-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RadIcR1CqeKBzG1VcFWGk4HAU2Ym5FxMm1Knm6oP0E2iudCoW10Md2nm62POskZ/ yOpLAX7iG5wm8/iMnJ3pNA== 0000912057-99-005947.txt : 19991117 0000912057-99-005947.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-005947 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOYKIN LODGING CO CENTRAL INDEX KEY: 0001015859 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 341824586 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11975 FILM NUMBER: 99753919 BUSINESS ADDRESS: STREET 1: GUILDHALL BLDG 45 W PROSPECT AVE STREET 2: SUITE 1500 CITY: CLEVELAND STATE: OH ZIP: 44115 BUSINESS PHONE: 2164301200 MAIL ADDRESS: STREET 1: GUILDHALL BLDG 45 W PROSPECT AVE STREET 2: SUITE 1500 CITY: CLEVELAND STATE: OH ZIP: 44115 FORMER COMPANY: FORMER CONFORMED NAME: BOYKIN LODGING TRUST INC DATE OF NAME CHANGE: 19960604 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended Commission file number 001-11975 September 30, 1999 BOYKIN LODGING COMPANY (Exact Name of Registrant as Specified in Its Charter) Ohio 34-1824586 - -------------------------------------- -------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) Guildhall Building, Suite 1500, 45 W. Prospect Avenue Cleveland, Ohio 44115 - ------------------------------------------- ------------------------------- (Address of Principal Executive Office) (Zip Code) (216) 430-1200 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- The number of common shares, without par value, outstanding as of November 10, 1999: 17,103,554 PART I ITEM 1. FINANCIAL STATEMENTS BOYKIN LODGING COMPANY INDEX TO FINANCIAL STATEMENTS BOYKIN LODGING COMPANY: Consolidated Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1998..................................................3 Consolidated Statements of Income for the Three and Nine Months Ended September 30, 1999 and 1998 (unaudited)..........................4 Consolidated Statement of Shareholders' Equity for the Nine Months Ended September 30, 1999 (unaudited)...................................5 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998 (unaudited)..........................6 Notes to Consolidated Financial Statements..................................7 BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES: Consolidated Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1998.................................................13 Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1999 and 1998 (unaudited).........................14 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998 (unaudited).........................15 Notes to Consolidated Financial Statements.................................16
BOYKIN LODGING COMPANY CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 (DOLLAR AMOUNTS IN THOUSANDS)
(Unaudited) September 30, December 31, 1999 1998 ---------- ---------- ASSETS Investment in hotel properties, net $ 590,233 $ 595,132 Cash and cash equivalents 3,193 5,643 Rent receivable from lessees: Related party lessees 7,682 4,748 Third party lessees 1,203 547 Deferred expenses, net 3,093 3,159 Restricted cash 3,804 4,330 Investment in unconsolidated joint venture 4,314 -- Other assets 1,393 1,503 --------- --------- $ 614,915 $ 615,062 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Borrowings against credit facility $ 163,000 $ 156,000 Term note payable 130,000 130,000 Accounts payable and accrued expenses 9,186 6,521 Dividends/distributions payable 8,697 8,618 Due to lessees: Related party lessees 580 2,971 Third party lessees 903 1,775 Minority interest in joint ventures 11,416 11,251 Minority interest in operating partnership 11,066 11,710 Shareholders' equity: Preferred shares, without par value; 10,000,000 shares authorized; no shares issued and outstanding -- -- Common shares, without par value; 40,000,000 shares authorized; 17,098,863 and 17,044,361 shares outstanding September 30, 1999 and December 31, 1998, respectively, -- -- Additional paid-in capital 310,312 307,512 Retained deficit (28,896) (21,296) Unearned compensation - restricted shares (1,349) -- --------- --------- Total shareholders' equity 280,067 286,216 --------- --------- $ 614,915 $ 615,062 ========= =========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. 3 BOYKIN LODGING COMPANY CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Revenues: Lease revenue from related party $ 20,792 $ 18,997 $ 55,960 $ 41,598 Other lease revenue 3,529 4,173 11,608 9,796 Interest and other income 489 97 652 279 -------- -------- -------- -------- 24,810 23,267 68,220 51,673 -------- -------- -------- -------- Expenses: Real estate related depreciation and amortization 7,259 6,748 21,506 15,064 Real estate and personal property taxes, insurance and ground rent 2,731 2,473 8,201 6,033 General and administrative 1,516 824 4,519 2,725 Interest expense 5,238 5,105 15,222 8,857 Amortization of deferred financing costs 224 158 542 434 -------- -------- -------- -------- 16,968 15,308 49,990 33,113 -------- -------- -------- -------- Income before minority interests and extraordinary item 7,842 7,959 18,230 18,560 Minority interest in joint ventures (155) (177) (487) (420) Minority interest in operating partnership (533) (568) (1,177) (1,418) -------- -------- -------- -------- Income before extraordinary item 7,154 7,214 16,566 16,722 Extraordinary item- Loss on early extinguishment of debt, net of minority interest of $110 -- -- -- (1,138) -------- -------- -------- -------- Net income applicable to common shares $ 7,154 $ 7,214 $ 16,566 $ 15,584 ======== ======== ======== ======== Earnings per share: Basic $ .42 $ .42 $ .97 $ 1.06 Diluted $ .42 $ .42 $ .97 $ 1.06 Weighted average number of common shares outstanding: Basic 17,059 17,125 17,050 14,647 Diluted 17,059 17,125 17,050 14,650
The accompanying notes to consolidated financial statements are an integral part of these statements. 4 BOYKIN LODGING COMPANY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
Unearned Additional Compensation Common Paid-In Retained Restricted Shares Capital Deficit Shares Total -------- --------- --------- -------- ------- Balance, December 31, 1998 17,044,361 $ 307,512 $ (21,296) $ -- $ 286,216 Issuance of common shares 54,502 2,300 -- (1,583) 717 Issuance of share warrant -- 500 -- -- 500 Dividends declared -- -- (24,166) -- (24,166) Amortization of unearned compensation -- -- -- 234 234 Net income -- -- 16,566 -- 16,566 ---------- ---------- ---------- ---------- ---------- Balance, September 30, 1999 17,098,863 $ 310,312 $ (28,896) $ (1,349) $ 280,067 ========== ========== ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part of this statement. 5 BOYKIN LODGING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED, AMOUNTS IN THOUSANDS)
1999 1998 ---------- ---------- Cash flows from operating activities: Net income $ 16,566 $ 15,584 Adjustments to reconcile net income to net cash flow provided by operating activities- Extraordinary item-noncash loss on early extinguishment of debt -- 1,138 Depreciation and amortization 22,048 15,498 Amortization of unearned compensation 234 -- Minority interests 1,664 1,838 Changes in assets and liabilities- Rent receivable (3,590) (7,034) Restricted cash 526 (5,090) Other 64 273 Accounts payable and accrued expenses 2,665 1,621 Due to lessees (3,263) 2,765 --------- --------- Net cash flow provided by operating activities 36,914 26,593 --------- --------- Cash flows from investing activities: Acquisition of Red Lion Inns Operating L.P., net of common shares issued of $80,333 and cash acquired of $11 -- (191,004) Acquisition of hotel properties, net of joint venture contribution -- (76,288) Improvements and additions to hotel properties, net (16,481) (25,973) Investment in unconsolidated joint venture (4,347) -- --------- --------- Net cash flow used for investing activities (20,828) (293,265) --------- --------- Cash flows from financing activities: Payments of dividends and distributions (25,908) (20,770) Borrowings against credit facility 7,000 156,000 Repayment of borrowings against credit facility -- (96,750) Term note borrowing -- 130,000 Payment of deferred financing costs (522) (2,975) Net proceeds from issuance of common shares 717 104,590 Proceeds from issuance of share warrant 500 -- Distributions to joint venture minority interest partners, net (323) (57) Cash payments for redemption of certain limited partnership interests -- (967) Cash payment for common share repurchases -- (1,830) --------- --------- Net cash flow (used for) provided by financing activities (18,536) 267,241 --------- --------- Net change in cash and cash equivalents (2,450) 569 Cash and cash equivalents, beginning of period 5,643 1,855 --------- --------- Cash and cash equivalents, end of period $ 3,193 $ 2,424 ========= =========
