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 June 30, 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
August 13, 1999: 17,146,209
PART I
ITEM 1. FINANCIAL STATEMENTS
BOYKIN LODGING COMPANY
INDEX TO FINANCIAL STATEMENTS
BOYKIN LODGING COMPANY:
Consolidated Balance Sheets as of June 30, 1999 (unaudited)
and December 31, 1998................................................ 3
Consolidated Statements of Income for the Three and Six Months
Ended June 30, 1999 and 1998 (unaudited)............................. 4
Consolidated Statement of Shareholders' Equity for the Six Months
Ended June 30, 1999 (unaudited)...................................... 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998 (unaudited)............................. 6
Notes to Consolidated Financial Statements................................ 7
BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND
SUBSIDIARIES:
Consolidated Balance Sheets as of June 30, 1999 (unaudited)
and December 31, 1998................................................ 12
Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 1999 and 1998 (unaudited)............................. 13
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998 (unaudited)............................. 14
Notes to Consolidated Financial Statements................................ 15
BOYKIN LODGING COMPANY
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
(Unaudited)
June 30, December 31,
1998 1999
----------- ------------
ASSETS
Investment in hotel properties, net $594,271 $595,132
Cash and cash equivalents 2,170 5,643
Rent receivable from lessees:
Related party lessees 8,958 4,748
Third party lessees 1,667 547
Deferred expenses, net 3,331 3,159
Restricted cash 3,029 4,330
Other assets 1,330 1,503
--------- ---------
$614,756 $615,062
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings against credit facility $163,000 $156,000
Term note payable 130,000 130,000
Accounts payable and accrued expenses 8,363 6,521
Dividends/distributions payable 8,665 8,618
Due to lessees:
Related party lessees 802 2,971
Third party lessees 1,329 1,775
Minority interest in joint ventures 11,287 11,251
Minority interest in operating partnership 11,140 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; 17,144,082 and 17,044,361 shares outstanding
June 30, 1999 and December 31, 1998, respectively, -- --
Additional paid-in capital 309,402 307,512
Retained deficit (27,960) (21,296)
Unearned compensation - restricted shares (1,272) --
--------- ---------
Total shareholders' equity 280,170 286,216
--------- ---------
$614,756 $615,062
--------- ---------
--------- ---------
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
3
BOYKIN LODGING COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
Revenues:
Lease revenue from related party $19,547 $13,955 $35,168 $22,601
Other lease revenue 4,305 3,409 8,078 5,622
Interest income 95 128 163 182
------- ------- ------- -------
23,947 17,492 43,409 28,405
------- ------- ------- -------
Expenses:
Real estate related depreciation and amortization 7,107 5,096 14,247 8,316
Real estate and personal property taxes, insurance
and ground rent 2,873 2,036 5,470 3,560
General and administrative 1,575 1,103 3,002 1,901
Interest expense 5,005 2,583 9,983 3,751
Amortization of deferred financing costs 159 145 318 275
------- ------- ------- -------
16,719 10,963 33,020 17,803
------- ------- ------- -------
Income before minority interests and extraordinary item 7,228 6,529 10,389 10,602
Minority interest in joint ventures (219) (201) (332) (245)
Minority interest in operating partnership (478) (470) (644) (850)
------- ------- ------- -------
Income before extraordinary item 6,531 5,858 9,413 9,507
------- ------- ------- -------
Extraordinary item- Loss on early extinguishment of
debt, net of minority interest of $110 -- (1,138) -- (1,138)
------- ------- ------- -------
Net income applicable to common shares $6,531 $4,720 $9,413 $8,369
------- ------- ------- -------
------- ------- ------- -------
Earnings per share:
Basic $.38 $.31 $.55 $.63
Diluted $.38 $.31 $.55 $.62
Weighted average number of common shares outstanding:
Basic 17,082 15,412 17,065 13,388
Diluted 17,082 15,436 17,065 13,462
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 SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
Unearned
Additional Compensation
Common Paid-In Retained Restricted
Shares Capital Deficit Shares Total
---------- -------- --------- ------- --------
Balance, December 31, 1998 17,044,361 $307,512 $(21,296) $ -- $286,216
Issuance of common shares 99,721 1,390 -- (1,390) --
Issuance of share warrant -- 500 -- -- 500
Dividends declared -- -- (16,077) -- (16,077)
Amortization of unearned compensation -- -- -- 118 118
Net income -- -- 9,413 -- 9,413
---------- -------- -------- ------- --------
Balance, June 30, 1999 17,144,082 $309,402 $(27,960) $(1,272) $280,170
---------- -------- -------- ------- --------
---------- -------- -------- ------- --------
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 SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED, AMOUNTS IN THOUSANDS)
1999 1998
---------- ----------
Cash flows from operating activities:
Net income $ 9,413 $ 8,369
Adjustments to reconcile net income to net cash flow provided by
operating activities-
Extraordinary item-noncash loss on early extinguishment of debt -- 1,138
Depreciation and amortization 14,565 8,591
Amortization of unearned compensation 118 --
Minority interests 976 1,095
Changes in assets and liabilities-
Rent receivable (5,330) (5,726)
Restricted cash 1,301 --
Other 96 689
Accounts payable and accrued expenses 1,842 3,389
Due to lessees (2,615) 308
-------- ---------
Net cash flow provided by operating activities 20,366 17,853
-------- ---------
Cash flows from investing activities:
Acquisitions of Red Lion Inns Operating L.P., net of commonshares
issued of $80,333 and cash acquired of $11 -- (191,004)
Acquisition of hotel properties, net of joint venture contribution -- (76,288)
Improvements and additions to hotel properties, net (13,281) (17,563)
-------- ---------
Net cash flow used for investing activities (13,281) (284,855)
-------- ---------
Cash flows from financing activities:
Payments of dividends and distributions (17,243) (12,100)
Borrowings against credit facility 7,000 148,200
Repayment of borrowings against credit facility -- (96,750)
Term note borrowing -- 130,000
Payment of deferred financing costs (520) (2,975)
Net proceeds from issuance of common shares -- 104,563
Proceeds from issuance of share warrant 500 --
Distributions to joint venture minority interest partners, net (295) (138)
Cash payments for redemption of certain limited partnership interests -- (967)
-------- ---------
Net cash flow (used for) provided by financing activities (10,558) 269,833
-------- ---------
Net change in cash and cash equivalents (3,473) 2,831
Cash and cash equivalents, beginning of period 5,643 1,855
-------- ---------
Cash and cash equivalents, end of period $ 2,170 $ 4,686
-------- ---------
-------- ---------
The accompanying notes to consolidated financial statements
are an integral part of these statements.
