<PAGE> 1
Filed Pursuant to Rule 424(B)(5)
Registration No. 333-39369
PROSPECTUS SUPPLEMENT
(To Prospectus dated November 14, 1997)
4,500,000 COMMON SHARES
[LOGO]
BOYKIN LODGING COMPANY
------------------------
Boykin Lodging Company (the "Company") is a self-administered real estate
investment trust ("REIT") that currently owns 17 hotels (the "Hotels"). Serving
both business and leisure travelers in the upscale-to-moderate price segment of
the hospitality market, the Hotels contain an aggregate of 4,568 guest rooms and
are located in nine states. The Hotels are leased to four separate operating
companies and generally operate under franchise agreements with premier
nationally recognized hotel chains, including Doubletree(R), Marriott(R),
Radisson(R), Holiday Inn(R) and Hilton(R).
The Company has entered into an Agreement and Plan of Merger with Red Lion
Inns Limited Partnership, under which the Company has agreed, subject to certain
conditions, to acquire a portfolio of 10 Doubletree-licensed hotels containing
an aggregate of 3,062 guest rooms. See "The Company -- Recent
Developments -- Proposed Merger."
All of the Common Shares offered hereby (the "Offering") are offered by the
Company. Since the Company's initial public offering in November 1996, the
Company has paid regular dividends to holders of its outstanding Common Shares.
The Common Shares are traded on the New York Stock Exchange ("NYSE") under the
symbol "BOY." On February 18, 1998, the last reported sale price of the Common
Shares on the NYSE was $25 1/16. See "Price Range of Common Shares and
Distributions."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE S-6 FOR CERTAIN FACTORS RELEVANT TO
AN INVESTMENT IN THE COMMON SHARES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
============================================================================================================
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $25.00 $1.375 $23.625
- ------------------------------------------------------------------------------------------------------------
Total (3).............................. $112,500,000 $6,187,500 $106,312,500
============================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities arising under the Securities Act of 1933,
as amended.
(2) Before deducting expenses, estimated at $1,125,000, payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
675,000 additional Common Shares solely to cover over-allotments, if any.
See "Underwriting." If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $129,375,000, $7,115,625 and $122,259,375, respectively.
------------------------
The Common Shares offered by this Prospectus Supplement are offered by the
several Underwriters, subject to prior sale, withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
Underwriters and to certain further conditions. It is expected that delivery of
the Common Shares offered hereby will be made at the offices of Lehman Brothers
Inc., New York, New York on or about February 24, 1998.
------------------------
LEHMAN BROTHERS
BT ALEX. BROWN
A.G. EDWARDS & SONS, INC.
MORGAN STANLEY DEAN WITTER
EVEREN SECURITIES, INC.
MCDONALD & COMPANY
SECURITIES, INC.
February 18, 1998
<PAGE> 2
[inside front cover - before the fold]
Centered on the top of the page is Boykin Lodging Company's logo approximately
2-1/2" by 1-1/2." Directly under the logo is a map approximately 7" in width by
5" in height of the lower forty-eight states of the United States. The state
boundaries are separated by lines, however, individual states are not labeled.
The map is marked with yellow, green, orange, blue and red dots. Below the map
is a key which states: [yellow dot] Managed by Boykin Management Company; [green
dot] Managed by CapStar Hotel Company; [orange dot] managed by Davidson Hotel
Company; [blue dot] Managed by Outrigger Lodging Services; [red dot] Proposed
Merger with Red Lion Inns Limited Partnership. The dots have been placed on the
map in the vicinity of the location of the hotel properties. Yellow dots -
Cleveland, Ohio (two dots), Columbus, Ohio, Buffalo, New York, French Lick,
Indiana, Charlotte, North Carolina (two dots), Raleigh, North Carolina,
Berkeley, California, Melbourne, Florida (two dots), Daytona Beach, Florida and
Fort Myers, Florida. Green Dots - Kansas City, Missouri and Minneapolis,
Minnesota. Orange Dot - Baltimore, Maryland. Blue Dot - San Diego, California.
Red Dots - Bellevue, Washington, Boise, Idaho, Colorado Springs, Colorado,
Omaha, Nebraska, Portland, Oregon, (two dots), Sacramento, California, Spokane
Valley, Washington, Springfield, Oregon and Yakima Valley, Washington. Below the
key is the following text in all capital letters: CERTAIN PERSONS PARTICIPATING
IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR
OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES. SUCH TRANSACTIONS MAY INCLUDE
THE PURCHASE OF COMMON SHARES PRIOR TO THE PRICING OF THE OFFERING FOR THE
PURPOSE OF MAINTAINING THE PRICE OF THE COMMON SHARES, THE PURCHASE OF COMMON
SHARES FOLLOWING THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION
IN THE COMMON SHARES OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON
SHARES AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
[inside front cover after the fold]
The inside front cover after the fold (16" width by 10 -3/4" height) contains
eight photographs and two drawings (each approximately 3-1/2" by 3-1/2", except
for one photograph of the Doubletree Hotel Kansas City which is 3-1/2" by 5") of
the Company's hotel properties. The pictures/drawings are of the exteriors of
the following hotels, clockwise from the upper left hand corner, Buffalo
Marriott, Buffalo, NY, Daytona Beach Radisson Resort, Daytona Beach, FL.
(drawing), Holiday Inn Minneapolis West, Minneapolis, MN, Cleveland Marriott
East, Cleveland, OH, Berkeley Marina Radisson Inn, Berkeley, CA., Marriott's
Hunt Valley Inn, Baltimore, MD, Holiday Inn Crabtree, Raleigh, NC (drawing),
Doubletree Hotel Kansas City (formerly an Omni Hotel), Kansas City, MO, French
Lick Springs Resort, French Lick, IN, and Melbourne Hilton Oceanfront,
Melbourne, FL. The Boykin Lodging Company logo appears in the lower right hand
corner.
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified by the more detailed information and
financial information and statements, and the notes thereto, appearing elsewhere
in this Prospectus Supplement and in the accompanying Prospectus. This
Prospectus Supplement and the accompanying Prospectus contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, those discussed in "Risk Factors." Unless otherwise indicated, the
information contained in this Prospectus Supplement and the accompanying
Prospectus assumes: (i) that the Underwriters' overallotment option is not
exercised; (ii) that the units of limited partnership interest ("Units") in
Boykin Hotel Properties, L.P., an Ohio limited partnership that owns the
Company's hotel properties (the "Partnership"), that are outstanding on the date
the Offering is consummated are exchanged for Common Shares on a one-for-one
basis; (iii) that an intercompany convertible note payable to the Company that
is convertible into equity interests in the Partnership is so converted; and
(iv) that options granted to directors and officers of the Company for the
purchase of Common Shares are not exercised. The Company, as referred to herein
and in the accompanying Prospectus, includes the Partnership and its
subsidiaries and joint ventures except when the context otherwise requires.
See "Glossary" for the definitions of certain terms used in this Prospectus
Supplement and the accompanying Prospectus.
THE COMPANY
The Company is a self-administered REIT that currently owns 17 hotels (the
"Hotels"). Serving both business and leisure travelers in the
upscale-to-moderate price segment of the hospitality market, the Hotels contain
an aggregate of 4,568 guest rooms and are located in nine states. The Hotels are
leased to four separate operating companies and generally operate under
franchise agreements with premier nationally recognized hotel chains, including
Doubletree(R), Marriott(R), Radisson(R), Holiday Inn(R) and Hilton(R).
The Company's business strategies include acquiring full-service commercial
and resort hotels on an accretive basis and at a discount to replacement cost,
developing strategic alliances and relationships with both a network of high
quality lessees and franchisors of the hotel industry's premier upscale brands,
and achieving revenue growth in its hotels through selective renovation and its
lessees' strong management performance. The Company focuses on owning hotel
properties that are, or can be, associated with brands that will lead the
hospitality industry in revenue per available room ("REVPAR").
Consistent with its strategies, the Company has acquired eight of its 17
Hotels (those eight Hotels, the "Acquired Hotels") since its initial public
offering in November 1996 (the "Initial Offering"). The Acquired Hotels contain
a total of 2,160 guest rooms and were purchased for an average per room price of
approximately $50,000, which represents a significant discount to replacement
cost. Substantially all of the Acquired Hotels are full-service hotels and, like
the Company's nine initial hotels (the "Initial Hotels"), all compete in the
upscale-to-moderate price segment of the hospitality market. The Company leases
its hotels to hotel operators; lessees of the Acquired Hotels are CapStar Hotel
Company ("CapStar"), Davidson Hotel Company ("Davidson"), Outrigger Lodging
Services ("Outrigger") and Boykin Management Company Limited Liability Company
("BMC"). The Company plans to continue to acquire hotels in accordance with its
growth strategies.
RECENT DEVELOPMENTS
Proposed Merger. The Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") on December 30, 1997 with Red Lion Inns Limited
Partnership ("Red Lion"), under which the Company agreed to acquire the
portfolio of 10 Doubletree-licensed hotels owned by Red Lion (the "Doubletree
Hotels"). The Doubletree Hotels contain 3,062 guest rooms and are located in
California, Oregon, Washington, Colorado, Idaho and Nebraska. If the proposed
merger (the "Proposed Merger") is consummated, the Doubletree Hotels will
continue to be managed by Doubletree and to be leased to a BMC subsidiary. Under
the Merger Agreement, the Company will issue 3.1 million Common Shares and pay
$35.3 million in cash to the Red Lion limited partners and general partner. In
connection with the Proposed Merger, the Partnership will become responsible for
Red
<PAGE> 4
Lion's liabilities, which the Company estimates will be approximately $156
million. At the time of the announcement of the Merger Agreement, the
consideration value was expected to total approximately $271 million.
The Company expects that the Proposed Merger, if completed, will (i) be
immediately accretive to the Company's funds from operations per share, (ii)
give the Company a significant brand alliance; (iii) substantially enhance the
Company's geographic diversity and (iv) represent an acquisition at a discount
to replacement cost. The Company and Red Lion expect to complete the Proposed
Merger early in the second quarter of 1998. Consummation of the Proposed Merger
is subject to various conditions, including approval by the Red Lion limited
partners of the Proposed Merger and approval by the Company's shareholders of
the issuance of Common Shares in connection with the Proposed Merger, and there
is no assurance that the Proposed Merger will be completed. See "The
Company--Recent Developments--Proposed Merger."
Red Lion has released its unaudited results of operations for the year
ended December 31, 1997. Red Lion reported gross revenues of the Doubletree
Hotels of $110.4 million, gross operating profit of the hotels of $40 million
and net income of $3.4 million, or $0.81 per limited partnership unit, for the
year. Cash flow available for distribution and incentive management fees was
$13.9 million, or $3.30 per limited partnership unit. The issued and outstanding
limited partnership units totaled 4,133,500 at December 31, 1997.
Recent and Pending Acquisitions. In November 1997, the Company acquired
interests in the 388-room Doubletree Hotel Kansas City and the 199-room Hampton
Inn San Diego Airport/Sea World. The Company is continually engaged in
discussions concerning potential hotel acquisitions. The Company has executed
agreements to acquire two hotels containing an aggregate of 568 guest rooms at
an aggregate cost of $37.0 million, and a letter of intent to acquire another
hotel containing 207 guest rooms at a cost of $19.3 million. The Company's
purchase of these hotels is subject to various uncertainties and conditions,
including satisfactory completion of the Company's due diligence reviews. There
is no assurance that the Company will consummate these potential acquisitions.
Financing Activities. The Company has a revolving credit facility (the
"Credit Facility"), which was amended in October 1997 to expand the committed
amount to $150 million from $75 million and to reduce the interest rate from
LIBOR plus 2.00% to a rate that fluctuates at LIBOR plus 1.40% to 1.75%. The
Credit Facility is available to finance acquisitions and for other working
capital purposes and is secured by first mortgages on 13 of the Hotels. The
Company intends to use proceeds of the Offering to repay all outstanding
indebtedness under the Credit Facility. On February 18, 1998, approximately
$96.8 million was outstanding under the Credit Facility.
The Company expects to obtain a commitment for a $130 million 10-year term
loan, to be funded on the closing of the Proposed Merger, with a rate of
interest to be fixed at a spread over the 10-year United States Treasury bond
rate upon closing of the loan. The loan will be secured by the Doubletree
Hotels, with amortization based on a 23-year schedule commencing on the second
anniversary of the loan. The Company also expects to obtain a commitment for a
$200 million unsecured revolving credit facility (which would replace the
Company's existing Credit Facility), with a rate of interest at the same spread
over LIBOR as the existing Credit Facility. The Company expects to borrow $54
million under the new credit facility to fund the remainder of its cash
obligations in connection with the Proposed Merger. The $146 million balance of
the new revolving credit facility would be available for other acquisitions and
general corporate purposes. Each of these commitments will be subject to
customary conditions, including the lenders' satisfactory completion of due
diligence inquiries and the preparation, execution and delivery of mutually
acceptable financing documentation.
Financial Results. The Company has released its unaudited results of
operations for the year ended December 31, 1997. For the year, the Company
reported revenues of $38.3 million, income before extraordinary items of $15.2
million, an extraordinary item of $0.9 million due to losses on the early
extinguishment of debt, net income of $14.3 million, basic earnings per share of
$1.51 and diluted earnings per share of $1.49. Funds From Operations was $27.4
million, and the weighted average number of Common Shares and Units outstanding
for the year was 10,883,301. Borrowings under the Credit Facility were
approximately $91.8 million at December 31, 1997.
S-2
<PAGE> 5
LESSEES
The Company leases its properties to established hotel operators pursuant
to leases that provide the Company with the greater of a base rental income or a
percentage of revenues from operations (the "Percentage Leases").
The Company believes that having multiple tenants facilitates meeting its
growth objectives. In selecting lessees, the Company seeks 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, the Company. The Company structures its relationships
with each lessee to align the Company's and the lessee's economic interests.
Since the Initial Offering, the Company has expanded its lessee relationships to
include CapStar, Davidson and Outrigger, in addition to its initial lessee, BMC.
The Company expects to pursue lease relationships with additional hotel
operators that have excellent operating histories and demonstrated management
expertise.
CapStar. CapStar is a publicly traded hotel investment and management
company that acquires, owns, renovates, repositions and manages hotels
throughout the United States. As of January 27, 1998, CapStar owned 54
full-service hotels with 14,503 rooms and leased or managed an additional 67
hotels owned by third parties, which contain 10,318 rooms. CapStar leases and
manages the Company's 196-room Holiday Inn Minneapolis West hotel and the
Company's 388-room Doubletree Kansas City hotel.
Davidson. Davidson is a privately held national hotel management company
that provides management, development, consulting and accounting expertise for
the hospitality industry. As of January 27, 1998, Davidson managed 29 hotels
throughout the United States. Davidson leases and manages the Company's 392-room
Marriott's Hunt Valley Inn in Baltimore, Maryland.
Outrigger. Outrigger is a privately held hotel management company that, as
of January 27, 1998, owned and operated over 25 hotels, with approximately 5,000
rooms, throughout the United States. In addition to branded hotels, Outrigger
operates upscale, boutique hotels, providing management and sales support.
Outrigger leases and manages the Company's 199-room Hampton Inn San Diego
Airport/Sea World in San Diego, California.
BMC. BMC was formed at the time of the Initial Offering and has continued
the 39-year hotel operation and management business of the Boykin Group. BMC's
subsidiaries conduct a hotel interior design business and a hotel and restaurant
food, beverage, supply and equipment purchasing business. As of January 27,
1998, BMC operated or managed 33 properties containing 7,842 rooms located
throughout the United States. BMC manages 13 of the Hotels and, through a
subsidiary, is the lessee of the Doubletree Hotels.
BMC is owned by Robert W. Boykin (the Company's Chief Executive Officer)
and John E. Boykin. Robert and John Boykin, who have a substantial interest in
the Company, have interests that conflict with the Company's interests in
connection with the structuring and enforcement of the leases and other
agreements between the Company and BMC and in connection with activities that
may maximize profits for BMC without necessarily benefiting the Company.
The Company and BMC have undertaken several measures to align the interests
of BMC and its owners with the interests of the Company and its shareholders and
to address these conflicts of interest. These measures include purchases and
retention by BMC's owners of equity interests in the Company, prohibitions
against holding conflicting management positions, maintenance of a specified net
worth in BMC to support its Percentage Lease obligations, limitations on hotel
ownership activities other than through the Company, limitations on changes in
control of BMC and a requirement in the Company's charter that the Company's
decisions in matters in which its interests conflict with its affiliates'
interests be made by the Company's independent directors. BMC also has developed
a deferred compensation plan for corporate-level senior executives under which
each award's value is based on the value of the Company's Common Shares. See
"Lessees."
S-3
<PAGE> 6
THE HOTELS
The operating Hotels in the Company's portfolio at September 30, 1997
achieved revenue and REVPAR growth of 6.2% and 8.0%, respectively, during the
nine months ended September 30, 1997 over the nine months ended September 30,
1996. The Initial Hotels achieved revenue and REVPAR growth of 6.1% and 7.6%,
respectively, for the 1997 period over the comparable 1996 period, and the five
operating Hotels acquired thereafter had revenue and REVPAR growth of 6.4% and
9.5%, respectively, for the 1997 period over the 1996 period.
The following table sets forth certain additional information regarding the
Hotels:
<TABLE>
<CAPTION>
ROOM REVENUES PER AVAILABLE ROOM
----------------------------------
YEAR ENDED NINE MONTHS ENDED
NUMBER OF ----------- --------------------
HOTEL LOCATION ROOMS 12/31/96 9/30/96 9/30/97
---------------------------------------- ------------------ --------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
Cleveland Marriott East Cleveland, OH 403 $ 70.35 $72.89 $80.16
Marriott's Hunt Valley Inn (1) Baltimore, MD 392 $ 50.65 $51.50 $58.29
Cleveland Airport Marriott Cleveland, OH 375 $ 66.31 $68.75 $71.38
Buffalo Marriott Buffalo, NY 356 $ 70.50 $71.40 $77.24
Columbus North Marriott Columbus, OH 300 $ 67.60 $68.77 $74.99
Berkeley Marina Radisson Berkeley, CA 373 $ 88.50 $89.57 $98.06
Daytona Beach Radisson Resort (1) Daytona Beach, FL 206 (2) (2) (2)
Radisson Inn Sanibel Gateway Fort Myers, FL 157 $ 53.18 $58.73 $57.22
Holiday Inn Minneapolis West (1) Minneapolis, MN 196 $ 46.00 $47.19 $48.45
Holiday Inn Crabtree (1) Raleigh, NC 176 $ 52.91 $49.70 $50.39
Lake Norman Holiday Inn Charlotte, NC 119 $ 48.34 $49.78 $52.57
Hampton Inn San Diego Airport/Sea World
(1) San Diego, CA 199 $ 27.74 $29.84 $35.74
Lake Norman Hampton Inn Charlotte, NC 117 $ 46.19 $47.15 $53.38
Doubletree Hotel Kansas City (1) Kansas City, MO 388 (3) (3) (3)
Melbourne Quality Suites Melbourne, FL 208 $ 59.17 $63.22 $67.57
Melbourne Hilton Oceanfront (1) Melbourne, FL 118 $ 56.28 $58.37 $66.70
French Lick Springs Resort (1) French Lick, IN 485 $ 24.79 $25.53 $28.54
-----
Total 4,568
=====
Weighted average 269 $ 56.93 $58.45 $63.35
</TABLE>
- ---------------
(1) Acquired after the Initial Offering.
(2) The Company purchased the Whitehall Inn property located in Daytona Beach,
Florida in March 1997. The Company opened the property in January 1998
following extensive renovations.
(3) Reopened in April 1997 after a major reconstruction.
S-4
<PAGE> 7
The information in the following table relates to the Doubletree Hotels,
which the Company expects to acquire in the Proposed Merger. See "The
Company--Recent Developments--Proposed Merger."
<TABLE>
<CAPTION>
ROOM REVENUES PER AVAILABLE ROOM
----------------------------------
YEAR ENDED NINE MONTHS ENDED
NUMBER OF ----------- --------------------
HOTEL LOCATION ROOMS 12/31/96 9/30/96 9/30/97
------------------------------------- -------------------- --------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
Doubletree Hotel Portland Lloyd
Center Portland, OR 476 $ 76.79 $79.67 $79.28
Doubletree Hotel Sacramento Sacramento, CA 448 $ 56.03 $57.17 $65.14
Doubletree Hotel Omaha Downtown Omaha, NE 413 $ 55.78 $56.28 $56.10
Doubletree Hotel Boise Riverside Boise, ID 304 $ 58.00 $61.07 $59.85
Doubletree Hotel Colorado Springs
World Arena Colorado Springs, CO 299 $ 65.89 $70.68 $73.66
Doubletree Hotel Spokane Valley Spokane Valley, WA 237 $ 42.33 $44.02 $39.79
Doubletree Hotel Portland Downtown Portland, OR 235 $ 65.58 $66.69 $73.44
Doubletree Hotel Eugene/Springfield Springfield, OR 234 $ 41.65 $43.12 $38.14
Doubletree Hotel Bellevue Center Bellevue, WA 208 $ 60.36 $62.79 $71.18
Doubletree Hotel Yakima Valley Yakima Valley, WA 208 $ 41.29 $43.79 $42.91
-----
Total 3,062
=====
Weighted average 306 $ 58.25 $60.37 $61.94
</TABLE>
THE OFFERING
All of the Common Shares offered hereby are offered by the Company.
<TABLE>
<S> <C>
Common Shares offered................................. 4,500,000 shares (1)
Common Shares and Units to be
outstanding after the Offering...................... 15,374,341 shares (2)
Use of Proceeds....................................... All of the net proceeds will be
contributed to the Partnership in
exchange for additional Units; the
Partnership will use approximately
$96.8 million of the proceeds to
repay the debt outstanding under the
Credit Facility, approximately $1.0
million to acquire Units held by two
of the Partnership's unaffiliated
limited partners, and the remainder
to fund acquisitions and for general
partnership purposes. See "Use of
Proceeds."
New York Stock Exchange symbol........................ BOY
</TABLE>
- ---------------
(1) Assumes the Underwriters' overallotment option is not exercised.
(2) Includes 1,332,090 Common Shares issuable on exchange of 1,332,090 Units.
Does not give effect to the 994,000 Common Shares issuable under the
Company's Long-Term Incentive Plan, to the Common Shares subject to the
options covering 55,000 Common Shares granted to the Company's independent
directors or to the 3,110,048 Common Shares that will be issued if the
Proposed Merger is consummated.
S-5
<PAGE> 8
RISK FACTORS
Prospective investors should consider carefully, among other factors, the
matters described below, each of which could have adverse consequences to the
Company and adversely affect the value of the Common Shares offered hereby.
RISKS RELATED TO THE PROPOSED MERGER
NO ASSURANCE OF CONSUMMATION OF THE PROPOSED MERGER OR OF BENEFIT. The
consummation of the Proposed Merger remains subject to various conditions, many
of which are beyond the control of the Company. These contingencies include
approval by Red Lion's unitholders of the Proposed Merger and approval by the
Company's shareholders of the issuance of the Common Shares necessary to
consummate the Proposed Merger. Accordingly, there is no assurance that the
Proposed Merger will be consummated. In addition, there is no assurance that the
benefits the Company expects to realize from the Proposed Merger will be
realized or that the Doubletree Hotels will not have an adverse effect on the
Company's operating or financial performance. See "The Company -- Recent
Developments -- Proposed Merger."
DILUTION. The Proposed Merger would have resulted in an increase in the
Company's pro forma net tangible book value per share (after giving effect to
the Offering) from $15.77 to $17.42 on a pro forma as adjusted basis, giving
effect to the Proposed Merger as of September 30, 1997. Similarly, because of
the application of purchase accounting adjustments and the impact of the Common
Shares to be issued in connection with the Proposed Merger, the Company's pro
forma net income before extraordinary item per share (after giving effect to the
Offering) would have decreased from $1.47 to $1.36 on a pro forma as adjusted
basis, giving effect to the Proposed Merger for the 12 months ended September
30, 1997.
BRAND CONCENTRATION. If the Proposed Merger is consummated, 11 of the
Company's 27 hotels will bear the Doubletree brand. On a pro forma as adjusted
basis, these hotels would have represented 41.8% of the Company's total revenues
for the nine months ended September 30, 1997. Accordingly, these hotels and the
continued viability of the Doubletree brand would have a material effect on the
Company's revenues. Any material adverse change in the popularity of the
Doubletree brand or in the financial performance of these hotels could adversely
affect the Company's financial results and condition and its ability to make
distributions to shareholders. See "The Company -- Recent Developments --
Proposed Merger."
RECENT CHANGES TO THE DOUBLETREE HOTELS. The Doubletree Hotels have been
operating under the Doubletree brand only since June 1997. Prior to that, the
Doubletree Hotels operated under the Red Lion brand. While the Company expects
that this reflagging will ultimately improve the hotels' operating and financial
performance, there is no assurance that any improvement will occur.
EFFECT ON MARKET PRICE OF SHARES AVAILABLE FOR FUTURE SALE; SHARES ISSUABLE
IN THE PROPOSED MERGER. If the Proposed Merger is consummated, the Company will
issue 3,110,048 Common Shares. No prediction can be made as to the effect, if
any, that future sales, or the availability of Preferred Shares or Common Shares
for future sale, by the Company or by its executive officers will have on the
market price of the Common Shares prevailing from time to time. Sales of
substantial amounts of Common Shares or Preferred Shares (including shares
issued on the exercise of options, on the conversion of Units or in the Proposed
Merger), or the perception that such sales could occur, could adversely affect
prevailing market prices for the Common Shares. Certain Affiliates of the
Company and its predecessor entity (the "Boykin Group Affiliates") and certain
associates of the Company have agreed, subject to certain limited exceptions,
not to offer, sell, contract to sell or otherwise dispose of any Common Shares
before November 1999.
RISKS RELATED TO RAPID GROWTH
The Company is experiencing rapid growth. If the Proposed Merger is
completed, the Company's portfolio will include interests in 27 hotels,
containing an aggregate of 7,630 rooms. This represents an approximately 217%
increase in the Company's room count since the Initial Offering in November
1996. As a result of the Company's 1997 acquisitions (and the Proposed Merger,
if consummated) the Company is operating in (and will be operating in)
geographic markets where the Company previously did not have any properties.
S-6
<PAGE> 9
Although the Company's management has experience in integrating
acquisitions, none of its prior acquisitions have been of comparable magnitude
to the Proposed Merger. The diversion of management attention, as well as any
other difficulties which may be encountered in the transition and integration
process, could have an adverse impact on the revenue and operating results of
the Company.
CONFLICTS OF INTEREST
CONFLICTS BETWEEN BMC'S INTERESTS AND THE COMPANY'S INTERESTS. Robert and
John Boykin (who are brothers) derive potential benefits from the operation by
BMC of 13 of the Hotels and, effective January 1, 1998 (through Westboy LLC
("Westboy"), a wholly owned subsidiary of BMC), the Doubletree Hotels.
Accordingly, Robert and John Boykin faced conflicts of interest in connection
with the structuring of the Percentage Leases for those hotels and may face such
conflicts upon renewals thereof. They will also face conflicts of interest in
connection with the structuring of leases for hotels the Company may acquire in
the future and lease to BMC or an Affiliate of BMC, such as Westboy, and in
operating their leased hotels in a manner that may maximize profits for BMC
without necessarily benefiting the Company. The Company's independent directors
are required to make determinations on behalf of the Company in connection with
any such conflict.
DIFFERING CONSEQUENCES OF FINANCING OR SALE OF HOTELS. Unlike the public
shareholders purchasing Common Shares in the Offering, Boykin Group Affiliates
own interests in the Partnership. As a result, the sale of hotels by the
Partnership may result in different and more adverse tax consequences to these
Boykin Group Affiliates than would be experienced by the Company and the public
shareholders, and Boykin Group Affiliates may seek to influence the Company not
to sell a hotel even though that sale might otherwise be financially
advantageous to the Company and the public shareholders. In addition, if the
Company sells to a nonaffiliate a hotel leased to BMC (or Westboy) and
terminates the related Percentage Lease in connection therewith, the Company
must pay BMC (or Westboy) the fair market value of its leasehold interest in the
remaining term of that Percentage Lease. Finally, certain Boykin Group
Affiliates and certain other partners of the Partnership may seek to influence
the Partnership to incur debt on the Hotels or on any acquired hotels on any
prepayment or conversion of an intercompany convertible note entered into in
connection with the Initial Offering (the "Intercompany Convertible Note") to
continue the tax deferral inherent in the assets they contributed to the
Partnership.
CONFLICTING INTERESTS IN ENFORCEMENT OF CERTAIN AGREEMENTS; TIME ALLOCATION
CONFLICTS. Robert Boykin has a conflict of interest with respect to his
obligations as an executive officer and director of the Company to enforce the
terms of certain agreements entered into in connection with the formation of the
Company, including the Percentage Leases, his and certain Boykin Group
Affiliates' noncompetition agreements with the Company, the agreements relating
to the conveyance to the Company of the Initial Hotels and certain related
assets and the Intercompany Convertible Note. Any failure to enforce the
material terms of any of these agreements, including the indemnification
provisions for breaches of representations and warranties contained in the
agreements governing the contribution of the Initial Hotels, could have a
material adverse effect on the Company. Mr. Boykin, who is an officer and
director of the Company and a director of BMC, also faces conflicts of interest
with respect to the allocation of his time and resources.
CONTROL BY BOYKIN GROUP
Members of the Boykin Group have the ability to acquire in the aggregate
11.4% (8.0% after the Offering and 6.7% if the Proposed Merger is consummated)
of the Company through their direct or indirect ownership of Units that they may
exchange for Common Shares on a one-for-one basis (subject to the Company's
right to pay cash in lieu of issuing shares), commencing in November 1999.
Robert Boykin also has significant control over the operations of the Company as
a result of his senior management position with the Company. Robert and John
Boykin have significant control over the operations of BMC as a result of their
ownership interests and directorships in BMC and John Boykin's senior management
position with BMC. Accordingly, Robert and John Boykin and their Affiliates have
substantial influence over the Company, which may not necessarily be consistent
with the interests of other shareholders.
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ACQUISITION RISKS
The Company competes for investment opportunities with other entities. The
Company incurs certain risks as a result of these acquisitions, including the
expenditure of funds on, and the devotion of management time to, transactions
that may not come to fruition. Additional risks are that acquired properties
will not achieve anticipated operating results, or will take longer than
anticipated to achieve those results, and that judgments with respect to the
cost of improvements to bring acquired properties to the requisite standards
will prove inaccurate.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of Robert Boykin, its Chairman,
President and Chief Executive Officer. The loss of Mr. Boykin's services could
have a material adverse effect on the performance of the Company. The Company
does not maintain a "key-man" life insurance policy covering Mr. Boykin.
FRANCHISE RISKS
Sixteen of the Hotels are subject to franchise agreements. The Company
expects that hotels it acquires will also generally be subject to franchise
agreements. The failure of a hotel, the Company, or a lessee or third-party
manager to meet standards imposed by a franchisor or otherwise to adhere to a
franchise agreement could result in the loss or cancellation of the franchise
agreement. The loss of a franchise could have a material adverse effect on the
operations or the underlying value of the hotel covered by the franchise.
The franchise agreements with Marriott governing five of the Hotels contain
a provision requiring the franchisee, on receiving a bona fide offer to buy the
related Hotel, to give the franchisor the option to buy that hotel on the same
terms as are contained in that offer. These agreements also require Marriott's
consent to the sale of the hotel and, subject to certain conditions, to the
incurrence and refinancing of indebtedness secured by the hotel. These
provisions may inhibit the Company's ability to sell or refinance the Hotels.
These Marriott franchise agreements also require the Company, upon a default
under the franchise agreement by the affected lessee, to arrange for a
replacement lessee and to guarantee the performance of certain obligations of
the lessee.
DOUBLETREE MANAGEMENT AGREEMENT
The Doubletree Hotels are managed by Red Lion Hotels, Inc. (the "Doubletree
Manager"), a wholly owned subsidiary of Doubletree Corporation, under a
management agreement between Westboy and the Doubletree Manager (the "Doubletree
Management Agreement"). The Doubletree Management Agreement has an initial term
expiring April 5, 2012, which may be extended at the option of the Doubletree
Manager for up to 10 additional terms of five years each. Accordingly, the
financial performance of the Doubletree Hotels will be significantly dependent
upon management by the Doubletree Manager for most or all of the useful life of
the Doubletree Hotels. Neither Westboy nor the Company may terminate the
Doubletree Manager for poor performance of the Doubletree Hotels if there has
been no breach of the Doubletree Management Agreement.
The Doubletree Management Agreement limits the amount of mortgage debt that
may be placed on the Doubletree Hotels. This limitation could adversely affect
the Company's ability to maximize the leverage of the Doubletree Hotels. See
"The Company -- Recent Developments."
If the Proposed Merger is consummated, the Company will be prohibited from
conveying its interest in a Doubletree Hotel unless the conveyance is subject to
the Doubletree Management Agreement or a similar management agreement with the
Doubletree Manager or, with respect to certain hotels, the Doubletree Manager is
provided a substitute hotel to manage. The Doubletree Manager will also have a
right of first refusal if the Company proposes to sell any of the Doubletree
Hotels. The ability of the Company to sell its interest in the Doubletree
Hotels, and the price it may receive for that interest, could be adversely
affected by the right of first refusal and management restrictions.
RISKS INVOLVED IN INVESTMENTS THROUGH JOINT VENTURES AND OTHER ENTITIES
Four of the Hotels are owned by joint ventures in which the Company has
controlling interests. The Company anticipates entering into similar joint
ventures in the future. Any joint venture investment involves risks such as the
possibility that the co-venturer may seek relief under federal or state
insolvency laws, become
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bankrupt, or have economic or business interests or goals that are inconsistent
with the business interests or goals of the Company. While the bankruptcy or
insolvency of a Company's co-venturer generally should not disrupt the
operations of the joint venture, the Company could be forced to purchase the
co-venturer's interest in the joint venture or such interest could be sold to a
third party.
DEPENDENCE ON LESSEES AND MANAGERS
The Company leases the Hotels to lessees under the Percentage Leases and
expects to lease any hotels acquired in the future to lessees under similar
leases. The Doubletree Hotels that the Company expects to acquire in the
Proposed Merger are leased to Westboy and are operated by an Affiliate of
Doubletree under a management agreement with Westboy. As a result, the Company
is and will continue to be dependent on lessees (particularly BMC, as the lessee
of 13 of the 17 Hotels, and, after the Proposed Merger, Westboy) and managers
for all of its operating income. Lessees and managers may be subject to
obligations to, and possible claims of, third parties arising out of their
separate operating activities. The incurrence of any such liabilities could have
a material adverse effect on a lessee's or manager's ability to perform under
the applicable lease or management agreement. The lessees' obligations under the
Percentage Leases are, and the Doubletree Manager's obligations under the
Doubletree Management Agreement will be, unsecured.
If the Company terminates any Percentage Lease following a default by a
lessee, the Company will have to re-lease the affected property in order to
maintain its qualification as a REIT. There can be no assurance that the Company
would be able to do so on terms as favorable to it as those contained in the
terminated lease. The Company also may have to incur substantial expenditures in
connection with any such re-leasing. Moreover, in the event of a bankruptcy of a
lessee, the Company's ability to re-lease the affected hotels or recover damages
based on the default under, or rejection of the relevant leases by, the lessee
would be adversely affected.
THE COMPANY'S LIMITED OPERATING HISTORY
The Company has operated since November 1996 and accordingly has limited
experience in operating in accordance with the requirements for maintaining its
qualification as a REIT.
POTENTIAL ADVERSE EFFECT ON THE VALUE OF THE COMMON SHARES OF FLUCTUATIONS IN
INTEREST RATES OR EQUITY MARKETS
The market price of equity securities of a publicly traded REIT is
determined in part by the attractiveness of the yield from distributions on
those securities in relation to prevailing interest rates. Accordingly, an
increase in interest rates generally may lead purchasers of the Common Shares to
demand a higher annual yield, which could adversely affect the market price of
the Common Shares. Moreover, the market value of the Common Shares can be
substantially and adversely affected by changes in general securities market
conditions or fluctuations in the markets for equity securities.
RISK OF INVESTMENT IN REAL ESTATE AND THE HOTEL INDUSTRY
OPERATING RISKS. The Hotels are subject to certain operating risks. These
risks include competition from other hotels, overbuilding in the hotel industry,
which adversely affects occupancy and room rates, increases in operating costs
attributable to inflation and other factors, significant dependence on business
and commercial travelers and tourism, and adverse effects of general and local
economic conditions.
RENOVATION AND CAPITAL IMPROVEMENTS REQUIREMENTS. The Hotels require
continuing renovation and capital improvements, including periodic refurbishment
and replacement of FF&E, to remain competitive. While the Company maintains a
capital expenditures reserve for the Hotels, and Red Lion maintains a similar
reserve for the Doubletree Hotels, required expenditures could exceed
expectations. If that occurs, the incremental costs could adversely affect cash
flow available for distribution.
VALUE AND ILLIQUIDITY OF REAL ESTATE. Real estate investments are
relatively illiquid. In addition, certain significant expenditures associated
with each equity investment (such as mortgage payments, real estate taxes and
maintenance costs) are generally not reduced when circumstances cause a
reduction in income from the investment.
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UNINSURED AND UNDERINSURED LOSSES. There are certain types of losses,
generally of a catastrophic nature, such as earthquakes and floods, that may be
uninsurable or not economically insurable. Should an uninsured loss or a loss in
excess of insured limits occur, the Company could lose its investment in the
affected hotel as well as the anticipated future revenues from that hotel, while
remaining obligated for any mortgage indebtedness or other financial obligations
related to that hotel.
DEVELOPMENT AND REDEVELOPMENT RISKS. New and continued project development
is subject to a number of risks: financing may not be available on favorable
terms, construction costs of a property may exceed original estimates, and
operating results may not achieve anticipated levels, or may take longer to
achieve those levels than anticipated.
PROPERTY TAX CHANGES. If real or personal property taxes increase or
assessments are levied, the Company's ability to make distributions to its
shareholders could be adversely affected.
COSTS OF COMPLIANCE WITH CERTAIN LAWS. All hotels that are "public
accommodations" or "commercial facilities," as defined in the Americans With
Disabilities Act (the "ADA"), must comply with Title III of the ADA.
Noncompliance with the ADA could result in the imposition of fines or an award
of damages to private litigants. If changes in these laws involve substantial
expenditures or must be made on an accelerated basis, the Company's ability to
make distributions to its shareholders could be adversely affected.
REAL ESTATE FINANCING RISKS. The Company commonly finances acquisitions
through debt financing. The risks normally associated with debt financing
include the risk that cash flow will be insufficient to meet required payments
of principal and interest, the risk of an inability to refinance indebtedness or
that the terms of a refinancing will not be as favorable as the terms of the
existing indebtedness, and the risk that necessary capital expenditures for such
purposes as renovations and other improvements cannot be financed on favorable
terms, if at all. Any inability to secure refinancing of indebtedness on
acceptable terms could result in a disposition of properties on disadvantageous
terms, which could result in losses to the Company and could adversely affect
its cash flow available for distribution. In addition, an increase in interest
rates would increase the amount payable under any outstanding variable rate
indebtedness.
The Company's Credit Facility is secured by mortgages on 13 of the Hotels,
and all of those hotels are subject to foreclosure if the Company defaults under
the Credit Facility. To obtain a portion of the cash consideration for the
Proposed Merger, the Company expects to enter into a $130 million term loan
secured by mortgages on the Doubletree Hotels. The Doubletree Hotels would be
subject to foreclosure if the Company defaulted on these mortgages. In addition,
the Company's need to distribute 95% of its REIT taxable income in order to
maintain its qualification as a REIT will limit its ability to rely on cash flow
from operations to finance new development or acquisitions.
POTENTIAL ENVIRONMENTAL LIABILITY. Under various federal, state and local
laws, 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 laws 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.
The Company is not aware of any material noncompliance, liability or claim
relating to hazardous or toxic substances or to other environmental matters in
connection with any of the Hotels or any of the Doubletree 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 on which they are
located, or with respect to any property the Company may acquire in the future.
See "Business and Properties -- Environmental Matters."
SEASONALITY. Generally, hotel revenues are greater in the second and third
quarters than in the first and fourth quarters. This can be expected to cause
quarterly fluctuations in the Company's hotel revenues and lease revenues.
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TAX RISKS
FAILURE TO QUALIFY AS A REIT. The Company has operated as a REIT under the
Code, commencing with its taxable year ended December 31, 1996. The Company has
not requested, and does not expect to request, a ruling from the IRS regarding
its status as a REIT. Qualification as a REIT involves the application of
technical and complex provisions of the Code for which there are only limited
judicial or administrative interpretations. The determination of various factual
matters and circumstances not entirely within the Company's control may affect
its ability to continue to qualify as a REIT, including default by a lessee
under, and a termination of, an operating lease. In addition, no assurance can
be given that legislation, regulations, administrative interpretations or court
decisions will not significantly change the rules applicable to the Company with
respect to its qualification as a REIT or the federal income tax consequences of
such qualification.
The Company has received an opinion of Baker & Hostetler LLP that, based on
the assumption that the Percentage Leases, the Doubletree Percentage Lease
(assuming the Proposed Merger occurs), the Partnership Agreement, the Company's
organizational documents, and all other documents to which the Company is a
party will be complied with by all parties thereto, and based upon certain
representations of the Company, the Company has qualified as a REIT under the
Code for 1996 and 1997, the Company is organized in conformity with the
requirements for qualification and taxation as a REIT and its method of
operation has and will, whether the Proposed Merger occurs or not, enable it to
continue to meet the requirements for taxation as a REIT under the Code.
Investors should be aware, however, that opinions of counsel are not binding on
the IRS or the courts. Both the opinion and the continued qualification of the
Company as a REIT depend on the Company's continuing ability to meet various
requirements concerning, among other things, the ownership of its outstanding
shares, the nature of its assets, the sources of its income and the amount of
its distributions to shareholders. See "Federal Income Tax Considerations --
Taxation of the Company" in the accompanying Prospectus.
