-----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, SI9SNmslumoWds3n7pwOo42TJftgUZ4MObYZs5OjKF+nqW+Pps5ODtFDZ5BSyvhG oXoiOE0rvaOxYebK6KqdwQ== 0001047469-99-012795.txt : 19990402 0001047469-99-012795.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012795 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOYKIN LODGING CO CENTRAL INDEX KEY: 0001015859 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 341824586 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11975 FILM NUMBER: 99581445 BUSINESS ADDRESS: STREET 1: GUILDHALL BLDG 45 W PROSPECT AVE STREET 2: SUITE 1500 CITY: CLEVELAND STATE: OH ZIP: 44115 BUSINESS PHONE: 2164301200 MAIL ADDRESS: STREET 1: GUILDHALL BLDG 45 W PROSPECT AVE STREET 2: SUITE 1500 CITY: CLEVELAND STATE: OH ZIP: 44115 FORMER COMPANY: FORMER CONFORMED NAME: BOYKIN LODGING TRUST INC DATE OF NAME CHANGE: 19960604 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year ended December 31, 1998 Commission file number 001-11975 BOYKIN LODGING COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Ohio 34-1824586 ------------------------------------------- ------------------------------------------- (State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.) Organization) Guildhall Building, Suite 1500, 45 W. Prospect Avenue 44115 ------------------------------------------- ------------------------------------------- (Address of Principal Executive Office) (Zip Code)
(216) 430-1200 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: TITLE OF CLASS NAME OF EXCHANGE ON WHICH REGISTERED - ---------------------------------------- ------------------------------------ Common Shares, Without Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the voting stock held by non-affiliates of the registrant, as of March 19, 1999, was approximately $212 million. As of March 19, 1999, the registrant had 17,061,638 common shares issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 25, 1999, into Part III, Items 10, 11, 12, and 13. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FORWARD LOOKING STATEMENTS This Form 10-K contains statements that constitute forward-looking statements. Those statements appear in a number of places in this Form 10-K and the documents incorporated by reference herein and include statements regarding the intent, belief or current expectations of Boykin, its directors or its officers with respect to: - Leasing, management or performance of our hotels; - Adequacy of our reserves for renovation and refurbishment; - Potential acquisitions and dispositions; - Our financing plans; - Our policies regarding investments, acquisitions, dispositions, financings, conflicts of interest and other matters; and - Trends affecting our, or any of our hotels' financial condition or results of operations. You 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 information contained in this Form 10-K and in the documents incorporated by reference herein 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, we caution that, while we believe such assumptions or bases to be reasonable and have 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, we or our management express 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. PART I ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS ABOUT BOYKIN LODGING COMPANY AND ITS STRATEGIES Boykin Lodging Company, an Ohio corporation, is a real estate investment trust that owns hotels throughout the United States and leases its properties to established hotel operators. Our primary business strategies are: - acquiring upscale, full-service commercial and resort hotels that will increase our cash flow and are purchased at a discount to their replacement cost; - developing strategic alliances and relationships with a network of high-quality hotel operators and franchisors of the hotel industry's premier upscale brands; and - maximizing revenue growth in our hotels through - - strong management performance from our lessee/operators; - selective renovation; - expansion and development; and - brand repositioning. 1 Our management has substantial hotel operating, development, acquisition and transactional experience. Our officers have over 100 years combined experience in the hotel industry and have directly overseen the acquisition, disposition, recapitalization, development and repositioning of over a billion dollars of hotel assets throughout the United States. FORMATION AND INITIAL PUBLIC OFFERING Boykin was formed to continue and expand the hotel ownership, acquisition, redevelopment and repositioning activities of its predecessors, Boykin Management Company and its affiliates (the "Boykin Group"). We have been in the hotel business for 40 years. We completed our initial public offering ("IPO") in November 1996. In conjunction with our IPO, we contributed approximately $133.9 million to Boykin Hotel Properties, L.P., an Ohio limited partnership (the "Partnership"), in exchange for an approximate 84.5% equity interest as the sole general partner of the Partnership and we loaned $40 million to the Partnership in exchange for an intercompany convertible note. The Partnership then acquired nine hotel properties (the "Initial Hotels") in which the Boykin Group held significant ownership interests, seven of which the Boykin Group developed and has owned and managed since their opening. We do all our business through the Partnership. MAJOR EVENTS SINCE THE IPO - Since the IPO, consistent with our strategies, we have acquired 22 hotels containing 6,281 guest rooms, bringing the total number of hotels we own as of December 31, 1998 to 31 hotels with a total of 8,689 guest rooms. During this period, we established new strategic alliances with five high quality hotel lessee/operators and two premier franchisors. We also made significant renovations at seven of our hotels and reflagged/repositioned three hotels. In 1998 and 1997, we spent $32.5 million and $13.5 million, respectively, on renovations. This represented 14 percent and 11 percent of 1998 and 1997 hotel revenues, respectively, significantly above the hotel industry standard of four percent. - Since the IPO, we increased our debt capacity from a $75 million secured credit facility to a $250 million unsecured facility. In 1998, we also put in place $130 million of term debt at a fixed interest rate of 6.9% for ten years. - On February 24, 1998, we completed a follow-on public equity offering of 4.5 million common shares. The net proceeds were approximately $106.3 million, which we contributed to the Partnership, increasing our ownership percentage therein to 90.3%. We used the proceeds to repay existing indebtedness under our credit facility, purchase limited partnership units from two unaffiliated limited partners, fund the acquisitions of two hotels purchased in March 1998 and for general corporate purposes. - On May 22, 1998 we completed our merger with Red Lion Inns Limited Partnership, in which we acquired Red Lion Inns Operating L.P. ("OLP") which owns a portfolio of ten DoubleTree-licensed hotels. These hotels contain 3,062 guest rooms and are located in California, Oregon, Washington, Colorado, Idaho, and Nebraska. The DoubleTree hotels, which formerly operated as "Red Lion Hotels" or "Red Lion Inns," were reflagged to operate as DoubleTree hotels in June 1997. In the transaction, we issued 3.1 million common shares and paid approximately $35.3 million in cash to the Red Lion limited partners and general partner. The total consideration value, including assumed liabilities of approximately $155.7 million and common shares issued valued at $80.3 million, was $271.3 million. The issuance of Boykin's common shares in the merger had the impact of increasing our ownership percentage in the Partnership to 92.2%. - On February 1, 1999, we formed a joint venture with AEW Partners III, L.P. (AEW), an investment partnership managed by AEW Capital Management, L.P., a Boston-based real estate investment firm that manages a portfolio of approximately $6 billion. This joint venture provides us with the 2 ability to continue our acquisition and growth strategies with private capital at a time when public capital sources are limited, and when we expect to see attractive buying opportunities. AEW will provide $50 million of equity capital for the joint venture, and Boykin will provide approximately $17 million and serve as the operating partner of the joint venture. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS All of Boykin Lodging's operations are in the hotel industry. (c) NARRATIVE DESCRIPTION OF BUSINESS Our primary business objectives are to maximize current returns to our shareholders by increasing cash flow available for distribution and long-term total returns to shareholders through appreciation in value of our common shares. We seek to achieve these objectives through participation in increased revenues from our hotels pursuant to lease agreements with tenants that provide us with the greater of a base rental income or a percentage of revenues from hotel operations. We also seek to achieve these objectives by selective acquisition, ownership, redevelopment, repositioning and expansion of additional hotel properties as well as timely disposition of non-strategic assets. We will seek to continue to invest in properties at which our established industry and marketing expertise will enable us to improve the acquired hotels' performance. BOYKIN'S HOTEL PORTFOLIO Our hotel portfolio includes 29 full-service hotels and two limited-service hotels, all of which compete in the upscale to moderate price segment of the hospitality market. For the year ended December 31, 1998, our hotels had an average occupancy rate of 65.1%, an average daily rate ("ADR") of $90.23 and revenue per available room ("REVPAR") of $58.72. Refer to Item 2(a) "Hotel Properties" on page 11 for a listing of our hotels. Also refer to Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 22 for a chart of hotel operating data for 1998 and 1997. HOW BOYKIN APPLIES ITS BUSINESS STRATEGIES A. ACQUISITIONS We believe that the upscale and moderate market segments of the hospitality industry continue to present attractive acquisition opportunities on a selective basis. Our acquisition strategy focuses on 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 and/or implementation of new marketing strategies which will maximize revenues and profitability. - REDEVELOPMENT AND RENOVATION OPPORTUNITIES -- Hotels with sound operational fundamentals that, because of a lack of capital, require physical renovation to achieve their full performance potential, and other properties which can benefit from total redevelopment and market repositioning. - 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 our repositioning and redevelopment experience and access to capital. We intend 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. We will acquire or develop additional hotel properties only as suitable opportunities arise, and will not undertake acquisition or development of properties unless adequate sources of capital and financing are 3 available. Funds for future acquisitions or development of hotels are expected to be derived, in whole or in part, from capital obtained from borrowings under our credit facility or other borrowings, from the proceeds of a sale of non-strategic hotels, additional issuances of common shares or other securities, cash flows from operations, or capital funding under the terms of our joint venture arrangement with AEW. B. STRATEGIC ALLIANCES AND RELATIONSHIPS Our strategic alliances and relationships fall into two primary areas: - Franchise Brand Strategy - Multiple Lessee/Joint Venture Strategy 1. FRANCHISE BRAND STRATEGY We focus on owning hotel properties that are, or can be, associated with brands that will lead the hospitality industry in REVPAR, such as DoubleTree-Registered Trademark-, Marriott-Registered Trademark-, Radisson-Registered Trademark-, Hilton-Registered Trademark-, Holiday Inn-Registered Trademark-, Hampton Inns-Registered Trademark-, Quality Suites-Registered Trademark-, Hyatt-Registered Trademark-, Renaissance-Registered Trademark-, Omni-Registered Trademark-, and Embassy Suites-Registered Trademark-. We believe that we can maximize our market share and revenue by taking advantage of our orientation toward sales and marketing to identify the most effective branding and to leverage our brands with effective direct sales strategies. We expect to continue to affiliate with a number of different franchisors in order to maximize the performance of our 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. We believe that our relationships with certain franchisors facilitate finding acquisition opportunities and completing acquisitions on attractive terms. 2. MULTIPLE LESSEE AND JOINT VENTURE STRATEGY We lease our properties to established hotel operators pursuant to the percentage lease agreements, which provide us with the greater of a base rental income or a percentage of revenues from operations. We believe that having multiple tenants facilitates meeting our growth objectives. In selecting lessees, we seek hotel operators with demonstrated full-service hotel expertise, a stable operating and financial performance history, an excellent reputation in the hospitality industry, and an ability to introduce additional acquisition opportunities to, and to lease additional hotels from us. We expect to pursue lease relationships with additional hotel operators that have strong operating histories and demonstrated management expertise. The 31 hotels in our current portfolio are leased to and operated by the following entities:
NUMBER LESSEE OF HOTELS OPERATOR - ----------------------------------------------------------------------- ------------- ------------------------------ Boykin Management Company Limited Liability Company ("BMC")............ 15 BMC Westboy LLC ("Westboy")................................................ 10 Promus Hotel Corporation MeriStar Hotels and Resorts, Inc. ("MeriStar")......................... 3 MeriStar Davidson Hotel Company ("Davidson").................................... 1 Davidson Outrigger Lodging Services ("Outrigger"),.............................. 1 Outrigger Radisson Hotels Worldwide ("Radisson")................................. 1 Radisson -- 31 -- --
BMC AND WESTBOY Robert W. Boykin, our Chairman of the Board, President and Chief Executive Officer, and his brother, John E. Boykin, control BMC, which was formed at the time of our IPO. Westboy is a wholly- 4 owned subsidiary of BMC that leases the ten DoubleTree hotels acquired by us as part of the Red Lion merger. BMC has continued the hotel operation and management business of the Boykin Group. BMC and its subsidiaries have been in the hotel business for 40 years and have capabilities in all phases of development and management of hotel properties. BMC currently manages 18 properties containing 4,510 guest rooms located throughout the United States, including 15 hotels leased from us. BMC's subsidiaries, which conduct management activities for owners other than us, include an award-winning hotel interior design business and a hotel and restaurant food, beverage, supply and equipment purchasing business. These operations are conducted, in part, with a view to introducing us to acquisition opportunities. BMC and its owners, who have a substantial interest in the Partnership, have interests that conflict with our interests in connection with the structuring and enforcement of the percentage lease agreements and other agreements between us and BMC and in connection with activities that may maximize profits for BMC without necessarily benefiting us. We have implemented several measures, including those listed below, to align the interests of BMC and its owners with our interests and to address these conflicts of interest: - BMC's owners have agreed to retain their equity interests in the Partnership until November 1999; - Robert W. Boykin will not hold office in BMC (other than a directorship), and neither John E. Boykin nor any other officer of BMC will hold office in Boykin Lodging; - Distributions from BMC and net proceeds of any sale of BMC (with certain limited exceptions) will be used to purchase units in the Partnership or our common shares, and half of BMC's consolidated earnings will be retained in BMC and its subsidiaries to maintain their consolidated net worth at not less than 25% of the aggregate annual rent payments under BMC's percentage lease agreements; - Determinations made on behalf of Boykin Lodging in connection with any conflict of interest involving any affiliate of Boykin are made by our independent directors; - Any affiliate of the Boykin Group will conduct all hotel acquisition, development and ownership activities only through Boykin Lodging; and - Any change in control of BMC without our consent will constitute a default under BMC's percentage lease agreements. BMC also has developed a deferred compensation plan for its corporate-level senior executives, under which each award's value is based on the value of our common shares. THIRD PARTY OPERATOR Promus Hotel Corporation manages our portfolio of ten DoubleTree hotels. Promus is a publicly-traded company with a long history of owning and operating upscale hotels. Promus owns the DoubleTree-Registered Trademark-, Embassy Suites-Registered Trademark-, and Hampton Inns-Registered Trademark- hotel brands, among others. THIRD PARTY LESSEE/OPERATORS As part of our multiple tenant strategy, we have implemented a strategy of structuring joint ventures with our third party lessee/operators to align the hotel lessees' economic interests with our economic interests. In each joint venture, the lessee's ability to receive cash flow and equity capital distributions is subordinated to Boykin Lodging's receipt of specified minimum distributions. In addition, each lessee must maintain a specified net worth to support its lease payment obligations and pledge its joint venture interest as security for the lease payment obligations. We are permitted to subject any joint venture's hotel to a mortgage or to sell the hotel or its interest in the joint venture without receiving the affected joint venture partner's consent. 5 During 1997 and 1998, We formed joint ventures with the following companies or their affiliates to operate, lease and share in the ownership of the following hotels:
BOYKIN LESSEE LESSEE/JV OWNERSHIP OWNERSHIP NAME OF JOINT VENTURE PARTNER PERCENTAGE PERCENTAGE HOTEL OWNED UNDER JOINT VENTURE - ------------------------- ---------- --------------- --------------- -------------------------------------------------- BoyStar Ventures, L.P.... MeriStar 91% 9% Holiday Inn Minneapolis West Shawan Road Hotel Limited Partnership.............. Davidson 91% 9% Marriott's Hunt Valley Inn Boykin San Diego , L.L.C.................... Outrigger 91% 9% Hampton Inn San Diego Airport/Sea World Boykin Kansas City, L.L.C.................... MeriStar 80% 20% DoubleTree Kansas City RadBoy Mt. Laurel, L.L.C.................... Radisson 85% 15% Radisson Hotel Mt. Laurel DATE OF HOTEL NAME OF JOINT VENTURE PURCHASE - ------------------------- ---------------- BoyStar Ventures, L.P.... July 1997 Shawan Road Hotel Limited Partnership.............. July 1997 Boykin San Diego , L.L.C.................... November 1997 Boykin Kansas City, L.L.C.................... November 1997 RadBoy Mt. Laurel, L.L.C.................... June 1998
MERISTAR. MeriStar is a publicly traded hotel management company based in Washington, D.C. that manages hotels throughout the United States. MeriStar's portfolio of full-service hotels under management includes both independent brands and a number of well-known franchised brands, including Hilton-Registered Trademark-, Sheraton-Registered Trademark-, Marriott-Registered Trademark-, Embassy Suites-Registered Trademark-, Westin-Registered Trademark- and DoubleTree-Registered Trademark-. MeriStar also leases and operates our Pink Shell Beach Resort which owned 100% by the Partnership. DAVIDSON. Davidson is a privately held national hotel management company located in Memphis, Tennessee. Davidson provides management, development, consulting and accounting expertise for the hospitality industry. Davidson operates hotels under franchise agreements with such franchisors as Marriott-Registered Trademark-, Embassy Suites-Registered Trademark-, Hilton-Registered Trademark-, Crowne Plaza-Registered Trademark-, Omni-Registered Trademark- and Holiday Inn-Registered Trademark-. OUTRIGGER. Outrigger is a privately held hotel management company based in Encino, California. Outrigger has operated or operates a full range of hotel products, including Marriott-Registered Trademark-, Sheraton-Registered Trademark-, Hilton-Registered Trademark-, Residence Inn-Registered Trademark-, Holiday Inn-Registered Trademark-, and Radisson-Registered Trademark-, and many limited service products. In addition to branded hotels, Outrigger operates upscale, boutique hotels. RADISSON. Radisson Hotels Worldwide, headquartered in Minneapolis, Minnesota, is one of the lodging brands of Carlson Hotels Worldwide, an operating unit of Carlson Companies Inc., with revenues over $20 billion. Its lodging operations include over 560 locations in 54 countries. Specific brands include Regent International Hotels-Registered Trademark-, Radisson Hotel & Resorts-Registered Trademark-, Country Inns Suites by Carlson-Registered Trademark-, Radisson Seven Seas Cruises-Registered Trademark-, and several other well-known hotel, restaurant and cruise operations. C. INTERNAL GROWTH FROM STRONG MANAGEMENT, RENOVATION, AND DEVELOPMENT AND REPOSITIONING 1. Strong Management Performance We believe that the revenue and cash flow from our hotels will be maximized by intensive management and marketing. We intend to derive increased cash flow through the application of our lessees' operating strategies, which include active hotel revenue maximization (also referred to as effective yield management). We believe that our lessees' commitment to customer service and the experience of their management teams positions us to capitalize on the expected continuing demand in our markets. We also believe that, based on our historical operating results and the location of our hotels and on the strength of our own and our lessees' management teams, the portfolio should provide us with the opportunity for cash flow growth through the percentage leases. 2. Capital Expenditure and Renovation Strategy We believe that our regular program of capital improvements at our hotels, including replacement and refurbishment of furniture, fixtures, and equipment, helps maintain and enhance their competitiveness and maximizes revenue growth under the percentage leases. During the year ended December 31, 1998, we 6 spent approximately $32.5 million on renovations. This represents an average of approximately 14 percent of 1998 hotel revenues under our ownership. We consider 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 percentage leases require us to provide reserves for capital expenditures equal to specified percentages of individual hotel total revenues. For the year ended December 31, 1998, this reserve would have represented an average of $1,302 per room for the hotels. We generally use the capital expenditures reserve for the replacement and refurbishment of furniture, fixtures, and equipment and other capital expenditures to maintain and enhance the competitive position of our hotels, although we may make other uses of amounts reserved that we consider appropriate from time to time. We believe that the reserve will be adequate to meet our continuing capital expenditure and furniture, fixtures, and equipment needs for our hotels in light of their age and condition. We have announced our intention to make approximately $20 million of improvements at some of the ten DoubleTree hotels over the next two years. Approximately 750 of the hotel rooms in this portfolio will be renovated in the first quarter of 1999. Funding for these capital expenditures will be made from cash on hand, available capital expenditure reserves, and borrowings on our credit facility. 3. Development and Repositioning Strategy We may develop additional full-service or upscale limited-service hotels on land that we acquire in our current geographic markets or on land contiguous to our hotels. We believe that selective development of hotels in our existing geographic markets could enable us to take advantage of operating efficiencies to generate attractive returns on investment. We may also reposition under-performing hotels by changing the franchise brand affiliation. TERMS OF THE PERCENTAGE LEASE AGREEMENTS 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 was filed as an exhibit to our Registration Statement on Form S-11 (Registration Statement No. 333-6341, filed on June 19, 1996, as amended). We expect that leases with respect to our future hotel property investments will have substantially similar terms, although the Board of Directors may alter any of these terms. The percentage lease agreements have the material terms described below: - DURATION -- non-cancelable remaining terms ranging from two to ten years, subject to earlier termination on the occurrence of certain contingencies described in the percentage leases. The majority of the percentage leases do not contain renewal terms and those with renewal options are subject to agreement between the parties regarding market terms. - AMOUNTS PAYABLE UNDER THE PERCENTAGE LEASES. Lessees are obligated to pay to us the higher of minimum rent or percentage rent, except for the French Lick Springs Resort, for which both minimum rent and percentage rent are required to be paid. - Minimum rent is a fixed amount determined by negotiation between us and the applicable lessee and is payable monthly. - Percentage rent is calculated by multiplying fixed percentages by gross room and other revenue and gross food and beverage revenue, over specified threshold amounts. Percentage rent is payable quarterly. 7 Both the threshold gross room and other revenue amounts used in computing percentage rent and minimum rent are adjusted annually for changes in the United States Consumer Price Index. Lessees are also obligated to pay us certain other amounts, including interest accrued on any late payment or charge. Each lease also requires the lessee to pay all costs and expenses incurred in the operation of the hotel. The lessee is required to maintain the hotel in good order and repair and to make necessary nonstructural repairs. We fund capital expenditures as we consider necessary and as required by our franchisors. - INSURANCE AND PROPERTY TAXES. We pay, or cause the lessee to pay, real estate and personal property taxes and maintain, or cause the lessee to maintain, property insurance, including casualty insurance, on our hotels. The lessee maintains comprehensive general public liability, workers' compensation, 12-month rental interruption and any other insurance customary for properties similar to the hotel or required by any relevant franchisor and must have us named as an additional insured. We believe that the insurance coverage carried by each hotel is adequate in scope and amount. - INDEMNIFICATION. The lessee indemnifies us against all liabilities, costs and expenses incurred by, imposed on or asserted against us, on account of, among other things: - accidents or injury to persons or property on or about the hotel; - negligence by the lessee or any of its agents; - certain environmental liabilities resulting from conditions existing at the time of the lease execution; - taxes and assessments in respect of the hotel (other than our real estate taxes and income taxes on income attributable to the hotel); - the sale or consumption of alcoholic beverages on the hotel property; and - any breach of the lease by the lessee. - ASSIGNMENT AND SUBLEASING. The lessee is not permitted to sublet all or any part of the hotel, assign its interest, or enter a management agreement with a third party to operate the hotel without our prior written consent. - EVENTS OF DEFAULT. Events of default include, among others: - the failure by the lessee to pay minimum and percentage rent when due; - failure to observe or perform any other term of the lease; - termination of the franchise agreement covering any hotel leased to the lessee; - any failure to comply with covenants as defined in the lease agreements. In the event of default under any lease with BMC, we may terminate the lease and any or all of the other percentage leases with BMC, and BMC will be required to surrender possession of the affected hotels. If an event of default under any lease with any other lessee occurs, we may terminate the lease and the lessee will be required to surrender possession of the affected hotel. FRANCHISE AGREEMENTS Our hotels are operated under franchise license agreements with premier nationally recognized hotel chains, including: - - DoubleTree-Registered - Radisson-Registered - Holiday Inn-Registered - Hampton Inns-Registered Trademark- Trademark- Trademark- Trademark- - - Marriott-Registered - Hilton-Registered Trademark- - Quality Suites-Registered Trademark- Trademark-