The accompanying notes to consolidated financial statements are an integral part of these statements. 6 BOYKIN LODGING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 1. BACKGROUND: Boykin Lodging Company is a real estate investment trust that owns hotels throughout the United States and leases its properties to established hotel operators. Boykin's principal source of revenue is lease payments from lessees pursuant to percentage lease agreements. Percentage lease revenue is based upon the room, food and beverage and other revenues of Boykin's hotels. The lessees' ability to make payments to Boykin pursuant to the percentage leases is dependent primarily upon the operations of the hotels. INITIAL PUBLIC OFFERING AND MAJOR EVENTS SINCE THE IPO In November 1996, Boykin completed its initial public offering ("IPO"), acquiring approximately 84.5% of the equity interest in Boykin Hotel Properties, L.P., an Ohio limited partnership (the "Partnership"), and also loaned $40,000 to the Partnership in exchange for an intercompany convertible note. The Partnership then acquired nine hotel properties and leased them to Boykin Management Company Limited Liability Company ("BMC"). BMC is owned by Robert W. Boykin, Chairman, President and Chief Executive Officer of Boykin Lodging Company (53.8%) and his brother, John E. Boykin (46.2%). The Partnership acquired eight additional hotel properties in 1997 using remaining proceeds from the IPO and borrowings under Boykin's credit facility. Boykin Lodging Company is the sole general partner of the Partnership. On February 24, 1998, Boykin completed a follow-on public equity offering, issuing an additional 4,500,000 common shares. The net proceeds of approximately $106,313 were contributed to the Partnership and used to pay down existing indebtedness under the credit facility, purchase limited partnership units from two unaffiliated partners, acquire two hotels and for general corporate purposes. On May 22, 1998 Boykin completed its merger with Red Lion Inns Limited Partnership, in which Boykin acquired Red Lion Inns Operating L.P. ("OLP"), which owns a portfolio of ten DoubleTree-licensed hotels. In the transaction, Boykin issued 3,109,606 million common shares and paid approximately $35,305 in cash to the Red Lion limited partners and general partner. The total consideration value, including assumed liabilities of approximately $155,710 and common shares issued valued at $80,333, was $271,348. The issuance of Boykin's common shares in the merger increased Boykin Lodging's ownership percentage in the Partnership to 92.2%. Boykin acquired two other hotels in 1998 and one in August 1999, for a total of 32 hotels in which Boykin has an ownership interest as of September 30, 1999. As part of Boykin's acquisitions in 1997 and 1998, Boykin established strategic alliances with four hotel operators and purchased five hotels with them through joint venture structures. The following table sets forth the joint venture agreements established in 1997 and 1998: 7
Boykin Lessee/JV Lessee/JV Ownership Ownership Date of Hotel Name of Joint Venture Partner Percentage Percentage Hotel Owned Under Joint Venture Purchase - --------------------- ------- ---------- ---------- ------------------------------- -------- BoyStar Ventures, L.P. MeriStar 91% 9% Holiday Inn Minneapolis West July 1997 Shawan Road Hotel L.P. Davidson 91% 9% Marriott's Hunt Valley Inn July 1997 Boykin San Diego LLC Outrigger 91% 9% Hampton Inn San Diego Airport/Sea World November 1997 Boykin Kansas City LLC MeriStar 80% 20% DoubleTree Kansas City November 1997 RadBoy Mt. Laurel LLC Radisson 85% 15% Radisson Hotel Mt. Laurel June 1998
BASIS OF PRESENTATION Boykin Lodging exercises unilateral control over the Partnership. Therefore, the separate financial statements of Boykin Lodging, the Partnership, OLP, and the joint ventures discussed above are consolidated. All significant intercompany transactions and balances have been eliminated. These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in Boykin's Annual Report on Form 10-K for the year ended December 31, 1998. RECLASSIFICATIONS Certain reclassifications have been made to the prior year financial statements to conform with the current year presentation. 2. JOINT VENTURE WITH AEW: On February 1, 1999, Boykin formed of a joint venture with AEW Partners III, L.P. ("AEW"), an investment partnership managed by AEW Capital Management, L.P., a Boston-based real estate investment firm. AEW will provide $50,000 of equity capital for the joint venture, and Boykin will provide approximately $17,000 and serve as the operating member of the joint venture. Because of the non-controlling nature of its 25% ownership interest in the joint venture, Boykin accounts for its investment utilizing the equity method. Boykin and AEW plan to use the joint venture to take advantage of acquisition opportunities in the lodging industry. The joint venture agreement contains provisions for AEW and Boykin to double their respective capital commitments under certain circumstances. In addition, as part of the transaction, Boykin will receive incentive returns based on the performance of acquired assets as well as other compensation as a result of the joint venture's activities. After the end of the two-year investment period, AEW has the option to convert its capital invested in the joint venture into Boykin convertible preferred shares. Pursuant to the venture agreements, AEW also purchased a warrant for $500. The warrant gives AEW the right to buy up to $20,000 of Boykin's preferred or common shares (at Boykin's election) for $16.48 a share. The warrant is exercisable after the two-year investment period, and expires one year after it becomes exercisable. The amount of the warrant will be reduced and eliminated under the terms of the agreement on a dollar for dollar basis as the last $20,000 of AEW's $50,000 of capital is invested. If issued, the preferred shares would be convertible into common shares at $16.48 per common share and have a minimum cumulative annual dividend equivalent to $1.88 per 8 common share, Boykin's current common share dividend. On August 31, 1999, the Boykin/AEW venture entered into a venture with a private investor, forming Boykin Chicago, LLC, in which Boykin/AEW has a 75% interest. Boykin's investment in this joint venture was approximately $4.3 million as of September 30, 1999. Boykin Chicago purchased the 421-room Executive Plaza Hotel located in Chicago, Illinois for cash consideration of $48 million. The acquisition was accounted for by Boykin Chicago as a purchase and was funded with proceeds from a $30,000 secured mortgage note with the remainder in cash from the partners. A subsidiary of BMC leases the property pursuant to a long-term percentage lease agreement. 3. NET INCOME PER SHARE AND PARTNERSHIP UNIT: Boykin Lodging's basic and diluted earnings per share for three and nine months ended September 30, 1999 under SFAS No. 128, "Earnings per Share" are as follows:
Three Months Ended Nine months ended September 30, September 30, ------------------ ------------------ 1999 1998 1999 1998 ------ ------ ------ ------ Basic and diluted earnings per common share $ .42 $ .42 $ .97 $ 1.06
Basic earnings per share is based on the weighted average number of common shares outstanding during the period. Diluted earnings per share adjusts the weighted average shares outstanding for the effect of all dilutive securities. At September 30, 1999 and 1998, a total of 1,291,000 limited partnership units were issued and outstanding. The basic and diluted weighted average number of common shares and limited partnership units outstanding for the three and nine months ended September 30, 1999 was 18,350,000 and 18,341,000, respectively. 4. CREDIT FACILITIES: Boykin has an unsecured credit facility with a group of banks which, effective November 5, 1999, enables Boykin to borrow up to $175,000, subject to borrowing base and loan-to-value limitations, at a rate of interest that fluctuates at LIBOR plus 1.40% to 2.25% (7.2% at September 30, 1999), as defined. Boykin is required to pay a .25% fee on the unused portion of the credit facility. The credit facility expires in June 2000, with an additional one-year extension at Boykin's option. As of September 30, 1999 and December 31, 1998, outstanding borrowings against the credit facility were $163,000 and $156,000, respectively. In connection with obtaining a new $45,000 term loan agreement on October 29, 1999 (Note 10), Boykin reduced the outstanding borrowings to $118,000. The credit facility requires Boykin, among other things, to maintain a specified minimum net worth, a coverage ratio of EBITDA to debt service, and a coverage ratio of EBITDA to debt service and fixed charges. Further, Boykin is required to maintain its franchise agreement at each hotel and to maintain its REIT status. Boykin was in compliance with its covenants at September 30, 1999 and December 31, 1998. 5. TERM NOTE PAYABLE: On May 22, 1998, OLP entered into a $130,000 term loan agreement. The loan expires in June 2023 and may be prepaid without penalty or defeasance after May 21, 2008. The loan bears interest at a fixed rate of 6.9% for ten years, and at a new fixed rate to be determined thereafter. The loan requires interest- 9 only payments for the first two years, with principal repayments commencing in the third loan year based on a 25-year amortization schedule. The loan is secured by ten DoubleTree hotels. Under covenants in the loan agreement, assets of OLP are not available to pay the creditors of any other Boykin entity, except to the extent of permitted cash distributions from OLP to Boykin. Likewise, the assets of other entities are not available to pay the creditors of OLP. The loan agreement also requires OLP to hold funds in escrow for the payment of capital expenditures, insurance and real estate taxes. The term note also requires OLP to comply with certain financial covenants. OLP was in compliance with these covenants at September 30, 1999 and December 31, 1998. Maturities of long-term debt as of September 30, 1999 are as follows: Remainder of 1999 $ -- 2000 992 2001 2,090 2002 2,239 2003 2,399 2004 and thereafter 122,280 -------- $130,000 ========
6. PERCENTAGE LEASE AGREEMENTS: The percentage leases have noncancelable remaining terms ranging from two to nine years, subject to earlier termination on the occurrence of certain contingencies, as defined. The rent due under each percentage lease is the greater of minimum rent, as defined, or percentage rent. Percentage rent applicable to room and other hotel revenue varies by lease and is calculated by multiplying fixed percentages by the total amounts of such revenues over specified threshold amounts. Both the minimum rent and the revenue thresholds used in computing percentage rents are subject to annual adjustments based on increases in the United States Consumer Price Index ("CPI"). Percentage rent applicable to food and beverage revenues is calculated by multiplying fixed percentages by the total amounts of such revenues. Percentage Lease revenue for the three months ended September 30, 1999 and 1998 was $24,321 and $23,170 respectively, of which approximately $9,093 and $7,860 respectively, was in excess of minimum rent. Percentage lease revenue for the nine months ended September 30, 1999 and 1998 was $67,568 and $51,394, respectively, of which approximately $21,896 and $15,619, respectively, was in excess of minimum rent. Boykin Lodging recognizes lease revenue for interim and annual reporting purposes on an accrual basis pursuant to the terms of the respective percentage leases. Future minimum rentals (ignoring future CPI increases) to be received by Boykin from BMC and from other lessees pursuant to the percentage leases for each of the years in the period 1999 to 2003 and in total thereafter are as follows:
Related Party Other Lessees Lessees Totals ------- ------- ------- Remainder of 1999 $ 12,315 $ 2,269 $14,584 2000 49,261 9,076 58,337 2001 42,960 9,076 52,036 2002 36,055 7,677 43,732 2003 11,439 5,884 17,323 Thereafter 26,409 23,067 49,476 --------- ------- -------- $ 178,439 $57,049 $235,488
10 7. RELATED PARTY TRANSACTIONS: The Chairman, President and Chief Executive Officer of Boykin Lodging is the majority shareholder of BMC. BMC and Westboy LLC, a subsidiary of BMC, were significant sources of Boykin's percentage lease revenue through September 30, 1999. At September 30, 1999 and December 31, 1998, Boykin had rent receivable of $7,682 and $4,748, respectively, due from related party lessees. Boykin Lodging paid Spectrum Design Services, a subsidiary of BMC, $687 for design and other services through September 30, 1999. Of this total, $364 was for design services, $204 represents purchasing services, $62 was for project management services, and $57 was reimbursement of expenses incurred while performing services for the hotels in 1999. At September 30, 1999 and December 31, 1998, Boykin had a payable to related party lessees of $580 and $2,971, respectively, primarily for the reimbursement of capital expenditure costs incurred on behalf of the Partnership and OLP. 8. STATEMENT OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES: During the nine-month periods ended September 30, 1999 and 1998, noncash financing transactions consisted of $8,697 and $8,618 respectively, of dividends and Partnership distributions which were declared but not paid as of September 30, 1999 and 1998, respectively. Interest paid during the nine-month periods ended September 30, 1999 and 1998 was $15,207 and $7,793 respectively. As of September 30, 1999, Boykin had granted 113,961 restricted common shares, valued at $1,583, under Boykin's Long-Term Incentive Plan. 9. PRO FORMA FINANCIAL INFORMATION: The pro forma financial information set forth below for the nine months ended September 30, 1998 is presented as if the following significant transactions had been consummated as of January 1, 1998: - the share offering of 4,500,000 common shares in February 1998; - the issuance of 3,109,606 common shares in May 1998 related to the Red Lion merger; - the acquisitions of properties by Boykin in 1998; and - Boykin's common share repurchase of 114,500 shares in 1998. The pro forma financial information is not necessarily indicative of what the actual results of operations of Boykin would have been assuming these transactions had been consummated as of January 1, 1998, nor does it purport to represent the results of operations for future periods.