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would not be allowed a deduction for distributions to shareholders in
computing its taxable income and would be subject to federal income tax
(including any applicable minimum tax) on its taxable income at regular
corporate rates. Unless entitled to relief under certain Code provisions, the
Company also would be disqualified from treatment as a REIT for the four taxable
years following the year during which REIT qualification was lost. As a result,
the cash available for distribution to shareholders could be reduced or
eliminated for each of the years involved. Although the Company currently
intends to operate in a manner designed to continue to qualify it as a REIT, it
is possible that future economic, market, legal, tax or other considerations may
cause the Board of Directors, with the consent of a majority of the
shareholders, to revoke the REIT election.
REIT MINIMUM DISTRIBUTION REQUIREMENTS. In order to qualify as a REIT, the
Company generally is required each year to distribute to its shareholders at
least 95% of its net taxable income (excluding any net capital gain). Further,
the Company is subject to a 4% nondeductible excise tax on the amount, if any,
by which certain distributions paid by it with respect to any calendar year are
less than the sum of 85% of its ordinary income, plus 95% of its capital gain
net income for that year, plus amounts not distributed in prior years.
The Company intends to continue to make distributions to its shareholders
to comply with the 95% distribution requirement and to avoid the nondeductible
excise tax. The Company's income consists primarily of its share of the income
of the Partnership. The Company's cash available for distribution consists
primarily of cash distributions from the Partnership. Differences in timing
between taxable income and receipt of cash available for distribution and the
seasonality of the hospitality industry could require the Company, through the
Partnership, to borrow funds on a short-term basis to meet the 95% distribution
requirement and to avoid the nondeductible excise tax. Under certain
circumstances, the Company may be required from time to time to accrue certain
income items for tax purposes prior to their receipt in cash (for example, rent
earned but not yet received). These differences in timing between the accrual of
certain income items for tax purposes and the receipt thereof could cause the
Company to have taxable income without sufficient cash to make the annual
distributions required of a REIT under the Code. In such cases, the Company may
be compelled to borrow funds or liquidate investments on terms that are
disadvantageous to the Company in order to meet the distribution requirements.
See "Federal Income Tax Considerations" in the accompanying Prospectus.
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Distributions by the Partnership are determined by the Company's Board of
Directors and are dependent on a number of factors, including the amount of cash
in the Partnership available for distribution, the Partnership's financial
condition, any decision by the Board of Directors to reinvest funds rather than
distribute such funds, the Partnership's capital expenditures, the annual
distribution requirements under the REIT provisions of the Code and other
factors the Board of Directors believes are relevant. See "Federal Income Tax
Considerations -- Requirements for Qualification -- Annual Distribution
Requirements" in the accompanying Prospectus.
FAILURE OF THE PARTNERSHIP TO BE CLASSIFIED AS A PARTNERSHIP FOR FEDERAL
INCOME TAX PURPOSES; IMPACT ON REIT STATUS. The Company has received an opinion
from Baker & Hostetler LLP stating that the Partnership and its joint ventures
will be classified as partnerships for federal income tax purposes and not as
publicly traded partnerships. If the IRS were to challenge successfully the tax
status of the Partnership or any of the joint ventures as a partnership for
federal income tax purposes, the entity would be taxable as a corporation. In
that event, because the value of the Company's ownership interest in the
Partnership and, through its ownership interest in the Partnership, each of the
joint ventures, constitutes more than 10% of each entity's voting securities
(and, with regard to the Partnership, exceeds 5% of the Company's assets), the
Company would cease to qualify as a REIT. Further, the imposition of a
corporate-level tax on the Partnership or on a joint venture would substantially
reduce the amount of cash available for distribution to the Company and its
shareholders. See "Federal Income Tax Considerations -- Tax Aspects of the
Company's Investments in the Partnership" in the accompanying Prospectus.
TAX ON NET INCOME FROM FORECLOSURE PROPERTY. The Company is subject to a
tax at the highest rate applicable to corporations (currently 35%) on any "net
income from foreclosure property." "Foreclosure property" is property acquired
by the Company upon a lease default or mortgage foreclosure. "Net income from
foreclosure property" is the gross income derived during the taxable year from
foreclosure property, less applicable deductions, but only to the extent such
income does not qualify under the 75% income test and 95% income test. As a
result of the rules with respect to foreclosure property, if a lessee defaults
on its obligations under a Percentage Lease for a hotel and the Company
terminates the Percentage Lease and is unable to find a replacement lessee for
that hotel within 90 days of that foreclosure, gross income from hotel
operations conducted by the Company from that hotel would cease to qualify for
the 75% and 95% gross income tests and thus the Company would fail to qualify as
a REIT; however, although it is unclear under the Code, if the hotel operations
were conducted by an independent contractor, it might be possible for the hotel
to be foreclosure property for two years after that foreclosure (the "Grace
Period," which period could be extended an additional four years) without
disqualifying the Company as a REIT. For taxable years beginning after August 5,
1997, the Taxpayer Relief Act of 1997 (the "1997 Act") extends the Grace Period
for foreclosure property to three years for the initial period, with one
additional extension of three years.
NO LIMITATION ON DEBT; ABILITY TO ISSUE PREFERRED SHARES
The Company currently has a policy of maintaining a ratio of debt-to-total
market capitalization (i.e., total third-party debt of the Company as a
percentage of the market value of issued and outstanding Common Shares,
including Common Shares issuable on exchange of outstanding Units, plus total
debt, measured at the time the debt is incurred) of not more than 45%. The
Company's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness the Company may incur, and the Board of
Directors could alter or eliminate the Company's current borrowing policy. If
this policy were changed or eliminated, the Company could become more highly
leveraged, resulting in an increase in debt service, which could adversely
affect the Company's funds from operations and its ability to make expected
distributions to its shareholders, and in an increased risk of default on the
Company's obligations. The more leveraged a company is, the more likely a
decrease in cash flow would impair its ability to make debt service payments in
the normal course of business. The Company's Amended and Restated Articles of
Incorporation ("Articles") authorize the Board of Directors to issue up to
10,000,000 preferred shares and to establish certain preferences and rights of
any such shares issued. See "Description of Capital Stock -- Preferred Shares"
in the accompanying Prospectus. The issuance of preferred shares with
preferential dividend rights could diminish the cash available for distribution
to the holders of Common Shares. In addition, the issuance of such shares could
have the effect of delaying or preventing a change in control of the Company
even if a change in control were in the shareholders' interest.
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LIMITATIONS ON OWNERSHIP OF COMMON SHARES
In order for the Company to maintain its qualification as a REIT, not more
than 50% in value of the outstanding shares of the Company may be owned,
directly or indirectly, by five or fewer individuals. Accordingly, the Company's
Articles prohibit ownership of more than 9.0% of the Common Shares by any single
shareholder, with certain exceptions. The Board of Directors may waive this
restriction if evidence satisfactory to it and to the Company's tax counsel is
presented showing that ownership in excess of this limit would not jeopardize
the Company's status as a REIT. See "Description of Common Shares --
Restrictions on Ownership" in the accompanying Prospectus. Accordingly, a holder
of Common Shares may be prohibited from increasing his holdings of Common
Shares.
ANTI-TAKEOVER EFFECT OF OWNERSHIP LIMIT
Generally prohibiting any shareholder from owning more than 9.0% of the
Common Shares may (i) discourage a change in control of the Company, (ii) deter
tender offers for the Common Shares, which may otherwise be attractive to the
Company's shareholders, or (iii) limit the opportunity for shareholders to
receive a premium for their Common Shares that may otherwise exist if an
investor attempted to assemble a block of the Common Shares in excess of 9.0% of
the outstanding Common Shares or to effect a change in control of the Company.
The ownership limitation exists to enable the Company to meet the REIT
qualification requirement that not more than 50% in value of its outstanding
shares be owned by five or fewer individuals, while providing the Company's
Board of Directors the flexibility to allow an individual to own more than 10%
of the Company's outstanding shares, so long as that ownership does not violate
other REIT qualification requirements. Certain tender offers and invitations for
tenders for more than 10% of the Common Shares of the Company are also subject
to certain advance filing and notification requirements under Section 1707.041
of the Ohio Revised Code.
FORWARD-LOOKING STATEMENTS
This Prospectus Supplement and the accompanying Prospectus contain
statements that constitute forward-looking statements. Those statements appear
in a number of places in this Prospectus Supplement, the accompanying Prospectus
and the documents incorporated by reference herein and include statements
regarding the intent, belief or current expectations of the Company, its
directors or its officers with respect to (i) the declaration or payment of
dividends; (ii) the leasing, management or performance of the Hotels, the
Doubletree Hotels and hotels to be acquired; (iii) the adequacy of reserves for
renovation and refurbishment; (iv) potential acquisitions by the Company,
including the Proposed Merger; (v) the use of the proceeds of the Offering; (vi)
the Company's financing plans; (vii) the Company's policies regarding
investments, dispositions, financings, conflicts of interest and other matters;
(viii) the Company's qualification and continued qualification as a REIT; (ix)
the Projected EBITDA Yields of various properties; and (x) trends affecting the
Company's or any hotel's financial condition or results of operations.
Prospective investors are cautioned that any such forward-looking statement
is not a guarantee of future performance and involves risks and uncertainties,
and that actual results may differ materially from those in the forward-looking
statement as a result of various factors. The information contained in this
Prospectus Supplement, in the accompanying Prospectus and in the documents
incorporated by reference herein, including without limitation the information
set forth above and the information herein and in such Prospectus under the
headings "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Policies and Objectives with Respect to Certain
Activities," "Certain Federal Income Tax Considerations" and "Federal Income Tax
Considerations" identifies important factors that could cause such differences.
With respect to any such forward-looking statement that includes a statement of
its underlying assumptions or bases, the Company cautions that, while it
believes such assumptions or bases to be reasonable and has formed them in good
faith, assumed facts or bases almost always vary from actual results, and the
differences between assumed facts or bases and actual results can be material
depending on the circumstances. When, in any forward-looking statement, the
Company or its management expresses an expectation or belief as to future
results, that expectation or belief is expressed in good faith and is believed
to have a reasonable basis, but there can be no assurance that the stated
expectation or belief will result or be achieved or accomplished.
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THE COMPANY
The Company is a self-administered REIT that currently owns 17 Hotels.
Serving both business and leisure travelers in the upscale-to-moderate price
segment of the hospitality market, the Hotels contain an aggregate of 4,568
guest rooms and are located in nine states. The Hotels are leased to four
separate operating companies and generally operate under franchise agreements
with premier nationally recognized hotel chains, including Doubletree(R),
Marriott(R), Radisson(R), Holiday Inn(R) and Hilton(R).
The Company's business strategies include acquiring full-service commercial
and resort hotels on an accretive basis and at a discount to replacement cost,
developing strategic alliances and relationships with both a network of high
quality lessees and franchisors of the hotel industry's premier upscale brands,
and achieving revenue growth in its hotels through selective renovation and its
lessees' strong management performance. The Company focuses on owning hotel
properties that are, or can be, associated with brands that will lead the
hospitality industry in REVPAR.
Consistent with its strategies, the Company has acquired eight hotels since
the Initial Offering in November 1996. These Acquired Hotels contain a total of
2,160 guest rooms and were purchased for an average per room price of
approximately $50,000, which represents a significant discount to replacement
cost. Substantially all of the Acquired Hotels are full-service hotels and, like
the Company's Initial Hotels, all compete in the upscale-to-moderate price
segment of the hospitality market. The Company leases its hotels to hotel
operators; lessees of the Acquired Hotels are CapStar, Davidson, Outrigger and
BMC. The Company plans to continue to acquire hotels in accordance with its
growth strategies.
The operating Hotels in the Company's portfolio at September 30, 1997
achieved revenue and REVPAR growth of 6.2% and 8.0%, respectively, during the
nine months ended September 30, 1997 over the nine months ended September 30,
1996. The Initial Hotels achieved revenue and REVPAR growth of 6.1% and 7.6%,
respectively, for the 1997 period over the comparable 1996 period, and the five
operating Hotels acquired thereafter had revenue and REVPAR growth of 6.4% and
9.5%, respectively, for the 1997 period over the 1996 period.
RECENT DEVELOPMENTS
Proposed Merger. The Company entered into the Merger Agreement on December
30, 1997 with Red Lion and certain related parties, under which the Company
agreed to acquire the Doubletree Hotels. Under the Merger Agreement, the Company
will issue 3.1 million Common Shares and pay $35.3 million in cash to the Red
Lion limited partners and general partner, and two wholly owned subsidiaries of
the Company will become the sole partners in Red Lion and then contribute their
Red Lion interests to the Partnership. In connection with the Proposed Merger,
the Partnership will become responsible for Red Lion's liabilities, which the
Company estimates will be approximately $156 million. At the time of the
announcement of the Merger Agreement, the consideration value was expected to
total approximately $271 million. The Company plans to finance its cash
requirements in connection with the Proposed Merger as described under
"-- Financing Activities." The Proposed Merger will constitute a taxable
transaction for the Red Lion partners and will be accounted for as a purchase by
the Company.
The Company expects that the Proposed Merger, if completed, will (i) be
immediately accretive to the Company's funds from operations per share, (ii)
give the Company a significant brand alliance, (iii) substantially enhance the
Company's geographic diversity and (iv) represent an acquisition at a discount
to replacement cost. The Doubletree Hotels, which formerly operated as "Red Lion
Hotels" or "Red Lion Inns," were reflagged in June 1997 to operate as Doubletree
Hotels and are located in growing commercial markets primarily in the western
and northwest United States. The Doubletree Hotels are situated on major traffic
arteries that are near airports, commercial centers and tourist sites. Each
hotel offers full-service accommodations, including meeting space, lounges and
banquet facilities, and most have at least two restaurants. The hotels typically
offer valet service, swimming pools, health and fitness centers, concierge
services, business centers and complimentary airport shuttle services.
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The following table sets forth certain additional information with respect
to the Doubletree Hotels.
<TABLE>
<CAPTION>
NUMBER OF
HOTEL LOCATION ROOMS
- ------------------------------------------ --------------------- --------------
<S> <C> <C>
Doubletree Hotel Portland Lloyd Center Portland, OR 476
Doubletree Hotel Sacramento Sacramento, CA 448
Doubletree Hotel Omaha Downtown Omaha, NE 413
Doubletree Hotel Boise Riverside Boise, ID 304
Doubletree Hotel Colorado Springs World Colorado Springs, CO 299
Arena
Doubletree Hotel Spokane Valley Spokane Valley, WA 237
Doubletree Hotel Portland Downtown Portland, OR 235
Doubletree Hotel Eugene/Springfield Springfield, OR 234
Doubletree Hotel Bellevue Center Bellevue, WA 208
Doubletree Hotel Yakima Valley Yakima Valley, WA 208
-----
Total 3,062
=====
</TABLE>
In connection with the Proposed Merger and to avoid certain adverse tax
consequences that it would have otherwise incurred, Red Lion leased all of the
Doubletree Hotels to Westboy under a Percentage Lease Agreement (the "Doubletree
Percentage Lease") effective as of January 1, 1998. Also in connection with the
Proposed Merger, Westboy hired the Doubletree Manager to manage the Doubletree
Hotels pursuant to the Doubletree Management Agreement. If the Proposed Merger
is consummated, the Doubletree Hotels will continue to be leased to Westboy and
managed by the Doubletree Manager.
The Doubletree Management Agreement provides for a base management fee of
3% of hotel revenues and an incentive management fee of 15% of the first $36
million of "profits" (as defined) and 25% of "profits" in excess of $36 million.
The Doubletree Manager has agreed not to charge its customary franchise fee in
addition to these base and incentive fees. In certain cases, the incentive fee
may be deferred or forgiven, depending on the Doubletree Hotels' cash flow. The
financial performance of the Doubletree Hotels will be significantly dependent
upon management by the Doubletree Manager for most or all of the useful life of
the Doubletree Hotels. Although the Doubletree Management Agreement contains no
measurable performance criteria which the Doubletree Manager is required to
meet, and the Doubletree Manager may extend the agreement for an aggregate term
of up to 64 years, the Company believes Westboy's asset management skills and
the financial incentives to the Doubletree Manager support the addition of the
Doubletree Hotels to the Company's hotel portfolio. See "Risk Factors --
Doubletree Management Agreement."
The Doubletree Management Agreement also limits the amount of mortgage debt
that may be placed on the Doubletree Hotels.
The Company believes that the Doubletree Hotels have significant potential
for increased revenues and REVPAR, and therefore believes that its rents under
the Doubletree Percentage Lease will grow in the future. The Company's belief is
based upon the following:
- The Doubletree brand, on average, has historically produced higher
average daily rates than the Red Lion brand;
- The traveling public's awareness of the Doubletree brand and the
efficiency of Doubletree's reservations system should be enhanced
following the December 1997 merger of Doubletree and Promus Hotel
Corporation;
- The Doubletree Management Agreement (which is guaranteed by a Doubletree
subsidiary) provides material financial incentives to the Doubletree
Manager to maximize profitability (and therefore revenues) from the
Doubletree Hotels; and
- The Company's capacity to make significantly increased capital
expenditures at the Doubletree Hotels (a 33 1/3% increase in scheduled
annual amounts plus a one-time $10 million expenditure following the
Proposed Merger) should result in increased REVPAR at the hotels and
generate rental payment growth under the Doubletree Percentage Lease.
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The Company and Red Lion expect to complete the Proposed Merger early in
the second quarter of 1998. Consummation of the Proposed Merger is subject to
various conditions, and there is no assurance that it will be completed.
Moreover, if the Proposed Merger is completed, there is no assurance that the
Company will be able successfully to assimilate the Doubletree Hotels or to
realize the anticipated benefits of the Proposed Merger. See "Risk Factors --
Risks Related to the Proposed Merger."
Red Lion has released its unaudited results of operations for the year
ended December 31, 1997. Red Lion reported gross revenues of the Doubletree
Hotels of $110.4 million, gross operating profit of the hotels of $40 million
and net income of $3.4 million, or $0.81 per limited partnership unit, for the
year. Cash flow available for distribution and incentive management fees was
$13.9 million, or $3.30 per limited partnership unit. The issued and outstanding
limited partnership units totaled 4,133,500 at December 31, 1997.
Recent and Pending Acquisitions. In November 1997, the Company acquired
interests in the 388-room Doubletree Hotel Kansas City and the 199-room Hampton
Inn San Diego Airport/Sea World. The Company is continually engaged in
discussions concerning potential hotel acquisitions. The Company has executed
agreements to acquire two hotels containing an aggregate of 568 guest rooms at
an aggregate cost of $37.0 million, and a letter of intent to acquire another
hotel containing 207 guest rooms at a cost of $19.3 million. The Company's
purchase of these hotels is subject to various uncertainties and conditions,
including satisfactory completion of the Company's due diligence reviews. There
is no assurance that the Company will consummate these potential acquisitions.
Financing Activities. The Credit Facility was amended in October 1997 to
expand the committed amount to $150 million from $75 million and to reduce the
interest rate from LIBOR plus 2.00% to a rate that fluctuates at LIBOR plus
1.40% to 1.75%. The Credit Facility is available to finance acquisitions and for
other working capital purposes and is secured by first mortgages on 13 of the
Hotels. The Company intends to use proceeds of the Offering to repay all
outstanding indebtedness under the Credit Facility. On February 18, 1998,
approximately $96.8 million was outstanding under the Credit Facility.
The Company expects to obtain a commitment for a $130 million 10-year term
loan, to be funded on the closing of the Proposed Merger, with a rate of
interest to be fixed at a spread over the 10-year United States Treasury bond
rate upon closing of the loan. The loan will be secured by the Doubletree
Hotels, with amortization based on a 23-year schedule commencing on the second
anniversary of the loan. The Company also expects to obtain a commitment for a
$200 million unsecured revolving credit facility (which would replace the
Company's existing Credit Facility), with a rate of interest at the same spread
over LIBOR as the existing Credit Facility. The Company expects to borrow $54
million under the new credit facility to fund the remainder of its cash
obligations in connection with the Proposed Merger. The $146 million balance of
the new revolving credit facility would be available for other acquisitions and
general corporate purposes. Each of these commitments will be subject to
customary conditions, including the lenders' satisfactory completion of due
diligence inquiries and the preparation, execution and delivery of mutually
acceptable financing documentation.
Financial Results. The Company has released its unaudited results of
operations for the year ended December 31, 1997. For the year, the Company
reported revenues of $38.3 million, income before extraordinary items of $15.2
million, an extraordinary item of $0.9 million due to losses on the early
extinguishment of debt, net income of $14.3 million, basic earnings per share of
$1.51 and diluted earnings per share of $1.49. Funds From Operations was $27.4
million, and the weighted average number of Common Shares and Units outstanding
for the year was 10,883,301. Borrowings under the Credit Facility were
approximately $91.8 million at December 31, 1997.
BUSINESS AND GROWTH STRATEGIES
BUSINESS OBJECTIVES
The Company's primary business objectives are to maximize current returns
to shareholders through increases in cash flow available for distribution and to
increase long-term total returns to shareholders through appreciation in value
of the Common Shares. The Company seeks to achieve these objectives through
participation in increased revenues from the Hotels pursuant to the Percentage
Leases and by selective acquisition, ownership, redevelopment, repositioning and
expansion of additional hotel properties.
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<PAGE> 19
BUSINESS STRATEGIES
The Company's strategies to meet its objectives include (i) acquiring and
leasing full-service commercial and resort hotels on an accretive basis and at a
discount to replacement cost in the upscale and moderate markets, (ii)
developing strategic alliances and relationships with multiple lessees and
franchisors of premier upscale brands, (iii) strategically renovating, upgrading
and repositioning hotel properties, (iv) achieving revenue growth in the Hotels,
and (v) expanding and developing additional hotel properties.
Acquisitions
The Company has acquired eight hotel properties since the Initial Offering
for an aggregate consideration of $108 million and believes that the upscale and
moderate market segments of the hospitality industry continue to present
attractive acquisition opportunities. The Company's acquisition strategy
includes the following features:
- Full-service hotels: The Company seeks to acquire full-service commercial
hotels, airport hotels, major tourist hotels and destination resorts in major
markets and business centers. The Company's 1997 acquisitions of the Daytona
Beach Radisson Resort, the Melbourne Hilton Oceanfront and the French Lick
Springs Resort evidence the Company's increased emphasis on acquiring tourist
and destination resort hotels.
The Daytona Beach Radisson Resort, which the Company acquired in March
1997, is a beachfront resort with 206 guest rooms. Following its acquisition,
the property was closed for a complete renovation. The property's January 1998
opening, following its $6.6 million renovation and reflagging, coincides with
the expected 1998 commencement of construction in Daytona Beach of the Ocean
Walk restaurant, retail and hotel complex and an Adventure Landing waterpark and
amusement complex, ongoing development and redevelopment of other hotels and
condominiums, and an expansion of the Daytona Beach convention center. The
Company's projected earnings before interest, taxes, depreciation and
amortization ("EBITDA") from the property for 1998, divided by the cost to the
Company of acquiring the property and projected capital expenditures in excess
of the Company's capital expenditure reserve from the acquisition date through
December 31, 1998 (the percentage resulting from that division, the "Projected
EBITDA Yield"), exceeds 13%.
The French Lick Springs Resort, which the Company acquired in April 1997,
is a full-service destination resort containing 485 guest rooms, five
restaurants and lounges, meeting rooms containing an aggregate of 60,000 square
feet of meeting space, two golf courses (including one designed by Donald A.
Ross), 18 tennis courts, an equestrian center and riding stables, a health and
beauty spa and a bowling alley. The Company seeks to improve significantly over
the next several years the resort's historically low occupancy through BMC's
marketing efforts, which include an emphasis on group marketing, and through
enhancements to the property from increased capital spending. The property's
REVPAR for the nine months ended September 30, 1997 exceeded its REVPAR for the
nine months ended September 30, 1996 by 11.8%, primarily because of an increase
in occupancy. The property's Projected EBITDA Yield for 1998 exceeds 12%.
- Portfolio Acquisitions: The Proposed Merger is an example of the
Company's portfolio acquisition strategy. See "-- Recent Developments --
Proposed Merger." The Company is exploring other portfolio acquisition
opportunities but has not entered into any agreement to make any such
acquisition.
- Redevelopment and Renovation Opportunities: The Company seeks hotels that
require physical renovation or redevelopment to achieve their full performance
potential. The Company's Daytona Beach Radisson Resort, Holiday Inn Crabtree and
Holiday Inn Minneapolis West are examples of this type of property.
The Holiday Inn Crabtree is undergoing a $3.6 million renovation, which the
Company expects to complete by March 1998. The Company expects the renovation
will allow the hotel to capitalize on its premier location in Raleigh, North
Carolina, to reduce the gap between the hotel's ADR and the ADR's of its closest
competitors, which have significantly higher average rates. The property's
Projected EBITDA Yield for 1998 exceeds 13%.
The 196-room Holiday Inn Minneapolis West, which is leased to and managed
by CapStar and which the Company purchased in a 91%-9% joint venture with
CapStar, is an architecturally attractive hotel that is undergoing a $1.5
million renovation. The Company expects that this renovation and the focused
marketing effort currently underway will, within the next 18 months, enable the
property to substantially narrow the 23% gap in
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<PAGE> 20
REVPAR in 1996 between the property and its local competitive set. The hotel's
Projected EBITDA Yield for 1998 is approximately 12%.
As a result of its successful acquisition activities, the Company believes
it possesses a competitive advantage in market knowledge, technical expertise
and industry relationships that will enable it to continue to implement
successfully its acquisition strategy on a national scale. Further, the Company
believes it will benefit from its relationships with CapStar, Davidson,
Outrigger and BMC and from developing relationships with additional lessees that
have demonstrated excellence in hotel properties management.
- Market Repositioning Opportunities: The Company acquires undervalued
hotels whose performance can be enhanced significantly through new brand
affiliations, implementation of new marketing strategies and effective yield
management. In addition to the Daytona Beach Radisson and French Lick Springs
resorts described above, the Doubletree Hotel Kansas City and the Hampton Inn
San Diego Airport/Sea World represent properties in this category.
The 388-room Doubletree Hotel Kansas City, which opened in April 1997
following a major renovation, is located directly across from the recently
expanded convention center in downtown Kansas City, Missouri. The Company
expects that the hotel's location, in combination with the quality of its
design, construction and finish, will give the hotel a competitive advantage in
its market. The property is leased to and managed by CapStar, and the Company
and a CapStar Affiliate own an 80% and a 20% interest, respectively, in a joint
venture that owns the hotel. Based on the distribution priorities in the joint
venture, the property's Projected EBITDA Yield for 1998 exceeds 11%.
The 199-room Hampton Inn San Diego Airport/Sea World is leased to and
managed by Outrigger and was purchased in a 91%-9% joint venture with Outrigger.
The hotel enjoys an excellent tourism location in San Diego, California. Based
on the distribution priorities in the joint venture, the property's Projected
EBITDA Yield for 1998 exceeds 12%.
Strategic Alliances and Relationships
- Multiple Lessee Strategy: The Company continues to pursue lease
relationships with qualified operators who can provide the Company with
additional hotel acquisition opportunities. The Company's acquisitions of
Marriott's Hunt Valley Inn, the Holiday Inn Minneapolis West, the Doubletree
Hotel Kansas City and the Hampton Inn San Diego Airport/Sea World involve lease
relationships established by the Company in 1997.
The 392-room Marriott's Hunt Valley Inn is leased to and managed by
Davidson. The hotel, in which the Company and Davidson have a 91% and 9%
interest, respectively, is located in the Baltimore suburb of Hunt Valley
adjacent to a new retail development and a substantial and expanding office
space complex. Marriott's Hunt Valley Inn achieved REVPAR growth of 13% during
the nine months ended September 30, 1997 over the nine months ended September
30, 1996. The property's Projected EBITDA Yield for 1998 exceeds 14%.
- Brand Strategy: The Company focuses on owning hotel properties that are,
or can be, associated with brands that will lead the hospitality industry in
REVPAR, such as Doubletree(R), Marriott(R), Radisson(R), Hilton(R), Hyatt(R),
Renaissance(R), Omni(R), Holiday Inn(R) and Embassy Suites(R). The Company
believes that it can maximize its market share and revenue by taking advantage
of its orientation toward sales and marketing to identify the most effective
branding and to leverage its brands with effective direct sales strategies. The
Company expects to continue to affiliate with a number of different franchisors
in order to maximize the performance of its hotels by providing greater access
to a broad base of national marketing and reservation systems and to mitigate
the risks of franchise loss and franchise overlap. The Company believes that its
relationships with certain franchisors facilitate sourcing and completing
acquisitions on attractive terms. The Company intends 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.
Internal Growth
The Company believes that, based on historical operating results and the
strength of the Company's and its lessees' management teams, and the Company's
hotel portfolio and markets, the Hotels should provide the
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<PAGE> 21
Company with the opportunity for cash flow growth through the Percentage Leases.
REVPAR and aggregate total revenues of the Hotels (excluding the Doubletree
Hotel Kansas City, which had been in operation for less than six months, and the
Daytona Beach Radisson Resort, which first contributed revenue in January 1998)
increased from $52.53 and $121.5 million, respectively, in 1995 to $56.93 and
$129.2 million, respectively, in 1996 and from $58.45 and $98.0 million,
respectively, for the nine-month period ended September 30, 1996 to $63.35 and
$104.3 million, respectively, for the nine-month period ended September 30,
1997.
The Company expects that its Berkeley Marina hotel's performance may suffer
in 1998 during renovation in connection with its conversion to a Radisson.
However, the Company anticipates that the performance of the hotel will improve
in 1999 as a result of its renovation and Radisson affiliation.
The Company also expects improved financial performance from its Melbourne
Quality Suites and recently acquired Melbourne Hilton Oceanfront hotels. In
addition to the internal operational synergies resulting from the properties'
close physical proximity, the cooperation between the hotels has enabled both to
benefit from inquiries made through their separate centralized reservation
systems. The Melbourne Hilton Oceanfront hotel's REVPAR for the nine months
ended September 30, 1997 exceeded its REVPAR for the nine months ended September
30, 1996 by 14.3%. The property's Projected EBITDA Yield for 1998 is
approximately 14%.
The Company believes that the revenue and cash flow of the Hotels will be
maximized by intensive management and marketing. The Company intends to derive
increased cash flow through the application of its lessees' operating
strategies, which include the active management and balancing of room rates with
forecasted room demand in order to maximize total hotel revenues ("yield
management"). The Company believes that the lessees' commitment to customer
service and the experience of their management teams position the Company to
capitalize on the expected continuing demand in the Company's markets. The
Company's objectives include enhancing its competitive position by continuing a
regular program of renovation and capital improvement.
Capital Expenditure and Renovation Strategy
The Company believes that its regular program of capital improvements at
the Hotels, including replacement and refurbishment of FF&E, helps maintain and
enhance their competitiveness and maximizes revenue growth under the Percentage
Leases. During the nine-month period ended September 30, 1997, the Company spent
approximately $3.9 million from the Company's capital expenditure reserve on
renovations and capital improvements at the Hotels. This represents an average
of approximately $1,305 per room on an annualized basis. The Percentage Leases
require the Company to add to a capital expenditures reserve, annually,
aggregate minimum reserves of 4.0% of total revenue of the Hotels. For the
12-month period ended September 30, 1997, on a pro forma basis this reserve
would have represented an average of $1,337 per room. The Company generally uses
the capital expenditures reserve for the replacement and refurbishment of FF&E
and other capital expenditures to maintain and enhance the competitive position
of the Hotels, although it may make other uses of amounts reserved that it
considers appropriate from time to time. The Company believes that the reserve
will be adequate to meet its continuing capital expenditure and FF&E needs for
the Hotels in light of their age and condition. BMC's, CapStar's, Davidson's and
Outrigger's experience in developing and renovating their respective properties
will assist the Company in maintaining its properties' competitive edge in their
respective markets.
Over the next 12 months, the Company's major capital expenditure plans
include: (i) a $5 million upgrade of the Berkeley Marina hotel in connection
with its conversion to a Radisson, including a complete upgrade and
modernization of the exterior, front entrance, lobby and half of the guest
rooms; (ii) a $1.5 million renovation of the Holiday Inn Minneapolis West,
including a new upscale concierge floor to cater to business travelers and
renovation of the guest rooms and public areas; (iii) the continuation of the
Company's $3.6 million renovation of the Holiday Inn Crabtree's exterior,
windows, guest rooms, common areas, lobby and pool; and (iv) a $2 million
expenditure at the French Lick Springs Resort for general upgrades and
improvements.
Development Strategy
The Company may develop additional full-service or upscale limited-service
hotels on land that the Company acquires in its current geographic markets or on
land contiguous to the Hotels. Full-service hotels may
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<PAGE> 22
include hotels affiliated with Doubletree(R), Marriott(R), Radisson(R),
Renaissance(R), Hilton(R), Hyatt(R), Omni(R), Holiday Inn(R) and Embassy
Suites(R). Limited-service hotels may include Marriott Courtyard Hotels(R),
Fairfield Inns(R), Residence Inns(R), Homewood Suites(R) and Hampton Inns(R).
The Company believes that selective development of hotels in its existing
geographic markets would enable it to take advantage of operating efficiencies
to generate attractive returns on investment.
Access to Capital
The Credit Facility enables the Company to acquire hotels without financing
contingencies and is available for certain other purposes, including capital
expenditures and working capital, as necessary. As a public company, the Company
generally has access to a wide variety of financing sources to fund
acquisitions, such as the ability to issue public and private debt, equity and
hybrid securities, and the ability to utilize Units as consideration when cash
is not appropriate for tax or other reasons. While its organizational documents
contain no limitation on the amount of debt it may incur, the Company, subject
to the discretion of the Board of Directors, intends to maintain a
debt-to-total-market capitalization ratio (measured at the time debt is
incurred) of not more than 45%. The Company may from time to time re-evaluate
its debt capitalization policy in light of economic conditions, relative costs
of debt and equity capital, market values of its properties, acquisition,
development and expansion opportunities and other factors. See "-- Recent
Developments -- Financing Activities."
TAX STATUS OF THE COMPANY
The Company has elected to be taxed as a REIT under Sections 856 through
860 of the Code, commencing with its taxable year ended December 31, 1996. As a
REIT, under current federal income tax laws the Company generally will not be
subject to federal income tax on income it distributes to shareholders as long
as it distributes at least 95% of its REIT taxable income currently and
satisfies a number of organizational and operational requirements. If the
Company fails to qualify as a REIT in any taxable year, the Company will be
subject to federal income tax (including any applicable alternative minimum tax)
on its taxable income at regular corporate rates, which would effectively impose
on the Company's shareholders the "double taxation" that generally results from
investment in a corporation. See "Risk Factors -- Tax Risks -- Failure to
Qualify as a REIT" and "Federal Income Tax Considerations."
LESSEES
The Company leases its properties to established hotel operators pursuant
to the Percentages Leases, which provide the Company with the greater of a base
rental income or a percentage of revenues from operations.
The Company believes that having multiple tenants facilitates meeting its
growth objectives. In selecting lessees, the Company seeks 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, the Company. The Company has, to date, leased two hotels
to CapStar, one hotel to Davidson and one hotel to Outrigger. The Company has
leased the Initial Hotels and four of the Acquired Hotels to BMC. The Doubletree
Hotels are leased to Westboy, a wholly owned subsidiary of BMC. The Company
expects to pursue lease relationships with additional hotel operators that have
excellent operating histories and demonstrated management expertise.
The Company's hotel joint ventures (more fully described below) are
structured to align the hotel lessee's economic interests with the Company's
economic interests. In each joint venture, the lessee's ability to receive cash
flow and equity capital distributions is subordinated to the Company's receipt
of specified minimum distributions. In addition, each lessee must maintain a
specified net worth to support its lease payment obligations, and its joint
venture partnership interest is pledged as security for the lease payment
obligations. The Company is permitted to subject any joint venture's hotel to a
mortgage or to sell the hotel or the Company's interest in the joint venture
without the affected joint venture partner's consent.
CapStar. CapStar is a publicly traded hotel investment and management
company that acquires, owns, renovates, repositions and manages hotels
throughout the United States. As of January 27, 1998, CapStar owned 54
full-service hotels with 14,503 rooms and leased or managed an additional 67
hotels owned by third parties,
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which contain 10,318 rooms. CapStar's portfolio of full-service hotels under
management includes both independent brands and a number of well-known franchise
brands, including Hilton(R), Sheraton(R), Marriott(R), Embassy Suites(R),
Westin(R) and Doubletree(R).
In July 1997, the Company and CapStar formed a joint venture called BoyStar
Ventures ("BoyStar") for the purpose of acquiring full-service, commercial and
resort hotel properties that CapStar will lease and manage. BoyStar, in which
the Company owns a 91% general partnership interest and CapStar owns a 9%
limited partnership interest, acquired the 196-room Holiday Inn Minneapolis West
in July 1997. In November 1997, the Company, through a joint venture with a
Capstar Affiliate (80% owned by the Company and 20% owned by the CapStar
Affiliate), acquired the 388-room Doubletree Hotel Kansas City and leased it to
CapStar. The hotel is managed by CapStar Management Company, L.P. The CapStar
Affiliate has the right, commencing in January 2000 and subject to certain
performance criteria, to sell half of its interest in the Kansas City joint
venture to the Company for its fair market value, payable in cash or Common
Shares at the option of the Company.
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. As of January
27, 1998, Davidson managed 29 hotels across the United States under franchise
agreements with such franchisors as Marriott(R), Embassy Suites(R), Hilton(R),
Crowne Plaza(R), Omni(R) and Holiday Inn(R).
In July 1997, the Company acquired a 91% general partnership interest in
the Shawan Road Hotel Limited Partnership, in which a Davidson Affiliate owns a
9% limited partnership interest. The partnership owns Marriott's Hunt Valley
Inn, located in suburban Baltimore, Maryland. Davidson leases the hotel from the
partnership and manages the hotel. The Davidson Affiliate has the right,
commencing in July 1999 and subject to certain performance criteria, to sell
half of its interest in the limited partnership to the Company for its fair
market value, payable in cash or Common Shares at the option of the Company.
Outrigger. Outrigger is a privately held hotel management company based in
California. Outrigger, as of January 27, 1998, owned and operated over 25
hotels, with approximately 5,000 rooms, throughout the United States. Outrigger
currently operates or has operated a full range of hotel products, including
Marriott(R), Sheraton(R), Hilton(R), Residence Inn(R), Holiday Inn(R) and
Radisson(R) and many limited service products. In addition to branded hotels,
Outrigger operates upscale, boutique hotels, providing management and sales
support.
The Company and an Outrigger Affiliate formed a joint venture to acquire
the 199-room Hampton Inn San Diego Airport/Sea World in San Diego, California.
The joint venture, in which the Company owns a 91% interest and the Outrigger
Affiliate owns a 9% interest, acquired the hotel in November 1997. The joint
venture has leased the hotel to an Affiliate of Outrigger, and the hotel is
managed by Outrigger and operates under a franchise agreement with Promus Hotel
Corporation (the licensor of Hampton Inn hotels).
BMC. Robert W. Boykin and John E. Boykin indirectly own BMC, which was
formed at the time of the Initial Offering. BMC has continued the 39-year hotel
operation and management business of the Boykin Group. The Boykin Group has
capabilities in all phases of development and management of hotel properties. As
of January 27, 1998, BMC operated or managed 33 properties containing 7,842
rooms located throughout the United States.
BMC manages 13 of the Hotels. Its subsidiaries conduct management
activities for owners other than the Company, 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 the Company to acquisition opportunities.
In anticipation of the Proposed Merger and to avoid certain adverse tax
consequences that it would otherwise have incurred, Red Lion leased to Westboy,
effective January 1, 1998, the 10 Doubletree Hotels that the Company expects to
acquire in the Proposed Merger. Westboy contemporaneously executed the
Doubletree Management Agreement with the Doubletree Manager, a subsidiary of
Doubletree, under which the Doubletree Manager will operate the Doubletree
Hotels. The lease and management agreement will remain in effect following
consummation of the Proposed Merger.
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<PAGE> 24
BMC and its owners, who have a substantial interest in the Company, have
interests that conflict with the Company's interests in connection with the
structuring and enforcement of the Percentage Leases and other leases and
agreements between the Company and BMC and in connection with activities that
may maximize profits for BMC without necessarily benefiting the Company. The
Company and BMC have undertaken several measures, including those listed below,
to align the interests of BMC and its owners with the interests of the Company
and its shareholders and to address these conflicts of interest:
- BMC's owners have agreed to retain their equity interests in the Company
(in the form of Units exchangeable for Common Shares (if the Company
consents thereto)) 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 the Company;
- Distributions from BMC and net proceeds of any sale of BMC (with certain
limited exceptions) will be used to purchase Units or 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 Leases;
- Determinations made on behalf of the Company in connection with any
conflict of interest involving any Boykin Group Affiliate are made by the
Company's Independent Directors;
- Each Boykin Group Affiliate will conduct all hotel acquisition,
development and ownership activities only through the Company; and
- Any change in control of BMC without the Company's consent will
constitute a default under BMC's Percentage Leases.
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 the
Company's Common Shares.
Under BMC or its predecessor, the performance of the Initial Hotels has
exceeded industry averages. During the five-year period ended December 31, 1996,
the Initial Hotels generated REVPAR that exceeded the REVPAR of their local
competing hotels (in each market, four to seven competitors as currently defined
by the Company and BMC for property and personnel performance evaluation
purposes). The Initial Hotels experienced 7.6% REVPAR growth for the nine months
ended September 30, 1997 over the nine months ended September 30, 1996 and
exceeded the U.S. average of 4.5% REVPAR growth for upscale full service hotels
for the nine months ended September 30, 1997 over the nine months ended
September 30, 1996.
