been combined using the same month and periods as the other eight hotels. In the opinion of management, the impact of using the different interim period ends is not material. 3. Represents lease payments from the Initial Lessee to the Partnership calculated on a pro forma basis by applying the rent provisions in the Percentage Leases to the historical revenues of the Initial Hotels for the period indicated, including for the Melbourne Quality Suites Inn an additional $725 of rent for the year ended December 31, 1995 and the 12 months ended June 30, 1996 required under the rental interruption insurance provision of the Percentage Lease agreements. The rent formula utilized in computing the pro forma Percentage Lease revenue and expense includes, for the calendar year 1995, an adjustment to reduce the threshold revenue amounts in the Percentage Lease formulas by the 2.5% increase in the Consumer Price Index for that year.
45 52 4. Estimated at $1.45 million annually for salaries, professional fees, directors' and officers' insurance, directors' fees and expenses and other general and administrative expenses associated with being a public company. 5. Calculated as 15.9% of the income before minority interest. 6. Represents Funds From Operations of the Company, on a consolidated basis. The following table computes Funds From Operations for the twelve months ended June 30, 1996 under the newly adopted National Association of Real Estate Investment Trusts ("NAREIT") definition. Funds From Operations consists of income (loss) before minority interest (computed in accordance with generally accepted accounting principles) excluding gains (losses) from debt restructuring and sales of property (including furniture and equipment) plus real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures. Industry analysts consider Funds From Operations to be an appropriate measure of the performance of an equity REIT. Funds From Operations should not be considered as a basis for computing distributions or as an alternative (i) to net income or other measurements under generally accepted accounting principles, as an indicator of operating performance, or (ii) to cash flows from operating, investing, or financing activities, as a measure of liquidity. Funds From Operations does not reflect cash expenditures for capital improvements or principal amortization of indebtedness on the Initial Hotels.
TWELVE MONTHS ENDED JUNE 30, 1996 -------------------- Net income................................... $ 10,291 Minority interest............................ 1,946 Depreciation................................. 9,544 ---------- Funds From Operations........................ $ 21,781 ==========
7. Represents additions to the Capital Expenditures Fund calculated as 4% of total revenue of the Initial Hotels, adjusted for $1,261 additional revenues at the Melbourne Quality Suites for the year ended December 31, 1995 as required under the rental interruption insurance provision of the Percentage Leases. 8. Calculated as Funds From Operations less additions to the Capital Expenditures Fund. 9. Represents estimated initial dividends to be paid based on the initial dividend rate of $ per share and an aggregate of 9,365 Common Shares and Units outstanding. 10. Represents income (loss) before extraordinary items, excluding depreciation and amortization, interest expense, and gain on property insurance recovery. 11. The Summary Combined Historical Operating Data, Cash Flow Data and Other Data for the Lake Norman Hotels for the six month periods ended June 30, 1995 and 1996 are presented on a pro forma basis, making necessary pro forma adjustments to the historical operating results to reflect additional depreciation expense associated with the purchase accounting writeup to the investment in hotel properties, the additional interest expense associated with the acquisition indebtedness and an increase in management fee expense. 12. From August 1993 until February 1996, the catering, meeting, lounge and restaurant facilities of the Lake Norman Holiday Inn were operated by a third party operator. In February 1996, when a Boykin Group Affiliate purchased the hotel facility, it also purchased the food and beverage business assets of this operator. 46 53 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Upon completion of the Formation Transactions and the Offering, the Company will own an 84.1% interest in the Initial Hotels through its interest in the Partnership. In order for the Company to qualify as a REIT, neither the Company nor the Partnership can operate hotels. Therefore, the Partnership will lease the Initial Hotels to the Initial Lessee. The Partnership's, and therefore the Company's, principal sources of funds will be lease payments under the Percentage Leases. Percentage Rent will be based on the Initial Hotels' revenues, and the Initial Lessee's ability to make payments to the Partnership under the Percentage Leases will be dependent primarily on the Initial Lessee's ability to generate cash flow from the operation of the Initial Hotels. GENERAL Results of operations are best explained by three key performance indicators: Occupancy, ADR, and REVPAR. Increases in REVPAR attributable to increases in Occupancy are accompanied by increases in most categories of variable operating costs. Increases in REVPAR attributable to increases in ADR are accompanied by increases in limited categories of operating costs, such as management fees and license fees. PRO FORMA RESULTS OF OPERATIONS FOR THE CONSOLIDATED COMPANY The following table sets forth key indicators for all of the Initial Hotels combined and is useful in understanding the underlying changes in the percentage rent for the Company during the pro forma period of 1995 and the six months ended June 1996.
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, -------------------------- ---------------- KEY FACTORS 1993 1994 1995 1995 1996 ------------------------------------ ------ ------ ------ ------ ------ Occupancy........................... 72.6% 74.7% 74.9% 74.2% 76.8% ADR................................. $75.50 $79.27 $85.47 $84.82 $89.03 REVPAR.............................. $54.08 $59.24 $63.98 $62.93 $68.35
For the year ended December 31, 1995 the Company had pro forma revenues of $25.5 million from the Percentage Leases that would have been in place at the Initial Hotels. The pro forma revenues for the twelve months ended June 30, 1996 would have been $27.2 million. This 6.7% increase of $1.7 million is attributable to a 3.5% improvement in occupancy from 74.2% for the six months ended June 30, 1995 to 76.8% for the six months ended June 30, 1996, and a 5% improvement in ADR from $84.82 in the six months ended June 30, 1995 to $89.03 in the six months ended June 30, 1996. Pro forma expenses remained about the same as no significant changes have occurred during the six month period. RESULTS OF OPERATIONS OF THE INITIAL HOTELS (EXCLUDING LAKE NORMAN HOTELS) The following table sets forth certain combined historical financial information for the Initial Hotels (Excluding Lake Norman Hotels), as a percentage of revenues, for the periods indicated. 47 54
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ----------------------------- ------------------ FINANCIAL DATA 1993 1994 1995 1995 1996 ------------------------------- ------- ------- ------- ------- ------- Room revenue................... 63.5% 64.4% 64.9% 65.4% 66.5% Food and beverage revenue...... 31.0 30.2 29.4 29.1 28.1 Other revenue.................. 5.5 5.4 5.7 5.5 5.4 ------- ------- ------- ------- ------- Total revenue................ 100.0 100.0 100.0 100.0 100.0 Departmental and other expenses..................... 73.9 71.4 69.9 69.3 68.9 Real estate and personal property taxes, insurance and rent......................... 4.3 4.4 4.6 4.6 4.4 Depreciation and amortization................. 8.1 7.5 8.4 7.6 8.4 Interest expense............... 17.2 16.4 18.1 16.5 17.6 Gain on property insurance recovery..................... -- -- (.9) -- -- ------- ------- ------- ------- ------- Income (loss) before extraordinary items.......... (3.5) .3 (.1) 2.0 .7 Extraordinary item -- gain (loss) on early extinguishment of debt....... -- -- .7 1.4 (3.1) ------- ------- ------- ------- ------- Net income (loss).............. (3.5)% .3% .6% 3.4% (2.4)% ======= ======= ======= ======= ======= OTHER DATA(1) EBITDA, as a % of revenue...... 21.8% 24.2% 25.6% 26.1% 26.6% KEY FACTORS(2) Occupancy...................... 74.5% 75.2% 74.5% 73.8% 77.1% ADR............................ $ 77.59 $ 81.91 $ 88.07 $ 88.40 $ 91.56 REVPAR......................... $ 57.79 $ 61.59 $ 65.59 $ 65.30 $ 70.55 - --------------- (1) The Company believes that EBITDA, defined as net income before interest, depreciation, amortization, gain on property insurance recovery and extraordinary items, provides a good indicator of the financial performance of the Initial Hotels and will be a significant factor in determining the Initial Lessee's ability to make lease payments to the Partnership. Industry analysts generally consider this to be an appropriate measure of the performance of hotels. However, this indicator should not be considered as an alternative to net income as an indication of the Initial Lessee's performance or to cash flow as a measure of liquidity. (2) No assurance can be given that the trends reflected in this data will continue or that occupancy, ADR and REVPAR will not decrease as a result of changes in national or local economic or hospitality industry conditions.
Comparison of the six months ended June 30, 1996 with the six months ended June 30, 1995 Room revenues increased $2.2 million, or 8.6% from the six months ended June 30, 1995 to the same period in 1996. REVPAR increased from $65.30 in the six months ended June 30, 1995 to $70.55 for the same period in 1996, or a 8% increase. Room revenues were driven by both increases in ADR at all of the Initial Hotels (excluding Lake Norman Hotels), and occupancy which increased between the periods at six of the seven Initial Hotels (excluding Lake Norman Hotels). The occupancy growth is attributable to a continuation into 1996 of the strong demand experienced in the last half of 1995, particularly in the Ohio and California markets. Food and beverage revenue grew $.4 million or 3.1% from the six months ended June 30, 1995 compared to the same period in 1996. This is attributable to the growth in occupancy between the periods. 48 55 Departmental and other expenses grew by $1.7 million or 6.3% between the periods. This was caused primarily by the growth in occupancy, which is accompanied by increases in most categories of variable expenses. This is demonstrated by these costs remaining relatively unchanged as a percentage of revenues during both periods. In addition, management fees increased by $.2 million between the periods because of higher revenues and increases in the management fee rate implemented in the second quarter of 1995 at four of the hotels. Franchisor fees also increased by $.3 million between the periods because of revenue increases and contractually scheduled increases in the fee rate at two of the hotels. Depreciation and amortization expense increased by $.5 million or 18% primarily due to the additional depreciation on the property writeup recorded in May 1995 when the Melbourne, Berkeley, and Cleveland Airport hotels redeemed their respective partnership interests held by non-Boykin Group Affiliates and Boykin Group Affiliates were admitted as new partners, and the depreciation on new property additions. Interest expense increased by $.9 million or 14% due to the new mortgage debt incurred in May 1995 to finance the redemptions of the Melbourne, Berkeley and Cleveland Airport hotels' partnership interests and to refinance existing mortgage debt at the Fort Myers, Melbourne, Berkeley and Cleveland Airport hotels. The gain on early extinguishment of debt of $.6 million recorded in May 1995 related to the refinancing referred to above while the loss of $1.3 million on early extinguishment of debt in 1996 related to the refinancing of the mortgage debt of the Buffalo hotel. Net income was impacted most significantly by the change in the extraordinary items between the periods. In 1995 the Initial Hotels (excluding Lake Norman Hotels) recorded an extraordinary gain of $.6 million on refinancing while in 1996 the Buffalo hotel recorded an extraordinary loss of $1.3 million on its refinancing. EBITDA increased $.9 million or 9.0% from the six months ended June 1995 to the six months ended June 1996. This improvement is attributable to the increase in revenues of $2.7 million due to growth in occupancy during the periods, reduced by the corresponding increases in variable operating costs of $1.7 million in departmental and other expenses. Comparison of the year ended December 31, 1995 with 1994 Room revenues increased $2.1 million, or 4.3% from 1994 to 1995. As can be seen by the growth of REVPAR, revenues as reported were driven by increases in the ADR which occurred at almost all of the hotels, while occupancy declined .7% overall. This was attributable in part to the general improvement in the business travel and tourism industries. The continuation of the Boykin Group's focus on maximizing REVPAR by focusing on increasing ADR while maintaining stable occupancy during this period had a significant effect. Food and beverage revenue grew $.2 million or .8% from 1994 to 1995. This reflects the slight decline in occupancy offset by inflationary price increases in food and beverages. The composition of revenue stayed consistent between the periods, with only a slight decline in food revenues, from 30.2% of the total to 29.4%, reflecting that the gains in revenue occurred in room rates during this period. Total revenues increased $2.6 million, or 3.5%, from 1994 to 1995. This increase was in spite of the loss of an estimated $1.3 million in revenues arising from the damage to the Melbourne Quality Suites by Hurricane Erin in August 1995. The hurricane damage was covered by insurance, including business interruption insurance, so the net income of the combined hotels was not materially affected. Departmental and other expenses increased by $.7 million or 1.2% between the years because of general inflationary pressures which were offset by aggressive cost management and $1.3 million in estimated proceeds from the Melbourne business interruption insurance claims which were netted against operating expenses. These costs declined as a percentage of revenues from 71.4% in 1994 to 69.9% in 1995, due to the positive effect of revenues growing at a faster pace than expenses. In addition, management fees increased from 3.8% of revenues in 1994 to 4.2% of revenues in 1995 because of higher revenues and increases in the management fee rate implemented in the second quarter of 1995 at four of the hotels. Franchisor fees increased $.9 million, or 29.2%, between years primarily because 1994 contained a reduction in franchise fees of $.6 million from the forgiveness of accrued franchise fees at the Melbourne Quality Suites hotel that resulted from a renegotiation of the franchise agreement. This was offset by growth in fees as a result of 49 56 improved revenues and a contractually scheduled increase in the fee rate at the Columbus Marriott North. Real estate and personal property taxes, insurance and rent increased 7.5% from 1994 to 1995. This is primarily attributable to higher costs for insurance as the Boykin Group purchased improved coverage. The gain on property insurance recovery of $.7 million recorded in 1995 related to the excess of insurance proceeds over the net book value of assets replaced at the Melbourne Quality Suites due to the damage caused by Hurricane Erin in August 1995. Depreciation and amortization expense increased by $.9 million or 15% primarily due to the additional depreciation on the property writeup recorded in May 1995 when Melbourne, Berkeley and Cleveland Airport hotels redeemed their respective partnership interests held by non-Boykin Group Affiliates and Boykin Group Affiliates were admitted as new partners. Interest expense increased by $1.8 million or 15% due to the new mortgage debt incurred in May 1995 to finance the redemption of the Melbourne, Berkeley and Cleveland Airport hotels' partnership interests and to refinance existing mortgage debt at the Fort Myers, Melbourne, Berkeley and Cleveland Airport hotels. The gain on early extinguishment of debt of $.6 million recorded in May 1995 related to the refinancing referred to above. Net income improved $.3 million due to the improved ADR at most of the Initial Hotels (excluding Lake Norman Hotels), the benefit of the Melbourne property insurance settlement and the extraordinary gain on refinancing, all of which were partially offset by higher depreciation and interest costs resulting from the May 1995 redemption of partnership interests held by certain non-Boykin Group Affiliates. EBITDA grew $1.7 million or 19.5% from 1994 to 1995. This improvement is attributable to the increase in revenues due to growth in ADR during the periods which was partially offset by increases in franchise and management fees. Comparison of the year ended December 31, 1994 with 1993 Room revenues increased $2.9 million, or 6.3% from 1993 to 1994. This was primarily driven by increases in ADR at almost all of the Initial Hotels (excluding Lake Norman Hotels), while occupancy increased .7%. This was attributable to the general improvement in the business travel and tourism industries and lack of any new competition in the markets where the Initial Hotels (excluding Lake Norman Hotels) operate. Food and beverage revenue grew $.5 million or 2% from 1993 to 1994, relating to the slight increase in occupancy and inflationary price increases in food and beverages. The composition of revenue stayed consistent between the periods, with only a slight decline in food revenues, from 31.0% of the total to 30.2%, which reflects that most of the gains in revenue occurred in room rates during this period. Departmental and other expenses grew by $.7 million, or 1.4%, between the years because of general inflationary pressures, offset by aggressive cost management. These costs declined as a percentage of revenues from 73.9% in 1993 to 71.4% in 1994, as revenues grew faster than expenses. Expenses were also reduced in 1994 by $.6 million because of the forgiveness of accrued franchise fees at the Melbourne Quality Suites hotel that resulted from a renegotiation of the franchise agreement with the franchisor. Depreciation and amortization expense remained relatively constant between 1993 and 1994. Net income improved $2.6 million due to improved ADR and the benefit of the forgiveness of franchise fees at Melbourne, offset partially by higher departmental and other expenses. EBITDA grew $2.5 million or 16.1% from 1993 to 1994. This improvement is attributable to the increase in ADR during the periods and the forgiveness of accrued in franchise fees at Melbourne. LIQUIDITY AND CAPITAL RESOURCES The Company's principal source of cash to meet its cash requirements, including distributions to shareholders, will be its share of the Partnership's cash flow. The Partnership's principal source of revenue will be rent payments under the Percentage Leases. The Initial Lessee's obligations under the Percentage Leases are unsecured and the Initial Lessee's ability to make rent payments to the Partnership under the Percentage Leases, and the Company's liquidity, including its ability to make distributions to shareholders, will be 50 57 dependent on the Initial Lessee's ability to generate sufficient cash flow from the operation of the Initial Hotels. On consummation of the Offering and application of the net proceeds therefrom, the Company will have no outstanding debt. The Company intends to acquire and develop additional hotels and will incur indebtedness to fund that acquisition and development. The Company may also incur indebtedness to meet distribution requirements imposed on a REIT under the Code to the extent that working capital and cash flow from the Company's investments are insufficient to make the required distributions. The proposed terms of the $75 million Credit Facility permit borrowings for that purpose, but impose certain limitations on the Company's ability to engage in other borrowings. See "Policies and Objectives with Respect to Certain Activities -- Financing." The Company has obtained a commitment for the Credit Facility to assist it in funding its acquisition and development of additional hotels and for certain other business purposes. Borrowings under the Credit Facility are expected to be secured by first mortgages on several of the Initial Hotels and on any additional properties acquired or developed by the Company, subject to certain release provisions. If the Company and the Credit Facility lenders are unable to reach a definitive agreement with respect to the Credit Facility, the Company will seek a substitute credit facility with similar features. The Company may also seek to increase the amount of any credit facility, negotiate additional credit facilities, or issue debt instruments. Any debt incurred or issued by the Company may be secured or unsecured, long-term, medium-term or short-term, bear interest at a fixed or variable rate, and be subject to such other terms as the Board of Directors considers prudent. The Company will acquire or develop additional hotels only as suitable opportunities arise, and the Company will not undertake acquisition or development of properties unless adequate sources of financing are available. Funds for future acquisitions or development of hotels are expected to be derived, in whole or in part, from borrowings under the Credit Facility or other borrowings or from the proceeds of additional issuances of Common Shares or other securities. The Company has no agreement or understanding to invest in any properties other than the Initial Hotels, and there can be no assurance that the Company will successfully acquire or develop additional hotels. See "The Company -- Business Objectives and Strategies -- Acquisition Strategy." The Company will use $3.5 million of the net proceeds from the Offering as its initial contribution to the Capital Expenditures Fund. The Company will also contribute to the Capital Expenditures Fund on a continuing basis, from the rent paid under the Percentage Leases, an amount equal to 4% of the Initial Lessee's revenues from operation of the Initial Hotels. The Company intends to use the Capital Expenditures Fund for capital improvements to the Initial Hotels and refurbishment and replacement of FF&E, but may make other uses of amounts in the fund that it considers appropriate from time to time. The Company anticipates making similar arrangements with respect to future hotels that it may acquire or develop. During the period from January 1, 1993 through June 30, 1996, the Initial Hotels spent approximately $15 million for capital expenditures. The Company considers the majority of these improvements to be revenue producing and therefore these amounts have been capitalized and are being depreciated over their estimated useful lives. The Initial Hotels also spent $13.4 million during the period from January 1, 1993 through June 30, 1996 on repairs and maintenance and these amounts have been charged to expense as incurred. See "The Company -- Business Objectives and Strategies -- Renovation Strategy" for further discussion of capital expenditures at the Initial Hotels. INFLATION The Company's revenues initially will be based on the Percentage Leases, which will result in changes in the Company's revenues based on changes in the underlying Initial Hotel revenues. Therefore, the Company initially will be relying entirely on the performance of the Initial Hotels and the Initial Lessee's ability to increase revenues to keep pace with inflation. Operators of hotels in general, and the Initial Lessee, can change room rates quickly, but competitive pressures may limit the Initial Lessee's ability to raise rates faster than inflation. The compound annual growth rate of ADR on the Initial Hotels for the five years ended December 31, 1995 was 3.0%, or about the rate of inflation in the Consumer Price Index. According to industry statistics, industry-wide annual increases in ADR have failed to keep pace with inflation since 1987. 51 58 The Company's largest fixed expense is the depreciation of the investment in hotel properties. The Company's variable expenses, which are subject to inflation, represent approximately 20.0% of pro forma revenues. These variable expenses (general & administrative costs as well as real estate and personal taxes, property and casualty insurance and ground rent) are expected to grow with the general rate of inflation. SEASONALITY The Initial Hotels' operations historically have been seasonal. Seven of the Initial Hotels maintain higher occupancy rates during the second and third quarters. The two Florida Initial Hotels experience their highest occupancy in the first quarter. This seasonality pattern can be expected to cause fluctuations in the Company's quarterly lease revenue under the Percentage Leases. The Company anticipates that its cash flow from the Initial Lessee's operation of the Initial Hotels will be sufficient to enable the Company to make quarterly distributions at the estimated initial rate for at least the next twelve months. To the extent that cash flow from operations is insufficient during any quarter, because of temporary or seasonal fluctuations in lease revenue, the Company expects to utilize other cash on hand or borrowings to make those distributions. See "Business and Properties -- Business Strategy -- Financing Strategy.") No assurance can be given that the Company will make distributions in the future at the initially estimated rate, or at all. 52 59 BUSINESS AND PROPERTIES THE HOTEL INDUSTRY The hotel industry is currently benefiting from an increase in room demand which outpaces the growth in supply. According to the Kenneth Leventhal Real Estate Group of Ernst & Young LLP, industry-wide room demand increased between 3.0% and 4.7% each year from 1992 through 1995, while the supply of new rooms increased between 1.0% and 1.4% annually during that period. As might be expected in such a supply/demand environment, occupancies and ADR have increased each year during the period and are projected to increase in 1996. Occupancy rose from 62% industry-wide in 1992 to a projected 66% in 1995. As shown in the following chart from Kenneth Leventhal's 1996 National Lodging Forecast (the "1996 Forecast") Kenneth Leventhal projects industry-wide occupancy to grow to 67% in 1996 and to increase to 68% by year-end 1997. See the chart set forth under "The Company" for a comparison of the occupancy, ADR and REVPAR for the Initial Hotels to that of their local markets (including the Initial Hotels and their local competing hotels as defined by the Company), all U.S. upscale/moderate full service hotels, and all U.S. hotels. U. S. HOTEL OCCUPANCY HISTORIC AND PROJECTED [GRAPHIC]
MEASUREMENT PERIOD (FISCAL YEAR COVERED) PERCENTAGE OF OCCUPANCY 1990 62 1991 61 1992 62 1993 63 1994 65 1995 66 1996 67 1997 68
SOURCE: SMITH TRAVEL RESEARCH (1990-1994); E&Y KENNETH LEVENTHAL REAL ESTATE GROUP (1995-1997) Industry-wide ADR grew from $60 to $66 during the period 1992 through 1995, and, as shown in the following chart from the 1996 Forecast, ADR is projected to increase 4.5% to $69 in 1996 and 4.3% to $72 in 1997. U. S. HOTEL AVERAGE DAILY RATE HISTORIC AND PROJECTED [GRAPHIC]
MEASUREMENT PERIOD (FISCAL YEAR COVERED) $ AVERAGE DAILY RATE 1990 58 1991 59 1992 60 1993 61 1994 64 1995 66 1996 69 1997 72
SOURCE: SMITH TRAVEL RESEARCH (1990-1994); E&Y KENNETH LEVENTHAL REAL ESTATE GROUP (1995-1997) 53 60 THE INITIAL HOTELS The following table sets forth certain information with respect to each of the Initial Hotels:
NUMBER NUMBER OF NUMBER OF RESTAURANTS/ OF PARKING LOUNGES/ FITNESS GIFT PROPERTY ROOMS SPACES PROPERTY DESCRIPTION POOL BARS MEETING ROOM CENTER POOL SHOP - ----------------------------- ------ ------ -------------------------- ------------ ---------------- ------- ---- ---- Berkeley Marina Marriott 373 539 Three 3-story buildings 1/1/0 11,000 sq. ft, Yes Yes Yes and one 4-story building. including 5,100 sq. ft. ballroom Buffalo Marriott 356 637 One 10-story tower. 1/1/1 11,500 sq. ft. Yes Yes Yes Cleveland Airport Marriott 375 600 Two 4-story room wings and 2/1/0 11,600 sq. ft. Yes Yes Yes one 9-story guest room including 4,900 tower. sq. ft. ballroom Cleveland Marriott East 403 840 Two 7-story guest room 1/1/0 14,400 sq. ft. Yes Yes Yes wings, one 4-story guest including 6,864 room wing. sq. ft. ballroom Columbus North Marriott 300 694 One 9-story tower and one 1/1/0 14,000 sq. ft. Yes Yes Yes 3-story guest room wing. including 7,500 sq. ft. ballroom Lake Norman Hampton Inn 117 134 One 5-story building. 0/0/0 900 sq. ft. Yes Yes No Lake Norman Holiday Inn 119 195 One 2-story building. 1/1/0 2,300 sq. Yes Yes No Melbourne Quality Suites 208 295 Two 9-story guest towers. 1/1/1 1,584 sq. ft. Yes Yes Yes Radisson Inn Sanibel Gateway 157 160 Two 3-story guest 1/1/1 480 sq. ft. No Yes Yes buildings. OTHER PROPERTY AMENITIES - ----------------------------- -------------------------- Berkeley Marina Marriott Concierge Buffalo Marriott Car rental desk; shoe shine stand; concierge; game room Cleveland Airport Marriott Concierge; auto rental Cleveland Marriott East Concierge; auto rental Columbus North Marriott Concierge Lake Norman Hampton Inn Free continental breakfast Lake Norman Holiday Inn Free continental breakfast Melbourne Quality Suites Beach; game room Radisson Inn Sanibel Gateway Beach access; game room
54 61 GENERAL. Each of the Initial Hotels is under the direction of a general manager and an executive committee, which are accountable for and are compensated in part based on the property's performance. This group oversees day-to-day operations and develops annual budgets and marketing, long-term capital, and human resource development plans. Each Initial Hotel is responsible for developing its own marketing plan. These plans are comprehensive, analyzing local market conditions and the hotel's competition, determining hotel positioning, identifying consumer needs, and outlining marketing objectives and strategies. Each plan will continue to be evaluated quarterly by the Initial Lessee to maintain effectiveness under changing market conditions. The Initial Lessee stresses first-rate financial management and comprehensive revenue reporting and believes its management team is skilled at anticipating business needs and changes to maintain competitiveness in its markets. All hotel departments, including rooms, food & beverage, accounting, sales and marketing, engineering and human resources, will continue to receive regular on-site performance reviews and have open lines of communication directly to the Initial Lessee's management. These performance reviews will enable the Initial Lessee to maintain an in-depth understanding of each hotel's marketing opportunities and insure that the Company's properties receive direction to enable on-site management to maximize profits. The following discussion sets forth additional information for each Initial Hotel. Additional statistical data concerning capital expenditures at each of the Initial Hotels during the fiscal years 1991 through 1995 is set forth in the chart under the heading "The Company -- Business Objectives and Strategies -- Renovation Strategy." Information concerning the indebtedness associated with the Initial Hotels and the payment thereof in connection with the Offering is set forth under "Use of Proceeds." The information set forth below comparing each Initial Hotel to its local competition is based on reports obtained from Smith Travel Research, which is not associated in any way with the Company or any of its Affiliates and has not provided any form of assistance in connection with and the Offering. Each Initial Hotel's Local Competition includes four to seven competitors in its market, as currently defined by Boykin Management for property and personnel performance evaluation purposes and used for all periods referred to. Boykin Management's consistently-applied criteria for defining each hotel's competitive set include comparability of location, target customers, rates, and level of service provided. The composition of a hotel's competitive set changes from time to time as competitors enter or exit the market or as comparative information for competitors becomes unavailable. BERKELEY MARINA MARRIOT. This 373-room waterfront hotel is on the east side of San Francisco Bay in the Berkeley Marina Complex. The hotel is in a secluded area approximately 20 minutes from downtown San Francisco and 30 minutes from San Francisco International Airport. The hotel is located near the Golden Gate Bridge, Fisherman's Wharf and the Napa/Sonoma wine country. The University of California at Berkeley is three miles away. Approximately 60% of the guests are business travelers. The primary business travelers are employed by Sybase, Chevron, University of California at Berkeley, Kaiser, and AT&T. Tourist travel accounts for approximately 40% of the hotel's business and is based on nearby tourist destinations and the hotel's marina location. Group travel, which accounts for about 25% of the hotel's business and tourist travel, is primarily related to professional and amateur sports, entertainment and educational groups. The property has been owned and managed by the Boykin Group as a Marriott since its opening in 1972. The property was expanded to its current size in 1985. The hotel has approximately 11,000 square feet of flexible meeting and banquet space, which can be divided into 14 rooms. In addition, there are seven executive suites that can accommodate smaller conferences. The hotel also has a 300-seat restaurant and a lounge and has 700 feet of dock space in the Berkeley Marina Complex that is leased to Hornblower Dining Yachts. Areas budgeted for renovation during the next 12 months include additional guest rooms, the hotel's conference center, and certain structural improvements and equipment upgrades. The land underlying this hotel is leased under a ground lease that expires in 2033 but can be extended by the tenant to 2051. The rent payable under the lease includes annual minimum rent of $100,000 and percentage rent based on the hotel's revenues. The tenant is responsible for all taxes, maintenance and insurance on the leased property. See note 8 to the Combined Financial Statements for the Initial Hotels 55 62 (Excluding Lake Norman Hotels) for the year ended December 31, 1995, for further information concerning the lease. This hotel's average occupancy, ADR and REVPAR for the years 1991 through 1995 exceeded the aggregate average occupancy, ADR and REVPAR of its local competition during that period by 8.0%, 11.6% and 20.5%, respectively. BUFFALO MARRIOTT. This 356-room hotel is the only full-service Marriott hotel in the greater Buffalo Metropolitan area. Located just off Interstate 290 in the growing suburb of Amherst, the hotel is adjacent to the State University of New York at Buffalo and is approximately 15 minutes from downtown Buffalo, 30 minutes from Niagara Falls, and 10 minutes from the Greater Buffalo International Airport. Approximately 70% of the guests are business travelers. The primary business travelers are employed by General Motors, NYNEX, Citicorp, Dupont and the State University of New York. Group travel, which accounts for approximately 18% of the hotel's business, is generated by sports and social-related activities. The property has been owned and managed by the Boykin Group as a Marriott since opening in 1981. The hotel has approximately 11,500 square feet of flexible meeting and banquet space, which can be divided into 11 rooms. In addition, there are six executive suites that can accommodate smaller conferences. The hotel also has a 250-seat restaurant and a lounge. The property had approximately 200 rooms renovated, at an estimated cost of $1.0 million, in 1995. The hotel's design will accommodate a 2,500 square foot ballroom expansion and the addition of up to 100 guest rooms. Improvements and renovations budgeted for the next 12 months include installation of a business center, renovation of the hotel's restaurant, guest room HVAC and bedding replacements, and miscellaneous equipment items. This hotel's average occupancy, ADR and REVPAR for the years 1991 through 1995 exceeded the aggregate average occupancy, ADR and REVPAR of its local competition during that period by 9.2%, 17.5% and 28.4%, respectively. CLEVELAND AIRPORT MARRIOTT. This 375-room hotel is located in Cleveland, Ohio on Interstate 71 approximately eight miles from downtown Cleveland and two miles from Cleveland Hopkins International Airport. Approximately 42% of the guests are business travelers. The primary business traveler guests are employed by PPG Industries, American Greetings, General Electric, Marriott Corporation, Ford Motor Company, and certain others. Group travel, which accounts for approximately 25% of the hotel's business, is primarily related to professional sports and entertainment and educational groups. Tourist travel accounts for approximately 33% of the hotel's business and is based on nearby tourist attractions such as the Cleveland Zoo and Rainforest, NASA Lewis Research Center, the Rock & Roll Hall of Fame, Jacobs Field, the home of the Cleveland Indians baseball team, and Gund Arena, the home of the Cleveland Cavaliers basketball team. The hotel is also expected to benefit from the contemplated expansion of the airport, the development of Science Parkway (adjacent to NASA), and continued usage of the nearby International Exposition Center, which houses the largest meeting facility under one roof in the world. The property was developed by the Boykin Group and has been managed by it since its opening in 1970. In 1974, the property was expanded to 375 guest rooms, and meeting space, a ballroom and a second restaurant were added. The hotel has approximately 11,600 square feet of flexible meeting and banquet space, which can be divided into 14 rooms. In addition there are four executive suites that can accommodate smaller conferences. The hotel also has a lounge. As part of an ongoing program, approximately $2.6 million has been spent over the last five years on improvement and renovation of this hotel. Areas budgeted for renovation during the next 12 months include certain meeting rooms, exterior lot lighting, guest room bathroom floors and miscellaneous equipment. This hotel's average occupancy, ADR and REVPAR for the years 1991 through 1995 exceeded the aggregate average occupancy, ADR and REVPAR of its local competition during that period by 1.6%, 14.3% and 15.7%, respectively. CLEVELAND MARRIOTT EAST. This 403-room hotel is located in Beachwood, Ohio, a suburb of Cleveland, just off Interstate 271. The hotel adjoins commercial office development and is approximately 20 minutes from downtown Cleveland and 30 minutes from the Cleveland Hopkins International Airport. Approximately 80% 56 63 of the guests are business travelers. The primary business travelers are employed by Swagelok, Allen Bradley, General Electric, TRW, Progressive Insurance, Picker International and Master Builders. Group travel accounts for approximately 20% of the hotel's business. The hotel is also adjacent to the planned 650-acre Chagrin Highlands research-office park development. The property has been owned and managed by the Boykin Group as a Marriott since its opening in 1977. The hotel has approximately 14,400 square feet of flexible meeting and banquet space, which can be divided into as many as 17 rooms. In addition, there are eight executive suites that can accommodate smaller conferences. The hotel also has a 200-seat restaurant and a lounge. As part of an ongoing program, approximately $2.6 million has been spent over the last five years on improvement and renovation of this hotel, including a substantial lobby renovation. Areas budgeted for renovation and improvement during the next 12 months include the restaurant and ballroom, guest room corridor carpeting, guest elevators and certain exterior maintenance items. While this hotel's average occupancy for the years 1991 through 1995 trailed the aggregate average occupancy of its local competition during that period by 2.8%, the hotel's average ADR and REVPAR for that period exceeded the aggregate average ADR and REVPAR of that competitive set during that period by 4.4% and 1.5%, respectively. COLUMBUS NORTH MARRIOTT. This 300-room hotel is located in Columbus, Ohio, just off Interstate 71 and near Interstate 270. The hotel is the only full-service Marriott Hotel in Columbus, and is approximately 20 minutes from downtown Columbus, 20 minutes from Ohio State University and 20 minutes from the Port Columbus International Airport. Approximately 70% of the guests are business travelers. The primary business travelers are employed by American Express, Honda, Banc One, Borden, General Electric, AT&T and IBM. Group travel, which accounts for 30% of the hotel's business, is primarily related to convention and business groups. The property has been owned and managed by the Boykin Group as a Marriott since its opening in 1981. The hotel has approximately 14,000 square of flexible meeting and banquet space, which can be divided into 13 rooms. In addition, there are ten executive suites that can accommodate smaller conferences. The hotel also has a 200-seat restaurant and a lounge. A $2.5 million renovation of the hotel's guest rooms, lobby and lounge was completed in 1994. Items budgeted for capital expenditures during the next 12 months include renovation of the restaurant and certain guest rooms, installation of fire sprinklers, replacement of the hotel's parking lot, and certain exterior maintenance items. The hotel's management is evaluating expansion of the ballroom by 2,500 square feet and an addition of up to 100 guest rooms, but no decision has been made regarding either opportunity. This hotel's average occupancy, ADR and REVPAR for the years 1991 through 1995 exceeded the aggregate average occupancy, ADR and REVPAR of its local competition during that period by .1%, 8.5% and 8.6%, respectively. LAKE NORMAN HAMPTON INN. This 117-room limited-service hotel, which was built in 1991, is located in Lake Norman, North Carolina at the southeast corner of the intersection of Interstate 77 North, Exit 28 and North Carolina Highway 73. See "Business and Property -- The Initial Hotels -- Lake Norman Holiday Inn," for a description of this hotel's location and sources of room demand. The hotel has one meeting room. In 1995 the property underwent a soft goods renovation and improvement. Improvements budgeted for the next 12 months include replacement of lobby furniture and area rugs and guest room furniture and televisions. The Boykin Group acquired this hotel in February 1996, and the competitive data available to the Company does not cover the period 1991 through 1993. While this hotel's average occupancy for the years 1994 and 1995 exceeded the aggregate average occupancy of its local competition during those years by 3.7%, the hotel's average ADR and REVPAR for those years trailed the aggregate average ADR and REVPAR of that competitive set for those years by 4.2% and .8%, respectively. 57 64 LAKE NORMAN HOLIDAY INN. This 119-room hotel is located in Lake Norman, North Carolina at the northeast corner of the intersection of Interstate 77 North, Exit 28 and North Carolina Highway 73. Charlotte, North Carolina is 19 miles to the south. Lake Norman is an upscale community located approximately five miles south of downtown Mooresville, North Carolina and just southeast of Lake Norman, one of North Carolina's most widely-used recreational lakes, offering boating, swimming, and nearby golf facilities. About 30% to 40% of the demand results from leisure travel. Approximately 60% to 70% of the area's hotel market is represented by the commercial segment, which includes government, social, military, educational, religious and fraternal groups. Commercial sources of room demand include Duke Power, Ingersol Rand, Matsushita, Muratec/Murata, Widemann, Polymerland, Nautilus, Trans Industries and Westinghouse. This hotel has three banquet and meeting rooms. In 1994 and 1995 the property underwent a soft goods renovation and improvement. Areas budgeted for renovation and improvement during the next 12 months include banquet meeting room, restaurant and guest room renovations and installation of certain exterior lighting. The Boykin Group acquired this hotel in February 1996 and the competitive data available to the Company does not cover the period 1991 through 1993. While this hotel's average occupancy for the years 1994 and 1995 trailed the aggregate average occupancy of its local competition by .1% during those years, the hotel's average ADR and room REVPAR for those years exceeded the aggregate average ADR and REVPAR of that competitive set for those years by 11.9% and 11.5%, respectively. MELBOURNE QUALITY SUITES. This 208-suite oceanfront hotel is located in Indialantic, Florida, on the beach off Florida's coastal highway A1A, approximately 20 miles south of Kennedy Space Center and 65 miles southeast of Disney World. The hotel, which received a Gold Hospitality Award from Choice Hotels in 1994, is approximately ten miles from Melbourne International Airport. Approximately 25% of the guests are tourist or vacation travelers attracted by popular destinations such as Disney World, Universal Studios and Sea World. Approximately 20% of the guests are business travelers. The primary business travelers are employed by Harris Corporation, the Department of Defense, and certain aerospace companies. Group travel, which represents 55% of the hotel's business, is primarily related to government and military travel. This property has been owned and managed by the Boykin Group as a Quality Suites hotel since its opening in 1986. The hotel has approximately 1,584 square feet of flexible meeting and banquet space, which can be divided into two rooms. In addition, there are three executive suites that can accommodate smaller conferences. The hotel also has a 128-seat restaurant and a lounge. The property has recently undergone a substantial renovation after being temporarily closed as a result of damage caused by Hurricane Erin in August 1995. Capital improvements budgeted for the next 12 months include installation of a new lounge, conversion of the existing lounge into meeting rooms, certain guest room conversions, and replacement of guest room televisions. This hotel's average occupancy, ADR and REVPAR for the years 1991 through 1995 exceeded the aggregate average occupancy, ADR and REVPAR of its local competition during that period by 7.2%, 13.9% and 22.7%, respectively. RADISSON INN SANIBEL GATEWAY. This 157-room hotel, located in Fort Myers, Florida, is 15 miles from I-75, and seven miles off U.S. Highway 41. The hotel, which was a President's Award recipient (awarded to the top 10% of Radisson Hotels based on measures established by Radisson) in 1993, 1994 and 1995, is two and one-half miles from Sanibel Island and four and one-half miles from Ft. Myers Beach. It is 25 minutes from the New Southwest Florida Airport and 15 minutes from the Boston Red Sox and Minnesota Twins spring training complexes. Approximately 80% of the guests are tourists and vacationers. Group travel accounts for 14% of the hotel's business. The property has been owned and managed by the Boykin Group since its opening in 1986. The hotel has approximately 865 square feet of flexible meeting and banquet space, a 90-seat restaurant and a lounge. Improvements budgeted for the next 12 months include installation of guest room wall coatings, replacement of guest room bathroom wall coverings and flooring, and certain guest room furniture and equipment upgrades. This hotel's average occupancy, ADR and REVPAR for the years 1991 through 1995 exceeded the aggregate average occupancy, ADR and REVPAR of its local competition during that period by 6.5%, 3.3% and 9.8%, respectively. 58 65 THE PERCENTAGE LEASES Each of the Initial Hotels will be leased by the Partnership to the Initial Lessee. The following table sets forth (i) the Percentage Rent formulas, (ii) the annual Minimum Rent, and (iii) the pro forma Percentage Rent and total Rent that would have been paid for each Initial Hotel pursuant to the terms of the Percentage Leases based upon pro forma revenues for the twelve months ended June 30, 1996 as if the Partnership had owned the Initial Hotels and the Percentage Leases had been in effect since January 1, 1995 (dollar amounts in thousands).
FOR THE TWELVE MONTHS ENDED JUNE 30, 1996 FOOD & --------- FRANCHISE BEVERAGE PRO FORMA LEASE RENEWAL ANNUAL PERCENTAGE ROOMS & EXPIRATION EXPIRATION MINIMUM ROOMS & OTHER PERCENTAGE RENT OTHER HOTEL DATE DATE RENT RENT FORMULA(1) FORMULA(1) REVENUE - ------------------- ---------- ---------- --------- --------------------------- ---------- --------- Berkeley 12/31/00 10/31/97 $ 5,200 35% from $0 to $8,391 6% $12,692 Marina 50% from $8,391 to $11,188 Marriott 75% over $11,188 Buffalo 3/26/04 3/26/04 2,570 31% from $0 to $5,731 6% 9,830 Marriott 45% from $5,731 to $8,597 70% over $8,597 Cleveland 4/1/02 4/1/02 2,740 33% from $0 to $6,832 6% 9,928 Airport 52.5% from $6,832 to $8,784 Marriott 70% over $8,784 Cleveland 10/7/01 10/7/01 3,020 32% from $0 to $7,566 6% 10,985 Marriott 50% from $7,566 to $9,728 East 70% over $9,728 Columbus 12/31/06 9/4/14 1,970 30% from $0 to $5,282 6% 7,639 North 45% from $5,282 to $6,791 Marriott 70% over $6,791 Lake Norman 12/31/06 4/11/10 520 30% from $0 to $1,110 6% 1,998 Hampton Inn 45% from $1,110 to $1,737 65% over $1,737 Lake Norman 2/8/06 2/8/06 580 30% from $0 to $1,512 6% 2,199 Holiday Inn 50% $1,512 to $1,944 75% over $1,944 Melbourne 12/31/06 12/31/06(3) 1,300 35% from $0 to $3,336 6% 4,779(4) Quality Suites 50% from $3,336 to $4,290 75% over $4,290 Radisson Inn 12/31/06 12/31/09 740 25% from $0 to $1,875 6% 3,155 Sanibel 45% from $1,875 to $2,813 Gateway 65% over $2,813 --------- --------- Total $18,640 $63,205 ========= ========= PRO FORMA FOOD & BEVERAGE PRO FORMA HOTEL REVENUE ANNUAL RENT(2) - ------------------- --------- -------------- Berkeley $ 5,343 $ 5,833 Marina Marriott Buffalo 4,475 4,234 Marriott Cleveland 3,985 4,355 Airport Marriott Cleveland 4,924 4,717 Marriott East Columbus 3,818 3,117 North Marriott Lake Norman 0 792 Hampton Inn Lake Norman 585 906 Holiday Inn Melbourne 493(4) 2,060 Quality Suites Radisson Inn 471 1,152 Sanibel Gateway --------- ------- Total $24,094 $ 27,166 ========= ==============
- --------------- (1) Shown as a percentage of revenues. (2) Calculated on a pro forma basis by applying the rent provisions in the Percentage Leases to pro forma revenues of the Initial Hotels for the twelve month period as if January 1, 1995 was the beginning of the lease year. The rent formula utilized in computing the pro forma Percentage Lease revenue and expense includes for the calendar year 1995 an adjustment to reduce the threshold revenue amounts in the Percentage Lease formulas by the 2.5% increase in the Consumer Price Index for that year. (3) Both the Initial Lessee and Choice Hotels International, Inc. may terminate the franchise effective December 31, 1996 and December 31, 2001, upon three months prior notice. (4) Includes $1,147 of Rooms and Other Revenue and $114 of Food and Beverage Revenue, as required under the rental interruption insurance provision of the Percentage Lease agreements. 59 66 At the inception of the Company, each Initial Hotel will be separately leased by the Company to the Initial Lessee under a Percentage Lease. Hotels acquired in the future may be leased to the Initial Lessee or other lessees and it is possible, though not presently intended, that the Initial Hotels may also be leased to others or sold in the future. Each Percentage Lease contains the provisions described below. The Company expects that leases with respect to its future hotel property investments will contain substantially similar provisions, although the Board of Directors may, in its discretion, alter any of these provisions with respect to any particular lease, depending on the purchase price paid, economic conditions and other factors it considers relevant. The following summary of the material terms of the Percentage Leases is qualified in its entirety by reference to the form of Percentage Lease, which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. Duration. The Percentage Leases will have noncancelable terms ranging from four to 10 years, subject to earlier termination on the occurrence of certain contingencies described in the Percentage Leases (including, particularly, the provisions described herein under "Damage to Hotels," "Condemnation of Hotel" and "Termination of Percentage Leases on Disposition of the Hotels"). The Percentage Leases do not contain renewal terms. The Percentage Leases for seven of the Initial Hotels expire on the earlier of the franchise renewal date or the tenth anniversary of the Offering. Having these lease terminations coincide with franchise renewal dates may facilitate any necessary repositioning of the hotels at the time of the franchise renewals. In addition, having staggered lease termination dates will enable the Company to deal with lease and franchise renewal issues on a more deliberate basis than would be the case if all of the leases expired simultaneously. Amounts Payable Under the Percentage Leases. The Initial Lessee will be obligated to pay (i) the higher of Minimum Rent or Percentage Rent; and (ii) certain other amounts, including interest accrued on any late payment or charge (the "Additional Charges"). Minimum Rent is a fixed amount determined by negotiation between the Company and the Initial Lessee. Percentage Rent is calculated by multiplying fixed percentages by gross room and other revenue, and gross food and beverage revenue, over specified threshold amounts. Minimum Rent is payable monthly in advance, and Percentage Rent is payable for each quarter within 30 days after the end of the quarter. Both the threshold gross room and other revenue amounts used in computing Percentage Rent and Minimum Rent will be adjusted for changes in the Consumer Price Index. The changes will be calculated at the beginning of each calendar year beginning with 1997, based on the average annual change in the CPI during the prior 12 months. Each Percentage Lease requires the Initial Lessee to pay rent, all costs and expenses, and all utility and other charges incurred in the operation of the hotel. All capital expenditures (as defined in the lease) will be the responsibility of the Company. Each Percentage Lease also provides for rent reductions and abatements in the event of damage or destruction or a partial taking of the hotel as described under "Damage to Initial Hotels" and "Condemnation of Initial Hotels." The Initial Lessee will be required to carry insurance to cover rental interruption for a period up to one year. Maintenance and Modifications. The Initial Lessee will be required, at its expense, to maintain the hotel in good order and repair, except for ordinary wear and tear, and to make nonstructural, foreseen and unforeseen, and ordinary and extraordinary, repairs which may be necessary and appropriate to keep the hotel in good order and repair. The Company will fund capital expenditures and the repair, replacement and refurbishment of FF&E in the hotel, when and as considered necessary by the Company as required by the Franchises, and will maintain the Capital Expenditures Fund to help provide funds to cover such expenses. See "The Company -- Business Objectives and Strategies -- Renovation Strategy." The Company will make an annual contribution to the Capital Expenditures Fund in an amount equal to 4% of the Initial Lessee's aggregate gross revenues generated from the hotel. The Company and the Initial Lessee will agree on an annual capital budget for each Initial Hotel. The Initial Lessee, at its expense, may make noncapital and capital additions, modifications or improvements to the hotel, so long as doing so does not significantly alter the character or purposes of the hotel or significantly detract from its value or operating efficiencies. All such alterations, replacements and improvements will be subject to all of the terms of the Percentage Lease and will become the property of the 60 67 Company on termination of the lease. The Company will own the FF&E, except in limited circumstances under which the Initial Lessee may purchase certain FF&E and the Initial Lessee will own substantially all other personal property not affixed to, or considered a part of, the real estate or improvements thereon. Any purchase of FF&E by the Initial Lessee will be made on terms negotiated between the Company and the Initial Lessee. For so long as the Initial Lessee maintains its interior design and purchasing operations, it will perform interior design and purchasing services for the Initial Hotels without charge to the Company. Insurance and Property Taxes. The Company is responsible for paying real estate and personal property taxes on the hotel and for maintaining property insurance, including casualty insurance. The Initial Lessee is required to maintain comprehensive general public liability, workers' compensation, 12-month rental interruption insurance and any other insurance customary for properties similar to the hotel or required by any relevant Franchisor, and to have the Company named as an additional insured. The Company believes that the insurance coverage carried by each Initial Hotel is adequate in scope and amount. Indemnification. Under each Percentage Lease, the Initial Lessee will indemnify the Company against all liabilities, costs and expenses (including reasonable attorneys' fees and disbursements) incurred by, imposed on or asserted against the Partnership, on account of, among other things, (i) any accident or injury to person or property on or about the hotel; (ii) any negligence by the Initial Lessee or any of its agents as to the leased property; (iii) any environmental liability resulting from conditions existing at the time of completion of the Offering or caused or resulting thereafter from any action, inaction or negligence of the Initial Lessee (see "Business and Properties -- Environmental Matters"); (iv) taxes and assessments in respect of the hotel (other than real estate taxes and income taxes of the Company on income attributable to the hotel); (v) the sale or consumption of alcoholic beverages on or in the real property or improvements thereon; or (vi) any breach of the lease by the Initial Lessee. The Initial Lessee will not be required, however, to indemnify the Company against the Company's negligence or willful misconduct. Assignment and Subleasing. The Initial Lessee will not be permitted to sublet all or any part of the hotel or assign its interest under the lease without the prior written consent of the Partnership. The Initial Lessee may, however, enter into a management agreement with a third party for the management and operation of the hotel, with the consent of the Company, which the Company may withhold in its sole and absolute discretion. No assignment, subletting or management agreement will release the Initial Lessee from any of its obligations under the lease. The lease may not be indirectly sold by selling direct or indirect ownership or control of the Initial Lessee without causing a default under the Initial Lease. Damage to Initial Hotels. If damage to or destruction of any Initial Hotel renders such hotel unsuitable for the Initial Lessee's use and occupancy and is covered by insurance, the Company may elect to repair, rebuild or restore the hotel or offer to acquire it on the terms set forth in the lease. If the hotel is not rebuilt, the lease will terminate and the insurance proceeds will be retained by the Company. If damage to or destruction of the hotel does not render the hotel wholly unsuitable for the Initial Lessee's use and occupancy and is covered by insurance, the Company generally will be obligated to repair or restore the hotel. The lease will remain in full force and effect during the first 12 months of any period required for repair or restoration of the hotel, after which time rent will be equitably abated. Condemnation of Initial Hotels. In the event of a total condemnation of an Initial Hotel, each of the Company and the Initial Lessee will be entitled to terminate the lease as of the date of taking. The resulting condemnation award will be allocated between the Company and the Initial Lessee as set forth in the lease. In the event of a partial taking that does not render the hotel unsuitable for the Initial Lessee's use, the Company must restore the untaken portion of the hotel to a complete architectural unit, subject to an equitable abatement of the rent during the period in which the hotel is not fully useable, and the Company must provide the required funds to cover the cost of that restoration, which may include that part of the condemnation award specified for restoration. Events of Default. Events of Default under each Percentage Lease include, among others, the following: 61 68 (i) the failure by the Initial Lessee to pay Minimum Rent when due and the continuation of that failure for a period of 10 days; (ii) the failure by the Initial Lessee to pay the Percentage Rent for any quarter within 10 days after the end of that quarter; (iii) the failure by the Initial Lessee to observe or perform any other term of the Lease and the continuation of that failure beyond any applicable cure period; (iv) an Event of Default under any other Percentage Lease; (v) if the Initial Lessee files a petition in bankruptcy or reorganization under any federal or state bankruptcy law or any similar federal or state law, or is adjudicated a bankrupt or makes an assignment for the benefit of creditors or admits in writing its inability to pay its debts generally as they become due, or if a petition or answer proposing the adjudication of the Initial Lessee as a bankrupt or its reorganization pursuant to any federal or state bankruptcy law or any similar federal or state law is filed in any court and the Initial Lessee is adjudicated a bankrupt and that adjudication is not vacated or set aside or stayed within 60 days after the entry of an order in respect thereof, or if a receiver of the Initial Lessee or of the whole or substantially all of the assets of the Initial Lessee is appointed in any proceeding brought by the Initial Lessee or any such receiver, trustee or liquidator is appointed in any proceeding brought against the Initial Lessee and that appointment is not vacated or set aside or stayed within 60 days after that appointment is made; (vi) if the Initial Lessee voluntarily discontinues operations of the hotel for more than 10 days, except as a result of damage, destruction, or condemnation; (vii) if the franchise agreement with respect to any Initial Hotel is terminated by the franchisor as a result of any action or failure to act by the Initial Lessee or its agents; (viii) any failure to comply with the Initial Lessee's covenants regarding distributions and maintenance of its net worth, as described under "Lessees -- The Initial Lessee"; or (ix) Robert and John Boykin and their heirs cease to own at least 51% of the Initial Lessee or otherwise fail to control the Initial Lessee. If an Event of Default occurs and continues beyond any curative period, the Company may terminate the Lease and any or all of the other Percentage Leases, and the Initial Lessee will be required to surrender possession of the affected hotels. Termination of Percentage Leases on Disposition of the Initial Hotels. If the Company enters into an agreement to transfer an Initial Hotel to a non-Affiliate, the Company may terminate that hotel's Percentage Lease by giving the Initial Lessee 30 days prior notice and paying it the fair market value of its leasehold interest in the remaining term of that Percentage Lease. Franchise Agreements. The Initial Lessee will be the franchisee under the franchise agreements for the Initial Hotels. Inventory. All working capital assets required in the operation of the Initial Hotels will be purchased by the Initial Lessee at its expense. FRANCHISE AGREEMENTS Five of the nine Initial Hotels are licensed by Marriott International, Inc. Of the four remaining Initial Hotels, one is licensed by Promus Hotels, Inc. (licensor of Hampton Inns hotels), one by Choice Hotels International, Inc. (licensor of Quality Suites hotels), one by Radisson Hotels International, Inc. and one by Holiday Inns Franchising, Inc. These franchisors have consented to the transfer of the Initial Hotels to the Partnership and of the related franchise agreements to the Initial Lessee. The Company anticipates that the additional hotel properties in which it invests will in most cases be operated under franchise agreements. The Company believes that the public's perception of quality associated with a franchisor can be an important feature in the operation of a hotel. Franchisors provide a variety of 62 69 benefits for franchisees, including national advertising, publicity, and other marketing programs designed to increase brand awareness, training of personnel, continuous review of quality standards, and centralized reservation systems. The franchise agreements generally impose certain management, operational, recordkeeping, accounting, reporting, and marketing standards and procedures with which the Initial Lessee must comply. The franchise agreements will obligate the Initial Lessee to comply with the franchisors' standards and requirements with respect to, among other things, training of operational personnel, safety, maintenance of insurance, provision of ancillary services and products, display of signage, and the type, quality, and age of FF&E included in guest rooms and lobbies and other common areas. See "Risk Factors -- Hotel Industry Risks -- Franchise Risks." Termination. Each franchise agreement gives the Initial Lessee the right to operate the related Initial Hotel under a franchise for a period of years specified in that agreement. The Initial Lessee is responsible for making all payments under the franchise agreements to the franchisor. The expiration dates for the Initial Hotels' franchise agreements range from October 31, 1997 to September 4, 2014. The franchise agreements provide for early termination at the franchisor's option on the occurrence of certain events, including the Initial Lessee's failure to pay fees or perform its other covenants under the franchise agreement, bankruptcy, abandonment of the franchise, or assignment of the franchise without the consent of the franchisor. The Initial Lessee has the right to terminate the Berkeley Marina Marriott franchise agreement, which is scheduled to expire on October 31, 1997, at any time on or after December 31, 1996. Each of the Initial Lessee and Choice Hotels International, Inc. has the right to terminate the Melbourne Quality Suites franchise agreement, which is scheduled to expire on December 31, 2006, effective December 31, 1996 and, if the agreement is not so terminated, effective December 31, 2001. Sale of Hotel. The franchise agreements with Marriott contain a provision requiring the franchisee, on receiving a bona fide offer to buy or lease the related Initial Hotel, to give the franchisor the option to buy or lease (as applicable) that hotel on the same terms as are contained in that offer. The Choice Hotel franchise agreement provides that the agreement automatically terminates on transfer of the related hotel unless the franchisor expressly consents to that transfer. The Hampton Inn license agreement provides that a transferee of the related hotel must apply for a new franchise and that transfers not specifically authorized under the license agreement (for example, transfers upon the death of the licensee or an equity owner of the licensee) are void and are also a breach of the license agreement. The Holiday Inn license agreement provides that a transferee of the hotel must apply for a new license unless the franchisor has given its prior written consent to the transfer of the hotel. Noncompetition. The franchise agreements for the five Marriott hotels included in the Initial Hotels prohibit the franchisee from being connected or associated in any manner with any hotel, motel or inn business within a 5 mile radius around the franchised hotel. These restrictions can be waived by Marriott, whose waiver may not be unreasonably withheld. The Company has obtained a waiver of these restrictions in regard to the Offering. If a franchise agreement is terminated because of a default by the Initial Lessee, the Initial Lessee may not, for 24 months after termination, operate any motel, hotel or inn business (other than those in which it is then engaged) that is in the 5 mile radius trade area. There are no restrictions on the Company's ownership of other hotels in the Hampton or Holiday Inn license agreements, or in the Radisson or Choice Hotel franchise agreements. Fees. Under the franchise agreements, the Initial Lessee will pay franchise fees ranging from 3% to 6% of gross room sales and advertising or marketing and reservation fees ranging from .8% to 4% of gross room sales. HAMPTON INN IS A REGISTERED TRADEMARK OF PROMUS HOTELS, INC. PROMUS HOTELS, INC., HAS NOT ENDORSED OR APPROVED THE OFFERING. A GRANT OF A HAMPTON INN FRANCHISE LICENSE FOR ANY HOTEL IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY PROMUS HOTELS, INC. (OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE PARTNERSHIP OR THE COMMON SHARES OFFERED HEREBY. 63 70 NEITHER HOLIDAY INNS, INC., HOLIDAY INNS FRANCHISING, INC., NOR ANY PARENT, SUBSIDIARY, DIVISION OR AFFILIATE OF EITHER HAS ENDORSED OR APPROVED THE OFFERING OR THIS PROSPECTUS. THE GRANT OF A HOLIDAY INN LICENSE AGREEMENT BY HOLIDAY INNS FRANCHISING, INC. WITH RESPECT TO ANY HOTEL IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY HOLIDAY INNS, INC. OR HOLIDAY INNS FRANCHISING, INC. (OR ANY SUCH PARENT, SUBSIDIARY, DIVISION OR AFFILIATE) OF THE COMPANY OR THE SALE OF THE COMMON SHARES TO PROSPECTIVE INVESTORS AS DESCRIBED IN THIS PROSPECTUS. MARRIOTT HOTEL IS A REGISTERED TRADEMARK OF MARRIOTT INTERNATIONAL, INC. ("MARRIOTT"). MARRIOTT HAS NOT ENDORSED OR APPROVED THE OFFERING. A GRANT OF A MARRIOTT HOTEL FRANCHISE FOR ANY OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY MARRIOTT (OR ANY OF ITS SUBSIDIARIES, AFFILIATES OR DIVISIONS) OF THE COMPANY, THE PARTNERSHIP OR THE COMMON SHARES OFFERED HEREBY. QUALITY SUITES INN IS A REGISTERED TRADEMARK OF CHOICE HOTELS INTERNATIONAL, INC. CHOICE HOTELS INTERNATIONAL, INC. HAS NOT ENDORSED OR APPROVED THE OFFERING. A GRANT OF A QUALITY SUITES INN FRANCHISE LICENSE FOR ANY HOTEL IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY CHOICE HOTELS INTERNATIONAL, INC. (OR ANY OR ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE PARTNERSHIP OR THE COMMON SHARES OFFERED HEREBY. RADISSON INN IS A REGISTERED TRADEMARK OF RADISSON HOTELS INTERNATIONAL, INC. RADISSON HOTELS INTERNATIONAL, INC. HAS NOT ENDORSED OR APPROVED THE OFFERING. A GRANT OF A RADISSON INN FRANCHISE LICENSE FOR ANY HOTEL IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY RADISSON HOTELS INTERNATIONAL, INC. OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS OF THE COMPANY OR THE PARTNERSHIP OR THE COMMON SHARES OFFERED HEREBY. EXCLUDED PROPERTIES William, Robert and John Boykin will participate with an unrelated party in the development of a parcel, other than for hotel use, that is located near the Buffalo Marriott Hotel and that is not owned by the Boykin Group. One parcel of undeveloped real estate owned by William Boykin will also not be transferred to the Partnership. OTHER ACTIVITIES At the time of the Formation Transactions, subsidiaries of the Initial Lessee will acquire and continue the third-party hotel management, interior design and purchasing services business of Boykin Management. John E. Boykin will serve as the initial Secretary of the subsidiaries. The subsidiaries initially will manage 12 hotels, none of which is owned by the Company, Boykin Management or any other Boykin Group Affiliate. Three of these hotels are Hampton Inns in the Chicago, Illinois area, containing an aggregate of 366 rooms. These hotels are owned by an insurance company and have been managed by Boykin Management since December 1995. Another of these hotels is the 400-room Hanalei Best Western Hotel, in San Diego, California. The Boykin Group has managed this property, which is owned by another insurance company, since 1992. The remaining eight managed hotels, which Boykin Management has managed since February 1996 on behalf of an institutional investor, contain an aggregate of 1,154 rooms and are located in Santa Barbara County and Ventura County, California. William, Robert and John Boykin hold interests in a joint venture formed to purchase, other than for hotel purposes, a six-acre parcel in the immediate vicinity of the Buffalo Marriott Hotel. The Company and 64 71 the joint venture have entered into an agreement that provides for certain cross-easements between the properties and provides that the land will contain specific deed restrictions to prevent the development of any hotel thereon. William J. Boykin, the retired Chairman of Boykin Management and the father of Robert and John Boykin, is developing a Hampton Inn on certain real property owned by him in Miami, Florida that is adjacent to a shopping center developed by him in 1989. The hotel is expected to open in the fall of 1996. No other Boykin Group Affiliate will have an interest in the development of this hotel, but the Company will have a right of first refusal to purchase the hotel if William J. Boykin elects to sell it. EMPLOYEES The Company will have five employees. These employees will perform, directly or through the Partnership, various acquisition, development, redevelopment and management functions. Approximately 75% of the Initial Lessee's employees will be engaged in managing the operations of the Initial Hotels. Approximately 25 of the Initial Lessee's employees will also have responsibilities relating to the design, purchasing and management services to be rendered to third parties, as described above. The Initial Lessee will continue the Boykin Group's ongoing recruiting efforts to attract the highest quality talent at all levels of sales management. None of the persons who will be employees of the Company or the Initial Lessee are represented by a union. The Company believes that its and the Initial Lessee's relations with their respective employees are excellent. ENVIRONMENTAL MATTERS Under various federal, state and local laws, ordinances, and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on, under or in the property. This liability may be imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. Furthermore, a person that arranges for the disposal of a hazardous substance at another property or transports a hazardous substance for disposal or treatment at another property may be liable for the costs of removal or remediation of hazardous substances at that property, regardless whether that person owns or operates that property. The costs of any such remediation or removal may be substantial, and the presence of any such substance, or the failure promptly to remediate any such substance, may adversely affect the property owner's ability to sell or lease the property or to borrow using it as collateral. Other federal, state and local laws, ordinances and regulations require abatement or removal of certain asbestos-containing materials in connection with demolition or certain renovations or remodeling, impose certain worker protection and notification requirements, and govern emissions of and exposure to asbestos fibers in the air. Other federal, state and local laws, ordinances and regulations and the common law impose on owners and operators certain requirements regarding conditions and activities that may affect human health or the environment. These conditions and activities include, for example, the presence of lead in drinking water, the presence of lead-containing paint in occupied structures, and the ownership or operation of underground storage tanks. Failure to comply with applicable requirements could result in difficulty in the lease or sale of any affected property or the imposition of monetary penalties, in addition to the costs required to achieve compliance and potential liability to third parties. The Company, the Partnership or the Initial Lessee, as the case may be, may be potentially liable for such costs or claims in connection with the ownership and operation of the Initial Hotels. See "Risk Factors -- Potential Environmental Liability". Phase I environmental site assessments or assessment updates have been completed within the last 24 months for each Initial Hotel, and a Phase II assessment was conducted for one Initial Hotel in April 1996. These assessments were intended to identify potential sources of contamination for which the Initial Hotels may be responsible. The Phase I assessments included historical reviews of the Initial Hotels, reviews of certain public records, preliminary investigations of the sites and surrounding properties (without invasive sampling or testing), screening for the presence of asbestos, PCBs and underground storage tanks, and the 65 72 preparation and issuance of a written report. Certain of the Phase I assessments tested for the presence of radon, lead-based paint, or lead in drinking water. The Phase II assessment involved subsurface sampling. The Phase I and Phase II assessments did not reveal any environmental contamination or condition that the Company believes would have a material adverse effect on the Company's business, assets or results of operations. Furthermore, the Company is not aware of any such contamination or condition. Nevertheless, it is possible that there exists material environmental contamination of which the Company is unaware. No assurance can be given that (i) the assessments described above revealed all potential environmental liabilities; (ii) future or amended laws, ordinances or regulations, or more stringent interpretations or enforcement policies of existing environmental requirements, will not impose any material environmental liability; or (iii) the environmental condition of the Initial Hotels has not been and will not be affected by changes in the condition of properties in the vicinity of the Initial Hotels or by the acts of third parties unrelated to the Company, Partnership or the Initial Lessee. The Company believes that the Initial Hotels are in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances and other environmental matters, the violation of which could have a material adverse effect on the Company or the Partnership. Neither the Company nor, to the knowledge of the Company, any other entity with an interest in any of the Initial Hotels, has been notified by any governmental authority, or is otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of its present or former properties. Certain Boykin Group Affiliates, including Robert and John Boykin, have agreed to indemnify and hold harmless the Company from and against any liability arising as a result of any environmental condition relating to the Initial Hotels at the time of consummation of the Offering. COMPETITION Each of the Initial Hotels is located in a developed area that includes other hotel properties. See "Business and Properties--The Initial Hotels" for a more detailed description of each Initial Hotel's competitive position in its market. The occupancy, ADR and REVPAR of any Initial Hotel or any hotel property acquired in the future could be materially and adversely affected by the number of competitive hotel properties in its market area. The Company may be competing for investment opportunities with entities that have substantially greater financial resources than the Company. These entities may generally be able to accept more risk than the Company can prudently manage, including risks with respect to the creditworthiness of entities in which investments may be made or risks attendant to a geographic concentration of investments. Competition may generally reduce the number of suitable investment opportunities offered to the Company and increase the bargaining power of property owners seeking to sell. TAX DEPRECIATION The Partnership will acquire all of the equity interests in the Initial Hotels in exchange for cash and equity interests in the Partnership. The Partnership's initial basis for federal income tax purposes in the hotels in which the Partnership acquires equity interests will be a carryover of the basis of the sellers in the hotels on the date of the acquisitions, increased by any gain recognized on the transfers to the Partnership. The Partnership plans to use the Alternative Depreciation System ("ADS") for the buildings and improvements constituting the Initial Hotels. Under ADS, the Partnership generally will depreciate those buildings and improvements (even those acquired with a carryover basis) over a new 40-year recovery period using a straight-line method and a mid-month convention. The depreciation deductions generally will be specially allocated to the Company under Code Section 704(c). THE INTERCOMPANY CONVERTIBLE NOTE The Company will lend approximately $40 million of the net proceeds of the Offering to the Partnership for uses specified under "Use of Proceeds." The loan will be evidenced by the Intercompany Convertible 66 73 Note, which will mature on the fifth anniversary of the closing of the Offering. Interest will accrue at a rate equal to % per annum, increasing to % per annum on the third anniversary of the completion of the Offering, and will be payable quarterly. The Intercompany Convertible Note may be prepaid in full, but not in part, at any time. The Company will have the right to convert the Intercompany Convertible Note after the second anniversary of the completion of the Offering, and prior to maturity and in advance of any proposed prepayment by the Partnership, into additional equity interests in the Partnership at face value based on the initial offering price of the Common Shares (and assuming that the value of one Partnership Unit equals the value of one Common Share). On conversion of the Intercompany Convertible Note, the Company would receive an additional equity interest in the Partnership of 3.8%, which will reduce the equity interest in the Partnership of the other holders of Units to 15.9%, assuming no other Common Shares or Units were issued prior to that conversion. The Intercompany Convertible Note will be secured by a mortgage on certain of the Initial Hotels and will be subordinated in right of payment to all other indebtedness of the Partnership. The Intercompany Convertible Note will be guaranteed by certain Boykin Group Affiliates and by certain Other Partners of the Contributed Partnerships. Although the yield on the Intercompany Convertible Note will initially exceed the yield on the equity in the Partnership, the Company has not relied on the incremental cash flow in setting its initial dividend rate. LEGAL PROCEEDINGS Neither the Company, the Initial Lessee nor the Partnership is currently involved in any material litigation nor, to the Company's knowledge, is any material litigation currently threatened against the Company, the Initial Lessee or the Partnership. Robert and John Boykin and the other Boykin Group Affiliates holding ownership interests in the Initial Hotels have represented to the Partnership that there is no material litigation threatened against or affecting the Initial Hotels, or threatened against or affecting any Boykin Group Affiliate, in a manner that would have a material adverse effect on the Initial Lessee. POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES The following supplements the discussion of the Company's internal growth, acquisition, development and financing strategies set forth in "The Company -- Business Objectives and Strategies." The Company's policies with respect to those activities and the matters discussed below have been established by the Board of Directors of the Company and may be amended or revised from time to time at the discretion of the Board of Directors without a vote of the shareholders of the Company, except that changes in certain policies with respect to conflicts of interest must be consistent with legal requirements. INVESTMENT POLICIES Investments in Real Estate. The Company may acquire equity interests in hotel properties other than the Initial Hotels through the Partnership or other entities controlled by the Partnership, or through joint ventures or other types of co-ownership. These investments may be subject to existing mortgage financing and other indebtedness that may have priority over the equity interest of the Company. The Company's current policy is to not invest in any one property more than 25% of its total assets at the time of the investment. Investments in Real Estate Mortgages. While the Company will emphasize equity real estate investments, it may invest in mortgage and other real estate interests, including securities of other REITs, and in nonperforming mortgages with the goal of acquiring the underlying property. The Company may invest in participating or convertible mortgages (which are similar to equity participation) if it may benefit from the cash flow or any appreciation in the value of the subject property. The Company does not currently intend to invest in mortgages or securities of other REITs. 67 74 FINANCING While its organizational documents contain no limitation on the amount of debt it may incur, the Company, subject to the discretion of the Board of Directors, intends to maintain a debt-to-total market capitalization ratio (measures at the time the debt is incurred) of not more than 45%. The Company may from time to time re-evaluate its debt capitalization policy in light of economic conditions, relative costs of debt and equity capital, market valued of its properties acquisitions, development and expansion opportunities and other factors. Any indebtedness may be incurred through the Partnership or the Company. Indebtedness incurred by the Company may be in the form of bank borrowings, secured or unsecured, and publicly or privately placed debt instruments, the proceeds of which would be loaned or contributed to the Partnership. Indebtedness incurred by the Partnership may be in the form of purchase money obligations to the sellers of properties, publicly or privately placed debt instruments, further borrowings from the Company, or financing from banks, institutional investors or other lenders, any of which indebtedness may be unsecured or may be secured by mortgages or other interests in the property owned by the Partnership. This indebtedness may be recourse to all or any part of the property of the Company or the Partnership, or may be limited to the specific property to which the indebtedness relates. The proceeds from any borrowings by the Company or the Partnership may be used for the payment of distributions or dividends, for working capital, or to refinance existing indebtedness or to finance acquisitions or expansions of properties. See "Federal Income Tax Considerations -- Requirements for Qualification -- Distribution Requirements." If the Board of Directors determines to raise additional equity capital, the Board has the authority, without shareholder approval, to issue additional Common Shares or Preferred Shares or other capital shares of the Company in any manner (and generally on such terms and for such consideration) as it deems appropriate, including in exchange for property. Any such offering might cause a dilution of the existing shareholders' investment in the Company. The Company has obtained a commitment for the Credit Facility. See "The Company -- Business Objectives and Strategies -- Financing Strategy" for a description of the terms of the Credit Facility. POLICIES WITH RESPECT TO CERTAIN OTHER ACTIVITIES The Company has authority to offer capital shares or other securities and to repurchase or otherwise reacquire its shares or any other securities, and may engage in such activities in the future. As described under "Shares Available for Future Sale," the Company may issue Common Shares to holders of Units in connection with exercise of the Exchange Rights. The Company has not issued Common Shares or any other securities to date, except in connection with the formation of the Company. The Company has no outstanding loans to other entities or persons, including its officers and directors, except for the loan to the Partnership evidenced by the Intercompany Convertible Note, and except as described above under " -- Investment Policies," does not currently intend to make loans to other entities. The Company has not engaged, and does not currently intend to engage, in trading, underwriting or agency distribution or sale of securities of other issuers, and has not invested, and does not currently intend to invest, in the securities of other issuers (other than the Partnership) for the purpose of exercising control. The Company intends to make investments in such a way that it will not be treated as an investment company under the Investment Company Act of 1940. The Company intends to make investments at all times in a manner consistent with the requirements of the Code in order for the Company to qualify as a REIT unless, because of changing circumstances or changes in the Code, in Treasury Regulations or in the interpretations of either, the Company's Board of Directors determines that it is no longer in the best interests of the Company and its shareholders to qualify as a REIT. CONFLICT OF INTEREST POLICY Neither the Company's governing instruments nor Company policy prohibit any Company director, officer, security holder or Affiliate from having a pecuniary interest in any investment to be acquired or disposed of by the Company or in any transaction to which the Company is a party or in which it has an interest. 68 75 The Company's Articles of Incorporation require that a majority of the Company's Board of Directors consist of persons who are not officers or other employees of the Company, Affiliates of the Boykin Group, or persons (or members of firms) who directly or indirectly receive substantial fee income from the Company ("Independent Directors"). Determinations to be made on behalf of the Company with respect to relationships or opportunities that represent a conflict of interest for any Company officer or director as such will be subject to the approval of the Independent Directors. See "Risk Factors -- Conflicts of Interest." In addition, Robert and John Boykin and the other Affiliates of the Boykin Group have agreed that they will conduct all of their hotel ownership, development and acquisition activities through the Company, except as described under " -- Excluded Properties." The Company and the Initial Lessee have agreed on certain additional measures that are designed to minimize conflicts of interest between the Initial Lessee and its owners, on one hand, and the Company and its shareholders, on the other. See "Lessees -- The Initial Lessee." The Partnership's partnership agreement requires the Company to resolve in favor of the Company's shareholders any conflict of interest between those shareholders, on one hand, and the limited partners of the Partnership, on the other hand, if the conflict cannot be resolved in a manner not adverse to the interests of either group. The partnership agreement also exonerates the Company from monetary damages for losses sustained, liabilities incurred, or benefits not derived by limited partners in connection with any such resolution, so long as the Company has acted in good faith. THE FORMATION Formation Transactions. The principal transactions in connection with the formation of the Company as a REIT and the acquisition of the Initial Hotels by the Partnership are as follows: - The Company was formed as an Ohio corporation in February 1996 and issued an aggregate of one Common Share to Raymond P. Heitland. - The Company will sell 7,875,000 Common Shares in the Offering. - The Company will contribute approximately $119.0 million of the net proceeds from the Offering to the Partnership in exchange for an approximately 80.3% equity interest in the Partnership. The Company will be the sole general partner of the Partnership. The Company will also lend to the Partnership approximately $40 million of the net proceeds from the Offering in exchange for an interest-bearing note convertible by the Company into equity interests of the Partnership (the "Intercompany Convertible Note"). See "Business and Properties -- The Intercompany Convertible Note." - Entities owned by Robert and John Boykin will form the Initial Lessee as its sole members, and the Initial Lessee will acquire the Boykin Group hotel operation and management business of Boykin Management. Subsidiaries of the Initial Lessee will continue the third-party hotel management, interior design and purchasing services businesses of Boykin Management following the Offering. See "Lessees -- The Initial Lessee." - The Boykin Group Affiliates will (i) cause the Contributed Partnerships to convey certain working capital assets and liabilities to the Initial Lessee; and (ii) together with the Other Partners and certain Boykin Associates, indemnify the Partnership against liabilities of the Contributed Partnerships other than the mortgage indebtedness to be discharged by the Partnership as described herein. - Each Initial Hotel is owned by a Contributed Partnership that comprises other entities and individuals. Through the Contributed Partnerships, Boykin Group Affiliates hold interests in all nine of the Initial Hotels, Boykin Associates hold interests in two of the Initial Hotels, and Other Partners hold interests in five of the Initial Hotels. The Partnership will acquire a 100% ownership interest in all of the Initial Hotels for an aggregate of approximately 1.49 million Units (valued at approximately $32.8 million), approximately $9.2 million in cash, and the repayment of approximately $8.0 million of existing indebtedness on the Initial Hotels, as follows: -- The Partnership will acquire interests in all nine of the Initial Hotels from Boykin Group Affiliates in exchange for approximately 1.34 million Units (valued at approximately $29.5 mil- 69 76 lion), and repayment of a $3.1 million loan made by Boykin Management for the benefit of one of the Initial Hotels (approximately $1.5 million of which the Initial Lessee, as Boykin Management's successor, will in turn repay to a third-party lender, and the balance of which will be used to pay income taxes payable as a result of the Formation Transactions or for working capital of the Initial Lessee). -- The Partnership will acquire interests in two of the Initial Hotels from Boykin Associates in exchange for approximately 20,600 Units (valued at approximately $454,000), and $829,000 in cash; -- The Partnership will acquire interests in five of the Initial Hotels from the Other Partners in exchange for approximately 127,400 Units (valued at approximately $2.8 million) and $8.3 million in cash; and -- The Partnership will repay a loan of approximately $4.9 million made by the Other Partners to one of the Initial Hotels. See "Risk Factors -- Lack of Independent Appraisals and Arm's-Length Negotiations" for a discussion of the valuation matters considered in connection with the Formation Transactions. - The recipients of Units will have rights (generally not exercisable until the third anniversary of the closing of the Offering in the case of Boykin Group Affiliates and Boykin Associates) to exchange their Units for cash (the "Exchange Rights"), subject to the Company's right to issue Common Shares for those Units on a one-for-one basis. The Unit recipients will enter into a Registration Rights Agreement with the Company under which any Common Shares so issued may be registered in certain public offerings made by the Company after the transfer restrictions on those Common Shares lapse. Exchange Rights may be exercised before the specified anniversary of the closing of the Offering to the extent necessary to enable the estate of any Unit holder to satisfy estate tax liabilities, subject to the prior approval of the Company's Board of Directors for any exercise that would cause the number of Units exchanged in any 12-month period to exceed five percent of the Units outstanding at the beginning of that period. - The Partnership will use approximately $136.6 million of the funds contributed to it to repay third-party mortgage indebtedness encumbering the Initial Hotels, approximately $3.5 million of those funds as the initial contribution to the Capital Expenditures Fund, and approximately $1.7 million of those funds for formation costs, working capital and other general partnership purposes. - The Partnership will lease each Initial Hotel to the Initial Lessee pursuant to a Percentage Lease. - The Initial Lessee will assume the liquor licenses, franchise agreements, other licenses and permits and certain working capital liabilities of the Initial Hotels. - Robert W. Boykin will become the Chief Executive Officer of the Company and will enter into the employment agreement and be granted the stock options described under "Management -- Employment Agreements" and "Management -- Executive Compensation." The Formation Transactions benefits to the Boykin Group Affiliates, the Boykin Associates and the Other Partners, in addition to those described above, include: (i) increased cash distributions to recipients of Units from the operations of the Initial Hotels, because of the prepayment of mortgage debt; (ii) elimination of approximately $5.3 million of mortgage debt guaranties; (iii) the ability to exchange Units received in the Formation Transactions (as described above) for cash, or at the Company's election, Common Shares with registration rights, which will be more liquid than their interests in the Initial Hotels; (iv) deferral of income tax by contributing their interests in the Contributed Partnerships; (v) repayment from the proceeds of the Offering of $3.1 million of loans made by Boykin Management to one of the Initial Hotels; (vi) realization of an immediate accretion in the net tangible book value of their investment in the Partnership of $52.55 per Unit; and (vii) receipt by Robert W. Boykin, Raymond P. Heitland and Mark L. Bishop of options to purchase 250,000, 75,000 and 75,000 Common Shares, respectively, under the Company's Long Term Incentive Plan. In addition, Robert and John Boykin will indirectly own all of the interests in the Initial Lessee, which will be entitled to all profits and cash flow from the Initial Hotels after payment of rent under the Percentage Leases and other operating expenses. 70 77 MANAGEMENT COMPANY DIRECTORS AND EXECUTIVE OFFICERS The Board of Directors of the Company currently consists of two members, each of whom is a Boykin Group Affiliate. The Company intends to expand the Board of Directors, on or prior to completion of the Offering, to seven persons, including four Independent Directors. Directors will be elected at each annual meeting of shareholders and will serve until their successors are elected and qualified. Executive officers of the Company are elected and serve at the discretion of the Board of Directors until their successors are duly chosen and qualified. The following table sets forth certain information concerning the individuals who will be directors and officers of the Company on the completion of the Offering.
