<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission file number 001-11975
September 30, 1999
BOYKIN LODGING COMPANY
(Exact Name of Registrant as Specified in Its Charter)
Ohio 34-1824586
- -------------------------------------- --------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Guildhall Building, Suite 1500,
45 W. Prospect Avenue
Cleveland, Ohio 44115
- ------------------------------------------- -------------------------------
(Address of Principal Executive Office) (Zip Code)
(216) 430-1200
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
---- ----
The number of common shares, without par value, outstanding as of
November 10, 1999: 17,103,554
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
BOYKIN LODGING COMPANY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
BOYKIN LODGING COMPANY:
Consolidated Balance Sheets as of September 30, 1999 (unaudited)
and December 31, 1998..................................................3
Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 1999 and 1998 (unaudited)..........................4
Consolidated Statement of Shareholders' Equity for the Nine Months
Ended September 30, 1999 (unaudited)...................................5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 (unaudited)..........................6
Notes to Consolidated Financial Statements..................................7
BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND
SUBSIDIARIES:
Consolidated Balance Sheets as of September 30, 1999 (unaudited)
and December 31, 1998.................................................13
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 1999 and 1998 (unaudited).........................14
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 (unaudited).........................15
Notes to Consolidated Financial Statements.................................16
</TABLE>
<PAGE>
BOYKIN LODGING COMPANY
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Investment in hotel properties, net $ 590,233 $ 595,132
Cash and cash equivalents 3,193 5,643
Rent receivable from lessees:
Related party lessees 7,682 4,748
Third party lessees 1,203 547
Deferred expenses, net 3,093 3,159
Restricted cash 3,804 4,330
Investment in unconsolidated joint venture 4,314 --
Other assets 1,393 1,503
--------- ---------
$ 614,915 $ 615,062
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings against credit facility $ 163,000 $ 156,000
Term note payable 130,000 130,000
Accounts payable and accrued expenses 9,186 6,521
Dividends/distributions payable 8,697 8,618
Due to lessees:
Related party lessees 580 2,971
Third party lessees 903 1,775
Minority interest in joint ventures 11,416 11,251
Minority interest in operating partnership 11,066 11,710
Shareholders' equity:
Preferred shares, without par value; 10,000,000 shares
authorized; no shares issued and outstanding -- --
Common shares, without par value; 40,000,000 shares
authorized; 17,098,863 and 17,044,361 shares outstanding
September 30, 1999 and December 31, 1998, respectively, -- --
Additional paid-in capital 310,312 307,512
Retained deficit (28,896) (21,296)
Unearned compensation - restricted shares (1,349) --
--------- ---------
Total shareholders' equity 280,067 286,216
--------- ---------
$ 614,915 $ 615,062
========= =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
3
<PAGE>
BOYKIN LODGING COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Lease revenue from related party $ 20,792 $ 18,997 $ 55,960 $ 41,598
Other lease revenue 3,529 4,173 11,608 9,796
Interest and other income 489 97 652 279
-------- -------- -------- --------
24,810 23,267 68,220 51,673
-------- -------- -------- --------
Expenses:
Real estate related depreciation and amortization 7,259 6,748 21,506 15,064
Real estate and personal property taxes, insurance
and ground rent 2,731 2,473 8,201 6,033
General and administrative 1,516 824 4,519 2,725
Interest expense 5,238 5,105 15,222 8,857
Amortization of deferred financing costs 224 158 542 434
-------- -------- -------- --------
16,968 15,308 49,990 33,113
-------- -------- -------- --------
Income before minority interests and extraordinary item 7,842 7,959 18,230 18,560
Minority interest in joint ventures (155) (177) (487) (420)
Minority interest in operating partnership (533) (568) (1,177) (1,418)
-------- -------- -------- --------
Income before extraordinary item 7,154 7,214 16,566 16,722
Extraordinary item- Loss on early extinguishment of
debt, net of minority interest of $110 -- -- -- (1,138)
-------- -------- -------- --------
Net income applicable to common shares $ 7,154 $ 7,214 $ 16,566 $ 15,584
======== ======== ======== ========
Earnings per share:
Basic $ .42 $ .42 $ .97 $ 1.06
Diluted $ .42 $ .42 $ .97 $ 1.06
Weighted average number of common shares outstanding:
Basic 17,059 17,125 17,050 14,647
Diluted 17,059 17,125 17,050 14,650
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
4
<PAGE>
BOYKIN LODGING COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Unearned
Additional Compensation
Common Paid-In Retained Restricted
Shares Capital Deficit Shares Total
-------- --------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 17,044,361 $ 307,512 $ (21,296) $ -- $ 286,216
Issuance of common shares 54,502 2,300 -- (1,583) 717
Issuance of share warrant -- 500 -- -- 500
Dividends declared -- -- (24,166) -- (24,166)
Amortization of unearned compensation -- -- -- 234 234
Net income -- -- 16,566 -- 16,566
---------- ---------- ---------- ---------- ----------
Balance, September 30, 1999 17,098,863 $ 310,312 $ (28,896) $ (1,349) $ 280,067
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of this statement.
5
<PAGE>
BOYKIN LODGING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 16,566 $ 15,584
Adjustments to reconcile net income to net cash flow provided by
operating activities-
Extraordinary item-noncash loss on early extinguishment of debt -- 1,138
Depreciation and amortization 22,048 15,498
Amortization of unearned compensation 234 --
Minority interests 1,664 1,838
Changes in assets and liabilities-
Rent receivable (3,590) (7,034)
Restricted cash 526 (5,090)
Other 64 273
Accounts payable and accrued expenses 2,665 1,621
Due to lessees (3,263) 2,765
--------- ---------
Net cash flow provided by operating activities 36,914 26,593
--------- ---------
Cash flows from investing activities:
Acquisition of Red Lion Inns Operating L.P., net of common shares
issued of $80,333 and cash acquired of $11 -- (191,004)
Acquisition of hotel properties, net of joint venture contribution -- (76,288)
Improvements and additions to hotel properties, net (16,481) (25,973)
Investment in unconsolidated joint venture (4,347) --
--------- ---------
Net cash flow used for investing activities (20,828) (293,265)
--------- ---------
Cash flows from financing activities:
Payments of dividends and distributions (25,908) (20,770)
Borrowings against credit facility 7,000 156,000
Repayment of borrowings against credit facility -- (96,750)
Term note borrowing -- 130,000
Payment of deferred financing costs (522) (2,975)
Net proceeds from issuance of common shares 717 104,590
Proceeds from issuance of share warrant 500 --
Distributions to joint venture minority interest partners, net (323) (57)
Cash payments for redemption of certain limited partnership interests -- (967)
Cash payment for common share repurchases -- (1,830)
--------- ---------
Net cash flow (used for) provided by financing activities (18,536) 267,241
--------- ---------
Net change in cash and cash equivalents (2,450) 569
Cash and cash equivalents, beginning of period 5,643 1,855
--------- ---------
Cash and cash equivalents, end of period $ 3,193 $ 2,424
========= =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
6
<PAGE>
BOYKIN LODGING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
1. BACKGROUND:
Boykin Lodging Company is a real estate investment trust that owns
hotels throughout the United States and leases its properties to established
hotel operators. Boykin's principal source of revenue is lease payments from
lessees pursuant to percentage lease agreements. Percentage lease revenue is
based upon the room, food and beverage and other revenues of Boykin's hotels.
The lessees' ability to make payments to Boykin pursuant to the percentage
leases is dependent primarily upon the operations of the hotels.