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after payment of
expenses incurred in connection with the Offering, are estimated to be $105.2
million ($121.1 million if the Underwriters' overallotment option is exercised
in full). The Company will contribute all of the net proceeds to the Partnership
in exchange for an additional 3.8% general partnership interest, resulting in
the Company owning a 91.6% general partnership interest in the Partnership
(91.9% if the Underwriters' overallotment option is exercised in full). The
Partnership intends to use the net proceeds to repay $96.8 million in
outstanding indebtedness under the Credit Facility, to purchase 40,976 Units
from two unaffiliated limited partners for an aggregate purchase price of $1.0
million, and to fund current and future acquisitions and for general corporate
purposes. The current interest rate on the Credit Facility, which matures in
November 1999 (or, at the Company's option, November 2000), is LIBOR plus 1.5%.
The indebtedness incurred within the last year under the Credit Facility was
used to finance hotel acquisitions and hotel renovations. Lehman Brothers
Holdings, Inc., an Affiliate of Lehman Brothers Inc., which is one of the
Underwriters, will receive approximately $22.6 million from the Company's
repayment of the indebtedness described above.
S-22
<PAGE> 25
PRICE RANGE OF COMMON SHARES AND DISTRIBUTIONS
The Common Shares are listed on the NYSE 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:
<TABLE>
<CAPTION>
CASH
PRICE RANGE DISTRIBUTIONS
--------------- DECLARED
HIGH LOW PER SHARE
---- ---- -------------
<S> <C> <C> <C>
Year Ended December 31, 1996:
Fourth Quarter (beginning October 30, 1996)......... $24 $20 $0.28
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 Ending December 31, 1998:
First Quarter (through February 18, 1998)........... $28 1/2 $25 1/16 --
</TABLE>
On January 26, 1998, there were 186 record holders of the Company's Common
Shares, including shares held in "street name" by nominees who are record
holders, and approximately 8,800 beneficial owners. On February 18, 1998, the
last reported sales price of the Common Shares on the NYSE was $25 1/16 per
share.
The Company's current annual distribution rate is $1.80 per share, payable
quarterly in an amount equal to $0.45 per share. Distributions to date represent
approximately 87% of the Company's as adjusted pro forma Cash Available for
Distribution for the 12 months ended September 30, 1997. The entire annual
distribution to holders of Common Shares for 1996 represented a return of
capital for federal income tax purposes. The Company's 1997 distributions were
fully taxable as dividends.
The declaration and payment of distributions by the Company is at the
discretion of the Company's Board of Directors and depends on, among other
things, the Company's receipt of cash distributions from the Partnership, the
Company's level of indebtedness, any contractual restrictions and other factors
considered relevant by the Board. The level of the Partnership's cash
distributions is determined by the Partnership in light of its cash needs,
including its requirements for investing and financing activities and other
anticipated cash needs. The Partnership's principal source of revenue consists
of payments of rent by the lessees under the Percentage Leases. See "Risk
Factors -- Risk of Investment in Real Estate and the Hotel
Industry -- Seasonality" for a discussion of the effect of the seasonal nature
of hotel revenues on the Company's receipt of rent payments from the lessees.
S-23
<PAGE> 26
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) on a
historical basis as of September 30, 1997, (ii) on an as adjusted basis to give
effect to the issuance and sale of the Common Shares in the Offering and the
application of the net proceeds therefrom as described under "Use of Proceeds"
and (iii) on a pro forma as adjusted basis to also reflect the Proposed Merger:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-----------------------------------
PRO FORMA
AS AS
HISTORICAL ADJUSTED ADJUSTED
-------- -------- ---------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Borrowings under Credit Facility (1)...................... $ 59,000 $ -- $ 16,620
Mortgage notes payable.................................... -- -- 130,000
Minority interest......................................... 15,090 14,673 14,673
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; 9,536,251 shares issued and outstanding
(14,036,251 and 17,146,299 shares issued and
outstanding on an as adjusted and pro forma as
adjusted basis, respectively) (2).................... -- -- --
Additional paid-in capital.............................. 124,304 229,492 309,825
Retained deficit (3).................................... (6,676) (6,676) (7,587)
-------- -------- --------
Total shareholders' equity.............................. 117,628 222,816 302,238
-------- -------- --------
Total capitalization.................................... $191,718 $237,489 $463,531
======== ======== ========
</TABLE>
- ---------------
(1) The Company's borrowings under the Credit Facility increased to $96,750 as
of February 18, 1998 primarily because of the acquisitions of the Doubletree
Hotel Kansas City and the Hampton Inn San Diego Airport/Sea World in
November 1997.
(2) Excludes 1,340,718 Common Shares issuable on exchange of 1,340,718 Units.
Does not give effect to the 1,000,000 Common Shares issuable under the
Company's Long-Term Incentive Plan or to the Common Shares subject to the
options covering 55,000 Common Shares granted to the Company's independent
directors.
(3) Includes in the pro forma as adjusted amounts an extraordinary loss of $0.9
million resulting from the refinancing of the Credit Facility.
S-24
<PAGE> 27
SELECTED FINANCIAL INFORMATION
The following tables set forth selected historical and pro forma operating
and financial data for the Company and BMC and selected combined historical
financial data for the Initial Hotels. The selected historical financial data
for the Company and BMC 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, 1995, 1994 and 1993 have been derived
from the historical financial statements of the Company, BMC and the Initial
Hotels, respectively, audited by Arthur Andersen LLP, independent public
accountants, whose reports with respect thereto are incorporated herein by
reference.
The unaudited pro forma operating information is presented as if (i) the
Initial Offering and related formation transactions, (ii) the acquisitions of
the Melbourne Hilton Oceanfront, Holiday Inn Crabtree, French Lick Springs
Resort, Holiday Inn Minneapolis West and Marriott's Hunt Valley Inn and (iii)
the Offering and the use of the net proceeds therefrom, all had been consummated
as of January 1, 1996. The unaudited pro forma balance sheet information is
presented as if the Offering and the use of the net proceeds therefrom had been
consummated on September 30, 1997.
The unaudited pro forma as adjusted operating information is presented as
if (i) the pro forma transactions described in the previous paragraph and (ii)
the Proposed Merger all had been consummated as of January 1, 1996, while the
unaudited pro forma as adjusted balance sheet information is presented as if the
Offering and the use of net proceeds therefrom and the Proposed Merger all had
been consummated on September 30, 1997.
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Unaudited Pro Forma Financial Statements included herein and
all of the financial statements and notes thereto incorporated by reference in
this Prospectus Supplement.
The historical and pro forma earnings per share information, the latest of
which is as of September 30, 1997, has been prepared under the methods
prescribed by Accounting Principles Board Opinion No. 15. In the quarter ended
December 31, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 ("SFAS 128") for calculating earnings per share. The Company
has included for informational purposes the basic and diluted earnings per share
amounts, identified as "Pro Forma Restated" calculated under the methods
prescribed by SFAS 128.
S-25
<PAGE> 28
BOYKIN LODGING COMPANY
SELECTED HISTORICAL AND PRO FORMA OPERATING AND FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED
HISTORICAL(1)(2) PRO FORMA (UNAUDITED)(2) (UNAUDITED)(2)
--------------------------- ------------------------------ --------------------------------
11/4/96 NINE MONTHS NINE MONTHS
(INCEPTION OF NINE MONTHS ENDED 9/30, ENDED 9/30,
OPERATIONS) ENDED YEAR ENDED ----------------- YEAR ENDED -------------------
TO 12/31/96 9/30/97 12/31/96 1996 1997 12/31/96 1996 1997
------------- ----------- ---------- ------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Lease revenue.................. $ 3,258 $28,866 $ 38,889 $30,026 $32,561 $ 68,563 $ 53,173 $ 55,919
Interest income................ 120 337 -- -- -- -- -- --
------ ------- ------- ------- ------- ------- ------- -------
Total revenues........... 3,378 29,203 38,889 30,026 32,561 68,563 53,173 55,919
------ ------- ------- ------- ------- ------- ------- -------
Real estate related
depreciation and
amortization................. 1,344 6,931 10,663 7,999 7,901 22,361 16,772 16,674
Real estate and personal
property taxes, insurance and
rent......................... 620 3,834 5,468 4,041 4,430 10,468 7,791 8,180
General and administrative..... 450 1,708 1,450 1,088 1,708 1,950 1,463 2,083
Interest expense............... 54 1,359 -- -- -- 10,063 7,547 7,547
Amortization of deferred
financing costs.............. 69 327 436 327 327 549 412 412
------ ------- ------- ------- ------- ------- ------- -------
Total expenses........... 2,537 14,159 18,017 13,455 14,366 45,391 33,985 34,896
------ ------- ------- ------- ------- ------- ------- -------
Income before minority interest
and extraordinary item....... 841 15,044 20,872 16,571 18,195 23,172 19,188 21,023
Minority interest in joint
ventures..................... -- (92) (28) (66) (75) (28) (66) (75)
Minority interest in operating
partnership.................. (40) (1,825) (1,679) (1,306) (1,444) (1,541) (1,257) (1,397)
------ ------- ------- ------- ------- ------- ------- -------
Income before extraordinary
item......................... $ 801 $13,127 $ 19,165 $15,199 $16,676 $ 21,603 $ 17,865 $ 19,551
======= ======= ======= ======= ======= =======
Extraordinary item -- loss on
early extinguishment of debt
(net of $970 and $14 of
minority interest for the
periods ended December 31,
1996 and September 30, 1997,
respectively)................ (4,908) (141)
------ -------
Net income (loss) applicable to
Common Shares................ $(4,107) $12,986
====== =======
EARNINGS PER SHARE:
Income before extraordinary
item......................... $ .09 $ 1.37 $ 1.37 $ 1.08 $ 1.19 $ 1.26 $ 1.04 $ 1.14
======= ======= ======= ======= ======= =======
Extraordinary item, net........ (.55) (.01)
------ -------
Net income (loss) per Common
Share...................... $ (.46) $ 1.36
====== =======
Weighted average number of
Common Shares outstanding.... 8,981 9,518 14,016 14,016 14,018 17,126 17,126 17,128
PRO FORMA RESTATED EARNINGS PER
SHARE(8)
Basic: Income before
extraordinary
item......................... $ .09 $ 1.37 $ 1.37 $ 1.08 $ 1.19 $ 1.26 $ 1.04 $ 1.14
Extraordinary item,
net.................. (.55) (.01)
Net income (loss) per
Common Share....... (.46) 1.36
Diluted: Income before
extraordinary
item......................... .09 1.37 1.36 1.08 1.18 1.26 1.04 1.14
Extraordinary item,
net (.54) (.01)
Net income (loss) per
Common Share....... (.45) 1.36
</TABLE>
S-26
<PAGE> 29
BOYKIN LODGING COMPANY
SELECTED HISTORICAL AND PRO FORMA OPERATING AND FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED
HISTORICAL(1)(2) PRO FORMA (UNAUDITED)(2) (UNAUDITED)(2)
--------------------------- ------------------------------ --------------------------------
11/4/96 NINE MONTHS NINE MONTHS
(INCEPTION OF NINE MONTHS ENDED 9/30, ENDED 9/30,
OPERATIONS) ENDED YEAR ENDED ----------------- YEAR ENDED -------------------
TO 12/31/96 9/30/97 12/31/96 1996 1997 12/31/96 1996 1997
------------- ----------- ---------- ------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds From Operations(3)....... $ 2,185 $21,860 $ 31,494 $24,490 $25,993 $ 45,492 $ 35,880 $ 37,594
Net cash provided by operating
activities(4)................ 329 20,158 31,930 24,817 26,320 46,041 36,292 38,006
Net cash used for investing
activities(5)................ (1,824) (75,550) (5,082) (3,852) (4,092) (9,515) (7,211) (7,466)
Net cash provided by (used for)
financing activities(6)...... 22,857 35,497 (27,635) (20,727) (20,697) (33,233) (24,925) (24,895)
Dividends declared(7).......... 2,700 12,855 25,229 18,922 18,924 30,827 23,120 23,123
Weighted average number of
Common Shares and Units
outstanding.................. 10,359 10,872 15,353 15,353 15,332 18,463 18,463 18,442
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL(1)(2)
------------------------- PRO FORMA PRO FORMA AS ADJUSTED
AT 12/31/96 AT 9/30/97 (UNAUDITED)(2) AT 9/30/97 (UNAUDITED)(2) AT 9/30/97
----------- ----------- -------------------------- --------------------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment in hotel properties, net.......... $ 113,322 $ 194,213 $194,764 $468,336
Total assets................................. 137,271 203,245 249,016 480,156
Total debt................................... -- 59,000 -- 146,620
Minority interest in Partnership............. 14,045 13,657 13,240 13,240
Shareholders' equity......................... 117,021 117,628 222,816 302,238
</TABLE>
- ---------------
(1) Includes the operating results of the following acquired properties (all
accounted for using the purchase method) since their respective acquisition
dates: Melbourne Hilton Oceanfront (March 1997), Holiday Inn Crabtree (March
1997), French Lick Springs Resort (April 1997), Holiday Inn Minneapolis West
(July 1997) and Marriott's Hunt Valley Inn (July 1997).
(2) The historical, pro forma and pro forma as adjusted data all exclude the
effects of the purchases of the Doubletree Hotel Kansas City and the Hampton
Inn San Diego Airport/Sea World in November 1997. These acquisitions were
funded with borrowings under the Credit Facility. As a result, the Company's
outstanding borrowings under the Credit Facility were $91,750 at December
31, 1997.
(3) Represents Funds From Operations of the Company on a consolidated basis. The
following table computes Funds From Operations for the nine months ended
September 30, 1997 under the National Association of Real Estate Investment
Trusts ("NAREIT") definition. Funds From Operations consists of income
(loss) before minority interest (computed in accordance with generally
accepted accounting principles) excluding gains (losses) from debt
restructuring and sales of property (including furniture and equipment) plus
real estate-related depreciation and amortization (excluding amortization of
deferred financing costs) and after adjustments for unconsolidated
partnerships and joint ventures. Industry analysts consider Funds From
Operations to be an appropriate measure of the performance of an equity
REIT. Funds From Operations should not be considered as a basis for
computing distributions or as an alternative (i) to net income or other
measurements under generally accepted accounting principles, as an indicator
of operating performance, or (ii) to cash
S-27
<PAGE> 30
BOYKIN LODGING COMPANY
SELECTED HISTORICAL AND PRO FORMA OPERATING AND FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
flows from operating, investing, or financing activities, as a measure of
liquidity. Funds From Operations does not reflect cash expenditures for
capital improvements or principal amortization of indebtedness.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997
-----------------
<S> <C>
Net Income....................................................... $12,986
Extraordinary item............................................... 141
Minority interest................................................ 1,917
Depreciation..................................................... 6,931
Funds From Operations applicable to joint venture minority
interest....................................................... (115)
-------
Funds From Operations............................................ $21,860
=======
</TABLE>
(4) 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.
(5) 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 the Company's percentage interest in
such hotel revenues is considered in the calculation.
(6) For pro forma purposes, net cash used for financing activities represents
estimated dividends and distributions based upon the Company's historical
annual dividend rate of $1.80 per Common Share and the pro forma weighted
average number of Common Shares and Units outstanding during the applicable
period.
(7) For pro forma purposes, represents estimated dividends based upon the
Company's historical annual dividend rate of $1.80 per Common Share and the
pro forma weighted average number of Common Shares outstanding for the
applicable period.
(8) Pro forma restated basic and diluted earnings per share amounts have been
calculated under the methods prescribed by SFAS 128 for each of the
historical and pro forma periods presented. See Note P on Page F-8 for a
description of the calculation for each of the pro forma periods. The
historical periods are calculated as follows:
<TABLE>
<CAPTION>
NOVEMBER 4, 1996 THROUGH NINE MONTHS ENDED SEPTEMBER
DECEMBER 31, 1996 30, 1997
------------------------------ ------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- ------ --------- ------- ------ ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INCOME BEFORE EXTRAORDINARY ITEM:
Basic earnings per share................................ $ 801 8,981 $ 0.09 $13,127 9,518 $ 1.37
Effect of outstanding options, net of assumed treasury
shares................................................ -- 55 -- -- 57 --
------- ----- ------ ------- ----- ------
Diluted earnings per share.............................. $ 801 9,036 $ 0.09 $13,127 9,575 $ 1.37
======= ===== ====== ======= ===== ======
NET INCOME (LOSS) PER COMMON SHARE:
Basic earnings per share................................ $(4,107) 8,981 $ (0.46) $12,986 9,518 $ 1.36
Effect of outstanding options, net of assumed treasury
shares................................................ -- 55 0.01 -- 57 --
------- ----- ------ ------- ----- ------
Diluted earnings per share.............................. $(4,107) 9,036 $ (0.45) $12,986 9,575 $ 1.36
======= ===== ====== ======= ===== ======
</TABLE>
S-28
<PAGE> 31
BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY
SELECTED HISTORICAL AND PRO FORMA OPERATING AND FINANCIAL DATA
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED
HISTORICAL PRO FORMA (UNAUDITED)(1) (UNAUDITED)(2)
----------------------------- ------------------------------ --------------------------------
11/4/96 NINE MONTHS NINE MONTHS
(INCEPTION OF ENDED 9/30, ENDED 9/30,
OPERATIONS) NINE MONTHS YEAR ENDED ----------------- YEAR ENDED -------------------
TO 12/31/96 ENDED 9/30/97 12/31/96 1996 1997 12/31/96 1996 1997
------------- ------------- ---------- ------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Room revenue.................. $ 7,684 $56,117 $ 69,717 $53,423 $58,048 $134,998 $104,069 $109,823
Food and beverage revenue..... 3,976 22,215 30,297 22,281 23,122 69,462 50,717 51,033
Other hotel revenue........... 620 5,810 7,625 5,973 6,180 14,006 10,860 10,835
------- ------- -------- ------- ------- -------- -------- --------
Total hotel revenues.... 12,280 84,142 107,639 81,677 87,350 218,466 165,646 171,691
Other revenue................. 382 2,050 2,777 1,663 2,050 2,777 1,663 2,050
------- ------- -------- ------- ------- -------- -------- --------
Total revenues.......... 12,662 86,192 110,416 83,340 89,400 221,243 167,309 173,741
------- ------- -------- ------- ------- -------- -------- --------
Operating expenses............ 9,748 56,367 74,292 54,796 58,822 154,157 114,474 118,755
Cost of goods sold of nonhotel
operations.................. 102 484 1,686 993 484 1,686 993 484
Percentage Lease expense...... 3,258 27,463 33,268 25,819 28,229 62,942 48,966 51,587
------- ------- -------- ------- ------- -------- -------- --------
Total expenses.......... 13,108 84,314 109,246 81,608 87,535 218,785 164,433 170,826
------- ------- -------- ------- ------- -------- -------- --------
Net income (loss)............. $ (446) $ 1,878 $ 1,170 $ 1,732 $ 1,865 $ 2,458 $ 2,876 $ 2,915
======= ======= ======== ======= ======= ======== ======== ========
</TABLE>
- ---------------
(1) The unaudited pro forma information is presented as if BMC leased and
operated from January 1, 1996 all of the hotels which it leased and operated
as of September 30, 1997.
(2) The unaudited pro forma as adjusted information is presented as if BMC
leased and operated from January 1, 1996 (i) all of the hotels which it
leased and operated as of September 30, 1997 and (ii) the Doubletree Hotels.
S-29
<PAGE> 32
INITIAL HOTELS
SELECTED COMBINED HISTORICAL FINANCIAL DATA
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------- JANUARY 1, 1996 TO NINE MONTHS ENDED
1992 1993 1994 1995 NOVEMBER 3, 1996(1) SEPTEMBER 30, 1996(1)
------- ------- ------- ------- ------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Room revenue................... $45,200 $45,753 $48,652 $50,730 $51,627 $45,532
Food and beverage revenue...... 22,514 22,357 22,811 22,984 20,062 17,535
Other revenue.................. 3,634 3,977 4,092 4,490 4,148 3,656
------- ------- ------- ------- ------- -------
Total revenues................. 71,348 72,087 75,555 78,204 75,837 66,723
------- ------- ------- ------- ------- -------
Departmental and other
expenses..................... 52,248 53,242 53,967 54,629 52,367 45,869
Real estate and personal
property taxes, insurance and
rent......................... 2,988 3,112 3,329 3,579 3,228 2,911
Depreciation and
amortization................. 5,822 5,822 5,690 6,545 6,308 5,619
Interest expense............... 12,997 12,375 12,397 14,169 13,430 11,933
Gain on property insurance
recovery..................... -- -- -- (670) (32) --
------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary item........... (2,707) (2,464) 172 (48) 536 391
Extraordinary item -- gain
(loss) on early
extinguishment of debt....... -- -- -- 556 (1,315) (1,315)
------- ------- ------- ------- ------- -------
Net income (loss).............. $(2,707) $(2,464) $ 172 $ 508 $ (779) $ (924)
======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) On February 8, 1996, the Lake Norman Holiday Inn and Lake Norman Hampton Inn
were acquired by a Company 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.
S-30
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The discussion set forth below focuses on changes in the pro forma results
of the Company and BMC for the year ended December 31, 1996 and for the nine
months ended September 30, 1997, giving effect to the completion of the Offering
and the application of the net proceeds therefrom, consummation of the Proposed
Merger, the financing of the Proposed Merger through a $130 million fixed rate
note and replacement of the Credit Facility with a new $200 million credit
facility. For a description of the detailed pro forma information underlying
this discussion, see the Pro Forma Financial Statements of the Company and BMC
included herein.
For a discussion of the Company's and BMC's historical results and pro
forma results without giving effect to consummation of the Offering and the
Proposed Merger and related financings for such periods, see the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 and its
Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997,
which are incorporated by reference herein.
BACKGROUND
On December 30, 1997, the Company entered into the Merger Agreement with
Red Lion and certain related parties, under which the Company agreed, subject to
certain conditions, to acquire the Doubletree Hotels. See "The Company -- Recent
Developments -- Proposed Merger." In addition, since September 30, 1997, the
Company has acquired two hotels.
In November 1997, the Company acquired a 91% interest in the 199-room
Hampton Inn San Diego Airport/Sea World in San Diego, California for $8.1
million. Outrigger, a private hotel management company, acquired the remaining
9% and is leasing and managing the hotel under a Percentage Lease. The funds to
complete the purchase were borrowed under the Credit Facility.
In November 1997, the Company paid $20 million for an 80% interest in the
388-room Doubletree Hotel Kansas City. The remaining 20% is owned by a joint
venture, owned by CapStar and the former owner. The joint venture leases the
hotel under a Percentage Lease. The funds to complete the purchase were borrowed
under the Credit Facility. The property, which is managed by CapStar, recently
was reflagged as a Doubletree hotel. During 1997, prior to the Company's
purchase, the hotel completed a $25 million renovation.
S-31
<PAGE> 34
PRO FORMA RESULTS OF OPERATIONS
THE COMPANY
The pro forma financial information is summarized below:
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
------------------------------ ------------------------------
AFTER AFTER
OFFERING AND OFFERING AND
THE COMPANY PROPOSED MERGER THE COMPANY PROPOSED MERGER
----------- --------------- ----------- ---------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL INFORMATION
Revenues..................... $ 38,889 $ 68,563 $ 32,561 $ 55,919
------- ------- ------- -------
Expenses:
Depreciation and
amortization............ 10,641 22,361 7,884 16,674
Taxes, insurance and
rent.................... 5,468 10,468 4,430 8,180
General and
administrative.......... 1,450 1,950 1,708 2,083
Interest expense........... 4,538 10,063 3,403 7,547
Amortization of financing
costs................... 436 549 327 412
Minority interest.......... 1,969 1,569 1,866 1,472
------- ------- ------- -------
Total expenses..... 24,502 46,960 19,618 36,368
------- ------- ------- -------
Income before extraordinary
items...................... $ 14,387 $ 21,603 $ 12,943 $ 19,551
======= ======= ======= =======
Income before extraordinary
items per Common Share..... $ 1.51 $ 1.26 $ 1.36 $ 1.14
======= ======= ======= =======
OTHER DATA
Funds From Operations (1).... $ 26,956 $ 45,492 $ 22,590 $ 37,594
Net cash provided by
operating activities (2)... 27,392 46,041 22,917 38,006
Net cash (used for) investing
activities (3)............. (5,082) (9,515) (4,092) (7,466)
Net cash (used for) financing
activities (4)............. (19,609) (33,233) (14,677) (24,895)
PRO FORMA RESTATED EARNINGS
PER COMMON SHARE (5)
Basic........................ $ 1.51 $ 1.26 $ 1.36 $ 1.14
Diluted...................... 1.50 1.26 1.35 1.14
</TABLE>
- ---------------
(1) Represents Funds From Operations of the Company on a consolidated basis.
Funds From Operations is computed under the National Association of Real
Estate Investment Trusts ("NAREIT") definition. Funds From Operations
consists of income (loss) before minority interest (computed in accordance
with generally accepted accounting principles) excluding gains and (losses)
from debt restructuring and sales of property (including furniture and
equipment) plus real estate-related depreciation and amortization (excluding
amortization of deferred financing costs) and after adjustments for
unconsolidated partnerships and joint ventures. Industry analysts consider
Funds From Operations to be an appropriate measure of the performance of an
equity REIT. Funds From Operations should not be considered as a basis for
computing distributions or as an alternative (i) to net income or other
measurements under generally accepted accounting principles, as an indicator
of operating performance, or (ii) to cash flows from operating, investing,
or financing activities, as a measure of liquidity. Funds From Operations
does not reflect cash expenditures for capital improvements or principal
amortization of indebtedness.
(2) Represents net income before depreciation of real estate assets,
amortization of deferred financing costs and minority interest and is
adjusted for the joint venture minority interest in these items. For pro
forma purposes, no effect has been given to changes in working capital
assets and liabilities.
(3) Represents 4% of hotel revenues for the applicable period. For those hotels
which are owned through a joint venture, only the Company's percentage
interest in such hotels is considered in the calculation.
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<PAGE> 35
(4) Represents the estimated dividends and distributions based on the Company's
historical annual dividend rate of $1.80 per Common Share and the weighted
average number of Common Shares and Units outstanding during the applicable
period.
(5) Pro forma restated basic and diluted earnings per share amounts have been
calculated under the methods prescribed by SFAS 128 for each of the pro
forma periods presented. See Note P on Page F-8 for a description of the
calculation for each of the pro forma periods.
Comparison for Pro Forma Results for the Nine Months Ended September 30,
1997
Revenues would have grown from $33 million to $56 million, an increase of
70%, due to the additional revenues which would have been generated under the
Doubletree Percentage Lease.
Depreciation and amortization would have increased from $8 million to $17
million, an increase of 113%, reflecting the additional depreciation on the
Doubletree Hotels. Taxes, insurance and rent would have increased from $4
million to $8 million, an increase of 100%, reflecting the incremental costs
applicable to the Doubletree Hotels to be paid by the Company. Interest expense
would have increased from $3 million to $8 million, an increase of 167%,
reflecting the additional $130 million of new fixed rate mortgage debt and a
reduction from $59 million to $17 million of borrowings under the Company's
credit facility.
The resulting income before extraordinary items would have increased from
$13 million to $20 million, an increase of 54%. Earnings per share would have
decreased from $1.36 to $1.14, a decrease of 16%, due to the dilutive effect of
the additional shares issued as a result of the Offering and the Proposed
Merger.
Funds From Operation ("FFO") would have increased from $23 million to $38
million, an increase of 65%, while net cash provided by operating activities
would have increased from $23 million to $38 million, an increase of 65%, as a
result of the additional FFO generated by the Doubletree Hotels and reduced
interest cost due to the use of proceeds from the Offering. Net cash used for
investing activities would have increased from $4 million to $7 million, an
increase of 75%, because of an increased capital expenditure reserve relating to
the Doubletree Hotels. Net cash used for financing activities would have
increased from $15 million to $25 million, an increase of 67%, because of
increased dividends for the additional Common Shares outstanding as a result of
the Offering and the Proposed Merger.
Comparison of Pro Forma Results for Year Ended December 31, 1996
Revenues would have grown from $39 million to $69 million, an increase of
77%, because of the additional revenues which would have been generated under
the Doubletree Percentage Lease.
Depreciation and amortization would have increased from $11 million to $22
million, an increase of 100%, reflecting the additional depreciation on the
Doubletree Hotels based upon the Company's investment in these hotels and the
estimated useful lives of 25 years for buildings and seven years for furniture
and equipment. Taxes, insurance and rent would have increased from $5 million to
$10 million, an increase of $5 million, or 100%, to reflect the incremental
costs applicable to the Doubletree Hotels to be paid by the Company. Interest
expense would have increased from $5 million to $10 million, an increase of
100%, reflecting the borrowing of $130 million of new fixed rate mortgage debt
and a reduction from $59 million to $17 million of borrowings under the
Company's credit facility.
The resulting income before extraordinary items would have increased from
$14 million to $22 million, an increase of 57%. Earnings per share would have
decreased from $1.51 to $1.26, a decrease of 17%, due to the dilutive effect of
the additional shares issued as a result of the Offering and the Proposed
Merger.
FFO would have increased from $27 million to $45 million, an increase of
67%, while net cash provided by operating activities would have increased from
$27 million to $46 million, an increase of 70%, as a result of the additional
FFO generated by the Doubletree Hotels and reduced interest cost arising from
the use of proceeds from the Offering. Net cash used for investing activities
would have increased from $5 million to $10 million, an increase of 100%, due to
an increased capital expenditure reserve relating to the Doubletree Hotels. Net
cash used for financing activities would have increased from $20 million to $33
million, an increase of 65%, due to increased dividends for the additional
Common Shares outstanding as a result of the Offering and consummation of the
Proposed Merger.
S-33
<PAGE> 36
BMC
The pro forma information is summarized below:
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------------------- -----------------------------
BMC WITH THE BMC WITH THE
BMC DOUBLETREE HOTELS BMC DOUBLETREE HOTELS
-------- ----------------- -------- -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL INFORMATION
Revenues.............. $110,416 $ 221,243 $ 89,400 $ 173,741
-------- -------- ------- --------
Expenses:
Operating Expenses.... 74,292 154,157 58,822 118,755
Cost of goods sold of
non hotel
operations.......... 1,686 1,686 484 484
Percentage Lease
expense.......... 33,268 62,942 28,229 51,587
-------- -------- ------- --------
Total
Expenses.. 109,246 218,785 87,535 170,826
-------- -------- ------- --------
Net income............ $ 1,170 $ 2,458 $ 1,865 $ 2,915
======== ======== ======= ========
</TABLE>
Comparison of Pro Forma Results for the Nine Months Ended September 30,
1997
Revenues would have grown from $89 million to $174 million, an increase of
96%, due to the additional revenues which would have been generated by the
Doubletree Hotels.
Operating expenses would have increased from $59 million to $119 million,
an increase of 102%, to reflect the additional expenses of the Doubletree
Hotels, and base and incentive management fee payments to the Doubletree
Manager, who will manage the hotels for Westboy under the Doubletree Management
Agreement. Percentage Lease expense would have increased from $28 million to $52
million, an increase of 86%, to reflect the additional rent payable under the
Doubletree Percentage Lease.
The resulting net income would have increased from $1.9 million to $2.9
million, an increase of 53%.
Comparison of Pro Forma Results for Year Ended December 31, 1996
Revenues for BMC would have grown from $110 million to $221 million, an
increase of 100%, due to the additional revenues which would have been generated
by the Doubletree Hotels.
Operating expenses would have increased from $74 million to $154 million,
an increase of 108%, reflecting the additional expenses of the Doubletree Hotels
and base and incentive management fee payments to the Doubletree Manager.
Percentage Lease expense would have increased from $33 million to $63 million,
an increase of 91%, reflecting the additional rent payable under the Doubletree
Percentage Lease.
The resulting net income would have increased from $1.2 million to $2.5
million, an increase of 108%.
LIQUIDITY AND CAPITAL RESOURCES
On October 15, 1997 the Company's Credit Facility was amended to increase
the maximum amount of borrowings from $75 million to $150 million. As of
February 18, 1998, $96.8 million was outstanding under the Credit Facility. The
Company expects to obtain a commitment for a new unsecured credit facility of up
to $200 million, to be available on completion of the Proposed Merger. The
Company also expects to obtain a commitment for a $130 million 10-year term loan
(the "Fixed Rate Note") secured by the Doubletree Hotels, with a rate of
interest to be fixed at a spread over the 10-year United States Treasury Bond
upon closing of the loan. Interest only will be paid for the first two years,
with principal repayments commencing in the third loan year based on a 23-year
amortization schedule. The Company anticipates that the Fixed Rate Note and new
credit facility will enable the Company to finance the Proposed Merger and to
meet its anticipated cash needs for the next year.
S-34
<PAGE> 37
The Company is undertaking the Offering to obtain a more conservative
capital structure and provide additional capacity for future acquisitions. The
Company plans to borrow $130 million under the Fixed Rate Note at the time of
the closing of the Proposed Merger to include a level of fixed interest rate
debt in the Company's capital structure. The Company estimates that on a pro
forma basis giving effect to the Offering, the closing of the Proposed Merger,
and the borrowings under the Fixed Rate Note and the new credit facility, the
Company would have approximately $184 million in outstanding indebtedness and
available borrowing capacity under the credit facility of $146 million.
BUSINESS AND PROPERTIES
THE HOTEL INDUSTRY
The hotel industry continues to benefit from strong demand growth and
limited supply, particularly in the upscale and moderate full service segments.
In its 1998 National Lodging Forecast, the E&Y Kenneth Leventhal Real Estate
Group of Ernst & Young LLP estimates that 1997 industry profits were a record
$15 billion, driven by estimated industry-wide ADR increases of approximately
7.1%, to $75. New supply, most of which was concentrated in the extended stay
and limited service sectors, outpaced demand growth for only the first time
since the beginning of the decade, and industry-wide average occupancy declined
slightly to 64.8% from 65.2%. The E&Y Kenneth Leventhal Real Estate Group
forecasts that industry-wide ADR will grow to $80 and $84 in 1998 and 1999,
respectively. Industry-wide occupancy is forecast to decrease slightly to 64.3%
and 63.5% in 1998 and 1999, respectively, resulting in REVPAR growth of 5.8% in
1998 and 3.7% in 1999, as shown in the graph below. The E&Y Kenneth Leventhal
Real Estate Group indicates that estimated 1997 occupancy of 69.4% for the full
service segment exceeded the industry average by 4.6 percentage points. The E&Y
Kenneth Leventhal Real Estate Group also states that while modest supply
increases are expected, the full service segment is expected to remain healthy
and post strong average daily rate advances in 1998.
HISTORICAL AND PROJECTED U.S.
REVENUE PER AVAILABLE ROOM (REVPAR)
<TABLE>
<CAPTION>
[Bar Chart]
<S> <C>
1993 $38.42
1994 $40.71
1995 $42.83
1996 $45.71
1997 $48.60
1998 $51.44
1999 $53.34
</TABLE>
Source: Smith Travel Research (1993-1996); E&Y Kenneth Leventhal Real Estate
Group (1997-1999)
THE HOTELS
Each of the Hotels is under the direction of a general manager and an
executive committee, which are accountable for and are compensated in part based
on the property's performance. This group oversees day-to-day operations and
develops annual budgets and marketing, long-term capital and human resource
development plans. Each Hotel is responsible for developing its own marketing
plan. These plans are comprehensive,
S-35
<PAGE> 38
analyzing local market conditions and the hotel's competition, determining hotel
positioning, identifying consumer needs and outlining marketing objectives and
strategies. Each plan is evaluated quarterly by the applicable lessee to
maintain effectiveness under changing market conditions.
The Company's lessees stress first-rate financial management and
comprehensive revenue reporting. All hotel departments, including rooms, food
and beverage, accounting, sales and marketing, engineering and human resources,
receive regular on-site performance reviews and have open lines of communication
directly to the lessee's management. These performance reviews enable the lessee
to maintain an in-depth understanding of the hotel's marketing opportunities and
ensure that the Company's properties receive direction to enable on-site
management to maximize profits.
The following tables set forth certain information with respect to the
Hotels:
<TABLE>
<CAPTION>
MONTH/YEAR NUMBER OF
PROPERTY ACQUIRED(1) ROOMS LESSEE
- ---------------------------------------------------------------- -------------- --------- ----------
<S> <C> <C> <C>
Cleveland Marriott East......................................... November 1977 403 BMC
Marriott's Hunt Valley Inn...................................... July 1997 392 Davidson
Cleveland Airport Marriott...................................... November 1970 375 BMC
Buffalo Marriott................................................ March 1981 356 BMC
Columbus North Marriott......................................... June 1981 300 BMC
Berkeley Marina Radisson........................................ December 1972 373 BMC
Daytona Beach Radisson Resort................................... March 1997 206 BMC
Radisson Inn Sanibel Gateway.................................... December 1986 157 BMC
Holiday Inn Minneapolis West.................................... July 1997 196 CapStar
Holiday Inn Crabtree............................................ March 1997 176 BMC
Lake Norman Holiday Inn......................................... February 1996 119 BMC
Hampton Inn San Diego Airport/Sea World......................... November 1997 199 Outrigger
Lake Norman Hampton Inn......................................... February 1996 117 BMC
Doubletree Hotel Kansas City.................................... November 1997 388 CapStar
Melbourne Quality Suites........................................ December 1986 208 BMC
Melbourne Hilton Oceanfront..................................... March 1997 118 BMC
French Lick Springs Resort...................................... April 1997 485 BMC
</TABLE>
<TABLE>
<CAPTION>
ROOM REVENUES
AVERAGE OCCUPANCY AVERAGE DAILY RATE PER AVAILABLE ROOM
-------------------------------- -------------------------------- --------------------------------
NINE MONTHS NINE MONTHS NINE MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED ENDED
PROPERTY/LOCATION 12/31/96 9/30/96 9/30/97 12/31/96 9/30/96 9/30/97 12/31/96 9/30/96 9/30/97
- ------------------------ ---------- ------- ------- ---------- ------- ------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cleveland Marriott East
Cleveland, Ohio....... 73.7% 75.9% 76.3% $ 95.41 $ 96.02 $105.04 $70.35 $ 72.89 $ 80.16
Marriott's Hunt Valley
Inn
Baltimore, Maryland... 63.3% 64.5% 67.7% $ 79.98 $ 79.84 $ 86.12 $50.65 $ 51.50 $ 58.29
Cleveland Airport
Marriott
Cleveland, Ohio....... 72.8% 75.4% 72.6% $ 91.09 $ 91.20 $ 98.32 $66.31 $ 68.75 $ 71.38
Buffalo Marriott
Buffalo, New York..... 75.1% 75.5% 79.1% $ 93.84 $ 94.60 $ 97.61 $70.50 $ 71.40 $ 77.24
Columbus North Marriott
Columbus, Ohio........ 75.7% 77.4% 77.1% $ 89.29 $ 88.80 $ 97.23 $67.60 $ 68.77 $ 74.99
Berkeley Marina Radisson
Berkeley,
California............ 85.8% 86.9% 89.2% $ 103.11 $103.08 $109.89 $88.50 $ 89.57 $ 98.06
Daytona Beach Radisson
Resort
Daytona Beach,
Florida............... (2) (2) (2) (2) (2) (2) (2) (2) (2)
Radisson Inn Sanibel
Gateway
Fort Myers, Florida... 78.5% 81.4% 76.9% $ 67.74 $ 72.10 $ 74.38 $53.18 $ 58.73 $ 57.22
Holiday Inn Minneapolis
West
Minneapolis,
Minnesota............. 61.2% 62.6% 62.0% $ 75.15 $ 75.43 $ 78.15 $46.00 $ 47.19 $ 48.45
</TABLE>
S-36
<PAGE> 39
<TABLE>
<CAPTION>
ROOM REVENUES
AVERAGE OCCUPANCY AVERAGE DAILY RATE PER AVAILABLE ROOM
-------------------------------- -------------------------------- --------------------------------
NINE MONTHS NINE MONTHS NINE MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED ENDED
PROPERTY/LOCATION 12/31/96 9/30/96 9/30/97 12/31/96 9/30/96 9/30/97 12/31/96 9/30/96 9/30/97
- ------------------------ ---------- ------- ------- ---------- ------- ------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Holiday Inn Crabtree
Raleigh, North
Carolina.............. 77.5% 74.6% 70.6% $ 68.27 $ 66.59 $ 71.38 $52.91 $ 49.70 $ 50.39
Lake Norman Holiday Inn
Charlotte, North
Carolina.............. 69.9% 72.1% 76.5% $ 69.15 $ 69.09 $ 68.76 $48.34 $ 49.78 $ 52.57
Hampton Inn San
Diego/Sea World
San Diego,
California............ 70.4% 73.3% 78.3% $ 39.40 $ 40.73 $ 45.65 $27.74 $ 29.84 $ 35.74
Lake Norman Hampton Inn
Charlotte, North
Carolina.............. 73.1% 75.5% 80.5% $ 63.17 $ 62.45 $ 66.29 $46.19 $ 47.15 $ 53.38
Doubletree Hotel Kansas
City
Kansas City,
Missouri.............. (3) (3) (3) (3) (3) (3) (3) (3) (3)
Melbourne Quality Suites
Melbourne, Florida.... 74.1% 77.7% 80.5% $ 79.90 $ 81.32 $ 83.89 $59.17 $ 63.22 $ 67.57
Melbourne Hilton
Oceanfront
Melbourne, Florida.... 74.2% 76.1% 84.6% $ 75.81 $ 76.71 $ 78.88 $56.28 $ 58.37 $ 66.70
French Lick Springs
Resort
French Lick,
Indiana............... 33.7% 34.7% 36.6% $ 73.61 $ 73.53 $ 77.99 $24.79 $ 25.53 $ 28.54
Total
Weighted average...... 68.7% 70.3% 71.7% $ 82.84 $ 83.17 $ 88.39 $56.93 $ 58.45 $ 63.35
</TABLE>
- ---------------
(1) Indicates the month and year the property was acquired by the Company or an
Affiliate or predecessor of the Company.
