FORM
10-Q
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
(Mark
One)
|
S
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
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|
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SECURITIES
EXCHANGE ACT OF 1934
|
||
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For
the Quarterly period ended March 31, 2010
|
||
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OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
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|
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SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from
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to
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Commission
file number 0-9032
SONESTA
INTERNATIONAL HOTELS CORPORATION
(Exact
name of registrant as specified in its charter)
|
NEW YORK
|
13-5648107
|
|
|
(State
or other jurisdiction or incorporation or organization)
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(I.R.S.
Employer Identification No.)
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116 Huntington Avenue,
Boston, MA 02116
(Address
of principal executive offices) (Zip Code)
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617-421-5400
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|
(Registrant’s
telephone number, including area code)
|
|
(Former
name, former address and former fiscal year,
|
|
if
changed since last report)
|
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by section 13 or 15
(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
|
Yes
S
|
No
|
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company (as defined in Exchange
Act Rule 12b-2);
Large
Accelerated Filer Accelerated Filer Non-Accelerated
Filer
Smaller
Reporting Company S
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
|
Yes
|
No
S
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APPLICABLE
ONLY TO CORPORATE ISSUERS:
Number of
Shares of Common Stock Outstanding
As of May
12, 2010 -- $.80 par value,
Class A –
3,698,230
SONESTA
INTERNATIONAL HOTELS CORPORATION
|
Page
|
||
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Amendment
to partnership agreement of SBR-Fortune Associates, LLLP, dated as of June
18, 2009. This agreement was previously filed with our report
on Form 10-Q on August 13, 2009 but certain portions were omitted pursuant
to a request for confidential treatment at that time. The
attached is a complete copy of the agreement.
|
||
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Certifications
by the Company’s Chief Executive Officers and Vice President and
Treasurer, as required by Rule 13a-14(a)/15d-14(a) of the Securities
Exchange Act of 1934, as amended.
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||
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Certification
by Company Officers required by 18 U.S.C. Section 1350 (Section 906 of the
Sarbanes-Oxley Act of 2002).
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||
SONESTA
INTERNATIONAL HOTELS CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
March 31, 2010 (unaudited)
and December 31, 2009
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(in thousands)
|
||||||||
|
March 31, 2010
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December 31, 2009
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|||||||
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ASSETS
|
||||||||
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Current
assets:
|
||||||||
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Cash and cash
equivalents
|
$ | 26,441 | $ | 35,557 | ||||
|
Accounts and notes
receivable:
|
||||||||
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Trade, less allowance of $74 ($70
at December 31, 2009) fordoubtful accounts
|
5,010 | 5,092 | ||||||
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Other, including current
portion of long-term receivables andadvances
|
1,558 | 1,242 | ||||||
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Total accounts and notes
receivable
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6,568 | 6,334 | ||||||
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Inventories
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603 | 623 | ||||||
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Current deferred tax
assets
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553 | 476 | ||||||
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Prepaid expenses and other
current assets
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1,365 | 1,242 | ||||||
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Total current
assets
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35,530 | 44,232 | ||||||
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Restricted
cash
|
5,000 | -- | ||||||
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Long-term
receivables and advances
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1,529 | 1,354 | ||||||
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Property
and equipment, at cost:
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||||||||
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Land and land
improvements
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2,102 | 2,102 | ||||||
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Buildings
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25,721 | 25,721 | ||||||
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Furniture and
equipment
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31,459 | 30,859 | ||||||
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Leasehold
improvements
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9,122 | 9,109 | ||||||
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Projects in
progress
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-- | 64 | ||||||
| 68,404 | 67,855 | |||||||
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Less accumulated depreciation and
amortization
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34,927 | 33,585 | ||||||
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Net property and
equipment
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33,477 | 34,270 | ||||||
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Other
long-term assets
|
1,352 | 875 | ||||||
| $ | 76,888 | $ | 80,731 | |||||
See
accompanying notes to condensed consolidated financial statements.