INITIAL PUBLIC OFFERING AND MAJOR EVENTS SINCE THE IPO
In November 1996, Boykin completed its initial public offering
("IPO"), acquiring approximately 84.5% of the equity interest in Boykin Hotel
Properties, L.P., an Ohio limited partnership (the "Partnership"), and also
loaned $40,000 to the Partnership in exchange for an intercompany convertible
note. The Partnership then acquired nine hotel properties and leased them to
Boykin Management Company Limited Liability Company ("BMC"). BMC is owned by
Robert W. Boykin, Chairman, President and Chief Executive Officer of Boykin
Lodging Company (53.8%) and his brother, John E. Boykin (46.2%). The
Partnership acquired eight additional hotel properties in 1997 using
remaining proceeds from the IPO and borrowings under Boykin's credit
facility. Boykin Lodging Company is the sole general partner of the
Partnership.
On February 24, 1998, Boykin completed a follow-on public equity
offering, issuing an additional 4,500,000 common shares. The net proceeds of
approximately $106,313 were contributed to the Partnership and used to pay
down existing indebtedness under the credit facility, purchase limited
partnership units from two unaffiliated partners, acquire two hotels and for
general corporate purposes.
On May 22, 1998 Boykin completed its merger with Red Lion Inns
Limited Partnership, in which Boykin acquired Red Lion Inns Operating L.P.
("OLP"), which owns a portfolio of ten DoubleTree-licensed hotels. In the
transaction, Boykin issued 3,109,606 million common shares and paid
approximately $35,305 in cash to the Red Lion limited partners and general
partner. The total consideration value, including assumed liabilities of
approximately $155,710 and common shares issued valued at $80,333, was
$271,348. The issuance of Boykin's common shares in the merger
increased Boykin Lodging's ownership percentage in the Partnership to 92.2%.
Boykin acquired two other hotels in 1998 and one in August 1999, for
a total of 32 hotels in which Boykin has an ownership interest as of
September 30, 1999.
As part of Boykin's acquisitions in 1997 and 1998, Boykin
established strategic alliances with four hotel operators and purchased
five hotels with them through joint venture structures. The following table
sets forth the joint venture agreements established in 1997 and 1998:
7
<PAGE>
<TABLE>
<CAPTION>
Boykin Lessee/JV
Lessee/JV Ownership Ownership Date of Hotel
Name of Joint Venture Partner Percentage Percentage Hotel Owned Under Joint Venture Purchase
- --------------------- ------- ---------- ---------- ------------------------------- --------
<S> <C> <C> <C> <C> <C>
BoyStar Ventures, L.P. MeriStar 91% 9% Holiday Inn Minneapolis West July 1997
Shawan Road Hotel L.P. Davidson 91% 9% Marriott's Hunt Valley Inn July 1997
Boykin San Diego LLC Outrigger 91% 9% Hampton Inn San Diego Airport/Sea World November 1997
Boykin Kansas City LLC MeriStar 80% 20% DoubleTree Kansas City November 1997
RadBoy Mt. Laurel LLC Radisson 85% 15% Radisson Hotel Mt. Laurel June 1998
</TABLE>
BASIS OF PRESENTATION
Boykin Lodging exercises unilateral control over the Partnership.
Therefore, the separate financial statements of Boykin Lodging, the
Partnership, OLP, and the joint ventures discussed above are consolidated.
All significant intercompany transactions and balances have been eliminated.
These financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. For further information,
refer to the consolidated financial statements and footnotes thereto included
in Boykin's Annual Report on Form 10-K for the year ended December 31, 1998.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform with the current year presentation.
2. JOINT VENTURE WITH AEW:
On February 1, 1999, Boykin formed of a joint venture with AEW
Partners III, L.P. ("AEW"), an investment partnership managed by AEW Capital
Management, L.P., a Boston-based real estate investment firm. AEW will
provide $50,000 of equity capital for the joint venture, and Boykin will
provide approximately $17,000 and serve as the operating member of the joint
venture. Because of the non-controlling nature of its 25% ownership interest
in the joint venture, Boykin accounts for its investment utilizing the equity
method.
Boykin and AEW plan to use the joint venture to take advantage of
acquisition opportunities in the lodging industry. The joint venture
agreement contains provisions for AEW and Boykin to double their respective
capital commitments under certain circumstances. In addition, as part of the
transaction, Boykin will receive incentive returns based on the performance
of acquired assets as well as other compensation as a result of the joint
venture's activities.
After the end of the two-year investment period, AEW has the option
to convert its capital invested in the joint venture into Boykin convertible
preferred shares. Pursuant to the venture agreements, AEW also purchased a
warrant for $500. The warrant gives AEW the right to buy up to $20,000 of
Boykin's preferred or common shares (at Boykin's election) for $16.48 a
share. The warrant is exercisable after the two-year investment period, and
expires one year after it becomes exercisable. The amount of the warrant will
be reduced and eliminated under the terms of the agreement on a dollar for
dollar basis as the last $20,000 of AEW's $50,000 of capital is invested. If
issued, the preferred shares would be convertible into common shares at
$16.48 per common share and have a minimum cumulative annual dividend
equivalent to $1.88 per
8
<PAGE>
common share, Boykin's current common share dividend.
On August 31, 1999, the Boykin/AEW venture entered into a venture
with a private investor, forming Boykin Chicago, LLC, in which Boykin/AEW has
a 75% interest. Boykin's investment in this joint venture was approximately
$4.3 million as of September 30, 1999. Boykin Chicago purchased the 421-room
Executive Plaza Hotel located in Chicago, Illinois for cash consideration of
$48 million. The acquisition was accounted for by Boykin Chicago as a
purchase and was funded with proceeds from a $30,000 secured mortgage note
with the remainder in cash from the partners. A subsidiary of BMC leases the
property pursuant to a long-term percentage lease agreement.
3. NET INCOME PER SHARE AND PARTNERSHIP UNIT:
Boykin Lodging's basic and diluted earnings per share for three and
nine months ended September 30, 1999 under SFAS No. 128, "Earnings per Share"
are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine months ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic and diluted earnings per common share $ .42 $ .42 $ .97 $ 1.06
</TABLE>
Basic earnings per share is based on the weighted average number of
common shares outstanding during the period. Diluted earnings per share
adjusts the weighted average shares outstanding for the effect of all
dilutive securities. At September 30, 1999 and 1998, a total of 1,291,000
limited partnership units were issued and outstanding. The basic and diluted
weighted average number of common shares and limited partnership units
outstanding for the three and nine months ended September 30, 1999 was
18,350,000 and 18,341,000, respectively.
4. CREDIT FACILITIES:
Boykin has an unsecured credit facility with a group of banks which,
effective November 5, 1999, enables Boykin to borrow up to $175,000, subject
to borrowing base and loan-to-value limitations, at a rate of interest that
fluctuates at LIBOR plus 1.40% to 2.25% (7.2% at September 30, 1999), as
defined. Boykin is required to pay a .25% fee on the unused portion of the
credit facility. The credit facility expires in June 2000, with an additional
one-year extension at Boykin's option. As of September 30, 1999 and December
31, 1998, outstanding borrowings against the credit facility were $163,000
and $156,000, respectively. In connection with obtaining a new $45,000 term
loan agreement on October 29, 1999 (Note 10), Boykin reduced the outstanding
borrowings to $118,000.
The credit facility requires Boykin, among other things, to maintain
a specified minimum net worth, a coverage ratio of EBITDA to debt service,
and a coverage ratio of EBITDA to debt service and fixed charges. Further,
Boykin is required to maintain its franchise agreement at each hotel and to
maintain its REIT status. Boykin was in compliance with its covenants at
September 30, 1999 and December 31, 1998.