(2) The Company purchased the Whitehall Inn property located in Daytona Beach,
Florida in March 1997. The Company opened the property in January 1998
following extensive renovations.
(3) Reopened in April 1997 after a major reconstruction.
THE PERCENTAGE LEASES
The following table sets forth (i) the Percentage Rent formulas, (ii) the
annual Minimum Rent and (iii) the pro forma Percentage Rent and total rent that
would have been paid for each Hotel pursuant to the terms of the Percentage
Leases based upon pro forma revenues for the 12 months ended September 30, 1997
as if the Company had owned the Hotels and the Percentage Leases had been in
effect since January 1, 1996 (dollar amounts in thousands).
<TABLE>
<CAPTION>
FOR THE TWELVE
MONTHS ENDED
FOOD & SEPTEMBER 30, 1997
BEVERAGE ------------------
ANNUAL ROOMS & OTHER PERCENTAGE PRO FORMA
MINIMUM PERCENTAGE RENT ANNUAL
HOTEL RENT RENT FORMULA(1) FORMULA(1) RENT(2)
- --------------------------- ------- ---------------------------------------------- ---------- ------------------
<S> <C> <C> <C> <C>
Cleveland Marriott East $3,173 32% from $0 to $7,949 6% $5,447
50% from $7,949 to $10,220
70% over $10,220
Marriott's Hunt Valley Inn $3,192 (4) 35% from $1,178 to $6,957 10% $3,854
50% from $6,957 to $7,852
70% over $7,852
Cleveland Airport Marriott $2,879 33% from $0 to $7,177 6% $4,347
52.5% from $7,177 to $9,228
70% over $9,228
Buffalo Marriott $2,700 31% from $0 to $6,021 6% $4,568
45% from $6,021 to $9,032
70% over $9,032
Columbus North Marriott $2,070 30% from $0 to $5,549 6% $3,646
45% from $5,549 to $7,134
70% over 7,134
</TABLE>
S-37
<PAGE> 40
<TABLE>
<CAPTION>
FOR THE TWELVE
MONTHS ENDED
FOOD & SEPTEMBER 30, 1997
BEVERAGE ------------------
ANNUAL ROOMS & OTHER PERCENTAGE PRO FORMA
MINIMUM PERCENTAGE RENT ANNUAL
HOTEL RENT RENT FORMULA(1) FORMULA(1) RENT(2)
- --------------------------- ------- ---------------------------------------------- ---------- ------------------
<S> <C> <C> <C> <C>
Berkeley Marina Radisson $5,463 35% from $0 to $8,815 6% $6,627
50% from $8,815 to $11,754
75% over $11,754
Daytona Beach $1,059 29% from $0 to $3,563 6% (3)
Radisson Resort(3) 60% from $3,563 to $4,453
69% over $4,453
Radisson Inn $ 777 25% from $0 to $1,970 6% $1,059
Sanibel Gateway 45% from $1,970 to $2,955
65% over $2,955
Holiday Inn $1,879 45% from $425 to $2,400 for rooms 10% $1,864
Minneapolis West 60% from $2,400 to $3,600 for rooms
68% over $3,600 for rooms
10% for other revenues
Holiday Inn Crabtree $ 830 25% from $0 to $1,676 6% $1,387
40% from $1,676 to $3,016
70% over $3,016
Lake Norman Holiday Inn $ 609 30% from $0 to $1,588 6% $ 969
50% $1,588 to $2,042
75% over 2,042
Hampton Inn San Diego $ 960 (4) 30% from 570 to 2,018 10% $ 991
Airport/Sea World 65% from 2,018 to 3,086
80% over 3,086
Lake Norman $ 546 30% from $0 to $1,166 6% $ 935
Hampton Inn 45% from $1,166 to $1,825
65% over $1,825
Doubletree Hotel $2,400 (4) 12% from $0 to $4,076 for rooms 10% (5)
Kansas City 30% from $4,076 to $8,153 for rooms
65% over $8,153 for rooms
10% for other revenues
Melbourne $1,366 35% from $0 to $3,505 6% $2,185
Quality Suites 50% from $3,505 to $4,507
75% over $4,507
Melbourne Hilton Oceanfront $ 732 34% from $673 to $1,347 6% $1,255
45% from $1,347 to $2,020
75% over $2,020
French Lick $3,000 75% over $5,131 for rooms -- $3,000
Springs Resort(6) 35% over $3,082 for other revenues
5% over $4,788 for food and beverage revenues
</TABLE>
- ---------------
(1) Shown as a percentage of revenues.
(2) Calculated on a pro forma basis by applying the rent provisions in the
Percentage Leases to pro forma revenues of the Hotels for the 12 month
period.
(3) This facility was closed for renovation in March 1997 and reopened in
January 1998.
(4) Minimum rent is increased under certain circumstances to provide the Company
with a minimum return on its equity investment in the joint venture.
(5) The hotel was closed for renovation during most of the 12 month period ended
September 30, 1997.
(6) Both Annual Minimum Rent and Percentage Rent are payable under the
Percentage Lease for this hotel.
The Percentage Leases have the terms described below. The Company expects
that leases with respect to its future hotel property investments will have
substantially similar terms, although the Board of Directors may alter any of
these terms. 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 the Company's Registration Statement on
Form S-11 (Registration Statement No. 333-6341, filed on June 19, 1996, as
amended (the "S-11 Registration Statement")).
S-38
<PAGE> 41
Duration. The Percentage Leases have noncancelable remaining terms ranging
from three to ten years, subject to earlier termination on the occurrence of
certain contingencies described in the Percentage Leases. Except for the
Percentage Leases with Davidson and CapStar and the Doubletree Percentage Lease,
the Percentage Leases do not contain renewal terms. The right to extend the term
of the Percentage Lease with Davidson, CapStar, and Doubletree, is subject to
agreement between the parties regarding market terms.
Amounts Payable Under the Percentage Leases. The lessees are obligated to
pay (i) 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); and (ii) certain other amounts, including interest accrued
on any late payment or charge (the "Additional Charges"). Minimum Rent is a
fixed amount determined by negotiation between the Company and the applicable
lessee (except in certain cases, as reflected in the table presented above).
Percentage Rent is calculated by multiplying fixed percentages by gross room and
other revenue and gross food and beverage revenue, over specified threshold
amounts. Minimum Rent is payable monthly in advance, and Percentage Rent is
payable for each quarter within 30 days after the end of the quarter. Both the
threshold gross room and other revenue amounts used in computing Percentage Rent
and Minimum Rent are adjusted annually for changes in the Consumer Price Index.
Each Percentage Lease requires the lessee to pay rent, all costs and
expenses, and all utility and other charges incurred in the operation of the
hotel. All capital expenditures (as defined in the lease) are the responsibility
of the Company. Each Percentage Lease also provides for rent reductions and
abatements in the event of damage or destruction or a partial taking of the
hotel. The lessee is required to carry insurance to cover rental interruption
for a period at least one year.
Maintenance and Modifications. The lessee is required to maintain the
hotel in good order and repair and to make the nonstructural repairs necessary
therefor. The Company funds capital expenditures and the repair, replacement and
refurbishment of FF&E in the hotel, when and as considered necessary by the
Company and as required by the franchises, and maintains a capital expenditures
reserve to help provide funds to cover such expenses. The Company reserves
annually an amount equal to 4% of the gross revenues generated from the Hotels.
See "The Company--Business and Growth Strategies--Renovation Strategy."
For as long as BMC maintains its interior design and purchasing operations,
it will perform interior design and purchasing services for the hotels leased to
BMC at a discount from its normal rates.
Insurance and Property Taxes. The Company pays real estate and personal
property taxes and maintains property insurance, including casualty insurance,
on the Hotels, except for the Doubletree Hotel Kansas City and Hampton Inn San
Diego Airport/Sea World Hotels, for which the lessee bears that responsibility.
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 the Company named as an additional insured. The Company believes that the
insurance coverage carried by each Hotel is adequate in scope and amount.
Indemnification. Under each Percentage Lease, the lessee indemnifies the
Company against all liabilities, costs and expenses (including reasonable
attorneys' fees and disbursements) incurred by, imposed on or asserted against
the Partnership, on account of, among other things, (i) any accident or injury
to person or property on or about the hotel; (ii) any negligence by the lessee
or any of its agents as to the leased property; (iii) in the case of the Initial
Hotels, any environmental liability resulting from conditions existing at the
time of completion of the Initial Offering or caused or resulting thereafter
from any action, inaction or negligence of BMC (See "-- Environmental Matters");
(iv) taxes and assessments in respect of the hotel (other than real estate taxes
and income taxes of the Company on income attributable to the hotel); (v) the
sale or consumption of alcoholic beverages on or in the real property or
improvements thereon; or (vi) any breach of the lease by the lessee. The lessee
is not required, however, to indemnify the Company against the Company's
negligence or willful misconduct.
Assignment and Subleasing. The lessee is not permitted to sublet all or
any part of the hotel or to assign its interest under the lease without the
prior written consent of the Company. The lessee may, however, enter into a
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management agreement with a third party for the management and operation of the
hotel, with the consent of the Company, which the Company may withhold in its
sole and absolute discretion. The lease may not be directly or indirectly sold
by selling direct (or, in most cases, indirect) ownership or control of the
lessee without causing a default under the lease.
Events of Default. Events of default under each Percentage Lease include,
among others, the failure by the lessee to pay Minimum Rent when due and the
continuation of that failure for a period of 10 days, the failure by the lessee
to pay the Percentage Rent for any quarter within 10 days after the end of that
quarter, the failure by the lessee to observe or perform any other term of the
lease and the continuation of that failure beyond any applicable cure period, an
event of default under any other Percentage Lease to which the lessee is a
party, termination of the franchise agreement covering any hotel leased to the
lessee, and with respect to BMC, any failure to comply with BMC's covenants
regarding distributions and maintenance of its net worth, as described under
"Lessees--BMC," and any failure by Robert and John Boykin and their heirs to
own, collectively, at least 51% of BMC or otherwise to control BMC.
If an event of default occurs and continues beyond any curative period, in
the case of BMC as lessee, the Company 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 occurs and continues
beyond any curative period, in the case of lessees other than BMC, the Company
may terminate the lease and the lessee will be required to surrender possession
of the affected hotel.
Franchise Agreements. The lessee, or in certain cases a third party
management company, will be the franchisee under the franchise agreements for
the hotels leased to the lessee.
Doubletree Percentage Lease. Westboy, a subsidiary of BMC, has entered
into a Percentage Lease for the Doubletree Hotels. If the Proposed Merger does
not occur, the Red Lion Partnership has the right to cause Westboy to assign the
Doubletree Percentage Lease and Westboy has the right, if the Red Lion
Partnership does not exercise that right, to terminate the lease. The assignment
or the termination, as applicable, would be effective on December 31, 1998. A
copy of the Doubletree Percentage Lease was filed as an exhibit to the Company's
Form 8-K filed on January 9, 1998. The Doubletree Percentage Lease is like the
other Percentage Leases described above, except that (i) its duration is subject
to different terms, (ii) it requires that 3% of gross revenues be spent on
capital improvements at the direction of the lessee or of any manager engaged by
the lessee, that 1% of gross revenues be spent on capital improvements at the
discretion of the lessor (subject to certain limited exceptions), and that the
Company spend an additional $10 million on capital improvements at the
Doubletree Hotels by June 30, 2000 and (iii) it limits the amount of mortgage
debt that may be placed on the Doubletree Hotels.
FRANCHISE AGREEMENTS
Five of the 17 Hotels are licensed by Marriott International, Inc. Of the
12 remaining Hotels, one is licensed by Doubletree Corporation, two by Promus
Hotels, Inc. (licensor of Hampton Inn hotels), one by Choice Hotels
International, Inc. (licensor of Quality Suites hotels), three by Radisson
Hotels International, Inc., three by Holiday Inns Franchising, Inc. and one by
Hilton Inns, Inc. The French Lick Springs Resort has no franchise affiliation.
The Company anticipates that most of the additional hotel properties in
which it invests will be operated under franchise agreements. The Company
believes that the public's perception of quality associated with a franchisor
can be an important feature in the operation of a hotel. Franchisors provide a
variety of benefits for franchisees, including national advertising, publicity,
and other marketing programs designed to increase brand awareness, training of
personnel, continuous review of quality standards, and centralized reservation
systems. The franchise agreements generally impose certain management,
operational, recordkeeping, accounting, reporting and marketing standards and
procedures with which the franchised operator must comply. See "Risk Factors --
Hotel Industry Risks -- Franchise Risks."
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Termination. Each franchise agreement gives the operator the right to
operate the franchised hotel under a franchise for a period of years specified
in that agreement. The operator is responsible for making all payments to the
franchisor under the franchise agreements. The expiration dates for the Hotels'
franchise agreements range from October 7, 2001 to January 8, 2018. The
franchise agreements provide for early termination at the franchisor's option on
the occurrence of certain events of default.
Sale of Hotel. The franchise agreements with Marriott and Hilton contain a
provision requiring the franchisee, on receiving a bona fide offer to buy or
lease the franchised hotel, to give the franchisor the option to buy or lease
(as applicable) that hotel on the same terms as are contained in that offer. The
Choice Hotel franchise agreement provides that the agreement automatically
terminates on transfer of the franchised hotel unless the franchisor expressly
consents to that transfer. The Hampton Inn license agreement provides that a
transferee of the licensed hotel must apply for a new franchise and that
transfers not specifically authorized under the license agreement are void and
are also a breach of the license agreement. The Holiday Inn license agreement
provides that a transferee of the hotel must apply for a new license unless the
franchisor has given its prior written consent to the transfer of the hotel.
Noncompetition. The franchise agreements for the Company's five Marriott
hotels prohibit the franchisee from being connected or associated in any manner
with any hotel, motel or inn business within a five-mile radius around the
franchised hotel. These restrictions can be waived by Marriott, whose waiver may
not be unreasonably withheld. If a franchise agreement is terminated because of
a default by the lessee, the lessee may not, for 24 months after termination,
operate any motel, hotel or inn business (other than those in which it is then
engaged) that is in the five-mile radius trade area.
Fees. Under the franchise agreements, the lessees 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.
HAMPTON INN(R) IS A REGISTERED TRADEMARK OF PROMUS HOTELS, INC. PROMUS HOTELS,
INC., HAS NOT ENDORSED OR APPROVED THE OFFERING. A GRANT OF A HAMPTON INN
FRANCHISE LICENSE FOR ANY HOTEL IS NOT INTENDED AS, AND SHOULD NOT BE
INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY PROMUS HOTELS,
INC. (OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE
PARTNERSHIP OR THE COMMON SHARES OFFERED HEREBY.
NEITHER HOLIDAY INNS, INC., HOLIDAY INNS FRANCHISING, INC., NOR ANY PARENT,
SUBSIDIARY, DIVISION OR AFFILIATE OF EITHER HAS ENDORSED OR APPROVED THE
OFFERING OR THIS PROSPECTUS SUPPLEMENT. THE GRANT OF A HOLIDAY INN(R) LICENSE
AGREEMENT BY HOLIDAY INNS FRANCHISING, INC. WITH RESPECT TO ANY HOTEL IS NOT
INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR
ENDORSEMENT BY HOLIDAY INNS, INC. OR HOLIDAY INNS FRANCHISING, INC. (OR ANY SUCH
PARENT, SUBSIDIARY, DIVISION OR AFFILIATE) OF THE COMPANY OR THE SALE OF THE
COMMON SHARES TO PROSPECTIVE INVESTORS AS DESCRIBED IN THIS PROSPECTUS
SUPPLEMENT.
MARRIOTT(R) HOTEL IS A REGISTERED TRADEMARK OF MARRIOTT INTERNATIONAL, INC.
("MARRIOTT"). MARRIOTT HAS NOT ENDORSED OR APPROVED THE OFFERING. A GRANT OF A
MARRIOTT HOTEL FRANCHISE FOR ANY OF THE HOTELS IS NOT INTENDED AS, AND SHOULD
NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY MARRIOTT
(OR ANY OF ITS SUBSIDIARIES, AFFILIATES OR DIVISIONS) OF THE COMPANY, THE
PARTNERSHIP OR THE COMMON SHARES OFFERED HEREBY.
QUALITY SUITES INN(R) IS A REGISTERED TRADEMARK OF CHOICE HOTELS INTERNATIONAL,
INC. CHOICE HOTELS INTERNATIONAL, INC. HAS NOT ENDORSED OR APPROVED THE
OFFERING. A GRANT OF A QUALITY SUITES INN FRANCHISE LICENSE FOR ANY HOTEL IS NOT
INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR
ENDORSEMENT BY CHOICE HOTELS INTERNATIONAL, INC. (OR ANY OR ITS AFFILIATES,
SUBSIDIARIES OR
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DIVISIONS) OF THE COMPANY OR THE PARTNERSHIP OR THE COMMON SHARES OFFERED
HEREBY.
RADISSON INN(R) IS A REGISTERED TRADEMARK OF RADISSON HOTELS INTERNATIONAL, INC.
RADISSON HOTELS INTERNATIONAL, INC. HAS NOT ENDORSED OR APPROVED THE OFFERING. A
GRANT OF A RADISSON INN FRANCHISE LICENSE FOR ANY HOTEL IS NOT INTENDED AS, AND
SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY
RADISSON HOTELS INTERNATIONAL, INC. (OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR
DIVISIONS) OF THE COMPANY OR THE PARTNERSHIP OR THE COMMON SHARES OFFERED
HEREBY.
HILTON(R) AND THE STYLIZED H(R) ARE REGISTERED TRADEMARKS OF HILTON HOTELS
CORPORATION ("HILTON HOTELS"). NEITHER HILTON INNS, INC. ("HILTON INNS") NOR
HILTON HOTELS, NOR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, AGENTS OR
EMPLOYEES (COLLECTIVELY, THE "HILTON ENTITIES") SHALL IN ANY WAY BE DEEMED AN
ISSUER OR UNDERWRITER OF THE COMMON SHARES OFFERED HEREBY, NOR HAS ANY OF THE
HILTON ENTITIES ENDORSED, OR APPROVED, THE OFFERING. THE HILTON ENTITIES HAVE
NOT ASSUMED, AND SHALL NOT HAVE ANY LIABILITY OR RESPONSIBILITY FOR, ANY
FINANCIAL STATEMENTS OR OTHER FINANCIAL INFORMATION CONTAINED HEREIN, OR ANY
PROSPECTUS OR PROSPECTUS SUPPLEMENT, OR ANY WRITTEN, OR ORAL, COMMUNICATIONS
REGARDING THE SUBJECT MATTER HEREOF. A GRANT OF A HILTON INNS FRANCHISE LICENSE
FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS,
EITHER AN EXPRESS, OR IMPLIED, APPROVAL OR ENDORSEMENT BY ANY OF THE HILTON
ENTITIES (OR ANY OF THEIR AFFILIATES, SUBSIDIARIES OR DIVISIONS), OF THE COMPANY
OR THE COMMON SHARES OFFERED HEREBY.
DOUBLETREE HOTELS(R) IS A REGISTERED TRADEMARK OF DOUBLETREE CORPORATION.
DOUBLETREE CORPORATION HAS NOT ENDORSED OR APPROVED THE OFFERING. A GRANT OF A
DOUBLETREE FRANCHISE LICENSE FOR ANY HOTEL IS NOT INTENDED AS, AND SHOULD NOT BE
INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY DOUBLETREE
CORPORATION (OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY
OR THE PARTNERSHIP OR THE COMMON SHARES OFFERED HEREBY.
See "The Company -- Recent Developments -- Proposed Merger" and "Risk
Factors -- Doubletree Management Agreement Risks" for a discussion of certain
features of the Doubletree Management Agreement that may affect the Company if
the Proposed Merger is consummated.
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. The Company, the Partnership or a lessee, as the case may be,
may be potentially liable for such costs or claims in connection with the
ownership and operation of the Hotels and hotels acquired by the Company in the
future.
Groundwater contamination is present at one property used previously as
part of a municipal landfill. Although the Company does not believe that the
contamination will result in any material obligation or liability being imposed
on the Company, no assurance can be given that the Company will not be required
to undertake, or contribute to the cost of, remedial activities, or that
operations at the property would not be disrupted by any remedial activity.
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Neither the Company nor, to the knowledge of the Company, any other entity
with an interest in any of the Hotels, has been notified by any governmental
authority, or is otherwise aware, of any material noncompliance, liability or
claim relating to hazardous or toxic substances or to other environmental
matters in connection with any of the 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 are located which could
create a material environmental liability. Further, there can be no assurance
that the hotels that the Company may acquire, including the Doubletree Hotels,
will not give rise to any material environmental liability. See "Risk
Factors--Potential Environmental Liability."
THE INTERCOMPANY CONVERTIBLE NOTE
The Company loaned approximately $40 million of the net proceeds of the
Initial Offering to the Partnership. The loan is evidenced by the Intercompany
Convertible Note, which matures on November 4, 2001. Interest accrues at a rate
equal to 9.5% per annum, increasing to 9.75% per annum on November 4, 1999, and
is payable quarterly. The Intercompany Convertible Note may be prepaid in full,
but not in part, at any time. The Company has the right to convert the
Intercompany Convertible Note after November 4, 1998, and prior to maturity and
in advance of any proposed prepayment by the Partnership, into additional equity
interests in the Partnership at face value based on the $20.00 per share initial
offering price of the Common Shares in the Initial Offering (assuming that the
value of one Partnership Unit equals the value of one Common Share). On
conversion of the Intercompany Convertible Note, the Company would receive an
additional equity interest in the Partnership of 0.9%, which will reduce the
equity interest in the Partnership of the other holders of Units to 7.0%, after
giving effect to the Offering and the use of the net proceeds therefrom and to
the Proposed Merger, assuming no other Common Shares or Units are issued prior
to that conversion. The Intercompany Convertible Note is secured by a mortgage
on two of the Hotels and is subordinated in right of payment to all other
indebtedness of the Partnership.
The Intercompany Convertible Note is guaranteed by certain Boykin Group
Affiliates and by certain other partners of the Partnership. The existence of
the Intercompany Convertible Note may assist certain of the Partnership's
limited partners in continuing the tax deferral inherent in the leveraged assets
they contributed to the Partnership in connection with the Initial Offering
because, pursuant to Section 752(a) of the Code, any increase in a partner's
share of partnership liabilities is treated as a cash contribution by the
partner to the partnership, thereby increasing the partner's tax basis in his
partnership interest. The Company is unable to predict whether the Intercompany
Convertible Note will be converted or when any such conversion would occur. Any
determination regarding conversion will be made by the Independent Directors.
Although the yield on the Intercompany Convertible Note currently exceeds the
yield on the equity in the Partnership, the Company has not relied on the
incremental cash flow in setting its dividend rate. There should be no negative
federal income tax consequences to the shareholders of the Company resulting
from the conversion (or lack of conversion) of the Intercompany Convertible
Note.
LEGAL PROCEEDINGS
Neither the Company nor the Partnership is currently involved in any
material litigation nor, to the Company's knowledge, is any material litigation
currently threatened against the Company or the Partnership.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion supplements, and supersedes when so indicated, the
discussion under the heading "Federal Income Tax Considerations" in the
accompanying Prospectus.
TAX ASPECTS OF THE COMPANY'S INVESTMENT IN THE PARTNERSHIP AND CERTAIN JOINT
VENTURES -- DEPRECIATION DEDUCTIONS AVAILABLE TO THE PARTNERSHIP
Subsequent to the date of the accompanying Prospectus, the Partnership has
purchased additional properties. As a result of these purchases, the discussion
contained in "Tax Aspects of the Company's Investment in the
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<PAGE> 46
Partnership and Certain Joint Ventures -- Depreciation Deductions Available to
the Partnership" is no longer relevant.
TAXATION OF TAXABLE US SHAREHOLDERS
Subsequent to the date of the accompanying Prospectus, the IRS issued
guidance on how certain changes to the Code, with respect to taxation of
long-term capital gains earned by taxpayers other than a corporation, apply to
REIT shareholders. On November 10, 1997, the IRS issued Notice 97-64 to describe
how regulated investment companies ("RICs"), REITs, and their shareholders must
apply the capital gain provisions of the 1997 Act to their capital gains
dividends. RICs, REITs, and their shareholders must use the guidance in Notice
97-64 until further guidance is issued. Under this Notice, if the Company
designates a dividend as a capital gain dividend (or makes a capital gains
designation for an undistributed amount), it may also designate the dividend (or
undistributed amount) as a 20% rate gain distribution, an unrecaptured Section
1250 gain distribution, or a 28% rate gain distribution. If no additional
designation is made regarding a capital gain dividend (or undistributed amount),
it will be treated as a 28% rate gain distribution.
NEW WITHHOLDING REGULATIONS
Subsequent to the date of the accompanying Prospectus, final regulations
dealing with withholding tax on income paid to foreign persons and related
matters (the "New Withholding Regulations") were promulgated. In general, the
New Withholding Regulations do not significantly alter the substantive
withholding and information reporting requirements, but unify current
certification procedures and forms and clarify reliance standards. For example,
the New Withholding Regulations adopt a certification rule which was in the
proposed regulations under which a foreign shareholder who wishes to claim the
benefit of an applicable treaty rate with respect to dividends received from a
U.S. corporation will be required to satisfy certain certification and other
requirements. In addition, the New Withholding Regulations require a corporation
that is a REIT to treat as a dividend the portion of a distribution that is not
designated as a capital gain dividend or return of basis and apply the 30%
withholding tax (subject to any applicable deduction or exemption) to such
portion, and to apply the FIRPTA withholding rules (discussed in the
accompanying Prospectus) with respect to the portion of the distribution
designated by the REIT as capital gain dividend. The New Withholding Regulations
will generally be effective for payments made after December 31, 1998. EXCEPT
FOR THIS PARAGRAPH, THE DISCUSSION SET FORTH IN THE ACCOMPANYING PROSPECTUS
UNDER "FEDERAL INCOME TAX CONSIDERATIONS -- TAXATION OF FOREIGN STOCKHOLDERS"
DOES NOT TAKE THE NEW WITHHOLDING REGULATIONS INTO ACCOUNT. PROSPECTIVE NON-U.S.
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
IMPACT OF THE NEW WITHHOLDING REGULATIONS.
POLICIES AND OBJECTIVES WITH RESPECT
TO CERTAIN ACTIVITIES
The following supplements the discussion of the Company's internal growth,
acquisition, development and financing strategies set forth in "The
Company--Business and Growth Strategies." The Company's policies with respect to
those activities and the matters discussed below have been established by the
Board of Directors of the Company and may be revised at the discretion of the
Board of Directors without a vote of the shareholders of the Company, except
that changes in certain policies with respect to conflicts of interest must be
consistent with legal requirements.
INVESTMENT POLICIES
Investments in Real Estate. The Company intends to acquire equity
interests in hotel properties other than the Hotels through the Partnership or
other entities controlled by the Partnership, or through joint ventures or other
types of co-ownership. These investments may be subject to existing mortgage
financing and other indebtedness that have priority over the equity interest of
the Company.
The Company's current policy is to not invest in any one property more than
25% of its total assets at the time of the investment.
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Investments in Real Estate Mortgages. While the Company will emphasize
equity real estate investments, it may invest in mortgage and other real estate
interests, including securities of other REITs, and in nonperforming mortgages
with the goal of acquiring the underlying property. The Company may invest in
participating or convertible mortgages (which are similar to equity
participation) if it may benefit from the cash flow or any appreciation in the
value of the subject property. The Company does not currently intend to invest
in mortgages or securities of other REITs.
FINANCING
While its organizational documents contain no limitation on the amount of
debt it may incur, the Company, subject to the discretion of the Board of
Directors, intends to maintain a debt-to-total-market capitalization ratio
(measured at the time the debt is incurred) of not more than 45%. The Company
may from time to time re-evaluate its debt capitalization policy in light of
economic conditions, relative costs of debt and equity capital, market values of
its proposed acquisitions, development and expansion opportunities and other
factors. Any indebtedness may be incurred through the Partnership or the
Company. Indebtedness incurred by the Company may be in the form of bank
borrowings, secured or unsecured, and publicly or privately placed debt
instruments, the proceeds of which would be loaned or contributed to the
Partnership. Indebtedness incurred by the Partnership may be in the form of
purchase money obligations to the sellers of properties, publicly or privately
placed debt instruments, further borrowings from the Company, or financing from
banks, institutional investors or other lenders, any of which indebtedness may
be unsecured or may be secured by mortgages or other interests in the property
owned by the Partnership. This indebtedness may be recourse to all or any part
of the property of the Company or the Partnership, or may be limited to the
specific property to which the indebtedness relates. The proceeds from any
borrowings by the Company or the Partnership may be used for the payment of
distributions or dividends, for working capital, or to refinance existing
indebtedness or to finance acquisitions or expansions of properties. See
"Federal Income Tax Considerations--Requirements for Qualification--Distribution
Requirements."
If the Board of Directors determines to raise additional equity capital,
the Board has the authority, without shareholder approval, to issue additional
Common Shares or Preferred Shares or other capital shares of the Company in any
manner (and generally on such terms and for such consideration) it deems
appropriate, including in exchange for property. Any such offering might cause a
dilution of the existing shareholders' investment in the Company.
POLICIES WITH RESPECT TO CERTAIN OTHER ACTIVITIES
The Company has authority to offer capital shares or other securities and
to repurchase or otherwise reacquire its shares or any other securities, and may
engage in such activities in the future. See "The Company--Business and Growth
Strategies--Access to Capital" and "The Partnership--Exchange Rights." The
Company has no outstanding loans to other entities or persons, including its
officers and directors, except for the loan to the Partnership evidenced by the
Intercompany Convertible Note, and, except as described above under
"--Investment Policies," does not currently intend to make loans to other
entities. The Company has not engaged, and does not currently intend to engage,
in the trading, underwriting or agency distribution or sale of securities of
other issuers, and has not invested, and does not currently intend to invest, in
the securities of other issuers (other than the Partnership and any joint
venture in which it participates for the purpose of owning one or more hotels)
for the purpose of exercising control. The Company intends to make investments
in such a way that it will not be treated as an investment company under the
Investment Company Act of 1940.
The Company intends to make investments at all times in a manner consistent
with the requirements of the Code in order for the Company to qualify as a REIT
unless, because of changing circumstances or changes in the Code, in Treasury
Regulations or in the interpretations of either, the Company's Board of
Directors determines that it is no longer in the best interests of the Company
and its shareholders to qualify as a REIT.
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CONFLICT-OF-INTEREST POLICY
Neither the Company's governing instruments nor Company policy prohibit any
Company director, officer, security holder or Affiliate from having a pecuniary
interest in any investment to be acquired or disposed of by the Company or in
any transaction to which the Company is a party or in which it has an interest.
The Company's Articles require that a majority of the Company's Board of
Directors consist of Independent Directors. An Independent Director is a person
who is (i) independent of management of the Company, (ii) not employed by or an
officer of the Company, (iii) not an "affiliate" (as defined in Rule 405 under
the Securities Act) of the Company or of any subsidiary of the Company, and (iv)
not a person who acts on a regular basis as an individual or representative of
an organization serving as a professional advisor, legal counsel or consultant
to management if, in the opinion of the Board of Directors, the relationship is
material to the Company, that person, or the organization represented.
Determinations to be made on behalf of the Company with respect to relationships
or opportunities that represent a conflict of interest for any Company officer
or director as such are subject to the approval of the Independent Directors.
See "Risk Factors--Conflicts of Interest." In addition, Robert and John Boykin
and the other Affiliates of the Boykin Group have agreed that they will conduct
all of their hotel ownership, development and acquisition activities through the
Company. The Company and BMC have agreed on certain additional measures that are
designed to minimize conflicts of interest between BMC and its owners, on the
one hand, and the Company and its shareholders, on the other. See
"Lessees -- BMC."
The Partnership's partnership agreement requires the Company to resolve in
favor of the Company's shareholders any conflict of interest between those
shareholders, on the one hand, and the limited partners of the Partnership, on
the other hand, if the conflict cannot be resolved in a manner not adverse to
the interests of either group. The partnership agreement also exonerates the
Company from monetary damages for losses sustained, liabilities incurred, or
benefits not derived by limited partners in connection with any such resolution,
so long as the Company has acted in good faith.
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MANAGEMENT
COMPANY DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Company currently consists of seven members.
Directors are elected at each annual meeting of shareholders and serve until
their successors are elected and qualified.
Executive officers of the Company are elected and serve at the discretion
of the Board of Directors until their successors are duly chosen and qualified.
The following table sets forth certain information concerning the directors
and officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- -------------------------------------
<S> <C> <C>
Robert W. Boykin 48 Director; Chairman of the Board,
President and Chief Executive Officer
Raymond P. Heitland 62 Director; Chief Financial Officer
Mark L. Bishop 38 Senior Vice President -- Acquisitions
Michael D. Murphy 41 Senior Vice President -- Acquisitions
Paul A. O'Neil 40 Treasurer
Andrew C. Alexander 34 Vice President -- Corporate Counsel
Albert T. Adams 46 Director
Lee C. Howley, Jr. 50 Director
Frank E. Mosier 67 Director
William H. Schecter 55 Director
Ivan J. Winfield 63 Director
</TABLE>
The following is a biographical summary of the business experience of the
directors and officers of the Company.
Robert W. Boykin has served as the President and Chief Executive Officer of
the Company since its formation. He served as the President and Chief Executive
officer of Boykin Management from 1985 until November 1996. He served as Boykin
Management's Executive Vice President from 1981 until 1985.
Raymond P. Heitland has served as the Chief Financial Officer of the
Company since its formation. He served as the Chief Financial Officer of Boykin
Management from 1970 until November 1996.
Mark L. Bishop is Senior Vice President -- Acquisitions of the Company. He
served as Senior Vice President -- Acquisitions of Boykin Management 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.
Michael D. Murphy became Senior Vice President -- Acquisitions of the
Company in January 1998. From April 1996 until November 1997, Mr. Murphy served
as Senior Vice President of Acquisitions with Patriot American Hospitality,
Inc., a hotel REIT. From October 1994 until April 1996, Mr. Murphy served as the
Chief Executive Officer of The Stonebridge Group, Inc., a real estate consulting
company founded by Mr. Murphy. From October 1989 until October 1994, Mr. Murphy
was employed by Affirmative Equities Company, L.P., a real estate investment and
consulting firm, serving as a Principal.
Paul A. O'Neil is the Treasurer of the Company. He served as Chief
Financial Officer and Treasurer of BMC from November 1996 until May 1997 and as
Senior Vice President of Boykin Management from 1994 until November 1996. Prior
to joining Boykin Management, he managed the Real Estate Services Group in
Arthur Andersen LLP's Cleveland, Ohio, office from 1990 to 1994.
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<PAGE> 50
Andrew C. Alexander became Vice President -- Corporate Counsel of the
Company in July 1997. 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.
Albert T. Adams has been a partner with the law firm of Baker & Hostetler
LLP in Cleveland, Ohio since 1984 and has been affiliated with the firm since
1977. Baker & Hostetler LLP provides legal services to the Company and various
Boykin Group Affiliates. Mr. Adams is a graduate of Harvard College, Harvard
Business School and Harvard Law School. He serves as a member of the Board of
Trustees of the Western Reserve Historical Society and is a Vice President of
the Harvard Business School Club of Northeastern Ohio. Mr. Adams is a director
of Developers Diversified Realty Corporation and Associated Estates Realty
Corporation, both publicly held real estate investment trusts.
Lee C. Howley, Jr. has been the sole owner and president of Howley &
Company, a real estate brokerage and development company, since 1981, and has
been the sole owner and Chairman of Coast Management Company, a cleaning and
real estate management company, since 1987. Mr. Howley serves on the Board of
Directors of Captec Net Lease Realty, Inc., a publicly held real estate
investment trust, International Total Services, Inc., a publicly held airport
security and services company and LESCO, Inc., a publicly held manufacturer and
supplier of lawn care products, and currently serves as Co-Chairman of the Rock
'n Roll Hall of Fame and Museum in Cleveland, Ohio.
Frank E. Mosier is a director of Associated Estates Realty Corporation. Mr.
Mosier was Vice Chairman of the Advisory Board of BP America Inc., a producer
and refiner of petroleum products, from 1991 to 1993. Mr. Mosier was Vice
Chairman of BP America Inc. from 1988 until his retirement in 1991 and president
and chief operating officer of BP America Inc. from 1986 to 1988.
William H. Schecter, who became a director of the Company in August 1997,
has been the president of National City Capital Corporation, a private equity
investment subsidiary of National City Corporation, since 1988. Mr. Schecter is
a director of NatCity Investments, a registered investment company.
Ivan J. Winfield has been Associate Professor and Chairholder of the Herzog
Chair in Free Enterprise at Baldwin Wallace College, in Berea, Ohio, since
September 1995. Mr. Winfield retired in 1994 from Coopers & Lybrand, L.L.P. From
1978 to 1990, he was managing partner of the firm's Oklahoma practice and from
1990 to 1994 he was managing partner of the firm's northeast Ohio practice. Mr.
Winfield is a Trustee of The Fairport Funds and is Chairman of its audit
committee. Mr. Winfield is also a Director of HMI Industries, Inc. and is
Chairman of its Finance Committee and a director of International Total
Services, Inc.
Committees
The Audit Committee comprises Messrs. Adams, Howley, Mosier, Schecter and
Winfield. The Audit Committee recommends annually to the Board of Directors the
independent public accountants for the Company, reviews with the independent
public accountants the arrangements for and scope of the audits to be conducted
by them and the results of those audits and reviews various financial and
accounting matters affecting the Company.
The Executive Committee comprises Messrs. Boykin, Heitland and Adams. The
Executive Committee, during the intervals between the meetings of the Company's
Board of Directors, possesses and may exercise all of the powers of the Board of
Directors in the management of the business and affairs of the Company, except
as otherwise provided (i) by law, (ii) the Articles of Incorporation of the
Company or in the Code of Regulations of the Company (in each case as amended
from time to time) or (iii) by action of the Board of Directors.
The Compensation Committee comprises Messrs. Adams, Howley, Mosier,
Schecter and Winfield. The Compensation Committee periodically reviews and
determines the compensation, including fringe benefits and incentive
compensation, of officers and management personnel of the Company.
The Long-Term Incentive Plan Committee, which comprises Messrs. Howley,
Mosier, Schecter and Winfield, administers the Company's Long-Term Incentive
Plan and determines the employees of the Company who may participate in the
grant of any award (including share options), and the terms thereof, under the
Long-Term Incentive Plan.
S-48
<PAGE> 51
THE PARTNERSHIP
The following summary of the Partnership Agreement, and the descriptions of
certain provisions thereof set forth elsewhere in this Prospectus Supplement,
are qualified in their entirety by reference to the Partnership Agreement, which
was filed as an exhibit to the S-11 Registration Statement.
MANAGEMENT
The Partnership is an Ohio limited partnership. The Company, as the sole
general partner of the Partnership (the "General Partner"), has full, exclusive
and complete responsibility and discretion in the management and control of the
Partnership, and the limited partners of the Partnership (the "Limited
Partners") have no authority to transact business for, or to participate in the
management activities or decisions of, the Partnership. However, any amendment
to the Partnership Agreement that would (i) seek to impose personal liability on
the Limited Partners, (ii) affect the Exchange Rights, or (iii) impose on the
Limited Partners any obligation to make additional contributions to the capital
of the Partnership, would require the consent of Limited Partners holding at
least 66 2/3% of the Units.
The Partnership was formed to own the properties acquired by the Company.
Accordingly, the income and expenses of the Company reflected in the financial
information provided to the shareholders will be the income and expenses of the
Partnership, adjusted (on a pro forma basis) to deduct the minority interest of
the Limited Partners. Distributions from the Partnership are made at the
discretion of the Company as the sole general partner of the Partnership.
TRANSFERABILITY OF INTERESTS
The Company may not voluntarily withdraw from the Partnership or transfer
or assign its interest in the Partnership unless the transaction in which the
withdrawal or transfer occurs results in the Limited Partners receiving property
in an amount equal to the amount they would have received had they exercised
their Exchange Rights immediately prior to the transaction, or unless the
successor to the Company contributes substantially all of its assets to the
Partnership in return for an interest in the Partnership. With certain limited
exceptions, the Limited Partners may not transfer their interests in the
Partnership without the consent of the Company. The Company may not consent to
any transfer that would cause the Partnership to be treated as a corporation for
federal income tax purposes.
CAPITAL CONTRIBUTIONS
The Company contributed or loaned to the Partnership all of the net
proceeds of the Initial Offering as its initial capital contribution and
pursuant to the Intercompany Convertible Note. The Limited Partners contributed
to the Partnership as their initial capital contributions the Limited Partners'
proportionate ownership interests in the Initial Hotels. The Company will
contribute all of the net proceeds from the Offering to the Partnership as an
additional capital contribution in exchange for additional Partnership
interests.
The Partnership Agreement provides that if the Partnership requires
additional funds at any time or from time to time in excess of funds available
to the Partnership from borrowings or capital contributions, the Company may
borrow those funds from a financial institution or other lender and lend those
funds to the Partnership on the same terms and conditions as are applicable to
the Company's borrowing of the funds. As an alternative to borrowing funds
required by the Partnership, the Company may contribute the amount of the
required funds as an additional capital contribution to the Partnership. If the
Company so contributes additional capital, the Company's partnership interest in
the Partnership will be increased on a proportionate basis based on the amount
of the additional capital contributions and the value of the Partnership at the
time of the contributions. If the Company issues Preferred Shares, it will
contribute the proceeds therefrom to the Partnership in exchange for Partnership
interests that have the same terms as those Preferred Shares. The Partnership
interests of the Limited Partners will be correspondingly decreased or adjusted
in connection with any such contribution.