SONESTA
INTERNATIONAL HOTELS CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
March 31, 2010 (unaudited)
and December 31, 2009
|
(in thousands)
|
||||||||
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March 31, 2010
|
December 31, 2009
|
|||||||
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
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Current
liabilities:
|
||||||||
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Current portion of long-term
debt
|
$ | 536 | $ | 594 | ||||
|
Accounts payable
|
2,866 | 2,887 | ||||||
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Advance deposits
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1,292 | 1,103 | ||||||
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Accrued income
taxes
|
562 | 327 | ||||||
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Accrued
liabilities:
|
||||||||
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Salaries and
wages
|
1,169 | 1,278 | ||||||
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Rentals
|
1,023 | 3,741 | ||||||
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Interest
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176 | 236 | ||||||
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Pension and other employee
benefits
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2,463 | 2,064 | ||||||
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Interest rate
swap
|
742 | -- | ||||||
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Other
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1,400 | 1,028 | ||||||
| 6,973 | 8,347 | |||||||
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Total current
liabilities
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12,229 | 13,258 | ||||||
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Long-term
debt
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31,464 | 31,245 | ||||||
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Pension
liability, non-current
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6,195 | 6,554 | ||||||
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Other
non-current liabilities
|
992 | 1,082 | ||||||
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Deferred
tax liabilities
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1,017 | 1,939 | ||||||
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Commitments
and contingencies
|
||||||||
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Stockholders’
equity:
|
||||||||
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Common stock:
|
||||||||
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Class A, $.80 par
value
|
||||||||
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Authorized--10,000
shares
|
||||||||
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Issued – 6,102 shares at stated
value
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4,882 | 4,882 | ||||||
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Retained
earnings
|
34,542 | 35,734 | ||||||
|
Treasury shares – 2,404, at
cost
|
(12,053 | ) | (12,053 | ) | ||||
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Accumulated other comprehensive
loss
|
(2,380 | ) | (1,910 | ) | ||||
|
Total
stockholders’ equity
|
24,991 | 26,653 | ||||||
| $ | 76,888 | $ | 80,731 | |||||
See
accompanying notes to condensed consolidated financial statements.
SONESTA INTERNATIONAL HOTELS CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in
thousands except for per share data)
|
Three Months Ended
March 31
|
||||||||
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2010
|
2009
|
|||||||
|
Revenues:
|
||||||||
|
Rooms
|
$ | 8,190 | $ | 7,419 | ||||
|
Food
and beverage
|
4,114 | 3,477 | ||||||
|
Management,
license and service fees
|
1,399 | 1,126 | ||||||
|
Parking,
telephone and other
|
1,059 | 1,081 | ||||||
| 14,762 | 13,103 | |||||||
|
Other revenues from managed and
affiliated properties
|
1,370 | 1,221 | ||||||
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Total
revenues
|
16,132 | 14,324 | ||||||
|
Costs
and expenses:
|
||||||||
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Costs
and operating expenses
|
7,313 | 6,585 | ||||||
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Advertising
and promotion
|
1,562 | 1,376 | ||||||
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Administrative
and general
|
3,075 | 3,211 | ||||||
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Human
resources
|
280 | 251 | ||||||
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Maintenance
|
878 | 846 | ||||||
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Rentals
|
1,145 | 1,525 | ||||||
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Property
taxes
|
280 | 354 | ||||||
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Depreciation
and amortization
|
1,380 | 1,355 | ||||||
| 15,913 | 15,503 | |||||||
|
Other expenses from managed and
affiliated properties
|
1,370 | 1,221 | ||||||
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Total
costs and expenses
|
17,283 | 16,724 | ||||||
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Operating
loss
|
(1,151 | ) | (2,400 | ) | ||||
|
Other
income (deductions):
|
||||||||
|
Interest
expense
|
(567 | ) | (716 | ) | ||||
|
Interest
income
|
60 | 123 | ||||||
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Foreign
exchange loss
|
(5 | ) | (11 | ) | ||||
|
Gain
(loss) on sales of assets
|
(4 | ) | 2 | |||||
| (516 | ) | (602 | ) | |||||
|
Loss
before income tax benefit
|
(1,667 | ) | (3,002 | ) | ||||
|
Income
tax benefit
|
(475 | ) | (790 | ) | ||||
|
Net
loss
|
(1,192 | ) | (2,212 | ) | ||||
|
Cash
dividends
|
-- | -- | ||||||
|
Retained
earnings at beginning of period
|
35,734 | 14,155 | ||||||
|
Retained
earnings at end of period
|
$ | 34,542 | $ | 11,943 | ||||
|
Net
loss per share of common stock
|
$ | (0.32 | ) | $ | (0.60 | ) | ||
|
Weighted
average number of shares outstanding
|
3,698 | 3,698 | ||||||
See
accompanying notes to condensed consolidated financial statements.