5. TERM NOTE PAYABLE:
On May 22, 1998, OLP entered into a $130,000 term loan agreement.
The loan expires in June 2023 and may be prepaid without penalty or
defeasance after May 21, 2008. The loan bears interest at a fixed rate of
6.9% for ten years, and at a new fixed rate to be determined thereafter. The
loan requires interest-
9
<PAGE>
only payments for the first two years, with principal repayments commencing
in the third loan year based on a 25-year amortization schedule. The loan is
secured by ten DoubleTree hotels. Under covenants in the loan agreement,
assets of OLP are not available to pay the creditors of any other Boykin
entity, except to the extent of permitted cash distributions from OLP to
Boykin. Likewise, the assets of other entities are not available to pay the
creditors of OLP. The loan agreement also requires OLP to hold funds in
escrow for the payment of capital expenditures, insurance and real estate
taxes. The term note also requires OLP to comply with certain financial
covenants. OLP was in compliance with these covenants at September 30, 1999
and December 31, 1998. Maturities of long-term debt as of September 30, 1999
are as follows:
<TABLE>
<S> <C>
Remainder of 1999 $ --
2000 992
2001 2,090
2002 2,239
2003 2,399
2004 and thereafter 122,280
--------
$130,000
========
</TABLE>
6. PERCENTAGE LEASE AGREEMENTS:
The percentage leases have noncancelable remaining terms ranging from two
to nine years, subject to earlier termination on the occurrence of certain
contingencies, as defined. The rent due under each percentage lease is the
greater of minimum rent, as defined, or percentage rent. Percentage rent
applicable to room and other hotel revenue varies by lease and is calculated by
multiplying fixed percentages by the total amounts of such revenues over
specified threshold amounts. Both the minimum rent and the revenue thresholds
used in computing percentage rents are subject to annual adjustments based on
increases in the United States Consumer Price Index ("CPI"). Percentage rent
applicable to food and beverage revenues is calculated by multiplying fixed
percentages by the total amounts of such revenues. Percentage Lease revenue for
the three months ended September 30, 1999 and 1998 was $24,321 and $23,170
respectively, of which approximately $9,093 and $7,860 respectively, was in
excess of minimum rent. Percentage lease revenue for the nine months ended
September 30, 1999 and 1998 was $67,568 and $51,394, respectively, of which
approximately $21,896 and $15,619, respectively, was in excess of minimum rent.
Boykin Lodging recognizes lease revenue for interim and annual reporting
purposes on an accrual basis pursuant to the terms of the respective
percentage leases.
Future minimum rentals (ignoring future CPI increases) to be received by
Boykin from BMC and from other lessees pursuant to the percentage leases for
each of the years in the period 1999 to 2003 and in total thereafter are as
follows:
<TABLE>
<CAPTION>
Related Party Other
Lessees Lessees Totals
------- ------- -------
<S> <C> <C> <C>
Remainder of 1999 $ 12,315 $ 2,269 $14,584
2000 49,261 9,076 58,337
2001 42,960 9,076 52,036
2002 36,055 7,677 43,732
2003 11,439 5,884 17,323
Thereafter 26,409 23,067 49,476
--------- ------- --------
$ 178,439 $57,049 $235,488
</TABLE>
10
<PAGE>
7. RELATED PARTY TRANSACTIONS:
The Chairman, President and Chief Executive Officer of Boykin Lodging is
the majority shareholder of BMC. BMC and Westboy LLC, a subsidiary of BMC,
were significant sources of Boykin's percentage lease revenue through
September 30, 1999. At September 30, 1999 and December 31, 1998, Boykin had
rent receivable of $7,682 and $4,748, respectively, due from related party
lessees.
Boykin Lodging paid Spectrum Design Services, a subsidiary of BMC, $687
for design and other services through September 30, 1999. Of this total, $364
was for design services, $204 represents purchasing services, $62 was for
project management services, and $57 was reimbursement of expenses incurred
while performing services for the hotels in 1999.
At September 30, 1999 and December 31, 1998, Boykin had a payable to
related party lessees of $580 and $2,971, respectively, primarily for the
reimbursement of capital expenditure costs incurred on behalf of the
Partnership and OLP.
8. STATEMENT OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES:
During the nine-month periods ended September 30, 1999 and 1998, noncash
financing transactions consisted of $8,697 and $8,618 respectively, of
dividends and Partnership distributions which were declared but not paid as
of September 30, 1999 and 1998, respectively. Interest paid during the
nine-month periods ended September 30, 1999 and 1998 was $15,207 and $7,793
respectively. As of September 30, 1999, Boykin had granted 113,961 restricted
common shares, valued at $1,583, under Boykin's Long-Term Incentive Plan.
9. PRO FORMA FINANCIAL INFORMATION:
The pro forma financial information set forth below for the nine months
ended September 30, 1998 is presented as if the following significant
transactions had been consummated as of January 1, 1998:
- the share offering of 4,500,000 common shares in February 1998;
- the issuance of 3,109,606 common shares in May 1998 related to the Red
Lion merger;
- the acquisitions of properties by Boykin in 1998; and
- Boykin's common share repurchase of 114,500 shares in 1998.
The pro forma financial information is not necessarily indicative of
what the actual results of operations of Boykin would have been assuming these
transactions had been consummated as of January 1, 1998, nor does it purport to
represent the results of operations for future periods.
<TABLE>
<CAPTION>
Nine months ended
September 30,1998
-----------------
<S> <C>
Revenues:
Lease revenue $64,581
Interest income 264
-------
64,845
-------
Expenses:
Real estate related depreciation and amortization 20,055
Real estate and personal property taxes, insurance and ground rent 7,427
General and administrative 2,725
Interest expense 14,661
Amortization of deferred financing costs 493
-------
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
Net income before minority interest and extraordinary item 19,484
Minority interest 1,666
-------
Income before extraordinary item $17,818
=======
Net income per share before extraordinary item
Basic $1.05
Diluted $1.05
</TABLE>
10. SUBSEQUENT EVENT:
On October 29, 1999, Boykin entered into a $45,000 term loan agreement.
The loan is secured by three hotel properties and expires in October 2002,
with two one-year extensions at Boykin's option. The loan bears interest at a
rate that fluctuates at LIBOR plus 2% and may be prepaid at any time without
penalty or defeasance. In connection with obtaining this $45,000 term loan,
Boykin reduced the outstanding borrowings on the credit facility to $118,000.
12
<PAGE>
BOYKIN MANAGEMENT COMPANY
LIMITED LIABILITY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 24,390 $ 12,973
Accounts receivable:
Trade, net of allowance for doubtful accounts of $132 and $166 at
September 30, 1999 and December 31, 1998, respectively 12,368 8,097
Related party lessors 635 2,971
Other 638 178
Inventories 2,320 2,060
Property and equipment, net 359 434
Investment in Boykin Lodging Company 245 248
Prepaid expenses and other assets 2,294 2,383
-------- --------
Total assets $ 43,249 $ 29,344
======== ========
LIABILITIES AND MEMBERS' CAPITAL
Rent payable to related party lessors $ 8,047 $ 4,748
Accounts payable:
Trade 4,015 3,114
Advance deposits 2,073 774
Bank overdraft liability 5,507 4,806
Accrued expenses:
Accrued payroll 1,188 633
Accrued vacation 2,653 2,250
Accrued sales, use and occupancy taxes 2,321 1,856
Accrued management fee 4,504 4,044
Other accrued liabilities 6,527 3,080
-------- --------
Total liabilities 36,835 25,305
-------- --------
Members' capital:
Capital contributed 3,000 3,000
Retained earnings 3,624 1,282
Accumulated other comprehensive loss (210) (243)
-------- --------
Total members' capital 6,414 4,039
-------- --------
Total liabilities and members' capital $ 43,249 $ 29,344
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.