6
BOYKIN LODGING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
1. BACKGROUND:
Boykin Lodging Company is a real estate investment trust that owns
hotels throughout the United States and leases its properties to established
hotel operators. Boykin's principal source of revenue is lease payments from
lessees pursuant to percentage lease agreements. Percentage lease revenue is
based upon the room, food and beverage and other revenues of Boykin's hotels.
The lessees' ability to make payments to Boykin pursuant to the percentage
leases is dependent primarily upon the operations of the hotels.
INITIAL PUBLIC OFFERING AND MAJOR EVENTS SINCE THE IPO
In November 1996, Boykin completed its initial public offering
("IPO"), 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 an 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 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 June 30, 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 and six month period ended
June 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. For further information,
refer to the consolidated financial statements and footnotes thereto included
in Boykin's annual report on Form 10-K for the year ended December 31, 1998.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform with the current year presentation.
2. JOINT VENTURE WITH AEW:
On February 1, 1999, Boykin formed 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. Due to its ownership interest of 25% in the joint venture, Boykin
accounts for its investment utilizing the equity method.
Boykin and AEW plan to use the joint venture to take advantage of
acquisition opportunities in the lodging industry. The joint venture
agreement contains provisions for AEW and Boykin to double their respective
capital commitments under certain circumstances. In addition, as part of the
transaction, Boykin will receive incentive returns based on the performance
of acquired assets as well as other compensation as a result of the joint
venture's activities.
After the end of the two-year investment period, AEW has the option
to convert its capital invested in the joint venture into Boykin convertible
preferred shares. Pursuant to the venture agreements, AEW also purchased a
warrant for $500. The warrant gives AEW the right to buy up to $20,000 of
Boykin's preferred or common shares (at Boykin's election) for $16.48 a
share. The warrant is exercisable after the two-year investment period, and
expires one year after it becomes exercisable. The amount of the warrant will
be reduced and eliminated under the terms of the agreement on a dollar for
dollar basis as the last $20,000 of AEW's $50,000 of capital is invested. If
issued, the preferred shares would be convertible into common shares at
$16.48 per common share and have a minimum cumulative annual dividend
equivalent to $1.88 per common share, Boykin's current common share dividend.
As of June 30, 1999 there were no acquisitions made nor operations related to
the joint venture.
8
3. NET INCOME PER SHARE AND PARTNERSHIP UNIT:
Boykin Lodging's basic and diluted earnings per share for the three and
six months ended June 30, 1999 under SFAS No. 128, "Earnings per Share" are
as follows:
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
------------- -------------
1999 1998 1999 1998
-------- -------- -------- --------
Basic earnings per common share $ .38 $ .31 $ .55 $ .63
Diluted earnings per common share $ .38 $ .31 $ .55 $ .62
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 June 30, 1999 and 1998, a total of 1,291,000 limited
partnership units were issued and outstanding. The basic and diluted weighted
average number of common shares and limited partnership units outstanding for
the three and six months ended June 30, 1999 was 18,374,000 and 18,356,000,
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 2.25% (6.7% at June 30, 1999), as defined.
Boykin is required to pay a .25% fee on the unused portion of the credit
facility. The credit facility expires in June 2000, with an additional
one-year extension at Boykin's option. As of June 30, 1999 and December 31,
1998, outstanding borrowings against the credit facility were $163,000 and
$156,000, respectively.
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 June 30, 1999
and December 31, 1998.
5. TERM NOTE PAYABLE:
On May 22, 1998, OLP entered into a $130,000 term loan agreement. The
loan expires in June 2023 and may be prepaid without penalty or defeasance
after May 21, 2008. The loan bears interest at a fixed rate of 6.9% for ten
years, and at a new fixed rate to be determined thereafter. The loan requires
interest-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 compliance with certain
financial covenants. OLP was in compliance with these covenants at June 30,
1999 and December 31, 1998.