NAME AGE POSITION - ------------------------------ --- ------------------------------------------------------ Robert W. Boykin 46 Director; Chairman of the Board, President and Chief Executive Officer Raymond P. Heitland 60 Director; Chief Financial Officer Mark L. Bishop 37 Senior Vice President--Acquisitions and Development Ivan J. Winfield 62 Proposed Director Lee C. Howley, Jr. 49 Proposed Director Frank E. Mosier 66 Proposed Director William N. Hulett III 52 Proposed Director Albert T. Adams 45 Proposed Director
The following is a biographical summary of the business experience of the current and proposed directors and executive officers of the Company. Robert W. Boykin is the President and Chief Executive Officer of the Company. He has served as the President and Chief Executive officer of Boykin Management since 1985. He served as Boykin Management's Executive Vice-President from 1981 to 1985. Raymond P. Heitland is the Chief Financial Officer of the Company. He has served as the Chief Financial Officer of Boykin Management since 1970. Mark L. Bishop is Senior Vice President--Acquisitions and Development of the Company. He has served as Senior Vice President--Acquisitions of Boykin Management since April 1994. From December 1986 until April 1994 Mr. Bishop was employed by Grubb-Ellis, serving as National Chairman of the Hospitality Properties Division beginning in February 1988, and as Vice President/Senior Marketing Consultant beginning in February 1991. Ivan Winfield is currently Associate Professor and Chairholder of the Herzog Chair in Free Enterprise at Baldwin Wallace College, in Berea, Ohio. Mr. Winfield retired in 1994 from Coopers & Lybrand, L.L.P. From 1978 to 1990 he was managing partner of the firm's Oklahoma practice and from 1990 to 1994 he was managing partner of the firm's Northeast Ohio practice. Mr. Winfield is a Trustee of The Fairport Funds and is Chairman of its audit committee. Mr. Winfield is also a Director of HMI Industries, Inc. and is Chairman of its Finance Committee. Lee C. Howley, Jr. has been the sole owner and president of Howley & Company, a real estate brokerage and development company, since 1981, and has been the sole owner and Chairman of Coast Management Company, a cleaning and real estate management company, since 1987. Since January 1992 Mr. Howley has served as the Chairman of the Convention and Visitors Bureau of Greater Cleveland. Mr. Howley serves on the Board of Directors of LESCO, Inc., a publicly held manufacturer and supplier of lawn care products. Frank E. Mosier is a director of Centerior Energy Corporation and Associated Estates Realty Corporation. Mr. Mosier was Vice Chairman of the Advisory Board of BP America Inc., a producer and refiner of 71 78 petroleum products, from 1991 to 1993. Mr. Mosier was Vice Chairman of BP America Inc. from 1988 until his retirement in 1991 and president and Chief Operating Officer of BP America Inc. from 1986 to 1988. William N. Hulett III is the Co-Chairman and Chief Executive Officer of the Rock and Roll Hall of Fame and Museum in Cleveland, Ohio. From 1981 to 1993, Mr. Hulett was the President of Stouffer Hotel Company, the owner of a national hotel chain. Prior to that time, Mr. Hulett served as Vice President of Operations for Westin Hotels, based in Seattle, Washington. In December 1991, he completed a third consecutive term as Chairman of the Convention and Visitors Bureau of Greater Cleveland. He is a member of the Board of Trustees of the New Cleveland Campaign, a director of the Greater Cleveland Growth Association and a member of the 1992 U.S. Savings Bonds Volunteer Committee appointed by the Secretary of the Treasury. Mr. Hulett was named Business Executive of the year for 1995 by the Sales and Marketing Executive Association. Mr. Hulett is a Director of Developers Diversified Realty Corporation. Albert T. Adams has been a partner with the law firm of Baker & Hostetler in Cleveland, Ohio since 1984, and has been affiliated with the firm since 1977. Baker & Hostetler provides legal services to the Boykin Group and various Boykin Group Affiliates. Mr. Adams is a graduate of Harvard College, Harvard Business School and Harvard Law School. He serves as a member of the Board of Trustees of the Western Reserve Historical Society and is a Vice President of the Harvard Business School Club of Northeastern Ohio. Mr. Adams is a director of Developers Diversified Realty Corporation and Associated Estates Realty Corporation. AUDIT COMMITTEE The Audit Committee will consist of three Independent Directors. The Audit Committee will make recommendations concerning the engagement of independent public accountants, review with the independent public accountants the plans and results of the audit engagement, approve professional services provided by the independent public accountants, review the independence of the independent public accountants, consider the range of audit and nonaudit fees, review the independent public accountants' letter of comments and management's responses, review the adequacy of the Company's internal accounting controls, and review major accounting or reporting changes contemplated or made. COMPENSATION COMMITTEE The Compensation Committee will consist of three Independent Directors, will determine compensation for senior management, advise the Board of Directors on the adoption and administration of employee benefit and compensation plans, and administer the Company's Long-Term Incentive Plan. LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS The Ohio Revised Code provides, with certain limited exceptions, that a director may be held liable in damages for his act or omission as a director only if it is proved by clear and convincing evidence that he undertook the act or omission with deliberate intent to cause injury to the corporation or with reckless disregard for its best interest. The Ohio Revised Code authorizes Ohio corporations to indemnify officers and directors from liability if the officer or director acted in good faith and in a manner reasonably believed by the officer or director to be in or not opposed to the best interests of the corporation, and, with respect to any criminal actions, if the officer or director had no reason to believe his action was unlawful. In the case of an action by or on behalf of a corporation, indemnification may not be made (i) if the person seeking indemnification is adjudged liable for negligence or misconduct, unless the court in which such action was brought determines such person is fairly and reasonably entitled to indemnification or (ii) if liability asserted against such person concerns certain unlawful distributions. The indemnification provisions of the Ohio Code require indemnification if a director or officer has been successful on the merits or otherwise in defense of any action, suit or proceeding that he was a party to by reason of the fact that he is or was a director or officer of the corporation. The indemnification authorized under Ohio law is not exclusive and is in addition to any other rights granted to officers and directors under the articles of incorporation or code of regulations of the corporation or any agreement between officers and directors and the corporation. A corporation may purchase and maintain 72 79 insurance or furnish similar protection on behalf of any officer or director against any liability asserted against him and incurred by him in his capacity, or arising out of the status, as an officer or director, whether or not the corporation would have the power to indemnify him against such liability under the Ohio Code. The Company's Code of Regulations provides for the indemnification of directors and officers of the Company to the maximum extent permitted by Ohio law as authorized by the Board of Directors of the Company, and for the advancement of expenses incurred in connection with the defense of any action, suit or proceeding that he was a party to by reason of the fact that he is or was a director of the Company upon the receipt of an undertaking to repay such amount unless it is ultimately determined that the director is entitled to indemnification. The Company is seeking to obtain an insurance policy which will insure the officers and directors of the Company against claims arising out of alleged wrongful acts by such persons in their respective capacities as officers and directors of the Company. EXECUTIVE COMPENSATION The Company was incorporated in Ohio on February 8, 1996, and did not pay any compensation to its officers or directors prior to the Offering. The following table sets forth the annual base compensation expected to be paid for the year ending December 31, 1996, to the Chief Executive Officer and to each of the other executive officers of the Company whose annual salary will exceed $100,000. SUMMARY COMPENSATION TABLE
NAME PRINCIPAL POSITION SALARY - -------------------- --------------------------------------------------- -------- Robert W. Boykin Chairman, President and Chief Executive Officer $250,000 Raymond P. Heitland Chief Financial Officer and Treasurer $150,000 Mark L. Bishop Senior Vice President--Acquisitions and Development $140,000
EMPLOYMENT CONTRACTS Robert W. Boykin, Raymond P. Heitland and Mark L. Bishop have entered into employment contracts with the Company. Mr. Boykin's agreement provides for an initial three year term that is automatically extended for an additional year at the end of each year of the agreement, subject to the right of either party to terminate the agreement by giving two years' prior written notice. The agreements for Messrs. Heitland and Bishop provide for an initial one year term that is automatically extended for an additional year at the end of each year of the agreement, subject to the right of either party to terminate the agreement by giving six months' prior written notice. Mr. Boykin will also be entitled to a bonus of from 10% to 90% of his annual base salary, and Messrs. Heitland and Bishop will be entitled to bonuses of from 5% to 45% of their annual base salaries, if Funds From Operations per Common Share for any year exceed, by 5% to 20% or more, the Funds From Operations per Common Share for the immediately preceding year. For purposes of the bonuses payable for 1996, the Compensation Committee of the Board will calculate appropriate prorated amounts. Messrs. Boykin, Heitland and Bishop will also be granted certain options to purchase Common Shares in connection with the Offering. See "-- Long-Term Incentive Plan." Each agreement provides that the employee will not compete with the Company in the ownership, acquisition or development of hotels during his employment or at any time during a period of up to two years immediately following the termination of his employment. Further, each agreement provides that upon (i) the termination of the employee's employment by the Company other than for "cause" (as defined in the employment contracts) or by the employee for certain actions of the Company, such as effecting a material adverse change in the employee's duties and responsibilities, or (ii) a "change in control" of the Company (as defined in the employment contracts), the employee will be entitled to all of the compensation and benefits payable to him under the employment contract for the remainder of the stated term of the employment contract. 73 80 REGISTRATION RIGHTS The Company has entered into a Registration Rights Agreement with certain Boykin Group Affiliates and other partners of the Contributed Partnerships pursuant to which the Company has granted those individuals and entities certain rights, on exchange of their Units for Common Shares, to register Common Shares in public offerings initiated by the Company after the transfer restrictions on the Units and Common Shares held by those individuals and entities lapse. COMPENSATION OF DIRECTORS The Company intends to pay its Independent Directors an annual fee of $16,000 and a fee of $1,000 for each directors' meeting and each committee meeting attended. Each director may elect to receive his compensation in the form of grants of Common Shares. No other directors will receive directors' fees. Upon completion of the Offering, each Independent Director will receive an option for 5,000 Common Shares exercisable at the initial public offering price of the Common Shares, which option will vest fully within the first two years of issuance and will have a term of ten years. DIRECTORS' DEFERRED COMPENSATION PLAN The purpose of the Company's Directors' Deferred Compensation Plan (the "Deferred Plan") is to assist it in attracting and retaining persons of competence and stature to serve as outside directors by giving them the option to defer receipt of the fees payable to them by the Company for their services as directors. A director is eligible to participate in the Deferred Plan if he or she receives fees for services as a director and is not employed by the Company. The Deferred Plan is administered by Company officers and directors who are (i) appointed by the Board of Directors of the Company and (ii) not eligible to participate in the Deferred Plan. The Deferred Plan is applicable to all director's fees payable with respect to periods commencing on or after October 1, 1996. The value of amounts credited to a director in the Deferred Plan increases or decreases based on the market value of the Company's Common Shares plus the value of dividends or other distributions on the Company's Common Shares. Distribution of amounts credited to a director in the Deferred Plan commence (i) on a date elected by the director, provided that the date is not earlier than the January 1 following the year in which the director attains age 55, and not later than the January 1 following the year in which the director attains age 72, or (ii) within ninety (90) days after the date of the director's death or disability. LONG-TERM INCENTIVE PLAN The purpose of the Company's Long-Term Incentive Plan (the "Plan") is to promote the long-term growth and profitability of the Company by enabling it to attract, retain and reward key employees of the Company and its affiliates and to strengthen the mutuality of interest between such key employees and the Company's shareholders. Grants of incentive or nonqualified share options, restricted shares, deferred shares, share purchase rights, share appreciation rights in tandem with options ("SARs"), other share-based awards, or any combination thereof, may be made under the Plan. Officers and key employees who are responsible for or contribute to the management, growth or profitability of the business of the Company and its affiliates are eligible for grants and awards under the Plan. The Compensation Committee will administer the Plan and determine the type, amount and timing of grants and awards. The members of the Compensation Committee are not eligible to participate in the Plan. The Company has reserved 1,000,000 Common Shares for issuance under the Plan. No Participant in the Plan may be granted stock options or other share awards in any calendar year for more than 300,000 shares. Upon the Closing, Robert W. Boykin, Raymond P. Heitland and Mark L. Bishop will be granted options to purchase 250,000, 75,000 and 75,000 shares, respectively, under the Plan. The share limitations, shares reserved and the terms of outstanding awards will be adjusted, as the Compensation Committee deems appropriate, in the event of a share dividend, split or other change in the corporate structure of the Company affecting the shares. Share Options and Tandem SARs. The term of each option granted under the Plan will not exceed 10 years from the date of grant, and the exercise price of share options may not be less than 100% of the fair market value (as defined in the Plan) of the shares on the date the option is granted. The Compensation 74 81 Committee may grant tandem SARs to any person granted an option under the Plan. Each tandem SAR will represent the right to receive, in cash or shares as the Compensation Committee determines, a distribution in an amount equal to the excess of the fair market value of the option shares (to which the SAR corresponds) on the date of exercise over the exercise price for those shares. Each tandem SAR expires at the same time as its corresponding option. The exercise of an option will result in an immediate forfeiture of its corresponding SAR, and the exercise of an SAR will cause an immediate forfeiture of its corresponding option. The Plan provides that all options and tandem SARs will vest on a change in control (as defined in the Plan) of the Company. Share Awards. The Compensation Committee may award Common Shares under the Long-Term Incentive Plan and may place restrictions on the transfer or defer the date of receipt of those shares. Each award will specify any applicable restrictions or deferral date, the duration of those restrictions, and the time at which the restrictions lapse. Participants will be required to deposit shares with the Company during the period of any restrictions. The Compensation Committee may also grant share purchase rights for which the purchase price may not be less than 100% of the fair market value (as defined in the Plan) on the date of grant. Other Share-Based Awards. The Compensation Committee may grant other awards of shares and other awards that are valued or otherwise based on the Company's Common Shares. Miscellaneous. The Plan provides for vesting, exercise or forfeiture of rights granted under the Plan on retirement, death, disability, termination of employment or a change of control. The Board of Directors may modify, suspend or terminate the Plan as long as it does not impair the rights thereunder of any participant. Under applicable law, the holders of Common Shares must approve any increase in the maximum number of shares reserved for issuance under the Plan, any change in the classes of employees eligible to participate in the Plan and any material increase in the benefits accruing to participants. INITIAL LESSEE DIRECTORS AND OFFICERS
NAME AGE POSITION - ------------------------------ --- ------------------------------------------------------ Ronald A. Cook 44 Director; President Paul A. O'Neil 38 Director; Chief Financial Officer and Treasurer John E. Boykin 51 Director; Secretary Thomas J. O'Leary 53 Director; Vice President--Operations Joseph P. Berardi 47 Vice President--Architecture and Construction Robert W. Boykin 46 Director
The following is a biographical summary of the business experience of the current and proposed directors and executive officers of the Initial Lessee. Ronald A. Cook has served as Executive Vice President of Boykin Management since December 1995. From March 1995 to December 1995, Mr. Cook was Executive Vice President of Ruffin Hotel Management Company. Mr. Cook was President of Hotel Management Group, Inc. from May 1986 to February 1995. Paul A. O'Neil has served as Senior Vice President of Boykin Management since October 1994. Mr. O'Neil was with Arthur Andersen from 1979 to October 1994, and managed the Real Estate Services Group in Arthur Andersen's Cleveland, Ohio office from July 1990 to October 1994. John E. Boykin, the brother of Robert W. Boykin, has served as Senior Vice President--Food and Beverage Operations of Boykin Management since 1979. In 1981 he formed Purchasing Concepts, Inc., which manages the food and beverage procurement activities for Boykin Management's hotels and for over 50 independent hotels, clubs and restaurants. Mr. Boykin has served as President of Purchasing Concepts, Inc. since its inception. 75 82 Thomas J. O'Leary has served as Senior Vice President, Hotel Operations of Boykin Management since February 1990. He was Vice President of Operations for Mariner Hotel Corporation from 1988 to February 1990. Joseph P. Berardi has served as Senior Vice President, Architecture and Construction of Boykin Management since 1981. The Initial Lessee intends to develop incentive compensation plans for its hotel-level and corporate-level senior executives which tie such compensation in part to the performance of the Company and in part to the performance of the Initial Hotels. Such plans may include awards of Company shares, options and other similar incentives. CERTAIN TRANSACTIONS Formation Transactions. In connection with the formation of the Company in February 1996, Raymond P. Heitland acquired one Common Share for a price of $100. In connection with the Formation Transactions, all of the equity interests in the Contributed Partnerships (which own the Initial Hotels) will be transferred to the Partnership in exchange for an aggregate of 1,490,000 Units and $9.2 million in cash. William, Robert and John Boykin will receive, either directly or indirectly through entities that they own and control, approximately 136,400, 653,600, and 552,000 Units, respectively, for their ownership interests in the Contributed Partnerships. These Units in the aggregate will represent approximately 14.3% of the equity interest in the Partnership. The Contributed Partnership that owned the Lake Norman Initial Hotels acquired those properties in February 1996. The aggregate purchase price for the properties was approximately $10 million. Prior to the Formation Transactions, Robert and John, together, held a 46% interest and two of the Other Partners, together, held a 54% interest, in that Contributed Partnership. The aggregate value of the Units distributed and mortgage indebtedness paid by the Partnership in the Formation Transactions with respect to the Lake Norman Hotels will be approximately $13.9 million. See "The Formation." The Partnership will use approximately $8.0 million of the net proceeds of the Offering to repay loans made to the Contributed Partnerships by certain partners of the Contributed Partnerships (the "Partner Loans"). Approximately $3.1 million of the Partner Loans is payable to Boykin Management. The Initial Lessee, as the successor to Boykin Management, will use those funds to retire third party bank indebtedness incurred by it and to pay income taxes or meet working capital needs. Approximately $5.3 million of the mortgage indebtedness to be paid by the Partnership from the net proceeds of the Offering is guaranteed by Boykin Group Affiliates, including William, Robert and John Boykin. Transactions with the Initial Lessee. The Initial Lessee, which is indirectly owned by Robert and John Boykin, will enter into the Percentage Leases with the Partnership and will be obligated to pay rent thereunder. The Initial Lessee will acquire certain assets and assume certain liabilities of the Initial Hotels, including the Franchise Agreements of the Initial Hotels. See "Lessees -- The Initial Lessee" and "The Formation." The Initial Lessee manages the Initial Hotels under the Percentage Leases. See "Business and Properties -- Percentage Leases." Employment Arrangements. The Company has entered into employment agreements with, and granted certain options to, Robert W. Boykin, Raymond P. Heitland and Mark L. Bishop. The agreement for Robert W. Boykin provides for an initial three year term and the agreements for Mr. Heitland and Mr. Bishop provide for an initial term of one year. See "Management -- Employment Contracts" and "-- Long-Term Incentive Plan." Fees for Services and Other Transactions. The Initial Hotels paid a Boykin Group Affiliate $148,000 and $143,000 for purchasing and design services rendered for the years ended December 31, 1994 and 1995, 76 83 respectively. The Initial Hotels purchased hotel furnishings through a Boykin Group Affiliate in the amounts of $1.8 million and $2.5 million for the year ended December 31, 1994 and the year ended December 31, 1995, respectively. These Boykin Group Affiliates will become subsidiaries of the Initial Lessee at the time of the Offering, and these subsidiaries will perform such purchasing and design services for the Initial Hotels without charge to the Company. See "Business and Properties -- The Percentage Leases." The Contributed Partnerships were indebted to Boykin Management and certain other Boykin Group Affiliates in the aggregate amounts of $4.0 million and $3.8 million at December 31, 1995 and June 30, 1996, respectively, for management fees, design fees, certain loan guarantee fees and loans payable, and certain other amounts including reimbursable expenses. Buffalo Property. William, Robert and John Boykin hold interests in a joint venture formed to purchase, other than for hotel purposes, a six-acre parcel in the immediate vicinity of the Buffalo Marriott Hotel. The Company and the joint venture have entered into an agreement that provides for certain cross-easements between the properties and provides that the land will contain specific deed restrictions to prevent the development of any hotel thereon. Relationship with Counsel. Albert T. Adams, a proposed director of the Company, is a partner in Baker & Hostetler, which provides legal services to the Boykin Group and various Boykin Group Affiliates and is serving as counsel to the Company in connection with the Offering. See "Legal Matters." PRINCIPAL SHAREHOLDERS OF THE COMPANY The following table sets forth certain information regarding the beneficial ownership of Common Shares and Units by each director and proposed director of the Company, by each named executive officer of the Company, by all directors, officers and proposed directors and officers of the Company as a group, and by each person who is expected to be the beneficial owner of 5% or more of the outstanding Common Shares immediately following the completion of the Offering. The table assumes that the Formation Transactions and the Offering are completed and that the Underwriters' over-allotment option will not be exercised. Each person named in the table has sole voting and investment power with respect to all Common Shares or Units shown as beneficially owned by that person, except as otherwise set forth in the notes to the table.
PERCENTAGE OWNERSHIP NAME AND ADDRESS OF THE COMPANY OF BENEFICIAL OWNER(1) UNITS (2) AFTER CONVERSION (5) - ------------------------------------------------------------- --------- -------------------- Robert W. Boykin............................................. 653,582(3) 6.98% Raymond P. Heitland.......................................... 9,682 * Mark L. Bishop............................................... 0 0 Ivan J. Winfield............................................. 0 0 3901 Insworth Drive Pepper Pike, Ohio 44124 Lee C. Howley, Jr............................................ 0 0 5430 Portage Drive Vermilion, Ohio 44089 Frank E. Mosier.............................................. 0 0 1111 Superior Ave. Suite 785 Cleveland, Ohio 44114 William N. Hulett III........................................ 0 0 6127 Chagrin River Road Bentleyville, Ohio 44022 John E. Boykin............................................... 552,038(4) 5.89% Albert T. Adams.............................................. 0 0 3200 National City Center Cleveland, Ohio 44114 All directors and officers and proposed directors and officers of the Company as a group.................................. 1,215,302 12.98%
77 84 - --------------- * Less than 1%. (1) Unless otherwise indicated, the address of each beneficial owner is Terminal Tower, Suite 1500, 50 Public Square, Cleveland, Ohio 44113-2258. (2) None of the persons listed will own any Common Shares immediately following the completion of the Offering. All Units are exchangeable for Common Shares at an exchange ratio of one Unit for each Common Share (subject to the Company's right to elect to instead pay cash for those Units), but the Boykin Group Affiliates and Boykin Associates who receive Units in connection with the formation generally may not exchange those Units until the third anniversary of the Offering. If all Units were exchanged for Common Shares (without regard to the Ownership Limit) these shares would constitute approximately 15.9% of the then outstanding Common Shares. Units are subject to certain restrictions on transfer. (3) Includes 435,077 Units held by other Boykin Group Affiliates. Does not include options for 300,000 shares. (4) Includes 372,866 Units held by other Boykin Group Affiliates. (5) On a fully-diluted basis, assuming Units are exchanged for Common Shares at the exchange rate of one Unit for each Common Share without regard to the Ownership Limit. It is not anticipated that the Ownership Limit will be waived. CAPITAL STOCK OF THE COMPANY GENERAL The Company was formed as an Ohio corporation on the filing of its Articles of Incorporation on February 8, 1996. The Company's Articles of Incorporation authorize the issuance of 25 million Common Shares, without par value, of which one share is issued and outstanding. In addition, up to 1 million Common Shares have been reserved for issuance under the Company's Long-Term Incentive Plan and an additional 25,000 Common Shares will be reserved for issuance on exercise of options to be granted to the Independent Directors. Following completion of the Offering, 7,875,000 million Common Shares will be issued and outstanding (9,056,250 if the Underwriters' overallotment option is exercised in full). There is no established trading market for the Common Shares. Application will be made for the listing of the Common Shares on the New York Stock Exchange under the symbol "BOY." National City Bank, Cleveland, Ohio, will act as transfer agent and registrar for the Common Shares. The following description of the Company's capital shares and of certain provisions of the Company's Articles of Incorporation is a summary of and is qualified in its entirety by reference to the Articles of Incorporation, a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part. See "Additional Information." COMMON SHARES Holders of the Company's Common Shares are entitled to receive dividends, when, as and if declared by the Board of Directors of the Company, out of funds legally available therefor. The holders of Common Shares, upon any liquidation, dissolution or winding-up of the Company, are entitled to share ratably in any assets remaining after payment in full of all liabilities of the Company and all preferences of the holders of any outstanding preferred shares. The Common Shares possess ordinary voting rights, each share entitling the holder thereof to one vote. Holders of Common Shares do not have cumulative voting rights in the election of directors and do not have preemptive rights. All of the Company's Common Shares now outstanding are, and the Common Shares offered hereby when issued and sold to the Underwriters in the manner described in this Prospectus will be, fully paid and nonassessable. 78 85 PREFERRED SHARES The Board of Directors is authorized to provide for the issuance of two classes of preferred shares (collectively, the "Preferred Shares"), each in one or more series, to establish the number of shares in each series and to fix the designation, powers, preferences and rights (other than voting rights) of each series and the qualifications, limitations or restrictions thereon. An aggregate of 5 million Preferred Shares are authorized. Because the Board of Directors has the power to establish the preferences and rights of each series of Preferred Shares, the Board of Directors may afford the holders of any series of Preferred Shares preferences, powers and rights senior to the rights of holders of Common Shares. The issuance of Preferred Shares could have the effect of delaying or preventing a change in control of the Company. The Company has no present intention to issue Preferred Shares. RESTRICTIONS ON TRANSFER For the Company to qualify as a REIT under the Code, it must meet certain requirements concerning the ownership of its outstanding shares. Specifically, not more than 50% in value of the Company's outstanding shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of a taxable year (other than the first year of the Company's existence) or during a proportionate part of a shorter taxable year, and the Company must be beneficially owned by 100 or more persons during at least 335 days of a taxable year (other than that first year) or during a proportionate part of a shorter taxable year. See "Federal Income Tax Considerations -- Requirements for Qualification." Because the Company expects to qualify as a REIT, the Articles of Incorporation limit the acquisition of shares of the Company's capital stock (the "Ownership Limit"). The Ownership Limit provides that, subject to certain exceptions set forth in the Articles of Incorporation, no person may own, or be deemed to own, by vote or value, by virtue of the applicable attribution provisions of the Code, more than 9.0% of each class of the outstanding shares of the Company. The Board of Directors may, but is not required to, waive the Ownership Limit if it determines that greater ownership will not jeopardize the Company's status as a REIT. As a condition of that waiver, the Board of Directors may require opinions of counsel satisfactory to it and undertakings or representations from the applicant with respect to preserving the REIT status of the Company. If any purported transfer of capital shares of the Company or any other event would otherwise result in any person or entity violating the Ownership Limit or would cause the Company to be beneficially owned by fewer than 100 persons, that transfer will be void and of no force or effect as to the number of shares in excess of the Ownership Limit, and the purported transferee (the "Prohibited Transferee") will acquire no right or interest (or, in the case of any event other than a purported transfer, the person or entity holding record title to shares in excess of the Ownership Limit (the "Prohibited Owner") will cease to own any right or interest) in the excess shares. In addition, if any purported transfer of shares of the Company or any other event would cause the Company to become "closely held" under the Code or otherwise to fail to qualify as a REIT under the Code, that transfer will be void and of no force or effect as to the number of shares in excess of the number that could have been transferred without that result, and the Prohibited Transferee will acquire no right or interest (or, in the case of any event other than a transfer, the Prohibited Owner will cease to own any right or interest) in the excess shares. Also, if any purported transfer of shares of the Company or any other event would otherwise cause the Company to own, or be deemed to own by virtue of the applicable attribution provisions of the Code, 10% or more, by vote or value, of the ownership interests in the Initial Lessee or in any sublessee, that transfer or event will be void and of no force or effect as to the number of shares in excess of the number that could have been transferred or affected by that event without that result, and the Prohibited Transferee will acquire no right or interest (or, in the case of any event other than a transfer, the Prohibited Owner will cease to own any right or interest) in the excess shares. Any excess shares arising from a prohibited transfer described above will be transferred automatically to a trust, the beneficiary of which will be a qualified charitable organization selected by the Company (the "Beneficiary"). The trustee of the trust, who will be designated by the Company and be unaffiliated with the Company and any Prohibited Owner, will be empowered to sell the excess shares to a qualified person or entity and to distribute to the applicable Prohibited Transferee an amount equal to the lesser of the price paid by the 79 86 Prohibited Transferee for those excess shares or the sale proceeds received for those shares by the trust. The trustee will be empowered to sell any excess shares resulting from any event other than a transfer, or from a transfer for no consideration, to a qualified person or entity and distribute to the applicable Prohibited Owner an amount equal to the lesser of the fair market value of those excess shares on the date of the triggering event or the sale proceeds received by the trust for those excess shares. Prior to a sale of any excess shares by the trust, the trustee will be entitled to receive, in trust for the benefit of the Beneficiary, all dividends and other distributions paid by the Company with respect to those shares, and also will be entitled to exercise all voting rights with respect to those shares. All certificates representing shares of the Company will bear a legend referring to the restrictions described above. Every owner of more than 5% (or such lower percentage as may be required by the Code or Treasury Regulations) of the outstanding shares of the Company must file no later than January 30 of each year a written notice with the Company containing the information specified in the Articles of Incorporation. In addition, each shareholder will be required, upon demand, to disclose to the Company in writing such information as the Company may request in order to determine the effect, if any, of that shareholder's actual and constructive ownership on the Company's status as a REIT and to ensure compliance with the Ownership Limit. The Ownership Limit may have the effect of precluding an acquisition of control of the Company without approval of the Board of Directors. OHIO ANTI-TAKEOVER PROVISIONS The Company has elected not to be subject to Ohio's "Merger Moratorium" statute (Chapter 1704 of the Ohio Revised Code) or its "Control Share Acquisition" act (Section 1701.831 of the Ohio Revised Code), in light of the substantial share transfer restrictions included in the Company's Articles of Incorporation. Section 1707.041 of the Ohio Revised Code, which regulates certain "control bids" for Ohio corporations, does not contain an election provision and remains applicable to the Company. THE PARTNERSHIP The following summary of the Partnership Agreement, and the descriptions of certain provisions thereof set forth elsewhere in this Prospectus, is qualified in its entirety by reference to the Partnership Agreement, which is filed as an exhibit to the Registration Statement of which this Prospectus is a part. MANAGEMENT The Partnership is an Ohio limited partnership. Pursuant to the Partnership Agreement, the Company, as the sole general partner of the Partnership (the "General Partner"), will have full, exclusive and complete responsibility and discretion in the management and control of the Partnership, and the limited partners of the Partnership (the "Limited Partners") will have no authority to transact business for, or to participate in the management activities or decisions of, the Partnership. However, any amendment to the Partnership Agreement that would (i) seek to impose personal liability on the Limited Partners; (ii) affect the Exchange Rights; or (iii) impose on the Limited Partners any obligation to make additional contributions to the capital of the Partnership, would require the consent of Limited Partners holding at least 66 2/3% of the limited partnership interests. The Partnership has been formed to own the Initial Hotels and to own all other properties acquired by the Company. Accordingly, the income and expenses of the Company that will be reflected in the financial information to be provided to the shareholders will be the income and expenses of the Partnership, adjusted (on a pro forma basis) to deduct the minority interest of the Limited Partners. Distributions from the Partnership will be made at the discretion of the Company as the sole general partner of the Partnership. See "Distributions" for a discussion of the factors relevant to the determination of those distributions. All distributions from the Partnership will be made to the Company and the Limited Partners concurrently, and 80 87 will be allocated to the Company, on the one hand, and to the Limited Partners, on the other, on a pro rata basis by reference to their respective percentage interests in the Partnership. TRANSFERABILITY OF INTERESTS The Company may not voluntarily withdraw from the Partnership or transfer or assign its interest in the Partnership unless the transaction in which the withdrawal or transfer occurs results in the Limited Partners receiving property in an amount equal to the amount they would have received had they exercised their Exchange Rights immediately prior to the transaction, or unless the successor to the Company contributes substantially all of its assets to the Partnership in return for an interest in the Partnership. With certain limited exceptions, the Limited Partners may not transfer their interests in the Partnership without the consent of the Company. The Company may not consent to any transfer that would cause the Partnership to be treated as a corporation for federal income tax purposes. CAPITAL CONTRIBUTIONS The Company will contribute or loan to the Partnership all of the net proceeds of the Offering as its initial capital contribution or pursuant to the Intercompany Convertible Note. The Limited Partners will contribute to the Partnership the Limited Partners' proportionate ownership interests in the Initial Hotels as their initial capital contributions. The value of each Limited Partner's capital contribution will equal its pro rata share of the price paid by the Partnership to acquire the Contributed Partnerships. The Partnership Agreement provides that if the Partnership requires additional funds at any time or from time to time in excess of funds available to the Partnership from borrowings or capital contributions, the Company may borrow those funds from a financial institution or other lender and lend those funds to the Partnership on the same terms and conditions as are applicable to the Company's borrowing of the funds. As an alternative to borrowing funds required by the Partnership, the Company may contribute the amount of the required funds as an additional capital contribution to the Partnership. If the Company so contributes additional capital, the Company's partnership interest in the Partnership will be increased on a proportionate basis based on the amount of the additional capital contributions and the value of the Partnership at the time of the contributions. If the Company issues Preferred Shares, it will contribute the proceeds therefrom to the Partnership in exchange for Partnership interests that have the same terms as those Preferred Shares. The partnership interests of the Limited Partners will be correspondingly decreased or adjusted in connection with any such contribution. EXCHANGE RIGHTS Pursuant to the Partnership Agreement, the Limited Partners will receive the Exchange Rights, which will enable them to cause the Partnership to purchase their Units for cash. The Exchange Rights may be exercised by Limited Partners who are Boykin Group Affiliates or Boykin Associates at any time after the third anniversary of the closing of the Offering, and by the Other Partners, who hold an aggregate of 1.4% of the Units, at any time after the closing of the Offering, in whole or in part. The amount of cash to be received by a Limited Partner exercising exchange rights will be determined by mathematically converting the Limited Partner's Units to a number of Common Shares at a conversion rate of one Common Share for each Unit held by that Limited Partner and then multiplying the resulting number of Common Shares by the average daily market price of a Common Share for the ten (10) consecutive trading days immediately preceding the date the Company receives the applicable notice of exchange from that Limited Partner. The Company may elect to assume and directly satisfy an Exchange Right by paying cash to the Limited Partner or by delivering Common Shares for the exchanged Units on a one-for-one basis. If the Company elects to pay cash in satisfaction of an Exchange Right, the amount payable by the Company is due within one year after the exercise of the right, subject to an interest charge equal to the lower of the Company's current annual dividend rate or 8.0% per annum. The number of shares into which Units are converted for purposes of determining the cash payable on exercise of Exchange Rights will be adjusted on the occurrence of stock splits, mergers, consolidations or similar pro rata share transactions that otherwise would have the effect of diluting the ownership interests of the Limited Partners or the shareholders of the Company. 81 88 TAX MATTERS; PROFITS AND LOSSES Pursuant to the Partnership Agreement, the Company will be the tax matters partner of the Partnership and, as such, will have authority to make tax elections under the Code on behalf of the Partnership. Profit and loss of the Partnership generally will be allocated among the partners in accordance with their respective interests in the Partnership, except to the extent that the Partnership is required pursuant to Section 704(c) of the Code to allocate depreciation deductions relating to, or gain on sale of, the Initial Hotels in a different manner. See "Federal Income Tax Considerations -- Tax Aspects of the Company's Investment in the Operating Partnership -- Tax Allocations With Respect to the Properties." OPERATIONS The Partnership Agreement requires that the Partnership be operated in a manner that will enable the Company to satisfy the requirements for being classified as a REIT and to avoid any federal income tax liability. DISTRIBUTIONS The Partnership Agreement provides that the Partnership will make cash distributions from cash from operations (including net sale or refinancing proceeds, but excluding net proceeds from the sale of the Partnership's property in connection with the liquidation of the Partnership) quarterly, in amounts determined by the Company, in its sole discretion, to the partners in accordance with their respective percentage interests in the Partnership. Upon liquidation of the Partnership, after payment of, or adequate provision for, debts and obligations of the Partnership, including any partner loans, any remaining assets of the Partnership will be distributed to all partners with positive capital accounts in accordance with their respective positive capital account balances. If the Company has a negative balance in its capital account following a liquidation of the Partnership, it will be obligated to contribute cash to the Partnership equal to the negative balance in its capital account. TERM The Partnership will continue until December 31, 2050, or until sooner dissolved on (i) the bankruptcy, dissolution or withdrawal of the Company (unless the Limited Partners elect to continue the Partnership); (ii) the sale or other disposition of all or substantially all the assets of the Partnership; (iii) the redemption of all limited partnership interests in the Partnership (other than those held by the Company, if any); or (iv) the election of the General Partner. SHARES AVAILABLE FOR FUTURE SALE On the completion of the Offering, the Company will have 7,875,000 million Common Shares outstanding (without taking into account any options granted to employees or directors of the Company and assuming no exercise of the Underwriters' overallotment option or exchange of Units). All of the Common Shares issued in the Offering will be freely tradeable, by persons other than "affiliates" of the Company, without restriction under the Securities Act of 1933 (the "Securities Act"). All of the outstanding Units will be "restricted" securities within the meaning of Rule 144 under the Securities Act and may not be sold under the Securities Act unless an exemption from registration is available, including exemptions contained in Rule 144. Prior to the date of this Prospectus, there has been no public market for the Common Shares. Trading of the Common Shares is expected to commence following the completion of the Offering. No prediction can be made as to the effect, if any, that future sales of shares or the availability of shares for future sale will have on the market price prevailing from time to time. Sales of substantial amounts of Common Shares (including shares issued on the exercise of options), or the perception that such sales could occur, could adversely affect the market price of the Common Shares. The holders of all of the Common Shares and Units outstanding immediately prior to the Offering have agreed, subject to certain exceptions, not to offer, sell, contract to sell 82 89 or otherwise dispose of any Common Shares or Units for a period of one year after the date of this Prospectus without the prior written consent of the Representatives. See "Underwriting." FEDERAL INCOME TAX CONSIDERATIONS The following discussion summarizes the federal income tax considerations that materially affect a prospective shareholder who is a U.S. citizen or resident or a tax-exempt organization (including individual retirement accounts). The discussion is general in nature and not exhaustive of all possible tax considerations, nor does the discussion give a detailed description of any state, local, or foreign tax considerations. The discussion does not address all aspects of federal income tax law that may be relevant to a prospective shareholder of the Company in light of his or her particular circumstances or to certain types of shareholders (including insurance companies, financial institutions or broker-dealers, and (except to the limited extent discussed herein) foreign corporations and persons who are not citizens or resident of the United States) subject to special treatment under the federal income tax laws. THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING AND EACH PROSPECTIVE SHAREHOLDER OF THE COMPANY IS ADVISED TO CONSULT WITH HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP AND SALE OF COMMON SHARES IN AN ENTITY ELECTING TO BE TAXED AS A REIT, INCLUDING THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS. GENERAL The Company expects that it will be organized and will operate in such a manner so as to qualify for taxation as a REIT under Sections 856 through 860 of the Code commencing with its taxable year ending December 31, 1996 and the Company intends to operate in such a manner in the future. No assurance can be given, however, that the Company will operate in a manner so as to qualify or remain qualified as a REIT. Baker & Hostetler, counsel to the Company ("Counsel"), has rendered its opinion, subject to certain assumptions and conditioned upon certain factual representations made by the Company, that (i) the Company will be organized in conformity with the requirements for qualification as a REIT under the Code and that the method of operation of the Company and the Operating Partnership will permit the Company to continue to so qualify for its current and future taxable years; (ii) the Operating Partnership will be treated as a partnership for federal income tax purposes; and (iii) the summary of federal income tax considerations set forth in this Prospectus accurately summarizes the federal income tax considerations that are likely to be material to a holder of Common Shares. Unlike a tax ruling, an opinion of counsel is not binding on the IRS, and no assurance can be given that the IRS will not challenge the status of the Company as a REIT for federal income tax purposes. With respect to Counsel's opinion relating to the qualification of the Company as a REIT, it should be noted that the Company's continued qualification as a REIT in current and future taxable years will depend upon whether the Company and the Operating Partnership continue to meet the various qualification tests imposed under the Code (discussed below). Counsel will not review compliance with these tests on a periodic or continuing basis. Accordingly, no assurance can be given that the actual results of the Company's operations for the current or future taxable years will satisfy such requirements. See "Federal Income Tax Considerations -- Requirements for Qualification as a REIT -- Failure to Qualify." The opinions and discussion herein are based upon the Code, as currently in effect, applicable Treasury Regulations adopted thereunder, reported judicial decisions, and IRS rulings, all as of the date hereof and certain factual representations and assumptions made by the Company concerning the organization and proposed operation of the Company. There can be no assurance, however, that the legal authorities on which such opinions and this discussion are based will not change, perhaps retroactively, that the Company's representations and factual assumptions underlying this discussion will be accurate, or that there will not be a change in circumstances of the Company that would affect such opinions or this discussion. Accordingly, there can be no assurance that the IRS will not challenge the conclusion of Counsel's opinions. 83 90 TAXATION OF THE COMPANY AS A REIT If the Company qualifies for taxation as a REIT and distributes to its shareholders at least 95% of its REIT taxable income, it generally will not be subject to federal corporate income tax on the portion of its ordinary income or capital gain that is timely distributed to its shareholders. This treatment substantially eliminates the "double taxation" (at the corporate and shareholder levels) that generally results from investment in a corporation. If the Company were to fail to qualify as a REIT, it would be taxed at rates applicable to corporations on all of its income, whether or not distributed to its shareholders. Even if the Company qualifies as a REIT, it may be subject to federal income or excise tax as follows: (i) The Company will be taxed at regular corporate rates on REIT taxable income and net capital gains not distributed to its shareholders; (ii) Under certain circumstances, the Company may be subject to the "alternative minimum tax" on its items of tax preference, if any; (iii) If the Company has net income from prohibited transactions (which are, in general, certain sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business) such income will be subject to a 100% tax; (iv) If the Company should fail to satisfy the 75% gross income test or the 95% gross income test (as discussed below), and has nonetheless maintained its qualification as a REIT because certain other requirements have been met, it will be subject to a 100% tax on the net income attributable to the greater of the amount by which the Company fails the 75% or 95% test, multiplied by a fraction intended to reflect the Company's profitability; (v) If the Company should fail to distribute during each calendar year at least the sum of (A) 85% of its REIT ordinary income for such year, (B) 95% of its REIT capital gain net income for such year and (C) any undistributed taxable income from prior years, it would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed; (vi) If the Company has (A) net income from the sale or other disposition of "foreclosure property" (which is, in general, property acquired by the Company by foreclosure or otherwise on default on a loan secured by the property) which is held primarily for sale to customers in the ordinary course of business or (B) other nonqualifying income from foreclosure property, it will be subject to tax on such income at the highest corporate rate; and (vii) If the Company acquires assets from a C corporation (i.e., generally a corporation subject to tax at the corporate level) in a transaction in which the bases of the acquired assets in the Company's hands are determined by reference to the bases of the assets (or any other property) in the hands of the C corporation, and the Company recognizes net gain on the disposition of such assets in any taxable year during the 10-year period (the "Restriction Period") beginning on the date on which such assets were acquired by the Company then, pursuant to guidelines issued by the IRS, the excess of the fair market value of such property at the beginning of the applicable Restriction Period over the Company's adjusted basis in such property as of the beginning of such Restriction Period will be subject to a tax at the highest regular corporate rate. REQUIREMENTS FOR QUALIFICATION AS A REIT General. The Code defines a REIT as a corporation, trust or association: (i) which is managed by one or more trustees or directors; (ii) the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest; (iii) which would be taxable as a domestic corporation but for Sections 856 through 859 of the Code; 84 91 (iv) which is neither a financial institution nor an insurance company subject to certain provisions of the Code; (v) which has the calendar year as its taxable year; (vi) the beneficial ownership of which is held by 100 or more persons; (vii) during the last half of each taxable year not more than 50% in value of the outstanding shares of which is owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain exempt entities); (viii) which makes an election to be a REIT (or made such an election in a previous taxable year that is still valid) and satisfies all relevant filing and other administrative requirements that must be met in order to maintain REIT status; and (ix) which meets certain income and asset tests, described below. Conditions (i) through (v), inclusive, must be met during the entire taxable year and condition (vi) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. However, conditions (vi) and (vii) will not apply until after the first taxable year for which an election is made to be taxed as a REIT. The Company's taxable year will be the calendar year. Following the consummation of this Offering, the Company will have satisfied the share ownership requirements set forth in (vi) and (vii) above (respectively, the "100 shareholder requirement" and "five or fewer requirement"). In order to ensure continuing compliance with the share ownership requirements, the Company has placed certain restrictions on the transfer of its Common Shares to prevent further concentration of share ownership. See "Capital Stock of the Company -- Restrictions on Transfer." Moreover, to evidence compliance with these requirements, the Company must maintain records which disclose the actual ownership of its outstanding Common Shares. In fulfilling its obligation to maintain these records, the Company must, and will, demand written statements each year from the record holders of designated percentages of its Common Shares disclosing the actual owners of such Common Shares. A list of those persons failing or refusing to comply with such demand must be maintained as a part of the Company's records. A shareholder failing or refusing to comply with the Company's written demand must submit with his or her tax return a similar statement and certain other information. Asset Tests. In order for the Company to maintain its qualification as a REIT, at the close of each quarter of its taxable year, it must satisfy three tests relating to the nature of its assets: (i) At least 75% of the value of the Company's total assets must be represented by any combination of interests in real property, interests in mortgages on real property, shares in other REITs, cash, cash items, and certain government securities. (ii) Not more than 25% of the Company's total assets may be represented by securities other than those in the 75% asset class. (iii) Of the investments included in the 25% asset class, the value of any one issuer's securities owned by the Company may not exceed 5% of the value of the Company's total assets, and the Company may not own more than 10% of any one issuer's outstanding voting securities (excluding securities of a qualified REIT subsidiary (as defined in the Code) or another REIT). Where the Company owns an interest in a partnership, it will be treated for purposes of the asset tests as owning a proportionate part of the partnership's assets. See "-- Tax Aspects of the Company's Investment in the Operating Partnership -- General." The Company's investment in the Initial Hotels through its interest in the Operating Partnership will constitute qualified assets for purposes of the 75% asset test. As such, the Company expects that more than 75% of the value of its assets will be real estate assets. The Company does not expect to hold any securities representing more than 10% of any one issuer's voting securities nor does the Company expect to hold securities of any one issuer exceeding 5% of the value of the Company's gross assets. 85 92 If the Company inadvertently fails one or more of the asset tests at the end of a calendar quarter, such a failure would not cause it to lose its REIT status, provided that (i) it satisfied all of the asset tests at the close of a preceding calendar quarter, and (ii) the discrepancy between the values of the Company's assets and the standards imposed by the asset test either did not exist immediately after the acquisition of any particular asset or was not wholly or partly caused by such an acquisition. If the condition described in clause (ii) of the preceding sentence was not satisfied, the Company could still avoid disqualification by eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose. Income Tests. In order for the Company to maintain its qualification as a REIT, it must satisfy three separate percentage tests relating to the source of its gross income in each taxable year. For purposes of these tests, where the Company invests in a partnership, the Company will be treated as receiving its proportionate share of the gross income of the partnership, and such gross income will retain the same character in the hands of the Company as it had in the hands of the partnership. See "-- Tax Aspects of the Company's Investment in the Operating Partnership -- General." (i) The 75% Test. At least 75% of the Company's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from specified real estate sources, including "rents from real property" and interest and certain other income earned from mortgages on real property, gain from the sale of real property or mortgages (other than in prohibited transactions) or income from qualified types of temporary investments. (ii) The 95% Test. At least 95% of the Company's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from the same items which qualify under the 75% income test or from dividends, interest and gain from the sale or disposition of stock or securities, or from any combination of the foregoing. (iii) The 30% Test. Less than 30% of the Company's gross income (including gross income from prohibited transactions) for each taxable year must be derived from a gain in connection with the sale or other disposition of stock or securities held for less than one year, property in a prohibited transaction and real property held for less than four years (other than involuntary conversions and foreclosure property). Rents received by the Company will qualify as "rents from real property" for purposes of the 75% and 95% income tests if the following requirements are met. (i) The amount of rent received must generally not be based in whole or in part on the income or profits derived by any person from such property. However, amounts received or accrued generally will not be excluded from the term "rents from real property" solely by reason of being based on a fixed percentage or percentages of receipts or sales, or if they are based on the net income or profits of the tenant and the tenant derives substantially all of its income with respect to such property from the leasing or subleasing of substantially all of such property and such tenant receives from subtenants only amounts which would be treated as rents from real property if received directly by the Company. (ii) Rents must not be received from a tenant in which the Company or a direct or indirect owner of 10% or more of the Company, owns directly or constructively a 10% or greater interest in the assets or net profits of such tenant (a "Related Party Tenant"). (iii) The Company must not operate or manage its property or furnish or render directly services to its tenants unless such services are of a type that a tax-exempt organization can provide its tenants without causing its rental income to be unrelated business taxable income under the Code ("Qualifying Services"). If such services are not Qualifying Services, such services must be rendered by an "independent contractor" that is adequately compensated and from whom the Company derives no income. Receipts for services furnished (whether or not rendered by an independent contractor) that are not customarily provided to tenants of properties of a similar class in the geographic market in which the Company's property is located ("Noncustomary Services") will not qualify as rents from real property. (iv) Rent attributable to personal property leased in connection with a lease of real property will not qualify as "rents from real property" if such rent is greater than 15% of the total rent received under the lease. 86 93 In order for the Minimum Rent and the Percentage Rent to constitute "rents from real property," the Percentage Leases must be respected as true leases for federal income tax purposes and not treated as service contracts, joint ventures or some other type of arrangement. The determination of whether the Percentage Leases are true leases depends on an analysis of all the surrounding facts and circumstances. In making such a determination, courts have considered a variety of factors, including the intent of the parties, the form of the agreement, and the degree of control over the property that is retained by the property owner. Code Section 7701(e) provides that a contract that purports to be a service contract (or a partnership agreement) is treated instead as a lease of property if the contract is properly treated as such, taking into account all relevant factors, including whether or not (i) the service recipient is in physical possession of the property; (ii) the service recipient controls the property; (iii) the service recipient has a significant economic or possessory interest in the property (e.g., the property's use is likely to be dedicated to the service recipient for a substantial portion of the useful life of the property, the recipient shares the risk that the property will decline in value, the recipient shares in any appreciation in the value of the property, the recipient shares in savings in the property's operating costs, or the recipient bears the risk of damage to or loss of the property); (iv) the service provider does not bear any risk of substantially diminished receipts or substantially increased expenditures if there is nonperformance under the contract; (v) the service provider does not use the property concurrently to provide significant services to entities unrelated to the service recipient; and (vi) the total contract price does not substantially exceed the rental value of the property for the contract period. Since the determination whether a service contract should be treated as a lease is inherently factual, the present or absence of any single factor may not be dispositive in every case. In rendering its opinion that the Company will qualify for taxation as a REIT, Counsel has concluded that the Percentage Leases should be treated as true leases for federal income tax purposes. Such conclusion is based, in part, on the following facts: (i) the Operating Partnership and the Initial Lessee intend for their relationship to be that of a lessor and lessee and such relationship will be documented by lease agreements; (ii) the Initial Lessee will have the right to exclusive possession and use and quiet enjoyment of the Initial Hotels during the term of the Percentage Leases; (iii) the Initial Lessee will bear the cost of, and be responsible for, day-to-day maintenance and repair of the Initial Hotels, other than the cost of maintaining underground utilities and structural repairs, and will dictate how the Initial Hotels are operated, maintained and improved; (iv) the Initial Lessee will bear all of the costs and expenses of operating the Initial Hotels (including the cost of any inventory used in their operation) during the term of the Percentage Leases (other than real property taxes, and the cost of replacement or refurbishment of furniture, fixtures and equipment, to the extent such costs do not exceed the allowance of such costs provided by the Operating Partnership under each Percentage Lease); (v) the Initial Lessee will benefit from any savings in the costs of operating the Initial Hotels during the term of the Percentage Leases; (vi) the Initial Lessee will indemnify the Operating Partnership against all liabilities imposed on the Operating Partnership during the term of the Percentage Leases by reason of (A) injury to persons or damage to property occurring at the Initial Hotels or (B) Initial Lessee's use, management, maintenance or repair of the Initial Hotels; (vii) the Initial Lessee is obligated to pay substantial fixed rent for the period of use of the Initial Hotels; and (viii) the Initial Lessee stands to incur substantial losses (or reap substantial gains) depending on how successfully it operates the Initial Hotels. Investors should be aware that there are no controlling Treasury Regulations, published rulings, or judicial decisions involving leases with terms substantially the same as the Percentage Leases that discuss whether such leases constitute true leases for federal income tax purposes. Therefore, the foregoing conclusions with respect to the relationship between the Operating Partnership and the Initial Lessee is based upon all of the facts and circumstances and upon rulings and judicial decisions involving situations that are considered to be analogous. There can be no complete assurance that the IRS will not successfully assert a contrary position. If the Percentage Leases are recharacterized as service contracts or partnership agreements, rather than true leases, part or all of the payments that the Operating Partnership receives from Initial Lessee may not be considered rent or may not otherwise satisfy the various requirements for qualification as "rents from real property." In that case, the Company likely would not be able to satisfy either the 75% or 95% income tests and, as a result, would lose its REIT status. See "-- Requirements for Qualification as a REIT -- Income Tests." 87 94 As noted above, in order for the Rents to qualify as "rents from real property," the Percentage Rent must not be based in whole or in part on the income or profits of any person. The Percentage Rent, however, will qualify as "rents from real property" if it is based on percentages of receipts or sales and the percentages (i) are fixed at the time the Percentage Leases are entered into; (ii) are not renegotiated during the term of the Percentage Leases in a manner that has the effect of basing Percentage Rent on income or profits; and (iii) conforms with normal business practice. More generally, the Percentage Rent will not qualify as "rents from real property" if, considering the Percentage Leases and all the surrounding circumstances, the arrangement does not conform with normal business practice, but is in reality used as a means of basing the Percentage Rent on income or profits. Since the Percentage Rent is based on fixed percentages of the gross revenues from the Initial Hotels that are established in the Percentage Leases, and the Company has represented that the percentages (i) will not be renegotiated during the terms of the Percentage Leases in a manner that has the effect of basing the Percentage Rent on income or profits; and (ii) conform with normal business practice, the Percentage Rent should not be considered based in whole or in part on the income or profits of any person. Furthermore, the Company has represented that, with respect to other hotel properties that it acquires in the future, it will not charge rent for any property that is based in whole or in part on the income or profits of any person (except by reason of being based on a fixed percentage of gross revenues, as described above). Another requirement for the Rents to constitute "rents from real property" is that the Rents attributable to personal property leased in connection with the lease of the real property comprising an Initial Hotel must not be greater than 15% of the Rents received under the Percentage Lease. The Rents attributable to the personal property in an Initial Hotel is the amount that bears the same ratio to total rent for the taxable year as the average of the adjusted bases of the personal property in the Initial Hotel at the beginning and at the end of the taxable year bears to the average of the aggregate adjusted bases of both the real and personal property comprising the Initial Hotel at the beginning and at the end of such taxable year (the "Adjusted Basis Ratio"). Furthermore, the Company has represented that rents attributable to personal property will not exceed 15% of the rents received under the Percentage Lease. A third requirement for qualifications of the Rents as "rents from real property" is that the Company must not own, directly or constructively, 10% or more of any tenant (the "10% Ownership Limitation"). Under the attribution rules governing the 10% Ownership Test, the Company is considered to own any shares owned by the Operating Partnership if partners in the Operating Partnership collectively own 10% or more (by value) of the Company. The Partnership Agreement provides that a redeeming Limited Partner will receive cash, rather than Common Stock, if the acquisition of Common Stock by such Partner would result in the Company being treated as owning, directly or constructively, 10% or more of the Initial Lessee or any sublessee. However, notwithstanding such restriction, because the Code's constructive ownership rules for purposes of the 10% Ownership Limitation are broad and it is not possible to continually monitor direct and indirect ownership of all Company Shares, it is possible that the Limited Partners of the Operating Partnership may at some time own, directly or through attribution, 10% or more of such Shares, which would cause the Company to fail the gross income requirements and thus lose its REIT status. A fourth requirement for qualification of the Rents as "rents from real property" is that the Company cannot furnish or render non-Qualifying Services other than through an independent contractor from whom the Company itself does not derive or receive any income. Although the Company does provide certain management services, the Company has represented and warranted to Baker & Hostetler that these services are usual and customary management services provided by landlords in the geographic areas in which the Company owns property, and that such services are not primarily for the convenience of its residents. To the extent the provision of services would cause such disqualification, the Company has represented that it will hire independent contractors, from which the Company derives no income, to perform such services. As described above, however, if the Percentage Leases are recharacterized as service contracts, partnership agreements or some other form of arrangement, the Rents likely would be disqualified as "rents from real property" because the Company would be considered to furnish or render non-Qualifying Services to the occupants of the Initial Hotels other than through an independent contractor from whom the Company derives or receives no income. 88 95 In summary, if the Rents do not qualify as "rents from real property" because either (i) the Percentage Rent is based on income or profits of the Initial Lessee; (ii) the Company owns, directly or constructively, 10% or more of the Lessee or any sublessee; or (iii) the Company furnishes non-Qualifying Services to the tenants of the Initial Hotels other than through a qualifying independent contractor (or furnishes Non-Customary Services (whether or not through an independent contractor) unless separately charged for by the independent contractor), none of the Rents would qualify as "rents from real property." In such event, the Company likely would lose its REIT status because it would be unable to satisfy either the 75% or 95% income tests. See "-- Requirements for Qualification as a REIT -- Income Tests." Based on the foregoing, the Rents should qualify as "rents from real property" for purposes of the 75% and 95% income tests. As described above, the foregoing conclusions and Counsel's opinion as to the qualification of the Company to be taxed as a REIT are based upon an analysis of all the facts and circumstances and upon rulings and judicial decisions involving situations that are considered to be analogous, as well as representations by the Company and the Operating Partnership and assumptions that are described above and set out in Counsel's opinion. Opinions of counsel are not binding upon the IRS or a court. Accordingly, there can not be complete assurance that the IRS will not assert successfully a contrary position and, therefore, prevent the Company from qualifying for taxation as a REIT. The interest accrued on the Intercompany Convertible Note by the Company will be qualified income for purposes of the 75% test because the Intercompany Convertible Note is secured by second mortgages on two of the Initial Hotels. If the sum of the income realized by the Company (whether directly or through its interest in the Operating Partnership) which does not satisfy the requirements of the 75% and the 95% gross income tests (collectively, "Non-Qualifying Income"), exceeds 5% of the company's gross income for any taxable year, the company's status as a REIT would be jeopardized. The company has represented that the amount of its Non-Qualifying Income will not exceed 5% of the Company's annual gross income for any taxable year. It is possible that, from time to time, the Company or the Operating Partnership will enter into hedging transactions with respect to one or more of its assets or liabilities. Any such hedging transactions could take a variety of forms. If the Company or the Operating Partnership enters into an interest rate swap or cap contract to hedge any variable rate indebtedness incurred to acquire or carry real estate assets, any periodic income or gain from the disposition of such contract should be qualifying income for purposes of the 95% gross income test, but not for the 75% gross income test. Furthermore, any such contract would be considered a "security" for purposes of applying the 30% gross income test. To the extent that the Company or the Operating Partnership hedges with other types of financial instruments or in other situations, it may not be entirely clear how the income from those transactions will be treated for purposes of the various income tests that apply to REITs under the Code. The Company intends to structure any hedging transactions in a manner that does not jeopardize its status as a REIT. If the Company fails to satisfy one or both of the 75% or 95% income tests for any taxable year, it may still qualify as a REIT in such year if (i) it attaches a schedule of the source and nature of each item of its gross income to its federal income tax return for such year; (ii) the inclusion of any incorrect information in its return was not due to fraud with intent to evade tax; and (iii) the Company's failure to meet such tests is due to reasonable cause and not due to willful neglect. It is not possible, however, to state whether in all circumstances the Company would be entitled to the benefit of these relief provisions. Even if these relief provisions apply, the Company will still be subject to a tax imposed with respect to the excess net income. See "-- Taxation of the Company as a REIT." No such relief is available for violations of the 30% income test. Annual Distribution Requirements. The Company, in order to qualify as a REIT, is required to distribute dividends (other than capital gain dividends) to its shareholders in an amount at least equal to (A) the sum of (i) 95% of the Company's "REIT taxable income" (computed without regard to the dividends paid deduction and the REITs net capital gain); and (ii) 95% of the net income (after tax), if any, from foreclosure property, minus (B) the sum of certain items of noncash income. In addition, if the Company disposes of any asset during its Restriction Period, the Company will be required to distribute at least 95% of the built-in gain (after tax), if any, recognized on the disposition of such asset. Such distributions must be paid in the taxable year to 89 96 which they relate, or in the following taxable year if declared before the Company timely files its tax return for such year and if paid on or before the first regular dividend payment after such declaration. To the extent that the Company does not distribute all of its net capital gain or distributes at least 95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be subject to tax on the undistributed amount at regular capital gains and ordinary corporate tax rates. Moreover, if the Company should fail to distribute during each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year; (ii) 95% of its REIT net capital gain income for such year; and (iii) any undistributed taxable income from prior periods, the Company would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. The Company intends to make timely distributions sufficient to satisfy the annual distribution requirements. In this regard, the partnership agreement of the Operating Partnership authorizes the Company, as general partner, to take such steps as may be necessary to cause the Operating Partnership to distribute to its partners an amount sufficient to permit the Company to meet these distribution requirements. It is possible that the Company, from time to time, may not have sufficient cash or other liquid assets to meet the 95% distribution requirement due primarily to the expenditure of cash for nondeductible expenses such as principal amortization or capital expenditures. In the event that such timing differences occur, the Company may find it necessary to cause the Operating Partnership to arrange for borrowings or liquidate some of its investments in order to meet the annual distribution requirement. In order to avoid any problem with the 95% distribution requirement, the Company will closely monitor the relationship between its REIT taxable income and cash flow and, if necessary, will borrow funds (or cause the Operating Partnership to borrow funds) in order to satisfy the distribution requirements. If the Company fails to satisfy the 95% distribution requirement as a result of an adjustment to the Company's tax return by the IRS, the Company may be permitted to remedy such a failure by paying a "deficiency dividend" (plus applicable interest and penalties) within a specified time. Failure to Qualify. If the Company fails to qualify for taxation as a REIT in any taxable year and the relief provisions do not apply, the Company will be subject to tax (including any applicable corporate alternative minimum tax) on its taxable income at regular corporate rates. Distributions to shareholders in any year in which the Company fails to qualify will not be deductible by the Company, nor will they be required to be made. In such event, to the extent of current and accumulated earnings and profits, all distributions to shareholders will be taxable to them as ordinary income, and, subject to certain limitations of the Code, corporate distributees may be eligible for the dividends received deduction. Unless entitled to relief under specific statutory provisions, the Company also will be ineligible for qualification as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether in all circumstances the Company would be entitled to such statutory relief. TAX ASPECTS OF THE COMPANY'S INVESTMENT IN THE OPERATING PARTNERSHIP General. The Company will hold a direct interest in the Operating Partnership. In general, a partnership is not subject to federal income tax. Rather, each partner includes in the partner's taxable income or loss its allocable share of the partnership's items of income, gain, loss, deduction and credit, without regard to whether the partner receives a distribution from the partnership. The Company will include its proportionate share of the foregoing items of the Operating Partnership for purposes of the various REIT income tests and in the computation of its REIT taxable income. See "-- Requirements for Qualification as a REIT -- Income Tests." Any resultant increase in the Company's REIT taxable income will increase its distribution requirements (see "-- Requirements for Qualification as a REIT -- Annual Distribution Requirements"), but will not be subject to federal income tax in the hands of the Company provided that such income is distributed by the Company to its shareholders. Moreover, for purposes of the REIT asset tests (see "-- Requirements for Qualification as a REIT -- Asset Tests"), the Company will include its proportionate share of assets held by the Operating Partnership. Entity Classification. The Company's interest in the Operating Partnership involves special tax considerations, including the possibility of a challenge by the IRS of the status of the Operating Partnership as a partnership (as opposed to an association taxable as a corporation) for federal income tax purposes. If the 90 97 Operating Partnership was treated as an association, it would be taxable as a corporation and therefore subject to an entity-level tax on its income. In such a situation, the character of the Company's assets and items of gross income would change, which would preclude the Company from satisfying the asset and income tests (see "-- Requirements for Qualification as a REIT -- Asset Tests" and "-- Income Tests"), and in turn would prevent the Company from qualifying as a REIT. See "-- Requirements for Qualification as a REIT -- Failure to Qualify" above for a discussion of the effect of the Company's failure to meet such tests for a taxable year. The Company does not intend to request a ruling from the IRS that the Operating Partnership will be treated as a partnership for federal income tax purposes. Counsel has rendered its opinion, subject to certain factual assumptions and representations of the Company and the Operating Partnership, that the Operating Partnership will be treated for federal income tax purposes as a partnership. Counsel's opinion is not binding on the IRS or the courts. Tax Allocations with Respect to the Properties. The Operating Partnership initially will acquire a tax basis in each of the Initial Hotels equal to the adjusted tax basis of such asset in the hands of the current ownership entities, increased by any gain realized by the current ownership entities on the transfer. For purposes of determining the percentage interests of the contributing partners, the contributing partners will be credited with having contributed an amount equal to the agreed value of the contributed assets. The difference between the agreed value of a contributed asset and its adjusted tax basis is referred to as the book-tax difference (the "Book-Tax Difference"). It is expected that the agreed value of most of the Initial Hotels will substantially exceed their tax basis, so that there will be substantial Book-Tax Differences at the time of contribution. Pursuant to Section 704(c) of the Code, income, gain, loss and deduction attributable to property contributed by a partner in exchange for a partnership interest (such as the Initial Hotels), must be allocated so that the contributing partner is charged with, or benefits from, respectively, any Book-Tax Difference associated with the property at the time of the contribution. Such allocations are solely for federal income tax purposes and do not affect the book capital accounts or other economic arrangements among the partners. The partnership agreement of the Operating Partnership will require such allocations to be made in a manner consistent Section 704(c) of the Code. In general, the Operating Partnership's Section 704(c) allocations allocate to the Company the same amounts of depreciation deductions attributable to the Initial Hotels and other assets and taxable gain or loss upon sale of such assets as the Company would have received had it purchased its interest in such assets at their agreed value. To accomplish this, the existing owners will be allocated lower amounts of depreciation deductions for tax purposes and increased taxable income (or less loss) on sale by the Operating Partnership of the Initial Hotels than their allocations of depreciation deductions and income or gain for book purposes. This will tend to eliminate the Book-Tax Difference over the life of the Operating Partnership. However, the special allocation rules of Section 704(c) do not always entirely rectify the Book-Tax Difference on an annual basis or with respect to a specific taxable transaction such as a sale. Thus, the carryover basis of the contributed assets in the hands of the Operating Partnership in some cases may cause the Company to be allocated lower depreciation and other deductions, and possibly greater amounts of taxable income in the event of a sale of the Initial Hotels in excess of the economic or book income allocated to it as a result of such sale. This might adversely affect the Company's ability to distribute sufficient dividends to comply with the REIT distribution requirements. See "-- Requirements for Qualification as a REIT -- Annual Distribution Requirements." The foregoing principles also apply in determining the earnings and profits of the Company for purposes of determining the portion of distributions taxable as dividend income. See "-- Taxation of the Company's Shareholders." The application of these rules over time may result in a higher portion of distributions being taxed as dividends than would have occurred had the Company purchased its interest in the Initial Hotels at their agreed value. Treasury Regulations under Section 704(c) of the Code allow partnerships to use any reasonable method of accounting for Book-Tax Differences for contributions of property so that a contributing partner receives the tax benefits and burdens of any built-in gain or loss associated with contributed property. The Operating Partnership currently intends to account for Book-Tax Differences using the traditional method provided for in the regulations. 