-----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, PI/KYEYXc29V6GeoCUR50tCqmKQirNWM1yz0vt5ubgSkztTBDHe92ZKvdUGl39Go hIQvZloWhu3iMVimyn3CUQ== 0000950152-98-009056.txt : 19981118 0000950152-98-009056.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950152-98-009056 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98751961 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 BOYKIN LODGING 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period Commission file number 001-11975 ended September 30, 1998 ------------ Boykin Lodging Company (Exact Name of Registrant as Specified in Its Charter) Ohio 34-1824586 ------------------------------ ------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) Guildhall Building, Suite 1500, 45 W. Prospect Avenue 44115 - ----------------------------------------------------- ------------------- (Address of Principal Executive Office) (Zip Code) (216) 430-1200 - --------------------------------------------------- Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of Common Shares, without par value, outstanding as of November 16, 1998: 17,044,360 1 2 PART I ITEM 1. FINANCIAL STATEMENTS BOYKIN LODGING COMPANY INDEX TO FINANCIAL STATEMENTS BOYKIN LODGING COMPANY: Consolidated Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997..............................................3 Consolidated Statements of Income for the Three and Nine Months Ended September 30, 1998 and 1997 (unaudited)......................4 Consolidated Statement of Shareholders' Equity for the Nine Months Ended September 30, 1998 (unaudited)...............................5 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997 (unaudited)......................6 Notes to Consolidated Financial Statements..............................7 BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES: Consolidated Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997.............................................13 Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1998 and 1997 (unaudited).....................14 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997 (unaudited).....................15 Notes to Consolidated Financial Statements.............................16
2 3 BOYKIN LODGING COMPANY CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 (AMOUNTS IN THOUSANDS)
(Unaudited) September 30, December 31, 1998 1997 --------- --------- ASSETS ------ INVESTMENT IN HOTEL PROPERTIES, net $ 594,873 $ 231,651 CASH AND CASH EQUIVALENTS 2,424 1,855 RENT RECEIVABLE FROM LESSEES: Related party lessees 8,512 897 Third party lessees 1,228 360 DEFERRED EXPENSES, net 3,333 2,055 RESTRICTED CASH 5,090 -- OTHER ASSETS 1,525 2,037 --------- --------- Total assets $ 616,985 $ 238,855 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ BORROWINGS AGAINST CREDIT FACILITY $ 151,000 $ 91,750 TERM NOTE PAYABLE 130,000 -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES 7,305 4,688 DEFERRED LEASE REVENUE 9,311 -- DIVIDENDS/DISTRIBUTIONS PAYABLE 8,618 4,893 DUE TO LESSEES: Related party lessees 4,081 1,069 Third party lessees 1,817 1,268 MINORITY INTEREST IN JOINT VENTURES 11,102 7,318 MINORITY INTEREST IN OPERATING PARTNERSHIP 11,279 13,054 SHAREHOLDERS' EQUITY: Preferred shares, without par value; 10,000,000 shares authorized; no shares issued and outstanding -- -- Common shares, without par value; 40,000,000 shares authorized; 17,044,360 and 9,542,251 shares outstanding September 30, 1998 and December 31, 1997, respectively, stated at -- -- Additional paid-in capital 307,523 124,430 Retained deficit (25,051) (9,615) --------- --------- Total shareholders' equity 282,472 114,815 --------- --------- Total liabilities and shareholders' equity $ 616,985 $ 238,855 ========= =========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. 3 4 BOYKIN LODGING COMPANY CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 1998 1997 1998 1997 -------- -------- -------- -------- REVENUES: Lease revenue from related party $ 15,828 $ 10,556 $ 33,487 $ 27,463 Other lease revenue 3,518 1,403 8,596 1,403 Interest income 97 77 279 337 -------- -------- -------- -------- 19,443 12,036 42,362 29,203 -------- -------- -------- -------- EXPENSES: Real estate related depreciation and amortization 6,748 2,584 15,064 6,931 Real estate and personal property taxes, insurance and ground rent 2,473 1,489 6,033 3,834 General and administrative 824 669 2,725 1,708 Interest expense 5,105 966 8,857 1,359 Amortization of deferred financing costs 158 109 434 327 -------- -------- -------- -------- 15,308 5,817 33,113 14,159 -------- -------- -------- -------- INCOME BEFORE MINORITY INTERESTS AND EXTRAORDINARY ITEM 4,135 6,219 9,249 15,044 MINORITY INTEREST IN JOINT VENTURES (117) (92) (312) (92) MINORITY INTEREST IN OPERATING PARTNERSHIP (269) (754) (560) (1,825) -------- -------- -------- -------- INCOME BEFORE EXTRAORDINARY ITEM 3,749 5,373 8,377 13,127 EXTRAORDINARY ITEM- Loss on early extinguishment of debt, net of minority interest of $110 and $14 in 1998 and 1997, respectively -- (141) (1,138) (141) -------- -------- -------- -------- NET INCOME APPLICABLE TO COMMON SHARES $ 3,749 $ 5,232 $ 7,239 $ 12,986 ======== ======== ======== ======== EARNINGS PER SHARE BEFORE EXTRAORDINARY ITEM: Basic $ 0.22 $ 0.56 $ 0.57 $ 1.37 Diluted $ 0.22 $ 0.56 $ 0.57 $ 1.37 EARNINGS PER SHARE: Basic $ 0.22 $ 0.55 $ 0.49 $ 1.36 Diluted $ 0.22 $ 0.55 $ 0.49 $ 1.36 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic 17,125 9,522 14,647 9,518 Diluted 17,125 9,596 14,650 9,575
The accompanying notes to consolidated financial statements are an integral part of these statements. 4 5 BOYKIN LODGING COMPANY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
Additional Common Paid-In Retained Shares Capital Deficit Total ----------- ----------- ----------- ----------- Balance, December 31, 1997 9,542,251 $ 124,430 $ (9,615) $ 114,815 Issuance of common shares, net of offering expenses of $8,047 7,616,609 184,923 -- 184,923 Common share purchases for treasury (114,500) (1,830) -- (1,830) Dividends declared -- -- (22,675) (22,675) Net income -- -- 7,239 7,239 ----------- ----------- ----------- ----------- Balance, September 30, 1998 17,044,360 $ 307,523 $ (25,051) $ 282,472 =========== =========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part of this statement. 5 6 BOYKIN LODGING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED, AMOUNTS IN THOUSANDS)
1998 1997 --------- --------- Cash flows from operating activities: Net income $ 7,239 $ 12,986 Adjustments to reconcile net income to net cash flow provided by operating activities- Extraordinary item - noncash loss on early extinguishment of debt 1,138 141 Depreciation and amortization 15,498 7,017 Minority interests 872 1,917 Changes in assets and liabilities- Rent receivable (7,034) (4,824) Restricted cash (5,090) -- Other assets 273 (207) Accounts payable and accrued expenses 1,621 1,313 Deferred lease revenue 9,311 -- Due to lessees 2,765 1,815 --------- --------- Net cash flow provided by operating activities 26,593 20,158 --------- --------- 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) -- Acquisitions of hotel properties (79,817) (68,734) Improvements and additions to hotel properties (25,973) (6,816) --------- --------- Net cash flow used for investing activities (296,794) (75,550) --------- --------- Cash flows from financing activities: Payment of dividends and distributions (20,770) (12,886) Borrowings against credit facility 156,000 59,000 Repayment of borrowings against credit facility (96,750) -- Term note borrowing 130,000 -- Payment of deferred financing costs (2,975) -- Net proceeds from issuance of common shares 104,590 490 Additional offering costs -- (14) Distributions to joint venture minority interest partners (162) -- Capital contributions from joint venture minority interest partners 3,634 -- Cash payments for redemption of certain limited partnership interests (967) (827) Retirement of mortgage debt assumed -- (10,266) Cash payment for common share purchases (1,830) -- --------- --------- Net cash flow provided by financing activities 270,770 35,497 --------- --------- Net change in cash and cash equivalents 569 (19,895) Cash and cash equivalents, beginning of period 1,855 21,362 --------- --------- Cash and cash equivalents, end of period $ 2,424 $ 1,467 ========= =========