8 Our French Lick Springs Resort in French Lick, Indiana operates as an independent hotel. We expect that most of the additional hotel properties that we acquire will be operated under franchise agreements. We believe 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 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 expiration dates for the hotels' franchise agreements range from August 31, 2001 to December 31, 2018, which, in some cases, may be extended for additional terms beyond 2018. The franchise agreements generally impose certain management, operational, record-keeping, accounting, reporting and marketing standards and procedures with which the franchised operator must comply. Some of the key provisions of the franchise agreements include the following: - Each franchise agreement gives the lessee/operator the right to operate the franchised hotel under a franchise for a period of years specified in that agreement. The franchise agreements provide for early termination at the franchisor's option on the occurrence of certain events of default, such as the failure to properly maintain the hotel. - The lessees/operators are responsible to pay franchise fees ranging from 3% to 6% of gross room sales and advertising or marketing and reservation fees ranging from 0.8% to 4% of gross room sales. - Notification must be given to the franchisor upon the sale of a hotel giving the franchisor rights, as defined in its franchise agreement, ranging from consent to the transfer of ownership, the franchisors' ability to match an offer for sale, or the right terminate the franchise agreement EMPLOYEES We currently have thirteen employees. These employees perform, directly or through the Partnership, various acquisition, development, redevelopment and corporate management functions. INVENTORY All working capital assets required in the operation of our hotels are provided by the lessees at their expense. 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 or petroleum 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 substances. 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. 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. We may be potentially liable for such costs or claims in connection with the ownership and operation of the current hotels and hotels we may acquire in the future. We have not been notified by any governmental authority, and are not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances or to other environmental matters in connection with any of its hotels. Nonetheless, it is possible that material environmental contamination or conditions exist, or could arise in the future, in the hotels or on the land upon which they 9 are located which could create a material environmental liability. Further, there can be no assurance that the hotels that we may acquire will not give rise to any material environmental liability. COMPETITION Each of our hotels is located in a developed area that includes other hotel properties. The occupancy, ADR and REVPAR of any 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. Competition for potential acquisitions may generally reduce the number of suitable investment opportunities offered to us and increase the bargaining power of property owners seeking to sell. SEASONALITY The operations at our hotels historically have been seasonal. Twenty-six of the hotels maintain higher occupancy rates during the second and third quarters. The five hotels in Florida experience their highest occupancy in the first quarter. This seasonality pattern can be expected to cause fluctuations in our quarterly lease revenue under the percentage leases. (d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES All of our operations are conducted in the United States. 10 ITEM 2. PROPERTIES (a) HOTEL PROPERTIES On December 31, 1998, we owned the following 31 hotel properties:
NUMBER PROPERTY OF ROOMS LESSEE LOCATION - ------------------------------------------------------ ----------- ----------- ------------------------- DoubleTree Portland, Lloyd Center..................... 476 Westboy Portland, OR DoubleTree Sacramento................................. 448 Westboy Sacramento, CA DoubleTree Omaha...................................... 413 Westboy Omaha, NE DoubleTree Kansas City................................ 388 MeriStar Kansas City, MO DoubleTree Boise...................................... 304 Westboy Boise, ID DoubleTree Colorado Springs........................... 299 Westboy Colorado Springs, CO DoubleTree Spokane Valley............................. 237 Westboy Spokane, WA DoubleTree Portland Downtown.......................... 235 Westboy Portland, OR DoubleTree Springfield................................ 234 Westboy Springfield, OR DoubleTree Bellevue Center............................ 208 Westboy Bellevue, WA DoubleTree Yakima Valley.............................. 208 Westboy Yakima, WA Cleveland Marriott East............................... 403 BMC Cleveland, OH Marriott's Hunt Valley Inn............................ 392 Davidson Baltimore, MD Cleveland Airport Marriott............................ 375 BMC Cleveland, OH Buffalo Marriott...................................... 356 BMC Buffalo, NY Columbus North Marriott............................... 300 BMC Columbus, OH Berkeley Marina Radisson.............................. 373 BMC Berkeley, CA Radisson Hotel Mt. Laurel............................. 283 Radisson Mt. Laurel, NJ High Point Radisson................................... 251 BMC High Point, NC Daytona Beach Radisson Resort......................... 206 BMC Daytona Beach, FL Radisson Inn Sanibel Gateway.......................... 157 BMC Fort Myers, FL Holiday Inn Minneapolis West.......................... 196 MeriStar Minneapolis, MN Holiday Inn Crabtree.................................. 176 BMC Raleigh, NC Lake Norman Holiday Inn............................... 119 BMC Charlotte, NC Knoxville Hilton...................................... 317 BMC Knoxville, TN Melbourne Hilton Oceanfront........................... 118 BMC Melbourne, FL Hampton Inn San Diego Airport/Sea World............... 199 Outrigger San Diego, CA Lake Norman Hampton Inn............................... 117 BMC Charlotte, NC Melbourne Quality Suites.............................. 208 BMC Melbourne, FL Pink Shell Beach Resort............................... 208 MeriStar Fort Myers, FL French Lick Springs Resort............................ 485 BMC French Lick, IN ----- 8,689 ----- -----
(b) OFFICE SPACE Pursuant to a shared services and office space agreement, we paid BMC approximately $4,000 per month in 1998 for the right to use certain office space and receive certain related services. 11 ITEM 3. LEGAL PROCEEDINGS We are subject to various legal proceedings and claims that arise in the ordinary course of business. In our opinion, the amount of any ultimate liability with respect to these actions will not materially affect our financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to Instruction 3 to Item 401(b) of Regulation S-K, the following information is reported below. Our executive officers are elected and serve at the discretion of the Board of Directors until their successors are duly chosen and qualified, and are as follows:
NAME AGE POSITION - ------------------------ --- ------------------------------------------------------ Robert W. Boykin 49 Chairman of the Board, President and Chief Executive Officer Richard C. Conti 49 Chief Operating Officer Paul A. O'Neil 41 Chief Financial Officer and Treasurer Mark L. Bishop 39 Senior Vice President -- Acquisitions Andrew C. Alexander 35 Vice President -- Corporate Counsel
The following is a biographical summary of the business experience of our executive officers. Robert W. Boykin has served as our President and Chief Executive Officer since our formation. He served as the President and Chief Executive officer of Boykin Management Company from 1985 until November 1996. He served as Boykin Management Company's Executive Vice President from 1981 until 1985. Richard C. Conti joined us on May 1, 1998 to serve as our Chief Operating Officer. Mr. Conti was a Principal and Director with Coopers & Lybrand L.L.P. Mr. Conti was responsible for Coopers & Lybrand L.L.P.'s hospitality consulting practice in the Midwest and has been involved in the hospitality industry for over 21 years. Mr. Conti has worked closely with many of the leaders in the industry and brings to us a wealth of industry knowledge and contacts. Mark L. Bishop is our Senior Vice President-Acquisitions. He served as Senior Vice President-Acquisitions of Boykin Management Company from April 1994 until November 1996. From December 1986 until April 1994, Mr. Bishop was employed by Grubb & Ellis, serving as Vice President/Senior Marketing Consultant beginning in February 1991. From February 1990 until December 1995, Mr. Bishop also owned and served as President of four separate companies that owned and operated restaurants. Our Treasurer, Paul A. O'Neil, succeeded Raymond P. Heitland as Chief Financial Officer on May 26, 1998, in connection with Mr. Heitland's retirement. Mr. O'Neil served as the Chief Financial Officer of Boykin Management Company from 1996 to 1997. He was the Treasurer of Boykin Management from 1994 to 1996. Prior to joining Boykin Management, he managed the Real Estate Service Group in Arthur Andersen L.L.P.'s Cleveland office from 1990 to 1994. Mr. O'Neil is a member of the American Institute of Certified Public Accountants. Andrew C. Alexander became our Vice President-Corporate Counsel in July 1998. From July 1995 until July 1997, Mr. Alexander served as Vice President-Corporate Counsel of Renaissance Hotel Group, N.V., a publicly traded hotel company. From September 1989 until July 1995, Mr. Alexander was an attorney at the law firm of Calfee, Halter & Griswold, LLP. 12 There are no arrangements or understandings known to us between any executive officer and any other person pursuant to which any executive officer was elected to office. There is no family relationship between any of our directors or executive officers and any other director or executive officer. EMPLOYMENT ARRANGEMENTS. Robert W. Boykin and Mark L. Bishop entered into employment contracts with us in connection with the IPO. 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. Mr. Bishop's agreement provides for a 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. Bishop's employment agreement is currently in effect until December 31, 1999. Each of Mr. Boykin and Mr. Bishop is prohibited from competing with us during the term of his employment agreement and, in the case of Mr. Boykin, for a term of two years thereafter, and in the case of Mr. Bishop, for a term of six months thereafter. On May 20, 1997, we entered into an employment arrangement with Paul A. O'Neil. The arrangement provides for an initial one-year term that will be extended for an additional year at the end of each year of the arrangement, subject to the right of either party to terminate the employment relationship by giving six months prior written notice. On March 20, 1998, we entered into an employment arrangement with Richard C. Conti. Please see Exhibit 10.14 of our Form 10-Q as of June 30, 1998 for the terms of Mr. Conti's employment arrangement. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS (a) MARKET INFORMATION Our common shares are traded on the New York Stock Exchange under the symbol "BOY." The following table sets forth for the indicated periods the high and low sales prices for the common shares and the cash distributions declared per share:
CASH DISTRIBUTIONS PRICE RANGE DECLARED ----------------------------- PER HIGH LOW SHARE -------------- -------------- ------- Year Ended December 31, 1997: First Quarter......................... $ 24 1/2 $ 21 5/8 $0.45 Second Quarter........................ $ 23 15/16 $ 20 $0.45 Third Quarter......................... $ 27 $ 22 1/2 $0.45 Fourth Quarter........................ $ 27 3/4 $ 24 3/4 $0.45 Year Ended December 31, 1998: First Quarter......................... $ 28 1/2 $ 23 9/16 $0.47 Second Quarter........................ $ 24 11/16 $ 20 $0.47 Third Quarter......................... $ 22 5/8 $ 14 $0.47 Fourth Quarter........................ $ 15 1/16 $ 12 1/16 $0.47 Year Ending December 31, 1999: First Quarter (through March 19, 1999)............................... $ 14 5/16 $ 12 $0.47
(b) SHAREHOLDER INFORMATION As of March 19, 1999, there were 938 record holders of our common shares, including shares held in "street name" by nominees who are record holders, and approximately 18,000 beneficial owners. 13 In order to comply with certain requirements related to our qualification as a REIT, our charter limits the number of common shares that may be owned by any single person or affiliated group to 9% of the outstanding common shares. (c) DISTRIBUTION INFORMATION We currently anticipate that we will maintain our current distribution rate in the near term, unless actual results of operations, economic conditions or other factors differ from our current expectations. The declaration and payment of distributions is at the discretion of our Board of Directors and depends on, among other things, our receipt of cash distributions from the Partnership, the Partnership's level of indebtedness, any contractual restrictions and other factors considered relevant by the Board. We determine the level of our cash distributions in light of our cash needs, including our requirements for investing and financing activities and other anticipated cash needs. Our principal source of revenue consists of payments of rent by the lessees under the percentage leases. (d) SALES OF UNREGISTERED SECURITIES In September 1997, we sold 20,000 common shares to BMC for cash consideration of $490,625, or $24.53 per share. This sale was not registered under the Securities Act of 1933 in reliance upon the exemption from the registration requirements thereof provided by Section 4 (2) of Securities Act of 1933. ITEM 6. SELECTED FINANCIAL DATA The following tables set forth selected historical and pro forma operating and financial data for Boykin Lodging Company and BMC and selected combined historical financial data for the Initial Hotels. The selected historical financial data for Boykin Lodging and BMC for the years ended December 31, 1998 and 1997, and for the period November 4, 1996 (inception of operations) to December 31, 1996, and the selected combined historical financial data for the Initial Hotels for the period January 1, 1996 through November 3, 1996, and for the years ended December 31, 1994 and 1995 have been derived from the historical financial statements of Boykin Lodging, BMC and the Initial Hotels, respectively, audited by Arthur Andersen LLP, independent public accountants. Our pro forma financial information and that of BMC is presented as if the following significant transactions had been consummated as of January 1, 1997: - our sale of 4.5 million common shares in February 1998; - our issuance of 3.1 million common shares in May 1998 related to Red Lion merger; - our acquisitions in 1997 and 1998; and - our repurchase of 114,500 shares in 1998. The 1997 pro forma results of operations exclude the results of the Daytona Beach Radisson Resort and the DoubleTree Kansas City, as these hotels were closed for renovations during portions of the year. The following selected financial data 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 Form 10-K. 14 BOYKIN LODGING COMPANY SELECTED HISTORICAL OPERATING AND FINANCIAL DATA (AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
PERIOD FROM YEAR ENDED YEAR ENDED NOVEMBER 4, 1996 DECEMBER 31, DECEMBER 31, TO DECEMBER 31, 1998 1997 1996 ------------ ------------ ----------------- OPERATING DATA: Total revenues................................................. $ 70,122 $ 38,266 $ 3,378 Total expenses................................................. 47,921 20,832 2,537 ------------ ------------ -------- Income before minority interest and extraordinary item......... 22,201 17,434 841 Minority interest.............................................. (2,059) (2,210) (40) ------------ ------------ -------- Income before extraordinary item............................... 20,142 15,224 801 Extraordinary item -- loss on early extinguishment of debt, net of minority interest......................................... (1,138) (882) (4,908) ------------ ------------ -------- Net income (loss) applicable to common shares.................. $ 19,004 $ 14,342 $ (4,107) ------------ ------------ -------- ------------ ------------ -------- EARNINGS PER SHARE: Net income (loss) per common share: Basic........................................................ $ 1.25 $ 1.51 $ (.46) Diluted...................................................... $ 1.25 $ 1.49 $ (.45) Weighted average number of common shares outstanding: Basic........................................................ 15,252 9,523 8,981 Diluted...................................................... 15,252 9,595 9,036 OTHER DATA: Funds from operations(1)....................................... $ 42,805 $ 27,381 $ 2,185 Net cash provided by operating activities...................... $ 39,960 $ 29,477 $ 329 Net cash used for investing activities......................... $ (299,784) $ (110,554) $ (1,824) Net cash provided by financing activities...................... $ 263,612 $ 61,570 $ 22,857 Dividends declared............................................. $ 30,685 $ 17,150 $ 2,700 Weighted average number of common shares and units outstanding.................................................. 16,549 10,883 10,359
AS OF DECEMBER 31, -------------------------- 1998 1997 ------------ ------------ BALANCE SHEET DATA: Investment in hotel properties, net................................................ $ 595,132 $ 231,651 Total assets....................................................................... 615,062 238,855 Total debt......................................................................... 286,000 91,750 Minority interest in Partnership................................................... 11,710 13,054 Shareholders' equity............................................................... 286,216 114,815
15 BOYKIN LODGING COMPANY SELECTED PRO FORMA OPERATING AND FINANCIAL DATA FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
1998 1997 ---------- ---------- OPERATING DATA: Total revenues.......................................................................... $ 83,360 $ 81,070 Total expenses.......................................................................... 60,170 57,206 ---------- ---------- Income before minority interest and extraordinary item.................................. 23,190 23,864 Minority interest....................................................................... (2,079) (1,752) ---------- ---------- Income before extraordinary item applicable to common shares............................ $ 21,111 $ 22,112 ---------- ---------- ---------- ---------- EARNINGS PER SHARE: Income before extraordinary item per common share: Basic................................................................................. $ 1.24 $ 1.30 Diluted............................................................................... $ 1.24 $ 1.29 Weighted average number of common shares outstanding Basic................................................................................. 17,044 17,037 Diluted............................................................................... 17,044 17,109 OTHER DATA: Funds from operations(1)................................................................ $ 48,667 $ 50,165 Net cash provided by operating activities(2)............................................ $ 49,319 $ 50,772 Net cash used for investing activities(3)............................................... $ (11,455) $ (10,988) Net cash used for financing activities(4)............................................... $ (34,470) $ (33,003) Weighted average number of common shares and units outstanding.......................... 18,335 18,335
- ------------ (1) The White Paper on Funds From Operations approved by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") in March 1995 defines funds from operations ("FFO") as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of properties, plus real estate related depreciation and amortization and after comparable adjustments for company's portion of these items related to unconsolidated entities and joint ventures. We believe that FFO is helpful to investors as a measure of the performance of an equity REIT because, along with cash flow from operating, financing and investing activities, it provides investors with an indication of our ability to incur and service debt, make capital expenditures and fund other cash needs. We compute FFO in accordance with standards established by NAREIT which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the NAREIT definition differently than us. FFO does not represent cash generated from operating activities determined by GAAP and should not be considered as an alternative to GAAP net income as an indication of our financial performance or to cash flow from operating activities determined by GAAP as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including its ability to make cash distributions. FFO may include funds that may not be available for management's discretionary use due to functional 16 requirements to conserve funds for capital expenditures and property acquisitions, and other commitments and uncertainties. The following is a reconciliation between net income and FFO (in thousands):
HISTORICAL HISTORICAL YEAR PERIOD ENDED ENDED DECEMBER 31, DECEMBER 31, PRO FORMA FOR YEARS -------------------- ------------ ENDED DECEMBER 31, 1998 1997 1996 1998 1997 --------- --------- ------------ --------- --------- Net income (loss)................................. $ 19,004 $ 14,342 $ (4,107) $ 21,111 $ 22,112 Real estate related depreciation and amortization.................................... 21,265 10,148 1,344 26,256 26,270 Minority interest................................. 2,059 2,210 40 2,079 1,752 Extraordinary item................................ 1,138 882 4,908 -- -- FFO applicable to joint venture minority interest........................................ (661) (201) -- (779) 31 --------- --------- ------------ --------- --------- Funds from operations............................. $ 42,805 $ 27,381 $ 2,185 $ 48,667 $ 50,165 --------- --------- ------------ --------- --------- --------- --------- ------------ --------- ---------
(2) For pro forma purposes, net cash provided by operating activities represents net income before depreciation of real estate assets, amortization of deferred financing costs and minority interest including adjustments for the joint venture minority interest therein. For pro forma purposes, no effect has been given to changes in working capital assets and liabilities. (3) For pro forma purposes, net cash used for investing activities represents 4% of hotel revenues for the applicable period. For those hotels which are owned through a joint venture, only our percentage interest in such hotel revenues is considered in the calculation. (4) For pro forma purposes, net cash used for financing activities represents estimated dividends and distributions based upon our historical annual dividend rate of $1.88 and $1.80 per common share in 1998 and 1997, respectively and the pro forma weighted average number of common shares and units outstanding during the applicable period. 17 BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY SELECTED HISTORICAL AND PRO FORMA OPERATING AND FINANCIAL DATA (AMOUNTS IN THOUSANDS)
HISTORICAL PERIOD FROM NOVEMBER 4, 1996 (INCEPTION OF (UNAUDITED) HISTORICAL YEAR OPERATIONS) TO PRO FORMA YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, -------------------- --------------------- -------------------- 1998 1997 1996 1998 1997 --------- --------- --------------------- --------- --------- OPERATING DATA: Room revenue................ $ 148,643 $ 72,751 $ 7,684 $ 150,169 $ 149,677 Food and beverage revenue... 71,925 30,229 3,976 72,501 72,669 Other hotel revenue......... 15,085 7,568 620 15,245 14,842 --------- --------- ------- --------- --------- Total hotel revenues...... 235,653 110,548 12,280 237,915 237,188 Other revenue............... 2,407 2,477 382 2,407 2,477 --------- --------- ------- --------- --------- Total revenues............ 238,060 113,025 12,662 240,322 239,665 --------- --------- ------- --------- --------- Operating expenses.......... 170,162 75,891 9,748 171,782 169,077 Cost of goods sold of non-hotel operations...... 427 619 102 427 619 Percentage lease expense.... 67,424 34,834 3,258 68,078 69,630 --------- --------- ------- --------- --------- Total expense............... 238,013 111,344 13,108 240,287 239,326 --------- --------- ------- --------- --------- Net income (loss)........... $ 47 $ 1,681 $ (446) $ 35 $ 339 --------- --------- ------- --------- --------- --------- --------- ------- --------- ---------
