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 March 31, 1999 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 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 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, 1999: 17,061,638
PART I
ITEM 1. FINANCIAL STATEMENTS
BOYKIN LODGING COMPANY
INDEX TO FINANCIAL STATEMENTS
BOYKIN LODGING COMPANY:
Consolidated Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998................................................3
Consolidated Statements of Income for the Three Months
Ended March 31, 1999 and 1998 (unaudited)............................4
Consolidated Statement of Shareholders' Equity for the Three Months
Ended March 31, 1999 (unaudited).....................................5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 (unaudited)............................6
Notes to Consolidated Financial Statements................................7
BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND SUBSIDIARIES:
Consolidated Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998...............................................13
Consolidated Statements of Operations for the Three Months
Ended March 31, 1999 and 1998 (unaudited)...........................14
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 (unaudited)...........................15
Notes to Consolidated Financial Statements...............................16
BOYKIN LODGING COMPANY
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
(Unaudited)
March 31, December 31,
1999 1998
----------- ------------
ASSETS
Investment in hotel properties, net $ 594,614 $ 595,132
Cash and cash equivalents 890 5,643
Rent receivable from lessees:
Related party lessees 5,039 4,748
Third party lessees 1,119 547
Deferred expenses, net 2,985 3,159
Restricted cash 3,177 4,330
Other assets 1,248 1,503
--------- ---------
$ 609,072 $ 615,062
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings against credit facility $ 158,000 $ 156,000
Term note payable 130,000 130,000
Accounts payable and accrued expenses 6,736 6,521
Dividends/distributions payable 8,626 8,618
Due to lessees:
Related party lessees 770 2,971
Third party lessees 874 1,775
Minority interest in joint ventures 11,001 11,251
Minority interest in operating partnership 11,269 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; 17,061,638 and 17,044,361 shares
outstanding March 31, 1999 and December 31, 1998,
respectively, -- --
Additional paid-in capital 308,229 307,512
Retained deficit (26,433) (21,296)
--------- ---------
Total shareholders' equity 281,796 286,216
--------- ---------
$ 609,072 $ 615,062
--------- ---------
--------- ---------
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
3
BOYKIN LODGING COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
1999 1998
---- ----
Revenues:
Lease revenue from related party $ 15,621 $ 8,647
Other lease revenue 3,773 2,213
Interest income 68 54
-------- --------
19,462 10,914
-------- --------
Expenses:
Real estate related depreciation and amortization 7,140 3,220
Real estate and personal property taxes, insurance
and ground rent 2,597 1,524
General and administrative 1,427 799
Interest expense 4,979 1,168
Amortization of deferred financing costs 159 130
-------- --------
16,302 6,841
-------- --------
Income before minority interests 3,160 4,073
Minority interest in joint ventures (112) (44)
Minority interest in operating partnership (166) (380)
-------- --------
Net income applicable to common shares $ 2,882 $ 3,649
-------- --------
-------- --------
Earnings per share:
Basic $ 0.17 $ 0.32
Diluted $ 0.17 $ 0.32
Weighted average number of common shares outstanding:
Basic 17,047 11,342
Diluted 17,047 11,447
The accompanying notes to consolidated financial statements
are an integral part of these statements.
4
BOYKIN LODGING COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
Additional
Common Paid-In Retained
Shares Capital Deficit Total
---------- --------- --------- ---------
Balance, December 31, 1998 17,044,361 $ 307,512 $(21,296) $ 286,216
Issuance of common shares 17,277 217 -- 217
Issuance of share warrant -- 500 -- 500
Dividends declared -- -- (8,019) (8,019)
Net income -- 2,882 2,882
---------- --------- ---------- ---------
Balance, March 31, 1999 17,061,638 $ 308,229 $ (26,433) $ 281,796
---------- --------- ---------- ---------
---------- --------- ---------- ---------
The accompanying notes to consolidated financial statements
are an integral part of this statement.