S-49
<PAGE> 52
EXCHANGE RIGHTS
Pursuant to the Partnership Agreement, the Limited Partners received the
Exchange Rights, which enable them to cause the Partnership to purchase their
Units for cash. The Exchange Rights may be exercised by Limited Partners who are
Boykin Group Affiliates or Boykin Associates at any time after November 4, 1999,
and by the other partners, who hold an aggregate of 1.5% of the Units, at any
time, in whole or in part. The amount of cash to be received by a Limited
Partner exercising exchange rights will be determined by mathematically
converting the Limited Partner's Units to a number of Common Shares at a
conversion rate of one Common Share for each Unit held by that Limited Partner
and then multiplying the resulting number of Common Shares by the average daily
market price of a Common Share for the 10 consecutive trading days immediately
preceding the date the Company receives the applicable notice of exchange from
that Limited Partner.
The Company may elect to assume and directly satisfy an Exchange Right by
paying cash to the Limited Partner or by delivering Common Shares for the
exchanged Units on a one-for-one basis. If the Company elects to pay cash in
satisfaction of an Exchange Right, the amount payable by the Company is due
within one year after the exercise of the right, subject to an interest charge
equal to the lower of the Company's current annual dividend rate or 8.0% per
annum. The number of shares into which Units are converted for purposes of
determining the cash payable on exercise of Exchange Rights will be adjusted on
the occurrence of stock splits, mergers, consolidations or similar pro rata
share transactions that otherwise would have the effect of diluting the
ownership interests of the Limited Partners or the shareholders of the Company.
OPERATIONS
The Partnership Agreement requires that the Partnership be operated in a
manner that will enable the Company to satisfy the requirements for being
classified as a REIT and to avoid any federal income tax liability.
DISTRIBUTIONS
The Partnership Agreement provides that the Partnership will make cash
distributions from cash from operations (including net sale or refinancing
proceeds, but excluding net proceeds from the sale of the Partnership's property
in connection with the liquidation of the Partnership) quarterly, in amounts
determined by the Company, in its sole discretion, to the partners in accordance
with their respective percentage interests in the Partnership. Upon liquidation
of the Partnership, after payment of, or adequate provision for, debts and
obligations of the Partnership, including any partner loans, any remaining
assets of the Partnership will be distributed to all partners with positive
capital accounts in accordance with their respective positive capital account
balances.
S-50
<PAGE> 53
UNDERWRITING
The underwriters of the Offering (the "Underwriters"), for whom Lehman
Brothers Inc., BT Alex. Brown Incorporated, A.G. Edwards & Sons, Inc., Morgan
Stanley & Co. Incorporated, EVEREN Securities, Inc. and McDonald & Company
Securities, Inc. are serving as representatives (the "Representatives"), have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement (the "Underwriting Agreement"), to purchase from the Company, and the
Company has agreed to sell to each Underwriter, the aggregate number of Common
Shares set forth opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
------------------------------------------------------------------------ ---------
<S> <C>
Lehman Brothers Inc..................................................... 900,000
BT Alex. Brown Incorporated............................................. 900,000
A.G. Edwards & Sons, Inc................................................ 900,000
Morgan Stanley & Co. Incorporated....................................... 900,000
EVEREN Securities, Inc.................................................. 450,000
McDonald & Company Securities, Inc...................................... 450,000
---------
Total.............................................................. 4,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase Common Shares are subject to certain conditions and
that if any of the Common Shares are purchased by the Underwriters pursuant to
the Underwriting Agreement, all Common Shares agreed to be purchased by the
Underwriters pursuant to the Underwriting Agreement must be so purchased.
The Company has been advised that the Underwriters propose to offer the
Common Shares directly to the public initially at the public offering price set
forth on the cover page of this Prospectus Supplement and to certain selected
dealers (who may include the Underwriters) at such public offering price less a
selling concession not in excess of $.80 per share. The Underwriters may allow,
and the selected dealers may reallow, a concession not in excess of $.10 per
share to certain other brokers and dealers. After the Offering, the concession
to selected dealers and the reallowances to other dealers may be changed by the
Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
The Company has granted to the Underwriters an option to purchase up to an
additional 675,000 Common Shares at the public offering price less the aggregate
underwriting discounts shown on the cover page of this Prospectus Supplement
solely to cover overallotments, if any. The option may be exercised at any time
up to 30 days after the date of this Prospectus Supplement. To the extent that
the Underwriters exercise such option, the Underwriters will be committed
(subject to certain conditions) to purchase a number of option shares
proportionate to such Underwriters' initial commitment, as indicated in the
preceding table.
Until the distribution of the Common Shares is completed, the rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase Common Shares. As an exception to these rules,
the Representatives are permitted to engage in certain transactions that
stabilize the price of the Common Shares. Such transactions may consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Shares.
If the Underwriters create a short position in the Common Shares in
connection with the Offering (i.e., if they sell more Common Shares than are set
forth on the cover page of this Prospectus Supplement), the Representatives may
reduce that short position by purchasing Common Shares in the open market. The
Representatives also may elect to reduce any short position by exercising all or
part of the overallotment option described herein.
The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
Common Shares in the open market to reduce the Underwriters' short position or
to stabilize the price of the Common Shares, they may reclaim the amount of the
selling
S-51
<PAGE> 54
concession from the Underwriters and selling group members who sold those Common
Shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the Offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Shares. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Common Shares have been approved for listing on the New York Stock
Exchange, subject to official notice of issuance, under the symbol "BOY."
The Underwriters have informed the Company that they do not intend to
confirm sales to any account over which they exercise discretionary authority.
The Company has agreed not to offer, sell or contract to sell, or otherwise
dispose of, or announce the offering of, any Common Shares, or any securities
convertible into, or exchangeable for, Common Shares for a period of 180 days
from and after the date of this Prospectus Supplement without the prior written
consent of Lehman Brothers Inc., except the Common Shares offered hereby, up to
1,000,000 Common Shares issuable to a unit investment trust at a price of no
less than $25 per share, Common Shares to be issued in the Proposed Merger,
Common Share issuable under the Company's Long-Term Incentive Plan and
directors' stock option plans, and the Common Shares subject to outstanding
options.
Lehman Brothers Holdings, Inc., an Affiliate of Lehman Brothers Inc., which
is one of the Underwriters, will receive $22.6 million on the Company's
repayment of the indebtedness outstanding under the Credit Facility. See "Use of
Proceeds." In addition, Lehman Brothers Inc. is being paid fees aggregating
$700,000 for its services as the financial advisor to the Company and in
connection with its provision of a fairness opinion to the Company respecting
the Proposed Merger. Morgan Stanley & Co. Incorporated served as the financial
advisor and provided a fairness opinion to Red Lion in connection with the
Proposed Merger, for which it is being paid a fee of approximately $2.3 million
(assuming a Common Share closing price on the closing date of the Proposed
Merger of $25.50 per share). Moreover, from time to time, certain of the
Underwriters or their Affiliates may provide investment and commercial banking
services to the Company.
EXPERTS
The financial statements and schedules incorporated by reference in this
Prospectus Supplement and elsewhere in the Registration Statement, to the extent
and for the periods indicated in their reports, have been audited by Arthur
Andersen LLP, Deloitte & Touche LLP and Rhea & Ivy P.L.C., independent public
accountants, and are included herein in reliance upon the authority of said
firms as experts in accounting and auditing.
The consolidated financial statements of Red Lion Inns Limited Partnership
and its subsidiary limited partnership as of December 31, 1996 and for the year
then ended have been incorporated by reference herein in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
LEGAL MATTERS
The validity of the Common Shares offered hereby, as well as certain legal
matters described under "Federal Income Tax Considerations" in the accompanying
Prospectus, will be passed upon for the Company by Baker & Hostetler LLP,
Cleveland, Ohio, and certain legal matters will be passed upon for the
Underwriters by Willkie Farr & Gallagher, New York, New York. Baker & Hostetler
LLP provides legal services to the Company and various Company affiliates.
Albert T. Adams, a director of the Company, is a partner in Baker & Hostetler
LLP.
S-52
<PAGE> 55
GLOSSARY
Unless otherwise indicated or the context otherwise requires, the following
capitalized terms have the meanings set forth below for purposes of this
Prospectus Supplement and the accompanying Prospectus:
"Acquired Hotels" means the Company's Doubletree Hotel Kansas City, French
Lick Springs Resort, Daytona Beach Radisson Resort, Holiday Inn Minneapolis
West, Marriott's Hunt Valley Inn, Hampton Inn San Diego Airport/Sea World,
Melbourne Hilton Oceanfront and Holiday Inn Crabtree, each of which the Company
acquired after the Initial Offering.
"ADR" means average daily room rate.
"Affiliate" of any person means (i) any person who directly or indirectly
controls or is controlled by or is under common control with that person, (ii)
any other person who owns, beneficially, directly or indirectly, 5% or more of
the outstanding capital stock, shares or equity interests of that person, or
(iii) any officer, director, employee, partner or trustee of that person or any
person controlling, controlled by or under common control with that person
(excluding trustees and persons serving in similar capacities who are not
otherwise an Affiliate of that person). The term "person" means and includes
individuals, corporations, general and limited partnerships, stock companies or
associations, joint ventures, associations, companies, trusts, banks, trust
companies, land trusts, business trusts, or other entities and governments and
agencies and political subdivisions thereof. For purposes of this definition,
"control" (including the correlative meanings of the terms "controlled by" and
"under common control with"), as used with respect to any person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of that person, through the ownership
of voting securities, partnership interests or other equity interests.
"Articles of Incorporation" means the Amended and Restated Articles of
Incorporation of the Company.
"BMC" means Boykin Management Company Limited Liability Company.
"Boykin Associates" means certain Boykin Group officers and employees other
than Robert W. Boykin and John E. Boykin, and certain former employees of the
Boykin Group.
"Boykin Group" means Boykin Management and its Affiliates.
"Boykin Group Affiliate" means Boykin Management or any of its Affiliates.
"Boykin Management" means Boykin Management Company, an Ohio corporation.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Code of Regulations" means the Code of Regulations of the Company.
"Commission" means the United States Securities and Exchange Commission.
"Common Shares" means the Common Shares, without par value, of the Company.
"Company" means Boykin Lodging Company, an Ohio corporation, including,
unless the context otherwise requires, its subsidiaries (including the
Partnership and its subsidiaries and joint ventures).
"Consumer Price Index" means the "U.S. City Average, All Items" Consumer
Price Index for All Urban Consumers published by the Bureau of Labor Statistics
of the United States Department of Labor (Base: 1982-1984=100), or any successor
index thereto.
"Doubletree Hotels" means the 10 Doubletree-licensed properties that the
Company expects to acquire in the Proposed Merger.
"Exchange Right" means the right of the holders of Units to exchange each
Unit for one Common Share.
S-53
<PAGE> 56
"FF&E" means furnishings, fixtures and equipment of the Hotels.
"Franchise Agreements" means the existing franchise agreements relating to
the Hotels.
"Funds From Operations" means income (loss) before minority interest
(computed in accordance with generally accepted accounting principles),
excluding gains (losses) from debt restructuring and sales of property
(including furniture and equipment), plus real estate related depreciation and
amortization (excluding amortization of financing costs) and after adjustments
for unconsolidated partnerships and joint ventures.
"Hotels" means the 17 hotels currently owned by the Company.
"Independent Director" means a person who is (i) independent of management
of the Company, (ii) not employed by or an officer of the Company, (iii) not an
"affiliate" (as defined in Rule 405 under the Securities Act of the Company or
of any subsidiary of the Company and (iv) not a person who acts on a regular
basis as an individual or representative of an organization serving as a
professional advisor, legal counsel or consultant to management if, in the
opinion of the Board of Directors, the relationship is material to the Company,
that person, or the organization represented.
"Initial Hotels" means the nine hotel properties acquired by the Company in
connection with the Initial Offering.
"Initial Offering" means the Company's initial public offering of Common
Shares, which was consummated on November 4, 1996.
"Intercompany Convertible Note" means the $40 million loan from the Company
to the Partnership.
"IRS" means the United States Internal Revenue Service.
"Minimum Rent" means the fixed obligation of a lessee to pay a sum certain
in monthly rent under each of the Percentage Leases.
"Offering" means the offering of Common Shares of the Company pursuant to
this Prospectus Supplement.
"Ownership Limit" means the beneficial ownership of 9.8% of the outstanding
Common Shares of the Company.
"Partnership" means Boykin Hotel Properties, L.P., a limited partnership
organized under the laws of the State of Ohio.
"Partnership Agreement" means the partnership agreement of the Partnership
as amended and restated.
"Percentage Leases" mean the operating leases between the lessees and the
Partnership pursuant to which the lessees lease the Hotels from the Partnership.
"Percentage Rent" means rent payable by the lessees pursuant to the
Percentage Leases based on percentages of room revenue, food revenue and
beverage revenue.
"REIT" means a real estate investment trust as defined pursuant to Sections
856 through 860 of the Code.
"Representatives" means Lehman Brothers Inc., BT Alex. Brown & Sons
Incorporated, Morgan Stanley & Co. Incorporated, A.G. Edwards & Sons, Inc.,
EVEREN Securities, Inc. and McDonald & Company Securities, Inc.
"Securities Act" means the Securities Act of 1933, as amended from time to
time.
"Total Market Capitalization" means the aggregate market value of the
Company's outstanding Common Shares and total long-term debt of the Company.
S-54
<PAGE> 57
"Treasury Regulations" means the Income Tax Regulations promulgated under
the Code.
"Underwriters" means the Underwriters named in this Prospectus Supplement.
"Underwriting Agreement" means the Underwriting Agreement between the
Company and the Underwriters.
"Units" means units of limited partnership interests in the Partnership.
"Westboy" means Westboy LLC, a subsidiary of BMC.
S-55
<PAGE> 58
INDEX TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
BOYKIN LODGING COMPANY:
Condensed Consolidated Statement of Income for the Year Ended December 31, 1996..... F-2
Condensed Consolidated Statement of Income for the Nine Months Ended September 30,
1996............................................................................. F-3
Condensed Consolidated Statement of Income for the Nine Months Ended September 30,
1997............................................................................. F-4
Notes to the Pro Forma Condensed Consolidated Statements of Income.................. F-5
Condensed Consolidated Balance Sheet as of September 30, 1997....................... F-10
Notes to Pro Forma Condensed Consolidated Balance Sheet............................. F-11
BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES:
Condensed Consolidated Statement of Income for the Year Ended December 31, 1996..... F-13
Condensed Consolidated Statement of Income for the Nine Months Ended September 30,
1996............................................................................. F-14
Condensed Consolidated Statement of Income for the Nine Months Ended September 30,
1997............................................................................. F-15
Notes to Pro Forma Condensed Combined Statements of Income.......................... F-16
</TABLE>
F-1
<PAGE> 59
BOYKIN LODGING COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
INITIAL PRO FORMA
OFFERING AND ADJ. FOR
FORMATION PRE-RED LION BEFORE HISTORICAL
HISTORICAL TRANSACTIONS ACQUISITIONS OFFERING OFFERING PRO FORMA RED LION
---------- ------------ ------------ -------- -------- --------- ----------
(A) (B) (C) (D) (A)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Lease revenue.............. $3,258 $ 24,553 $ 11,078 $38,889 $ -- $38,889 $ --
Hotel revenue.............. -- -- -- -- -- -- 40,903
Interest income............ 120 -- (120) -- -- -- --
------ -------- -------- ------- ------- ------- --------
Total revenues....... 3,378 24,553 10,958 38,889 -- 38,889 40,903
------ -------- -------- ------- ------- ------- --------
EXPENSES:
Real estate related
depreciation and
amortization............. 1,344 6,792 2,505 10,641 22 10,663 10,046
Real estate and personal
property taxes, insurance
and rent................. 620 3,438 1,410 5,468 -- 5,468 3,096
Base management fees....... -- -- -- -- -- -- 3,325
Incentive management
fees..................... -- -- -- -- -- -- 5,794
General and
administrative........... 450 1,000 -- 1,450 -- 1,450 2,182
Interest expense........... 54 (54) 4,538 4,538 (4,538) -- 11,510
Amortization of deferred
financing costs.......... 69 367 -- 436 -- 436 536
Minority interest.......... 40 1,517 412 1,969 (262) 1,707 --
------ -------- -------- ------- ------- ------- --------
Total expenses and
minority
interest........... 2,577 13,060 8,865 24,502 (4,778) 19,724 36,489
------ -------- -------- ------- ------- ------- --------
INCOME BEFORE INCOME
TAXES...................... 801 11,493 2,093 14,387 4,778 19,165 4,414
INCOME TAX EXPENSE.......... -- -- -- -- -- -- 377
------ -------- -------- ------- ------- ------- --------
INCOME BEFORE EXTRAORDINARY
ITEMS APPLICABLE TO COMMON
SHARES..................... $ 801 $ 11,493 $ 2,093 $14,387 $ 4,778 $19,165 $ 4,037
====== ======== ======== ======= ======= ======= ========
ALLOCATION OF NET INCOME:
GENERAL PARTNER............ $ 80
LIMITED PARTNER............ 3,957
--------
$ 4,037
========
NET INCOME PER LIMITED
PARTNER UNIT............... $ 0.96
========
WEIGHTED AVERAGE LIMITED
PARTNER UNITS
OUTSTANDING................ 4,134
========
INCOME BEFORE EXTRAORDINARY
ITEMS PER COMMON SHARE..... $ 0.09 $ 1.51 $ 1.37
====== ======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES
OUTSTANDING................ 8,981 9,516 4,500 14,016
====== ======= ======= =======
PRO FORMA RESTATED EARNINGS
PER SHARE (P)
Basic...................... $ 0.09 $ 1.51 $ 1.37
Diluted.................... 0.09 1.50 1.36
<CAPTION>
AS
ADJUSTED
ADJUSTMENTS PRO FORMA
----------- ---------
<S> <C> <C>
REVENUES:
Lease revenue.............. $ 29,674(E) $68,563
Hotel revenue.............. (40,903)(F) --
Interest income............ -- --
--------- -------
Total revenues....... (11,229) 68,563
--------- -------
EXPENSES:
Real estate related
depreciation and
amortization............. 1,652(G) 22,361
Real estate and personal
property taxes, insurance
and rent................. 1,904(H) 10,468
Base management fees....... (3,325)(I) --
Incentive management
fees..................... (5,794)(I) --
General and
administrative........... (1,682)(J) 1,950
Interest expense........... (1,447)(K) 10,063
Amortization of deferred
financing costs.......... (423)(L) 549
Minority interest.......... (138)(M) 1,569
--------- -------
Total expenses and
minority
interest........... (9,253) 46,960
--------- -------
INCOME BEFORE INCOME
TAXES...................... (1,976) 21,603
INCOME TAX EXPENSE.......... (377)(N) --
--------- -------
INCOME BEFORE EXTRAORDINARY
ITEMS APPLICABLE TO COMMON
SHARES..................... $ (1,599) $21,603
========= =======
ALLOCATION OF NET INCOME:
GENERAL PARTNER............
LIMITED PARTNER............
NET INCOME PER LIMITED
PARTNER UNIT...............
WEIGHTED AVERAGE LIMITED
PARTNER UNITS
OUTSTANDING................
INCOME BEFORE EXTRAORDINARY
ITEMS PER COMMON SHARE..... $ 1.26
=======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES
OUTSTANDING................ 3,110(O) 17,126
========= =======
PRO FORMA RESTATED EARNINGS
PER SHARE (P)
Basic...................... $ 1.26
Diluted.................... 1.26
</TABLE>
See Notes to Pro Forma Condensed Consolidated Statements of Income.
F-2
<PAGE> 60
BOYKIN LODGING COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
INITIAL PRO FORMA
OFFERING AND ADJ. FOR
FORMATION PRE-RED LION BEFORE HISTORICAL
HISTORICAL TRANSACTIONS ACQUISITIONS OFFERING OFFERING PRO FORMA RED LION
---------- ------------ ------------ -------- -------- --------- ----------
(A) (B) (C) (D) (A)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Lease revenue.............. $ -- $ 21,792 $8,234 $30,026 $ -- $30,026 $ --
Hotel revenue.............. -- -- -- -- -- -- 31,765
Interest income............ -- -- -- -- -- -- --
------ ------- ------- ------- ------- ------- -------
Total revenues....... -- 21,792 8,234 30,026 -- 30,026 31,765
------ ------- ------- ------- ------- ------- -------
EXPENSES:
Real estate related
depreciation and
amortization............. -- 6,102 1,880 7,982 17 7,999 7,455
Real estate and personal
property taxes, insurance
and rent................. -- 3,052 989 4,041 -- 4,041 2,276
Base management fees....... -- -- -- -- -- -- 2,519
Incentive management
fees..................... -- -- -- -- -- -- 4,387
General and
administrative........... -- 1,088 -- 1,088 -- 1,088 1,637
Interest expense........... -- -- 3,404 3,404 (3,404) -- 8,580
Amortization of deferred
financing costs.......... -- 327 -- 327 -- 327 428
Minority interest.......... -- 1,297 360 1,657 (285) 1,372 --
------ ------- ------- ------- ------- ------- -------
Total expenses and
minority
interest........... -- 11,866 6,633 18,499 (3,672) 14,827 27,282
------ ------- ------- ------- ------- ------- -------
INCOME BEFORE INCOME
TAXES...................... -- 9,926 1,601 11,527 3,672 15,199 4,483
INCOME TAX EXPENSE.......... -- -- -- -- -- -- 337
------ ------- ------- ------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY
ITEMS APPLICABLE TO COMMON
SHARES..................... $ -- $ 9,926 $1,601 $11,527 $ 3,672 $15,199 $ 4,146
====== ======= ======= ======= ======= ======= =======
ALLOCATION OF NET INCOME:
GENERAL PARTNER............ $ 83
LIMITED PARTNER............ 4,063
-------
$ 4,146
=======
NET INCOME PER LIMITED
PARTNER UNIT............... $ 0.98
=======
WEIGHTED AVERAGE LIMITED
PARTNER UNITS
OUTSTANDING................ 4,134
=======
INCOME BEFORE EXTRAORDINARY
ITEMS PER COMMON SHARE..... $ -- $ 1.21 $ 1.08
====== ======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES
OUTSTANDING................ -- 9,516 4,500 14,016
====== ======= ======= =======
PRO FORMA RESTATED EARNINGS
PER SHARE(P)
Basic...................... $ -- $ 1.21 $ 1.08
Diluted.................... -- 1.21 1.08
<CAPTION>
AS
ADJUSTED
ADJUSTMENTS PRO FORMA
----------- ---------
<S> <C> <C>
REVENUES:
Lease revenue.............. $ 23,147(E) $53,173
Hotel revenue.............. (31,765)(F) --
Interest income............ -- --
-------- -------
Total revenues....... (8,618) 53,173
-------- -------
EXPENSES:
Real estate related
depreciation and
amortization............. 1,318(G) 16,772
Real estate and personal
property taxes, insurance
and rent................. 1,474(H) 7,791
Base management fees....... (2,519)(I) --
Incentive management
fees..................... (4,387)(I) --
General and
administrative........... (1,262)(J) 1,463
Interest expense........... (1,033)(K) 7,547
Amortization of deferred
financing costs.......... (343)(L) 412
Minority interest.......... (49)(M) 1,323
-------- -------
Total expenses and
minority
interest........... (6,801) 35,308
-------- -------
INCOME BEFORE INCOME
TAXES...................... (1,817) 17,865
INCOME TAX EXPENSE.......... (337)(N) --
-------- -------
INCOME BEFORE EXTRAORDINARY
ITEMS APPLICABLE TO COMMON
SHARES..................... $ (1,480) $17,865
======== =======
ALLOCATION OF NET INCOME:
GENERAL PARTNER............
LIMITED PARTNER............
NET INCOME PER LIMITED
PARTNER UNIT...............
WEIGHTED AVERAGE LIMITED
PARTNER UNITS
OUTSTANDING................
INCOME BEFORE EXTRAORDINARY
ITEMS PER COMMON SHARE..... $ 1.04
=======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES
OUTSTANDING................ 3,110(O) 17,126
======== =======
PRO FORMA RESTATED EARNINGS
PER SHARE(P)
Basic...................... $ 1.04
Diluted.................... 1.04
</TABLE>
See Notes to Pro Forma Condensed Consolidated Statements of Income.
F-3
<PAGE> 61
BOYKIN LODGING COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
INITIAL
OFFERING PRO FORMA
AND ADJ. FOR
FORMATION PRE-RED LION BEFORE HISTORICAL
HISTORICAL TRANSACTIONS ACQUISITIONS OFFERING OFFERING PRO FORMA RED LION
---------- ------------ ------------ -------- -------- --------- ----------
(A) (B) (C) (D) (A)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Lease revenue.............. $ 28,866 $ -- $3,695 $32,561 $ -- $32,561 $ --
Hotel revenue.............. -- -- -- -- -- -- 31,703
Interest income............ 337 -- (337) -- -- -- --
------ ------- ------- ------- ------- ------- -------
Total revenues....... 29,203 -- 3,358 32,561 -- 32,561 31,703
------ ------- ------- ------- ------- ------- -------
EXPENSES:
Real estate related
depreciation and
amortization............. 6,931 -- 953 7,884 17 7,901 7,667
Real estate and personal
property taxes, insurance
and rent................. 3,834 -- 596 4,430 -- 4,430 2,415
Base management fees....... -- -- -- -- -- -- 2,530
Incentive management
fees..................... -- -- -- -- -- -- 4,376
General and
administrative........... 1,708 -- -- 1,708 -- 1,708 1,410
Interest expense........... 1,359 -- 2,044 3,403 (3,403) -- 8,915
Amortization of deferred
financing costs.......... 327 -- -- 327 -- 327 327
Minority interest.......... 1,917 -- (51) 1,866 (347) 1,519 --
------ ------- ------- ------- ------- ------- -------
Total expenses and
minority
interest........... 16,076 -- 3,542 19,618 (3,733) 15,885 27,640
------ ------- ------- ------- ------- ------- -------
INCOME BEFORE INCOME
TAXES...................... 13,127 -- (184) 12,943 3,733 16,676 4,063
INCOME TAX EXPENSE.......... -- -- -- -- -- -- --
------ ------- ------- ------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY
ITEMS APPLICABLE TO COMMON
SHARES..................... $ 13,127 $ -- $ (184) $12,943 $ 3,733 $16,676 $ 4,063
====== ======= ======= ======= ======= ======= =======
ALLOCATION OF NET INCOME:
GENERAL PARTNER............ $ 81
LIMITED PARTNER............ 3,982
-------
$ 4,063
=======
NET INCOME PER LIMITED
PARTNER UNIT............... $ 0.96
=======
WEIGHTED AVERAGE LIMITED
PARTNER UNITS
OUTSTANDING................ 4,134
=======
INCOME BEFORE EXTRAORDINARY
ITEMS PER COMMON SHARE..... $ 1.37 $ 1.36 $ 1.19
====== ======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING.. 9,518 9,518 4,500 14,018
====== ======= ======= =======
PRO FORMA RESTATED EARNINGS
PER SHARE(P)
Basic...................... $ 1.37 $ 1.36 $ 1.19
Diluted.................... 1.37 1.35 1.18
<CAPTION>
AS ADJUSTED
ADJUSTMENTS PRO FORMA
----------- -----------
<S> <C> <C>
REVENUES:
Lease revenue.............. $ 23,358(E) $55,919
Hotel revenue.............. (31,703)(F) --
Interest income............ -- --
-------- -------
Total revenues....... (8,345) 55,919
-------- -------
EXPENSES:
Real estate related
depreciation and
amortization............. 1,106(G) 16,674
Real estate and personal
property taxes, insurance
and rent................. 1,335(H) 8,180
Base management fees....... (2,530)(I) --
Incentive management
fees..................... (4,376)(I) --
General and
administrative........... (1,035)(J) 2,083
Interest expense........... (1,368)(K) 7,547
Amortization of deferred
financing costs.......... (242)(L) 412
Minority interest.......... (47)(M) 1,472
-------- -------
Total expenses and
minority
interest........... (7,157) 36,368
-------- -------
INCOME BEFORE INCOME
TAXES...................... (1,188) 19,551
INCOME TAX EXPENSE.......... --(N) --
-------- -------
INCOME BEFORE EXTRAORDINARY
ITEMS APPLICABLE TO COMMON
SHARES..................... $ (1,188) $19,551
======== =======
ALLOCATION OF NET INCOME:
GENERAL PARTNER............
LIMITED PARTNER............
NET INCOME PER LIMITED
PARTNER UNIT...............
WEIGHTED AVERAGE LIMITED
PARTNER UNITS
OUTSTANDING................
INCOME BEFORE EXTRAORDINARY
ITEMS PER COMMON SHARE..... $ 1.14
=======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING.. 3,110(O) 17,128
======== =======
PRO FORMA RESTATED EARNINGS
PER SHARE(P)
Basic...................... $ 1.14
Diluted.................... 1.14
</TABLE>
See Notes to Pro Forma Condensed Consolidated Statements of Income.
F-4
<PAGE> 62
BOYKIN LODGING COMPANY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
(A) Represents the historical statements of income of the Company and Red Lion,
as applicable, for the period presented.
(B) Represents pro forma adjustments to the Company's historical consolidated
statements of income for the year ended December 31, 1996 and for the nine
month period ended September 30, 1996 to reflect the consummation of the
Initial Offering and related formation transactions as of January 1, 1996.
For additional information, please see pages F-1 through F-60 (Historical
and Pro Forma Financial Statements) of the Company's Form S-11, as amended,
dated October 29, 1996, the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997 and the Company's Current Reports
on Forms 8-K and 8-K/A filed during 1997.
(C) Represents pro forma revenues and expenses associated with the hotel
properties acquired by the Company during 1997, assuming all such
acquisitions had been consummated on January 1, 1996. Following is the
composition of the pro forma adjustments by hotel property.
FOR THE YEAR ENDED DECEMBER 31, 1996:
<TABLE>
<CAPTION>
1997
HOTEL MONTH LEASE INTEREST TAXES, INSURANCE INTEREST MINORITY
PROPERTY ACQUIRED REVENUE INCOME DEPRECIATION AND RENT EXPENSE INTEREST
- --------------------------- --------- ------- -------- ------------ ---------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Melbourne Hilton
Oceanfront............... March $ 1,099 $ -- $ 360 $ 176 $ -- $ 87
Holiday Inn Crabtree....... March 1,358 -- 223 88 -- 162
French Lick Springs
Resort................... April 3,000 (120) 722 361 1,550 38
Holiday Inn Minneapolis
West..................... July 1,819 -- 413 423 868 42
Marriott's Hunt Valley
Inn...................... July 3,802 -- 787 362 2,120 83
------- ----- ------ ------ ------ ----
$11,078 $ (120) $2,505 $1,410 $4,538 $412
======= ===== ====== ====== ====== ====
</TABLE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996:
<TABLE>
<CAPTION>
HOTEL LEASE INTEREST TAXES, INSURANCE INTEREST MINORITY
PROPERTY REVENUE INCOME DEPRECIATION AND RENT EXPENSE INTEREST
- --------------------------- ------- -------- ------------ ---------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Melbourne Hilton Oceanfront.......... $ 871 $ -- $ 270 $ 157 $ -- $ 69
Holiday Inn Crabtree................. 906 -- 168 35 -- 109
French Lick Springs Resort........... 2,250 -- 542 253 1,163 45
Holiday Inn Minneapolis West......... 1,364 -- 310 275 651 76
Marriott's Hunt Valley Inn........... 2,843 -- 590 269 1,590 61
------- ----- ------ ------ ------ ----
$ 8,234 $ -- $1,880 $ 989 $3,404 $360
======= ===== ====== ====== ====== ====
</TABLE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997:
<TABLE>
<CAPTION>
HOTEL LEASE INTEREST TAXES, INSURANCE INTEREST MINORITY
PROPERTY REVENUE INCOME DEPRECIATION AND RENT EXPENSE INTEREST
- --------------------------- ------- -------- ------------ ---------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Melbourne Hilton Oceanfront.......... $ 261 $ -- $ 75 $ 40 $ -- $ 23
Holiday Inn Crabtree................. 248 -- 47 36 -- 26
French Lick Springs Resort........... 258 (337) 181 91 (197) (24)
Holiday Inn Minneapolis West......... 939 -- 224 214 651 15
Marriott's Hunt Valley Inn........... 1,989 -- 426 215 1,590 (91)
------- ----- ------ ------ ------ ----
$ 3,695 $ (337) $ 953 $ 596 $2,044 $(51)
======= ===== ====== ====== ====== ====
</TABLE>
F-5
<PAGE> 63
BOYKIN LODGING COMPANY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(CONTINUED)
The pro forma adjustments reflected above represent the following:
1. Pro forma lease payments to the Partnership calculated on a pro forma
basis by applying the rent provisions of the Percentage Leases to the
historical revenues of the acquired hotel properties for the applicable
period. As the hotel operating revenues will be earned by the respective
lessees, historical hotel operating revenues of the acquired hotel
properties have not been reflected in the accompanying pro forma
statements of income.
2. Pro forma depreciation of the buildings, improvements and furniture and
equipment of the acquired hotel properties. Depreciation is computed
using the straight-line method and is based upon estimated useful lives
of 25-30 years for buildings and improvements and seven years for
furniture and equipment. The purchase price allocations related to the
acquisition properties, including related transaction costs, were as
follows:
<TABLE>
<CAPTION>
BUILDINGS
HOTEL AND FURNITURE AND
PROPERTY LAND IMPROVEMENTS EQUIPMENT
------------------------------------- ------ ------------ -------------
<S> <C> <C> <C>
Melbourne Hilton Oceanfront.......... $ 852 $ 7,699 $ 750
Holiday Inn Crabtree................. 725 6,542 431
French Lick Springs Resort........... 2,000 16,000 1,890
Holiday Inn Minneapolis West......... 1,000 10,604 700
Marriott's Hunt Valley Inn........... 2,890 21,575 2,631
------ ------- ------
$7,467 $ 62,420 $ 6,402
====== ======= ======
</TABLE>
3. Historical amounts of real estate and personal property taxes, property
and casualty insurance related to the acquired properties to be paid by
the Partnership. All other hotel operating expenses are incurred by the
lessees and, therefore, historical amounts of such expenses have not
been reflected in the accompanying pro forma statements of income.
4. Pro forma interest expense related to the borrowings necessary to fund
the acquisitions of the French Lick Springs Resort, the Holiday Inn
Minneapolis West and Marriott's Hunt Valley Inn. Historical interest
income has been eliminated as the invested funds which generated such
income were used to fund acquisitions.
5. Minority interest related to the pro forma adjustments, calculated at
approximately 15.5% in 1996 and 1997.
(D) Reflects (i) the elimination of the Company's interest expense as a portion
of the proceeds from the Offering are assumed to be used to retire the
outstanding borrowings under the Credit Facility and (ii) incremental
depreciation on the investment in hotel properties attributable to the
writeup of such investment as a result of the redemption of certain Units
with a portion of the proceeds of the Offering.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
30,
YEAR ENDED ------------------
DECEMBER 31, 1996 1996 1997
----------------- ---- ----
<S> <C> <C> <C>
Purchase accounting adjustment to
investment in hotel
properties...................... $ 551
Depreciable life.................. 25
---
Incremental
depreciation.......... $ 22 $17 $17
=== === ===
</TABLE>
F-6
<PAGE> 64
BOYKIN LODGING COMPANY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(CONTINUED)
(E) Represents lease payments to the Partnership applicable to the Doubletree
Hotels calculated on a pro forma basis by applying the rent provisions of
the Doubletree Percentage Lease to the historical hotel operating revenues
of the Doubletree Hotels. The rent formula utilized in computing the pro
forma Doubletree Percentage Lease revenue includes for the calender years
1996 and 1997 adjustments to reduce threshold revenue amounts in the
Doubletree Percentage Lease formulas by the 3.3% and 1.7%, respectively,
increases in the Consumer Price Index for those years.
(F) Represents the elimination of the historical hotel revenues of the
Doubletree Hotels as such revenues will accrue to the lessee.
(G) Represents the adjustment necessary to reflect pro forma depreciation on the
Doubletree Hotels based upon the Company's pro forma investment in such
properties and the use of the straight-line method over estimated useful
lives of 25 years for buildings and improvements and seven years for
furniture and equipment. These estimated useful lives are based upon
management's knowledge of the properties and the hotel industry in general.
At September 30, 1997, the Company's pro forma investment in the Doubletree
Hotels, at cost, consists of the following:
<TABLE>
<S> <C>
Land........................................................... $ 19,697
Buildings and improvements..................................... 238,875
Furniture and equipment........................................ 15,000
--------
$273,572
========
</TABLE>
(H) Represents the estimated incremental real estate and personal property taxes
and property and casualty insurance applicable to the Doubletree Hotels to
be paid by the Partnership.
(I) Represents the elimination of historical management and incentive
management fees applicable to the Doubletree Hotels as such expenses will
be paid by the lessee.
(J) Represents (i) the elimination of the historical amounts of general and
administrative expenses of the Doubletree Hotels, and (ii) $500 of
estimated incremental general and administrative expenses to be incurred by
the Partnership with respect to the Doubletree Hotels.
F-7
<PAGE> 65
BOYKIN LODGING COMPANY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(CONTINUED)
(K) Represents (i) the elimination of the historical interest expense of the
Doubletree Hotels, and (ii) estimated pro forma interest expense associated
with the Company's borrowings under a new credit facility and the Fixed Rate
Note.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
YEAR ENDED -------------------
DECEMBER 31, 1996 1996 1997
----------------- ------- -------
<S> <C> <C> <C>
Incremental credit facility
borrowings........................ $ 16,620
Interest rate....................... 7.75%
-------
Credit Facility interest.......... 1,288 $ 966 $ 966
-------
Fixed Rate Note..................... 130,000
Interest rate....................... 6.75%
-------
Fixed Rate Note interest
expense........................ 8,775 6,581 6,581
------- ------- -------
As Adjusted Pro Forma interest
expense........................... 10,063 7,547 7,547
Less Red Lion historical interest
expense........................... (11,510) (8,580) (8,915)
------- ------- -------
Adjustment.......................... $ (1,447) $(1,033) $(1,368)
======= ======= =======
</TABLE>
(L) Represents (i) the elimination of the historical amortization of deferred
financing costs of Red Lion and the Company, and (ii) amortization of
deferred financing costs associated with the Company's Fixed Rate Note and
the new credit facility. Pro forma deferred financing costs associated with
the Fixed Rate Note and the credit facility are being amortized on a
straight-line basis over the 10-year and 3-year terms of the related debt,
respectively.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 1996 30,
--------------------------------------------- -----------------
CREDIT FACILITY FIXED RATE NOTE TOTAL 1996 1997
--------------- --------------- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Pro forma deferred
financing
costs........... $ 1,063 $ 1,950
Amortizable
life............ 3 10
------ ------
As Adjusted Pro
Forma
amortization.... $ 354 $ 195 $ 549 $ 412 $ 412
====== ======
Historical
amortization.... 972 755 654
----- ----- -----
Adjustment........ $(423) $ (343) $ (242)
===== ===== =====
</TABLE>
(M) Represents minority interest in the net income of the Partnership associated
with the Doubletree Hotels and related pro forma adjustments. Minority
interest is calculated at approximately 8.1% for all periods presented.
(N) Represents the elimination of historical income tax expense of Red Lion as
the Company is a qualified REIT and therefore has no federal income tax
provision.
(O) Represents the issuance of 3,110,048 Common Shares on consummation of the
Proposed Merger.
(P) The historical and pro forma earnings per share information has been
prepared under the methods prescribed by Accounting Principles Board Opinion
No. 15. In the period ended December 31, 1997, the Company adopted Statement
of Financial Accounting Standards No. 128 (SFAS 128) for calculating
earnings per share.
