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 ended March 31, 1997
Commission file number 001-11975
---------
Boykin Lodging Company
(Exact Name of Registrant as Specified in Its Charter)
Ohio 34-1824586
------------------------------ -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Terminal Tower, Suite 1500, 50 Public Square 44113
- -------------------------------------------- ----------
(Address of Principal Executive Office) (Zip Code)
(216) 241-6375
- ----------------------------------------------------
(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
May 14, 1997: 9,516,251
2
PART I
ITEM 1. FINANCIAL STATEMENTS
See Index to Financial Statements on page F-1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BACKGROUND
On November 4, 1996, the Company completed an initial public offering
(the "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 $173,898,000. 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 $40,000,000 intercompany convertible note (the "Note").
The Note matures on the fifth anniversary of the Offering. On conversion of the
Note, the Company will receive an additional general partnership interest in the
Partnership of 2.9%. 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 the nine hotels (the "Initial Hotels"). As
discussed below, during the quarter ended March 31, 1997, the Company acquired
two additional hotels (these two hotel properties along with the Initial Hotels
are collectively referred to as the "Hotels"). The Partnership leases the Hotels
to Boykin Management Company Limited Liability Company, an Ohio limited
liability company (the "Initial Lessee"), pursuant to leases (the "Percentage
Leases").
The Company's principal source of revenue is lease payments from the
Initial Lessee pursuant to the Percentage Leases. Percentage Lease revenue is
based upon the room, food and beverage and other revenues of the Hotels. The
Initial Lessee's ability to make payments to the Company pursuant to the
Percentage Leases is dependent primarily upon the operations of the Hotels.
Therefore, management believes that a discussion of the historical and pro forma
operations of the Initial Lessee and the historical operations of the Initial
Hotels is important to an understanding of the business of the Company.
During the quarter ended March 31, 1997, the Company acquired two hotel
properties for an aggregate consideration of $16.8 million, which was funded
with cash proceeds from the Offering. The hotel properties acquired were the
118-room Hilton Melbourne Beach in Melbourne, Florida, and the 176-room Holiday
Inn Crabtree in Raleigh, North Carolina. The Company plans to invest
approximately $3 million in capital improvements in the Holiday Inn Crabtree
over the next twelve months. The funds for these improvements will come from
borrowings under its $75 million credit facility (the "Credit Facility"). These
properties were leased to the Initial Lessee, which will operate the properties
under long-term Percentage Leases. Also, in March 1997 the Company purchased the
real and personal property of the Whitehall Inn located in Daytona Beach,
Florida. The Company's total investment was $4.2 million, which was funded with
cash proceeds from the Offering. In May 1997 the Company wound up operations
there and began a complete renovation of the property. The renovation, which is
expected to cost approximately $4 million, will be funded from borrowings under
the Credit Facility. The Company expects to begin business operations as a
resort with a major hotel franchise affiliation in January 1998. The property
will be leased to the Initial Lessee, which will operate the resort under a
long-term Percentage Lease.
3
The following discusses (i) the Company's actual results of operations
for the quarter ended March 31, 1997 and pro forma results of operations for the
quarters ended March 31, 1997 and 1996, (ii) the Initial Lessee's actual results
of operations for the quarter ended March 31, 1997 and pro forma results of
operations for the quarters ended March 31, 1997 and 1996, and (iii) the
historical results of operations for the Initial Hotels for the quarter ended
March 31, 1996.
The pro forma results of operations assume that (i) the Offering and
related transactions, and (ii) the acquisitions of the Hilton Melbourne Beach
and Holiday Inn Crabtree all occurred on January 1, 1996.
RESULTS OF OPERATIONS
THE COMPANY
Actual Results of Operations
For the quarter ended March 31, 1997, the Company earned $7,208,000 of
Percentage Lease revenue. Interest income earned on available funds was
$231,000. Real estate related depreciation and amortization and amortization of
deferred financing costs aggregated to $2,050,000. Real estate and personal
property taxes, insurance and ground rent were $1,022,000 in the aggregate.
General and administrative expenses were $488,000. The minority interest in the
income of the Partnership was $446,000. The Company's net income was $3,381,000.
Funds From Operations ("FFO"), which is the sum of the net income, minority
interest, and real estate related depreciation and amortization, was $5,768,000.
Pro Forma Results of Operations
For the quarter ended March 31, 1997, the Company's pro forma revenue
from Percentage Leases was $7,713,000, representing a $719,000, or 10%, increase
over pro forma Percentage Lease revenue for the quarter ended March 31, 1996.
Pro forma Percentage Lease revenue for the first quarter 1997 increased over
that of 1996 primarily as a result of (i) increases in the average daily rates
and improvements in occupancy rates at the Hotels, and (ii) $158,000 of revenues
from the Daytona property prior to its closure. See "Results of Operations --
The Initial Lessee -- Pro Forma Results of Operations."
Pro forma expenses for the quarter before minority interest, consisting
principally of depreciation, amortization, property taxes, insurance, ground
rent and general administrative expenses, remained relatively constant between
1996 and 1997. As a percentage of revenues, the Company's expenses before
minority interest decreased from 53.3% in 1996 to 48.5% in 1997, indicative of
the relatively fixed nature of the expenses.
Pro forma FFO for the quarters ended March 31, 1997 and 1996 was
$6,197,000 and $5,458,000, respectively. The increase in FFO in 1997 is
attributable to the increase in Percentage Lease revenues. FFO consists of
income (loss) before minority interest (computed in accordance with generally
accepted accounting principles) excluding gains (losses) from debt restructuring
and sales of property (including furniture and equipment) plus real estate
related depreciation and amortization (excluding amortization of deferred
financing costs) and after adjustments for unconsolidated partnerships and joint
ventures. Industry analysts consider FFO to be an appropriate measure of the
performance of an equity REIT. FFO should not be considered as a basis for
computing distributions or as an alternative (i) to net income or other
measurements under generally accepted accounting principles, as an indicator of
operating performance, or (ii) to cash flows from operating, investing, or
financing activities, as a measure of liquidity. FFO would not reflect cash
expenditures for capital improvements or principal amortization of indebtedness
with respect to the Hotels.
THE INITIAL LESSEE
Actual Results of Operations
For the quarter ended March 31, 1997, the Initial Lessee had revenues
of $23,751,000. The Percentage Lease expense during the period was $7,208,000
while departmental expenses of the Hotels and other expenses of the Initial
Lessee were $16,005,000 in the aggregate. Net income for the period was
$538,000.
2
4
Pro Forma Results of Operations
Comparison of the Initial Lessee for the quarter ended March 31, 1997 to the
quarter ended March 31, 1996.
Room revenue increased by $1,382,000 or 8.9% in 1997 over 1996,
principally as a result of an increase in ADR from $86.20 in 1996 to $91.12 in
1997, an increase in occupancy rates from 73.8% in 1996 to 75.1% in 1997, and
$456,000 of revenues from the Daytona property prior to its closure. The
occupancy growth is attributable to a continuation through the first quarter of
1997 of the strong industry-wide demand, particularly in the Ohio and California
markets.