The accompanying notes to consolidated financial statements are an integral part of these statements. 6 7 BOYKIN LODGING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 1. ORGANIZATION AND INITIAL PUBLIC OFFERING: ----------------------------------------- Boykin Lodging Company (the "Company") is a self-administered equity real estate investment trust ("REIT") that was formed to acquire equity interests in hotel properties. The Company had no operations prior to November 4, 1996. On November 4, 1996, the Company completed an initial public offering of 8,275,000 common shares. An additional 1,241,250 common shares were issued by the Company on November 29, 1996 upon an exercise in full of the underwriters' over-allotment option (together with the initial public offering, the "Initial Offering"). The offering price of all shares sold was $20 per share, resulting in gross proceeds of approximately $190,325 and net proceeds (less the underwriters' discount and offering expenses) of approximately $173,898. The Company contributed all of the net proceeds of the Initial Offering to Boykin Hotel Properties, L.P., a limited partnership (the "Partnership") in exchange for (i) an 84.5% general partnership interest in the Partnership, and (ii) a $40,000 Intercompany Convertible Note (the "Note"). The Note matures on the fifth anniversary of the closing of the Initial Offering. Interest on the Note accrues at a rate equal to 9.5% per annum, increasing to 9.75% per annum on the third anniversary of the completion of the Initial Offering, and is payable quarterly. The Note may be prepaid in full, but not in part, at any time. The Company will have the right to convert the Note after the second anniversary of the completion of the Initial Offering, and prior to maturity and in advance of any proposed prepayment by the Partnership, into additional equity interests in the Partnership at face value based on the initial offering price of the Company's common shares. The Company is the sole general partner of the Partnership. The Note is secured by mortgages on certain hotel properties. The Partnership used a substantial portion of the proceeds received from the Company and issued limited partnership interests representing approximately 15.5% of the Partnership to acquire nine hotel properties (the "Initial Hotels"). The Company acquired interests in eight additional hotels in 1997 and 14 more during the first nine months of 1998, bringing the total number of hotels owned at September 30, 1998 to 31 with an aggregate of 8,689 guest rooms (collectively, the "Hotels"). The Partnership and its subsidiaries lease fifteen of the Hotels to Boykin Management Company Limited Liability Company, an Ohio limited liability company ("BMC"), ten hotels to Westboy L.L.C. ("Westboy"), a wholly-owned subsidiary of BMC, three Hotels to MeriStar Hotels and Resorts, Inc. ("MeriStar"), one Hotel to Davidson Hotel Company ("Davidson"), one Hotel to Outrigger Lodging Services ("Outrigger"), and one Hotel to Radisson Hospitality Worldwide ("Radisson"), pursuant to leases which contain provisions for rent based on the revenues of the Hotels (the "Percentage Leases"). Each Percentage Lease obligates the lessee to pay rent equal to the greater of the minimum rent or a percentage rent based on the gross revenues of the leased hotel. The lessee holds the franchise agreement for each franchised hotel. The Partnership owns a 100% equity interest in the twenty-five Hotels leased by BMC and Westboy and one Hotel leased by MeriStar. The remaining five Hotels are owned by joint ventures, in three of which the Partnership has a 91% equity interest, one an 85% equity interest, and the other an 80% equity interest. The minority interests in these Hotels are owned by MeriStar (9% and 20%), Davidson (9%), Outrigger (9%) and Radisson (15%), or their affiliates. BMC is owned by Robert W. Boykin, Chairman, President and Chief Executive Officer of the Company (53.8%) and his brother, John E. Boykin (46.2%). Pursuant to the partnership agreement for the Partnership, the limited partners of the Partnership received exchange rights, which enable them to cause the Partnership to pay cash for their interests in the Partnership, or at the Company's election, to exchange common shares for such interests. The exchange rights may be exercised in whole or in part. The number of common shares initially issuable to the limited partners upon exercise of the exchange rights was 1,378,000. The number of shares issuable upon exercise of the exchange rights will be adjusted upon the occurrence of stock splits, mergers, consolidations or similar pro rata share transactions that which otherwise would have the effect of diluting the ownership interests of the limited partners or the shareholders of the Company. 7 8 Basis of Presentation - --------------------- The Company exercises control over the Partnership and its majority-owned entities. Therefore, the separate financial statements maintained by the Company, the Partnership and all majority owned entities have been presented on a consolidated basis with the Company. 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, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the period ended December 31, 1997. 2. FOLLOW-ON EQUITY OFFERING AND PURCHASE OF PARTNERSHIP UNITS: ------------------------------------------------------------ In February 1998, the Company completed a follow-on equity offering (the "Offering") of 4,500,000 common shares. The Offering price of the shares was $25 per share, resulting in gross proceeds of approximately $112,500 and net proceeds (less the underwriters' discount and offering expenses) of approximately $106,313. The Company contributed all of the net proceeds to the Partnership, which were used by the Partnership to pay existing indebtedness under the Company's credit facility, purchase limited partnership units from two unaffiliated limited partners, fund the acquisitions of two hotels purchased in March 1998 (Note 4) and for general corporate purposes. The Company purchased 40,976 outstanding limited partnership units for aggregate cash consideration of $967. The excess of the aggregate purchase price paid over the capital account balances of the units purchased was $562 and was recorded as additional investment in hotel properties. 3. MERGER WITH RED LION INNS LIMITED PARTNERSHIP: ---------------------------------------------- On May 22, 1998 the Company completed its merger with Red Lion Inns Limited Partnership ("Red Lion"), in which the Company acquired Red Lion Inns Operating L.P. ("OLP") which owns a portfolio of ten DoubleTree-licensed hotels (the "DoubleTree Hotels"). The DoubleTree Hotels contain 3,062 guest rooms and are located in California, Oregon, Washington, Colorado, Idaho, and Nebraska. A subsidiary of Promus Hotel Corporation continues to manage the DoubleTree Hotels, which are leased to Westboy. In the transaction, the Company issued 3,109,606 common shares and paid approximately $35,305 in cash to the Red Lion limited partners and general partner. The transaction was accounted for as a purchase. The common shares issued in the merger were valued at $25.83 per share for accounting purposes (the five day average trading price of the Company's shares before the merger announcement). The total consideration value, including assumed liabilities of approximately $155,710 and common shares issued valued at $80,333, was $271,348 in cash and common shares. As a result of the Offering, the merger and the purchase of the limited partnership units, the Company increased its ownership percentage in the Partnership to 92.2% 8 9 4. ACQUISITIONS OF HOTEL PROPERTIES: --------------------------------- In March 1998, the Company acquired, in a single transaction, two hotel properties for an aggregate consideration of $37,000 which was funded with cash proceeds from the Offering and borrowings under the Company's credit facility. The hotel properties acquired were the 317-room Knoxville Hilton in Knoxville, Tennessee and the 251-room High Point Radisson in High Point, North Carolina. These properties are leased to and managed by BMC under long-term Percentage Leases. In May 1998, the Company acquired the 208-room Pink Shell Resort in Fort Myers Beach, Florida for net cash consideration of $19,250, after $2 million of purchase price funded by the lessee of the hotel. The consideration paid by the Company was funded through borrowings under the Company's credit facility. MeriStar leases and manages the property under a long-term Percentage Lease. In June 1998, the Company entered into a joint venture with Radisson, forming RadBoy Mt. Laurel, L.L.C. ("RadBoy"), in which the Partnership owns an 85% interest. RadBoy purchased the 283-room Radisson Hotel Mount Laurel in Mount Laurel, New Jersey for net cash consideration of $23,240. The Company's share of the purchase price was funded through borrowings under the Company's credit facility. Radisson leases and manages the property under a long-term Percentage Lease. All of the above acquisitions were accounted for as purchases and accordingly, the operating results of the acquired properties have been included in the accompanying consolidated financial statements commencing on the respective dates of acquisition. 