6. PERCENTAGE LEASE AGREEMENTS:
9
The percentage leases have noncancelable remaining terms ranging from
two to nine years, subject to earlier termination on the occurrence of
certain contingencies, as defined. The rent due under each percentage lease
is the greater of minimum rent, as defined, or percentage rent. Percentage
rent applicable to room and other hotel revenue varies by lease and is
calculated by multiplying fixed percentages by the total amounts of such
revenues over specified threshold amounts. Both the minimum rent and the
revenue thresholds used in computing percentage rents are subject to annual
adjustments based on increases in the United States Consumer Price Index
("CPI"). Percentage rent applicable to food and beverage revenues is
calculated by multiplying fixed percentages by the total amounts of such
revenues. Percentage Lease revenue for the three months ended June 30, 1999
and 1998 was $23,852 and $17,364 respectively, of which approximately $8,622
and $5,456 respectively, was in excess of minimum rent. Percentage lease
revenue for the six months ended June 30, 1999 and 1998 was $43,246 and
$28,223, respectively, of which approximately $12,802 and $7,758,
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 $ 24,630 $ 4,538 $ 29,168
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
-------- ------- --------
$190,754 $59,318 $250,072
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 June
30, 1999. At June 30, 1999 and December 31, 1998, Boykin had rent receivable
of $8,958 and $4,748, respectively, due from related party lessees.
Boykin Lodging paid Spectrum Design Services, a subsidiary of BMC, $465
for design and other services through June 30, 1999. Of this total, $228 was
for design services, $194 represented purchasing services and $43 was
reimbursement of expenses incurred while performing services for the hotels
during 1999.
At June 30, 1999 and December 31, 1998, Boykin had a payable to related
party lessees of $802 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 six-month periods ended June 30, 1999 and 1998, noncash
financing transactions consisted of $8,665 and $8,671 respectively, of
dividends and Partnership distributions which were declared but not paid as
of June 30, 1999 and 1998, respectively.
10
Interest paid during the six-month periods ended June 30, 1999 and 1998
was $10,063 and $1,147 respectively. In the first half of 1999, Boykin issued
99,721 common shares, valued at $1,390 under Boykin's Long-Term Incentive
Plan.
9. PRO FORMA FINANCIAL INFORMATION:
The pro forma financial information set forth below for the six months
ended June 30, 1998 is presented as if the following significant transactions
had been consummated as of January 1, 1998:
- the share offering of 4,500,000 common shares in February 1998;
- the issuance of 3,109,606 common shares in May 1998 related to the
Red Lion merger;
- the acquisitions of properties by Boykin in 1998; and
- Boykin's common share repurchase of 114,500 shares in 1998.
The pro forma financial information is not necessarily indicative of
what the actual results of operations of Boykin would have been assuming
these transactions had been consummated as of January 1, 1998, nor does it
purport to represent the results of operations for future periods.
Six Months Ended
June 30, 1998
-------------
Revenues:
Lease revenue $41,411
Interest income 167
--------
41,578
--------
Expenses:
Real estate related depreciation and amortization 13,307
Real estate and personal property taxes, insurance and ground rent 4,954
General and administrative 1,901
Interest expense 9,556
Amortization of deferred financing costs 334
--------
--------
Net income before minority interest and extraordinary item 11,526
Minority interest 1,046
--------
Income before extraordinary item $10,480
--------
--------
Income per share before extraordinary item
Basic $.61
Diluted $.61
11
BOYKIN MANAGEMENT COMPANY
LIMITED LIABILITY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
(Unaudited)
June 30, December 31,
ASSETS 1999 1998
- ------ ------------ ------------
Cash and cash equivalents $ 22,994 $ 12,973
Accounts receivable:
Trade, net of allowance for doubtful accounts of $111 and $166 at
June 30, 1999 and December 31, 1998, respectively 10,533 8,097
Related party lessors 802 2,971
Other 429 178
Inventories 2,289 2,060
Property and equipment, net 385 434
Investment in Boykin Lodging Company 284 248
Prepaid expenses and other assets 2,289 2,383
------------ ------------
Total assets $ 40,005 $ 29,344
------------ ------------
------------ ------------
LIABILITIES AND MEMBERS' CAPITAL
Rent payable to related party lessors $ 8,958 $ 4,748
Accounts payable:
Trade 3,584 3,114
Advance deposits 1,209 774
Bank overdraft liability 5,478 4,806
Accrued expenses:
Accrued payroll 1,959 633
Accrued vacation 2,785 2,250
Accrued sales, use and occupancy taxes 2,364 1,856
Accrued management fee 2,823 4,044
Other accrued liabilities 5,947 3,080
------------ ------------
Total liabilities 35,107 25,305
------------ ------------
Members' capital:
Capital contributed 3,000 3,000
Retained earnings 2,069 1,282
Accumulated other comprehensive loss (171) (243)
------------ ------------
Total members' capital 4,898 4,039
------------ ------------
Total liabilities and members' capital $ 40,005 $ 29,344
------------ ------------
------------ ------------
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
12
BOYKIN MANAGEMENT COMPANY
LIMITED LIABILITY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED, AMOUNTS IN THOUSANDS)
Three Months Ended Six Months Ended
June 30, June 30,
--------- --------
1999 1998 1999 1998
------ ------ ------- -------
Revenues:
Room revenue $42,291 $39,968 $77,042 $72,486
Food and beverage revenue 18,883 18,768 36,149 34,696
Other hotel revenue 3,949 4,071 7,277 7,060
Other revenue 571 809 1,096 1,564
------ ------ ------- -------
Total revenues 65,694 63,616 121,564 115,806
------ ------ ------- -------
Expenses:
Departmental expenses of hotels:
Rooms 9,609 9,460 18,342 17,461
Food and beverage 13,360 13,851 26,077 26,012
Other 2,403 2,110 4,252 3,673
Cost of goods sold of non-hotel operations - 145 15 396
Percentage lease expense 19,547 18,563 35,168 33,297
General and administrative 6,419 6,380 12,623 12,317
Advertising and promotion 3,249 2,703 6,289 5,334
Utilities 2,945 2,503 5,995 5,023
Franchisor royalties and other charges 2,065 2,011 3,791 3,694
Repairs and maintenance 1,636 2,376 3,505 4,391
Depreciation and amortization 30 23 60 45
Management fee expense 2,406 2,534 4,175 4,321
Other expense 314 (128) 485 (112)
------ ------ ------- -------
Total expenses 63,983 62,531 120,777 115,852
------ ------ ------- -------
Net income (loss) $1,711 $1,085 $787 $(46)
------ ------ ------- -------
------ ------ ------- -------
Comprehensive income (loss) $1,790 $990 $859 $(141)
------ ------ ------- -------
------ ------ ------- -------
The accompanying notes to consolidated financial statements
are an integral part of these statements.