Food, beverage, and other hotel revenues increased $188,000, or 2.5%,
reflecting increased occupancy levels. Non-hotel revenues increased
significantly from $507,000 to $771,000, due largely to fees from third-party
management contracts which commenced at the end of the first quarter of 1996.
Departmental expenses increased $530,000, or 6.1%, due to increased
revenue and occupancy levels and general inflationary pressures, but decreased
as a percentage of revenues from 37.1% in 1996 to 36.5% in 1997. Cost of goods
sold for non-hotel operations decreased significantly due to a shift away from
furniture and equipment sales toward fee-based purchasing services at the
interior design subsidiary. General and administrative expenses increased
$351,000, or 12.9%, as a result of increased sales levels, staffing changes, and
management incentive compensation plans implemented in 1997.
Pro forma Percentage Lease expense increased 10.3%, or $719,000, due to
revenue increases at the Hotels and the application of the Percentage Lease
formulas. Approximately $158,000 of the increase in Percentage Lease expense
related to lease payments for the Daytona property prior to its closure.
Pro forma net income increased $144,000, reflecting relatively stable
profitability at the leased Hotels and increases in non-hotel revenues.
THE INITIAL HOTELS - ACTUAL RESULTS OF OPERATIONS
For the quarter ended March 31, 1996, revenues at the Initial Hotels
were $20,611,000. Departmental expenses were $7,867,000, or 38.2% of revenues.
Hotel operating expenses exclusive of interest, depreciation and amortization
were $7,576,000, or 36.8%, of revenues. The loss before extraordinary item of
$596,000 was the result of interest expense charges of $3,957,000 and
depreciation and amortization expense of $1,807,000. The extraordinary item
reflected a loss of $1,315,000 on early extinguishment of debt from the
refinancing of the mortgage notes payable at two of the Initial Hotels in
January 1996.
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 Initial Lessee's obligations under the
Percentage Leases are unsecured and the Initial Lessee's 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 Initial Lessee's ability to generate sufficient cash flow from
the operation of the Hotels.
On March 31, 1997, the Company had $476,000 of cash and cash
equivalents. In addition, the Company had $1,000,000 of borrowings against the
Credit Facility on March 31, 1997. On April 4, 1997, the borrowings under the
Credit Facility increased to $20 million to fund the acquisition of the French
Lick Springs Resort, discussed below.
The Company intends to acquire and selectively develop additional hotel
properties and will incur indebtedness to fund such acquisitions and
development. The Company may also incur indebtedness to meet distribution
requirements imposed on a REIT under the Internal Revenue Code to the extent
that working capital
3
5
and cash flow from the Company's investments are insufficient to make the
required distributions. The terms of the Company's $75 million Credit Facility
permit borrowings for that purpose, but impose certain limitations on the
Company's ability to engage in other borrowings.
The Credit Facility has a three-year term. Borrowings against the
Credit Facility bear interest at a floating rate of prime plus .5%, or at the
Company's election, 2% over various Eurodollar (LIBOR) rates. The Company is
required to pay a .25% fee on the unused portion of the Credit Facility. The
Credit Facility requires, among other things, the maintenance of a minimum net
worth, and specified coverage ratios of EBITDA to debt service and EBITDA to
debt service and fixed charges.
The Company obtained the Credit Facility to assist it in funding its
acquisitions and development of additional hotels and for certain other
purposes, including capital expenditures and working capital, as necessary.
Borrowings under the Credit Facility are secured by first mortgages on seven of
the Initial Hotels including lease revenues generated from such properties. The
Company may seek to increase the amount of the Credit Facility, 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.
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 from additional issuances of common shares or
other securities.
On April 4, 1997, the Company acquired the 485-room French Lick Springs
Resort in French Lick, Indiana. The acquisition price was $20 million and was
funded with proceeds from the Company's Credit Facility. The Company has leased
the resort to the Initial Lessee.
The Percentage Leases require the Company to establish aggregate
minimum reserves for capital expenditures of 4% of total revenues of the Hotels.
In addition, the Company intends to make funds available from the 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 quarter ended March 31, 1997,
the Company made $1,004,000 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.
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 Initial Lessee's ability to increase revenues to keep pace with
inflation. Operators of hotels in general, and the Initial Lessee, can change
room rates quickly, but competitive pressures may limit the Initial Lessee's
ability to raise rates faster than inflation.
The Company's largest expense item is the depreciation of its
investments in hotel properties. The Company's other expenses (general and
administrative costs as well as real estate and personal property taxes,
property and casualty insurance and ground rent) are subject to inflation and
are expected to grow with the general rate of inflation.
4
6
SEASONALITY
The Hotels' operations historically have been seasonal. The Hotels
located in Florida experience their highest occupancy in the first quarter. The
balance of the Hotels maintain higher occupancy rates during the second and
third quarters. The seasonality pattern can be expected to cause fluctuations in
the Company's quarterly lease revenue 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. To the extent that cash flow
from operations is insufficient during any quarter because of temporary or
seasonal fluctuations in Percentage Lease revenue, the Company expects to
utilize cash on hand or borrowings to make those distributions. No assurance can
be given that the Company will make distributions in the future at the current
rate, or at all.
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 financial statements of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
3.1* Amended and Restated Articles of Incorporation
3.2* Code of Regulations
4.1* Specimen Share Certificate
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
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedules
* 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.
5
7
(b) Reports on Form 8-K
-------------------
Date Filed Items Reported Summary
---------- -------------- -------
1) March 21, 1997 (date of
report - March 6, 1997) Item 2 (acquisition of assets) The Company acquired the Holiday
Inn Crabtree in Raleigh, North
Carolina
Item 5 (other events) The Company acquired the Hilton
Melbourne Beach in Melbourne,
Florida and the real and personal
property of the Whitehall Inn in
Daytona Beach, Florida.
2) April 21, 1997 (date of
report - April 4, 1997) Item 2 (acquisition of assets) The Company acquired the French
Lick Springs Resort in French
Lick, Indiana.
FORWARD-LOOKING STATEMENTS
--------------------------
This Form 10-Q contains forward-looking statements. Although the
Company believes that its acquisition and redevelopment plans are based upon
reasonable assumptions, it can give no assurance that such expectations will be
realized. Factors that could cause actual results to differ materially from the
Company's expectations include the Company's financial performance, real estate
market conditions, execution of the Company's hotel acquisition programs,
difficulties with contractors hired to redevelop or renovate properties, changes
in local or national economic conditions, and other similar risks.