5. NEW ACCOUNTING STANDARDS: ------------------------- Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income," which requires disclosure of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is defined as changes in shareholders' equity from nonowner sources. SFAS No. 130 is not applicable to the Company as it has no items of other comprehensive income, as defined. In April 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position (SOP) 98-5 "Reporting on the Costs of Start-Up Activities" which is effective for the Company as of January 1, 1999. This SOP requires start-up and organization costs to be expensed as incurred and also requires previously deferred start-up costs to be recognized as a cumulative effect adjustment in the statement of income. In the opinion of management, adopting this SOP will not have a material impact on the Company's consolidated financial statements. In May 1998, the Emerging Issues Task Force ("EITF") issued EITF 98-9, "Accounting for Contingent Rent in Interim Periods." EITF 98-9 provides that a lessor shall defer recognition of contingent rental income in interim periods until specified targets that trigger the contingent income are met. The Company has elected to adopt the provisions of EITF 98-9 effective January 1, 1998, and has restated its financial results for the first and second quarters of 1998 and recorded the results of the third quarter of 1998 in accordance with EITF 98-9. Prior to EITF 98-9, in accordance with industry practice, the Company recognized Percentage Lease revenue in interim periods as calculated and paid under the terms of its lease agreements. For the Company, the application of EITF 98-9 generally results in monthly base rent being recognized in the first and second quarters and percentage rents collected or due from the lessees in the first and second quarters being deferred and recognized in the third and fourth quarters. EITF 98-9 relates solely to the Company's recognition of lease revenue for financial reporting purposes and has no effect on rent payments under the Company's leases, quarterly funds from operations, or the Company's cash flows and does not affect the Company's annual reported lease revenue. At September 30, 1998, the Company's deferred lease revenue was $9.3 million, representing the difference between the revenue recognized under EITF 98-9 and the percentage rent collected or due from lessees during the first three quarters under the quarterly rent calculations in the leases. The Company will recognize the deferred revenue as lease revenue in the fourth quarter of 1998. 9 10 In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivatives Instruments and Hedging Activities." As the Company has not utilized such instruments or entered into any such activities to date, this pronouncement has no impact on the Company. 6. NET INCOME PER SHARE AND PARTNERSHIP UNIT: ------------------------------------------ The Company's basic and diluted earnings per share for three and nine months ended September 30, 1998 under SFAS No. 128, "Earnings per Share" are as follows:
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1998 1997 1998 1997 ---- ---- ---- ---- Basic earnings per common share $0.22 $0.55 $0.49 $1.36 Diluted earnings per common share $0.22 $0.55 $0.49 $1.36
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, 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 months ended September 30, 1998 was 18,416,000. The basic and diluted weighted average number of common shares and limited partnership units outstanding for the nine months ended September 30, 1998 was 15,947,000 and 15,949,000, respectively. 7. CREDIT FACILITY: ---------------- On June 11, 1998, the Company entered into a new unsecured credit facility with a group of banks, which enables the Company to borrow up to $250,000, subject to borrowing base and loan-to-value limitations, at a rate of interest that fluctuates at LIBOR plus 1.40% to 1.75% (7.1% at September 30, 1998), as defined. The Company 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 the Company's option. The new facility replaced the Company's previous $150,000 credit facility, which was secured by first mortgages on thirteen of the Hotels. As of September 30, 1998 and December 31, 1997, the Company had $151,000 and $91,750, respectively, outstanding against the credit facility. The credit facility requires the Company, among other things, to maintain a minimum net worth, a coverage ratio of EBITDA to debt service, and a coverage ratio of EBITDA to debt service and fixed charges. Further, the Company is required to maintain the franchise agreement at each Hotel and to maintain its REIT status. The Company was in compliance with its covenants at September 30, 1998 and December 31, 1997. 8. TERM NOTE PAYABLE: ------------------ In connection with the Red Lion merger, on May 22, 1998, OLP entered into a $130,000 term loan agreement. The loan expires in June 2023 and may be prepaid without penalty or defeasance after May 21, 2008. The loan bears interest at a fixed rate of 6.9% for ten years, and at a new fixed rate to be determined thereafter. The loan requires interest-only payments for the first two years, with principal repayments commencing in the third loan year based on a 25-year amortization schedule. The loan is secured by the DoubleTree Hotels. Under covenants in the loan agreement, assets of OLP are not available to pay the creditors of any other entity, except to the extent of permitted cash distributions from OLP to the Partnership. Likewise, the assets of other entities are not available to pay the creditors of OLP. 10 11 9. EXTRAORDINARY ITEM: ------------------- In connection with obtaining the new unsecured credit facility discussed in Note 7, the Company wrote off existing deferred financing costs under the former secured facility totaling $1,138. These charges, net of $110 of minority interest, were reflected as an extraordinary item in the accompanying consolidated statement of income for the nine months ended September 30, 1998. 10. PERCENTAGE LEASE AGREEMENTS: ---------------------------- The Percentage Leases have noncancelable remaining terms ranging from three to ten years, subject to earlier termination on the occurrence of certain contingencies, as defined. The rent due under each Percentage Lease is the greater of minimum rent, as defined, or percentage rent. Percentage rent applicable to room and other hotel 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, 1998 and 1997 was $19,346 and $11,959, respectively, of which approximately $4,033 and $5,014, respectively, was in excess of minimum rent. Percentage Lease revenue for the nine months ended September 30, 1998 and 1997 was $42,083 and $28,866, respectively, of which approximately $6,308 and $10,872, respectively, was in excess of minimum rent. The 1998 amounts reflect the adoption of EITF 98-9 as discussed in Note 5. Future minimum rentals (ignoring future CPI increases) to be received by the Company from BMC (including Westboy) and from other lessees pursuant to the Percentage Leases for each of the years in the period 1998 to 2002 and in total thereafter are as follows: BMC Other Lessees Totals --- ------------- ------ Remainder of 1998 $ 12,127 $ 2,556 $ 14,683 1999 48,507 10,425 58,932 2000 48,507 10,625 59,132 2001 42,305 10,625 52,930 2002 35,474 9,226 44,700 Thereafter 37,257 36,450 73,707 -------- -------- --------- $224,177 $ 79,907 $304,084 ======== ======== ========
11. RELATED PARTY TRANSACTIONS: --------------------------- The Chairman, President and Chief Executive Officer of the Company is the majority shareholder of BMC. BMC was a significant source of the Company's Percentage Lease revenue through September 30, 1998. At September 30, 1998 and December 31, 1997, the Company had rent receivable of $8,512 and $897, respectively, due from BMC. At September 30, 1998 and December 31, 1997, the Company had a payable to BMC of $4,081 and $1,069, respectively, primarily for the reimbursement of capital expenditure costs incurred on behalf of the Company. 12. STATEMENT OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES: -------------------------------------------------- During the nine-month periods ended September 30, 1998 and 1997, noncash financing transactions consisted of $8,618 and $4,894, respectively, of dividends and Partnership distributions which were declared but not paid as of September 30, 1998 and 1997, respectively. In connection with the completion of the Red Lion merger, the Company issued 3,109,606 common shares, valued at $80,333, as partial consideration for the acquisition of OLP. 11 12 Interest paid during the nine-month periods ended September 30, 1998 and 1997 was $7,793 and $875, respectively. 13. PRO FORMA FINANCIAL INFORMATION: -------------------------------- The unaudited pro forma financial information set forth below is presented as if (i) the Offering discussed in Note 2, (ii) the merger with Red Lion discussed in Note 3, including the acquisition of the DoubleTree Hotels and the issuance of common shares and (iii) the acquisitions of properties in 1997 and the 1998 acquisitions discussed in Note 4 had been consummated as of January 1, 1997. The 1998 pro forma financial information also reflects the adoption of EITF 98-9 which had the impact of reducing 1998 lease revenue and income before extraordinary item by $9,433 and $8,771, respectively. The 1997 results have not been adjusted for EITF 98-9. The pro forma financial information is not necessarily indicative of what the actual results of operations of the Company would have been assuming the Offering, the Red Lion merger, and the acquisitions had been consummated as of January 1, 1997, nor does it purport to represent the results of operations for future periods.