Nine months ended September 30,1998 ----------------- Revenues: Lease revenue $64,581 Interest income 264 ------- 64,845 ------- Expenses: Real estate related depreciation and amortization 20,055 Real estate and personal property taxes, insurance and ground rent 7,427 General and administrative 2,725 Interest expense 14,661 Amortization of deferred financing costs 493 -------
11 Net income before minority interest and extraordinary item 19,484 Minority interest 1,666 ------- Income before extraordinary item $17,818 ======= Net income per share before extraordinary item Basic $1.05 Diluted $1.05
10. SUBSEQUENT EVENT: On October 29, 1999, Boykin entered into a $45,000 term loan agreement. The loan is secured by three hotel properties and expires in October 2002, with two one-year extensions at Boykin's option. The loan bears interest at a rate that fluctuates at LIBOR plus 2% and may be prepaid at any time without penalty or defeasance. In connection with obtaining this $45,000 term loan, Boykin reduced the outstanding borrowings on the credit facility to $118,000. 12 BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 (AMOUNTS IN THOUSANDS)
(Unaudited) September 30, December 31, 1999 1998 ---- ---- ASSETS Cash and cash equivalents $ 24,390 $ 12,973 Accounts receivable: Trade, net of allowance for doubtful accounts of $132 and $166 at September 30, 1999 and December 31, 1998, respectively 12,368 8,097 Related party lessors 635 2,971 Other 638 178 Inventories 2,320 2,060 Property and equipment, net 359 434 Investment in Boykin Lodging Company 245 248 Prepaid expenses and other assets 2,294 2,383 -------- -------- Total assets $ 43,249 $ 29,344 ======== ======== LIABILITIES AND MEMBERS' CAPITAL Rent payable to related party lessors $ 8,047 $ 4,748 Accounts payable: Trade 4,015 3,114 Advance deposits 2,073 774 Bank overdraft liability 5,507 4,806 Accrued expenses: Accrued payroll 1,188 633 Accrued vacation 2,653 2,250 Accrued sales, use and occupancy taxes 2,321 1,856 Accrued management fee 4,504 4,044 Other accrued liabilities 6,527 3,080 -------- -------- Total liabilities 36,835 25,305 -------- -------- Members' capital: Capital contributed 3,000 3,000 Retained earnings 3,624 1,282 Accumulated other comprehensive loss (210) (243) -------- -------- Total members' capital 6,414 4,039 -------- -------- Total liabilities and members' capital $ 43,249 $ 29,344 ======== ========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. 13 BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED, AMOUNTS IN THOUSANDS)
Three Months Ended Nine months ended September 30, September 30, ------------------- ------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Revenues: Room revenue $ 45,121 $ 41,917 $ 122,163 $ 114,403 Food and beverage revenue 18,132 17,327 54,284 52,023 Other hotel revenue 5,074 4,461 12,891 11,521 Other revenue 773 443 1,869 2,007 --------- --------- --------- --------- Total revenues 69,100 64,148 191,207 179,954 --------- --------- --------- --------- Expenses: Departmental expenses of hotels: Rooms 10,498 9,979 28,843 27,440 Food and beverage 13,187 13,154 39,280 39,166 Other 2,570 2,642 6,900 6,315 Cost of goods sold of non-hotel operations 294 27 309 423 Percentage lease expense 21,445 18,997 56,613 52,294 General and administrative 6,350 6,579 18,973 18,896 Advertising and promotion 3,173 3,026 9,462 8,360 Utilities 2,621 2,887 6,963 7,910 Franchisor royalties and other charges 2,157 2,093 5,948 5,787 Repairs and maintenance 2,880 2,317 8,483 6,708 Depreciation and amortization 29 22 89 67 Management fee expense 2,435 2,341 6,610 6,662 Other expense (94) 79 392 (33) --------- --------- --------- --------- Total expenses 67,545 64,143 188,865 179,995 --------- --------- --------- --------- Net income (loss) $ 1,555 $ 5 $ 2,342 $ (41) ========= ========= ========= ========= Comprehensive income (loss) $ 1,516 $ (128) $ 2,375 $ (269) ========= ========= ========= =========
The accompanying notes to consolidated financial statements are an integral part of these statements. 14 BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED, AMOUNTS IN THOUSANDS)
1999 1998 ---------- ----------- Cash flows from operating activities: Net income (loss) $ 2,342 $ (41) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 89 67 Realized loss on investment 36 -- Changes in assets and liabilities: Accounts receivable (2,395) (10,024) Inventories (260) (1,465) Prepaid expenses and other assets 89 (883) Rent payable 3,299 7,615 Accounts payable 2,901 7,753 Other accrued liabilities 5,330 7,723 -------- -------- Net cash flow provided by operating activities 11,431 10,745 -------- -------- Cash flows from investing activities: Property additions (14) (69) -------- -------- Net cash flow used for investing activities (14) (69) -------- -------- Payments of obligations to former owners -- (2) -------- -------- Net cash flow used for financing activities -- (2) -------- -------- Net increase in cash and cash equivalents 11,417 10,674 Cash and cash equivalents, beginning of period 12,973 6,862 -------- -------- Cash and cash equivalents, end of period $ 24,390 $ 17,536 ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. 15 BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 (DOLLAR AMOUNTS IN THOUSANDS) 1. DESCRIPTION OF BUSINESS: Boykin Management Company Limited Liability Company and its subsidiaries (collectively, "BMC") - lease and operate full and limited service hotels located throughout the United States pursuant to long-term percentage leases; - manage full and limited service hotels located throughout the United States pursuant to management agreements; - provide national purchasing services to hotels; and - provide interior design services to hotels and other businesses. 2. ORGANIZATION: BMC commenced operations on November 4, 1996 as an Ohio limited liability company. BMC is indirectly owned by Robert W. Boykin (53.8%) and John E. Boykin (46.2%). Robert W. Boykin is the Chairman, President and Chief Executive Officer of Boykin Lodging Company. Pursuant to formation transactions related to the November 4, 1996 initial public offering of Boykin Lodging, Boykin Management Company ("former BMC") and Bopa Design Company (doing business as Spectrum Services), wholly owned subsidiaries of The Boykin Company ("TBC"), were merged into subsidiaries of BMC. In addition, Purchasing Concepts, Inc. ("PCI") contributed its assets to a subsidiary of BMC and that subsidiary assumed PCI's liabilities. TBC and PCI are related through common ownership. BMC and its subsidiaries are the successors to the businesses of former BMC, Spectrum Services and PCI. As BMC, former BMC, Spectrum Services and PCI were related through common ownership, there were no purchase accounting adjustments to the historical carrying values of the assets and liabilities of former BMC, Spectrum Services and PCI upon merger into or contribution to the subsidiaries of BMC. 3. BASIS OF PRESENTATION: The separate financial statements of BMC's subsidiaries have been presented on a consolidated basis with BMC. All significant intercompany transactions and balances have been eliminated. These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. For further information, refer to BMC's consolidated financial statements and footnotes thereto included in Boykin Lodging's annual report on Form 10-K for the year ended December 31, 1998. 4. PERCENTAGE LEASE AGREEMENTS: BMC LEASES ON 15 HOTELS BMC leases 15 hotels ("the BMC Hotels") from the Partnership pursuant to long-term percentage leases. The BMC Hotels are located in Cleveland, Ohio (2); Columbus, Ohio; Buffalo, New York; Berkeley, California; Raleigh, North Carolina; Charlotte, North Carolina (2); High Point, North Carolina; Knoxville, Tennessee; Ft. Myers, Florida; Melbourne, Florida (2); Daytona Beach, Florida; and French Lick, Indiana. 