5
BOYKIN LODGING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED, AMOUNTS IN THOUSANDS)
1999 1998
-------- --------
Cash flows from operating activities:
Net income $ 2,882 $ 3,649
Adjustments to reconcile net income to net cash flow
provided by operating activities-
Depreciation and amortization 7,299 3,350
Minority interests 278 424
Changes in assets and liabilities-
Rent receivable (863) (669)
Restricted cash 1,153 --
Other assets 180 (489)
Accounts payable and accrued expenses 432 (473)
Due to lessees (3,102) 1,108
------- --------
Net cash flow provided by operating activities 8,259 6,900
------- --------
Cash flows from investing activities:
Acquisitions of hotel properties -- (37,075)
Improvements and additions to hotel properties (6,532) (7,437)
------- --------
Net cash flow used for investing activities (6,532) (44,512)
------- --------
Cash flows from financing activities:
Payment of dividends and distributions (8,618) (4,893)
Borrowings against credit facility 2,000 36,200
Repayment of borrowings against credit facility -- (96,750)
Net proceeds from issuance of common shares -- 105,134
Proceeds from issuance of share warrant 500 --
Distributions to joint venture minority interest partners, net (362) (139)
Cash payments for redemption of certain limited partnership interests -- (967)
------- --------
Net cash flow (used for) provided by financing activities (6,480) 38,585
------- --------
Net change in cash and cash equivalents (4,753) 973
Cash and cash equivalents, beginning of period 5,643 1,855
------- --------
Cash and cash equivalents, end of period $ 890 $ 2,828
------- --------
------- --------
The accompanying notes to consolidated financial statements
are an integral part of these statements.
6
BOYKIN LODGING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 Lodging 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"), issuing a total of 9,516,250 common shares, including exercise of the
underwriters' over-allotment option. In conjunction with its IPO, Boykin
Lodging contributed approximately $133,898 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 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.
On February 24, 1998, Boykin completed a follow-on public equity
offering, issuing additional 4,500,000 common shares. The net proceeds of
approximately $106,313 were contributed to the Partnership, increasing Boykin
Lodging Company's 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 Boykin completed its merger with Red Lion Inns
Limited Partnership, in which Boykin Lodging 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 common shares issued in the merger were valued at $25.83 per
share, the five-day average trading price of Boykin's shares before the
merger announcement. The issuance of Boykin's common shares in the merger
increased Boykin Lodging's ownership percentage in the Partnership to 92.2%.
As part of Boykin's acquisitions in 1997 and 1998, Boykin established
new strategic alliances with four hotel operators and purchased five hotels
with them through joint venture structures. The following table sets forth
the joint venture agreements established in 1997 and 1998:
7
Boykin Lessee/JV
Lessee/JV Ownership Ownership Date of Hotel
Name of Joint Venture Partner Percentage Percentage Hotel Owned Under Joint Venture Purchase
- --------------------- --------- ----------- ---------- ------------------------------- -------------
BoyStar Ventures, L.P. MeriStar 91% 9% Holiday Inn Minneapolis West July 1997
Shawan Road Hotel L.P. Davidson 91% 9% Marriott's Hunt Valley Inn July 1997
Boykin San Diego LLC Outrigger 91% 9% Hampton Inn San Diego Airport/Sea World November 1997
Boykin Kansas City LLC MeriStar 80% 20% DoubleTree Kansas City November 1997
RadBoy Mt. Laurel LLC Radisson 85% 15% Radisson Hotel Mt. Laurel June 1998
As of March 31, 1999 Boykin owned 31 hotels containing a total of
8,689 guest rooms located in 16 different states.
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-month period ended March 31,
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.
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.
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.
8
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 common share, Boykin's current common share dividend.
3. NET INCOME PER SHARE AND PARTNERSHIP UNIT:
Boykin Lodging's basic and diluted earnings per share for three
months ended March 31, 1999 under SFAS No. 128, "Earnings per Share" are as
follows:
1999 1998
---- ----
Basic earnings per common share $0.17 $0.32
Diluted earnings per common share $0.17 $0.32
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 March 31, 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 months ended March 31, 1999 was 18,338,000. For the three months
ended March 31, 1998 the basic and diluted weighted average number of common
shares and limited partnership units outstanding was 12,658,000 and
12,763,000, respectively.
4. CREDIT FACILITY:
Boykin has an unsecured credit facility with a group of banks which,
effective April 1, 1999, enables Boykin to borrow up to $200,000, subject to
borrowing base and loan-to-value limitations, at a rate of interest that
fluctuates at LIBOR plus 1.40% to 1.75% (6.6% at March 31, 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 March 31, 1999 and December 31,
1998, outstanding borrowings against the credit facility were $158,000 and
$156,000, respectively.
9
The credit facility requires Boykin, among other things, to maintain
a minimum net worth, a coverage ratio of EBITDA to debt service, and a
coverage ratio of EBITDA to debt service and fixed charges. Further, Boykin
is required to maintain the franchise agreement at each hotel and to maintain
its REIT status. Boykin was in compliance with its covenants at March 31,
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-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 maintain certain financial
covenants. OLP was in compliance with these covenants at March 31, 1999 and
December 31, 1998.