13
<PAGE>
BOYKIN MANAGEMENT COMPANY
LIMITED LIABILITY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Nine months ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Room revenue $ 45,121 $ 41,917 $ 122,163 $ 114,403
Food and beverage revenue 18,132 17,327 54,284 52,023
Other hotel revenue 5,074 4,461 12,891 11,521
Other revenue 773 443 1,869 2,007
--------- --------- --------- ---------
Total revenues 69,100 64,148 191,207 179,954
--------- --------- --------- ---------
Expenses:
Departmental expenses of hotels:
Rooms 10,498 9,979 28,843 27,440
Food and beverage 13,187 13,154 39,280 39,166
Other 2,570 2,642 6,900 6,315
Cost of goods sold of non-hotel operations 294 27 309 423
Percentage lease expense 21,445 18,997 56,613 52,294
General and administrative 6,350 6,579 18,973 18,896
Advertising and promotion 3,173 3,026 9,462 8,360
Utilities 2,621 2,887 6,963 7,910
Franchisor royalties and other charges 2,157 2,093 5,948 5,787
Repairs and maintenance 2,880 2,317 8,483 6,708
Depreciation and amortization 29 22 89 67
Management fee expense 2,435 2,341 6,610 6,662
Other expense (94) 79 392 (33)
--------- --------- --------- ---------
Total expenses 67,545 64,143 188,865 179,995
--------- --------- --------- ---------
Net income (loss) $ 1,555 $ 5 $ 2,342 $ (41)
========= ========= ========= =========
Comprehensive income (loss) $ 1,516 $ (128) $ 2,375 $ (269)
========= ========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
14
<PAGE>
BOYKIN MANAGEMENT COMPANY
LIMITED LIABILITY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,342 $ (41)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 89 67
Realized loss on investment 36 --
Changes in assets and liabilities:
Accounts receivable (2,395) (10,024)
Inventories (260) (1,465)
Prepaid expenses and other assets 89 (883)
Rent payable 3,299 7,615
Accounts payable 2,901 7,753
Other accrued liabilities 5,330 7,723
-------- --------
Net cash flow provided by operating activities 11,431 10,745
-------- --------
Cash flows from investing activities:
Property additions (14) (69)
-------- --------
Net cash flow used for investing activities (14) (69)
-------- --------
Payments of obligations to former owners -- (2)
-------- --------
Net cash flow used for financing activities -- (2)
-------- --------
Net increase in cash and cash equivalents 11,417 10,674
Cash and cash equivalents, beginning of period 12,973 6,862
-------- --------
Cash and cash equivalents, end of period $ 24,390 $ 17,536
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
15
<PAGE>
BOYKIN MANAGEMENT COMPANY
LIMITED LIABILITY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS:
Boykin Management Company Limited Liability Company and its subsidiaries
(collectively, "BMC")
- lease and operate full and limited service hotels located throughout
the United States pursuant to long-term percentage leases;
- manage full and limited service hotels located throughout the United
States pursuant to management agreements;
- provide national purchasing services to hotels; and
- provide interior design services to hotels and other businesses.
2. ORGANIZATION:
BMC commenced operations on November 4, 1996 as an Ohio limited liability
company. BMC is indirectly owned by Robert W. Boykin (53.8%) and John E. Boykin
(46.2%). Robert W. Boykin is the Chairman, President and Chief Executive Officer
of Boykin Lodging Company.
Pursuant to formation transactions related to the November 4, 1996 initial
public offering of Boykin Lodging, Boykin Management Company ("former BMC") and
Bopa Design Company (doing business as Spectrum Services), wholly owned
subsidiaries of The Boykin Company ("TBC"), were merged into subsidiaries of
BMC. In addition, Purchasing Concepts, Inc. ("PCI") contributed its assets to a
subsidiary of BMC and that subsidiary assumed PCI's liabilities. TBC and PCI are
related through common ownership. BMC and its subsidiaries are the successors to
the businesses of former BMC, Spectrum Services and PCI. As BMC, former BMC,
Spectrum Services and PCI were related through common ownership, there were no
purchase accounting adjustments to the historical carrying values of the assets
and liabilities of former BMC, Spectrum Services and PCI upon merger into or
contribution to the subsidiaries of BMC.
3. BASIS OF PRESENTATION:
The separate financial statements of BMC's subsidiaries have been presented
on a consolidated basis with BMC. All significant intercompany transactions and
balances have been eliminated. These financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions for Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine-month periods ended September
30, 1999 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999. For further information, refer to BMC's
consolidated financial statements and footnotes thereto included in Boykin
Lodging's annual report on Form 10-K for the year ended December 31, 1998.
4. PERCENTAGE LEASE AGREEMENTS:
BMC LEASES ON 15 HOTELS
BMC leases 15 hotels ("the BMC Hotels") from the Partnership pursuant to
long-term percentage leases. The BMC Hotels are located in Cleveland, Ohio (2);
Columbus, Ohio; Buffalo, New York; Berkeley, California; Raleigh, North
Carolina; Charlotte, North Carolina (2); High Point, North Carolina; Knoxville,
Tennessee; Ft. Myers, Florida; Melbourne, Florida (2); Daytona Beach, Florida;
and French Lick, Indiana.
16
<PAGE>
The percentage leases have noncancellable remaining terms ranging from
two to eight years, subject to earlier termination on the occurrence of
certain contingencies, as defined. BMC is required to pay the higher of
minimum rent, as defined, or percentage rent. Percentage rent applicable to
room and other hotel revenue varies by lease and is calculated by multiplying
fixed percentages by the total amounts of such revenues over specified
threshold amounts. Percentage rent related to food and beverage revenues and
other revenues, in some cases, is based on fixed percentages of such
revenues. Both the threshold amounts used in computing percentage rent and
minimum rent on room and other hotel revenues are subject to adjustments as
of January 1 of each year based on increases in the United States Consumer
Price Index.
For both annual and interim reporting purposes, BMC recognizes
percentage lease expense pursuant to the provisions of the related percentage
lease agreements.
Other than real estate and personal property taxes, casualty insurance,
ground lease rental, and capital improvements, which are obligations of the
Partnership, the percentage leases require BMC to pay all costs and expenses
incurred in the operation of the BMC Hotels.
The percentage leases require BMC to indemnify Boykin Lodging Company
against all liabilities, costs and expenses incurred by, imposed on or
asserted against the Partnership in the normal course of operating the BMC
Hotels.
WESTBOY LEASE ON TEN DOUBLETREE HOTELS
Effective January 1, 1998, Westboy, LLC ("Westboy"), a wholly-owned
subsidiary of BMC, entered into a long term lease agreement with Red Lion
Inns Operating L.P. ("OLP") with terms similar to those described above. OLP
was acquired by Boykin Lodging Company on May 22, 1998. The ten
DoubleTree-licensed hotels ("the DoubleTree Hotels") leased by Westboy are
located in California, Oregon (3), Washington (3), Colorado, Idaho and
Nebraska. The hotels are managed by a subsidiary of Promus Hotel Corporation.
BMC made an initial capital contribution to Westboy of $1,000, of which $900
was funded with a demand promissory note. Assets of Westboy are not available
to pay the creditors of any other entity, except to the extent of permitted
cash distributions from Westboy to BMC. Similarly, except to the extent of
the unpaid promissory note, the assets of BMC are not available to pay the
creditors of Westboy.