SONESTA INTERNATIONAL HOTELS CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Increase
(Decrease) in Cash
|
(in
thousands)
|
||||||||
|
Three
Months Ended March 31
|
||||||||
|
2010
|
2009
|
|||||||
|
Cash
used for operating activities
|
||||||||
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Net
loss
|
$ | (1,192 | ) | $ | (2,212 | ) | ||
|
Adjustments
to reconcile net loss to net cash used for operating
activities
|
||||||||
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Depreciation
and amortization of property and equipment
|
1,380 | 1,355 | ||||||
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Other
amortization
|
35 | 23 | ||||||
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Deferred
federal and state tax benefit
|
(726 | ) | (934 | ) | ||||
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Loss
(gain) on sales of assets
|
4 | (2 | ) | |||||
|
Changes
in assets and liabilities
|
||||||||
|
Restricted
cash
|
-- | 158 | ||||||
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Accounts
and notes receivable
|
33 | 613 | ||||||
|
Inventories
|
20 | 78 | ||||||
|
Prepaid
expenses and other
|
(39 | ) | (160 | ) | ||||
|
Accounts
payable
|
(21 | ) | (186 | ) | ||||
|
Advance
deposits
|
189 | 286 | ||||||
|
Federal,
foreign and state income taxes
|
200 | 118 | ||||||
|
Accrued
liabilities
|
(2,565 | ) | (4,292 | ) | ||||
|
Cash
used for operating activities
|
(2,682 | ) | (5,155 | ) | ||||
|
Cash
used for investing activities
|
||||||||
|
Expenditures
for property and equipment
|
(585 | ) | (1,847 | ) | ||||
|
Payments
received on long-term receivables and advances
|
340 | 69 | ||||||
|
Investment
in development partnership
|
-- | (842 | ) | |||||
|
Proceeds
from sales of assets
|
7 | 33 | ||||||
|
New
loans and advances
|
(958 | ) | (36 | ) | ||||
|
Cash
used for investing activities
|
(1,196 | ) | (2,623 | ) | ||||
|
Cash
used for financing activities
|
||||||||
|
Proceeds
from issuance of long-term debt
|
32,000 | -- | ||||||
|
Cost
of financing
|
(399 | ) | -- | |||||
|
Payments
on refinancing of long-term debt
|
(31,644 | ) | -- | |||||
|
Restricted
cash
|
(5,000 | ) | -- | |||||
|
Scheduled
payments on long term debt
|
(195 | ) | (291 | ) | ||||
|
Cash
dividends paid
|
-- | (925 | ) | |||||
|
Cash used for financing
activities
|
(5,238 | ) | (1,216 | ) | ||||
|
Net
decrease in cash
|
(9,116 | ) | (8,994 | ) | ||||
|
Cash
and cash equivalents at beginning of period
|
35,557 | 37,463 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 26,441 | $ | 28,469 | ||||
|
|
Supplemental Schedule
of Interest and Income Taxes
Paid
|
Cash paid
for interest in the 2010 three-month period and the 2009 three-month period was
approximately $603,000 and $708,000, respectively. Cash paid
for income taxes in the first quarter of 2010 and 2009 was approximately $51,000
and $23,000, respectively.
See
accompanying notes to condensed consolidated financial statements.
SONESTA INTERNATIONAL HOTELS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
Basis of
Presentation
|
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States 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, 2010 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2010.
The
balance sheet at December 31, 2009 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
The
Company evaluated all events and transactions that occurred after March 31, 2010
through the date this report was filed.
For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2009.
|
2.
|
Long-Term Receivables
and Advances
|
|
(in
thousands)
|
||||||||
|
March 31,2010
|
December 31,2009
|
|||||||
|
Sharm
El Sheikh, Egypt (a)
|
$ | 869 | $ | 940 | ||||
|
Sharm
El Sheikh, Egypt (b)
|
475 | -- | ||||||
|
Luxor,
Egypt (c)
|
1,089 | 1,311 | ||||||
|
St.