6. PERCENTAGE LEASE AGREEMENTS:
The percentage leases have noncancelable remaining terms ranging from
two to ten years, subject to earlier termination on the occurrence of certain
contingencies, as defined. The rent due under each percentage lease is the
greater of minimum rent, as defined, or percentage rent. Percentage rent
applicable to room and other hotel revenue varies by lease and is calculated
by multiplying fixed percentages by the total amounts of such revenues over
specified threshold amounts. Both the minimum rent and the revenue thresholds
used in computing percentage rents are subject to annual adjustments based on
increases in the United States Consumer Price Index ("CPI"). Percentage rent
applicable to food and beverage revenues is calculated by multiplying fixed
percentages by the total amounts of such revenues. Percentage Lease revenue
for the three months ended March 31, 1999 and 1998 was
10
$19,394 and $10,860, respectively, of which approximately $4,180 and $2,302,
respectively, was in excess of minimum rent.
Boykin Lodging recognizes lease revenue for interim and annual
reporting purposes on an accrual basis pursuant to the terms of the
respective percentage leases.
Future minimum rentals (ignoring future CPI increases) to be received
by Boykin from BMC and from other lessees pursuant to the percentage leases
for each of the years in the period 1999 to 2003 and in total thereafter are
as follows:
Related Party Other
Lessees Lessees Totals
------------- --------- -----------
Remainder of 1999 $ 36,945 $ 6,807 $ 43,752
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
--------- -------- ---------
$ 203,069 $ 61,587 $ 264,656
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 a significant source of Boykin's percentage lease revenue through March
31, 1999. At March 31, 1999 and December 31, 1998, Boykin had rent receivable
of $5,039 and $4,748, respectively, due from related party lessees.
Boykin Lodging paid Spectrum Design Services $287 for design services
through March 31, 1999. Of this total, $120 was for design services, $126
represented purchasing services and $41 was reimbursement of expenses
incurred while performing services for the hotels during 1999.
At March 31, 1999 and December 31, 1998, Boykin had a payable to
related party lessees of $770 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 three-month periods ended March 31, 1999 and 1998, noncash
financing transactions consisted of $8,626 and $7,207, respectively, of
dividends and Partnership distributions which were declared but not paid as
of March 31, 1999 and 1998, respectively.
11
Interest paid during the three-month periods ended March 31, 1999 and
1998 was $4,998 and $1,598, respectively. In the first quarter of 1999,
Boykin issued 17,277 common shares, valued at $217 under Boykin's Long-Term
Incentive Plan.
9. PRO FORMA FINANCIAL INFORMATION:
The pro forma financial information set forth below for the first
quarter of 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.
Three Months
Ended
March 31, 1998
--------------
Revenues:
Lease revenue $ 18,791
Interest income 39
--------
Expenses: 18,830
Real estate related depreciation and amortization 6,516
Real estate and personal property taxes, insurance and ground rent 2,400
General and administrative 799
Interest expense 4,676
Amortization of deferred financing costs 168
--------
14,559
Net income before minority interest 4,271
Minority interest 453
--------
Net income $ 3,818
--------
--------
Net income per share
Basic $ .22
Diluted $ .22
12
BOYKIN MANAGEMENT COMPANY
LIMITED LIABILITY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
(Unaudited)
March 31, December 31,
ASSETS 1999 1998
- ------ ----------- ------------
Cash and cash equivalents $ 19,101 $ 12,973
Accounts receivable:
Trade, net of allowance for doubtful accounts
of $130 and $166 at March 31, 1999 and
December 31, 1998, respectively 9,051 8,097
Related party lessors 770 2,971
Other 244 178
Inventories 2,568 2,060
Property and equipment, net 411 434
Investment in Boykin Lodging Company 241 248
Prepaid expenses and other assets 2,532 2,383
-------- --------
Total assets $ 34,918 $ 29,344
-------- --------
-------- --------
LIABILITIES AND MEMBERS' CAPITAL
Rent payable to related party lessors $ 5,039 $ 4,748
Accounts payable:
Trade 3,409 3,114
Advance deposits 1,605 774
Bank overdraft liability 4,980 4,806
Accrued expenses:
Accrued payroll 1,560 633
Accrued vacation 2,610 2,250
Accrued sales, use and occupancy taxes 2,067 1,856
Accrued management fee 5,077 4,044
Other accrued liabilities 5,463 3,080
-------- --------
Total liabilities 31,810 25,305
-------- --------
Members' capital:
Capital contributed 3,000 3,000
Retained earnings 358 1,282
Accumulated other comprehensive loss (250) (243)
-------- --------
Total members' capital 3,108 4,039
-------- --------
Total liabilities and members' capital $ 34,918 $ 29,344
-------- --------
-------- --------
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
13
BOYKIN MANAGEMENT COMPANY
LIMITED LIABILITY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED, AMOUNTS IN THOUSANDS)
1999 1998
---- ----
Revenues:
Room revenue $ 34,751 $ 32,518
Food and beverage revenue 17,266 15,928
Other hotel revenue 3,328 2,989
Other revenue 525 755
-------- --------
Total revenues 55,870 52,190
-------- --------
Expenses:
Departmental expenses of hotels:
Rooms 8,733 8,001
Food and beverage 12,717 12,161
Other 1,849 1,563
Cost of goods sold of non-hotel operations 15 251
Percentage lease expense 15,621 14,734
General and administrative 6,204 5,937
Advertising and promotion 3,040 2,631
Utilities 3,050 2,520
Franchisor royalties and other charges 1,726 1,683
Repairs and maintenance 1,869 2,015
Depreciation and amortization 30 22
Management fee expense 1,769 1,787
Other expense 171 16
-------- --------
Total expenses 56,794 53,321
-------- --------
Net loss $ (924) $ (1,131)
-------- --------
-------- --------
Comprehensive loss $ (931) $ (1,131)
-------- --------
-------- --------
The accompanying notes to consolidated financial statements
are an integral part of these statements.