INITIAL HOTELS SELECTED COMBINED HISTORICAL FINANCIAL DATA (AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER JANUARY 1, 31, 1996 TO -------------------- NOVEMBER 3, 1994 1995 1996(1) --------- --------- ----------- OPERATING DATA: Room revenue................................................. $ 48,652 $ 50,730 $ 51,627 Food and beverage revenue.................................... 22,811 22,984 20,062 Other revenue................................................ 4,092 4,490 4,148 --------- --------- ----------- Total revenues............................................. 75,555 78,204 75,837 Departmental and other expenses.............................. 53,967 54,629 52,367 Real estate and personal property taxes, insurance and ground rent....................................................... 3,329 3,579 3,228 Depreciation and amortization................................ 5,690 6,545 6,308 Interest expense............................................. 12,397 14,169 13,430 Gain on property insurance recovery.......................... -- (670) (32) --------- --------- ----------- Income (loss) before extraordinary item...................... 172 (48) 536 Extraordinary item-- gain (loss) on early extinguishment of debt....................................................... -- 556 (1,315) --------- --------- ----------- Net income (loss)............................................ $ 172 $ 508 $ (779) --------- --------- ----------- --------- --------- -----------
- ------------ (1) On February 8, 1996, the Lake Norman Holiday Inn and Lake Norman Hampton Inn were acquired by a Boykin Affiliate. The acquisition was accounted for as a purchase and, accordingly, the operating results of the Holiday Inn and Hampton Inn have been included in the above operating data commencing February 8, 1996. 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BOYKIN'S FORMATION AND RECENT EVENTS On November 4, 1996, we completed our IPO issuing a total of 9.5 million common shares. In conjunction with our IPO, we contributed approximately $133.9 million to Boykin Hotel Properties, L.P., an Ohio limited partnership (the "Partnership"), in exchange for an approximate 84.5% equity interest as the sole general partner of the Partnership and we loaned $40 million to the Partnership in exchange for an intercompany convertible note. The Partnership then acquired nine hotel properties (the "Initial Hotels") and another eight hotel properties in 1997 using remaining proceeds from the IPO and borrowings under our credit facility. We do all of our business through the Partnership. On February 24, 1998, we completed a follow-on public equity offering and issued an additional 4.5 million common shares. The net proceeds of approximately $106.3 million were contributed to the Partnership, increasing our ownership percentage therein to 90.3%. The proceeds were used by the Partnership to pay down existing indebtedness under the credit facility, purchase limited partnership units from two unaffiliated limited partners, fund the acquisitions of two hotels purchased in March 1998 and for general corporate purposes. On May 22, 1998 we completed our merger with Red Lion Inns Limited Partnership, in which we acquired Red Lion Inns Operating L.P. ("OLP") which owns a portfolio of ten DoubleTree-licensed hotels. In the transaction, we issued 3.1 million common shares and paid approximately $35.3 million in cash to the Red Lion limited partners and general partner. The total consideration value, including assumed liabilities of approximately $155.7 million and common shares issued valued at $80.3 million, was $271.3 million. The issuance of our common shares in the merger had the impact of increasing our ownership percentage in the Partnership to 92.2%. At the end of 1998, we owned 31 hotels containing a total of 8,689 guest rooms located in 16 different states. Our principal source of revenue is lease payments from lessees pursuant to percentage lease agreements. Percentage lease revenue is based upon the room, food and beverage and other revenues of our hotels. The lessees' ability to make payments to us pursuant to the percentage leases is dependent primarily upon the operations of the hotels. RESULTS OF OPERATIONS The following discusses our actual results of operations for 1998 compared to 1997 and 1997 compared to the short period from November 4 through December 31, 1996. It also discusses our pro forma results of operations and that of BMC for the years ended December 31, 1998 and 1997. The pro forma information is presented as if the following items had been consummated as of January 1, 1997: - our sale of 4.5 million common shares in February 1998; - our issuance of 3.1 million common shares in May 1998 related to the Red Lion merger; - our acquisitions in 1997 and 1998; and - our repurchase of 114,500 common shares in 1998. The 1997 pro forma results of operations exclude the results of the Daytona Beach Radisson Resort and the DoubleTree Kansas City, as these hotels were closed for renovations during portions of the year. Because the rent we collect from BMC constitutes a significant portion of our lease revenues, we believe that a discussion of the historical and pro forma operations of BMC is also important to understand our business. The pro forma information of BMC is presented as if our acquisitions of hotels leased by BMC and Westboy were consummated as of January 1, 1997. The 1997 pro forma information 19 excludes the results of the Daytona Beach Radisson Resort, as this hotel was closed during most of 1997 for renovation. BOYKIN LODGING COMPANY ACTUAL RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED 1997 Our percentage lease revenue increased to $69.7 million in 1998 from $37.9 million in 1997, primarily because the number of hotels we owned increased from 17 to 31 during the year. Percentage lease revenue payable by BMC represented $56.7 million, or 81.3% of total percentage lease revenue in 1998, compared to 91.9% in 1997. The amount of percentage lease revenues from BMC, as a percentage of total lease revenues, decreased in 1998 because of the addition of third party lessees in 1998. Income before minority interests and extraordinary item increased to $22.2 million in 1998 compared to $17.4 million in 1997. As a percent of total revenues, income before minority interests and extraordinary item decreased to 31.7% in 1998 from 45.6% in 1997, primarily resulting from: - an increase in interest expense to $13.9 million in 1998, or 19.8% of total revenues, in 1998, compared to $2.65 million, or 6.9%, in 1997, due to an increase in the average outstanding debt balances associated with the purchase of additional hotels. Interest expense in 1997 was unusually low due to minimal borrowings under our credit facility as the remaining funds from our IPO were used to fund the majority of acquisitions in the first half of 1997. New debt associated with our 1998 acquisitions and the Red Lion merger increased our interest expense in 1998. - an increase in real estate related depreciation and amortization, as a percent of total revenue, from 26.5% in 1997 to 30.3% in 1998, because of an increase in the size of our hotel portfolio. General and administrative expenses decreased, as a percentage of total revenue, from 6.3% in 1997 to 5.3% in 1998, and personal property taxes, insurance, and ground rent, as a percentage of revenues also decreased from 13.5% in 1997 to 12.0% in 1998. Net income was $19.0 million in 1998 compared to $14.3 million in 1997. Minority interest applicable to the operating partnership and joint venture partnerships in the income before extraordinary item of the Partnership was $2.1 million in 1998, or 2.9% of total revenues, compared to $2.2 million, or 5.8% in 1997. Extraordinary charges (net of minority interest of $.2 million and $.1 million in 1997 and 1998, respectively) increased from $.9 million in 1997 to $1.1 million in 1998. The extraordinary charge in 1998 represented the write-off of deferred financing costs associated with our former $150 million secured credit facility which was replaced with a new $250 million unsecured facility. The extraordinary charge in 1997 represented the write-off of deferred financing costs incurred in connection with increasing our available credit facility in October 1997 and the retirement of mortgage indebtedness of one of the joint ventures. Our FFO in 1998 was $42.8 million compared to $27.4 million in 1997. For a definition of FFO, reconciliation of net income to FFO and discussion why we believe FFO is an important measure to investors of a REIT's financial performance, please see Item 6. "Selected Financial Data" on page 16. ACTUAL RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE PERIOD FROM NOVEMBER 4, 1996 (INCEPTION OF OPERATIONS) TO DECEMBER 31, 1996 Percentage lease revenue increased to $37.9 million from $3.3 million in 1996, primarily because of the partial year of operations in 1996 and the increase in the number of hotels we owned from 9 to 17 at December 31, 1996 and 1997, respectively. Percentage lease revenue payable by BMC represented $34.8 million or 91.9% of total percentage lease revenue in 1997 compared to 100% in 1996. Income before minority interest and extraordinary item increased to $17.4 million in 1997 compared to $.8 million in 1996. As a percent of total revenue, income before minority interest and extraordinary item increased to 45.6% in 1997 from 24.9% in 1996, primarily resulting from: 20 - a decline in real estate related depreciation and amortization, as a percent of total revenue, from 39.8% in 1996 to 26.5% in 1997, - a decrease in real estate and personal property taxes, insurance and ground rent, as a percentage of total revenues, from 18.4% in 1996 to 13.5% in 1997, - a decrease in general and administrative expenses, as a percent of total revenues, from 13.3% in 1996 to 6.3% in 1997. These expenses, as a percent of total revenues, decreased because of a greater increase in percentage lease revenues during our full year of operations in 1997 relative to the increase in expenses during the same period. - an increase in interest expense to $2.7 million in 1997 compared to $54,000 in 1996 because of borrowings under the our credit facility used to fund acquisitions in 1997. Net income was $14.3 million in 1997 compared to a net loss in 1996 of $4.1 million. Minority interest applicable to the operating partnership and joint venture partnerships in the income before extraordinary item of the Partnership was $2.2 million in 1997, or 5.8% of total revenues, compared to $40,000, or 1.2%, in 1996. Extraordinary charges (net of minority interest of $1.0 million and $.2 million in 1996 and 1997, respectively) decreased from $4.9 million in 1996 to $.9 million in 1997. The extraordinary charge in 1996 represented the write-off of deferred financing costs and the payment of prepayment penalties and fees incurred in connection with the retirement of all mortgage indebtedness assumed by the Partnership upon formation of the company. Our FFO in 1997 was $27.4 million compared to $2.2 million in 1996 due to a partial year in 1996 and the increased number of hotels owned during 1997. PRO FORMA RESULTS OF OPERATIONS YEAR ENDED 1998 COMPARED TO 1997 For the year ended December 31, 1998, our pro forma total revenue would have been $83.3 million, representing a $2.3 million, or 2.8%, increase over pro forma total revenue for the year ended December 31, 1997 of $81.1 million. The increase for 1998 over 1997 is primarily the result of increased percentage lease revenue because of increases in the average daily rates (ADR) and the exclusion of the Daytona and Kansas City hotels in the 1997 results as they were closed for renovations during portions of 1997. Pro forma expenses before minority interest, consisting principally of depreciation and amortization, property taxes, insurance, ground rent, general administrative expenses and interest expense would have been $60.2 million, representing a $3.0 million, or 5.2%, increase over 1997 expenses of $57.2 million. As a percentage of revenues, our expenses before minority interest would have increased from 70.6% in 1997 to 72.2% in 1998. The principal factors for this increase are attributable to interest expense, general and administrative expenses, depreciation and amortization. General and administrative expenses would have increased $1.3 million in 1998 compared to 1997, or 55.8%, primarily attributable to incremental costs associated with hiring management personnel to support our strategic growth objectives. Real estate and personal property taxes, insurance and ground rent expense would have decreased from $10.2 million in 1997 to $9.8 million in 1998, or 4.2%, primarily because of lower insurance premiums in 1998 compared to 1997. Pro forma interest expense would have increased 11.5% in 1998, because of higher average borrowing levels in 1998 compared to 1997 associated with funding capital expenditures, offset somewhat by lower interest rates in 1998. Pro forma FFO for the year ended December 31, 1998 decreased slightly to $48.7 million compared to $50.2 million in 1997. During 1998, the pro forma ADR at our hotels (excluding Daytona and Kansas City as these hotels were closed during portions of 1997 for renovations) increased to $90.18 compared to $87.52 in 1997, representing a 3.0% increase. The weighted average occupancy decreased to 66.6% from 68.3% in 1997. This resulted in an increase in REVPAR to $60.04 in 1998 compared to $59.80 in 1997. The following table 21 sets forth the pro forma operating data of the hotels owned by us as of December 31, 1998, without regard to when we acquired the hotels.
ADR OCCUPANCY REVPAR -------------------- -------------------- -------------------- 1998 1997 1998 1997 1998 1997 --------- --------- --------- --------- --------- --------- All 29 Hotels(1)....................................... $ 90.18 $ 87.52 66.6% 68.3% $ 60.04 $ 59.80 Initial Nine Hotels.................................... 95.62 94.77 71.7 76.5 68.58 72.53 Acquired Hotels (10 Properties)........................ 89.30 83.85 58.9 58.4 52.62 48.94 Acquired Red Lion DoubleTrees (10 properties).......... 86.39 83.82 69.1 70.3 59.66 58.97 Total 31 Hotels(2)..................................... 90.23 N/A 65.1 N/A 58.72 N/A
- ------------ (1) The pro forma data excludes the operations of the Daytona Beach Radisson Resort and the DoubleTree Kansas City as these hotels were closed during portions of the pro forma periods prior to being reopened in January 1998 and April 1997, respectively. (2) Includes all 31 hotels including Daytona and Kansas City. No assurance can be given that the trends reflected in this data applicable to the hotels will continue or that ADR, occupancy, and REVPAR will not decrease as a result of changes in national or local economic or hospitality industry conditions. BMC ACTUAL RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED 1997 For the year ended December 31, 1998 BMC had hotel revenues of $235.7 million compared to $110.5 million in 1997. The increase was due to the increase in the number of hotels leased, from 13 at December 31, 1997 to 25 at December 31, 1998. BMC recorded net income of $47,000 in 1998 compared to $1.7 million in 1997. Percentage lease expense during 1998 was $67.4 million, or 28.6% of hotel revenues, compared to $34.8 million, or 31.5% of hotel revenues, in 1997. Departmental and other hotel operating expenses, consisting primarily of rooms expenses, food and beverage costs, franchise fees, utilities, repairs and maintenance, and other general and administrative expenses of the hotels were $170.2 million in 1998 compared to $75.9 million in 1997. As a percent of hotel revenues, the departmental and other hotel operating expenses increased from 68.6% in 1997 to 72.2% in 1998, because of the additional hotels and management fees paid to Promus for the DoubleTree hotels. ACTUAL RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE PERIOD FROM NOVEMBER 4, 1996 (INCEPTION OF OPERATIONS) TO DECEMBER 31, 1996 For the year ended December 31, 1997 BMC had hotel revenues of $110.5 million compared to $12.3 million in 1996. The increase was because of the partial year in 1996 and an increase in the number of hotels leased, from nine at December 31, 1996 to 13 at December 31, 1997. BMC recorded net income of $1.7 million in 1997 compared to a net loss of $.4 million in 1996. The loss in 1996 was partially the result of the application of the percentage lease rent terms during an interim period (as opposed to a full calendar year). The terms of each lease allow for annualizing the rent payable to compensate for the effects of seasonality when base rents may be required during periods of lower occupancy which would otherwise be offset during peak seasons. Historically, the fourth quarter has been a period of lower occupancy for the Initial Hotels on a combined basis in comparison to the other three quarters of the year. The percentage lease expense during 1997 was $34.8 million, or 31.5% of hotel revenues, compared to $3.3 million, or 26.5% of hotel revenues, in 1996. Departmental and other hotel operating expenses, consisting primarily of rooms expenses, food and beverage costs, franchise fees, utilities, repairs and maintenance, and other general and administrative expenses of the hotels, were $75.9 million in 1997 compared to $9.7 million in 1996. As a percent of hotel revenues, the departmental and other hotel 22 operating expenses decreased from 79.4% in 1996 to 68.6% in 1997 because of the lower fourth quarter revenues in 1996 (as opposed to a full calendar year). PRO FORMA RESULTS OF OPERATIONS YEAR ENDED 1998 COMPARED TO 1997 For the year ended December 31, 1998, BMC's pro forma hotel revenues would have been $237.9 million, a slight increase in pro forma hotel revenues over the year ended December 31, 1997 of $237.2 million. The increase in revenues for 1998 compared to 1997 is primarily the result of increases in the average daily rates offset by lower occupancy rates experienced at some of the BMC hotels. Pro forma percentage lease expense would have decreased from $69.6 million in 1997 to $68.1 million in 1998, or 2.2%, because of changes in the percentage lease calculations in 1998 for increases in the Consumer Price Index applied to the relatively flat hotel revenues between years. Pro forma departmental expenses and other hotel operating expenses of BMC would have been $172.2 million in 1998 compared to $169.1 million in 1997, an increase of 1.9%. As a percentage of hotel revenues, these expenses would have increased slightly from 71.3% in 1997 to 72.4% in 1998. Pro forma net income of BMC would have been $35,000 in 1998 compared to net income of $.3 million in 1997. LIQUIDITY AND CAPITAL RESOURCES Our principal source of cash to meet our cash requirements, including distributions to shareholders, is our share of the Partnership's cash flow from the percentage leases. The lessees' obligations under the percentage leases are unsecured and the lessees' ability to make rent payments to the Partnership under the percentage leases, are dependent on the lessees' ability to generate sufficient cash flow from the operation of the hotels. As of December 31, 1998, we had $5.6 million of unrestricted cash and cash equivalents, $4.3 million of restricted cash for the payment of capital expenditures, real estate tax and insurance and we had outstanding borrowings totaling $156.0 million and $130.0 million against our credit facility and term note payable, respectively. In February 1999, the borrowings under our credit facility increased to $158.0 million to fund capital expenditures for significant renovations at four DoubleTree hotels. We have a $250 million credit facility available, as limited under terms of the credit agreement, to fund acquisitions of additional hotels, renovations and capital expenditures, and for our working capital needs. For information relating to the terms of our credit facility and our $130 million term note payable, please see Notes 5 and 6, respectively, of the notes to consolidated financial statements of Boykin Lodging Company included in this Form 10-K. We may seek to negotiate additional credit facilities or issue debt instruments. Any debt incurred or issued by us 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. In November 1997, we filed a shelf registration statement with the Securities and Exchange Commission for the issuance of up to $300 million in securities over two years. Securities issued under this registration statement may be preferred shares, depository shares, common shares or any combination thereof, and may be issued at different times, depending on market conditions. Warrants to purchase these securities may also be issued. The terms of issuance of any securities covered by this registration statement would be determined at the time of their offering. The 4.5 million common shares sold in the February 28, 1998 offering were sold under this registration statement. On February 1, 1999, we formed a joint venture with AEW Partners III, L.P. ("AEW"), an investment partnership managed by AEW Capital Management, L.P., a Boston-based real estate investment firm that manages a portfolio of approximately $6 billion. AEW will provide $50 million of equity capital for the joint venture, and we will provide approximately $17 million and serve as the operating partner of the joint venture. We plan to use the joint venture to take advantage of acquisition opportunities in the lodging 23 industry. Combined with debt financing, the initial capital commitments would allow the joint venture to complete approximately $175 million of acquisitions over a 24-month period. The joint venture agreement also contains provisions for AEW and Boykin to double their respective capital commitments under certain circumstances, which could result in total acquisitions by the joint venture of approximately $350 million. In addition, as part of the transaction, we will receive incentive returns based on the performance of acquired assets as well as other compensation as a result of the joint venture's activities. We anticipate that funds generated from operations and our credit facility will enable us to meet our anticipated cash needs for the next year. Our percentage lease revenues and cash flow are dependent in large part upon the hotel revenues recognized by our lessees. There can be no assurance that those revenues will meet expected levels. The availability of borrowings under the credit facility is restrained by borrowing base and loan-to-value limits, as well as other financial performance covenants contained in the agreement. There can be no assurance that funds will be available in anticipated amounts from the credit facility. Additionally, no assurance can be given that we will make distributions in the future at the current rate, or at all. INFLATION Our revenues are from percentage leases, which can change based on changes in the revenues of our hotels. Therefore, we rely entirely on the performance of the hotels and the lessees' ability to increase revenues to keep pace with inflation. Operators of hotels in general, and our lessees, can change room rates quickly, but competitive pressures may limit the lessees' ability to raise rates to keep pace with inflation. Our general and administrative costs as well as real estate and personal property taxes, property and casualty insurance and ground rent are subject to inflation. YEAR 2000 COMPLIANCE Many computer systems were originally designed to recognize calendar years by the last two digits in the date code field. Beginning in the year 2000, these date code fields will need to accept four-digit entries to distinguish twenty-first century dates from twentieth century dates. As a result computerized systems, which include information and non-information technology systems, and applications used by us, are being reviewed, evaluated and modified or replaced, if necessary, to ensure all such financial, information and operational systems are Year 2000 compliant. STATE OF READINESS We are addressing the Year 2000 compliance issue by focusing on our corporate facility, which includes all of our administrative, non-hotel operating functions, and on our hotel properties. Corporate Facility: For our corporate facility, we are in the phase of assessing our hardware components and critical corporate business applications, all of which are expected to be modified or upgraded, as necessary, to ensure Year 2000 compliance by the end of the second quarter of 1999. Hotel Properties: We are communicating with our lessees and other vendors with whom we do significant business to determine their readiness of Year 2000 compliance. For all of our hotels, we have gained an understanding of the process which our lessees have undertaken to address the risk assessment, validation, remediation and contingency plans related to Year 2000 compliance. 24 These processes have included the following: - completion of an inventory and assessment of all computerized systems, applications and hardware by internal personnel; - prioritization of items representing critical business applications; and - estimation of remediation costs. Most of our lessees are using internal personnel, who are determining the level of resources needed, necessary modifications or upgrades, remediation and contingency plans to become Year 2000 compliant. Our lessees have informed us that they have dedicated the tools and resources to address all Year 2000 issues in an effort to be Year 2000 compliant during the third quarter of 1999. There can be no assurance that the efforts related to the hotel properties will be sufficient to make these properties' computerized systems and applications Year 2000 compliant in a timely manner or that the allocated resources will be sufficient. A failure to become Year 2000 compliant could affect the integrity of the hotel property guest check-in, billing and accounting functions. Certain physical hotel property machinery and equipment could also fail resulting in safety risks and customer dissatisfaction. We cannot predict at this time the most reasonably likely worst case scenario relating to Year 2000 issues. YEAR 2000 PROJECT COSTS We estimate that total unexpended costs for the Year 2000 compliance review, evaluation, assessment and remediation efforts for the corporate facility and the hotels should not exceed $.8 million, although there can be no assurance that actual costs will not exceed this amount. During 1998, we spent approximately $1.6 million related to computerized systems and equipment which are Year 2000 compliant. It should be noted that the vast majority of our costs to remediate this issue are capital in nature and would therefore not affect our funds from operations. CONTINGENCY PLAN We are in the process of developing our contingency plan for the corporate facility and hotel properties to provide for the most reasonably likely worst case scenarios regarding Year 2000 compliance. This contingency plan is expected to be completed in the third quarter of 1999. SEASONALITY Our hotels' operations historically have been seasonal. Twenty-six of our hotels maintain higher occupancy rates during the second and third quarters. The five hotels located in Florida experience their highest occupancy in the first quarter. This seasonality pattern can be expected to cause fluctuations in our quarterly lease revenue under the percentage leases. We anticipate that our cash flow from the percentage leases will be sufficient to enable us to continue to make quarterly distributions at the current rate for the next twelve months. To the extent that cash flow from operations is insufficient during any quarter because of temporary or seasonal fluctuations in percentage lease revenue, we expect to utilize cash on hand or borrowings to make those distributions. No assurance can be given that we will make distributions in the future at the current rate, or at all. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK In 1998 we entered into a $130 million term note payable which bears interest at a fixed rate of 6.9% for ten years, and a new fixed rate to be determined thereafter. The term note requires interest only payments for the first two years, with principal repayments commencing in the third loan year based on a 25-year amortization schedule. The term note expires in June 2023. Assuming a 10% increase in interest 25 rates as of December 31, 1998, the fair market value of the term note payable would be approximately $126.1 million. In 1998, we also entered into a new unsecured credit facility with a group of banks, which enables us to borrow up to $250 million, subject to borrowing base and loan-to-value limitations, at a rate of interest that fluctuates at LIBOR plus 1.40% to 1.75%. Due to changes in the U.S. and global economy, interest rates fluctuate regularly which creates risk that these rates may increase in the future, which would adversely impact our interest expense and cash flows. See Notes 2, 5 and 6 to the consolidated financial statements for discussion of fair values of financial instruments and the terms of the unsecured credit facility and the term note payable. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to the Financial Statements on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item 10 is incorporated by reference to the information under the headings "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" contained in Boykin Lodging's Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 25, 1999, and the information under the heading "Executive Officers" in Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is incorporated by reference to the information under the heading "Executive Compensation" contained in Boykin Lodging's Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 25, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is incorporated by reference to the information under the heading "Security Ownership of Certain Beneficial Owners and Management" contained in Boykin Lodging's Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 25, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 is incorporated by reference to the information under the heading "Transactions with Management" contained in Boykin Lodging's Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 25, 1999. 26 BOYKIN LODGING COMPANY AS OF DECEMBER 31, 1998 AND 1997 INDEX TO FINANCIAL STATEMENTS BOYKIN LODGING COMPANY: Report of Independent Public Accountants........................................... F-2 Consolidated Balance Sheets as of December 31, 1998 and 1997....................... F-3 Consolidated Statements of Operations for the Years Ended December 31, 1998 and 1997 and the Period February 8, 1996 (Inception) through December 31, 1996....... F-4 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1998 and 1997 and the Period February 8, 1996 (Inception) through December 31, 1996............................................................................. F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and 1997 and the Period February 8, 1996 (Inception) through December 31, 1996....... F-6 Notes to Consolidated Financial Statements......................................... F-7 Schedule III -- Real Estate and Accumulated Depreciation as of December 31, 1998... F-20 INITIAL HOTELS (PREDECESSORS TO BOYKIN LODGING COMPANY): Report of Independent Public Accountants........................................... F-22 Combined Statement of Operations for the Period January 1, 1996, through November 3, 1996................................................................. F-23 Combined Statement of Partners' Deficit for the Period January 1, 1996, through November 3, 1996................................................................. F-24 Combined Statement of Cash Flows for the Period January 1, 1996, through November 3, 1996................................................................. F-25 Notes to Combined Financial Statements............................................. F-26 BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES (BMC): Report of Independent Public Accountants........................................... F-30 Consolidated Balance Sheets as of December 31, 1998 and 1997....................... F-31 Consolidated Statements of Operations and Comprehensive Income for the Years Ended December 31, 1998 and 1997 and the Period November 4, 1996 (Inception of Operations) through December 31, 1996............................................ F-32 Consolidated Statements of Members' Capital for the Years Ended December 31, 1998 and 1997 and the Period November 4, 1996 (Inception of Operations) through December 31, 1996................................................................ F-33 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and 1997 and the Period November 4, 1996 (Inception of Operations) through December 31, 1996......................................................................... F-34 Notes to Consolidated Financial Statements......................................... F-35 BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC. AND BOPA DESIGN COMPANY (PREDECESSORS TO BMC): Report of Independent Public Accountants........................................... F-41 Combined Statement of Revenues and Expenses for the Period January 1, 1996, through November 3, 1996................................................................. F-42 Notes to Combined Financial Statements............................................. F-43
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Boykin Lodging Company: We have audited the accompanying consolidated balance sheets of Boykin Lodging Company (an Ohio corporation) and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended December 31, 1998 and 1997 and the period ended December 31, 1996. These financial statements and the schedule referred to below are the responsibility of Boykin Lodging's management. Our responsibility is to express an opinion on these financial statements and schedule 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 financial position of Boykin Lodging Company and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for the years ended December 31, 1998 and 1997 and the period ended December 31, 1996 in conformity with generally accepted accounting principles. Our audit was 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 is the responsibility of Boykin Lodging 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 12, 1999. F-2 BOYKIN LODGING COMPANY CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998, AND 1997 (DOLLAR AMOUNTS IN THOUSANDS)
1998 1997 ---------- ---------- ASSETS Investment in hotel properties, net....................................................... $ 595,132 $ 231,651 Cash and cash equivalents................................................................. 5,643 1,855 Rent receivable from lessees: Related party lessees................................................................... 4,748 897 Third party lessees..................................................................... 547 360 Deferred expenses, net.................................................................... 3,159 2,055 Restricted cash........................................................................... 4,330 -- Other assets.............................................................................. 1,503 2,037 ---------- ---------- $ 615,062 $ 238,855 ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Borrowings against credit facility........................................................ $ 156,000 $ 91,750 Term note payable......................................................................... 130,000 -- Accounts payable and accrued expenses..................................................... 6,521 4,688 Dividends/distributions payable........................................................... 8,618 4,893 Due to lessees: Related party lessees................................................................... 2,971 1,069 Third party lessees..................................................................... 1,775 1,268 Minority interest in joint ventures....................................................... 11,251 7,318 Minority interest in operating partnership................................................ 11,710 13,054 Shareholders' equity: Preferred shares, without par value; 10,000,000 shares authorized; no shares issued and outstanding........................................................................... -- -- Common shares, without par value; 40,000,000 shares authorized; 17,044,361 and 9,542,251 shares outstanding.................................................................... -- -- Additional paid-in capital.............................................................. 307,512 124,430 Retained deficit........................................................................ (21,296) (9,615) ---------- ---------- Total shareholders' equity.............................................................. 286,216 114,815 ---------- ---------- $ 615,062 $ 238,855 ---------- ---------- ---------- ----------
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. F-3 BOYKIN LODGING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FEBRUARY 8, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
PERIOD FEBRUARY 8, YEAR ENDED YEAR ENDED 1996 THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1996 ------------ ------------ ------------------- Revenues: Lease revenue from related party.............................. $ 56,708 $ 34,834 $ 3,258 Other lease revenue........................................... 13,039 3,050 -- Interest income............................................... 375 382 120 ------------ ------------ ------- 70,122 38,266 3,378 ------------ ------------ ------- Expenses: Real estate related depreciation and amortization............. 21,265 10,148 1,344 Real estate and personal property taxes, insurance and ground rent........................................................ 8,413 5,173 620 General and administrative.................................... 3,745 2,404 450 Interest expense.............................................. 13,905 2,653 54 Amortization of deferred financing costs...................... 593 454 69 ------------ ------------ ------- 47,921 20,832 2,537 ------------ ------------ ------- Income before minority interests and extraordinary item......... 22,201 17,434 841 Minority interest in joint ventures............................. (461) (144) -- Minority interest in operating partnership...................... (1,598) (2,066) (40) ------------ ------------ ------- Income before extraordinary item................................ 20,142 15,224 801 Extraordinary item -- loss on early extinguishment of debt, net of minority interest of $110, $172 and $970 in 1998, 1997 and 1996, respectively............................................ (1,138) (882) (4,908) ------------ ------------ ------- Net income (loss) applicable to common shares................... $ 19,004 $ 14,342 $ (4,107) ------------ ------------ ------- ------------ ------------ ------- Earnings per share: Basic......................................................... $ 1.25 $ 1.51 $ (.46) Diluted....................................................... $ 1.25 $ 1.49 $ (.45) Weighted average number of common shares outstanding: Basic......................................................... 15,252 9,523 8,981 Diluted....................................................... 15,252 9,595 9,036
The accompanying notes to consolidated financial statements are an integral part of these statements. F-4 BOYKIN LODGING COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FEBRUARY 8, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996 (DOLLAR AMOUNTS IN THOUSANDS)
ADDITIONAL COMMON PAID-IN RETAINED SHARES CAPITAL DEFICIT TOTAL ------------ ---------- ---------- ---------- Issuance of common shares, net of offering expenses of $16,427...................................................... 9,516,251 $ 173,898 $ -- $ 173,898 Purchase accounting adjustment necessary to reflect assets at predecessor cost............................................. -- (50,070) -- (50,070) Net loss....................................................... -- -- (4,107) (4,107) Dividends declared -- $.2837 per common share.................. -- -- (2,700) (2,700) ------------ ---------- ---------- ---------- Balance, December 31, 1996..................................... 9,516,251 123,828 (6,807) 117,021 Net income..................................................... -- -- 14,342 14,342 Dividends declared -- $1.80 per common share................... -- -- (17,150) (17,150) Shares issued.................................................. 26,000 616 -- 616 Additional offering costs...................................... -- (14) -- (14) ------------ ---------- ---------- ---------- Balance, December 31, 1997..................................... 9,542,251 124,430 (9,615) 114,815 Issuance of common shares, net of offering expenses of $8,058....................................................... 7,616,610 184,912 -- 184,912 Common share purchases for treasury............................ (114,500) (1,830) -- (1,830) Dividends declared -- $1.88 per common share................... -- -- (30,685) (30,685) Net income..................................................... -- -- 19,004 19,004 ------------ ---------- ---------- ---------- Balance, December 31, 1998..................................... 17,044,361 $ 307,512 $ (21,296) $ 286,216 ------------ ---------- ---------- ---------- ------------ ---------- ---------- ----------
The accompanying notes to consolidated financial statements are an integral part of these statements. F-5 BOYKIN LODGING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FEBRUARY 8, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS)
PERIOD FEBRUARY 8, YEAR ENDED YEAR ENDED 1996 THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1996 ------------- ------------- ------------- Cash flows from operating activities: Net income (loss)................................................... $ 19,004 $ 14,342 $ (4,107) Adjustments to reconcile net income (loss) to net cash flow provided by operating activities -- Extraordinary item-noncash loss on early extinguishment of debt... 1,138 882 57 Depreciation and amortization..................................... 21,858 10,602 1,413 Minority interests................................................ 2,059 2,210 930 Changes in assets and liabilities -- Rent receivable................................................. (2,589) (951) (306) Other assets.................................................... 370 (1,200) (772) Accounts payable and accrued expenses........................... 837 1,936 2,433 Restricted cash................................................. (4,330) -- -- Due to lessees.................................................. 1,613 1,656 681 ------------- ------------- ------------- Net cash flow provided by operating activities................ 39,960 29,477 329 ------------- ------------- ------------- Cash flows from investing activities: Acquisitions of hotel properties, net of joint venture partner contribution...................................................... (76,288) (97,043) -- Acquisition of Red Lion Inns Operating L.P., net of common shares issued of $80,333 and cash acquired of $11........................ (191,004) -- -- Improvements and additions to hotel properties...................... (32,492) (13,511) (622) Title, insurance, transfer taxes and filing fees paid to acquire Initial Hotel properties.......................................... -- -- (1,202) ------------- ------------- ------------- Net cash flow used for investing activities................... (299,784) (110,554) (1,824) ------------- ------------- ------------- Cash flows from financing activities: Payments of dividends and distributions............................. (29,388) (17,781) -- Borrowings against credit facility.................................. 161,000 91,750 2,000 Repayment of borrowings against credit facility..................... (96,750) -- (2,000) Term note borrowing................................................. 130,000 -- -- Retirement of mortgage debt assumed................................. -- (10,338) (140,623) Payment of deferred financing costs................................. (2,975) (1,589) -- Proceeds from issuance of common shares, net........................ 104,579 602 172,591 Cash payments for redemption of certain limited partnership interests......................................................... (967) (1,074) -- Distributions to joint venture minority interest partners, net...... (57) -- -- Cash payments to non-continuing equity investors of predecessor..... -- -- (9,111) Cash payment for common share purchases............................. (1,830) -- -- ------------- ------------- ------------- Net cash flow provided by financing activities................ 263,612 61,570 22,857 ------------- ------------- ------------- Net change in cash and cash equivalents............................... $ 3,788 $ (19,507) $ 21,362 Cash and cash equivalents, beginning of period........................ 1,855 21,362 -- ------------- ------------- ------------- Cash and cash equivalents, end of period.............................. $ 5,643 $ 1,855 $ 21,362 ------------- ------------- ------------- ------------- ------------- -------------
The accompanying notes to consolidated financial statements are an integral part of these statements. F-6 BOYKIN LODGING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 1. BACKGROUND: Boykin Lodging Company is a real estate investment trust that owns hotels throughout the United States and leases its properties to established hotel operators. Boykin's principal source of revenue is lease payments from lessees pursuant to percentage lease agreements. Percentage lease revenue is based upon the room, food and beverage and other revenues of Boykin's hotels. The lessees' ability to make payments to Boykin Lodging pursuant to the percentage leases is dependent primarily upon the operations of the hotels. INITIAL PUBLIC OFFERING AND MAJOR EVENTS SINCE THE IPO In November 1996, Boykin completed its initial public offering ("IPO") issuing a total of 9,516,250 common shares, including exercise of the underwriters' over-allotment option. In conjunction with its IPO, Boykin Lodging contributed approximately $133,898 to Boykin Hotel Properties, L.P., an Ohio limited partnership (the "Partnership"), in exchange for an approximate 84.5% equity interest as the sole general partner of the Partnership and also loaned $40,000 to the Partnership in exchange for an intercompany convertible note. The Partnership then acquired nine hotel properties (the "Initial Hotels") and leased them to Boykin Management Company Limited Liability Company ("BMC"). BMC is owned by Robert W. Boykin, Chairman, President and Chief Executive Officer of Boykin Lodging Company (53.8%) and his brother, John E. Boykin (46.2%). The Partnership acquired eight additional hotel properties in 1997 using remaining proceeds from the IPO and borrowings under Boykin's credit facility. On February 24, 1998, Boykin completed a follow-on public equity offering and issued an additional 4,500,000 common shares. The net proceeds of approximately $106,313 were contributed to the Partnership, increasing Boykin Lodging Company's ownership percentage therein to 90.3%. The proceeds were used by the Partnership to pay down existing indebtedness under the credit facility, purchase limited partnership units from two unaffiliated limited partners, fund the acquisitions of two hotels purchased in March 1998 and for general corporate purposes. On May 22, 1998 Boykin completed its merger with Red Lion Inns Limited Partnership, in which Boykin Lodging acquired Red Lion Inns Operating L.P. ("OLP") which owns a portfolio of ten DoubleTree-licensed hotels. In the transaction, Boykin issued 3,109,606 common shares and paid approximately $35,305 in cash to the Red Lion limited partners and general partner. The total consideration value, including assumed liabilities of approximately $155,710 and common shares issued valued at $80,333, was $271,348. The common shares issued in the merger were valued at $25.83 per share, the five-day average trading price of Boykin's shares before the merger announcement. The issuance of Boykin's common shares in the merger had the impact of increasing Boykin Lodging's ownership percentage in the Partnership to 92.2%. At the end of 1998, Boykin owned 31 hotels containing a total of 8,689 guest rooms located in 16 different states. As part of Boykin's acquisitions in 1997 and 1998, Boykin established new strategic F-7 BOYKIN LODGING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED alliances with four hotel operators and purchased five hotels with them through joint venture structures. The following table sets forth the joint venture agreements which have been established in 1997 and 1998:
BOYKIN LESSEE/JV LESSEE/JV OWNERSHIP OWNERSHIP NAME OF JOINT VENTURE PARTNER PERCENTAGE PERCENTAGE HOTEL OWNED UNDER JOINT VENTURE - ------------------------- ---------- --------------- --------------- -------------------------------------------- BoyStar Ventures, L.P. MeriStar 91% 9% Holiday Inn Minneapolis West Shawan Road Hotel L.P. Davidson 91% 9% Marriott's Hunt Valley Inn Boykin San Diego LLC Outrigger 91% 9% Hampton Inn San Diego Airport/Sea World Boykin Kansas City LLC MeriStar 80% 20% DoubleTree Kansas City RadBoy Mt. Laurel LLC Radisson 85% 15% Radisson Hotel Mt. Laurel DATE OF HOTEL NAME OF JOINT VENTURE PURCHASE - ------------------------- ---------------- BoyStar Ventures, L.P. July 1997 Shawan Road Hotel L.P. July 1997 Boykin San Diego LLC November 1997 Boykin Kansas City LLC November 1997 RadBoy Mt. Laurel LLC June 1998
BASIS OF PRESENTATION Boykin Lodging exercises unilateral control over the Partnership. Therefore, the separate financial statements of Boykin Lodging, OLP, the Partnership, and the joint ventures discussed above are consolidated. All significant intercompany transactions and balances have been eliminated. RECLASSIFICATIONS Certain reclassifications have been made to the prior year financial statements to conform with the current year presentation. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: INVESTMENT IN HOTEL PROPERTIES Hotel properties are stated at cost and are depreciated using the straight-line method over estimated useful lives ranging from 20 to 40 years for buildings and improvements and 3 to 20 years for furniture and equipment. Boykin reviews 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. Boykin does not believe that there are any factors or circumstances indicating impairment of any of its investment in hotel properties. Investment in hotel properties as of December 31, 1998 and 1997 consists of the following:
1998 1997 ---------- ---------- Land.................................................................. $ 55,538 $ 21,248 Buildings and improvements............................................ 512,165 186,415 Furniture and equipment............................................... 57,369 28,004 Construction in progress.............................................. 2,772 7,418 ---------- ---------- 627,844 243,085 Less -- Accumulated depreciation...................................... (32,712) (11,434) ---------- ---------- $ 595,132 $ 231,651 ---------- ---------- ---------- ----------
The thirty-one hotel properties owned by Boykin Lodging at December 31, 1998 are located in Florida (5), North Carolina (4), Ohio (3), California (3), Oregon (3), Washington (3), New York, New F-8 BOYKIN LODGING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Jersey, Missouri, Maryland, Indiana, Colorado, Minnesota, Idaho, Nebraska, and Tennessee and are subject to percentage leases as described in Note 10. CASH AND CASH EQUIVALENTS Cash and cash equivalents are defined as cash on hand and in banks plus short-term investments with an original maturity of three months or less. DEFERRED EXPENSES Included in deferred expenses at December 31, 1998 and 1997 are the following:
1998 1997 --------- --------- Financing costs............................................................ $ 3,316 $ 1,589 Franchise fees............................................................. 657 627 --------- --------- 3,973 2,216 Accumulated amortization................................................... (814) (161) --------- --------- $ 3,159 $ 2,055 --------- --------- --------- ---------
Deferred financing costs are being amortized over the term of the related debt agreements. Accumulated amortization at December 31, 1998 and 1997 was $704 and $111, respectively. Deferred franchise fees are being amortized on a straight-line basis over the terms of related franchise agreements. Accumulated amortization at December 31, 1998 and 1997 was $110 and $50, respectively. RESTRICTED CASH Restricted cash consists of cash to be held in escrow reserves under the terms of the term note payable discussed in Note 6. These reserves relate to the payment of capital expenditures, insurance, and real estate taxes. DIVIDENDS/DISTRIBUTIONS Boykin Lodging pays dividends which are dependent upon the receipt of distributions from the Partnership. REVENUE RECOGNITION Boykin Lodging recognizes lease revenue for interim and annual reporting purposes on an accrual basis pursuant to the terms of the respective percentage leases. MINORITY INTERESTS Minority interest in the Partnership represents the limited partners' actual proportionate share of the equity in the Partnership. Income is allocated to minority interest based on the weighted average limited partnership percentage ownership throughout the period. Minority interest in joint ventures represents the joint venture partners' actual proportionate share of the equity in the joint ventures. Income is allocated to minority interest based on the joint venture partners' percentage ownership throughout the period, subject to minimum returns to the Partnership, as defined in the joint venture agreements. F-9 BOYKIN LODGING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED INCOME TAXES Boykin qualifies as a REIT under Sections 856-860 of the Internal Revenue Code. Accordingly, no provision for income taxes has been reflected in the accompanying consolidated financial statements. Boykin's earnings and profits, as defined by federal income tax law, will determine the taxability of distributions to shareholders. Earnings and profits will differ from income reported for financial reporting purposes primarily due to the differences in the estimated useful lives and methods used to compute depreciation. For federal income tax purposes, dividends to shareholders applicable to 1998 and 1997 operating results represent ordinary taxable income while dividends applicable to 1996 operating results represent a 100% return of capital. EARNINGS PER SHARE Boykin follows Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." Boykin's basic and diluted earnings per share for 1998, 1997, and 1996 are as follows:
YEAR ENDED YEAR ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1996 --------------- --------------- --------------- Basic: Income before extraordinary item................ $ 1.32 $ 1.60 $ .09 Extraordinary item.............................. (.07) (.09) (.55) ----- ----- ----- Net income (loss)............................. $ 1.25 $ 1.51 $ (.46) ----- ----- ----- ----- ----- ----- Diluted: Income before extraordinary item................ $ 1.32 $ 1.59 $ .09 Extraordinary item.............................. (.07) (.10) (.54) ----- ----- ----- Net income (loss)............................. $ 1.25 $ 1.49 $ (.45) ----- ----- ----- ----- ----- -----
Basic earnings per share is based on the weighted average number of common shares outstanding during the period whereas diluted earnings per share adjusts the weighted average shares outstanding for the effect of all dilutive securities. The weighted average number of shares used in determining basic earnings per share was 15,252,000, 9,523,000, and 8,981,000 for the years ended December 31, 1998 and 1997, and for the period November 4, 1996 through December 31, 1996. For 1997 and 1996, diluted per share amounts reflect incremental common shares outstanding of 72,000 and 55,000 related to unexercised stock options as of December 31, 1997 and 1996, respectively. There were no dilutive stock options outstanding at December 31, 1998. There are no adjustments to the reported amounts of income in computing diluted per share amounts. PARTNERSHIP UNITS At December 31, 1998 and 1997, a total of 1,291,000 and 1,332,000 limited partnership units were issued and outstanding, respectively. The weighted average number of limited partnership units outstanding for the periods ended December 31, 1998, 1997, and 1996 were 1,297,000, 1,360,000, and 1,378,000 respectively. The weighted average number of common shares and limited partnership units for the periods ended December 31, 1998, 1997 and 1996 were 16,549,000, 10,883,000, and 10,359,000 respectively. F-10 BOYKIN LODGING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value is determined by using available market information and appropriate valuation methodologies. Boykin's principal financial instruments are cash, cash equivalents, restricted cash, accounts receivable, borrowings against the credit facility, and the term note payable. Cash, cash equivalents, and restricted cash, due to their short maturities, and the liquidity of accounts receivable, are carried at amounts which reasonably approximate fair value. As borrowings against the credit facility bear interest at variable market rates, carrying value approximates market value at December 31, 1998 and 1997. The estimated fair value of the $130,000 term note payable (Note 6) is based on the discounted value of contracted cash flows estimated using rates currently offered for debt with similar maturities. This estimate assumes a ten percent increase from Boykin's actual rate on the term note of 6.9%. At December 31, 1998 the estimated fair value was approximately $126,061. USE OF ESTIMATES 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. ACQUISITIONS OF HOTEL PROPERTIES: The following table summarizes Boykin's acquisitions in 1998 and 1997: 1998 ACQUISITIONS
ACQUISITION NUMBER OF PURCHASE PERCENTAGE OWNED HOTEL LOCATION DATE ROOMS PRICE BY PARTNERSHIP LESSEE - ----------------------------------- ---------------- -------------- ------------- ----------- --------------------- --------- Knoxville Hilton................... Knoxville, TN March 1998 317 $ 26,400 100% BMC High Point Radisson................ High Point, NC March 1998 251 $ 10,600 100% BMC Pink Shell Beach Resort............ Fort Myers, FL May 1998 208 $ 19,250 100% MeriStar DoubleTree Portfolio............... Various May 1998 3,062 $ 271,300 100% Westboy Radisson Hotel Mt. Laurel.......... Mt. Laurel, NJ June 1998 283 $ 23,240 85% Radisson
1997 ACQUISITIONS
ACQUISITION NUMBER OF PURCHASE PERCENTAGE OWNED HOTEL LOCATION DATE ROOMS PRICE BY PARTNERSHIP LESSEE - ----------------------------------- ---------------- -------------- ------------- ----------- --------------------- --------- Melbourne Hilton Oceanfront........ Melbourne, FL March 1997 118 $ 9,300 100% BMC Holiday Inn Crabtree............... Raleigh, NC March 1997 176 $ 7,500 100% BMC French Lick Springs Resort......... French Lick, IN April 1997 485 $ 20,000 100% BMC Holiday Inn Minneapolis West....... Minneapolis, MN July 1997 196 $ 12,300 91% MeriStar Marriott's Hunt Valley Inn......... Baltimore, MD July 1997 392 $ 27,300 91% Davidson DoubleTree Kansas City............. Kansas City, MO November 1997 388 $ 25,000 80% MeriStar Hampton Inn San Diego Airport/ Sea World............................ San Diego, CA November 1997 199 $ 8,900 91% Outrigger
All of the acquisitions have been accounted for using the purchase method, with the operating results of the acquired properties being included in the consolidated operating results of Boykin Lodging since the respective dates of acquisition. F-11 BOYKIN LODGING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 4. INTERCOMPANY CONVERTIBLE NOTE: The $40,000 intercompany convertible note matures in November 2001. Interest on the note accrues at a rate equal to 9.5% per annum, increasing to 9.75% per annum beginning in November 1999, and is payable quarterly. The note may be prepaid in full, but not in part, at any time. Boykin has the right to convert the note, 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 $20 per share IPO price of Boykin Lodging's common shares. Boykin Lodging is the sole general partner of the Partnership. The note is secured by mortgages on certain hotel properties. 5. CREDIT FACILITY: On June 11, 1998, Boykin entered into a new unsecured credit facility with a group of banks, which enables Boykin to borrow up to $250,000, subject to borrowing base and loan-to-value limitations, at a rate of interest that fluctuates at LIBOR plus 1.40% to 1.75% (7.25% at December 31, 1998), as defined. Boykin is required to pay a .25% fee on the unused portion of the credit facility. The credit facility expires in June 2000, with an additional one-year extension. The new facility replaced the Boykin's previous $150,000 credit facility, which was secured by first mortgages on thirteen of the hotels. As of December 31, 1998 and December 31, 1997, Boykin had $156,000 and $91,750, respectively, outstanding against the credit facility. The credit facility requires Boykin, among other things, to maintain a minimum net worth, a coverage ratio of EBITDA to debt service, and a coverage ratio of EBITDA to debt service and fixed charges. The company is required to maintain the franchise agreement at each hotel and to maintain its REIT status. Boykin was in compliance with its covenants at December 31, 1998 and December 31, 1997. 6. TERM NOTE PAYABLE: On May 22, 1998, OLP entered into a $130,000 term loan agreement. The loan expires in June 2023 and may be prepaid without penalty or defeasance after May 21, 2008. The loan bears interest at a fixed rate of 6.9% for ten years, and at a new fixed rate to be determined thereafter. The loan requires interest-only payments for the first two years, with principal repayments commencing in the third loan year based on a 25-year amortization schedule. The loan is secured by ten DoubleTree hotels. Under covenants in the loan agreement, assets of OLP are not available to pay the creditors of any other Boykin entity, except to the extent of permitted cash distributions from OLP to Boykin. Likewise, the assets of other Boykin entities are not available to pay the creditors of OLP. The loan agreement also requires OLP to hold funds in escrow for the payment of capital expenditures, insurance and real estate taxes. The term note also requires OLP to maintain certain financial covenants. OLP was in compliance with these covenants at December 31, 1998. Maturities of long term debt at December 31, 1998 are as follows: 1999.............................................................. $ -- 2000.............................................................. 992 2001.............................................................. 2,090 2002.............................................................. 2,239 2003.............................................................. 2,399 2004 and thereafter............................................... 122,280 --------- $ 130,000 --------- ---------
F-12 BOYKIN LODGING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 7. DESCRIPTION OF CAPITAL SHARES: COMMON SHARES Holders of Boykin's common shares are entitled to receive dividends, as and if declared by the Board of Directors, out of funds legally available therefor. The holders of common shares, upon any liquidation, dissolution or winding-up of Boykin, are entitled to share ratably in any assets remaining after payment in full of all liabilities of Boykin 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, 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 ten 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 Boykin. No preferred shares had been issued or were outstanding as of December 31, 1998 and 1997. 8. LIMITED PARTNERSHIP INTERESTS: Pursuant to the Partnership Agreement, the limited partners of the Partnership have exchange rights, which enable them to cause the Partnership to pay cash for their interests in the Partnership, or at Boykin Lodging'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 was 1,378,000. 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 Boykin Lodging. During 1998 and 1997, the Partnership purchased 40,976 and 45,910, respectively, of its outstanding limited partnership units for aggregate cash consideration of $967 and $1,074, respectively. The excess of the aggregate purchase price paid over the capital account balances of the units purchased was $562 and $610, respectively and was recorded as additional investment in hotel properties. As a result of the purchases of limited partnership units and the use of proceeds from the issuances of common shares discussed in Note 1 to purchase additional general partnership units, offset by the redemption of general partnership units in conjunction with the repurchase of 114,500 common shares in 1998, Boykin's general partnership interest in the Partnership increased to 92.1% as of December 31, 1998 from 85.0% as of December 31, 1997. 9. EXTRAORDINARY ITEM: In June 1998, in connection with obtaining the new unsecured credit facility discussed in Note 5, Boykin wrote off existing deferred financing costs under the former secured facility totaling $1,138. These charges, net of $110 of minority interest, were reflected as an extraordinary item in the accompanying consolidated statement of income for the year ended December 31, 1998. F-13 BOYKIN LODGING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED In connection with obtaining an increased credit facility in 1997 and retiring certain assumed mortgage indebtedness, Boykin wrote off existing deferred financing costs totaling $882. These charges, net of $172 of minority interest, were reflected as an extraordinary item in the accompanying consolidated statement of income for 1997. In acquiring the Initial Hotels in 1996, an extraordinary loss of $4,908 was incurred which consisted of prepayment penalties of $5,821 and the write off of deferred financing costs of $57, net of $970 of minority interest. This loss was incurred from retirement of the underlying mortgage indebtedness of the hotels. The debt was retired from the proceeds from the sale of the general partnership interest to Boykin Lodging and from the proceeds from the intercompany convertible note. 10. PERCENTAGE LEASE AGREEMENTS: The percentage leases have noncancelable remaining terms ranging from two to ten years, subject to earlier termination on the occurrence of certain contingencies, as defined. The rent due under each percentage lease is the greater of minimum rent, as defined, or percentage rent. Percentage rent applicable to room and other hotel revenues varies by lease and is calculated by multiplying fixed percentages by the total amounts of such revenues over specified threshold amounts. Both the minimum rent and the revenue thresholds used in computing percentage rents applicable to room and other hotel revenues are subject to annual adjustments based on increases in the United States Consumer Price Index (CPI). Percentage rent applicable to food and beverage revenues is calculated by multiplying fixed percentages by the total amounts of such revenues. Percentage lease revenues were $69,747, $37,884 and $3,258, respectively, for the years ended December 31, 1998 and 1997 and the period ended December 31, 1996, of which approximately $18,746, $12,303 and $306, respectively, was in excess of minimum rent. Future minimum rentals (ignoring future CPI increases) to be received by Boykin from BMC and from other lessees pursuant to the percentage leases for each of the years in the period 1999 to 2003 and in total thereafter are as follows:
RELATED PARTY OTHER LESSEES LESSEES TOTALS ---------- --------- ---------- 1999................................... $ 49,261 $ 9,076 $ 58,337 2000................................... 49,261 9,076 58,337 2001................................... 42,960 9,076 52,036 2002................................... 36,055 7,677 43,732 2003................................... 11,439 5,884 17,323 Thereafter............................. 26,409 23,067 49,476 ---------- --------- ---------- $ 215,385 $ 63,856 $ 279,241 ---------- --------- ---------- ---------- --------- ----------
11. SHARE COMPENSATION PLANS: Boykin has a Long-Term Incentive Plan (LTIP) which provides for the granting to eligible employees 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. Boykin has reserved 1,000,000 common shares for issuance under the LTIP. F-14 BOYKIN LODGING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED OPTION PLAN The following table summarizes information related to share option grant and exercise activity in 1998, 1997 and 1996:
OPTIONS GRANTED TO -------------------------- OFFICERS WEIGHTED AVERAGE EXERCISED AND NON-EMPLOYEE FAIR VALUE OF OPTIONS PRICE PER YEAR EMPLOYEES DIRECTORS OPTIONS GRANTED EXERCISED SHARE - ---------------------------------- ----------- ------------- ----------------- ----------- ----------- 1998.............................. 340,483 30,000 $ 2.10 5,000 $ 20.00 1997.............................. 148,500 30,000 $ 2.54 5,000 $ 20.00 1996.............................. 400,000 25,000 $ 1.59 -- --
As of December 31, 1998 and 1997, the following information related to outstanding options was as follows:
TOTAL OPTIONS EXERCISABLE OPTIONS ------------------------------------------- -------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE PER SHARE REMAINING PER SHARE OPTIONS EXERCISE CONTRACTUAL OPTIONS EXERCISE YEAR OUTSTANDING PRICE LIFE OUTSTANDING PRICE - ---------------------------- ----------- ------------- --------------- ----------- ------------- 1998........................ 963,983 $ 20.53 8.8 years 385,343 $ 21.23 1997........................ 598,500 $ 21.17 9.1 years 161,666 $ 20.36
Options vest over various periods ranging from one to nine years from the date of grant. The term of each option granted will not exceed ten years from date of grant, and the exercise price may not be less than 100% of the fair market value of Boykin's common shares on the grant date. Boykin has adopted the disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," and applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its employee share option plan. If Boykin Lodging had elected to recognize compensation costs for the LTIP based on the fair value at the grant dates for option awards consistent with the method prescribed by SFAS No. 123, reported amounts of net income and earnings per share would have been changed to the pro forma amounts indicated below.
YEAR ENDED PERIOD ENDED DECEMBER 31, 1998 DECEMBER 31, 1997 -------------------- -------------------- AS PRO AS PRO REPORTED FORMA REPORTED FORMA --------- --------- --------- --------- Net income........................................ $ 19,004 $ 18,225 $ 14,342 $ 13,845 Earnings per share: Basic........................................... $ 1.25 $ 1.19 $ 1.51 $ 1.46 Diluted......................................... $ 1.25 $ 1.19 $ 1.49 $ 1.44
F-15 BOYKIN LODGING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The fair value of employee share options used to compute the pro forma amounts of net income and basic earnings per share was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
OPTIONS ISSUED IN: ---------------------- 1998 1997 ---------- ---------- Dividend yield......................................... 9.50% 6.50% Expected volatility.................................... 19.03% 18.2% Risk-free interest rate................................ 5.39% 6.16% Expected holding period................................ 6.6 years 5.4 years
12. EMPLOYEE BENEFIT PLAN: Effective January 1, 1997, Boykin adopted the Boykin Lodging Company Money Purchase Pension Plan, a defined contribution plan which was established to provide retirement benefits to eligible employees. Boykin's contributions for the years ended December 31, 1998 and 1997 totaled $140 and $127, respectively. 13. COMMITMENTS: In general, the percentage leases require Boykin Lodging to establish reserves for capital expenditures. Boykin Lodging intends to use the capital expenditures reserve for the replacement and refurbishment of furniture, fixtures and equipment and other capital expenditures although it may make other uses of the amounts in the fund that it considers appropriate from time to time. Two of the hotels owned by Boykin and land related to another hotel are subject to land leases which expire at various dates through 2068. All leases require minimum annual rentals, and one lease requires percentage rent based on hotel revenues. The other two leases are adjusted for increases in CPI every ten years. Rental expense charged to operations related to these leases for the years ended December 31, 1998 and 1997 was $832 and $830, respectively. Rent expense for the period ended December 31, 1996 was $108. Under the terms of the Red Lion merger agreement, Boykin committed to spend $10,000 over a two-year period in capital renovations at some of the hotels in that portfolio. Boykin plans on spending a total of $20,000 during this period of which approximately $10,000 will be funded through hotel capital expenditure reserves based on a percentage of hotel revenues. The remainder will be funded from Boykin's operations and borrowings under its credit facility. The DoubleTree Kansas City purchased by Boykin K.C. in November 1997 underwent a substantial renovation which was completed in April 1997. The renovation was funded, in part, with $15,110 of proceeds from tax increment financing bonds issued by the Redevelopment Authority of Kansas City, Missouri. Debt service on the bonds is to be funded entirely by sales taxes, payroll taxes, real estate taxes, hotel taxes and other specified taxes and net revenues generated by the hotel. However, if the specified taxes generated by the hotel are insufficient to satisfy the debt service requirements of the bonds, Boykin K.C. could be obligated to fund such shortfall. In the opinion of management of Boykin, it is unlikely that Boykin K.C. will have to fund any debt service on the bonds. Boykin's joint venture partner in Shawan has the right, commencing in July 1999, subject to certain performance criteria, to sell one-half of their respective interests in this joint venture to Boykin at fair market value, with Boykin retaining the option to fund the purchase price with cash or through the issuance of common shares. F-16 BOYKIN LODGING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 14. RELATED PARTY TRANSACTIONS: The Chairman, President and Chief Executive Officer of Boykin Lodging is the majority shareholder of BMC. BMC and Westboy LLC, a subsidiary of BMC, were a significant source of Boykin's percentage lease revenue through December 31, 1998 and 1997. At December 31, 1998 and 1997, Boykin had rent receivable of $4,748 and $897, respectively, due from related party lessees. Boykin Lodging paid Spectrum Design Services $672 for design services in 1998. Of this total, $290 was for design services, $285 represented purchasing services and $97 was reimbursement of expenses incurred while performing services for the hotels during 1998. At December 31, 1998 and 1997, Boykin had a payable to related party lessees of $2,971 and $1,069, respectively, primarily for the reimbursement of capital expenditure costs incurred on behalf of Boykin Lodging. In September 1997, BMC purchased 20,000 common shares of Boykin for cash consideration of $491. Boykin utilized the proceeds to purchase 20,000 additional general partner units in the Partnership. The Initial Hotels were acquired by the Partnership from entities in which certain officers of Boykin and their affiliates had substantial ownership interests. These officers and their affiliates received 1,222,143 limited partnership units in exchange for their interests in the hotel properties. 15. STATEMENTS OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES: In 1998, Boykin issued 3,109,606 common shares, valued at $80,333, as partial consideration for the acquisition of OLP. Approximately $8,618 of dividends and partnership distributions were declared but were not paid as of December 31, 1998. In 1997, the Partnership assumed $10,338 of existing debt which was immediately retired after closing of an acquisition. Approximately $4,893 of dividends and Partnership distributions which were declared but were not paid as of December 31, 1997. In 1996, in connection with the IPO, approximately $64,000 of historical net book value in hotel properties was contributed to the Partnership in exchange for Partnership units and the Partnership assumed approximately $140,000 of debt. Approximately $3,091 of dividends and Partnership distributions were declared but were not paid as of December 31, 1996. Interest paid during the years ended December 31, 1998, and 1997, and the period ended December 31, 1996 was and $12,763, $2,059, and $25, respectively. 16. SUBSEQUENT EVENT: On February 1, 1999, Boykin formed a joint venture with AEW Partners III, L.P. (AEW), an investment partnership managed by AEW Capital Management, L.P., a Boston-based real estate investment firm. AEW will provide $50,000 of equity capital for the joint venture, and Boykin will provide approximately $17,000 and serve as the operating partner of the joint venture. Boykin and AEW plan to use the joint venture to take advantage of acquisition opportunities in the lodging industry. The joint venture agreement contains provisions for AEW and Boykin to double their respective capital commitments under certain circumstances. In addition, as part of the transition, Boykin will receive incentive returns based on the performance of acquired assets as well as other compensation as a result of the joint venture's activities. After the end of the two-year investment period, AEW has the option to convert its capital invested in the joint venture into Boykin convertible preferred shares. Pursuant to the venture agreements, AEW also F-17 BOYKIN LODGING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED purchased a warrant for $500. The warrant gives AEW the right to buy up to $20,000 of Boykin's preferred or common (at Boykin's election) shares for $16.48 a share. The warrant is exercisable after the two year investment period, and expires one year after it becomes exercisable. The amount of the warrant will be reduced and eliminated under the terms of the agreement on a dollar for dollar basis as the last $20,000 of AEW's $50,000 capital is invested. If issued, the preferred shares would be convertible into common shares at $16.48 per common share and have a minimum cumulative annual dividend equivalent to $1.88 per common share, Boykin's current common share dividend. 17. PRO FORMA FINANCIAL INFORMATION (UNAUDITED): Pro forma financial information is presented as if the following significant transactions had been consummated as of January 1, 1997: - the share offering of 4,500,000 common shares in February 1998; - the issuance of 3,109,606 common shares in May 1998 related to the Red Lion merger; - the acquisitions of properties by Boykin in 1997 and 1998; - Boykin's common share repurchase of 114,500 shares in 1998;
YEARS ENDED DECEMBER 31, -------------------- 1998 1997 --------- --------- Lease revenue..................................................................... $ 83,000 $ 81,070 Interest revenue.................................................................. 360 -- --------- --------- Total revenues.................................................................... 83,360 81,070 Real estate related depreciation and amortization................................. 26,256 26,270 Real estate and personal property taxes, insurance and ground rent................ 9,807 10,240 General and administrative........................................................ 3,745 2,404 Interest expense.................................................................. 19,710 17,685 Amortization of deferred financing costs.......................................... 652 607 --------- --------- 60,170 57,206 Income before minority interest and extraordinary item............................ 23,190 23,864 Minority interest................................................................. (2,079) (1,752) --------- --------- Income before extraordinary item.................................................. $ 21,111 $ 22,122 --------- --------- --------- --------- Income per share before extraordinary item: Basic........................................................................... $ 1.24 $ 1.30 Diluted......................................................................... $ 1.24 $ 1.29
The operations of the Kansas City and Daytona hotels are excluded from the 1997 pro forma results as these hotels were closed for renovations during portions of the year. 18. QUARTERLY OPERATING RESULTS (UNAUDITED) Boykin Lodging's unaudited consolidated quarterly operating data for the year ended December 31, 1998 and 1997 follows. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of quarterly results have been reflected in the data. Quarterly operating results are not necessarily indicative of the results to be achieved in succeeding quarters or years. F-18 BOYKIN LODGING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED In May 1998, the Emerging Issues Task Force (EITF) issued EITF 98-9, "Accounting for Contingent Rent in Interim Periods." EITF 98-9 provided that a lessor shall defer recognition of contingent rental income in interim periods until specified targets that trigger the contingent income are met. Boykin elected to adopt the provisions of EITF 98-9 in the third quarter of 1998, retroactive to January 1, 1998, and restated its financial results for the first and second quarters of 1998. In November 1998, the EITF rescinded its previous ruling, allowing Boykin to revert back to its previous revenue recognition policies before adopting EITF 98-9. Therefore, the following quarterly information for 1998 has been restated from that previously reported on Forms 10-Q/A to reflect Boykin's decision to recognize percentage rent revenue in accordance with the terms of its percentage lease agreements rather than pursuant to the requirements of the rescinded EITF 98-9.