Maarten, Netherlands Antilles (d)
|
284 | -- | ||||||
|
Other
|
199 | 215 | ||||||
|
Total long-term receivables and
advances
|
2,916 | 2,466 | ||||||
|
Less: current
portion
|
1,387 | 1,112 | ||||||
|
Net long-term receivables and
advances
|
$ | 1,529 | $ | 1,354 | ||||
|
(a)
|
This
loan was made in January 2008 to the owners of Sonesta Beach Hotel Sharm
El Sheikh and Sonesta Club Sharm El Sheikh by converting receivables for
fees and expenses into a five-year loan, payable in monthly installments,
starting in January 2008. The Company is accounting for this
loan using an effective interest rate of 6.5%. Monthly payments
of $28,820 on this loan are paid directly from the hotels and deducted
from distributions of profits to the owner of these managed
hotels.
|
|
(b)
|
This
loan, in the original amount of $500,000, was made in January 2010 to the
owner of Sonesta Beach Resort Sharm El Sheikh. The interest
rate is 5.25%, and the loan has a three year term. Monthly
payments of principal and interest of $15,075 commenced in February
2010.
|
|
(c)
|
These
loans, in the original amount of $1,363,000, were made in August 2009 to
the owner of Sonesta St. George Hotel Luxor and Sonesta St. George I
Cruise Ship, which are both managed by the Company. The loans
consist of cash advances of $500,000, and the conversion of receivables
for fees and expenses due to the Company totaling $863,000. The
Company made these loans to assist the owner with the financing of
improvements to the Sonesta St. George Hotel Luxor, which included
additional guest rooms and meeting/function space. The interest
rate is 5.25%, and monthly payments of interest and principal commenced in
November 2009. The last payment is due October
2011.
|
SONESTA
INTERNATIONAL HOTELS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
(d)
|
In
February 2010, the Company agreed to loan up to $1,000,000 to the owners
of two hotels in St. Maarten, to which the Company licenses the use of its
name. At the same time, the license agreements for these hotels
were extended until December 2019, with a mutual cancellation option
beginning in May 2015. The proceeds will be used to fund
improvements at both of the properties. The Company expects to
fund the entire loan amount in 2010. The loans shall be repaid
in 10 annual payments of $100,000, the first of which will be due on March
31, 2011. Interest is due quarterly and will be based on LIBOR
plus a surcharge based on increases in room revenues from year to
year. The maximum surcharge is 1.5% per annum. The
Company is accounting for this loan using an effective interest rate of 6%
and has discounted the loan accordingly. The discount has been
recorded as an other long-term asset and is amortized over the remaining
term of the license agreements.
|
Management
continually monitors the collectability of its receivables and advances and
believes they are fully realizable.
|
3.
|
Borrowing
Arrangements
|
Long-Term
Debt
The
Company’s long-term debt consists of a first mortgage note payable by
Charterhouse of Cambridge Trust and Sonesta of Massachusetts, Inc., which are
the Company’s subsidiaries that own and operate the Royal Sonesta Hotel
Boston. The mortgage loan was refinanced in February
2010. A new $32,000,000 loan repaid the $31,644,000 outstanding under
the previous loan. Costs incurred in connection with the refinancing
totaled approximately $400,000, which included a 1% fee to the
lender. The new loan, which will mature March 1, 2015, has a variable
rate based on LIBOR, but the Company has entered into an interest swap agreement
that provides for a 6.4% fixed interest rate for the term of the
loan. Payments of interest and principal, based on a 25 year
amortization period, will be approximately $650,000 per quarter.
The loan
is secured by a first mortgage on the Royal Sonesta Hotel Boston property which
is included in fixed assets at a net book value of $19,012,000 at March 31,
2010. As additional security, the Company provides a $5,000,000
parent company guaranty and established a restricted cash collateral account in
the amount of $5,000,000. This cash collateral account will be
released over a two year period provided the Hotel achieves certain debt service
coverage ratios. The loan is subject to a maximum loan to value
ratio, and to minimum debt service coverage ratios, which will be tested
quarterly based on trailing twelve month earnings of the Hotel.
|
4.
|
Hotel Costs and
Operating Expenses
|
Hotel
costs and operating expenses in the accompanying condensed Consolidated
Statements of Operations are summarized below:
|
(in thousands)
|
||||||||
|
Three
Months Ended March 31
|
||||||||
|
2010
|
2009
|
|||||||
|
Direct
departmental costs
|
||||||||
|
Rooms
|
$ | 2,435 | $ | 2,156 | ||||
|
Food
and beverage
|
3,610 | 3,152 | ||||||
|
Heat,
light and power
|
618 | 662 | ||||||
|
Other
|
650 | 615 | ||||||
| $ | 7,313 | $ | 6,585 | |||||
Direct
departmental costs include payroll expenses and related payroll burden, the cost
of food and beverage consumed and other departmental costs.