13
BOYKIN MANAGEMENT COMPANY
LIMITED LIABILITY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED, AMOUNTS IN THOUSANDS)
1999 1998
------- ------
Cash flows from operating activities:
Net income (loss) $ 787 $ (46)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 60 45
Realized loss on investment 36 --
Changes in assets and liabilities:
Accounts receivable (518) (4,883)
Inventories (229) (1,558)
Prepaid expenses and other assets 94 (707)
Rent payable 4,210 6,485
Accounts payable 1,577 1,841
Other accrued liabilities 4,015 5,275
------- ------
Net cash provided by operating activities 10,032 6,452
------- ------
Cash flows from investing activities:
Property additions (11) (155)
------- ------
Net cash used for investing activities (11) (155)
------- ------
Cash flows from financing activities --- ---
------- ------
Net increase in cash and cash equivalents 10,021 6,297
Cash and cash equivalents, beginning of period 12,973 6,862
------- ------
Cash and cash equivalents, end of period $22,994 $13,159
------- ------
------- ------
The accompanying notes to consolidated financial statements
are an integral part of these statements.
14
BOYKIN MANAGEMENT COMPANY
LIMITED LIABILITY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS:
Boykin Management Company Limited Liability Company and its subsidiaries
(collectively, "BMC")
- lease and operate full and limited service hotels located throughout
the United States pursuant to long-term percentage leases;
- manage full and limited service hotels located throughout the United
States pursuant to management agreements;
- provide national purchasing services to hotels; and
- provide interior design services to hotels and other businesses.
2. ORGANIZATION:
BMC commenced operations on November 4, 1996 as an Ohio limited
liability company. BMC is indirectly owned by Robert W. Boykin (53.8%) and
John E. Boykin (46.2%). Robert W. Boykin is the Chairman, President and Chief
Executive Officer of Boykin Lodging Company.
Pursuant to formation transactions related to the November 4, 1996
initial public offering of Boykin Lodging, Boykin Management Company ("former
BMC") and Bopa Design Company (doing business as Spectrum Services), wholly
owned subsidiaries of The Boykin Company ("TBC"), were merged into
subsidiaries of BMC. In addition, Purchasing Concepts, Inc. ("PCI")
contributed its assets to a subsidiary of BMC and that subsidiary assumed
PCI's liabilities. TBC and PCI are related through common ownership. BMC and
its subsidiaries are the successors to the businesses of former BMC, Spectrum
Services and PCI. As BMC, former BMC, Spectrum Services and PCI were related
through common ownership, there were no purchase accounting adjustments to
the historical carrying values of the assets and liabilities of former BMC,
Spectrum Services and PCI upon the merger into or contribution to the
subsidiaries of BMC.
3. BASIS OF PRESENTATION:
The separate financial statements of BMC's subsidiaries have been
presented on a consolidated basis with BMC. All significant intercompany
transactions and balances have been eliminated. These financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions for
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and six month periods ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to BMC's
consolidated financial statements and the 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.
15
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 on an accrual basis pursuant to the provisions of
the related percentage lease agreements.
Other than real estate and personal property taxes, casualty insurance,
ground lease rental, and capital improvements, which are obligations of the
Partnership, the percentage leases require BMC to pay all costs and expenses
incurred in the operation of the BMC Hotels.
The percentage leases require BMC to indemnify Boykin Lodging Company
against all liabilities, costs and expenses incurred by, imposed on or
asserted against the Partnership in the normal course of operating the BMC
Hotels.
WESTBOY LEASE ON TEN DOUBLETREE HOTELS
Effective January 1, 1998, Westboy, LLC ("Westboy"), a wholly-owned
subsidiary of BMC, entered into a long term lease agreement with Red Lion
Inns Operating L.P. ("OLP") with terms similar to those described above. OLP
was acquired by Boykin Lodging Company on May 22, 1998. The ten
DoubleTree-licensed hotels (the "DoubleTree Hotels") leased by Westboy are
located in California, Oregon (3), Washington (3), Colorado, Idaho and
Nebraska. The hotels are managed by a subsidiary of Promus Hotel Corporation.