CHIBOY LEASE ON EXECUTIVE PLAZA HOTEL
Effective August 31, 1999, ChiBoy LLC ("ChiBoy"), a wholly-owned
subsidiary of BMC, entered into a long term lease agreement with Boykin
Chicago, LLC, an entity in which Boykin Lodging Company has an 18.75%
interest, with terms similar to those described above. The Executive Plaza
hotel is located in Chicago, Illinois.
FUTURE MINIMUM RENTAL PAYMENTS
Future minimum rental payments (ignoring CPI increases) to be paid by
BMC, Westboy, and ChiBoy under their respective percentage lease agreements
at September 30, 1999, for each of the years in the period 1999 to 2003 and
in total thereafter are as follows:
<TABLE>
<S> <C>
Remainder of 1999 $ 13,155
2000 52,620
2001 47,760
2002 40,855
2003 16,239
Thereafter 29,609
----------
$ 200,238
</TABLE>
5. RELATED PARTY TRANSACTIONS:
Percentage lease expense payable to the Partnership was $20,792 and
$18,997 for the three months ended September 30, 1999 and 1998, respectively.
Percentage lease expense payable for the nine months ended September 30, 1999
and 1998 was $55,960, and $41,598, respectively. Percentage lease expense for
ChiBoy payable to Boykin Chicago, LLC for the quarter ended September 30, 1999
was $653.
17
<PAGE>
At September 30, 1999 and December 31, 1998, BMC (including Westboy) had
receivables from the Partnership (including OLP) of $580 and $2,971,
respectively, primarily for the reimbursement of capital expenditures incurred
on behalf of the Partnership and OLP. As of September 30, 1999, ChiBoy had a
receivable of $55 from Boykin Chicago, LLC, primarily for the reimbursement of
capital expenditures. The results of Boykin Chicago, LLC are not consolidated
with those of the Partnership.
At September 30, 1999 and December 31, 1998, BMC (including Westboy) had
payables to the Partnership (including OLP) of $7,682 and $4,748,
respectively, for amounts due pursuant to the percentage leases. As of
September 30, 1999, ChiBoy also owed $365 to Boykin Chicago, LLC for amounts
due pursuant to its percentage lease.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BACKGROUND AND BUSINESS STRATEGIES
Boykin Lodging Company, an Ohio corporation, is a real estate investment
trust that owns hotels throughout the United States and leases its properties to
established hotel operators. Our primary business strategies are:
- - maximizing revenue growth in our hotels through
- strong management performance from our lessee/operators;
- selective renovation;
- expansion and development; and
- brand repositioning.
- - developing strategic alliances and relationships with both a network of
high-quality hotel operators and franchisors of the hotel industry's
premier upscale brands; and
- - brand repositioning acquiring upscale, full-service commercial and resort
hotels that will increase our cash flow and are purchased at a discount to
their replacement cost
BOYKIN'S FORMATION AND RECENT EVENTS
On November 4, 1996, we completed our IPO, issuing a total of 9.5
million common shares. In conjunction with our IPO, we contributed
approximately $133.9 million to Boykin Hotel Properties, L.P., an Ohio
limited partnership (the "Partnership"), in exchange for an approximate 84.5%
equity interest as the sole general partner of the Partnership and we loaned
$40 million to the Partnership in exchange for an intercompany convertible
note. The Partnership then acquired nine hotel properties and another eight
hotel properties in 1997 using remaining proceeds from the IPO and borrowings
under our credit facility. We do all of our business through the Partnership.
On February 24, 1998, we completed a follow-on public equity offering
and issued an additional 4.5 million common shares. The net proceeds of
approximately $106.3 million were contributed to the Partnership, increasing
our ownership percentage therein to 90.3%. The proceeds were used by the
Partnership to pay down existing indebtedness under the credit facility,
purchase limited partnership units from two unaffiliated limited partners,
fund the acquisitions of two hotels purchased in March 1998 and for general
corporate purposes.
On May 22, 1998 we completed our merger with Red Lion Inns Limited
Partnership, in which we acquired Red Lion Inns Operating L.P. ("OLP"), which
owns a portfolio of ten DoubleTree-licensed hotels. In the transaction, we
issued 3.1 million common shares and paid approximately $35.3 million in cash
to the Red Lion limited partners and general partner. The total consideration
value, including assumed liabilities of approximately $155.7 million and
common shares issued valued at $80.3 million, was $271.3 million. The
issuance of our common shares in the merger had the impact of increasing our
ownership percentage in the Partnership to 92.2%.
We acquired two other hotels in 1998 and one in August 1999, for a total
of 32 hotels in which we have an ownership interest. These hotels have a
total of 9,110 guest rooms and are located in 17 different states.
Our principal source of revenue is lease payments from lessees pursuant
to percentage lease agreements. Percentage lease revenue is based upon the
room, food and beverage and other revenues of our hotels. The
18
<PAGE>
lessees' ability to make payments to us pursuant to the percentage leases is
dependent primarily upon the operations of the hotels.
THIRD QUARTER HIGHLIGHTS
Refer to the "Results of Operations" section below for discussion of our
third quarter results compared to 1998 as well as the operational results of
BMC.
JOINT VENTURE ACQUISITION
On August 31, 1999, Boykin Chicago, LLC ("the Chicago JV") acquired the 421
room Executive Plaza Hotel located in Chicago, Illinois for $48 million cash, or
approximately $114,000 per room. We estimate this to be about half of the
hotel's replacement cost. The Chicago JV leased the hotel to a subsidiary of
BMC. Thirty million of the purchase price was funded through non-recourse debt
secured by the hotel. We have an 18.75% effective ownership in the Chicago JV
through our joint venture with AEW. Our share of the results of the Chicago JV
have been reflected in the accompanying financial statements under the equity
method of accounting. We have begun planning for an extensive renovation
of the hotel, expected to exceed $10 million, and commence late in 2000.
RENOVATION PROGRAM
We believe it is important to keep our hotels in first-class condition
in an effort to outperform the competition and to deliver superior REVPAR
gains, and our renovation activities are focused on hotels in areas with the
highest revenue potential. We also believe the long-term demand for rooms in
most of our markets will continue to grow and therefore we expect to continue
to implement our renovation plans aggressively.
In 1999, we continued our renovation program in our hotels, spending
$16.5 million year-to-date, or approximately 7 percent of hotel revenues. The
majority of these capital expenditures went into four of our DoubleTree
hotels, which underwent major guestroom renovations. The Holiday Inn
Minneapolis West, Cleveland Marriott East and Radisson Hotel Mt. Laurel
renovations are in progress. We plan to spend a total of approximately $23
million in 1999, which is approximately eight percent of our expected hotel
revenues.
We continue to actively seek acquisitions, but we are being selective in
terms of yield and earnings criteria. We are considering expansions at a few
of our hotels as well as the development or sale of land parcels to maximize
the value of our portfolio.
RESULTS OF OPERATIONS
The following discusses our results of operations and those of BMC for
the quarter ended September 30, 1999 compared to the same period in 1998.
BOYKIN LODGING COMPANY
Quarter ended September 30, 1999 compared to 1998
Our percentage lease revenue increased 5.0% to $24.3 million in 1999,
from $23.2 million for the same period in 1998. Percentage lease revenue
payable by BMC and Westboy represented $20.8 million, or 85.5% of total
percentage lease revenue in the 1999 period, compared to $19.0 million, or
82.0% of total percentage lease revenue in 1998. The increase in percentage
lease revenue from BMC and Westboy is primarily attributable to higher hotel
room and total revenues from the BMC properties in 1999 as compared to 1998.