SONESTA
INTERNATIONAL HOTELS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
5.
|
Segment
Information
|
Segment
information for the Company’s two reportable segments, Owned & Leased Hotels
and Management Activities, for the three-month periods ending March 31, 2010 and
2009 follows:
Quarter
ended March 31, 2010
|
(in
thousands)
|
||||||||||||
|
Owned
&
Leased Hotels
|
Management
Activities
|
Consolidated
|
||||||||||
|
Revenues
|
$ | 13,359 | $ | 1,403 | $ | 14,762 | ||||||
|
Other
revenues from managed and
|
||||||||||||
|
affiliated
properties
|
-- | 1,370 | 1,370 | |||||||||
|
Total
revenues
|
13,359 | 2,773 | 16,132 | |||||||||
|
Operating
income (loss) before depreciation and amortization expense
|
1,044 | (815 | ) | 229 | ||||||||
|
Depreciation
and amortization
|
(1,313 | ) | (67 | ) | (1,380 | ) | ||||||
|
Interest
income (expense), net
|
(564 | ) | 57 | (507 | ) | |||||||
|
Other
deductions
|
-- | (9 | ) | (9 | ) | |||||||
|
Segment
pre-tax loss
|
(833 | ) | (834 | ) | (1,667 | ) | ||||||
|
Segment
assets
|
42,996 | 33,892 | 76,888 | |||||||||
|
Segment
capital additions
|
509 | 76 | 585 | |||||||||
Quarter
ended March 31, 2009
|
(in
thousands)
|
||||||||||||
|
Owned
&
Leased Hotels
|
Management
Activities
|
Consolidated
|
||||||||||
|
Revenues
|
$ | 11,970 | $ | 1,133 | $ | 13,103 | ||||||
|
Other
revenues from managed and
|
||||||||||||
|
affiliated
properties
|
-- | 1,221 | 1,221 | |||||||||
|
Total
revenues
|
11,970 | 2,354 | 14,324 | |||||||||
|
Operating
loss before depreciation and amortization expense
|
(24 | ) | (1,021 | ) | (1,045 | ) | ||||||
|
Depreciation
and amortization
|
(1,290 | ) | (65 | ) | (1,355 | ) | ||||||
|
Interest
income (expense), net
|
(713 | ) | 120 | (593 | ) | |||||||
|
Other
deductions
|
-- | (9 | ) | (9 | ) | |||||||
|
Segment
pre-tax loss
|
(2,027 | ) | (975 | ) | (3,002 | ) | ||||||
|
Segment
assets
|
74,111 | 45,418 | 119,529 | |||||||||
|
Segment
capital additions
|
1,799 | 48 | 1,847 | |||||||||
SONESTA
INTERNATIONAL HOTELS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
6.
|
Comprehensive Income
(Loss)
|
Comprehensive
income (loss) is as follows:
|
(in
thousands)
|
||||||||
|
Three
Months ended March 31
|
||||||||
|
2010
|
2009
|
|||||||
|
Net
Loss
|
$ | (1,192 | ) | $ | (2,212 | ) | ||
|
Unrealized
loss on interest rate swap, net of tax of $272
|
$ | (470 | ) | $ | -- | |||
|
Comprehensive
loss
|
$ | (1,662 | ) | $ | (2,212 | ) | ||
|
7.
|
Earnings (Loss) per
Share
|
As the
Company has no dilutive securities, there is no difference between basic and
diluted earnings per share of common stock. The following table sets forth the
computation of basic income or losses per share of common stock (in thousands
except for per share data):
|
Three
months ended
March
31
|
||||||||
|
2010
|
2009
|
|||||||
|
Numerator:
|
||||||||
|
Loss
from operations
|
$ | (1,192 | ) | $ | (2,212 | ) | ||
|
Denominator:
|
||||||||
|
Weighted
average number of shares outstanding
|
3,698 | 3,698 | ||||||
|
Loss
per share of common stock
|
$ | (0.32 | ) | $ | (0.60 | ) | ||
|
8.