91 98 With respect to any property purchased by the Operating Partnership subsequent to the formation of the Company, such property will initially have a tax basis equal to its purchase price and Section 704(c) of the Code will not apply. Basis in Partnership Interest. The Company's adjusted tax basis in its partnership interest in the Partnership generally (i) will be equal to the amount of cash and the basis of any other property contributed to the Partnership by the Company; (ii) will be increased by (A) its allocable share of the Partnership's income and (B) its allocable share of indebtedness of the Partnership; and (iii) will be reduced, but not below zero, by the Company's allocable share of (a) the Partnership's loss and (B) the amount of cash distributed to the Company and by constructive distributions resulting from a reduction in the Company's share of indebtedness of the Partnership. If the allocation of the Company's distributive share of the Partnership's loss would reduce the adjusted tax basis of the Company's partnership interest in the Partnership below zero, the recognition of such loss will be deferred until such time as the recognition of such loss would not reduce the Company's adjusted tax basis below zero. To the extent that the Partnership's distributions, or any decrease in the Company's share of the indebtedness of the Partnership (such decrease being considered a constructive cash distribution to the partners), would reduce the Company's adjusted tax basis below zero, such distributions (including such constructive distributions) constitute taxable income to the Company. Such distributions and constructive distributions normally will be characterized as capital gain, and, if the Company's partnership interest in the Partnership has been held for longer than the long-term capital gain holding period (currently one year), the distributions and constructive distributions will constitute long-term capital gain. Depreciation Deductions Available to the Partnership. Immediately after the Offering, the Company will make a cash contribution to the Partnership in exchange for an approximately 80.3% general partnership interest in the Partnership (which interest will increase to 84.1% if the Intercompany Convertible Note is converted). The Partnership will concurrently acquire all of the equity interests in the Contributed Partnerships in exchange for approximately $9.2 million in cash and issuance of Units representing approximately 19.7% of the equity interests in the Partnership (15.9% if the Intercompany Convertible Note is converted). The Partnership's initial basis in the Initial Hotels for federal income tax purposes will be a carryover of the basis of the Contributed Partnerships in the Initial Hotels on the date of such transactions, increased by any gain recognized on the transfers to the Partnership. The Partnership plans to depreciate, for federal income tax purposes, the Initial Hotels and any depreciable hotel property which it may acquire for cash in the future under ADS. Under ADS, the Partnership will depreciate such building and improvements -- even those acquired with a carryover basis -- over a new 40 year recovery period using a straight-line method and a mid-month convention. The Partnership plans to use the modified accelerated cost recovery system of depreciation ("MACRS") for subsequently acquired furnishings and equipment. Under MACRS, the Partnership generally will depreciate such furnishings and equipment over a seven-year recovery period using a 200% declining balance method and a half-year convention. If, however, the Partnership places more than 40% of its furnishings and equipment in service during the last three months of a taxable year, a mid-quarter depreciation convention must be used for the furnishings and equipment placed in service during that year. The Partnership plans to use ADS for the depreciation of subsequently acquired buildings and improvements. Under ADS, the Partnership generally will depreciate such buildings and improvements over a 40-year recovery period using a straight line method and a mid-month convention. Sale of the Properties. Generally, any gain realized by a partnership on the sale of assets held by the partnership for more than one year will be long-term capital gain. However, under REIT rules, the Company's share of any gain realized by the Operating Partnership on the sale of any property held as inventory or other property held primarily for sale to customers in the ordinary course of a trade or business ("dealer property") will be treated as income from a prohibited transaction that is subject to a 100% penalty tax. See "-- Taxation of the Company as a REIT." Under existing law, whether property is dealer property is a question of fact that depends on all the facts and circumstances with respect to the particular transaction. A safe harbor to avoid classification as a prohibited transaction exists as to real estate assets held for the production of rental income by a REIT for at least four years where in any taxable year the REIT has made no more than seven sales of property, or, in the alternative, the aggregate of the adjusted bases of all properties sold does not exceed 10% of 92 99 the adjusted bases of all of the REIT's properties during the year and the expenditures includable in a property's basis made during the four-year period prior to disposition do not exceed 30% of the property's net sale price. All inventory required in the operation of the Initial Hotels will be purchased by the Initial Lessee or its designee as required by the terms of the Percentage Leases. Accordingly, the Company and the Operating Partnership believe that no asset owned by the Company or the Operating Partnership is dealer property of the Company or the Operating Partnership. Nevertheless, the Company and the Operating Partnership will attempt to comply with the terms of the safe-harbor provisions of the Code. Complete assurance cannot be given, however, that the Company or the Operating Partnership can comply with the safe-harbor provisions of the Code or avoid owning property that may be characterized as dealer property. TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS As long as the Company qualifies as a REIT, distributions made to the Company's taxable shareholders out of current or accumulated earnings and profits (and not designated as capital gain dividends) will be taken into account by such shareholders as ordinary income. Domestic shareholders generally are shareholders who are (i) citizens or residents of the United States; (ii) corporations, partnerships or other entities created in or organized under the laws of the United States or any political subdivision thereof; or (iii) estates or trusts the income of which is subject to United States federal income taxation regardless of its source. Corporate shareholders will not be entitled to the dividends received deduction. Any dividend declared by the Company in October, November or December of any year payable to a shareholder of record on a specific date in any such month shall be treated as both paid by the Company and received by the shareholder on December 31 of such year, provided that the dividend is actually paid by the Company during January of the following calendar year. Distributions that are designated as capital gain dividends will be taxed as long-term capital gains (to the extent they do not exceed the Company's actual net capital gain for the taxable year) without regard to the period for which the shareholder has held its shares. However, corporate shareholders may be required to treat up to 20% of certain capital gain dividends as ordinary income. Distributions in excess of current and accumulated earnings and profits will not be taxable to a shareholder to the extent that they do not exceed the adjusted basis of the shareholder's Common Shares, but rather will reduce the adjusted basis of such shares. To the extent that such distributions exceed the adjusted basis of a shareholder's Common Shares, they will be included in income as long-term capital gain assuming the shares are a capital asset in the hands of the shareholder and have been held for more than one year. Shareholders may not include in their individual income tax returns any net operating losses or capital losses of the Company. In general, a shareholder will realize capital gain or loss on the disposition of Common Shares equal to the difference between (a) the sales price for such shares and (b) the adjusted tax basis of such shares. Gain or loss realized upon the sale or exchange of Common Shares by a shareholder who has held such Common Shares for more than one year (after applying certain holding period rules) will be treated as long-term gain or loss, respectively, and otherwise will be treated as short-term capital gain or loss. However, losses incurred upon a sale or exchange of Common Shares by a shareholder who has held such shares for six months or less (after applying certain holding period rules) will be deemed a long-term capital loss to the extent of any capital gain dividends received by the selling shareholder with respect to such Common Shares. Distributions from the Company and gain from the disposition of shares will not be treated as passive activity income. Distributions from the Company (to the extent they do not constitute a return of capital) will generally be treated as investment income for purposes of the investment interest limitation. Gain from the disposition of shares and capital gain dividends will not be treated as investment income unless the taxpayer elects to have the gain taxed at ordinary income rates. Backup Withholding. The Company will report to its domestic shareholders and the IRS the amount of dividends paid during each calendar year, and the amount of tax withheld, if any, with respect thereto. Under the backup withholding rules, a shareholder may be subject to backup withholding at the rate of 31% with respect to dividends paid unless such shareholder (a) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact, or (b) provides a taxpayer identification number, 93 100 certifies as to no loss of exemption from backup withholding, and otherwise complies with applicable requirements of the backup withholding rules. A shareholder who does not provide the Company with its correct taxpayer identification number may also be subject to penalties imposed by the IRS. Any amount paid as backup withholding will be creditable against the shareholder's income tax liability. In addition, the Company may be required to withhold a portion of capital gain distributions made to any shareholders who fail to certify their nonforeign status to the Company. TAXATION OF TAX-EXEMPT SHAREHOLDERS Tax-exempt entities, including qualified employee pension and profit-sharing trusts, individual retirement accounts and certain funded welfare plan arrangements ("Exempt Organizations"), generally are exempt from federal income taxation. However, they are subject to taxation on their unrelated business taxable income ("UBTI"). While many investments in real estate generate UBTI, the IRS has issued a published ruling that dividend distributions by a REIT to an exempt employee pension trust do not constitute UBTI, provided that the shares of the REIT are not otherwise used in an unrelated trade or business of the exempt employee pension trust. Based on that ruling and on the intention of the Company to invest its assets in a manner that will avoid the recognition of UBTI by the Company, amounts distributed by the Company to Exempt Organizations generally should not constitute UBTI. However, if an Exempt Organization finances its acquisition of the Common Stock with debt, a portion of its income from the Company will constitute UBTI pursuant to the "debt-financed property" rules. Furthermore, social clubs, voluntary employee benefits associations, supplemental unemployment benefit trusts, and qualified group legal services plans that are exempt from taxation under paragraphs (7), (9), (17), and (20), respectively, of Code section 501(c) are subject to different UBTI rules, which generally will require them to characterize distributions from the Company as UBTI. In addition, for taxable years beginning on or after January 1, 1994, a pension trust that owns more than 10% of the Company is required to treat a percentage of the dividends from the Company as UBTI (the "UBTI Percentage") in certain circumstances. The UBTI Percentage is the gross income derived from an unrelated trade or business (determined as if the Company were a pension trust) divided by the gross income of the Company for the year in which the dividends are paid. The UBTI rule applies only if (i) the UBTI Percentage is at least 5%; (ii) the Company qualifies as a REIT by reason of the modification of the 5/50 Rule that allows the beneficiaries of the pension trust to be treated as holding shares of the Company in proportion to their actuarial interests in the pension trust; and (iii) either (A) one pension trust owns more than 25% of the value of the Company's stock or (B) a group of pension trusts individually holding more than 10% of the value of the Company's stock collectively own more than 50% of the value of the Company's stock. While an investment in the Company by an Exempt Organization generally is not expected to result in UBTI except in the circumstances described in the preceding paragraph, any gross UBTI that does arise from such an investment will be combined with all other gross UBTI of the Exempt Organization for a taxable year and reduced by all deductions attributable to the UBTI plus $1,000. Any amount then remaining will constitute UBTI on which the Exempt Organization will be subject to tax. If the gross income taken into account in computing UBTI exceeds $1,000, the Exempt Organization is obligated to file a tax return for such year on an IRS Form 990-T. Neither the Company, its Board of Directors, nor any of its Affiliates expects to undertake the preparation or filing of IRS Form 990-T for any Exempt Organization in connection with an investment by such Exempt Organization in the Common Stock. Generally, IRS Form 990-T must be filed with the IRS by April 15 of the year following the year to which it relates. TAXATION OF FOREIGN SHAREHOLDERS The rules governing United States federal income taxation of nonresident alien individuals, foreign corporations, foreign partnerships and other foreign shareholders (collectively, "Non-U.S. Shareholders") are complex, and no attempt will be made herein to provide more than a summary of such rules. PROSPECTIVE NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE AND LOCAL INCOME TAX LAWS WITH REGARD TO AN INVESTMENT IN THE COMMON SHARES, INCLUDING ANY REPORTING REQUIREMENTS. 94 101 It is currently anticipated that the Company will qualify as a "domestically controlled REIT" (i.e., a REIT in which at all times during a specified testing period less than 50% of the value of the shares is owned directly or indirectly by Non-U.S. Shareholders) and therefore gain from the sale of Common Shares by a Non-U.S. Shareholder would not be subject to United States taxation unless such gain is treated as "effectively connected" with the Non-U.S. Shareholder's United States trade or business. Distributions that are not attributable to gain from the sale or exchange by the Company of United States real property interests (and are not designated as capital gain dividends) will be treated as dividends of ordinary income to the extent that they are made out of current or accumulated earnings and profits of the Company. Such distributions generally will be subject to a United States withholding tax equal to 30% of the gross amount of the distribution, subject to reduction or elimination under an applicable tax treaty. However, if dividends from the investment in the shares are treated as "effectively connected" with the Non-U.S. Shareholder's conduct of a United States trade or business, such dividends will be subject to regular U.S. income taxation (foreign corporations may also be subject to the 30% branch profits tax). The Company expects to withhold United States income tax at the rate of 30% on the gross amount of any such dividends made to a Non-U.S. Shareholder unless: (i) a lower treaty rate applies and the Non-U.S. Shareholder files certain information evidencing its entitlement to such lower treaty rate; or (ii) the Non-U.S. Shareholder files an IRS Form 4224 with the Company claiming that the distribution is "effectively connected" income. Distributions which exceed current and accumulated earnings and profits of the Company will not be taxable to the extent that they do not exceed the adjusted basis of a shareholder's shares but, rather, will reduce (but not below zero) the adjusted basis of such shares. To the extent that such distributions exceed the adjusted basis of a Non-U.S. Shareholder's shares, they generally will give rise to United States tax liability if the Non-U.S. Shareholder would otherwise be subject to tax on gain from the sale or disposition of his or her shares in the Company, as described above. If it cannot be determined at the time a distribution is made whether or not such distribution will be in excess of current and accumulated earnings and profits, the distributions will be subject to withholding at the same rate as dividends. However, amounts thus withheld are refundable if it is subsequently determined that such distribution was, in fact, in excess of current and accumulated earnings and profits of the Company. Distributions by the Company to a Non-U.S. Shareholder that are attributable to gain from sales or exchanges by the Company of a United States real property interest are subject to income and withholding tax under the provisions of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA, these distributions, if any, that are treated as gain recognized from the sale of a United States real property interest, are taxed as income "effectively connected" with a United States business. Non-U.S. Shareholders would thus be taxed at the normal capital gain rates applicable to U.S. shareholders (subject to the applicable alternative minimum tax and a special alternative minimum tax for nonresident alien individuals). Also, distributions subject to FIRPTA may be subject to a 30% branch profits tax in the hands of a foreign corporate shareholder not entitled to treaty exemption. The Company is required by applicable Treasury Regulations to withhold 35% of any distribution that could be designated by the Company as a capital gains dividend. This amount is creditable against the Non-U.S. Shareholder's FIRPTA tax liability. A refund may be available if the amount exceeds the Non-U.S. Shareholder's federal tax liability. OTHER TAX CONSIDERATIONS State and Local Taxes. The company or its shareholders or both may be subject to state, local or other taxation in various state, local or other jurisdictions, including those in which they transact business or reside. The tax treatment in such jurisdictions may differ from federal income tax consequences discussed above. Consequently, prospective shareholders should consult with their own tax advisors regarding the effect of state, local and other tax laws on an investment in the Common Shares of the Company. ERISA CONSIDERATIONS A fiduciary of a pension, profit sharing, retirement, welfare or other employee benefit plan ("Plan") subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), should consider the fiduciary standards under ERISA in the context of the Plan's particular circumstances before authorizing 95 102 an investment of a portion of the Plan's assets in the Common Shares. Accordingly, any such fiduciary should consider (i) whether the investment satisfies the diversification requirements of Section 404(a)(1)(C) of ERISA; (ii) whether the investment is in accordance with the documents and instruments governing the Plan as required by Section 404(a)(1)(D) of ERISA; and (iii) whether the investment is prudent under ERISA. In addition to the imposition of general fiduciary standards of investment prudence and diversification, ERISA, and the corresponding provisions of the Code, prohibit a wide range of transactions involving the assets of the Plan and persons who have certain specified relationships to the Plan ("parties in interest" within the meaning of ERISA, "disqualified persons" within the meaning of the Code). Thus, a Plan fiduciary considering an investment in the Common Shares also should consider whether the acquisition or the continued holding of the Common Shares might constitute or give rise to a direct or indirect prohibited transaction. The Department of Labor (the "DOL") has issued final regulations (the "Regulations") as to what constitutes assets of an employee benefit plan under ERISA. Under the Regulations, if a Plan acquires an equity interest in an entity, which interest is neither a "publicly offered security" nor a security issued by an investment company registered under the Investment Company Act of 1940, as amended, the Plan's assets would include, for purposes of the fiduciary responsibility provisions of ERISA, both the equity interest and an undivided interest in each of the entity's underlying assets unless certain specified exceptions apply. The Regulations define a publicly offered security as a security that is "widely held," "freely transferable," and either part of a class of securities registered under the Exchange Act, or sold pursuant to an effective registration statement under the Securities Act (provided the securities are registered under the Exchange Act within 120 days after the end of the fiscal year of the issuer during which the public offering occurred). The Common Shares are being sold in an offering registered under the Securities Act and will be registered under the Exchange Act. The DOL Regulations provide that a security is "widely held" only if it is part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another. A security will not fail to be "widely held" because the number of independent investors falls below 100 subsequent to the initial public offering as a result of events beyond the issuer's control. The Company expects the Common Shares to be "widely held" on completion of the Offering. The DOL Regulations provide that whether a security is "freely transferable" is a factual question to be determined on the basis of all relevant facts and circumstances. The DOL Regulations further provide that when a security is part of an offering in which the minimum investment is $10,000 or less, as is the case with the Offering, certain restrictions ordinarily will not, alone or in combination, affect the finding that those securities are "freely transferable." The Company believes that the restrictions imposed under its Articles of Incorporation on the transfer of the Common Shares are limited to the restrictions on transfer generally permitted under the DOL Regulations and are not likely to result in the failure of the Common Shares to be "freely transferable." The Company also believes that certain restrictions that apply to the Common Shares to be held by the Company, or derived from contractual arrangements requested by the Underwriters in connection with the Offering, are unlikely to result in the failure of the Common Shares to be "freely transferable." See "Shares Available for Future Sale" and "Underwriting." The DOL Regulations only establish a presumption in favor of the finding of free transferability, and, therefore, no assurance can be given that the DOL and the U.S. Treasury Department will not reach a contrary conclusion. Assuming that the Common Shares will be "widely held" and are "freely transferable," the Company believes that the Common Shares will be publicly offered securities for purposes of the Regulations and that the assets of the Company will not be deemed to be "plan assets" of any Plan that invests in the Common Shares. 96 103 UNDERWRITING The underwriters of the Offering (the "Underwriters"), for whom Lehman Brothers Inc., Alex. Brown & Sons Incorporated, Dean Witter Reynolds Inc., A.G. Edwards & Sons, Inc., EVEREN Securities, Inc. and McDonald & Company Securities, Inc. are serving as representatives, have severally agreed, subject to the terms and conditions of the Underwriting Agreement (the "Underwriting Agreement") (the form of which is filed as an exhibit to the Registration Statement (as defined) of which this Prospectus is a part), to purchase from the Company and the Company has agreed to sell to each Underwriter, the aggregate number of shares of Common Stock set forth opposite their respective names below:
NUMBER UNDERWRITER OF SHARES ------------------------------------------------------------------------ --------- Lehman Brothers Inc..................................................... Alex. Brown & Sons Incorporated......................................... Dean Witter Reynolds Inc................................................ A.G. Edwards & Sons, Inc................................................ EVEREN Securities, Inc.................................................. McDonald & Company Securities, Inc...................................... --------- Total................................................................... ========
The Underwriting Agreement provides that the obligations of the Underwriters to purchase Common Shares are subject to certain other conditions and that if any of the Common Shares are purchased by the Underwriters pursuant to the Underwriting Agreement, all Common Shares agreed to be purchased by the Underwriters pursuant to the Underwriting Agreement must be so purchased. Although the Conduct Rules of the National Association of Securities Dealers, Inc. ("NASD") exempt REITs from the conflict of interest provisions thereof, the Underwriters have determined to conduct the Offering in accordance with Rule 2720 of the Conduct Rules because an affiliate of Lehman Brothers Inc. will receive more than ten percent of the net proceeds of the Offering in repayment of currently outstanding indebtedness. In accordance with these provisions, Lehman Brothers Inc. has agreed that the price at which the Common Shares are to be distributed to the public shall be no higher than that recommended by a "qualified independent underwriter" meeting certain standards described in the Rules of Fair Practice of the NASD. Dean Witter Reynolds Inc. has agreed to act as the qualified independent underwriter in connection with the Offering, has participated in the preparation of the Prospectus and the Registration Statement of which this Prospectus forms a part, and has exercised the usual standard of due diligence with respect thereto. The Company has been advised that the Underwriters propose to offer the Common Shares directly to the public initially at the public offering price set forth on the cover page of this Prospectus and to certain selected dealers (who may include the Underwriters) at such public offering price less a selling concession not in excess of $ per share. The Underwriters may allow, and the selected dealers may reallow, a concession not in excess of $ per share to certain other brokers and dealers. After the initial public offering of the Common Shares, the concession to selected dealers and the reallowances to other dealers may be changed by the Underwriters. The Company has granted to the Underwriters an option to purchase up to an additional Common Shares at the public offering price less the aggregate underwriting discounts and commissions shown on the cover page of this Prospectus solely to cover over-allotments, if any. The option may be exercised at any time up to 30 days after the date of this Prospectus. To the extent that the Underwriters exercise such option, the Underwriters will be committed (subject to certain conditions) to purchase a number of option shares proportionate to such Underwriter's initial commitment. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. 97 104 The Company has applied to list the Common Shares for quotation on the New York Stock Exchange under the symbol "BOY." In order to meet one of the requirements for the listing of the Common Shares, the Underwriters have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial holders for a minimum of 1.1 million publicly-held shares and for an aggregate market value of at least $40 million. The Underwriters have informed the Company that they do not intend to confirm sales to any account over which they exercise discretionary authority. The Company has agreed not to offer, sell or contract to sell, or otherwise dispose of, or announce the offering of, any Common Shares, or any securities convertible into, or exchangeable for, Common Shares, except the Common Shares offered hereby, for a period of 180 days from and after the date of this Prospectus without the prior written consent of Lehman Brothers Inc. From time to time, certain of the Underwriters or their affiliates may provide investment banking services to the Company. The Company will pay an advisory fee equal to .5% of the gross proceeds of the Offering (including any exercise of the Underwriters' over-allotment option) to Lehman Brothers Inc. for advisory services in connection with the evaluation, analysis and structuring of the Company's formation and the Offering. In connection with the Offering, an affiliate of Lehman Brothers Inc. will be repaid mortgage loans in the principal amount of $65.2 million made by it to certain Boykin Group Affiliates, and has delivered a commitment to make the Credit Facility available to the Company. The interest payable with respect to the mortgage loan repayment is less than it would be if the repayment had not been made in connection with the Offering. See "Use of Proceeds" and "The Company -- Business Objectives and Strategies -- Financing Strategy." Prior to this Offering there has been no public market for the Common Shares. The initial public offering price for the Common Shares offered hereby will be determined by negotiation between the Company and the Underwriters and will be based on, among other things, the Initial Hotels' financial and operating history and condition, the prospectus of the Company and its industry in general, the management of the Company and the market prices of securities of companies engaged in businesses similar to those of the Company. EXPERTS The Balance Sheet of Boykin Lodging Company as of June 30, 1996; the Combined Financial Statements of the Initial Hotels (Excluding Lake Norman Hotels) as of December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995 and the related financial statement schedule; the Combined Financial Statements of the Lake Norman Hotels as of December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995; and the Combined Statements of Net Assets of Boykin Management Company, Purchasing Concepts, Inc. and Bopa Design Company as of June 30, 1995 and 1996 and the related Combined Statements of Revenues and Expenses for each of the three years in the period ended June 30, 1996 included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. LEGAL MATTERS The validity of the Common Shares offered hereby as well as certain legal matters described under "Federal Income Tax Considerations" will be passed upon for the Company by Baker & Hostetler, Cleveland, Ohio, and certain legal matters will be passed upon for the Underwriters by Willkie Farr & Gallagher, New York, New York. Baker & Hostetler provides legal services to the Boykin Group and various Boykin Group Affiliates. Albert T. Adams, a proposed director of the Company, is a partner in Baker & Hostetler. 98 105 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (of which this Prospectus is a part) on Form S-11 under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. Statements contained in this Prospectus as to the content of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference and the exhibits and schedules thereto. For further information regarding the Company and the Common Shares offered hereby, reference is hereby made to the Registration Statement and such exhibits and schedules, which may be obtained from the Commission at its principal office in Washington, D.C. on payment of the fees prescribed by the Commission. The Commission also maintains a Web site (address http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The Company intends to furnish its shareholders with annual reports containing consolidated financial statements audited by its independent certified public accountants and with quarterly reports containing unaudited condensed consolidated financial statements for each of the first three quarters of each fiscal year. 99 106 GLOSSARY Unless the context otherwise requires, the following capitalized terms have the meanings set forth below for purposes of this Prospectus: "ADR" means average daily room rate. "ADS" means the alternative depreciation system under the Code. "Affiliate" of any person means (i) any person who directly or indirectly controls or is controlled by or is under common control with that person, (ii) any other person who owns, beneficially, directly or indirectly, five percent (5%) or more of the outstanding capital stock, shares or equity interests of that person, or (iii) any officer, director, employee, partner or trustee of that person or any person controlling, controlled by or under common control with that person (excluding trustees and persons serving in similar capacities who are not otherwise an Affiliate of that person). The term "person" means and includes individuals, corporations, general and limited partnerships, stock companies or associations, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts, or other entities and governments and agencies and political subdivisions thereof. For purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that person, through the ownership of voting securities, partnership interests or other equity interests. "AMT" means the alternative minimum tax. "Articles of Incorporation" means the Amended and Restated Articles of Incorporation of the Company. "Minimum Rent" means the fixed obligation of the Initial Lessee to pay a sum certain in monthly rent under each of the Percentage Leases. "Boykin Associates" means certain Boykin Group officers and employees other than Robert W. Boykin and John E. Boykin, and certain former employees of the Boykin Group. "Boykin Group" means Boykin Management Company and its Affiliates. "Boykin Group Affiliate" means Boykin Management Company or any Affiliate of Boykin Management Company. "Boykin Management" means Boykin Management Company. "Capital Expenditures Fund" means the account required by the Percentage Leases to be maintained by the Partnership to provide a reserve for capital expenditures on the Initial Hotels. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Code of Regulations" means the Code of Regulations of the Company. "Commission" means the United States Securities and Exchange Commission. "Common Shares" means the Common Shares, without par value, of the Company. "Company" means Boykin Lodging Company, an Ohio corporation, including, when the context so requires, its subsidiaries (including the Partnership and its subsidiaries). "Consumer Price Index" means the "U.S. City Average, All Items" Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics of the United States Department of Labor (Base: 1982-1984=100), or any successor index thereto. "Contributed Partnerships" means the various partnerships and limited liability company that own the Initial Hotels. 100 107 "Distributable Cash Flow" means Funds From Operations less scheduled mortgage debt amortization payments and provisions for ongoing capitalized improvements to the Hotels. "Exchange Right" means the right of the holders of Units to exchange each Unit for one Common Share. "FF&E" means furnishings, fixtures and equipment of the Initial Hotels. "FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980. "Formation Transactions" means the principal transactions in connection with the formation of the Company as a REIT, the formation of the Partnership and the acquisition of the Initial Hotels by the Partnership. "Franchise Agreements" means the existing franchise agreements relating to the Initial Hotels. "Funds From Operations" means income (loss) before minority interest (computed in accordance with generally accepted accounting principles), excluding gains (losses) from debt restructuring and sales of property (including furniture and equipment), plus real estate related depreciation and amortization (excluding amortization of financing costs), and after adjustments for unconsolidated partnerships and joint ventures. "Independent Director" means a person who is (i) independent of management of the Company, (ii) not employed by or an officer of the Company, (iii) not an "affiliate" (as defined in Rule 405 under the Securities Act of 1933, as amended) of the Company or of any subsidiary of the Company, and (iv) not a person who acts on a regular basis as an individual or representative of an organization serving as a professional advisor, legal counsel or consultant to management if, in the opinion of the Board of Directors, the relationship is material to the Company, that person, or the organization represented. "Initial Hotels" means the nine hotel properties to be acquired by the Partnership. "Initial Lessee" means Boykin Management Company Limited Liability Company, which will lease the Initial Hotels from the Partnership pursuant to the Percentage Leases. "Intercompany Convertible Note" means the $40 million loan from the Company to the Partnership. "IRS" means the United States Internal Revenue Service. "Limited Partners" means the limited partners of the Partnership. "Offering" means the offering of Common Shares of the Company pursuant to this Prospectus. "Other Partners" means the partners in the Contributed Partnerships who are not Boykin Group Affiliates. "Ownership Limit" means the beneficial ownership of 9.8% of the outstanding Common Shares of the Company. "Partnership" means Boykin Hotel Properties, L.P., a limited partnership organized under the laws of the State of Ohio. "Partnership Agreement" means the partnership agreement of the Partnership as amended and restated. "Percentage Leases" mean the operating leases between the Initial Lessee and the Partnership pursuant to which the Initial Lessee leases the Initial Hotels from the Partnership. "Percentage Rent" means rent payable by the Initial Lessee pursuant to the Percentage Leases based on percentages of room revenue, food revenue, and beverage revenue. 101 108 "Purchase Agreements" means the agreements between the Partnership and each of the partners of the Contributed Partnerships pursuant to which the Partnership will acquire the entire equity interest in the Contributed Partnerships, which own the Initial Hotels. "REIT" means a real estate investment trust as defined pursuant to Sections 856 through 860 of the Code. "REIT requirements" means the requirements for qualifying as a REIT under the Code and the Treasury Regulations. "Related Party Limit" means the constructive ownership of more than 9.8% of the outstanding Common Shares of the Company. "Related Party Tenant" means a tenant that is owned, directly or constructively, by a REIT or by an owner of 10% or more of a REIT. "Representatives" means Lehman Brothers Inc., Alex. Brown & Sons Incorporated, Dean Witter Reynolds Inc., A.G. Edwards & Sons, Inc., EVEREN Securities, Inc. and McDonald & Company Securities, Inc. "Rule 144" means the rule adopted by the Commission that permits holders of restricted securities and affiliates of an issuer of securities, pursuant to certain conditions and subject to certain restrictions, to sell publicly their securities of the issuer without registration under the Securities Act. "Securities Act" means the Securities Act of 1933, as amended from time to time. "Total Market Capitalization" means the aggregate market value of the Company's outstanding Common Shares and total long-term debt of the Company. "Treasury Regulations" means the Income Tax Regulations promulgated under the Code. "UBTI" means unrelated business taxable income as defined in Section 512(a) of the Code. "Underwriters" means the Underwriters named in this Prospectus. "Underwriting Agreement" means the Underwriting Agreement between the Company and the Underwriters. "Units" means units of limited partnership interests in the Partnership. 102 109 INDEX TO FINANCIAL STATEMENTS
PAGE ---- BOYKIN LODGING COMPANY: Pro Forma (Unaudited) Condensed Consolidated Statement of Income for the Year Ended December 31, 1995...... F-3 Condensed Consolidated Statement of Income for the Twelve Months Ended June 30, 1996................................................................................. F-4 Condensed Consolidated Statement of Income for the Six Months Ended June 30, 1995.... F-5 Condensed Consolidated Statement of Income for the Six Months Ended June 30, 1996.... F-6 Notes to the Pro Forma Condensed Consolidated Statements of Income................... F-7 Condensed Consolidated Balance Sheet as of June 30, 1996............................. F-8 Notes to Pro Forma Condensed Consolidated Balance Sheet.............................. F-9 Historical Report of Independent Public Accountants............................................. F-11 Balance Sheet as of June 30, 1996.................................................... F-12 Notes to Balance Sheet............................................................... F-13 INITIAL LESSEE: Pro Forma (Unaudited) Condensed Combined Statement of Operations for the Year Ended December 31, 1995...... F-17 Condensed Combined Statement of Operations for the Twelve Months Ended June 30, 1996................................................................................. F-18 Condensed Combined Statement of Operations for the Six Months Ended June 30, 1995.... F-19 Condensed Combined Statement of Operations for the Six Months Ended June 30, 1996.... F-20 Notes to Pro Forma Condensed Combined Statements of Operations....................... F-21 Condensed Combined Balance Sheet as of June 30, 1996................................. F-23 Notes to Pro Forma Condensed Combined Balance Sheet.................................. F-24 INITIAL HOTELS (EXCLUDING LAKE NORMAN HOTELS): Historical Report of Independent Public Accountants............................................. F-26 Combined Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996........... F-27 Combined Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995 and for the Six Months Ended June 30, 1995 and 1996................................ F-28 Combined Statements of Partners' Deficit for the Years Ended December 31, 1993, 1994 and 1995 and the Six Months Ended June 30, 1996...................................... F-29 Combined Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 and for the Six Months Ended June 30, 1995 and 1996................................ F-30 Notes to Combined Financial Statements............................................... F-31 Schedule III -- Real Estate and Accumulated Depreciation............................. F-41 LAKE NORMAN HOTELS: Historical Report of Independent Public Accountants............................................. F-43 Combined Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996........... F-44 Combined Statements of Operations for the Years Ended December 31, 1993, 1994, 1995, for the six months ended June 30, 1995, the period January 1 to February 7, 1996, the period February 8 to June 30, 1996 and the Pro Forma six months ended June 30, 1995 and 1996............................................................................. F-45 Combined Statements of Partners' Equity for the Years Ended December 31, 1993, 1994 1995, for the period January 1 to February 7, 1996 and the period February 8 to June 30, 1996............................................................................. F-46 Combined Statements of Cash Flows for the Years Ended December 31, 1993, 1994, 1995, the six months ended June 30, 1995, the period January 1 to February 7, 1996 and the period February 8 to June 30, 1996................................................... F-47 Notes to Combined Financial Statements............................................... F-48 BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC. AND BOPA DESIGN COMPANY: Historical Report of Independent Public Accountants............................................. F-53 Combined Statements of Net Assets as of March 31, 1995 and 1996 and June 30, 1996.... F-54 Combined Statements of Revenues and Expenses for the Years Ended March 31, 1994, 1995 and 1996 and the six months ended June 30, 1995 and 1996........................... F-55 Notes to Combined Financial Statements............................................... F-56
F-1 110 BOYKIN LODGING COMPANY PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995, THE TWELVE MONTHS ENDED JUNE 30, 1996, THE SIX MONTHS ENDED JUNE 30, 1995, AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) The Company's unaudited Pro Forma Condensed Consolidated Statements of Income for the year ended December 31, 1995, the twelve months ended June 30, 1996, and the six month periods ended June 30, 1995 and 1996 are presented as if the consummation of the Formation Transactions had occurred as of January 1, 1995 and carried forward through each period presented. The unaudited Pro Forma Condensed Consolidated Statement of Income for the twelve months ended June 30, 1996 is presented in conjunction with the analysis of the expected initial distributions as set forth under the caption "Distribution Policy." Such pro forma information is based in part upon the Pro Forma Combined Statements of Operations of the Initial Lessee and the application of the net proceeds of the Offering as set forth under the caption "Use of Proceeds." Such information should be read in conjunction with the Pro Forma Combined Statements of Operations of the Initial Lessee and the Combined Financial Statements of the Initial Hotels listed in the Index to Financial Statements at page F-1 of this Prospectus. In management's opinion, all adjustments necessary to reflect the effects of the Formation Transactions have been made. The following unaudited Pro Forma Condensed Consolidated Statements of Income are not necessarily indicative of what actual results of operations of the Company would have been assuming such transactions had been completed as of the beginning of the periods presented, nor do they purport to represent the results of operations for future periods. Further, the unaudited Pro Forma Condensed Consolidated Statements of Income for the interim periods ended June 30, 1995 and 1996 are not necessarily indicative of the results of operations for the full year. F-2 111 BOYKIN LODGING COMPANY PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ---------- ----------- --------- Percentage Lease revenue.................................... $ -- $25,521(A) $25,521 ---------- ----------- --------- Depreciation................................................ -- 9,544(B) 9,544 Real estate and personal property taxes, property and casualty insurance, and ground rent....................... -- 3,893(C) 3,893 General and administrative.................................. -- 1,450(D) 1,450 Minority interest........................................... -- 1,691(E) 1,691 --------- Total expenses and minority interest................... 16,578 --------- NET INCOME ATTRIBUTABLE TO COMMON SHARES.................... $ 8,943 ======== NET INCOME PER COMMON SHARE................................. $ 1.14 ======== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............... 7,875 ========
See Notes to Pro Forma Condensed Consolidated Statements of Income. F-3 112 BOYKIN LODGING COMPANY PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED JUNE 30, 1996 (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ---------- ----------- --------- Percentage Lease revenue.................................... $ -- $27,166(A) $27,166 ---------- ----------- --------- Depreciation................................................ -- 9,544(B) 9,544 Real estate and personal property taxes, property and casualty insurance, and ground rent -- 3,935(C) 3,935 General and administrative.................................. -- 1,450(D) 1,450 Minority interest........................................... -- 1,946(E) 1,946 --------- Total expenses and minority interest................... 16,875 --------- NET INCOME ATTRIBUTABLE TO COMMON SHARES.................... $10,291 ======== NET INCOME PER COMMON SHARE................................. $ 1.31 ======== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............... 7,875 ========
See Notes to Pro Forma Condensed Consolidated Statements of Income. F-4 113 BOYKIN LODGING COMPANY PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ---------- ----------- --------- Percentage Lease revenue.................................... $ -- $12,277(A) $12,277 ---------- ----------- --------- Depreciation................................................ -- 4,772(B) 4,772 Real estate and personal property taxes, property and casualty insurance, and ground rent....................... -- 1,973(C) 1,973 General and administrative.................................. -- 725(D) 725 Minority interest........................................... -- 764(E) 764 --------- Total expenses and minority interest................... 8,234 --------- NET INCOME ATTRIBUTABLE TO COMMON SHARES.................... $ 4,043 ======== NET INCOME PER COMMON SHARE................................. $ 0.51 ======== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............... 7,875 ========
See Notes to Pro Forma Condensed Consolidated Statements of Income. F-5 114 BOYKIN LODGING COMPANY PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ---------- ----------- --------- Percentage Lease revenue.................................... $ -- $13,922(A) $13,922 ---------- ----------- --------- Depreciation................................................ -- 4,772(B) 4,772 Real estate and personal property taxes, property and casualty insurance, and ground rent....................... -- 2,015(C) 2,015 General and administrative.................................. -- 725(D) 725 Minority interest........................................... -- 1,019(E) 1,019 --------- Total expenses and minority interest................... 8,531 --------- NET INCOME ATTRIBUTABLE TO COMMON SHARES.................... $ 5,391 ======== NET INCOME PER COMMON SHARE................................. $ 0.68 ======== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............... 7,875 ========
See Notes to Pro Forma Condensed Consolidated Statements of Income. F-6 115 BOYKIN LODGING COMPANY NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE DATA) (A) Represents lease payments from the Initial Lessee to the Partnership calculated on a pro forma basis by applying the rent provisions of the Percentage Leases to the pro forma revenues of the Initial Hotels, as well as an additional $725 of Percentage Lease payments required for the year ended December 31, 1995 and the 12 months ended June 30, 1996 pursuant to the rental interruption insurance provisions of the Percentage Lease agreements. The rent formula utilized in computing the pro forma Percentage Lease revenues includes for the calendar year 1995 an adjustment to reduce the threshold revenue amounts in the Percentage Lease formulas by the 2.5% increase in the Consumer Price Index for that year. See "The Initial Lessee -- The Percentage Leases" for the Percentage Lease formulas. (B) Represents depreciation of the Initial Hotel properties. Depreciation is computed using the straight-line method and is based upon the estimated useful lives of 30 years for buildings and improvements and 7 years for furniture and equipment. These estimated useful lives are based on management's knowledge of the properties and the hotel industry in general. At June 30, 1996, the Company's pro forma investment in hotel properties, at cost, consists of the following:
CONTRIBUTED LAKE NORMAN HOTELS HOTELS TOTAL ----------- ----------- -------- Land.................................... $ 11,638 $ 1,517 $ 13,155 Buildings and improvements.............. 71,571 8,970 80,541 Furniture, fixtures and equipment....... 20,702 1,592 22,294 ----------- ----------- -------- $ 103,911 $12,079 $115,990 ======== ========== ========
(C) Represents real estate and personal property taxes, property and casualty insurance, and ground rent expense to be paid by the Partnership. Such amounts were derived from historical amounts paid by the Initial Hotels. Historical real estate tax expense has been increased on a pro forma basis by $200 per annum due to estimated reassessments of the property values resulting from the Formation Transactions of the Initial Hotels. (D) Represents general and administrative expenses to be paid by the Partnership. These amounts are based on historical general and administrative expenses, the employment contracts discussed in "Management -- Executive Compensation" and "Management -- Employment Contracts," as well as probable 1996 expenses. Salaries and wages.................................. $ 745 Professional fees................................... 150 Directors' and officers' insurance.................. 250 Directors' fees and expenses........................ 100 Other operating expenses............................ 205 ------ $1,450 ======
(E) Calculated at 15.9% of the income of the Partnership. F-7 116 BOYKIN LODGING COMPANY PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996 (UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS) The unaudited Pro Forma Condensed Consolidated Balance Sheet is presented as if the consummation of the Formation Transactions and the application of the net proceeds of the Offering as set forth under the caption "Use of Proceeds" had occurred on June 30, 1996. Such pro forma information is based in part upon the combined balance sheets of the Initial Hotels. It should be read in conjunction with the financial statements listed in the Index to Financial Statements at page F-1 of this Prospectus. In management's opinion, all adjustments necessary to reflect the effects of these transactions have been made. This unaudited Pro Forma Condensed Consolidated Balance Sheet is not necessarily indicative of what the actual financial position would have been assuming such transactions had been completed as of June 30, 1996, nor does it purport to represent the future financial position of the Company.
HISTORICAL (A) -------------------- COMBINED LAKE CONTRIBUTED NORMAN PRO FORMA PRO HOTELS HOTELS ADJUSTMENTS FORMA -------- -------- --------- -------- ASSETS INVESTMENT IN HOTEL PROPERTIES, net............ $ 68,204 $ 9,438 $ 38,348(B) $115,990 CASH AND CASH EQUIVALENTS...................... 3,847 359 353(C) 4,559 ACCOUNTS RECEIVABLE, net....................... 4,307 216 (4,523)(D) -- INVENTORIES, PREPAID EXPENSES AND OTHER ASSETS....................................... 4,823 48 (4,526)(D) 345 DEFERRED EXPENSES, net......................... 2,240 404 (2,644)(E) -- -------- -------- --------- -------- Total assets.............................. $ 83,421 $ 10,465 $ 27,008 $120,894 ======== ======== ========= ======== LIABILITIES AND EQUITY MORTGAGE NOTES PAYABLE......................... $123,726 $ 9,618 $(133,344)(F) $ -- ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES.................................. 9,162 391 (7,562)(D) 1,991 ADVANCES FROM AND ACCRUED INTEREST DUE TO PARTNERS..................................... 7,725 -- (7,725)(G) -- MINORITY INTEREST IN PARTNERSHIP............... -- -- 18,906(H) 18,906 -------- -------- --------- -------- Total liabilities......................... 140,613 10,009 (129,725) 20,897 -------- -------- --------- -------- EQUITY: Combined accumulated equity (deficit)........ (57,192) 456 56,736(I) -- Common stock and capital surplus............. -- -- 106,815(J) 106,815 Retained earnings............................ -- -- (6,818)(K) (6,818) -------- -------- --------- -------- Total equity.............................. (57,192) 456 156,733 99,997 -------- -------- --------- -------- Total liabilities and equity.............. $ 83,421 $ 10,465 $ 27,008 $120,894 ======== ======== ========= ========
See Notes to Pro Forma Condensed Consolidated Balance Sheet. F-8 117 BOYKIN LODGING COMPANY NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996 (UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS) (A) Reflects the historical combined balance sheets as of June 30, 1996 of the Initial Hotels. (B) Increase in investment in hotel properties attributable to the application of purchase accounting to those properties in which persons not affiliated with the Boykin Group exchanged their interests for Units of the Partnership or cash, and persons affiliated with the Boykin Group exchanged their interests for cash. In addition, reflects the payment of transfer taxes and other direct costs of acquisition as an increase to the investment in hotel properties.
CONTRIBUTED LAKE NORMAN HOTELS HOTELS TOTAL ----------- ----------- ------- Cash purchase price............................. $ 9,151 $ -- $ 9,151(a) Value of Units issued........................... 891 1,911 2,802(b) Transfer taxes and other direct costs of acquisition................................... 1,249 31 1,280(c) Historical capital account deficit of nonaffiliated persons in Initial Hotels....... 24,416 699 25,115(d) ----------- ----------- ------- Purchase accounting writeup $35,707 $ 2,641 $38,348 ======== ========== =======
The exchanges of ownership interests by Boykin Group Affiliates for Units in the Partnership do not result in adjustments to historical basis as such transactions are between entities under common control. (C) Net decrease reflects the following proposed transactions: Proceeds of the Offering............................................. $ 173,250(e) Expenses of the Offering............................................. (14,329)(f) Retirement of mortgage notes payable (See (F))....................... (133,344) Prepayment penalties and other fees on retirement of mortgage notes payable............................................................ (4,508)(g) Retirement of partner advances and accrued interest (See (G))........ (7,725) Cash purchase price of hotel property acquisitions................... (9,151)(a) Payment of transfer taxes and other direct costs of acquiring Initial Hotels............................................................. (1,280)(c) Reimbursements to (from) the Partnership for prorated expenses: Prepaid expenses................................................... (345)(h) Accrued expenses................................................... 1,991(i) Cash and cash equivalents not being purchased........................ (4,206)(j) --------- $ 353 =========
(D) Decrease reflects assets and liabilities of the Initial Hotels which are not being purchased. (E) Decrease reflects deferred expenses not being purchased by the Company and the writeoff of deferred financing costs in conjunction with the repayment of mortgage notes payable of the Initial Hotels. Deferred expenses not being purchased by the Company....................... $ (334)(k) Write-off of deferred financing costs...................................... (2,310)(l) ------- $(2,644) =======
(F) Decrease reflects the repayment of historical mortgage notes payable of the Initial Hotels with a portion of the proceeds from the Offering. (G) Decrease reflects the repayment of partner advances and accrued interest thereon with a portion of the proceeds of the Offering. F-9 118 BOYKIN LODGING COMPANY NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED) AS OF JUNE 30, 1996 (H) Represents the recognition of minority interest in the Partnership that will not be owned by the Company. Adjustment reflects the following: Value of Units issued to nonaffiliated persons.................. $ 2,802(b) Minority interest applicable to affiliated persons.............. 16,104(m) ------- $18,906 =======
The manner in which the value assigned to minority interest was determined is as follows: Total equity of the Partnership................................ $118,903 Minority interest percentage................................... 15.9% -------- $ 18,906 ========
(I) Adjustment reflects the following: Historical capital account deficit of nonaffiliated persons.......... $ 25,115(d) Assets and liabilities of the Initial Hotels not purchased: Cash and cash equivalents.......................................... (4,206)(j) Accounts receivable (See (D))...................................... (4,523) Inventories, prepaid expenses and other assets (See (D))........... (4,526) Deferred expenses, net............................................. (334)(k) Accounts payable, accrued expenses and other liabilities (See (D))............................................................ 7,562 Reimbursements to (from) the Partnership for prorated expenses: Prepaid expenses................................................... (345)(h) Accrued expenses................................................... 1,991(i) Recognition of minority interest in the Partnership applicable to affiliated persons................................................. (16,104)(m) Transfer of balance to common stock.................................. 52,106(n) -------- $ 56,736 ========
(J) Net increase reflects the following proposed transactions: Proceeds of the Offering............................................. $173,250(e) Expenses of the Offering............................................. (14,329)(f) Transfer of balance from combined equity of the Initial Hotels....... (52,106)(n) -------- $106,815 ========
(K) Reflects the payment of prepayment penalties and other fees and the writeoff of deferred financing costs in conjunction with the repayment of the mortgage notes payable of the Initial Hotels with a portion of the proceeds from the Offering. Prepayment penalties and other fees........... $4,508(g) Writeoff of deferred financing costs.......... 2,310(l) ------ $6,818 ======
F-10 119 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO BOYKIN LODGING COMPANY: We have audited the accompanying balance sheet of Boykin Lodging Company (an Ohio corporation) as of June 30, 1996. This balance sheet is the responsibility of the Company's management. Our responsibility is to express an opinion on this balance sheet based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of Boykin Lodging Company as of June 30, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cleveland, Ohio, July 25, 1996. F-11 120 BOYKIN LODGING COMPANY BALANCE SHEET JUNE 30, 1996 ASSETS CASH..................................................................... $100 ==== STOCKHOLDERS' EQUITY PREFERRED SHARES, without par value, 5,000,000 shares authorized, no shares issued and outstanding.......................................... $ -- COMMON SHARES, without par value, 25,000,000 shares authorized, 1 share issued and outstanding................................................. -- ADDITIONAL PAID-IN CAPITAL............................................... 100 ---- Total stockholders' equity $100 ====
The accompanying notes are an integral part of this balance sheet. F-12 121 BOYKIN LODGING COMPANY NOTES TO BALANCE SHEET AS OF JUNE 30, 1996 1. ORGANIZATION AND BASIS OF BALANCE SHEET PRESENTATION: Boykin Lodging Company (the Company) was incorporated February 8, 1996 to acquire equity interests in existing hotel properties and to selectively consider the development of new hotels. The Company expects to qualify as a real estate investment trust for federal income tax purposes. The Company intends to offer for sale 7,875,000 shares of common stock in an initial public offering (the Offering). The Company has had no operations during the period from inception through June 30, 1996. Upon completion of the Offering, the Company will contribute substantially all of the net proceeds of the Offering to Boykin Hotel Properties, L.P., a limited partnership (the Partnership) in exchange for an equity interest in the Partnership and will provide a $40 million Intercompany Convertible Note (the Note) to the Partnership. The Note will mature on the fifth anniversary of the closing of the Offering. Interest on the Note will accrue at a rate equal to % per annum, increasing to % per annum on the third anniversary of the completion of the Offering, and will be payable quarterly. The Note may be prepaid in full, but not in part, at any time. The Company will have the right to convert the Note after the second anniversary of the completion of the Offering, and prior to maturity and in advance of any proposed prepayment by the Partnership, into additional equity interests in the Partnership at face value based on the initial offering price of the Company's Common Shares (and assuming that the value of one Partnership Unit equals the value of one Common Share). On conversion of the Note, the Company will receive an additional equity interest in the Partnership of 3.8%. Assuming conversion of the Note, the Company will have an 84.1% equity interest in the Partnership. The Company will be the sole general partner of the Partnership. The Note will be secured by mortgages on certain of the Initial Hotels, defined below. The Partnership will use a substantial portion of the proceeds from the Company and will issue limited partnership interests representing approximately 15.9% (after conversion of the Note) of the Partnership to acquire nine hotel properties (the Initial Hotels) from various entities, to finance certain capital improvements, and for general working capital purposes. The Partnership will lease the Initial Hotels to Boykin Management Company Limited Liability Company (the Initial Lessee) pursuant to leases which contain provisions for rent based on the revenues of the Initial Hotels (the Percentage Leases). Each Percentage Lease obligates the Initial Lessee to pay rent equal to the greater of the minimum rent or a percentage rent based on the gross revenues of each Initial Hotel. The Initial Lessee will hold the franchise agreement for each Initial Hotel. Pursuant to the Partnership Agreement, the limited partners of the Partnership will receive Exchange Rights, which will enable them to cause the Company to pay cash for their interests in the Partnership, or at the Company's election, to exchange common shares for such interests. The Exchange Rights may be exercised in whole or in part. The number of Common Shares initially issuable to the limited partners upon exercise of the Exchange Rights is 1,490,000. The number of shares issuable upon exercise of the Exchange Rights will be adjusted upon the occurrence of stock splits, mergers, consolidations or similar pro rata share transactions, which otherwise would have the effect of diluting the ownership interests of the limited partners or the shareholders of the Company. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Distributions The Company intends to make regular quarterly distribution which are dependent upon receipt of distributions from the Partnership. Acquisitions of Initial Hotels In accounting for the acquisitions of the Initial Hotels discussed in Note 1, purchase accounting will be applied to those hotel properties in which (i) non-affiliated persons exchange their interests for Units of the Partnership or cash, or (ii) affiliated persons exchange their interests for cash consideration. The exchange of F-13 122 BOYKIN LODGING COMPANY NOTES TO BALANCE SHEET -- (CONTINUED) AS OF JUNE 30, 1996 ownership interests by affiliated persons for Units of the Partnership will not result in purchase accounting adjustments to historical basis as such transactions will be between entities under common control. 3. DESCRIPTION OF CAPITAL STOCK: Common Shares Holders of the Company's Common Shares are entitled to receive dividends, when, as and if declared by the Board of Directors of the Company, out of funds legally available therefor. The holders of Common Shares, upon any liquidation, dissolution or winding-up of the Company, are entitled to share ratably in any assets remaining after payment in full of all liabilities of the Company and all preferences of the holders of any outstanding preferred shares. The Common Shares possess ordinary voting rights, each share entitling the holder thereof to one vote. Holders of Common Shares do not have cumulative voting rights in the election of directors and do not have preemptive rights. Preferred Shares The Board of Directors is authorized to provide for the issuance of two classes of preferred shares (collectively, the Preferred Shares), each in one or more series, to establish the number of shares in each series and to fix the designation, powers, preferences and rights (other than voting rights) of each series and the qualifications, limitations or restrictions thereon. An aggregate of five million Preferred Shares are authorized. Because the Board of Directors has the power to establish the preferences and rights of each series of Preferred Shares, the Board of Directors may afford the holders of any series of Preferred Shares preferences, powers and rights senior to the rights of holders of Common Shares. The issuance of Preferred Shares could have the effect of delaying or preventing a change in control of the Company. The Company has no present intention to issue Preferred Shares. 4. EMPLOYEE BENEFITS: Long-Term Incentive Plan Grants of incentive or nonqualified share options, restricted shares, deferred shares, share purchase rights and share appreciation rights in tandem with options, or any combination thereof, may be made under the plan. Eligible employees of the Company may participate in the long-term incentive plan. Members of the Compensation Committee are not eligible to participate in the long-term incentive plan. The Company has reserved 1,000,000 Common Shares for issuance under the plan. Upon the Closing, Robert W. Boykin, Raymond P. Heitland and Mark L. Bishop will be granted options to purchase 250,000, 75,000 and 75,000 shares, respectively, under the long-term incentive plan. These grants will be made at the initial public offering price. The Company will follow the disclosure option in Statement of Financial Accounting Standards No. 123 and accordingly no expense will be recognized for these options. The long-term incentive plan provides for vesting, exercise or forfeiture of rights granted under the long-term incentive plan on retirement, death, disability, termination of employment or a change of control. The Board of Directors may modify, suspend or terminate the long-term incentive plan as long as it does not impair the rights thereunder of any participant. Under applicable law, the holders of Common Shares must approve any increase in the maximum number of shares reserved for issuance under the long-term incentive plan, any change in the classes of employees eligible to participate in the long-term incentive plan and any material increase in the benefits accruing to participants. F-14 123 BOYKIN LODGING COMPANY NOTES TO BALANCE SHEET -- (CONTINUED) AS OF JUNE 30, 1996 Compensation of Directors Each independent director will receive an option for 5,000 Common Shares exercisable at the initial public offering price of the Common Shares. These options will vest fully within the first two years of issuance and will have a term of ten years. Employment Contracts The Company will enter into an employment contract with Robert W. Boykin, the Company's Chairman of the Board, President and Chief Executive Officer, at an initial annual base compensation of $250,000. The employment contract with Mr. Boykin provides for an initial three year term that is automatically extended for an additional year at the end of each year of the agreement, subject to the right of either party to terminate the agreement by giving two years' prior notice. In addition, the Company will enter into employment contracts with two other executive officers at an aggregate annual base compensation of $290,000. These contracts provide for an initial one year term that is automatically extended for an additional year at the end of each year of the agreement, subject to the right of either party to terminate the agreement by giving six months' prior notice. In addition, each employment contract provides for the payment of a bonus based upon specified percentages of annual base salary in the event that specified operating results are achieved. F-15 124 INITIAL LESSEE PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS The Initial Lessee's unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 1995, the twelve months ended June 30, 1996, and the six month periods ended June 30, 1995 and 1996, respectively, are presented as if the consummation of the Formation Transactions had occurred as of January 1, 1995 and carried forward through each period presented. The unaudited Pro Forma Condensed Combined Statement of Operations for the twelve months ended June 30, 1996 is presented in conjunction with the analysis of the expected initial distributions as set forth under the caption "Distribution Policy." Such pro forma information is based upon the combined statements of operations of the Initial Hotels and the combined statements of revenues and expenses of Boykin Management Company, Purchasing Concepts, Inc. and Bopa Design Company. It should be read in conjunction with the financial statements listed in the Index to Financial Statements at page F-1 of this Prospectus. In management's opinion, all adjustments necessary to reflect the effects of the Formation Transactions have been made. The Initial Lessee will be structured as a pass through entity for income tax purposes and, accordingly, no provision for income taxes has been provided. These unaudited Pro Forma Condensed Combined Statements of Operations are not necessarily indicative of what the actual results of operations of the Initial Lessee would have been assuming that the Formation Transactions had been completed as of the beginning of the periods presented, nor do they purport to represent the results of operations for future periods. Further, the unaudited Pro Forma Condensed Combined Statement of Operations for the interim periods ended June 30, 1995 and 1996 are not necessarily indicative of the results of operations for the full year. F-16 125 INITIAL LESSEE PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
HISTORICAL --------------------------------------------------------- (A) (B) INITIAL PRO (A) LAKE ADJUSTMENTS HOTELS (C) FORMA CONTRIBUTED NORMAN TO CONFORM COMBINED INITIAL PRO FORMA INITIAL HOTELS HOTELS YEAR-ENDS HISTORICAL LESSEE ADJUSTMENTS LESSEE ---------- -------- ---------- --------- -------- ---------- -------- REVENUES: Room revenue..................... $ 50,730 $ 3,764 $ 291 $54,785 $ -- $ -- $54,785 Food and beverage revenue........ 22,984 -- 59 23,043 -- 600(D) 23,643 Other revenue -- Initial Hotels......................... 4,490 124 29 4,643 -- -- 4,643 Other revenue -- Initial Lessee......................... -- -- -- -- 8,737 (6,686)(E) 2,051 ---------- -------- ---------- --------- -------- ---------- -------- Total revenues................. 78,204 3,888 379 82,471 8,737 (6,086) 85,122 ---------- -------- ---------- --------- -------- ---------- -------- EXPENSES: Departmental expenses of Initial Hotels: Rooms.......................... 11,896 1,025 48 12,969 -- (65)(F) 12,904 Food and beverage.............. 16,597 -- (57) 16,540 -- 500(G) 17,040 Other.......................... 2,313 78 15 2,406 -- -- 2,406 Cost of goods sold of Initial Lessee......................... -- -- -- -- 3,720 (2,466)(H) 1,254 General and administrative....... 6,832 368 23 7,223 2,733 (603)(I) 9,353 Advertising and promotion........ 3,253 194 (2) 3,445 -- -- 3,445 Utilities........................ 3,245 207 19 3,471 -- -- 3,471 Management fees.................. 3,280 115 20 3,415 -- (3,415)(J) -- Franchisor royalties and other charges........................ 3,813 271 30 4,114 -- -- 4,114 Repairs and maintenance.......... 3,771 182 (5) 3,948 -- -- 3,948 Real estate and personal property taxes, property and casualty insurance, and ground rent..... 3,579 106 8 3,693 105 (3,693)(K) 105 Interest expense................. 14,169 415 7 14,591 170 (14,761)(L) -- Depreciation and amortization.... 6,545 466 -- 7,011 85 (6,996)(M) 100 Unallocated business interruption income......................... (474) -- -- (474) -- -- (474 ) Gain on property insurance recovery....................... (670) -- -- (670) -- 670(N) -- Other............................ 103 (3 ) 39 139 -- 50(O) 189 Percentage Lease payments........ -- -- -- -- -- 25,521(P) 25,521 ---------- -------- ---------- --------- -------- ---------- -------- Total expenses............ 78,252 3,424 145 81,821 6,813 (5,258) 83,376 ---------- -------- ---------- --------- -------- ---------- -------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS............................ $ (48) $ 464 $ 234 $ 650 $ 1,924 $ (828) $ 1,746 =========== ========= =========== ========== ========= =========== =========
See Notes to Pro Forma Condensed Combined Statements of Operations. F-17 126 INITIAL LESSEE PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED JUNE 30, 1996 (UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
HISTORICAL ---------------------------------------------- (A) INITIAL PRO (A) LAKE HOTELS (C) PRO FORMA CONTRIBUTED NORMAN COMBINED INITIAL FORMA INITIAL HOTELS HOTELS HISTORICAL LESSEE ADJUSTMENTS LESSEE ---------- -------- ---------- --------- -------- -------- REVENUES: Room revenue............................... $ 53,235 $ 4,063 $ 57,298 $ -- $ -- $57,298 Food and beverage revenue.................. 23,395 223 23,618 -- 362 (D) 23,980 Other revenue -- Initial Hotels............ 4,626 134 4,760 -- -- 4,760 Other revenue -- Initial Lessee............ -- -- -- 8,700 (6,430)(E) 2,270 ---------- -------- ---------- --------- -------- -------- Total revenues........................... 81,256 4,420 85,676 8,700 (6,068) 88,308 ---------- -------- ---------- --------- -------- -------- EXPENSES: Departmental expenses of Initial Hotels: Rooms.................................... 12,415 1,019 13,434 -- (55)(F) 13,379 Food and beverage........................ 16,788 220 17,008 -- 300 (G) 17,308 Other.................................... 2,377 82 2,459 -- -- 2,459 Cost of goods sold of Initial Lessee....... -- -- -- 3,528 (2,090)(H) 1,438 General and administrative................. 6,987 402 7,389 2,896 (651)(I) 9,634 Advertising and promotion.................. 3,385 196 3,581 -- -- 3,581 Utilities.................................. 3,312 208 3,520 -- -- 3,520 Management fees............................ 3,537 147 3,684 -- (3,684)(J) -- Franchisor royalties and other charges..... 4,182 287 4,469 -- -- 4,469 Repairs and maintenance.................... 3,773 213 3,986 -- -- 3,986 Real estate and personal property taxes, property and casualty insurance, and ground rent.............................. 3,632 103 3,735 101 (3,735)(K) 101 Interest expense........................... 15,091 415 15,506 150 (15,656)(L) -- Depreciation and amortization.............. 7,083 466 7,549 86 (7,529)(M) 106 Unallocated business interruption income... (474) -- (474) -- -- (474) Gain on property insurance recovery........ (670) -- (670) -- 670(N) -- Other...................................... 180 (1) 179 (4) 71(O) 246 Percentage Lease payments.................. -- -- -- -- 27,166(P) 27,166 ---------- -------- ---------- --------- -------- -------- Total expenses........................... 81,598 3,757 85,355 6,757 (5,193) 86,919 ---------- -------- ---------- --------- -------- -------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS..... $ (342) $ 663 $ 321 $ 1,943 $ (875) $ 1,389 =========== ========= =========== ========== ========= =========
See Notes to Pro Forma Condensed Combined Statements of Operations. F-18 127 INITIAL LESSEE PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
HISTORICAL ---------------------------------------------- (A) INITIAL PRO (A) LAKE HOTELS (A) PRO FORMA CONTRIBUTED NORMAN COMBINED INITIAL FORMA INITIAL HOTELS HOTELS HISTORICAL LESSEE ADJUSTMENTS LESSEE ---------- -------- ---------- --------- -------- -------- REVENUES: Room revenue............................... $ 25,631 $ 1,767 $ 27,398 $ -- $ -- $27,398 Food and beverage revenue.................. 11,411 -- 11,411 -- 300 (D) 11,711 Other revenue -- Initial Hotels............ 2,159 78 2,237 -- -- 2,237 Other revenue -- Initial Lessee............ -- -- -- 4,389 (3,347) (E) 1,042 ---------- -------- ---------- --------- -------- -------- Total revenues........................... 39,201 1,845 41,046 4,389 (3,047) 42,388 ---------- -------- ---------- --------- -------- -------- EXPENSES: Departmental expenses of Initial Hotels: Rooms.................................... 5,886 495 6,381 -- (24) (F) 6,357 Food and beverage........................ 8,103 -- 8,103 -- 250 (G) 8,353 Other.................................... 1,126 45 1,171 -- -- 1,171 Cost of goods sold of Initial Lessee....... -- -- -- 2,025 (1,514) (H) 511 General and administrative................. 3,436 200 3,636 1,330 (298) (I) 4,668 Advertising and promotion.................. 1,597 77 1,674 -- -- 1,674 Utilities.................................. 1,625 98 1,723 -- -- 1,723 Management fees............................ 1,551 111 1,662 -- (1,662) (J) -- Franchisor royalties and other charges..... 1,797 127 1,924 -- -- 1,924 Repairs and maintenance.................... 1,910 91 2,001 -- -- 2,001 Real estate and personal property taxes, property and casualty insurance, and ground rent.............................. 1,818 55 1,873 58 (1,873) (K) 58 Interest expense........................... 6,452 759 7,211 91 (7,302) (L) -- Depreciation and amortization.............. 2,990 289 3,279 40 (3,272) (M) 47 Other...................................... 130 -- 130 13 (29) (O) 114 Percentage Lease payments.................. -- -- -- -- 12,277 (P) 12,277 ---------- -------- ---------- --------- -------- -------- Total expenses........................... 38,421 2,347 40,768 3,557 (3,447) 40,878 ---------- -------- ---------- --------- -------- -------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS..... $ 780 $ (502) $ 278 $ 832 $ 398 $ 1,510 =========== ========= =========== ========== ========= =========
See Notes to Pro Forma Condensed Combined Statements of Operations. F-19 128 INITIAL LESSEE PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
HISTORICAL ---------------------------------------------- (A) INITIAL PRO (A) LAKE HOTELS (A) PRO FORMA CONTRIBUTED NORMAN COMBINED INITIAL FORMA INITIAL HOTELS HOTELS HISTORICAL LESSEE ADJUSTMENTS LESSEE ---------- -------- ---------- --------- -------- -------- REVENUES: Room revenue............................... $ 27,845 $ 2,066 $ 29,911 $ -- $ -- $29,911 Food and beverage revenue.................. 11,763 223 11,986 -- 62 (D) 12,048 Other revenue -- Initial Hotels............ 2,266 88 2,354 -- -- 2,354 Other revenue -- Initial Lessee............ -- -- -- 4,678 (3,323) (E) 1,355 ---------- -------- ---------- --------- -------- -------- Total revenues........................... 41,874 2,377 44,251 4,678 (3,261) 45,668 ---------- -------- ---------- --------- -------- -------- EXPENSES: Departmental expenses of Initial Hotels: Rooms.................................... 6,357 489 6,846 -- (13) (F) 6,833 Food and beverage........................ 8,351 220 8,571 -- 50 (G) 8,621 Other.................................... 1,175 49 1,224 -- -- 1,224 Cost of goods sold of Initial Lessee....... -- -- -- 1,894 (1,138) (H) 756 General and administrative................. 3,568 234 3,802 1,586 (346) (I) 5,042 Advertising and promotion.................. 1,731 79 1,810 -- -- 1,810 Utilities.................................. 1,673 99 1,772 -- -- 1,772 Management fees............................ 1,788 143 1,931 -- (1,931) (J) -- Franchisor royalties and other charges..... 2,136 143 2,279 -- -- 2,279 Repairs and maintenance.................... 1,917 122 2,039 -- -- 2,039 Real estate and personal property taxes, property and casualty insurance, and ground rent.............................. 1,863 52 1,915 62 (1,915) (K) 62 Interest expense........................... 7,367 759 8,126 62 (8,188) (L) -- Depreciation and amortization.............. 3,528 289 3,817 40 (3,804) (M) 53 Other...................................... 168 2 170 2 (8) (O) 164 Percentage Lease payments.................. -- -- -- -- 13,922 (P) 13,922 ---------- -------- ---------- --------- -------- -------- Total expenses........................... 41,622 2,680 44,302 3,646 (3,371) 44,577 ---------- -------- ---------- --------- -------- -------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS..... $ 252 $ (303) $ (51) $ 1,032 $ 110 $ 1,091 =========== ========= =========== ========== ========= =========
See Notes to Pro Forma Condensed Combined Statements of Operations. F-20 129 INITIAL LESSEE NOTES TO PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS (UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS) (A) Derived from the historical combined financial statements of the Initial Hotels for the period presented. (B) Conforms the operating results of the Initial Hotel having a September 30 fiscal year-end to a December 31, 1995 year-end by adding the operating results of that Initial Hotel for the period October 1 to December 31, 1995 and subtracting the operating results of that Initial Hotel for the corresponding interim period of the prior year. (C) For the year ended December 31, 1995, includes the operating results of Boykin Management Company (BMC) for the year ended March 31, 1996 and the operating results of Purchasing Concepts, Inc. (PCI) and Bopa Design Company (Spectrum Services) for the year ended December 31, 1995. Such amounts are derived from the historical combined statement of revenues and expenses of BMC, PCI and Spectrum Services. In the opinion of management, the effect of nonconforming period ends is not material. For the twelve months ended June 30, 1996, and the six month periods ended June 30, 1995 and 1996, the period ends of BMC, PCI and Spectrum Services have been combined using the same months and periods. In preparing the pro forma statement of operations of the Initial Lessee for the twelve months ended June 30, 1996, the period end of BMC has been conformed to June 30, 1996 by adding its historical operating results for the three-month period April 1 to June 30, 1996 to its historical fiscal year-end operating results for the fiscal year ended March 31, 1996 and then subtracting its historical operating results for the three-month period April 1 to June 30, 1995. (D) From August 1993 until February 1996, the catering, meeting, lounge and restaurant facilities of the Lake Norman Holiday Inn were operated by a third-party operator. In February 1996, when a Boykin Affiliate purchased the hotel facility, it also purchased the food and beverage business assets of this operator. This adjustment represents the approximate food and beverage revenues of this operator for the period indicated, based upon actual historical revenue information obtained by the Company. (E) Reflects the elimination of management fees charged to the Initial Hotels by BMC, the elimination of intercompany sales from PCI and Spectrum Services to the Initial Hotels, and the elimination of interest income earned by BMC on the advances due from Boykin Columbus Joint Venture; such advances will be retired in connection with the Formation Transactions.
TWELVE MONTHS SIX MONTHS YEAR ENDED ENDED JUNE ENDED JUNE 30, DECEMBER 31, 30, ------------------ 1995 1996 1995 1996 ------------ ------------- ------- ------- Management fees charged to Initial Hotels... $ (3,600) $(3,736) $(1,521) $(1,889) Intercompany sales to Initial Hotels: PCI.................................... (136) (134) (64) (62) Spectrum Services...................... (2,683) (2,274) (1,647) (1,238) Interest income on advances to Boykin Columbus Joint Venture.......................... (267) (286) (115) (134) ------------ ------------- ------- ------- ($ 6,686) $(6,430) $(3,347) $(3,323) ========== =========== ======= =======
(F) Prior to February 1996, the Lake Norman Hotels provided complimentary breakfasts to their guests. In February 1996, when a Boykin Affiliate purchased the Lake Norman Hotels, the practice of providing complimentary breakfasts was terminated at one of the Lake Norman Hotels. This adjustment eliminates the historical expense associated with the complimentary breakfasts at that hotel. (G) Reflects operating costs associated with the food and beverage operations discussed in (D). (H) Reflects the cost of sales related to the Spectrum Services revenues eliminated in (E). F-21 130 (I) Decrease reflects (i) the elimination of expenses related to the PCI revenues eliminated in (E), and (ii) the elimination of estimated general and administrative expenses of BMC which will be incurred by the Partnership. The expenses to be incurred by the Partnership primarily relate to administrative salaries.
TWELVE MONTHS SIX MONTHS YEAR ENDED ENDED JUNE ENDED JUNE 30, DECEMBER 31, 30, ------------------ 1995 1996 1995 1996 ------------ ------------- ------- ------- Expenses recorded by Initial Hotels in connection with purchases from PCI.................................. $ (136) $ (134) $ (64) $ (62) General and administrative expenses of BMC to be incurred by the Partnership............................... (467) (517) (234) (284) ------------ ------------- ------- ------- $ (603) $ (651) $ (298) $ (346) ========== =========== ======= =======
(J) Reflects the elimination of management fee expense of the Initial Hotels related to the management fee revenues eliminated in (E). (K) Reflects the elimination of real estate and personal property taxes, property and casualty insurance, and ground rent expenses to be paid by the Partnership. (L) Reflects the elimination of (i) mortgage interest expense of the Initial Hotels due to the expected repayment of such debt with a portion of the proceeds from the Offering, and (ii) interest expense on note payable obligations of BMC which are expected to be retired in connection with the formation and capitalization of the Initial Lessee. (M) Reflects the elimination of depreciation expense related to the investments in hotel properties of the Initial Hotels which are to be acquired by the Partnership. (N) Reflects the elimination of the gain recognized on property insurance recovery. As the Company will own the Initial Hotel properties, the Initial Lessee will not realize or incur such gains or losses. (O) Reflects the elimination of miscellaneous items of nonoperating income and expense which will not be earned or incurred by the Initial Lessee. The pro forma adjustments consist of the following:
TWELVE MONTHS SIX MONTHS YEAR ENDED ENDED JUNE ENDED JUNE 30, DECEMBER 31, 30, ------------------ 1995 1996 1995 1996 ------------ ------------- ------- ------- Interest income earned by Initial Hotels.... $ 192 $ 194 $ 89 $ 91 Expenses incurred by Initial Hotels in connection with a prior attempted public offering and sale of assets............... (51) (36) (51) (36) Gain (loss) on fixed asset disposals........ 7 1 (10) (16) Other non-recurring charges................. (98) (88) (57) (47) ------------ ------------- ------- ------- $ 50 $ 71 $ (29) $ (8) ========== =========== ======= =======
(P) Represents lease payments calculated on a pro forma basis by applying the rent provisions of the Percentage Leases to the pro forma room, food and beverage and other revenues of the Initial Hotels as well as an additional $725 of Percentage Lease payments required pursuant to the rental interruption insurance provisions of the Percentage Lease agreements for the year ended December 31, 1995 and the 12 months ended June 30, 1996. The rent formula utilized in computing the pro forma Percentage Lease expense includes for the calendar year 1995 an adjustment to reduce the threshold revenue amounts in the Percentage Lease formulas by the 2.5% increase in the Consumer Price Index for that year. See "Business and Properties" for the Percentage Lease formulas. F-22 131 INITIAL LESSEE PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF JUNE 30, 1996 (UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS) The unaudited Pro Forma Condensed Combined Balance Sheet is presented as if the consummation of the Formation Transactions (as they relate to the formation of the Initial Lessee) had occurred on June 30, 1996. Such pro forma information is based in part upon the Pro Forma Condensed Consolidated Balance Sheet of the Company, the combined balance sheets of the Initial Hotels, and the combined statement of net assets of Boykin Management Company, Purchasing Concepts, Inc., and Bopa Design Company, all as of June 30, 1996. It should be read in conjunction with the financial statements listed in the Index to Financial Statements at page F-1 of this Prospectus. In management's opinion, all adjustments necessary to reflect the effects of the Formation Transactions have been made. This unaudited Pro Forma Condensed Combined Balance Sheet is not necessarily indicative of what the actual financial position would have been assuming the Formation Transactions had been completed as of June 30, 1996, nor does it purport to represent the future financial position of the Initial Lessee.