14
BOYKIN MANAGEMENT COMPANY
LIMITED LIABILITY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED, AMOUNTS IN THOUSANDS)
1999 1998
-------- --------
Cash flows from operating activities:
Net loss $ (924) $ (1,131)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 30 22
Changes in assets and liabilities:
Accounts receivable 1,181 (9,894)
Inventories (508) (1,404)
Prepaid expenses and other assets (149) (1,418)
Rent payable 291 1,591
Accounts payable 1,300 1,799
Other accrued liabilities 4,914 9,270
-------- --------
Net cash provided by (used for) operating activities 6,135 (1,165)
-------- --------
Cash flows from investing activities:
Property additions (7) (75)
-------- --------
Net cash used for investing activities (7) (75)
-------- --------
Cash flows from financing activities -- --
-------- --------
Net cash used for financing activities -- --
-------- --------
Net increase in cash and cash equivalents 6,128 (1,240)
Cash and cash equivalents, beginning of period 12,973 6,862
-------- --------
Cash and cash equivalents, end of period $ 19,101 $ 5,622
-------- --------
-------- --------
The accompanying notes to consolidated financial statements
are an integral part of these statements.
15
BOYKIN MANAGEMENT COMPANY
LIMITED LIABILITY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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
16
3. BASIS OF PRESENTATION:
The separate financial statements of BMC's subsidiaries have been
presented on a consolidated basis with BMC. All significant intercompany
transactions and balances have been eliminated. These financial statements
have been prepared in accordance with generally accepted accounting
principles for the interim financial information and with the instructions
for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 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.
The percentage leases have noncancellable remaining terms ranging from
two to nine 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.
17
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.
Future minimum rent (ignoring CPI increases) to be paid by BMC and
Westboy under their respective percentage lease agreements at March 31, 1999
for each of the years in the period 1999 to 2003 and in total thereafter is
as follows:
Remainder of 1999 $ 36,945
2000 49,261
2001 42,960
2002 36,055
2003 11,439
Thereafter 26,409
---------
$ 203,069
5. RELATED PARTY TRANSACTIONS:
Percentage lease expense payable to the Partnership (including OLP in
1999) was $15,621 and $8,647 for the three months ended March 31, 1999 and
1998, respectively.
At March 31, 1999 and December 31, 1998, BMC (including Westboy) had
receivables from the Partnership (including OLP) of $770 and $2,971,
respectively, primarily for the reimbursement of capital expenditure costs
incurred on behalf of the Partnership and OLP.
At March 31, 1999 and December 31, 1998, BMC (including OLP) had
payables to the Partnership (including OLP) of $5,039 and $4,748,
respectively, for amounts due pursuant to the percentage leases.
18
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:
- acquiring upscale, full-service commercial and resort hotels that
will increase our cash flow and are purchased at a discount to
their replacement cost;
- 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
- maximizing revenue growth in our hotels through -
- strong management performance from our lessee/operators;
- selective renovation;
- expansion and development; and
- brand repositioning.
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.
19
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 currently own 31 hotels containing a total of 8,689 guest rooms
located in 16 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 lessees'
ability to make payments to us pursuant to the percentage leases is dependent
primarily upon the operations of the hotels.
FIRST QUARTER HIGHLIGHTS AND OUTLOOK FOR THE REMAINDER OF 1999
Refer to the "Results of Operations" section below for discussion of our
first quarter results compared to 1998 as well as the operational results of
BMC.