|
Pension
Plan
|
The
components of the net periodic pension cost for the Company’s Pension Plan were
as follows:
|
(in
thousands)
|
||||||||
|
Three
Months ended March 31
|
||||||||
|
2010
|
2009
|
|||||||
|
Service
cost
|
$ | -- | $ | 21 | ||||
|
Interest
cost
|
405 | 408 | ||||||
|
Expected
return on assets
|
(414 | ) | (429 | ) | ||||
|
Recognized
actuarial loss
|
41 | 23 | ||||||
|
Net
expense included in the consolidated
statements of
operations
|
$ | 32 | $ | 23 | ||||
SONESTA
INTERNATIONAL HOTELS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
Company froze its Pension Plan effective December 31,
2006. Additional service and/or compensation increases after January
1, 2007 will not increase participants’ benefits and, in addition, newly hired
employees will not receive benefits under the Plan. For additional
information on the Pension Plan, and the Company’s 401(k) savings plan, we refer
to footnote 8 of the Company’s 2008 Annual Report filed on Form
10-K.
The
Company currently plans to make quarterly contributions of approximately
$391,000 to the Pension Plan on April 15, July 15 and October 15, 2010, and on
January 15, 2011. Accordingly, these amounts have been classified as
a current liability.
The
Company does not have any other post-retirement benefit plans.
|
9.
|
Derivative Financial
Instruments
|
In
February 2010, the Company refinanced an existing mortgage loan with a new loan,
which has a variable rate based on LIBOR (see note 3 – Borrowing
arrangements). The Company entered into an interest rate swap
agreement to manage the interest rate risk associated with this
loan. The critical terms of the swap agreement match the critical
terms of the mortgage loan. Therefore, the Company designated the
interest rate swap as a cash flow hedge of the variable rate
borrowings. The Company does not engage in speculative transactions,
nor does it hold or issue financial instruments for trading
purposes. The counterparty to the Company’s swap agreement is a
financial institution with investment grade credit ratings. Prior to
2010 the Company did not engage in any derivative activities.
Cash
Flow Hedging Strategy
For
derivative instruments that are designated and qualify as cash flow hedges, the
effective portion of the gain or loss on the derivative instrument is reported
as a component of other comprehensive income (“OCI”) and reclassified into
earnings in the same line item associated with the forecasted transaction and in
the same period or periods during which the hedged transaction affects earnings
(e.g., in “interest expense” when the hedged transactions are interest cash
flows associated with variable rate debt). The remaining gain or loss
on the derivative instrument in excess of the cumulative change in the present
value of future cash flows of the hedged item, or ineffectiveness, if any, is
recognized in the statement of operations during the current
period.
The
interest rate swap agreement the Company entered into manages the interest rate
risk on its mortgage loan described in note 3. The forward-starting
interest rate swap with a notional amount of $32,000,000 converts the variable
rate of LIBOR plus 3.35% on the $32,000,000 principal amount of the loan to a
fixed rate of 6.4% for the 5 year term of the loan.
As the
terms of the swap match the terms of the underlying hedged mortgage loan, there
should be no gain or loss from the ineffectiveness recognized in income unless
there is a termination of the swap or a modification to the mortgage loan
terms. If the loan terms remain unchanged, and all payments are being
made when scheduled, there will be no future impact on the Company’s results
from operations. Based upon quotes, the fair value of the interest
rate swap was a $(742,000) liability as of March 31, 2010.
SONESTA
INTERNATIONAL HOTELS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair
value of the Company’s derivative instruments based upon quotes, with
appropriate adjustments for non-performance risk of the parties to the
derivative contracts, at March 31, 2010 is as follows:
|
(in
thousands)
|
||||
|
Liability
Derivatives
|
||||
|
2010
|
||||
|
Derivatives
designated as hedging instruments:
|
||||
|
Interest
rate swap – cash flow hedge
|
$ | 742 | ||
|
Total
derivatives designated as hedging instruments
|
$ | 742 | ||
|
Derivatives
not designated as hedging instruments:
|
$ | -- | ||
|
Total
derivatives
|
$ | 742 | ||
The
effect of derivative instruments on the statement of operations for the three
month period ended March 31, 2010 is as follows (in thousands):
|
Pre-tax
Loss Recognized in OCI on Derivative (Effective Portion)
|
Amount
Reclassified from Accumulated OCI into Income
|
||||||||
|
Derivatives
in Cash Flow Hedging Relationships
|
2010
|
Location
of Amount Reclassified from Accumulated OCI into Income
|
2010
|
||||||
|
Interest
rate swap
|
$ | (742 | ) |
Interest
expense
|
$ | -- | |||
|
__
|
|||||||||
|
Total
|
$ | (742 | ) |
Total
|
$ | -- | |||
|
10.