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
-------------------------------------
May 14, 1997 Robert W. Boykin
Director, Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Raymond P. Heitland
-------------------------------------
May 14, 1997 Raymond P. Heitland
Director, Chief Financial Officer
(Principal Accounting Officer)
6
8
BOYKIN LODGING COMPANY
INDEX TO FINANCIAL STATEMENTS
BOYKIN LODGING COMPANY:
Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996................................................ F-2
Consolidated Statement of Income for the three months
ended March 31, 1997............................................. F-3
Consolidated Statement of Shareholders' Equity for the three months
ended March 31, 1997............................................. F-4
Consolidated Statement of Cash Flows for the three months
ended March 31, 1997............................................. F-5
Notes to Consolidated Financial Statements.......................... F-6
BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND
SUBSIDIARIES:
Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996................................................F-11
Consolidated Statement of Operations for the three months
ended March 31, 1997.............................................F-12
Consolidated Statement of Cash Flows for the three months
ended March 31, 1997.............................................F-13
Notes to Consolidated Financial Statements..........................F-14
INITIAL HOTELS:
Combined Balance Sheet as of March 31, 1996.........................F-17
Combined Statement of Operations for the three months
ended March 31, 1996.............................................F-19
Combined Statement of Cash Flows for the three months
ended March 31, 1996.............................................F-20
Notes to Combined Financial Statements..............................F-22
BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC. AND
BOPA DESIGN COMPANY:
Combined Statement of Net Assets as of March 31, 1996...............F-26
Combined Statement of Revenues and Expenses for
the three months ended March 31, 1996............................F-27
Notes to Combined Financial Statements..............................F-28
F-1
9
BOYKIN LODGING COMPANY
----------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF MARCH 31, 1997 AND DECEMBER 31,1996
-----------------------------------------
(unaudited, amounts in thousands)
March 31, December 31,
1997 1996
------------ ------------
ASSETS
------
INVESTMENT IN HOTEL PROPERTIES, net $133,395 $113,322
CASH AND CASH EQUIVALENTS 476 21,362
RENT RECEIVABLE FROM THE LESSEE 2,172 306
DEFERRED EXPENSES, net 1,480 1,509
OTHER ASSETS 1,081 772
------------ ------------
Total assets $138,604 $137,271
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
BORROWINGS AGAINST CREDIT FACILITY $ 1,000 $ -
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 2,285 2,433
DIVIDENDS/DISTRIBUTIONS PAYABLE 4,902 3,091
DUE TO LESSEE 442 681
MINORITY INTEREST IN PARTNERSHIP 13,869 14,045
SHAREHOLDERS' EQUITY:
Preferred shares, without par value; 10,000,000 shares
authorized; no shares issued and outstanding - -
Common shares, without par value; 40,000,000 shares
authorized; 9,516,251 shares issued and outstanding,
stated at - -
Additional paid-in capital 123,814 123,828
Retained deficit (7,708) (6,807)
------------ ------------
116,106 117,021
------------ ------------
Total shareholders' equity $138,604 $137,271
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-2
10
BOYKIN LODGING COMPANY
----------------------
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1997
-----------------------------------------
(unaudited, amounts in thousands except for per share data)
REVENUES:
Lease revenue $ 7,208
Interest income 231
----------
7,439
----------
EXPENSES:
Real estate related depreciation and amortization 1,941
Real estate and personal property taxes, insurance and
ground rent 1,022
General and administrative 488
Interest expense 52
Amortization of deferred financing costs 109
----------
3,612
----------
INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY ITEM 3,827
MINORITY INTEREST (446)
----------
NET INCOME APPLICABLE TO COMMON SHARES $ 3,381
==========
EARNINGS PER SHARE $ .36
==========
Weighted average number of shares 9,516
==========
The accompanying notes to consolidated financial statements
are an integral part of this statement.
F-3
11
BOYKIN LODGING COMPANY
----------------------
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
----------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1997
-----------------------------------------
(unaudited, dollar amounts in thousands)
Common Paid-In Retained
Shares Capital Deficit Total
----------- ------------ ----------- ------------
Balance, December 31, 1996 9,516,251 $123,828 $(6,807) $117,021
Additional offering expenses - (14) - (14)
Dividends declared - - (4,282) (4,282)
Net income - - 3,381 3,381
----------- ------------ ---------- ------------
Balance, March 31, 1997 9,516,251 $123,814 $(7,708) $116,106
=========== ============ ========== ============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
F-4
12
BOYKIN LODGING COMPANY
----------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1997
-----------------------------------------
(unaudited, amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,381
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 2,076
Minority interest 446
Changes in assets and liabilities-
Rent receivable from the Lessee (1,866)
Other assets (328)
Accounts payable and accrued expenses (148)
Due to affiliates (239)
-----------
Net cash provided by operating activities 3,322
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of hotel properties (21,099)
Improvements and additions to hotel properties (1,004)
-----------
Net cash flow used for investing activities (22,103)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of dividends and distributions (3,091)
Borrowings against credit facility 1,000
Additional offering costs (14)
-----------
Net cash flow used for financing activities (2,105)
-----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (20,886)
CASH AND CASH EQUIVALENTS, beginning of period 21,362
-----------
CASH AND CASH EQUIVALENTS, end of period $ 476
===========
The accompanying notes to consolidated financial statements
are an integral part of this statement.
F-5
13
BOYKIN LODGING COMPANY
----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
MARCH 31, 1997
--------------
(unaudited, dollar amounts in thousands except per share data)
1. ORGANIZATION AND INITIAL PUBLIC OFFERING:
-----------------------------------------
Boykin Lodging Company (the Company) was incorporated February 8, 1996 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 shares of common stock. An additional 1,241,250
shares of common stock 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 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
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 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 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 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 (and assuming that the value of one Partnership unit equals the
value of one common share). On conversion of the Note, the Company will receive
an additional general partnership interest in the Partnership of 2.9%. Assuming
conversion of the Note, the Company has an 87.4% general partnership interest in
the Partnership. 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 from the Company and
issued limited partnership interests representing approximately 15.5% of the
Partnership to acquire nine hotel properties (the Initial Hotels) from various
entities, to finance certain capital improvements, and for general working
capital purposes. The Partnership leases the Initial Hotels to Boykin Management
Company Limited Liability Company (the Lessee) 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 each hotel.
The Lessee holds the franchise agreement for each hotel. The Lessee 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, 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 is 1,378,000.
F-6
14
The number of shares issuable upon exercise of the exchange rights will be
adjusted upon the occurrence of stock splits, mergers, consolidations or similar
pro rata share transactions, which otherwise would have the effect of diluting
the ownership interests of the limited partners or the shareholders of the
Company.
Basis of Presentation
- ---------------------
The Company exercises unilateral control over the Partnership. Therefore, the
financial statements of the Company and the Partnership 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-month period ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1997. 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, 1996.
2. NET INCOME PER SHARE AND PARTNERSHIP UNITS:
-------------------------------------------
Net income per share is based on the weighted average number of common shares
and common equivalent shares outstanding during the period. Outstanding options
are included as common equivalent shares using the treasury stock method when
the effect is dilutive. The weighted average number of shares used in
determining net income per share was 9,516,251 for the quarter ended March 31,
1997. At March 31, 1997, a total of 1,378,000 limited partnership units were
issued and outstanding. The weighted average number of common shares and limited
partnership units outstanding for the same period was 10,894,251.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share," in March 1997, which
will revise the calculation methods and disclosures regarding earnings per
share. As required by the Statement, the Company will adopt SFAS No. 128 in the
fourth quarter of 1997.