19
<PAGE>
Net income remained flat at $7.2 million for the three months ended
September 30, 1999, and 1998. As a percent of total revenue, net income
decreased to 28.8% in 1999 from 31.0% in 1998, primarily resulting from an
increase in 1999 operating expenses.
The increase in the size of our hotel portfolio caused expenses to
increase. General and administrative expenses increased $.7 million to $1.5
million or 6.1% of revenues as compared with 3.5% of revenues in 1998,
because of increased payroll costs associated with hiring management
personnel to support our strategic growth objectives. Depreciation expense
increased $.5 million to $7.3 million, or 29.3% of revenues, because of
significant renovation activity which took place in 1998. Property taxes,
insurance and ground rent increased because of higher property tax
assessments associated with property purchases and renovations that have
occurred over the past 18 months.
Nine months ended September 30, 1999 Compared to 1998
Our percentage lease revenue increased 31.5% to $67.6 million in 1999,
from $51.4 million for the same period in 1998. Percentage lease revenue
payable by BMC and Westboy represented $56.0 million, or 82.8% of total
percentage lease revenue in the 1999 period, compared to $41.6 million, or
80.9% of total percentage lease revenue in 1998. The increase in percentage
lease revenue from BMC and Westboy is primarily attributable to the lease
revenue from Westboy, which commenced upon completion of the Red Lion merger.
Net income increased to $16.6 million for the nine months ended
September 30, 1999, compared to $15.6 million in 1998. As a percent of total
revenue, net income decreased to 24.3% in 1999 from 30.2% in 1998, primarily
resulting from the following items:
- - An increase in interest expense to $15.2 million in 1999, or 22.3% of total
revenues, compared to $8.9 million or 17.1% in 1998.
- - An increase in real estate related depreciation and amortization from $15.1
million, or 29.2% of total revenues in 1998, to $21.5 million or 31.5% of
revenues in 1999.
The increase in the size of our hotel portfolio caused these increases. New
debt associated with our 1998 acquisitions and the Red Lion merger combined
with increased borrowings to fund hotel renovations increased our interest
expense in 1999, despite lower average interest rates in 1999 compared to
1998. General and administrative expenses increased $1.8 million to $4.5
million, or 6.6% of revenues as compared to $5.3% in 1998, primarily because
of the hiring of management personnel to support the increased reporting and
support requirements of a larger portfolio of hotels.
Our funds from operations ("FFO") for the quarter ended September 30,
1999 were $14.9 million compared to $14.5 million in 1998. The White Paper on
Funds From Operations approved by the Board of Governors of the National
Association of Real Estate Investment Trusts ("NAREIT") in March 1995 defines
FFO as net income (loss) (computed in accordance with GAAP), excluding gains
(or losses) from debt restructuring and sales of properties, plus real estate
related depreciation and amortization and after comparable adjustments for
our portion of these items related to unconsolidated entities and joint
ventures. We believe that FFO is helpful to investors as a measure of the
performance of an equity REIT because, along with cash flow from operating
activities, financing activities and investing activities, it provides
investors with another indication of the ability of a company to incur and
service debt, to make capital expenditures and to fund other cash needs.
We compute FFO in accordance with the NAREIT White Paper, which may not
be comparable to FFO reported by other REITs that do not define the term in
accordance with the current NAREIT definition or that interpret the current
NAREIT definition differently than us. FFO does not represent cash generated
from operating activities determined by GAAP and should not be considered as
an alternative to net income (determined in accordance with GAAP) as an
indication of our financial performance or to cash flow from operating
activities (determined in accordance with GAAP) as a measure of our
liquidity, nor is it indicative of funds available to fund our cash needs,
including our ability to make cash distributions. FFO may include funds that
may not be available for management's discretionary use because of functional
requirements to conserve funds for capital expenditures and property
acquisitions, and other commitments and uncertainties. The following is
reconciliation between net income and FFO for the three months ended
September 30, 1999 and 1998, respectively, (in thousands):
20
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine months ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 7,154 $ 7,214 $ 16,566 $ 15,584
Extraordinary item -- -- -- 1,138
Real estate related depreciation and amortization 7,259 6,748 21,506 15,064
Minority interest 688 745 1,664 1,838
Joint venture FFO adjustment (196) (224) (711) (586)
-------- -------- -------- --------
Funds from operations $ 14,905 $ 14,483 $ 39,025 $ 33,038
======== ======== ======== ========
</TABLE>
21
<PAGE>
The following table illustrates key operating statistics of our portfolio for
the three and nine months ended September 30, 1999, regardless of ownership:
<TABLE>
<CAPTION>
Three Months Ended Nine months ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
All hotels (32 hotels)(a)
Hotel revenues $ 85,501 $ 80,439 $242,993 $231,216
REVPAR $ 69.37 $ 65.33 $65.24 $62.00
Occupancy 76.0% 71.7% 70.5% 67.2%
Average daily rate $91.29 $ 91.07 $ 92.50 $ 92.31
Initial Hotels (9 hotels)
Hotel revenues $ 24,611 $ 23,219 $70,635 $67,207
REVPAR $78.43 $ 74.30 $ 74.46 $70.91
Occupancy 78.0% 75.9% 75.4% 73.3%
Average daily rate $ 100.49 $ 97.96 $98.79 $96.70
DoubleTree Portfolio (10 hotels)(a)
Hotel revenues $29,535 $ 29,540 $84,232 $84,661
REVPAR $ 68.22 $68.12 $ 62.29 $62.15
Occupancy 80.6% 77.0% 73.3% 71.1%
Average daily rate $84.64 $ 88.41 $85.01 $87.40
Acquired Hotels (13 hotels)(a)(b)
Hotel revenues $ 31,354 $27,680 $88,126 $79,348
REVPAR $ 64.32 $ 57.02 $61.62 $55.96
Occupancy 70.7% 64.5% 65.0% 59.7%
Average daily rate $90.95 $ 88.38 $ 94.80 $93.67
(a) Includes predecessors' results.
(b) Represents the operating results of hotels acquired by us since our IPO, other than the DoubleTree portfolio.
</TABLE>
22
<PAGE>
BMC
Quarter ended September 30, 1999 compared to 1998
For the quarter ended September 30, 1999, BMC's hotel revenues increased
7.2%, to $68.3 million, compared to $63.7 million for the same period in 1998.
The increase in 1999 was due to increased revenues from hotels under renovation
in 1998, improved performance of several hotels acquired within the past two
years, and the addition of one hotel in the third quarter of 1999.
Percentage lease expense for the quarter ended September 30, 1999
increased 12.9%, to $21.4 million, compared to $19.0 million for the same
period in 1998. Departmental and other hotel operating expenses, consisting
primarily of rooms expenses, food and beverage costs, franchise fees,
utilities, repairs and maintenance, management fees, and other general and
administrative expenses of the hotels were $45.8 million in the quarter ended
September 30, 1999 compared to $45.1 million for the same period in 1998.
This increase is attributable to increased departmental, repairs and
maintenance, and management fee expenses in 1999, caused by increased
revenues. As a percentage of hotel revenues, the departmental and other hotel
operating expenses decreased to 67.0% in 1999 from 70.8% in 1998. The
combination of increased revenues and decreased operating expenses as a
percentage of revenues resulted in higher net income of $1.6 million for the
quarter ended September 30, 1999, compared to net income of five thousand
dollars in 1998.
Nine months ended September 30, 1999 compared to 1998
For the nine months ended September 30, 1999, BMC's hotel revenues
increased 6.4%, to $189.3 million, compared to $177.9 million for the same
period in 1998. The increase was because of increased revenues in the Florida
hotels and in hotels under renovation in 1998 as well as the addition of one
hotel in the third quarter of 1999. This was offset by a slight revenue decrease
in the DoubleTree hotels, four of which have been under renovation in 1999.