|
Fair Value
Measurements
|
The
Company uses a three-tier fair value hierarchy, which prioritizes the inputs
used in measuring fair value. These tiers include: Level 1, defined as
observable inputs such as quoted prices in active markets; Level 2, defined as
inputs other than quoted prices in active markets that are either directly or
indirectly observable; and Level 3, defined as unobservable inputs in which
little or no market data exists, therefore requiring an entity to develop its
own assumptions.
As of
March 31, 2010, the Company held an interest rate swap instrument that is
required to be measured at fair value on a recurring basis (see Note 9). The
Company determines the fair value of the swap contract based on quotes, with
appropriate adjustments for any significant impact of non-performance risk of
the parties to the swap contracts. Therefore, the Company has categorized the
swap contract as Level 2. The Company has consistently applied these valuation
techniques in all periods presented and believes it has obtained the most
accurate information available for the type of derivative contract it
holds.
SONESTA
INTERNATIONAL HOTELS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
Company’s assets (liabilities) measured at fair value on a recurring basis at
March 31, 2010, was as follows (in thousands):
|
(in
thousands)
|
||||||||||||||||
|
Quoted
Prices in Active Markets for Identical Assets
|
Significant
Observable Inputs
|
Significant
Unobservable Inputs
|
||||||||||||||
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
Total
|
|||||||||||||
|
Interest
rate swap
|
$ | -- | $ | (742 | ) | $ | -- | $ | (742 | ) | ||||||
The
remainder of the assets and liabilities held by the Company at March 31, 2010
are not required to be measured at fair value. The carrying amount of short-term
financial instruments (cash and cash equivalents, restricted cash, trade
receivables, accounts payable and accrued liabilities) approximates fair value
due to the short maturity of those instruments. The concentration of credit risk
on trade receivables is minimized by diverse nature of the Company’s customer
base. The carrying value of the Company’s term mortgage loan
approximates its fair value due to its variable interest rate and proximity to
the refinancing.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FIRST QUARTER 2010 COMPARED
TO 2009
In the
first quarter of 2010 the Company recorded a net loss of $1,192,000, or $(0.32)
per share, compared to a net loss of $2,212,000, or $(0.60) per share, during
the first quarter of 2009.
Business
levels at the Company’s owned and leased hotels improved during the first
quarter of 2010 compared to the same quarter in 2009. Operating
losses at Royal Sonesta Hotel Boston decreased from $1,513,000 in the first
quarter of 2009 to $1,405,000 in the 2010 first quarter, a decrease of
$108,000. Royal Sonesta New Orleans recorded operating income of
$1,137,000 in the 2010 first quarter compared to $199,000 last year,
representing an increase of $938,000. This increase was the result of
a 12% revenue increase, and lower rent expense. Operating losses from
management activities decreased by $270,000 to $883,000 in the 2010 first
quarter, due to increased management income from the Company’s hotels and ships
in Egypt as well as increased franchise income. Interest expense
decreased following the refinancing of the mortgage loan secured by Royal
Sonesta Hotel Boston in February 2010. A detailed analysis of the
revenues and income by location follows.
REVENUES
The
Company records costs incurred on behalf of owners of managed and affiliated
properties, and expenses reimbursed from managed and affiliated properties, on a
gross basis. The revenues included and discussed in this Management’s
Discussion and Analysis exclude the “other revenues and expenses from managed
and affiliated properties.”
|
TOTAL
REVENUES
(in
thousands)
|
||||||||||||
|
NO.
OF
ROOMS
|
2010
|
2009
|
||||||||||
|
Royal
Sonesta Hotel Boston
|
400 | $ | 3,728 | $ | 3,350 | |||||||
|
Royal
Sonesta Hotel New Orleans
|
500 | 9,631 | 8,620 | |||||||||
|
Management
and service fees and other revenues
|
1,403 | 1,133 | ||||||||||
|
Total
revenues, excluding other revenues frommanaged and affiliated
properties
|
$ | 14,762 | $ | 13,103 | ||||||||
Total
revenues for the quarter ended March 31, 2010 were $14,762,000 compared to
$13,103,000 in the 2009 quarter, an increase of $1,659,000.