During the first quarter, we continued our renovation program, spending
$6.5 million, or approximately ten percent of hotel sales. The majority of
these capital expenditures went into four of our DoubleTree hotels, which
underwent major guest room renovations. We plan on spending a total of
approximately $25 million in 1999, which is approximately eight percent of
our expected hotel revenues. The majority of this amount will be spent
renovating six of our DoubleTree hotels, as part of a $20 million renovation
program expected to be complete by mid-2000. We also plan on renovating guest
rooms and public space at our Cleveland Marriott East, Holiday Inn
Minneapolis West and Radisson Hotel Mt. Laurel. 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 we are focusing our
renovation activities 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.
20
On February 1, 1999, we formed 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 that manages a portfolio of
approximately $6 billion. This joint venture provides us with the ability to
continue our acquisition and growth strategies with private capital at a time
when public capital sources are limited, and when we expect to see attractive
buying opportunities. AEW will provide $50 million of equity capital for the
joint venture, and we will provide approximately $17 million and serve as the
operating member of the joint venture. Combined with debt financing, the
initial capital commitments would allow the joint venture to complete
approximately $175 million of acquisitions over a 24-month period. The joint
venture agreement also contains provisions for AEW and Boykin to double their
respective capital commitments under certain circumstances, which could
result in total acquisitions by the joint venture of approximately $350
million. In addition, as part of the transaction, we 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.
Looking at the remainder of the year and beyond, we are optimistic about
our portfolio's growth prospects. In spite of new hotels opening this year in
certain of our markets, we anticipate a positive impact on our results of
operations stemming from the hotels we renovated and repositioned in 1998 and
those we are renovating in 1999. We continue to actively seek acquistions,
but we are being selective in terms of yield and earnings criteria. We
continue to actively market the sale of our four non-strategic DoubleTree
hotels acquired last May, however, we have decided to pull our two hotels
near Charlotte, North Carolina off the market as the offers we received were
too low and these two hotels generate solid cash flows. We also continue to
consider expansions at a few of our hotels as well as the development or sale
of land parcels to maximize the value of our portfolio.
21
RESULTS OF OPERATIONS
The following discusses our results of operations and those of BMC for
the quarter ended March 31, 1999 compared to the same period in 1998.
BOYKIN LODGING COMPANY
Quarter ended March 31, 1999 compared to 1998
Our percentage lease revenue increased 78.6% to $19.4 million in 1999,
from $10.9 million for the same period in 1998 because the number of hotels
we owned increased from 19 to 31 at March 31, 1998 and 1999, respectively.
Percentage lease revenue payable by BMC and Westboy represented $15.6
million, or 80.5% of total percentage lease revenue in the 1999 period,
compared to $8.6 million, or 79.6% 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 decreased to $2.9 million for the three months ended March
31, 1999, compared to $3.6 million in 1998. As a percent of total revenue,
net income decreased to 14.8% in 1999 from 33.4% in 1998, primarily resulting
from the following items:
- an increase in real estate related depreciation and amortization
from $3.2 million, or 29.5% of total revenues in 1998, to $7.1
million, or 36.7% in 1999;
- an increase in interest expense to $5.0 million in 1999, or 25.6%
of total revenues, compared to $1.2 million, or 10.7%, in 1998.
The increase in the size of our hotel portfolio caused these increases.
New debt associated with our 1998 acquisitions and the Red Lion merger
increased our interest expense in 1999, despite lower average interest rates
in 1999 compared to 1998.
General and administrative expenses increased $.6 million to $1.4
million, or 7.3% of revenues, primarily due to increased payroll expense
related to the increase in the size of our portfolio.
Our funds from operations ("FFO") for the quarter ended March 31, 1999
was $10.1 million compared to $7.2 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.
22
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 due to functional
requirements to conserve funds for capital expenditures and property
acquisitions, and other commitments and uncertainties. The following is a
reconciliation between net income and FFO for the three months ended March
31, 1999 and 1998, respectively, (in thousands):
1999 1998
---- ----
Net income $ 2,882 $ 3,649
Real estate related depreciation and amortization 7,140 3,220
Minority interest 278 424
FFO applicable to joint venture minority interest (199) (71)
-------- -------
Funds from operations $ 10,101 $ 7,222
-------- -------
-------- -------
23
The following table illustrates key operating statistics of our
portfolio for the three months ended March 31, 1999, regardless of ownership:
Three Months Ended
March 31,
------------------
1999 1998 (a)
---- --------
All hotels (31 hotels)
Hotel revenues $ 68,461 $ 66,438
REVPAR $ 56.52 $ 55.43
Occupancy 61.4% 60.4%
Average daily rate $ 92.07 $ 91.79
Initial Hotels (9 hotels)
Hotel revenues $ 21,280 $ 21,214
REVPAR $ 67.43 $ 67.03
Occupancy 70.2% 70.2%
Average daily rate $ 96.09 $ 95.50
DoubleTree Portfolio (10 hotels)
Hotel revenues $ 25,527 $ 25,034
REVPAR $ 52.64 $ 52.58
Occupancy 62.9% 62.5%
Average daily rate $ 83.69 $ 84.15
Acquired Hotels (12 hotels) (b)
Hotel revenues $ 21,654 $ 20,190
REVPAR $ 52.05 $ 49.41
Occupancy 53.3% 51.0%
Average daily rate $ 97.56 $ 96.93
(a) includes predecessors' results.