16 The percentage leases have noncancellable remaining terms ranging from two to eight years, subject to earlier termination on the occurrence of certain contingencies, as defined. BMC is required to pay the higher of minimum rent, as defined, or percentage rent. Percentage rent applicable to room and other hotel revenue varies by lease and is calculated by multiplying fixed percentages by the total amounts of such revenues over specified threshold amounts. Percentage rent related to food and beverage revenues and other revenues, in some cases, is based on fixed percentages of such revenues. Both the threshold amounts used in computing percentage rent and minimum rent on room and other hotel revenues are subject to adjustments as of January 1 of each year based on increases in the United States Consumer Price Index. For both annual and interim reporting purposes, BMC recognizes percentage lease expense pursuant to the provisions of the related percentage lease agreements. Other than real estate and personal property taxes, casualty insurance, ground lease rental, and capital improvements, which are obligations of the Partnership, the percentage leases require BMC to pay all costs and expenses incurred in the operation of the BMC Hotels. The percentage leases require BMC to indemnify Boykin Lodging Company against all liabilities, costs and expenses incurred by, imposed on or asserted against the Partnership in the normal course of operating the BMC Hotels. WESTBOY LEASE ON TEN DOUBLETREE HOTELS Effective January 1, 1998, Westboy, LLC ("Westboy"), a wholly-owned subsidiary of BMC, entered into a long term lease agreement with Red Lion Inns Operating L.P. ("OLP") with terms similar to those described above. OLP was acquired by Boykin Lodging Company on May 22, 1998. The ten DoubleTree-licensed hotels ("the DoubleTree Hotels") leased by Westboy are located in California, Oregon (3), Washington (3), Colorado, Idaho and Nebraska. The hotels are managed by a subsidiary of Promus Hotel Corporation. BMC made an initial capital contribution to Westboy of $1,000, of which $900 was funded with a demand promissory note. Assets of Westboy are not available to pay the creditors of any other entity, except to the extent of permitted cash distributions from Westboy to BMC. Similarly, except to the extent of the unpaid promissory note, the assets of BMC are not available to pay the creditors of Westboy. CHIBOY LEASE ON EXECUTIVE PLAZA HOTEL Effective August 31, 1999, ChiBoy LLC ("ChiBoy"), a wholly-owned subsidiary of BMC, entered into a long term lease agreement with Boykin Chicago, LLC, an entity in which Boykin Lodging Company has an 18.75% interest, with terms similar to those described above. The Executive Plaza hotel is located in Chicago, Illinois. FUTURE MINIMUM RENTAL PAYMENTS Future minimum rental payments (ignoring CPI increases) to be paid by BMC, Westboy, and ChiBoy under their respective percentage lease agreements at September 30, 1999, for each of the years in the period 1999 to 2003 and in total thereafter are as follows: Remainder of 1999 $ 13,155 2000 52,620 2001 47,760 2002 40,855 2003 16,239 Thereafter 29,609 ---------- $ 200,238
5. RELATED PARTY TRANSACTIONS: Percentage lease expense payable to the Partnership was $20,792 and $18,997 for the three months ended September 30, 1999 and 1998, respectively. Percentage lease expense payable for the nine months ended September 30, 1999 and 1998 was $55,960, and $41,598, respectively. Percentage lease expense for ChiBoy payable to Boykin Chicago, LLC for the quarter ended September 30, 1999 was $653. 17 At September 30, 1999 and December 31, 1998, BMC (including Westboy) had receivables from the Partnership (including OLP) of $580 and $2,971, respectively, primarily for the reimbursement of capital expenditures incurred on behalf of the Partnership and OLP. As of September 30, 1999, ChiBoy had a receivable of $55 from Boykin Chicago, LLC, primarily for the reimbursement of capital expenditures. The results of Boykin Chicago, LLC are not consolidated with those of the Partnership. At September 30, 1999 and December 31, 1998, BMC (including Westboy) had payables to the Partnership (including OLP) of $7,682 and $4,748, respectively, for amounts due pursuant to the percentage leases. As of September 30, 1999, ChiBoy also owed $365 to Boykin Chicago, LLC for amounts due pursuant to its percentage lease. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKGROUND AND BUSINESS STRATEGIES Boykin Lodging Company, an Ohio corporation, is a real estate investment trust that owns hotels throughout the United States and leases its properties to established hotel operators. Our primary business strategies are: - - maximizing revenue growth in our hotels through - strong management performance from our lessee/operators; - selective renovation; - expansion and development; and - brand repositioning. - - developing strategic alliances and relationships with both a network of high-quality hotel operators and franchisors of the hotel industry's premier upscale brands; and - - brand repositioning acquiring upscale, full-service commercial and resort hotels that will increase our cash flow and are purchased at a discount to their replacement cost BOYKIN'S FORMATION AND RECENT EVENTS On November 4, 1996, we completed our IPO, issuing a total of 9.5 million common shares. In conjunction with our IPO, we contributed approximately $133.9 million to Boykin Hotel Properties, L.P., an Ohio limited partnership (the "Partnership"), in exchange for an approximate 84.5% equity interest as the sole general partner of the Partnership and we loaned $40 million to the Partnership in exchange for an intercompany convertible note. The Partnership then acquired nine hotel properties and another eight hotel properties in 1997 using remaining proceeds from the IPO and borrowings under our credit facility. We do all of our business through the Partnership. On February 24, 1998, we completed a follow-on public equity offering and issued an additional 4.5 million common shares. The net proceeds of approximately $106.3 million were contributed to the Partnership, increasing our ownership percentage therein to 90.3%. The proceeds were used by the Partnership to pay down existing indebtedness under the credit facility, purchase limited partnership units from two unaffiliated limited partners, fund the acquisitions of two hotels purchased in March 1998 and for general corporate purposes. On May 22, 1998 we completed our merger with Red Lion Inns Limited Partnership, in which we acquired Red Lion Inns Operating L.P. ("OLP"), which owns a portfolio of ten DoubleTree-licensed hotels. In the transaction, we issued 3.1 million common shares and paid approximately $35.3 million in cash to the Red Lion limited partners and general partner. The total consideration value, including assumed liabilities of approximately $155.7 million and common shares issued valued at $80.3 million, was $271.3 million. The issuance of our common shares in the merger had the impact of increasing our ownership percentage in the Partnership to 92.2%. We acquired two other hotels in 1998 and one in August 1999, for a total of 32 hotels in which we have an ownership interest. These hotels have a total of 9,110 guest rooms and are located in 17 different states. Our principal source of revenue is lease payments from lessees pursuant to percentage lease agreements. Percentage lease revenue is based upon the room, food and beverage and other revenues of our hotels. The 18 lessees' ability to make payments to us pursuant to the percentage leases is dependent primarily upon the operations of the hotels. THIRD QUARTER HIGHLIGHTS Refer to the "Results of Operations" section below for discussion of our third quarter results compared to 1998 as well as the operational results of BMC. JOINT VENTURE ACQUISITION On August 31, 1999, Boykin Chicago, LLC ("the Chicago JV") acquired the 421 room Executive Plaza Hotel located in Chicago, Illinois for $48 million cash, or approximately $114,000 per room. We estimate this to be about half of the hotel's replacement cost. The Chicago JV leased the hotel to a subsidiary of BMC. Thirty million of the purchase price was funded through non-recourse debt secured by the hotel. We have an 18.75% effective ownership in the Chicago JV through our joint venture with AEW. Our share of the results