F-8
<PAGE> 66
BOYKIN LODGING COMPANY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(CONTINUED)
For informational purposes the Company has included as "Pro Forma Restated"
information the basic and diluted earnings per share amounts calculated
under the methods prescribed by SFAS 128. The basic and diluted amounts were
determined as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER -----------------------------------------------------------
31, 1996 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
---------------------------- ---------------------------- ----------------------------
PER SHARE PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- ------ --------- ------- ------ --------- ------- ------ ---------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL
Income before
extraordinary items:
Basic earnings per
share.................. $ 801 8,981 $0.09 $ -- -- $ -- $13,127 9,518 $1.37
Effect of outstanding
options, net of assumed
treasury shares........ -- 55 -- -- -- -- -- 57 --
------- ------ --------- ------- ------ --------- ------- ------ ---------
Diluted earnings per
share.................. $ 801 9,036 $0.09 $ -- -- $ -- $13,127 9,575 $1.37
======== ====== ========= ======== ====== ========= ======== ====== =========
BEFORE OFFERING
Income before
extraordinary items:
Basic earnings per
share.................. $14,387 9,516 $1.51 $11,527 9,516 $1.21 $12,943 9,518 $1.36
Effect of outstanding
options, net of assumed
treasury shares........ -- 55 (.01) -- -- -- -- 57 (0.01)
------- ------ --------- ------- ------ --------- ------- ------ ---------
Diluted earnings per
share.................. $14,387 9,571 $1.50 $11,527 9,516 $1.21 $12,943 9,575 $1.35
======== ====== ========= ======== ====== ========= ======== ====== =========
PRO FORMA
Income before
extraordinary items:
Basic earnings per
share.................. $19,165 14,016 $1.37 $15,199 14,016 $1.08 $16,676 14,018 $1.19
Effect of outstanding
options, net of assumed
treasury shares........ -- 55 (0.01) -- -- -- -- 57 (0.01)
------- ------ --------- ------- ------ --------- ------- ------ ---------
Diluted earnings per
share.................. $19,165 14,071 $1.36 $15,199 14,016 $1.08 $16,676 14,075 $1.18
======== ====== ========= ======== ====== ========= ======== ====== =========
AS ADJUSTED PRO FORMA
Income before
extraordinary items:
Basic earnings per
share.................. $21,603 17,126 $1.26 $17,865 17,126 $1.04 $19,551 17,128 $1.14
Effect of outstanding
options, net of assumed
treasury shares........ -- 55 -- -- -- -- -- 57 --
------- ------ --------- ------- ------ --------- ------- ------ ---------
Diluted earnings per
share.................. $21,603 17,181 $1.26 $17,865 17,126 $1.04 $19,551 17,185 $1.14
======== ====== ========= ======== ====== ========= ======== ====== =========
</TABLE>
F-9
<PAGE> 67
BOYKIN LODGING COMPANY
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
AS
HISTORICAL ADJUSTED
HISTORICAL OFFERING PRO FORMA RED LION ADJUSTMENTS PRO FORMA
---------- -------- --------- ---------- ----------- ---------
(C) (A) (C)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INVESTMENT IN HOTEL PROPERTIES,
net............................. $194,213 $ 551(B) $194,764 $158,777 $ 114,795(D) $468,336
CASH AND CASH EQUIVALENTS......... 1,467 46,188 46,687 686 (35,305)(D) 2,153
(968)(B) (9,320)(E)
191,840(F)
(3,013)(G)
(144,202)(H)
(45,220)(I)
RENT RECEIVABLE................... 5,130 -- 5,130 -- -- 5,130
DEFERRED EXPENSES, net............ 1,483 -- 1,483 959 (959)(J) 3,585
2,102(G)
OTHER ASSETS...................... 952 -- 952 -- -- 952
-------- -------- -------- -------- --------- --------
Total assets.................. $203,245 $ 45,771 $249,016 $160,422 $ 70,718 $480,156
======== ======== ======== ======== ========= ========
LIABILITIES AND EQUITY
BORROWINGS AGAINST CREDIT
FACILITY........................ $ 59,000 $(59,000) $ -- $121,250 $(121,250)(H) $ 16,620
61,840(F)
(45,220)(I)
FIXED RATE NOTE................... -- -- -- -- 130,000(F) 130,000
ACCOUNTS PAYABLE AND ACCRUED
EXPENSES........................ 4,137 -- 4,137 3,848 980(E) 6,915
(2,050)(K)
DIVIDENDS/DISTRIBUTIONS PAYABLE... 4,894 -- 4,894 2,320 -- 7,214
DUE TO RELATED PARTY.............. 2,496 -- 2,496 22,952 (22,952)(H) 2,496
MINORITY INTEREST IN JOINT
VENTURES........................ 1,433 -- 1,433 -- -- 1,433
MINORITY INTEREST IN OPERATING
PARTNERSHIP..................... 13,657 (417)(B) 13,240 -- -- 13,240
EQUITY:
SHAREHOLDERS' EQUITY............ 117,628 105,188 222,816 -- 80,333(D) 302,238
(911)(G)
PARTNERS' CAPITAL............... -- -- -- 10,052 (10,052)(L) --
-------- -------- -------- -------- --------- --------
Total liabilities and equity.... $203,245 $ 45,771 $249,016 $160,422 $ 70,718 $480,156
======== ======== ======== ======== ========= ========
</TABLE>
See Notes to Pro Forma Condensed Consolidated Balance Sheet.
F-10
<PAGE> 68
BOYKIN LODGING COMPANY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(A) Reflects (i) proceeds from the issuance of 4.5 million Common Shares, net of
underwriting fees and other issue costs of $7,313, and (ii) the use of such
proceeds to pay off outstanding borrowings under the Credit Facility and to
redeem certain Units as discussed more fully in Note(B) below.
(B) Reflects the redemption of 40,976 Units with a portion of the proceeds from
the Offering. The redemption price per Unit is equal to the per share
offering price less a 5.5% underwriting fee. As the aggregate redemption
price is in excess of the capital account balances applicable to the
redeemed Units, such excess is recorded as a writeup to the investment in
hotel properties.
<TABLE>
<S> <C>
Aggregate redemption price of Units.............................. $ 968
Capital account balance applicable to redeemed Units............. (417)
------
Writeup to investment in hotel properties........................ $ 551
======
</TABLE>
(C) Reflects the historical condensed balance sheets as of September 30, 1997 of
the Company and Red Lion.
(D) Increase in investment in hotel properties attributable to the application
of purchase accounting to the Doubletree Hotels to be acquired by the
Company, based upon the cash consideration to be paid and the estimated
value of Common Shares to be issued by the Company upon consummation of the
Proposed Merger, as well as the payment of direct costs of the Proposed
Merger.
<TABLE>
<S> <C> <C>
Cash to be paid..................................... $ 35,305
Common Shares to be issued:
Estimated number of shares........................ 3,110,048
Price per share................................... $ 25.83
---------
80,333
Direct costs of the Proposed Merger (See Note
(E)).............................................. 10,300
--------
Total purchase price.............................. 125,938
Red Lion historical partners' capital............... 10,052
Adjustments to historical partners' capital:
Elimination of deferred financing costs(See Note
(J))........................................... (959)
Elimination of deferred income tax liability(See
Note(K))....................................... 2,050
---------
Adjusted historical partners' capital of Red
Lion......................................... 11,143
--------
Purchase accounting writeup......................... $114,795
========
</TABLE>
The price per share used in determining the value of the Common Shares to be
issued represents the average closing price for the Common Shares during the
period three days before and three days after the announcement of the
agreement relating to the Proposed Merger.
(E) Represents the payment or accrual, as applicable, of direct costs of the
Proposed Merger.
(F) Represents proceeds received by the Company from borrowings against a new
credit facility and the proceeds from the Fixed Rate Note. The proceeds from
these borrowings will be used to fund the cash portion of the purchase
price, to retire existing Red Lion indebtedness, to pay direct costs of the
Proposed Merger and to pay deferred financing costs associated with the
Company's Fixed Rate Note and the credit facility. The Fixed Rate Note is
assumed by the Company to have a 10-year term and to require payments of
interest only at 6.75% per annum for the first two years, with principal
payments commencing in the third loan year based on a 23 year amortization.
F-11
<PAGE> 69
BOYKIN LODGING COMPANY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(G) Represents the payment of deferred financing costs associated with the
Company's Fixed Rate Note and the new credit facility, net of the writeoff
of the Company's historical unamortized deferred financing costs associated
with the credit facility.
<TABLE>
<S> <C>
Deferred financing costs associated with the Fixed Rate Note................ $1,950
Deferred financing costs associated with the credit facility................ 1,063
Historical deferred financing costs associated with the credit facility..... (911)
------
Adjustment.................................................................. $2,102
======
</TABLE>
(H) Represents the repayment of Red Lion's third party and related party
indebtedness with proceeds from the borrowings discussed in Note (F).
(I) Represents the repayment of borrowings under the Credit Facility with
available cash.
(J) Represents the elimination of Red Lion's historical deferred financing costs
as the related debt will be retired. See Note (D).
(K) Represents the elimination of historical deferred income tax liability of
Red Lion as such liability will not be payable by the Company. See Note (D).
(L) Represents the elimination of the historical partners' capital of Red Lion.
See Note (D).
F-12
<PAGE> 70
BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS HISTORICAL
FOR FORMATION FOR PRE-RED LION DOUBLETREE AS ADJUSTED
HISTORICAL TRANSACTIONS ACQUISITIONS PRO FORMA HOTELS ADJUSTMENTS PRO FORMA
---------- ------------- ---------------- --------- ---------- ----------- -----------
(A) (B) (C) (D)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Rooms....................... $ 7,684 $ 51,966 $ 10,067 $ 69,717 $ 65,281 $ -- $ 134,998
Food and beverage........... 3,976 20,123 6,198 30,297 39,165 -- 69,462
Other hotel revenue......... 620 4,163 2,842 7,625 6,381 -- 14,006
-------- -------- -------- -------- -------- -------- --------
Total hotel revenues...... 12,280 76,252 19,107 107,639 110,827 -- 218,466
Other revenue............... 382 2,395 -- 2,777 -- -- 2,777
-------- -------- -------- -------- -------- -------- --------
Total revenues............ 12,662 78,647 19,107 110,416 110,827 -- 221,243
-------- -------- -------- -------- -------- -------- --------
EXPENSES:
Departmental expenses of
hotels--
Rooms..................... 2,066 11,761 2,534 16,361 16,841 -- 33,202
Food and beverage......... 2,894 14,667 4,215 21,776 26,592 -- 48,368
Other..................... 360 2,133 1,594 4,087 4,208 -- 8,295
Cost of goods sold of
non-hotel operations...... 102 1,584 -- 1,686 -- -- 1,686
Percentage Lease expense.... 3,258 24,553 5,457 33,268 -- 29,674(E) 62,942
Base management fee......... -- -- -- -- -- 3,325(F) 3,325
Incentive management fee.... -- -- -- -- -- 5,794(F) 5,794
General and
administrative............ 1,884 8,277 1,643 11,804 9,092 822(G) 21,718
Advertising and promotion... 609 3,042 838 4,489 5,671 -- 10,160
Utilities................... 558 3,060 1,121 4,739 3,416 -- 8,155
Franchisor royalties and
other charges............. 665 4,100 362 5,127 -- -- 5,127
Repairs and maintenance..... 674 3,486 1,110 5,270 4,104 -- 9,374
Depreciation and
amortization.............. 19 81 -- 100 -- -- 100
Other....................... 19 520 -- 539 -- -- 539
-------- -------- -------- -------- -------- -------- --------
Total expenses............ 13,108 77,264 18,874 109,246 69,924 39,615 218,785
-------- -------- -------- -------- -------- -------- --------
NET INCOME (LOSS)............. $ (446) $ 1,383 $ 233 $ 1,170 $ 40,903 $ (39,615) $ 2,458
======== ======== ======== ======== ======== ======== ========
</TABLE>
See the Notes to Pro Forma Condensed Consolidated Statements of Income.
F-13
<PAGE> 71
BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS HISTORICAL
FOR FORMATION FOR PRE-RED LION DOUBLETREE AS ADJUSTED
HISTORICAL TRANSACTIONS ACQUISITIONS PRO FORMA HOTELS ADJUSTMENTS PRO FORMA
---------- ------------- ---------------- --------- ---------- ----------- -----------
(A) (B) (C) (D)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Rooms....................... $ -- $ 45,871 $ 7,552 $ 53,423 $ 50,646 $ -- $ 104,069
Food and beverage........... -- 17,597 4,684 22,281 28,436 -- 50,717
Other hotel revenue......... -- 3,671 2,302 5,973 4,887 -- 10,860
-------- -------- -------- -------- -------- -------- --------
Total hotel revenues...... -- 67,139 14,538 81,677 83,969 -- 165,646
Other revenue............... -- 1,663 -- 1,663 -- -- 1,663
-------- -------- -------- -------- -------- -------- --------
Total revenues............ -- 68,802 14,538 83,340 83,969 -- 167,309
-------- -------- -------- -------- -------- -------- --------
EXPENSES:
Departmental expenses of
hotels-
Rooms..................... -- 10,207 1,910 12,117 12,659 -- 24,776
Food and beverage......... -- 12,781 3,195 15,976 19,563 -- 35,539
Other..................... -- 1,886 1,195 3,081 3,176 -- 6,257
Cost of goods sold of
non-hotel operations...... -- 993 -- 993 -- -- 993
Percentage Lease expense.... -- 21,792 4,027 25,819 -- 23,147(E) 48,966
Base management fee......... -- -- -- -- -- 2,519(F) 2,519
Incentive management fee.... -- -- -- -- -- 4,387(F) 4,387
General and
administrative............ -- 7,228 1,010 8,238 6,887 568(G) 15,693
Advertising and promotion... -- 2,665 559 3,224 4,283 -- 7,507
Utilities................... -- 2,752 783 3,535 2,587 -- 6,122
Franchisor royalties and
other charges............. -- 3,619 264 3,883 -- -- 3,883
Repairs and maintenance..... -- 3,079 1,033 4,112 3,049 -- 7,161
Depreciation and
amortization.............. -- 62 -- 62 -- -- 62
Other....................... -- 568 -- 568 -- -- 568
-------- -------- -------- -------- -------- -------- --------
Total expenses............ -- 67,632 13,976 81,608 52,204 30,621 164,433
-------- -------- -------- -------- -------- -------- --------
NET INCOME.................... $ -- $ 1,170 $ 562 $ 1,732 $ 31,765 $ (30,621) $ 2,876
======== ======== ======== ======== ======== ======== ========
</TABLE>
See the Notes to Pro Forma Condensed Consolidated Statements of Income.
F-14
<PAGE> 72
BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS HISTORICAL
FOR FORMATION FOR PRE-RED LION DOUBLETREE AS ADJUSTED
HISTORICAL TRANSACTIONS ACQUISITIONS PRO FORMA HOTELS ADJUSTMENTS PRO FORMA
---------- ------------- ---------------- --------- ---------- ----------- -----------
(A) (B) (C) (D)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Rooms....................... $ 56,117 $ -- $ 1,931 $ 58,048 $ 51,775 $ -- $ 109,823
Food and beverage........... 22,215 -- 907 23,122 27,911 -- 51,033
Other hotel revenue......... 5,810 -- 370 6,180 4,655 -- 10,835
-------- -------- -------- -------- -------- -------- --------
Total hotel revenues...... 84,142 -- 3,208 87,350 84,341 -- 171,691
Other revenue............... 2,050 -- -- 2,050 -- -- 2,050
-------- -------- -------- -------- -------- -------- --------
Total revenues............ 86,192 -- 3,208 89,400 84,341 -- 173,741
-------- -------- -------- -------- -------- -------- --------
EXPENSES:
Departmental expenses of
hotels--
Rooms..................... 12,442 -- 515 12,957 12,993 -- 25,950
Food and beverage......... 16,190 -- 462 16,652 19,248 -- 35,900
Other..................... 2,927 -- 288 3,215 2,999 -- 6,214
Cost of goods sold of
non-hotel operations...... 484 -- -- 484 -- -- 484
Percentage Lease expense.... 27,463 -- 766 28,229 -- 23,358(E) 51,587
Base management fee......... -- -- -- -- -- 2,530(F) 2,530
Incentive management fee.... -- -- -- -- -- 4,376(F) 4,376
General and
administrative............ 9,776 -- 364 10,140 6,851 389(G) 17,380
Advertising and promotion... 3,596 -- 140 3,736 4,886 -- 8,622
Utilities................... 3,429 -- 322 3,751 2,518 -- 6,269
Franchisor royalties and
other charges............. 4,121 -- 66 4,187 -- -- 4,187
Repairs and maintenance..... 3,806 -- 298 4,104 3,143 -- 7,247
Depreciation and
amortization.............. 61 -- -- 61 -- -- 61
Other....................... 19 -- -- 19 -- -- 19
-------- -------- -------- -------- -------- -------- --------
Total expenses............ 84,314 -- 3,221 87,535 52,638 30,653 170,826
-------- -------- -------- -------- -------- -------- --------
NET INCOME (LOSS)............. $ 1,878 $ -- $ (13) $ 1,865 $ 31,703 $ (30,653) $ 2,915
======== ======== ======== ======== ======== ======== ========
</TABLE>
See the Notes to Pro Forma Condensed Consolidated Statements of Income.
F-15
<PAGE> 73
BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
(A) Represents the historical statement of income of BMC for the period
presented.
(B) Represents pro forma adjustments to BMC's historical consolidated statements
of income for the year ended December 31, 1996 and for the nine month period
ended September 30, 1996 to reflect the assumption that BMC leased and
operated from January 1, 1996 all of the Initial Hotels owned by the
Partnership as of December 31, 1996. For additional information, please see
pages F-1 through F-60 (Historical and Pro Forma Financial Statements) of
Boykin's Form S-11, as amended, dated October 29, 1996, the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997, and the Current
Reports on Forms 8-K and 8-K/A filed by the Company in 1997.
(C) Represents pro forma revenues and expenses associated with hotel properties
acquired by the Company in 1997 and leased to BMC, assuming that BMC leased
and operated such properties commencing January 1, 1996. Following is the
composition of the pro forma adjustments by hotel property.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1996:
- --------------------------
1997 MONTH DEPARTMENTAL PERCENTAGE GENERAL AND ADVERTISING AND FRANCHISE REPAIRS AND
HOTEL PROPERTY LEASED REVENUES EXPENSES LEASE EXPENSE ADMINISTRATIVE PROMOTION UTILITIES FEES MAINTENANCE
- -------------- ----------- -------- ------------ ------------- -------------- --------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Melbourne
Hilton
Oceanfront... March $ 3,961 $1,593 $ 1,099 $ 344 $ 233 $ 264 $ 167 $ 174
Holiday Inn
Crabtree.... March 4,156 1,466 1,358 475 119 161 195 241
French Lick
Springs
Resort...... April 11,098 5,284 3,000 824 486 696 -- 695
------- ------ ------- ------ ----- ------ ----- ------
$19,215 $8,343 $ 5,457 $1,643 $ 838 $ 1,121 $ 362 $ 1,110
======= ====== ======= ====== ===== ====== ===== ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30, 1996:
- ----------------------
HOTEL DEPARTMENTAL PERCENTAGE GENERAL AND ADVERTISING AND FRANCHISE REPAIRS AND
PROPERTY REVENUES EXPENSES LEASE EXPENSE ADMINISTRATIVE PROMOTION UTILITIES FEES MAINTENANCE
- ---------- -------- ------------ ------------- -------------- --------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Melbourne
Hilton
Oceanfront... $ 3,061 $1,273 $ 871 $ 204 $ 180 $ 199 $ 113 $ 135
Holiday
Inn
Crabtree... 2,955 1,065 906 272 93 116 151 207
French
Lick
Springs
Resort... 8,522 3,962 2,250 534 286 468 -- 691
------- ------ ------ ------ ----- ------- ----- ------
$14,538 $6,300 $ 4,027 $1,010 $ 559 $ 783 $ 264 $ 1,033
======= ====== ====== ====== ===== ======= ===== ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30, 1997:
- ----------------------
HOTEL DEPARTMENTAL PERCENTAGE GENERAL AND ADVERTISING AND FRANCHISE REPAIRS AND
PROPERTY REVENUES EXPENSES LEASE EXPENSE ADMINISTRATIVE PROMOTION UTILITIES FEES MAINTENANCE
- ---------- -------- ------------ ------------- -------------- --------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Melbourne
Hilton
Oceanfront... $ 777 $ 322 $ 261 $ 49 $ 31 $ 51 $ 33 $ 33
Holiday
Inn
Crabtree... 844 330 248 87 29 47 33 68
French
Lick
Springs
Resort... 1,587 613 257 228 80 224 -- 197
------- ------ ------- ------ ----- ------- ----- -------
$ 3,208 $1,265 $ 766 $ 364 $ 140 $ 322 $ 66 $ 298
======= ====== ======= ====== ===== ======= ===== =======
</TABLE>
(D) Represents historical amounts of revenues and expenses for the Doubletree
Hotels as derived from the notes to the historical financial statements of
Red Lion for the period presented. Certain historical amounts of Red Lion
have been reclassified to conform with the Company's income statement
classifications.
(E) Represents lease payments calculated on a pro forma basis by applying the
rent provisions of the Doubletree Percentage Lease to the historical room,
food and beverage and other revenues of the Doubletree Hotels. The rent
formula utilized in computing the pro forma Doubletree Percentage Lease
expense includes for the calendar years 1996 and 1997 adjustments to reduce
the threshold revenue amounts in the Doubletree Percentage Lease formulas by
the 3.3% and 1.7% increases in the Consumer Price Index for those years.
(F) Represents the historical amounts of base and incentive management fees paid
by Red Lion for the applicable period. Westboy will assume all such
obligations associated with the management agreement with Doubletree.
(G) Represents historical amounts of general liability insurance expense
associated with the operation of the Doubletree Hotels and immaterial
miscellaneous other general expenses incurred by Red Lion on a historical
basis which will become the obligations of Westboy.
F-16
<PAGE> 74
PROSPECTUS
BOYKIN LODGING COMPANY
$300,000,000
PREFERRED SHARES, DEPOSITARY SHARES, COMMON SHARES AND WARRANTS
Boykin Lodging Company (the "Company") may from time to time offer in one
or more classes or series (i) whole or fractional preferred shares
(collectively, "Preferred Shares"), (ii) Preferred Shares represented by
depositary shares ("Depositary Shares"), (iii) common shares, without par value
("Common Shares"), with an aggregate public offering price of up to
$300,000,000, on terms to be determined at the time or times of offering, and
(iv) warrants to purchase Preferred Shares, Depositary Shares or Common Shares
(collectively, "Warrants"). The Preferred Shares, Depositary Shares, Common
Shares and Warrants (collectively, the "Offered Securities") may be offered,
separately or together, in separate classes or series, in amounts, at prices and
on terms to be set forth in a supplement to this Prospectus (a "Prospectus
Supplement").
The specific terms of the Offered Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, when applicable: (i) in the case of Preferred
Shares, the number of shares, the specific class, series, title and stated
value, any dividend, liquidation, redemption, conversion, voting and other
rights, and any initial public offering price; (ii) in the case of Depositary
Shares, the number of shares, the whole or fractional Preferred Shares
represented by each such Depositary Share and any initial public offering price;
(iii) in the case of Common Shares, the number of shares and any initial public
offering price; and (iv) in the case of Warrants, the securities to which they
relate, duration, offering price, exercise price and detachability features. In
addition, those specific terms may include limitations on direct or beneficial
ownership and restrictions on transfer of the Offered Securities, in each case
as may be appropriate to preserve the status of the Company as a real estate
investment trust ("REIT") for federal income tax purposes.
The applicable Prospectus Supplement will also contain information, when
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Offered Securities
covered by that Prospectus Supplement.
The Offered Securities may be offered by the Company directly, through
agents designated from time to time by the Company, or to or through
underwriters or dealers. If any agents or underwriters are involved in the sale
of any of the Offered Securities, their names and any applicable purchase price,
fee, commission or discount arrangement between or among them will be set forth
in or will be calculable from the information set forth in the applicable
Prospectus Supplement. No Offered Securities may be sold without delivery of the
applicable Prospectus Supplement describing the method and terms of the offering
of those Offered Securities.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
November 14, 1997
<PAGE> 75
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR AN APPLICABLE PROSPECTUS
SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER,
DEALER OR AGENT. THIS PROSPECTUS AND ANY APPLICABLE PROSPECTUS SUPPLEMENT DO NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and information statements and other
information with the Securities and Exchange Commission (the "Commission"). The
Registration Statement, the exhibits and schedules forming a part thereof and
the reports, proxy statements and other information filed by the Company with
the Commission in accordance with the Exchange Act can be inspected and copied
at the Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following regional offices of the Commission:
Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission also
maintains a Web site at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, including
the Company, that file electronically with the Commission. In addition, the
Company's Common Shares are listed on the New York Stock Exchange and similar
information concerning the Company can be inspected and copied at the offices of
the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement (the
"Registration Statement") (of which this Prospectus is a part) under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Offered Securities. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain portions of which have been omitted
as permitted by the rules and regulations of the Commission. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules thereto. For further information
regarding the Company and the Offered Securities, reference is hereby made to
the Registration Statement and such exhibits and schedules, which may be
obtained from the Commission at its principal office in Washington, D.C. upon
payment of the fees prescribed by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company with the
Commission and are incorporated herein by reference:
a. Annual Report on Form 10-K for the fiscal year ended December 31,
1996, as amended by the Annual Report on Form 10-K/A filed with the
Commission on March 31, 1997;
b. The description of the Company's Common Shares contained in the
Company's Registration Statement on Form 8-A/A filed with the Commission on
October 23, 1997;
c. Quarterly Reports on Form 10-Q for the fiscal quarters ended March
31, 1997 and June 30, 1997;
d. Current Report on Form 8-K dated April 4, 1997, as amended by the
Current Report on Form 8-K/A filed with the Commission on June 17, 1997;
and
2
<PAGE> 76
e. Current Report on Form 8-K dated March 6, 1997, as amended by the
Current Reports on Form 8-K/A filed with the Commission on June 2, 1997,
June 17, 1997 and June 19, 1997.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Offered Securities are deemed to be
incorporated by reference in this Prospectus and to be part hereof from the date
of filing of such documents.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein is deemed to be modified or superseded for
purposes of this Prospectus to the extent that a statement contained herein (or
in the applicable Prospectus Supplement) or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded does not, except as so modified or superseded, constitute a part of
this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom this Prospectus has been delivered, upon the written or oral request of
such person, a copy of any and all documents incorporated by reference in this
Prospectus (other than exhibits to such documents unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to Boykin Lodging Company, Terminal Tower, Suite 1500,
50 Public Square, Cleveland, Ohio 44113-2258, Attention: Raymond P. Heitland,
Secretary, telephone number (216) 241-6375.
THE COMPANY
The Company was formed in February 1996 to continue and expand the hotel
ownership, acquisition, redevelopment and repositioning activities of its
predecessors, Boykin Management Company and its affiliates (the "Boykin Group").
The Company completed its initial public offering in November 1996 (the "Initial
Offering") and operates as a self-administered equity real estate investment
trust.
The Company's primary business strategies are to achieve revenue growth in
its hotels, acquire and lease additional hotel and resort properties in the
upscale and moderate markets on an accretive basis, strategically renovate and
upgrade properties to maximize performance and selectively expand and develop
additional hotel properties.
The Company's executive offices are located in the Terminal Tower, Suite
1500, 50 Public Square, Cleveland, Ohio 44113-2258, and its telephone number is
(216) 241-6375.
USE OF PROCEEDS
Unless otherwise described in the accompanying Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Offered Securities
for general corporate purposes, which may include the repayment of certain
indebtedness under the Company's credit facility, the acquisition of properties
(including using the net proceeds for possible portfolio or asset acquisitions
or in business combinations) as suitable opportunities arise and the improvement
of certain properties in the Company's portfolio.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED SHARE DIVIDENDS
The Company's ratio of earnings to combined fixed charges and preferred
share dividends for the year ended December 31, 1994, the pre-Initial Offering
period of January 1, 1996 to November 3, 1996, the post-Initial Offering period
of November 4, 1996 through December 31, 1996 and the nine-month period ended
September 30, 1997 were 1.01, 1.04, 6.29 and 8.20, respectively. In 1992, 1993
and 1995, earnings were insufficient to cover fixed charges by $2,707,000,
$2,464,000 and $48,000, respectively. Through the date of this Prospectus, the
Company's ratio of earnings to combined fixed charges and preferred share
dividends has equaled the Company's ratio of earnings to fixed charges because
the Company has had no Preferred Shares outstanding.
3
<PAGE> 77
For purposes of computing this ratio, earnings have been calculated by
adding fixed charges (excluding capitalized interest) to income (loss) before
income taxes and extraordinary items. Fixed charges consist of interest costs,
whether expensed or capitalized, the interest component of rental expense, and
amortization of debt discounts and issue costs, whether expensed or capitalized,
adjusted by preferred share dividends.
DESCRIPTION OF PREFERRED SHARES
The Amended and Restated Articles of Incorporation of the Company (the
"Articles") authorize the issuance of up to (i) 5,000,000 Class A Cumulative
Preferred Shares, without par value (the "Cumulative Shares"), and (ii)
5,000,000 Class A Noncumulative Preferred Shares, without par value (the
"Noncumulative Shares") (the Cumulative Shares and the Noncumulative Shares
collectively, the "Preferred Shares"). As of the date of this Prospectus, no
Cumulative Shares or Noncumulative Shares are outstanding.
The following description of the Preferred Shares sets forth certain
general terms and provisions of each class of Preferred Shares to which any
Prospectus Supplement may relate. The statements below are in all respects
subject to and qualified in their entirety by reference to the applicable
provisions of the Articles, which will be further amended by the Board of
Directors in connection with the fixing by the Board of Directors of certain
terms of the Preferred Shares as provided below.
GENERAL
The Cumulative Shares and the Noncumulative Shares rank on a parity with
each other and are identical to each other, except (1) that dividends on the
Cumulative Shares will be cumulative, while dividends on the Noncumulative
Shares will not be cumulative, and (2) in respect of the following matters that,
pursuant to the terms of the Articles and subject to Ohio law, may be fixed by
the Board of Directors with respect to each series of each class of Preferred
Shares prior to the issuance thereof: (i) the designation of the series which
may be by distinguishing number, letter or title, (ii) 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), (iii) the dividend rate or rates of the series,
including the means by which such rates may be established, (iv) with respect to
the Cumulative Shares, the date or dates from which dividends shall accrue and
be cumulative and, with respect to all Preferred Shares, the date 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, (v)
redemption rights and prices, (vi) the terms and amounts of any sinking fund,
(vii) 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
Company, (viii) whether the shares of the series are 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 (ix) restrictions (in addition to those
set forth in the Articles) on the issuance of shares of the same or any other
class or series.
Reference is made to the applicable Prospectus Supplement relating to the
Preferred Shares offered thereby for specific terms, including:
(1) The class, series and title of such Preferred Shares;
(2) The number of such Preferred Shares offered, the liquidation
preference per share and the offering price of such Preferred Shares;
(3) The dividend rate or rates, period or periods and payment date or
dates or method of calculation thereof applicable to such Preferred
Shares;
(4) The date from which dividends on such Preferred Shares shall
accumulate, if applicable;
(5) The procedures for any auction or remarketing of such Preferred
Shares;
(6) The provision for any sinking fund for such Preferred Shares;
(7) The provision for redemption, if applicable, of such Preferred Shares;
(8) Any listing of such Preferred Shares on any securities exchange;
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(9) Any terms and conditions upon which such Preferred Shares will be
convertible into Common Shares of the Company, including the
conversion price (or manner of calculation thereof);
(10) Whether interests in such Preferred Shares will be represented by
Depositary Shares;
(11) Any other specific terms, preferences, rights, limitations or
restrictions of or on such Preferred Shares;
(12) A discussion of federal income tax considerations applicable to such
Preferred Shares;
(13) The relative ranking and preferences of such Preferred Shares as to
dividend rights and rights upon liquidation, dissolution or winding up
of the affairs of the Company;
(14) Any limitations on issuance of securities ranking senior to or on a
parity with such Preferred Shares as to dividend rights and rights
upon liquidation, dissolution or winding up of the affairs of the
Company; and
(15) Any limitations on direct or beneficial ownership and restrictions on
transfer, in each case as may be appropriate to preserve the status of
the Company as a REIT.
The Preferred Shares will, when issued, be fully paid and nonassessable and
will have no preemptive rights.
RANK
All Preferred Shares will, when issued, rank (i) on a parity with all other
Preferred Shares with respect to dividend rights (subject to dividends on
Noncumulative Shares being noncumulative) and rights upon liquidation,
dissolution or winding up of the Company, (ii) senior to all classes of Common
Shares of the Company and to all other equity securities ranking junior to such
Preferred Shares with respect to dividend rights and rights upon liquidation,
dissolution or winding up of the Company; (iii) on a parity with all equity
securities issued by the Company the terms of which specifically provide that
such equity securities rank on a parity with the Preferred Shares with respect
to dividend rights and rights upon liquidation, dissolution or winding up of the
Company; and (iv) junior to all equity securities issued by the Company the
terms of which specifically provide that such equity securities rank senior to
the Preferred Shares, with respect to dividend rights and rights upon
liquidation, dissolution or winding up of the Company.
DIVIDENDS
The holders of each series of each class of Preferred Shares are entitled
to receive, if, when and as declared, out of funds legally available therefor,
dividends in cash at the rate determined for such series and no more, payable on
the dates fixed for such series, in preference to the holders of Common Shares
and of any other class of shares ranking junior to the Preferred Shares. With
respect to each series of Cumulative Shares, such dividends will be cumulative
from the dates fixed for the series. With respect to each series of
Noncumulative Preferred Shares, dividends will not be cumulative (i.e., if the
Board of Directors fails to declare a dividend payable on a dividend payment
date on any Noncumulative Shares, the holders of such series of Noncumulative
Shares will have no right to receive a dividend in respect of the dividend
period ending on such dividend payment date, and the Company will have no
obligation to pay any dividend for such period, whether or not dividends on such
series of Noncumulative Shares would be declared to be payable on any future
dividend payment date). Each such dividend will be payable to holders of record
as they appear on the share transfer books of the Company on such record dates
as are fixed by the Board of Directors of the Company.
If Preferred Shares of any series of any class are outstanding, no
dividends may be paid or declared and set apart for any series of 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
for all shares of all series of such class then issued and outstanding and
entitled to receive such dividend (but, if such series are series of
Noncumulative Shares, then only with respect to the current dividend period),
ratably in proportion to the respective annual dividend rates fixed therefor,
shall have been paid or declared and set apart and (ii) the dividends payable
for the dividend periods terminating on the same or any earlier date for all
other classes of Preferred Shares then issued and outstanding and entitled to
receive such dividends (but, with respect to Noncumulative Shares, only with
respect to the then current dividend period), ratably in proportion to the
respective dividend rates fixed therefor, shall have been paid or declared and
set apart.
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So long as any series of Preferred Shares is outstanding, no dividend,
except a dividend payable in Common Shares or other shares ranking junior to
such series of Preferred Shares, shall be paid or declared or any distribution
made, except as aforesaid, in respect of the Common Shares or any other shares
ranking junior to such series of Preferred Shares, nor shall any Common Shares
or any other shares ranking junior to such series of Preferred Shares be
purchased, retired or otherwise acquired by the Company, except out of the
proceeds of the sale of Common Shares or other shares of the Company ranking
junior to such series of Preferred Shares received by the Company subsequent to
the date of first issuance of such series of Preferred Shares, unless (i) all
accrued and unpaid dividends on all classes of Preferred Shares then
outstanding, including the full dividends for all current dividend periods
(except, with respect to Noncumulative Shares, for the then current dividend
period only), shall have been declared and paid or a sum sufficient for payment
thereof set apart, and (ii) there shall be no arrearages with respect to the
redemption of any series of any class of Preferred Shares from any sinking fund
provided for such class in accordance with the Articles.
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 any class of Preferred Shares will be inapplicable to (i) any payments
in lieu of issuance of fractional shares, whether upon any merger, conversion,
stock dividend or otherwise, (ii) the conversion of Preferred Shares into Common
Shares, or (iii) the exercise by the Company of its rights to repurchase shares
of its capital stock in order to preserve its status as a REIT under the
Internal Revenue Code of 1986, as amended from time to time (the "Code"). No
interest, or sum of money in lieu of interest, is payable in respect of any
dividend payment on Preferred Shares of any series which may be in arrears.
Any dividend payment made on Preferred Shares will first be credited
against the earliest accrued but unpaid dividend due with respect to such shares
which remains payable.
REDEMPTION
If so described in the applicable Prospectus Supplement, a series of a
class of Preferred Shares will be subject to mandatory redemption or redemption
at the option of the Company, as a whole or in part, in each case upon the
terms, at the times and at the redemption prices described in such Prospectus
Supplement.
The Prospectus Supplement relating to a series of Preferred Shares that is
subject to mandatory redemption will specify the number of such Preferred Shares
that will be redeemed by the Company in each year commencing after a date to be
specified, at a redemption price per share to be specified, together with an
amount equal to all accrued and unpaid dividends thereon (which, in the case of
Noncumulative Shares, includes only unpaid dividends for the current dividend
period) to the date of redemption. The redemption price may be payable in cash
or other property, as described in the applicable Prospectus Supplement.
Except in connection with the repurchase by the Company of shares in order
to maintain its qualification as a REIT for federal income tax purposes, the
Company may not purchase or redeem (for sinking fund purposes or otherwise) less
than all of a class of Preferred Shares then outstanding except in accordance
with a share purchase offer made to all holders of record of such class, unless
all dividends on all Preferred Shares of that class then outstanding for
previous and current dividend periods (but, in the case of Noncumulative Shares,
dividends for the current dividend period only) shall have been declared and
paid or funds therefor set apart and all accrued sinking fund obligations
applicable thereto shall have been complied with.
If fewer than all of the outstanding shares of any class of Preferred
Shares are to be redeemed, the number of shares to be redeemed will be
determined by the Company and such shares to be redeemed will be selected by lot
in a manner determined by the Board of Directors.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of a Preferred Share to
be redeemed at the address shown on the share transfer books of the Company. If
fewer than all the Preferred Shares of any series are to be redeemed, the notice
mailed to each such holder thereof will also specify the number of Preferred
Shares to be redeemed from each holder. If notice of redemption of any Preferred
Shares has been given and if the funds necessary for such redemption have been
set aside by the Company in trust for the benefit of the holders of the
Preferred Shares so called for redemption, then
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from and after the redemption date dividends will cease to accrue on such
Preferred Shares, and such holders will cease to be shareholders with respect to
such shares and such holders shall have no right or claim against the Company
with respect to such shares, except only the right to receive the redemption
price without interest or to exercise before the redemption date any unexercised
privilege of conversion.
LIQUIDATION PREFERENCE
In the event of any voluntary liquidation, dissolution or winding up of the
affairs of the Company, the holders of any series of any class of Preferred
Shares are entitled to receive in full out of the assets of the Company,
including its capital, before any amount is paid or distributed among the
holders of the Common Shares or any other shares ranking junior to such series,
the amounts fixed by the Board of Directors with respect to such series and set
forth in the applicable Prospectus Supplement plus an amount equal to all
dividends accrued and unpaid thereon (but, with respect to Noncumulative Shares,
dividends for the current dividend period only) to the date of payment of the
amount due pursuant to such liquidation, dissolution or winding up the affairs
of the Company. After payment to the holders of the Preferred Shares of the full
preferential amounts to which they are entitled, the holders of Preferred
Shares, as such, shall have no right or claim to any of the remaining assets of
the Company.
If liquidating distributions shall have been made in full to all holders of
Preferred Shares, the remaining assets of the Company will distribute among the
holders of any other classes or series of shares ranking junior to the Preferred
Shares upon liquidation, dissolution or winding up, according to their
respective rights and preferences and in each case according to their respective
numbers of shares. The merger or consolidation of the Company into or with any
other corporation, or the sale, lease or conveyance of all or substantially all
of the assets of the Company, will not constitute a dissolution, liquidation or
winding up of the Company.
VOTING RIGHTS
Holders of Preferred Shares will not have any voting rights, except as set
forth below and as from time to time required by law.
If and when the Company is in default in the payment of dividends on any
series of Cumulative Shares at any time outstanding, for a number of dividend
payment periods (whether or not consecutive) which in the aggregate contain at
least 540 days, then holders of all series of Cumulative Shares then
outstanding, voting together as a class, will be entitled to elect a total of
two members of the Board of Directors, which voting right will be vested (and
any additional directors will serve) until all accrued and unpaid dividends on
such series of Cumulative Shares shall have been paid or declared and a sum
sufficient for the payment thereof set aside for payment.
If and when the Company has not paid or declared and set aside a sum
sufficient for the payment of dividends on any series of Noncumulative Shares
then 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 Noncumulative Shares then outstanding, voting together as a class,
shall be entitled to elect two members of the Board of Directors (in addition to
any members of the Board of Directors elected by the holders of Cumulative
Shares) until the Company has fully paid or has set aside a sum sufficient for
the payment of, dividends on such Noncumulative Shares for a number of
consecutive dividend payment periods which in the aggregate contain at least 360
days.
The affirmative vote of the holders of at least two-thirds of a class of
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, is
necessary to effect either of the following:
(1) 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 class of Preferred Shares; or
(2) Any amendment, alteration or repeal, whether by merger,
consolidation or otherwise, of any of the provisions of the Articles or the
Code of Regulations which affects adversely and materially the preferences
or voting or other right of the holders of such class of Preferred Shares
which are set forth in the Articles;
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provided, however, neither the amendment of the Articles so as to
authorize, create or change the authorized or outstanding number of a class
of Preferred Shares or of any shares ranking on a parity with or junior to
such class of Preferred Shares nor the amendment of the provisions of the
Code of Regulations so as to change the number or classification of
directors of the Company shall be deemed to affect adversely and materially
preferences or voting or other rights of the holders of such class of
Preferred Shares.
Without limiting the provisions described above, under Ohio law, holders of
each class of Preferred Shares will be entitled to vote as a class on any
amendment to the Articles, whether or not they are entitled to vote thereon by
the Articles, if the amendment would (i) increase or decrease the par value of
the shares of such class, (ii) change the issued shares of such class into a
lesser number of shares of such class or into the same or different number of
shares of another class, (iii) change the express terms or add express terms of
the shares of the class in any manner substantially prejudicial to the holders
of such class, (iv) change the express terms of issued shares of any class
senior to the particular class in any manner substantially prejudicial to the
holders of shares of the particular class, (v) authorize shares of another class
that are convertible into, or authorize the conversion of shares of another
class into, shares of the particular class, or authorize the directors to fix or
alter conversion rights of shares of another class that are convertible into
shares of the particular class, (vi) reduce or eliminate the stated capital of
the Company, (vii) substantially change the purposes of the Company or (viii)
change the Company into a nonprofit corporation.
If, and only to the extent, that (i) a class of Preferred Shares is issued
in more than one series and (ii) 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 such class of 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 the Articles or
the Code of Regulations which affects adversely and materially the preferences
or voting or other rights of the holders of such series which are set forth in
the Articles; provided, however, neither the amendment of the Articles so as to
authorize, create or change the authorized or outstanding number of a class of
Preferred Shares or of any shares ranking on a parity with or junior to such
class of Preferred Shares nor the amendment of the provisions of the Code of
Regulations so as to change the number or classification of directors of the
Company shall be deemed to affect adversely and materially the preference or
voting or other rights of the holders of such series.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would be required shall be
effected, all outstanding shares of such series of Preferred Shares shall have
been redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which shares of any series of any
class of Preferred Shares are convertible into Common Shares will be set forth
in the applicable Prospectus Supplement relating thereto. Such terms will
include the number of Common Shares into which the Preferred Shares are
convertible, the conversion price (or manner of calculation thereof), the
conversion period, provisions as to whether conversion will be at the option of
the holders of such Preferred Shares or the Company, the events requiring an
adjustment of the conversion price, and provisions affecting conversion upon the
occurrence of certain events.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares. Specifically,
not more than 50% in value of the Company's outstanding shares may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include certain entities) during the last half of a taxable year or during a
proportionate part of a shorter taxable year, and the Company must be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year or during a proportionate part of a shorter taxable year. See "Federal
Income Tax Considerations--Requirements for Qualification." Because the Company
believes that it qualified, and will continue to qualify, as a REIT beginning
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with the taxable year ended December 31, 1996, the Articles limit the
acquisition of shares of the Company's capital stock (the "Ownership Limit").