(b) Represents the operating results of hotels acquired by Boykin since our
IPO, other than the DoubleTree portfolio.
BMC
Quarter ended March 31, 1999 compared to 1998
For the quarter ended March 31, 1999, BMC's hotel revenues increased
7.6%, to $55.3 million, compared to $51.4 million for the same period in
1998. The increase was primarily because of the March 12, 1998 commencement
of the percentage leases related to the Highpoint Radisson and Knoxville
Hilton, from which BMC experienced a full quarter's results of operations in
1999. The increase was also due to increased revenues at Florida hotels and
the DoubleTree portfolio in 1999 compared to 1998.
24
Percentage lease expense for the quarter ended March 31, 1999 increased
6.0%, to $15.6 million, compared to $14.7 million for the same period in
1998, primarily due to a full quarter in 1999 from the Highpoint and
Knoxville hotels. 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 $41.2 million in the quarter ended
March 31, 1999 compared to $38.3 million for the same period in 1998. As a
percent of hotel revenues, the departmental and other hotel operating
expenses decreased slightly to 74.4% in 1999 from 74.5% in 1998, resulting in
a slightly smaller net loss of $.9 million for the quarter ended March 31,
1999 compared to a net loss of $1.1 million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of cash to meet our cash requirements, including
distributions to shareholders, is our share of the Partnership's 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.
During 1997, 1998, and the first quarter of 1999, BMC realized net
income (loss) of $1,681, $47, and ($924), respectively. The loss in the first
quarter is consistent with the first quarter of 1998 and is due to the
seasonality of BMC's business as 20 out of BMC's 25 hotels maintain higher
occupancy rates in the second and third quarters. At March 31, 1999 BMC had
total members' capital of $3.1 million, and total cash of $19.1 million.
As of March 31, 1999, we had $.9 million of unrestricted cash and cash
equivalents, $3.2 million of restricted cash for the payment of capital
expenditures, real estate tax and insurance and we had outstanding borrowings
totaling $158.0 million and $130.0 million against our credit facility and
term note payable, respectively. In May 1999, the borrowings under our credit
facility increased to $164.0 million, primarily to fund capital expenditures
for significant renovations at four DoubleTree hotels.
Effective April 1, 1999, we have a $200 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 term note payable, please see Notes 4
and 5, 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.
25
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 over two years. Securities issued under this registration
statement may be preferred shares, depository shares, common shares or any
combination thereof, and may be issued at 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
facility 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 - BOYKIN LODGING
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 and non-information
technology systems, and applications used by us, are being reviewed,
evaluated and modified or replaced, if necessary, to ensure all such
financial, information and operational systems are Year 2000 compliant.
26
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:
For our corporate facility, we are in the phase of assessing our
hardware components and critical corporate business applications, all of
which are expected to be modified or upgraded, as necessary, to ensure Year
2000 compliance by the end of the second quarter of 1999.
Hotel Properties:
We are communicating with our lessees and other vendors with whom we do
significant business to determine their readiness of Year 2000 compliance.
For all of our hotels, we have gained an understanding of the process which
our lessees have undertaken to address the risk assessment, validation,
remediation and contingency plans related to Year 2000 compliance.
These processes have included the following:
- - completion of an inventory and assessment of all computerized systems,
applications and hardware by internal personnel;
- - prioritization of items representing critical business applications; and
- - estimation of remediation costs.
Most of our lessees are using internal personnel, who are determining
the level of resources needed, necessary modifications or upgrades,
remediation and contingency plans to become Year 2000 compliant. Our lessees
have informed us that they have dedicated the tools and resources to address
all Year 2000 issues in an effort to be Year 2000 compliant during the third
quarter of 1999.
There can be no assurance that the efforts related to the hotel
properties will be sufficient to make these properties' computerized systems
and applications Year 2000 compliant in a timely manner or that the allocated
resources will be sufficient. A failure to become Year 2000 compliant could
affect the integrity of the hotel property guest check-in, billing and
accounting functions. Certain physical hotel property machinery and equipment
could also fail, resulting in safety risks and customer dissatisfaction. We
cannot predict at this time the most reasonably likely worst case scenario
relating to Year 2000 issues.