(A) (B) (B) HISTORICAL INITIAL CONTRIBUTED LAKE NORMAN AS PRO FORMA LESSEE HOTELS HOTELS COMBINED ADJUSTMENTS PRO FORMA ------- ----------- ----------- ---------- ----------- --------- ASSETS CASH AND EQUIVALENTS................. $ 2,605 $ 3,847 $ 359 $ 6,811 $ (2,978)(C) $ 3,833 ACCOUNTS RECEIVABLE.................. 5,482 4,307 216 10,005 (4,201)(D) 5,804 INVENTORIES, PREPAIDS AND OTHER ASSETS............................. 149 4,498 28 4,675 (3,551)(E) 1,124 PROPERTY AND EQUIPMENT, net.......... 334 -- -- 334 -- 334 DEFERRED FRANCHISE FEES AND OTHER DEFERRED COSTS..................... -- 86 248 334 -- 334 ------- ----------- ----- ---------- ----------- --------- Total assets................. $ 8,570 $12,738 $ 851 $ 22,159 $ (10,730) $11,429 ====== =========== ============= ========= ============ ========== LIABILITIES AND EQUITY NOTES PAYABLE........................ $ 1,495 $ -- $ -- $ 1,495 $ (1,495)(F) $ -- ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES.............. 2,056 7,213 344 9,613 (1,184)(G) 8,429 EQUITY............................... 5,019 5,525 507 11,051 (8,051)(H) 3,000 ------- ----------- ----- ---------- ----------- --------- Total liabilities and equity..................... $ 8,570 $12,738 $ 851 $ 22,159 $ (10,730) $11,429 ====== =========== ============= ========= ============ ==========
See Notes to Pro Forma Condensed Combined Balance Sheet. F-23 132 INITIAL LESSEE NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF JUNE 30, 1996 (UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS) (A) Initial Lessee balance sheet data was derived from the unaudited combined statement of net assets of Boykin Management Company, Purchasing Concepts, Inc. and Bopa Design Company as of the date indicated, included elsewhere in this Prospectus. See the Index to Financial Statements included on page F-1 of this Prospectus. (B) Amounts are derived from the Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1996 of the Company, and the related notes thereto, and reflect the historical balances of the Initial Lessee and the Initial Hotels less those assets and liabilities contributed to or assumed by the Company. See the Index to Financial Statements included on page F-1 of this Prospectus. (C) Reflects the following sources and uses of cash: Reclassification of escrow cash (See (E))............................ $ 3,551 Payment to the Company for prorated expenses......................... (1,646)(a) Distributions to shareholders........................................ (2,019)(b) Retire BMC notes payable (See (F))................................... (1,495) Distributions to partners prior to transfer of working capital to Initial Lessee: Boykin Partnerships................................................ (3,906)(c) Lake Norman Hotels................................................. (480)(c) Collection of note receivable due from affiliate..................... 3,017(d) ------- $(2,978) =======
(D) Reflects the collection of the advances and accrued interest due to the Initial Lessee from Boykin Columbus Joint Venture (BCJV), the elimination of management and design fees due to the Initial Lessee from the Initial Hotels and the elimination of amounts due to the Initial Hotels from the Initial Lessee. Advances and accrued interest due from BCJV.......................... $(3,017)(d) Management fees due from Initial Hotels to the Initial Lessee........ (908)(e) Design fees due from Initial Hotels to the Initial Lessee............ (157)(f) Amounts due to the Initial Hotels from Initial Lessee................ (119)(g) ------- $(4,201) =======
(E) As the mortgage debt and real estate will be sold to the Partnership, the Initial Lessee will not be required to maintain escrow cash accounts. This adjustment transfers the former restricted escrow fund to available cash. (F) Reflects the repayment of BMC's bank debt with available cash. (G) Reflects the elimination of management and design fees payable to the Initial Lessee by the Initial Hotels, and the elimination of miscellaneous amounts due to the Initial Hotels from the Initial Lessee. Management fees due to the Initial Lessee from the Initial Hotels.... $ (908)(e) Design fees due to the Initial Lessee from the Initial Hotels........ (157)(f) Amounts due to the Initial Lessee from the Initial Hotels............ (119)(g) ------- $(1,184) =======
F-24 133 (H) Reflects the following: Payment to the Partnership for prorated expenses of the Initial Hotels............................................................. $(1,646)(a) Distributions to partners/shareholders by contributed entities: Initial Hotels..................................................... (4,386)(c) BMC................................................................ (2,019)(b) ------- $(8,051) =======
As stated in "Lessees -- Initial Lessee," the Initial Lessee will have a minimum net worth of $3,000 upon completion of the Formation Transactions. It is the intention of the Initial Lessee that, to the extent cash is available, the Initial Hotels and BMC will make cash distributions to their respective partners and shareholders, as applicable, such that the aggregate net assets to be transferred by these entities to the Initial Lessee at closing will result in the Initial Lessee having an initial net worth of $3,000. F-25 134 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Boykin Management Company: We have audited the accompanying combined balance sheets of the Initial Hotels (excluding Lake Norman Hotels), as defined in Note 1 to the combined financial statements, as of December 31, 1994 and 1995, and the related combined statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1995. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Initial Hotels (excluding Lake Norman Hotels), as of December 31, 1994 and 1995, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements and included on page F-41 of this Prospectus is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Cleveland, Ohio, February 2, 1996. F-26 135 INITIAL HOTELS EXCLUDING LAKE NORMAN HOTELS COMBINED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31 --------------------- 1994 1995 -------- -------- JUNE 30, 1996 ----------- (UNAUDITED) ASSETS INVESTMENTS IN HOTEL PROPERTIES, at cost: Land..................................................... $ 7,382 $ 7,382 $ 7,382 Buildings and improvements............................... 78,948 89,371 89,895 Furniture and equipment.................................. 31,228 36,099 36,892 Construction in progress................................. 951 1,036 389 -------- -------- ----------- 118,509 133,888 134,558 Less- Accumulated depreciation........................... 59,982 63,311 66,354 -------- -------- ----------- Net investment in hotel properties....................... 58,527 70,577 68,204 CASH AND CASH EQUIVALENTS.................................. 3,996 2,909 3,847 ACCOUNTS RECEIVABLE, net of allowance for doubtful accounts of $64 and $34 at December 31, 1994 and 1995, respectively, and $20 at June 30, 1996................... 2,820 2,369 3,525 INSURANCE CLAIM RECEIVABLE................................. -- 913 663 RECEIVABLES FROM AFFILIATE................................. 7 129 119 INVENTORIES................................................ 460 480 456 PREPAIDS AND OTHER ASSETS.................................. 587 788 816 CASH HELD IN ESCROW........................................ 1,896 2,607 3,551 DEFERRED EXPENSES, net..................................... 395 2,560 2,240 -------- -------- ----------- $ 68,688 $ 83,332 $ 83,421 ======== ======== =========== LIABILITIES AND PARTNERS' DEFICIT MORTGAGE NOTES PAYABLE..................................... $111,788 $122,203 $ 123,726 ADVANCES FROM AND ACCRUED INTEREST DUE TO PARTNERS......... 15,198 7,751 7,725 ACCOUNTS PAYABLE: Trade.................................................... 1,746 1,490 1,876 Affiliate................................................ 221 75 -- Management fees to related party......................... 498 943 808 Bank overdraft........................................... 1,435 1,402 757 ACCRUED EXPENSES AND OTHER LIABILITIES..................... 4,999 5,728 5,721 COMMITMENTS AND CONTINGENCIES.............................. -------- -------- ----------- 135,885 139,592 140,613 PARTNERS' DEFICIT.......................................... (67,197) (56,260) (57,192) -------- -------- ----------- $ 68,688 $ 83,332 $ 83,421 ======== ======== ===========
The accompanying notes to combined financial statements are an integral part of these combined balance sheets. F-27 136 INITIAL HOTELS EXCLUDING LAKE NORMAN HOTELS COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS)
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------- ------------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- (UNAUDITED) REVENUES FROM HOTEL OPERATIONS: Room revenue.......................... $45,753 $48,652 $50,730 $25,631 $27,845 Food and beverage revenue............. 22,357 22,811 22,984 11,411 11,763 Other revenue......................... 3,977 4,092 4,490 2,159 2,266 ------- ------- ------- ------- ------- Total revenues..................... 72,087 75,555 78,204 39,201 41,874 ------- ------- ------- ------- ------- EXPENSES: Departmental expenses -- Rooms.............................. 11,268 11,869 11,896 5,886 6,357 Food and beverage.................. 16,833 16,924 16,597 8,103 8,351 Other.............................. 2,125 1,986 2,313 1,126 1,175 General and administrative............ 6,848 6,906 6,832 3,436 3,568 Advertising and promotion............. 3,407 3,191 3,253 1,597 1,731 Utilities............................. 3,251 3,346 3,245 1,625 1,673 Management fees to related party...... 2,693 2,882 3,280 1,551 1,788 Franchisor royalties and other charges............................ 3,308 2,952 3,813 1,797 2,136 Repairs and maintenance............... 3,429 3,728 3,771 1,910 1,917 Real estate and personal property taxes, insurance and rent.......... 3,112 3,329 3,579 1,818 1,863 Interest expense...................... 11,411 11,324 13,430 6,079 6,993 Interest expense on partner advances........................... 964 1,073 739 373 374 Depreciation and amortization......... 5,822 5,690 6,545 2,990 3,528 Unallocated business interruption insurance income................... -- -- (474) -- -- Gain on property insurance recovery... -- -- (670) -- -- Other................................. 80 183 103 130 168 ------- ------- ------- ------- ------- Total expenses..................... 74,551 75,383 78,252 38,421 41,622 ------- ------- ------- ------- ------- Income (loss) before extraordinary item............................. (2,464) 172 (48) 780 252 EXTRAORDINARY ITEM -- GAIN (LOSS) ON EARLY EXTINGUISHMENT OF DEBT.......... -- -- 556 556 (1,315) ------- ------- ------- ------- ------- NET INCOME (LOSS)....................... $(2,464) $ 172 $ 508 1,336 (1,063) ======= ======= ======= ======= =======
The accompanying notes to combined financial statements are an integral part of these combined statements. F-28 137 INITIAL HOTELS EXCLUDING LAKE NORMAN HOTELS COMBINED STATEMENTS OF PARTNERS' DEFICIT (IN THOUSANDS)
NET COMBINED PARTNERS' (DEFICIT) -------- BALANCE, DECEMBER 31, 1992................................... $(64,458) Net loss................................................... (2,464 ) Capital contributions...................................... 775 Cash distributions......................................... (648 ) -------- BALANCE, DECEMBER 31, 1993................................... (66,795 ) Net income................................................. 172 Cash distributions......................................... (574 ) -------- BALANCE, DECEMBER 31, 1994................................... (67,197 ) Net income................................................. 508 Capital contributions...................................... 7,811 Cash distributions......................................... (2,015 ) Redemption of partnership interests, net of $9,357 aggregate cash redemption payments...................... 4,633 -------- BALANCE, DECEMBER 31, 1995................................... (56,260 ) Net loss (unaudited)....................................... (1,063 ) Capital contributions (unaudited).......................... 800 Cash distributions (unaudited)............................. (600 ) Net loss of Pacific Ohio Partners for the period October 1, 1995 to December 31, 1995 excluded from these statements (unaudited)............................................. (69 ) -------- BALANCE, JUNE 30, 1996 (UNAUDITED)........................... $(57,192) =========
The accompanying notes to combined financial statements are an integral part of these combined statements. F-29 138 INITIAL HOTELS EXCLUDING LAKE NORMAN HOTELS COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, -------------------------------- --------------------- 1993 1994 1995 1995 1996 ------- ------- -------- -------- -------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).............................................. $(2,464) $ 172 $ 508 $ 1,336 $ (1,063) Adjustments to reconcile net income (loss) to net cash provided by operating activities -- Net income (loss) of Pacific Ohio Partners for the periods October 1 to December 31, 1994 and 1995, respectively, excluded from the combined statements of operations........ -- -- -- 16 (69) Depreciation and amortization expense........................ 5,888 5,756 7,645 3,409 5,089 Deferred interest expense on partner advances................ 871 989 705 353 374 Extraordinary loss (gain) on early extinguishment of debt.... -- -- (556) (556) 1,315 Gain on property insurance recovery.......................... -- -- (670) -- -- Changes in assets and liabilities -- Receivables................................................ (319) 155 (264) (383) (896) Inventories, prepaids and other assets..................... (161) 311 (221) (159) (4) Cash held in escrow........................................ (206) 61 (711) 266 (944) Accounts payable, accrued expenses and other liabilities... 114 256 739 1,571 (476) ------- ------- -------- -------- -------- Net cash provided by operating activities............. 3,723 7,700 7,175 5,853 3,326 ------- ------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Improvements and additions to hotel properties, net............ (2,771) (4,746) (5,366) (2,006) (1,546) Property insurance proceeds received, net...................... -- -- 1,122 -- -- ------- ------- -------- -------- -------- Net cash used for investing activities................ (2,771) (4,746) (4,244) (2,006) (1,546) ------- ------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on mortgage notes payable................... $ (673) $ (872) $(54,082) $(53,900) $(42,087) Proceeds from refinancing of mortgage debt..................... -- -- 66,250 66,250 41,673 Payment of debt prepayment premium and debt issuance costs..... (51) -- (4,473) (4,203) (228) Payments on advances from partners............................. (38) (42) (529) (529) (400) Capital contributions.......................................... 775 -- 188 188 800 Cash distributions paid........................................ (648) (574) (2,015) (1,736) (600) Redemptions of partnership interests........................... -- -- (9,357) (9,357) -- ------- ------- -------- -------- -------- Net cash used for financing activities................ (635) (1,488) (4,018) (3,287) (842) ------- ------- -------- -------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS.......................... 317 1,466 (1,087) 560 938 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................. 2,213 2,530 3,996 3,996 2,909 ------- ------- -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD....................... $ 2,530 $ 3,996 $ 2,909 $ 4,556 $ 3,847 ======== ======== ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest..................... $11,424 $11,499 $ 12,056 $ 5,415 $ 6,451 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Contributions of partner advances to capital................. $ -- $ -- $ 7,623 $ 7,623 $ -- Mortgage principal forgiven.................................. -- -- 2,335 2,335 -- Prepayment penalty financed with additional borrowing........ -- -- -- -- 1,246
The accompanying notes to combined financial statements are an integral part of these combined statements. F-30 139 INITIAL HOTELS EXCLUDING LAKE NORMAN HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) (AMOUNTS AND DISCLOSURES AS OF JUNE 30, 1995 AND 1996 AND FOR THE PERIODS THEN ENDED ARE UNAUDITED) 1. BASIS OF PRESENTATION: The Initial Hotels excluding Lake Norman Hotels consist of the following full-service hotels:
NUMBER OF PROPERTY NAME LOCATION ROOMS ------------------------------------------ --------------------- --------- Berkeley Marina Marriott.................. Berkeley, California 373 Buffalo Marriott.......................... Buffalo, New York 356 Cleveland Airport Marriott................ Cleveland, Ohio 375 Cleveland Marriott East................... Beachwood, Ohio 403 Columbus North Marriott................... Columbus, Ohio 300 Melbourne Quality Suites.................. Melbourne, Florida 208 Radisson Inn Sanibel Gateway.............. Ft. Myers, Florida 157
Boykin Management Company (BMC) was involved in the development of each of the above hotels and has managed all of the Initial Hotels excluding the Lake Norman Hotels since their respective inceptions. The hotels are owned by partnerships (Boykin Partnerships) in which the shareholders of The Boykin Company (TBC), BMC's parent company, and certain officers and employees of BMC (collectively, BMC Affiliates) have significant direct and indirect ownership interests. As of December 31, 1995, the Boykin Partnerships are owned as follows:
PARTNERSHIP INTEREST ------------------ BMC THIRD AFFILIATES PARTY ---------- ----- Berkeley Marina Associates, L.P. (BMLP)................. 100% 0% Buffalo Hotel Joint Venture (BHJV)...................... 50% 50% Pacific Ohio Partners (POP)............................. 100% 0% Beachwood Hotel Joint Venture (Beachwood)............... 35% 65% Columbus Hotel Joint Venture (CHJV)..................... 50% 50% Melbourne Oceanfront Hotel Associates (MOHA)............ 100% 0% Fort Myers Hotel Partnership (FMHP)..................... 100% 0%
The Lake Norman Hotels consist of a Hampton Inn and a Holiday Inn, both located in Charlotte, North Carolina. The Lake Norman Hotels, together with the hotels owned by the Boykin Partnerships, are the Initial Hotels. Boykin Lodging Company, Inc. is a recently organized Ohio corporation which has been established to acquire equity interests in existing hotel properties and to consider selectively the development of new hotels. Boykin Lodging Company will use the proceeds from a proposed initial public offering to acquire the general partnership interest, representing an 84.1% equity interest, in Boykin Hotel Properties, L.P., an Ohio limited partnership (the Partnership). It is proposed that the partners and shareholders of the entities owning the Initial Hotels will contribute their respective partnership interests to the Partnership in exchange for cash and partnership interests. The Partnership will use a portion of the proceeds from the sale of the general partnership interest to Boykin Lodging Company to retire mortgage indebtedness encumbering the Initial F-31 140 INITIAL HOTELS EXCLUDING LAKE NORMAN HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED Hotel properties. All of the Initial Hotels will be leased to Boykin Management Company Limited Liability Company (the Initial Lessee) pursuant to operating leases which contain provisions for rent based on the revenues of the Initial Hotels. The Initial Lessee is an affiliate of BMC. Management believes that these combined financial statements result in a more meaningful presentation of the Initial Hotel businesses excluding the Lake Norman Hotels to be acquired by the Partnership and thus appropriately reflect the historical financial position and results of operations of the predecessor of the Initial Lessee. All significant intercompany balances and transactions have been eliminated. The Lake Norman Hotels have been excluded from the accompanying combined financial statements as they were not owned or managed by BMC Affiliates until February 8, 1996. Interim Unaudited Financial Information The combined financial statements as of and for the six months ended June 30, 1995 and 1996 are unaudited; however, in the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair representation of the combined financial statements for these interim periods have been included. The results of interim periods are not necessarily indicative of the results to be obtained for a full year. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Accounting Periods For annual reporting purposes, all of the Boykin Partnerships except POP have been included in the accompanying combined financial statements based on a December 31 year-end. The accompanying combined financial statements as of December 31, 1993, 1994 and 1995 include the accounts of POP as of September 30, 1993, 1994 and 1995. In order to show comparable operations during the interim periods ended June 30, 1995 and 1996, POP's operating results were adjusted to exclude the three month periods October 1 to December 31, 1994 and 1995. The total revenues of POP excluded from the combined statements of operations for the six month periods ended June 30, 1995 and 1996 were $2,950 and $3,328, respectively, and total net income (loss) excluded was $16 and $(69), respectively. In the opinion of management, the effect of nonconforming period ends is not material to the combined financial statements. Hotel Properties Hotel properties are stated at cost. Depreciation is computed using primarily the straight-line method based upon the following estimated useful lives: Buildings and improvements 7-40 years Furniture and equipment 3-20 years For the year ended December 31, 1995, the Boykin Partnerships adopted Statement of Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, the partners and management of the Boykin Partnerships review the hotel properties for impairment when events or changes in circumstances indicate the carrying amounts of the hotel properties may not be recoverable. When such conditions exist, management estimates the future cash flows from operations and disposition of the hotel properties. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel property's estimated fair market value would be recorded and an impairment loss would be recognized. No such impairment losses were recognized in connection with the adoption of SFAS No. 121. F-32 141 INITIAL HOTELS EXCLUDING LAKE NORMAN HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED Maintenance and repairs are charged to operations as incurred; major renewals and betterments are capitalized. Upon the sale or disposition of a fixed asset, the asset and related accumulated depreciation are removed from the accounts, and the gain or loss is included in the determination of net income or loss. Cash and Cash Equivalents All highly liquid investments with an original maturity date of three months or less when purchased are considered to be cash equivalents. Inventories Inventories consisting primarily of food and beverages and gift store merchandise are stated at the lower of first-in, first-out cost or market. Cash Held in Escrow Cash held in escrow consists of amounts for real estate taxes remitted to the lenders which hold the mortgages on the hotel facilities and amounts deposited for the replacement of hotel real and personal property pursuant to the terms of certain mortgage and franchise agreements. Deferred Expenses Deferred expenses consist of initial franchise fees and deferred loan costs. Amortization of initial franchise fees is computed on a straightline basis over the terms of the franchise agreements while deferred loan costs are amortized over the terms of the related loan agreements. The amortization of deferred loan costs of $66, $66, $519, $99 and $457 for the years ended December 31, 1993, 1994 and 1995 and the six month periods ended June 30, 1995 and 1996, respectively, is included in interest expense in the accompanying combined statements of operations. Accumulated amortization of deferred expenses was $620 and $1,002 at December 31, 1994 and 1995, respectively, and $1,075 at June 30, 1996. Revenue Recognition Revenue is recognized as earned. Ongoing credit evaluations are performed and an allowance for potential credit losses is provided against the portion of accounts receivable which is estimated to be uncollectible. Such losses have been within management's expectations. Income Taxes The Boykin Partnerships are not subject to federal or state income taxes; however, they must file informational income tax returns and the partners must take income or loss of the Boykin Partnerships into consideration when filing their respective tax returns. Management's Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-33 142 INITIAL HOTELS EXCLUDING LAKE NORMAN HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED 3. MORTGAGE NOTES PAYABLE: Mortgage notes payable consisted of the following:
DECEMBER 31, --------------------- JUNE 30, 1994 1995 1996 -------- -------- -------- Notes payable to an investment banking firm in variable monthly installments of interest at a specified incremental rate over 30 day LIBOR; semiannual payments of principal equal to a specified percentage of cash flow, as defined; remaining unpaid principal due June 1, 1998; secured by real and personal property of FHMP, MOHA, POP and BMLP (collectively, the Borrowers) having an aggregate net book value of $45,632 at December 31, 1995. See Note (a) below............................... $ -- $ 66,250 $ 66,250
Accrued "additional interest" on above notes at 6%. See Note (a) below......................................... -- 583 1,274 Mortgage note payable to a life insurance company in monthly installments of interest only (Fixed Interest) at a rate of 8% through April 1995, 9% from May 1995 through January 2000 and 10% from February 2000 through October 2004; the unpaid principal due October 2004; collateralized by real and personal property having a net book value of $9,156 at December 31, 1995; requires an escrow reserve of 4% of revenues for the replacement or refurbishment of furniture, fixtures and equipment. See Note (b) below..................................... 13,697 13,697 13,697 Mortgage notes payable to a life insurance company in monthly installments of interest only at a blended rate of 11.25%; the unpaid principal due in full May 1, 1996; collateralized by certain real and personal property having a net book value of $5,630 at December 31, 1995; the partners of Beachwood have severally guaranteed $3,000 until the net annual income, as defined, of the property reaches $3,848 before debt service but after capital reserves of 3% of gross revenues. See Note (c) below........................... 28,500 28,500 -- Mortgage note payable to a life insurance company, in monthly installments of principal and interest (at 11.25%) of $151 until June 2001, at which time the remaining unpaid principal balance of approximately $10,910 is due; additional interest equal to 5% of gross annual room income, as defined, in excess of a base of $5,125 per year is required; additional interest payments of approximately $164, $165 and $181 were required for the years ended December 31, 1993, 1994 and 1995, respectively; collateralized by certain real and personal property having a net book value of $10,159 at December 31, 1995. See Note (c) below....... $ 13,480 $ 13,173 $ --
F-34 143 INITIAL HOTELS EXCLUDING LAKE NORMAN HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, --------------------- JUNE 30, 1994 1995 1996 -------- -------- -------- Mortgage notes payable to a life insurance company in aggregate monthly installments of principal and interest of $493 collateralized by certain real and personal property having an aggregate net book value of $15,789 at December 31, 1995. See Note (c) below....... -- -- 42,505 Mortgage note payable to a bank in monthly installments of $225, including interest at 9.77%. See Note (d) below.................................................. 24,937 -- -- Mortgage note payable to a bank in monthly installments of $104, including interest at 9%. See Note (d) below.................................................. 12,303 -- -- Mortgage note payable to a bank in monthly installments of principal and interest of $27; the effective interest rate was 4.77%. See Note (d) below............ 6,484 -- -- Mortgage note payable to a life insurance company, in monthly installments of principal and interest (at 10.875%) of $123. See Note (d) below................... 12,387 -- -- -------- -------- -------- $111,788 $122,203 $123,726 ======== ======== ========
- --------------- (a) The interest rate floats as follows: Until June 1, 1997, 4.25% over 30 day LIBOR From then until June 1, 1998, 4.50% over 30 day LIBOR Thereafter (if applicable) 5.00% over 30 day LIBOR In addition, a service fee of .06% of the outstanding balance is required. At December 31, 1995 and June 30, 1996, the interest rate was approximately 10%. Under certain conditions, the Borrowers can elect an interest deferral option whereby monthly payments of interest would be based on an interest rate not to exceed 10%. However, the excess of interest based on the normal interest rate over the deferral rate would be added to the principal balance. Semiannual principal payments are required equal to 50% of "cash flow," as defined. The percentage increases to 100% after June 1, 1998 or if the interest deferral option is elected. Such payments are to be applied first to accrued and unpaid interest on deferred interest, next to deferred interest, with the remainder to be applied to the outstanding principal balance. If certain conditions are met, the Borrowers can extend the initial maturity date by a maximum of twelve months. To extend the maturity date, the Borrowers must pay a fee equal to 1% of the then outstanding principal balance. In general, the notes are nonrecourse. However, in certain limited defined circumstances, the lender would have recourse to the Borrowers and certain BMC Affiliates. The loan agreement contains restrictive covenants with respect to, among other things, property maintenance and insurance, payment of taxes, property transfers and maintenance of specified debt service coverage ratios. The Borrowers were in compliance with the loan covenants at December 31, 1995 and June 30, 1996. Monthly escrow deposits are also required to be made to fund repayments of furniture and fixtures reserves and property taxes. The payment of "additional interest" is required upon maturity or repayment in full of the notes. Such amount to be paid is equal to the product of $66,250 multiplied by (i) 4.75% until June 1, 1996; F-35 144 INITIAL HOTELS EXCLUDING LAKE NORMAN HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED (ii) 5.25% until June 1, 1997, (iii) 6% thereafter. Under certain conditions, the rate at which such additional interest is to be calculated can be reduced. Management estimates that the additional interest to be paid will be computed at 3% if the proposed initial public offering discussed in Note 1 is completed. The "additional interest" is being charged to interest expense utilizing the effective interest rate method over the contractual term of the notes. Such amount was $583 for the year ended December 31, 1995 and $691 for the six-month period ended June 30, 1996. (b) Commencing April 1996, the note requires the payment of additional interest based on annual net cash flow (Net Cash Flow Interest), as defined. The effect of Net Cash Flow Interest is to increase the effective interest rate on the obligation to 11% per annum. For the year ended December 31, 1995 and the six-month periods ended June 30, 1995 and 1996, $308, $154 and $137, respectively, have been provided for the payment of Net Cash Flow Interest. Upon the occurrence of a casualty, a taking, a transfer or maturity, all as defined, additional interest based on the property's appreciation in value will also be payable. In the event of prepayment, CHJV must pay an amount which brings the lender's yield for the period from origination to prepayment date to 12.75%, compounded monthly, inclusive of Fixed Interest and Net Cash Flow Interest. The mortgage agreement contains covenants which, among other restrictions, limit CHJV's capacity to incur additional debt or sell assets; limit the ability of partners of CHJV to sell or transfer their respective ownership interests; require the property to be managed by BMC; and require CHJV to make annual deposits into an escrow account for the replacement of furnishings. As of December 31, 1995 and June 30, 1996, CHJV was in compliance with such covenants. (c) On January 29, 1996, the BHJV and Beachwood mortgage notes payable were refinanced with the proceeds of new mortgage notes from the same lender. The new notes carry an interest rate of 8.69% and have a five-year term. Monthly payments of principal and interest of $116 and $251 are required for the new BHJV and Beachwood mortgage notes payable, respectively, with the remaining unpaid principal amounts due at maturity. Additionally, the payment of the prepayment penalty on the previous BHJV mortgage note was financed by the proceeds of a second mortgage note in the amount of $1,246. The second note carries interest at the rate of 8.54% and fully amortizes over five years with monthly payments of principal and interest of $26. The notes require monthly deposits for taxes and furniture and fixtures replacement. The prepayment penalty for the notes is calculated based upon yield maintenance formulas. The new BHJV and Beachwood mortgage notes contain cross collateralization and cross default provisions. (d) These mortgage notes payable were refinanced in May 1995. See (a) for discussion of the terms of the new mortgage notes. Aggregate scheduled annual principal payments for the above mortgage notes payable (reflecting the terms of the BHJV and Beachwood subsequent refinancings discussed above, but excluding the BHJV second mortgage note) including the "additional interest" discussed in (a) at December 31, 1995 are as follows:
YEAR AMOUNT ----------------------------------------------------- -------- 1996................................................. $ 1,551 1997................................................. 1,751 1998................................................. 69,415 1999................................................. 1,035 2000................................................. 1,129 Thereafter........................................... 50,714 -------- $125,595 ========
F-36 145 INITIAL HOTELS EXCLUDING LAKE NORMAN HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED All of the outstanding debt is expected to be repaid from the proceeds of the proposed initial public offering discussed in Note 1. Debt Extinguishment In May 1995, FMHP, MOHA, POP and BMLP refinanced their respective existing mortgage indebtedness, realizing a net extraordinary gain of $556 on the early extinguishment of debt. The net extraordinary gain was related to the forgiveness of $2,335 of principal due on the FMHP mortgage reduced by the payment of prepayment premiums and the writeoff of unamortized deferred financing costs on the POP and BMLP mortgages. In addition to retiring existing indebtedness, the refinancing proceeds were used to redeem partnership interests held by non-BMC Affiliate partners of BMLP, MOHA and POP (Note 7). The refinancing and concurrent payment of a prepayment penalty on the BHJV note resulted in an extraordinary loss due to the early extinguishment of debt in the amount of $1,315 for the six-month period ended June 30, 1996. 4. UNUSUAL ITEM -- PROPERTY DAMAGE FROM HURRICANE: On August 2, 1995, certain hotel property of MOHA was damaged by wind-driven rain associated with hurricane Erin. The damage led to the temporary closure of the hotel until restoration of the damaged property took place. The temporary closure reduced the available room nights for the year ended December 31, 1995 by 20,430 rooms, or 27% of the otherwise available room nights. Management estimates that the temporary closure resulted in $1,261 in lost revenue, and $1,093 in lost net income. MOHA has made a business interruption insurance claim for reimbursement of the lost net income. Included in the combined statement of operations for the year ended December 31, 1995 is $1,093 of income related to this claim. This income has been offset against departmental expenses and various other expense categories in the aggregate amounts of $178 and $441, respectively. In addition, MOHA has made a property insurance claim for the damage to hotel property. The difference between the proceeds to be received from this claim and the net book value of the damaged property is reflected in the combined statement of operations as an unusual gain on property insurance recovery. The costs of replacing and renovating the damaged property have been capitalized as additions to hotel property in the accompanying combined balance sheet. MOHA has a $913 insurance claim receivable at December 31, 1995 ($663 at June 30, 1996). The receivable at December 31, 1995 is comprised of $320 for property damage and $593 for business interruption. MOHA has submitted its claims to its insurance carrier, and believes that the claims are in accordance with the terms of the related insurance policies. 5. RELATED PARTY TRANSACTIONS: A substantial portion of the hotels' management and accounting functions are performed by BMC, for a fee computed as specified in each hotel's management agreement. The base management fee is based on percentages of hotel revenues of 3% or 3.5%. In addition, if specified operating results are achieved, an incentive fee is due to BMC. The management agreements with BMC expire at various dates through September 30, 2010. Certain other costs relating to purchasing and design services are incurred by an affiliate of BMC and billed to the hotels. Such purchases approximated $133, $148, $143, $47 and $50 for the years ended December 31, 1993, 1994 and 1995 and the six-month periods ended June 30, 1995 and 1996, respectively. Furthermore, the hotels made purchases of hotel furnishings through an affiliate of BMC. These purchases F-37 146 INITIAL HOTELS EXCLUDING LAKE NORMAN HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED amounted to approximately $1,701, $1,823, $2,531, $666 and $698 for the years ended December 31, 1993, 1994, and 1995 and the six-month periods ended June 30, 1995 and 1996, respectively. Receivables from and payables to affiliates represent amounts due from or to BMC and its affiliates applicable to insurance charges and various other items. Included in accounts payable to affiliates at December 31, 1994 is $171 due from FMHP to BMC for loan guarantee fees related to the FMHP mortgage which was refinanced in May 1995. The fees due were paid in 1995. Until October 1994, the hotels maintained a "fully insured program under a Minimum Premium Contract" for various insurance benefits offered to enrolled employees under an insurance plan which included other entities affiliated with BMC. The hotels provided a pro-rata share of expense required by the plan which was based upon enrolled employees at each hotel. The total amount of such shared expenses billed to the hotels approximated $1,617 and $1,176 for 1993 and 1994, respectively. In October 1994, the plan was terminated and replaced with a fully-insured plan which requires the payment of monthly premiums. 6. ADVANCES FROM PARTNERS: Partner advances consisted of the following:
DECEMBER 31, --------------------- JUNE 30, 1994 1995 1996 -------- -------- -------- Advances from partners used to complete construction and to fund operation, bearing interest at 10% per annum. Note (a)............................................... $ 2,637 $ 2,637 $ 2,637
Unsecured notes payable to partners, with interest at bank prime rate. Note (b).............................. 4,790 -- -- Second mortgage note payable to a partner in monthly installments of principal and interest (at 10.25%) of $8. Note (c)........................................... 529 -- -- Accrued interest payable on advances from partners. Note (b).................................................... 7,242 5,114 5,088 -------- -------- -------- $ 15,198 $ 7,751 $ 7,725 ======== ======== ========
- --------------- (a) Repayment of the loans and related accrued interest is determined by the net cash flow, as defined, of CHJV, in accordance with the priority of payments outlined in the partnership agreement. In February 1996, CHJV made a $400 payment of interest to the partners on their advances. (b) In connection with the refinancing discussed in Note 3 and the change in ownership discussed in Note 7, principal and interest aggregating $7,623 were contributed to the capital of MOHA in May 1995. (c) In connection with the refinancing discussed in Note 3, retired in May 1995. Total interest expense on partner advances was $964, $1,073 and $739 for the years ended December 31, 1993, 1994 and 1995, respectively, and $373 and $374 for the six-month periods ended June 30, 1995 and 1996, respectively. 7. CHANGES IN OWNERSHIP: In May 1995, in connection with the refinancing discussed in Note 3, MOHA, BMLP and POP redeemed their respective partnership interests held by non-BMC Affiliates and BMC Affiliates were admitted as new partners. In addition, FMHP redeemed its partnership interest held by BMLP. As a result of the redemptions, BMC Affiliates own 100% of these partnerships. The aggregate cash redemption price paid to non-BMC Affiliates was $9,357. For each partnership, the difference between the redemption price paid and the related capital account balances of the partners redeemed was recorded as an adjustment of the carrying value of the respective investments in hotel properties of MOHA, FMHP, BMLP and POP. F-38 147 INITIAL HOTELS EXCLUDING LAKE NORMAN HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED The purchase accounting adjustment recorded, which was equal to the cash paid to redeem the partnership interests plus the deficit capital account balances of the redeemed partners at the time of the redemptions, was an aggregate increase in the carrying value of the investments in hotel property as follows: Buildings and improvements................... $10,230 Furniture and equipment...................... 3,760 -------- $13,990 =======
Following is pro forma data assuming that the redemptions of the non-BMC affiliates discussed above and the related refinancing discussed in Note 3 had occurred at the beginning of 1995. The pro forma adjustments to historical operating results are (i) to increase depreciation expense for the effect of the purchase accounting adjustments to the carrying values of investments in hotel properties; (ii) to adjust management fee expense for FMHP, MOHA, BMLP and POP to 4.5% of hotel revenues as required by the terms of the refinancing; and, (iii) to increase interest expense to reflect the terms of the new mortgage debt and the amortization of related deferred financing costs.
UNAUDITED --------------------------- SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, 1995 1995 ------------ ------------ Total revenues............................... $ 78,204 $ 39,201 Loss before extraordinary item............... $ (2,016) $ (904) Net loss..................................... $ (1,460) $ (348)
8. COMMITMENTS AND CONTINGENCIES: Claims and Legal Matters Certain of the hotels are involved in claims and legal matters incidental to their businesses. In the opinion of management, the ultimate resolution of these matters will not have a material impact on the financial position or results of operations of the hotels. Franchise Agreements Under the terms of hotel franchise agreements, annual payments for franchise royalties and reservation and advertising services are due from the hotels. For six of the hotels, fees are computed based upon percentages of gross room revenues. At December 31, 1995, the franchise royalty fees payable by the hotels ranged from 3% to 5% of room revenues while the fees for advertising services ranged from .8% to 3.5%. Effective January 1, 1996, the royalty fee to be paid by BMLP increased by 2% of room revenues. For MOHA, the payment is a flat fee ranging from $6 per month in 1994 to $12 per month in 1998; in 1999 and thereafter, the fee at MOHA will be at 6% of gross room revenues. The franchise agreements expire at various dates through 2014. During 1992, CHJV amended and extended its franchise agreement. Under the terms of the amended agreement, no fee was due during 1992; franchise fees commenced in August 1993 at a reduced percentage of room revenues, increasing gradually through 1997. In January 1994, MOHA executed an amended franchise agreement. The amended agreement provided for the forgiveness of $600 of unpaid fees accrued under the original franchise agreement through December 31, 1993. Such amount is reflected as a reduction of franchisor royalties and other charges for 1994. The franchise agreements contain provisions whereby the franchisor would be entitled to additional payments in the event the franchisees would terminate the franchise agreements prior to maturity. F-39 148 INITIAL HOTELS EXCLUDING LAKE NORMAN HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED Other As a result of the proposed initial public offering discussed in Note 1 and the resulting prepayment of the mortgage notes payable, prepayment penalties of approximately $3,340 will be due upon closing. See Note 3 for a discussion of additional interest payment requirements with respect to certain of the mortgage notes. The land on which the Berkeley Marina Marriott is located is leased under an operating lease agreement expiring in 2033 which can be extended to 2051. The lease requires minimum annual rentals of $100, and percentage rentals based on hotel revenues. BMLP is responsible for all taxes, insurance and maintenance on the property. Rental expense charged to operations for the land lease were as follows:
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, ---------------------- ------------- 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- Minimum rent................................ $100 $100 $100 $ 50 $ 50 Percentage rent............................. 521 550 584 288 318 ---- ---- ---- ---- ---- $621 $650 $684 $338 $368 ==== ==== ==== ==== ====
9. FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107 requires disclosure about fair value for all financial instruments, whether or not recognized for financial statement purposes. Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 1995 and June 30, 1996. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts which could be realized on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Cash Equivalents Management estimates that the fair value of cash equivalents approximates carrying value due to the relatively short maturity of these instruments. Long-Term Debt Management estimates that the fair values of mortgage and other long-term debt approximate carrying values based upon the hotels' effective borrowing rate for issuance of debt with similar terms and remaining maturities. F-40 149 INITIAL HOTELS EXCLUDING LAKE NORMAN HOTELS SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1995 (IN THOUSANDS)
GROSS AMOUNTS AT WHICH COSTS CAPITALIZED CARRIED AT SUBSEQUENT TO ACQUISITION(D) CLOSE OF INITIAL COST PERIOD ----------------------------- ----------------------------- ------------ BUILDINGS BUILDINGS AND AND DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND - ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------ Berkeley Marina Marriott, Berkeley, California (BMLP).................... $ 29,292 $ -- $ 5,013 $ -- $ 14,720 $ -- Buffalo Marriott, Buffalo, New York........... 13,173 733 13,016 -- 1,149 733 Cleveland Airport Marriott, Cleveland, Ohio (POP)....... 19,459 1,175 9,340 -- 8,038 1,175 Cleveland Marriott East, Beachwood, Ohio............. 28,500 836 4,561 -- 6,465 836 Columbus North Marriott, Columbus, Ohio.............. 13,697 828 11,829 -- 1,190 828 Melbourne Quality Suites, Melbourne, Florida (MOHA)... 13,131 761 7,475 2,331 2,555 3,092 Radisson Inn Sanibel Gateway, Ft. Myers, Florida (FMHP)... 4,951 718 4,023 -- (3) 718 ------------ ------ ------------ ------ ------------ ------ Total......................... $122,203 $ 5,051 $ 55,257 $ 2,331 $ 34,114 $ 7,382 ============= ====== ============ ====== ============ ====== ACCUMULATED DEPRECIATION NET BOOK BUILDINGS VALUE BUILDINGS AND BUILDINGS AND TOTAL IMPROVEMENTS AND DATE OF DATE OF DESCRIPTION IMPROVEMENTS (A)(C) (B) IMPROVEMENTS CONSTRUCTION ACQUISITION - ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------ Berkeley Marina Marriott, Berkeley, California (BMLP).................... $ 19,733 19,733 $ 9,088 $ 10,645 1972 N/A Buffalo Marriott, Buffalo, New York........... 14,165 14,898 7,095 7,070 1981 N/A Cleveland Airport Marriott, Cleveland, Ohio (POP)....... 17,378 18,553 5,263 12,115 1970 N/A Cleveland Marriott East, Beachwood, Ohio............. 11,026 11,862 8,041 2,985 1977 N/A Columbus North Marriott, Columbus, Ohio.............. 13,019 13,847 6,437 6,582 1981 N/A Melbourne Quality Suites, Melbourne, Florida (MOHA)... 10,030 13,122 2,459 7,571 1986 N/A Radisson Inn Sanibel Gateway, Ft. Myers, Florida (FMHP)... 4,020 4,738 1,419 2,601 1986 N/A ------------ ------------ ------------ ------------ Total......................... $ 89,371 96,753 $ 39,802 $ 49,569 ============ ======= ============ ============ LIFE ON WHICH DEPRECIATION IN INCOME STATEMENT IS DESCRIPTION COMPUTED - ------------------------------ -------------- Berkeley Marina Marriott, Berkeley, California (BMLP).................... 7-30 years Buffalo Marriott, Buffalo, New York........... 10-30 years Cleveland Airport Marriott, Cleveland, Ohio (POP)....... 7-30 years Cleveland Marriott East, Beachwood, Ohio............. 10-40 years Columbus North Marriott, Columbus, Ohio.............. 7-30 years Melbourne Quality Suites, Melbourne, Florida (MOHA)... 7-30 years Radisson Inn Sanibel Gateway, Ft. Myers, Florida (FMHP)... 7-30 years Total.........................
F-41 150 (a) Reconciliation of land, buildings and improvements:
YEARS ENDED DECEMBER 31, ----------------------------- 1993 1994 1995 ------- ------- ------- Balance at beginning of period............... $84,816 $84,983 $86,330 Additions--improvements...................... 167 1,419 1,099 Retirements.................................. -- (72) (906) Adjustments of basis resulting from partner redemptions (see (d) below)................ -- -- 10,230 ------- ------- ------- Balance at end of period..................... $84,983 $86,330 $96,753 ======= ======= =======
(b) Reconciliation of accumulated depreciation:
YEARS ENDED DECEMBER 31, ----------------------------- 1993 1994 1995 ------- ------- ------- Balance at beginning of period............... $30,871 $33,803 $36,728 Depreciation expense......................... 2,932 2,992 3,333 Retirements.................................. -- (67) (259) ------- ------- ------- Balance at end of period..................... $33,803 $36,728 $39,802 ======= ======= =======
(c) Aggregate cost for federal income tax reporting purposes at December 31, 1995 is as follows: Land......................................... $ 8,309 Buildings and improvements................... 93,443 -------- $101,752 ========
(d) Includes the effect of purchase accounting adjustments recorded in 1995 in connection with the redemptions of certain partners of BMLP, POP, FMHP and MOHA discussed in Note 7 to the combined financial statements. Such adjustments were as follows:
INCREASE (DECREASE) BUILDINGS AND IMPROVEMENTS ------------------- BMLP......................................... $ 2,866 POP.......................................... 5,977 FMHP......................................... (433) MOHA......................................... 1,820 ---------- $10,230 ==================
F-42 151 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO BOYKIN LODGING COMPANY: We have audited the accompanying combined balance sheets of the Lake Norman Hotels (as defined in Note 1 to the financial statements) as of December 31, 1994 and 1995, and the related combined statements of operations, partners' equity and cash flows for each of the three years in the period ended December 31, 1995. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Lake Norman Hotels as of December 31, 1994 and 1995, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cleveland, Ohio, April 5, 1996. F-43 152 LAKE NORMAN HOTELS COMBINED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ---------------- JUNE 30, 1994 1995 1996 ------ ------ ----------- ASSETS INVESTMENTS IN HOTEL PROPERTIES, at cost: Land........................................................ $ 788 $ 788 $ 1,190 Buildings and improvements.................................. 6,178 6,190 7,088 Furniture and equipment..................................... 2,279 2,578 1,351 ------ ------ ----------- 9,245 9,556 9,629 Less- Accumulated depreciation.............................. 3,357 3,817 191 ------ ------ ----------- Net investments in hotel properties......................... 5,888 5,739 9,438 CASH AND CASH EQUIVALENTS..................................... 397 343 359 ACCOUNTS RECEIVABLE........................................... 90 82 216 DEFERRED EXPENSES, net........................................ 67 57 404 PREPAIDS AND OTHER ASSETS..................................... 10 8 48 ------ ------ ----------- $6,452 $6,229 $10,465 ====== ====== =========== LIABILITIES AND PARTNERS' EQUITY MORTGAGE NOTES PAYABLE........................................ $5,318 $5,057 $ 9,618 ACCOUNTS PAYABLE: Trade....................................................... 43 30 84 Management fees............................................. 7 7 83 ACCRUED EXPENSES AND OTHER LIABILITIES........................ 190 197 224 COMMITMENTS AND CONTINGENCIES................................. ------ ------ ----------- 5,558 5,291 10,009 PARTNERS' EQUITY.............................................. 894 938 456 ------ ------ ----------- $6,452 $6,229 $10,465 ====== ====== ===========
The accompanying notes to combined financial statements are an integral part of these combined balance sheets. F-44 153 LAKE NORMAN HOTELS COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS)
UNAUDITED ------------------------------------------------------------- 1996 ------------------------- PRO FORMA SIX JANUARY 1, FEBRUARY SIX MONTHS ENDED MONTHS TO 8, DECEMBER 31, ENDED FEBRUARY TO JUNE 30, ---------------------------- JUNE 30, 7, JUNE 30, ----------------- 1993 1994 1995 1995 1996 1996 1995 1996 ------ ------ ------ --------- ---------- ---------- ------ ------ HOTEL REVENUES: Room revenue........... $2,764 $3,200 $3,764 $ 1,767 $ 339 $1,727 $1,767 $2,066 Food and beverage revenue............. 300 -- -- -- -- 223 -- 223 Other revenue.......... 149 153 124 78 15 73 78 88 ------ ------ ------ --------- ---------- ---------- ------ ------ Total revenues...... 3,213 3,353 3,888 1,845 354 2,023 1,845 2,377 ------ ------ ------ --------- ---------- ---------- ------ ------ EXPENSES: Departmental expenses-- Rooms............... 676 831 1,025 495 91 398 495 489 Food and beverage... 346 -- -- -- -- 220 -- 220 Other............... 63 63 78 45 9 40 45 49 General and administrative...... 332 311 368 200 48 186 200 234 Advertising and promotion........... 176 193 194 77 15 64 77 79 Utilities.............. 193 206 207 98 21 78 98 99 Management fees........ 84 98 115 54 10 121 111 143 Franchisor royalties and other charges... 193 242 271 127 19 124 127 143 Repairs and maintenance......... 165 160 182 91 18 104 91 122 Real estate and personal property taxes, insurance and rent................ 129 96 106 55 10 42 55 52 Interest expense....... 289 326 415 217 37 582 759 759 Depreciation and amortization........ 576 523 466 289 57 212 289 289 Other.................. (3) (8) (3) -- -- 2 -- 2 ------ ------ ------ --------- ---------- ---------- ------ ------ Total expenses...... 3,219 3,041 3,424 1,748 335 2,173 2,347 2,680 ------ ------ ------ --------- ---------- ---------- ------ ------ NET INCOME (LOSS)........ $ (6) $ 312 $ 464 $ 97 $ 19 $ (150) $ (502) $ (303) ====== ====== ====== ========= ========== ========== ====== ======
The accompanying notes to combined financial statements are an integral part of these combined statements. F-45 154 LAKE NORMAN HOTELS COMBINED STATEMENTS OF PARTNERS' EQUITY (IN THOUSANDS)
NET COMBINED PARTNERS' EQUITY -------- BALANCE, DECEMBER 31, 1992................................... $ 988 Net loss................................................... (6) -------- BALANCE, DECEMBER 31, 1993................................... 982 Net income................................................. 312 Cash distributions......................................... (400) -------- BALANCE, DECEMBER 31, 1994................................... 894 Net income................................................. 464 Cash distributions......................................... (420) -------- BALANCE, DECEMBER 31, 1995................................... 938 Net income, January 1, to February 7, 1996 (unaudited)..... 19 -------- BALANCE, FEBRUARY 7, 1996 (unaudited)........................ $ 957 ========= - ------------------------------------------------------------------------- BALANCE FEBRUARY 7, 1996 (unaudited)......................... $ - Capital contributions (unaudited).......................... 606 Net loss, February 8, to June 30, 1996 (unaudited)......... (150) -------- BALANCE, JUNE 30, 1996 (unaudited)........................... $ 456 =========
The accompanying notes to combined financial statements are an integral part of these combined statements. F-46 155 LAKE NORMAN HOTELS COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
(UNAUDITED) ----------------------------------------- SIX MONTHS JANUARY 1, FEBRUARY 8, DECEMBER 31, ENDED TO TO ------------------------- JUNE 30, FEBRUARY 7, JUNE 30, 1993 1994 1995 1995 1996 1996 ----- ----- ----- --------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................... $ (6) $ 312 $ 464 $ 97 $ 19 $ (150) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities -- Depreciation and amortization expense... 583 529 472 292 60 361 Payments for franchise fees and other deferred costs........................ -- -- -- -- -- (155) Changes in assets and liabilities -- Accounts receivable................... (32) (14) 8 (38) 58 (216) Inventories, prepaids and other assets............................. 14 6 -- 2 (2) (48) Accounts payable, accrued expenses and other liabilities.................. (82) (29) (6) 9 (177) 391 ----- ----- ----- --------- ----------- ----------- Net cash provided by (used for) operating activities........... 477 804 938 362 (42) 183 ----- ----- ----- --------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of assets of Lake Norman Hotels................................ -- -- -- -- -- (9,719) Improvements and additions to hotel properties, net....................... (30) (129) (311) (247) (25) (26) ----- ----- ----- --------- ----------- ----------- Net cash used for investing activities....................... (30) (129) (311) (247) (25) (9,745) ----- ----- ----- --------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term borrowings...... -- -- -- -- -- 9,500 Principal payments on mortgage notes payable............................... (265) (277) (261) (125) (38) (14) Capital contributions................... -- -- -- -- -- 606 Distributions paid...................... -- (400) (420) (315) -- -- Payments for deferred financing costs... -- -- -- -- -- (171) ----- ----- ----- --------- ----------- ----------- Net cash provided by (used for) financing activities............. (265) (677) (681) (440) (38) 9,921 ----- ----- ----- --------- ----------- ----------- NET CHANGE IN CASH AND CASH EQUIVALENTS..... $ 182 $ (2) $ (54) $(325) $(105) $ 359 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................... 217 399 397 397 343 -- ----- ----- ----- --------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................... $ 399 $ 397 $ 343 $ 72 $ 238 $ 359 ====== ====== ====== ========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid........................... $ 283 $ 337 $ 415 $ 214 $ 67 $ 436
The accompanying notes to combined financial statements are an integral part of these combined statements. F-47 156 LAKE NORMAN HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) (AMOUNTS AND DISCLOSURES AS OF JUNE 30, 1995 AND 1996 AND FOR THE PERIODS THEN ENDED ARE UNAUDITED) 1. BASIS OF PRESENTATION: Organization The Lake Norman Hotels consist of the following hotels:
NUMBER OF PROPERTY NAME OWNER LOCATION ROOMS - ------------- --------------------- ------------------------ --------- Holiday Inn Norman Associates Charlotte, North Carolina 119 Hampton Inn Norman Associates II Charlotte, North Carolina 117
Belmont Land and Investment Company, DMC Properties, Inc. and CLT Development Corp. each hold a one-third interest in both Norman Associates and Norman Associates II. In February 1996, B.B.G., I, L.L.C. (BBG), owned 46% by certain shareholders of The Boykin Company and 54% by a third party, acquired the Lake Norman Hotels for $9,721 from Norman Associates and Norman Associates II. Basis of Presentation Boykin Lodging Company is a recently organized Ohio corporation which has been established to acquire equity interests in existing hotel properties and to consider selectively the development of new hotels. Boykin Lodging Company will use the proceeds from a proposed initial public offering to acquire the general partnership interest, representing an 84.1% equity interest, in Boykin Hotel Properties, L.P., an Ohio limited partnership (the Partnership). It is proposed that the shareholders of BBG will contribute their interests in the Lake Norman Hotels to the Partnership in exchange for partnership interests. The Partnership will use a portion of the proceeds from the sale of the general partnership interest to Boykin Lodging Company to retire mortgage indebtedness encumbering the Lake Norman Hotels. The accompanying combined financial statements are prepared on the accrual basis of accounting and include the accounts of the Lake Norman Hotels using their historical cost basis. All significant intercompany balances and transactions have been eliminated. Management believes that these combined financial statements result in a more meaningful presentation of the Lake Norman Hotel businesses to be acquired by the Partnership and thus appropriately reflect the historical financial position and results of operations. Interim Unaudited Financial Information The combined financial statements for the six months ended June 30, 1995 and the periods January 1, to February 7, 1996 (period prior to acquisition by BBG) and February 8, to June 30, 1996 (period after acquisition by BBG) are unaudited. In the opinion of management, all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the combined financial statements for these interim periods have been included. The results of interim periods are not necessarily indicative of the results to be obtained for a full year. The unaudited pro forma data for the six-month periods ended June 30, 1995 and 1996 reflect pro forma operating results assuming that BBG had acquired the Lake Norman Hotels as of the beginning of the respective accounting periods. The primary pro forma adjustments to historical operating results are (i) to increase interest expense to reflect the terms of the acquisition debt; (ii) to increase depreciation expense for the effect of the purchase accounting writeup of the investments in hotel properties; and (iii) to increase management fee expense to 6% of hotel revenues as discussed in Note 5. F-48 157 LAKE NORMAN HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Accounting Periods For annual reporting purposes, the Lake Norman Hotels have been included in the accompanying combined financial statements based on a December 31 year-end. Investments in Hotel Properties Hotel properties are stated at cost. Depreciation is computed using accelerated and straight-line methods based upon the following estimated useful lives: Buildings and improvements 10-39 years Furniture and equipment 5-7 years For the year ended December 31, 1995, the Lake Norman Hotels adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, the partners and management of the Lake Norman Hotels review the hotel properties for impairment when events or changes in circumstances indicate the carrying amount of the hotel properties may not be recoverable. When such conditions exist, management estimates the future cash flows from operations and disposition of the hotel properties. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to the related estimated fair market value would be recorded and an impairment loss would be recognized. No such impairment losses have been recognized. Maintenance and repairs are charged to operations as incurred; major renewals and betterments are capitalized. Upon the sale or disposition of a fixed asset, the asset and related accumulated depreciation are removed from the accounts, and the gain or loss is included in the determination of net income. Cash and Cash Equivalents All highly liquid investments with an original maturity date of three months or less when purchased are considered to be cash equivalents. Deferred Expenses Deferred expenses consist primarily of deferred loan costs, which are amortized over the terms of the related loan agreements and deferred franchise fees which are amortized over the terms of the related franchise agreements. The amortization of deferred loan costs of $7, $7 and $7 for the years ended December 31, 1993, 1994 and 1995, respectively, and $3, $1 and $14 for the six-month period ended June 30, 1995, the period January 1, to February 7, 1996 and the period February 8, to June 30, 1996, respectively, has been included in interest expense in the accompanying combined statements of operations. Accumulated amortization of deferred expenses was $59, $69 and $39 at December 31, 1994 and 1995, and June 30, 1996, respectively. Revenue Recognition Revenue is recognized as earned. Ongoing credit evaluations are performed and an allowance for potential credit losses is provided against the portion of accounts receivable which is estimated to be uncollectible. Such losses have been within management's expectations. Income Taxes The Lake Norman Hotels are not subject to federal or state income taxes; however, they must file informational income tax returns and the partners must take income or loss of the Lake Norman Hotels into consideration when filing their respective tax returns. F-49 158 LAKE NORMAN HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED Management's Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. ACQUISITION BY BBG: On February 8, 1996, BBG acquired certain assets of the Lake Norman Hotels from Norman Associates and Norman Associates II in exchange for aggregate cash consideration of $9,721. The purchase price allocation was as follows: Land............................................. $1,190 Buildings and improvements....................... 7,088 Furniture and equipment.......................... 1,327 Other assets..................................... 116 ------ $9,721 ======
BBG funded the purchase price with mortgage debt borrowings of $9,500 and contributed capital. Norman Associates and Norman Associates II used a portion of the sales proceeds to retire the mortgage notes encumbering the properties. BBG also acquired certain food and beverage assets from the operator of those facilities and canceled the lease (see Note 6). 4. MORTGAGE NOTES PAYABLE:
DECEMBER 31, ----------------- JUNE 30, 1994 1995 1996 ------ ------ --------- First mortgage note payable in monthly installments of principal and interest of $77; interest is at 2.75% above the prime rate, with a floor of 11.5% and a ceiling of 17%; matures February 2001, at which time the remaining principal is due; secured by the real and personal property of the Lake Norman Hotels. See (a) below................... $ -- $ -- $ 7,791 Second mortgage note payable in monthly installments of principal and interest of $23; interest is at 4.5% above the prime rate, with a floor of 13.25% and a ceiling of 17%; matures February 2001, at which time the remaining principal is due; secured by a second mortgage interest in the real and personal property of the Lake Norman Hotels. See (a) below.............................................. -- -- 1,695 Accrued fees on the above notes. See (b) below............... -- -- 132 Mortgage note payable to a bank in monthly installments of principal of $16 plus accrued interest; matures in May 1996 at which time the remaining principal and accrued interest are due. The interest rate is adjustable and was 7.6% and 7.4% at December 31, 1994 and 1995, respectively. The note is collateralized by certain real and personal property having a net book value of $2,789 at December 31, 1995 and is guaranteed by the partners of Norman Associates......... 2,742 2,552 --
F-50 159 LAKE NORMAN HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, ----------------- JUNE 30, 1994 1995 1996 ------ ------ --------- Mortgage note payable to a bank in monthly installments of principal and interest at the rate of .25% over the bank's prime rate or 1.75% over the 30, 60 or 90 day LIBOR rate, with a floor of 5% and a ceiling of 11.25% through December 31, 1996 and 12.25% through December 31, 1997. The interest rate at December 31, 1995 was 7.7%. The fixed monthly payment of principal and interest is adjusted and updated semi-annually for interest rate changes. The unpaid principal and interest is due in full December 31, 1997. The note is collateralized by certain real and personal property having a net book value of $2,950 at December 31, 1995 and is guaranteed by the partners of Norman Associates II......................................................... 2,576 2,505 -- ------ ------ --------- $5,318 $5,057 $ 9,618 ====== ====== ========
- --------------- (a) $600 of the first mortgage note and the full amount of the second mortgage note are guaranteed on a joint and several basis by the shareholders of BBG. (b) The payment of commitment fees and other financing fees is required upon maturity or repayment in full of the notes. The aggregate amount of the fees to be paid increases from $337 if repayment occurs within the first loan year to $910 if the notes are retired at the maturity date. Management estimates that the additional interest to be paid will be $337 if the proposed initial public offering discussed in Note 1 is completed. The additional interest is being charged to interest expense over a one-year period due to the anticipated retirement of the notes within one year. For the period ended June 30, 1996, $132 of additional interest was provided. Aggregate scheduled annual principal payments for the above notes as of March 31, 1996, excluding the additional interest discussed in (b), are as follows:
YEAR ENDING DECEMBER 31, AMOUNT - ------------------------------------- ------ 1996................................. $ 59 1997................................. 98 1998................................. 112 1999................................. 127 2000................................. 144 2001................................. 8,946 ------ $9,486 ======
5. COMMITMENTS: Franchise Agreements Under the terms of hotel franchise agreements expiring in 2007 and 2010 with respect to the Holiday Inn and Hampton Inn, respectively, annual payments for franchise royalties and reservation and advertising services are due from the Lake Norman Hotels. Franchisor royalties and marketing contributions are computed based upon percentages (ranging from 5.5% to 7%) of gross room revenue. The franchise agreements contain provisions whereby the franchisors would be entitled to additional payments in the event the franchisees would terminate the franchise agreement prior to maturity. F-51 160 LAKE NORMAN HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED Management Agreements Prior to February 8, 1996, the Lake Norman Hotels were operated under management agreements which provided for a management fee of 3% of gross revenues in exchange for management services. Effective February 8, 1996, Boykin Management Company (BMC) assumed management responsibilities for the Lake Norman Hotels. The management agreements with BMC require the payment of a management fee equal to 5% of hotel revenues. The management agreements with BMC expire December 31, 1999. BBG also pays a 1% asset management fee to an affiliate of the third-party owner. Other As a result of the proposed initial public offering discussed in Note 1 and the resulting prepayment of the Lake Norman Hotels' mortgage notes payable, prepayment penalties of approximately $234 will be due upon closing. See Note 4 for a discussion of commitment fees and other financing fee payment requirements with respect to the mortgage notes payable. 6. HOLIDAY INN RESTAURANT: Consistent with the franchise agreement, the Holiday Inn must maintain a restaurant on the premises. In August 1993, the hotel ceased operation of the restaurant, lounge and meeting/catering facilities and entered into a lease with a third party to continue to maintain the food and beverage operation. The five-year lease provided for a base rent of $5 per month plus a percentage rent based on the gross revenues of the restaurant. In August 1994, the hotel waived the base rent and in May 1995 the percentage rent was also waived. In February 1996, the lease was terminated in connection with the sale of the hotel to BBG. BBG also acquired the assets and business of the operator at the same time of its purchase of the hotel. See Note 3 for discussion of the sale. Rental income of $49, $43 and $6 in 1993, 1994 and 1995, respectively, is included in other revenue in the accompanying combined statements of operations. 7. FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107 requires disclosure about fair value for all financial instruments, whether or not recognized for financial statement purposes. Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 1995 and June 30, 1996. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts which could be realized on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Cash Equivalents Management estimates that the fair value of cash equivalents approximates carrying value due to the relatively short maturity of these instruments. Long-Term Debt Management estimates that the fair value of mortgage debt approximates carrying value based upon the Lake Norman Hotels' effective borrowing rate for issuance of debt with similar terms and remaining maturities. F-52 161 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Boykin Management Company, Purchasing Concepts, Inc. and Bopa Design Company: We have audited the accompanying combined statements of net assets of Boykin Management Company (an Ohio corporation), Purchasing Concepts, Inc. (an Ohio corporation) and Bopa Design Company (an Ohio corporation) as of March 31, 1995 and 1996 and the related combined statements of revenues and expenses for each of the three years in the period ended March 31, 1996. These combined financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying financial statements have been prepared to present the combined net assets of Boykin Management Company, Purchasing Concepts, Inc. and Bopa Design Company which are to be merged into or contributed to subsidiaries of Boykin Management Company, Ltd. pursuant to the formation transactions referred to in Note 2 and the related combined revenues and expenses of such businesses. These combined financial statements are not intended to be a complete presentation of the combined assets, liabilities, revenues and expenses of Boykin Management Company, Purchasing Concepts, Inc. and Bopa Design Company. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined net assets of Boykin Management Company, Purchasing Concepts, Inc. and Bopa Design Company as of March 31, 1995 and 1996, to be merged into or contributed to subsidiaries of Boykin Management Company, Ltd. pursuant to the formation transactions referred to in Note 2, and the revenues and expenses related to such net assets for each of the three years in the period ended March 31, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cleveland, Ohio, April 30, 1996. F-53 162 BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC. AND BOPA DESIGN COMPANY COMBINED STATEMENTS OF NET ASSETS (IN THOUSANDS)
MARCH 31, ---------------- JUNE 30, 1995 1996 1996 ------ ------ ----------- (UNAUDITED) CASH AND CASH EQUIVALENTS..................................... $ 828 $2,322 $ 2,605 MANAGEMENT FEES AND OTHER RECEIVABLES DUE FROM: Affiliates.................................................. 3,759 3,997 4,082 Other....................................................... 159 386 1,400 DESIGN COSTS IN EXCESS OF BILLINGS............................ 994 -- -- PROPERTY AND EQUIPMENT, net................................... 243 324 334 PREPAID EXPENSES, DEPOSITS AND OTHER ASSETS................... 12 124 149 ------ ------ ----------- Total assets........................................ 5,995 7,153 8,570 ------ ------ ----------- ACCOUNTS PAYABLE: Affiliates.................................................. 182 92 229 Other....................................................... 233 373 170 ADVANCE BILLINGS FOR DESIGN SERVICES.......................... 1,490 161 296 ACCRUED PAYROLL............................................... 179 179 216 OTHER ACCRUED EXPENSES........................................ 222 484 1,145 NOTES PAYABLE................................................. 1,845 1,570 1,495 COMMITMENTS AND CONTINGENCIES................................. ------ ------ ----------- Total liabilities................................... 4,151 2,859 3,551 ------ ------ ----------- NET ASSETS.................................................... $1,844 $4,294 $ 5,019 ====== ====== ===========
The accompanying notes to combined financial statements are an integral part of these combined statements. F-54 163 BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC. AND BOPA DESIGN COMPANY COMBINED STATEMENTS OF REVENUES AND EXPENSES (IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED MARCH 31, JUNE 30, -------------------------- ---------------- 1994 1995 1996 1995 1996 ------ ------ ------ ------ ------ (UNAUDITED) REVENUES: Management fees-- Affiliates................................... $2,877 $3,231 $3,817 $1,647 $1,935 Other........................................ 468 359 337 159 427 Design and other fees-- Affiliates................................... 1,769 1,612 2,819 1,711 1,300 Other........................................ 965 1,611 1,212 639 727 Interest income-- Affiliates................................... 253 243 268 118 153 Other........................................ 10 48 109 39 59 Other........................................... -- 157 175 76 77 ------ ------ ------ ------ ------ Total revenues.......................... 6,342 7,261 8,737 4,389 4,678 ------ ------ ------ ------ ------ EXPENSES: Cost of sales and operating expenses............ 2,893 2,821 3,720 2,025 1,894 Selling, general and administrative expenses.... 2,276 2,502 2,733 1,330 1,586 Depreciation and amortization expense........... 76 78 85 40 40 Rent............................................ 115 119 105 58 62 Interest........................................ 166 181 170 91 62 Expenses associated with attempted public offering..................................... -- 1,335 -- -- -- Other, net...................................... 17 8 -- 13 2 ------ ------ ------ ------ ------ Total expenses.......................... 5,543 7,044 6,813 3,557 3,646 ------ ------ ------ ------ ------ REVENUES IN EXCESS OF EXPENSES.................... $ 799 $ 217 $1,924 $ 832 $1,032 ====== ====== ====== ====== ======
The accompanying notes to combined financial statements are an integral part of these combined statements. F-55 164 BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC. AND BOPA DESIGN COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) (AMOUNTS AND DISCLOSURES FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996 ARE UNAUDITED) 1. DESCRIPTION OF BUSINESSES: Boykin Management Company (BMC), a wholly owned subsidiary of The Boykin Company (TBC), and certain of its subsidiaries manage and operate full and limited service hotels located throughout the United States pursuant to management agreements. See Note 4 for further discussion of the management agreements. Purchasing Concepts, Inc. (PCI), related to TBC through common ownership, provides national purchasing services to hotels and restaurants. Bopa Design Company (doing business as Spectrum Services), a wholly owned subsidiary of TBC since January 1, 1996, provides interior design services to hotels and other businesses. Certain of the hotels managed by BMC and served by PCI and Spectrum Services are related to BMC, PCI and Spectrum Services through common ownership. 2. BASIS OF PRESENTATION: Pursuant to certain currently contemplated formation transactions, BMC and Spectrum Services will merge into subsidiaries of Boykin Management Company Limited Liability Company (BMCL), a newly formed Ohio Limited Liability Company. Prior to such mergers, BMC and Spectrum Services will transfer certain assets and liabilities to TBC pursuant to an Assignment and Assumption Agreement. In addition, PCI will contribute its assets to a subsidiary of BMCL and that subsidiary will assume PCI's liabilities. BMCL and its subsidiaries will act as the successors to the businesses of BMC, PCI and Spectrum Services and as the lessee of certain hotels affiliated with TBC which are to be acquired by Boykin Hotel Properties, L.P., a partnership in which Boykin Lodging Company, will be the general partner. The accompanying financial statements present on a historical combined basis the net assets of BMC, PCI and Spectrum Services to be merged into or contributed to BMCL and its subsidiaries and the related revenues and expenses of such businesses. Assets, liabilities, revenues and expenses of BMC, PCI and Spectrum Services which are not to be merged into or contributed to BMCL and its subsidiaries have been excluded from the accompanying financial statements. Accordingly, the accompanying financial statements are not intended to be a complete presentation of the combined assets, liabilities, revenues and expenses of BMC, PCI and Spectrum Services (collectively, the Combined Entities). BMC has a March 31 fiscal year-end, whereas PCI and Spectrum Services utilize calendar year-ends. The accompanying audited financial statements combine the accounts of BMC as of March 31, 1995 and 1996 and for each of the three years in the period ended March 31, 1996 with the accounts of PCI and Spectrum Services as of December 31, 1994 and 1995, and for each of the three years in the period ended December 31, 1995, respectively. Such combined periods are referred to as the years ended March 31, 1994, 1995 and 1996. The accompanying unaudited financial statements combine the accounts of BMC, PCI and Spectrum Services as of June 30, 1996 and for the six-month interim periods ended June 30, 1995 and 1996. As BMCL, BMC, PCI and Spectrum Services are related through common ownership there will be no purchase accounting adjustments to the historical carrying values of the assets and liabilities of BMC, PCI and Spectrum Services upon merger into or contribution to the subsidiaries of BMCL. 3. SIGNIFICANT ACCOUNTING POLICIES: The accompanying financial statements have been prepared on the accrual basis of accounting. All significant intercompany balances and transactions have been eliminated. F-56 165 BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC. AND BOPA DESIGN COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED Cash and Cash Equivalents All highly liquid investments with an original maturity of three months or less when purchased are considered to be cash equivalents. Income Taxes Income tax attributes of the Combined Entities are not being assumed by BMCL or its subsidiaries. As such, the accompanying combined statements of net assets include no accrued or deferred income tax liabilities nor any future tax benefits. The accompanying combined statements of revenues and expenses do not reflect any federal income tax provisions as BMCL and its subsidiaries will be formed as passthrough entities for tax purposes. The taxable income of BMC is included in the consolidated federal income tax return of its parent company, TBC. PCI and Spectrum Services are S Corporations for federal income tax reporting purposes. Property and Equipment, Net Property and equipment, net is comprised of the following:
AT MARCH 31, ------------ JUNE 30, 1995 1996 1996 ---- ---- -------- Leasehold improvements..................................... $124 $124 $128 Furniture and equipment.................................... 487 607 639 ---- ---- -------- 611 731 767 Less--Accumulated depreciation and amortization............ (368) (407) (433) ---- ---- -------- $243 $324 $334 ==== ==== =======
Property and equipment are stated at cost. Depreciation is computed using the straight-line and declining balance methods based upon the following estimated useful lives: Leasehold improvements....................... 7-10 years Furniture and equipment...................... 3-10 years
Maintenance and repairs are charged to operations as incurred; major renewals and betterments are capitalized. Upon the sale or disposition of a fixed asset, the asset and related accumulated depreciation are removed from the accounts and the gain or loss is included in the statement of revenues and expenses. Management's Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 4. REVENUES: BMC has management agreements with several entities to manage the operations of hotels and restaurants. Generally, BMC receives a fee based upon percentages of revenues. In certain management contracts, BMC is entitled to additional incentive fees in the event the managed property achieves specified operating results. Certain contracts also include limitations on management fees, or restrict payment of earned F-57 166 BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC. AND BOPA DESIGN COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED fees to BMC based upon the defined cash flow of the related property. PCI provides national purchasing services to hotels and restaurants and Spectrum Services provides interior design services to hotels and other businesses. Revenue is recognized as earned pursuant to the terms of hotel management agreements with respect to BMC, and as the services of PCI and Spectrum Services are rendered. Ongoing credit evaluations are performed and an allowance for potential credit losses is provided against the portion of accounts receivable which is estimated to be uncollectible. Such losses have been within management's expectations. Revenues from affiliates in the accompanying combined statements of revenues and expenses represent revenues earned by the Combined Entities on goods or services provided to various hotel properties in which the respective owners of the Combined Entities or their affiliates have direct or indirect ownership interests. Other revenues consist of the following for the periods presented:
SIX MONTHS YEAR ENDED MARCH ENDED 31, JUNE 30, ------------------- ---------- 1994 1995 1996 1995 1996 --- ---- ---- --- --- Telephone commissions....................................... $-- $153 $123 $76 $64 Development fees............................................ -- -- 36 -- 5 Consulting fees............................................. -- -- 16 -- 8 Miscellaneous............................................... -- 4 -- -- -- --- ---- ---- --- --- $-- $157 $175 $76 $77 === ==== ==== === ===
None of the above items resulted from related party transactions. 5. NOTES PAYABLE: Notes payable consisted of the following:
SIX MONTHS MARCH 31, ENDED ---------------- JUNE 30, 1995 1996 1996 ------ ------ -------- Installment note payable to a bank in quarterly installments of $75, plus interest at prime plus 1/2%; last installment due September 1, 1999; guaranteed by TBC and certain TBC shareholders..................................................... $ -- $ 925 $ 850 $1,000,000 line of credit with a bank, due on demand; bearing interest at prime; guaranteed by TBC and certain TBC shareholders..................................................... -- 645 645 Term notes payable to a bank due January 1996 bearing interest at prime plus 1%.......................................................... 1,845 -- -- ------ ------ -------- $1,845 $1,570 $1,495 ====== ====== =======
Aggregate scheduled annual principal payments for the above notes payable at March 31, 1996 are as follows:
YEAR ENDING MARCH 31, AMOUNT - --------------------------------------------- ------ 1997......................................... $ 870 1998......................................... 300 1999......................................... 300 2000......................................... 100 ------ $1,570 =======
F-58 167 BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC. AND BOPA DESIGN COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED 6. COMMITMENTS AND CONTINGENCIES: BMC is a guarantor of the mortgage debt (only in the event certain specified limited events occur) of the following entities:
DEBT OUTSTANDING MARCH 31, BORROWER 1996 ----------------------------------------------------------------- ---------------- Melbourne Oceanfront Hotel Associates............................ $ 13,000 Fort Myers Hotel Partnership..................................... 4,900 Berkeley Marina Associates Limited Partnership................... 29,000 Pacific Ohio Partners............................................ 19,350
In October 1992, BMC entered into a five-year lease agreement for office space. The lease provides for two, three-year renewal options. The annual rent is $126. As an incentive to enter into the lease, BMC received a $70 payment from the lessor which is being recognized as a reduction of rent expense on a straight-line basis over the five-year lease term. The Combined Entities are involved in claims and legal matters incidental to their businesses. In the opinion of management of the Combined Entities, the ultimate resolution of these matters will not have a material impact on the financial position or the results of operations of the Combined Entities. 7. RELATED PARTY TRANSACTIONS: Management fees and other receivables due from affiliates are comprised of the following at March 31, 1995 and 1996:
MARCH 31, JUNE ---------------- 30, 1995 1996 1996 ------ ------ ------ Management fees receivable.......................................... $ 409 $ 797 $ 908 Design fees receivable.............................................. 12 65 157 Loans and interest receivable from Boykin Columbus Joint Venture.... 2,670 2,941 3,017 Loans receivable from shareholders.................................. 340 -- -- Loan guarantee fee receivable....................................... 171 -- -- Other (reimbursable expenses, etc.)................................. 157 194 -- ------ ------ ------ $3,759 $3,997 $4,082 ====== ====== ======
In general, the above amounts are due from partnerships or joint ventures in which certain owners and officers of PCI, Spectrum Services or TBC, have ownership interests. These partnerships or joint ventures own hotel properties which are managed by BMC. The shareholders of TBC, certain of their family members and certain officers of BMC are material partners in Boykin Columbus Joint Venture. BMC advanced funds to Boykin Columbus Joint Venture in connection with the construction of a Marriott hotel in Columbus, Ohio and to fund operating deficits of that hotel. The loans receivable from Boykin Columbus Joint Venture bear interest at 10% per annum. Interest income earned on the loans to Boykin Columbus Joint Venture was $220, $230 and $260 in 1994, 1995 and 1996, respectively, and $115 and $134 for each of the six month periods ended June 30, 1995 and 1996, respectively. F-59 168 BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC. AND BOPA DESIGN COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED BMC guaranteed the mortgage debt of Fort Myers Hotel Partnership until such debt was refinanced in May 1995. Included in interest income from affiliates for both 1994 and 1995 was $33 of fee revenue related to the guarantee. No guarantee fee was earned in 1996. Included in other receivables at June 30, 1996 is $875 of costs incurred to date by BMC in connection with the initial public offering of the stock of Boykin Lodging Company. Upon completion of the offering, BMC will be reimbursed for such costs incurred from the offering proceeds received by Boykin Lodging Company. Accounts payable to affiliates are comprised of property insurance retro premium adjustments and telephone commissions received by BMC and payable to the various affiliated hotels at the respective statement dates. Advance billings for design services are related primarily to billings to affiliates. Included in other accrued expenses at June 30, 1996 is $700 of costs accrued in connection with the Boykin Lodging Company initial public offering discussed above. 8. FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107 requires disclosure about fair value for all financial instruments, whether or not recognized for financial statement purposes. Disclosure about fair value of financial instruments is based on pertinent information available to management as of March 31, 1996 and June 30, 1996. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts which could be realized on disposition of the financial instruments. The use of different market assumptions and/or estimation methodology may have a material effect on the estimated fair value amounts. Cash Equivalents Management estimates that the fair value of cash equivalents approximates carrying value due to the relatively short maturity of these instruments. Loans and Interest Receivable Management estimates that the fair value of the loans and interest receivable from Boykin Columbus Joint Venture (BCJV) approximates carrying value based upon the discounted expected cash flows at an interest rate commensurate with the creditworthiness of BCJV. Notes Payable Management estimates that the fair values of notes payable approximate carrying values based upon BMC's effective borrowing rate for issuance of debt with similar terms and remaining maturities. F-60 169 - ------------------------------------------------------ - ------------------------------------------------------ No dealer, salesperson or other individual has been authorized to give any information or make any representations not contained in this Prospectus in connection with the Offering covered by this Prospectus. If given or made, such information or representations must not be relied upon as having been authorized by the Company or the Underwriters. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, the Common Stock in any jurisdiction where, or to any person to whom, it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create an implication that there has not been any change in the facts set forth in this Prospectus or in the affairs of the Company since the date hereof. --------------------------- SUMMARY TABLE OF CONTENTS
PAGE ----- Prospectus Summary.................... 1 Risk Factors.......................... 18 The Company........................... 29 Lessees............................... 34 Use of Proceeds....................... 36 Distribution Policy................... 37 Capitalization........................ 39 Dilution.............................. 40 Selected Financial Information........ 41 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 47 Business and Properties............... 53 Policies and Objectives with Respect to Certain Activities............... 67 The Formation......................... 69 Management............................ 71 Certain Transactions.................. 77 Principal Shareholders of the Company............................. 78 Capital Stock of the Company.......... 79 The Partnership....................... 81 Shares Available for Future Sale...... 83 Federal Income Tax Considerations..... 83 ERISA Considerations.................. 96 Underwriting.......................... 98 Experts............................... 99 Legal Matters......................... 99 Additional Information................ 100 Glossary.............................. 101 Index to Financial Statements......... F-1
- ------------------------------------------------------ - ------------------------------------------------------ 7,875,000 COMMON SHARES [LOGO] BOYKIN LODGING COMPANY COMMON SHARES --------------------------- PROSPECTUS , 1996 --------------------------- LEHMAN BROTHERS ALEX. BROWN & SONS INCORPORATED DEAN WITTER REYNOLDS INC. A.G. EDWARDS & SONS, INC. EVEREN SECURITIES, INC. MCDONALD & COMPANY SECURITIES, INC. - ------------------------------------------------------ - ------------------------------------------------------ 170 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the fees and expenses in connection with the issuance and distribution of the securities offered hereby. Except for the SEC registration fee, the NASD filing fee and the NYSE listing fee, all amounts are estimates. SEC registration fee..................................................... $ 68,697 NASD filing fee.......................................................... 20,424 NYSE listing fee......................................................... 98,600 Accounting fees and expenses............................................. 685,000 *Legal fees and expenses................................................. *Blue Sky fees and expenses (including counsel fees)..................... *Printing and engraving expenses......................................... *Transfer agent's and registrar's fees and expenses...................... *Miscellaneous expenses.................................................. -------- Total.................................................................... $ ========
- --------------- * To be completed by amendment ITEM 31. SALES TO SPECIAL PARTIES On March 15, 1996, following the incorporation and in connection with the organization of the Registrant, one of the Registrant's Common Shares was issued to Raymond P. Heitland for $100.00 in cash. This transaction was effected in reliance on the exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended (the "Act"). ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES On March 15, 1996, following the incorporation and in connection with the organization of the Registrant, one of the Registrant's Common Shares was issued to Raymond P. Heitland for $100.00 in cash. This transaction was effected in reliance on the exemption from registration afforded by Section 4(2) of the Act. The Partnership entered into binding contracts on May 22, 1996 (136,364 Units), May 24, 1996 (9,682 Units), June 17, 1996 (127,379 Units) and June 18, 1996 (1,216,575 Units) to issue a total of 1,490,000 Units to 20 general partners of the Contributed Partnerships at the closing of the Offering. These transactions were effected pursuant to Section 4(2) of the Act. ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Ohio Revised Code (the "Code") authorizes Ohio corporations to indemnify officers and directors from liability if the officer or director acted in good faith and in a manner reasonably believed by the officer or director to be in or not opposed to the best interests of the corporation, and, with respect to any criminal actions, if the officer or director had no reason to believe his action was unlawful. In the case of an action by or on behalf of a corporation, indemnification may not be made (i) if the person seeking indemnification is adjudged liable for negligence or misconduct, unless the court in which such action was brought determines such person is fairly and reasonably entitled to indemnification or (ii) if liability asserted against such person concerns certain unlawful distributions. The indemnification provisions of the Ohio Code require indemnification if a director or officer has been successful on the merits or otherwise in defense of any action, suit or proceeding that he was a party to by reason of the fact that he is or was a director or officer of the corporation. II-1 171 The indemnification authorized under Ohio law is not exclusive and is in addition to any other rights granted to officers and directors under the articles of incorporation or code of regulations of the corporation or any agreement between officers and directors and the corporation. A corporation may purchase and maintain insurance or furnish similar protection on behalf of any officer or director against any liability asserted against him and incurred by him in his capacity, or arising out of the status, as an officer or director, whether or not the corporation would have the power to indemnify him against such liability under the Ohio Code. The Registrant's Code of Regulations provides for the indemnification of directors and officers of the Registrant to the maximum extent permitted by Ohio law as authorized by the Board of Directors of the Registrant, for the advancement of expenses incurred in connection with the defense of any action, suit or proceeding that he was a party to by reason of the fact that he is or was a director of the Registrant upon the receipt of an undertaking to repay such amount unless it is ultimately determined that the director is entitled to indemnification. The Registrant is seeking to obtain an insurance policy which will insure the officers and directors of the Registrant from any claim arising out of an alleged wrongful act by such persons in their respective capacities as officers and directors of the Registrant. Reference is made to Section of the Underwriting Agreement, a copy of which is filed herewith as Exhibit 1, for information concerning indemnification arrangements among the Registrant and the Underwriters. ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED Not applicable. ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements See page F-1 of the Prospectus for a list of the financial statements included as part of the Prospectus. (b) Exhibits
EXHIBIT NO. DESCRIPTION - ------- ------------------------------------------------------------------------------------- *1.1 Form of Underwriting Agreement 3.1 Amended and Restated Articles of Incorporation of the Company 3.2 Amended and Restated Code of Regulations of the Company *4.1 Specimen Share Certificate 5.1 Form of opinion of Baker & Hostetler regarding the legality of the Common Shares being registered 8.1 Form of opinion of Baker & Hostetler regarding certain Federal income tax matters *10.1 Limited Partnership Agreement of the Partnership 10.2 Form of Registration Rights Agreement 10.3 1996 Long Term Incentive Plan 10.4 Directors' Deferred Compensation Plan *10.5 Employment Agreement between the Company and Robert W. Boykin *10.6 Employment Agreement between the Company and Raymond P. Heitland *10.7 Employment Agreement between the Company and Mark L. Bishop. 10.8 Form of Percentage Lease Agreement *10.9 Intercompany Convertible Note
II-2 172
EXHIBIT NO. DESCRIPTION - ------- ------------------------------------------------------------------------------------- *10.10 Agreements with General Partners of the Contributed Partnerships 10.11 Form of Noncompetition Agreement *10.12 Alignment of Interests Agreement 23.1 Consents of Arthur Andersen LLP (included at page II-5) 23.2 Consents of Baker & Hostetler (included in their opinions to be filed as Exhibit 5.1 and 8.1) 23.3 Director Consents *24.1 Power of Attorney
- --------------- * To be filed by amendment ITEM 36. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 173 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-11 AND HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO, ON THE 14th DAY OF AUGUST, 1996. BOYKIN LODGING COMPANY By: /s/ ROBERT W. BOYKIN ------------------------------------ Robert W. Boykin, Chairman, President and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON THE DAY OF AUGUST, 1996 IN THE CAPACITIES INDICATED.