of the Chicago JV have been reflected in the accompanying financial statements under the equity method of accounting. We have begun planning for an extensive renovation of the hotel, expected to exceed $10 million, and commence late in 2000. RENOVATION PROGRAM We believe it is important to keep our hotels in first-class condition in an effort to outperform the competition and to deliver superior REVPAR gains, and our renovation activities are focused on hotels in areas with the highest revenue potential. We also believe the long-term demand for rooms in most of our markets will continue to grow and therefore we expect to continue to implement our renovation plans aggressively. In 1999, we continued our renovation program in our hotels, spending $16.5 million year-to-date, or approximately 7 percent of hotel revenues. The majority of these capital expenditures went into four of our DoubleTree hotels, which underwent major guestroom renovations. The Holiday Inn Minneapolis West, Cleveland Marriott East and Radisson Hotel Mt. Laurel renovations are in progress. We plan to spend a total of approximately $23 million in 1999, which is approximately eight percent of our expected hotel revenues. We continue to actively seek acquisitions, but we are being selective in terms of yield and earnings criteria. We are considering expansions at a few of our hotels as well as the development or sale of land parcels to maximize the value of our portfolio. RESULTS OF OPERATIONS The following discusses our results of operations and those of BMC for the quarter ended September 30, 1999 compared to the same period in 1998. BOYKIN LODGING COMPANY Quarter ended September 30, 1999 compared to 1998 Our percentage lease revenue increased 5.0% to $24.3 million in 1999, from $23.2 million for the same period in 1998. Percentage lease revenue payable by BMC and Westboy represented $20.8 million, or 85.5% of total percentage lease revenue in the 1999 period, compared to $19.0 million, or 82.0% of total percentage lease revenue in 1998. The increase in percentage lease revenue from BMC and Westboy is primarily attributable to higher hotel room and total revenues from the BMC properties in 1999 as compared to 1998. 19 Net income remained flat at $7.2 million for the three months ended September 30, 1999, and 1998. As a percent of total revenue, net income decreased to 28.8% in 1999 from 31.0% in 1998, primarily resulting from an increase in 1999 operating expenses. The increase in the size of our hotel portfolio caused expenses to increase. General and administrative expenses increased $.7 million to $1.5 million or 6.1% of revenues as compared with 3.5% of revenues in 1998, because of increased payroll costs associated with hiring management personnel to support our strategic growth objectives. Depreciation expense increased $.5 million to $7.3 million, or 29.3% of revenues, because of significant renovation activity which took place in 1998. Property taxes, insurance and ground rent increased because of higher property tax assessments associated with property purchases and renovations that have occurred over the past 18 months. Nine months ended September 30, 1999 Compared to 1998 Our percentage lease revenue increased 31.5% to $67.6 million in 1999, from $51.4 million for the same period in 1998. Percentage lease revenue payable by BMC and Westboy represented $56.0 million, or 82.8% of total percentage lease revenue in the 1999 period, compared to $41.6 million, or 80.9% of total percentage lease revenue in 1998. The increase in percentage lease revenue from BMC and Westboy is primarily attributable to the lease revenue from Westboy, which commenced upon completion of the Red Lion merger. Net income increased to $16.6 million for the nine months ended September 30, 1999, compared to $15.6 million in 1998. As a percent of total revenue, net income decreased to 24.3% in 1999 from 30.2% in 1998, primarily resulting from the following items: - - An increase in interest expense to $15.2 million in 1999, or 22.3% of total revenues, compared to $8.9 million or 17.1% in 1998. - - An increase in real estate related depreciation and amortization from $15.1 million, or 29.2% of total revenues in 1998, to $21.5 million or 31.5% of revenues in 1999. The increase in the size of our hotel portfolio caused these increases. New debt associated with our 1998 acquisitions and the Red Lion merger combined with increased borrowings to fund hotel renovations increased our interest expense in 1999, despite lower average interest rates in 1999 compared to 1998. General and administrative expenses increased $1.8 million to $4.5 million, or 6.6% of revenues as compared to $5.3% in 1998, primarily because of the hiring of management personnel to support the increased reporting and support requirements of a larger portfolio of hotels. Our funds from operations ("FFO") for the quarter ended September 30, 1999 were $14.9 million compared to $14.5 million in 1998. The White Paper on Funds From Operations approved by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") in March 1995 defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of properties, plus real estate related depreciation and amortization and after comparable adjustments for our portion of these items related to unconsolidated entities and joint ventures. We believe that FFO is helpful to investors as a measure of the performance of an equity REIT because, along with cash flow from operating activities, financing activities and investing activities, it provides investors with another indication of the ability of a company to incur and service debt, to make capital expenditures and to fund other cash needs. We compute FFO in accordance with the NAREIT White Paper, which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than us. FFO does not represent cash generated from operating activities determined by GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make cash distributions. FFO may include funds that may not be available for management's discretionary use because of functional requirements to conserve funds for capital expenditures and property acquisitions, and other commitments and uncertainties. The following is reconciliation between net income and FFO for the three months ended September 30, 1999 and 1998, respectively, (in thousands): 20
Three Months Ended Nine months ended September 30, September 30, ------------------- ------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net income $ 7,154 $ 7,214 $ 16,566 $ 15,584 Extraordinary item -- -- -- 1,138 Real estate related depreciation and amortization 7,259 6,748 21,506 15,064 Minority interest 688 745 1,664 1,838 Joint venture FFO adjustment (196) (224) (711) (586) -------- -------- -------- -------- Funds from operations $ 14,905 $ 14,483 $ 39,025 $ 33,038 ======== ======== ======== ========
21 The following table illustrates key operating statistics of our portfolio for the three and nine months ended September 30, 1999, regardless of ownership:
Three Months Ended Nine months ended September 30, September 30, ------------------------ ------------------------ 1999 1998 1999 1998 ------ ------ ------ ------ All hotels (32 hotels)(a) Hotel revenues $ 85,501 $ 80,439 $242,993 $231,216 REVPAR $ 69.37 $ 65.33 $65.24 $62.00 Occupancy 76.0% 71.7% 70.5% 67.2% Average daily rate $91.29 $ 91.07 $ 92.50 $ 92.31 Initial Hotels (9 hotels) Hotel revenues $ 24,611 $ 23,219 $70,635 $67,207 REVPAR $78.43 $ 74.30 $ 74.46 $70.91 Occupancy 78.0% 75.9% 75.4% 73.3% Average daily rate $ 100.49 $ 97.96 $98.79 $96.70 DoubleTree Portfolio (10 hotels)(a) Hotel revenues $29,535 $ 29,540 $84,232 $84,661 REVPAR $ 68.22 $68.12 $ 62.29 $62.15 Occupancy 80.6% 77.0% 73.3% 71.1% Average daily rate $84.64 $ 88.41 $85.01 $87.40 Acquired Hotels (13 hotels)(a)(b) Hotel revenues $ 31,354 $27,680 $88,126 $79,348 REVPAR $ 64.32 $ 57.02 $61.62 $55.96 Occupancy 70.7% 64.5% 65.0% 59.7% Average daily rate $90.95 $ 88.38 $ 94.80 $93.67 (a) Includes predecessors' results. (b) Represents the operating results of hotels acquired by us since our IPO, other than the DoubleTree portfolio.