27
Year 2000 Project Costs
We estimate that total unexpended costs for the Year 2000 compliance
review, evaluation, assessment and remediation efforts for the corporate
assurance that actual costs will not exceed this amount. During 1998 and the
first quarter of 1999, we spent approximately $2.3 million related to
computerized systems and equipment which are 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 the
corporate facility and hotel properties to provide for the most reasonably
likely worst case scenarios regarding Year 2000 compliance. This contingency
plan is expected to be completed in the third quarter of 1999.
SEASONALITY
Our hotels' operations historically have been seasonal. Twenty-six 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. We anticipate that our cash flow from the percentage leases will be
sufficient to enable us to continue to make quarterly distributions at the
current rate for the next twelve months. To the extent that cash flow from
operations is insufficient during any quarter because of temporary or
seasonal fluctuations in percentage lease revenue, we expect to utilize 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.
28
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 March 31, 1999, the fair
market value of the term note payable would be approximately $126.1 million.
In 1998, we also entered into a new unsecured credit facility with a
group of banks, which, effective April 1, 1999 enables us to borrow up to
$200 million, subject to borrowing base and loan-to-value limitations, at a
rate of interest that fluctuates at LIBOR plus 1.40% to 1.75%. 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.
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 our financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 1, 1999 in connection with the formation of the joint
venture with AEW, Boykin, in a private transaction exempt from the
registration requirement of the Securities Act of 1933 (the "Act") pursuant
to Section 4(2) of the Act, (i) entered into a Stock Purchase Option
Agreement with AEW pursuant to which AEW, after the end of the two-year
investment period, will have the option to convert its capital invested in
the joint venture into Boykin convertible preferred shares and (ii) sold AEW
one warrant for $500,000. The grant of the option under the Stock Purchase
Option Agreement was made for $10 and other good and valuable consideration.
The Stock Purchase Option Agreement was entered as part of the larger joint
venture arrangement with AEW. As a result, the consideration for the option
can not be quantified.
If issued pursuant to the Stock Purchase Option Agreement upon the
conversion of AEW's capital invested in the joint venture the preferred
shares will be convertible into common shares at $16.48 per common share and
have a minimum cumulative annual dividend currently equivalent to $1.88 per
common share, Boykin's current common share annual dividend.
29
The warrant gives AEW the right to buy up to $20 million of Boykin's
preferred or common shares (at Boykin's option) for $16.48 per 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 on a dollar-for-dollar basis as the last $20 million of AEW's
capital is invested under joint venture agreements. See Note 2 to the
consolidated financial statements of Boykin Lodging Company included in this
Form 10-Q for further information relating the terms of the Stock Purchase
Option Agreement and the warrant.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1*** Agreement and Plan of Merger dated as of December 30, 1997
by and among Red Lion Inns Limited Partnership, Red Lion
Properties, Inc., Red Lion Inns Operating L.P., Boykin Hotel
Properties, L.P., Boykin Lodging Company, Boykin Acquisition
Corporation I, Inc., Boykin Acquisition Corporation II,
Inc., and Boykin Acquisition Partnership, L.P.
3.1* Amended and Restated Articles of Incorporation
3.2* Code of Regulations
4.1* Specimen Share Certificate
10.1* Limited Partnership Agreement of Boykin Hotel Properties, L.P.
10.2* Form of Registration Rights Agreement
10.3* Long-Term Incentive Plan
10.4* Directors' Deferred Compensation Plan
10.5* Employment Agreement between Boykin Lodging and Robert W. Boykin
10.6* Employment Agreement between Boykin Lodging and Raymond P.
Heitland
10.7* Employment Agreement between Boykin Lodging and Mark L. Bishop
10.8* Form of Percentage Lease
10.9* Intercompany Convertible Note
10.10* Agreements with General Partners of the Contributed
Partnerships
10.11* Form of Noncompetition Agreement
10.12* Alignment of Interests Agreement
10.13** Description of Employment Arrangement between Boykin Lodging
and Paul A. O'Neil
10.14*** Description of Employment Arrangement between Boykin Lodging
and Richard C. Conti
10.15**** Limited Liability Company Agreement of Boykin/AEW LLC dated
as of February 1, 1999.
10.16 Stock Purchase Option Agreement by and among Boykin Lodging
Company, Boykin Hotel Properties, L.P. and AEW Partners III,
L.P. dated as of February 1, 1999.