Nine Months Ended September 30, ------------- 1998 1997 ------- ------- Revenues: Lease revenue $55,148 $64,887 Interest income 264 -- ------- ------- 55,412 64,887 Expenses: Real estate related depreciation and amortization 20,055 19,644 Real estate and personal property taxes, insurance and ground rent 7,427 7,084 General and administrative 2,725 1,708 Interest expense 14,661 14,323 Amortization of deferred financing costs 493 441 ------- ------- Income before minority interest and extraordinary item 10,051 21,687 Minority interest 1,004 1,589 ------- ------- Income before extraordinary item $ 9,047 $20,098 ======= ======= Income per share before extraordinary item Basic $ .53 $ 1.18 Diluted $ .53 $ 1.18
12 13 BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 (AMOUNTS IN THOUSANDS)
(Unaudited) September 30, December 31, ASSETS 1998 1997 - ------ -------- -------- CASH AND CASH EQUIVALENTS $ 17,536 $ 6,862 ACCOUNTS RECEIVABLE: Trade, net of allowance for doubtful accounts of $156 and $84 at September 30, 1998 and December 31, 1997, respectively 10,847 3,859 Boykin Hotel Properties, L.P. 3,362 1,069 Red Lion Inns Operating L.P. 719 -- Other 24 -- INVENTORIES 2,253 788 PROPERTY AND EQUIPMENT, net 368 366 INVESTMENT IN BOYKIN LODGING COMPANY 301 529 PREPAID EXPENSES AND OTHER ASSETS 1,791 908 -------- -------- Total assets $ 37,201 $ 14,381 ======== ======== LIABILITIES AND MEMBERS' CAPITAL - -------------------------------- RENT PAYABLE: Boykin Hotel Properties, L.P. $ 3,223 $ 897 Red Lion Inns Operating L.P. 5,289 -- ACCOUNTS PAYABLE: Trade 3,567 1,746 Advance deposits 1,468 259 Bank overdraft liability 5,893 2,837 Former owners and affiliate -- 2 ACCRUED EXPENSES: Accrued payroll 1,360 391 Accrued vacation 2,602 893 Accrued sales, use and occupancy taxes 2,287 646 Accrued management fee 3,219 -- Other accrued liabilities 4,289 2,437 -------- -------- Total liabilities 33,197 10,108 -------- -------- MEMBERS' CAPITAL: Capital contributed 3,000 3,000 Retained earnings 1,194 1,235 Unrealized (depreciation)/appreciation on investment (190) 38 -------- -------- Total members' capital 4,004 4,273 -------- -------- Total liabilities and members' capital $ 37,201 $ 14,381 ======== ========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. 13 14 BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED, AMOUNTS IN THOUSANDS)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 1998 1997 1998 1997 --------- --------- --------- --------- REVENUES: Room revenue $ 41,917 $ 20,705 $ 114,403 $ 56,117 Food and beverage revenue 17,327 7,841 52,023 22,215 Other hotel revenue 4,461 2,478 11,521 5,810 Other revenue 443 542 2,007 2,050 --------- --------- --------- --------- Total revenues 64,148 31,566 179,954 86,192 --------- --------- --------- --------- EXPENSES: Departmental expenses of hotels: Rooms 9,979 4,568 27,440 12,442 Food and beverage 13,154 5,794 39,166 16,190 Other 2,642 1,241 6,315 2,927 Cost of goods sold of non-hotel operations 27 69 423 484 Percentage lease expense 18,997 10,556 52,294 27,463 General and administrative 6,579 3,376 18,896 9,776 Advertising and promotion 3,026 1,324 8,360 3,596 Utilities 2,887 1,278 7,910 3,429 Franchisor royalties and other charges 2,093 1,564 5,787 4,121 Repairs and maintenance 2,317 1,376 6,708 3,806 Depreciation and amortization 22 20 67 61 Management fee expense 2,341 -- 6,662 -- Other (income)/expense 79 (10) (33) 19 --------- --------- --------- --------- Total expenses 64,143 31,156 179,995 84,314 --------- --------- --------- --------- NET INCOME (LOSS) $ 5 $ 410 $ (41) $ 1,878 ========= ========= ========= ========= COMPREHENSIVE INCOME (LOSS) $ (128) $ 410 $ (269) $ 1,878 ========= ========= ========= =========
The accompanying notes to consolidated financial statements are an integral part of these statements. 14 15 BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED, AMOUNTS IN THOUSANDS)
1998 1997 -------- -------- Cash flows from operating activities: Net (loss) income $ (41) $ 1,878 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 67 61 Changes in assets and liabilities: Accounts receivable (10,024) (4,081) Inventories (1,465) (307) Prepaid expenses and other assets (883) (311) Rent payable 7,615 3,452 Accounts payable 7,753 4,165 Other accrued liabilities 7,723 2,016 -------- -------- Net cash provided by operating activities 10,745 6,873 -------- -------- Cash flows from investing activities: Property additions (69) (55) Investment in Boykin Lodging Company -- (490) -------- -------- Net cash used for investing activities (69) (545) -------- -------- Cash flows from financing activities: Payments of obligations to former owners (2) (373) Collections of amounts due from former owners -- 69 -------- -------- Net cash used for financing activities (2) (304) -------- -------- Net increase in cash and cash equivalents 10,674 6,024 Cash and cash equivalents, beginning of period 6,862 5,469 -------- -------- Cash and cash equivalents, end of period $ 17,536 $ 11,493 ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. 15 16 BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (DOLLAR AMOUNTS IN THOUSANDS) 1. DESCRIPTION OF BUSINESS: ------------------------ Boykin Management Company Limited Liability Company and its subsidiaries (collectively, "BMC") (i) lease and operate full and limited service hotels located throughout the United States pursuant to long-term percentage leases; (ii) manage full and limited service hotels located throughout the United States pursuant to management agreements; (iii) provide national purchasing services to hotels, and (iv) 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 (the "Company"). Pursuant to formation transactions related to the November 4, 1996 initial public offering of the Company, 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. In connection with the formation of BMC, certain assets and liabilities of nine of the BMC Hotels (Note 5) were assumed by 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 the 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, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. For further information, refer to BMC's consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the period ended December 31, 1997. 4. NEW ACCOUNTING STANDARDS: ------------------------- Effective January 1, 1998, BMC adopted Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income," which requires disclosure of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is defined as changes in members' capital from nonowner sources, which for BMC consist of differences between the cost basis and fair market value of its investment in 20,000 common shares in the Company. For the three and nine-month periods ended September 30, 1998, there was a difference of $133 and $228, respectively, between net income and comprehensive income due to the decline in market value of the investment. In May 1998, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 98-9, "Accounting for Contingent Rent in Interim Financial Periods." This issue addresses lessor revenue and lessee expense recognition in interim periods related to rental agreements which provide for minimum rental payments, plus contingent rents based on the lessee's operations, such as a percentage of sales in excess of an annual specified sales target. The EITF reached a final consensus that lessees, such as BMC, should accrue contingent rental expense in interim periods prior 16 17 to the lessee's achievement of the specified target that triggers the contingent rent expense, provided that achievement of the target by the end of the fiscal year is considered probable. The application of EITF 98-9 has no impact on BMC. 5. PERCENTAGE LEASE AGREEMENTS: ---------------------------- BMC leases 15 hotels (the "BMC Hotels") from the Partnership pursuant to long-term leases (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. The Percentage Leases have noncancellable remaining terms ranging from three to ten years, subject to earlier termination on the occurrence of certain contingencies, as defined. The Percentage Leases do not contain renewal terms. 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 ranges from 6% to 10% of such revenues. Both the threshold amounts used in computing percentage rent and minimum rent on room and other hotel revenues are subject to adjustments as of January 1 of each year based on increases in the United States Consumer Price Index. Other than real estate and personal property taxes, casualty insurance, ground lease rental, and capital improvements, which are obligations of the Partnership, the Percentage Leases require BMC to pay all costs and expenses incurred in the operation of the BMC Hotels. The Percentage Leases require BMC to indemnify the 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. 6. DOUBLETREE LEASE AGREEMENT: --------------------------- 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 in Note 5. OLP was acquired by the Company on May 22, 1998. The ten DoubleTree-licensed hotels (the "DoubleTree Hotels") leased by Westboy are located in California, Oregon, Washington, 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. 7. RELATED PARTY TRANSACTIONS: --------------------------- At September 30, 1998 and December 31, 1997 BMC had receivables from the Partnership of $4,081 and $1,069, respectively, primarily for the reimbursement of capital expenditure costs incurred on behalf of the Partnership. At September 30, 1998 and December 31, 1997 BMC had payables to the Partnership of $8,512 and $897, respectively, for amounts due pursuant to the Percentage Leases. 8. PRO FORMA FINANCIAL INFORMATION: -------------------------------- The following unaudited pro forma condensed statements of operations for the nine-month periods ended September 30, 1998 and 1997 are presented as if BMC leased and operated from January 1, 1997 all of the BMC Hotels and the DoubleTree Hotels owned by the Company as of September 30, 1998. 17 18 The pro forma condensed statements of operations do not purport to present what actual results of operations would have been if the BMC Hotels and the DoubleTree Hotels were operated by BMC pursuant to the Percentage Leases from January 1, 1997 or to project results for any future period.