SIGNATURE TITLE DATE - ------------------------------------- -------------------------------------- ---------------- /s/ ROBERT W. BOYKIN Chairman, President, Chief Executive August 14, 1996 - ------------------------------------- Officer and Director (Principal Robert W. BOYKIN Executive Officer) Boykin /s/ RAYMOND P. HEITLAND Chief Financial Officer and Director August 14, 1996 - ------------------------------------- (Principal Financial and Accounting Raymond P. Heitland Officer)
II-4 174 CONSENT OF ARTHUR ANDERSEN LLP As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this registration statement (Registration Statement File No. 333-6341). ARTHUR ANDERSEN LLP August 13, 1996, Cleveland, Ohio. II-5 EX-3.1 2 EXHIBIT 3.1 1 Exhibit 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF BOYKIN LODGING COMPANY FIRST: The name of the corporation shall be Boykin Lodging Company (the "Corporation"). SECOND: The place in the State of Ohio where the principal office of the Corporation is located is Cleveland, Cuyahoga County. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be formed under Sections 1701.01 to 1701.98, inclusive, of the Ohio Revised Code. FOURTH: The authorized number of shares of the Corporation is 30,000,000, consisting of 25,000,000 Common Shares, without par value (hereinafter called "Common Shares"), 3,000,000 Class A Cumulative Preferred Shares, without par value (hereinafter called "Cumulative Preferred Shares"), and 2,000,000 Class A Noncumulative Preferred Shares, without par value (hereinafter called "Noncumulative Preferred Shares"). DIVISION A: PREFERRED SHARES I. THE CLASS A CUMULATIVE PREFERRED SHARES. The Cumulative Preferred Shares shall have the following express terms: Section 1. SERIES. The Cumulative Preferred Shares may be issued from time to time in one or more series. All Cumulative Preferred Shares shall be of equal rank and shall be identical, except in respect of the matters that may be fixed by the Board of Directors as hereinafter provided, and each share of a series shall be identical with all other shares of such series, except as to the dates from which dividends shall accrue and be cumulative. All Cumulative Preferred Shares shall rank on a parity with the Noncumulative Preferred Shares and shall be identical to all Noncumulative Preferred Shares except (1) in respect of the matters that may be fixed by the Board of Directors as provided in clauses (a) through (i), inclusive, of this Section 1 and (2) only dividends on Cumulative Preferred Shares shall be cumulative as set forth herein. Subject to the provisions of Sections 2 through 5, both inclusive, and of Items III and IV of this Division, which provisions shall apply to all Cumulative Preferred Shares, the Board of Directors hereby is authorized to cause such shares to be issued in one or more series and with respect to each such series to determine and fix prior to the issuance thereof (and thereafter, to the extent provided in clause (b) of this Section) the following: (a) The designation of the series, which may be by distinguishing number, letter or title; (b) The authorized number of shares of the series, which number the Board of Directors may (except when otherwise provided in the creation of the series) increase or decrease from time to time before or after the issuance thereof (but not below the number of shares thereof then outstanding); (c) The dividend rate or rates of the series, including the means by which such rates may be established; (d) The date or dates from which dividends shall accrue and be cumulative and the dates on which and the period or periods for which dividends, if declared, shall be payable, including the means by which such dates and periods may be established; (e) The redemption rights and price or prices, if any, for shares of the series; 2 (f) The terms and amount of the sinking fund, if any, for the purchase or redemption of shares of the series; (g) The amounts payable on shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation; (h) Whether the shares of the series shall be convertible into Common Shares or shares of any other class and, if so, the conversion rate or rates or price or prices, any adjustments thereof and all other terms and conditions upon which such conversion may be made; and (i) Restrictions (in addition to those set forth elsewhere in these Amended and Restated Articles of Incorporation) on the issuance of shares of the same series or of any other class or series. The Board of Directors is authorized to adopt from time to time amendments to the Amended and Restated Articles of Incorporation, as amended, fixing, with respect to each such series, the matters described in clauses (a) through (i), both inclusive, of this Section and is authorized to take such actions with respect thereto as may be required by law in order to effect such amendments. Section 2. DIVIDENDS. (a) The holders of Cumulative Preferred Shares of each series, in preference to the holders of Common Shares and of any other class of shares ranking junior to the Cumulative Preferred Shares, shall be entitled to receive out of any funds legally available therefor, when and as declared by the Board of Directors, dividends in cash at the rate or rates for such series fixed in accordance with the provisions of Section 1 above and no more, payable on the dates fixed for such series. Such dividends shall accrue and be cumulative, in the case of shares of each particular series, from and after the date or dates fixed with respect to such series. Any dividend payment made on the Cumulative Preferred Shares shall first be credited against the earliest accrued but unpaid dividends on such Cumulative Preferred Shares. No dividends shall be paid upon or declared or set apart for any series of the Cumulative Preferred Shares for any dividend period unless at the same time (i) a like proportionate dividend for the dividend periods terminating on the same or any earlier date, ratably in proportion to the respective annual dividend rates fixed therefor, shall have been paid upon or declared or set apart for all Cumulative Preferred Shares of all series then issued and outstanding and entitled to receive such dividend and (ii) the dividends payable for the dividend periods terminating on the same or any earlier date (but only with respect to the then current dividend period), ratably in proportion to the respective dividend rates fixed therefor, shall have been paid upon or declared or set apart for all Noncumulative Preferred Shares then issued and outstanding and entitled to receive such dividends. (b) So long as any Cumulative Preferred Shares shall be outstanding no dividend, except a dividend payable in Common Shares or other shares ranking junior to the Cumulative Preferred Shares, shall be paid or declared or any distribution be made, except as aforesaid, in respect of the Common Shares or any other shares ranking junior to the Cumulative Preferred Shares, nor shall any Common Shares or any other shares ranking junior to the Cumulative Preferred Shares be purchased, retired or otherwise acquired by the Corporation, except out of the proceeds of the sale of Common Shares or other shares of the Corporation ranking junior to the Cumulative Preferred Shares received by the Corporation subsequent to the date of first issuance of Cumulative Preferred Shares of any series, unless: (1) All accrued and unpaid dividends on Cumulative Preferred Shares, including the full dividends for all current dividend periods, shall have been declared and paid or a sum sufficient for payment thereof set apart; (2) All unpaid dividends on Noncumulative Preferred Shares for the then current dividend period shall have been declared and paid or a sum sufficient for payment therefor set apart; and -2- 3 (3) There shall be no arrearages with respect to the redemption of Cumulative Preferred Shares or Noncumulative Preferred Shares of any series from any sinking fund provided for shares of such series in accordance with Section 1 of this Division A.I or Section 1 of Division A.II. (c) The foregoing restrictions on the payment of dividends or other distributions on, or on the purchase, redemption, retirement or other acquisition of, Common Shares or any other shares ranking on a parity with or junior to the Cumulative Preferred Shares shall be inapplicable to (i) any payments in lieu of issuance of fractional shares thereof, whether upon any merger, conversion, stock dividend or otherwise, (ii) the conversion of Cumulative Preferred Shares or Noncumulative Preferred Shares into Common Shares, and (iii) the exercise by the Corporation of its rights pursuant to Division C or any similar provision hereafter contained in these Amended and Restated Articles of Incorporation with respect to any other class or series of shares hereafter created or authorized. (d) If, for any taxable year, the Corporation elects to designate as "capital gain dividends" (as defined in Section 857 of the Internal Revenue Code), any portion (the "Capital Gains Amount") of the dividends paid or made available for the year to holders of all classes of stock (the "Total Dividends"), then the portion of the Capital Gains Amount that shall be allocable to holders of the Cumulative Preferred Shares shall be the amount that the total dividends paid or made available to the holders of the Cumulative Preferred Shares for the year bears to the Total Dividends. Section 3. REDEMPTION. (a) Subject to the express terms of each series of Cumulative Preferred Shares, the Corporation: (1) May, from time to time at the option of the Board of Directors, redeem all or any part of any redeemable series of Cumulative Preferred Shares at the time outstanding at the applicable redemption price for such series fixed in accordance with Section 1 of this Division A.I.; and (2) Shall, from time to time, make such redemptions of each series of Cumulative Preferred Shares as may be required to fulfill the requirements of any sinking fund provided for shares of such series at the applicable sinking fund redemption price fixed in accordance with Section 1 of this Division A.I.; and shall in each case pay all accrued and unpaid dividends to the redemption date. (b) (1) Notice of every such redemption shall be mailed, postage prepaid, to the holders of record of the Cumulative Preferred Shares to be redeemed at their respective addresses then appearing on the books of the Corporation, not less than 30 days nor more than 60 days prior to the date fixed for such redemption, or such other time prior thereto as the Board of Directors shall fix for any series pursuant to Section 1 of this Division prior to the issuance thereof. At any time after notice as provided above has been deposited in the mail, the Corporation may deposit the aggregate redemption price of Cumulative Preferred Shares to be redeemed, together with accrued and unpaid dividends thereon to the redemption date, with any bank or trust company in Cleveland, Ohio, or New York, New York, having capital and surplus of not less than $100,000,000, named in such notice and direct that there be paid to the respective holders of the Cumulative Preferred Shares so to be redeemed amounts equal to the redemption price of the Cumulative Preferred Shares so to be redeemed, together with such accrued and unpaid dividends thereon, on surrender of the share certificate or certificates held by such holders; and upon the deposit of such notice in the mail and the making of such deposit of money with such bank or trust company, such holders shall cease to be shareholders with respect to such shares; and from and after the time such notice shall have been so deposited and such deposit of money shall have been so made, such holders shall have no rights or claim against the Corporation with respect to such shares, except only the right to receive such money from such bank or trust company without interest or to exercise before the redemption date any unexpired privilege of conversion. If less than all of the outstanding Cumulative Preferred Shares are to be redeemed, the Corporation shall select by lot the shares so to be redeemed in such manner as shall be prescribed by the Board of Directors. -3- 4 (2) If the holders of Cumulative Preferred Shares which have been called for redemption shall not within six years after such deposit claim the amount deposited for the redemption thereof, any such bank or trust company shall, upon demand, pay over to the Corporation such unclaimed amounts and thereupon such bank or trust company and the Corporation shall be relieved of all responsibility in respect thereof and to such holders. (c) Any Cumulative Preferred Shares which are (1) redeemed by the Corporation pursuant to this Section, (2) purchased and delivered in satisfaction of any sinking fund requirement provided for shares of such series, (3) converted in accordance with the express terms thereof, or (4) otherwise acquired by the Corporation, shall resume the status of authorized but unissued Cumulative Preferred Shares without serial designation. (d) Except in connection with the exercise of the Corporation's rights pursuant to Division C or any similar provisions hereafter contained in these Amended and Restated Articles of Incorporation, the Corporation may not purchase or redeem (for sinking fund purposes or otherwise) less than all of the Cumulative Preferred Shares then outstanding except in accordance with a purchase offer made to all holders of record of Cumulative Preferred Shares, unless all dividends on all Cumulative Preferred Shares then outstanding for all previous and current dividend periods shall have been declared and paid or funds therefor set apart and all accrued sinking fund obligations applicable thereto shall have been complied with. Section 4. LIQUIDATION. (a) (1) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the holders of Cumulative Preferred Shares of any series shall be entitled to receive in full out of the assets of the Corporation, including its capital, before any amount shall be paid or distributed among the holders of the Common Shares or any other shares ranking junior to the Cumulative Preferred Shares, the amounts fixed with respect to shares of such series in accordance with Section 1 of this Division A.I., plus an amount equal to all dividends accrued and unpaid thereon to the date of payment of the amount due pursuant to such liquidation, dissolution or winding up of the affairs of the Corporation. If the net assets of the Corporation legally available therefor are insufficient to permit the payment upon all outstanding Cumulative Preferred Shares and Noncumulative Preferred Shares of the full preferential amount to which they are respectively entitled, then such net assets shall be distributed ratably upon all outstanding Cumulative Preferred Shares and Noncumulative Preferred Shares in proportion to the full preferential amount to which each such share is entitled. (2) After payment to the holders of Cumulative Preferred Shares of the full preferential amounts as aforesaid, the holders of Cumulative Preferred Shares, as such, shall have no right or claim to any of the remaining assets of the Corporation. (b) The merger or consolidation of the Corporation into or with any other Corporation, the merger of any other Corporation into it, or the sale, lease or conveyance of all or substantially all the assets of the Corporation, shall not be deemed to be a dissolution, liquidation or winding up for purposes of this Section. Section 5. VOTING. (a) The holders of Cumulative Preferred Shares shall have no voting rights, except as provided in this Section or required by law. (b) (1) If, and so often as, the Corporation shall be in default in the payment of dividends on any series of Cumulative Preferred Shares at the time outstanding, whether or not earned or declared, for a number of dividend payment periods (whether or not consecutive) which in the aggregate contain at least 540 days, the holders of all series of Cumulative Preferred Shares, voting separately as a class, shall be entitled to elect, as herein provided, two members of the Board of Directors of the Corporation; but the holders of the Cumulative Preferred Shares shall not exercise such special class voting rights except at meetings of such -4- 5 shareholders for the election of directors at which the holders of not less than 50% of the Cumulative Preferred Shares are present in person or by proxy; and the special class voting rights provided for in this paragraph when the same shall have become vested shall remain so vested until all accrued and unpaid dividends on the Cumulative Preferred Shares then outstanding shall have been paid or declared and a sum sufficient for the payment thereof set aside for payment, whereupon the holders of the Cumulative Preferred Shares shall be divested of their special class voting rights in respect of subsequent elections of directors, subject to the revesting of such special class voting rights in the event above specified in this paragraph. (2) On a dividend payment default entitling holders of Cumulative Preferred Shares to elect two directors as specified in paragraph (1) of this Subsection, a special meeting of such holders for the purpose of electing such directors shall be called by the Secretary of the Corporation upon written request of, or may be called by, the holders of record of at least 10% of the Cumulative Preferred Shares with respect to which such default exists and notice thereof shall be given in the same manner as that required for the annual meeting of shareholders; but the Corporation shall not be required to call such special meeting if the annual meeting of shareholders shall be called to be held within 90 days after the date of receipt of the foregoing written request from the holders of Cumulative Preferred Shares. At any meeting at which the holders of Cumulative Preferred Shares shall be entitled to elect directors, holders of 50% of the Cumulative Preferred Shares, present in person or by proxy, shall be sufficient to constitute a quorum, and the vote of the holders of a majority of such shares so present at any such meeting at which there shall be such a quorum shall be sufficient to elect the members of the Board of Directors which the holders of Cumulative Preferred Shares are entitled to elect as herein provided. Notwithstanding any provision of these Articles of Incorporation or the Code of Regulations of the Corporation or any action taken by the holders of any class of shares fixing the number of directors of the Corporation, the two directors who may be elected by the holders of Cumulative Preferred Shares pursuant to this Subsection shall serve in addition to any other directors then in office or proposed to be elected otherwise than pursuant to this Subsection. Nothing in this Subsection shall prevent any change otherwise permitted in the total number of or classifications of directors of the Corporation nor require the resignation of any director elected otherwise than pursuant to this Subsection. Notwithstanding any classification of the other directors of the Corporation, the two directors elected by the holders of Cumulative Preferred Shares shall be elected annually for terms expiring at the next succeeding annual meeting of shareholders. (3) Upon any divesting of the special class voting rights of the holders of the Cumulative Preferred Shares in respect of elections of directors as provided in this Subsection, the terms of office of all directors then in office elected by such holders shall terminate immediately thereupon. If the office of any director elected by such holders voting as a class becomes vacant by reason of death, resignation, removal from office or otherwise, the remaining director elected by such holders voting as a class may elect a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. (c) The affirmative vote of the holders of at least two-thirds of the Cumulative Preferred Shares at the time outstanding, voting separately as a class, given in person or by proxy either in writing or at a meeting called for the purpose, shall be necessary to effect either of the following: (1) Any amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Amended and Restated Articles of Incorporation or of the Code of Regulations of the Corporation which affects adversely and materially the preferences or voting or other rights of the holders of Cumulative Preferred Shares which are set forth in these Amended and Restated Articles of Incorporation; but neither an amendment of these Amended and Restated Articles of Incorporation so as to authorize, create or change the authorized or outstanding number of Cumulative Preferred Shares or of any shares ranking on a parity with or junior to the Cumulative Preferred Shares nor an amendment of the Code of Regulations so as to change the number or classification of directors of the Corporation shall be deemed to affect adversely and materially preferences or voting or other rights of the holders of Cumulative Preferred Shares; or (2) The authorization, creation or increase in the authorized number of any shares, or of any security convertible into shares, in either case ranking prior to such Cumulative Preferred Shares. -5- 6 (d) If, and only to the extent, that (1) Cumulative Preferred Shares are issued in more than one series and (2) Ohio law permits the holders of a series of a class of shares to vote separately as a class, the affirmative vote of the holders of at least two-thirds of each series of Cumulative Preferred Shares at the time outstanding, voting separately as a class, given in person or by proxy either in writing or at a meeting called for the purpose of voting on such matters, shall be required for any amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of these Amended and Restated Articles of Incorporation or of the Code of Regulations of the Corporation which affects adversely and materially the preferences or voting or other rights of the holders of such series which are set forth in these Amended and Restated Articles of Incorporation; but neither an amendment of these Amended and Restated Articles of Incorporation, so as to authorize, create or change the authorized or outstanding number of Cumulative Preferred Shares or of any shares ranking on a parity with or junior to the Cumulative Preferred Shares nor an amendment of the Code of Regulations so as to change the number or classification of directors of the Corporation, shall be deemed to affect adversely and materially the preferences or voting or other rights of the holders of such series. II. THE CLASS A NONCUMULATIVE PREFERRED SHARES. The Noncumulative Preferred Shares shall have the following express terms: Section 1. SERIES. The Noncumulative Preferred Shares may be issued from time to time in one or more series. All Noncumulative Preferred Shares shall be of equal rank and shall be identical, except in respect of the matters that may be fixed by the Board of Directors as hereinafter provided, and each share of a series shall be identical with all other shares of such series, except as to the dates on which and the periods for which dividends may be payable. All Noncumulative Preferred Shares shall rank on a parity with the Cumulative Preferred Shares and shall be identical to all Cumulative Preferred Shares except (1) in respect of the matters that may be fixed by the Board of Directors as provided in clauses (a) through (i), inclusive, of this Section 1 and (2) only dividends on the Cumulative Preferred Shares are cumulative as set forth in Division A.I. herein. Subject to the provisions of Sections 2 through 5, both inclusive, and of Items III and IV of this Division, which provisions shall apply to all Noncumulative Preferred Shares, the Board of Directors hereby is authorized to cause such shares to be issued in one or more series and with respect to each such series to determine and fix prior to the issuance thereof (and thereafter, to the extent provided in clause (b) of this Section) the following: (a) The designation of the series, which may be by distinguishing number, letter or title; (b) The authorized number of shares of the series, which number the Board of Directors may (except when otherwise provided in the creation of the series) increase or decrease from time to time before or after the issuance thereof (but not below the number of shares thereof then outstanding); (c) The dividend rate or rates of the series, including the means by which such rates may be established; (d) The dates on which and the period or periods for which dividends, if declared, shall be payable, including the means by which such dates and periods may be established; (e) The redemption rights and price or prices, if any, for shares of the series; (f) The terms and amount of the sinking fund, if any, for the purchase or redemption of shares of the series; (g) The amounts payable on shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation; (h) Whether the shares of the series shall be convertible into Common Shares or shares of any other class and, if so, the conversion rate or rates or price or prices, any adjustments thereof and all other terms and conditions upon which such conversion may be made; and -6- 7 (i) Restrictions (in addition to those set forth elsewhere in these Amended and Restated Articles of Incorporation) on the issuance of shares of the same series or of any other class or series. The Board of Directors is authorized to adopt from time to time amendments to the Amended and Restated Articles of Incorporation, as amended, fixing, with respect to each such series, the matters described in clauses (a) through (i), both inclusive, of this Section and is authorized to take such actions with respect thereto as may be required by law in order to effect such amendments. Section 2. DIVIDENDS. (a) The holders of Noncumulative Preferred Shares of each series, in preference to the holders of Common Shares and of any other class of shares ranking junior to the Noncumulative Preferred Shares, shall be entitled to receive out of any funds legally available therefor, if, when and as declared by the Board of Directors, dividends in cash at the rate or rates for such series fixed in accordance with the provisions of Section 1 above and no more, payable on the dates fixed for such series. Such dividends shall accrue, in the case of shares of each particular series, from and after the date or dates fixed with respect to such series; provided, however, that if the Board of Directors fails to declare a dividend payable on a dividend payment date on any Noncumulative Preferred Shares, the holders of the Noncumulative Preferred Shares shall have no right to receive a dividend in respect of the dividend period ending on such dividend payment date, and the Corporation shall have no obligation to pay the dividend accrued for such period, whether or not dividends on such Noncumulative Preferred Shares are declared payable on any future dividend payment date. Any dividend payment made on the Noncumulative Preferred Shares shall first be credited against the earliest declared but unpaid dividend on such Noncumulative Preferred Shares. No dividends shall be paid upon or declared or set apart for any series of the Noncumulative Preferred Shares for any dividend period unless at the same time (i) a like proportionate dividend for the then current dividend period, ratably in proportion to the respective annual dividend rates fixed therefor, shall have been paid upon or declared or set apart for all Noncumulative Preferred Shares of all series then issued and outstanding and entitled to receive such dividend and (ii) the dividends payable for the dividend periods terminating on the same or any earlier date, ratably in proportion to the respective dividend rates fixed therefor, shall have been paid upon or declared and set apart for all Cumulative Preferred Shares then issued and outstanding and entitled to receive such dividends. (b) So long as any Noncumulative Preferred Shares shall be outstanding no dividend, except a dividend payable in Common Shares or other shares ranking junior to the Noncumulative Preferred Shares, shall be paid or declared or any distribution be made, except as aforesaid, in respect of the Common Shares or any other shares ranking junior to the Noncumulative Preferred Shares, nor shall any Common Shares or any other shares ranking junior to the Noncumulative Preferred Shares be purchased, retired or otherwise acquired by the Corporation, except out of the proceeds of the sale of Common Shares or other shares of the Corporation ranking junior to the Noncumulative Preferred Shares received by the Corporation subsequent to the date of first issuance of Noncumulative Preferred Shares of any series, unless: (1) All accrued and unpaid dividends on Cumulative Preferred Shares, including the full dividends for all current dividend periods, shall have been declared and paid or a sum sufficient for payment thereof set apart; (2) All unpaid dividends on Noncumulative Preferred Shares for the then current dividend period shall have been declared and paid or a sum sufficient for payment therefor set apart; and (3) There shall be no arrearages with respect to the redemption of Cumulative Preferred Shares or Noncumulative Preferred Shares of any series from any sinking fund provided for shares of such series in accordance with the provisions of Section 1 of this Division A.II or Section 1 of Division A.I. (c) The foregoing restrictions on the payment of dividends or other distributions on, or on the purchase, redemption, retirement or other acquisition of, Common Shares or any other shares ranking on a parity with or junior to the Noncumulative Preferred Shares shall be inapplicable to (i) any payments in lieu of issuance -7- 8 of fractional shares thereof, whether upon any merger, conversion, stock dividend or otherwise, (ii) the conversion of Cumulative Preferred Shares or Noncumulative Preferred Shares into Common Shares, and (iii) the exercise by the Corporation of its rights pursuant to Division C or any similar provisions hereafter contained in these Amended and Restated Articles of Incorporation with respect to any other class or series of shares hereafter created or authorized. (d) If, for any taxable year, the Corporation elects to designate as "capital gain dividends" (as defined in Section 857 of the Internal Revenue Code), any portion (the "Capital Gains Amount") of the dividends paid or made available for the year to holders of all classes of stock (the "Total Dividends"), then the portion of the Capital Gains Amount that shall be allocable to holders of the Noncumulative Preferred Shares shall be the amount that the total dividends paid or made available to the holders of the Noncumulative Preferred Shares for the year bears to the Total Dividends. Section 3. REDEMPTION. (a) Subject to the express terms of each series, the Corporation: (1) May, from time to time at the option of the Board of Directors, redeem all or any part of any redeemable series of Noncumulative Preferred Shares at the time outstanding at the applicable redemption price for such series fixed in accordance with Section 1 of this Division A.II.; and (2) Shall, from time to time, make such redemptions of each series of Noncumulative Preferred Shares as may be required to fulfill the requirements of any sinking fund provided for shares of such series at the applicable sinking fund redemption price fixed in accordance with Section 1 of this Division A.II.; and shall in each case pay all unpaid dividends for the then current dividend period to the redemption date. (b) (1) Notice of every such redemption shall be mailed, postage prepaid, to the holders of record of the Noncumulative Preferred Shares to be redeemed at their respective addresses then appearing on the books of the Corporation, not less than 30 days nor more than 60 days prior to the date fixed for such redemption, or such other time prior thereto as the Board of Directors shall fix for any series pursuant to Section 1 of this Division prior to the issuance thereof. At any time after notice as provided above has been deposited in the mail, the Corporation may deposit the aggregate redemption price of Noncumulative Preferred Shares to be redeemed, together with unpaid dividends thereon for the then current dividend period to the redemption date, with any bank or trust company in Cleveland, Ohio, or New York, New York, having capital and surplus of not less than $100,000,000, named in such notice and direct that there be paid to the respective holders of the Noncumulative Preferred Shares so to be redeemed amounts equal to the redemption price of the Noncumulative Preferred Shares so to be redeemed together with such accrued and unpaid dividends thereon for the then current dividend period, on surrender of the share certificate or certificates held by such holders; and upon the deposit of such notice in the mail and the making of such deposit of money with such bank or trust company, such holders shall cease to be shareholders with respect to such shares; and from and after the time such notice shall have been so deposited and such deposit of money shall have been so made, such holders shall have no rights or claim against the Corporation with respect to such shares, except only the right to receive such money from such bank or trust company without interest or to exercise before the redemption date any unexpired privilege of conversion. If less than all of the outstanding Noncumulative Preferred Shares are to be redeemed, the Corporation shall select by lot the shares so to be redeemed in such manner as shall be prescribed by the Board of Directors. (2) If the holders of Noncumulative Preferred Shares which have been called for redemption shall not within six years after such deposit claim the amount deposited for the redemption thereof, any such bank or trust company shall, upon demand, pay over to the Corporation such unclaimed amounts and thereupon such bank or trust company and the Corporation shall be relieved of all responsibility in respect thereof and to such holders. -8- 9 (c) Any Noncumulative Preferred Shares which are (1) redeemed by the Corporation pursuant to this Section, (2) purchased and delivered in satisfaction of any sinking fund requirement provided for shares of such series, (3) converted in accordance with the express terms thereof, or (4) otherwise acquired by the Corporation, shall resume the status of authorized but unissued Noncumulative Preferred Shares without serial designation. (d) Except in connection with the exercise of the Corporation's rights pursuant to Division C or any similar provisions hereafter contained in these Amended and Restated Articles of Incorporation, the Corporation may not purchase or redeem (for sinking fund purposes or otherwise) less than all of the Noncumulative Preferred Shares then outstanding except in accordance with a purchase offer made to all holders of record of Noncumulative Preferred Shares, unless all unpaid dividends on all Noncumulative Preferred Shares then outstanding shall have been paid or funds therefor set apart and all accrued sinking fund obligations applicable thereto shall have been complied with. Section 4. LIQUIDATION. (a) (1) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the holders of Noncumulative Preferred Shares of any series shall be entitled to receive in full out of the assets of the Corporation, including its capital, before any amount shall be paid or distributed among the holders of the Common Shares or any other shares ranking junior to the Noncumulative Preferred Shares, the amounts fixed with respect to shares of such series in accordance with Section 1 of this Division A.II., plus an amount equal to all dividends declared and unpaid thereon. If the net assets of the Corporation legally available therefor are insufficient to permit the payment upon all outstanding Cumulative Preferred Shares and Noncumulative Preferred Shares of the full preferential amount to which they are respectively entitled, then such net assets shall be distributed ratably upon all outstanding Cumulative Preferred Shares and Noncumulative Preferred Shares in proportion to the full preferential amount to which each such share is entitled. (2) After payment to the holders of Noncumulative Preferred Shares of the full preferential amounts as aforesaid, the holders of Noncumulative Preferred Shares, as such, shall have no right or claim to any of the remaining assets of the Corporation. (b) The merger or consolidation of the Corporation into or with any other Corporation, the merger of any other Corporation into it, or the sale, lease or conveyance of all or substantially all the assets of the Corporation, shall not be deemed to be a dissolution, liquidation or winding up for purposes of this Section. Section 5. VOTING. (a) The holders of Noncumulative Preferred Shares shall have no voting rights, except as provided in this Section or required by law. (b) (1) If, and so often as, the Corporation shall not have fully paid, or shall not have declared and set aside a sum sufficient for the payment of, dividends on any series of Noncumulative Preferred Shares at the time outstanding, for a number of dividend payment periods (whether or not consecutive) which in the aggregate contain at least 540 days, the holders of all series of such Noncumulative Preferred Shares, voting separately as a class, shall be entitled to elect, as herein provided, two members of the Board of Directors of the Corporation; but the holders of the Noncumulative Preferred Shares shall not exercise such special class voting rights except at meetings of such shareholders for the election of directors at which the holders of not less than 50% of the Noncumulative Preferred Shares are present in person or by proxy; and the special class voting rights provided for in this paragraph when the same shall have become vested shall remain so vested until the Corporation shall have fully paid, or shall have set aside a sum sufficient for the payment of, dividends on such Noncumulative Preferred Shares then outstanding for a number of consecutive dividend payment periods which in the aggregate contain at least 360 days, whereupon the holders of the Noncumulative Preferred Shares shall be -9- 10 divested of their special class voting rights in respect of subsequent elections of directors, subject to the revesting of such special class voting rights in the event above specified in this paragraph. (2) On an event entitling holders of Noncumulative Preferred Shares to elect two directors as specified in paragraph (1) of this Subsection, a special meeting of such holders for the purpose of electing such directors shall be called by the Secretary of the Corporation upon written request of, or may be called by, the holders of record of at least 10% of the Noncumulative Preferred Shares of the affected series and notice thereof shall be given in the same manner as that required for the annual meeting of shareholders; but the Corporation shall not be required to call such special meeting if the annual meeting of shareholders shall be called to be held within 90 days after the date of receipt of the foregoing written request from the holders of Noncumulative Preferred Shares. At any meeting at which the holders of Noncumulative Preferred Shares shall be entitled to elect directors, holders of 50% of the Noncumulative Preferred Shares, present in person or by proxy, shall be sufficient to constitute a quorum, and the vote of the holders of a majority of such shares so present at any such meeting at which there shall be such a quorum shall be sufficient to elect the members of the Board of Directors which the holders of Noncumulative Preferred Shares are entitled to elect as herein provided. Notwithstanding any provision of these Amended and Restated Articles of Incorporation or the Code of Regulations of the Corporation or any action taken by the holders of any class of shares fixing the number of directors of the Corporation, the two directors who may be elected by the holders of Noncumulative Preferred Shares pursuant to this Subsection shall serve in addition to any other directors then in office or proposed to be elected otherwise than pursuant to this Subsection. Nothing in this Subsection shall prevent any change otherwise permitted in the total number of or classifications of directors of the Corporation nor require the resignation of any director elected otherwise than pursuant to this Subsection. Notwithstanding any classification of the other directors of the Corporation, the two directors elected by the holders of Noncumulative Preferred Shares shall be elected annually for terms expiring at the next succeeding annual meeting of shareholders. (3) Upon any divesting of the special class voting rights of the holders of the Noncumulative Preferred Shares in respect of elections of directors as provided in this Subsection, the terms of office of all directors then in office elected by such holders shall terminate immediately thereupon. If the office of any director elected by such holders voting as a class becomes vacant by reason of death, resignation, removal from office or otherwise, the remaining director elected by such holders voting as a class may elect a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. (c) The affirmative vote of the holders of at least two-thirds of the Noncumulative Preferred Shares at the time outstanding, voting separately as a class, given in person or by proxy either in writing or at a meeting called for the purpose, shall be necessary to effect either of the following: (1) Any amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Amended and Restated Articles of Incorporation or of the Code of Regulations of the Corporation which affects adversely and materially the preferences or voting or other rights of the holders of Noncumulative Preferred Shares which are set forth in these Amended and Restated Articles of Incorporation; but neither an amendment of these Amended and Restated Articles of Incorporation so as to authorize, create or change the authorized or outstanding number of Noncumulative Preferred Shares or of any shares ranking on a parity with or junior to the Noncumulative Preferred Shares nor an amendment of the Code of Regulations so as to change the number or classification of directors of the Corporation shall be deemed to affect adversely and materially preferences or voting or other rights of the holders of Noncumulative Preferred Shares; or (2) The authorization, creation or increase in the authorized number of any shares, or any security convertible into shares, in either case ranking prior to such Noncumulative Preferred Shares. (d) If, and only to the extent, that (1) Noncumulative Preferred Shares are issued in more than one series and (2) Ohio law permits the holders of a series of a class of shares to vote separately as a class, the affirmative vote of the holders of at least two-thirds of each series of the Noncumulative Preferred Shares at the time outstanding, voting separately as a class, given in person or by proxy either in writing or at a meeting called -10- 11 for the purpose of voting on such matters, shall be required for any amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of these Amended and Restated Articles of Incorporation or of the Code of Regulations of the Corporation which affects adversely and materially the preferences or voting or other rights of the holders of such series which are set forth in these Amended and Restated Articles of Incorporation; but neither an amendment of these Amended and Restated Articles of Incorporation, so as to authorize, create or change the authorized or outstanding number of Noncumulative Preferred Shares or of any shares remaining on a parity with or junior to the Noncumulative Preferred Shares nor an amendment of the Code of Regulations so as to change the number or classification of directors of the Corporation shall be deemed to affect adversely and materially preferences or voting or other rights of the holders of such series. III. DEFINITIONS. For the purposes of this Division: (a) Whenever reference is made to shares "ranking prior to" Cumulative Preferred Shares or Noncumulative Preferred Shares, such reference shall mean all shares of the Corporation in respect of which the rights of the holders thereof as to the payment of dividends or as to distributions in the event of a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation are given preference over the rights of the holders of Cumulative Preferred Shares or Noncumulative Preferred Shares, as the case may be; (b) Whenever reference is made to shares "on a parity with" Cumulative Preferred Shares or Noncumulative Preferred Shares, such reference shall mean all shares of the Corporation in respect of which the rights of the holders thereof as to the payment of dividends or as to distributions in the event of a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation rank equally (except as to the amounts fixed therefor) with the rights of the holders of Cumulative Preferred Shares or Noncumulative Preferred Shares, as the case may be; and (c) Whenever reference is made to shares "ranking junior to" Cumulative Preferred Shares or Noncumulative Preferred Shares, such reference shall mean all shares of the Corporation other than those defined under Subsections (a) and (b) of this Section as shares "ranking prior to" or "on a parity with" Cumulative Preferred Shares or Noncumulative Preferred Shares, as the case may be. IV. RESTRICTIONS ON TRANSFER TO PRESERVE TAX BENEFIT. The Cumulative Preferred Shares and the Noncumulative Preferred Shares are subject to the restrictions on transfer set forth with respect to those shares in Division C of this Article FOURTH. DIVISION B: COMMON SHARES The Common Shares are subject to the express terms of the Cumulative Preferred Shares and any series thereof and to the express terms of the Noncumulative Preferred Shares and any series thereof, and have the following express terms: Section 1. DIVIDEND RIGHTS. The holders of Common Shares shall be entitled to receive, when, as and if declared by the Board of Directors of the Corporation, out of the assets of the Corporation which are by law available therefor, dividends or distributions payable in cash, in property or in securities of the Corporation. Section 2. RIGHTS UPON LIQUIDATION. In the event of any voluntary or involuntary liquidation, dissolution or winding up of, or any distribution of the assets of, the Corporation, each holder of Common Shares shall be entitled to receive, ratably with each other holder of Common Shares, that portion of the assets of the Corporation available for distribution to its holders of Common Shares as the number of Common Shares held by such holder bears to the total number of Common Shares then outstanding. Section 3. VOTING RIGHTS. The holders of Common Shares shall be entitled to vote on all matters presented to the shareholders of the Corporation (except any matter expressly reserved in these Amended -11- 12 and Restated Articles of Incorporation to holders of shares other than Common Shares), and shall be entitled to one vote for each Common Share entitled to vote thereon. Section 4. RESTRICTIONS ON TRANSFER TO PRESERVE TAX BENEFIT. The Common Shares are subject to the restrictions on transfer set forth with respect to those shares in Division C of this Article FOURTH. DIVISION C: RESTRICTIONS ON TRANSFER OF PREFERRED SHARES AND COMMON SHARES I. RESTRICTIONS ON TRANSFER. Section 1. DEFINITIONS. For purposes of this Division C of this Article FOURTH, the following terms shall have the following meanings set forth below: "Beneficial Ownership" shall mean ownership of Equity Shares by a Person who would be treated as an owner of such Equity Shares either directly or indirectly through the application of Section 544 of the Internal Revenue Code, as modified by Section 856(h)(1)(B) of the Internal Revenue Code. The terms "Beneficial Owner," "Beneficially Owns," and "Beneficially Owned" shall have correlative meanings. "Beneficiary" shall mean, with respect to any Trust, one or more organizations described in each of Section 170(b)(1)(A) (other than clause (vii) or (viii) thereof) and Section 170(c)(2) of the Internal Revenue Code that are named by the Corporation as the beneficiary or beneficiaries of such Trust, in accordance with Section (1) of Division C.II. hereof. "Board of Directors" shall mean the Board of Directors of the Corporation. "Boykin Hotel Properties, L.P. Agreement" shall mean the Amended and Restated Agreement of Limited Partnership of Boykin Hotel Properties, L.P., an Ohio limited partnership. "Constructive Ownership" shall mean ownership of Equity Shares by a Person who would be treated as an owner of such Equity Shares either directly or indirectly through the application of Section 318 of the Internal Revenue Code, as modified by Section 856(d)(5) of the Internal Revenue Code. The terms "Constructive Owner," "Constructively Owns," and "Constructively Owned" shall have correlative meanings. "Equity Shares" shall mean Cumulative Preferred Shares, Noncumulative Preferred Shares and Common Shares of the Corporation. The term "Equity Shares" shall include all Cumulative Preferred Shares, Noncumulative Preferred Shares and Common Shares of the Corporation that are held as Shares-in-Trust in accordance with this Division C of this Article FOURTH. "Initial Public Offering" means the sale of Common Shares pursuant to the Corporation's first effective registration statement for Common Shares filed under the Securities Act of 1933, as amended. "Market Price" on any date shall mean the average of the Closing Price for the five consecutive Trading Days ending on such date. The "Closing Price" on any date shall mean the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the applicable Equity Shares are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which those Equity Shares are listed or admitted to trading or, if those Equity Shares are not listed or admitted to trading on any national securities exchange, the last quoted price, or if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or, if such system is no longer in use, the principal other automated quotations system that may then be in use or, if the shares of Equity Shares are not quoted by any such organization, the -12- 13 average of the closing bid and asked prices as furnished by a professional market maker making a market in those Equity Shares selected by the Board of Directors. "Non-Transfer Event" shall mean an event other than a purported Transfer that would cause any Person to Beneficially Own or Constructively Own Equity Shares in excess of the Ownership Limit, including, but not limited to, the issuance, granting of any option or entering into of any agreement for the sale, transfer or other disposition of Equity Shares or the sale, transfer, assignment or other disposition of any securities or rights convertible into or exchangeable for Equity Shares. "Ownership Limit" shall mean 9% of the number of outstanding shares of any class of Equity Shares. "Permitted Transferee" shall mean any Person designated as a Permitted Transferee in accordance with this Division C. "Person" shall mean an individual, corporation, partnership, estate, trust, a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Internal Revenue Code, association, private foundation within the meaning of Section 509(a) of the Internal Revenue Code, joint stock company or other entity and also includes a "group" as that term is used for purposes of Section 12(d)(3) of the Securities Exchange Act of 1934, as amended. "Prohibited Owner" shall mean, with respect to any purported Transfer or Non-Transfer Event, any Person who, but for this Division C of this Article FOURTH, would own record title to Equity Shares. "Redemption Rights" shall mean the rights granted under the Boykin Hotel Properties, L.P. Agreement to the limited partners to exchange, under certain circumstances, their limited partnership interests for cash (or, at the option of the Corporation, for Common Shares). "Restriction Termination Date" shall mean the first day after the date of the Initial Public Offering on which the Board of Directors determines that it is no longer in the best interests of the Corporation to attempt to, or continue to, qualify as a REIT. "Shares-in-Trust" shall mean any Equity Shares designated as Shares-in-Trust pursuant to this Division C. "Trading Day" shall mean a day on which the principal national securities exchange on which the applicable Equity Shares are listed or admitted to trading is open for the transaction of business or, if those Equity Shares are not listed or admitted to trading on any national securities exchange, shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. "Transfer" (as a noun) shall mean any sale, transfer, gift, assignment, devise or other disposition of Equity Shares, whether voluntary or involuntary, whether of record, constructively or beneficially and whether by operation of law or otherwise. "Transfer" (as a verb) shall have the correlative meaning. "Trust" shall mean any separate trust created pursuant to this Division C for the exclusive benefit of any Beneficiary. "Trustee" shall mean any Person or entity unaffiliated with both the Corporation and any Prohibited Owner, such Trustee to be designated by the Corporation to act as trustee of any Trust, or any successor trustee thereof. -13- 14 Section 2. RESTRICTION ON TRANSFERS AND NON-TRANSFER EVENT. (a) Except as set forth in Section 7 below and subject to Section 8 below, from the date of the Initial Public Offering to the Restriction Termination Date, (i) no Person shall Beneficially Own or Constructively Own outstanding Equity Shares in excess of the Ownership Limit, but any Transfer or Non-Transfer Event that, if effective, would result in any Person Beneficially Owning or Constructively Owning outstanding Equity Shares in excess of the Ownership Limit shall be void AB INITIO as to the Transfer or Non-Transfer Event affecting that number of Equity Shares which would be otherwise Beneficially Owned or Constructively Owned by such Person in excess of the Ownership Limit and the intended transferee shall acquire no rights in such excess Equity Shares. (b) Except as set forth in Section 7 below, from the date of the Initial Public Offering to the Restriction Termination Date, any Transfer or Non-Transfer Event that, if effective, would result in any class of Equity Shares being beneficially owned by fewer than 100 Persons (determined without reference to any rules of attribution) shall be void AB INITIO as to the Transfer or Non-Transfer Event affecting that number of shares which would be otherwise beneficially owned (determined without reference to any rules of attribution) by the transferee, and the intended transferee shall acquire no rights in such Equity Shares. (c) From the date of the Initial Public Offering to the Restriction Termination Date, any Transfer of or Non-Transfer Event affecting Equity Shares that, if effective, would result in the Corporation being "closely held" within the meaning of Section 856(h) of the Internal Revenue Code shall be void AB INITIO as to the Transfer of or Non-Transfer Event affecting that number of Equity Shares which would cause the Corporation to be "closely held" within the meaning of Section 856(h) of the Internal Revenue Code, and the intended transferee shall acquire no rights in such Equity Shares. (d) From the date of the Initial Public Offering to the Restriction Termination Date, any Transfer of or Non-Transfer Event affecting Equity Shares that, if effective, would cause the Corporation to Constructively Own 10% or more of the ownership interests in a tenant of the real property of the Corporation or of any direct or indirect subsidiary of the Corporation (a "Subsidiary"), within the meaning of Section 856(d)(2)(B) of the Internal Revenue Code, shall be void AB INITIO as to the Transfer of or Non-Transfer Event affecting that number of Equity Shares which would cause the Corporation to Constructively Own 10% or more of the ownership interests in a tenant of the Corporation's or of a Subsidiary's real property, within the meaning of Section 856(d)(2)(B) of the Internal Revenue Code, and the intended transferee shall acquire no rights in such excess Equity Shares. Section 3. TRANSFER TO TRUST. (a) If, notwithstanding the other provisions contained in this Division C, at any time after the Initial Public Offering and prior to the Restriction Termination Date there is a purported Transfer or Non-Transfer Event such that any Person would either Beneficially Own or Constructively Own Equity Shares in excess of the Ownership Limit, then, (i) except as set forth in Section 7 below, the purported transferee shall acquire no right or interest (or, in the case of a Non-Transfer Event, the Person holding record title to the Equity Shares Beneficially Owned or Constructively Owned by such Beneficial Owner or Constructive Owner, shall cease to own any right or interest) in such number of Equity Shares which would cause such Beneficial Owner or Constructive Owner to Beneficially Own or Constructively Own Equity Shares in excess of the Ownership Limit, (ii) such number of Equity Shares in excess of the Ownership Limit (rounded up to the nearest whole share) shall be designated Shares-in-Trust and, in accordance with this Division C, transferred automatically by operation of the terms of this Section IV.C.I.3. to a Trust to be held in accordance with this Division C, and (iii) the Prohibited Owner shall submit such number of Equity Shares to the Corporation for registration in the name of the Trustee. Such transfer to a Trust and the designation of shares as Shares-in-Trust shall be effective as of the close of business on the business day prior to the date of the Transfer or Non-Transfer Event, as the case may be. -14- 15 (b) If, notwithstanding the other provisions contained in this Division C, at any time after the Initial Public Offering and prior to the Restriction Termination Date, there is a purported Transfer or Non-Transfer Event that, if effective, would (i) result in any class of the Equity Shares being beneficially owned by fewer than 100 Persons (determined without reference to any rules of attribution), (ii) result in the Corporation being "closely held" within the meaning of Section 856(h) of the Internal Revenue Code, or (iii) cause the Corporation to Constructively Own 10% or more of the ownership interests in a tenant of the Corporation's or of a Subsidiary's real property, within the meaning of Section 856(d)(2)(B) of the Internal Revenue Code, then (x) the purported transferee shall not acquire any right or interest (or, in the case of a Non-Transfer Event, the Person holding record title to the Equity Shares with respect to which such Non-Transfer Event occurred, shall cease to own any right or interest) in such number of Equity Shares, the ownership of which by such purported transferee or record holder would (A) result in any class of Equity Shares being beneficially owned by fewer than 100 Persons (determined without reference to any rules of attribution), (B) result in the Corporation being "closely held" within the meaning of Section 856(h) of the Internal Revenue Code, or (C) cause the Corporation to Constructively Own 10% or more of the ownership interests in a tenant of the Corporation's or of a Subsidiary's real property, within the meaning of Section 856(d)(2)(B) of the Internal Revenue Code, (y) such number of Equity Shares (rounded up to the nearest whole share) shall be designated Shares-in-Trust and, in accordance with this Division C, transferred automatically by operation of the terms of this Section IV.C.I.3. to a Trust to be held in accordance with this Division C, and (z) the Prohibited Owner shall submit such number of Equity Shares to the Corporation for registration in the name of the Trustee. Such transfer to a Trust and the designation of shares as Shares-in-Trust shall be effective as of the close of business on the business day prior to the date of the Transfer or Non-Transfer Event, as the case may be. Section 4. REMEDIES FOR BREACH. If the Corporation, or its designee, shall at any time determine in good faith that a Transfer or Non-Transfer Event has taken place in violation of this Division C or that a Person intends to acquire or has attempted to acquire Beneficial Ownership or Constructive Ownership of any Equity Shares in violation of this Division C, the Corporation shall take such action as it considers advisable to refuse to give effect to or to prevent such Transfer or Non-Transfer Event or acquisition, including, but not limited to, refusing to give effect to such Transfer on the books of the Corporation or instituting proceedings to enjoin such Transfer or Non-Transfer Event or acquisition. Section 5. NOTICE OF RESTRICTED TRANSFER. Any Person who acquires or attempts to acquire Equity Shares in violation of this Division C, or any Person who owned Equity Shares that were transferred to a Trust pursuant to this Division C, shall immediately give written notice to the Corporation of such event and shall provide to the Corporation such other information as the Corporation may request in order to determine the effect, if any, of such event on the Corporation's status as a REIT. Section 6. OWNERS REQUIRED TO PROVIDE INFORMATION. From the date of the Initial Public Offering to the Restriction Termination Date: (a) Every Beneficial Owner or Constructive Owner of more than 5%, or such lower percentage as is specified pursuant to regulations issued under the Internal Revenue Code, of the outstanding shares of any class of shares of the Corporation shall, within 30 days after January 1 of each year, provide to the Corporation a written statement or affidavit stating the name and address of such Beneficial Owner or Constructive Owner, the number of Equity Shares Beneficially Owned or Constructively Owned, and a description of how such shares are held. (b) Each Person who is a Beneficial Owner or Constructive Owner of Equity Shares and each Person (including the shareholder of record) who is holding Equity Shares for a Beneficial Owner or Constructive Owner shall provide to the Corporation a written statement or affidavit stating such information as the Corporation may request in order to determine the Corporation's status as a REIT and to ensure compliance with the Ownership Limit as applicable. Section 7. EXCEPTIONS. The Ownership Limit shall not apply to the acquisition of Equity Shares by an underwriter that participates in a public offering of such shares for a period of 90 days following -15- 16 the purchase by such underwriter of such shares. In addition, the Board of Directors, upon receipt of a ruling from the Internal Revenue Service or an opinion of counsel, in either case to the effect that the Corporation's status as a REIT would not be jeopardized thereby, may allow a Person to own a certain amount in excess of the Ownership Limit if (i) the Board of Directors obtains such representations and undertakings from such Person as are reasonably necessary to ascertain that no Person's Beneficial Ownership or Constructive Ownership of Equity Shares could result in the REIT (a) losing its REIT status for federal income tax purposes, or (b) being "related" to any tenant or lessee under the REIT rules of the Internal Revenue Code, and (ii) such Person agrees in writing that any violation or attempted violation that could cause such a result will cause a transfer to a Trust of Equity Shares pursuant to this Division C. Section 8. NEW YORK STOCK EXCHANGE TRANSACTIONS. Notwithstanding any provision contained herein to the contrary, nothing in these Amended and Restated Articles of Incorporation shall preclude the settlement of any transaction entered into through the facilities of the New York Stock Exchange. II. SHARES-IN-TRUST. Section 1. TRUST. Any Equity Shares transferred to a Trust and designated Shares-in-Trust pursuant to this Division C shall be held for the exclusive benefit of the Beneficiary. The Corporation shall name a Beneficiary for each Trust within five days after the Corporation first has actual notice of the existence thereof. Any transfer to a Trust, and designation of Equity Shares as Shares-in-Trust, shall be effective as of the close of business on the business day prior to the date of the Transfer or Non-Transfer Event that results in the transfer to the Trust. Shares-in-Trust shall continue to constitute issued and outstanding Equity Shares of the Corporation and shall be entitled to the same rights and privileges as are all other issued and outstanding Equity Shares of the same class and series. When transferred to a Permitted Transferee in accordance with this Division C, such Shares-in-Trust shall cease to be designated as Shares-in-Trust. Section 2. DIVIDEND RIGHTS. The Trust, as record holder of Shares-in-Trust, shall be entitled to receive all dividends and distributions declared by the Board of Directors on such Shares-in-Trust and shall hold such dividends and distributions in trust for the benefit of the Beneficiary. The Prohibited Owner with respect to Shares-in-Trust shall repay to the Trust the amount of any dividends or distributions received by it that (i) are attributable to those Shares-in-Trust and (ii) the record date of which was on or after the date that such shares became Shares-in-Trust. The Corporation shall take all measures that it determines reasonably necessary to recover the amount of any such dividend or distribution paid to a Prohibited Owner, including, if necessary, withholding any portion of future dividends or distributions payable on Equity Shares Beneficially Owned or Constructively Owned by the Person who, but for the provisions of this Division C, would Constructively Own or Beneficially Own the Shares-in-Trust; and, as soon as reasonably practicable following the Corporation's receipt or withholding thereof, shall pay over to the Trust for the benefit of the Beneficiary the dividends so received or withheld, as the case may be. Section 3. RIGHTS UPON LIQUIDATION. In the event of any voluntary or involuntary liquidation, dissolution or winding up of, or any distribution of the assets of, the Corporation, each holder of Shares-in-Trust shall be entitled to receive, ratably with each other holder of Equity Shares of the same class or series, that portion of the assets of the Corporation which is available for distribution to the holders of such class and series of Equity Shares. The Trust shall distribute to the Prohibited Owner the amounts received upon such liquidation, dissolution, or winding up, or distribution; PROVIDED, HOWEVER, that the Prohibited Owner shall not be entitled to receive amounts pursuant to this Division C in excess of, in the case of a purported Transfer in which the Prohibited Owner gave value for Equity Shares and which Transfer resulted in the transfer of the shares to the Trust, the price per share, if any, such Prohibited Owner paid for the Equity Shares and, in the case of a Non-Transfer Event or Transfer in which the Prohibited Owner did not give value for such shares (E.G., if the shares were received through a gift or devise) and which Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of shares to the Trust, the price per share equal to the Market Price on the date of such Non-Transfer Event or Transfer. Any remaining amount in such Trust shall be distributed to the Beneficiary. -16- 17 Section 4. VOTING RIGHTS. The Trustee shall be entitled to vote all Shares-in-Trust. Any vote by a Prohibited Owner as a holder of Equity Shares prior to the discovery by the Corporation that the Equity Shares are Shares-in-Trust shall, so far as is practicable under applicable law, be rescinded and shall be void AB INITIO with respect to such Shares-in-Trust and the Prohibited Owner shall be deemed to have given, as of the close of business on the business day prior to the date of the Transfer or Non-Transfer Event that results in the transfer to the Trust of Equity Shares pursuant to this Division C, an irrevocable proxy to the Trustee to vote the Shares-in-Trust in the manner in which the Trustee, in its sole and absolute discretion, considers advisable. Section 5. DESIGNATION OF PERMITTED TRANSFEREE. The Trustee shall have the exclusive and absolute right to designate a Permitted Transferee of any Shares-in-Trust. In an orderly fashion so as not to materially adversely affect the Market Price of the Shares-in-Trust, the Trustee shall designate a Person as Permitted Transferee, so long as (i) the Permitted Transferee so designated purchases for valuable consideration (whether in a public or private sale) the Shares-in-Trust and (ii) the Permitted Transferee so designated can acquire such Shares-in-Trust without such acquisition resulting in a transfer to a Trust and the redesignation of such Equity Shares as Shares-in-Trust. Upon the designation by the Trustee of a Permitted Transferee, the Trustee shall (i) cause to be transferred to the Permitted Transferee that number of Shares-inTrust acquired by the Permitted Transferee, (ii) cause to be recorded on the books of the Corporation that the Permitted Transferee is the holder of record of such number of Equity Shares, (iii) cause the Shares-in-Trust to be canceled, and (iv) distribute to the Beneficiary any and all amounts held by the Trustee with respect to the Shares-in-Trust after making any payment to the Prohibited Owner required under Sections IV.C.II.3. and IV.C.II.6. Section 6. COMPENSATION TO RECORD HOLDER OF EQUITY SHARES THAT BECOME SHARES-IN-TRUST. Any Prohibited Owner shall be entitled (following designation of Equity Shares proposed or purported to be held by that Prohibited Owner as Shares-in-Trust and subsequent designation of a Permitted Transferee or the Trustee's acceptance of an offer to purchase such shares) to receive from the Trustee following the sale or other disposition of such Shares-in-Trust the lesser of (i) in the case of (a) a purported Transfer in which the Prohibited Owner gave value for Equity Shares and which Transfer resulted in the transfer of the shares to the Trust, the price per share, if any, such Prohibited Owner paid for the Equity Shares, or (b) a Non-Transfer Event or Transfer in which the Prohibited Owner did not give value for such shares (E.G., if the shares were received through a gift or devise) and which Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of shares to the Trust, the price per share equal to the Market Price on the date of such Non-Transfer Event or Transfer, and (ii) the price per share received by the Trustee from the sale or other disposition of such Shares-in-Trust. Any amounts received by the Trustee in respect of such Shares-in-Trust and in excess of such amounts to be paid to the Prohibited Owner shall be distributed to the Beneficiary. Each Beneficiary and Prohibited Owner waive any and all claims that they may have against the Trustee and the Trust arising out of the disposition of Shares-in-Trust, except for claims arising out of the gross negligence or willful misconduct of, or any failure to make payments in accordance with this Division C, by such Trustee or the Corporation. Section 7. PURCHASE RIGHT IN SHARES-IN-TRUST. Shares-in-Trust shall be considered to have been offered for sale to the Corporation, or its designee, on the date of the event that created such Shares-in-Trust status at a price per share equal to the lesser of (i) the price per share in the event that created such Shares-in-Trust status (or, in the case of a devise, gift or Non-Transfer Event, the Market Price at the time of such devise, gift or Non-Transfer Event) and (ii) the Market Price on the date the Corporation, or its designee, accepts such offer. The Corporation shall have the right to accept such offer for a period of ninety days after the later of (i) the date of the event which created such Shares-in-Trust status and (ii) the date the Corporation determines in good faith that an event occurred that created such Shares-in-Trust status, if the Corporation does not receive a notice of such event. III. REMEDIES NOT LIMITED. Subject to Article I, Sections 7 and 8, nothing contained in this Division C shall limit the authority of the Corporation to take such other action as it deems necessary or advisable to protect the Corporation and the interests of its shareholders by preservation of the Corporation's status as a REIT and to ensure compliance with the Ownership Limit. -17- 18 IV. AMBIGUITY. In the case of any ambiguity in the application of any provision of this Division C, including any definition contained herein, the Board of Directors shall have the power to determine the application of that provision. V. LEGEND. Each certificate for Equity Shares shall bear the following legend: "The [Common Shares or Cumulative Preferred Shares or Noncumulative Preferred Shares] represented by this certificate are subject to restrictions on transfer for the purpose of the Corporation's maintenance of its status as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"). No Person may (i) Beneficially Own or Constructively Own Common Shares in excess of 9% of the number of outstanding Common Shares, (ii) Beneficially Own or Constructively Own shares of any class or series of Preferred Shares in excess of 9% of the number of outstanding shares of that class or series of Preferred Shares, (iii) beneficially own Equity Shares that would result in the Equity Shares being beneficially owned by fewer than 100 Persons (determined without reference to any rules of attribution), (iv) Beneficially Own Equity Shares that would result in the Corporation being "closely held" under Section 856(h) of the Code, or (v) Constructively Own Equity Shares that would cause the Corporation to Constructively Own 10% or more of the ownership interests in a tenant of the Corporation's or of a Subsidiary's real property, within the meaning of Section 856(d)(2)(B) of the Code. Each holder of Equity Shares is required to furnish the Corporation such information as the Corporation may request pursuant to Section 6 of the Corporation's Amended and Restated Articles of Incorporation. Any Person who attempts to Beneficially Own or Constructively Own Equity Shares in excess of the above limitations must immediately notify the Corporation in writing. If those restrictions are violated, the Equity Shares represented hereby in excess of those limitations will be transferred automatically by operation of the Corporation's Amended and Restated Articles of Incorporation to a Trust and will be designated Shares-in-Trust. All capitalized terms in this legend have the meanings defined in the Corporation's Amended and Restated Articles of Incorporation, as they may be amended from time to time, a copy of which, including the restrictions on transfer, will be sent without charge to each shareholder who so requests." VI. SEVERABILITY. Each provision of this Article FOURTH shall be several, and an adverse determination as to any such provision shall in no way affect the validity of any other provision. FIFTH: At all times following the consummation of the Initial Public Offering (as defined in Article FOURTH), at least a majority of the members of the Board of Directors shall, except as may result from a vacancy or vacancies therein, be Independent Directors. An "Independent Director" shall mean a person who is (i) independent of management of the Corporation, (ii) not employed by or an officer of the Corporation, (iii) not an "affiliate" (as defined in Rule 405 under the Securities Act of 1933, as amended) of the Corporation or of any Subsidiary of the Corporation, and (iv) not a person who acts on a regular basis as an individual or representative of an organization serving as a professional advisor, legal counsel or consultant to management if, in the opinion of the Board of Directors, the relationship is material to the Corporation, that person, or the organization represented. Any determination to be made by the Board of Directors in connection with any matter presenting a conflict of interest for any officer of the Corporation or any director of the Corporation who is not an Independent Director shall be made by the Independent Directors. SIXTH: No holder of shares of the Corporation of any class shall be entitled as such, as a matter of right, to subscribe for or purchase shares of any class, now or hereafter authorized, or to subscribe for or purchase securities convertible into or exchangeable for shares of the Corporation or to which shall be attached or appertain any warrants or rights entitling the holder thereof to subscribe for or purchase shares, except such rights of subscription or purchase, if any, for such considerations and upon such terms and conditions as its Board of Directors from time to time may determine. -18- 19 SEVENTH: Notwithstanding any provision of Sections 1701.01 to 1701.98, inclusive, of the Ohio Revised Code, or any successor statutes now or hereafter in force, requiring for the authorization or taking of any action the vote or consent of the holders of shares entitling them to exercise two-thirds or any other proportion of the voting power of the Corporation or of any class or classes of shares thereof, such action, unless otherwise expressly required by law or these Amended and Restated Articles of Incorporation, may be authorized or taken by the vote or consent of the holders of shares entitling them to exercise a majority of the voting power of the Corporation or of such class or classes of shares thereof. EIGHTH: To the extent permitted by law, the Corporation, by action of its Board of Directors, may purchase or otherwise acquire shares of any class issued by it at such times, for such consideration and upon such terms and conditions as its Board of Directors may determine. NINTH: No person who is serving or has served as a director of the Corporation shall be personally liable to the Corporation or any of its shareholders for monetary damages for breach of any fiduciary duty of such person as a director by reason of any act or omission of such person as a director; but the foregoing provision shall not eliminate or limit the liability of any person (a) for any breach of such person's duty of loyalty as a director to the Corporation or its shareholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) under Section 1701.95 of the Ohio Revised Code, (d) for any transaction from which such person derived any improper personal benefit, or (e) to the extent that such liability may not be limited or eliminated by virtue of Section 1701.13 of the Ohio Revised Code or any successor section or statute. Any repeal or modification of this Article NINTH by the shareholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation existing at the time of such repeal or modification. TENTH: Section 1701.831 of the Ohio Revised Code shall not apply to the Corporation. ELEVENTH: Chapter 1704 of the Ohio Revised Code shall not apply to the Corporation. TWELFTH: If any provision (or portion thereof) of these Amended and Restated Articles of Incorporation shall be found to be invalid, prohibited, or unenforceable for any reason, the remaining provisions (or portions thereof) of these Amended and Restated Articles of Incorporation shall remain in full force and effect, and shall be construed as if such invalid, prohibited, or unenforceable provision had been stricken herefrom or otherwise rendered inapplicable, it being the intent of the Corporation and its shareholders that each such remaining provision (or portion thereof) of these Amended and Restated Articles of Incorporation remain, to the fullest extent permitted by law, applicable and enforceable as to all shareholders, notwithstanding any such finding. THIRTEENTH: No shareholder of the Corporation may cumulate his voting power in the election of directors. FOURTEENTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in these Amended and Restated Articles of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon shareholders herein are granted subject to this reservation. FIFTEENTH: These Amended and Restated Articles of Incorporation shall take the place of and supersede the Corporation's existing Articles of Incorporation. -19- EX-3.2 3 EXHIBIT 3.2 1 Exhibit 3.2 CODE OF REGULATIONS OF BOYKIN LODGING COMPANY ARTICLE I MEETINGS OF SHAREHOLDERS Section 1. ANNUAL MEETINGS. The annual meeting of shareholders shall be held at such time and on such date as may be fixed by the Board of Directors and stated in the notice of the meeting, for the election of directors, the consideration of reports to be laid before such meeting and the transaction of such other business as may properly come before the meeting. Section 2. SPECIAL MEETINGS. Special meetings of the shareholders shall be called upon the written request of the president, the directors by action at a meeting, a majority of the directors acting without a meeting, or of the holders of shares entitling them to exercise twenty-five percent (25%) of the voting power of the Corporation entitled to vote thereat. Calls for such meetings shall specify the purposes thereof. No business other than that specified in the call shall be considered at any special meeting. Section 3. NOTICES OF MEETINGS. Unless waived, written notice of each annual or special meeting stating the time, place, and the purposes thereof shall be given by personal delivery or by mail to each shareholder of record entitled to vote at or entitled to notice of the meeting, not more than sixty (60) days nor less than seven (7) days before any such meeting. If mailed, such notice shall be directed to the shareholder at his address as the same appears upon the records of the Corporation. Any shareholder, either before or after any meeting, may waive any notice required to be given by law or under these Regulations. Section 4. PLACE OF MEETINGS. Meetings of shareholders shall be held at the principal office of the Corporation unless the Board of Directors determines that a meeting shall be held at some other place within or without the State of Ohio and causes the notice thereof to so state. Section 5. QUORUM. The holders of shares entitling them to exercise a majority of the voting power of the Corporation entitled to vote at any meeting, present in person or by proxy, shall constitute a quorum for the transaction of business to be considered at such meeting; provided, however, that no action required by law or by the Articles of Incorporation or these Regulations to be authorized or taken by the holders of a designated proportion of the shares of any particular class or of each class may be authorized or taken by a lesser proportion. The holders of a majority of the voting shares represented at a meeting, whether or not a quorum is present, may adjourn such meeting from time to time, until a quorum shall be present. Section 6. RECORD DATE. The Board of Directors may fix a record date for any lawful purpose, including without limiting the generality of the foregoing, the determination of shareholders entitled to (i) receive notice of or to vote at any meeting, (ii) receive payment of any dividend or distribution, (iii) receive or exercise rights of purchase of or subscription for, or exchange or conversion of, shares or other securities, subject to any contract right with respect thereto, or (iv) participate in the execution of written consents, waivers or releases. Said record date shall not be more than sixty (60) days preceding the date of such meeting, the date fixed for the payment of any dividend or distribution or the date fixed for the receipt or the exercise of rights, as the case may be. If a record date shall not be fixed, the record date for the determination of shareholders who are entitled to notice of, or who are entitled to vote at, a meeting of shareholders, shall be the close of business 2 on the date next preceding the day on which notice is given, or the close of business on the date next preceding the day on which the meeting is held, as the case may be. Section 7. PROXIES. A person who is entitled to attend a shareholders' meeting, to vote thereat, or to execute consents, waivers or releases, may be represented at such meeting or vote thereat, and execute consents, waivers and releases, and exercise any of his other rights, by proxy or proxies appointed by a writing signed by such person. ARTICLE II DIRECTORS Section 1. NUMBER OF DIRECTORS. Until changed in accordance with the provisions of this section (or as otherwise provided in the Corporation's Articles of Incorporation, as amended from time to time), the number of directors of the Corporation, none of whom need be shareholders, shall be seven (7). The number of directors may be fixed or changed (but in no case shall the number be fewer than three (3) or more than fifteen (15)) at any annual meeting or at any special meeting called for that purpose by the affirmative vote of the holders of shares entitling them to exercise a majority of the voting power of the Corporation on such proposal. Section 2. ELECTION OF DIRECTORS. Directors shall be elected at the annual meeting of shareholders, but when the annual meeting is not held or directors are not elected thereat, they may be elected at a special meeting called and held for that purpose. Such election shall be by ballot whenever requested by any shareholder entitled to vote at such election; but, unless such request is made, the election may be conducted in any manner approved at such meeting. At each meeting of shareholders for the election of directors, the persons receiving the greatest number of votes shall be directors. Section 3. TERM OF OFFICE. Each director shall hold office until the annual meeting next succeeding his election and until his successor is elected and qualified, or until his earlier resignation, removal from office or death. Section 4. REMOVAL. All the directors or any individual director may be removed from office, without assigning any cause, by the vote of the holders of a majority of the voting power entitling them to elect directors in place of those to be removed, provided that unless all the directors are removed, no individual director shall be removed in case the votes of a sufficient number of shares are cast against his removal which, if cumulatively voted at an election of all the directors would be sufficient to elect at least one director. In case of any such removal, a new director may be elected at the same meeting for the unexpired term of each director removed. Section 5. VACANCIES. Vacancies in the Board of Directors may be filled by a majority vote of the remaining directors until an election to fill such vacancies is had. Shareholders entitled to elect directors shall have the right to fill any vacancy in the board (whether the same has been temporarily filled by the remaining directors or not) at any meeting of the shareholders called for that purpose, and any directors elected at any such meeting of shareholders shall serve until the next annual election of directors and until their successors are elected and qualified. Section 6. QUORUM AND TRANSACTION OF BUSINESS. A majority of the whole authorized number of directors shall constitute a quorum for the transaction of business, except that a majority of the directors in office shall constitute a quorum for filling a vacancy on the board. Whenever less than a quorum is present at the time and place appointed for any meeting of the board, a majority of those present may adjourn the meeting -2- 3 from time to time until a quorum shall be present. The act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the board. Section 7. ANNUAL MEETING. Annual meetings of the Board of Directors shall be held immediately following annual meetings of the shareholders, or as soon thereafter as is practicable. If no annual meeting of the shareholders is held, or if directors are not elected thereat, then the annual meeting of the Board of Directors shall be held immediately following any special meeting of the shareholders at which directors are elected, or as soon thereafter as is practicable. If such annual meeting of directors is held immediately following a meeting of the shareholders, it shall be held at the same place at which such shareholders' meeting was held. Section 8. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such times and places, within or without the State of Ohio, as the Board of Directors may, by resolution or by-law, from time to time, determine. The secretary shall give notice of each such resolution or by-law to any director who was not present at the time the same was adopted, but no further notice of such regular meeting need be given. Section 9. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the chairman of the board, the president, any vice president, or any two members of the Board of Directors, and shall be held at such times and places, within or without the State of Ohio, as may be specified in such call. Section 10. NOTICE OF ANNUAL OR SPECIAL MEETINGS. Notice of the time and place of each annual or special meeting shall be given to each director by the secretary or by the person or persons calling such meeting. Such notice need not specify the purpose or purposes of the meeting and may be given in any manner or method and at such time so that the director receiving it may have reasonable opportunity to participate in the meeting. Such notice shall, in all events, be deemed to have been properly and duly given if mailed at least forty-eight (48) hours prior to the meeting and directed to the residence of each director as shown upon the secretary's records and, in the event of a meeting to be held through the use of communications equipment, if the notice sets forth the telephone number at which each director may be reached for purposes of participation in the meeting as shown upon the secretary's records and states that the secretary must be notified if a director desires to be reached at a different telephone number. The giving of notice shall be deemed to have been waived by any director who shall participate in such meeting and may be waived, in a writing, by any director either before or after such meeting. Section 11. COMPENSATION. The directors, as such, shall be entitled to receive such reasonable compensation for their services as may be fixed from time to time by resolution of the board, and expenses of attendance, if any, may be allowed for attendance at each annual, regular or special meeting of the board. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of the executive committee or of any standing or special committee may by resolution of the board be allowed such compensation for their services as the board may deem reasonable, and additional compensation may be allowed to directors for special services rendered. Section 12. BY-LAWS. For the government of its actions, the Board of Directors may adopt by-laws consistent with the Articles of Incorporation and these Regulations. ARTICLE III COMMITTEES Section 1. EXECUTIVE COMMITTEE. The Board of Directors may from time to time, by resolution passed by a majority of the whole board, create an executive committee of three or more directors, the members of which shall be elected by the Board of Directors to serve during the pleasure of the board. If the -3- 4 Board of Directors does not designate a chairman of the executive committee, the executive committee shall elect a chairman from its own number. Except as otherwise provided herein and in the resolution creating an executive committee, such committee shall, during the intervals between the meetings of the Board of Directors, possess and may exercise all of the powers of the Board of Directors in the management of the business and affairs of the Corporation, other than that of filling vacancies among the directors or in any committee of the directors. The executive committee shall keep full records and accounts of its proceedings and transactions. All action by the executive committee shall be reported to the Board of Directors at its meeting next succeeding such action and shall be subject to control, revision and alteration by the Board of Directors, provided that no rights of third persons shall be prejudicially affected thereby. Vacancies in the executive committee shall be filled by the directors, and the directors may appoint one or more directors as alternate members of the committee who may take the place of any absent member or members at any meeting. Section 2. MEETINGS OF EXECUTIVE COMMITTEE. Subject to the provisions of these Regulations, the executive committee shall fix its own rules of procedure and shall meet as provided by such rules or by resolutions of the Board of Directors, and it shall also meet at the call of the president, the chairman of the executive committee or any two members of the committee. Unless otherwise provided by such rules or by such resolutions, the provisions of Section 10 of Article II relating to the notice required to be given of meetings of the Board of Directors shall also apply to meetings of the executive committee. A majority of the executive committee shall be necessary to constitute a quorum. The executive committee may act in a writing, or by telephone with written confirmation, without a meeting, but no action by writing of the executive committee shall be effective unless concurred in by all members of the committee. Section 3. AUDIT COMMITTEE. The Audit Committee shall consist of three "Independent Directors" (as defined in the Corporation's Amended and Restated Articles of Incorporation, as they may be amended from time to time) and otherwise shall operate under rules set forth in Sections 1 and 2 of this Article III for an executive committee. The Audit Committee shall make recommendations concerning the engagement of independent public accountants, review with the independent public accounts the plans and results of the audit engagement, approve professional services provided by the independent public accountants, review the independence of the independent public accountants, consider the range of audit and nonaudit fees, review the independent public accountants' letter of comments and management's responses, review the adequacy of the Company's internal accounting controls, and review major accounting or reporting changes contemplated or made. Section 4. COMPENSATION COMMITTEE. The Compensation Committee shall consist of three Independent Directors and otherwise shall operate under rules set forth in Sections 1 and 2 of this Article III for an executive committee. The Compensation Committee shall determine compensation for senior management, advise the Board of Directors on the adoption and administration of employee benefit and compensation plans, and administer the Company's Long-Term Incentive Plan. Section 5. OTHER COMMITTEES. The Board of Directors may by resolution provide for such other standing or special committees as it deems desirable, and discontinue the same at pleasure. Each such committee shall have such powers and perform such duties, not inconsistent with law, as may be delegated to it by the Board of Directors. The provisions of Section 1 and Section 2 of this Article shall govern the appointment and action of such committees so far as the same are consistent with such appointment and unless otherwise provided by the Board of Directors. Vacancies in such committees shall be filled by the Board of Directors or as the Board of Directors may provide. -4- 5 ARTICLE IV OFFICERS Section 1. GENERAL PROVISIONS. The Board of Directors shall elect a president, such number of vice presidents as the board may from time to time determine, a secretary and a treasurer and, in its discretion, a chairman of the Board of Directors. The Board of Directors may from time to time create such offices and appoint such other officers, subordinate officers and assistant officers as it may determine. The president, any vice president who succeeds to the office of the president, and the chairman of the board shall be, but the other officers need not be, chosen from among the members of the Board of Directors. Any two of such offices, other than that of president and vice president, may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity. Section 2. TERM OF OFFICE. The officers of the Corporation shall hold office during the pleasure of the Board of Directors, and, unless sooner removed by the Board of Directors, until the organization meeting of the Board of Directors following the date of their election and until their successors are chosen and qualified. The Board of Directors may remove any officer at any time, with or without cause. A vacancy in any office, however created, shall be filled by the Board of Directors. ARTICLE V DUTIES OF OFFICERS Section 1. CHAIRMAN OF THE BOARD. The chairman of the board, if one be elected, shall preside at all meetings of the Board of Directors and shall have such other powers and duties as may be prescribed by the Board of Directors. Section 2. PRESIDENT. The president shall be the chief executive officer of the Corporation and shall exercise supervision over the business of the Corporation and over its several officers, subject, however, to the control of the Board of Directors. He shall preside at all meetings of shareholders, and, in the absence of the chairman of the board, or if a chairman of the board shall not have been elected, shall also preside at meetings of the Board of Directors. He shall have authority to sign all certificates for shares and all deeds, mortgages, bonds, agreements, notes, and other instruments requiring his signature; and shall have all the powers and duties prescribed by Chapter 1701 of the Revised Code of Ohio and such others as the Board of Directors may from time to time assign to him. Section 3. VICE PRESIDENTS. The vice presidents shall have such powers and duties as may from time to time be assigned to them by the Board of Directors or the president. At the request of the president, or in the case of his absence or disability, the vice president designated by the president (or in the absence of such designation, the vice president designated by the board) shall perform all the duties of the president and, when so acting, shall have all the powers of the president. The authority of vice presidents to sign in the name of the Corporation certificates for shares and deeds, mortgages, bonds, agreements, notes and other instruments shall be coordinate with like authority of the president. Section 4. SECRETARY. The secretary shall keep minutes of all the proceedings of the shareholders and Board of Directors and shall make proper record of the same, which shall be attested by him; shall have authority to execute and deliver certificates as to any of such proceedings and any other records of the Corporation; shall have authority to sign all certificates for shares and all deeds, mortgages, bonds, agreements, notes and other instruments to be executed by the Corporation which require his signature; shall give notice of meetings of shareholders and directors; shall produce on request at each meeting of shareholders a certified list of shareholders arranged in alphabetical order; shall keep such books and records as may be required by law or -5- 6 by the Board of Directors; and, in general, shall perform all duties incident to the office of secretary and such other duties as may from time to time be assigned to him by the Board of Directors or the president. Section 5. TREASURER. The treasurer shall have general supervision of all finances; he shall receive and have in charge all money, bills, notes, deeds, leases, mortgages and similar property belonging to the Corporation, and shall do with the same as may from time to time be required by the Board of Directors. He shall cause to be kept adequate and correct accounts of the business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, stated capital and shares, together with such other accounts as may be required, and upon the expiration of his term of office shall turn over to his successor or to the Board of Directors all property, books, papers and money of the Corporation in his hands; and shall have such other powers and duties as may from time to time be assigned to him by the Board of Directors or the president. Section 6. ASSISTANT AND SUBORDINATE OFFICERS. The Board of Directors may appoint such assistant and subordinate officers as it may deem desirable. Each such officer shall hold office during the pleasure of the Board of Directors, and perform such duties as the Board of Directors or the president may prescribe. The Board of Directors may, from time to time, authorize any officer to appoint and remove subordinate officers, to prescribe their authority and duties, and to fix their compensation. Section 7. DUTIES OF OFFICERS MAY BE DELEGATED. In the absence of any officer of the Corporation, or for any other reason the Board of Directors may deem sufficient, the Board of Directors may delegate, for the time being, the powers or duties, or any of them, of such officer to any other officer or to any director. ARTICLE VI TRANSACTIONS WITH CERTAIN AFFILIATES Following the consummation of the sale of Common Shares, without par value, of the Corporation pursuant to the Corporation's first effective registration statement for such shares filed under the Securities Act of 1933, as amended (the "Securities Act"), the Corporation shall not, nor shall it permit its subsidiaries to, (i) lend money to, or borrow money from, any employee of the Corporation or any "affiliate" (as defined in Rule 405 under the Securities Act) other than Boykin Hotel Properties, L.P., or (ii) enter into any other transaction or agreement with any such affiliate, unless such other transaction is approved by a majority of the Directors of the Corporation who are "Independent Directors" (as defined in the Corporation's Articles of Incorporation). The Independent Directors shall make all determinations to be made on behalf of the Corporation with respect to the relationships or opportunities that represent a conflict of interest for any officer or director of the Corporation as such. ARTICLE VII INDEMNIFICATION AND INSURANCE Section 1. INDEMNIFICATION IN NON-DERIVATIVE ACTIONS. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party, to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, other than an action by or in the right of the Corporation, by reason of the fact that he is or was a director or officer of the Corporation, or is -6- 7 or was serving at the request of the Corporation as a director, trustee, officer, employee, or agent of another corporation, domestic or foreign, nonprofit or for profit, partnership, joint venture, trust, or other enterprise, against expenses, including attorneys' fees, judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal action or proceeding, that he had reasonable cause to believe that his conduct was unlawful. Section 2. INDEMNIFICATION IN DERIVATIVE ACTIONS. The Corporation shall indemnify any person who was or is a party, or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee, or agent of another corporation, domestic or foreign, nonprofit or for profit, partnership, joint venture, trust, or other enterprise against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation unless, and only to the extent that the Court of Common Pleas, or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the Court of Common Pleas or such court shall deem proper. Section 3. INDEMNIFICATION AS MATTER OF RIGHT. To the extent that a director, trustee, officer, employee, or agent has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in Section 1 or 2 of this Article VII, or in defense of any claim, issue, or matter therein, he shall be indemnified against expenses, including attorneys' fees, actually and reasonably incurred by him in connection therewith. Section 4. DETERMINATION OF CONDUCT. Any indemnification under Sections 1 and 2 of this Article VII, unless ordered by a court, shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, trustee, officer, employee, or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 1 and 2 of this Article VII. Such determination shall be made (a) by a majority vote of a quorum consisting of directors of the Corporation who were not and are not parties to or threatened with any such action, suit, or proceeding, or (b) if such a quorum is not obtainable or if a majority vote of a quorum of disinterested directors so directs, in a written opinion by independent legal counsel, other than an attorney or a firm having associated with it an attorney who has been retained by or who has performed services for the Corporation or any person to be indemnified within the past five years, or (c) by the shareholders or (d) by the Court of Common Pleas or the court in which such action, suit, or proceeding was brought. Any determination made by the disinterested directors under Section 4(a) or by independent legal counsel under Section 4(b) of this Article VII shall be promptly communicated to the person who threatened or brought the action or suit, by or in the right of the Corporation under Section 2 of this Article VII, and within ten days after receipt of such notification, such person shall have the right to petition the Court of Common Pleas or the court in which such action or suit was brought to review the reasonableness of such determination. Section 5. ADVANCE PAYMENT OF EXPENSES. Expenses, including attorneys' fees, incurred in defending any action, suit, or proceeding referred to in Sections 1 or 2 of this Article VII, may be paid by the Corporation in advance of the final disposition of such action, suit, or proceeding as authorized by the directors -7- 8 in the specific case upon receipt of an undertaking by or on behalf of the director, trustee, officer, employee, or agent to repay such amount, unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized in this Article VII. Section 6. NONEXCLUSIVITY. The indemnification provided by this Article VII shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under the Articles of Incorporation or the Code of Regulations or any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office and shall continue as to a person who has ceased to be a director, trustee, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. Section 7. LIABILITY INSURANCE. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee, or agent of another corporation, domestic or foreign, nonprofit or for profit, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article VII or of Chapter 1701 of the Ohio Revised Code. ARTICLE VIII CERTIFICATES FOR SHARES Section 1. FORM AND EXECUTION. Certificates for shares, certifying the number of fully paid shares owned, shall be issued to each shareholder in such form as shall be approved by the Board of Directors. Such certificates shall be signed by the president or a vice president and by the secretary or an assistant secretary or the treasurer or an assistant treasurer; provided, however, that if such certificates are countersigned by a transfer agent and/or registrar, the signatures of any of said officers and the seal of the Corporation upon such certificates may be facsimiles, engraved, stamped or printed. If any officer or officers, who shall have signed, or whose facsimile signature shall have been used, printed or stamped on any certificate or certificates for shares, shall cease to be such officer or officers, because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates, if authenticated by the endorsement thereon of the signature of a transfer agent or registrar, shall nevertheless be conclusively deemed to have been adopted by the Corporation by the use and delivery thereof and shall be as effective in all respects as though signed by a duly elected, qualified and authorized officer or officers, and as though the person or persons who signed such certificate or certificates, or whose facsimile signature or signatures shall have been used thereon, had not ceased to be an officer or officers of the Corporation. Section 2. TRANSFER AND REGISTRATION OF CERTIFICATES. The Board of Directors shall have authority to make such rules and regulations, not inconsistent with law, the Articles of Incorporation or this Code of Regulations, as it deems expedient concerning the issuance, transfer and registration of certificates for shares and the shares represented thereby. Section 3. LOST, DESTROYED OR STOLEN CERTIFICATES. A new share certificate or certificates may be issued in place of any certificate theretofore issued by the Corporation which is alleged to have been lost, destroyed or wrongfully taken upon (i) the execution and delivery to the Corporation by the person claiming the certificate to have been lost, destroyed or wrongfully taken of an affidavit of that fact, specifying whether or not, at the time of such alleged loss, destruction or taking, the certificate was endorsed, and (ii) the furnishing to the Corporation of indemnity and other assurances satisfactory to the Corporation and to all transfer agents and registrars of the class of shares represented by the certificate against any and all losses, damages, costs, expenses -8- 9 or liabilities to which they or any of them may be subjected by reason of the issue and delivery of such new certificate or certificates or in respect of the original certificate. Section 4. REGISTERED SHAREHOLDERS. A person in whose name shares are of record on the books of the Corporation shall conclusively be deemed the unqualified owner and holder thereof for all purposes and to have capacity to exercise all rights of ownership. Neither the Corporation nor any transfer agent of the Corporation shall be bound to recognize any equitable interest in or claim to such shares on the part of any other person, whether disclosed upon such certificate or otherwise, nor shall they be obliged to see to the execution of any trust or obligation. ARTICLE IX FISCAL YEAR The fiscal year of the Corporation shall end on December 31, of each year, or on such other date as may be fixed from time to time by the Board of Directors. ARTICLE X SEAL The Board of Directors may provide a suitable seal containing the name of the Corporation. If deemed advisable by the Board of Directors, duplicate seals may be provided and kept for the purposes of the Corporation. ARTICLE XI AMENDMENTS This Code of Regulations may be amended, or new regulations may be adopted, at any meeting of shareholders called for such purpose by the affirmative vote of, or without a meeting by the written consent of, the holders of shares entitling them to exercise a majority of the voting power of the Corporation on such proposal. -9- EX-5.1 4 EXHIBIT 5.1 1 EXHIBIT 5.1 621-0200 August ___, 1996 Boykin Lodging Company Terminal Tower Suite 1500 50 Public Square Cleveland, Ohio 44113 Gentlemen: As counsel for Boykin Lodging Company, an Ohio corporation (the "Company"), we are familiar with the Company's Registration Statement on Form S-11, as amended (the "Registration Statement"), first filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, on June 19, 1996, with respect to 9,056,250 of the Company's Common Shares, without par value (the "Common Shares"), including 7,875,000 Common Shares to be sold to the underwriters (the "Firm Shares") and an additional 1,181,250 Common Shares subject to an over-allotment option granted to the underwriters by the Company (the "Additional Shares"). In connection with the foregoing, we have examined (a) the Amended and Restated Articles of Incorporation and the Code of Regulations of the Company, (b) the proposed form of Underwriting Agreement filed as an exhibit to the Registration Statement (the "Underwriting Agreement") with respect to the Common Shares, and (c) such records of the corporate proceedings of the Company and such other documents as we deemed necessary to render this opinion. Based upon such examination, we are of the opinion that: 1. The Company is a corporation duly organized and validly existing under the laws of the state of Ohio. 2. The Firm Shares and the Additional Shares to be sold by the Company have been duly authorized and, when issued and sold pursuant to the duly executed Underwriting Agreement (in substantially the form filed as an exhibit to the Registration Statement) and in the manner 2 Boykin Lodging Company August __, 1996 Page 2 contemplated by the Registration Statement, will be validly issued, fully paid and nonassessable. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and the reference to us under the caption "Legal Matters" in the Prospectus that is a part of the Registration Statement. Very truly yours, EX-8.1 5 EXHIBIT 8.1 1 Exhibit 8.1 [BAKER & HOSTETLER LETTERHEAD] August ___, 1996 Boykin Lodging Company Terminal Tower, Suite 1500 50 Public Square Cleveland, Ohio 44113 Ladies and Gentlemen: We have acted as counsel to Boykin Lodging Company, an Ohio corporation (the "Company"), in connection with the preparation of a registration statement (the "Registration Statement") filed with the Securities and Exchange commission on August ___, 1996 (No. ___-___), as amended through the date hereof, with respect to the offering and sale (the "Offering") of up to 9,056,250 common shares, no par value, of the Company, the Company's contribution of substantially all of the net proceeds of the Offering to Boykin Hotel Properties, L.P., an Ohio limited partnership (the "Operating Partnership"), in exchange for a general partnership interest in the Operating Partnership and a note convertible into general partnership interests in the Operating Partnership. You have requested our opinion on certain federal income tax matters in connection with the Offering. The Operating Partnership intends to acquire equity interests in certain existing hotels and associated personal property (the "Initial Hotels"). The Operating Partnership will lease each of the Initial Hotels to Boykin Management Company Limited Liability Company ("BMCL"), an Ohio limited liability company (the "Lessee"), pursuant to substantially similar operating leases (the "Percentage Leases"). BMCL will operate the Initial Hotels under the Percentage Leases. In connection with the opinions rendered below, we have examined the following: 1. the Company's Amended and Restated Articles of Incorporation, as filed with the Secretary of State of Ohio; 2. the Company's Code of Regulations; 3. the Registration Statement, including the prospectus contained as part of the Registration Statement (the "Prospectus"); 4. the Amended and Restated Agreement of Limited Partnership of the Operating Partnership; 2 5. the Percentage Leases between the Operating Partnership and the Lessee; and 6. such other documents as we have deemed necessary or appropriate for purposes of this opinion. In connection with the opinions rendered below, we have assumed generally that: 1. each of the documents referred to above has been duly authorized, executed, and delivered; is authentic, if an original, or is accurate, if a copy; and has not been amended; 2. during its short 1996 taxable year ending December 31, 1996 and subsequent taxable years, the Company will operate in such a manner that will make the representations contained in the Representation Letter, dated August ___, 1996 and executed by a duly appointed officer of the Company (the "Representation Letter"), true for such years; 3. the Company will not make any amendments to its organizational documents or the Operating Partnership Agreement after the date of this opinion that would affect the Company's qualification as a real estate investment trust (a "REIT") for any taxable year; and 4. each Limited Partner has full power, authority, and legal right to enter into and perform the terms of the Operating Partnership Agreement and the transactions contemplated thereby. In connection with the opinions rendered below, we also have relied upon the correctness of the representations contained in the Representation Letter. For purposes of our opinions, we made no independent investigation of the facts contained in the documents and assumptions set forth above, the representations set forth in the Representation Letter, or the Prospectus. No facts have come to our attention, however, that would cause us to question the accuracy and completeness of such facts or documents in a material way. In addition, to the extent that any of the representations provided to us in the Representation Letter are with respect to matters set forth in the Internal Revenue Code of 1986, as amended (the "Code"), or the Treasury regulations thereunder (the "Regulations"), we have reviewed with the individuals making such representation the relevant portion of the Code and the applicable Regulations and are reasonably satisfied that such individuals understand such provisions and are capable of making such representations. Based on the documents and assumptions set forth above, the representations set forth in the Representation Letter, and the discussion in the Prospectus under the caption "Federal Income Tax Considerations" (which is incorporated herein by reference), we are of the opinion that: (a) commencing with the Company's short taxable year ending December 31, 1996, the Company will qualify to be taxed as a REIT pursuant to sections 856 through 860 of the Code, and the Company's proposed method of operation will 3 enable it to meet the requirements for qualification and taxation as a REIT under the Code; (b) the descriptions of the law and the legal conclusions contained in the Prospectus under the caption "Federal Income Tax Considerations" are correct in all material respects, and the discussion contained therein fairly summarizes the federal tax considerations that are material to a holder of the Common Shares; and (c) the Operating Partnership will be treated for federal income tax purposes as a partnership and not as an association taxable as corporation or as a publicly traded partnership. We will not review on a continuing basis the Company's compliance with the documents or assumptions set forth above, or the representations set forth in the Representation Letter. Accordingly, no assurance can be given that the actual results of the Company's operations for any given taxable year will satisfy the requirements for qualification and taxation as a REIT. The foregoing opinions are based on current provisions of the Code and the Regulations, published administrative interpretations thereof, and published court decisions. The Internal Revenue Service has not issued Regulations or administrative interpretations with respect to various provisions of the Code relating to REIT qualification. No assurance can be given that the law will not change in a way that will prevent the Company from qualifying as a REIT, or the Operating Partnership from being classified as a partnership for federal income tax purposes. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. We also consent to the references to Baker & Hostetler under the captions "Federal Income Tax Considerations" and "Legal Matters" in the Prospectus. The foregoing opinions are limited to the federal income tax matters addressed herein, and no other opinions are rendered with respect to other federal tax matters or to any issues arising under the tax laws of any state or locality. We undertake no obligation to update the opinions expressed herein after the date of this letter. This opinion letter is solely for the information and use of the addressees, and may not be relied upon for any purpose by any other person without our express written consent. Very truly yours, EX-10.2 6 EXHIBIT 10.2 1 Exhibit 10.2 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of _____________, 1996, is by and among Boykin Lodging Company, an Ohio corporation (the "Company"), and the individuals and entities listed on Exhibit A attached hereto (such individuals and entities collectively, the "Holders" and each individually, a "Holder"). W I T N E S S E T H : WHEREAS, the Holders were direct or indirect beneficial owners of nine partnerships, the equity interests in which were transferred to an Ohio limited partnership of which the Company is the sole general partner (the "Reit Partnership"); and WHEREAS, the Holders agreed to transfer such interests in part in consideration of the Company entering into this Agreement; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. DEFINITIONS. As used in this Agreement: a. "Affiliate" of a Person means (i) with respect to a Person which is a natural person, such Person's spouse and lineal descendants and any trust or other fiduciary solely for the benefit of such individual or such individual's spouse or lineal descendants, (ii) with respect to a Person that is a corporation, the shareholders of such Person on the date hereof, (iii) with respect to a Person that is a partnership, the partners of such Person on the date hereof, (iv) with respect to a Person that is an estate, the beneficiaries of such Person on the date hereof, or (v) any other Person controlling, controlled by, or under common control with such Person. b. "Commission" means the Securities and Exchange Commission. c. "Common Shares" means the common shares, without par value, of the Company. d. "Initial Public Offering" means the sale of Common Shares pursuant to the Company's first effective registration statement for such shares filed under the Securities Act. 2 e. "Person" means a natural person, a partnership, a corporation, an association, a joint stock company, a trust, an estate, a joint venture, an unincorporated organization or other entity or a governmental entity or any department, agency or political subdivision of any thereof. f. "Registrable Shares" means, at any particular time at which notice has been given pursuant to Section 2(a) hereunder, any of the following which are held by any Holder, any Affiliate of a Holder, or any Affiliate of an Affiliate of a Holder: (i) shares of Common Shares which are held by any Holder immediately upon the consummation of the Initial Public Offering or for which Units are exchangeable by any Holder, (ii) shares of Common Shares acquired pursuant to or acquirable upon the exercise of options outstanding immediately upon completion of the Initial Public Offering (other than options granted pursuant to the Company's 1996 Long Term Incentive Plan), (iii) shares of Common Shares issued pursuant to a dividend reinvestment plan adopted by the Company, (iv) shares of Common Shares then outstanding which were issued as, or upon the conversion or exercise of other securities issued as, a dividend or other distribution with respect to or in replacement of other Registrable Shares, (v) shares of Common Shares then issuable upon conversion or exercise of other securities which were issued as a dividend or other distribution with respect to or in replacement of other Registrable Shares, and (vi) any equity securities of the Company issued or issuable with respect to the securities referred to in clauses (i) through (v) by way of a share dividend or share split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. For purposes of this Agreement, a Person will be deemed to be a holder of Registrable Shares, and those shares will be deemed held by that Person, when such Person has the unqualified right to acquire such Registrable Shares (by conversion, exchange or otherwise, but disregarding any restrictions imposed by law upon the exercise of such right), whether or not such acquisition has actually been effected. g. "Registration Expenses" has the meaning ascribed to it in Section 6 of this Agreement. h. "Securities Act" means the Securities Act of 1933, as amended. i. "Units" means limited partnership interests in the Reit Partnership. 2. PIGGYBACK REGISTRATIONS. a. RIGHT TO PIGGYBACK. Subject to the remaining provisions of this Section 2, following the Initial Public Offering, whenever the Company proposes to register its Common -2- 3 Shares under the Securities Act (other than a registration on Form S-4 or S-8) (a "Piggyback Registration"), the Company will give written notice to all holders of Registrable Shares of its intention to effect such a registration and will include in such registration all Registrable Shares with respect to which the Company has received written requests for inclusion therein within 15 days after the receipt of the Company's notice. The Company is not required to give any Person more than three opportunities to have Registrable Shares included in a Piggyback Registration. b. PRIORITY ON PRIMARY REGISTRATION. If a Piggyback Registration is an underwritten primary offering on behalf of the Company, and the managing underwriters for the Offering advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering, the Company will include in such registration (i) FIRST, the securities the Company proposes to sell, (ii) SECOND, the Registrable Shares requested to be included in such registration which in the opinion of such underwriters can be sold, prorated among the holders of such Registrable Shares who request that Registrable Shares be included in such offering, on the basis of the number of Registrable Shares owned or deemed to be owned by such holders, with further successive PRO RATA allocations, if any such holder has requested the registration of less than all such Registrable Shares such holder is so entitled to register, among such holders (other than the holder who requested less than all such Registrable Shares such holder is so entitled to register), and (iii) THIRD, other securities requested to be included in such registration. c. PRIORITY ON SECONDARY REGISTRATIONS. If a Piggyback Registration is an underwritten secondary offering on behalf of holders of the Company's securities other than holders of Registrable Shares, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering, the Company will include in such registration (i) FIRST, the securities included therein held by the holders other than holders of Registrable Shares, (ii) SECOND, the Registrable Shares requested to be included in such registration which in such opinion of such underwriters can be sold, prorated among the holders of such Registrable Shares on the basis of the number of Registrable Shares owned or deemed to be owned by such holders, with further successive PRO RATA allocations among the holders of Registrable Shares if any holder of Registrable Shares has requested the registration of less than all such Registrable Shares such holder is so entitled to register, and (iii) THIRD, other securities requested to be included in such registration. 3. HOLDBACK AGREEMENTS. Each of the holders of Registrable Shares agrees not to effect any public sale or -3- 4 distribution of equity securities of the Company, or any securities convertible into or exchangeable or exercisable for such securities, during the seven days prior to, and the 90-day period beginning on the effective date of, any underwritten Piggyback Registration (except as part of such underwritten registration), unless the underwriters managing the registered public offering otherwise agree. 4. REGISTRATION PROCEDURES. Whenever the holders of Registrable Shares have requested that any Registrable Shares be registered pursuant to this Agreement, the Company will endeavor to effect the registration of such Registrable Shares in accordance with the intended method of disposition thereof, and pursuant thereto the Company will as expeditiously as possible: a. Prepare and file with the Commission a registration statement with respect to such Registrable Shares and endeavor to cause such registration statement to become and remain effective for such period, not to exceed six months, as may be reasonably necessary to effect the sale of such securities; b. Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than six months and comply with the provisions of the Securities Act applicable to the Company with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by sellers thereof set forth in such registration statement; c. Furnish to each seller of Registrable Shares and the underwriters of the securities being registered such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such seller or underwriters may reasonably request in order to facilitate the disposition of the Registrable Shares owned by such seller or the sale of such securities by such underwriters; d. Endeavor to register or qualify such Registrable Shares under such other securities or blue sky laws of such jurisdictions as any seller reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Shares owned by such seller (provided, however, that the Company will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 4(d), (ii) subject itself to taxation in any such jurisdiction, or (iii) consent to general service of process in any such jurisdiction); -4- 5 e. Cause all such Registrable Shares to be listed on each securities exchange or market trading system on which similar securities issued by the Company are then listed; f. Provide a transfer agent and registrar for all such Registrable Shares not later than the effective date of such registration statement; g. Enter into such customary agreements (including underwriting agreements in customary form) and take all such other actions as the holders of a majority of the Registrable Shares being sold or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Shares (including, without limitation, effecting a stock split or a combination of shares); h. Make available at reasonable times for inspection by sellers of Registrable Shares, any underwriter participating in any disposition pursuant to such registration statement, and any attorney, accountant or other agent retained by any such seller or underwriter, all pertinent financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors, employees and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement; i. Notify each seller of such Registrable Shares, promptly after it shall receive notice thereof, of the time when such registration statement has become effective or a supplement to any prospectus forming a part of such registration statement has been filed; j. Notify each seller of such Registrable Shares of any request by the Commission for the amending or supplementing of such registration statement or prospectus or for additional information; k. Prepare and file with the Commission, promptly upon the request of any seller of such Registrable Shares, any amendments or supplements to such registration statement or prospectus which, in the opinion of counsel selected by the holders of a majority of the Registrable Shares being registered, is reasonably required under the Securities Act or the rules and regulations thereunder in connection with the distribution of Registrable Shares by such seller; l. Prepare and promptly file with the Commission and promptly notify each seller of such Registrable Shares of the filing of such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating -5- 6 to such securities is required to be delivered under the Securities Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading; m. Advise each seller of such Registrable Shares, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission or any state authority or agency suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for such purpose and promptly use all reasonable efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; n. At the request of any underwriter in connection with an underwritten offering, furnish on the date or dates provided for in the underwriting agreement: (i) an opinion of counsel, addressed to the underwriters, covering such matters as such underwriters may reasonably request; and (ii) a letter or letters from the independent certified public accountants of the Company addressed to the underwriters, covering such matters as such underwriters and sellers may reasonably request, in which letters such accountants shall state, without limiting the generality of the foregoing, that they are independent certified public accountants within the meaning of the Securities Act and that in the opinion of such accountants the financial statements and other financial data of the Company included in the registration statement, the prospectus, or any amendment or supplement thereto comply in all material respects with the applicable accounting requirements of the Commission. 5. REGISTRATION EXPENSES. a. All expenses incident to the Company's performance of or compliance with this Agreement, including, without limitation, all registration and filing fees, fees and expenses of compliance with securities or blue sky laws, printing expenses, messenger and delivery expenses, and fees and disbursements of counsel for the Company and its independent certified public accountants, underwriters (excluding discounts and commissions attributable to the Registrable Shares included in such registration) and other Persons retained by the Company (all such expenses being herein called "Registration Expenses"), will be borne by the Company. In addition, the Company will pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit or quarterly review, the expense of any liability insurance obtained by the Company and the expenses and fees for listing the securities to be -6- 7 registered on each securities exchange on which any shares of Common Shares are then listed. b. In connection with each Piggyback Registration effected pursuant to this Agreement, the Company will reimburse the holders of Registrable Shares covered by such registration for the reasonable fees and disbursements of one counsel chosen by the holders of a majority of the Registrable Shares. 6. INDEMNIFICATION. a. The Company agrees to indemnify each seller of Registrable Shares, its officers and directors and each Person who controls such seller (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses (including, without limitation, attorneys' fees except as limited by Section 6(c)) caused by any untrue or alleged untrue statement of a material fact contained in any registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such seller or any underwriter expressly for use therein or by such seller's or underwriter's failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after the Company has furnished such seller or underwriter with a sufficient number of copies of the same. In connection with an underwritten offering, the Company will indemnify such underwriters, their officers and directors and each Person who controls such underwriters (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of sellers of Registrable Shares. The reimbursements required by this Section 6(a) will be made by periodic payments during the course of the investigation or defense, as and when bills are received or expenses incurred. b. In connection with any registration statement in which a seller of Registrable Shares is participating, each such seller will furnish to the Company in writing such information, -7- 8 questionnaires and affidavits as the Company reasonably requests for use in connection with any such registration statement or prospectus and, to the fullest extent permitted by law, will indemnify the Company, its directors and officers and each Person who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses (including, without limitation, attorneys' fees except as limited by Section 6(c)) resulting from any untrue statement of a material fact contained in the registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in any information or affidavit so furnished in writing by such seller; provided that the obligation to indemnify will be several, not joint and several, among such sellers of Registrable Shares, and the liability of each such seller of Registrable Shares will be in proportion to and be limited to the net amount received by such seller from the sale of Registrable Shares pursuant to such registration statement. c. Any Person entitled to indemnification hereunder will (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party will not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent will not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. d. The indemnification provided for under this Agreement will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling Person of such indemnified party and will survive the transfer of securities. The Company also agrees to make such provisions as are reasonably requested by any indemnified party for contribution to such party in the event the Company's indemnification is unavailable for any reason. 7. COMPLIANCE WITH RULE 144. At the request of any holder who proposes to sell securities in compliance with Rule 144 of the Commission, the Company will (i) forthwith furnish to such -8- 9 holder a written statement of its compliance with the filing requirements of the Commission as set forth in Rule 144 as such rule may be amended from time to time and (ii) make available to the public and such holders such information as will enable the holders to make sales pursuant to Rule 144. 8. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Person may participate in any registration hereunder which is underwritten unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Person or Persons entitled hereunder to approve such arrangements and (b) completes and executes all question- naires, powers of attorney, custody agreements, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. 9. NO INCONSISTENT AGREEMENTS. The Company will not hereafter enter into any agreement with respect to its securities which is inconsistent with the rights granted to the holders of Registrable Shares in this Agreement. 10. REMEDIES. Any Person having rights under any provision of this Agreement will be entitled to enforce such rights specifically, to recover damages caused by reason of any breach of any provision of this Agreement, and to exercise all other rights granted by law. 11. AMENDMENTS AND WAIVERS. Except as otherwise expressly provided herein, the provisions of this Agreement may be amended or waived at any time only by the written agreement of the Company and the holders of a majority of the Registrable Shares. Any waiver, permit, consent or approval of any kind or character on the part of any such holders of any provision or condition of this Agreement must be made in writing and will be effective only to the extent specifically set forth in writing. 12. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, all covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto will bind and inure to the benefit of the respective successors and assigns of the parties hereto, whether so expressed or not. In addition, and whether or not any express assignment has been made, the provisions of this Agreement which are for the benefit of any Holder are also for the benefit of, and enforceable by, any subsequent holder of Registrable Shares who acquired those Registrable Shares directly or indirectly from that Holder (other than in an offering registered under the Securities Act) and consents in writing to be bound by this Agreement. -9- 10 13. FINAL AGREEMENT. This Agreement constitutes the final agreement of the parties concerning the matters referred to herein, and supersedes all prior agreements and understandings. 14. SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. 15. DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement are inserted for convenience of reference only and do not constitute a part of and shall not be utilized in interpreting this Agreement. 16. NOTICES. Any notices required or permitted to be sent hereunder shall be delivered personally or mailed, certified mail, return receipt requested, or delivered by overnight courier service to the following addresses, or such other addresses as shall be given by notice delivered hereunder, and shall be deemed to have been given upon delivery, if delivered personally, three business days after mailing, if mailed, or one business day after delivery to the courier, if delivered by overnight courier service: IF TO THE HOLDERS OF REGISTRABLE SHARES, at their addresses set forth on the stock record books of the Company; with a copy to: Albert T. Adams Baker & Hostetler 3200 National City Center 1900 East Ninth Street Cleveland, Ohio 44114-3485 If to the Company, to: Boykin Lodging Company Attn: Robert W. Boykin, President Terminal Tower, Suite 15600 50 Public Square Cleveland, Ohio 44113-2258 -10- 11 with a copy to: Albert T. Adams Baker & Hostetler 3200 National City Center 1900 East Ninth Street Cleveland, Ohio 44114-3485 17. GOVERNING LAW. The validity, meaning and effect of this Agreement shall be determined in accordance with the laws of the State of Ohio applicable to contracts made and to be performed in that state without giving effect to the principles of conflicts of laws thereof. 18. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, and such counterparts together shall constitute one instrument. Each party shall receive a duplicate original of the counterpart copy or copies executed by it and the Company. 19. TERM. This Agreement will expire ten years from the date hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on their respective behalf, by their respective officers thereunto duly authorized, as of the day and year first set forth above. BOYKIN LODGING COMPANY, an Ohio corporation By:________________________________ [THE HOLDERS] -11- 12 EXHIBIT A --------- The Holders ----------- -12- EX-10.3 7 EXHIBIT 10.3 1 EXHIBIT 10.3 BOYKIN LODGING COMPANY LONG-TERM INCENTIVE PLAN SECTION 1. PURPOSE; DEFINITIONS. The purpose of the Boykin Lodging Company Long-Term Incentive Plan (the "Plan") is to enable Boykin Lodging Company (the "Company") to attract, retain and reward key employees of the Company and of its Affiliates and to strengthen the mutuality of interests between such key employees and the Company's shareholders by offering such key employees equity or equity-based incentives. For purposes of the Plan, the following terms shall be defined as set forth below: (a) "Affiliate" means any entity (other than the Company and its Subsidiaries) that is designated by the Board as a participating employer under the Plan. (b) "Award" means any award of Stock options, Restricted Shares, Deferred Shares, Share Purchase Rights, Share Appreciation Rights or Other Share-Based Awards under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Change in Control" has the meaning set forth in Section 11(b). (e) "Change in Control Price" has the meaning set-forth in Section 11(d). (f) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. (g) "Committee" means the Committee referred to in Section 2 of the Plan. (h) "Company" means Boykin Lodging Company, an Ohio corporation, or any successor corporation. (i) "Deferred Shares" means an award of the right to receive Shares at the end of a specified period granted pursuant to Section 7. (j) "Disability" means disability as determined under procedures established by the Committee for purposes of the Plan. 2 (k) "Disinterested Person" has the meaning set forth in Rule 16b-3(c)(2)(i) as promulgated by the Securities and Exchange Commission (the "Commission") under the Exchange Act, or any successor definition adopted by the Commission. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (m) "Fair Market Value" means, as of any date, the mean between the highest and lowest quoted selling price, regular way, of the Shares on such date on the New York Stock Exchange or, if no such sale of the Shares occurs on the New York Stock Exchange on such date, then such mean price on the next preceding day on which the Shares were traded. If the Shares are no longer traded on the New York Stock Exchange, then the Fair Market Value of the Shares shall be determined by the Committee in good faith. (n) "Incentive Stock Option" means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code or any successor section thereto. (o) "Non-Qualified Stock Option", means any Stock Option that is not an Incentive Stock Option. (p) "Other Share-Based Award" means an award granted pursuant to Section 10 that is valued, in whole or in part, by reference to, or is otherwise based on, Shares. (q) "Outside Director" has the meaning set forth in Section 162(m) of the Code and the regulations promulgated thereunder. (r) "Plan" means the Boykin Lodging Company Long-Term Incentive Plan, as amended from time to time. (s) "Potential Change in Control" has the meaning set forth in Section 11(c). (t) "Restricted Shares" means an award of shares that is granted pursuant to Section 6 and is subject to restrictions. (u) "Section 16 Participant", means a participant under the Plan who is then subject to Section 16 of the Exchange Act. (v) "Shares" mean, the common shares, without par value, of the Company. -2- 3 (w) "Share Appreciation Right" means an award of a right to receive an amount from the Company that is granted pursuant to Section 9. (x) "Stock Option" or "Option" means any option to purchase Shares (including Restricted Shares and Deferred Shares, if the Committee so determines) that is granted Pursuant to Section 5. (y) "Share Purchase Right" means an award of the right to purchase Shares that is granted pursuant to Section 8. (z) "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. SECTION 2. ADMINISTRATION. The Plan shall be administered by the Compensation Committee of the Board (the "Committee"). The Committee shall consist of three directors of the Company, all of whom shall be Disinterested Persons and Outside Directors. Such directors shall be appointed by the Board and shall serve as the Committee at the pleasure of the Board. The functions of the Committee specified in the Plan shall be exercised by the Board if and to the extent that no Committee exists which has the authority to so administer the Plan. The Committee shall have full power to interpret and administer the Plan and full authority to select the individuals to whom Awards will be granted and to determine the type and amount of Awards to be granted to each participant, the consideration, if any, to be paid for Such Awards, the timing of such Awards, the terms and conditions of Awards granted under the Plan and the terms and conditions of the related agreements which will be entered into with participants. As to the selection of and grant of Awards to participants who are not Section 16 participants, the Committee may delegate its responsibilities to members of the Company's management consistent with applicable law. The Committee shall have the authority to adopt, alter and repeal such rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any Award issued under the Plan (and any agreements relating thereto); to direct employees of the Company or other advisors to prepare such materials or perform such analyses as the Committee deems necessary or appropriate; and otherwise to supervise the administration of the Plan. Any interpretation and administration of the Plan by the Committee, and all actions and determinations of the Committee, shall be final, binding and conclusive on the Company, its shareholders, Subsidiaries, Affiliates, all participants in the Plan, their -3- 4 respective legal representatives, successors and assigns, and all persons claiming under or through any of them. No member of the Board or of the Committee shall incur any liability for any action taken or omitted, or any determination made, in good faith in connection with the Plan. SECTION 3. SHARES SUBJECT TO THE PLAN. (a) Aggregate Shares Subject to the Plan. Subject to adjustment as provided below in Section 3(c), the total number of Shares reserved and available for Awards under the Plan is 1,000,000. Any Shares issued hereunder may consist, in whole or in part, of authorized and unissued shares or treasury shares. (b) Forfeiture or Termination of Awards of Shares. If any Shares subject to any Award granted hereunder are forfeited or an Award otherwise terminates or expires without the issuance of Shares, the Shares subject to such Award shall again be available for distribution in connection with future Awards under the Plan as set forth in Section 3(a), unless the participant who had been awarded such forfeited Shares or the expired or terminated Award has theretofore received dividends or other benefits of ownership with respect to such Shares. For purposes hereof, a participant shall not be deemed to have received a benefit of ownership with respect to such Shares by the exercise of voting rights or the accumulation of dividends which are not realized because of the forfeiture of such Shares or the expiration or termination of the related Award without issuance of such Shares. (c) Adjustment. In the event of any merger, reorganization, consolidation, recapitalization, share dividend, share split, combination of shares or other change in corporate structure of the Company affecting the Shares, such substitution or adjustment shall be made in the aggregate number of Shares reserved for issuance under the Plan, in the number and option price of shares subject to outstanding options granted under the Plan, in the number and purchase price of shares subject to outstanding Share Purchase Rights granted under the Plan, and in the number of shares subject to Restricted Share Awards, Deferred Share Awards and any other outstanding Awards granted under the Plan as may be approved by the Committee, in its sole discretion; provided that the number of shares subject to any Award shall always be a whole number. (d) Annual Award Limit. No Participant may be granted Stock Options or Awards under the Plan with respect to an aggregate of more than 250,000 Shares (subject to adjustment as provided in Section 3(c) hereof) during any calendar year. SECTION 4. ELIGIBILITY. Officers and other key employees of the Company and its Subsidiaries and Affiliates, if any, who are responsible for or contribute to the management, growth or -4- 5 profitability of the business of the Company or its Subsidiaries or Affiliates, if any, are eligible to be granted Awards under the Plan. SECTION 5. STOCK OPTIONS. (a) Grant. Stock Options may be granted alone, in addition to or in tandem with other Awards granted under the Plan or cash awards made outside the Plan. The Committee shall determine the individuals to whom, and the time or times at which, grants of Stock Options will be made, the number of Shares purchasable under each Stock Option and the other terms and conditions of the Stock Option in addition to those set forth in Sections 5(b) and 5(c). Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. Stock Options granted under the Plan may be of two types which shall be indicated on their face: (i) Incentive Stock Options and (ii) Non- Qualified Stock Options. Subject to Section 5(c) hereof, the Committee shall have the authority to grant to any participant incentive Stock Options, Non-Qualified Stock Options or both types of Stock Options. (b) Terms and Conditions. Options granted under the Plan shall be evidenced by Option Agreements, shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable: (1) Option Price. The option price per share of Shares purchasable under a Non-Qualified Stock Option or an Incentive Stock Option shall be determined by the Committee at the time of grant and shall be not less than 100% of the Fair Market Value of the Shares at the date of grant (or, with respect to an incentive stock option, 110% of the Fair Market Value of the Shares at the date of grant in the case of a participant who at the date of grant owns Shares possessing more than ten percent of the total combined voting power of all classes of stock of the Company or its parent or Subsidiary corporations (as determined under Section 424(d), (e) and (f) of the Code)). (2) Option Term. The term of each Stock Option shall be fixed by the Committee and may not exceed ten years from the date the Option is granted (or, with respect to an Incentive Stock Options, five years in the case of a participant who at the date of grant owns Shares possessing more than ten percent of the total combined voting power of all classes of stock of the Company or its parent or subsidiary corporations (as determined under Section 424(d), (e) and (f) of the Code)). (3) Exercise. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the -5- 6 Committee at or after grant; provided, however, that, except as provided in Section 5(b)(6) and Section 11, unless otherwise determined by the Committee at or after grant, no Stock Option shall be exercisable prior to six months and one day following the date of grant. If any Stock Option is exercisable only in installments or only after specified exercise dates, the Committee may waive, in whole on in part, such installment exercise provisions, and may accelerate any exercise date or dates, at any time at or after grant based on such factors as the Committee shall determine, in its sole discretion. (4) Method of Exercise. Subject to any installment exercise provisions that apply with respect to such Stock Option, and the six month and one day holding period set forth in Section 5(b)(3), Stock Options may be exercised in whole or in part, at any time during the option period, by giving to the Company written notice of exercise specifying the number of Shares on the date the option is exercised. Such notice shall be accompanied by payment in full of the option price of the Shares for which the Option is exercised, in cash or Shares or by check or such other instrument as the Committee may accept. The value of each such Share surrendered or withheld shall be 100% of the Fair Market Value of the Shares on the date the option is exercised. No Shares shall be issued pursuant to an exercise of an Option until full payment has been made. A participant shall not have rights to dividends or any other rights of a shareholder with respect to any Shares subject to an Option unless and until the participant has given written notice of exercise, has paid in full for such Shares, has given, if requested, the representation described in Section 14(a) and such Shares have been issued to him. (5) Non-Transferability of Options. No Stock Option shall be transferable by the participant other than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the participant's lifetime, only by the Participant or, subject to Sections 5(b)(3) and 5(c), by the participant's authorized legal representative if the participant is unable to exercise an option as a result of the participant's Disability; provided, however, that if so provided in the instrument evidencing the Option, the Committee may permit any optionee to transfer the Option during his lifetime to one or more members of his family, or to one or more trusts for the benefit of one or more members of his family, provided that no consideration is paid for the transfer and that such transfer would not result in the loss of any exemption under Rule 16b-3 for any Option that the Committee does not permit to be so transferred. The transferee of an Option shall be subject to all restrictions, terms, and conditions applicable to the Option prior to its transfer, except that the Option shall not be further transferable inter vivos by the -6- 7 transferee. The Committee may impose on any transferable Option and on the Common Shares to be issued upon the exercise of the Option such limitations and conditions as the Committee deems appropriate. (6) Termination by Death. Subject to Section 5(c), if any participant's employment by the Company or any Subsidiary or Affiliate terminates by reason of death, any Stock Option held by such Participant may thereafter be exercised, to the extent such Option was exercisable at the time of death or would have become exercisable within one year from the time of death had the participant continued to fulfill all conditions of the Option during such period (or on such accelerated basis as the Committee may determine at or after grant), by the estate of the participant (acting through its fiduciary), for a period of one year (or such other period as the Committee may specify at or grant) from the date of such death. The balance of the Stock Option shall be forfeited. (7) Termination by Reason of Disability. Subject to Sections 5(b)(3) and 5(c), if a participant's employment by the Company or any Subsidiary or Affiliate terminates by reason of Disability, any Stock Option held by such participant may hereafter be exercised, to the extent such Option was exercisable at the time of termination or would have become exercisable within one year from the time of termination had the participant continued to fulfill all conditions of the Option during such period (or on such accelerated basis as the Committee may determine at or after grant), by the participant or by the participant's duly authorized legal representative if the participant is unable to exercise the Option as a result of the participant's Disability, for a period of one year (or such other period as the Committee may specify at or after grant), from the date of such termination of employment; provided, however, that in no event may any such Option be exercised prior to six months and one day from the date of grant; and provided, further, that if the participant dies within such one-year period (or such other period as the Committee shall specify at or after grant), any unexercised Stock Option held by such participant shall thereafter be exercisable by the estate of the participant (acting though its fiduciary) to the same extent to which it was exercisable at the time of death for a period of one year from the date of such termination of employment. The balance of the Stock Option shall be forfeited. (8) Other Termination. Unless otherwise determined by the Committee at or after the time of granting any Stock Option, if a participant's employment by the Company or any Subsidiary or Affiliate is terminated for any reason other than death or Disability, all Stock Options held by such participant shall thereupon terminate 90 days after the date of such termination. -7- 8 (c) Incentive Stock Options. Notwithstanding Sections 5(b)(6) and (7), an Incentive Stock Option shall be exercisable by (i) a participant's authorized legal representative (if the participant is unable to exercise the Incentive Stock Option as a result of the participant's Disability) only if, and to the extent, permitted by Section 422 of the Code and Section 16 of the Exchange Act and the rules and regulations promulgated thereunder and (ii) by the participant's estate, in the case of death, or authorized legal representative, in the case of Disability, no later than 10 years from the date the Incentive Stock Option was granted (in addition to any other restrictions or limitations which may apply). Anything in the Plan to the contrary notwithstanding, no term or provision of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of the participants affected, to disqualify any Incentive Stock Option under such Section 422 or any successor section thereto. (d) Buyout Provisions. The Committee may at any time buy out for a payment in cash, Shares, Deferred Shares or Restricted Shares an option previously granted, based on such terms and conditions as the Committee shall establish and agree upon with the participant, provided that no such transaction involving a Section 16 participant shall be structured or effected in a manner that would violate, or result in any liability on the part of the participant under, Section 16 of the Exchange Act or the rules and regulations promulgated thereunder. SECTION 6. RESTRICTED SHARES. (a) Grant. Restricted Shares may be issued alone, in addition to or in tandem with other Awards under the Plan or cash awards made outside of the Plan. The Committee shall determine the individuals to whom, and the time or times at which, grants of Restricted Shares will be made, the number of Restricted Shares to be awarded to each Participant, the price (if any) to be paid by the participant (subject to Section 6(b)), the date or dates upon which Restricted Share Awards will vest and the period or periods within which such Restricted Share Awards may be subject to forfeiture, and the other terms and conditions of such Awards in addition to those set forth in Section 6(b). The Committee may condition the grant of Restricted Shares upon the attainment of specified performance goals or such other factors as the Committee may determine in its sole discretion. (b) Terms and Conditions. Restricted Shares awarded under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall deem desirable. A Participant who receives a Restricted Share Award shall not have any rights with respect to such Award, unless and until such -8- 9 participant has executed an agreement evidencing the Award in the form approved from time to time by the Committee and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the applicable terms and conditions of such Award. (1) The purchase price (if any) for Restricted Shares shall be determined by the Committee at the time of grant. (2) Awards of Restricted Shares must be accepted by executing a Restricted Share Award agreement and paying any price required under Section 6(b)(1). (3) Each participant receiving a Restricted Share Award shall be issued a stock certificate in respect of such Restricted Shares. Such certificate shall be registered in the name of such participant, and shall bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Award. (4) The Committee shall require that the stock certificates evidencing such Restricted Shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Shares Award the Participant shall have delivered to the Company a stock power, endorsed in blank, relating to the Shares covered by such Award. (5) Subject to the provisions of this Plan and the Restricted Share Award agreement, during a period set by the committee commencing with the date of such Award (the "Restriction Period"), the participant shall not be permitted to sell, transfer, pledge, assign or otherwise encumber the Restricted Shares awarded under the Plan. The Restriction Period shall not be less than [three years] in duration ("Minimum Restricted Period"). Subject to these limitations and the Minimum Restriction Period requirement, the Committee, in its sole discretion, may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions, in whole or in part, based on service, performance or such other factors and criteria as the Committee may determine, in its sole discretion. (6) Except as provided in this Section 6(b)(6), Section 6(b)(5) and Section 6(b)(7) the participant shall have, with respect to the Restricted Shares awarded, all of the rights of a shareholder of the Company, including the right to vote the Shares, and the right to receive any dividends. The Committee, in its sole discretion, as determined at the time of award, may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested, subject to Section 14(f), in additional Restricted Shares to the extent Shares are available under Section 3, or otherwise reinvested. -9- 10 Unless the Committee or Board determines otherwise, share dividends issued with respect to Restricted Shares shall be treated as additional Restricted Shares that are subject to the same restrictions and other terms and conditions that apply to the Shares with respect to which such dividends are issued. (7) No Restricted Shares shall be transferable by a participant other than by will or by the laws of descent and distribution. (8) If a participant's employment by the Company or any Subsidiary or Affiliate terminates by reason of death, any Restricted Shares held by such participant shall thereupon vest and all restrictions thereon shall lapse, to the extent such Restricted Shares would have become vested or no longer subject to restriction within one year from the time of death had the participant continued to fulfill all of the conditions of the Restricted Share Award during such period (or on such accelerated basis as the Committee may determine at or after grant). The balance of the Restricted Shares shall be forfeited. (9) If a participant's employment by the Company or any Subsidiary or Affiliate terminates by reason of Disability, any Restricted Shares held by such participant shall thereupon vest and all restrictions thereon shall lapse, to the extent such Restricted Shares would have become vested or no longer subject to restriction within one year from the time of termination had the participant continued to fulfill all of the conditions of the Restricted Share Award during such period (or on such accelerated basis as the Committee may determine at or after grant), subject in all cases to the Minimum Restriction Period requirement. The balance of the Restricted Shares shall be forfeited. (10) Unless otherwise determined by the Committee at or after the time of granting any Restricted Shares, if a participant's employment by the Company or any Subsidiary or Affiliate terminates for any reason other than death or Disability, the Restricted Shares held by such participant which are unvested or subject to restriction at the time of termination shall thereupon be forfeited. (c) Minimum Value Provisions. In order to better ensure that award payments actually reflect the performance of the Company and service of the participant, the Committee may provide in its sole discretion for a tandem performance-based or other award designed to guarantee a minimum value, payable in cash or Shares to the recipient of a Restricted Share Award, subject to such performance, future service, deferral and other terms and conditions as may be specified by the Committee. -10- 11 SECTION 7. DEFERRED SHARES. (a) Grant. Deferred Shares may be awarded alone, in addition to or in tandem other Awards granted under the Plan or cash awards made outside the Plan. The Committee shall determine the individuals to whom, and the time or times at which, Deferred Shares shall be awarded, the number of Deferred Shares to be awarded to any participant, the duration of the period (the "Deferral Period") during which, and the conditions under which, receipt of the Shares will be deferred, and the other terms and conditions of the Award in addition to those set forth in Section 7(b). The Committee may condition the grant of Deferred Shares upon the attainment of specified performance goals or such other factors as the Committee shall determine, in its sole discretion. (b) Terms and Conditions. Deferred Share Awards shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee considers desirable: (1) The purchase price for Deferred Shares shall be determined at the time of grant by the Committee. Subject to the provisions of the Plan and the Award agreement referred to in Section 7(b)(9), Deferred Share Awards may not be sold, assigned, transferred, pledged or otherwise encumbered during the Deferral Period. At the expiration of the Deferral Period (or the Elective Deferral Period referred to in Section 7(b)(8), when applicable), stock certificates shall be delivered to the participant, or his legal representative, for the shares covered by the Deferred Share Award. The Deferral period applicable to any Deferred Share Award shall not be less than six months and one day ("Minimum Deferral Period"). (2) Unless otherwise determined by the Committee at grant, amounts equal to any dividends declared during the Deferral Period with respect to the number of Shares covered by a Deferred Share Award will be paid to the participant currently, or deferred and deemed to be reinvested in additional Deferred Shares, or otherwise reinvested, all as determined at or after the time of the Award by the Committee, in its sole discretion. (3) No Deferred Shares shall be transferable by a participant other than by will or by the laws of descent and distribution. (4) If a participant's employment by the Company or any Subsidiary or Affiliate terminates by reason of death, any Deferred Shares awarded to by such participant shall thereafter vest and all restrictions thereon shall lapse, to the extent such Deferred Shares would have become vested or no longer subject to restriction within one year from the time of death had the participant -11- 12 continued to fulfill all of the conditions of the Deferred Share Award during such period (or on such accelerated basis as the Committee may determine at or after grant). The balance of the Deferred Shares shall be forfeited. (5) If a participants employment by the Company or any Subsidiary or Affiliate terminates by reason of Disability, any Deferred Shares awarded to such participant shall thereafter vest and all restrictions thereon shall lapse, to the extent such Deferred Shares would have become vested or no longer subject to restriction within one year from the time of termination had the participant continued to fulfill all of the conditions of the Deferred Shares Award during such period (or on such accelerated basis as the Committee may determined at or after grant), subject in all cases to the Minimum Deferral Period requirement. The balance of the Deferred Shares shall be forfeited. (6) Unless otherwise determined by the Committee at or after the time of granting any Deferred Share Award, if a participant's employment by the Company or any Subsidiary or Affiliate terminates for any reason other than death or Disability, all Deferred Shares held by such participant which are unvested or subject to restriction shall thereupon be forfeited. (7) Based on service, performance or such other factors or criteria as the Committee may determine, the Committee may, at or after grant, accelerate the vesting of all or any part of any Deferred Share Award or waive a portion of the Deferral Period for all or any part of such Award, subject in all cases to the Minimum Deferral Period requirement. (8) A participant may elect to further defer receipt of a Deferred Share Award (or an installment of an Award) for a specified period or until a specified event (the "Elective Deferral Period"), subject in each case to the Committee's approval and the terms of this Section 7 and such other terms as are determined by the Committee, all in its sole discretion. Subject to any exceptions approved by the Committee, such election must be made at least 12 months prior to completion of the Deferral Period for such Deferred Share Award (or such installment). (9) Each such Award shall be confirmed by, and subject to the terms of, a Deferred Share Award agreement evidencing the Award in the form approved from time to time by the Committee. (c) Minimum Value Provisions. In order to better ensure that award payments actually reflect the performance of the Company and service of the Participant, the Committee may provide, in its sole discretion, for a tandem performance-based or other Award designed to guarantee a minimum value, payable in cash or Shares to the -12- 13 recipient of a Deferred Share Award, subject to such performance, future service, deferral and other terms and conditions as may be specified by the Committee. SECTION 8. SHARE PURCHASE RIGHTS. (a) Grant. Share Purchase Rights may be granted alone, in addition to or in tandem with other Awards granted under the Plan or cash awards made outside the Plan. The committee shall determine the individuals to whom, and the time or times at which, grants of Share Purchase Rights will be made, the number of Shares which may be purchased pursuant to Share Purchase Rights, and the other terms and conditions of the Share Purchase Rights in addition to those set forth in Section 8(b). The Shares subject to the Share Purchase Rights may be purchased at the Fair Market Value of such Shares on the date of grant; Subject to Section 8(b) hereof, the Committee may also impose such deferral, forfeiture or other terms and conditions as it shall determine, in its sole discretion, on such Share Purchase Rights or the exercise thereof. Each Share Purchase Right Award shall be confirmed by, and be subject to the terms of, a Share Purchase Rights Agreement which shall be in form approved by the Committee. (b) Terms and Conditions. Share Purchase Rights may contain such additional terms and conditions not inconsistent with the terms of the Plan as the Committee shall deem desirable, and shall generally be exercisable for such period as shall be determined by the Committee. However, Share Purchase Rights granted to Section 16 participants shall not become exercisable earlier than six months and one day after the grant date. Share Purchase Rights shall not be transferable by a participant other than by will or by the laws of descent and distribution. SECTION 9. SHARE APPRECIATION RIGHTS. (a) Grant. Share Appreciation Rights may be granted in connection with all or any part of an Option, either concurrently with the grant of the Option or, if the Option is a Non-Qualified Stock Option, by an amendment to the Option at any time thereafter during the term of the Option. Share Appreciation Rights may be exercised in whole or in part at such times under such conditions as may be specified by the Committee in the participant's Option Agreement. (b) Terms and Conditions. The following terms and conditions will apply to all Share Appreciation Rights: (1) Share Appreciation Rights shall entitle the participant, upon exercise of all or any part of the Share Appreciation Rights, to surrender to -13- 14 the Company unexercised that portion of the underlying Option relating to the same number of Shares as is covered by the Share Appreciation Rights (or the portion of the Share Appreciation Rights so exercised) and to receive in exchange from the Company an amount (paid as provided in Section 9(b)(5)) equal to the excess of (x) the Fair Market Value, on the date of exercise, of the Shares covered by the surrendered portion of the underlying Option over (y) the exercise price of the Shares covered by the surrendered portion of the underlying Option. The Committee may limit the amount that the participant will be entitled to receive upon surrender of a Share Appreciation Right. (2) Upon the exercise of the Share Appreciation Right and surrender of the related portion of the underlying Option, the Option, to the extent surrendered, will not thereafter be exercisable. The underlying Option may provide that such Share Appreciation Rights will be payable solely in cash. The terms of the underlying Option shall provide a method by which an alternative fair market value of the Shares on the date of exercise shall be calculated based on one of the following: (x) the closing price of the Shares on the national exchange on which they are then traded on the business day immediately preceding the day of exercise; (y) the highest closing price of the Shares on the national exchange on which they have been traded, during the 90 days immediately preceding the Change in Control; or (z) the greater of (x) and (y). (3) In addition to any further conditions upon exercise that may be imposed by the Committee, the Share Appreciation Rights shall be exercisable only to the extent that the related Option is exercisable, except that in no event will a Share Appreciation Right held by a Section 16 Participant be exercisable within the first six months after it is awarded even though the related Option is or becomes exercisable, and each Share Appreciation Right will expire no later than the date on which the related Option expires. A Share Appreciation Right may only be exercised at a time when the Fair Market Value of the Shares covered by the Share Appreciation Right exceeds the exercise price of the Shares covered by the underlying Option. No Share Appreciation Right held by a Section 16 Participant shall be exercisable by its terms within the first six months after it is granted, and a Section 16 Participant may only exercise a Share Appreciation Right during a period beginning on the third business day and ending on the twelfth business day following the release for publication of quarterly or annual summary statements of the Company's sales and earnings. (4) Share Appreciation Rights may be exercised by the participant's giving written notice of the exercise to the Company, stating the number of Share Appreciation Rights he has elected to exercise and surrendering the portion of the underlying Option relating to the same number of Shares as the number of Share Appreciation Rights elected to be exercised. -14- 15 (5) The manner in which the Company's obligation arising upon the exercise of the Share Appreciation Right will be paid will be determined by the Committee and shall be set forth in the participant's Option Agreement. The Committee may provide for payment in Shares or cash, or a fixed combination of Shares or cash, or the Committee may reserve the right to determine the manner of payment at the time the Share Appreciation Right is exercised. Shares issued upon the exercise of a Share Appreciation Right will be valued at their Fair Market Value on the date of exercise. SECTION 10. OTHER SHARE-BASED AWARDS. (a) Grant. Other Awards of Shares and other Awards that are valued, in whole or in part, by reference to, or are otherwise based on, Shares, including, without limitation, performance shares, convertible preferred shares, convertible debentures, exchangeable securities and Share Awards or options valued by reference to Book Value or subsidiary performance, may be granted alone, in addition to or in tandem with other Awards granted under the Plan or cash awards made outside of the Plan. At the time the Shares or Other Share-Based Award is granted, the Committee shall determine the individuals to whom and the time or times at which such Shares or other Share-Based Awards shall be awarded, the number of Shares to be used in computing an Award or which are to be awarded pursuant to such Awards, the consideration, if any, to be paid for such Shares or other Share-Based Awards, and all other terms and conditions of the Awards in addition to those set forth in Section 10(b). The provisions of other Share-Based Awards need not be the same with respect to each participant. (b) Terms and Conditions. Other Share-Based Awards shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable. (1) Subject to the provisions of this Plan and the Award agreement referred to in Section 10(b)(5) below, Shares awarded or subject to Awards made under this Section 10 may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on which the Shares are issued, or, if later, the date on which any applicable restriction, performance, holding or deferral period or requirement is satisfied or lapses. All Shares or Other Share-Based Awards granted under this Section 10 shall be subject to a minimum holding period (including any applicable restriction, performance -15- 16 and/or deferral periods) of six months and one day ("Minimum Holding Period"). (2) Subject to the provisions of this Plan and the Award agreement and unless otherwise determined by the Committee at the time of grant, the recipient of an Other Share-Based Award shall be entitled to receive, currently or on a deferred basis, interest or dividends or interest or dividend equivalents with respect to the number of Shares covered by the Award, as determined at the time of the Award by the Committee, in its sole discretion, and the Committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional Shares or otherwise reinvested. (3) Subject to the Minimum Holding Period, any Other Share-Based Award and any Shares covered by any such Award shall vest or be forfeited to the extent, at the times and subject to the conditions, if any, provided in the Award agreement, as determined by the Committee, in its sole discretion. (4) In the event of the participant's Disability or death, or in cases of special circumstances, the Committee may, in its sole discretion, waive, in whole or in part, any or all of the remaining limitations imposed hereunder or under any related Award agreement with respect to any part of all of any Award under this Section 10, provided that the Minimum Holding Period requirement may not be waived, except in case of a participant's death. (5) Each Award shall be confirmed by, and subject to the terms of, an agreement or other instrument evidencing the Award in the form approved from time to time by the Committee, the Company and the participant. (6) Shares (including securities convertible into Shares) issued on a bonus basis under this Section 10 shall be issued for no cash consideration. Shares (including securities convertible into Shares) purchased pursuant to a purchase right awarded under this Section 10 shall bear a price of at least 85% of the Fair Market Value of the Shares on the date of grant. The purchase price of such Shares, and of any Other Share-Based Award granted hereunder, or the formula by which such price is to be determined, shall be fixed by the Committee at the time of grant. (7) In the event that any "derivative security", as defined in Rule 16a-1(c) (or any successor thereof) promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act, is awarded pursuant to this Section 10 to any Section 16 participant, such derivative security shall not be transferrable other than by will or by the laws of descent and distribution. -16- 17 SECTION 11. CHANGE IN CONTROL PROVISION. (a) Impact of Event. At any time during the 365 days commencing with the date of either (1) a "Change in Control" as defined in Section 11(b) or (2) a "Potential Change in Control" as defined in Section 11(c), a majority of the "Continuing Directors" as defined in Section 11(e) (or one of the two Continuing Directors if only two Continuing Directors are then serving on the Board of Directors or the sole Continuing Director if only one Continuing Director is then serving on the Board of Directors) may cause the following provisions to take effect as stated and as of the date set forth in a Written Action (the "Written Action") adopted to that effect (that date, the "Accelerated Vesting Date") and if there are no Continuing Directors, the following provisions will automatically take effect: (1) Any Stock Options awarded under the Plan not previously exercisable and vested shall become fully exercisable and vested; (2) Any Share Appreciation Rights shall become immediately exercisable; (3) The restrictions applicable to any Restricted Shares, Deferred Shares Awards, Share Purchase Rights Awards and Other Share Based Awards shall lapse and such shares and awards shall be deemed fully vested; and (4) The value of all outstanding Awards, in each case to the extent vested, shall, unless otherwise determined by the Committee in its sole discretion at or after grant but prior to any Change in Control or Potential Change in Control, be paid to the participant in cash in exchange for the surrender of those Awards on the basis of the "Change in Control Price" as defined in Section 11(d) as of the Accelerated Vesting Date; but the provisions of Sections 11(a)(1) through (3) shall not apply with respect to Awards granted to any Section 16 Participant which have been held by such participant for less than six months and one day as of the Accelerated Vesting Date. (b) Definition of Change in Control. For purposes of Section 11(a), a "Change in Control" means the occurrence of any of the following: (i) the Board or shareholders of the Company approve a consolidation or merger that results in the shareholders of the Company immediately prior to the transaction giving rise to the consolidation or merger owning less than 50% of the total combined voting power of all classes of stock entitled to vote of the surviving entity immediately after the consummation of the transaction giving rise to the merger or consolidation; (ii) the Board or shareholders of the Company approve the sale of substantially all of the assets of the Company or the liquidation or dissolution of the Company; (iii) any person or other entity (other than the Company or a Subsidiary or any Company -17- 18 employee benefit plan (including any trustee of any such plan acting in its capacity as trustee)) purchases any Shares (or securities convertible into Shares) pursuant to a tender or exchange offer without the prior consent of the Board of Directors, or becomes the beneficial owner of securities of the Company representing 25% or more of the voting power of the Company's outstanding securities; or (iv) during any two-year period, individuals who at the beginning of such period constitute the entire Board of Directors cease to constitute a majority of the Board of Directors, unless the election or the nomination for election of each new director is approved by at least two-thirds of the directors then still in office who were directors at the beginning of that period. (c) Definition of Potential Change in Control. For purposes of Section 11(a), a "Potential Change in Control" means the happening of any one of the following: (1) The approval by the shareholders of the Company of an agreement by the Company, the consummation of which would result in a Change in Control of the Company as defined in Section 11(b); or (2) The acquisition of beneficial ownership, directly or indirectly, by any entity, person or group (other than the Company or a Subsidiary or any Company employee benefit plan (including any trustee of any such plan acting in its capacity as trustee)) of securities of the Company representing 15% or more of the combined voting power of the Company's outstanding securities and the adoption by the Board of a resolution to the effect that a Potential Change in Control of the Company has occurred for purposes of this Plan. (d) Change in Control Price. For purposes of this Section 11, "Change in Control Price", means the greater of: (a) the highest price per share paid in any transaction reported on the New York Stock Exchange Composite Index (or, if the Shares are not then traded on the New York Stock Exchange, the highest price paid as reported for any national exchange on which the Shares are then traded) or paid or offered in any bona fide transaction related to a Change in Control or Potential Change in Control of the Company, at any time during the 60-day period immediately preceding the occurrence of the Change in Control (or, when applicable, the occurrence of the Potential Change in Control event), and (b) the highest price per share paid in any transaction reported on the New York Stock Exchange Composite Index (or, if the Shares are not then traded on the New York Stock Exchange, the highest price paid as reported for any national exchange on which the Shares are then traded), at any time during the 60-day period immediately preceding the date on which the Continuing Directors execute a Written Action relating to that Change in Control or Potential Change in Control, in each case as determined by the Committee. -18- 19 (e) Definition of Continuing Director. For purposes of this Section 11, a "Continuing Director" means an individual who was a member of the Board of Directors immediately prior to the date of a Change in Control or a Potential Change in Control and is a member of the Board of Directors at the time a Written Action relating to that Change in Control or Potential Change in Control is taken. SECTION 12. AMENDMENTS AND TERMINATION. The Board may at any time, in its sole discretion, amend, alter or discontinue the Plan, but no such amendment, alteration or discontinuation shall be made which would impair the rights of a participant under an Award theretofore granted, without the participant's consent. The Company shall submit to the shareholders of the Company for their approval any amendments to the Plan which are required by Section 16 of the Exchange Act or the rules and regulations thereunder, or Section 162(m) of the Code, to be approved by the shareholders. The Committee may at any time, in its sole discretion, amend the terms of any Award, but no such amendment shall be made which would impair the rights of a participant under an Award theretofore granted, without the participant's consent; nor shall any such amendment be made which would make the applicable exemptions provided by Rule 16b-3 under the Exchange Act unavailable to any Section 16 participant holding the Award without the participant's consent. Subject to the above provisions, the Board shall have all necessary authority to amend the Plan to make into account changes in applicable securities and tax laws and accounting rules, as well as other developments. SECTION 13. UNFUNDED STATUS OF PLAN. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a participant by the Company, nothing contained herein shall give any such participant any rights that are greater than those of a general creditor of the Company. SECTION 14. GENERAL PROVISIONS. (a) The Committee may require each Participant acquiring Shares pursuant to an Award under the Plan to represent to and agree with the Company in writing that the participant is acquiring the Shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All Shares or other securities delivered under the Plan shall be subject to such stop-transfer orders and other restrictions as the Committee may deem advisable under -19- 20 the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares is then listed, and any applicable federal or state securities laws, and the Committee may cause a legend or legends to be put on any certificates for such shares to make appropriate reference to such restrictions. (b) Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. (c) Neither the adoption of the Plan, nor its operation, nor any document describing, implementing or referring to the Plan, or any part thereof, shall confer upon any participant under the Plan any right to continue in the employ, or as a director, of the Company or any Subsidiary or Affiliate, or shall in any way affect the right and power of the Company or any Subsidiary or Affiliate to terminate the employment, or service as a director, of any participant under the Plan at any time with or without assigning a reason therefor, to the same extent as the Company or any Subsidiary or Affiliate might have done if the Plan had not been adopted. (d) For purposes of this Plan, a transfer of a participant between the Company and its Subsidiaries and Affiliates shall not be deemed a termination of employment. (e) No later than the date as of which an amount first becomes includable in the gross income of the participant for federal income tax purposes with respect to any award under the Plan, the Participant shall pay to the Company, or make arrangements satisfactory to the Committee regarding the payment, of, any federal, state or local taxes or other items of any kind required by law to be withheld with respect to such amount. Subject to the following sentence, unless otherwise determined by the Committee, withholding obligations may be settled with Shares, including unrestricted Shares previously owned by the participant or Shares that are part of the Award that gives rise to the withholding requirement. Notwithstanding the foregoing, any election by a Section 16 participant to settle such tax withholding obligation with Shares that is part of such Award shall be subject to approval by the Committee, in its sole discretion. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company and its Subsidiaries and Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. (f) The actual or deemed reinvestment of dividends or dividend equivalents in additional Restricted Shares (or in Deferred Shares or other types of Awards) at the time of any dividend payment shall only be permissible if sufficient Shares are -20- 21 available under Section 3 for such reinvestment (taking into account then outstanding Stock Options, Share Purchase Rights and other Plan Awards). (g) The Plan, all Awards made and actions taken thereunder and any agreements relating thereto shall be governed by and construed in accordance with the laws of the State of Ohio. (h) All agreements entered into with participants pursuant to the Plan shall be subject to the Plan. (i) The provisions of Awards need not be the same with respect to each participant. SECTION 15. SHAREHOLDER APPROVAL; EFFECTIVE DATE OF PLAN. The Plan was adopted by the Board on June 18, 1996 and is subject to approval by the holders of the Company's outstanding Shares, in accordance with applicable law. The Plan will become effective on the date of such approval. SECTION 16. TERM OF PLAN. No Award shall be granted pursuant to the Plan on or after July 31, 2006, but Awards granted prior to such date may extend beyond that date. -21- EX-10.4 8 EXHIBIT 10.4 1 EXHIBIT 10.4 DIRECTORS' DEFERRED COMPENSATION PLAN BOYKIN LODGING COMPANY (the "Company") desires to establish a Directors' Deferred Compensation Plan (the "Plan") to assist it in attracting and retaining persons of competence and stature to serve as outside directors by giving them the option of deferring receipt of the fees payable to them by the Company for their services as directors. Therefore, the Company hereby adopts the Plan as hereinafter set forth: 1. EFFECTIVE DATE. The Plan shall apply to all elections to defer made after its adoption and shall be applicable to all director's fees payable with respect to periods commencing with the Company's fiscal quarter which begins October 1, 1996. 2. PARTICIPATION. Each director of the Company (a) who is duly elected to the Company's Board of Directors and (b) who receives fees for services as a director, may elect to defer receipt of fees otherwise payable to him, as provided for in the Plan. Each such director who elects to defer fees shall be a Participant in the Plan. 3. ADMINISTRATION. The Company's Board of Directors appoints ____________________________________________________, directors and/or officers of the Company who are not eligible to become Participants, to act as the Administrators of the Plan ("Administrators"). They shall serve at the pleasure of the Board of Directors and shall administer, construe and interpret the Plan. The Administrators shall not be liable for any act done or determination made in good faith. The Board of Directors shall have the power to designate additional or replacement Administrators at its discretion. 4. DEFERRALS. (a) DEFERRAL ELECTION. Prior to January 1 of each year, any eligible director may file with the Company and/or the Administrators of the Plan, an election 2 in writing to participate in the Plan for that year or for that year and succeeding years. Each director who first becomes eligible to participate after the date of the adoption of this Plan may make an election for the portion of the year in which he first became eligible with respect to fees for services to be rendered after the date of such election. When a deferral election is filed, no fees will be paid for services so designated for that year (or portion thereof) or for that year and for succeeding years. If an election has been filed to participate in the Plan for succeeding years and a Participant wishes to discontinue deferral, an election to terminate participation in the Plan for any year must be filed prior to January 1 of that year. (b) ACCOUNTING. Appropriate records shall be maintained by the Company ("Deferral Accounts") which shall list and reflect each Participant's credits and valuations. The Company shall credit to each Participant's Deferral Account an amount equivalent to the fees that would have been paid to him if he had not elected to participate in the Plan. The credit shall be made on the date on which the fee would have been paid absent a deferral election. No funds shall be segregated into the Deferral Account of Participants; said accounts shall represent a general unsecured obligation of the Company. (c) VALUATION. Until the first distribution to a Participant, amounts credited to a Deferral Account of such Participant shall be increased or decreased as measured by the market value of the Company's Common Shares plus the value of dividends or other distributions on the Company's Common Shares. Each amount credited to a Deferral Account shall be assigned a number of Share Units (including fractions of a Share) determined by dividing the amount credited to the Deferral Account, -2- 3 whether in lieu of payment of fees for service as a director or as a dividend or other distribution attributable to such Share Units, by the fair market value of a share of the Company's Common Shares on the date of credit. Fair market value shall be the mean between the high and low selling price of a share of the Company's Common Shares on the New York Stock Exchange on the concerned date or, if no sales occurred on such date, on the most recent preceding date on which sales occurred. Each Share Unit shall have the value of a Common Share of the Company. The number of Share Units shall be adjusted to reflect stock splits, stock dividends or other capital adjustments effected without receipt of consideration by the Company. 