22 BMC Quarter ended September 30, 1999 compared to 1998 For the quarter ended September 30, 1999, BMC's hotel revenues increased 7.2%, to $68.3 million, compared to $63.7 million for the same period in 1998. The increase in 1999 was due to increased revenues from hotels under renovation in 1998, improved performance of several hotels acquired within the past two years, and the addition of one hotel in the third quarter of 1999. Percentage lease expense for the quarter ended September 30, 1999 increased 12.9%, to $21.4 million, compared to $19.0 million for the same period in 1998. Departmental and other hotel operating expenses, consisting primarily of rooms expenses, food and beverage costs, franchise fees, utilities, repairs and maintenance, management fees, and other general and administrative expenses of the hotels were $45.8 million in the quarter ended September 30, 1999 compared to $45.1 million for the same period in 1998. This increase is attributable to increased departmental, repairs and maintenance, and management fee expenses in 1999, caused by increased revenues. As a percentage of hotel revenues, the departmental and other hotel operating expenses decreased to 67.0% in 1999 from 70.8% in 1998. The combination of increased revenues and decreased operating expenses as a percentage of revenues resulted in higher net income of $1.6 million for the quarter ended September 30, 1999, compared to net income of five thousand dollars in 1998. Nine months ended September 30, 1999 compared to 1998 For the nine months ended September 30, 1999, BMC's hotel revenues increased 6.4%, to $189.3 million, compared to $177.9 million for the same period in 1998. The increase was because of increased revenues in the Florida hotels and in hotels under renovation in 1998 as well as the addition of one hotel in the third quarter of 1999. This was offset by a slight revenue decrease in the DoubleTree hotels, four of which have been under renovation in 1999. The percentage lease expense for the nine months ended September 30, 1999 increased 8.2%, to $56.6 million, compared to $52.3 million for the same period in 1998 because of the increase in hotel revenues. Departmental and other hotel operating expenses, consisting primarily of rooms expenses, food and beverage costs, franchise fees, utilities, repairs and maintenance, management fees, and other general and administrative expenses of the hotels were $131.9 million in the nine months ended September 30, 1999 compared to $127.3 million for the same period in 1998. As a percent of hotel revenues, the departmental and other hotel operating expenses decreased to 69.7% in 1999 from 71.5% in 1998. This was primarily because of a decrease in departmental expenses as a percentage of hotel revenues from 41.0% to 39.6% because of efficiencies gained in higher volumes. Utilities expense decreased $.9 million while general and administrative, management fees, and franchise fees remained constant. This was offset by increases in repairs and maintenance, advertising, and other expenses in 1999. BMC recorded net income of $2.3 million for the nine months ended September 30, 1999 compared to a net loss of forty-one thousand dollars in 1998. The increase in net income is primarily due to increased revenue performance of the hotels in 1999 combined with expense reductions. LIQUIDITY AND CAPITAL RESOURCES Our principal source of cash to meet our cash requirements, including distributions to shareholders, is our cash flow from the percentage leases. The lessees' obligations under the percentage leases are largely unsecured and the lessees' ability to make rent payments to the Partnership under the percentage leases are substantially dependent on the lessees' ability to generate sufficient cash flow from the operation of the hotels. As of September 30, 1999, we had $3.2 million of unrestricted cash and cash equivalents, $3.8 million of restricted cash for the payment of capital expenditures, real estate tax and insurance and we had outstanding borrowings totaling $163.0 million and $130.0 million against our credit facility and term note payable, respectively. On October 29, 1999, we entered into a $45 million term loan agreement. The loan is secured by three hotel properties, bears interest at a rate that fluctuates at 23 LIBOR plus 2% and may be prepaid at any time without penalty or defeasance. This debt has a three-year maturity with two separate one-year extensions, for a total term of five years including the extensions. All of the proceeds of this loan were used to reduce borrowings under our unsecured credit facility to $118,000. With this closing, we have extended our debt maturities so that $175 million, or 60% of our total debt is now long-term in nature. Effective November 5, 1999, we have a $175 million credit facility available, as limited under the terms of the credit agreement, to fund acquisitions of additional hotels, renovations and capital expenditures, and for our working capital needs. For information relating to the terms of our credit facility and our $130 million and $45 million term notes payable, see Notes 4, 5, and 10 respectively, of the notes to consolidated financial statements of Boykin Lodging Company included in this Form 10-Q. We may seek to negotiate additional credit facilities or issue debt instruments. Any debt incurred or issued by us may be secured or unsecured, long-term, medium-term or short-term, bear interest at a fixed or variable rate, and be subject to such other terms as the Board of Directors considers prudent. In November 1997, we filed a shelf registration statement with the Securities and Exchange Commission for the issuance of up to $300 million in securities. Securities issued under this registration statement may be preferred shares, depository shares, common shares or any combination thereof, and may be issued at various times, depending on market conditions. Warrants to purchase these securities may also be issued. The terms of issuance of any securities covered by this registration statement would be determined at the time of their offering. The 4.5 million common shares sold in the February 28, 1998 offering were sold under this registration statement. We anticipate that funds generated from operations and our credit facilities will enable us to meet our anticipated cash needs for the next year. Our percentage lease revenues and cash flow are dependent in large part upon the hotel revenues recognized by our lessees. There can be no assurance that those revenues will meet expected levels. The availability of borrowings under the credit facility is restrained by borrowing base and loan-to-value limits, as well as other financial performance covenants contained in the agreement. There can be no assurance that funds will be available in anticipated amounts from the credit facility. Additionally, no assurance can be given that we will make distributions in the future at the current rate, or at all. INFLATION Our revenues are from percentage leases, which can change based on changes in the revenues of our hotels. Therefore, we rely entirely on the performance of the hotels and the lessees' ability to increase revenues to keep pace with inflation. Operators of hotels in general, and our lessees, can change room rates quickly, but competitive pressures may limit the lessees' ability to raise rates to keep pace with inflation. Our general and administrative costs as well as real estate and personal property taxes, property and casualty insurance and ground rent are subject to inflation. YEAR 2000 COMPLIANCE Many computer systems were originally designed to recognize calendar years by the last two digits in the date code field. Beginning in the year 2000, these date code fields will need to accept four-digit entries to distinguish twenty-first century dates from twentieth century dates. As a result, computerized systems, which include information or computer related, and non-information technology systems including systems which operate elevators, phone systems, energy maintenance systems, security systems and applications used by us should be tested for compliance . These systems are being reviewed and evaluated and if necessary, modified or replaced, to ensure all such financial, information and operational systems are Year 2000 compliant. STATE OF READINESS We are addressing the Year 2000 compliance issue by focusing on our corporate facility, which includes all of our administrative, non-hotel operating functions, and on our hotel properties. Corporate Facility: 24 Our Year 2000 procedures and testing are complete for identified business critical systems. At this time we are not aware of any material Year 2000 non-compliance issues at our corporate facility. However, if these systems fail, the accuracy and timeliness of management information provided at our corporate facility could be disrupted. Hotel Properties: We are communicating with our lessees and other vendors with whom we do significant business to determine their state for Year 2000 compliance readiness. For all of our hotels, we have gained an understanding of the process which our lessees have undertaken to address risk assessment, validation, remediation and contingency plans related to Year 2000 compliance. These processes have included the following: - - completion of an inventory and assessment of all computerized systems, applications and hardware by internal personnel; - - prioritization of items representing critical business applications; - - estimation of remediation costs; - - addressing compliance with vendors and other outside parties; - - testing of all systems; - - remediation of noncompliant systems Most of our lessees are using internal personnel, who have been determining the level of resources needed, necessary modifications or upgrades, remediation and contingency plans to become Year 2000 compliant. Our lessees are either complete in their testing