Nine Months Ended September 30, ------------------------------- 1998 1997 --------- --------- REVENUES: Room revenue $ 115,929 $ 116,471 Food and beverage revenue 52,599 53,168 Other hotel revenue 11,681 11,411 Other revenue 2,007 2,050 --------- --------- Total revenues $ 182,216 $ 183,100 EXPENSES: Departmental expenses of hotels 73,780 71,160 Cost of goods sold of nonhotel operations 423 484 Percentage Lease expense 53,136 54,625 Other expenses 55,105 53,924 --------- --------- NET (LOSS) INCOME $ (228) $ 2,907 ========= =========
18 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKGROUND Boykin Lodging Company, an Ohio corporation (the "Company"), is a self-administered equity real estate investment trust ("REIT") that owns hotels throughout the United States and leases its properties to established hotel operators. The Company's primary business strategies are: - 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. On November 4, 1996, the Company completed an initial public offering (the "Initial Offering") of 8,275,000 shares. An additional 1,241,250 common shares were issued by the Company on November 29, 1996 upon an exercise in full of the underwriters' over-allotment option. The net proceeds to the Company from these transactions were $173.9 million. The Company contributed all of the net proceeds to Boykin Hotel Properties, L.P., an Ohio limited partnership (the "Partnership") in exchange for (i) an 84.5% general partnership interest in the Partnership, and (ii) a $40 million intercompany convertible note (the "Note"). The Note matures on the fifth anniversary of the Initial Offering. If the Note is converted, the Company will receive an additional general partnership interest in the Partnership of .9%. The Company is the sole general partner of the Partnership. The Partnership used a substantial portion of the proceeds from the Company and issued limited partnership interests representing approximately 15.5% of the Partnership to acquire nine hotel properties (the "Initial Hotels"). The Company acquired interests in eight additional hotels in 1997 and 14 more during the first nine months of 1998, bringing the total number of hotels owned at September 30, 1998 to 31 with an aggregate of 8,689 guest rooms (collectively, the "Hotels"). The Partnership and its subsidiaries lease fifteen of the Hotels to Boykin Management Company Limited Liability Company, an Ohio limited liability company ("BMC"), ten hotels to Westboy L.L.C. ("Westboy"), a wholly-owned subsidiary of BMC, three Hotels to MeriStar Hotels and Resorts, Inc. ("MeriStar"), one Hotel to Davidson Hotel Company ("Davidson"), one Hotel to Outrigger Lodging Services ("Outrigger"), and one Hotel to Radisson Hospitality Worldwide ("Radisson"), pursuant to leases which contain provisions for rent based on the revenues of the Hotels (the "Percentage Leases"). Each Percentage Lease obligates the lessee to pay rent equal to the greater of the minimum rent or a percentage rent based on the gross revenues of the leased hotel. The lessee holds the franchise agreement for each franchised hotel. The Partnership owns a 100% equity interest in the twenty-five Hotels leased by BMC and Westboy and one Hotel leased by MeriStar. The remaining five Hotels are owned by joint ventures, in three of which the Partnership has a 91% equity interest, one an 85% equity interest, and the other an 80% equity interest. In February 1998, the Company completed a follow-on equity offering (the "Offering") of 4,500,000 common shares, under the Company's $300 million shelf registration statement, which provides for the issuance of up to $300 million in securities through November 1999. The Offering price of the shares was $25 per share, resulting in gross proceeds of approximately $112.5 million and net proceeds (less the underwriters' discount and offering expenses) of approximately $106.3 million. The Company contributed all of the net proceeds to the Partnership which were used by the Partnership to pay existing indebtedness under the Company's $150 million 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. The Company's principal source of revenue is lease payments from its lessees pursuant to the Percentage Leases. Percentage Lease revenue is based upon the room, food and beverage and other revenues of the Company's hotels. The lessees' ability to make payments to the Company pursuant to the Percentage Leases is dependent primarily upon the operations of the Hotels. Because of the foregoing and the significance of the BMC Percentage Leases to the Company, management believes that a discussion of the operations of BMC is important to an understanding of the business of the Company. THIRD QUARTER HIGHLIGHTS AND OUTLOOK FOR THE REMAINDER OF 1998 During the third quarter, two of the Company's largest hotels, the Cleveland Airport Marriott and the Berkeley Marina Radisson, were under significant renovation. For the third quarter of 1998, these two hotels experienced a decrease in revenues of $1.2 million, or 13%, compared to the same period in 1997, driven by a 10% occupancy decline and a 2.2% reduction in average daily rate ("ADR"). These two hotels accounted for approximately 13% of the Company's pro forma room revenues in 1997. 19 20 The Company completed the $6 million renovation at the Berkeley Marina Radisson in September 1998 and the $6 million renovation at the Cleveland Airport Marriott in November 1998. Management believes it is important to keep the Hotels in first-class condition in an effort to outperform the competition and to deliver superior room revenue per available room ("REVPAR") gains. Management also believes the long-term demand for rooms in most of the Company's markets will continue to grow and therefore expects to continue to implement its renovation plans aggressively. The Company's positioning of its assets for future growth has had some negative impact on operating results in 1998. The following table breaks down the REVPAR changes for the third quarter and nine months ended September 30, 1998 as compared to the same periods in 1997 to illustrate the impact of the renovation activity, adverse weather conditions and fire disruption at the Company's Florida hotels and the performance of the Company's other hotels:
Percentage change in REVPAR* Quarter Number Ended Number Nine Months of Hotels 9/30/98 of Hotels Ended 9/30/98 --------- ------- --------- ------------- Hotels undergoing renovation/repositioning 2 (12.0)% 4 (11.4)% Florida hotels 4 (3.5)% 4 0.1% Red Lion DoubleTree hotels 10 0.5% 10 0.3% Balance of portfolio 13 0.7% 11 5.0% Total 29 (1.0)% 29 (0.2)%
* Represents the operating results of hotels owned by the Company at September 30, 1998, including predecessors' results. These statistics exclude the results of the DoubleTree Hotel Kansas City and the Daytona Beach Radisson Resort as those hotels were closed for renovation during portions of the 1997 reporting periods. In August of 1998, the Company's Board of Directors authorized the Company to purchase up to one million shares, or approximately six percent of the Company's common shares, in the open market at times and at prices determined by management. As of September 30, 1998, the Company had purchased 114,500 shares at a cost of approximately $1.8 million, or an average price of $15.98 per share. The Company also announced in August its intent to sell non-strategic hotel assets and use a portion of the proceeds of these sales to retire debt or purchase additional shares. The Company is actively marketing two hotels near Charlotte, North Carolina, and four of the DoubleTree Hotels acquired in May of this year. The Company's acquisition program continues to move forward, but management has become more selective about the Company's acquisitions and its criteria in terms of yield and earnings. The Company did not complete any acquisitions in the third quarter and management anticipates a continued pause in acquisition activity in the marketplace while sellers' expectations adjust downward. The Company also is currently working with Chadwick, Saylor & Co. to find a private investor that may want to take advantage of selected acquisition opportunities through a joint venture with the Company. Management believes such a joint venture could enhance access to potential acquisitions, and generate additional fees to the Company. The Company has found a number of parties interested in exploring the idea with the Company. Looking at the remainder of the year and beyond, the Company is very optimistic about its portfolio's ability to meet the growing needs of both commercial and private customers of full-service upscale hotels. In spite of any anticipated slowing in the growth rate over the next four quarters, the Company anticipates a positive impact on its results of operations stemming from the Hotels renovated and repositioned in 1998. Six of the DoubleTree Hotels will benefit from renovations over the next two years. The Company expects to have approximately 750 of the DoubleTree Hotel rooms renovated by the end of the first quarter 1999. The Company is focusing its renovation activities on the Hotels in areas with the highest revenue potential. The Company is also considering expansions at a few of the Hotels as well as the development or sale of land parcels to maximize the value of the Company's portfolio. 20 21 RESULTS OF OPERATIONS The following discusses (i) the Company's results of operations for the quarter and nine months ended September 30, 1998 compared to the same period in 1997, and (ii) BMC's results of operations for the quarter and nine months ended September 30, 1998 compared to the same period in 1997. The Company's results of operations for 1998 reflect the adoption of EITF 98-9. For information relating to the provisions of EITF 98-9 and its impact on quarterly and year-to-date results of operations, reference is made to Note 5 of the Notes to Consolidated Financial Statements of Boykin Lodging Company within this Form 10-Q. Reference is also made to the Company's Form 10-Q/As for the quarterly periods ended March 31, 1998 and June 30, 1998 for the impact on the 1998 first and second quarter results of operations as restated in these Form 10-Q/As. THE COMPANY Quarter ended September 30, 1998 compared to 1997 For the three months ended September 30, 1998, Percentage Lease revenue, after accounting for EITF 98-9, increased to $19.3 million, or 61.8%, from $12.0 million for the same period in 1997. Third quarter revenues would have increased 93.7% without the application of EITF 98-9. The increase was primarily because of an increase in the number of Hotels owned by the Company from 15 to 31 at September 30, 1997 and 1998, respectively. Percentage Lease revenue payable by BMC and Westboy represented $15.8 million, or 81.8% of total Percentage Lease revenue in the 1998 period, compared to $10.6 million, or 88.3% of total Percentage Lease revenue, in 1997. 