BMC made an initial capital contribution to Westboy of $1,000, of which $900
was funded with a demand promissory note. Assets of Westboy are not available
to pay the creditors of any other entity, except to the extent of permitted
cash distributions from Westboy to BMC. Similarly, except to the extent of
the unpaid promissory note, the assets of BMC are not available to pay the
creditors of Westboy.
Future minimum rentals (ignoring CPI increases) to be paid by BMC and
Westboy under their respective percentage lease agreements at June 30, 1999
for each of the years in the period 1999 to 2003 and in total thereafter are
as follows:
Remainder of 1999 $ 24,630
2000 49,261
2001 42,960
2002 36,055
2003 11,439
Thereafter 26,409
---------
$ 190,754
5. RELATED PARTY TRANSACTIONS:
Percentage lease expense payable to the Partnership was $19,547 and
$12,481 for the three months ended June 30, 1999 and 1998, respectively.
Percentage lease expense payable for the six months ended June 30, 1999 and
1998 was $35,168, and $22,601, respectively.
At June 30, 1999 and December 31, 1998, BMC (including Westboy) had
receivables from the Partnership (including OLP) of $802 and $2,971,
respectively, primarily for the reimbursement of capital expenditure costs
incurred on behalf of the Partnership and OLP.
At June 30, 1999 and December 31, 1998, BMC (including Westboy) had
payables to the Partnership (including OLP) of $8,958 and $4,748,
respectively, for amounts due pursuant to the percentage leases.
16
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 DEVELOPMENT
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,
issuing an additional 4.5 million common shares. The net proceeds of
approximately $106.3 million were contributed to the Partnership, increasing
our ownership percentage therein to 90.3%. The proceeds were used by the
Partnership to pay down existing indebtedness under the credit facility,
purchase limited partnership units from two unaffiliated limited partners,
fund the acquisitions of two hotels purchased in March 1998 and for general
corporate purposes.
On May 22, 1998 we completed our merger with Red Lion Inns Limited
Partnership, in which we acquired Red Lion Inns Operating L.P. ("OLP"), which
owns a portfolio of ten DoubleTree-licensed hotels. In the transaction, we
issued 3.1 million common shares and paid approximately $35.3 million in cash
to the Red Lion limited partners and general partner. The total consideration
value, including assumed liabilities of approximately $155.7 million and
common shares issued valued at $80.3 million, was $271.3 million. The
issuance of our common shares in the merger had the impact of increasing our
ownership percentage in the Partnership to 92.2%.
We 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.
SECOND QUARTER HIGHLIGHTS AND OUTLOOK FOR THE REMAINDER OF 1999
Refer to the "Results of Operations" section below for discussion of our
second quarter results compared to 1998 as well as the operational results of
BMC.
During the first half of 1999, we continued our renovation program,
spending $13.4 million, or approximately nine percent of hotel revenues. The
majority of these capital expenditures went into four of our
17
DoubleTree hotels, which underwent major guestroom renovations. The Holiday
Inn Minneapolis West, Cleveland Marriott East and Radisson Hotel Mt. Laurel
renovations are in progress. We plan to spend a total of approximately $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 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.
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 acquisitions, 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. We also
are considering expansions at a few of our hotels as well as the development
or sale of land parcels to maximize the value of our portfolio.
RESULTS OF OPERATIONS
The following discusses our results of operations and those of BMC for
the quarter ended June 30, 1999 compared to the same period in 1998.
BOYKIN LODGING COMPANY
Quarter ended June 30, 1999 compared to 1998
Our percentage lease revenue increased 37.4% to $23.9 million in 1999,
from $17.4 million for the same period in 1998. Percentage lease revenue
payable by BMC and Westboy represented $19.5 million, or 82.0% of total
percentage lease revenue in the 1999 period, compared to $14.0 million, or
80.4% of total percentage lease revenue, in 1998. The increase in percentage
lease revenue from BMC and Westboy is primarily attributable to the lease
revenue from Westboy, which commenced upon completion of the Red Lion merger.
Net income increased to $6.5 million for the three months ended June 30,
1999, from $4.7 million in 1998. As a percent of total revenue, net income
increased to 27.3% in 1999 from 27.0% in 1998, primarily resulting from the
extraordinary item in 1998 which reduced 1998 net income by $1.1 million,
offset by an increase in 1999 operating expenses.
The increase in the size of our hotel portfolio caused expenses to
increase. New debt associated with our 1998 acquisitions, the Red Lion
merger, and significant renovation activity in 1998 and 1999 increased our
interest expense in 1999, despite lower average interest rates in 1999
compared to 1998. General and administrative expenses increased $.5 million
to $1.6 million, or 6.6% of revenues because of increased payroll costs
associated with hiring management personnel to support our strategic growth
objectives. Property taxes, insurance and ground rent increased because of
higher property tax assessments associated with property purchases and
renovations that have occurred over the past 18 months.