The Ownership Limit provides that, subject to certain exceptions set forth
in the Articles, no person may own, or be deemed to own, by vote or value, by
virtue of the applicable attribution provisions of the Code, more than 9.0% of
any class of the outstanding shares of the Company. The Board of Directors may,
but is not required to, waive the Ownership Limit if it determines that greater
ownership will not jeopardize the Company's status as a REIT. As a condition of
that waiver, the Board of Directors may require opinions of counsel satisfactory
to it and undertakings or representations from the applicant with respect to
preserving the REIT status of the Company.
If any purported transfer of capital shares of the Company or any other
event would otherwise result in any person or entity violating the Ownership
Limit or would cause the Company to be beneficially owned by fewer than 100
persons, that transfer will be void and of no force or effect as to the number
of shares in excess of the Ownership Limit, and the purported transferee (the
"Prohibited Transferee") will acquire no right or interest (or, in the case of
any event other than a purported transfer, the person or entity holding record
title to shares in excess of the Ownership Limit (the "Prohibited Owner") will
cease to own any right or interest) in the excess shares. In addition, if any
purported transfer of shares of the Company or any other event would cause the
Company to become "closely held" under the Code or otherwise to fail to qualify
as a REIT under the Code, that transfer will be void and of no force or effect
as to the number of shares in excess of the number that could have been
transferred without that result, and the Prohibited Transferee will acquire no
right or interest (or, in the case of any event other than a transfer, the
Prohibited Owner will cease to own any right or interest) in the excess shares.
Also, if any purported transfer of shares of the Company or any other event
would otherwise cause the Company to own, or be deemed to own by virtue of the
applicable attribution provisions of the Code, 10% or more, by vote or value, of
the ownership interests in the Boykin Management Company Limited Liability
Company or in any sublessee, that transfer or event will be void and of no force
or effect as to the number of shares in excess of the number that could have
been transferred or affected by that event without that result, and the
Prohibited Transferee will acquire no right or interest (or, in the case of any
event other than a transfer, the Prohibited Owner will cease to own any right or
interest) in the excess shares.
Any excess shares arising from a prohibited transfer described above will
be transferred automatically to a trust, the beneficiary of which will be a
qualified charitable organization selected by the Company (the "Beneficiary").
The trustee of the trust, who will be designated by the Company and be
unaffiliated with the Company and any Prohibited Owner, will be empowered to
sell the excess shares to a qualified person or entity and to distribute to the
applicable Prohibited Transferee an amount equal to the lesser of the price paid
by the Prohibited Transferee for those excess shares or the sale proceeds
received for those shares by the trust. The trustee will be empowered to sell
any excess shares resulting from any event other than a transfer, or from a
transfer for no consideration, to a qualified person or entity and distribute to
the applicable Prohibited Owner an amount equal to the lesser of the fair market
value of those excess shares on the date of the triggering event or the sale
proceeds received by the trust for those excess shares. Prior to a sale of any
excess shares by the trust, the trustee will be entitled to receive, in trust
for the benefit of the Beneficiary, all dividends and other distributions paid
by the Company with respect to those shares, and also will be entitled to
exercise all voting rights with respect to those shares.
All certificates representing shares of the Company will bear a legend
referring to the restrictions described above.
Every owner of more than 5% (or such lower percentage as may be required by
the Code or the Regulations promulgated thereunder (the "Treasury Regulations"))
of the outstanding shares of the Company must file no later than January 30 of
each year a written notice with the Company containing the information specified
in the Articles. In addition, each shareholder will be required, upon demand, to
disclose to the Company in writing such information as the Company may request
in order to determine the effect, if any, of that shareholder's actual and
constructive ownership on the Company's status as a REIT and to ensure
compliance with the Ownership Limit.
The Ownership Limit may have the effect of precluding an acquisition of
control of the Company without approval of the Board of Directors.
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DESCRIPTION OF DEPOSITARY SHARES
GENERAL
The Company may issue through a depositary (such depositary or its
successor, the "Preferred Shares Depositary") receipts ("Depositary Receipts")
for Depositary Shares, each of which will represent a fractional interest or a
share of a particular series of a class of Preferred Shares, as specified in the
applicable Prospectus Supplement. Preferred Shares of each series of each class
represented by Depositary Shares will be deposited under a separate Deposit
Agreement (each, a "Deposit Agreement") among the Company, the Preferred Shares
Depositary and the holders from time to time of the Depositary Receipts. Subject
to the Deposit Agreement, each owner of a Depositary Receipt will be entitled,
in proportion to the fractional interest of a share of the particular series of
a class of Preferred Shares represented by the Depositary Shares evidenced by
such Depositary Receipt, to all the rights and preferences of the Preferred
Shares represented by such Depositary Shares (including dividend, voting,
conversion, redemption and liquidation rights). As of the date of this
Prospectus, there are no Depositary Shares outstanding.
The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the applicable Deposit Agreement. Immediately following the issuance
and delivery of the applicable Preferred Shares by the Company to the Preferred
Shares Depositary, the Company will cause the Preferred Shares Depositary to
issue, on behalf of the Company, the Depositary Receipts. Copies of the
applicable form of Deposit Agreement and Depositary Receipt will be filed with
the Commission at or prior to any offering of Depositary Shares and may be
obtained from the Company upon request.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Preferred Shares Depositary will distribute all cash dividends or other
cash distributions, with all fractions being rounded down to the nearest whole
cent, received in respect of the Preferred Shares to the record holders of the
Depositary Receipts evidencing the related Depositary Shares in proportion to
the number of such Depositary Receipts owned by such holder, subject to certain
obligations of holders to file proofs, certificates and other information and to
pay certain charges and expenses to the Preferred Shares Depositary.
In the event of a distribution other than in cash, the Preferred Shares
Depositary will distribute property received by it to the record holders of
Depositary Receipts entitled thereto, subject to certain obligations of holders
to file proofs, certificates and other information and to pay certain charges
and expenses to the Preferred Shares Depositary, unless the Preferred Shares
Depositary determines that it is not feasible to make such distribution, in
which case the Preferred Shares Depositary may, with the approval of the
Company, sell such property and distribute the net proceeds from such sale to
such holders.
No distribution will be made in respect of any Depositary Share to the
extent that it represents any Preferred Share which has been converted or
exchanged. The Deposit Agreement will also contain provisions relating to the
manner in which any subscription or similar right offered by the Company to
holders of the Preferred Shares will be made available to holders of Depositary
Shares.
WITHDRAWAL OF SHARES
Upon surrender of Depositary Receipts at the corporate trust office of the
Preferred Shares Depositary (unless the related Depositary Shares have
previously been called for redemption), the holder thereof will be entitled to
delivery at such office, to or upon such holder's order, of the number of whole
or fractional Preferred Shares and any money or other property represented by
the Depositary Shares evidenced by such Depositary Receipts. Holders of
Depositary Receipts will be entitled to receive whole or fractional shares of
the related Preferred Shares on the basis of the proportion of Preferred Shares
represented by each Depositary Share as described in the applicable Prospectus
Supplement, but holders of such Preferred Shares will not thereafter be entitled
to receive Depositary Shares therefor. If the Depositary Receipts delivered by
the holder evidence a number of Depositary Shares in excess of the number of
Depositary Shares that represent the number of Preferred Shares to be withdrawn,
the Preferred Shares Depositary will deliver to such holder at the same time a
new Depositary Receipt evidencing such excess number of Depositary Shares.
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REDEMPTION OF DEPOSITARY SHARES
Whenever the Company redeems Preferred Shares held by the Preferred Shares
Depositary, the Preferred Shares Depositary will redeem as of the same
redemption date the number of Depositary Shares representing the Preferred
Shares so redeemed, so long as the Company has paid in full to the Preferred
Shares Depositary the redemption price of the Preferred Shares to be redeemed
plus an amount equal to any accrued and unpaid dividends (but, with respect to
Noncumulative Shares, dividends for the current dividend period only) thereon to
the date fixed for redemption. The redemption price per Depositary Share will be
equal to the redemption price and any other amounts per share payable with
respect to the corresponding Preferred Shares. If less than all the Depositary
Shares are to be redeemed, the Depositary Shares to be redeemed will be selected
by the Preferred Shares Depositary by lot or pro rata as may be determined by
the Preferred Shares Depositary.
After the date fixed for redemption, the Depositary Shares so called for
redemption will no longer be deemed to be outstanding and all rights of the
holders of the Depositary Receipts evidencing the Depositary Shares so called
for redemption will cease, except the right to receive any moneys payable upon
such redemption and any money or other property to which the holders of such
Depositary Receipts were entitled upon such redemption upon surrender thereof to
the Preferred Shares Depositary.
VOTING OF THE UNDERLYING PREFERRED SHARES
Upon receipt of notice of any meeting at which the holders of the Preferred
Shares are entitled to vote, the Preferred Shares Depositary will be required to
mail the information contained in such notice of meeting to the record holders
of the Depositary Receipts evidencing the Depositary Shares which represent such
Preferred Shares. Each record holder of Depositary Receipts evidencing
Depositary Shares on the record date (which will be the same date as the record
date for the Preferred Shares) will be entitled to instruct the Preferred Shares
Depositary as to the exercise of the voting rights pertaining to the amount of
Preferred Shares represented by such holder's Depositary Shares. The Preferred
Shares Depositary will endeavor, insofar as practical, to vote the amount of
Preferred Shares represented by such Depositary Shares in accordance with such
instructions, and the Company will agree to take all reasonable action which may
be deemed necessary by the Preferred Shares Depositary in order to enable the
Preferred Shares Depositary to do so. The Preferred Shares Depositary will be
required to abstain from voting the amount of Preferred Shares represented by
such Depositary Shares to the extent it does not receive specific instructions
from the holders of Depositary Receipts evidencing such Depositary Shares. The
Preferred Shares Depositary will not be responsible for any failure to carry out
any instruction to vote, or for the manner or effect of any such vote, as long
as such action or inaction is in good faith and does not result from gross
negligence or willful misconduct of the Preferred Shares Depositary.
LIQUIDATION PREFERENCE
In the event of liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, each holder of a Depositary Receipt will be
entitled to the fraction of the liquidation preference accorded each Preferred
Share represented by the Depositary Share evidenced by such Depositary Receipt,
as described in the applicable Prospectus Supplement.
CONVERSION OF PREFERRED SHARES
The Depositary Shares, as such, are not convertible into Common Shares or
any other securities or property of the Company. Nevertheless, if so described
in the applicable Prospectus Supplement relating to an offering of Depositary
Shares that represent convertible Preferred Shares, the Depositary Receipts may
be surrendered by holders thereof to the Preferred Shares Depositary with
written instructions to the Preferred Shares Depositary to instruct the Company
to cause conversion of the Preferred Shares represented by the Depositary Shares
evidenced by such Depositary Receipts into the securities into which those
Preferred Shares are convertible, and the Company has agreed that upon receipt
of such instructions and any amounts payable in respect thereof, it will cause
the conversion thereof utilizing the same procedures as those provided for
delivery of Preferred Shares to effect such conversion. If the Depositary Shares
evidenced by a Depositary Receipt are to be converted in part only, one or more
new Depositary Receipts will be issued for any Depositary Shares not to be
converted. No
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fractional Common Shares will be issued upon any conversion, and if such
conversion would have resulted in a fractional share being issued, an amount
will be paid in cash by the Company equal to the value of the fractional
interest based upon the closing price of the Common Shares on the last business
day prior to the conversion.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The form of Depositary Receipt evidencing the Depositary Shares which
represent the Preferred Shares and any provision of the Deposit Agreement may at
any time be amended by agreement between the Company and the Preferred Shares
Depositary. However, any amendment that materially and adversely alters the
rights of the holders of Depositary Receipts will not be effective unless such
amendment has been approved by the existing holders of at least a majority of
the Depositary Shares evidenced by the Depositary Receipts then outstanding.
The Deposit Agreement may be terminated by the Company upon not less than
30 days' prior written notice to the Preferred Shares Depositary if (i) such
termination is to preserve the Company's status as a REIT or (ii) a majority of
each class of Preferred Shares affected by such termination consents to such
termination, whereupon the Preferred Shares Depositary shall deliver or make
available to each holder of Depositary Receipts, upon surrender of the
Depositary Receipts held by such holder, such number of whole or fractional
Preferred Shares as are represented by the Depositary Shares evidenced by such
Depositary Receipts. In addition, the Deposit Agreement will automatically
terminate if (i) all outstanding Depositary Shares shall have been redeemed,
(ii) there shall have been a final distribution in respect of the related
Preferred Shares in connection with any liquidation, dissolution or winding up
of the Company and such distribution shall have been made to the holders of
Depositary Receipts evidencing the Depositary Shares representing such Preferred
Shares or (iii) each related Preferred Share shall have been converted into
interests in the Company not represented by Depositary Shares.
CHARGES OF PREFERRED SHARES DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of the Deposit Agreement. In addition, the
Company will pay the fees and expenses of the Preferred Shares Depositary in
connection with the performance of its duties under the Deposit Agreement.
However, holders of Depositary Receipts will pay the fees and expenses of the
Preferred Shares Depositary for any duties requested by such holders to be
performed which are outside of those expressly provided for in the Deposit
Agreement.
RESIGNATION AND REMOVAL OF DEPOSITARY
The Preferred Shares Depositary may resign at any time by delivering to the
Company notice of its election to do so, and the Company may at any time remove
the Preferred Shares Depositary, any such resignation or removal to take effect
upon the appointment of a successor Preferred Shares Depositary. A successor
Preferred Shares Depositary must be appointed within 60 days after delivery of
the notice of resignation or removal and must be a bank or trust company having
its principal office in the United States and having a combined capital and
surplus of at least $50,000,000.
MISCELLANEOUS
The Preferred Shares Depositary will be required to forward to holders of
Depositary Receipts any reports and communications from the Company which are
received by the Preferred Shares Depositary with respect to the related
Preferred Shares.
Neither the Preferred Shares Depositary nor the Company will be liable if
it is prevented from or delayed in, by law or any circumstance beyond its
control, performing its obligations under the Deposit Agreement. The obligations
of the Company and the Preferred Shares Depositary under the Deposit Agreement
will be limited to performing their duties thereunder in good faith and without
negligence, gross negligence or willful misconduct, and the Company and the
Preferred Shares Depositary will not be obligated to prosecute or defend any
legal proceeding in respect of any Depositary Receipts, Depositary Shares or
Preferred Shares represented thereby unless satisfactory indemnity is furnished.
The Company and the Preferred Shares Depositary may rely on written advice of
counsel or accountants, or information provided by persons presenting Preferred
Shares represented
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thereby for deposit, holders of Depositary Receipts or other persons believed to
be competent to give such information, and on documents believed to be genuine
and signed by a proper party.
If the Preferred Shares Depositary receives conflicting claims, requests or
instructions from any holders of Depositary Receipts, on the one hand, and the
Company, on the other hand, the Preferred Shares Depositary is entitled to act
on such claims, requests or instructions received from the Company.
RESTRICTIONS ON OWNERSHIP
The Company must meet certain requirements concerning the ownership of its
outstanding shares in order to qualify as a REIT under the Code. See the
discussion above under "Description of Preferred Shares--Restrictions on
Ownership."
DESCRIPTION OF COMMON SHARES
GENERAL
The Articles authorize the issuance of up to 40,000,000 Common Shares,
without par value. As of November 1, 1997, there were 9,536,251 Common Shares
issued and outstanding. In addition, up to 1,000,000 Common Shares have been
reserved for issuance upon the exercise of options under the Company's Long-Term
Incentive Plan and 30,000 Common Shares have been reserved for issuance upon the
exercise of options granted to the Company's directors. In addition, as of
November 1, 1997, there were 1,340,718 units (the "Units") outstanding in Boykin
Hotel Properties, L.P. (the "Partnership"), through which the Company owns all
of its hotel property interests. The Units may be exchanged for cash subject to
the Company's right to deliver Common Shares on a one-for-one-basis in lieu of a
cash payment. The 293,602 Units owned by John E. Boykin, Robert W. Boykin,
Raymond P. Heitland and Paul A. O'Neil may not be exchanged until November 4,
1999. As of the date of this Prospectus, the balance of the Units may be
exchanged. The Common Shares are listed on the New York Stock Exchange under the
symbol "BOY." National City Bank, Cleveland, Ohio, is the transfer agent and
registrar of the Common Shares.
The following description of the Common Shares sets forth certain general
terms and provisions of the Common Shares to which any Prospectus Supplement may
relate, including a Prospectus Supplement providing that Common Shares may be
issuable upon conversion of Preferred Shares or upon the exercise of Warrants.
The statements below describing the Common Shares are in all respects subject to
and qualified in their entirety by reference to the applicable provisions of the
Articles and the Company's Code of Regulations (the "Code of Regulations").
Holders of Common Shares are entitled to receive dividends, when, as and if
declared by the Board of Directors of the Company, out of funds legally
available therefor. The payment and declaration of dividends on the Common
Shares and purchases thereof by the Company will be subject to certain
restrictions if the Company fails to pay dividends on any outstanding Preferred
Shares. See "Description of Preferred Shares-Dividends." The holders of Common
Shares, upon any liquidation, dissolution or winding-up of the Company, are
entitled to receive ratably any assets remaining after payment in full of all
liabilities of the Company and the preferential amounts owing with respect to
any Preferred Shares. See "Description of Preferred Shares--Liquidation
Preference." The Common Shares possess ordinary voting rights, with each share
entitling the holder thereof to one vote. Holders of Common Shares do not have
cumulative voting rights in the election of directors. Holders of Common Shares
do not have preemptive rights, which means that they have no right to acquire
any additional Common Shares that may be subsequently issued by the Company.
All of the Common Shares now outstanding are, and any Common Shares offered
by any accompanying Prospectus Supplement when issued will be, fully paid and
nonassessable.
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RESTRICTIONS ON OWNERSHIP
The Company must meet certain requirements concerning the ownership of its
outstanding shares in order to qualify as a REIT under the Code. See the
discussion above under "Description of Preferred Shares--Restrictions on
Ownership."
OHIO ANTI-TAKEOVER PROVISIONS
The Company has elected not to be subject to Ohio's "Merger Moratorium"
statute (Chapter 1704 of the Ohio Revised Code) or its "Control Share
Acquisition" act (Section 1701.831 of the Ohio Revised Code), in light of the
substantial share transfer restrictions included in the Articles. Section
1707.041 of the Ohio Revised Code, which regulates certain "control bids" for
Ohio corporations, does not contain an election provision and remains applicable
to the Company.
DESCRIPTION OF WARRANTS
The Company may issue Warrants for the purchase of Preferred Shares,
Depositary Shares or Common Shares. Warrants may be issued independently or
together with Preferred Shares, Depositary Shares or Common Shares offered by
any Prospectus Supplement and may be attached to or separate from those Offered
Securities. Each series of Warrants will be issued under a separate warrant
agreement (each, a "Warrant Agreement") to be entered into between the Company
and a warrant agent described in the applicable Prospectus Supplement (the
"Warrant Agent"). The Warrant Agent will act solely as an agent of the Company
in connection with Warrants of such series and will not assume any obligation or
relationship of agency or trust for or with any holder or beneficial owner of
any Warrant.
The applicable Prospectus Supplement will describe the terms of Warrants
offered thereby, including the following when applicable: (1) the title of
Warrants; (2) the aggregate number of Warrants; (3) the price or prices at which
Warrants will be issued; (4) the number of Preferred Shares, Depositary Shares
or Common Shares purchasable upon exercise of Warrants; (5) the designation and
terms of any series of Preferred Shares, Depositary Shares or Common Shares with
which Warrants are being offered and the number of Warrants being offered with
such securities; (6) the date, if any, on and after which Warrants may be
transferred separately from any related securities; (7) the price at which the
securities purchasable upon exercise of Warrants may be purchased; (8) the date
on which the right to exercise Warrants will commence and the date on which such
right will expire; (9) the minimum or maximum amount of Warrants which may be
exercised at any one time; (10) information with respect to any book-entry
procedures; (11) a discussion of material federal income tax considerations; and
(12) any other terms of Warrants including terms, procedures and limitations
relating to the exchange and exercise of Warrants.
See the sections captioned "Description of Preferred Shares," "Description
of Depositary Shares" and "Description of Common Shares" for a general
description of the securities for which Warrants may be exercised, including a
description of certain restrictions on the ownership of the Preferred Shares,
Depositary Shares and Common Shares, and certain anti-takeover provisions of
Ohio law. Preferred Shares, Depositary Shares or Common Shares that may be
acquired upon the exercise of Warrants directly or constructively held by an
investor will be considered outstanding (a) at the time of acquisition of
Warrants, and (b) prior to the exercise of Warrants, in determining the
percentage ownership of the Preferred Shares, Depositary or the Common Shares
held by that investor for purposes of the ownership limits referenced above.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of certain material federal income tax
considerations to the Company and its security holders relating to the Offered
Securities and the treatment of the Company as a REIT. The discussion is general
in nature and is not intended to represent a detailed description of the federal
income tax consequences applicable to a particular shareholder of the Company in
view of a shareholder's particular circumstances, or to certain types of
shareholders (including insurance companies, tax-exempt organizations, financial
institutions or broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) subject to
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special treatment under the federal income tax laws. The discussion in this
section is based on current provisions of the Code, current and proposed
Treasury Regulations, court decisions and other administrative rulings and
interpretations, all of which are subject to change either prospectively or
retroactively. There can be no assurance that any such change, future Code
provision or other legal authority will not alter significantly the tax
considerations described herein.
THIS DISCUSSION IS NOT INTENDED TO BE A SUBSTITUTE FOR CAREFUL TAX PLANNING
AND EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS OWN TAX ADVISOR,
REGARDING THE SPECIFIC TAX CONSEQUENCES, IN VIEW OF SUCH PROSPECTIVE PURCHASER'S
INDIVIDUAL CIRCUMSTANCES, OF THE PURCHASE, OWNERSHIP AND SALE OF THE OFFERED
SECURITIES, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
GENERAL
The Company elected to be taxed as a REIT under Sections 856 through 860 of
the Code, effective for its short taxable year ended December 31, 1996. The
Company believes that, commencing with such taxable year, it has been and is
organized and operating in such a manner as to qualify for taxation as a REIT
under the Code. The Company intends to continue to operate in such a manner, but
no assurance can be given that it will operate in a manner so as to qualify or
remain qualified as a REIT.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth certain
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retroactively.
In the opinion of Baker & Hostetler LLP ("Counsel"), based on certain
assumptions and representations, the Company has qualified as a REIT for its
first taxable year ended December 31, 1996, and the Company is organized in
conformity with the requirements for qualification as a REIT and its method of
operation has and will enable it to continue to meet the requirements for
qualification and taxation as a REIT under the Code, provided the Company
continues to meet the asset composition, source of income, shareholder
diversification, distribution and other requirements of the Code necessary for
the Company to qualify as a REIT. Unlike a tax ruling, an opinion of counsel is
not binding on the United States Internal Revenue Service (the "IRS"), and no
assurance can be given that the IRS will not challenge the status of the Company
as a REIT for federal income tax purposes. In addition, it must be emphasized
that this opinion is based on various assumptions and is conditioned upon
certain representations made by the Company as to factual matters including, but
not limited to, those set forth below in this discussion of "Federal Income Tax
Considerations" and those concerning the Company's business and properties.
Moreover, such qualification and taxation as a REIT depends upon the Company's
ability to meet, through actual annual operating results, distribution levels
and diversity of share ownership, the various qualification tests imposed under
the Code discussed below, the results of which will not be reviewed by Counsel.
Accordingly, no assurance can be given that the actual results of the Company's
operations for any particular taxable year will satisfy such requirements. See
"-- Failure to Qualify."
TAXATION OF THE COMPANY
A REIT, such as the Company, generally will not be subject to federal
corporate income tax on its taxable income that is currently distributed to its
shareholders. This treatment substantially eliminates the "double taxation"
(i.e., taxation at both the corporate and shareholder levels) that generally
results from an investment in a corporation. However, the Company will be
subject to federal income tax in several ways, including the following: First,
the Company will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax."
Third, if the Company has (i) net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in the
ordinary course of business or (ii) other
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non-qualifying income from foreclosure property, it will be subject to tax on
such income at the highest corporate rate. Fourth, if the Company has net income
from "prohibited transactions" (which are, in general, certain sales or other
dispositions of property held primarily for sale to customers in the ordinary
course of business, other than foreclosure property), such income will be
subject to a 100% corporate level tax. Fifth, if the Company should fail to
satisfy the 75% gross income test or the 95% gross income test (each discussed
below) but has nonetheless maintained its qualification as a REIT by satisfying
certain other requirements, it will be subject to a 100% tax on (i) an amount
equal to the gross income attributable to the greater of the amount by which the
Company fails the 75% or 95% test, multiplied by (ii) a fraction intended to
reflect the Company's profitability. Sixth, if the Company should fail to
distribute during each calendar year at least the sum of: (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net income for
such year and (iii) any undistributed taxable income from prior periods, it will
be subject to a 4% excise tax on the excess of such required distribution over
the amounts actually distributed. This excise tax would not apply to
undistributed capital gains for which a Capital Gains Designation (as defined
below) was made. See "--Annual Distribution Requirements". Seventh, if the
Company acquires any asset from a C corporation (i.e., generally a corporation
subject to full corporate-level tax) in a transaction in which the basis of the
asset in the Company's hands is determined by reference to the basis of the
asset (or any other property) in the hands of the C corporation, and the Company
recognizes gain on the disposition of such asset during the ten-year period
beginning on the date the asset was acquired by the Company, then the excess of
(i) the fair market value of such asset as of the beginning of such period over
(ii) the Company's adjusted basis in such asset as of the beginning of such
period, will be subject to tax at the highest regular corporate tax rate.
REQUIREMENTS FOR QUALIFICATION
A REIT is defined in the Code as a corporation, trust or association: (i)
that is managed by one or more trustees or directors; (ii) the beneficial
ownership of which is evidenced by transferable shares or by transferable
certificates of beneficial interest; (iii) that would be taxable as a domestic
corporation, but for Sections 856 through 860 of the Code; (iv) which is neither
a financial institution nor an insurance company subject to certain provisions
of the Code; (v) the beneficial ownership of which is held by 100 or more
persons; (vi) not more than 50% in value of the outstanding shares of which is
owned during the last half of each taxable year, directly or indirectly, by or
for five or fewer individuals (as defined in the Code to include certain
entities); and (vii) which meets certain income and asset tests described below.
Conditions (i) through (iv) and (vii) above must be met during the entire
taxable year and condition (v) must be met during at least 335 days of a taxable
year of 12 months, or during a proportionate part of a taxable year of less than
12 months. However, conditions (v) and (vi) do not apply until after the first
taxable year for which an election is made to be taxed as a REIT. Under the
Taxpayer Relief Act of 1997 (the "1997 Act"), beginning with the Company's 1998
taxable year, if the Company complies with the Treasury Regulations for
ascertaining its actual ownership and did not know, or exercising reasonable
diligence would not have reason to know, that more than 50% in value of its
outstanding shares were held, actually or constructively, by five or fewer
individuals, then the Company will be treated as meeting such requirement. These
share ownership requirements need not be met until the second taxable year of
the Company for which a REIT election is made.
The Company has satisfied conditions (v) and (vi) set forth above. In
addition, the Articles provide for restrictions regarding the ownership and
transfer of the Company's capital shares, which restrictions are intended to
assist the Company in continuing to satisfy those requirements.
In the case of a REIT that is a partner in a partnership, the Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of the
assets and gross income of the partnership will retain the same character in the
hands of the REIT for purposes of Section 856 of the Code, including satisfying
the gross income tests and the asset tests. Thus, the Company's proportionate
share of the assets, liabilities and items of income of the Partnership and
other partnerships (including limited liability companies treated as
partnerships for federal income tax purposes) in which the Company is or becomes
a partner will be treated as assets, liabilities and items of income of the
Company for purposes of applying the requirements described herein.
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INCOME TESTS
In order to maintain qualification as a REIT, currently the Company
annually must satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents from
real property" and, in certain circumstances, interest) or from certain types of
temporary investments. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from such real property investments, dividends, interest and gain
from sale or disposition of stock or securities (or from any combination of the
foregoing). Third, short-term gain from the sale or other disposition of stock
or securities, gain from prohibited transactions and gain on the sale or other
disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of the Company's gross income (including gross income from prohibited
transactions) for each taxable year. The 30% gross income test has been repealed
by the 1997 Act for taxable years beginning after August 5, 1997 and need not be
met by the Company for its taxable year beginning January 1, 1998 and any
taxable year thereafter.
Rents received by the Company ("Rents") will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described above
only if the following conditions are met:
First, in order for the Rents to qualify as "rents from real property," the
Rent, including Rent received pursuant to leases ("Leases") that is based on (i)
percentages of room revenue, food revenue and beverage revenue (the "Percentage
Rent") or (ii) base Rent plus Percentage Rent, must not be based in whole or in
part on the income or profits of any person. The Rent, however, will qualify as
"rents from real property" if it is based on percentages of receipts or sales or
base Rent plus Rent based on percentages of receipts or sales and the Rent
formulas (i) are fixed at the time the Percentage Leases are entered into; (ii)
are not renegotiated during the term of the Leases in a manner that has the
effect of basing Rent on income or profits; and (iii) conforms with normal
business practice. More generally, the Rent will not qualify as "rents from real
property" if, considering the Leases and all the surrounding circumstances, the
arrangement does not conform with normal business practice, but is in reality
used as a means of basing the Rent on income or profits. Since the Rent is based
on fixed percentages of the gross revenues or base Rent plus fixed percentages
of the gross revenues that are established in the Leases, and the Company has
represented that the Rents (i) will not be renegotiated during the terms of the
Leases in a manner that has the effect of basing the Rent on income or profits;
and (ii) conform with normal business practice, the Rent should not be
considered based in whole or in part on the income or profits of any person.
Furthermore, the Company has represented that, with respect to hotel properties
that it acquires in the future, it will not charge rent for any property that is
based in whole or in part on the income or profits of any person (except by
reason of being based on a fixed percentage of gross revenues, or base Rent plus
fixed percentages of the gross revenues, as described above).
Second, in order for the Rents to constitute "rents from real property",
the Rents attributable to personal property leased in connection with the lease
of the real property comprising a hotel must not be greater than 15% of the
Rents received under the leases. The Rent attributable to the personal property
in a hotel is the amount that bears the same ratio to total rent for the taxable
year as the average of the adjusted bases of the personal property in the hotel
at the beginning and at the end of the taxable year bears to the average of the
aggregate adjusted bases of both the real and personal property comprising the
hotel at the beginning and at the end of such taxable year (the "Adjusted Basis
Ratio"). The Company has represented that Rents attributable to personal
property will not exceed 15% of the Rents received under the any lease.
Third, in order for the Rents to constitute "rents from real property", the
Company must not own, directly or constructively, 10% or more of any tenant (the
"10% Ownership Limitation"). Under the attribution rules governing the 10%
Ownership Test, the Company is considered to own any shares owned by the
Partnership if partners in the Partnership collectively own 10% or more (by
value) of the Company. The agreement of limited partnership of the Partnership
provides that a redeeming limited partner will receive cash, rather than Common
Shares, if the acquisition of Common Shares by such partner would result in the
Company being treated as owning, directly or constructively, 10% or more of any
tenant or any tenant's sublessee. However, notwithstanding such restriction,
because the Code's constructive ownership rules for purposes of the 10%
Ownership
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Limitation are broad and it is not possible to continually monitor direct and
indirect ownership of all Company shares, it is possible that the limited
partners of the Partnership may at some time own, directly or through
attribution, 10% or more of such shares, which would cause the Company to fail
the gross income requirements and thus lose its REIT status. Under the 1997 Act,
beginning with the Company's 1998 taxable year, the Company and a tenant will
not be related if (i)(a) the REIT's shares are owned by a partnership and (b) a
partner owning (directly or indirectly) less than a 25% interest in that
partnership also owns an interest in the tenant, or (ii) owners of the Company
and owners of the tenant are partners in a partnership and neither the owners of
the Company nor the owners of the tenant are directly or indirectly 25% or
greater partners in the partnership.
Fourth, in order for the Rents to constitute "rents from real property",
the Company cannot furnish or render services that are of a type that a
tax-exempt organization could not provide its tenants without causing its rental
income to be unrelated business taxable income under the Code ("Non-Qualifying
Services"), other than through an independent contractor from whom the Company
itself does not derive or receive any income, nor can it render services
(whether or not rendered by an independent contractor) that are not customarily
provided to tenants of properties of a similar class in the geographic market in
which the Company's property is located ("Noncustomary Services") (together, the
Noncustomary Services and Non-Qualifying Services are referred to as the
"Impermissible Services") Although the Company does provide certain management
services, the Company has represented and warranted to Counsel that these
services are usual and customary management services provided by landlords in
the geographic areas in which the Company owns property, and that such services
are not primarily for the convenience of its tenants. To the extent the
provision of Non-Qualifying Services would cause such disqualification, the
Company has represented that it will hire independent contractors, from which
the Company derives no income, to perform such services. As described below,
however, if any of the Company's leases are recharacterized as service
contracts, partnership agreements or some other form of arrangement, the Rents
likely would be disqualified as "rents from real property" because the Company
would be considered to furnish or render non-Qualifying Services to the
occupants of the hotels other than through an independent contractor from whom
the Company derives or receives no income.
Under the 1997 Act, beginning with the Company's 1998 taxable year, the
Company will be permitted to render a de minimis amount of Impermissible
Services to tenants of the hotels, or in connection with the management of
property, and still treat amounts received with respect to that property as
rent. The value of these Impermissible Services may not exceed 1% of all amounts
received or accrued during the year, directly or indirectly, from the property.
The value of any service (or management operation) for this purpose shall be
deemed to be not less than 150% of the direct cost of the REIT in furnishing or
rendering the service (or providing the management or operation).
In order for the Rents to constitute "rents from real property," the leases
pursuant to which the Rents are received must be respected as true leases for
federal income tax purposes and not treated as service contracts, joint ventures
or some other type of arrangement. The determination of whether the Leases are
true leases depends on an analysis of all the surrounding facts and
circumstances. In making such a determination, courts have considered a variety
of factors, including the intent of the parties, the form of the agreement, and
the degree of control over the property that is retained by the property owner.
Code Section 7701(e) provides that a contract that purports to be a service
contract (or a partnership agreement) is treated instead as a lease of property
if the contract is properly treated as such, taking into account all relevant
factors, including whether or not (i) the service recipient is in physical
possession of the property; (ii) the service recipient controls the property;
(iii) the service recipient has a significant economic or possessory interest in
the property (e.g., the property's use is likely to be dedicated to the service
recipient for a substantial portion of the useful life of the property, the
recipient shares the risk that the property will decline in value, the recipient
shares in any appreciation in the value of the property, the recipient shares in
savings in the property's operating costs, or the recipient bears the risk of
damage to or loss of the property); (iv) the service provider does not bear any
risk of substantially diminished receipts or substantially increased
expenditures if there is nonperformance under the contract; (v) the service
provider does not use the property concurrently to provide significant services
to entities unrelated to the service recipient; and (vi) the total contract
price does not substantially exceed the rental value of the property for the
contract period. Since the determination whether a service contract should be
treated as a lease is inherently factual, the present or absence of any single
factor may not be dispositive in every case.
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In rendering its opinion that the Company will qualify for taxation as a
REIT, Counsel has concluded that the Leases should be treated as true leases for
federal income tax purposes. Such conclusion is based, in part, on the following
facts: (i) the Partnership and the lessees intend for their relationship to be
that of a lessor and lessee and such relationship will be documented by lease
agreements; (ii) the lessees will have the right to exclusive possession and use
and quiet enjoyment of the hotels during the term of the Leases; (iii) the
lessees will bear the cost of, and be responsible for, day-to-day maintenance
and repair of the hotels, other than the cost of maintaining underground
utilities and structural repairs, and will dictate how the hotels are operated,
maintained and improved; (iv) the lessees will bear all of the costs and
expenses of operating the hotels (including the cost of any inventory used in
their operation) during the term of the Leases (other than real property taxes,
and the cost of replacement or refurbishment of furniture, fixtures and
equipment, to the extent such costs do not exceed the allowance of such costs
provided by the Partnership under each Lease); (v) the lessees will benefit from
any savings in the costs of operating the hotels during the term of the Leases;
(vi) the lessees will indemnify the Partnership against all liabilities imposed
on the Partnership during the term of the Leases by reason of (A) injury to
persons or damage to property occurring at the hotels or (B) the lessees' use,
management, maintenance or repair of the hotels; (vii) the lessees are obligated
to pay substantial fixed rent for the period of use of the hotels; and (viii)
the lessees stand to incur substantial losses (or reap substantial gains)
depending on how successfully they operate the hotels.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving leases with
terms substantially the same as the Leases that discuss whether such leases
constitute true leases for federal income tax purposes. Therefore, the foregoing
conclusions with respect to the relationship between the Partnership and the
lessees are based upon all of the facts and circumstances and upon rulings and
judicial decisions involving situations that are considered to be analogous.
There can be no assurance that the IRS will not successfully assert a contrary
position. If the Leases are recharacterized as service contracts or partnership
agreements, rather than true leases, part or all of the payments that the
Partnership receives from lessees may not be considered rent or may not
otherwise satisfy the various requirements for qualification as "rents from real
property." In that case, the Company likely would not be able to satisfy either
the 75% or 95% income tests and, as a result, would lose its REIT status. See
"-- Requirements for Qualification -- Income Tests."
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
The interest accrued on the $40 million loan from the Company to the
Partnership (the "Intercompany Convertible Note") by the Company will be
qualified income for purposes of the 75% test because the Intercompany
Convertible Note is secured by second mortgages on two of the hotels.
If the sum of the income realized by the Company (whether directly or
through its interest in the Partnership) which does not satisfy the requirements
of the 75% and the 95% gross income tests (collectively, "Non-Qualifying
Income"), exceeds 5% of the Company's gross income for any taxable year, the
Company's status as a REIT would be jeopardized. The Company has represented
that the amount of its Non-Qualifying Income will not exceed 5% of the Company's
annual gross income for any taxable year.
It is possible that, from time to time, the Company or the Partnership will
enter into hedging transactions with respect to one or more of its assets or
liabilities. Any such hedging transactions could take a variety of forms. If the
Company or the Partnership enters into an interest rate swap or cap contract to
hedge any variable rate indebtedness incurred to acquire or carry real estate
assets, any periodic income or gain from the disposition of such contract should
be qualifying income for purposes of the 95% gross income test, but not for the
75% gross income test. Furthermore, any such contract would be considered a
"security" for purposes of applying the 30% gross income test. To the extent
that the Company or the Partnership hedges with other types of financial
instruments or in other situations, it may not be entirely clear how the income
from those transactions will be treated for purposes of the various income tests
that apply to REITs under the Code. The Company intends to structure any hedging
transactions in a manner that does not jeopardize its status as a REIT. Under
the 1997 Act,
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beginning with the Company's 1998 taxable year, except as provided in
regulations, qualifying income for purposes of the 95% gross income test will
include any payment under an interest rate swap or cap agreement, option,
futures contract, forward rate agreement, or any similar financial instrument,
entered into by the Company to reduce its interest rate risk with respect to
debt that was or is to be incurred to acquire or carry real estate assets. Gain
from the sale or other disposition of such hedges is also treated as qualifying
income for purposes of the 95% gross income test.
If the Company fails to satisfy one or both of the 75% or 95% income tests
for any taxable year, it may still qualify as a REIT in such year if (i) it
attaches a schedule of the source and nature of each item of its gross income to
its federal income tax return for such year; (ii) the inclusion of any incorrect
information in its return was not due to fraud with intent to evade tax; and
(iii) the Company's failure to meet such tests is due to reasonable cause and
not due to willful neglect. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. Even if these relief provisions apply, the Company will still be
subject to a tax imposed with respect to the excess net income. See "-- Taxation
of the Company" No such relief is available for violations of the 30% income
test.
ASSET TESTS
In order for the Company to maintain its qualification as a REIT, at the
close of each quarter of its taxable year, it must satisfy three tests relating
to the nature of its assets:
(i) At least 75% of the value of the Company's total assets must be
represented by any combination of interests in real property,
interests in mortgages on real property, shares in other REITs,
cash, cash items, and certain government securities.
(ii) Not more than 25% of the Company's total assets may be represented
by securities other than those in the 75% asset class.
(iii) Of the investments included in the 25% asset class, the value of
any one issuer's securities owned by the Company may not exceed 5%
of the value of the Company's total assets, and the Company may
not own more than 10% of any one issuer's outstanding voting
securities (excluding securities of a qualified REIT subsidiary
(as defined in the Code) or another REIT).
Where the Company owns an interest in a partnership, it will be treated for
purposes of the asset tests as owning a proportionate part of the partnership's
assets. See "-- Tax Aspects of the Company's Investment in the Partnership --
General." The Company's investment in the hotels through its interest in the
Partnership (and through its joint ventures) will constitute qualified assets
for purposes of the 75% asset test. As such, the Company expects that more than
75% of the value of its assets will be real estate assets.
The Company does not expect to hold any securities representing more than
10% of any one issuer's voting securities nor does the Company expect to hold
securities of any one issuer exceeding 5% of the value of the Company's gross
assets. However, if the IRS is successful in treating the Partnership (or either
of the joint ventures) as a corporation for tax purposes, this test would not be
met and the Company's status as a REIT would be jeopardized. See "-- Tax Aspects
of the Company's Investment in the Partnership -- Classification as a
Partnership".