FOR THE 1998 QUARTER ENDED ----------------------------------------------------- (RESTATED) (RESTATED) (RESTATED) MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, ----------- ----------- ------------- ------------ Total revenues.............................................. $ 10,914 $ 17,492 $ 23,266 $ 18,450 Income before extraordinary item............................ 3,649 5,858 7,215 3,420 Net income.................................................. 3,649 4,720 7,215 3,420 Earnings per share: Income before extraordinary item -- Basic................................................... .32 .38 .42 .20 Diluted................................................. .32 .38 .42 .20 Net income -- Basic................................................... .32 .31 .42 .20 Diluted................................................. .32 .31 .42 .20 Weighted average number of common shares outstanding: Basic..................................................... 11,342 15,412 17,125 17,044 Diluted................................................... 11,447 15,436 17,125 17,044
FOR THE 1997 QUARTER ENDED ------------------------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, ----------- ----------- ------------- ------------- Total revenues................................................ $ 7,439 $ 9,728 $ 12,036 $ 9,063 Income before extraordinary item.............................. 3,381 4,373 5,373 2,097 Net income.................................................... 3,381 4,373 5,232 1,356 Earnings per share: Income before extraordinary item -- Basic..................................................... .36 .46 .56 .22 Diluted................................................... .35 .46 .56 .22 Net income -- Basic..................................................... .36 .46 .55 .14 Diluted................................................... .35 .46 .55 .14 Weighted average number of common shares outstanding: Basic....................................................... 9,516 9,516 9,522 9,537 Diluted..................................................... 9,575 9,553 9,596 9,651
F-19 BOYKIN LODGING COMPANY SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1998 (IN THOUSANDS)
COSTS CAPITALIZED GROSS AMOUNTS AT WHICH SUBSEQUENT TO CARRIED AT CLOSE OF INITIAL COST ACQUISITION PERIOD ------------------------ ------------------------ ------------------------ BUILDINGS AND BUILDING AND BUILDINGS AND DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS - ------------------------------------- --------------- --------- ------------- --------- ------------- --------- ------------- Corporate Offices Cleveland, Ohio.................... $ -- $ -- $ -- $ -- $ 34 $ -- $ 34 Berkeley Marina Radisson Berkeley, California............... -- -- 10,807 -- 4,932 -- 15,739 Buffalo Marriott Buffalo, New York.................. -- 1,164 15,174 -- 497 1,164 15,671 Cleveland Airport Marriott Cleveland, Ohio.................... -- 1,175 11,441 -- 5,509 1,175 16,950 Cleveland Marriott East Beachwood, Ohio.................... -- 1,918 19,514 -- 1,322 1,918 20,836 Columbus North Marriott Columbus, Ohio..................... -- 1,635 12,873 3 754 1,638 13,627 Melbourne Quality Suites Melbourne, Florida................. -- 3,092 7,819 -- 516 3,092 8,335 Radisson Inn Sanibel Gateway Ft. Myers, Florida................. -- 718 2,686 -- 258 718 2,944 Lake Norman Hampton Inn Charlotte, North Carolina.......... -- 490 4,131 -- 559 490 4,690 Lake Norman Holiday Inn Charlotte, North Carolina.......... -- 700 4,435 -- 855 700 5,290 Holiday Inn Crabtree Raleigh, North Carolina............ -- 725 6,542 -- 3,366 725 9,908 Melbourne Hilton Oceanfront Melbourne, Florida................. -- 852 7,699 -- 342 852 8,041 Daytona Beach Radisson Resort Daytona, Florida................... -- 386 3,470 -- 6,907 386 10,377 French Lick Springs Resort French Lick, Indiana............... -- 2,000 16,000 -- 1,817 2,000 17,817 Holiday Inn Minneapolis West Minneapolis, Minnesota............. -- 1,000 10,604 -- 340 1,000 10,944 Marriott's Hunt Valley Inn Baltimore, Maryland................ -- 2,890 21,575 -- 555 2,890 22,130 Hampton Inn San Diego Airport/Sea World San Diego, California.............. -- 1,000 7,400 -- 157 1,000 7,557 DoubleTree Kansas City Kansas City, Missouri.............. -- 1,500 20,958 -- 53 1,500 21,011 Knoxville Hilton Knoxville, Tennessee............... -- 1,500 8,132 -- 113 1,500 8,245 High Point Radisson High Point, North Carolina......... -- 450 25,057 -- 87 450 25,144 Radisson Hotel Mt. Laurel Mt. Laurel, New Jersey............. -- 2,000 19,697 -- 11 2,000 19,708 ACCUMULATED DEPRECIATION NET BOOK VALUE BUILDINGS AND LAND AND BUILDING DATE OF DATE OF DESCRIPTION TOTAL(B)(C) IMPROVEMENTS(D) AND IMPROVEMENTS CONSTRUCTION ACQUISITION - ------------------------------------- ----------- ----------------- ------------------ ------------- ------------- Corporate Offices Cleveland, Ohio.................... $ 34 $ 3 $ 31 1998 Berkeley Marina Radisson Berkeley, California............... 15,739 1,302 14,437 1972 1996 Buffalo Marriott Buffalo, New York.................. 16,835 1,988 14,847 1981 1996 Cleveland Airport Marriott Cleveland, Ohio.................... 18,125 2,109 16,016 1970 1996 Cleveland Marriott East Beachwood, Ohio.................... 22,754 2,460 20,294 1977 1996 Columbus North Marriott Columbus, Ohio..................... 15,265 1,779 13,486 1981 1996 Melbourne Quality Suites Melbourne, Florida................. 11,427 840 10,587 1986 1996 Radisson Inn Sanibel Gateway Ft. Myers, Florida................. 3,662 209 3,453 1986 1996 Lake Norman Hampton Inn Charlotte, North Carolina.......... 5,180 439 4,741 1991 1996 Lake Norman Holiday Inn Charlotte, North Carolina.......... 5,990 550 5,440 1987 1996 Holiday Inn Crabtree Raleigh, North Carolina............ 10,633 531 10,102 1974 1997 Melbourne Hilton Oceanfront Melbourne, Florida................. 8,893 528 8,365 1986 1997 Daytona Beach Radisson Resort Daytona, Florida................... 10,763 656 10,107 1974 1997 French Lick Springs Resort French Lick, Indiana............... 19,817 1,440 18,377 1903 1997 Holiday Inn Minneapolis West Minneapolis, Minnesota............. 11,944 699 11,245 1986 1997 Marriott's Hunt Valley Inn Baltimore, Maryland................ 25,020 1,450 23,570 1971 1997 Hampton Inn San Diego Airport/Sea World San Diego, California.............. 8,557 392 8,165 1989 1997 DoubleTree Kansas City Kansas City, Missouri.............. 22,511 1,134 21,377 1969 1997 Knoxville Hilton Knoxville, Tennessee............... 9,745 373 9,372 1981 1998 High Point Radisson High Point, North Carolina......... 25,594 816 24,778 1982 1998 Radisson Hotel Mt. Laurel Mt. Laurel, New Jersey............. 21,708 516 21,192 1975 1998 LIFE ON WHICH DEPRECIATION IN INCOME STATEMENT DESCRIPTION IS COMPLETED - ------------------------------------- ----------------- Corporate Offices Cleveland, Ohio.................... 10 years Berkeley Marina Radisson Berkeley, California............... 20 years Buffalo Marriott Buffalo, New York.................. 25 years Cleveland Airport Marriott Cleveland, Ohio.................... 20 years Cleveland Marriott East Beachwood, Ohio.................... 25 years Columbus North Marriott Columbus, Ohio..................... 25 years Melbourne Quality Suites Melbourne, Florida................. 30 years Radisson Inn Sanibel Gateway Ft. Myers, Florida................. 30 years Lake Norman Hampton Inn Charlotte, North Carolina.......... 30 years Lake Norman Holiday Inn Charlotte, North Carolina.......... 30 years Holiday Inn Crabtree Raleigh, North Carolina............ 30 years Melbourne Hilton Oceanfront Melbourne, Florida................. 30 years Daytona Beach Radisson Resort Daytona, Florida................... 40 years French Lick Springs Resort French Lick, Indiana............... 40 years Holiday Inn Minneapolis West Minneapolis, Minnesota............. 30 years Marriott's Hunt Valley Inn Baltimore, Maryland................ 30 years Hampton Inn San Diego Airport/Sea World San Diego, California.............. 30 years DoubleTree Kansas City Kansas City, Missouri.............. 30 years Knoxville Hilton Knoxville, Tennessee............... 30 years High Point Radisson High Point, North Carolina......... 30 years Radisson Hotel Mt. Laurel Mt. Laurel, New Jersey............. 30 years
F-20 BOYKIN LODGING COMPANY SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1998 -- CONTINUED (IN THOUSANDS)
GROSS AMOUNTS AT WHICH COSTS CAPITALIZED CARRIED AT CLOSE INITIAL COST SUBSEQUENT TO ACQUISITION OF PERIOD ------------------------ -------------------------- --------- BUILDINGS AND BUILDING AND DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND - ------------------------------------- --------------- --------- ------------- ----- ------------- --------- Pink Shell Beach Resort Ft. Myers, Florida................. -- 6,000 13,445 -- 446 6,000 DoubleTree Sacramento Sacramento, California............. --(a) 4,400 41,884 -- 187 4,400 DoubleTree Colorado Springs Colorado Springs, Colorado......... --(a) 3,340 31,296 -- 51 3,340 DoubleTree Boise Boise, Idaho....................... --(a) 2,470 23,998 -- 32 2,470 DoubleTree Omaha Omaha, Nebraska.................... --(a) 1,100 19,690 -- 78 1,100 DoubleTree Springfield Springfield, Oregon................ --(a) 2,160 6,050 -- 14 2,160 DoubleTree Portland Lloyd Center Portland, Oregon................... --(a) 3,900 61,633 -- 8 3,900 DoubleTree Portland Downtown Portland, Oregon................... --(a) 1,800 21,034 -- 155 1,800 DoubleTree Bellevue Bellevue, Washington............... --(a) 2,400 13,730 -- 7 2,400 DoubleTree Spokane Valley Spokane, Washington................ --(a) 1,630 6,693 -- 525 1,630 DoubleTree Yakima Valley Yakima, Washington................. --(a) 1,140 6,188 -- 23 1,140 --------- ------------- ----- ------------- --------- Total................................ $ 55,535 $ 481,655 $ 3 $ 30,510 $ 55,538 --------- ------------- ----- ------------- --------- --------- ------------- ----- ------------- --------- ACCUMULATED DEPRECIATION NET BOOK VALUE BUILDINGS AND BUILDINGS AND LAND AND BUILDING DATE OF DESCRIPTION IMPROVEMENTS TOTAL(B)(C) IMPROVEMENTS(D) AND IMPROVEMENTS CONSTRUCTION - ------------------------------------- ------------- ----------- ----------------- ------------------ ------------- Pink Shell Beach Resort Ft. Myers, Florida................. 13,891 19,891 312 19,579 1989 DoubleTree Sacramento Sacramento, California............. 42,071 46,471 1,027 45,444 1974 DoubleTree Colorado Springs Colorado Springs, Colorado......... 31,347 34,687 788 33,899 1986 DoubleTree Boise Boise, Idaho....................... 24,030 26,500 629 25,871 1968 DoubleTree Omaha Omaha, Nebraska.................... 19,768 20,868 493 20,375 1970/81 DoubleTree Springfield Springfield, Oregon................ 6,064 8,224 278 7,946 1973 DoubleTree Portland Lloyd Center Portland, Oregon................... 61,641 65,541 1,481 64,060 1964/81 DoubleTree Portland Downtown Portland, Oregon................... 21,189 22,989 552 22,437 1972 DoubleTree Bellevue Bellevue, Washington............... 13,737 16,137 387 15,750 1981 DoubleTree Spokane Valley Spokane, Washington................ 7,218 8,848 292 8,556 1969 DoubleTree Yakima Valley Yakima, Washington................. 6,211 7,351 183 7,168 1968 ------------- ----------- ------- -------- Total................................ $ 512,165 $ 567,703 $ 26,636 $ 541,067 ------------- ----------- ------- -------- ------------- ----------- ------- -------- LIFE ON WHICH DEPRECIATION IN DATE OF INCOME STATEMENT DESCRIPTION ACQUISITION IS COMPLETED - ------------------------------------- ------------- ----------------- Pink Shell Beach Resort Ft. Myers, Florida................. 1998 30 years DoubleTree Sacramento Sacramento, California............. 1998 30 years DoubleTree Colorado Springs Colorado Springs, Colorado......... 1998 30 years DoubleTree Boise Boise, Idaho....................... 1998 30 years DoubleTree Omaha Omaha, Nebraska.................... 1998 30 years DoubleTree Springfield Springfield, Oregon................ 1998 30 years DoubleTree Portland Lloyd Center Portland, Oregon................... 1998 30 years DoubleTree Portland Downtown Portland, Oregon................... 1998 30 years DoubleTree Bellevue Bellevue, Washington............... 1998 30 years DoubleTree Spokane Valley Spokane, Washington................ 1998 30 years DoubleTree Yakima Valley Yakima, Washington................. 1998 30 years Total................................
- -------------------- (a) These hotels are collateral for the term note payable. (b) Aggregate cost for federal income tax reporting purposes at December 31, 1998 is as follows:
Land.......................................................................... $ 50,391 Buildings and improvements.................................................... 502,329 --------- $ 552,720 --------- ---------
(c) Reconciliation of Gross Amounts of Land, Buildings and Improvements
Balance as of December 31, 1997............................................... $ 207,663 Acquisitions.................................................................. 332,817 Improvements and other additions.............................................. 27,223 --------- Balance as of December 31, 1998............................................... $ 567,703 --------- ---------
(d) Reconciliation of Accumulated Depreciation of Buildings and Improvements
Balance at December 31, 1997.................................................. $ 5,396 Depreciation expense.......................................................... 21,240 --------- Balance at December 31, 1998.................................................. $ 26,636 --------- ---------
F-21 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Boykin Lodging Company: We have audited the accompanying combined statements of operations, partners' deficit and cash flows of the Initial Hotels, as defined in Note 1 to the combined financial statements, for the period January 1, 1996 through November 3, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined results of operations and cash flows of the Initial Hotels for the period January 1, 1996 through November 3, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cleveland, Ohio, February 25, 1997. F-22 INITIAL HOTELS COMBINED STATEMENT OF OPERATIONS FOR THE PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 3, 1996 (AMOUNTS IN THOUSANDS) Revenues from hotel operations: Room revenue..................................................................... $ 51,627 Food and beverage revenue........................................................ 20,062 Other revenue.................................................................... 4,148 --------- Total revenues................................................................. 75,837 --------- Expenses: Departmental expenses -- Rooms.......................................................................... 11,683 Food and beverage.............................................................. 14,613 Other.......................................................................... 2,124 General and administrative....................................................... 6,574 Advertising and promotion........................................................ 3,027 Utilities........................................................................ 3,039 Management fees to related party................................................. 3,366 Franchisor royalties and other charges........................................... 4,081 Repairs and maintenance.......................................................... 3,468 Real estate and personal property taxes, insurance and rent...................... 3,228 Interest expense................................................................. 12,802 Interest expense on partner advances............................................. 628 Depreciation and amortization.................................................... 6,308 Unallocated business interruption insurance expense.............................. 118 Gain on property insurance recovery.............................................. (32) Other............................................................................ 274 --------- Total expenses................................................................. 75,301 --------- Income before extraordinary item............................................... 536 Extraordinary loss on early extinguishment of debt................................. (1,315) --------- Net loss........................................................................... $ (779) --------- ---------
The accompanying notes to combined financial statements are an integral part of this combined statement. F-23 INITIAL HOTELS COMBINED STATEMENT OF PARTNERS' DEFICIT FOR THE PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 3, 1996 (AMOUNTS IN THOUSANDS)
NET COMBINED PARTNERS' (DEFICIT) ---------- BALANCE, DECEMBER 31, 1995............................................................................ $ (56,260) Net loss............................................................................................ (779) Capital contributions............................................................................... 1,638 Cash distributions.................................................................................. (2,029) Net loss of Pacific Ohio Partners for the period October 1, 1995 to December 31, 1995 excluded from these statements.................................................................................. (69) ---------- BALANCE, NOVEMBER 3, 1996............................................................................. $ (57,499) ---------- ----------
The accompanying notes to combined financial statements are an integral part of this combined statement. F-24 INITIAL HOTELS COMBINED STATEMENT OF CASH FLOWS FOR THE PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 3, 1996 (AMOUNTS IN THOUSANDS) Cash flows from operating activities: Net loss........................................................................ $ (779) Adjustments to reconcile net loss to net cash provided by operating activities -- Net loss of Pacific Ohio Partners for the period October 1, 1995 to December 31, 1995, excluded from the combined statement of operations................. (69) Depreciation and amortization expense......................................... 8,897 Deferred interest expense on partner advances................................. 628 Extraordinary loss on early extinguishment of debt............................ 1,315 Payments for franchise fees and other deferred costs.......................... (156) Changes in assets and liabilities -- Receivables................................................................. (1,824) Inventories, prepaids and other assets...................................... (269) Cash held in escrow......................................................... 237 Accounts payable, accrued expenses and other liabilities.................... 334 --------- Net cash provided by operating activities................................. 8,314 --------- Cash flows from investing activities: Improvements and additions to hotel properties, net............................. (3,061) Acquisitions of hotels.......................................................... (9,721) Property insurance proceeds received, net....................................... 320 --------- Net cash used for investing activities.................................... (12,462) --------- Cash flows from financing activities: Principal payments on mortgage notes payable.................................... (43,417) Proceeds from refinancing and new borrowings of mortgage debt................... 51,173 Payment of debt prepayment premium and debt issuance costs...................... (424) Payments on advances from partners.............................................. (400) Capital contributions........................................................... 1,638 Cash distributions paid......................................................... (2,029) --------- Net cash provided by financing activities................................. 6,541 --------- Net change in cash and cash equivalents........................................... 2,393 Cash and cash equivalents at beginning of period.................................. 2,909 --------- Cash and cash equivalents at end of period........................................ $ 5,302 --------- --------- Supplemental disclosures of cash flow information: Cash paid during the period for interest...................................... $ 10,088 Supplemental schedule of noncash investing and financing activities: Prepayment penalty financed with additional borrowing......................... $ 1,246
The accompanying notes to combined financial statements are an integral part of this combined statement. F-25 INITIAL HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS AS OF NOVEMBER 3, 1996 (DOLLAR AMOUNTS IN THOUSANDS) 1. ORGANIZATION AND BASIS OF PRESENTATION: ORGANIZATION The Initial Hotels consist of the following 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 Marriott North................................ Columbus, Ohio 300 Melbourne Quality Suites Inn........................... Melbourne, Florida 208 Radisson Inn Sanibel Gateway........................... Ft. Myers, Florida 157 Hampton Inn............................................ Charlotte, N. Carolina 117 Holiday Inn............................................ Charlotte, N. Carolina 119
Boykin Management Company (former BMC) was involved in the development of each of the above hotels except the Hampton Inn and Holiday Inn and has managed all of the Initial Hotels excluding the Hampton Inn and Holiday Inn since their respective inceptions. The hotels were owned by partnerships (Boykin Partnerships) in which the shareholders of The Boykin Company (TBC), former BMC's parent company, and certain officers and employees of former BMC (collectively, BMC Affiliates) had significant direct and indirect ownership interests. As of November 3, 1996, the Initial Hotels were 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% B.B.G., I, L.L.C. (BBG)..................................................... 46% 54%
Boykin Lodging Company is an Ohio corporation which has been established to acquire equity interests in hotel properties. In November 1996, Boykin Lodging Company completed its initial public offering (IPO) issuing a total of 9,516,250 common shares, including exercise of the underwriters' over-allotment option. Boykin contributed all of the net proceeds of the IPO to Boykin Hotel Properties, L.P., an Ohio limited partnership (the Partnership) in exchange for an approximate 84.5% general partnership interest and a F-26 INITIAL HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED $40 million convertible note. Boykin is taxed as a real estate investment trust pursuant to Sections 856 -- 860 of the Internal Revenue Code. The partners of the Boykin Partnerships contributed their respective partnership interests to the Partnership in exchange for cash and partnership interests. The Partnership used a portion of the proceeds from the sale of the general partnership interest and the note to Boykin to retire mortgage indebtedness encumbering the Initial Hotels. All of the Initial Hotels are leased to Boykin Management Company Limited Liability Company (BMC) pursuant to operating leases which contain provisions for rent based on the revenues of the Initial Hotels. BMC is an affiliate of TBC. BASIS OF PRESENTATION Management believes that these combined financial statements result in a more meaningful presentation of the Initial Hotel businesses acquired by the Partnership and thus appropriately reflect the results of operations of the predecessor of Boykin Lodging Company. All significant intercompany transactions have been eliminated. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ACCOUNTING PERIODS For the period ended November 3, 1996, POP's operating results were adjusted to exclude the three-month period October 1, 1995 to December 31, 1995. The total revenues and net loss of POP excluded from the combined statements of operations for the period ended November 3, 1996 were $3,328 and $69, respectively. In the opinion of management, the effect of nonconforming period ends is not material to the combined financial statements. DEPRECIATION AND AMORTIZATION Depreciation and amortization on hotel properties 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
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. 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. ESTIMATES 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. F-27 INITIAL HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED EXTRAORDINARY ITEM The refinancing and concurrent payment of a prepayment penalty on the extinguishment of the BHJV note resulted in an extraordinary loss of $1,315 for the period ended November 3, 1996. 3. ACQUISITION: On February 8, 1996, BBG acquired the Holiday Inn and Hampton Inn from Norman Associates and Norman Associates II in exchange for aggregate cash consideration of $9,721. The acquisition was accounted for as a purchase and, accordingly, the operating results of these hotels have been included in the accompanying combined financial statements commencing February 8, 1996. 4. MORTGAGE NOTES PAYABLE: The Initial Hotels had mortgage notes payable with interest rates ranging from 8.54% to 13.25%. Certain of the notes required the payment of additional interest upon maturity or repayment in full. The additional interest was charged to interest expense utilizing the effective interest rate method over the contractual term of the notes and was $1,383 for the period ended November 3, 1996. All of the mortgage notes payable were paid off with a portion of the proceeds from the IPO. 5. RELATED PARTY TRANSACTIONS: A substantial portion of the Initial Hotels' management and accounting functions were performed by former 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% except for the Holiday Inn and Hampton Inn for which the fees were calculated as 5% of hotel revenues. In addition, if specified operating results are achieved, an incentive fee was due to former BMC. The management agreements with former BMC expired at various dates through September 30, 2010. BBG paid a 1% asset management fee to an affiliate of its third-party owner. The Initial Hotels incurred interest expense totaling $628 for the period ended November 3, 1996 related to advances and accrued interest on advances from partners used to complete construction and to fund operations. Interest bore at a rate of 10% per annum. 6. COMMITMENTS AND CONTINGENCIES: CLAIMS AND LEGAL MATTERS Some 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 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 eight of the hotels, fees are computed based upon percentages of gross room revenues. The franchise agreements expire at various dates through 2014. 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-28 INITIAL HOTELS NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED OTHER 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 for the period ended November 3, 1996 was as follows: Minimum rent................................................. $ 93 Percentage rent.............................................. 535 --------- $ 628 --------- ---------
7. PRO FORMA FINANCIAL INFORMATION (UNAUDITED): Following pro forma data for the period ended November 3, 1996 assumes that the acquisition of the Holiday Inn and the Hampton Inn occurred on January 1, 1996. Total revenues............................................. $ 76,228 Loss before extraordinary items............................ (817) Net loss................................................... (2,132)
F-29 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Boykin Management Company Limited Liability Company: We have audited the accompanying consolidated balance sheets of Boykin Management Company Limited Liability Company (an Ohio limited liability company) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations and comprehensive income, members' capital and cash flows for the years then ended and the period November 4, 1996 (inception of operations) through December 31, 1996. These 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 financial position of Boykin Management Company Limited Liability Company and subsidiaries as of December 31, 1998 and 1997 and the results of their operations and their cash flows of the years then ended and the period November 4, 1996 (inception of operations) through December 31, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cleveland, Ohio, February 12, 1999. F-30 BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997 (AMOUNTS IN THOUSANDS)
1998 1997 --------- --------- ASSETS Cash and cash equivalents................................................................... $ 12,973 $ 6,862 Accounts receivable: Trade, net of allowance for doubtful accounts of $166 and $84 at December 31, 1998 and 1997, respectively...................................................................... 8,097 3,859 Related party lessors..................................................................... 2,971 1,069 Other..................................................................................... 178 -- Inventories................................................................................. 2,060 788 Property and equipment, net................................................................. 434 366 Investment in Boykin Lodging Company........................................................ 248 529 Prepaid expenses and other assets........................................................... 2,383 908 --------- --------- $ 29,344 $ 14,381 --------- --------- --------- --------- LIABILITIES AND MEMBERS' CAPITAL Rent payable to related party lessors....................................................... $ 4,748 $ 897 Accounts payable: Trade..................................................................................... 3,114 1,746 Advance deposits and other................................................................ 774 261 Bank overdraft liability.................................................................. 4,806 2,837 Accrued expenses: Accrued payroll........................................................................... 633 391 Accrued vacation.......................................................................... 2,250 893 Accrued sales, use and occupancy taxes.................................................... 1,856 646 Accrued management fee.................................................................... 4,044 -- Other accrued liabilities................................................................. 3,080 2,437 --------- --------- Total liabilities......................................................................... 25,305 10,108 --------- --------- MEMBERS' CAPITAL: Capital contributed....................................................................... 3,000 3,000 Retained earnings......................................................................... 1,282 1,235 Accumulated other comprehensive income.................................................... (243) 38 --------- --------- Total members' capital.................................................................... 4,039 4,273 --------- --------- $ 29,344 $ 14,381 --------- --------- --------- ---------
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. F-31 BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD NOVEMBER 4, 1996 (INCEPTION OF OPERATIONS) THROUGH DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS)