Six Months Ended June 30, 1999 Compared to 1998
Our percentage lease revenue increased 53.2% to $43.2 million in 1999,
from $28.2 million for the same period in 1998. Percentage lease revenue
payable by BMC and Westboy represented $35.2 million, or 81.3% of total
percentage lease revenue in the 1999 period, compared to $22.6 million, or
80.0% of total percentage lease revenue, in 1998. The increase in percentage
lease revenue from BMC and Westboy is primarily attributable to the lease
revenue from Westboy, which commenced upon completion of the Red Lion merger.
Net income increased to $9.4 million for the six months ended June 30,
1999, compared to $8.4 million in 1998. As a percent of total revenue, net
income decreased to 21.7% in 1999 from 29.5% in 1998, primarily resulting
from the following items:
- - An increase in interest expense to $10.0 million in 1999 or 23.0% of total
revenues, from $3.8 million or
18
13.2% of total revenues in 1998.
- - An increase in real estate related depreciation and amortization from $8.3
million or 29.3% of total revenues in 1998, to $14.2 million or 32.8% of
total revenues in 1999.
The increase in the size of our hotel portfolio caused these increases. New
debt associated with our 1998 acquisitions and the Red Lion merger increased
our interest expense in 1999, despite lower average interest rates in 1999
compared to 1998. General and administrative expenses increased $1.1 million
to $3.0 million, or 6.9% of revenues primarily because of the hiring of
management personnel.
Our funds from operations ("FFO") for the quarter ended June 30, 1999
were $14.0 million compared to $11.3 million in 1998. The White Paper on Funds
From Operations approved by the Board of Governors of the National
Association of Real Estate Investment Trusts ("NAREIT") in March 1995 defines
FFO as net income (loss) (computed in accordance with GAAP), excluding gains
(or losses) from debt restructuring and sales of properties, plus real estate
related depreciation and amortization and after comparable adjustments for
our portion of these items related to unconsolidated entities and joint
ventures. We believe that FFO is helpful to investors as a measure of the
performance of an equity REIT because, along with cash flow from operating
activities, financing activities and investing activities, it provides
investors with another indication of the ability of a company to incur and
service debt, to make capital expenditures and to fund other cash needs.
We compute FFO in accordance with the NAREIT White Paper, which may not
be comparable to FFO reported by other REITs that do not define the term in
accordance with the current NAREIT definition or that interpret the current
NAREIT definition differently than us. FFO does not represent cash generated
from operating activities determined by GAAP and should not be considered as
an alternative to net income (determined in accordance with GAAP) as an
indication of our financial performance or to cash flow from operating
activities (determined in accordance with GAAP) as a measure of our
liquidity, nor is it indicative of funds available to fund our cash needs,
including our ability to make cash distributions. FFO may include funds that
may not be available for management's discretionary use 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 June 30,
1999 and 1998, respectively, (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- ------ --------- -------
Net income $ 6,531 $ 4,720 $ 9,413 $ 8,369
Extraordinary item --- 1,138 --- 1,138
Real estate related depreciation and amortization 7,107 5,096 14,247 8,316
Minority interest 697 671 976 1,095
FFO applicable to joint venture minority interest (316) (292) (515) (363)
-------- ------ -------- -------
Funds from operations $ 14,019 $11,333 $ 24,121 $18,555
-------- ------- -------- -------
-------- ------- -------- -------
19
The following table illustrates key operating statistics of our portfolio for
the three and six months ended June 30, 1999, regardless of ownership:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ------------------------
1999 1998 (a) 1999 1998(a)
--------- ---------- ---------- ----------
All hotels (31 hotels)
Hotel revenues $ 80,620 $ 76,517 $ 149,081 $ 142,980
REVPAR $ 66.79 $ 62.66 $ 61.70 $ 59.08
Occupancy 72.5% 67.8% 67.0% 64.2%
Average daily rate $ 92.07 $ 92.42 $ 92.07 $ 92.05
Initial Hotels (9 hotels)
Hotel revenues $ 24,744 $ 22,749 $ 46,024 $ 43,988
REVPAR $ 77.41 $ 71.22 $ 72.45 $ 69.19
Occupancy 77.8% 73.4% 74.0% 72.0%
Average daily rate $ 99.46 $ 97.02 $ 97.87 $ 96.03
DoubleTree Portfolio (10 hotels)
Hotel revenues $ 29,170 $ 30,087 $ 54,697 $ 55,120
REVPAR $ 65.83 $ 65.56 $ 59.27 $ 59.11
Occupancy 76.1% 73.6% 69.5% 68.1%
Average daily rate $ 86.47 $ 89.06 $ 85.22 $ 86.82
Acquired Hotels (12 hotels)(b)
Hotel revenues $ 26,706 $ 23,681 $ 48,360 $ 43,871
REVPAR $ 59.75 $ 53.44 $ 55.95 $ 51.44
Occupancy 65.2% 58.0% 59.3% 54.5%
Average daily rate $ 91.69 $ 92.13 $ 94.32 $ 94.36
(a) Includes predecessors' results.
(b) Represents the operating results of hotels acquired by us since our
IPO, other than the DoubleTree portfolio.
20
BMC
Quarter ended June 30, 1999 compared to 1998
For the quarter ended June 30, 1999, BMC's hotel revenues increased
3.7%, to $65.1 million, from $62.8 million for the same period in 1998. The
increase in 1999 was due to increased revenues of the Florida hotels and
hotels under renovation last year offset by lower revenues of the DoubleTree
portfolio in 1999 compared to 1998.