The Company's pro forma earnings per share that would have been reported had the
new standard been previously in effect are as follows:
Basic earnings per common share $.36
Diluted earnings per common share $.35
F-7
15
3. ACQUISITIONS OF HOTEL PROPERTIES:
---------------------------------
Acquisitions of Businesses
- --------------------------
During the quarter ended March 31, 1997, the Company acquired two hotel
properties for an aggregate consideration of $16.8 million which was funded with
cash proceeds from the Offering. The hotel properties acquired were the 118-room
Hilton Melbourne Beach in Melbourne, Florida and the 176-room Holiday Inn
Crabtree in Raleigh, North Carolina. The Company plans to invest approximately
$3 million in capital improvements in the Holiday Inn Crabtree over the next
twelve months. The funds for these improvements will come from borrowings under
the credit facility. These properties were leased to the Lessee which will
operate the properties under long-term Percentage Leases. These 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 their respective dates of acquisition.
Acquisition of Hotel Assets
- ---------------------------
In March 1997, the Company purchased the real and personal property of the
Whitehall Inn in Daytona Beach, Florida. The Company's total investment was $4.2
million, which was funded with cash proceeds from the Offering. The Company
discontinued operations at the Whitehall Inn in May 1997 and began a complete
renovation of the property. The renovation, which is expected to cost $4
million, will be funded from borrowings under the credit facility. The Company
expects to begin business operations as a resort with a major hotel franchise
affiliation in January 1998. The property will be leased to the Lessee which
will manage the resort under a long-term Percentage Lease.
4. CREDIT FACILITY:
----------------
In November 1996, the Company obtained a three-year commitment for a $75,000
credit facility to be used for acquisitions, capital improvements, working
capital and general corporate purposes. Borrowings against the credit facility
bear interest at a floating rate of prime rate plus .5% (8.75% and 9% at
December 31, 1996 and March 31, 1997, respectively) or, at the Company's
election, 2% over various Eurodollar (LIBOR) rates. The Company is required to
pay a .25% fee on the unused portion of the credit facility. As of December 31,
1996, the Company had no outstanding borrowings against the credit facility. As
of March 31, 1997, the Company had $1,000 outstanding against the credit
facility.
The credit facility is secured by mortgage interests in seven of the Initial
Hotel properties including lease revenues generated from such properties.
The credit facility requires, among other things, the Company 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 its franchise agreement at each of the hotel properties and
to maintain its REIT status. The Company was in compliance with its covenants at
December 31, 1996 and March 31, 1997.
F-8
16
5. PERCENTAGE LEASE AGREEMENTS:
----------------------------
The Percentage Leases have noncancelable terms ranging from four to 10 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 beginning January 1, 1997,
based on increases in the United States Consumer Price Index. Percentage rent
applicable to food and beverage revenues is calculated as 6% of such revenues.
Percentage Lease revenue for the quarter ended March 31, 1997 was $7,208, of
which approximately $2,172 was in excess of minimum rent.
Future minimum rentals (ignoring future CPI increases) to be received by the
Company from the Lessee pursuant to the Percentage Leases for each of the years
in the period 1997 to 2001 and in total thereafter are as follows:
1997 $ 20,729
1998 20,791
1999 20,791
2000 20,791
2001 14,693
Thereafter 40,486
-----------
$138,281
===========
6. RELATED PARTY TRANSACTIONS:
---------------------------
The Chairman, President and Chief Executive Officer of the Company is the
majority shareholder of the Lessee. The Lessee was the sole source of the
Company's Percentage Lease revenue in 1996. At March 31, 1997 and December 31,
1996, the Company has rent receivable of $2,172 and $306, respectively, due from
the Lessee.
At March 31, 1997 and December 31, 1996, the Company has a payable to the Lessee
of $442 and $681, respectively, primarily for the reimbursement of capital
expenditure costs incurred on behalf of the Company.
7. STATEMENT OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES:
--------------------------------------------------
During the quarter ended March 31, 1997, the noncash financing transactions
consisted of $4,902 of dividends and Partnership distributions which were
declared but not paid as of March 31, 1997.
8. SUBSEQUENT EVENT:
-----------------
Subsequent to March 31, 1997, the Company acquired a hotel property for an
aggregate consideration of $20 million which was funded with cash proceeds from
the Company's credit facility. The property acquired was a 485-room resort in
French Lick, Indiana. This property was leased to the Lessee which will operate
the property under a long-term Percentage Lease.
F-9
17
9. PRO FORMA FINANCIAL INFORMATION:
--------------------------------
The pro forma financial information set forth below is presented as if (i) the
Offering and the related formation transactions and (ii) the acquisitions of the
Hilton Melbourne Beach and the Holiday Inn Crabtree discussed in Note 3 had been
consummated as of January 1, 1996. The pro forma financial information is not
necessarily indicative of what actual results of operations of the Company would
have been assuming the Offering and the related formation transactions and the
acquisitions had been consummated as of January 1, 1996 nor does it purport to
represent the results of operations for future periods.
Three Months
Ended
March 31,
------------------
1997 1996
-------- ---------
Lease revenue $7,713 $6,994
Interest income 231 -
-------- ---------
Total revenue 7,944 6,994
Real estate related depreciation and
amortization 2,103 2,195
Real estate and personal property
taxes, insurance and ground rent 1,098 1,064
General and administrative 488 363
Interest expense 52 -
Amortization of deferred financing
costs 109 109
-------- ---------
Income before minority interest and
extraordinary item 4,094 3,263
Minority interest 487 359
-------- ---------
Income before extraordinary item $3,607 $2,904
======== =========
Income per share before extraordinary
item $.38 $.31
======== =========
F-10
18
BOYKIN MANAGEMENT COMPANY
-------------------------
LIMITED LIABILITY COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF MARCH 31, 1997 AND DECEMBER 31, 1996
------------------------------------------
(unaudited, amounts in thousands)
ASSETS
------
March 31, December 31,
1997 1996
------------- -----------------
Cash and cash equivalents $ 7,938 $ 5,469
Accounts receivable-
Trade, net of allowance for doubtful accounts of $33
and $68 at March 31, 1997 and December 31, 1996, respectively 3,598 2,933
Boykin Hotel Properties, L.P. 442 681
Former owners 62 69
Other 28 -
Inventories 536 470
Property and equipment, net 303 312
Prepaid expenses and other assets 1,063 587
----------- ----------
$13,970 $10,521
=========== ==========
LIABILITIES AND MEMBERS' CAPITAL
--------------------------------
Rent payable to Boykin Hotel Properties, L.P. $ 2,172 $ 306
Accounts payable-
Trade 1,624 1,567
Advance deposits 496 224
Bank overdraft liability 692 1,234
Former owners 357 373
Affiliate 263 267
Other 195 8
Accrued expenses-
Accrued payroll 779 716
Accrued vacation 831 784
Accrued sales, use and occupancy taxes 776 702
Other accrued liabilities 2,693 1,786
----------- ----------
10,878 7,967
Members' capital-
Capital contributed 3,000 3,000
Retained earnings (deficit) 92 (446)
----------- ----------
3,092 2,554
----------- ----------
$13,970 $10,521
=========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-11
19
BOYKIN MANAGEMENT COMPANY
-------------------------
LIMITED LIABILITY COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1997
-----------------------------------------
(unaudited, amounts in thousands)
REVENUES:
Room revenue $15,760
Food and beverage revenue 6,071
Other hotel revenue 1,149
Other revenue 771
----------
Total revenues 23,751
----------
EXPENSES:
Departmental expenses of hotels-
Rooms 3,508
Food and beverage 4,539
Other 570
Cost of goods sold of nonhotel operations 168
Percentage lease expense 7,208
General and administrative 2,937
Advertising and promotion 1,023
Utilities 954
Franchisor royalties and other charges 1,141
Repairs and maintenance 1,100
Depreciation and amortization 20
Other 45
----------
Total expenses 23,213
----------
NET INCOME $ 538
==========
The accompanying notes to consolidated financial statements
are an integral part of this statement.