PERIOD YEARS ENDED DECEMBER NOVEMBER 4, 31, 1996 THROUGH ---------------------- DECEMBER 31, 1998 1997 1996 ---------- ---------- ------------ Revenues: Room revenue............................................................. $ 148,643 $ 72,751 $ 7,684 Food and beverage revenue................................................ 71,925 30,229 3,976 Other hotel revenue...................................................... 15,085 7,568 620 Other revenue............................................................ 2,407 2,477 382 ---------- ---------- ------------ Total revenues......................................................... 238,060 113,025 12,662 Expenses: Departmental expenses of hotels: Rooms.................................................................. 36,224 16,630 2,066 Food and beverage...................................................... 53,173 21,945 2,894 Other.................................................................. 8,364 3,867 360 Cost of goods sold of non-hotel operations............................... 427 619 102 Percentage lease expense................................................. 67,424 34,834 3,258 General and administrative............................................... 25,182 13,232 1,884 Advertising and promotion................................................ 11,414 4,906 609 Utilities................................................................ 10,532 4,550 558 Franchisor royalties and other charges................................... 7,465 5,423 665 Repairs and maintenance.................................................. 8,926 5,163 674 Depreciation and amortization............................................ 129 82 19 Management fee........................................................... 8,620 -- -- Other.................................................................... 133 93 19 ---------- ---------- ------------ Total expenses......................................................... 238,013 111,344 13,108 ---------- ---------- ------------ Net income (loss).......................................................... $ 47 $ 1,681 $ (446) ---------- ---------- ------------ ---------- ---------- ------------ Comprehensive income (loss)................................................ $ (234) $ 1,719 $ (446) ---------- ---------- ------------ ---------- ---------- ------------
The accompanying notes to consolidated financial statements are an integral part of these statements. F-32 BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD NOVEMBER 4, 1996 (INCEPTION OF OPERATIONS) THROUGH DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS)
ACCUMULATED RETAINED OTHER CONTRIBUTED EARNINGS COMPREHENSIVE COMPREHENSIVE CAPITAL (DEFICIT) INCOME INCOME ----------- ----------- --------------- --------------- Initial capital contribution-- November 4, 1996....................................... $ 3,000 $ -- $ -- $ -- Net loss............................................. -- (446) -- (446) ----------- ----------- ----- ------ Balance at December 31, 1996............................. 3,000 (446) -- (446) Net income........................................... -- 1,681 -- 1,681 Unrealized appreciation on investment................ -- -- 38 38 ----------- ----------- ----- ------ Balance at December 31, 1997............................. 3,000 1,235 38 1,719 Net income........................................... -- 47 -- 47 Unrealized depreciation on investment................ -- -- (281) (281) ----------- ----------- ----- ------ Balance at December 31, 1998............................. $ 3,000 $ 1,282 $ (243) $ (234) ----------- ----------- ----- ------ ----------- ----------- ----- ------
The accompanying notes to consolidated financial statements are an integral part of these statements. F-33 BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD NOVEMBER 4, 1996 (INCEPTION OF OPERATIONS) THROUGH DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS)
PERIOD YEARS ENDED DECEMBER NOVEMBER 4, 31, 1996 THROUGH -------------------- DECEMBER 31, 1998 1997 1996 --------- --------- ------------- Cash flows from operating activities: Net income (loss)............................................................ $ 47 $ 1,681 $ (446) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization.............................................. 129 82 19 Loss (gain) on fixed asset disposal........................................ 56 -- (11) Changes in assets and liabilities: Accounts receivable...................................................... (6,318) (1,314) 3,231 Inventories.............................................................. (1,272) (318) (12) Prepaid expenses and other assets........................................ (1,475) (321) 531 Rent payable............................................................. 3,851 591 306 Accounts payable......................................................... 3,850 1,544 952 Other accrued liabilities................................................ 7,496 379 (5,210) --------- --------- ------ Net cash provided by (used for) operating activities................... 6,364 2,324 (640) --------- --------- ------ Cash flows from investing activities: Property additions, net...................................................... (253) (136) (1) Investment in Boykin Lodging Company......................................... -- (491) -- Collection of notes and accrued interest due from former owner............... -- -- 3,109 Cash of predecessor entities at date of merger............................... -- -- 7,678 Consideration from sale of fixed asset....................................... -- -- 36 --------- --------- ------ Net cash (used for) provided by investing activities................... (253) (627) 10,822 --------- --------- ------ Cash flows from financing activities: Payments of obligations to former owners..................................... -- (373) (3,529) Repayment of debt............................................................ -- -- (1,420) Collections of amounts due from former owners................................ -- 69 236 --------- --------- ------ Net cash used for financing activities................................. -- (304) (4,713) --------- --------- ------ Net increase in cash and cash equivalents...................................... 6,111 1,393 5,469 Cash and cash equivalents, beginning of period................................. 6,862 5,469 -- --------- --------- ------ Cash and cash equivalents, end of period....................................... $ 12,973 $ 6,862 $ 5,469 --------- --------- ------ --------- --------- ------
The accompanying notes to consolidated financial statements are an integral part of these statements. F-34 BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (DOLLAR AMOUNTS IN THOUSANDS) 1. DESCRIPTION OF BUSINESS: Boykin Management Company Limited Liability Company and its subsidiaries (collectively, "BMC") - lease and operate full and limited service hotels located throughout the United States pursuant to long-term percentage leases; - manage full and limited service hotels located throughout the United States pursuant to management agreements; - provide national purchasing services to hotels; and - provide interior design services to hotels and other businesses. 2. ORGANIZATION: BMC commenced operations on November 4, 1996 as an Ohio limited liability company. BMC is indirectly owned by Robert W. Boykin (53.8%) and John E. Boykin (46.2%). Robert W. Boykin is the Chairman, President and Chief Executive Officer of Boykin Lodging Company. Pursuant to formation transactions related to the November 4, 1996 initial public offering of Boykin Lodging, Boykin Management Company ("former BMC") and BOPA Design Company (doing business as Spectrum Services), wholly owned subsidiaries of The Boykin Company ("TBC"), were merged into subsidiaries of BMC. In addition, Purchasing Concepts, Inc. ("PCI") contributed its assets to a subsidiary of BMC and that subsidiary assumed PCI's liabilities. TBC and PCI are related through common ownership. BMC and its subsidiaries are the successors to the businesses of former BMC, Spectrum Services and PCI. As BMC, former BMC, Spectrum Services and PCI were related through common ownership, there were no purchase accounting adjustments to the historical carrying values of the assets and liabilities of former BMC, Spectrum Services and PCI upon merger into or contribution to the subsidiaries of BMC. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION The separate financial statements of BMC's subsidiaries have been published on a consolidated basis with BMC. All material intercompany transactions and balances have been eliminated. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash on hand and in banks plus short-term investments with an original maturity of three months or less. 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. F-35 BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED PROPERTY AND EQUIPMENT Property and equipment is comprised of the following:
DECEMBER 31, DECEMBER 31, 1998 1997 --------------- ------------- Leasehold improvements........................................... $ -- $ 115 Furniture and equipment.......................................... 507 352 ----- ----- 507 467 Less -- Accumulated depreciation and amortization................ (73) (101) ----- ----- $ 434 $ 366 ----- ----- ----- -----
Property and equipment is stated at cost. Depreciation and amortization is calculated using the straight-line and accelerated methods based upon the following estimated useful lives. Leasehold improvements............................ 7-10 years Furniture and equipment........................... 3-10 years
The management of BMC reviews the property and equipment for impairment when events or changes in circumstances indicate the carrying amounts of the assets may not be recoverable. When such conditions exist, management estimates the future cash flows from operations and disposition of the property and equipment. 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 assets estimated fair market value would be recorded and an impairment loss would be recognized. Maintenance and repairs are charged to operations as incurred. 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. INVESTMENT IN BOYKIN LODGING COMPANY During 1997, BMC purchased 20,000 common shares of Boykin Lodging Company for cash consideration of $491. BMC accounts for this investment in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investment in Debt and Equity Securities". The investment is classified as available-for-sale pursuant to the provisions of SFAS No. 115. COMPREHENSIVE INCOME Effective January 1, 1998, BMC adopted SFAS No. 130 "Reporting Comprehensive Income," which requires disclosure of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is defined as changes in shareholders' equity from nonowner sources which for BMC consist of differences between the cost basis and fair market value of its investment in 20,000 common shares in Boykin Lodging. For the years ended December 31, 1998, and 1997 there was a difference of $281, and $(38) respectively between net income and comprehensive income due to the decline (increase) in market value of the investment. F-36 BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED REVENUE RECOGNITION Revenue is recognized as earned. Ongoing credit evaluations are performed and historical credit losses have been within management's expectations. For hotels operated by BMC pursuant to long-term percentage leases, BMC recognizes the room, food, beverage and other hotel revenues as earned. For hotels which are managed by a subsidiary of BMC pursuant to management agreements, BMC recognizes management fee revenue as earned pursuant to the terms of the respective agreements. PERCENTAGE LEASE EXPENSE For both annual and interim reporting purposes, BMC recognizes percentage lease expense pursuant to the provisions of the related percentage lease agreements. FRANCHISE COSTS The cost of obtaining the franchise licenses is paid by Boykin Hotel Properties, L.P. (the Partnership), a partnership in which Boykin Lodging Company has a general partnership interest, and the ongoing franchise fees are paid by BMC. These fees are generally computed as a percentage of room revenue for each hotel in accordance with franchise agreements. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107 requires all entities to disclose the fair value of certain financial instruments in their financial statements. The primary financial instruments of BMC are cash and cash equivalents, the fair value of which approximates historical carrying value due to the short maturity of these instruments, and the investment in the common shares of the Boykin Lodging Company, which are carried at the year end market value as discussed above. INCOME TAXES BMC is a limited liability company which is taxed for federal income tax purposes as a partnership and, accordingly, no income tax provision has been recorded. USE OF ESTIMATES 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. PERCENTAGE LEASE AGREEMENTS: BMC LEASES ON 15 HOTELS BMC leases 15 hotels (the BMC Hotels) from the Partnership pursuant to long-term percentage leases. The BMC Hotels are located in Cleveland, Ohio (2); Columbus, Ohio; Buffalo, New York; Berkeley, California; Raleigh, North Carolina; Charlotte, North Carolina (2); High Point, North Carolina; Knoxville, Tennessee; Ft. Myers, Florida; Melbourne, Florida (2); Daytona Beach, Florida; and French Lick, Indiana. F-37 BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The percentage leases have noncancellable remaining terms ranging from two to nine years, subject to earlier termination on the occurrence of certain contingencies, as defined. BMC is required to pay the higher of minimum rent, as defined, or percentage rent. Percentage rent applicable to room and other hotel revenue varies by lease and is calculated by multiplying fixed percentages by the total amounts of such revenues over specified threshold amounts. Percentage rent related to food and beverage revenues and other revenues, in some cases, is based on fixed percentages of such revenues. Both the threshold amounts used in computing percentage rent and minimum rent on room and other hotel revenues are subject to adjustments as of January 1 of each year based on increases in the United States Consumer Price Index. Other than real estate and personal property taxes, casualty insurance, ground lease rental, and capital improvements, which are obligations of the Partnership, the percentage leases require BMC to pay all costs and expenses incurred in the operation of the BMC Hotels. The percentage leases require BMC to indemnify Boykin Lodging Company against all liabilities, costs and expenses incurred by, imposed on or asserted against the Partnership in the normal course of operating the BMC Hotels. WESTBOY LEASE ON TEN DOUBLETREE HOTELS: Effective January 1, 1998, Westboy, LLC (Westboy), a wholly-owned subsidiary of BMC, entered into a long term lease agreement with Red Lion Inns Operating L.P. (OLP) with terms similar to those described above. OLP was acquired by the Boykin Lodging Company on May 22, 1998. The ten DoubleTree-licensed hotels (the "DoubleTree Hotels") leased by Westboy are located in California, Oregon (3), Washington (3), Colorado, Idaho and Nebraska. The hotels are managed by a subsidiary of Promus Hotel Corporation. BMC made an initial capital contribution to Westboy of $1,000, of which $900 was funded with a demand promissory note. Assets of Westboy are not available to pay the creditors of any other entity, except to the extent of permitted cash distributions from Westboy to BMC. Similarly, except to the extent of the unpaid promissory note, the assets of BMC are not available to pay the creditors of Westboy. Future minimum rent (ignoring CPI increases) to be paid by BMC and Westboy under their respective percentage lease agreements at December 31, 1998 for each of the years in the period 1999 to 2003 and in total thereafter is as follows: 1999...................................................... $ 49,261 2000...................................................... 49,261 2001...................................................... 42,960 2002...................................................... 36,055 2003...................................................... 11,439 Thereafter................................................ 26,409 --------- $ 215,385
5. RELATED PARTY TRANSACTIONS: Percentage lease expense payable to the Partnership (including OLP in 1998) was $56,708, $34,834 and $3,258 in 1998, 1997 and 1996, respectively. F-38 BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED At December 31, 1998 and 1997, BMC (including Westboy) had receivables from the Partnership (including OLP) of $2,971 and $1,069, respectively, primarily for the reimbursement of capital expenditure costs incurred on behalf of the Partnership and OLP. At December 31, 1998 and December 31, 1997, BMC (including Westboy) had payables to the Partnership (including OLP) of $4,748 and $897, respectively, for amounts due pursuant to the percentage leases. 6. COMMITMENTS AND CONTINGENCIES: CLAIMS AND LEGAL MATTERS BMC is involved in claims and legal matters incidental to its 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 BMC. FRANCHISE AGREEMENTS Under the terms of the hotel franchise agreements, annual payments for franchise royalties and reservation and advertising services are due from the hotels. Franchise fees are computed based upon percentages of gross room revenues. At December 31, 1998, the franchise royalty fees payable ranged from 3% to 6% of room revenues while the fees for advertising services ranged from .8% to 4.0%. The franchise agreements expire at various dates through 2018. The hotel located in French Lick, Indiana has no franchise affiliation. MANAGEMENT AGREEMENT On January 1, 1998 Westboy entered into a management agreement with Promus hotels (formerly Red Lion Hotels, Inc.) The agreement calls for a base and incentive management fee. The base management fee represents 3% of annual gross hotel revenues. The incentive menagement fee adjusts based on certain financial thresholds. Total fees paid to Promus in 1998 were $8,620. OTHER Robert W. Boykin and John E. Boykin have entered in an agreement with the Boykin Lodging Company pursuant to which they have agreed that any distributions received from BMC (in excess of their tax liabilities with respect to the income of BMC) for a period of 10 years, and any net cash proceeds from any sale of BMC within the same 10-year period, will be used to purchase units in the Partnership or common shares of Boykin Lodging Company. Any units or common shares so purchased must be held for at least two years from the purchase date. Pursuant to an agreement with Boykin Lodging Company, during the first 10 years after the inception of operations of BMC, 50% of BMC's consolidated earnings (after distributions to cover income taxes) will be retained in BMC until its consolidated net worth reaches 25% of the aggregate annual rent payments due under the percentage lease agreements (and will be retained thereafter during that period to maintain that level). F-39 BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 7. EMPLOYEE BENEFITS PLANS: During 1997, BMC established a 401(k) plan for substantially all employees under which a portion of employee contributions are matched by BMC. BMC matching contributions for 1998 and 1997 were $104 and $91, respectively. Effective January 1, 1997, BMC established an incentive compensation plan for certain senior executives. The dollar amounts of individual awards are deemed to be invested in common shares of Boykin Lodging Company. BMC pays to each participant cash equal to the per share dividend amount paid by Boykin Lodging Company multiplied by the number of Boykin's shares credited to each participant's account. For the year ended December 31, 1998 and 1997, BMC has recorded a provision of $1 and $199 respectively with respect to this plan, which represents the amortization over the vesting period of the prepaid compensation associated with the awards. 8. PRO FORMA FINANCIAL INFORMATION (UNAUDITED): The following unaudited pro forma condensed statements of operations for the years ended December 31, 1998 and 1997 are presented as if BMC (including Westboy) leased and operated from January 1, 1997 all the BMC Hotels and the DoubleTree Hotels leased and/or operated as of December 31, 1998. The pro forma condensed statements of operations do not purport to present what actual results of operations would have been if the BMC Hotels and the DoubleTree Hotels were leased and/or operated by BMC (including Westboy) pursuant to the percentage leases from January 1, 1997 or to project results for any future period.
YEAR ENDED DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- Revenues: Room revenue........................................................ $ 150,169 $ 149,677 Food and beverage revenue........................................... 72,501 72,669 Other hotel revenue................................................. 15,245 14,842 Other revenue....................................................... 2,407 2,477 ---------- ---------- Total revenue..................................................... 240,322 239,665 Expenses: Departmental expenses of hotels..................................... 171,782 169,077 Cost of goods sold of non-hotel operations.......................... 427 619 Percentage lease expense............................................ 68,078 69,630 ---------- ---------- Net income............................................................ $ 35 $ 339 ---------- ---------- ---------- ----------
F-40 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Boykin Management Company, Purchasing Concepts, Inc. and Bopa Design Company: We have audited the accompanying combined statement of revenues and expenses of Boykin Management Company (an Ohio corporation), Purchasing Concepts, Inc. (an Ohio corporation) and Bopa Design Company (an Ohio corporation) for the period January 1, 1996 through November 3, 1996. These financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements 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 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 audit provides a reasonable basis for our opinion. The accompanying financial statements have been prepared to present the combined revenues and expenses of Boykin Management Company, Purchasing Concepts, Inc. and Bopa Design Company which were merged into or contributed to subsidiaries of Boykin Management Company Limited Liability Company pursuant to the formation transactions referred to in Note 2. These financial statements are not intended to be a complete presentation of the combined 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 revenues and expenses of Boykin Management Company, Purchasing Concepts, Inc. and Bopa Design Company for the period January 1, 1996 through November 3, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cleveland, Ohio, February 25, 1997. F-41 BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC. AND BOPA DESIGN COMPANY COMBINED STATEMENT OF REVENUES AND EXPENSES FOR THE PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 3, 1996 (AMOUNTS IN THOUSANDS) Revenues: Management fees -- Affiliates...................................................................... $ 3,402 Other........................................................................... 731 Design and other fees -- Affiliates...................................................................... 1,646 Other........................................................................... 1,435 Interest income from affiliates................................................... 225 Other............................................................................. 203 --------- Total revenues.............................................................. 7,642 --------- Expenses: Cost of sales and operating expenses.............................................. 3,003 Selling, general and administrative expenses...................................... 2,943 Depreciation and amortization expense............................................. 81 Rent.............................................................................. 100 Interest.......................................................................... 91 Other, net........................................................................ (38) --------- Total expenses.............................................................. 6,180 --------- Revenues in excess of expenses...................................................... $ 1,462 --------- ---------
The accompanying notes to combined financial statements are an integral part of this combined statement. F-42 BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC. AND BOPA DESIGN COMPANY AS OF NOVEMBER 3, 1996 NOTES TO COMBINED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 1. DESCRIPTION OF BUSINESSES: Boykin Management Company (former BMC), a wholly owned subsidiary of The Boykin Company (TBC), and certain of its subsidiaries managed and operated 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, provided 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, provided interior design services to hotels and other businesses. Certain of the hotels managed by former BMC and served by PCI and Spectrum Services were related to former BMC, PCI and Spectrum Services through common ownership. 2. BASIS OF PRESENTATION: Pursuant to formation transactions related to the November 4, 1996 initial public offering of Boykin Lodging Company, former BMC and Spectrum Services merged into subsidiaries of Boykin Management Company Limited Liability Company (BMC), a newly formed Ohio Limited Liability Company. Prior to such mergers, former BMC and Spectrum Services transferred certain assets and liabilities to TBC pursuant to an Assignment and Assumption Agreement. In addition, PCI contributed its assets to a subsidiary of BMC and that subsidiary assumed PCI's liabilities. BMC and its subsidiaries are the successors to the businesses of former BMC, PCI and Spectrum Services. BMC is the lessee of nine hotels formerly affiliated with TBC which were acquired by Boykin Hotel Properties, L.P., a partnership in which Boykin Lodging Company is the general partner. The hotels are leased pursuant to long-term leases which provide for the payment of rents based on percentages of hotel revenues. The accompanying financial statements present on a historical combined basis the revenues and expenses of former BMC, PCI and Spectrum Services that ultimately were merged into BMC and its subsidiaries. Items of revenues and expenses related to assets and liabilities of former BMC, PCI and Spectrum Services which were not merged into or contributed to BMC and its subsidiaries and have been excluded from the accompanying financial statements. Accordingly, the accompanying financial statements are not intended to be a complete presentation of the revenues and expenses of former BMC, PCI and Spectrum Services (collectively, the Combined Entities). 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. ACCOUNTING PERIODS Former BMC had a March 31 fiscal year-end, whereas PCI and Spectrum Services utilized calendar year-ends. The accompanying financial statements for the period January 1, 1996 through November 3, 1996 combine the accounts of former BMC, PCI and Spectrum Services for the period January 1, 1996 through November 3, 1996. For the period ended November 3, 1996, the operating results of former BMC have been adjusted to include the three-month period January 1, 1996 through March 31, 1996. The total F-43 BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC. AND BOPA DESIGN COMPANY AS OF NOVEMBER 3, 1996 NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED (DOLLAR AMOUNTS IN THOUSANDS) revenues and revenues in excess of expenses of former BMC included in the combined statements of revenues and expenses for the period January 1, 1996 through November 3, 1996 were $208, respectively. INCOME TAXES Income tax attributes of the Combined Entities were not assumed by BMC or its subsidiaries. As such, the accompanying combined statement of revenues and expenses do not reflect any federal income tax provisions as BMC and its subsidiaries were formed as pass-through entities for tax purposes. The taxable income of former BMC was included in the consolidated federal income tax return of its parent company, TBC. PCI and Spectrum Services (prior to January 1, 1996) were S Corporations for federal income tax reporting purposes. DEPRECIATION AND AMORTIZATION EXPENSE Depreciation and amortization expense is computed using the straight-line and declining balance methods based upon the following estimated useful lives: 7-10 Leasehold improvements........................... years 3-10 Furniture and equipment.......................... 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. REVENUE RECOGNITION Revenue is recognized as earned pursuant to the terms of hotel management agreements with respect to fomer BMC, and as the services of PCI and Spectrum Services are rendered. USE OF ESTIMATES 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: Former BMC has management agreements with several entities to manage the operations of hotels and restaurants. Generally, former BMC receives a fee based upon percentages of revenues. In certain management contracts, former 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 fees to former 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. F-44 BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC. AND BOPA DESIGN COMPANY AS OF NOVEMBER 3, 1996 NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED (DOLLAR AMOUNTS IN THOUSANDS) Revenues from affiliates in the accompanying combined statement 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 had direct or indirect ownership interests. Other revenues consisted primarily of telephone commissions. 5. COMMITMENTS AND CONTINGENCIES: 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 results of operations of the Combined Entities. 6. RELATED PARTY TRANSACTIONS: The shareholders of TBC, certain of their family members and certain officers of former BMC are material partners in Boykin Columbus Joint Venture (BCJV). Former BMC advanced funds to BCJV in connection with the construction of a hotel in Columbus, Ohio and to fund operating deficits of that hotel. The loans receivable from BCJV accrued interest at 10% per annum. Interest income earned on the loans to BCJV was $223 in the period January 1, 1996 through November 3, 1996. The loans and interest receivable from BCJV were paid off in connection with the initial public offering of Boykin Lodging Company. F-45 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) See page F-1 for an index to financial statements.
EXHIBITS - ------------ 2.1 **** Agreement and Plan of Merger dated as of December 30, 1997 by and among Red Lion Inns Limited Partnership, Red Lion Properties, Inc., Red Lion Inns Operating L.P. Boykin Hotel Properties, L.P., Boykin Lodging Company, Boykin Acquisition Corporation I, Inc., Boykin Acquisition Corporation II, Inc., and Boykin Acquisition Partnership, L.P. 3.1 Amended and Restated Articles of Incorporation, as amended 3.2 * Code of Regulations 4.1 * Specimen Share Certificate 10.1 * Limited Partnership Agreement of Boykin Hotel Properties, L.P. 10.2 * Form of Registration Rights Agreement 10.3 * Long-Term Incentive Plan 10.4 * Directors' Deferred Compensation Plan 10.5 * Employment Agreement between the Company and Robert W. Boykin 10.7 * Employment Agreement between the Company and Mark L. Bishop 10.8 * Form of Percentage Lease 10.9 * Intercompany Convertible Note 10.10* Agreements with General Partners of the Contributed Partnerships 10.11* Form of Noncompetition Agreement 10.12* Alignment of Interests Agreement 10.13** Description of Employment Arrangement between the Company and Paul A. O'Neil 10.14*** Description of Employment Arrangement between the Company and Richard C. Conti 21 Subsidiaries of the Registrant 23.1 Consent of Independent Public Accountants 27 Financial Data Schedule 99.1 **** Partnership Interest Assignment Agreement dated as of December 30, 1997 by and among Red Lion Properties, Inc., Boykin Hotel Properties, L.P., Boykin Lodging Company and West Doughboy LLC. 99.2 **** Percentage Lease Agreement dated as of December 30, 1997 by and between Red Lion Inns Operating L.P. and Westboy LLC 99.3 **** Termination of Management Agreement dated as of December 30, 1997 by and between Red Lion Inns Operating L.P. and Red Lion Hotels, Inc. 99.4 **** Management Agreement dated as of December 30, 1997 by and between Red Lion Hotels, Inc. and Westboy LLC. 99.5 **** Owner Agreement dated as of December 30, 1997 by and among Red Lion Inns Operating L.P., Westboy LLC and Red Lion Hotels, Inc. 99.6 **** Joint Press Release of Red Lion Inns Limited Partnership and Boykin Lodging Company dated as of December 30, 1997.