Percentage lease expense for the quarter ended June 30, 1999 increased
5.3%, to $19.5 million, compared to $18.6 million for the same period in
1998. Departmental and other hotel operating expenses, consisting primarily
of rooms expenses, food and beverage costs, franchise fees, utilities,
repairs and maintenance, management fees, and other general and
administrative expenses of the hotels were $44.4 million in the quarter ended
June 30, 1999 compared to $43.8 million for the same period in 1998. As a
percent of hotel revenues, the departmental and other hotel operating
expenses decreased to 68.2% in 1999 from 69.8% in 1998. The combination of
increased revenues and decreased operating expenses, as a percentage of
revenues, resulted in higher net income of $1.7 million for the quarter ended
June 30, 1999 compared to net income of $1.1 million in 1998.
Six months ended June 30, 1999 compared to 1998
For the six months ended June 30, 1999, BMC's hotel revenues increased
5.4%, to $120.5 million, compared to $114.2 million for the same period in
1998. The increase was due to increased revenues in the Florida hotels and in
hotels under renovation in 1998. This was offset by a slight decrease in the
revenues from DoubleTree hotels, four of which have been under renovation in
1999.
The percentage lease expense for the six months ended June 30, 1999
increased 5.6%, to $35.2 million, from $33.3 million for the same period in
1998 due to the increase in hotel revenues. Departmental and other hotel
operating expenses, consisting primarily of rooms expenses, food and beverage
costs, franchise fees, utilities, repair and maintenance, management fees,
and other general and administrative expenses of the hotels were $85.6
million in the six months ended June 30, 1999 compared to $82.2 million for
the same period in 1998. As a percent of hotel revenues, the departmental and
other hotel operating expenses decreased to 71.0% in 1999 from 71.9% in 1998.
This was primarily due to a decrease in departmental expenses as a percentage
of hotel revenues from 41.3% to 40.4% due to efficiencies gained in higher
volumes. Also, repairs and maintenance expenses decreased 20% to 2.9% of 1999
hotel revenues compared to 3.8% of 1998 hotel revenues, and general and
administrative expenses decreased from 10.8% of hotel revenues in 1998 to
10.5% in 1999.
BMC recorded net income of $787 for the six months ended June 30, 1999
compared to a net loss of $46 in 1998. The increase in income is primarily
due to increased revenue performance of the hotels in 1999 combined with
expense reductions.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of cash to meet our cash requirements, including
distributions to shareholders, is our 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.
As of June 30, 1999, we had $2.2 million of unrestricted cash and cash
equivalents, $3.0 million of restricted cash for the payment of capital
expenditures, real estate tax and insurance and we had outstanding borrowings
totaling $163.0 million and $130.0 million against our credit facility and
term note payable, respectively.
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, see Notes 4 and 5,
respectively, of the notes to consolidated financial statements of Boykin
Lodging Company included in this Form
21
10-Q. We may seek to negotiate additional credit facilities or issue debt
instruments. Any debt incurred or issued by us may be secured or unsecured,
long-term, medium-term or short-term, bear interest at a fixed or variable
rate, and be subject to such other terms as the Board of Directors considers
prudent.
In November 1997, we filed a shelf registration statement with the
Securities and Exchange Commission for the issuance of up to $300 million in
securities. Securities issued under this registration statement may be
preferred shares, depository shares, common shares or any combination
thereof, and may be issued at various times, depending on market conditions.
Warrants to purchase these securities may also be issued. The terms of
issuance of any securities covered by this registration statement would be
determined at the time of their offering. The 4.5 million common shares sold
in the February 28, 1998 offering were sold under this registration statement.
We anticipate that funds generated from operations and our credit
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
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.
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, our year 2000 compliance procedures are
substantially complete for identified business critical systems. We believe
that these procedures will avoid a major disruption of our business. Any
further procedures performed will be performed as needed throughout the
remainder 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
22
- - estimation of remediation costs.
Most of our lessees are using internal personnel, who have been
determining the level of resources needed, necessary modifications or
upgrades, remediation and contingency plans to become Year 2000 compliant.
Our lessees have given us their estimates of costs and resources needed
and are currently upgrading and remediating noncompliant systems. The lessees
which have not yet completed their year 2000 programs, expect to complete
purchasing of new systems by the end of the third quarter with testing and
installation of those new systems occurring in the fourth 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.
Year 2000 Project Costs
We estimate that total unexpended costs for the Year 2000 compliance
review, evaluation, assessment and remediation efforts for the corporate
facility and the hotels should not exceed $1.0 million, although there can be
no assurance that actual costs will not exceed this amount. During the first
half of 1999, we spent approximately $.9 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. 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 quarterly
distributions. No assurance can be given that we will make distributions in
the future at the current rate, or at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
In 1998 we entered into a $130 million term note payable which bears
interest at a fixed rate of 6.9% for ten years, and a new fixed rate to be
determined thereafter. The term note requires interest only payments for the
first two years, with principal repayments commencing in the third loan year
based on a 25-year amortization schedule. The term note expires in June 2023.
Assuming a 10% increase in interest rates as of June 30, 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 2.25%. Due to changes
in the U.S. and global economy, interest rates fluctuate regularly, which
creates risk that these rates may increase in the future, which would
adversely impact our interest expense and cash flows.