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. Income before minority interests and extraordinary item decreased to $4.1 million in 1998 compared to $6.2 million in 1997, after accounting for EITF 98-9. Without the application of EITF 98-9, income before minority interests and extraordinary item would have been $8.0 million, an increase of 28.0% over 1997. As a percent of total revenue, income before minority interests and extraordinary item decreased to 21.3% in 1998 from 51.7% in 1997, primarily resulting from (i) a $3.8 million impact on revenues and income before minority interests and extraordinary item for the application of EITF 98-9, (ii) an increase in interest expense to $5.1 million in 1998, or 26.3% of total revenues, in 1998, compared to $966, or 8.0%, in 1997, and (iii) an increase in real estate related depreciation and amortization, as a percent of total revenue, from 21.5% in 1997 to 34.7% in 1998. These increases were because of an increase in the size of the Company's hotel portfolio. The increases were offset by a decrease in general and administrative expenses, as a percentage of total revenue, from 5.6% in 1997 to 4.2% in 1998. Interest expense in 1997 was unusually low due to minimal borrowings under the Company's credit facility as the remaining funds from the Company's Initial Offering were used to fund the majority of acquisitions in the first half of 1997. New debt associated with the Company's 1998 acquisitions and the Red Lion merger increased the Company's interest expense in 1998. The Company's net income, after accounting for EITF 98-9, decreased to $3.7 million for the three months ended September 30, 1998, compared to $5.2 million in 1997. The effect of adopting EITF 98-9 lowered net income by $2.9 million for the third quarter of 1998. Minority interest applicable to the operating partnership decreased to $269 in 1998, or 1.4% of total revenues, compared to $754, or 6.3%, in 1997. The common shares issued as part of the February 1998 Offering and the Red Lion merger had the effect of diluting the limited partners' ownership interests in the Partnership. Minority interest applicable to joint venture partnerships increased to $117 in 1998 compared to $92 for the same period in 1997 due to the Company entering into three additional joint ventures since September 30, 1997. The extraordinary charge in the third quarter of 1997 resulted from the early extinguishment of debt assumed in connection with the acquisition of Marriott's Hunt Valley Inn in July 1997. Nine months ended September 30, 1998 compared to 1997 For the nine months ended September 30, 1998, Percentage Lease revenue, after accounting for EITF 98-9, increased to $42.1 million, or 45.8%, from $28.9 million for the same period in 1997. Revenues would have increased 78.0% without the application of EITF 98-9. The increase was primarily because of an increase in the number of Hotels owned by the Company from 15 to 31 at September 30, 1997 and 1998, respectively. Percentage Lease revenue payable by BMC and Westboy represented $33.5 million, or 79.6% of total Percentage Lease revenue, in the 1998 period, compared to $27.5 million, or 95.1% of total Percentage Lease revenue, in 1997. 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 and six Hotels acquired by the Company in 1997 and 1998 and leased to BMC. Income before minority interests and extraordinary item decreased to $9.2 million in 1998 compared to $15.0 million in 1997, after accounting for EITF 98-9. Without the application of EITF 98-9, income before minority 21 22 interests and extraordinary item would have been $18.6 million, an increase of 23.4% over 1997. As a percent of total revenue, income before minority interests and extraordinary item decreased to 21.8% in 1998 from 51.5% in 1997, primarily resulting from (i) a $9.3 million impact on revenues and income before minority interests and extraordinary item for the application of EITF 98-9, (ii) an increase in interest expense to $8.9 million in 1998, or 20.9% of total revenues, in 1998, compared to $1.4 million, or 4.7%, in 1997, (iii) an increase in real estate related depreciation and amortization, as a percent of total revenue, from 23.7% in 1997 to 35.6% in 1998, and (iv) an increase in general and administrative expenses, as a percent of total revenues, from 5.8% in 1997 to 6.4% in 1998, due to an increase in the size of the Company's hotel portfolio. Interest expense in 1997 was unusually low due to minimal borrowings under the Company's credit facility as the remaining funds from the Company's Initial Offering were used fund to the majority of acquisitions in the first half of 1997. New debt associated with the Company's 1998 acquisitions and Red Lion merger increased the Company's interest expense in 1998. The Company's net income, after accounting for EITF 98-9, decreased to $7.2 million for the nine months ended September 30, 1998, compared to $13.0 million in 1997. The effect of adopting EITF 98-9 lowered net income by $8.3 million for the nine month period of 1998. Minority interest applicable to the operating partnership decreased to $560 in 1998, or 1.3% of total revenues, compared to $1,825 or 6.2%, in 1997. The common shares issued as part of the February 1998 Offering and the Red Lion merger had the effect of diluting the limited partners' ownership interests in the Partnership. Minority interest applicable to joint venture partnerships increased to $312 in 1998 compared to $92 for the same period in 1997 due to the Company entering into three additional joint ventures since September 30, 1997. An extraordinary charge of $1.1 million in the second quarter of 1998 represented the write-off of deferred financing costs associated with the Company's former $150 million secured credit facility, which was replaced with a new $250 million unsecured facility. The White Paper on Funds From Operations ("FFO") 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 the Company's portion of these items related to unconsolidated entities and joint ventures. The Company believes 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 the Company to incur and service debt, to make capital expenditures and to fund other cash needs. The Company computes FFO for its annual reporting period in accordance with the NAREIT White Paper. For interim periods, the Company computes FFO in accordance with the NAREIT White Paper, as adjusted for deferred lease revenue in accordance with EITF 98-9. The Company's computation of FFO may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition, do not consider a deferred lease revenue adjustment to FFO, or that interpret the current NAREIT definition differently than the Company. 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 the Company's financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it indicative of funds available to fund the Company's cash needs, including its ability to make cash distributions. FFO may include funds that may not be available for management's discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions, and other commitments and uncertainties. The following is a reconciliation between net income and FFO for the three and nine months ended September 30, 1998 and 1997, respectively, (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net income $ 3,749 $ 5,232 $ 7,239 $ 12,986 Extraordinary item - 141 1,138 141 Real estate related depreciation and amortization 6,748 2,584 15,064 6,931 Minority interest 386 846 872 1,917 Deferred lease revenue 3,823 - 9,311 - FFO applicable to joint venture minority interest (223) (115) (586) (115) -------- -------- -------- -------- Funds from operations $ 14,483 $ 8,688 $ 33,038 $ 21,860 ======== ======== ======== ========
22 23 The following table illustrates key operating statistics of the Company's portfolio for the three and nine months ended September 30, 1998, regardless of ownership:
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1998 1997 1998 1997 ---- ---- ---- ---- All hotels (29 properties)(a) Hotel revenues $73,021 $73,762 $210,189 $210,857 REVPAR $65.57 $66.21 $62.11 $62.22 Occupancy 72.6% 74.9% 68.2% 70.7% Average daily rate $90.32 $88.35 $91.14 $88.06 Initial Nine Hotels Hotel revenues $23,219 $24,625 $67,207 $71,351 REVPAR $74.30 $79.11 $70.91 $75.26 Occupancy 75.9% 81.4% 73.3% 78.9% Average daily rate $97.96 $97.19 $96.70 $95.40 Acquired Hotels (10 properties)(b) Hotel revenues $20,262 $19,568 $58,322 $55,154 REVPAR $54.58 $52.51 $53.97 $50.54 Occupancy 64.4% $65.2% 59.9% 60.4% Average daily rate $84.74 $80.51 $90.07 $83.72 Acquired Red Lion DoubleTree Hotels (10 properties) Hotel revenues $29,540 $29,569 $84,661 $84,352 REVPAR $68.12 $67.77 $62.15 $61.94 Occupancy 77.0% 78.2% 71.1% 73.0% Average daily rate $88.41 $86.71 $87.40 $84.89
(a) Represents the operating results of hotels owned by the Company at September 30, 1998, including predecessors' results. These statistics exclude the results of the DoubleTree Hotel Kansas City and the Daytona Beach Radisson Resort as those hotels were closed for renovation during portions of the 1997 reporting periods. (b) Represents the operating results of hotels acquired by the Company since its Initial Public Offering, other than the Red Lion portfolio, including predecessors' results. These statistics exclude the results of the DoubleTree Hotel Kansas City and the Daytona Beach Radisson Resort as those hotels were closed for renovation during portions of the 1997 reporting periods. 23 24 BMC Quarter ended September 30, 1998 compared to 1997 For the quarter ended September 30, 1998, BMC's hotel revenues increased 105.3%, to $63.7 million, compared to $31.0 million for the same period in 1997. The increase was attributable to an increase in the number of hotels leased by BMC from 13 to 25 at September 30, 1997 and 1998, respectively, primarily because of the January 1, 1998 commencement of the Percentage Lease related to the ten DoubleTree Hotels leased by Westboy LLC. The DoubleTree Hotels contributed $29.5 million of revenues to BMC during the quarter ended September 30, 1998. The remaining increase in hotel revenues resulted from the addition of two hotels leased from the Partnership in 1998 and the reopening of the Daytona Beach Radisson Resort in January 1998, offset by a decrease in revenues at hotels undergoing significant renovations. The Percentage Lease expense for the quarter ended September 30, 1998 increased 80.0%, to $19.0 million, compared to $10.6 million for the same period in 1997. Percentage Lease expense in 1998 of $8.7 million related to the DoubleTree Hotels was the primary reason for the increase. The remaining increase in Percentage Lease expense resulted from the increased number of hotels leased from the Partnership, offset by a decrease in lease expense at hotels undergoing significant renovations. 