F-12
20
BOYKIN MANAGEMENT COMPANY
-------------------------
LIMITED LIABILITY COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1997
-----------------------------------------
(unaudited, amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 538
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 20
Changes in assets and liabilities-
Accounts receivable (454)
Inventories (66)
Prepaid expenses and other assets (476)
Accounts payable (30)
Rent payable 1,866
Other accrued liabilities 1,091
----------
Net cash provided by operating activities 2,489
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (11)
----------
Net cash used for investing activities (11)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of obligations to former owners (16)
Collections of amounts due from former owners 7
----------
Net cash used for financing activities (9)
----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,469
CASH AND CASH EQUIVALENTS, beginning of period 5,469
----------
CASH AND CASH EQUIVALENTS, end of period $ 7,938
==========
The accompanying notes to consolidated financial statements
are an integral part of this statement.
F-13
21
BOYKIN MANAGEMENT COMPANY
-------------------------
LIMITED LIABILITY COMPANY AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
MARCH 31, 1997
--------------
(unaudited, dollar amounts in thousands)
1. DESCRIPTION OF BUSINESS:
------------------------
Boykin Management Company Limited Liability Company and its subsidiaries
(collectively, the Lessee) (i) manage and operate full and limited service
hotels located throughout the United States; (ii) provide national purchasing
services to hotels, and (iii) provide interior design services to hotels and
other business.
2. ORGANIZATION:
-------------
The Lessee commenced operations on November 4, 1996 as an Ohio limited liability
company. The Lessee is effectively 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 (BMC) and Bopa Design
Company (doing business as Spectrum Services), wholly owned subsidiaries of The
Boykin Company (TBC), were merged into subsidiaries of the Lessee. In addition,
Purchasing Concepts, Inc. (PCI) contributed its assets to a subsidiary of the
Lessee and that subsidiary assumed PCI's liabilities. TBC and PCI are related
through common ownership. The Lessee and its subsidiaries are the successors to
the businesses of BMC, Spectrum Services and PCI. As the Lessee, 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 BMC, Spectrum Services and PCI upon merger into or contribution
to the subsidiaries of the Lessee. In connection with the formation of the
Lessee, certain assets and liabilities of nine of the Hotels (Note 4) were
assumed by the Lessee.
3. BASIS OF PRESENTATION:
----------------------
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-month period ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1997. For further information, refer to the Lessee's consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the period ended December 31, 1996.
F-14
22
4. PERCENTAGE LEASE AGREEMENTS:
----------------------------
The Lessee leases 11 hotels (the Hotels) from Boykin Hotel Properties, L.P. (the
Partnership), a partnership in which the Company has a general partnership
interest, pursuant to long-term leases (Percentage Leases). The Hotels are
located in Cleveland, Ohio (2), Columbus, Ohio; Buffalo, New York; Berkeley,
California; Raleigh, North Carolina; Charlotte, North Carolina (2); Ft. Myers,
Florida; and Melbourne, Florida (2).
The Percentage Leases have noncancelable terms ranging from four to ten years,
subject to earlier termination on the occurrence of certain contingencies, as
defined. The Percentage Leases do not contain renewal terms. The Lessee is
required to pay the higher of minimum rent, as defined, or a 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 is at 6% of such revenues in all of the Percentage Leases.
Both the threshold amounts used in computing percentage rent and minimum rent
are subject to annual adjustments beginning January 1, 1997 based on increases
in the United States Consumer Price Index.
Other than real estate and personal property taxes, casualty insurance and
capital improvements, which are obligations of the Partnership, the Percentage
Leases require the Lessee to pay all costs and expenses incurred in the
operation of the Hotels.
The Percentage Leases require the Lessee 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 Hotels.
Future minimum rent (ignoring CPI increases) to be paid by the Lessee under the
Percentage Leases at March 31, 1997 for each of the years in the period 1997 to
2001 and in total thereafter is as follows:
1997 $ 20,729
1998 20,791
1999 20,791
2000 20,791
2001 14,693
Thereafter 40,486
--------
$138,281
========
Rent expense for the three months ended March 31, 1997 was $7,208 of which
approximately $2,172 was in excess of minimum rent.
5. RELATED PARTY TRANSACTIONS:
---------------------------
At March 31, 1997, the Lessee has a receivable from the Partnership of $442,
primarily for the reimbursement of capital expenditure costs incurred on behalf
of the Partnership.
At March 31, 1997, the Lessee has a receivable from ($62) and a payable to
($357) the former owners of the subsidiaries of the Lessee and the Initial
Hotels.
At March 31, 1997, the Lessee has a payable to The Boykin Group of $263 related
to the formation of the Lessee.
F-15
23
6. PRO FORMA FINANCIAL INFORMATION (UNAUDITED):
--------------------------------------------
The following unaudited pro forma condensed statements of operations for the
three-month periods ended March 31, 1997 and 1996 are presented as if the Lessee
leased and operated from January 1, 1996 all of the Hotels owned by the
Partnership as of March 31, 1997.
The pro forma condensed statements of operations do not purport to present what
actual results of operations would have been if the Hotels were operated by the
Lessee pursuant to the Percentage Leases from January 1, 1996 or to project
results for any future period.
Three Months Ended
March 31,
---------------------
1997 1996
--------- ---------
Room revenue $16,974 $15,592
Food and beverage revenue 6,421 6,260
Other hotel revenue 1,206 1,179
Other revenue 771 507
--------- ----------
Total revenues 25,372 23,538
--------- ----------
Departmental expenses of hotels 9,269 8,739
Cost of goods sold of nonhotel operations 168 293
Percentage Lease expense 7,713 6,994
Other expenses 7,681 7,115
--------- ----------
Net income $ 541 $ 397
========= ==========
7. SUBSEQUENT EVENT:
-----------------
In April 1997, the Partnership purchased a hotel located in French Lick, Indiana
which was leased to the Lessee pursuant to a long-term Percentage Lease.