5. DISTRIBUTION. A Participant shall elect in writing, at the time he makes each deferral election under subparagraph 4(a), the date on which distribution of the credits to his Deferral Account to which the deferral election relates shall commence and the method of distribution, as permitted hereunder. Payment shall commence not earlier than the January 1 following the year in which the Participant attains age 55, and not later than the January 1 following the year in which the Participant attains age 72. Commencing immediately prior to the first distribution to a Participant and continuing thereafter, amounts credited to the Deferral Account of such Participant shall be credited with interest, compounded quarterly, calculated at a rate per annum equal to the prime rate of interest as published in the Wall Street Journal in effect on the first day of each fiscal quarter of the Company. Payment may be made in one lump sum, or five or ten equal annual installments of the Deferral Account balance allocated to such installment payments determined as of the December 31 immediately preceding commencement of distribution, with each payment accompanied by any interest credited during the period preceding payment of the installment. The time of and method of distribution of -3- 4 benefits may vary with each separate election, but each election shall be irrevocable. The Deferral Accounts do not represent rights to acquire the Company's Common Shares; payment shall only be made in cash. 6. DEATH OR DISABILITY. (a) In the event a Participant's service is terminated by reason of death or disability prior to the distribution of any portion of his benefits, the Company shall, within ninety (90) days of the date of service termination, commence distribution of benefits to the Participant (or to the beneficiary or beneficiaries in the event of death). Distribution shall be made in accordance with the method of distribution elected by the Participant pursuant to paragraph 5 hereof. In the event a Participant's death or disability occurs after distribution of benefits hereunder has begun, the Company shall continue to make distributions to the Participant (or to the beneficiary or beneficiaries in the event of death) in accordance with the methods of distribution elected by the Participant pursuant to paragraph 5 hereof. (b) Each Participant shall have the right to designate one or more beneficiaries to receive distributions in the event of Participant's death by filing with the Company a beneficiary designation on a form provided. The designated beneficiary or beneficiaries may be changed by a Participant at any time prior to his death by the delivery to the Company of a new beneficiary designation form. If no beneficiary shall have been designated, or if no designated beneficiary shall survive the Participant, distributions pursuant to this provision shall be made to the Participant's estate. 7. ASSIGNMENT AND ALIENATION OF BENEFITS. The right of each Participant to any account, benefit or payment hereunder shall not, to the extent permitted by law, be subject in -4- 5 any manner to attachment or other legal process for the debts of such Participant; and no account, benefit or payment shall be subject to anticipation, alienation, sale, transfer, assignment or encumbrance. 8. AMENDMENT OR TERMINATION. The Board of Directors of the Company may amend or terminate this Plan at any time and from time to time. Any amendment or termination of this Plan shall not affect the rights of a Participant accrued prior thereto without his written consent. 9. TAXES. The Company shall not be responsible for the tax consequences under federal, state or local law of any election made by any Participant under the Plan. All payments under the Plan shall be subject to withholding and reporting requirements to the extent permitted by applicable law. 10. APPLICABLE LAW. This Plan shall be interpreted under the laws of the State of Ohio. IN WITNESS WHEREOF, the Company has caused this Plan to be executed by its President this ____ day of _____________, 1996. BOYKIN LODGING COMPANY By: ____________________________ Robert W. Boykin, President -5- EX-10.8 9 EXHIBIT 10.8 1 EXHIBIT 10.8 FORM PERCENTAGE LEASE AGREEMENT DATED AS OF _______________, 1996 BETWEEN BOYKIN HOTEL PROPERTIES, L.P. AS LESSOR AND BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AS LESSEE 2 TABLE OF CONTENTS Page PERCENTAGE LEASE AGREEMENT........................................... 1 ARTICLE I............................................................ 1 1.1 Leased Property.................................... 1 1.2 Term............................................... 2 ARTICLE II........................................................... 2 ARTICLE III..........................................................13 3.1 Rent...............................................13 3.2 Payment of Percentage Rent.........................15 3.3 Confirmation of Percentage Rent....................16 3.4 Additional Charges.................................17 3.5 Conversion of Property.............................18 3.6 Annual Revenue Projections.........................18 3.7 Annual Capital Expenditures Budget.................18 3.8 Capital Expenditure Fund...........................19 3.9 Application of Capital Expenditure Fund............19 ARTICLE IV...........................................................22 4.1 Payment of Taxes and Impositions...................22 4.2 Utility Charges....................................23 4.3 Insurance Premiums.................................23 ARTICLE V............................................................24 No Termination, Abatement, Etc..............................24 ARTICLE VI...........................................................24 6.1 Ownership of the Leased Property...................24 6.2 Lessee's Personal Property.........................24 6.3 Lessor's Lien......................................25 ARTICLE VII..........................................................25 7.1 Condition of the Leased Property...................25 7.2 Use of the Leased Property.........................26 7.3 Lessor to Grant Easements, Etc.....................28 7.4 Compliance with Ground Lease.......................28 ARTICLE VIII.........................................................29 8.1 Compliance with Legal, Insurance Requirements, Lessor's Insurance and Tax Obligations.............29 8.2 Legal Requirements Covenants.......................29 8.3 Environmental Covenants............................30 ARTICLE IX...........................................................32 9.1 Maintenance and Repair.............................32 9.2 Encroachments, Restrictions, Etc...................33 ARTICLE X............................................................34 10.1 Alterations...........................................34 10.2 Salvage...............................................34 10.3 Joint Use Agreements..................................34 ARTICLE XI...........................................................35 Liens ...................................................35 -i- 3 Page ---- ARTICLE XII............................................................ 35 Permitted Contests............................................ 35 ARTICLE XIII........................................................... 36 13.1 General Insurance Requirements.......................... 36 13.2 Full Replacement Cost................................... 38 13.3 Waiver of Subrogation................................... 38 13.4 Waiver of Coinsurance................................... 38 13.5 Form Satisfactory, Etc.................................. 39 13.6 Increase in Limits...................................... 39 13.7 Blanket Policy.......................................... 39 13.8 No Separate Insurance................................... 39 13.9 Reports of Insurance Claims............................. 40 13.10 Failure to Obtain Insurance............................ 40 ARTICLE XIV............................................................ 40 14.1 Insurance Proceeds...................................... 40 14.2 Reconstruction in the Event of Damage or Destruction Covered by Insurance........................ 41 14.3 Reconstruction in the Event of Damage or Destruction Not Covered by Insurance.................... 42 14.4 Lessee's Personal Property.............................. 42 14.5 Abatement of Rent....................................... 42 14.6 Damage Near End of Term................................. 42 14.7 Waiver.................................................. 42 ARTICLE XV............................................................. 42 15.1 Parties' Rights and Obligations......................... 42 15.2 Total Taking............................................ 43 15.3 Allocation of Award..................................... 43 15.4 Partial Taking.......................................... 43 15.5 Temporary Taking........................................ 44 ARTICLE XVI............................................................ 44 16.1 Events of Default....................................... 44 16.2 Remedies................................................ 46 16.3 Waiver.................................................. 49 16.4 Application of Funds.................................... 50 16.5 Surrender............................................... 50 16.6 Waiver.................................................. 50 ARTICLE XVII........................................................... 50 ARTICLE XVIII.......................................................... 51 ARTICLE XIX............................................................ 51 19.1 REIT Compliance......................................... 51 19.2 Sublease Lessee Limitation.............................. 52 19.3 Lessee Ownership Limitation............................. 52 19.4 Lessee Officer and Employee Limitation.................. 52 19.5 Payments to Affiliates of Lessee........................ 52 -ii- 4 Page ---- 19.6 Third-Party Management Activities..................... 53 ARTICLE XX............................................................... 53 Holding Over.................................................... 53 ARTICLE XXI.............................................................. 53 Risk of Loss.................................................... 53 ARTICLE XXII............................................................. 53 Indemnification................................................. 54 ARTICLE XXIII............................................................ 55 23.1 Subletting and Assignment................................. 55 23.2 Attornment................................................ 55 23.3 Management Agreement...................................... 55 ARTICLE XXIV............................................................. 56 24.1 Officers' Certificates; Financial Statements; Lessor's Estoppel Certificates and Covenants........... 56 24.2 Lessee's Financial Covenants.............................. 57 ARTICLE XXV.............................................................. 57 Books and Records; Lessor's Right to Inspect.................... 57 ARTICLE XXVI............................................................. 58 No Waiver....................................................... 58 ARTICLE XXVII............................................................ 58 Remedies Cumulative............................................. 58 ARTICLE XXVIII........................................................... 58 Acceptance of Surrender......................................... 58 ARTICLE XXIX............................................................. 58 No Merger of Title.............................................. 58 ARTICLE XXX.............................................................. 58 Conveyance by Lessor............................................ 59 ARTICLE XXXI............................................................. 59 Quiet Enjoyment................................................. 59 ARTICLE XXXII............................................................ 59 Notices ....................................................... 59 ARTICLE XXXIII........................................................... 60 33.1 Lessor May Grant Liens, Subordination..................... 60 33.2 Lessee's Right to Cure.................................... 62 33.3 Breach by Lessor.......................................... 62 33.4 Lessee's Cooperation...................................... 62 -iii- 5 Page ---- ARTICLE XXXIV................................................ 63 34.1 Miscellaneous................................. 63 34.2 Transition Procedures......................... 63 34.3 Change of Franchise........................... 64 34.4 Waiver of Presentment, Etc.................... 64 ARTICLE XXXV................................................. 64 Memorandum of Lease................................. 64 ARTICLE XXXVI................................................ 65 Lessor's Option to Purchase Assets of Lessee........ 65 ARTICLE XXXVII............................................... 65 Lessor's Option to Terminate Lease.................. 65 ARTICLE XXXVIII.............................................. 66 Compliance with Franchise Agreement................. 66 ARTICLE XXXIX................................................ 66 Lessor's Limitation on Liability.................... 66 [ARTICLE XXXX. . . . . . . . . . . . . . . . . . . . . . . . 66 Condition] EXHIBIT A Description of the Land [and the Ground Lease] EXHIBIT B All Space Leases EXHIBIT C Initial FF&E EXHIBIT D Description of Facility EXHIBIT E Capital Expenditures EXHIBIT F Exceptions to Ownership/Ownership Interests EXHIBIT G Other Hotels & Operations -iv- 6 PERCENTAGE LEASE AGREEMENT -------------------------- THIS PERCENTAGE LEASE AGREEMENT (this "Lease"), made as of the ____day of ______________, 1996, by and between Boykin Hotel Properties, L.P., an Ohio limited partnership ("Lessor"), and Boykin Management Company Limited Liability Company, an Ohio limited liability company ("Lessee"), provides as follows: W I T N E S S E T H: -------------------- Lessor has acquired or will acquire the "Leased Property" (as hereinafter defined) located at _________________ and 8 other hotel properties and is entering into 8 similar leases with Lessee covering such other hotel properties, together with such other similar leases which Lessor and Lessee (and/or their affiliates) may hereafter enter into (the "Percentage Leases"). In furtherance of the consummation of such series of transactions, Lessor and Lessee wish to enter into this Lease. NOW, THEREFORE, Lessor, in consideration of the payment of rent by Lessee to Lessor, the covenants and agreements to be performed by Lessee, and upon the terms and conditions hereinafter stated, does hereby rent and lease unto Lessee, and Lessee does hereby rent and lease from Lessor, the Leased Property. ARTICLE I --------- 1.1 LEASED PROPERTY. The "Leased Property" is comprised of Lessor's interest in the following: [NOTE: EACH INDIVIDUAL LEASE WILL BE TAILORED TO THE RELEVANT PROPERTY AND CIRCUMSTANCES.] (a) the land [OR GROUND LEASEHOLD INTEREST] described in Exhibit A attached hereto and incorporated herein by reference (the "Land"); (b) all buildings, structures and other improvements of every kind including, but not limited to, alleyways and connecting tunnels, sidewalks, utility pipes, conduits and lines (on-site and off-site), parking areas and roadways appurtenant to such buildings, structures and other improvements presently situated upon the Land (collectively, the "Leased Improvements"), including the Facility; (c) all easements, rights and appurtenances relating to the Land and to the Leased Improvements; (d) [NOTE: NONE OF THE FOLLOWING SHOULD BE INCLUDED IN THE DEFINITION OF FF&E] all equipment, machinery, fixtures, and other items of property required or incidental to the use of 7 the Leased Improvements as a hotel, including all components thereof, now and hereafter permanently affixed to or incorporated in the Leased Improvements, including, without limitation, all furnaces, boilers, heaters, electrical equipment, heating, plumbing, lighting, ventilating, refrigerating, incineration, air and water pollution control, waste disposal, air-cooling and air-conditioning systems and apparatus, sprinkler systems and fire and theft protection equipment, all of which to the greatest extent permitted by law are hereby deemed by the parties hereto to constitute real estate, together with all replacements, modifications, alterations and additions thereto (collectively, the "Fixtures"); (e) all existing leases of space within the Leased Property (including any security deposits or collateral held by Lessor pursuant thereto), which space leases are listed on Exhibit B attached hereto and incorporated by reference; and (f) all contract rights, trade names, logos and other intangible property of Lessor with respect to the operation of the existing hotel business conducted on the Leased Property, including without limitation, all rights relating to the Franchise Agreement. (g) the furniture, fixtures and equipment listed or referred to on Exhibit C attached hereto and incorporated by reference. THE LEASED PROPERTY IS DEMISED IN ITS PRESENT CONDITION WITHOUT REPRESENTATION OR WARRANTY (EXPRESSED OR IMPLIED) BY LESSOR AND SUBJECT TO THE RIGHTS OF PARTIES IN POSSESSION, AND TO THE EXISTING STATE OF TITLE INCLUDING ALL CURRENT AND FUTURE COVENANTS, CONDITIONS, RESTRICTIONS, EASEMENTS AND OTHER MATTERS (NOT LIMITED TO ITEMS OF RECORD) INCLUDING ALL APPLICABLE LEGAL REQUIREMENTS, THE LIEN OF FINANCING INSTRUMENTS, MORTGAGES, DEEDS OF TRUST AND SECURITY DEEDS, AND INCLUDING OTHER MATTERS WHICH WOULD BE DISCLOSED BY AN INSPECTION OF THE LEASED PROPERTY OR BY AN ACCURATE SURVEY THEREOF. 1.2 TERM. The term of the Lease (the "Term") shall commence on the date that Lessor acquires the Leased Premises (the "Commencement Date") and shall end on , unless sooner terminated in accordance with the provisions hereof. ARTICLE II ---------- DEFINITIONS. For all purposes of this Lease, except as otherwise expressly provided or unless the context otherwise requires, (a) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular, (b) all accounting terms not otherwise defined -2- 8 herein have the meanings assigned to them in accordance with generally accepted accounting principles as are at the time applicable, (c) all references in this Lease to designated "Articles," "Sections" and other subdivisions are to the designated Articles, Sections and other subdivisions of this Lease and (d) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Lease as a whole and not to any particular Article, Section or other subdivision: ADDITIONAL CHARGES. As defined in Section 3.4. AFFILIATE. As used in this Lease the term "Affiliate" of a Person shall mean (a) any Person that, directly or indirectly, controls or is controlled by or is under common control with such Person, (b) any other Person that owns, beneficially, directly or indirectly, five percent (5%) or more of the outstanding capital stock, shares or equity interests of such Person, or (c) any officer, director, employee, partner or trustee of such Person or any Person controlling, controlled by or under common control with such Person (excluding trustees and persons serving in similar capacities who are not otherwise an Affiliate of such Person). For the purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, through the ownership of voting securities, partnership interests or other equity interests. ALIGNMENT OF INTEREST AGREEMENT. As defined in Section 24.2. AUDITED CONSOLIDATED FINANCIALS. Consolidated Financials audited by a firm of independent certified public accountants acceptable to Lessor in its sole discretion. AWARD. Compensation, sums or anything of value awarded, paid or received on a total or partial Condemnation. BASE RATE. The rate of interest announced publicly by National City Bank, in Cleveland, Ohio, from time to time, as such bank's base rate. If no such rate is announced or if such rate is discontinued, then such other rate as Lessor may reasonably designate. BASE RENT. The annual sum of $ ______________, payable in advance in equal, consecutive monthly installments, on or before the tenth (10th) day of each calendar month of the Term; provided however, that the first monthly payment of Base Rent shall be payable on the Commencement Date and that the first and last monthly payments of Base Rent shall be prorated as to any partial month (subject to adjustment as provided in Sections 14.5, 15.2, 15.4, and 15.5). -3- 9 BUSINESS DAY. Each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which national banks in the City of Cleveland, Ohio, or in the municipality wherein the Leased Property is located, are closed. CAPITAL EXPENDITURES. As defined in Section 3.7. CERCLA. The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. CODE. The Internal Revenue Code of 1986, as amended. COMMENCEMENT DATE. As defined in Section 1.2. CONDEMNATION. A Taking resulting from (1) the exercise of any governmental power, whether by legal proceedings or otherwise, by a Condemnor, and (2) a voluntary sale or transfer by Lessor to any Condemnor, either under threat of condemnation or while legal proceedings for condemnation are pending. CONDEMNOR. Any public or quasi-public authority, or private corporation or individual, having the power of Condemnation. CONSOLIDATED FINANCIALS. For any fiscal year (or other period for which such statements are prepared) for Lessee and its consolidated subsidiaries, a statement of financial position as of such fiscal year (or other period) end date and statements of operations, cash flows and retained earnings for the fiscal year (or other period) then ended, all in comparative form, together with notes thereto, prepared in accordance with generally accepted accounting principles. CONSOLIDATED NET WORTH. The sum of consolidated shareholders' equity of Lessee and any consolidated subsidiaries as shown on the most recent Audited Consolidated Financials. CONSUMER PRICE INDEX. The "U.S. City Average, All Items" Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics of the United States Department of Labor (Base: 1982-1984=100), or any successor index thereto. If (i) a significant change is made in the number or nature (or both) of items used in determining the Consumer Price Index, or (ii) the Consumer Price Index shall be discontinued for any reason, the Lessor shall request that the Bureau of Labor Statistics furnish a new index comparable to the Consumer Price Index, together with information which will make possible a conversion to the new index in computing the adjusted Base Rent hereunder. If for any reason the Bureau of Labor Statistics does not furnish an index and such information, the parties will instead mutually select, accept and use such other index or comparable statistic on the cost of living in Washington, D.C. that is computed and published by an agency of the United States or a responsible financial periodical of recognized authority. -4- 10 DATE OF TAKING. The date the Condemnor has the right to possession of the property being condemned. ENCUMBRANCE. As defined in Article XXXIV. ENVIRONMENTAL AUTHORITY. Any federal, state, local or foreign department, agency or other body or component of any Government that administers, oversees or enforces any Environmental Laws. ENVIRONMENTAL LAWS. All federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees, injunctions and duties under the common law relating to occupational health and safety, the protection of human health, and pollution of the indoor and outdoor environment (including without limitation, ambient air, surface water, ground water, land surface or subsurface strata), including without limitation laws and regulations relating to emissions, discharges, Releases or threatened Releases of Hazardous Materials or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials. Environmental Laws include, but are not limited to, CERCLA, EPCRA, FIFRA, RCRA, SARA and TSCA. ENVIRONMENTAL LIABILITY. Either of an Identified Environmental Liability or an Unidentified Environmental Liability. EPCRA. The Emergency Planning and Community Right to Know Act, as amended. EVENT OF DEFAULT. As defined in Section 16.1. FACILITY. The hotel and/or other facility offering lodging and other services or amenities being operated or proposed to be operated on the Leased Property which shall be included in the Leased Improvements. The Facility is more particularly described on Exhibit D attached hereto and incorporated by reference. FIFRA. The Federal Insecticide, Fungicide, and Rodenticide Act, as amended. FISCAL YEAR. The 12-month period from January 1 to December 31. FIXTURES. As defined in Section 1.1. FOOD AND BEVERAGE REVENUES. Gross revenues, receipts and income of any kind (whether on a cash or credit basis) paid, collected or accrued and derived directly or indirectly by Lessee from: (i) the sale, for on-site consumption at the Leased Property or through off-site catering services, of food and -5- 11 nonalcoholic beverages, including sales attributable to guest rooms, banquet rooms, meeting rooms, the restaurant, the lounge, the bar and other similar rooms; (ii) the sale of wine, beer, liquor or other alcoholic beverages, including sales attributable to the restaurant, the bar, the lounge, guest rooms, meeting rooms, banquet rooms, off-site catering or any location at the Leased Property; (iii) cover charges and audio-visual rental charges related to banquet, ballroom or meeting room events; and (iv) banquet and meeting room revenues, including room rental charges from such banquet and meeting rooms. Such revenues shall not include the following: (a) Room and Other Revenues as defined below; (b) Any gratuities or service charges added to a customer's bill or statement in lieu of a gratuity, which gratuity or charge Lessee is obligated to pay to or which was paid directly to an employee; (c) Customary and reasonable credits, rebates, refunds or negative adjustments to guests; (d) Sales taxes and any additional taxes imposed on the sale of alcoholic beverages; (e) Amounts attributable to customary and reasonable allowances, give aways and promotions; and (f) Sales transactions related to a lounge provided for the use of guests staying in rooms located on the concierge level of the Facility. FRANCHISE AGREEMENT. The franchise agreement or license agreement currently in effect with Franchisor, and any amendments, replacements or extensions thereof or other agreements relating thereto hereafter implemented with the prior approval of Lessor, under which the Facility is operated. FRANCHISOR. [Marriott] or such other national hotel franchisor approved by Lessor in accordance with Section 34.3. GOVERNMENT. The United States of America, any state, county, municipality, local government, district or territory thereof, any foreign nation, any state, district, department, territory or other political division thereof, or any administrative agency, board, commission, bureau or political subdivision of any of the foregoing. GROUND LEASE. The ground lease between Lessor and _____________________, executed with respect to the Land. GROUND RENT. All rent payable by Lessor as sublessee with respect to the Ground Lease. -6- 12 HAZARDOUS MATERIALS. All chemicals, pollutants, contaminants, wastes and toxic substances, including without limitation: (a) Solid or hazardous waste, as defined in RCRA or in any Environmental Law; (b) Hazardous substances, as defined in CERCLA or in any Environmental Law; (c) Toxic substances, as defined in TSCA or in any Environmental Law; (d) Insecticides, fungicides, or rodenticides, as defined in FIFRA or in any Environmental Law; and (e) Gasoline or any other petroleum product or byproduct, polychlorinated biphenols, asbestos, radon and urea formaldehyde. IDENTIFIED ENVIRONMENTAL LIABILITIES. Any and all obligations to pay the amount of any judgment or settlement, the cost of complying with any settlement, judgment or order for injunctive or other equitable relief, the cost of compliance or corrective action in response to any notice, demand or request from an Environmental Authority, the amount of any civil penalty or criminal fine, and any court costs and reasonable amounts for attorney's fees, fees for witnesses, consultants and experts, and costs of investigation and preparation for defense of any claim or any Proceeding, regardless of whether such Proceeding is threatened, pending or completed, that may be or have been asserted against or imposed upon Lessor, Lessee, any Predecessor, the Leased Property or any property used therein and arising out of any of the matters disclosed in the report of Law Environmental, dated , 19 , a copy of which has been delivered and examined by Lessee prior to the execution of this Lease. IMPOSITIONS. Collectively, all taxes (including, without limitation, all personal property, sales and use (including sales, rent or occupancy taxes on Rent), single business, gross receipts, transaction, privilege, rent or similar taxes as the same relate to or are imposed upon Lessee, its personal property or its business conducted upon the Leased Property), assessments (including, without limitation, all assessments for public improvements or benefit, whether or not commenced or completed prior to the date hereof and whether or not to be completed within the Term), water, sewer or other rents and charges, excises, tax inspection, authorization and similar fees and all other governmental charges, in each case whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character in respect of the Leased Property or the business conducted thereon by Lessee (including all interest and penalties -7- 13 thereon caused by any failure in payment by Lessee), which at any time prior to, during or with respect to the Term may be assessed or imposed on or with respect to or be a lien upon (a) Lessor's interest in the Leased Property, (b) the Leased Property, or any part thereof or any rent therefrom or any estate, right, title or interest therein, or (c) any occupancy, operation, use or possession of, or sales from, or activity conducted on or in connection with the Leased Property, or the leasing or use of the Leased Property or any part thereof by Lessee. Notwithstanding the foregoing, Impositions shall not include (1) any Real Estate Taxes on the Leased Property, (2) any personal property taxes on Lessor's personal property, (3) any tax based on net income (whether denominated as an income, franchise or capital stock or other tax) imposed on Lessor or any other Person other than Lessee and Affiliates of Lessee, (4) any net revenue tax of Lessor or any other Person (other than Lessee or an Affiliate of Lessee), (5) any tax imposed with respect to the sale, exchange or other disposition by Lessor of any Leased Property or the proceeds thereof, or (6) any single business, gross receipts (other than a tax on any rent received by Lessor from Lessee), transaction, privilege or similar taxes as the same relate to or are imposed upon Lessor, except to the extent that any tax, assessment, tax levy or charge that Lessee is obligated to pay pursuant to the first sentence of this definition, and that is in effect any time during the Term hereof, is totally or partially repealed, and a tax, assessment, tax levy or charge set forth in clause (1) through (6) is levied, assessed or imposed expressly in lieu thereof. INDEMNIFIED ENVIRONMENTAL LIABILITY. As defined in Section 8.3. INDEMNIFIED PARTY; INDEMNITEE. Either of a Lessee Indemnified Party or a Lessor Indemnified Party. INDEMNIFYING PARTY. Any party obligated to indemnify an Indemnified Party pursuant to Section 8.3 or Article XXII. INSURANCE REQUIREMENTS. All terms of any insurance policy required by this Lease, any Franchisor or any Legal Requirement, and all requirements of the issuer of any such policy as to such policy and/or the Leased Property. INVENTORY. All inventories, supplies, guest supplies, food and beverage inventory, and consumable merchandise used in connection with the operation of the Facility, but excluding all such items to the extent owned by concessionaires, tenants, subtenants, licensees or other Persons occupying all or a portion of the Leased Property as permitted by this Lease. LAND. As defined in Section 1.1(a). LEASE. This Lease. -8- 14 LEASED IMPROVEMENTS; LEASED PROPERTY. Each as defined in Section 1.1. LEGAL REQUIREMENTS. All federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions affecting either the Leased Property or the maintenance, construction, use or alteration thereof (whether by Lessee or otherwise), whether or not hereafter enacted and in force, including (a) all Environmental Laws, and (b) any laws, rules or regulations that may (1) require repairs, modifications or alterations in or to the Leased Property or (2) in any way adversely affect the use and enjoyment thereof; and all permits, licenses and authorizations and regulations relating thereto and all covenants, agreements, restrictions and encumbrances contained in any instruments, either of record or known to Lessee (other than encumbrances hereafter created by Lessor without the consent of Lessee), at any time in force affecting the Leased Property. LENDING INSTITUTION. Any insurance company, investment banking company, credit company, federally insured commercial or savings bank, national banking association, savings and loan association, employees welfare, pension or retirement fund or system, corporate profit sharing or pension trust, college or university, or real estate investment trust, including any corporation qualified to be treated for federal tax purposes as a real estate investment trust, such trust having a net worth of at least $10,000,000 and REMIC conduit lenders. LESSEE. The Lessee designated on this Lease and its permitted successors and assigns. LESSEE INDEMNIFIED PARTY. Lessee and (i) any Affiliate of Lessee, (ii) any Person against whom any liability may be asserted as a result of a direct or indirect ownership interest (including a shareholder's interest) in Lessee; (iii) the officers, directors, shareholders, employees, agents and representatives of Lessee; and (iv) the respective heirs, personal representatives, successors and assigns of any of the foregoing Persons. LESSEE'S PERSONAL PROPERTY. As defined in Section 6.2. LESSOR. The Lessor designated on this Lease and its successors and assigns. LESSOR INDEMNIFIED PARTY. Lessor and (i) any Affiliate of Lessor; (ii) any Person against whom any liability may be asserted as a result of a direct or indirect ownership interest (including an interest as a partner) in Lessor; (iii) the employees, agents and representatives of Lessor; (iv) Boykin Lodging Trust, Inc., its officers, directors, shareholders, -9- 15 employees and agents; and (v) the respective heirs, personal representatives, successors and assigns of any of the foregoing Persons. NOTICE. A notice given pursuant to Article XXXII. OFFICER'S CERTIFICATE. A certificate of Lessee in form and substance reasonably acceptable to Lessor signed by the chief operating officer and the chief financial officer or another officer authorized so to sign by the board of directors or by-laws of Lessee, or any other person whose power and authority to act has been authorized by delegation in writing by any such officer. OVERDUE RATE. On any date, a rate equal to the Base Rate plus 5% per annum, but in no event greater than the maximum rate then permitted under applicable law. PARTIAL FISCAL YEAR. Any portion of a Fiscal Year which falls during the Term hereof. PAYMENT DATE. Any due date for the payment of any installment of Rent. PERCENTAGE RENT. As defined in Section 3.1(b). PERSON. Any individual, corporation, general or limited partnership, limited liability company, limited liability partnership, stock company or association, joint venture, association, company, trust, bank, trust company, land trust, business trust, or other entity and government and agency and political subdivision thereof. PREDECESSOR. Any Person whose liabilities arising under any Environmental Law relating to the Leased Property have or may have been retained or assumed by Lessee, either contractually or by operation of law PRIMARY INTENDED USE. As defined in Section 7.2(b). PROCEEDING. Any judicial action, suit or proceeding (whether civil or criminal), any administrative proceeding (whether formal or informal), any investigation by a governmental authority or entity (including a grand jury), and any arbitration, mediation or other non-judicial process for dispute resolution. RCRA. The Resource Conservation and Recovery Act, as amended. REAL ESTATE TAXES. All real estate taxes (including any applicable interest and penalties thereon), including general and -10- 16 special assessments, if any, and possessory interest taxes which are imposed upon the Land and/or the Leased Property. RELEASE. A "Release" as defined in CERCLA or in any Environmental Law, unless such Release has been properly authorized and permitted in writing by all applicable Environmental Authorities or is allowed by such Environmental Law without authorizations or permits. RENT. Collectively, the Base Rent, Percentage Rent and Additional Charges. ROOM AND OTHER REVENUES: All gross revenues, receipts and income of any kind (whether on a cash or credit basis) paid, collected or accrued and derived directly or indirectly by Lessee from: (i) the rental of guest rooms; (ii) gift shop operations; (iii) fees collected from telephone, game room and guest laundry services; and (iv) guaranteed no show reservations, space rentals (excluding banquet and meeting room space rentals), discounts earned, vending machines, valet services, movie services, commissions earned, and swim club memberships, and (v) all other revenues in connection with the use or operation of the Leased Property and all services or activities provided thereon, including revenue derived from subtenants, concessionaires, and licensees, all as determined in accordance with generally accepted accounting principles. Notwithstanding the previous sentence, Room and Other Revenues shall not include: (a) Food and Beverage Revenues as defined above; (b) The amount of any credits, rebates, refunds or adjustments to customers, guests or patrons; (c) Sales or use taxes; (d) Interest income; (e) Gratuities paid or payable to Persons other than Lessee or its Affiliate; and (f) Gains from the sale of assets out of the ordinary course of business. SARA: The Superfund Amendments and Reauthorization Act of 1985, as amended. STATE: The State or Commonwealth of the United States in which the Leased Property is located. -11- 17 SUBSIDIARIES: Corporations in which Lessee owns, directly or indirectly, more than fifty percent (50%) of the voting stock or control, as applicable. TAKING: A taking or voluntary conveyance during the Term hereof of all or part of the Leased Property, or any interest therein or right accruing thereto or use thereof, as the result of, or in settlement of, any Condemnation or other eminent domain proceeding affecting the Leased Property whether or not the same shall have actually been commenced. TERM: As defined in Section 1.2. TSCA: The Toxic Substances Control Act, as amended. UNAVOIDABLE DELAY: A delay due to strikes, lock-outs, labor unrest, inability to procure materials, power failure, acts of God, governmental restrictions, enemy action, civil commotion, fire, unavoidable casualty or other causes beyond the control of the party responsible for performing an obligation hereunder, provided that lack of funds shall not be deemed a cause beyond the control of either party hereto unless such lack of funds is caused by the failure of the other party hereto to perform any obligations of such party under this Lease. UNECONOMIC FOR ITS PRIMARY INTENDED USE: A state or condition of the Facility such that in the good faith judgment of Lessor it is uneconomic to operate the Facility for its Primary Intended Use, taking into account, among other relevant factors, the number of usable rooms and projected revenues. UNIDENTIFIED ENVIRONMENTAL LIABILITIES: Any and all obligations to pay the amount of any judgment or settlement, the cost of complying with any settlement, judgment or order for injunctive or other equitable relief, the cost of compliance or corrective action in response to any notice, demand or request from an Environmental Authority, the amount of any civil penalty or fine or criminal fine, and any court costs and reasonable amounts for attorney's fees, fees for witnesses, consultants and experts, and costs of investigation and preparation for defense of any claim or any Proceeding, regardless of whether such Proceeding is threatened, pending or completed, that may be or have been asserted against or imposed upon Lessor, Lessee, any Predecessor, the Leased Property or any property used therein and arising out of: (a) Failure of Lessee, any Predecessor or the Leased Property to comply at any time with all Environmental Laws; (b) Presence of any Hazardous Materials on, in, under, at or in any way affecting the Leased Property; -12- 18 (c) A Release at any time of any Hazardous Materials on, in, at, under or in any way affecting the Leased Property or any off-site property or facility; (d) Identification of Lessee, or any Predecessor as a potentially responsible party under CERCLA or under any Environmental Law similar to CERCLA; (e) Presence at any time of any above ground and/or underground storage tanks as defined in RCRA or in any applicable Environmental Law on, in, at or under the Leased Property or any off-site property or facility; or (f) Any and all claims for injury or damage to persons or property arising out of exposure to Hazardous Materials originating or located at the Leased Property, or resulting from operation thereof; but excluding those arising out of: (g) Identified Environmental Liabilities. UNIFORM SYSTEM: The Uniform System of Accounts for Hotels (8th Revised Edition, 1986) as published by the Hotel Association of New York City, Inc. as same may hereafter be revised. UNSUITABLE FOR ITS PRIMARY INTENDED USE: A state or condition of the Facility such that, in the good faith judgment of Lessor, due to casualty damage or loss through Condemnation, the Facility cannot be operated or cannot function as an integrated hotel facility consistent with standards applicable to a well maintained and operated hotel. ARTICLE III ----------- 3.1 RENT. Lessee will pay to Lessor in lawful money of the United States of America which shall be legal tender for the payment of public and private debts, in immediately available funds, at Lessor's address set forth in Article XXXII hereof or at such other place or to such other Person, as Lessor from time to time may designate in a Notice, (A) the higher of (i) Base Rent or (ii) Percentage Rent and (B) Additional Charges, during the Term, as follows: (A) BASE RENT: The annual sum of $ ______________, payable in advance in equal, consecutive monthly installments, on or before the tenth (10th) day of each calendar month of the Term ("Base Rent"); provided, however, that the first monthly payment of Base Rent shall be payable on the Commencement Date and that the first and last monthly payments of Base Rent shall be prorated as to any partial month (subject to adjustment as provided in Sections 14.5, 15.2, 15.4, and 15.5); and provided, -13- 19 further, that Base Rent shall be increased by increases in CPI as set forth in Subsection (c) below. (b) PERCENTAGE RENT: For each Fiscal Year and Partial Fiscal Year during the Term commencing with the Fiscal Year or Partial Fiscal Year ending December 31, 1996, Lessee shall pay percentage rent ("Percentage Rent"), if such Percentage Rent is in excess of Base Rent for such Fiscal Year or Partial Fiscal Year, in an amount calculated by the following formula: The amount equal to the sum of (i) the Room and Other Revenues Computation for such Fiscal Year or Partial Fiscal Year plus (ii) the Food and Beverage Revenues Computation for such Fiscal Year or Partial Fiscal Year (each as defined below and collectively, the "Revenue Computations"). For the purpose of this formula: (1) The Room and Other Revenues Computation for the applicable Fiscal Year (or Partial Fiscal Year) is equal to the sum of (A) __% of the first $_________ in Room and Other Revenues for such Fiscal Year or Partial Fiscal Year, (B) __% of all amounts above $______ up to $______ in Room and Other Revenues for such Fiscal Year or Partial Fiscal Year, and (C) __% of all Room and Other Revenues in excess of $______ for such Fiscal Year or Partial Fiscal Year (the preceding dollar figures being referred to hereinafter as the "Threshold Amounts", such Threshold Amounts to be prorated on a per diem basis for any Partial Fiscal Year); and (2) The Food and Beverage Revenues Computation is equal to six percent (6%) of all Food and Beverage Revenues for the applicable Fiscal Year or portion thereof. (c) CPI ADJUSTMENTS TO THE THRESHOLD AMOUNTS AND BASE RENT: For each Fiscal Year of the Term beginning on or after January 1, 1997, the Threshold Amounts and Base Rent shall be adjusted from time to time as follows: If the most recently published Consumer Price Index as of the last day of the last month (the "Comparison Month") of any Fiscal Year is different than the average Consumer Price Index for the twelve (12) month period prior thereto, each of Base Rent and the Threshold Amount for the next Fiscal Year shall be adjusted by the percentage change in the Consumer Price Index calculated by multiplying the Base Rent and each Threshold -14- 20 Amount by the quotient obtained by dividing the Consumer Price Index for the most recent Comparison Month by the Consumer Price Index for the month which is exactly twelve (12) months prior thereto. Adjustments in the Threshold Amounts and Base Rent shall be effective on the first day of the first calendar month of the Fiscal Year to which such adjusted Threshold Amounts apply. In the event of casualty and corresponding payment of rent out of the proceeds of rental interruption insurance provided pursuant to Section 13.1(c), the Percentage Rent shall be based upon the higher of (i) actual revenues, (ii) revenues for the same period in the previous Fiscal Year (whether or not during the Term), or (iii) projected revenues used in computing the final insurance settlement. 3.2 PAYMENT OF PERCENTAGE RENT. Percentage Rent shall be due and payable quarterly on or before the thirtieth (30th) day after the last day of each quarter during the Term. Additionally, an Officer's Certificate, setting forth the calculation of such rent payment for such quarter, shall be delivered to Lessor quarterly, together with such quarterly Percentage Rent payment after each quarter of each Fiscal Year (or part thereof) during the Term. Such quarterly payment shall be based on the formula set forth in Section 3.1(b), but, in calculating the Revenue Computations for each quarter, gross revenues for the year to date shall be annualized by dividing such sum by the number of months which have passed year to date (including the current month) and multiplying the result by 12. The resulting Percentage Rent amount shall be multiplied by the number of months that have passed year-to-date (including the current month) and divided by twelve (12). Payments of Base Rent and Percentage Rent for the year to date shall be subtracted from the result to arrive at the Percentage Rent payment due for that quarter. The Revenue Computations shall be appropriately adjusted to calculate Percentage Rent for partial years. There shall be no reduction in the Base Rent regardless of the result of the Revenue Computations. In addition, on or before March 1 of each year, commencing with March 1, 1997, Lessee shall deliver to Lessor an Officer's Certificate reasonably acceptable to Lessor setting forth the computation (based on audited financial statements of Lessee) of the actual Percentage Rent that accrued for each quarter of the Fiscal Year that ended on the immediately preceding December 31 and shall pay to Lessor, with the delivery of the Officer's Certificate, the amount of Percentage Rent due and payable for the Fiscal Year then ended as shown in the Officer's Certificate, if any, that exceeds the amount actually paid as Percentage Rent by Lessee for such Fiscal Year. If the Percentage Rent actually due and payable for such Fiscal Year is shown by such certificate to be less than the amount actually paid as Percentage Rent for -15- 21 the applicable Fiscal Year, Lessor, at its option, shall reimburse such amount to Lessee or credit such amount against the next quarter's Percentage Rent payments; provided, however, that no Event of Default exists. Any difference between the annual Percentage Rent due and payable for any Fiscal Year (as shown in the applicable Officer's Certificate) and the total amount of quarterly payments for such Fiscal Year actually paid by Lessee (i) shall bear interest at the Overdue Rate in the case of an underpayment or (ii) shall bear interest at the Base Rate in the case of an overpayment, which interest shall accrue from the close of such Fiscal Year until the amount of such difference shall be paid or otherwise discharged by credit to Lessee. Any such interest payable to Lessor shall be deemed to be and shall be payable as Additional Charges. The obligation to pay Percentage Rent shall survive the expiration or earlier termination of the Term. A final reconciliation, taking into account, among other relevant adjustments, any adjustments which are accrued after such expiration or termination date but which related to Percentage Rent accrued prior to such termination date and Lessee's computation of Percentage Rent due and payable, shall be made not later than ninety (90) days after such expiration or termination date. Within such ninety (90) day period, Lessee shall deliver to Lessor an Officer's Certificate setting forth the final Percentage Rent amount payable to Lessor and payment of the amount due, if any. 3.3 CONFIRMATION OF PERCENTAGE RENT. Lessee shall utilize, or cause to be utilized, an accounting system for the Leased Property in accordance with generally accepted accounting principles consistently applied and the Uniform System, that will accurately record all data necessary to compute Percentage Rent, and Lessee shall retain for at least four years after the expiration of each Fiscal Year (and in any event until the reconciliation described in Section 3.2 for such Fiscal Year has been made), reasonably adequate records conforming to such accounting system showing all data necessary to compute Percentage Rent for the applicable Fiscal Years. In the event of a conflict between generally accepted accounting principles and the Uniform System, the Uniform System shall prevail. Lessor (or its accountants or representatives), at its expense (except as provided herein), shall have the right from time to time to audit the information that formed the basis for the data set forth in any Officer's Certificate provided under Section 3.2 and, in connection with such audits, to examine all Lessee's records (including supporting data and sales and excise tax returns) reasonably required to verify Percentage Rent, subject to any prohibitions or limitations on disclosure of any such data under Legal Requirements. If any such audit discloses a deficiency in the payment of Percentage Rent, and either Lessee agrees with the -16- 22 result of such audit or the matter is otherwise determined or compromised, Lessee shall forthwith pay to Lessor the amount of the deficiency, as finally agreed or determined, together with interest calculated at the Overdue Rate from the due date for the last quarterly payment of Percentage Rent for the Fiscal Year to the date of payment thereof; provided, however, that as to any audit that is commenced more than two (2) years after the date Percentage Rent for any Fiscal Year is reported by Lessee to Lessor, the deficiency, if any, with respect to such Percentage Rent, shall bear interest at the Overdue Rate only from the date such determination of deficiency is made unless such deficiency is the result of gross negligence or willful misconduct on the part of Lessee. If any such audit discloses that the Percentage Rent actually due from Lessee for any Fiscal Year exceed those reported by Lessee by more than two percent (2%), Lessee shall pay the cost of such audit and examination. Any proprietary information obtained by Lessor pursuant to the provisions of this Section shall be treated as confidential, except that such information may be used, subject to appropriate confidentiality safeguards, in any litigation between the parties, and except further that Lessor may disclose such information to prospective lenders or purchasers, their respective attorneys, accountants and other representatives, or pursuant to any Legal Requirements. The obligations of Lessee contained in this Section shall survive the expiration or earlier termination of this Lease. 3.4 ADDITIONAL CHARGES. In addition to the Base Rent and Percentage Rent, (a) Lessee also will pay and discharge as and when due and payable all other amounts, liabilities, obligations, costs and expenses necessary to perform its obligations hereunder and under the Franchise Agreement, and (b) in the event of any failure on the part of Lessee to timely pay any of those items referred to in clause (a) of this Section 3.4, Lessee also will promptly pay and discharge every fine, penalty, interest and cost that may be added for non-payment or late payment of such items (the items referred to in clauses (a) and (b) of this Section 3.4 being additional rent hereunder and being referred to herein collectively as the "Additional Charges"), and Lessor shall have all legal, equitable and contractual rights, powers and remedies provided either in this Lease or by statute or otherwise in the case of non-payment of the Additional Charges as in the case of non-payment of the Base Rent. If any installment of Base Rent, Percentage Rent or Additional Charges (but only as to those Additional Charges that are payable directly to Lessor) shall not be paid on its due date, Lessee will pay Lessor on demand, as Additional Charges, a late charge (to the extent permitted by law) computed at the Overdue Rate on the amount of such installment, from the due date of such installment to the date of payment thereof. To the extent that Lessee pays any Additional Charges to Lessor pursuant to any requirement of this Lease (which charges are not payable to Lessor), Lessee shall be relieved of its obligation to pay such Additional Charges to the -17- 23 entity to which they would otherwise be due and Lessor shall pay same from monies received from Lessee. 3.5 CONVERSION OF PROPERTY. If, during the Term, Lessee wishes to cease food and beverage operations at the Facility, Lessee shall give notice of such desire to Lessor, which shall require the approval of Lessor which Lessor may grant or withhold in its sole and absolute discretion. Lessor and Lessee shall, if such cessation is to occur, commence negotiations to adjust Rent to reflect the proposed change to the operation of the Facility, each acting reasonably and in good faith; provided, however, that any such adjustment shall conform with normal business practice and shall not result in the creation of a Rent formula based on the income or profits of Lessee. All other terms of this Lease will remain substantially the same. During negotiations, which shall not extend beyond 60 days, Lessee shall not "convert" the Facility and shall continue fulfilling its obligations under the existing terms of this Lease. If no agreement is reached after such 60-day period, Lessee shall withdraw such notice and this Lease shall continue in full force. 3.6 ANNUAL REVENUE PROJECTIONS. No later than thirty (30) days prior to the commencement of each Fiscal Year, Lessee shall submit Annual Revenue Projections for such Fiscal Year to Lessor. The Annual Revenue Projections shall be subject to Lessor's prior approval as to form and content and shall be in such form and shall contain such information as Lessee included in its annual revenue projections in accordance with its past practice, and shall, in any event, include the following: (a) Lessee's reasonable estimate of Room and Other Revenues and Food and Beverage Revenues for the Fiscal Year itemized on a monthly basis, as such estimates may be revised or replaced from time to time by Lessee; and (b) A projection of the Percentage Rent payable for such Fiscal Year. 3.7 ANNUAL CAPITAL EXPENDITURES BUDGET. Subject to the provisions of Sections 8.1, 9.2 and 19.1(a), Lessor, at its sole expense, shall be responsible for all Capital Expenditures as defined in this Section 3.7 and in accordance with Exhibit E attached hereto and incorporated herein by reference, provided, however, Lessor shall not be obligated to make any Capital Expenditure the need for which Lessor disputes or objects to in good faith. Not later than forty-five (45) days prior to the commencement of each Fiscal Year or Partial Fiscal Year, Lessee shall submit to Lessor for Lessor's approval, Lessee's proposed Annual Capital Expenditures Budget. The Annual Capital Expenditures Budget (the "Capital Expenditures Budget") shall be subject to Lessor's approval and shall contain the following: -18- 24 (a) Lessee's estimate of the amounts to be expended during the upcoming Fiscal Year to renew, replace or refurbish FF&E, and a reasonably detailed description of the expenses to be incurred, and Lessee's estimate of the amount that will be expended during the upcoming Fiscal Year on capital repairs, replacements and improvements to the Leased Improvements, together with a reasonably detailed description of the capital repairs, replacements and improvements that will be undertaken. The expenditures referred to in this Section 3.7 are referred to in this Lease as "Capital Expenditures". (b) A capital renewal program showing the major anticipated Capital Expenditures and that will be incurred over the ensuing three (3) year and five (5) year periods. If Lessor shall not give its approval to the Annual Capital Expenditures Budget, Lessee shall revise the Annual Capital Expenditures Budget, as may be required to obtain Lessor's consent thereto. The Capital Expenditures Budget shall be consistent with Lessee's policies as to Capital Expenditures as set forth on Exhibit E. 3.8 CAPITAL EXPENDITURE FUND. Lessor shall establish and maintain an account to provide a reserve for the Capital Expenditures costs at the Facility and each other facility covered by a Percentage Lease. Such Account shall be funded with an initial balance of $3,500,000 upon or prior to the execution of this Percentage Lease Agreement. In addition, Lessor shall deposit in such account a quarterly amount equal to four per cent (4%) of the sum of (i) the Room and Other Revenues plus (ii) the Food and Beverage Revenues for each such Facility. Subject to the provisions of Section 19.1(a), such account shall be used to defer the costs of Capital Expenditures at all such Facilities; provided that Lessor, in its reasonable discretion, shall be entitled to use such funds for other purposes if adequate reserves remain for the purpose of Capital Expenditures at all such Facilities. 3.9 APPLICATION OF CAPITAL EXPENDITURE FUND. When amounts are budgeted and agreed to be spent for Capital Expenditures, Lessee shall be responsible for the implementation of the Capital Expenditure program and shall make periodic draws on the Capital Expenditure Fund by the presentation to Lessor of appropriate documentation establishing the amounts to be paid in accordance with the Capital Expenditure Budget, and including such supporting documentation as Lessor may reasonably require. Lessor and Lessee shall cooperate in good faith to accomplish such implementation as quickly as practicable in accordance with sound business practices. 3.10 UNBUDGETED CAPITAL EXPENDITURES. No disbursements shall be made from the Capital Expenditure Fund which are not in -19- 25 accordance with the Capital Expenditure Budget. However, Lessor and lessee recognize that, in certain circumstances, Capital Expenditures which were not budgeted may be necessary. In the following circumstances, disbursements shall be made for Capital Expenditures from the Capital Expenditures Fund even though such expenditures were not included in the Capital Expenditure Budget: (i) When Lessor and Lessee agree to an addition to the Capital Expenditure Budget; (ii) When, due to circumstances beyond the control of Lessee or Lessor, expenditures for a project exceed the budgeted amount; (iii) When the Capital Expenditure is necessary on an emergency basis for any reason including the comfort and safety of guests or employees; and (iv) For deminimus Capital Expenditures not in excess of $10,000 per item. 3.11 AGENT METHOD FOR PURCHASES OF CAPITAL EXPENDITURES. (a) Lessor hereby retains Lessee as an independent contractor on the terms contained in this Agreement to act for and on behalf of Lessor as Lessor's agent in connection with the implementation of the Capital Expenditure program for the Facility. Lessee's cost analysis shall be based upon the plans and furnishings set forth in the specifications and other written information agreed to be implemented under the Capital Expenditure Budget. Lessee will be responsible for negotiating purchases of Capital Expenditures on Lessor's behalf. All purchases will be based on Lessee's actual cost, net of trade discounts (including cash discounts, where applicable). (b) Lessor acknowledges and agrees that purchase orders relating to any Capital Expenditure for the Project will be executed by Lessee as agent for and on behalf of Lessor. Lessor further acknowledges and agrees that Lessee shall have no liability under this Agreement or otherwise for payment of the Capital Expenditure or for freight or storage related to the Capital Expenditure provided that no expenditures shall be made except in accordance with the Budget and as provided above. All down payments as well as payment of all vendor invoices are the responsibility and obligation of Lessor. Lessor acknowledges that a delay on the part of Lessor relating to any required deposits or payments can result in delivery delays of the Capital Expenditure. The timing of the making of all purchase orders and delivery schedules will be established by mutual agreement of Lessor and Lessee. -20- 26 (c) Lessee shall not be obligated under any circumstances to (but in its discretion may) use its own funds for the purpose of making down payments (either at the time purchase orders are processed or otherwise) or making progress or final payments to Capital Expenditure vendors. Taxes, warehouse, delivery, redelivery, restocking, installation and similar charge, including, but not limited to delivery and storage costs, shall be obligations of Lessor and Lessor agrees to perform such obligations in a timely manner. All vendor invoices shall be addressed to and issued directly to Lessor. (d) Lessor shall designate a representative authorized to act on its behalf with respect to the Leased Property. (e) Lessor agrees to reimburse Lessee for all out-of-pocket expenses (including long distance and messenger fees) incurred by Lessee on behalf of or in connection with the Capital Expenditures for the Facility. All such reimbursements shall be paid monthly as incurred upon receipt of bills or other evidence reasonably satisfactory to Lessor. (f) Lessor shall furnish to Lessee from time to time all information, take such actions and process such draws as may be reasonably requested by Lessee or otherwise required under this Agreement in a timely manner as reasonably necessary for the orderly progress of work under this Agreement. Lessee shall have no responsibility or be liable in any manner whatsoever for any delay caused by information to be supplied or actions to be taken by Lessor, its agents or other independent contractors working on or at the Facility or caused by Lessor's failure to timely pay vendors. (g) If Lessor desires to change, modify or alter the quantity or specifications of any Capital Expenditure purchased by Lessee in writing, Lessee will endeavor to satisfy any such request. Lessor acknowledges and understands that Lessee's ability to comply with requested changes, modifications or alterations is subject to acceptance and performance on the part of the vendors and supplier with whom Lessee has entered into agreements for and on behalf of Lessor. Lessee assumes no liability or responsibility for its inability to comply with Lessor's request for changes, modifications or alterations under this paragraph. (h) Lessor acknowledges and agrees that Lessee shall not be responsible or liable to Lessor for any losses incurred or damages suffered by Lessor due to delays, failures or omissions of third party vendors in delivery of Capital Expenditure. Lessor agrees to hold Lessee harmless -21- 27 for any such losses or damages. Lessor assumes ownership of Capital Expenditure at the time of shipment of Capital Expenditure from any third party vendor or manufacturer and any claims Lessor may have against any freight company in connection with the delivery or shipment of the Capital Expenditure are the responsibility of Lessor. (i) LESSOR ACKNOWLEDGES AND AGREES THAT LESSEE MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, RELATING TO QUALITY, FITNESS OR CAPACITY OF THE WORK DONE PURSUANT TO CAPITAL EXPENDITURES. Lessor, as purchaser of the Capital Expenditure, shall have the benefit of any guarantees and warranties, either express or implied, from vendors and suppliers of the Capital Expenditure, but Lessee shall have no liability for any such third party guarantees or warranties. Lessee will use its best efforts on Lessor's behalf to obtain proper service for the replacement or correction of unsatisfactory Capital Expenditure, but Lessee does not warrant its ability to obtain such service and Lessee shall have no obligation or responsibility to replace or correct any such unsatisfactory Capital Expenditure. (j) Except with respect to matters arising from Lessee's misconduct or Lessee's negligence, Lessor agrees to indemnify and hold Lessee, its directors and officers harmless from and against any and all claims, suits, costs, liabilities, obligations, losses and damages whatsoever arising out of or in connection with the work done pursuant to Capital Expenditures, the use of results of Capital Expenditures in or at the Project and the payment of any and all sales, use or other taxes (excepting federal, state and local income taxes relating to Lessee's business). (k) Lessor shall be responsible for and shall pay all applicable sales and use taxes arising as a result of the purchase or use of the Capital Expenditure or Lessor shall deliver appropriate exemption certificates. (l) Lessee agrees that for so long as it maintains interior design and purchasing operations, it will perform the above services without charge to Lessor. ARTICLE IV ---------- 4.1 PAYMENT OF TAXES AND IMPOSITIONS. Lessor shall pay all property taxes (including the items in clauses (1) through (6) of the definition of "Impositions" set forth in Article II. Subject to Article XII relating to permitted contests, each party will pay, or cause to be paid, all Impositions imposed on each of them, respectively, before any fine, penalty, interest or cost may be added for non-payment, such payments to be made directly to the taxing or other authorities where feasible, and will -22- 28 promptly furnish to the other party copies of official receipts or other satisfactory proof evidencing such payments; provided, however, Lessee shall pay all Impositions in respect of the Leased Property and this Lease (other than fees, property taxes and taxes imposed on Lessor's income from the Leased Property). Lessor and Lessee shall, upon request of the other, provide such data as is maintained by the party to whom the request is made with respect to the Leased Property as may be necessary to prepare any required returns and reports. Lessee shall file all personal property tax returns in such jurisdictions where it is legally required to so file. Lessor, to the extent it possesses the same, and Lessee, to the extent it possesses the same, will provide the other party, upon request, with cost and depreciation records necessary for filing returns for any property so classified as personal property. Where Lessor is legally required to file personal property tax returns, Lessor shall provide Lessee with copies of assessment notices in sufficient time for Lessee to file a protest. Lessee may, upon notice to Lessor, at Lessee's option and at Lessee's sole expense, protest, appeal, or institute such other proceedings (in its or Lessor's name) as Lessee may deem appropriate to effect a reduction of real estate or personal property assessments for those Impositions to be paid by Lessee, and Lessor, at Lessee's expense as aforesaid, shall fully cooperate with Lessee in such protest, appeal, or other action. Lessee hereby agrees to indemnify, defend, and hold harmless Lessor from and against any claims, obligations, and liabilities against or incurred by Lessor in connection with such cooperation, although Lessee is not liable for the amount of any (i) Real Estate Taxes or (ii) personal property taxes attributable to personal property owned by Lessor. Lessor, however, reserves the right to effect any such protest, appeal or other action and, upon notice to Lessee, shall control any such activity, which shall then go forward at Lessor's sole expense. Upon such notice, Lessee, at Lessor's expense, shall cooperate fully with such activities. 4.2 UTILITY CHARGES. Lessee will be solely responsible for obtaining utility services to the Leased Property and will pay, or cause to be paid, all charges for electricity, gas, oil, water, sewer and other utilities attributable to, or used on, under or in the Leased Property during the Term as such charges become due. 4.3 INSURANCE PREMIUMS. Lessee will pay or cause to be paid all premiums for the insurance coverages required to be maintained by it under Article XIII. Lessor shall pay or cause to be paid all premiums for the insurance coverages required to be maintained by it under Article VIII. ARTICLE V --------- -23- 29 NO TERMINATION, ABATEMENT, ETC. Except as otherwise specifically provided in this Lease, Lessee, to the extent permitted by law, shall remain bound by this Lease in accordance with its terms and shall neither take any action without the written consent of Lessor to modify, surrender or terminate the same, nor seek nor be entitled to any abatement, deduction, deferment or reduction of the Rent, or setoff against the Rent, nor shall the obligations of Lessee be otherwise affected by reason of (a) any damage to, or destruction of, any Leased Property or any portion thereof from whatever cause or any Taking of the Leased Property or any portion thereof, (b) any claim which Lessee has or might have against Lessor by reason of any default or breach of any warranty by Lessor under this Lease or any other agreement between Lessor and Lessee, or to which Lessor and Lessee are parties, (c) any bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, winding up or other proceedings affecting Lessor or any assignee or transferee of Lessor, (d) any lawful or unlawful prohibition of, or restriction upon, Lessee's use of Leased Property, or interference with such use, or (e) for any other cause whether similar or dissimilar to any of the foregoing. Lessee hereby specifically waives all rights, arising from any occurrence whatsoever, which may now or hereafter be conferred upon it by law to (1) modify, surrender or terminate this Lease or quit or surrender the Leased Property or any portion thereof, or (2) abate, reduce, suspend or defer Rent or other sums payable by Lessee hereunder, except as otherwise specifically provided in this Lease. The obligations of Lessee hereunder shall be separate and independent covenants and agreements and the Rent and all other sums payable by Lessee hereunder shall continue to be payable in all events unless the obligations to pay the same shall be terminated pursuant to the express provisions of this Lease or by termination of this Lease other than by reason of an Event of Default. ARTICLE VI ---------- 6.1 OWNERSHIP OF THE LEASED PROPERTY. Lessee acknowledges that the Leased Property is the property of Lessor and that Lessee has only the right to the possession and use of the Leased Property upon the terms and conditions of this Lease. 6.2 LESSEE'S PERSONAL PROPERTY. Throughout the Term, Lessee will acquire, own, maintain and replace such personal property (other than Capital Expenditures) and Inventory as is required to operate the Leased Property as a hotel and, otherwise, in the manner contemplated by this Lease. At all times during the Term Lessee shall maintain an adequate and customary supply of inventory. Lessee may (and shall as provided herein below), at its expense, install, affix or assemble or place on any parcels of the Land or in any of the Leased Improvements, any items of personal property (including -24- 30 Inventory) owned by Lessee (collectively, the "Lessee's Personal Property"). Lessee, at the commencement of the Term, and from time to time thereafter, shall provide Lessor with an accurate list of all such items of the Lessee's Personal Property. Lessee may, subject to the conditions set forth in this Section 6.2 and Section 6.3, remove any of Lessee's Personal Property set forth on such list at any time during the Term or upon the expiration or any prior termination of the Term. All of Lessee's Personal Property not removed by Lessee within ten (10) days following the expiration or earlier termination of the Term shall be considered abandoned by Lessee and may be appropriated, sold, destroyed or otherwise disposed of by Lessor without first giving Notice thereof to Lessee, without any payment to Lessee and without any obligation to account therefor. Lessee will, at its expense, restore the Leased Property to the condition required by Section 9.1(d), including repair of all damage to the Leased Property caused by the removal of Lessee's Personal Property, whether effected by Lessee or Lessor. Lessee may make such financing arrangements, title retention agreements, leases or other agreements with respect to the Lessee's Personal Property as it sees fit provided that Lessee first advises Lessor of any such arrangement and such arrangement expressly provides that in the event of Lessee's default thereunder, Lessor may assume Lessee's obligations and rights under such arrangement. 6.3 LESSOR'S LIEN. To the fullest extent permitted by applicable law, Lessor is granted a lien and security interest on all of Lessee's Personal Property now or hereinafter placed in or upon the Leased Property, and such lien and security interest shall remain attached to Lessee's Personal Property until payment in full of all Rent and satisfaction of all of Lessee's obligations hereunder; provided, however, Lessor shall subordinate its lien and security interest to any purchase money security interest of any non-Affiliate of Lessee which finances such Lessee's Personal Property of such Lessee's Personal Property, the terms and conditions of such subordination to be satisfactory to Lessor in the exercise of reasonable discretion. Lessee shall, upon the request of Lessor, execute such financing statements, estoppel certificates and other documents or instruments reasonably requested by Lessor to perfect the lien and security interests herein granted. ARTICLE VII ----------- 7.1 CONDITION OF THE LEASED PROPERTY. Lessee acknowledges receipt and delivery of possession of the Leased Property. Lessee has examined and otherwise has knowledge of the condition of the Leased Property and has found the same to be satisfactory for its purposes hereunder. Lessee is leasing the Leased Property "as is," "where is" and with "all faults," in its present condition. Lessee waives any claim or action against Lessor in respect of the condition of the Leased Property. THE LEASED PROPERTY IS DEMISED IN ITS PRESENT CONDITION WITHOUT -25- 31 REPRESENTATION OR WARRANTY (EXPRESSED OR IMPLIED) BY LESSOR AND SUBJECT TO THE RIGHTS OF PARTIES IN POSSESSION, AND TO THE EXISTING STATE OF TITLE INCLUDING ALL CURRENT AND FUTURE COVENANTS, CONDITIONS, RESTRICTIONS, EASEMENTS AND OTHER MATTERS (NOT LIMITED TO ITEMS OF RECORD) INCLUDING ALL APPLICABLE LEGAL REQUIREMENTS, THE LIEN OF FINANCING INSTRUMENTS, MORTGAGES, DEEDS OF TRUST AND SECURITY DEEDS, AND INCLUDING OTHER MATTERS WHICH WOULD BE DISCLOSED BY AN INSPECTION OF THE LEASED PROPERTY OR BY AN ACCURATE SURVEY THEREOF. LESSOR MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED PROPERTY, OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY LESSEE. LESSEE ACKNOWLEDGES THAT THE LEASED PROPERTY HAS BEEN INSPECTED BY LESSEE AND IS SATISFACTORY TO IT. Notwithstanding the foregoing, however, to the extent permitted by law, Lessor hereby assigns to Lessee all of Lessor's rights to proceed against any predecessor in title other than Lessee (or an Affiliate of Lessee which conveyed the Leased Property to Lessor) for breaches of warranties or representations or for latent defects in the Leased Property. Lessor shall fully cooperate with Lessee in the prosecution of any such claim, in Lessor's or Lessee's name, all at Lessee's sole cost and expense. Lessee hereby agrees to indemnify, defend and hold harmless Lessor from and against any claims, obligations and liabilities against or incurred by Lessor in connection with such cooperation. All amounts recovered that are attributable to the period after the Term shall belong to Lessor. 7.2 USE OF THE LEASED PROPERTY. (a) Lessee covenants that it will proceed with all due diligence and will exercise its best efforts to obtain and to maintain all approvals needed to use and operate the Leased Property and the Facility under applicable local, state and federal law. (b) Lessee shall use or cause to be used the Leased Property only as a hotel facility (including food and beverage operations) of a caliber consistent with its present use, and for such other uses as may be necessary or incidental to such use or such other use as otherwise approved by Lessor (the "Primary Intended Use"). Lessee shall not use the Leased Property or any portion thereof for any other use without the prior written consent of Lessor, which consent may be granted, denied or conditioned in Lessor's sole discretion. No use shall be made or permitted to be made of the Leased Property, and no acts shall be done, which will cause the cancellation or increase the premium of any insurance policy covering the Leased Property or any part thereof (unless another adequate policy satisfactory to Lessor is available and Lessee pays any premium increase), nor shall Lessee sell or permit to be kept, used or sold in or about the Leased -26- 32 Property any article which may be prohibited by law or fire underwriter's regulations. Lessee shall, at its sole cost, comply with all of the requirements pertaining to the Leased Property of any insurance board, association, organization or company necessary for the maintenance of insurance, as herein provided, covering the Leased Property and Lessee's Personal Property. (c) Subject to the provisions of Articles XIV and XV Lessee covenants and agrees that during the Term it will (1) maintain, operate continuously the Leased Property as a hotel facility of the class currently operated at the Leased Property, (2) keep in full force and effect and comply with all the provisions of the Franchise Agreement, (3) not terminate or amend the Franchise Agreement without the consent of Lessor, (4) maintain appropriate certifications and licenses for such use and otherwise comply with all Legal Requirements and (5) seek to maximize the gross revenues generated therefrom consistent with sound business practices. (d) Lessee shall not commit or suffer to be committed any waste on the Leased Property, or in the Facility, nor shall Lessee cause or permit any nuisance thereon. (e) Lessee shall neither suffer nor permit the Leased Property or any portion thereof, or Lessee's Personal Property, to be used in such a manner as (1) might reasonably tend to impair Lessor's (or Lessee's, as the case may be) title thereto or to any portion thereof, or (2) may reasonably make possible a claim or claims of adverse usage or adverse possession by the public, as such, or of implied dedication of the Leased Property or any portion thereof, subject to Lessor's prior consent. (f) Except as set forth on Exhibit F attached hereto and incorporated by reference, Lessee or an Affiliate of Lessee shall not own, or have any ownership interest in, any hotel or motel property in which Lessor or an Affiliate of Lessor does not have an interest. Neither Lessee nor an Affiliate of Lessee shall operate or manage any hotel or motel that is within a ten (10) mile radius of any hotel or motel property in which Lessor or an Affiliate of Lessor has an interest on the date Lessee or its Affiliate would otherwise commence operating or managing such property, other than pursuant to this Lease or another lease, agreement or arrangement with Lessor or an Affiliate of Lessor. Lessor agrees to notify Lessee promptly of the location of any hotel or motel property in which Lessor or an Affiliate of Lessor has an interest. (g) Lessee shall not use, generate, handle, dispose or store Hazardous Materials on the Leased Property, except in the normal course of operations of the Leased Property as a hotel and in compliance with all Environmental Laws. -27- 33 (h) Lessee shall not enter into any collective bargaining agreements with respect to any of the employees at the Leased Property without the prior consent of Lessor, which shall not be unreasonably withheld or delayed, unless required by law. (i) Lessee hereby assumes and agrees to perform all of the obligations of Lessor under all leases in effect at the Leased Property as of the date of commencement of the Term. (j) Lessee represents that, as of the date hereof, its sole business activity consists of, and Lessee covenants that, during the Term hereof, its sole business activity shall consist of the lease and operation of the Leased Property, the Other Hotels and the operations described in Exhibit G attached hereto and incorporated by reference, all of which shall be performed by subsidiaries of Lessee and not by Lessee directly. Except as provided in the foregoing sentence, and on Exhibit F, Lessee agrees that neither it nor any of its Affiliates shall own, lease, operate, manage or franchise, directly or indirectly, any hotel not owned by Lessor or any Affiliate of Lessor during the Term of this Lease. Notwithstanding the foregoing, Lessor acknowledges that Lessee, through its subsidiaries, may engage in third party hotel management, purchasing services interior design services and other business activities. 7.3 LESSOR TO GRANT EASEMENTS, ETC. Lessor will, from time to time, so long as no Event of Default has occurred and is continuing, at the request of Lessee and at Lessee's cost and expense (but subject to the approval of Lessor, which approval shall not be unreasonably withheld or delayed), (a) grant easements and other rights in the nature of easements with respect to the Leased Property to third parties, (b) release existing easements or other rights in the nature of easements which are for the benefit of the Leased Property, (c) dedicate or transfer unimproved portions of the Leased Property for road, highway or other public purposes, (d) execute petitions to have the Leased Property annexed to any municipal corporation or utility district, (e) execute amendments or additions to any covenants and restrictions affecting the Leased Property and (f) execute and deliver to any Person any instrument appropriate to confirm or effect such grants, releases, dedications, transfers, petitions and amendments (to the extent of its interests in the Leased Property), but only upon delivery to Lessor of an Officer's Certificate stating that such grant, release, dedication, transfer, petition or amendment is beneficial to the proper conduct of the business of Lessee on the Leased Property and does not materially reduce the value of the Leased Property. 7.4 COMPLIANCE WITH GROUND LEASE. [Lessee shall comply with the provisions of the Ground Lease and shall take no action, or omit to take any action, that would cause or result in any default thereunder]. [IF APPLICABLE] -28- 34 ARTICLE VIII ------------ 8.1 COMPLIANCE WITH LEGAL, INSURANCE REQUIREMENTS, LESSOR'S INSURANCE AND TAX OBLIGATIONS. Subject to Article XII relating to permitted contests, Lessee, at its expense, will promptly (a) comply and cause the Leased Property to comply with all applicable Legal Requirements and Insurance Requirements in respect of the use, operation, maintenance, repair and restoration of the Leased Property; provided, however, that Lessor shall be responsible for the cost of compliance with Insurance Requirements presented to Lessor in writing including Franchisor requirements which are related to the leased real and personal property, as more fully set forth in Article XIII, and shall be responsible for all Capital Expenditures and the items in clauses (1) through (6) of the definition of "Impositions" set forth in Article II, unless the need for such Capital Expenditure is the result of Lessee's negligence, misconduct or an Alteration made by or commenced by Lessee other than Alterations contained in the Capital Expenditure Budget, and (b) procure, maintain and comply with all appropriate licenses and other authorizations required for any use of the Leased Property and Lessee's Personal Property then being made, and for the proper erection, installation, operation and maintenance of the Leased Property or any part thereof. 8.2 LEGAL REQUIREMENTS COVENANTS. Lessee covenants and agrees that the Leased Property and Lessee's Personal Property shall not be used for any unlawful purpose, and that Lessee shall not permit or suffer to exist any unlawful use of the Leased Property by others. Lessee shall acquire and maintain all appropriate licenses, certifications, permits and other authorizations and approvals needed to operate the Leased Property in its customary manner for the Primary Intended Use, and any other lawful use conducted on the Leased Property as may be permitted from time to time hereunder. Lessee further covenants and agrees that Lessee's use of the Leased Property and maintenance, alteration, and operation of the same, and all parts thereof, shall at all times conform to all Legal Requirements, unless the same are finally determined by a court of competent jurisdiction to be unlawful (and Lessee shall cause all such subtenants, invitees or others to so comply with all Legal Requirements). Lessee may, however, upon prior Notice to Lessor, and subject to the provisions of Article XII, contest the legality or applicability of any such Legal Requirement or any licensure or certification decision if Lessee maintains such action in good faith, with due diligence, without prejudice to Lessor's rights hereunder, and at Lessee's sole expense. If by the terms of any such Legal Requirement compliance therewith pending the prosecution of any such proceeding may legally be delayed without the incurrence of any lien, charge or liability of any kind against the Facility or Lessee's leasehold interest therein and without subjecting Lessee or Lessor to any liability, civil or criminal, for failure so to comply therewith, Lessee may -29- 35 delay compliance therewith until the final determination of such proceeding. If any lien, charge or civil or criminal liability would be incurred by reason of any such delay, Lessee, on the prior written consent of Lessor, which consent shall not be unreasonably withheld, may nonetheless contest as aforesaid and delay as aforesaid provided that such delay would not subject Lessor to criminal liability and Lessee both (a) furnishes to Lessor security reasonably satisfactory to Lessor against any loss or injury to Lessor by reason of such contest or delay and (b) prosecutes the contest with due diligence and in good faith. 8.3 ENVIRONMENTAL COVENANTS. In addition to, and not in diminution of, Lessee's covenants and undertakings in Sections 8.1 and 8.2 hereof, Lessee covenants and undertakes with Lessor as follows: (a) At all times hereafter until such time as all liabilities, duties or obligations of Lessee to the Lessor under the Lease have been satisfied in full, Lessee shall fully comply with all Environmental Laws applicable to the Leased Property and the operations thereon, subject to Lessor's obligation to pay for Capital Expenditures, Lessee agrees to give Lessor prompt written notice of (1) all Environmental Liabilities; (2) all pending, threatened or anticipated Proceedings, and all notices, demands, requests or investigations, relating to any Environmental Liability or relating to the issuance, revocation or change in any Environmental Authorization required for operation of the Leased Property; (3) all Releases at, on, in, under or in any way affecting the Leased Property, or any Release known by Lessee at, on, in or under any property adjacent to or near the Leased Property; and (4) all facts, events or conditions that could reasonably lead to the occurrence of any of the above-referenced matters. (b) Lessor hereby agrees to defend, indemnify and save harmless any and all Lessee Indemnified Parties from and against any and all Identified Environmental Liabilities and Unidentified Environmental Liabilities, in all cases, which were caused by the acts or negligent failures to act of Lessor. (c) Lessee hereby agrees to defend, indemnify and save harmless any and all Lessor Indemnified Parties from and against any and all Unidentified Environmental Liabilities caused by the acts or negligent failures to act of Lessee. Lessee's responsibility to indemnify Lessor shall survive the termination of this Lease. (d) If any Proceeding is brought against any Indemnified Party in respect of an Environmental Liability with respect to which such Indemnified Party may claim indemnification under either Section 8.3(b) or (c) (an "Indemnified Environmental Liability"), the Indemnifying Party, upon request, shall at its sole expense resist and defend such Proceeding, or cause the same -30- 36 to be resisted and defended by counsel designated by the Indemnified Party and approved by the Indemnifying Party, which approval shall not be unreasonably withheld; provided, however, that such approval shall not be required in the case of defense by counsel designated by any insurance company undertaking such defense pursuant to any applicable policy of insurance. Each Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel will be at the sole expense of such Indemnified Party unless such counsel has been approved by the Indemnifying Party, which approval shall not be unreasonably withheld. The Indemnifying Party shall not be liable for any settlement of any such Proceeding made without its consent, which shall not be unreasonably withheld, but if settled with the consent of the Indemnifying Party, or if settled without its consent (if its consent shall be unreasonably withheld), or if there be a final, nonappealable judgment for an adversarial party in any such Proceeding, the Indemnifying Party shall indemnify and hold harmless the Indemnified Parties from and against any liabilities incurred by such Indemnified Parties by reason of such settlement or judgment. For purposes of this Section 8.3, all amounts for which any Indemnitee seeks indemnification shall be computed net of (a) any actual income tax benefit resulting therefrom to such Indemnitee, (b) any insurance proceeds received (net of tax effects) with respect thereto, and (c) any amounts recovered (net of tax effects) from any third parties based on claims the Indemnitee has against such third parties which reduce the damages that would otherwise be sustained; provided that in all cases, the timing of the receipt or realization of insurance proceeds or income tax benefits or recoveries from third parties shall be taken into account in determining the amount of reduction of damages. Each Indemnitee agrees to use its reasonable efforts to pursue, or assign to Lessee, any claims or rights it may have against any third party which would materially reduce the amount of damages otherwise incurred by such Indemnitee. Notwithstanding anything to the contrary contained in this Lease, if Lessor shall become entitled to the possession of the Leased Property by virtue of the termination of this Lease or repossession of the Leased Property, then Lessor may assign its indemnification rights under Section 8.3 of this Lease (but not any other rights hereunder) to any Person to whom the Lessor subsequently transfers the Leased Property, subject to the following conditions and limitations, each of which shall be deemed to be incorporated into the terms of such assignment, whether or not specifically referred to therein; (1) The indemnification rights referred to in this section may be assigned only if a known Environmental Liability then exists or if a Proceeding -31- 37 is then pending or, to the knowledge of Lessee or Lessor, then threatened with respect to the Leased Property; (2) Such indemnification rights shall be limited to Indemnified Environmental Liabilities relating to or specifically affecting the Leased Property; and (3) Any assignment of such indemnification rights shall be limited to the immediate transferee of Lessor, and shall not extend to any such transferee's successors or assigns. (e) At any time any Indemnitee has reason to believe circumstances exist which could reasonably result in an Indemnified Environmental Liability, upon reasonable prior written notice to Lessee stating such Indemnitee's basis for such belief, an Indemnitee shall be given immediate access to the Leased Property (including, but not limited to, the right to enter upon, investigate, drill wells, take soil borings, excavate, monitor, test, cap and use available land for the testing of remedial technologies), Lessee's employees, and to all relevant documents and records regarding the matter as to which a responsibility, liability or obligation is asserted or which is the subject of any Proceeding; provided that such access may be conditioned or restricted as may be reasonably necessary to ensure compliance with Legal Requirements and the safety of personnel and facilities or to protect confidential or privileged information. All Indemnitees requesting such immediate access and cooperation shall endeavor to coordinate such efforts to result in as minimal interruption of the operation of the Leased Property as practicable. ARTICLE IX ---------- 9.1 MAINTENANCE AND REPAIR. (a) Subject to Lessor's obligation to make Capital Expenditures and performance of Lessor's obligations under Subsection 9.1(c), Lessee, at its sole expense, shall keep the Leased Property in good order and repair, except for ordinary wear and tear (whether or not the need for such repairs occurred as a result of Lessee's use, any prior use, the elements or the age of the Leased Property, or any portion thereof). Except as otherwise provided in Section 9.1(b), Article XIV or Article XV, and subject to Lessor's obligation to make Capital Expenditures, Lessee shall, with reasonable promptness, make all necessary and appropriate repairs, replacements, and improvements thereto of every kind and nature, whether interior or exterior ordinary or extraordinary, foreseen or unforeseen, or arising by reason of a condition existing prior to the commencement of the Term of this Lease (concealed or otherwise), or required by any governmental -32- 38 agency having jurisdiction over the Leased Property. Lessee, however, shall be permitted upon prior written notice to Lessor to prosecute claims against Lessor's predecessors in title for breach of any representation or warranty or for any latent defects in the Leased Property to be maintained by Lessee unless Lessor is already diligently pursuing or elects to diligently pursue such a claim. All repairs shall, to the extent reasonably achievable, be at least equivalent in quality to the original work. Lessee will not take or omit to take any action, the taking or omission of which might materially impair the value or the usefulness of the Leased Property or any part thereof for its Primary Intended Use. (b) Lessee shall, upon the expiration or prior termination of the Term, vacate and surrender the Leased Property to Lessor in the condition in which the Leased Property was originally received from Lessor, except as repaired, rebuilt, restored, altered or added to as permitted or required by the provisions of the Lease and except for ordinary wear and tear (subject to the obligation of Lessee to maintain the Leased Property in good order and repair, as provided in Subsection 9.1(a), damage by casualty or Condemnation, and Lessor's obligations with respect to Capital Expenditures. (c) Lessor shall be responsible for and pay for items of a capital nature as defined in Exhibit E and to make Capital Expenditures, all as required by and provided in Section 3.7 9.2 ENCROACHMENTS, RESTRICTIONS, ETC. If, as a result of any act or omission by Lessee, any of the Leased Improvements, at any time, materially encroach upon any property, street or right-of-way adjacent to the Leased Property, or violate the agreements or conditions contained in any lawful restrictive covenant or other agreement affecting the Leased Property, or any part thereof, or impair the rights of others under any easement or right-of-way to which the Leased Property is subject (each of the foregoing conditions being referred to herein as an "Encroachment"), then promptly upon the request of Lessor or at the behest of any person affected by any such encroachment, violation or impairment, Lessee shall, at its expense, subject to its right to contest the existence of any encroachment, violation or impairment and in such case, in the event of an adverse final determination, either (a) obtain valid and effective waivers or settlements of all claims, liabilities and damages resulting from each such encroachment, violation or impairment, whether the same shall affect Lessor or Lessee or (b) make such changes in the Leased Improvements, and take such other actions, as Lessee in the good faith exercise of its judgment deems reasonably practicable to remove such encroachment, and to end such violation or impairment, including, if necessary, the alteration of any of the Leased Improvements, and in any event take all such actions as may be necessary in order to be able to continue the operation of the Leased Improvements for the Primary Intended Use -33- 39 substantially in the manner and to the extent of the Leased Improvements were operated prior to the assertion of such violation, impairment or encroachment. If any such alteration is required for any reason other than Lessee's willful misconduct or gross negligence, the cost of such alterations shall be treated as Capital Expenditures and be performed pursuant to Section 3.7. Any such alteration shall be made in conformity with the applicable requirements of Article X. Nothing contained herein shall be construed as imposing on Lessee any liability for, or responsibility for remedying the effects of, any Encroachment occurring other than as a result of any willful misconduct or gross negligence of Lessee. Lessee's obligations under this Section 9.2 shall be in addition to and shall in no way discharge or diminish any obligation of any insurer under any policy of title or other insurance held Lessor. ARTICLE X --------- 10.1 ALTERATIONS. Lessee shall have the right, but not the obligation, with the prior approval of Lessor (which approval may not be unreasonably withheld) to make additions, modifications or improvements to the Leased Property in connection with the Primary Intended Use (collectively, "Alterations"), provided that such action shall not significantly alter the character or purposes or significantly detract from the value or operating efficiency thereof and will not impair the revenue-producing capability of the Leased Property or adversely affect the ability of Lessee to comply with the provisions of this Lease. As a condition of its approval, Lessor may retain the right to separately approve all plans and specifications related to any additions, modifications or improvements. Lessor may further require Lessee to obtain appropriate completion bonds and to provide for the removal of any improvements upon the termination of this Lease. The cost of such Alterations shall, subject to Lessor's obligations to make Capital Expenditures, be paid by Lessee, and all such Alterations shall be included under the terms of this Lease and upon expiration or earlier termination of the Lease shall pass to and become the property of Lessor. 