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 $45.1 million in the quarter ended September 30, 1998 compared to $20.5 million for the same period in 1997. As a percent of hotel revenues, the departmental and other hotel operating expenses increased to 70.8% in 1998 from 66.2% in 1997 primarily because of $2.3 million of management fee expense to Promus Hotel Corporation, the manager of the DoubleTree Hotels, pursuant to a long-term management agreement between Westboy LLC and Promus Hotel Corporation. BMC recorded net income of $5 for the quarter ended September 30, 1998 compared to $410 of net income in 1997. Nine months ended September 30, 1998 compared to 1997 For the nine months ended September 30, 1998, BMC's hotel revenues increased 111.5%, to $177.9 million, compared to $84.1 million for the same period in 1997. The increase was attributable to an increase in the number of hotels leased by BMC from 13 to 25 at September 30, 1997 and 1998, respectively, primarily because of the January 1, 1998 commencement of the lease of the ten DoubleTree Hotels from Westboy LLC. The DoubleTree Hotels contributed $84.7 million of revenues to BMC during the nine months ended September 30, 1998. The remaining increase in hotel revenues resulted from the addition of two hotels leased from the Partnership in 1998 and a full year results in 1998 from the 1997 addition of four hotels (including the Daytona hotel) leased from the Partnership, offset by a decrease in revenues at hotels undergoing significant renovations. The Percentage Lease expense for the nine months ended September 30, 1998 increased 90.4%, to $52.3 million, compared to $27.5 million for the same period in 1997. Percentage Lease expense in 1998 of $23.3 million related to the DoubleTree Hotels was the primary reason for the increase. The remaining increase in Percentage Lease expense resulted from the increased number of hotels leased from the Partnership, offset by a decrease in lease expense at hotels undergoing significant renovations. 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 $127.3 million in the nine months ended September 30, 1998 compared to $56.4 million for the same period in 1997. As a percent of hotel revenues, the departmental and other hotel operating expenses increased to 71.5% in 1998 from 67.0% in 1997 primarily because of $6.7 million of management fee expense to Promus Hotel Corporation. BMC recorded a net loss of $41 for the nine months ended September 30, 1998 compared to $1,878 of net income in 1997. LIQUIDITY AND CAPITAL RESOURCES The Company's principal source of cash to meet its cash requirements, including distributions to shareholders, is its share of the Partnership's cash flow from the Percentage Leases. The lessees' obligations under the Percentage Leases are unsecured and the lessees' ability to make rent payments to the Partnership under the Percentage Leases, and the Company's liquidity, including its ability to make distributions to shareholders, are dependent on the lessees' ability to generate sufficient cash flow from the operation of the Hotels. In addition, the Company obtained a $250 million credit facility in order to fund acquisitions of additional hotels, to fund renovations and capital expenditures, and for its working capital needs. For information relating to 24 25 the terms of the Company's credit facility and its $130 million term note payable, reference is made to Notes 7 and 8, respectively, of the Notes to Consolidated Financial Statements of Boykin Lodging Company included in this Form 10-Q. On September 30, 1998, the Company had $2.4 million of cash and cash equivalents and had outstanding borrowings totaling $151.0 million and $130.0 million against its credit facility and term note payable, respectively. In November 1998, the borrowings under the Company's credit facility increased to $156.0 million to fund capital expenditures, primarily for significant renovations. The Percentage Leases require the Company to establish aggregate minimum reserves for capital expenditures equal to specified percentages of total revenues of the Hotels. In addition, the Company intends to make funds available from its credit facility, as needed. The Company intends to use the reserve for capital improvements to the Hotels and refurbishment and replacement of FF&E, but may make other uses of amounts reserved that it considers appropriate from time to time. The Company anticipates making similar arrangements with respect to future hotels that it may acquire or develop. During the nine months ended September 30, 1998, the Company made $26.0 million of capital expenditures. The Company considers the majority of these improvements to be revenue-producing and therefore these amounts have been capitalized and are being depreciated over their estimated useful lives. The Company has announced its intention to make approximately $20 million of improvements at the Doubletree Hotels over the next two years. Approximately 750 of the hotel rooms in this portfolio are scheduled to be renovated in the first quarter of 1999. Funding for these capital expenditures is expected to be made from restricted cash, from the capital expenditure reserve, and from borrowings on the Company's credit facility. The Company will acquire or develop additional hotel properties only as suitable opportunities arise, and the Company will not undertake acquisition or development of properties unless adequate sources of financing are available. Funds for future acquisitions or development of hotels are expected to be derived, in whole or in part, from borrowings under the credit facility or other borrowings or from the proceeds of a sale of non-strategic Hotels or additional issuances of common shares or other securities. The Company may seek to negotiate additional credit facilities or issue debt instruments. Any debt incurred or issued by the Company may be secured or unsecured, long-term, medium-term or short-term, bear interest at a fixed or variable rate, and be subject to such other terms as the Board of Directors considers prudent. In November 1997, the Company filed a shelf registration statement with the Securities and Exchange Commission for the issuance of up to $300 million in securities over two years. Securities issued under this registration statement may be preferred shares, depository shares, common shares or any combination thereof, and may be issued at different times, depending on market conditions. Warrants to purchase these securities may also be issued. The terms of issuance of any securities covered by this registration statement would be determined at the time of their offering. The $112.5 million of common shares sold in the Offering were sold under this registration statement. The Company anticipates that funds generated from operations and its credit facility will enable the Company to meet its anticipated cash needs for the next year. The Company's Percentage Lease revenues and cash flow are dependent in large part upon the hotel revenues recognized by the Company's 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 the Company will make distributions in the future at the current rate, or at all. INFLATION The Company's revenues are based on the Percentage Leases, which result in changes in the Company's revenues based on changes in the revenues of the Hotels. Therefore, the Company relies 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 the Company's lessees, can change room rates quickly, but competitive pressures may limit the lessees' ability to raise rates faster than inflation. The Company's general and administrative costs, as well as real estate and personal property taxes, property and casualty insurance and ground rent, are subject to inflation. 25 26 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, in less than two years, the computerized systems, which include information and non-information technology systems, and applications used by the Company will need to be reviewed, evaluated and modified or replaced, if necessary, to ensure all such financial, information and operational systems are Year 2000 compliant. STATE OF READINESS The Company is addressing the Year 2000 compliance issue by focusing on its corporate facility, which includes all of its administrative, non-hotel operating functions, and on its hotel properties. For its corporate facility, the Company is in the phase of assessing its hardware components and critical corporate business applications, all of which are expected to be modified or upgraded, as necessary, to ensure Year 2000 compliance by the second quarter of 1999. The Company is communicating with its lessees and other vendors with whom it does significant business to determine their readiness of Year 2000 compliance. For the majority of the Hotels, the Company has gained an understanding of the process which its lessees have undertaken to address the 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, - - hiring of a third-party consultant to validate the internal review of inventory, assessment and remediation costs, and develop a contingency plan. The third party assessment, anticipated to be completed in the fourth quarter of 1998, will determine the level of resources needed, necessary modifications or upgrades, remediation and contingency plan and time frame to become Year 2000 compliant. These lessees have informed the Company that they have dedicated the tools and resources to address all Year 2000 issues in an effort to be Year 2000 compliant by the third quarter of 1999. There can be no assurance that the efforts related to the hotel properties will be sufficient to make these properties' computerized systems and applications Year 2000 compliant in a timely manner or that the allocated resources will be sufficient. A failure to become Year 2000 compliant could affect the integrity of the hotel property guest check-in, billing and accounting functions. Certain physical hotel property machinery and equipment could also fail resulting in safety risks and customer dissatisfaction. The Company has asked substantially all of its significant vendors and service providers to provide reasonable assurances as to those parties' Year 2000 state of readiness. Risk assessments and contingency plans, where required, will be finalized in the first six months of 1999. To the extent that vendors and service providers do not provide satisfactory evidence that their products and services are Year 2000 compliant, the Company will seek to obtain the necessary products and services from alternative sources. There can be no assurance, however, that Year 2000 remediation by vendors and service providers will be completed