F-16
24
INITIAL HOTELS
--------------
COMBINED BALANCE SHEET
----------------------
AS OF MARCH 31, 1996
--------------------
(unaudited, amounts in thousands)
ASSETS
------
INVESTMENTS IN HOTEL PROPERTIES, at cost:
Land $ 8,572
Buildings and improvements 96,456
Furniture and equipment 37,407
Construction in progress 1,765
-----------
144,200
Less- Accumulated depreciation 65,433
-----------
Net investment in hotel properties 78,767
CASH AND CASH EQUIVALENTS 3,202
ACCOUNTS RECEIVABLE, net of allowance for doubtful
accounts of $57 3,882
INSURANCE CLAIM RECEIVABLE 663
RECEIVABLES FROM AFFILIATE 92
INVENTORIES 442
PREPAIDS AND OTHER ASSETS 1,189
CASH HELD IN ESCROW 2,418
DEFERRED EXPENSES, net 2,838
---------
$ 93,493
=========
The accompanying notes to combined financial statements
are an integral part of this combined balance sheet.
F-17
25
INITIAL HOTELS
--------------
COMBINED BALANCE SHEET
----------------------
AS OF MARCH 31, 1996
--------------------
(unaudited, amounts in thousands)
LIABILITIES AND PARTNERS' DEFICIT
---------------------------------
MORTGAGE NOTES PAYABLE $133,215
ADVANCES FROM AND ACCRUED INTEREST DUE TO PARTNERS 7,545
ACCOUNTS PAYABLE:
Trade 2,176
Affiliate 51
Management fees to related party 778
Bank overdraft 1,081
ACCRUED EXPENSES AND OTHER LIABILITIES 6,360
COMMITMENTS AND CONTINGENCIES -
-----------
151,206
PARTNERS' DEFICIT (57,713)
-----------
$ 93,493
===========
The accompanying notes to combined financial statements
are an integral part of this combined balance sheet.
F-18
26
INITIAL HOTELS
--------------
COMBINED STATEMENT OF OPERATIONS
--------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1996
-----------------------------------------
(unaudited, amounts in thousands)
REVENUES FROM HOTEL OPERATIONS:
Room revenue $ 13,841
Food and beverage revenue 5,673
Other revenue 1,097
----------
Total revenues 20,611
----------
EXPENSES:
Departmental expenses-
Rooms 3,209
Food and beverage 4,083
Other 575
General and administrative 1,825
Advertising and promotion 928
Utilities 933
Management fees to related party 859
Franchisor royalties and other charges 1,035
Repairs and maintenance 978
Real estate and personal property taxes, insurance
and rent 923
Interest expense 3,763
Interest expense on partner advances 194
Depreciation and amortization 1,807
Other 95
----------
Total expenses 21,207
----------
Loss before extraordinary item (596)
EXTRAORDINARY ITEM -- LOSS ON EARLY
EXTINGUISHMENT OF DEBT (1,315)
----------
NET LOSS $ (1,911)
==========
The accompanying notes to combined financial statements
are an integral part of this combined statement.
F-19
27
INITIAL HOTELS
--------------
COMBINED STATEMENT OF CASH FLOWS
--------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1996
-----------------------------------------
(unaudited, amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,911)
Adjustments to reconcile net loss to net cash provided by
operating activities-
Net loss of Pacific Ohio Partners for the period
October 1, 1995 to December 31, 1995, excluded from
the combined statements of operations (69)
Depreciation and amortization expense 2,386
Deferred interest expense on partner advances 194
Extraordinary loss on early extinguishment of debt 1,315
Payments for franchise fees and other deferred costs (151)
Changes in assets and liabilities-
Receivables (1,221)
Inventories, prepaids and other assets (367)
Cash held in escrow 189
Accounts payable, accrued expenses and other
liabilities 807
------------
Net cash provided by operating
activities 1,172
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements and additions to hotel properties, net (284)
Purchase of assets of Lake Norman Hotels (9,721)
------------
Net cash used for investing activities (10,005)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on mortgage notes payable (41,837)
Proceeds from refinancing and new borrowings of
mortgage debt 51,173
Payment of debt prepayment premium and debt
issuance costs (165)
Payments on advances from partners (400)
Payments for deferred financing costs (171)
Capital contributions 1,126
Cash distributions paid (600)
------------
Net cash provided by financing
activities 9,126
------------
F-20
28
NET CHANGE IN CASH AND CASH EQUIVALENTS $ 293
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 2,909
------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 3,202
============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 3,540
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITIES:
Prepayment penalty financed with additional
borrowing $ 1,246
The accompanying notes to combined financial statements
are an integral part of this combined statement.
F-21
29
INITIAL HOTELS
--------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
AS OF MARCH 31, 1996
--------------------
(unaudited, dollar amounts in thousands)
1. ORGANIZATION AND BASIS OF PRESENTATION:
---------------------------------------
Organization
- ------------
The Initial Hotels consist of the following hotels:
Number of
Property Name Location Rooms
- -------------------------------------- --------------------------- -----------
Berkeley Marina Marriott Berkeley, California 373
Buffalo Marriott Buffalo, New York 356
Cleveland Airport Marriott Cleveland, Ohio 375
Cleveland Marriott East Beachwood, Ohio 403
Columbus Marriott North Columbus, Ohio 300
Melbourne Quality Suites Inn Melbourne, Florida 208
Radisson Inn Sanibel Gateway Ft. Myers, Florida 157
Hampton Inn Charlotte, N. Carolina 117
Holiday Inn Charlotte, N. Carolina 119
Boykin Management Company (BMC) was involved in the development of each of the
above hotels except the Hampton Inn and Holiday Inn and has managed all of the
Initial Hotels excluding the Hampton Inn and Holiday Inn since their respective
inceptions. The hotels were owned by partnerships (Boykin Partnerships) in which
the shareholders of The Boykin Company (TBC), BMC's parent company, and certain
officers and employees of BMC (collectively, BMC Affiliates) have significant
direct and indirect ownership interests.
As of March 31, 1996, the Initial Hotels were owned as follows:
Partnership Interest
-----------------------
BMC Third
Affiliates Party
------------ ----------
Berkeley Marina Associates, L.P. (BMLP) 100% 0%
Buffalo Hotel Joint Venture (BHJV) 50% 50%
Pacific Ohio Partners (POP) 100% 0%
Beachwood Hotel Joint Venture (Beachwood) 35% 65%
Columbus Hotel Joint Venture (CHJV) 50% 50%
Melbourne Oceanfront Hotel Associates (MOHA) 100% 0%
Fort Myers Hotel Partnership (FMHP) 100% 0%
B.B.G., I, L.L.C. (BBG) 46% 54%
F-22
30
Boykin Lodging Company (the Company) is an Ohio corporation which has been
established to acquire equity interests in hotel properties.