31
10.17 Warrant to Purchase Class A Cumulative Preferred Stock,
Series 1999-A of Boykin Lodging Company dated as of February
1, 1999.
10.18 Registration Rights Agreement by and among Boykin Lodging Company
and AEW Partners III, L.P. dated as of February 1, 1999.
27 Financial Data Schedule
* Incorporated by reference from Amendment No. 3 to Boykin
Lodging's Registration Statement on Form S-11 (Registration
No. 333-6341) (the "Form S-11") filed on October 24, 1996.
Each of the above exhibits has the same exhibit number in
the Form S-11.
** Incorporated by reference from Boykin Lodging's Form 10-Q
for the quarter ended June 30, 1997.
*** Incorporated by reference from Boykin Lodging's Form 10-Q
for the quarter ended June 30, 1998.
**** Certain portions of Exhibit 10.15 have been omitted pursuant
to a request for confidential treatment under Rule 24b-2
of the Securities Exchange Act of 1934. The omitted portions
have been filed separately with the Securities and Exchange
Commission. The omitted portions of Exhibit 10.15 are marked
with an Asterisk [*].
32
(b) Reports on Form 8-K
Date Filed Items Reported Summary
- ------------------------------ --------------------- -----------------------------------------
(1) March 3, 1999 (date of Item 5 (other events) Boykin announced the formation of a
Report- February 1, 1999) joint venture with AEW Partners III, L.P.
33
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. The information contained in this
Form 10-Q and in the documents incorporated by reference herein identifies
important factors that could cause such differences.
With respect to any such forward-looking statement that includes a
statement of its underlying assumptions or bases, 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
-------------------------
May 14, 1999 Robert W. Boykin
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Paul A. O'Neil
-------------------------
May 14, 1999 Paul A. O'Neil
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
34
EXHIBIT INDEX
Exhibits
--------
2.1*** Agreement and Plan of Merger dated as of December 30, 1997
by and among Red Lion Inns Limited Partnership, Red Lion
Properties, Inc., Red Lion Inns Operating L.P., Boykin Hotel
Properties, L.P., Boykin Lodging Company, Boykin Acquisition
Corporation I, Inc., Boykin Acquisition Corporation II,
Inc., and Boykin Acquisition Partnership, L.P.
3.1* Amended and Restated Articles of Incorporation
3.2* Code of Regulations
4.1* Specimen Share Certificate
10.1* Limited Partnership Agreement of Boykin Hotel Properties, L.P.
10.2* Form of Registration Rights Agreement
10.3* Long-Term Incentive Plan
10.4* Directors' Deferred Compensation Plan
10.5* Employment Agreement between Boykin Lodging and Robert W. Boykin
10.6* Employment Agreement between Boykin Lodging and Raymond P. Heitland
10.7* Employment Agreement between Boykin Lodging and Mark L. Bishop
10.8* Form of Percentage Lease
10.9* Intercompany Convertible Note
10.10* Agreements with General Partners of the Contributed
Partnerships
10.11* Form of Noncompetition Agreement
10.12* Alignment of Interests Agreement
10.13** Description of Employment Arrangement between Boykin Lodging
and Paul A. O'Neil
10.14*** Description of Employment Arrangement between Boykin Lodging
and Richard C. Conti
10.15**** Limited Liability Company Agreement of Boykin/AEW LLC dated
as of February 1, 1999.
35
10.16 Stock Purchase Option Agreement by and among Boykin Lodging
Company, Boykin Hotel Properties, L.P. and AEW Partners III, L.P.
dated as of February 1, 1999.
10.17 Warrant to Purchase Class A Cumulative Preferred Stock,
Series 1999-A of Boykin Lodging Company dated as of
February 1, 1999.
10.18 Registration Rights Agreement by and among Boykin Lodging
Company and AEW Partners III, L.P. dated as of February 1, 1999.
27 Financial Data Schedule
* Incorporated by reference from Amendment No. 3 to Boykin
Lodging's Registration Statement on Form S-11 (Registration
No. 333-6341) (the "Form S-11") filed on October 24, 1996.
Each of the above exhibits has the same exhibit number in
the Form S-11.
** Incorporated by reference from Boykin Lodging's Form 10-Q
for the quarter ended June 30, 1997.
*** Incorporated by reference from Boykin Lodging's Form 10-Q
for the quarter ended June 30, 1998.
**** Certain portions of Exhibit 10.15 have been omitted pursuant
to a request for confidential treatment under Rule 24b-2
of the Securities Exchange Act of 1934. The omitted portions
have been filed separately with the Securities and Exchange
Commission. The omitted portions of Exhibit 10.15 are marked
with an Asterisk [*].
36