If the Company inadvertently fails one or more of the asset tests at the
end of a calendar quarter, such a failure would not cause it to lose its REIT
status, provided that (i) it satisfied all of the asset tests at the close of a
preceding calendar quarter, and (ii) the discrepancy between the values of the
Company's assets and the standards imposed by the asset test either did not
exist immediately after the acquisition of any particular asset or was not
wholly or partly caused by such an acquisition. If the condition described in
clause (ii) of the preceding sentence was not satisfied, the Company could still
avoid disqualification by eliminating any discrepancy within 30 days after the
close of the calendar quarter in which it arose.
ANNUAL DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT, the Company is required to distribute
dividends (other than capital gain dividends) to its shareholders each year in
an amount at least equal to: (i) the sum of (a) 95% of the Company's
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"REIT taxable income" (computed without regard to the dividends paid deduction
and the Company's net capital gain) and (b) 95% of the net income (after tax),
if any, from foreclosure property, minus (ii) the sum of certain items of
non-cash income. To the extent that the Company does not distribute all of its
net capital gain or distributes at least 95%, but less than 100%, of its "REIT
taxable income," as adjusted, it will be subject to tax thereon at regular
ordinary and capital gains corporate tax rates. Furthermore, if the Company
fails to distribute during each calendar year at least the sum of: (i) 85% of
its REIT ordinary income for such year, (ii) 95% of its REIT capital gain income
for such year and (iii) any undistributed taxable income from prior periods, the
Company will be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Beginning with the Company's
1998 taxable year, the 1997 Act will expand the class of non-cash income that is
excluded from the distribution requirement to include (i) income from the
cancellation of indebtedness and (ii) for REITs, like the Company, that use an
accrual method of accounting, income in excess of the cash and the fair market
value of property received from (a) instruments containing original issue
discount or (b) instruments creating a residual interest in a Real Estate
Mortgage Investment Conduit ("REMIC"). Distributions by the Company must be paid
in the taxable year to which they relate, or in the following taxable year if
declared before the Company timely files its tax return for such year and if
paid on or before the first regular dividend payment after such declaration. To
the extent that the Company does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its REIT taxable income, as
adjusted, it will be subject to tax on the undistributed amount at regular
capital gains or ordinary corporate tax rates, as the case may be. Beginning
with the Company's 1998 taxable year, the 1997 Act will permit a REIT, with
respect to undistributed net long-term capital gains it will receive during the
taxable year, to elect to designate in a notice mailed to shareholders within 60
days of the end of the taxable year (or in a notice mailed with its annual
report for the taxable year) such amount of such gains, which its shareholders
will then be required to include in their taxable income as long-term capital
gains (the "Capital Gains Designation"). Thus, if the Company elects to make
this designation, the shareholders of the Company would include in their income
as long-term capital gains their proportionate share of the undistributed
long-term capital gains as designated by the Company. Each shareholder of the
Company would be deemed to have paid such shareholder's share of the tax paid by
the Company on such gains, which tax would be credited or refunded to the
shareholder. A shareholder would increase his tax basis in his Company stock by
the difference between the amount of income to the shareholder resulting from
the designation and the shareholder's credit or refund for the tax paid by the
Company.
The Company intends to make timely distributions sufficient to satisfy
these annual distribution requirements. In this regard, the partnership
agreement of the Partnership authorizes the Company, as the general partner, to
take such steps as may be necessary to cause the Partnership to distribute to
its partners an amount that would result in the Company's share of such
distribution being sufficient to permit the Company to meet these distribution
requirements. It is possible that the Company, from time to time, may not have
sufficient cash or other liquid assets to meet the 95% distribution requirement
because of timing differences between (i) the actual receipt of income and the
actual payment of deductible expenses and (ii) the inclusion of such income and
deduction of such expenses in arriving at the taxable income of the Company. In
the event that such timing differences occur, in order to meet the 95%
distribution requirement the Company may find it necessary to arrange for
short-term, or possibly long-term, borrowings or to pay dividends in the form of
taxable share dividends.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a certain year by paying "deficiency
dividends" to shareholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Thus, the Company
may be able to avoid being taxed on amounts distributed as deficiency dividends.
However, the Company will be required to pay interest based upon the amount of
any deduction taken for deficiency dividends.
RECORDKEEPING REQUIREMENTS
Pursuant to applicable Treasury Regulations, in order to be able to elect
to be taxed as a REIT, the Company must maintain certain records and request on
an annual basis certain information from its shareholders designed to disclose
the actual ownership of its outstanding shares. Under the 1997 Act, beginning
with the Company's 1998 taxable year, the Company will not lose its REIT status
if it fails to request information from its
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shareholders with respect to the actual ownership of its outstanding shares in
any taxable year, but instead will incur a monetary penalty. The Company has
complied with the recordkeeping requirements in the past and intends to continue
to comply with such requirements.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable corporate alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to shareholders in any year in
which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made by the Company. In such event, to the extent of
current and accumulated earnings and profits, all distributions to shareholders
will be taxable as ordinary income, and, subject to certain limitations, a
corporate distributee may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, the Company will
also be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost. Whether the Company
would be entitled to such statutory relief cannot be foreseen.
TAX ASPECTS OF THE COMPANY'S INVESTMENT IN THE PARTNERSHIP AND CERTAIN JOINT
VENTURES
The following discussion summarizes certain federal income tax
considerations applicable to the Company's direct investment in the Partnership
and, to a limited extent, the Company's indirect investment, through the
Partnership, in various limited partnership joint ventures in which the
Partnership serves as general partner. The discussion does not cover state or
local tax laws or any federal tax laws other than income tax laws.
General. The Company will hold a direct interest in the Partnership and
indirect interests in the joint ventures. In general, a partnership is not
subject to federal income tax. Rather, each partner includes in the partner's
taxable income or loss its allocable share of the partnership's items of income,
gain, loss, deduction and credit, without regard to whether the partner receives
a distribution from the partnership. The Company will include its proportionate
share of the foregoing items of the Partnership and its joint ventures for
purposes of the various REIT income tests and in the computation of its REIT
taxable income. See "-- Requirements for Qualification -- Income Tests." Any
resultant increase in the Company's REIT taxable income will increase its
distribution requirements (see "-- Requirements for Qualification -- Annual
Distribution Requirements"), but such income will not be subject to federal
income tax in the hands of the Company if it is distributed by the Company to
its shareholders. Moreover, for purposes of the REIT asset tests (see "--
Requirements for Qualification -- Asset Tests"), the Company will include its
proportionate share of assets held by the Partnership and the joint ventures.
Classification as a Partnership. The Company will be entitled to include in
its income its distributive share of the Partnership's income and its indirect
share of the income from its joint ventures and to deduct its distributive share
of the losses of these entities only if each of the Partnership and the joint
ventures is classified for federal income tax purposes as a partnership rather
than as a corporation or an association taxable as a corporation. An entity will
be classified as a partnership rather than as a corporation for federal income
tax purposes if the entity (i) is treated as a partnership under Treasury
regulations, effective January 1, 1997, relating to entity classification (the
"Check-the-Box Regulations") and (ii) is not a "publicly traded" partnership.
Pursuant to the Check-the-Box Regulations, an unincorporated entity with at
least two members may elect to be classified either as an association or as a
partnership. If such an entity fails to make an election, it generally will be
treated as a partnership for federal income tax purposes. The federal income tax
classification of an entity that was in existence prior to January 1, 1997, such
as the Partnership and the joint ventures, will be respected for all periods
prior to January 1, 1997 if (i) the entity had a reasonable basis for its
claimed classification, (ii) the entity and all members of the entity recognized
the federal tax consequences of any changes in the entity's classification
within the 60 months prior to January 1, 1997, and (iii) neither the entity nor
any member of the entity was notified in writing by a taxing authority on or
before May 8, 1996 that the classification of the entity was under examination.
The Partnership and each of the joint ventures had a reasonable basis for its
claimed classification under the Treasury Regulations in effect prior to January
1, 1997 and each intends to continue to be classified as a partnership for
federal income tax purposes. In addition, the Company has represented that
neither
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the Partnership nor the joint ventures (i) was notified by a taxing authority on
or before May 8, 1996 that the classification of the entity was under
examination or (ii) will elect to be classified as an association taxable as a
corporation under the Check-the-Box Regulations.
A "publicly traded partnership" is a partnership whose interests are traded
on an established securities market or are readily tradable on a secondary
market (or the substantial equivalent thereof). A publicly traded partnership
will be treated as a corporation for federal income tax purposes unless at least
90% of such partnership's gross income for a taxable year consists of
"qualifying income" under section 7704(d) of the Code, which generally includes
any income that is qualifying income for purposes of the 95% gross income test
applicable to REITs (the "90% Passive-Type Income Exception"). See "Federal
Income Tax Considerations -- Requirements for Qualification -- Income Tests."
The U.S. Treasury Department has issued regulations effective for taxable years
beginning after December 31, 1995 (the "PTP Regulations") that provide limited
safe harbors from the definition of a publicly traded partnership. Pursuant to
one of those safe harbors (the "Private Placement Exclusion"), interests in a
partnership will not be treated as readily tradable on a secondary market or the
substantial equivalent thereof if (i) all interests in the partnership were
issued in a transaction (or transactions) that was not required to be registered
under the Securities Act of 1933, as amended, and (ii) the partnership does not
have more than 100 partners at any time during the partnership's taxable year.
In determining the number of partners in a partnership, a person owning an
interest in a flow-through entity (i.e., a partnership, grantor trust, or S
corporation) that owns an interest in the partnership is treated as a partner in
such partnership only if (a) substantially all of the value of the owner's
interest in the flow-through entity is attributable to the flow-through entity's
interest (direct or indirect) in the partnership and (b) a principal purpose of
the use of the flow-through entity is to permit the partnership to satisfy the
100-partner limitation. Each of the Partnership and the joint ventures qualifies
for the Private Placement Exclusion.
If for any reason the Partnership or a joint venture were taxable as a
corporation, rather than as a partnership, for federal income tax purposes, the
Company would not be able to qualify as a REIT. See "-- Requirements for
Qualification -- Income Tests" and "-- Requirements for Qualification -- Asset
Tests." In addition, any change in the Partnership's, or any joint venture's,
status for tax purposes might be treated as a taxable event, in which case the
Company might incur a tax liability without any related cash distribution. See
"-- Requirements for Qualification -- Distribution Requirements." Further, items
of income and deduction of the Partnership or an affected joint venture would
not pass through to its partners, and its partners would be treated as
shareholders for tax purposes. Consequently, the Partnership or any affected
joint venture would be required to pay income tax at corporate tax rates on its
net income, and distributions to its partners would constitute dividends that
would not be deductible in computing the affected entity's taxable income.
Partnership Anti-Abuse Rule. The U.S. Department of the Treasury has issued
a final regulation (the "Anti-Abuse Rule") under the partnership provisions of
the Code (the "Partnership Provisions") that authorizes the IRS, in certain
abusive transactions involving partnerships, to disregard the form of the
transaction and recast it for federal tax purposes as the IRS deems appropriate.
The Anti-Abuse Rule applies where a partnership is formed or utilized in
connection with a transaction (or series of related transactions) a principal
purpose of which is to reduce substantially the present value of the partners'
aggregate federal tax liability in a manner inconsistent with the intent of the
Partnership Provisions. The Anti-Abuse Rule states that the Partnership
Provisions are intended to permit taxpayers to conduct joint business (including
investment) activities through a flexible economic arrangement that accurately
reflects the partners' economic agreement and clearly reflects the partners'
income, without incurring an entity-level tax. The purposes for structuring a
transaction involving a partnership are determined based on all of the facts and
circumstances, including a comparison of the purported business purpose for a
transaction and the claimed tax benefits resulting from the transaction. A
reduction in the present value of the partners' aggregate federal tax liability
through the use of a partnership does not, by itself, establish inconsistency
with the intent of the Partnership Provisions.
The Anti-Abuse Rule contains an example in which a corporation that elects
to be treated as a REIT contributes substantially all of the proceeds from a
public offering to a partnership in exchange for a general partnership interest.
The limited partners of the partnership contribute real property assets to the
partnership, subject to liabilities that exceed their respective aggregate bases
in such property. In addition, some of the limited partners have the right,
beginning two years after the formation of the partnership, to require the
redemption of
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their limited partnership interests in exchange for cash or REIT stock (at the
REIT's option) equal to the fair market value of their respective interests in
the partnership at the time of the redemption. The example concludes that the
use of the partnership is not inconsistent with the intent of the Partnership
Provisions and, thus, cannot be recast by the IRS. However, the Exchange Rights
do not conform in all respects to the redemption rights contained in the
foregoing example. Moreover, the Anti-Abuse Rule is extraordinarily broad in
scope and is applied based on an analysis of all of the facts and circumstances.
As a result, there can be no assurance that the IRS will not attempt to apply
the Anti-Abuse Rule to the Company. If the conditions of the Anti-Abuse Rule are
met, the IRS is authorized to take appropriate enforcement action, including
disregarding the Partnership for federal tax purposes or treating one or more of
its partners as nonpartners. Any such action could jeopardize the Company's
status as a REIT.
Tax Allocations with Respect to the Properties. Pursuant to Section 704(c)
of the Code, income, gain, loss and deduction attributable to property (such as
a hotel) contributed by a partner in exchange for a partnership interest must be
allocated so that the contributing partner is charged with, or benefits from,
respectively, any Book-Tax Difference associated with the property at the time
of the contribution. Such allocations are solely for federal income tax purposes
and do not affect the book capital accounts or other economic arrangements among
the partners. The partnership agreement of the Partnership requires such
allocations to be made in a manner consistent Section 704(c) of the Code.
The carryover basis of certain contributed assets in the hands of the
Partnership may cause the Company to be allocated lower depreciation and other
deductions, and possibly greater amounts of taxable income in the event of a
sale of the hotels in excess of the economic or book income allocated to it as a
result of such sale. This might adversely affect the Company's ability to
distribute sufficient dividends to comply with the REIT distribution
requirements. See "-- Requirements for Qualification -- Annual Distribution
Requirements." The foregoing principles also apply in determining the earnings
and profits of the Company for purposes of determining the portion of
distributions taxable as dividend income. See "-- Taxation of Taxable U.S.
Shareholders." The application of these rules over time may result in a higher
portion of distributions being taxed as dividends than would have occurred had
the Company purchased its interest in certain hotels at their agreed value.
The difference between the agreed value of a contributed asset and its
adjusted tax basis is referred to as the book-tax difference (the "Book-Tax
Difference"). Treasury Regulations under Section 704(c) of the Code allow
partnerships to use any reasonable method of accounting for Book-Tax Differences
for contributions of property so that a contributing partner receives the tax
benefits and burdens of any built-in gain or loss associated with contributed
property. The Partnership currently intends to account for Book-Tax Differences
using the traditional method provided for in the Treasury Regulations.
With respect to any property purchased by the Partnership such property
will initially have a tax basis equal to its purchase price and Section 704(c)
of the Code will not apply.
Basis in Partnership Interest. The Company's adjusted tax basis in its
partnership interest in the Partnership generally (i) will be equal to the
amount of cash and the basis of any other property contributed to the
Partnership by the Company; (ii) will be increased by (A) its allocable share of
the Partnership's income and (B) its allocable share of indebtedness of the
Partnership; and (iii) will be reduced, but not below zero, by the Company's
allocable share of (A) the Partnership's loss, (B) the amount of cash
distributed to the Company, and (C) the amount of constructive distributions
resulting from a reduction in the Company's share of indebtedness of the
Partnership.
If the allocation of the Company's distributive share of the Partnership's
loss would reduce the adjusted tax basis of the Company's partnership interest
in the Partnership below zero, the recognition of such loss will be deferred
until such time as the recognition of such loss would not reduce the Company's
adjusted tax basis to below zero. To the extent that the Partnership's
distributions, or any decrease in the Company's share of the indebtedness of the
Partnership (such decrease being considered a constructive cash distribution to
the partners), would reduce the Company's adjusted tax basis to below zero, such
distributions (including such constructive distributions) constitute taxable
income to the Company. Such distributions and constructive distributions
normally will be characterized as capital gain.
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Depreciation Deductions Available to the Partnership. Upon formation the
Company made a cash contribution to the Partnership in exchange for an
approximately 82.0% general partnership interest in the Partnership (which
interest will increase to 85.7% if the Intercompany Convertible Note is
converted). The Partnership concurrently acquired all of the equity interests in
the partnerships or limited liability companies that owned the hotels acquired
at the time of the Company's formation (the "Contributed Partnerships") in
exchange for approximately $9.1 million in cash and issuance of Units
representing approximately 18.0% of the equity interests in the Partnership
(14.3% if the Intercompany Convertible Note is converted). The Partnership's
initial basis in those hotels for federal income tax purposes was a carryover of
the basis of the Contributed Partnerships in those hotels on the date of such
transactions, increased by any gain recognized on the transfers to the
Partnership. The Partnership plans to depreciate, for federal income tax
purposes, such hotels and any depreciable hotel property which it acquires for
cash under the Alternative Depreciation System ("ADS"). Under ADS, the
Partnership will depreciate such buildings and improvements -- even those
acquired with a carryover basis -- over a new 40 year recovery period using a
straight-line method and a mid-month convention. The Partnership plans to use
the modified accelerated cost recovery system of depreciation ("MACRS") for
subsequently acquired furnishings and equipment. Under MACRS, the Partnership
generally will depreciate such furnishings and equipment over a seven-year
recovery period using a 200% declining balance method and a half-year
convention. If, however, the Partnership places more than 40% of its furnishings
and equipment in service during the last three months of any taxable year, a
mid-quarter depreciation convention must be used for the furnishings and
equipment placed in service during that year.
Sale of the Properties. Generally, any gain realized by a partnership on
the sale of assets held by the partnership for more than one year will be
long-term capital gain. See "-- Taxation of Taxable U.S. Shareholders" for
capital gains tax rates. However, under REIT rules, the Company's share of any
gain realized by the Partnership on the sale of any property held as inventory
or other property held primarily for sale to customers in the ordinary course of
a trade or business ("dealer property") will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. See "-- Taxation
of the Company." Under existing law, whether property is dealer property is a
question of fact that depends on all the facts and circumstances with respect to
the particular transaction. A safe harbor to avoid classification as a
prohibited transaction exists as to real estate assets held for the production
of rental income by a REIT for at least four years when in any taxable year the
REIT has made no more than seven sales of property, or, in the alternative, the
aggregate of the adjusted bases of all properties sold does not exceed 10% of
the adjusted bases of all of the REIT's properties during the year and the
expenditures includable in a property's basis made during the four-year period
prior to disposition do not exceed 30% of the property's net sale price. All
inventory required in the operation of the hotels will be purchased by the
lessees or their designees as required by the terms of the Leases. Accordingly,
the Company and the Partnership believe that no asset owned by the Company or
the Partnership is dealer property of the Company or the Partnership.
Nevertheless, the Company and the Partnership will attempt to comply with the
terms of the safe-harbor provisions of the Code. Complete assurance cannot be
given, however, that the Company or the Partnership can comply with the
safe-harbor provisions of the Code or avoid owning property that may be
characterized as dealer property.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to its
taxable U.S. shareholders out of current or accumulated earnings and profits
(and not designated as capital gain dividends) will result in ordinary income to
such shareholders. As used herein, the term "U.S. shareholder" means a holder of
shares that for U.S. federal income tax purposes is (i) a citizen or resident of
the United States, (ii) a corporation, partnership, or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate whose income from sources without the
United States is includable in gross income for U.S. federal income tax purposes
regardless of its connection with the conduct of a trade or business within the
United States, or (iv) any trust with respect to which (A) a U.S. court is able
to exercise primary supervision over the administration of such trust, and (B)
one or more U.S. fiduciaries have the authority to control all substantial
decisions of the trust. Corporate shareholders will not be entitled to the
dividends received deduction. Distributions (and beginning with the Company's
1998 taxable year, undistributed amounts) that are designated as capital gain
dividends are treated as gain from the sale or distribution of a capital asset
held for more than one
25
<PAGE> 99
year (to the extent they do not exceed the Company's actual net capital gain for
the taxable year) without regard to the period for which the shareholder has
held its shares. However, corporate shareholders may be required to treat up to
20% of certain capital gain dividends as ordinary income. Under the 1997 Act,
beginning with the Company's 1998 taxable year, the Company may elect to retain
and pay income tax on its net long-term capital gains. In that case, the
Company's shareholders would include in income their proportionate share of the
Company's undistributed long-term capital gains. In addition, the shareholders
would be deemed to have paid their proportionate share of the tax paid by the
Company, which would be credited or refunded to the shareholders. Each
shareholder's basis in his shares would be increased by the amount of the
undistributed long-term capital gain included in the shareholder's income, less
the shareholder's share of the tax paid by the Company.
Distributions by the Company in excess of its current and accumulated
earnings and profits will not be taxable to a shareholder to the extent that
such distributions do not exceed the adjusted basis of the shareholder's shares,
but rather, will be a non-taxable reduction in a shareholder's adjusted basis in
such shares to the extent thereof and thereafter will be taxed as capital gain.
Any dividend declared by the Company in October, November or December of
any year payable to a shareholder of record on a specified date in any such
month will be treated as both paid by the Company and received by the
shareholder on or before December 31 of such year, provided that the dividend is
actually paid by the Company by January 31 of the following calendar year.
Shareholders may not include any net operating losses or capital losses of
the Company in their individual income tax returns. In general, any loss upon
the sale or exchange of shares by a shareholder who has held such shares for six
months or less (after applying certain holding period rules) will be treated as
a long-term capital loss to the extent distributions from the Company are
required to be treated by such shareholder as long-term capital gain.
The 1997 Act made certain changes to the Code with respect to taxation of
long-term capital gains earned by taxpayers other than a corporation. In
general, for sales made after May 6, 1997, the maximum tax rate for individual
taxpayers on net long-term capital gains (i.e., the excess of net long-term
capital gain over net short-term capital loss) is lowered to 20% for most
assets. This 20% rate applies to sales on or after July 29, 1997 only if the
asset was held for more than 18 months at the time of disposition. Capital gains
on the disposition of assets on or after July 29, 1997 held for more than one
year and up to 18 months at the time of disposition will be taxed as "mid-term
gain" at a maximum rate of 28%. Also, so-called "unrecaptured section 1250 gain"
is subject to a maximum Federal income tax rate of 25%. "Unrecaptured section
1250 gain" generally includes the long-term capital gain realized on (i) the
sale after May 6, 1997 of a real property asset described in Section 1250 of the
Code or (ii) the sale after July 28, 1997 of a real property asset described in
Section 1250 of the Code which the taxpayer has held for more than 18 months,
but in each case not in excess of the amount of depreciation (less the gain, if
any, treated as ordinary income under Code Section 1250) taken on such asset. A
rate of 18% instead of 20% will apply after December 31, 2000 for assets held
for more than 5 years. However, the 18% rate applies only to assets acquired
after December 31, 2000, unless the taxpayer elects to treat an asset held prior
to such date as sold for its fair market value on January 1, 2001. In the case
of individuals whose ordinary income is taxed at a 15% rate, the 20% rate is
reduced to 10% and the 18% rate for assets held for more than 5 years is reduced
to 8%.
Certain aspects of the new legislation are currently unclear, including how
the reduced rates will apply to gains earned by REITs such as the Company. Until
the IRS issues some guidance, it is unclear whether or how the 20% or 10% rate
will apply to distributions of long-term capital gains by the Company. The 1997
Act gives the IRS authority to apply the 1997 Act's new rules on taxation of
capital gains to sales by pass-through entities, including REITs. It is possible
that the IRS could provide in such regulations that REIT capital gain dividends
must be determined by looking through to the assets sold by the REIT and treated
by REIT shareholders as "long-term capital gain", "mid-term gain" and
"unrecaptured section 1250 gain" to the extent of such respective gain realized
by the REIT. No regulations have yet been issued. Such regulations, if and when
issued, may have a retroactive effect.
26
<PAGE> 100
Shareholders of the Company should consult their tax advisor with regard to
(i) the application of the changes made by the 1997 Act with respect to taxation
of capital gains and capital gain dividends and (ii) state, local and foreign
taxes on capital gains.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the IRS and to each Non-U.S.
Shareholder (as defined below) the amount of dividends (including any capital
gain dividends) paid to, and the tax withheld with respect to, each Non-U.S.
Shareholder. These reporting requirements apply regardless of whether
withholding was reduced or eliminated by an applicable tax treaty. Copies of
these returns may also be required to be made available under the provisions of
a specific treaty or agreement with the tax authorities in the country in which
the Non-U.S. Shareholder resides.
U.S. backup withholding (which generally is imposed at the rate of 31% on
certain payments to persons that fail to furnish the information required under
the U.S. information reporting requirements) and information reporting will
generally not apply to dividends (including any capital gain dividends) paid on
shares to a Non-U.S. Shareholder at an address outside the United States.
The payment of the proceeds from the disposition of shares to or through a
U.S. office of a broker will be subject to information reporting and backup
withholding unless the owner, under penalties of perjury, certifies, among other
things, its status as a Non-U.S. Shareholder, or otherwise establishes an
exemption. The payment of the proceeds from the disposition of shares to or
through a non-U.S. office of a non-U.S. broker generally will not be subject to
backup withholding and information reporting, except as noted below. In the case
of a payment of proceeds from the disposition of shares to or through a non-U.S.
office of a broker which is (i) a U.S. person, (ii) a "controlled foreign
corporation" for U.S. federal income tax purposes or (iii) a foreign person 50%
or more of whose gross income for certain periods is derived from a U.S. trade
or business, information reporting (but not backup withholding) will apply
unless the broker has documentary evidence in its files that the holder is a
Non-U.S. Shareholder (and the broker has no actual knowledge to the contrary)
and certain other conditions are met, or the holder otherwise establishes an
exemption. Under proposed Treasury Regulations, a payment of the proceeds from
the disposition of shares to or through such broker will be subject to backup
withholding if such broker has actual knowledge that the holder is a Non-U.S.
person.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-U.S.
Shareholder's U.S. federal income tax liability, provided that required
information is furnished to the IRS.
These backup withholding and information reporting rules are currently
under review by the U.S. Treasury Department, and their application to stock is
subject to change. In particular, Treasury Regulations proposed in 1996, which
have not yet been adopted, and are therefore not currently effective, would, if
and when they become effective, revise in certain respects the rules applicable
to foreign shareholders with respect to payments made after December 31, 1997.
TAXATION OF TAX-EXEMPT U.S. SHAREHOLDERS
The IRS has issued a revenue ruling in which it held that amounts
distributed by a REIT to a tax-exempt employees' pension trust do not constitute
unrelated business taxable income ("UBTI"). Subject to the discussion below
regarding a "pension-held REIT," and based on such ruling and the statutory
framework of the Code, distributions by the Company to a shareholder that is a
tax-exempt entity should not constitute UBTI, provided that the tax-exempt
entity has not financed the acquisition of its stock with "acquisition
indebtedness" within the meaning of the Code, that the stock is not otherwise
used in an unrelated trade or business of the tax-exempt entity, and that the
Company, consistent with its present intent, does not hold a residual interest
in a REMIC.
However, if any pension or other retirement trust that qualifies under
Section 401(a) of the Code ("qualified pension trust") holds more than 10% by
value of the interests in a "pension-held REIT" at any time during a taxable
year, a portion of the dividends paid to the qualified pension trust by such
REIT may constitute UBTI. For
27
<PAGE> 101
these purposes, a "pension-held REIT" is defined as a REIT if (i) such REIT
would not have qualified as a REIT but for the provisions of the Code which look
through such a qualified pension trust in determining ownership of stock of the
REIT and (ii) at least one qualified pension trust holds more than 25% by value
of the interests of such REIT or one or more qualified pension trusts (each
owning more than a 10% interest by value in the REIT) hold in the aggregate more
than 50% by value of the interests in such REIT.
TAXATION OF FOREIGN SHAREHOLDERS
A "Non-U.S. Shareholder" is - any shareholder who is not a "U.S.
shareholder" as defined above. See "--Taxation of Taxable U.S. Shareholders".
The rules governing United States federal income taxation of Non-U.S.
Shareholders are complex and no attempt is made herein to provide more than a
summary of such rules. PROSPECTIVE NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH
THEIR OWN TAX ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE, AND LOCAL
INCOME TAX LAWS WITH REGARD TO AN INVESTMENT IN THE OFFERED SECURITIES,
INCLUDING ANY REPORTING REQUIREMENTS.
It is currently anticipated that the Company will qualify as a
"domestically controlled REIT" (i.e., a REIT in which at all times during a
specified testing period, less than 50% of the value of the capital stock of
which is owned directly or indirectly by Non-U.S. Shareholders) and therefore
gain from the sale of Offered Securities by a Non-U.S. Shareholder will not be
subject to United States taxation unless such gain is treated as "effectively
connected" with the Non-U.S. Shareholder's United States trade or business.
Distributions that are not attributable to gain from the sale or exchange
by the Company of United States real property interests (and are not designated
as capital gain dividends) will be treated as dividends of ordinary income to
the extent that they are made out of current or accumulated earnings and profits
of the Company. Such distributions generally will be subject to a United States
withholding tax equal to 30% of the gross amount of the distribution, subject to
reduction or elimination under an applicable tax treaty. However, if dividends
from the investment in the shares are treated as "effectively connected" with
the Non-U.S. Shareholder's conduct of a United States trade or business, such
dividends will be subject to regular U.S. income taxation (foreign corporations
may also be subject to the 30% branch profits tax). The Company expects to
withhold United States income tax at the rate of 30% on the gross amount of any
such dividends paid to a Non-U.S. Shareholder unless: (i) a lower treaty rate
applies and the Non-U.S. Shareholder files certain information evidencing its
entitlement to such lower treaty rate, or (ii) the Non-U.S. Shareholder files an
IRS Form 4224 with the Company claiming that the distribution is "effectively
connected" income. Distributions which exceed current and accumulated earnings
and profits of the Company will not be taxable to the extent that they do not
exceed the adjusted basis of a shareholder's shares, but rather will reduce (but
not below zero) the adjusted basis of such shares. To the extent that such
distributions exceed the adjusted basis of a Non-U.S. Shareholder's shares, they
generally will give rise to United States tax liability if the Non-U.S.
Shareholder would otherwise be subject to tax on gain from the sale or
disposition of his shares in the Company, as described above. If it cannot be
determined at the time a distribution is made whether or not such distribution
will be in excess of current and accumulated earnings and profits, the
distributions will be subject to withholding at the same rate as dividends.
However, amounts thus withheld are refundable if it is subsequently determined
that such distribution was, in fact, in excess of current and accumulated
earnings and profits of the Company. Beginning with payments made on or after
January 1, 1999, newly issued Treasury Regulations require a corporation that is
a REIT to treat as a dividend the portion of a distribution that is not
designated as a capital gain dividend or return of basis and apply the 30%
withholding tax (subject to any applicable deduction or exemption) to such
portion, and to apply the FIRPTA withholding rules (discussed below) with
respect to the remainder of the distribution.
Distributions by the Company to a Non-U.S. Shareholder that are
attributable to gain from sales or exchanges by the Company of a United States
real property interest are subject to income and withholding tax under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, those distributions, if any, which are treated as gain
recognized from the sale of a United States real property interest, are taxed as
income "effectively connected" with a United States business. Non-U.S.
Shareholders would thus be taxed at the normal capital gain rates applicable to
U.S. shareholders (subject to the applicable alternative minimum tax and a
special alternative minimum tax for nonresident alien individuals). Also,
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<PAGE> 102
distributions subject to FIRPTA may be subject to a 30% branch profits tax in
the hands of a foreign corporate shareholder not entitled to treaty exemption.
The Company will withhold 35% of any distribution to a Non-U.S. Shareholder that
could be designated by the Company as a capital gain dividend. This amount is
creditable against the Non-U.S. Shareholder's FIRPTA tax liability. A refund may
be available if the amount withheld exceeds the Non-U.S. Shareholder's actual
U.S. federal tax liability.
STATE AND LOCAL CONSEQUENCES
The Company and its shareholders may be subject to state or local taxation
in various jurisdictions, including those jurisdictions in which it or they
transact business or reside. The state and local tax treatment of the Company
and its shareholders may not conform to the federal income tax consequences
discussed above. CONSEQUENTLY, PROSPECTIVE SHAREHOLDERS SHOULD CONSULT THEIR OWN
TAX ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS ON AN INVESTMENT
IN THE COMPANY.
FEDERAL ESTATE TAX
Shares owned or treated as owned by an individual who is not a citizen or
"resident" (as specifically defined for U.S. federal estate tax purposes) of the
United States at the time of death will be includable in the individual's gross
estate for U.S. federal estate tax purposes, unless an applicable estate tax
treaty provides otherwise. Such individual's estate may be subject to U.S.
federal estate tax on the property includable in the estate for U.S. federal
estate tax purposes.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit sharing, retirement, welfare or other
employee benefit plan ("Plan") subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), should consider the fiduciary
standards under ERISA in the context of the Plan's particular circumstances
before authorizing an investment of a portion of the Plan's assets in the
Offered Securities. Accordingly, any such fiduciary should consider (i) whether
the investment satisfies the diversification requirements of Section
404(a)(1)(C) of ERISA; (ii) whether the investment is in accordance with the
documents and instruments governing the Plan as required by Section 404(a)(1)(D)
of ERISA; and (iii) whether the investment is prudent under ERISA. In addition
to the imposition of general fiduciary standards of investment prudence and
diversification, ERISA, and the corresponding provisions of the Code, prohibit a
wide range of transactions involving the assets of the Plan and persons who have
certain specified relationships to the Plan ("parties in interest" within the
meaning of ERISA, "disqualified persons" within the meaning of the Code). Thus,
a Plan fiduciary considering an investment in the Offered Securities also should
consider whether the acquisition or the continued holding of the Offered
Securities might constitute or give rise to a direct or indirect prohibited
transaction.
The Department of Labor (the "DOL") has issued final regulations (the
"Regulations") as to what constitutes assets of an employee benefit plan under
ERISA. Under the Regulations, if a Plan acquires an equity interest in an
entity, which interest is neither a "publicly offered security" nor a security
issued by an investment company registered under the Investment Company Act of
1940, as amended, the Plan's assets would include, for purposes of the fiduciary
responsibility provisions of ERISA, both the equity interest and an undivided
interest in each of the entity's underlying assets unless certain specified
exceptions apply. The Regulations define a publicly offered security as a
security that is "widely held," "freely transferable," and either part of a
class of securities registered under the Exchange Act, or sold pursuant to an
effective registration statement under the Securities Act (provided the
securities are registered under the Exchange Act within 120 days after the end
of the fiscal year of the issuer during which the public offering occurred). The
Offered Securities are being sold in an offering registered under the Securities
Act and the Common Shares are registered under the Exchange Act.
The DOL Regulations provide that a security is "widely held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. A security will not fail to be "widely held"
because the number of independent investors falls below 100 subsequent to the
initial public offering as a result of events beyond the issuer's control. The
Common Shares are "widely held."
29
<PAGE> 103
The DOL Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The DOL Regulations further provide that when
a security is part of an offering in which the minimum investment is $10,000 or
less, certain restrictions ordinarily will not, alone or in combination, affect
the finding that those securities are "freely transferable." The Company
believes that the restrictions imposed under its Articles of Incorporation on
the transfer of the Offered Securities are limited to the restrictions on
transfer generally permitted under the DOL Regulations and are not likely to
result in the failure of the Offered Securities to be "freely transferable." The
DOL Regulations only establish a presumption in favor of the finding of free
transferability, and, therefore, no assurance can be given that the DOL and the
U.S. Treasury Department will not reach a contrary conclusion.
Assuming that the Offered Securities will be "widely held" and "freely
transferable," the Company believes that the Offered Securities will be publicly
offered securities for the purposes of the Regulations and the assets of the
Company will not be deemed to be "plan assets" of any Plan that invests in the
Offered Securities.
PLAN OF DISTRIBUTION
The Company may sell the Offered Securities to one or more underwriters for
public offering and sale by them or may sell the Offered Securities to investors
directly or through agents. Any such underwriter or agent involved in the offer
and sale of the Offered Securities will be named in the applicable Prospectus
Supplement.
Underwriters may offer and sell the Offered Securities at a fixed price or
prices, which may be changed, related to the prevailing market prices at the
time of sale, or at negotiated prices. The Company also may, from time to time,
authorize underwriters acting as the Company's agents to offer and sell the
Offered Securities upon the terms and conditions set forth in an applicable
Prospectus Supplement. In connection with the sale of Offered Securities,
underwriters may be deemed to have received compensation from the Company in the
form of underwriting discounts or commissions and may also receive commissions
from purchasers of Offered Securities for whom they may act as agent.
Underwriters may sell Offered Securities to or through dealers, and such dealers
may receive compensation in the form of discounts, concessions from the
underwriters or commissions from the purchasers for whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of Offered Securities and any discounts,
concessions or commissions allowed by underwriters to participating dealers will
be set forth in the applicable Prospectus Supplement. Underwriters, dealers and
agents participating in the distribution of the Offered Securities may be deemed
to be underwriters, and any discounts and commissions received by them and any
profit realized by them on resale of the Offered Securities may be deemed to be
underwriting discounts and commissions under the Securities Act. Underwriters,
dealers and agents may be entitled, under agreements entered into with the
Company, to indemnification against and contribution toward certain civil
liabilities, including liabilities under the Securities Act.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Offered Securities from the Company at the public
offering price set forth in such Prospectus Supplement pursuant to Delayed
Delivery Contracts ("Contracts") providing for payment and delivery on the date
or dates stated in such Prospectus Supplement. Each Contract will be for an
amount not less than, and the aggregate principal amount of Securities sold
pursuant to Contracts shall be not less or more than, the respective amounts
stated in the applicable Prospectus Supplement. Institutions with whom
Contracts, when authorized, may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions, and other institutions, but will in all cases be
subject to the approval of the Company. Contracts will not be subject to any
conditions except (i) the purchase by an institution of the Offered Securities
covered by its Contracts shall not at the time of delivery be prohibited under
the laws of any jurisdiction in the United States to which such institution is
subject and (ii) if the Offered Securities are being sold to underwriters, the
Company shall have sold to such underwriters the total principal amount of the
Offered Securities less the principal amount thereof covered by Contracts.
30
<PAGE> 104
Unless otherwise specified in the applicable Prospectus Supplement, each
series of Offered Securities, other than Common Shares, which are listed on the
New York Stock Exchange, will be a new issue with no established trading market.
Any Common Shares sold pursuant to a Prospectus Supplement will be listed on
such Exchange. The Company may elect to list any other series of Offered
Securities on an exchange, but is not obligated to do so. Any underwriters to
whom Offered Securities are sold by the Company for public offering and sale may
make a market in such Offered Securities, but such underwriters will not be
obligated to do so and may discontinue any market making at any time without
notice. No assurance can be given as to the liquidity of or the trading markets
for any Offered Securities.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company and its
subsidiaries in the ordinary course of business.
The specific terms and manner of sale of the Offered Securities will be
described or summarized in the applicable Prospectus Supplement.
EXPERTS
The audited financial statements and schedules incorporated by reference in
this Prospectus and elsewhere in the registration statement to the extent and
for the periods indicated in their reports have been audited by Arthur Andersen
LLP, independent public accountants, and are incorporated by reference herein in
reliance upon the authority of said firm as experts in giving said reports.
31
<PAGE> 105
[inside back cover]
Photographs of the Company's hotel properties continue on the inside back cover.
Each photograph is approximately 3-1/2" by 3-1/2." Clockwise from the upper
right corner is Columbus Marriott North, Columbus, OH (includes a smaller insert
box with a photograph of the lobby area), Radisson Inn Sanibel Gateway, Fort
Myers, FL (includes a smaller insert box with a photograph of the lobby area),
Melbourne Quality Suites, Indialantic, FL, (includes a small insert box with a
photograph of a meeting area), Cleveland Marriott Airport, Cleveland, OH and
Hampton Inn Sea World, San Diego, CA.
<PAGE> 106
======================================================
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement or the Prospectus, and if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or by any of the Underwriters. Neither this Prospectus Supplement nor the
Prospectus constitutes an offer to sell or a solicitation of an offer to buy any
of the securities offered hereby by any person in any jurisdiction in which it
is unlawful to make such an offer or solicitation. Neither the delivery of this
Prospectus Supplement and the accompanying Prospectus nor any sale made
hereunder shall under any circumstance create any implication that the
information contained herein is correct as of any date subsequent to the date
hereof.
------------------------
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement Summary................... S-1
Risk Factors.................................... S-6
The Company..................................... S-14
Lessees......................................... S-20
Use of Proceeds................................. S-22
Price Range of Common Shares and
Distributions................................. S-23
Capitalization.................................. S-24
Selected Financial Information.................. S-25
Management's Discussion and Analysis of Pro
Forma Financial Condition and Results of
Operations.................................... S-31
Business and Properties......................... S-35
Certain Federal Income Tax Considerations....... S-43
Policies and Objectives with Respect to Certain
Activities.................................... S-44
Management...................................... S-47
The Partnership................................. S-49
Underwriting.................................... S-51
Experts......................................... S-52
Legal Matters................................... S-52
Glossary........................................ S-53
Pro Forma Financial Statements.................. F-1
</TABLE>
Prospectus
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information........................... 2
Incorporation of Certain Documents By
Reference..................................... 2
The Company..................................... 3
Use of Proceeds................................. 3
Ratio of Earnings to Combined Fixed Charges and
Preferred Share Dividends..................... 3
Description of Preferred Shares................. 4
Description of Depositary Shares................ 10
Description of Common Shares.................... 13
Description of Warrants......................... 14
Federal Income Tax Considerations............... 14
ERISA Considerations............................ 29
Plan of Distribution............................ 30
Experts......................................... 31
</TABLE>
======================================================
======================================================
4,500,000 Common Shares
BOYKIN LOGO
------------------------------------------
PROSPECTUS SUPPLEMENT
February 18, 1998
------------------------------------------
LEHMAN BROTHERS
BT ALEX. BROWN
A.G. EDWARDS & SONS, INC.
MORGAN STANLEY DEAN WITTER
EVEREN SECURITIES, INC.
MCDONALD & COMPANY
SECURITIES, INC.
======================================================