The Company sold 8,275,000 shares of its common stock in an initial public
offering on November 4, 1996. On November 29, 1996, the underwriters exercised
their overallotment option and purchased an additional 1,241,250 of the
Company's common shares (together with the initial public offering, the
Offering). The Company contributed all of the net proceeds of the Offering to
Boykin Hotel Properties, L.P., an Ohio limited partnership (the Partnership) in
exchange for an approximate 84.5% general partnership interest and a $40 million
convertible note (the Note). The Company intends to qualify as a real estate
investment trust pursuant to Sections 856 - 860 of the Internal Revenue Code.
The partners of the Boykin Partnerships contributed their respective partnership
interests to the Partnership in exchange for cash and partnership interests. The
Partnership used a portion of the proceeds from the sale of the general
partnership interest and the Note to the Company to retire mortgage indebtedness
encumbering the Initial Hotels. All of the Initial Hotels are leased to Boykin
Management Company Limited Liability Company (the Lessee) pursuant to operating
leases which contain provisions for rent based on the revenues of the Initial
Hotels. The Lessee is an affiliate of TBC.
Basis of Presentation
- ---------------------
Management believes that these combined financial statements result in a more
meaningful presentation of the Initial Hotel businesses acquired by the
Partnership and thus appropriately reflect the historical financial position and
results of operations of the predecessor of the Company. All significant
intercompany balances and transactions have been eliminated.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to 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 of the combined financial position of the
Initial Hotels as of March 31, 1996 and the results of their operations and cash
flows for the three-month period ended March 31, 1996 have been included.
Operating results for the three-month period ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1996. For further information refer to the combined financial
statements of the Initial Hotels and footnotes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 1996.
2. ACCOUNTING PERIODS:
-------------------
POP has a fiscal year end of September 30. In order to show comparable
operations during the quarter ended March 31, 1996, POP's operating results were
adjusted to exclude the three-month period October 1 to December 31, 1995. The
total revenues of POP excluded from the combined statement of operations for the
quarter ended March 31, 1996 was $3,328 and total net loss was $69.
In the opinion of management, the effect of nonconforming period ends is not
material to the combined financial statements.
F-23
31
3. ACQUISITION:
------------
On February 8, 1996, BBG acquired the Holiday Inn and Hampton Inn from Norman
Associates and Norman Associates II in exchange for aggregate cash consideration
of $9,721. BBG funded the purchase price with first and second mortgage debt
borrowings aggregating $9,500 and contributed capital. The acquisition was
accounted for as a purchase and, accordingly, the operating results of the
Holiday Inn and Hampton Inn have been included in the accompanying combined
financial statements commencing February 8, 1996.
Following is pro forma data assuming that the acquisition of the Holiday Inn and
the Hampton Inn discussed above occurred as of January 1, 1996. The primary pro
forma adjustments to historical operating results are (i) to increase
depreciation expense for the effect of the purchase accounting adjustments to
the carrying values of investments in hotel properties; (ii) to adjust
management fee expense of the Holiday Inn and Hampton Inn; and (iii) to increase
interest expense to reflect the terms of the new mortgage debt and the
amortization of related deferred financing costs.
1996
-----------
Total revenues $21,027
Loss before extraordinary item (687)
Net loss (2,002)
4. MORTGAGE NOTES PAYABLE:
-----------------------
Mortgage notes payable had various repayment terms and had various scheduled
maturity dates during the period 1998 to 2004. Interest rates on the mortgage
notes ranged from 8.54% to 13.25%. Certain of the mortgage notes required the
payment of additional interest upon maturity or repayment in full. The
additional interest was charged to interest expense utilizing the effective
interest rate method over the contractual term of the notes and was $380 for the
quarter ended March 31, 1996. All of the mortgage notes payable were
collateralized by investments in hotel properties and were paid off with a
portion of the proceeds from the Offering.
Debt Extinguishment
- -------------------
The refinancing and concurrent payment of a prepayment penalty on the BHJV note
resulted in an extraordinary loss due to the early extinguishment of debt in the
amount of $1,315 for the quarter ended March 31, 1996.
5. RELATED PARTY TRANSACTIONS:
---------------------------
A substantial portion of the Initial Hotels' management and accounting functions
were performed by BMC, for a fee computed as specified in each hotel's
management agreement. The base management fee is based on percentages of hotel
revenues of 3% or 3.5% except for the Holiday Inn and Hampton Inn for which the
fees are calculated as 5% of hotel revenues. In addition, if specified operating
results are achieved, an incentive fee was due to BMC. The management agreements
with BMC expired at various dates through September 30, 2010.
Certain other costs relating to purchasing and design services are incurred by
an affiliate of BMC and billed to the hotels. Such purchases approximated $25
for the quarter ended March 31, 1996. Furthermore, the hotels made purchases of
hotel furnishings through an
F-24
32
affiliate of BMC. These purchases amounted to approximately $150 for the quarter
ended March 31, 1996.
Receivables from and payables to affiliates represent amounts due from or to BMC
and its affiliates applicable to insurance charges and various other items.
BBG paid a 1% asset management fee to an affiliate of its third-party owner.
6. ADVANCES FROM PARTNERS:
-----------------------
Partner advances consisted of the following:
Advances from partners used to complete
construction and to fund operation,
bearing interest at 10% per annum $2,637
Accrued interest payable on advances from partners 4,908
------
$7,545
======
The advances from partners and related accrued interest therein were paid off by
the Partnership with a portion of the proceeds from the Offering.
Total interest expense on partner advances was $194 for the quarter ended March
31, 1996.
F-25
33
BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC.
----------------------------------------------------
AND BOPA DESIGN COMPANY
-----------------------
COMBINED STATEMENT OF NET ASSETS
--------------------------------
AS OF MARCH 31, 1996
--------------------
(unaudited, amounts in thousands)
CASH AND CASH EQUIVALENTS $ 3
MANAGEMENT FEES AND OTHER RECEIVABLES
DUE FROM:
Affiliates 3,981
Other 471
DESIGN COSTS IN EXCESS OF BILLINGS 496
PROPERTY AND EQUIPMENT, net 322
PREPAID EXPENSES, DEPOSITS AND OTHER ASSETS 224
---------
Total assets 5,497
---------
ACCOUNTS PAYABLE:
Affiliates 95
Bank overdraft liability 330
Other 197
ADVANCE BILLINGS FOR DESIGN SERVICES 741
ACCRUED PAYROLL 161
OTHER ACCRUED EXPENSES 170
NOTES PAYABLE 1,570
---------
Total liabilities 3,264
---------
NET ASSETS $ 2,233
=========
The accompanying notes to combined financial statements
are an integral part of this combined statement.
F-26
34
BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC.