The percentage lease expense for the nine months ended September 30,
1999 increased 8.2%, to $56.6 million, compared to $52.3 million for the same
period in 1998 because of the increase in hotel revenues. Departmental and
other hotel operating expenses, consisting primarily of rooms expenses, food
and beverage costs, franchise fees, utilities, repairs and maintenance,
management fees, and other general and administrative expenses of the hotels
were $131.9 million in the nine months ended September 30, 1999 compared to
$127.3 million for the same period in 1998. As a percent of hotel revenues,
the departmental and other hotel operating expenses decreased to 69.7% in
1999 from 71.5% in 1998. This was primarily because of a decrease in
departmental expenses as a percentage of hotel revenues from 41.0% to 39.6%
because of efficiencies gained in higher volumes. Utilities expense decreased
$.9 million while general and administrative, management fees, and franchise
fees remained constant. This was offset by increases in repairs and
maintenance, advertising, and other expenses in 1999.
BMC recorded net income of $2.3 million for the nine months ended
September 30, 1999 compared to a net loss of forty-one thousand dollars in
1998. The increase in net income is primarily due to increased revenue
performance of the hotels in 1999 combined with expense reductions.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of cash to meet our cash requirements, including
distributions to shareholders, is our cash flow from the percentage leases.
The lessees' obligations under the percentage leases are largely unsecured
and the lessees' ability to make rent payments to the Partnership under the
percentage leases are substantially dependent on the lessees' ability to
generate sufficient cash flow from the operation of the hotels.
As of September 30, 1999, we had $3.2 million of unrestricted cash and
cash equivalents, $3.8 million of restricted cash for the payment of capital
expenditures, real estate tax and insurance and we had outstanding borrowings
totaling $163.0 million and $130.0 million against our credit facility and
term note payable, respectively.
On October 29, 1999, we entered into a $45 million term loan agreement.
The loan is secured by three hotel properties, bears interest at a rate
that fluctuates at
23
<PAGE>
LIBOR plus 2% and may be prepaid at any time without penalty or defeasance.
This debt has a three-year maturity with two separate one-year extensions,
for a total term of five years including the extensions. All of the proceeds
of this loan were used to reduce borrowings under our unsecured credit
facility to $118,000. With this closing, we have extended our debt maturities
so that $175 million, or 60% of our total debt is now long-term in nature.
Effective November 5, 1999, we have a $175 million credit facility
available, as limited under the terms of the credit agreement, to fund
acquisitions of additional hotels, renovations and capital expenditures, and
for our working capital needs. For information relating to the terms of our
credit facility and our $130 million and $45 million term notes payable, see
Notes 4, 5, and 10 respectively, of the notes to consolidated financial
statements of Boykin Lodging Company included in this Form 10-Q. We may seek
to negotiate additional credit facilities or issue debt instruments. Any debt
incurred or issued by us may be secured or unsecured, long-term, medium-term
or short-term, bear interest at a fixed or variable rate, and be subject to
such other terms as the Board of Directors considers prudent.
In November 1997, we filed a shelf registration statement with the
Securities and Exchange Commission for the issuance of up to $300 million in
securities. Securities issued under this registration statement may be
preferred shares, depository shares, common shares or any combination
thereof, and may be issued at various times, depending on market conditions.
Warrants to purchase these securities may also be issued. The terms of
issuance of any securities covered by this registration statement would be
determined at the time of their offering. The 4.5 million common shares sold
in the February 28, 1998 offering were sold under this registration statement.
We anticipate that funds generated from operations and our credit
facilities will enable us to meet our anticipated cash needs for the next
year. Our percentage lease revenues and cash flow are dependent in large part
upon the hotel revenues recognized by our lessees. There can be no assurance
that those revenues will meet expected levels. The availability of borrowings
under the credit facility is restrained by borrowing base and loan-to-value
limits, as well as other financial performance covenants contained in the
agreement. There can be no assurance that funds will be available in
anticipated amounts from the credit facility. Additionally, no assurance can
be given that we will make distributions in the future at the current rate,
or at all.
INFLATION
Our revenues are from percentage leases, which can change based on
changes in the revenues of our hotels. Therefore, we rely entirely on the
performance of the hotels and the lessees' ability to increase revenues to
keep pace with inflation. Operators of hotels in general, and our lessees,
can change room rates quickly, but competitive pressures may limit the
lessees' ability to raise rates to keep pace with inflation.
Our general and administrative costs as well as real estate and personal
property taxes, property and casualty insurance and ground rent are subject
to inflation.
YEAR 2000 COMPLIANCE
Many computer systems were originally designed to recognize calendar
years by the last two digits in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish twenty-first century dates from twentieth century dates. As a
result, computerized systems, which include information or computer related,
and non-information technology systems including systems which operate
elevators, phone systems, energy maintenance systems, security systems and
applications used by us should be tested for compliance . These systems are
being reviewed and evaluated and if necessary, modified or replaced, to
ensure all such financial, information and operational systems are Year 2000
compliant.
STATE OF READINESS
We are addressing the Year 2000 compliance issue by focusing on our
corporate facility, which includes all of our administrative, non-hotel
operating functions, and on our hotel properties.
Corporate Facility:
24
<PAGE>
Our Year 2000 procedures and testing are complete for identified
business critical systems. At this time we are not aware of any material Year
2000 non-compliance issues at our corporate facility. However, if these
systems fail, the accuracy and timeliness of management information provided
at our corporate facility could be disrupted.
Hotel Properties:
We are communicating with our lessees and other vendors with whom we do
significant business to determine their state for Year 2000 compliance
readiness. For all of our hotels, we have gained an understanding of the
process which our lessees have undertaken to address risk assessment,
validation, remediation and contingency plans related to Year 2000
compliance. These processes have included the following:
- - completion of an inventory and assessment of all computerized systems,
applications and hardware by internal personnel;
- - prioritization of items representing critical business applications;
- - estimation of remediation costs;
- - addressing compliance with vendors and other outside parties;
- - testing of all systems;
- - remediation of noncompliant systems
Most of our lessees are using internal personnel, who have been
determining the level of resources needed, necessary modifications or
upgrades, remediation and contingency plans to become Year 2000 compliant.
Our lessees are either complete in their testing or are in the final stages
of remediating noncompliant systems. The lessees which have not yet completed
their Year 2000 programs are in the process of completing installation and
testing of new systems in order to be compliant. This testing is expected to
be completed during the fourth quarter of 1999.
We received assurances from our two most significant lessees and
managers, BMC and Promus, that they have performed sufficient procedures to
adequately identify and remediate material Year 2000 issues. However, BMC was
unable to gain access to third party systems to verify third party claims of
compliance. BMC has completed their initial contingency plan, and is
currently testing the plan at the property level and making the final
refinements.
There can be no assurance that the efforts related to the hotel
properties will be sufficient to make these properties' computerized systems
and applications Year 2000 compliant in a timely manner or that the allocated
resources will be sufficient. A failure to become Year 2000 compliant could
affect the integrity of the hotel property guest check-in, billing and
accounting functions. Certain physical hotel property machinery and equipment
could also fail, resulting in safety risks and customer dissatisfaction. Our
properties could face claims from customers or lost revenues because of
utility service interruptions and other third party quality issues.
We believe the worst case scenario relating to Year 2000 issues is the
possible failure of our lessees to complete all necessary modifications and
conversions in a timely manner resulting in business disruptions at our
hotels. This could have a material adverse impact on our financial position
and results of operations, as our operations are highly dependent upon
percentage lease revenue earned from our lessees. Our lease revenues are
based upon revenues generated at the leased properties. To the extent that
the Year 2000 problems materially affect the conduct of operations at those
properties, it is likely that those lessees' revenues would be affected, and
that our percentage lease revenues would ultimately be affected.