timely or that qualified replacement vendors and service providers will be available, and any failure of such third parties' systems could have a material adverse impact on the Company's computer systems and operations. YEAR 2000 PROJECT COSTS The Company estimates that total unexpended costs for the Year 2000 compliance review, evaluation, assessment and remediation efforts for the corporate facility and the Hotels should not exceed $1.5 million, although there can be no assurance that actual costs will not exceed this amount. As of September 30, 1998, the Company has expended approximately $.9 million related to computerized systems and equipment which are Year 2000 compliant. It should be noted that the vast majority of the Company's cost to remediate this issue are capital in nature and would therefore not affect the Company's funds from operations. CONTINGENCY PLAN The Company is in the process of developing its contingency plan for the corporate facility and hotel properties to provide for the most reasonably likely worst case scenarios regarding Year 2000 compliance. This contingency plan is expected to be completed in the third quarter of 1999. SEASONALITY The Hotels' operations historically have been seasonal. Twenty-six of the Hotels maintain higher occupancy rates during the second and third quarters. The five Hotels located in Florida experience their highest occupancy 26 27 rates in the first quarter. The seasonality pattern can be expected to cause fluctuations in the Company's quarterly lease payments received under the Percentage Leases. The Company anticipates that its cash flow from the Percentage Leases will be sufficient to enable the Company to make quarterly distributions at the current rate for the next twelve months. To the extent that cash flow from operations is insufficient during any quarter because of temporary or seasonal fluctuations in Percentage Lease payments received, the Company expects to utilize cash on hand or borrowings to make distributions. NEW ACCOUNTING PRONOUNCEMENTS In May 1998, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 98-9, "Accounting for Contingent Rent in Interim Financial Periods." This issue addresses lessor revenue and lessee expense recognition in interim periods related to rental agreements which provide for minimum rental payments, plus contingent rents based on the lessee's operations, such as a percentage of sales in excess of an annual specified sales target. The EITF reached a final consensus that lessors, such as the Company, should defer recognition of contingent rental income until specified targets are met. For information relating to the provisions of EITF 98-9 and its impact on quarterly and year-to-date results of operations, reference is made to Note 5 of the Notes to Consolidated Financial Statements of Boykin Lodging Company within this Form 10-Q. Reference is also made to the Company's Form 10-Q/As for the quarterly periods ended March 31, 1998 and June 30, 1998 for the impact on the 1998 first and second quarter results of operations as restated in these Form 10-Q/As. EITF 98-9 relates solely to the Company's recognition of lease revenue for financial reporting purposes and has no effect on rent payments under the Company's leases, quarterly funds from operations, or the Company's cash flows and does not have an effect on the Company's annual reported lease revenue. In addition, the Company does not expect EITF 98-9 to affect the Company's ability to continue to pay its quarterly distributions to shareholders on a basis consistent with past practices. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None. PART II ITEM 1. LEGAL PROCEEDINGS The 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 Company's 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. 27 28 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits -------- 2.1*** Agreement and Plan of Merger dated as of December 30, 1997 by and among Red Lion Inns Limited Partnership, Red Lion Properties, Inc., Red Lion Inns Operating L.P., Boykin Hotel Properties, L.P., Boykin Lodging Company, Boykin Acquisition Corporation I, Inc., Boykin Acquisition Corporation II, Inc., and Boykin Acquisition Partnership, L.P. 3.1* Amended and Restated Articles of Incorporation 3.2* Code of Regulations 4.1* Specimen Share Certificate 10.1* Limited Partnership Agreement of Boykin Hotel Properties, L.P. 10.2* Form of Registration Rights Agreement 10.3* Long-Term Incentive Plan 10.4* Directors' Deferred Compensation Plan 10.5* Employment Agreement between the Company and Robert W. Boykin 10.6* Employment Agreement between the Company and Raymond P. Heitland 10.7* Employment Agreement between the Company and Mark L. Bishop 10.8* Form of Percentage Lease 10.9* Intercompany Convertible Note 10.10* Agreements with General Partners of the Contributed Partnerships 10.11* Form of Noncompetition Agreement 10.12* Alignment of Interests Agreement 10.13** Description of Employment Arrangement between the Company and Paul A. O'Neil 10.14*** Description of Employment Arrangement between the Company and Richard C. Conti 27 Financial Data Schedule 99.1**** Partnership Interest Assignment Agreement dated as of December 30, 1997 by and among Red Lion Properties, Inc., Boykin Hotel Properties, L.P., Boykin Lodging Company and West Doughboy LLC. 99.2**** Percentage Lease Agreement dated as of December 30, 1997 by and between Red Lion Inns Operating L.P. and Westboy LLC 99.3**** Termination of Management Agreement dated as of December 30, 1997 by and between Red Lion Inns Operating L.P. and Red Lion Hotels, Inc. 99.4**** Management Agreement dated as of December 30, 1997 by and between Red Lion Hotels, Inc. and Westboy LLC. 99.5**** Owner Agreement dated as of December 30, 1997 by and among Red Lion Inns Operating L.P., Westboy LLC and Red Lion Hotels, Inc. 99.6**** Joint Press Release of Red Lion Inns Limited Partnership and Boykin Lodging Company dated as of December 30, 1997. * Incorporated by reference from Amendment No. 3 to the Company's Registration Statement on Form S-11 (Registration No. 333-6341) (the "Form S-11") filed on October 24, 1996. Each of the above exhibits has the same exhibit number in the Form S-11. ** Incorporated by reference from the Company's Form 10-Q for the quarter ended June 30, 1997. *** Incorporated by reference from the Company's Form 10-Q for the quarter ended June 30, 1998. **** Incorporated by reference from the Company's Form 8-K filing on January 8, 1998 related to the merger with Red Lion Inns Limited Partnership. (b) Reports on Form 8-K ------------------- None. 28 29 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 the Company, its directors or its officers with respect to (i) the leasing, management or performance of the Hotels; (ii) the adequacy of reserves for renovation and refurbishment; (iii) potential acquisitions by the Company; (iv) the Company's financing plans; and (v) 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 Form 10-Q and in the documents incorporated by reference herein identifies important factors that could cause such differences. With respect to any such forward-looking statement that includes a statement of its underlying assumptions or bases, 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. 29 30 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. BOYKIN LODGING COMPANY /s/ Robert W. Boykin -------------------------------------- November 16, 1998 Robert W. Boykin Director, Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) /s/ Paul A. O'Neil -------------------------------------- November 16, 1998 Paul A. O'Neil Chief Financial Officer and Treasurer (Principal Financial Officer) 30 31 EXHIBIT INDEX Exhibits -------- 2.1*** Agreement and Plan of Merger dated as of December 30, 1997 by and among Red Lion Inns Limited Partnership, Red Lion Properties, Inc., Red Lion Inns Operating L.P., Boykin Hotel Properties, L.P., Boykin Lodging Company, Boykin Acquisition Corporation I, Inc., Boykin Acquisition Corporation II, Inc., and Boykin Acquisition Partnership, L.P. 3.1* Amended and Restated Articles of Incorporation 3.2* Code of Regulations 4.1* Specimen Share Certificate 10.1* Limited Partnership Agreement of Boykin Hotel Properties, L.P. 10.2* Form of Registration Rights Agreement 10.3* Long-Term Incentive Plan 10.4* Directors' Deferred Compensation Plan 10.5* Employment Agreement between the Company and Robert W. Boykin 10.6* Employment Agreement between the Company and Raymond P. Heitland 10.7* Employment Agreement between the Company and Mark L. Bishop 10.8* Form of Percentage Lease 10.9* Intercompany Convertible Note 10.10* Agreements with General Partners of the Contributed Partnerships 10.11* Form of Noncompetition Agreement 10.12* Alignment of Interests Agreement 10.13** Description of Employment Arrangement between the Company and Paul A. O'Neil 10.14*** Description of Employment Arrangement between the Company and Richard C. Conti 27 Financial Data Schedule 99.1**** Partnership Interest Assignment Agreement dated as of December 30, 1997 by and among Red Lion Properties, Inc., Boykin Hotel Properties, L.P., Boykin Lodging Company and West Doughboy LLC. 99.2**** Percentage Lease Agreement dated as of December 30, 1997 by and between Red Lion Inns Operating L.P. and Westboy LLC 99.3**** Termination of Management Agreement dated as of December 30, 1997 by and between Red Lion Inns Operating L.P. and Red Lion Hotels, Inc. 99.4**** Management Agreement dated as of December 30, 1997 by and between Red Lion Hotels, Inc. and Westboy LLC. 99.5**** Owner Agreement dated as of December 30, 1997 by and among Red Lion Inns Operating L.P., Westboy LLC and Red Lion Hotels, Inc. 99.6**** Joint Press Release of Red Lion Inns Limited Partnership and Boykin Lodging Company dated as of December 30, 1997. * Incorporated by reference from Amendment No. 3 to the Company's Registration Statement on Form S-11 (Registration No. 333-6341) (the "Form S-11") filed on October 24, 1996. Each of the above exhibits has the same exhibit number in the Form S-11. ** Incorporated by reference from the Company's Form 10-Q for the quarter ended June 30, 1997. *** Incorporated by reference from the Company's Form 10-Q for the quarter ended June 30, 1998. **** Incorporated by reference from the Company's Form 8-K filing on January 8, 1998 related to the merger with Red Lion Inns Limited Partnership. 31 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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 2,424 0 9,740 0 0 0 594,873 0 616,985 0 281,000 0 0 0 282,472 616,985 0 42,362 0 23,822 872 0 9,291 8,377 0 8,377 0 (1,138) 0 7,239 .49 .49 REGISTRANT UTILIZES AN UNCLASSIFIED BALANCE SHEET THEREFORE TOTAL CURRENT ASSETS AND TOTAL CURRENT LIABILITIES ARE NOT APPLICABLE.
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