----------------------------------------------------
AND BOPA DESIGN COMPANY
-----------------------
COMBINED STATEMENT OF REVENUES AND EXPENSES
-------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1996
-----------------------------------------
(unaudited, amounts in thousands)
REVENUES:
Management fees-
Affiliates $ 874
Other 142
Design and other fees-
Affiliates 252
Other 299
Interest income-
Affiliates 67
Other 3
Other 43
--------
Total revenues 1,680
--------
EXPENSES:
Cost of sales and operating expenses 504
Selling, general and administrative expenses 852
Depreciation and amortization expense 18
Rent 31
Interest 36
Other, net 5
--------
Total expenses 1,446
--------
REVENUES IN EXCESS OF EXPENSES $ 234
========
The accompanying notes to combined financial statements
are an integral part of this combined statement.
F-27
35
BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC.
----------------------------------------------------
AND BOPA DESIGN COMPANY
-----------------------
AS OF MARCH 31, 1996
--------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
(unaudited, dollar amounts in thousands)
1. DESCRIPTION OF BUSINESSES:
--------------------------
Boykin Management Company (BMC), a wholly owned subsidiary of The Boykin Company
(TBC), and certain of its subsidiaries managed and operated full and limited
service hotels located throughout the United States pursuant to management
agreements. Purchasing Concepts, Inc. (PCI), related to TBC through common
ownership, provided national purchasing services to hotels and restaurants.
Bopa Design Company (doing business as Spectrum Services), a wholly owned
subsidiary of TBC since January 1, 1996, provided interior design services to
hotels and other businesses. Certain of the hotels managed by BMC and served by
PCI and Spectrum Services were related to BMC, PCI and Spectrum Services
through common ownership.
2. BASIS OF PRESENTATION:
----------------------
Pursuant to formation transactions related to the November 4, 1996 initial
public offering of Boykin Lodging Company, BMC and Spectrum Services merged into
subsidiaries of Boykin Management Company Limited Liability Company (BMCL), a
newly formed Ohio Limited Liability Company. Prior to such mergers, BMC and
Spectrum Services transferred certain assets and liabilities to TBC pursuant to
an Assignment and Assumption Agreement. In addition, PCI contributed its assets
to a subsidiary of BMCL and that subsidiary assumed PCI's liabilities.
BMCL and its subsidiaries are the successors to the businesses of BMC, PCI and
Spectrum Services. BMCL is the lessee of nine hotels formerly affiliated with
TBC which were acquired by Boykin Hotel Properties, L.P., a partnership in which
Boykin Lodging Company is the general partner. The hotels are leased pursuant to
long-term leases which provide for the payment of rents based on percentages of
hotel revenues.
The accompanying financial statements present on a historical combined basis the
net assets of BMC, PCI and Spectrum Services that ultimately were merged into or
contributed to BMCL and its subsidiaries and the related revenues and expenses
of such businesses. Assets and liabilities of BMC, PCI and Spectrum Services
which were not merged into or contributed to BMCL and its subsidiaries and the
items of revenues and expenses related to such assets and liabilities have been
excluded from the accompanying financial statements. Accordingly, the
accompanying financial statements are not intended to be a complete presentation
of the combined assets, liabilities, revenues and expenses of BMC, PCI and
Spectrum Services (collectively, the Combined Entities).
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to 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
F-28
36
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the net assets of the Combined Entities as of March 31, 1996 and their revenues
and expenses for the three-month period ended March 31, 1996 have been included.
Operating results for the three-month period ended March 31, 1996 are not
necessarily indicative of the results that may be expected for a full year. For
further information, refer to the combined financial statements of the Combined
Entities and footnotes thereto included in Boykin Lodging Company's annual
report on Form 10-K for the year ended December 31, 1996.
3. REVENUES:
---------
BMC has management agreements with several entities to manage the operations of
hotels and restaurants. Generally, BMC receives a fee based upon percentages of
revenues. In certain management contracts, BMC is entitled to additional
incentive fees in the event the managed property achieves specified operating
results. Certain contracts also include limitations on management fees, or
restrict payment of earned fees to BMC based upon the defined cash flow of the
related property. PCI provides national purchasing services to hotels and
restaurants and Spectrum Services provides interior design services to hotels
and other businesses.
Revenues from affiliates in the accompanying combined statements of revenues and
expenses represent revenues earned by the Combined Entities on goods or services
provided to various hotel properties in which the respective owners of the
Combined Entities or their affiliates had direct or indirect ownership
interests.
Other revenues consisted primarily of telephone commissions.
4. NOTES PAYABLE:
--------------
Notes payable consisted of the following at March 31, 1996:
Installment note payable to a bank in quarterly
installments of $75, plus interest at prime plus
1/2%; last installment due September 1, 1999;
guaranteed by TBC and certain TBC shareholders $ 925
$1,000 line of credit with a bank, due on demand;
bearing interest at prime; guaranteed by TBC and
certain TBC shareholders 645
--------
$1,570
========
All of the debt shown above was retired by BMCL upon completion of the formation
transactions discussed in Note 2.
5. COMMITMENTS AND CONTINGENCIES:
------------------------------
BMC was a guarantor of the mortgage debt (only in the event certain specified
limited events occur) of the following entities:
F-29
37
Debt Outstanding
Borrower March 31, 1996
---------------------------------------------- ----------------
Melbourne Oceanfront Hotel Associates $13,000
Fort Myers Hotel Partnership 4,900
Berkeley Marina Associates Limited Partnership 29,000
Pacific Ohio Partners 19,350
All of the guaranteed debt shown above was paid off by Boykin Hotel Properties,
L.P. on November 4, 1996.
6. RELATED PARTY TRANSACTIONS:
---------------------------
Management fees and other receivables due from affiliates are comprised of the
following at March 31, 1996:
Management fees receivable $ 797
Design fees receivable 49
Loans and interest receivable from Boykin Columbus Joint
Venture (BCJV) 2,941
Other (reimbursable expenses, etc.) 194
------
$3,981
======
In general, the above amounts are due from partnerships or joint ventures in
which certain owners and officers of PCI, Spectrum Services or TBC, had
ownership interests. These partnerships or joint ventures owned hotel properties
which were managed by BMC.
The shareholders of TBC, certain of their family members and certain officers of
BMC are material partners in BCJV. BMC advanced funds to BCJV in connection with
the construction of a hotel in Columbus, Ohio and to fund operating deficits of
that hotel. The loans receivable from BCJV accrued interest at 10% per annum.
Interest income earned on the loans to BCJV was $67 for the quarter ended March
31, 1996. The loans and interest receivable from BCJV were paid off on November
4, 1996.
Accounts payable to affiliates are comprised of property insurance retro premium
adjustments and telephone commissions received by BMC and payable to the various
affiliated hotels at the respective statement dates.
Advance billings for design services are related primarily to billings to
affiliates.
F-30
38
EXHIBIT INDEX
Sequentially
Numbered
Exhibit Pages
------- ------------
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 *
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedules
<FN>
* Incorporated by reference from Amendment No. 3 to the Company's
registration statement on Form S-11 (the "Form S-11") filed on (Registration No.
333-6341) October 24, 1996. Each of the above exhibits has the same exhibit
number in the Form S-11.