Year 2000 Project Costs
We estimate that total unexpended costs for the Year 2000 testing and
remediation efforts for the hotels should not exceed $.6 million, although
there can be no assurance that actual costs will not exceed this amount. We
spent approximately $1.3 million year to date in 1999 related to computerized
systems and equipment, which are expected to be Year 2000 compliant. The vast
majority of our costs to remediate this issue are capital in nature and
therefore do not affect our funds from operations.
Contingency Plan
We are in the process of developing our contingency plan for our
corporate facility and working with our lessees to provide for the most
reasonably likely worst case scenarios regarding Year 2000 compliance. The
contingency plan for the corporate office will be finalized during the fourth
quarter of 1999. This includes obtaining the building plan from the lessor of
our corporate facility. Most of our lessees have completed their contingency
plans and the others expect to
25
<PAGE>
complete their plans during the fourth quarter of 1999.
SEASONALITY
Our hotels' operations historically have been seasonal. Twenty-seven of our
hotels maintain higher occupancy rates during the second and third quarters. The
five hotels located in Florida experience their highest occupancy in the first
quarter. This seasonality pattern can be expected to cause fluctuations in our
quarterly lease revenue under the percentage leases. To the extent that cash
flow from operations is insufficient during any quarter because of temporary or
seasonal fluctuations in percentage lease revenue, we expect to use cash on hand
or borrowings to make those distributions. No assurance can be given that we
will make distributions in the future at the current rate, or at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
In 1998 we entered into a $130 million term note payable which bears
interest at a fixed rate of 6.9% for ten years, and a new fixed rate to be
determined thereafter. The term note requires interest only payments for the
first two years, with principal repayments commencing in the third loan year
based on a 25-year amortization schedule. The term note expires in June 2023.
Assuming a 10% increase in interest rates as of September 30, 1999, the fair
market value of the term note payable would be approximately $126.1 million.
Our $175 million unsecured credit facility and $45 million term note
payable bear interest at a rate which fluctuates at LIBOR plus 1.40% to
2.25%. Due to changes in the U.S. and global economy, interest rates
fluctuate regularly which creates risk that these rates may increase in the
future, which would adversely impact our interest expense and cash flows.
26
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
Our company is subject to various legal proceedings and claims that arise
in the ordinary course of business. In the opinion of management, the amount of
any ultimate liability with respect to these actions will not materially affect
the our financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<S> <C>
3.1*** Amended and Restated Articles of Incorporation
3.2* Code of Regulations
4.1* Specimen Share Certificate
4.2*** Dividend Reinvestment and Optional Share Purchase Plan
4.3** Shareholder Rights Agreement, dated as of May 25, 1999 between Boykin
Lodging Company and National City Bank as rights agent
27 Financial Data Schedule
</TABLE>
* Incorporated by reference from Amendment No. 3 to Boykin Lodging's
Registration Statement on Form S-11 (Registration No. 333-6341) (the
"Form S-11") filed on October 24, 1996. Each of the above exhibits has
the same exhibit number in the Form S-11.
** Incorporated by Reference as Exhibit 1 from the Registration statement
on Form 8-A filed on June 10, 1999.
*** Incorporated by reference from Boykin Lodging's Form 10-Q for the
quarter ended June 30, 1999 (the "Form 10-Q"). Each of the above
exhibits has the same exhibit number in the Form 10-Q.
(b) Reports on Form 8-K
None.
27
<PAGE>
FORWARD LOOKING STATEMENTS
This Form 10-Q contains statements that constitute forward-looking
statements. Those statements appear in a number of places in this Form 10-Q
and the documents incorporated by reference herein and include statements
regarding the intent, belief or current expectations of Boykin Lodging, its
directors or its officers with respect to:
- - Leasing, management or performance of the hotels,
- - Adequacy of reserves for renovation and refurbishment,
- - Potential acquisitions and dispositions by Boykin,
- - Boykin's financing plans,
- - Boykin's policies regarding investments, acquisitions, dispositions,
financings, conflicts of interest and other matters, and
- - Trends affecting Boykin's or any hotel's financial condition or results of
operations
You are cautioned that any such forward-looking statement is not a
guarantee of future performance and involves risks and uncertainties, and
that actual results may differ materially from those in the forward-looking
statement as a result of various factors. Factors that could cause actual
results to differ materially from our expectations include, among other
factors, financial performance, real estate conditions, execution of hotel
acquisition programs, changes in local or national economic conditions, and
other similar variables. The information contained in this Form 10-Q, in the
documents incorporated by reference herein and Boykin Lodging's periodic
filings with the Securities and Exchange Commission also identifies important
factors that could cause such differences.
With respect to any such forward-looking statement that includes a
statement of its underlying assumptions or bases, we caution that, while we
believe such assumptions or bases to be reasonable and have formed them in
good faith, assumed facts or bases almost always vary from actual results,
and the differences between assumed facts or bases and actual results can be
material depending on the circumstances. When, in any forward-looking
statement, we or our management express an expectation or belief as to future
results, that expectation or belief is expressed in good faith and is
believed to have a reasonable basis, but there can be no assurance that the
stated expectation or belief will result or be achieved or accomplished.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ Robert W. Boykin
---------------------------------
November 15, 1999 Robert W. Boykin
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Paul A. O'Neil
---------------------------------
November 15, 1999 Paul A. O'Neil
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
28
<PAGE>
EXHIBIT INDEX
EXHIBITS
<TABLE>
<S> <C>
3.1*** Amended and Restated Articles of Incorporation
3.2* Code of Regulations
4.1* Specimen Share Certificate
4.2*** Dividend Reinvestment and Optional Share Purchase Plan
4.3** Shareholder Rights Agreement, dated as of May 25, 1999 between Boykin
Lodging Company and National City Bank as rights agent
27 Financial Data Schedule
</TABLE>
* Incorporated by reference from Amendment No. 3 to Boykin Lodging's
Registration Statement on Form S-11 (Registration No. 333-6341) (the "Form
S-11") filed on October 24, 1996. Each of the above exhibits has the same
exhibit number in the Form S-11.
** Incorporated by Reference as Exhibit 1 from the Registration statement
on Form 8-A filed on June 10, 1999.
*** Incorporated by reference from Boykin Lodging's Form 10-Q for the
quarter ended June 30, 1999 (the "Form 10-Q"). Each of the above
exhibits has the same exhibit number in the Form 10-Q.
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF BOYKIN LODGING COMPANY AS OF SEPTEMBER 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,193
<SECURITIES> 0
<RECEIVABLES> 8,885
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 644,325
<DEPRECIATION> (54,092)
<TOTAL-ASSETS> 614,915
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 293,000
0
0
<COMMON> 0
<OTHER-SE> 280,067
<TOTAL-LIABILITY-AND-EQUITY> 614,915
<SALES> 0
<TOTAL-REVENUES> 68,220
<CGS> 0
<TOTAL-COSTS> 34,226
<OTHER-EXPENSES> 1,664
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,764
<INCOME-PRETAX> 16,566
<INCOME-TAX> 0
<INCOME-CONTINUING> 16,566
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,566
<EPS-BASIC> 0.97
<EPS-DILUTED> 0.97
<FN>
<F1>REGISTRANT UTILIZES AN UNCLASSIFED BALANCE SHEET THEREFORE CURRENT ASSETS
AND CURRENT LIABILITIES ARE NOT APPLICABLE.
</FN>
</TABLE>