- ------------ * Incorporated by reference from Amendment No. 3 to the Company's Registration Statement on Form S-11 (Registration No. 333-6341) (the "Form S-11") filed on October 24, 1996. Each of the above exhibits has the same exhibit number in the Form S-11. ** Incorporated by reference from the Company's Form 10-Q for the quarter ended June 30, 1997. *** Incorporated by reference from the Company's Form 10-Q for the quarter ended June 30, 1998. **** Incorporated by reference from the Company's Form 8-K filing on January 8, 1998 related to the merger with Red Lion Inns Limited Partnership. (b) Reports on Form 8-K None. SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. March 31, 1999 BOYKIN LODGING COMPANY By: /s/ ROBERT W. BOYKIN ----------------------------------- Robert W. Boykin
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. March 31, 1999 /s/ ROBERT W. BOYKIN ------------------------------------------ Robert W. Boykin Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) March 31, 1999 /s/ PAUL A. O'NEIL ------------------------------------------ Paul A. O'Neil Chief Financial Officer and Treasurer (Principal Accounting Officer) March 31, 1999 /s/ IVAN J. WINFIELD ------------------------------------------ Ivan J. Winfield Director March 31, 1999 /s/ LEE C. HOWLEY, JR. ------------------------------------------ Lee C. Howley, Jr. Director March 31, 1999 /s/ FRANK E. MOSIER ------------------------------------------ Frank E. Mosier Director March 31, 1999 /s/ WILLIAM H. SCHECTER ------------------------------------------ William H. Schecter Director March 31, 1999 /s/ ALBERT T. ADAMS ------------------------------------------ Albert T. Adams Director March 31, 1999 /s/ RAYMOND P. HEITLAND ------------------------------------------ Raymond P. Heitland Director
EXHIBIT INDEX
EXHIBIT NUMBER - ----------- 2.1**** Agreement and Plan of Merger dated as of December 30, 1997 by and among Red Lion Inns Limited Partnership, Red Lion Properties, Inc., Red Lion Inns Operating L.P. Boykin Hotel Properties, L.P., Boykin Lodging Company, Boykin Acquisition Corporation I, Inc., Boykin Acquisition Corporation II, Inc., and Boykin Acquisition Partnership, L.P. 3.1 Amended and Restated Articles of Incorporation, as amended 3.2* Code of Regulations 4.1* Specimen Share Certificate 10.1* Limited Partnership Agreement of Boykin Hotel Properties, L.P. 10.2* Form of Registration Rights Agreement 10.3* Long-Term Incentive Plan 10.4* Directors' Deferred Compensation Plan 10.5* Employment Agreement between the Company and Robert W. Boykin 10.7* Employment Agreement between the Company and Mark L. Bishop 10.8* Form of Percentage Lease 10.9* Intercompany Convertible Note 10.10* Agreements with General Partners of the Contributed Partnerships 10.11* Form of Noncompetition Agreement 10.12* Alignment of Interests Agreement 10.13** Description of Employment Arrangement between the Company and Paul A. O'Neil 10.14*** Description of Employment Arrangement between the Company and Richard C. Conti 21 Subsidiaries of the Registrant 23.1 Consent of Independent Public Accountants 27 Financial Data Schedule 99.1**** Partnership Interest Assignment Agreement dated as of December 30, 1997 by and among Red Lion Properties, Inc., Boykin Hotel Properties, L.P., Boykin Lodging Company and West Doughboy LLC. 99.2**** Percentage Lease Agreement dated as of December 30, 1997 by and between Red Lion Inns Operating L.P. and Westboy LLC 99.3**** Termination of Management Agreement dated as of December 30, 1997 by and between Red Lion Inns Operating L.P. and Red Lion Hotels, Inc. 99.4**** Management Agreement dated as of December 30, 1997 by and between Red Lion Hotels, Inc. and Westboy LLC. 99.5**** Owner Agreement dated as of December 30, 1997 by and among Red Lion Inns Operating L.P., Westboy LLC and Red Lion Hotels, Inc. 99.6**** Joint Press Release of Red Lion Inns Limited Partnership and Boykin Lodging Company dated as of December 30, 1997.
- ------------ * Incorporated by reference from Amendment No. 3 to the Company's Registration Statement on Form S-11 (Registration No. 333-6341) (the "Form S-11") filed on October 24, 1996. Each of the above exhibits has the same exhibit number in the Form S-11. ** Incorporated by reference from the Company's Form 10-Q for the quarter ended June 30, 1997. *** Incorporated by reference from the Company's Form 10-Q for the quarter ended June 30, 1998. **** Incorporated by reference from the Company's Form 8-K filing on January 8, 1998 related to the merger with Red Lion Inns Limited Partnership. EX-3.1 2 EXHIBIT 3.1 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 50,000,000, consisting of 40,000,000 Common Shares, without par value (hereinafter called "Common Shares"), 5,000,000 Class A Cumulative Preferred Shares, without par value (hereinafter called "Cumulative Preferred Shares"), and 5,000,000 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; (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: -2- (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 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, -3- 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. (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. -4- (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 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. Notwithsanding 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. -5- (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. (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 -6- 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 (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 -7- 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 part 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 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. -8- 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 rescribed 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. (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. -9- (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 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. -10- (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. Notithstanding 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. -11- (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 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. -12- 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 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. -13- "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 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. -14- "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. 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 -15- 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. (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 -16- 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 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 -17- 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. 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 -18- 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. 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 -19- 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. 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 -20- 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. -21- CERTIFICATE OF AMENDMENT TO THE AMENDED AND RESTATED ARTICLES OF INCORPORATION OF BOYKIN LODGING COMPANY Robert A. Weible, Secretary, of Boykin Lodging Company, an Ohio corporation (the "Corporation"), does hereby certify that the Executive Committee of the Board of Directors of the Corporation adopted the following resolution to amend the Amended and Restated Articles of Incorporation (the "Articles") of the Corporation by written action pursuant Section 1701.63(D) of the Ohio Revised Code and pursuant to the authority granted by Section 1701.70(B)(1) of the Ohio Revised Code and Section I.1. of Division A of the Articles: RESOLVED, that the Amended and Restated Articles of Incorporation of the Corporation be, and they hereby are, amended by adding at the end of Division A.I. of Article FOURTH a new Section 6 that reads as follows: SECTION 6. CLASS A CUMULATIVE PREFERRED SHARES, SERIES 1999-A. A. DESIGNATION AND AMOUNT. Of the 5,000,000 authorized Class A Cumulative Preferred Shares, 75,000 are designated as "Class A Cumulative Preferred Shares, Series 1999-A" (the "Series 1999-A Preferred Shares"). The Series 1999-A Preferred Shares have the express terms set forth in this Division as being applicable to all Class A Cumulative Preferred Shares as a class and, in addition, the following express terms. The number of Series 1999-A Preferred Shares may be increased or decreased by resolution of the Board of Directors and by the filing of a certificate of amendment pursuant to the General Corporation Law of the State of Ohio stating that the increase or reduction has been so authorized, but no decrease may reduce the number of Series 1999-A Preferred Shares to a number less than that of the Series 1999-A Preferred Shares then outstanding plus the number of Series 1999-A Preferred Shares issuable upon exercise of outstanding rights, options or warrants or upon conversion of outstanding securities issued by the Corporation. B. DIVIDENDS AND DISTRIBUTIONS. (1) Subject to the rights of the holders of any series of preferred shares (or any similar shares) ranking prior to the Series 1999-A Preferred Shares with respect to dividends, the holders of Series 1999-A Preferred Shares, in preference to the holders of Common Shares and of any other shares ranking junior to the Series 1999-A Preferred Shares, will be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, (1) quarterly dividends payable in cash on the same day as the quarterly dividend payment date for any regular quarterly dividend payable on the Common Shares with respect to the same period or, if no such regular quarterly dividend is payable on the Common Shares, on the fifth day of May, August, November and February in each year (each such date, a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a Series 1999-A Preferred Share or fraction thereof, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $47.00 or (b) subject to adjustment as hereinafter set forth, 100 times the per share amount of all regular quarterly cash dividends, and 100 times the per share value of all regular quarterly noncash dividends or other distributions (as determined by the Board of Directors in good faith), other than any dividend payable in Common Shares or a subdivision of the outstanding Common Shares (by reclassification or otherwise), declared on the Common Shares with respect to the same period, and (2) if a dividend or distribution other than a regular quarterly dividend and other than a dividend payable in Common Shares or a subdivision of the outstanding Common Shares (by reclassification or otherwise) is authorized, declared or paid to the holders of Common Shares (including without limitation a dividend or distribution of cash, rights, options or other securities or any noncash property), a per share cash dividend in an amount equal to the value of the per share amount payable on each Common Share (as determined by the Board of Directors in good faith) multiplied by the Dividend Multiple (as defined below), payable on the same day as the payment date for that dividend on the Common Shares. The multiple of dividends declared on the Common Shares to which holders of the Series 1999-A Preferred Shares are entitled, which is 100 initially but which will be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "Dividend Multiple." If the Company at any time after February 1, 1999: (i) declares or pays any dividend on the Common Shares payable in Common Shares, or (ii) effects a subdivision or combination or consolidation of the outstanding Common Shares (by reclassification or otherwise than by payment of a dividend in Common Shares) into a greater or lesser number of Common Shares, then in each such case the Dividend Multiple will thereafter be the Dividend Multiple applicable immediately prior to that event multiplied by a fraction, the numerator of which is the number of Common Shares outstanding immediately after that event and the denominator of which is the number of Common Shares that were outstanding immediately prior to that event. (2) The Board of Directors may fix in accordance with applicable law a record date for the determination of holders of Series 1999-A Preferred Shares entitled to receive payment of a dividend or other distribution declared thereon, which will be the same day as the record date for any dividend or distribution payable on the Common Shares with respect to the same period if any such dividend or distribution is so payable. Dividends on the Series 1999-A Preferred Shares will accrue and be cumulative (i) with respect to shares included in the initial issuance of Series 1999-A Preferred Shares and shares issued any time thereafter to and including the record date for the payment of the first dividend on the shares included in that initial issuance (the "First Record Date"), from the date of that initial issuance, (ii) with respect to shares issued any time after the First Record Date and not between a record date and the dividend payment date to which that record date applies (that period, the "Ex-dividend Period"), from the dividend payment date immediately preceding the date of issue of those shares, and (iii) with respect to shares issued after the First Record Date and during an Ex-dividend Period, from the dividend payment date on which that Ex-dividend Period ends. Accrued but unpaid dividends will not bear interest. Dividends paid on the Series 1999-A Preferred Shares in an amount less than the total amount of dividends at the time accrued and payable on those shares -2- will be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The amount of accrued and unpaid dividends on any Series 1999-A Preferred Share at any date is the amount of any dividends payable thereon in accordance with this Section 6.B. (whether or not declared) that have not been paid. C. REDEMPTION. The Series 1999-A Preferred Shares are redeemable, in whole but not in part, in accordance with Section 3 of Division A.1.of Article FOURTH, at any time on or after (but not before) the fifth anniversary of the initial issuance of a Series 1999-A Preferred Share, at the option of the Board of Directors, upon payment of an amount in cash for each share redeemed equal to the Conversion Multiple (as defined in Section E.1., below) times the Adjusted Share Price, together with all accrued and unpaid dividends thereon to the redemption date (the "Redemption Price"). The Board of Directors may, at its option, pay all or any portion of the Redemption Price for any Series 1999-A Preferred Shares redeemed in accordance with this Section 6.C. by delivering to the holder thereof the number of Common Shares derived by dividing the portion of the redemption price to be so paid by the Adjusted Share Price, so long as that form of payment will not result in the holder beneficially owning more than nine percent (9.0%) of the total number of the outstanding Common Shares (determined pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended), or violating Division C of this Article FOURTH, whichever is more restrictive. For purposes of this Section 6.C., "Adjusted Share Price" means a dollar amount equal to the average last sale price (or bid price if there were no sales) per Common Share on the NYSE over the twenty-one (21) days on which the NYSE is open and for which trades in Common Shares are reported immediately preceding the date on which the Corporation delivers the applicable redemption notice (adjusted to take into account any splits, combinations, reclassifications, or other changes in the Corporation's capitalization that occur between the date of that notice and the redemption date). If the Common Shares are no longer trading on the NYSE, then the Adjusted Share Price will be determined using the prices reported on the exchange or automated quotation system on which the Common Shares then trade. Each holder of Series 1999-A Preferred Shares may exercise the conversion rights described in Section 6.E. for those shares at any time prior to the date set for redemption of those shares. D. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution may be made (x) to the holders of shares ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series 1999-A Preferred Shares unless, prior thereto, the holders of Series 1999-A Preferred Shares shall have received an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, plus an amount equal to the greater of (1) $1,648.00 per share or (2) an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Shares, or (y) to the holders of shares ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series 1999-A Preferred Shares, except distributions made ratably on the Series 1999-A Preferred Shares and all other such parity shares in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up (the holders of Series 1999-A Preferred Shares being entitled to receive, for this purpose, the amount determined pursuant to clause (x) of this sentence). If the Corporation at any time after February 1, 1999 (i) -3- declares or pays any dividend on Common Shares payable in Common Shares, or (ii) effects a subdivision or combination or consolidation of the outstanding Common Shares (by reclassification or otherwise than by payment of a dividend in Common Shares) into a greater or lesser number of Common Shares, then in each such case the aggregate amount per share to which holders of Series 1999-A Preferred Shares were entitled immediately prior to such event under clause (x)(2) of the immediately preceding sentence will be adjusted by multiplying that amount by a fraction, the numerator of which is the number of Common Shares outstanding immediately after that event and the denominator of which is the number of Common Shares that were outstanding immediately prior to that event. Neither the consolidation of nor merger of the Corporation with or into any other corporation or corporations, nor the sale or other transfer of all or substantially all of the assets of the Corporation, will be considered a liquidation, dissolution or winding up of the Corporation within the meaning of this paragraph D. E. CONVERSION RIGHTS. (1) The holders of Series 1999-A Preferred Shares have the right, at their option, to convert all or any portion of their Series 1999-A Preferred Shares into Common Shares at any time and from time to time, on the basis set forth below, but (a) no such holder may so convert Series 1999-A Preferred Shares if, immediately after that conversion, that holder would be the record or beneficial owner of more than nine percent (9.0%) of the total number of the outstanding Common Shares (determined pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended), or violate Division C of this Article FOURTH, whichever is more restrictive, and (b) the right to convert Series 1999-A Preferred Shares that have been called for redemption pursuant to Section 6.C. terminates at the close of business on the redemption date for those Series 1999-A Preferred Shares pursuant to Section 6.C., unless the Corporation defaults in making payment of any cash payable on that redemption. Each Series 1999-A Preferred Share is initially convertible into 100 Common Shares (the number of Common Shares into which each Series 1999-A Preferred Share is convertible, the "Conversion Multiple"). If the Corporation, at any time after February 1, 1999: (i) declares or pays any dividend on the Common Shares payable in Common Shares, or (ii) effects a subdivision or combination or consolidation of the outstanding Common Shares (by reclassification or otherwise than by payment of a dividend in Common Shares) into a greater or lesser number of Common Shares, then in each such case the Conversion Multiple will thereafter be the Conversion Multiple applicable immediately prior to that event multiplied by a fraction, the numerator of which is the number of Common Shares outstanding immediately after that event and the denominator of which is the number of Common Shares that were outstanding immediately prior to that event. (2) In order for a holder of Series 1999-A Preferred Shares to convert Series 1999-A Preferred Shares into Common Shares, that holder shall surrender the certificate or certificates for those Series 1999-A Preferred Shares at the office of the transfer agent for the Series 1999-A Preferred Shares (or at the principal office of the Corporation if the Corporation serves as its own transfer agent), together with written notice that the holder elects to convert all or any number of the Series 1999-A Preferred Shares represented by that certificate or certificates. That notice must state the holder's name or the names of the nominees in which the -4- holder wishes the certificate or certificates for Common Shares to be issued and the number of Series 1999-A Preferred Shares to be converted. If required by the Corporation, certificates surrendered for conversion must be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or his or its attorney duly authorized in writing. The date of receipt of those certificates and notice by the transfer agent or by the Corporation (if the Corporation serves as its own transfer agent) will be the conversion date (the "Conversion Date") and the conversion will be effective as of the close of business on the Conversion Date. The Corporation shall, as soon as practicable after the Conversion Date, issue and deliver at that office, or send, on the converting holder's written instruction, to that holder or to his or its nominees, a certificate or certificates for the number of Common Shares to which that holder is entitled, together with cash in lieu of any fraction of a share. (3) The Corporation shall at all times when any Series 1999-A Preferred Shares are outstanding, reserve and keep available out of its authorized but unissued shares, for the purpose of effecting the conversion of the Series 1999-A Preferred Shares, such number of its duly authorized Common Shares as are from time to time sufficient to effect the conversion of all outstanding Series 1999-A Preferred Shares. (4) Upon any conversion effected in accordance with this Section 6.E., the Corporation shall pay all accrued and unpaid dividends on the Series 1999-A Preferred Shares surrendered for conversion. (5) All Series 1999-A Preferred Shares that have been surrendered for conversion as herein provided will no longer be considered outstanding, and all rights with respect to those shares, including the rights, if any, to receive notices and to vote, will cease and terminate at the close of business on the Conversion Date, except only the right of the holders thereof to receive Common Shares in exchange therefor and the dividend payment provided for in paragraph (4), above. If certificates representing more than one Series 1999-A Preferred Share are surrendered for conversion at one time by the same holder, the number of Common Shares issuable on conversion thereof will be computed on the basis of the aggregate number of Series 1999-A Preferred Shares so surrendered. F. FRACTIONAL SHARES. Series 1999-A Preferred Shares may be issued in whole shares or in any fraction of a share, which will entitle the holder, in proportion to that holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and have the benefit of all other rights of holders of Series 1999-A Preferred Shares. In lieu of issuing fractional shares of less than one one-hundredth (1/100) of a Preferred Share, the Corporation may elect to make a cash payment in an amount equal to the same fraction of the last sale price (or bid price if there were no sales) per Common Share on the New York Stock Exchange on the business day that immediately precedes the Conversion Date or, if the Common Shares are not the listed on the New York Stock Exchange, of the market price per share determined using the prices reported on the exchange or automated quotation system on which the Common Shares then trade, as equitably adjusted to reflect any change or adjustment to the Conversion Multiple after February 1, 1999. -5- G. CERTAIN TRANSACTIONS. If the Corporation is a party to any transaction (including without limitation a merger, consolidation, statutory share exchange, self tender offer for all or substantially all Common Shares outstanding, sale of all or substantially all of the Corporation's assets or recapitalization of the Common Shares but excluding the payment of any dividend payable in Common Shares or a subdivision, combination or consolidation of the outstanding Common Shares (by reclassification or otherwise)) (each of the foregoing being referred to herein as a "Transaction"), in each case as a result of which Common Shares are converted into the right to receive shares, securities or other property (including cash or any combination thereof), each Series 1999-A Preferred Share that is not redeemed or converted into the right to receive shares, securities or other property in connection with that Transaction will thereafter be convertible into the kind and amount of shares, securities and other property (including cash or any combination thereof) receivable upon the consummation of that Transaction by a holder of that number of Common Shares into which one Series 1999-A Preferred Share was convertible immediately prior to that Transaction, assuming that holder of Common Shares (i) is not a Person with which the Corporation consolidated or into which the Corporation merged or that merged into the Corporation or to which that sale or transfer was made, as the case may be (a "Constituent Person"), or an affiliate of a Constituent Person and (ii) failed to exercise his or her rights of election, if any, as to the kind or amount of shares, securities and other property (including cash) receivable upon that Transaction (but if the kind or amount of shares, securities and other property (including cash) receivable upon that Transaction is not the same for each Common Share held immediately prior to that Transaction by other than a Constituent Person or an affiliate thereof and in respect of which those rights of election have not been exercised ("Non-Electing Share"), then for the purpose of this Section 6.G., the kind and amount of shares, securities and other property (including cash) receivable upon that Transaction by each Non-Electing Share will be considered to be the kind and amount so receivable per share by a plurality of the Non-Electing Shares). The Corporation shall not be a party to any Transaction unless the terms of that Transaction are consistent with the provisions of this Section 6.G. and it shall not consent or agree to the occurrence of any Transaction until the Corporation has entered into an agreement with the successor or purchasing entity, as the case may be, for the benefit of the holders of the Series 1999-A Preferred Shares that will contain provisions enabling the holders of the Series 1999-A Preferred Shares that remain outstanding after that Transaction to convert their Series 1999-A Preferred Shares into the consideration received by holders of Common Shares at the Conversion Multiple in effect immediately prior to that Transaction. The provisions of this Section 6.G. similarly apply to successive Transactions. H. NOTICE. Whenever the Dividend Multiple or the Conversion Multiple is adjusted as herein provided, the Corporation shall promptly deliver to each holder of the Series 1999-A Preferred Shares, at that holder's last address shown on the share records of the Corporation, a notice of that adjustment, setting forth the adjusted Dividend Multiple or Conversion Multiple, as applicable, and the effective date of that adjustment and a brief statement of the facts requiring that adjustment. -6- IN WITNESS WHEREOF, the undersigned has executed this instrument as of February 1, 1999. /s/ Robert A. Weible -------------------------------------- Robert A. Weible, Secretary Boykin Lodging Company -7- EX-21 3 EXHIBIT 21 Exhibit 21 SUBSIDIARIES
Name State Ownership Percent - ---------------------------------------------------------------------------------------- Boykin Hotel Properties, L.P. ("BHPLP") Ohio 92.1% BoyStar Ventures, L.P. Ohio 91% (by BHPLP) Shawan Road Hotel L.P. Maryland 91% (by BHPLP) Boykin San Diego LLC Ohio 91% (by BHPLP) RadBoy Mt. Laurel LLC Ohio 85% (by BHPLP) Boykin Kansas City LLC Ohio 80% (by BHPLP) Boykin/AEW LLC Delaware 25% (by BHPLP) Red Lion Inns Operating L.P. Delaware 100% (by BHPLP)
EX-23.1 4 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statement File No. 333-39369. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 31, 1999. EX-27 5 EXHIBIT 27
5 THIS LEGEND CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF BOYKIN LODGING COMPANY AS OF DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001015859 BOYKIN LODGING COMPANY 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 5,643 0 5,295 0 0 0 627,844 32,712 615,062 0 286,000 0 0 0 286,216 615,062 0 70,122 0 33,423 2,059 0 14,498 20,142 0 20,142 0 (1,138) 0 19,004 1.25 1.25 REGISTRANT UTILIZES AN UNCLASSIFIED BALANCE SHEET THEREFORE TOTAL CURRENT ASSETS AND TOTAL CURRENT LIABILITIES ARE NOT APPLICABLE.
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