or are in the final stages of remediating noncompliant systems. The lessees which have not yet completed their Year 2000 programs are in the process of completing installation and testing of new systems in order to be compliant. This testing is expected to be completed during the fourth quarter of 1999. We received assurances from our two most significant lessees and managers, BMC and Promus, that they have performed sufficient procedures to adequately identify and remediate material Year 2000 issues. However, BMC was unable to gain access to third party systems to verify third party claims of compliance. BMC has completed their initial contingency plan, and is currently testing the plan at the property level and making the final refinements. There can be no assurance that the efforts related to the hotel properties will be sufficient to make these properties' computerized systems and applications Year 2000 compliant in a timely manner or that the allocated resources will be sufficient. A failure to become Year 2000 compliant could affect the integrity of the hotel property guest check-in, billing and accounting functions. Certain physical hotel property machinery and equipment could also fail, resulting in safety risks and customer dissatisfaction. Our properties could face claims from customers or lost revenues because of utility service interruptions and other third party quality issues. We believe the worst case scenario relating to Year 2000 issues is the possible failure of our lessees to complete all necessary modifications and conversions in a timely manner resulting in business disruptions at our hotels. This could have a material adverse impact on our financial position and results of operations, as our operations are highly dependent upon percentage lease revenue earned from our lessees. Our lease revenues are based upon revenues generated at the leased properties. To the extent that the Year 2000 problems materially affect the conduct of operations at those properties, it is likely that those lessees' revenues would be affected, and that our percentage lease revenues would ultimately be affected. Year 2000 Project Costs We estimate that total unexpended costs for the Year 2000 testing and remediation efforts for the hotels should not exceed $.6 million, although there can be no assurance that actual costs will not exceed this amount. We spent approximately $1.3 million year to date in 1999 related to computerized systems and equipment, which are expected to be Year 2000 compliant. The vast majority of our costs to remediate this issue are capital in nature and therefore do not affect our funds from operations. Contingency Plan We are in the process of developing our contingency plan for our corporate facility and working with our lessees to provide for the most reasonably likely worst case scenarios regarding Year 2000 compliance. The contingency plan for the corporate office will be finalized during the fourth quarter of 1999. This includes obtaining the building plan from the lessor of our corporate facility. Most of our lessees have completed their contingency plans and the others expect to 25 complete their plans during the fourth quarter of 1999. SEASONALITY Our hotels' operations historically have been seasonal. Twenty-seven of our hotels maintain higher occupancy rates during the second and third quarters. The five hotels located in Florida experience their highest occupancy in the first quarter. This seasonality pattern can be expected to cause fluctuations in our quarterly lease revenue under the percentage leases. To the extent that cash flow from operations is insufficient during any quarter because of temporary or seasonal fluctuations in percentage lease revenue, we expect to use cash on hand or borrowings to make those distributions. No assurance can be given that we will make distributions in the future at the current rate, or at all. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK In 1998 we entered into a $130 million term note payable which bears interest at a fixed rate of 6.9% for ten years, and a new fixed rate to be determined thereafter. The term note requires interest only payments for the first two years, with principal repayments commencing in the third loan year based on a 25-year amortization schedule. The term note expires in June 2023. Assuming a 10% increase in interest rates as of September 30, 1999, the fair market value of the term note payable would be approximately $126.1 million. Our $175 million unsecured credit facility and $45 million term note payable bear interest at a rate which fluctuates at LIBOR plus 1.40% to 2.25%. Due to changes in the U.S. and global economy, interest rates fluctuate regularly which creates risk that these rates may increase in the future, which would adversely impact our interest expense and cash flows. 26 PART II ITEM 1. LEGAL PROCEEDINGS Our company is subject to various legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of any ultimate liability with respect to these actions will not materially affect the our financial condition or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 3.1*** Amended and Restated Articles of Incorporation 3.2* Code of Regulations 4.1* Specimen Share Certificate 4.2*** Dividend Reinvestment and Optional Share Purchase Plan 4.3** Shareholder Rights Agreement, dated as of May 25, 1999 between Boykin Lodging Company and National City Bank as rights agent 27 Financial Data Schedule
* Incorporated by reference from Amendment No. 3 to Boykin Lodging's Registration Statement on Form S-11 (Registration No. 333-6341) (the "Form S-11") filed on October 24, 1996. Each of the above exhibits has the same exhibit number in the Form S-11. ** Incorporated by Reference as Exhibit 1 from the Registration statement on Form 8-A filed on June 10, 1999. *** Incorporated by reference from Boykin Lodging's Form 10-Q for the quarter ended June 30, 1999 (the "Form 10-Q"). Each of the above exhibits has the same exhibit number in the Form 10-Q. (b) Reports on Form 8-K None. 27 FORWARD LOOKING STATEMENTS This Form 10-Q contains statements that constitute forward-looking statements. Those statements appear in a number of places in this Form 10-Q and the documents incorporated by reference herein and include statements regarding the intent, belief or current expectations of Boykin Lodging, its directors or its officers with respect to: - - Leasing, management or performance of the hotels, - - Adequacy of reserves for renovation and refurbishment, - - Potential acquisitions and dispositions by Boykin, - - Boykin's financing plans, - - Boykin's policies regarding investments, acquisitions, dispositions, financings, conflicts of interest and other matters, and - - Trends affecting Boykin's or any hotel's financial condition or results of operations You are cautioned that any such forward-looking statement is not a guarantee of future performance and involves risks and uncertainties, and that actual results may differ materially from those in the forward-looking statement as a result of various factors. Factors that could cause actual results to differ materially from our expectations include, among other factors, financial performance, real estate conditions, execution of hotel acquisition programs, changes in local or national economic conditions, and other similar variables. The information contained in this Form 10-Q, in the documents incorporated by reference herein and Boykin Lodging's periodic filings with the Securities and Exchange Commission also identifies important factors that could cause such differences. With respect to any such forward-looking statement that includes a statement of its underlying assumptions or bases, we caution that, while we believe such assumptions or bases to be reasonable and have formed them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material depending on the circumstances. When, in any forward-looking statement, we or our management express an expectation or belief as to future results, that expectation or belief is expressed in good faith and is believed to have a reasonable basis, but there can be no assurance that the stated expectation or belief will result or be achieved or accomplished. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. /s/ Robert W. Boykin --------------------------------- November 15, 1999 Robert W. Boykin Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) /s/ Paul A. O'Neil --------------------------------- November 15, 1999 Paul A. O'Neil Chief Financial Officer and Treasurer (Principal Accounting Officer) 28 EXHIBIT INDEX EXHIBITS 3.1*** Amended and Restated Articles of Incorporation 3.2* Code of Regulations 4.1* Specimen Share Certificate 4.2*** Dividend Reinvestment and Optional Share Purchase Plan 4.3** Shareholder Rights Agreement, dated as of May 25, 1999 between Boykin Lodging Company and National City Bank as rights agent 27 Financial Data Schedule
* Incorporated by reference from Amendment No. 3 to Boykin Lodging's Registration Statement on Form S-11 (Registration No. 333-6341) (the "Form S-11") filed on October 24, 1996. Each of the above exhibits has the same exhibit number in the Form S-11. ** Incorporated by Reference as Exhibit 1 from the Registration statement on Form 8-A filed on June 10, 1999. *** Incorporated by reference from Boykin Lodging's Form 10-Q for the quarter ended June 30, 1999 (the "Form 10-Q"). Each of the above exhibits has the same exhibit number in the Form 10-Q. 29 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF BOYKIN LODGING COMPANY AS OF SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 3,193 0 8,885 0 0 0 644,325 (54,092) 614,915 0 293,000 0 0 0 280,067 614,915 0 68,220 0 34,226 1,664 0 15,764 16,566 0 16,566 0 0 0 16,566 0.97 0.97 REGISTRANT UTILIZES AN UNCLASSIFED BALANCE SHEET THEREFORE CURRENT ASSETS AND CURRENT LIABILITIES ARE NOT APPLICABLE.
-----END PRIVACY-ENHANCED MESSAGE-----