10.2 SALVAGE. All materials which are scrapped or removed in connection with the making of repairs or alterations required or permitted by Article IX or X shall be or become the property of Lessor or Lessee depending on which party is paying for or providing the financing for such work. 10.3 JOINT USE AGREEMENTS. If Lessee constructs additional improvements that are connected to the Leased Property or share maintenance facilities, HVAC (as defined in Section 13.1(b)), electrical, plumbing or other systems, utilities, parking or other amenities, the parties shall enter into a mutually agreeable cross-easement or joint use agreement to make available necessary services and facilities in connection with such -34- 40 additional improvements, to protect each of their respective interests in the properties affected, and to provide for separate ownership, use, and/or financing of such improvements. ARTICLE XI ---------- LIENS. Subject to the provision of Article XII relating to permitted contests, Lessee will not directly or indirectly create or allow to remain and will promptly discharge at its expense any lien, encumbrance, attachment, title retention agreement or claim upon the Leased Property or any attachment, levy, claim or encumbrance in respect of the Rent, not including, however, (a) this Lease, (b) the matters, if any, included as exceptions in the title policy insuring Lessor's interest in the Leased Property, (c) restrictions, liens and other encumbrances which are consented to in writing by Lessor or any easements granted pursuant to the provisions of Section 7.3 of this Lease, (d) liens for those Impositions upon Lessor which Lessee is not required to pay hereunder, (e) subleases permitted by Article XXIII hereof, (f) liens for Impositions or for sums resulting from noncompliance with Legal Requirements so long as (1) the same are not yet payable or are payable without the addition of any fine or penalty or (2) such liens are in the process of being contested as permitted by Article XII, (g) liens of mechanics, laborers, materialmen, suppliers or vendors for sums either disputed or not yet due provided that (1) the payment of such sums shall not be postponed under any related contract for more than sixty (60) days after the completion of the action giving rise to such lien and such reserve or other appropriate provisions as shall be required by law or generally accepted accounting principles shall have been made therefor or (2) any such liens are in the process of being contested as permitted by Article XII hereof, and (h) any liens which are the responsibility of Lessor pursuant to the provisions of Article XXXIV of this Lease, or result from Lessor's wrongful failure to pay for Capital Expenditures. ARTICLE XII ----------- PERMITTED CONTESTS. Lessee shall have the right to contest the amount or validity of any Imposition to be paid by Lessee or any Legal Requirement or Insurance Requirement or any lien, attachment, levy, encumbrance, charge or claim ("Claims") not otherwise permitted by Article XI, by appropriate legal proceedings in good faith and with due diligence (but this shall not be deemed or construed in any way to relieve, modify or extend Lessee's covenants to pay or its covenants to cause to be paid any such charges at the time and in the manner as in this Article provided), on condition, however, that such legal proceedings shall not operate to relieve Lessee from its obligations hereunder and shall not cause the sale or risk the -35- 41 loss of the Leased Property, or any part thereof, or cause Lessor or Lessee to be in default under any mortgage, deed of trust or security deed encumbering the Leased Property or any interest therein. Upon the request of Lessor, Lessee shall either (a) provide a bond or other assurance reasonably satisfactory to Lessor that all Claims which may be assessed against the Leased Property together with interest and penalties, if any, thereon will be paid, or (b) deposit within the time otherwise required for payment with a bank or trust company as trustee upon terms reasonably satisfactory to Lessor, as security for the payment of such Claims, money in an amount sufficient to pay the same, together with interest and penalties in connection therewith, as to all Claims which may be assessed against or become a Claim on the Leased Property, or any part thereof, in said legal proceedings. Lessee shall furnish Lessor and any lender of Lessor with reasonable evidence of such deposit within five days of the same. Lessor agrees to join in any such proceedings if the same be required to legally prosecute such contest of the validity of such Claims; provided, however, that Lessor shall not thereby be subjected to any liability for the payment of any costs or expenses in connection with any proceedings brought by Lessee; and Lessee covenants to indemnify and save harmless Lessor from any such costs or expenses. Lessee shall be entitled to any refund of any Claims and such charges and penalties or interest thereon which have been paid by Lessee or paid by Lessor and for which Lessor has been fully reimbursed. In the event that Lessee fails to pay any Claims when due or to provide the security therefor as provided in this paragraph and to diligently prosecute any contest of the same, Lessor may, upon ten days advance Notice to Lessee, pay such charges together with any interest and penalties and the same shall be repayable by Lessee to Lessor as Additional Charges at the next Payment Date provided for in this Lease. Provided, however, that should Lessor reasonably determine that the giving of such Notice would risk loss to the Leased Property or cause damage to Lessor, then Lessor shall give such Notice as is practical under the circumstances. Lessor reserves the right to contest any of the Claims at its expense not pursued by Lessee. Lessor and Lessee agree to cooperate in coordinating the contest of any claims. ARTICLE XIII ------------ 13.1 GENERAL INSURANCE REQUIREMENTS. Lessee shall at all times keep the Leased Property and the Facility (including all personal property) insured with the kinds and amounts of insurance described below and in compliance with any Franchise requirements; provided, however, that as to both Lessor's and Lessee's insurance requirements, the kinds and amounts of insurance required are reasonably available for purchase from insurance companies (i) authorized to write insurance in the State and (ii) with a minimum financial stability rating (A.M. Bests Rating) of "A minus 7" (or as otherwise reasonably -36- 42 acceptable to Lessor). The insurance shall be maintained in the amounts set forth below with deductibles in amounts reasonably acceptable to Lessor. The policies shall name Lessor and Lessee as insureds or as additional named insureds, as the case may be. Losses shall be payable to Lessor and/or its lenders except that Lessee's Business Interruption Insurance and Personal Property Insurance shall name Lessor as loss payee. Any loss adjustment shall require the written mutual consent of Lessor and Lessee, each acting reasonably and in good faith. Evidence of insurance shall be provided to each party on the date hereof, and evidence of renewal shall be provided, no later than thirty (30) days prior to expiration of any policy required hereunder. The policies on the Leased Property, including the Leased Improvements, Fixtures and all personal property shall include: (a) Lessor shall provide building insurance on the "Special Form" (formerly "All Risk" form) in an amount and carry such risks as are reasonably acceptable to Lessor, and personal property insurance on its property as is reasonably acceptable to it; (b) Lessor shall provide insurance on the "Comprehensive Coverage Form" for loss or damage (direct and indirect) from steam boilers, pressure vessels, electrical and mechanical systems, heating, ventilation and air conditioning ("HVAC") systems or similar apparatus, now or hereafter installed in the Facility, in an amount reasonably determined by Lessor from time to time; (c) Lessee shall provide loss of income/business interruption insurance/rent insurance on the "Special Form", with proceeds to be in an amount not less than one year of gross rent and other charges hereunder; (d) Lessee shall provide commercial general liability insurance, with amounts not less than $10,000,000, together with excess liability coverage of not less than $50,000,000, covering each of the following: bodily injury, death, or property damage liability per occurrence, personal and advertising injury, general aggregate, products and completed operations, and "all risk legal liability" (including, but not limited to, liquor law or "dram shop" liability), all with respect to Lessor, Lessee and the Leased Property; (e) Except to the extent Lessee is required to pay for the same, or otherwise required to be provided by Lessor hereunder, Lessor shall provide insurance covering such other hazards and in such amounts as may be customary for comparable properties in the vicinity of the Leased Property and reasonably acceptable to Lessor and is available from insurance companies, insurance pools or other appropriate companies authorized to do business in the State, and each with a minimum financial stability rating (A.M. Bests Rating) of "A minus 7," at rates -37- 43 which are economically practicable in relation to the risks covered as may be reasonably requested by Lessee; (f) Lessee shall provide fidelity bonds with limits and deductibles as may be reasonably requested by Lessor, covering Lessee's employees and other crime insurance as may be reasonably required by Lessor; (g) Lessee shall provide workmen's compensation insurance to the extent required by law; (h) Lessee shall provide vehicle liability and physical damage insurance for owned, non-owned, and hired vehicles, in the amount of $10,000,000; and (i) Lessee shall provide such other insurance as Lessor may reasonably request for facilities such as the Leased Property and the operation thereof, consistent with Lessee's and Lessor's obligations hereunder. 13.2 FULL REPLACEMENT COST. The term "full replacement cost" as used herein shall mean the actual replacement cost of the Leased Property requiring replacement from time to time including an increased cost of construction endorsement in the amount of $5,000,000, if available, and the cost of debris removal in an amount not to exceed twenty-five percent (25%) of the cost of construction. In the event either party believes that full replacement cost has increased or decreased at any time during the Lease Term, it shall have the right to have such full replacement cost redetermined. Lessee shall obtain such additional insurance as may be required as a result of such redetermination as full replacement cost. 13.3 WAIVER OF SUBROGATION. All insurance policies covering the Leased Property, the Fixtures, the Facility or any personal property, including, without limitation, contents, fire, property and "special perils" insurance, shall expressly waive any right of subrogation on the part of the insurer against the other party. Such policies will include such waiver clause or endorsement so long as the same are obtainable without unreasonable extra cost, and in the event of such an extra charge the other party, at its election, may pay the same, but shall not be obligated to do so. 13.4 WAIVER OF COINSURANCE. All insurance policies covering the Leased Property, the Fixtures, the Facility or any personal property, and all insurance covering loss of income and business interruption, shall expressly waive any coinsurance penalty and resulting reduction in insurance proceeds, provided that a waiver of coinsurance is applicable with respect to a given insurance policy. -38- 44 13.5 FORM SATISFACTORY, ETC. All of the policies of insurance referred to in this Article XIII shall be written in a form satisfactory to Lessor and Lessee and by insurance companies satisfactory to Lessor and Lessee. Each party agrees that it will not unreasonably withhold its approval as to the form of the policies of insurance or as to the insurance companies selected. All premiums therefor, shall be paid and such policies or binders delivered and followed with duplicate policies as issued thereof to the other party prior to their effective date (and, with respect to any renewal policy, thirty (30) days prior to the expiration of the existing policy), and in the event of the failure of the party required to provide such insurance either to effect such insurance as herein called for or to pay the premiums therefor, or to deliver such policies or certificates thereof at the times required, the other party shall be entitled, but shall have no obligation, to effect such insurance and pay the premiums therefor, which premiums shall be repayable upon written demand therefor. Each insurer mentioned in this Article XIII shall agree, by endorsement to the policy or policies issued by it, or by independent instrument, that it will give thirty (30) days' written notice before the policy or policies in question shall be materially altered, not renewed or cancelled. 13.6 INCREASE IN LIMITS. If either Lessor or Lessee at any time deems the limits of bodily injury or property damage under the comprehensive public liability insurance then carried to be either excessive or insufficient, Lessor or Lessee shall endeavor in good faith to agree on the proper and reasonable limits for such insurance to be carried; provided, however, that such limits shall not be reduced below a minimum limit of $10,000,000. Thereafter, such insurance shall be carried with the limits thus agreed on until further change pursuant to the provisions of this Section. 13.7 BLANKET POLICY. Notwithstanding anything to the contrary contained in this Article XIII, Lessee's obligations to carry the insurance provided for herein may be brought within the coverage of a so-called blanket policy or policies of insurance; provided, however, that the coverage afforded will not be reduced or diminished or otherwise be different from that which would exist under a separate policy meeting all other requirements of this Lease by reason of the use of such blanket policy of insurance, and provided further that the requirements of this Article XIII are otherwise satisfied. 13.8 NO SEPARATE INSURANCE. Neither Lessee nor Lessor on its own initiative, or pursuant to the request or requirement of any third party, shall (i) take out separate insurance concurrent in form or contributing in the event of loss, with that required in this Article, or (ii) increase the amount of any then existing insurance by securing an additional policy or additional policies, unless all parties having an insurable interest in the subject matter of the insurance, are included therein as -39- 45 additional insureds, and the loss is payable under such additional separate insurance in the same manner as losses are payable under this Lease. The party obtaining such separate insurance shall immediately notify the other party of the obtaining of any such separate insurance or of the increasing of any of the amounts of the then existing insurance. 13.9 REPORTS OF INSURANCE CLAIMS. Lessee shall promptly investigate and make a written report to the appropriate insurance company as to all accidents, claims for damage relating to the ownership, operation, and maintenance of the Leased Improvements, any damage or destruction to the Leased Improvements and the estimated cost of repair thereof and shall prepare any and all reports required by any insurance company in connection therewith. Lessee shall submit such proposed filings and reports relating to such claims to Lessor for its review and approval, which approval shall not be unreasonably withheld or delayed, prior to submitting same to the appropriate insurance company. All other adjustments, settlements and compromises shall be made only with the prior written consent of Lessor. 13.10 FAILURE TO OBTAIN INSURANCE. In the event that Lessee shall fail to obtain or maintain any such insurance, Lessor shall have the right but not the obligation, to obtain such insurance and to charge the Premium cost of such to Lessee as Additional Changes. ARTICLE XIV ----------- 14.1 INSURANCE PROCEEDS. All proceeds payable by reason of any loss or damage to the Leased Property, or any portion thereof, and insured under any policy of insurance required by Article XIII of this Lease shall be paid by the payor to Lessor. If for any reason such proceeds are paid to any Person other than Lessor, the recipient shall surrender all proceeds to Lessor to be held in trust by Lessor in an interest-bearing account (subject to the provisions of Section 14.6). The net proceeds shall be made available for reconstruction or repair, as the case may be, of any damage to or destruction of the Leased Property, or any portion thereof, and shall be paid out by Lessor from time to time for the reasonable costs of such reconstruction or repair upon satisfaction of reasonable terms and conditions. Any excess proceeds of insurance remaining after the completion of the restoration or reconstruction of the Leased Property shall be paid to Lessor. If Lessor is not required to, and elects not to, repair and restore, and the Lease is terminated as described in Section 14.2(a), all such insurance proceeds shall be retained by Lessor. All salvage resulting from any risk covered by insurance shall belong to Lessor. -40- 46 14.2 RECONSTRUCTION IN THE EVENT OF DAMAGE OR DESTRUCTION COVERED BY INSURANCE. (a) If during the Term the Leased Property is totally or partially damaged or destroyed by a risk covered by the insurance described in Article XIII and the Facility thereby is rendered Unsuitable for its Primary Intended Use or following such casualty the Facility is uneconomic for its Primary Intended Use, Lessor shall, at Lessor's option, either (1) restore the Facility to substantially the same condition as existed immediately before the damage or destruction and otherwise in accordance with the terms of the Lease, or (2) terminate this Lease by Notice to Lessee given within ninety (90) days of the date of such damage or destruction. If Lessor determines to terminate this Lease, the Lease will terminate as of the date specified in Lessor's notice not later than sixty (60) after such notice without further liability hereunder (other than liability stated to survive the expiration or termination hereof) and Lessor shall be entitled to retain all insurance proceeds. (b) Except as provided in Section 14.6, if during the Term the Leased Property is partially damaged or destroyed by a risk covered by the insurance described in Article XIII, but the Facility is not thereby rendered Unsuitable for its Primary Intended Use, provided the Facility is not unecomonic for its Primary Intended Use, Lessor shall restore the Facility to substantially the same condition as existed immediately before the damage or destruction and otherwise in accordance with the terms of this Lease to the extent it can reasonably do so with the net insurance proceeds actually received in respect to such damage or destruction. Such damage or destruction shall not terminate this Lease; provided, however, that if Lessor cannot within a reasonable time, obtain all necessary government approvals, including building permits, licenses and conditional use permits, after diligent efforts to do so, in order to be able to perform all required repair and restoration work and to operate the Facility for its Primary Intended Use in substantially the same manner as that existing immediately prior to such damage or destruction and otherwise in accordance with the terms of this Lease, this Lease shall terminate on the date which is thirty (30) days after Lessor shall have notified the Lessee of the passage in such Lessor's reasonable determination of such reasonable period of time. (c) If Lessor elects to repair or restore the Leased Property, and the cost of the repair or restoration exceeds the net amount of proceeds received by Lessor from the insurance required under Article XIII, Lessor shall be obligated to contribute any excess amounts needed to restore the Leased Property. 14.3 RECONSTRUCTION IN THE EVENT OF DAMAGE OR DESTRUCTION NOT COVERED BY INSURANCE. Except as provided in Section 14.6 -41- 47 below, if during the Term the Facility is totally or materially destroyed by a risk not covered by the insurance described in Article XIII (whether or not actually obtained or in full force), whether or not such damage or destruction renders the Facility Unsuitable for its Primary Intended Use, Lessor at its option shall either (a) repair, rebuild or restore the Facility at Lessor's sole expense to substantially the same condition it was in immediately before such damage or destruction and such damage or destruction shall not terminate this Lease, or (b) terminate this Lease by Notice to Lessee given within ninety (90) days of the date of such destruction and this Lease will terminate as of the date specified in Lessor's notice not later than 60 days after such notice. If such damage or destruction is not material, Lessor shall restore the Facility to substantially the same condition as existed immediately before the damage or destruction and otherwise in accordance with the terms of the Lease. 14.4 LESSEE'S PERSONAL PROPERTY. All insurance proceeds payable by reason of any loss of or damage to any of Lessee's Personal Property shall be paid to Lessee. 14.5 ABATEMENT OF RENT. In the event of a casualty, except as otherwise provided herein, this Lease shall remain in full force and effect and Lessee's obligation to make rental payments and to pay all other charges required by this Lease (whether through the payment of insurance proceeds to Lessor or otherwise) shall remain unabated. 14.6 DAMAGE NEAR END OF TERM. Notwithstanding any provisions of Section 14.2 or 14.3 to the contrary, if damage to or destruction of the Facility occurs during the last twenty-four (24) months of the Term, and such damage or destruction cannot be repaired or restored within the earlier of (i) twelve (12) months, or (ii) the expiration of the Term, then Lessee shall have the right to terminate this Lease by giving written notice to Lessor within 60 days after the date of damage or destruction, whereupon all accrued Rent shall be paid immediately. 14.7 WAIVER. Lessee hereby waives any statutory rights of termination that may arise by reason of any damage or destruction of the Facility that Lessor is obligated to restore or may restore under any of the provisions of this Lease. ARTICLE XV ---------- 15.1 PARTIES' RIGHTS AND OBLIGATIONS. If during the Term there is any Condemnation of all or any part of the Leased Property or any interest in this Lease, the rights and obligations of Lessor and Lessee shall be determined by this Article XV. -42- 48 15.2 TOTAL TAKING. If (i) title to the fee of the whole of the Leased Property or [(ii) THE ENTIRE GROUND LEASE IS CONDEMNED BY ANY CONDEMNOR], this Lease shall cease and terminate as of the Date of Taking by the Condemnor. If title to the fee of less than the whole of the Leased Property is so taken or condemned, which nevertheless renders the Leased Property Unsuitable or Uneconomic for its Primary Intended Use, Lessee and Lessor shall each have the option, by notice to the other, at any time prior to the date that is 30 days after the Date of Taking, to terminate this Lease as of the Date of Taking. Upon such date, if such Notice has been given, this Lease shall thereupon cease and terminate. All Rent paid or payable by Lessee hereunder shall be apportioned as of the Date of Taking, and Lessee shall promptly pay Lessor such amounts. In the event of any such termination, the provisions of Section 15.6 shall apply. 15.3 ALLOCATION OF AWARD. The total Award made with respect to the Leased Property or for loss of rent, or for Lessor's loss of business beyond the Term of this Lease, shall be solely the property of and payable to Lessor. Any Award made for the taking of Lessee's Personal Property, or for removal and relocation expenses of Lessee in any such proceedings shall be the sole property of and payable to Lessee. In any Condemnation proceedings, Lessor and Lessee shall each seek its Award in conformity herewith, at its respective expense; provided, however, Lessee shall not initiate, prosecute or acquiesce in any proceedings that may result in a diminution of any Award payable to Lessor. 15.4 PARTIAL TAKING. If title to less than the whole of the Leased Property is condemned, and the Leased Property is still suitable for its Primary Intended Use, and not Uneconomic for its Primary Intended Use, or if Lessee or Lessor is entitled but each fails to timely elect to terminate this Lease as provided in Section 15.3 hereof, Lessor at its cost (not to exceed the net Condemnation Award) shall with all reasonable dispatch after the payment of such award to Lessor restore the untaken portion of any Leased Improvements so that such Leased Improvements constitute a complete architectural unit of the same general character and condition (as nearly as may be possible under the circumstances) as the Leased Improvements existing immediately prior to the Condemnation. During and after the restoration of the untaken portion of the Leased Property, Base Rent shall be abated in the manner and to the extent that is fair, just and equitable to both Lessee and Lessor, taking into consideration, among other relevant factors, the number of usable rooms, the amount of square footage, and the revenues affected by such partial Taking. In the event Base Rent is abated, the Threshold Amounts shall also be reduced accordingly. If Lessor and Lessee are unable to agree upon the amount of such abatement and for reduction within thirty (30) days after such partial Taking, the matter may be submitted by either party to a court of competent jurisdiction for resolution. -43- 49 15.5 TEMPORARY TAKING. If the whole or any part of the Leased Property or of Lessee's interest under this Lease is condemned by any Condemnor for its temporary use or occupancy, this Lease shall not terminate by reason thereof, and Lessee shall continue to pay, in the manner and at the terms herein specified, the full amounts of Rent and Additional Charges, but, if the entire Leased Property is so condemned, only to the extent of net proceeds of condemnation awards. Except only to the extent that Lessee may be prevented from so doing pursuant to the terms of the order of the Condemnor, Lessee shall continue to perform and observe all of the other terms, covenants, conditions and obligations hereof on the part of the Lessee to be performed and observed, as though such Condemnation had not occurred. In the event of any Condemnation as in this Section 15.5 described, the entire amount of any Award made for such Condemnation allocable to the Term, whether paid by way of damages, rent or otherwise, shall be paid to Lessee. Lessor covenants that upon the termination of any such period of temporary use or occupancy it will, at its sole expense, restore the Leased Property as nearly as may be reasonably possible to the condition in which the same was immediately prior to such Condemnation, unless such period of temporary use or occupancy extends beyond the expiration of the Term, in which case Lessor shall not be required to make such restoration. ARTICLE XVI ----------- 16.1 EVENTS OF DEFAULT. If any one or more of the following events (individually, an "Event of Default") occurs: (a) Lessee fails to make payment of the Base Rent when the same becomes due and payable and such condition continues for a period of ten (10) days; or (b) Lessee fails to make payment of Percentage Rent when the same becomes due and payable and such condition continues for a period of ten (10) days; or (c) Lessee fails to observe or perform any other term, covenant or condition of this Lease and such failure is not cured by Lessee within a period of thirty (30) days after receipt by the Lessee of Notice thereof from Lessor, unless such failure cannot with due diligence be cured within a period of thirty (30) days, in which case it shall not be deemed an Event of Default if Lessee proceeds promptly and with due diligence to cure the failure and diligently completes the curing thereof; provided, however, in no event shall such cure period extend beyond one hundred eighty (180) days after such Notice; or (d) Lessee shall file a petition in bankruptcy or reorganization for an arrangement pursuant to any federal or state bankruptcy law or any similar federal or state law, or -44- 50 shall be adjudicated a bankrupt or shall make an assignment for the benefit of creditors or shall admit in writing its inability to pay its debts generally as they become due, or if a petition or answer proposing the adjudication of the Lessee as a bankrupt or its reorganization pursuant to any federal or state bankruptcy law or any similar federal or state law shall be filed in any court and the Lessee shall be adjudicated a bankrupt and such adjudication shall not be vacated or set aside or stayed within sixty (60) days after the entry of an order in respect thereof, or if a receiver of the Lessee or of the whole or substantially all of the assets of the Lessee shall be appointed in any proceeding brought by the Lessee or if any such receiver, trustee or liquidator shall be appointed in any proceeding brought against the Lessee and shall not be vacated or set aside or stayed within sixty (60) days after such appointment; or (e) without Lessor's consent, Lessee is liquidated or dissolved, or begins proceedings toward such liquidation or dissolution, or, in any manner, permits the sale or divestiture of substantially all of its assets; or (f) the estate or interest of Lessee in the Leased Property or any part thereof is voluntarily or involuntarily transferred, assigned, conveyed, levied upon or attached in an proceeding (unless Lessee is contesting such lien or attachment in good faith in accordance with Article XII hereof); or (g) except as a result of damage, destruction or a partial or complete Condemnation, Lessee voluntarily ceases operation of the Leased Property for a period in excess of ten (10) days; (h) the Franchise Agreement with respect to the Facility on the Leased Premises is terminated by the franchisor as a result of any action or failure to act by the Lessee or any Person with whom the Lessee contracts for management services at the Facility; or (i) an Event of Default shall occur under any Percentage Lease (other than this Lease) between Lessor and Lessee; or (j) Robert Boykin, John Boykin and their heirs shall at any time cease to own directly not less than a collective 51% interest in Lessee or shall fail to collectively control Lessee unless Lessor shall, in its sole and absolute discretion, have granted its prior written consent thereto; or (k) Lessee shall breach the terms of Section 7.2(f), Article 19, Section 23.1, or Section 24.2; or -45- 51 (l) a breach or default shall occur under the Alignment of Interests Agreement, which breach or default shall continue beyond any applicable notice or grace period; then, and in any such event, Lessor may, so long as such Event of Default continues, exercise one or more remedies available to it herein or at law or in equity including, but not limited to, its right to terminate this Lease by giving Lessee the shortest Notice of such termination permitted by law. If litigation is commenced with respect to any alleged default under this Lease, the prevailing party in such litigation shall receive, in addition to its damages incurred, such sum as the court shall determine as its reasonable attorneys' fees, and all costs and expenses incurred in connection therewith. No Event of Default (other than a failure to make a payment of money) shall be deemed to exist under clause (c) during any time the curing thereof is prevented by an Unavoidable Delay, provided that upon the cessation of such Unavoidable Delay, Lessee remedies such default or Event of Default without further delay. 16.2 REMEDIES. (a) If any one or more Events of Default shall occur and be continuing, then Lessor shall have the right, in addition to all other rights or remedies available at law or in equity, at its election: (i) To give Lessee written notice of Lessor's intention to terminate this Lease on the earliest date permitted by law or on any later date specified in such notice, in which case Lessee's right to possession of the Leased Property shall cease and this Lease will be terminated on such date, except as to liability of Lessee expressly, stated herein to survive the termination of this Lease, including, without limitation, liability pursuant to Section 16.2(d); or (ii) Without further demand or notice, to reenter and take possession of the Leased Property or any part of the Leased Property, repossess the same, expel Lessee and those claiming through or under Lessee, and remove the effects of both or either, using such force for such purposes as may be lawful and necessary, without being liable for prosecution, without being deemed guilty of any manner of trespass, and without prejudice to any remedies for arrears or future payments of Base Rent, Percentage Rent, Additional Charges or other amounts payable under this Lease or as a result of any preceding breach of covenants or conditions; or (iii) To cure any Event of Default and to charge Lessee for the cost of effecting such cure, including, without -46- 52 limitation, reasonable attorneys, fees and interest on the amount so advanced at the Overdue Rate, provided that Lessor shall have no obligation to cure any such Event of Default. (b) Should Lessor elect to reenter as provided in Section 16.2(a)(ii), or should Lessor take possession pursuant to legal proceedings or pursuant to any notice provided by law while an Event of Default is continuing, Lessor may, from time to time, without terminating this Lease, relet the Leased Property or any part of the Leased Property in Lessor's or Lessee's name, but for the account of Lessee, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Term of this Lease) and on such conditions and upon such other terms (which may include concessions of free rent and alteration and repair of the Leased Improvements) as Lessor, in its reasonable discretion, may determine and Lessor may collect and receive the rent. No such reentry or taking possession of the Leased Property by Lessor will be construed as an election on Lessor's part to terminate this Lease unless a written notice of such intention is given to Lessee. No notice from Lessor under this Article 16 or under a forcible or unlawful entry and detainer statute or similar law will constitute an election by Lessor to terminate this Lease unless such notice specifically so states. Lessor reserves the right following any such reentry or reletting to exercise its right to terminate this Lease by giving Lessee such written notice, in which event this Lease will terminate as specified in such notice. (c) In the event that Lessor does not elect to terminate this Lease as permitted in Section 16.2(a)(i), but elects instead to take possession as provided in Section 16.2(a)(ii), Lessee shall pay to Lessor Base Rent, Percentage Rent, Additional Charges and other sums as provided in this Lease which would be payable under this Lease if such repossession had not occurred, less the net proceeds, if any, of any reletting of the Leased Property, after deducting all of Lessor's expenses in connection with such reletting, including, without limitation, all repossession costs, brokerage commissions, attorneys, fees, expenses of employees, alteration and repair costs and expenses of preparation for such reletting. If, in connection with any reletting, the new lease term extends beyond the existing Term of this Lease, or the premises covered by such new lease include other premises not part of the Leased Property, a fair apportionment of the rent received from such reletting and the expenses incurred in connection with such reletting as provided in this Paragraph will be made in determining the net proceeds from such reletting, and any rent concessions will be equally apportioned over the term of the new lease. Lessee shall pay such rent and other sums to Lessor monthly on the date on which the Base Rent and Additional Charges, and, in the case of Percentage Rent, quarterly on the day on which Percentage Rent, would have been payable under this Lease if possession had not -47- 53 been retaken, and Lessor shall be entitled to receive such rent and other sums from Lessee on each such day. (d) If an Event of Default has occurred and this Lease is terminated by Lessor, Lessee shall remain liable to Lessor for damages in an amount equal to Base Rent, Percentage Rent, Additional Charges and other amounts which would have been owing by Lessee for the balance of the Term of this Lease had this Lease not been terminated, less the net proceeds, if any, of any reletting of the Leased Property by Lessor subsequent to such termination, after deducting all of Lessor's expenses in connection with such reletting, including, but without limitation, the expenses enumerated in Section 16.2(c) (which expenses, if the reletting is for a term that will extend beyond the existing Term, will be apportioned as described in Section 16.2(c)). Lessor shall be entitled to collect such damages from Lessee monthly on the day on which Base Rent or Additional Changes, and quarterly on the day on which Percentage Rent, would have been payable under this Lease if this Lease had not been terminated, and Lessor shall be entitled to receive such Base Rent and other amounts from Lessee on each such day. Alternatively, at the option of Lessor, in the event this Lease is so terminated, Lessor shall be entitled to recover against Lessee as damages for loss of the bargain and not as a penalty: (i) The worth at the time of award of the unpaid Base Rent and Percentage Rent which had been earned at the time of termination; (ii) The worth at the time of award of the amount, if any, by which the unpaid Base Rent, Percentage Rent and all Additional Charges which would have been earned after termination until the time of award exceeds the amount of rental loss that Lessee proves could have been reasonable avoided; (iii) The worth at the time of award of the amount, if any, by which the unpaid Base Rent, Percentage Rent and Additional Charges for the balance of the Term (had the same not been so terminated by Lessor) after the time of award exceeds the amount of such rental loss during such period that Lessee proves could be reasonably avoided; and (iv) Any other amount necessary to compensate Lessor for all the detriment proximately caused by Lessee's failure to perform its obligations under this Lease or which in the ordinary course of events would be likely to result therefrom. The "WORTH AT THE TIME OF AWARD" of the amounts referred to in clauses (i) and (ii) above shall be computed by adding interest from the date of termination until the time of the award computed at the Overdue Rate on the date on which this Lease is terminated. The worth at the time of award of the amount referred to in clause (iii) above shall be computed by using a -48- 54 discount rate of the Federal Reserve Bank of New York at the time of the award plus one percent (1%). (e) Percentage Rent for the purposes of this Section 16.2 shall be a sum equal to (i) the average of the annual amounts of the Percentage Rent for the three (3) Fiscal Years immediately preceding the Fiscal Year in which the termination, re-entry or repossession takes place, or (ii) if three (3) Fiscal Years shall not have elapsed, the average of the Percentage Rent during the preceding Fiscal Years during which the Lease was in effect, or (iii) if one (1) Fiscal Year has not elapsed, the amount derived by analyzing the Percentage Rent from the effective date of this Lease. (f) Any suit or suits for the recovery of the amounts and damages set forth in Sections 16.2(c) or (d) may be brought by, Lessor, from time to time, at Lessor, a election, and nothing in this Lease will be deemed to require Lessor to await the date upon which this Lease or the Term of this Lease would have expired had there occurred no Event of Default. Each right and remedy provided for in this Lease as a result of the occurrence of a default is cumulative and is in addition to every other right or remedy provided for in this Lease or now or after the date of the commencement of the Term existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by Lessor of any one or more of the rights or remedies provided for in this Lease or now or after the date of the commencement of the Term existing at law or in equity or by statute or otherwise shall not preclude the simultaneous or later exercise by Lessor of any or all other rights or remedies provided for in this Lease or now or after the date of the commencement of the Term existing at law or in equity or by statute or otherwise. All costs incurred by Lessor in collecting any amounts and damages owing by Lessee pursuant to the provisions of this Lease or to enforce any provision of this Lease, including, but not limited to, reasonable attorneys' fees and related costs, whether or not one or more actions are commenced by Lessor, shall also be recoverable by Lessor from Lessee. (g) Lessor shall have no obligation to mitigate damage following the occurrence of an Event of Default. 16.3 WAIVER. Lessee hereby waives, to the extent permitted by applicable law, (a) any right to a trial by jury in the event of summary proceedings to enforce the remedies set forth in this Article 16; (b) the benefit of any laws now or hereafter in any force exempting property from liability for rent or for debt; (c) any equity of redemption; and (d) except as provided herein, any presentations, demands for payment or for performance, or notice of non-performance. -49- 55 16.4 APPLICATION OF FUNDS. Any payments received by Lessor under any of the provisions of this Lease during the existence or continuance of any Event of Default shall, to the extent permitted by applicable law, be applied to Lessee's obligations in the order that Lessor may determine, in Lessor's discretion. 16.5 SURRENDER. If an Event of Default occurs (and the event giving rise to such Event of Default has not been cured within the curative period relating thereto as set forth in Section 16.1) and is continuing, whether or not this Lease has been terminated pursuant to Section 16.1, Lessee shall, if requested by Lessor to do so, immediately surrender to Lessor the Leased Property including, without limitation, any and all books, records, files, licenses, permits and keys relating thereto, and quit the same and Lessor may enter upon and repossess the Leased Property by reasonable force, summary proceedings, ejectment or otherwise, and may remove Lessee and all other persons and any and all personal property from the Leased Property, subject to rights of any hotel guests and to any requirement of law. Lessee hereby waives any and all requirements of applicable law for service of notice to reenter the Leased Property. Lessor shall be under no obligation to, but may if it so chooses, relet the Leased Property or otherwise mitigate Lessor's damages. 16.6 WAIVER. If this Lease is terminated pursuant to Section 16.1, Lessee waives, to the extent permitted by applicable law, (a) any right to a trial by jury in the event of summary proceedings to enforce the remedies set forth in this Article XVI, and (B) the benefit of any laws now or hereafter in force exempting property from liability for rent or for debt and Lessor waives any right to "pierce the corporate veil" (included limited liability resulting from LLC status) of Lessee other than to the extent funds shall have been inappropriately paid any Affiliate of Lessee following a default resulting in an Event of Default. ARTICLE XVII ------------ LESSOR'S RIGHT TO CURE LESSEE'S DEFAULT. If Lessee fails to make any payment or to perform any act required to be made or performed under this Lease including, without limitation, Lessee's failure to comply with the terms of the Franchise Agreement, and fails to cure the same within the relevant time periods provided in Section 16.1, Lessor, without waiving or releasing any obligation of Lessee, and without waiving or releasing any obligation or default, may (but shall be under no obligation to) at any time thereafter make such payment or perform such act for the account and at the expense of Lessee, and may, to the extent permitted by law, enter upon the Leased Property for such purpose and, subject to Section 16.2, take all such action thereon as, in Lessor's opinion, may be necessary or appropriate therefor. No such entry shall be deemed an eviction -50- 56 of Lessee. All sums so paid by Lessor and all costs and expenses (including, without limitation, reasonable attorney's fees and expenses, in each case to the extent permitted by law) so incurred, together with a late charge thereon (to the extent permitted by law) at the Overdue Rate from the date on which such sums or expenses are paid or incurred by Lessor, shall be paid by Lessee to Lessor on demand. The obligations of Lessee and rights of Lessor contained in this Article shall survive the expiration or earlier termination of this Lease. ARTICLE XVIII ------------- EXCULPATION. In the event of (a) a sale or transfer of all or any part of the Leased Property (by operation of law or otherwise), (b) the making of a lease of all or substantially all of the Leased Property or (c) a sale or transfer (by operation of law or otherwise) of the leasehold estate under any such lease, (i) the seller, transferor or lessor, as the case may be, shall be and hereby is automatically and entirely released and discharged, from and after the date of such sale, transfer or lease, of all liability in respect of the performance of any of the terms of this Lease on the part of Lessor thereafter to be performed and (ii) the term "Lessor" shall thereafter mean only the purchaser, transferee or lessee, as the case may be, and the covenants and agreements of Lessor shall thereafter be binding upon such purchaser, transferee or lessee. Lessee shall look solely to Lessor's estate and interest in the Leased Property for the satisfaction of any right of Lessee for the collection of a judgment or other judicial process or arbitration award requiring the payment of money by Lessor, and no other property or assets of Lessor. Lessor's agents, incorporators, subscribers, shareholders, officers, directors, members, partners, principals (disclosed or undisclosed) an affiliates, whether directly or through Lessor or through any receiver, assignee, trustee in bankruptcy or through anyone else, shall not be subject to levy, lien, execution, attachment, or other enforcement procedure for the satisfaction of Lessee's rights and remedies under of with respect to or arising from or in connection with this Lease. ARTICLE XIX ----------- 19.1 REIT COMPLIANCE. Lessee acknowledges that the general partner of Lessor intends to qualify as a real estate investment trust under the Code, and that pursuant to Lessor's limited partnership agreement, Lessor may not take or omit to take any action, or engage in any business or business transaction or relationship, that would or could result in the REIT being disqualified from treatment as a real estate investment trust. As a material inducement to Lessor to enter into this Lease, -51- 57 Lessee hereby agrees that it shall not take or omit to take any action, or engage in any business or business transaction or relationship, that would or could result in the REIT being disqualified from treatment as a real estate investment trust under the Code. Without limiting the generality of the foregoing, Lessee agrees that: (A) PERSONAL PROPERTY LIMITATION. Anything contained in this Lease to the contrary notwithstanding, the average of the adjusted tax bases of the items of personal property that are leased to Lessee under this Lease at the beginning and at the end of any Fiscal Year shall not exceed 15% of the average of the aggregate adjusted tax bases of the Leased Property at the beginning and at the end of such Fiscal Year. This Section 19.1(a) is intended to ensure that the Rent qualifies as "rents from real property," within the meaning of Section 856(d) of the Code, or any similar or successor provisions thereto, and shall be interpreted in a manner consistent with such intent. (B) SUBLEASE RENT LIMITATION. Anything contained in this Lease to the contrary notwithstanding, Lessee shall not sublet the Leased Property on any basis such that the rental to be paid by the sublessee thereunder would be based, in whole or in part, on either (i) the income or profits derived by the business activities of the sublessee, or (ii) any other formula such that any portion of the Rent would fail to qualify as "rents from real property" within the meaning of Section 856(d) of the Code, or any similar or successor provision thereto. 19.2 SUBLEASE LESSEE LIMITATION. Anything contained in this Lease to the contrary notwithstanding, Lessee shall not sublease the Leased Property to any Person in which Boykin Lodging Trust, Inc., owns, directly or indirectly a ten percent (10%) or more interest, within the meaning of Section 856(d)(2)(B) of the Code, or any similar or successor provisions thereto. 19.3 LESSEE OWNERSHIP LIMITATION. Anything contained in this Lease to the contrary notwithstanding, neither Lessee or an Affiliate of Lessee shall acquire, directly or indirectly, a 10% or more interest in Boykin Lodging Trust, Inc., within the meaning of Section 856(d)(2)(B) of the Code, or any similar or successor provision thereto. 19.4 LESSEE OFFICER AND EMPLOYEE LIMITATION. Anything contained in this Lease to the contrary notwithstanding, without the prior written consent of Lessor, no officer or employee of Lessee (or any Person who furnishes or renders services to the tenants of the Leased Property, or manages or operates the Leased Property) shall at the same time be an officer of Lessor. 19.5 PAYMENTS TO AFFILIATES OF LESSEE. Except for (i) payments made pursuant to a Management Agreement as permitted in -52- 58 Section 23.3 hereof, and (ii) payments made to acquire insurance as required by Article XIII, Lessee shall not pay any fees to any Affiliate of Lessee during the Term in connection with the Facility. 19.6 THIRD-PARTY MANAGEMENT ACTIVITIES. Notwithstanding any provision of this Lease to the contrary, a subsidiary of Lessee may provide property management services with respect to properties other than the Leased Property pursuant to management contracts entered into with Persons other than Lessor; provided, however, that Lessee may not provide such services with respect to any hotel facility located within a ten (10) mile radius of any hotel facility owned by Lessor as of the date hereof unless Lessee obtains the prior written consent of each of Lessor's independent directors. ARTICLE XX ---------- HOLDING OVER. If Lessee for any reason remains in possession of the Leased Property after the expiration or earlier termination of the Term, such possession shall be as a tenant at sufferance during which time Lessee shall pay as rental each month the aggregate of 105% of (a) one-twelfth of the aggregate Base Rent and Percentage Rent payable with respect to the last Fiscal Year of the Term, (b) all Additional Charges accruing during the applicable month and (c) all other sums, if any, payable by Lessee under this Lease with respect to the Leased Property. During such period, Lessee shall be obligated to perform and observe all of the terms, covenants and conditions of this Lease, but shall have no rights hereunder other than the right, to the extent given by law to tenants at sufferance, to continued occupancy and use of the Leased Property. Nothing contained herein shall constitute the consent, express or implied, of Lessor to the holding over of Lessee after the expiration or earlier termination of this Lease. ARTICLE XXI ----------- RISK OF LOSS. During the Term, the risk of loss or of decrease in the enjoyment and beneficial use of the Leased Property in consequences of the damage or destruction thereof by fire, the elements, casualties, thefts, riots, wars or otherwise, or in consequences of foreclosures, attachments, levies or executions is retained by Lessor, and, in the absence of negligence, misconduct or breach of this Lease by Lessee, Lessee shall in no event be answerable or accountable therefore. ARTICLE XXII ------------ -53- 59 INDEMNIFICATION. Notwithstanding the existence of any insurance provided for in Article XIII, and without regard to the policy limits of any such insurance, Lessee will protect, indemnify, hold harmless and defend any Lessor Indemnified Party from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses), to the extent permitted by law, imposed upon or incurred by or asserted against any Lessor Indemnified Party by reason of: (a) any accident, injury to or death of persons or loss of or damage to property occurring on or about the Leased Property or adjoining sidewalks, including without limitation any claims under liquor liability, "dram shop" or similar laws, (b) any past, present or future use, misuse, non-use, condition, management, maintenance or repair or negligence by Lessee, its agents, invitees, employees or guests, or any other person other than Lessor, of the Leased Property or Lessee's Personal Property or any litigation, proceeding or claim by governmental entities or other third parties to which Lessor is made a party or participant related to such use, misuse, non-use, condition, management, maintenance, or repair thereof by Lessee, including Lessee's failure to perform obligations (other than Condemnation proceedings), (c) any Impositions that are the obligations of Lessee pursuant to the applicable provisions of this Lease, (d) any failure on the part of Lessee to perform or comply with any of the terms of this Lease, (e) the nonperformance of any of the terms and provisions of any and all existing and future subleases of the Leased Property to be performed by the landlord thereunder, and (f) the sale of or consumption of alcoholic beverages on or in the Leased Property, (g) claims of Franchisor and Managers. Any amounts that become payable by Lessee under this Article shall be paid within ten days after demand therefor by Lessor, and if not timely paid, shall bear a late charge (to the extent permitted by law) at the Overdue Rate from the expiration of such ten (10) day period date of such determination to the date of payment. Lessee, at its expense, shall contest, resist and defend any such claim, action or proceeding asserted or instituted against any Lessor Indemnified Party or may compromise or otherwise dispose of the same as Lessee sees fit. Nothing herein shall be construed as indemnifying any Lessor Indemnified Party against its own grossly negligent acts or omissions or willful misconduct. Lessor shall indemnify and hold any Lessee Indemnified Party from and against any and all liabilities, losses, interest, damages, costs or expenses (including, without limitation, reasonable attorneys' fees) assessed against, levied upon or collected from any Lessee Indemnified Party arising out of the negligence, misconduct or breach of this Lease by Lessor. Lessee's and Lessor's liability under the provisions of this Article shall survive any termination of this Lease. -54- 60 ARTICLE XXIII ------------- 23.1 SUBLETTING AND ASSIGNMENT. Except as expressly permitted herein, Lessee shall not mortgage, assign, sublet, or otherwise transfer its interest in the Facility and, subject to the provisions of Article XIX and Section 23.2 and any other express conditions or limitations set forth herein, Lessee may, but only with the prior written consent of Lessor, which may be granted or withheld in Lessor's sole and absolute discretion, (a) assign this Lease, (b) sublet all or any part of the Leased Property, or (c) sublet any retail or restaurant portion of the Leased Improvements in the normal course of the Primary Intended Use; provided that any subletting to any party other than an Affiliate of Lessee shall not individually as to any one such subletting, or in the aggregate, materially diminish the actual or potential Rent payable under this Lease. In the case of a subletting, the sublessee shall comply with the provisions of Section 23.2, and in the case of an assignment, the assignee shall assume in writing and agree to keep and perform all of the terms of this Lease on the part of Lessee to be kept and performed and shall be, and become, jointly and severally liable with Lessee for the performance thereof. An original counterpart of each such sublease and assignment and assumption, duly executed by Lessee and such sublessee or assignee, as the case may be, in form and substance satisfactory to Lessor, shall be delivered promptly to Lessor. In case of either an assignment or subletting made during the Term, Lessee shall remain primarily liable, as principal rather than as surety, for the prompt payment of the Rent and for the performance and observance of all of the covenants and conditions to be performed by Lessee hereunder. 23.2 ATTORNMENT. Lessee shall insert in each sublease permitted under Section 23.1 provisions to the effect that (a) such sublease is subject and subordinate to all of the terms and provisions of this Lease and to the rights of Lessor hereunder, (b) if this Lease terminates before the expiration of such sublease, the sublessee thereunder will, at Lessor's option, attorn to Lessor and waive any right the sublessee may have to terminate the sublease or to surrender possession thereunder as a result of the termination of this Lease, and (c) if the sublessee receives a written Notice from Lessor or Lessor's assignees, if any, stating that an uncured Event of Default exists under this Lease, the sublessee shall thereafter be obligated to pay all rentals accruing under said sublease directly to the party giving such Notice, or as such party may direct. All rentals received from the sublessee by Lessor or Lessor's assignees, if any, as the case may be, shall be credited against the amounts owing by Lessee under this Lease. 23.3 MANAGEMENT AGREEMENT. Notwithstanding anything contained in this Article XXIII to the contrary, Lessee may, with the prior written consent of Lessor (which consent may be -55- 61 withheld in the sole and absolute direction of Lessor), enter into an agreement (a "Management Agreement") with any third party to assign responsibility for the management and/or operation of all or any part of the Leased Property, including any retail or restaurant portion of the Leased Improvements, provided, however, that Lessee shall not enter into any Management Agreement which will materially diminish the actual or potential Rent payable under this Lease. Notwithstanding the above, Lessee shall remain primarily liable, as principal rather than as surety, for the prompt payment of the Rent and for the performance and observance of all of the covenants and conditions to be performed by Lessee hereunder. ARTICLE XXIV ------------ 24.1 OFFICERS' CERTIFICATES; FINANCIAL STATEMENTS; LESSOR'S ESTOPPEL CERTIFICATES AND COVENANTS. (a) At any time and from time to time upon not less than twenty (20) days Notice by Lessor, Lessee will furnish to Lessor an Officer's Certificate certifying that this Lease is unmodified and in full force and effect (or that this Lease is in full force and effect as modified and setting forth the modifications), the date to which the Rent has been paid, whether to the knowledge of Lessee there is any existing default or Event of Default thereunder by Lessor or Lessee, and such other information as may be reasonably requested by Lessor or Lessor's lender. Any such certificate furnished pursuant to this Article may be relied upon by Lessor, any lender and any prospective purchaser of the Leased Property. (b) Lessee will furnish the following statements to Lessor: (1) on or before the twentieth (20th) day of each month, a detailed profit and loss statement for the Leased Property for the preceding month, a balance sheet for the Leased Property as of the end of the preceding month, and a detailed accounting of revenues for the Leased Property for the preceding month, and such other information as may be requested by Lessor or required by Lessor's lender, each in form acceptable to Lessor; and (2) the most recent Consolidated Financials of Lessee within forty-five (45) days after each quarter of any Fiscal Year (or, in the case of the final quarter in any Fiscal Year, the most recent Audited Consolidated Financials of Lessee within ninety (90) days) after such final quarter; and -56- 62 (3) with reasonable promptness, such information respecting the financial condition and affairs of Lessee as may be requested by Lessor. (c) At any time and from time to time upon not less than twenty (20) days notice by Lessee, Lessor will furnish to Lessee or to any person designated by Lessee an estoppel certificate certifying that this Lease is unmodified and in full force and effect (or that this Lease is in full force and effect as modified and setting forth the modifications), the date to which Rent has been paid, whether to the knowledge of Lessor there is any existing default or Event of Default on Lessee's part hereunder, and such other information as may be reasonably requested by Lessee. 24.2 LESSEE'S FINANCIAL COVENANTS. Lessee shall not pay any dividends to its shareholders, except in the amount necessary for such shareholders to pay their respective federal, state and local income taxes to the extent such taxes are allocable to Lessee's taxable income and reportable as such on such shareholders' tax returns, until such time as Lessee has fully complied with the terms and provisions of the "Alignment of Interests Agreement" dated , (the "Alignment of Interests Agreement"). Lessee shall not incur any indebtedness (other than ordinary trade payables) unless required (i) to pay rent, (ii) to maintain and repair the Leased Property in accordance with Article IX, or (iii) to make Alterations in accordance with Article X, provided that Lessee shall thereafter retire such indebtedness prior to making any dividend payments to its shareholders except to the extent needed to pay federal, state or local income tax on their respective shares of Lessee's taxable income. -57- 63 ARTICLE XXV ----------- BOOKS AND RECORDS; LESSOR'S RIGHT TO INSPECT. Lessee shall keep full and adequate books of account and other records reflecting the results of operation of the Facility on an accrual basis, all in accordance with the Uniform System and generally accepted accounting principles. The books of account and all other records relating to or reflecting the operation of the Facility shall be kept either at the Facility or at Lessee's offices in Cleveland, Ohio, and shall be available to Lessor and its representatives and its auditors or accountants, at all reasonable times for examination, audit, inspection and transcription. All of such books and records pertaining to the Facility including, without limitation, books of account, guest records and front office records, at all times shall be the property of Lessee, (subject to the terms of Section 35.2) but shall not be removed from the Facility or Lessee's offices by Lessee without Lessor approval. Lessee shall permit Lessor and its authorized representatives as frequently as reasonably requested by Lessor to inspect the Leased Property and Lessee's accounts and records pertaining thereto and make copies thereof, during usual business hours upon reasonable advance notice, subject only to any business confidentiality requirements reasonably requested by Lessee. ARTICLE XXVI ------------ NO WAIVER. No failure by Lessor or Lessee to insist upon the strict performance of any term hereof or to exercise any right, power or remedy consequent upon a breach thereof, and no acceptance of full or partial payment of Rent during the continuance of any such breach, shall constitute a waiver of any such breach or of any such term. To the extent permitted by law, no waiver of any breach shall affect or alter this Lease, which shall continue in full force and effect with respect to any other then existing or subsequent breach. ARTICLE XXVII ------------- REMEDIES CUMULATIVE. To the extent permitted by law, each legal, equitable or contractual right, power and remedy of Lessor or Lessee now or hereafter provided either in this Lease or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power and remedy and the exercise or beginning of the exercise by Lessor or Lessee of any one or more of such rights, powers and remedies shall not preclude the simultaneous or subsequent exercise by Lessor or Lessee of any or all of such other rights, powers and remedies. -58- 64 ARTICLE XXVIII -------------- ACCEPTANCE OF SURRENDER. No surrender to Lessor of this Lease or of the Leased Property or any part thereof, or of any interest therein, shall be valid or effective unless agreed to and accepted in writing by Lessor and no act by Lessor or any representative or agent of Lessor, other than such a written acceptance by Lessor, shall constitute an acceptance of any such surrender. ARTICLE XXIX ------------ NO MERGER OF TITLE. There shall be no merger of this Lease or of the leasehold estate created hereby by reason of the fact that the same person or entity may acquire, own or hold, directly or indirectly: (a) this Lease or the leasehold estate created hereby or any interest in this Lease or such leasehold estate and (b) the fee estate in the Leased Property. ARTICLE XXX ----------- CONVEYANCE BY LESSOR. If Lessor or any successor owner of the Leased Property conveys the Leased Property in accordance with the terms hereof other than as security for a debt, and the grantee or transferee of the Leased Property expressly assumes all obligations of Lessor hereunder arising or accruing from and after the date of such conveyance or transfer, Lessor or such successor owner, as the case may be, shall thereupon be released from all future liabilities and obligations of Lessor under this Lease arising or accruing from and after the date of such conveyance or other transfer as to the Leased Property and all such future liabilities and obligations shall thereupon be binding upon the new owner. ARTICLE XXXI ------------ QUIET ENJOYMENT. So long as Lessee pays all Rent as the same becomes due and complies with all of the terms of this Lease and performs its obligations hereunder, in each case within the applicable grace periods, if any, Lessee shall peaceably and quietly have, hold and enjoy the Leased Property for the Term hereof, free of any claim or other action by Lessor or anyone claiming by, through or under Lessor, but subject to all liens and encumbrances subject to which the Leased Property was conveyed to Lessor or hereafter consented to by Lessee or provided for herein. Notwithstanding the foregoing, Lessee shall have the right by separate and independent action to pursue any claim it may have against Lessor as a result of a breach by Lessor of the covenant of quiet enjoyment contained in this Section. -59- 65 ARTICLE XXXII ------------- NOTICES. All notices, demands, requests, consents, approvals and other communications ("Notice" or "Notices") hereunder shall be in writing and personally served, mailed (by registered or certified mail, return receipt requested and postage prepaid) or sent by facsimile transmission, addressed to Lessor at 50 Public Square, Suite 1500, Cleveland, Ohio 44113, Attention: Robert W. Boykin, and addressed to Lessee at 50 Public Square, Suite 1500, Cleveland, Ohio 44113, Attention: Ronald A. Cook, or to such other address or addresses as either party may hereafter designate, Notice by personal delivery or facsimile transmission shall be effective upon receipt, and Notice given by mail shall be complete at the time of deposit in the U.S. Mail system, but any prescribed period of Notice and any right or duty to do any act or make any response within any prescribed period or on a date certain after the service of such Notice given by mail shall be extended five days. ARTICLE XXXIII -------------- 33.1 LESSOR MAY GRANT LIENS, SUBORDINATION. Without the consent of Lessee, Lessor may, from time to time, directly or indirectly, create or otherwise cause to exist, modify or extend any lien, encumbrance, superior lease or title retention agreement ("Encumbrance") upon the Leased Property, or any portion thereof or interest therein, whether to secure any borrowing or other means of financing or refinancing. This Lease and Lessee's interest herein shall be subordinate to each and every Encumbrance unless the holder thereof elects otherwise. (a) The subordination provisions herein contained shall be self-operative and no further instrument of subordination shall be required. In confirmation of such subordination, Lessee shall execute and deliver promptly any certificate that Lessor or its successors in interest may request. Lessee hereby constitutes and appoints Lessor or its successors in interest as Lessee's attorney-in-fact to execute and deliver any such certificate or certificates for and on behalf of Lessee. Notwithstanding any provision in this Lease or any separate agreement with Lessee, Lessee covenants and agrees that Lessee shall not do any act, or refrain from doing any act, if doing such act, or refraining from doing such act, would constitute a default or breach of any Encumbrance. (b) This Lease has been, or may be, assigned as collateral security. After Lessee receives notice of such assignment and so long as the obligations secured by such assignment remain outstanding, Lessee (i) will not pay any Rent under this Lease more than thirty (30) days in advance of its due date without the prior written consent of the holder of any such -60- 66 assignment (the "Assignee"), (ii) will not surrender or consent to the modification of any of the terms of the Lease nor to the termination hereof by Lessor without the Assignee's prior written consent, (iii) will continue to pay Rent under this Lease to the Lessor or as directed by Lessor in accordance with the terms of this Lease (unless and until notified otherwise in writing by the Assignee in case of an event of default under the Assignee's mortgage or other Encumbrance, in which event Lessee will pay the rent due under this Lease directly to the Assignee or the Assignee's designee) and (iv) will not seek to terminate this Lease or seek or assert any set-off or counterclaim against Rent by reason of any act or omission of the Lessor, until Lessee shall have given written notice of such act or omission to the Assignee (at the Assignee's last address furnished to Lessee) and until a reasonable period of time shall have elapsed following the giving of such notice, during which period the Assignee shall have the right, but shall not be obligated, to remedy such act or omission. Any payments made to the Assignee by Lessee shall not affect or impair the other rights and remedies the Assignee may have under said mortgage or Encumbrance or otherwise against the Lessor. (c) Lessee agrees, at the election of the holder of any interest superior to this Lease pursuant to the terms hereof ("Holder") to fully and completely attorn to, from time to time, and to recognize Holder or any person, or such person's successors or assigns, who acquires the interest of Lessor under the Lease as Lessee's lessor under this Lease (collectively, "Successor Landlord") upon the then executory terms of this Lease. The foregoing provisions of this paragraph shall inure to the benefit of any such Successor Landlord, shall apply notwithstanding that, as a matter of law, the Lease may automatically terminate, shall be self-operative upon any such demand, and no further instrument shall be required to give effect to said provisions. Lessee however, upon demand of any such Successor Landlord agrees to execute, from time to time, lessor or any instruments to evidence and confirm the provisions of this paragraph, satisfactory to lessor or any such Successor Landlord. Upon such attornment and the acceptance thereof in writing by such Successor Landlord, this Lease shall continue in full force and effect as a direct lease between such Successor Landlord and Lessee upon all of the then executory terms of the Lease, except that such Successor Landlord shall not be: (i) liable for any act or omission of any prior lessor (including Lessor); or (ii) liable for the return of any security deposit (unless actually received by such Successor Lessor); or (iii) bound by any waiver or forbearance of any prior lessor (including Lessor); or -61- 67 (iv) be liable for any damages or other relief attributable to any latent or patent defects in construction; or (v) bound by any covenant to perform or complete any construction or to pay any sum to Lessee; or (vi) subject to any offsets or defenses which might have against any prior Lessor (including Lessor); or (vii) bound by any Rent which Lessee might have paid for more than the current quarter to any prior lessor (including Lessor); or (viii) bound by any amendment or modification of the Lease made without its consent. (d) If a lender or prospective lender shall request modifications to this Lease, Lessee shall not unreasonably withhold, delay or defer Lessee consent thereto. (e) Lessor shall request of each Holder that such Holder enter into a so-called "non-disturbance agreement" with Lessee on such Holder's standard form, and Lessor shall make good faith reasonable efforts to obtain such non-disturbance agreement. 33.2 LESSEE'S RIGHT TO CURE. Subject to the provisions of Section 33.3, if Lessor breaches any covenant to be performed by it under this Lease, Lessee, after Notice to and demand upon Lessor, without waiving or releasing any obligation hereunder, and in addition to all other remedies available to Lessee, may (but shall be under no obligation at any time thereafter to) make such payment or perform such act for the account and at the expense of Lessor. All sums so paid by Lessee and all costs and expenses (including, without limitation, reasonable attorneys' fees) so incurred, together with interest thereon at the Overdue Rate from the date on which such sums or expenses are paid or incurred by Lessee, shall be paid by Lessor to Lessee on demand or, following entry of a final, nonappealable judgment against Lessor for such sums, may be offset by Lessee against the Base Rent payments next accruing or coming due. The rights of Lessee hereunder to cure and to secure payment from Lessor in accordance with this Section 34.2 shall survive the termination of this Lease with respect to the Leased Property. 33.3 BREACH BY LESSOR. It shall be a breach of this Lease if Lessor: [(i)] fails to observe or perform any term, covenant or condition of this Lease on its part to be performed and such failure continues for a period of thirty (30) days after Notice thereof from Lessee, unless such failure cannot with due diligence be cured without a period of thirty (30) days, in which case such failure shall not be deemed to continue if Lessor, -62- 68 within such thirty (30) day period, proceeds promptly and with due diligence to cure the failure and diligently completes the curing thereof, or [(ii) defaults under the Ground Lease if such default is not cured within thirty (30) days after Notice thereof from the ground lessor of the Ground Lease.] The time within which Lessor shall be obligated to cure any such failure also shall be subject to extension of time due to the occurrence of any Unavoidable Delay. 33.4 LESSEE'S COOPERATION. In connection with the termination of this Lease due to the expiration of the Term or otherwise, Lessee shall cooperate with Lessor in transferring possession of the Leased Property to a new tenant, including, without limitation, cooperating with the transfer of any licenses or permits necessary for the operation of the Facility. ARTICLE XXXIV ------------- 34.1 MISCELLANEOUS. Anything contained in this Lease to the contrary notwithstanding, all claims against, and liabilities of, Lessee or Lessor arising prior to any date of termination of this Lease shall survive such termination. If any term or provision of this Lease or any application thereof is invalid or unenforceable, the remainder of this Lease and any other application of such term or provisions shall not be affected thereby. If any late charges or any interest rate provided for in any provision of this Lease are based upon a rate in excess of the maximum rate permitted by applicable law, the parties agree that such charges shall be fixed at the maximum permissible rate. Neither this Lease nor any provision hereof may be changed, waived, discharged or terminated except by a written instrument in recordable form signed by Lessor and Lessee. All the terms and provisions of this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. The headings in this Lease are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. This Lease shall be governed by and construed in accordance with the laws of the State, but not including its conflicts of laws rules. 34.2 TRANSITION PROCEDURES. Upon the expiration or termination of the Term of this Lease, for whatever reason, Lessor and Lessee shall do the following (and the provisions of this Section 35.2 shall survive the expiration or termination of this Lease until they have been fully performed) and, in general, shall cooperate in good faith to effect an orderly transition of the management of the Facility. (a) TRANSFER OF LICENSES. Upon the expiration or earlier termination of the Term, Lessee shall use its reasonable efforts (i) to transfer to Lessor or Lessor's nominee, to the extent assignable or transferable, the Franchise Agreement, any -63- 69 liquor licenses, and all other licenses, operating permits and other governmental authorizations and all contracts, including contracts with governmental or quasi-governmental entities, that may be necessary for the operation of the Facility (collectively, "Licenses"), or (ii) if such transfer is prohibited by law or Lessor otherwise elects, to cooperate with Lessor or Lessor's nominee in connection with the processing by Lessor of Lessor's nominee of any applications for, all Licenses; provided, in either case, except in the case of a termination resulting from an Event of Default by Lessee, that the costs and expenses of any such transfer or the processing of any such application shall be paid by Lessor or Lessor's nominee. (b) LEASES AND CONCESSIONS. Lessee shall assign to Lessor or Lessor's nominee simultaneously with the termination of this Lease, and the assignee shall assume any and all subleases and concession agreements in effect with respect to the Facility which Lessor elects to have assigned and to assume. (c) BOOKS AND RECORDS. Any and all books, records files and keys for the Facility kept by Lessee pursuant to this Lease or otherwise shall be delivered promptly to Lessor or Lessor's nominee, simultaneously with the termination of this Agreement, but such books and records shall thereafter be available to Lessee at all reasonable times for inspection, audit, examination, and transcription for a period of three (3) years and Lessee may retain (on a confidential basis) copies or computer records thereof. (d) TRANSITION ADJUSTMENTS. Lessee shall pay all accounts payable and accrued expenses relating to the Leased Property as of the date of termination of this Lease, to the extent such accounts payable and accrued expenses are required to be paid by Lessee under this Lease, and Lessee shall be entitled to receive and retain all accounts receivable, and an amount equal to all prepaid expenses paid by Lessee, as of the date of this termination. All advance bookings deposits and credits shall be paid to Lessor. (e) The provisions of this Section 34.2 shall survive the termination or expiration of this Lease. 34.3 CHANGE OF FRANCHISE. Lessee may change the existing franchise covering the Leased Property with the prior written consent of Lessor, which consent may be withheld in sole and absolute discretion of Lessor. 34.4 WAIVER OF PRESENTMENT, ETC. Lessee waives all presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, and notices of acceptance and waives all notices of the existence, creation or incurring of new or additional obligations, except as expressly granted herein. -64- 70 ARTICLE XXXV ------------ MEMORANDUM OF LEASE. Lessor and Lessee shall promptly upon the request of either enter into a short form memorandum of this Lease, in form suitable for recording under the laws of the State in which reference to this Lease, and all options contained herein, shall be made. Lessee shall pay all costs and expenses of recording such memorandum of this Lease. ARTICLE XXXVI ------------- LESSOR'S OPTION TO PURCHASE ASSETS OF LESSEE. Effective on not less than ninety (90) days' prior Notice given at any time within one hundred eighty (180) days before the expiration of the Term, but not later than ninety (90) days prior to such expiration, or upon such shorter Notice period as shall be appropriate if this Lease is terminated prior to its expiration date, Lessor shall have the option to purchase some or all of the assets of Lessee, tangible and intangible, relating to the Leased Property (other than this Lease and those matters covered by Section 35.2), at the expiration or earlier termination of this Lease for an amount (payable in cash on the expiration or earlier termination date of this Lease) equal to the then book value thereof. Notwithstanding any such purchase, Lessor shall obtain no rights to any trade name or logo used in connection with the Franchise Agreement unless separate agreement as to such use is reached with the applicable franchisor. ARTICLE XXXVII -------------- LESSOR'S OPTION TO TERMINATE LEASE. In the event Lessor enters into a bona fide contract to sell the Leased Property to a non-Affiliate, Lessor may terminate the Lease by giving not less than thirty (30) days' prior Notice to Lessee of Lessor's election to terminate this Lease effective upon the closing under such contract. In the event a closing under such contract does not occur, this Lease shall continue to be in full force and effect. Effective upon such closing, this Lease shall terminate and be of no further force and effect except as to any obligations of the parties existing as of such date that survive termination of this Lease. As compensation for the early termination of its leasehold estate under this Article XXXVIII, Lessor shall within ninety (90) days of such closing pay to Lessee the fair market value of Lessee's leasehold estate hereunder as of the closing of the sale of the Leased Property. In the event Lessor and Lessee are unable to agree upon the fair market value of the original leasehold estate, it shall be determined by appraisal using the appraisal procedure set forth in Article XXXIII. -65- 71 For the purposes of this Article, fair market value of the leasehold estate means, as applicable, an amount equal to the price that a willing buyer not compelled to buy would pay a willing seller not compelled to sell for Lessee's leasehold estate under this Lease. ARTICLE XXXVIII --------------- COMPLIANCE WITH FRANCHISE AGREEMENT. To the extent any of the provisions of the Franchise Agreement impose a greater obligation on Lessee than the corresponding provisions of this Lease, then Lessee shall be obligated to comply with, and the provisions of this Lease are deemed modified to the extent necessary to comply with, the provisions of the Franchise Agreement, it being the intent of the parties hereto that Lessee comply in every respect with the provisions of the Franchise Agreement so as to avoid any default thereunder. In addition, and notwithstanding any other provisions to the contrary contained in this Lease, in the event that Franchisor terminates the Franchise Agreement for any reason, Lessor shall have the right to terminate this lease in which case neither party shall thereafter have any liability to the other. ARTICLE XXXIX ------------- LESSOR'S LIMITATION ON LIABILITY. To the extent Lessor's obligations hereunder are covered by the obligations or are the subject of the obligations of parties to Contribution Agreements other than Lessor under the Contribution Agreements, Lessor's liability shall be limited to amounts received under such Contribution Agreements at the sole cost and expense of Lessee. [ARTICLE XXXX] -------------- CONDITION. THIS LEASE IS CONDITIONAL UPON LESSOR HAVING ACQUIRED THE LEASED PREMISES AND THE OTHER 8 HOTEL PROPERTIES THROUGH AN INITIAL PUBLIC OFFERING OF STOCK IN LESSOR. IN THE EVENT THAT THE INTITIAL PUBLIC OFFERING DOES NOT OCCUR AND LESSOR DOES NOT ACQUIRE THE LEASED PREMISES AND THE OTHER 8 HOTEL PROPERTIES, THEN THIS LEASE SHALL BE VOID AB INITIO, OF NO FURTHER FORCE AND EFFECT AND THE PARTIES SHALL THEREAFTER HAVE NO LIABILITY TO THE OTHER HEREUNDER. -66- 72 IN WITNESS WHEREOF, the parties have executed this Lease under seal by their duly authorized officers as of the date first above written. "LESSOR" BOYKIN HOTEL PROPERTIES, L.P. By:___________________________ Title:________________________ "LESSEE" BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY By:___________________________ Title:________________________ [CORPORATE SEAL] STATE OF OHIO ) ) SS: COUNTY OF CUYAHOGA ) The foregoing instrument was acknowledged before me this _____ day of ____________, 1996, by _________________ as _______________ of Boykin Hotel Properties, L.P., an Ohio limited partnership. My commission expires: ______________________. ------------------------------ Notary Public -67- 73 STATE OF OHIO ) ) SS: COUNTY OF CUYAHOGA ) The foregoing instrument was acknowledged before me this _____ day of ____________, 1996, by _________________ as _______________ of Boykin Management Company Limited Liability Company, an Ohio limited liability company. My commission expires: ______________________. ------------------------------ Notary Public -68- 74 Master Lease Exhibit A PROPERTY DESCRIPTION -69- EX-10.11 10 EXHIBIT 10.11 1 EXHIBIT 10.11 NONCOMPETITION AGREEMENT BETWEEN BOYKIN LODGING COMPANY AND THE BOYKIN PARTIES 2 NONCOMPETITION AGREEMENT THIS NONCOMPETITION AGREEMENT (the "Agreement") is entered into as of ____________________, 1996, between Boykin Lodging Company, an Ohio corporation (the "Company"), and each of the parties listed on Annex A attached hereto (each, a "Boykin Party," and collectively, the "Boykin Parties"). W I T N E S S E T H: WHEREAS, the Company was formed to own, develop, acquire and manage hotel properties; WHEREAS, certain Boykin Parties are selling their hotel properties to the Company; WHEREAS, it is a condition to the Company's obligation to consummate the purchase of those hotel properties that the Boykin Parties enter into this Agreement; NOW, THEREFORE, in consideration of the mutual promises herein contained, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. COVENANT NOT TO COMPETE. (a) Each Boykin Party agrees not to directly or indirectly, own, manage, develop or control, or be employed or engaged by or otherwise affiliated or associated as a consultant, independent contractor or otherwise with, any corporation, partnership, proprietorship, firm, association or other business entity engaged in the business of, or otherwise engage in the business of owning, managing, developing or controlling hotel properties, except that (i) any Boykin Party may (A) own not more than one percent (1%) of any class of publicly traded securities of any entity, and own interests in the Company subject only to any restriction imposed by any agreement or instrument other than this Agreement, and (B) have such an interest in, or participation, employment, engagement, affiliation, association or relationship with, any entity that manages hotel properties, so long as that entity is not engaged in the business of acquiring, owning or developing hotel properties; (ii) William J. Boykin, Robert W. Boykin and John E. Boykin may retain, dispose of and otherwise deal with their interests in the New Haven, Connecticut facility described in the Company's Prospectus dated ___________, 1996 under the heading "Certain Transactions" so long as their activities in connection therewith (A) are consistent with the description thereof in the Company's Prospectus, and (B) do not result in the acquisition, ownership or development of hotel properties in addition to that facility; and (iii) William J. Boykin may own and develop a Hampton Inn on real property currently owned by him in Miami, Florida. 3 (b) The restrictions on the Boykin Parties set forth in Section 1(a) will terminate as follows: (i) with respect to Boykin Management Company, Ltd. ("BMCL"), any entity in which BMCL directly or indirectly owns a fifty percent (50%) or more equity interest and any entity that directly or indirectly owns a fifty percent (50%) or more equity interest in BMCL, and Boykin Enterprises, Ltd. ("BEL") and any entity in which BEL directly or indirectly owns a fifty percent (50%) or more equity interest, on the later of: (A) the second anniversary of the first day on which Robert W. Boykin is neither a director or officer of the Company and (B) the first day on which no entity identified in this clause (i) is a lessee of any hotel owned by the Company, and (ii) with respect to each Boykin Party other than those identified in clause (i) of this subsection, on the second anniversary of the first day on which Robert W. Boykin is neither a director or officer of the Company. 2. NONDISCLOSURE. No Boykin Party may, during the term of this Agreement or at any time thereafter, directly or indirectly disclose, divulge, discuss, copy or otherwise use or suffer to be used in any manner, in competition with, or contrary to the interests of, the Company, any confidential information relating to the Company's operations or properties or otherwise relating to its particular business or other trade secrets of the Company, it being acknowledged by each Boykin Party that all such information regarding the business of the Company compiled or obtained by or furnished to it while it shall have been affiliated or associated with the Company is confidential information and the Company's exclusive property; but the foregoing restrictions do not apply to any such information that: (A) is clearly obtainable in the public domain, (B) becomes obtainable in the public domain, except by reason of the breach by any Boykin Party of the terms hereof, (C) was not acquired by any Boykin Party in connection with its affiliation with the Company, (D) was not acquired by any Boykin Party from the Company or its representatives, or (E) is required to be disclosed by rule of law or by order of a court or governmental body or agency. 3. HOTEL OPPORTUNITIES. From the date of this Agreement until (i) with respect to each Boykin Party identified in clause (i) of Section 1(b), above, the later of (A) the first day on which Robert W. Boykin is neither a director or officer of the Company and (B) the first day on which no entity identified in that clause (i) is a lessee of any hotel owned by the Company, and (ii) with respect to each Boykin Party other than those identified in clause (i) of Section 1(b), above, the first day on which Robert W. Boykin is neither a director or officer of the Company, that Boykin Party shall disclose and present to the Company any information it acquires in connection with any opportunity for hotel acquisition, development or ownership, and shall not pursue that opportunity for its own benefit until the -2- 4 Company gives written notice to that Boykin Party of the Company's intent not to pursue that opportunity. 4. INJUNCTIVE RELIEF. Each Boykin Party agrees and understands that the remedy at law for any breach by that party of Section 1 or 2 hereof will be inadequate and that the damages flowing from that breach would not be readily susceptible to being measured in monetary terms. Accordingly, each Boykin Party acknowledges that, upon adequate proof of its violation of any legally enforceable provision of Section 1 or 2 hereof, the Company shall be entitled to immediate injunctive relief and may obtain a temporary order restraining any threatened or further breach. Nothing in this Section 4 limits the Company's remedies at law or in equity for any breach by any Boykin Party of any of the provisions of Section 1 or 2 that may be pursued by the Company. 5. ACKNOWLEDGMENT. Each Boykin Party has carefully considered the nature and extent of the restrictions upon it and the rights and remedies conferred upon the Company under this Agreement, and hereby acknowledges and agrees that the restrictions are reasonable in duration and scope, are designed to eliminate competition which otherwise would be unfair to the Company, are fully required to protect the legitimate interests of the Company and do not confer a benefit on the Company disproportionate to the detriment to that Boykin Party. 6. SEVERABILITY. The provisions of this Agreement are severable and if any provision is determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions and any partially unenforceable provision, to the extent enforceable in any jurisdiction, nevertheless shall be binding and enforceable. 7. BINDING EFFECT. The rights and obligations of the Company under this Agreement shall inure to the benefit of, and shall be binding on, the Company and its successors and assigns, and the rights and obligations of each Boykin Party under this Noncompete Agreement shall inure to the benefit of, and shall be binding on, such Boykin Party and its successors, heirs, personal representatives and assigns. No party to this Agreement may assign this Agreement or any of its rights or obligations under it without the prior written consent of the other parties. 8. NOTICES. Any notice to be given under this Agreement shall be in writing, and if directed to the Company, shall be addressed to its principal place of business, Attention: General Counsel, and if directed to a Boykin Party, shall be addressed to the address set forth on Annex A, or to such other address or addresses as either the Company or a Boykin Party, as applicable, may hereafter designate in a notice sent in accordance with this Section 8. -3- 5 9. WAIVER. The failure of any party to enforce any provision of this Agreement shall not be construed as a waiver of that provision as to any future violation thereof, or prevent that party thereafter from enforcing each and every other provision of this Agreement. The rights granted the parties herein are cumulative and the waiver of any remedy shall not constitute a waiver of that party's right to assert all other legal remedies available to it under the circumstances. 10. AMENDMENTS. This Agreement supersedes all prior agreements and understandings between the parties concerning the subject matter of this Agreement and may not be modified or terminated orally. No modification, termination or waiver of any provision of this Agreement shall be valid unless in writing and signed by the party against whom it is sought to be enforced. 11. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio. 12. PRONOUNS; GENDER. Where necessary or appropriate to the meaning hereof, the singular and plural shall be deemed to include each other, and the masculine, feminine and neuter shall be deemed to include each other. -4- 6 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. BOYKIN LODGING COMPANY By:___________________________ Title:________________________ BOYKIN ENTERPRISES, LTD. PURCHASING CONCEPTS, INC. By:___________________________ By:___________________________ Title:________________________ Title:________________________ B. H. VENTURES PURCHASING CONCEPTS WEST JOINT VENTURE By:___________________________ By:___________________________ Title:________________________ Title:________________________ BOYKIN MANAGEMENT COMPANY PILGRIM HOTEL CORP. By:___________________________ By:___________________________ Title:________________________ Title:________________________ BOYKIN MANAGEMENT COMPANY OF THE BOYKIN COMPANY ILLINOIS, INC. By:___________________________ By:___________________________ Title:________________________ Title:________________________ BOYKIN MANAGEMENT COMPANY, LTD. THE BOYKIN GROUP, INC. By:___________________________ By:___________________________ Title:________________________ Title:________________________ BOPA DESIGN COMPANY d/b/a SPECTRUM SERVICES By:___________________________ ______________________________ Title:________________________ John E. Boykin BOYKIN PACIFIC MANAGEMENT COMPANY, INC. By:___________________________ ______________________________ Title:________________________ William J. Boykin -5- 7 ANNEX A ------- Boykin Parties -------------- NAME ADDRESS (for each Boykin Party) ---- ------------------------------- Boykin Enterprises, Ltd. c/o ________________ B. H. Ventures Terminal Tower, Suite 1500 Boykin Management Company 50 Public Square Boykin Management Company of Cleveland, Ohio 44113-2258 Illinois, Inc. Boykin Management Company, Ltd. BOPA Design Company d/b/a Spectrum Services Boykin Pacific Management Company, Inc. Purchasing Concepts, Inc. Purchasing Concepts West Joint Venture Pilgrim Hotel Corp. The Boykin Company The Boykin Group, Inc. John E. Boykin William J. Boykin EX-23.3 11 EXHIBIT 23.3 1 EXHIBIT 23.3 CONSENT OF PROPOSED DIRECTORS I hereby consent to being named in this Registration Statement on Form S-11 as a proposed director of Boykin Lodging Company (the "Company") and have agreed to serve as a director of the Company if elected. May 30, 1996 /s/ Albert T. Adams ----------------------------- Albert T. Adams June 3, 1996 /s/ Lee C. Howley, Jr. ----------------------------- Lee C. Howley, Jr. June 4, 1996 /s/ Ivan J. Winfield ----------------------------- Ivan J. Winfield June 5, 1996 /s/ Frank E. Moiser ----------------------------- Frank E. Moiser June 18, 1996 /s/ William N. Hulett III ----------------------------- William N. Hulett III -----END PRIVACY-ENHANCED MESSAGE-----