23
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
(a) On May 25, 1999, the Board of Directors of the Company adopted
a Shareholder Rights Agreement (the "Rights Agreement"). Pursuant to the
Rights Agreement, the Board of Directors declared a dividend distribution of
one Preferred Share Purchase Right (a "Right") for each outstanding common
share, without par value, of the Company (the "Common Shares") to
shareholders of record as of the close of business on June 15, 1999 (the
"Record Date"). In addition, one Right will automatically attach to each
Common Share issued after the Record Date and prior to the date the Rights
become exercisable. Each Right entitles the registered holder thereof to
purchase from the Company a unit (a "Preferred Unit") consisting of one
one-thousandth of a Class A Series 1999-A Noncumulative Preferred Share,
without par value, at a cash exercise price of $40.00 per Preferred Unit,
subject to adjustment.
Initially, the Rights are not exercisable and are attached to and
trade with the Common Shares outstanding as of, and all Common Shares issued
after, the Record Date. The Rights will separate from the Common Shares,
separate certificates will be distributed to holders of the Common Shares and
the Rights will become exercisable under certain circumstances following the
acquisition of, or the announcement of the commencement of a tender or
exchange offer that if consummated would result in, beneficial ownership of
15% or more of the outstanding Common Shares by any person or group. After
the acquisition of 15% or more of the outstanding Common Shares by any person
or group, proper provision will be made so that each holder of a Right (other
than that person or group, whose Rights will become null and void) thereafter
has the right to receive upon exercise that number of Preferred Units having
a market value of two times the exercise price of the Right. The acquisition
of Common Shares by AEW Partners III, L.P. under its agreements entered into
with the Company in February 1999 will not cause the Rights to become
exercisable.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the
Company in a transaction not approved by the Board of Directors of the
Company. The Rights should not interfere with any merger or other business
combination approved by the Board of Directors of the Company, since the
Rights Agreement may be amended, subject to certain limitations, or the
Rights may be redeemed, also subject to certain limitations prior to the
Company's entering into a merger or other business combination.
A copy of the Rights Agreement was filed with the Securities and
Exchange Commission on June 10, 1999 as an Exhibit to a Registration
Statement on Form 8-A. This description of the Rights does not purport to be
complete and is qualified in its entirety by reference to that Registration
Statement on Form 8-A and the Rights Agreement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Boykin held its annual meeting of the shareholders on May 25, 1999 at
the Cleveland Airport Marriott hotel in Cleveland, Ohio. At the meeting, the
shareholders approved a proposal to increase the number of common shares
reserved for issuance by 700,000, from 1,000,000 shares to 1,700,000 shares
under Boykin's Long-Term Incentive Plan. The results of the vote were as
follows:
Votes for 12,358,871
Votes against 1,981,833
Abstain 510,348
Shares not voted 2,210,586
The individuals listed below were elected to Boykin's Board of Directors,
each to hold office until the annual meeting next succeeding his election and
until his successor is elected and qualified, or until his earlier
resignation. The table below indicates the votes for, votes against, as well
as the abstentions and shares not voted for each nominee.
Name Votes For Votes Against Abstention Shares not Voted
---- --------- ------------- ---------- ----------------
Robert W. Boykin 14,430,054 0 421,003 2,210,581
Raymond P. Heitland 14,681,878 0 169,179 2,210,581
Ivan J. Winfield 14,681,889 0 169,168 2,210,581
Lee C. Howley, Jr. 14,684,574 0 166,483 2,210,581
Frank E. Mosier 14,678,488 0 172,569 2,210,581
William H. Schecter 14,687,724 0 163,333 2,210,581
Albert T. Adams 14,684,245 0 166,812 2,210,581
24
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation, as amended
3.2* Code of Regulations
4.1* Specimen Share Certificate
4.2 Dividend Reinvestment and Optional Share Purchase Plan
4.3** Shareholder Rights Agreement, dated as of May 25, 1999 between
Boykin Lodging Company and National City Bank, as rights agent
27 Financial Data Schedule
* Incorporated by reference from Amendment No. 3 to Boykin
Lodging's Registration Statement on Form S-11 (Registration
No. 333-6341) (the "Form S-11") filed on October 24, 1996.
Each of the above exhibits has the same exhibit number in
the Form S-11.
** Incorporated by reference as Exhibit 1 from the Registration
Statement on Form 8-A filed on June 10, 1999.
(b) Reports on Form 8-K
None.
25
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
-----------------------------
August 16, 1999 Robert W. Boykin
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Paul A. O'Neil
-----------------------------
August 16, 1999 Paul A. O'Neil
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
26
EXHIBIT INDEX
Exhibits
--------
3.1 Amended and Restated Articles of Incorporation, as amended
3.2* Code of Regulations
4.1* Specimen Share Certificate
4.2 Dividend Reinvestment and Optional Share Purchase Plan
4.3** Shareholder Rights Agreement, dated as of May 25, 1999 between
Boykin Lodging Company and National City Bank, as rights agent
27 Financial Data Schedule
* Incorporated by reference from Amendment No. 3 to Boykin Lodging's
Registration Statement on Form S-11 (Registration No. 333-6341) (the
"Form S-11") filed on October 24, 1996. Each of the above exhibits
has the same exhibit number in the Form S-11.
** Incorporated by reference as Exhibit 1 from the Registration
Statement on Form 8-A filed on June 10, 1999.
27