Royal
Sonesta Hotel Boston recorded first quarter 2010 revenues of $3,728,000 compared
to first quarter 2009 revenues of $3,350,000, representing a $378,000, or 11%,
increase. Room revenues during the 2010 first quarter increased by
$276,000, due to a 14% increase in room revenue per available room
(“REVPAR”). The hotel’s occupancy during the first quarter of 2010
surpassed last year’s by 10 percentage points. However, the average
daily rate decreased by 9%, which reflected the continuing competitive market in
the 2010 first quarter due to the economic recession. Increases in
rooms revenues were primarily from the transient market segment. The
remaining increase in revenues of $102,000 was primarily from increased parking
revenues and increased food and beverage revenues from the hotel’s ArtBar
restaurant and banqueting department, due to the higher occupancy
levels.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Royal
Sonesta Hotel New Orleans recorded first quarter 2010 revenues of $9,631,000
compared to $8,620,000 during the first quarter of 2009, representing a
$1,011,000, or 12%, increase. Room revenues increased by $495,000 due
to a 9% REVPAR increase. The hotel’s occupancy during the 2010 first
quarter improved by 7.5 percentage points compared to last year due to improved
business from both the transient and group and convention market
segments. The hotel’s average daily rate was down by a modest 3% due
to a decrease in average daily rates from the group and convention market
segment. The remaining increase in revenues of $516,000 was almost
entirely due to increased food and beverage revenues. The increased
occupancy levels improved restaurant and banqueting business. In
addition, the hotel recorded increased beverage revenues due to higher beverage
sales from the hotel’s main lounge, which was converted into Irvin Mayfield’s
Jazz Playhouse in late March 2009. In addition, the hotel generated
revenues from a newly created PJ’s coffee shop in the hotel’s
lobby. This new coffee shop outlet opened in December
2009.
Revenues
from management activities increased from $1,133,000 in the 2009 first quarter
to $1,403,000 during the 2010 first quarter, an increase of
$270,000. This was mainly due to a $130,000 increase in management
income from the Company’s collection of hotels and cruise ships in Egypt, and a
$105,000 increase in franchise income. The franchise income included
fees from Sonesta Hotel Orlando Downtown, which was reflagged as a Sonesta hotel
in January 2010.
OPERATING
INCOME
|
OPERATING
INCOME (LOSS)
(in
thousands)
|
||||||||
|
2010
|
2009
|
|||||||
|
Royal
Sonesta Hotel Boston
|
$ | (1,405 | ) | $ | (1,513 | ) | ||
|
Royal
Sonesta Hotel New Orleans
|
1,137 | 199 | ||||||
|
Operating
loss from hotels after management and service fees
|
(268 | ) | (1,314 | ) | ||||
|
Management
activities and other
|
(883 | ) | (1,086 | ) | ||||
|
Operating
loss
|
$ | (1,151 | ) | $ | (2,400 | ) | ||
Operating
loss for the three-month period ended March 31, 2010 decreased by $1,249,000 to
$1,151,000.
Operating
losses at Royal Sonesta Hotel Boston during the traditionally slow first quarter
decreased from $1,513,000 in 2009 to $1,405,000 in 2010. Increases in
revenues of $378,000 were partially offset by increased expenses of
$270,000. This expense increase was primarily due to a $333,000
increase in costs and operating expenses, representing a 13%
increase. During the 2010 first quarter, the hotel’s occupancy levels
exceeded the same period in 2009 by 10 percentage points, which resulted in
higher payroll expenses and increased costs for supplies.
Operating
income from Royal Sonesta Hotel New Orleans increased from $199,000 during the
2009 first quarter to $1,137,000 during the 2010 first quarter, a $938,000
increase. Revenue increases of $1,011,000 were partially offset by a
very modest $73,000 increase in expenses. Costs and operating
expenses increased by $357,000, or 9%, due to higher payroll and other expenses
resulting from the increase in occupancy levels during the 2010 quarter compared
to 2009. Rent expense decreased by $389,000 in the 2010 quarter
compared to last year, despite an increase in operating profits. The
Company operates the Royal Sonesta New Orleans under a lease, and rent is equal
to 75% of net cash flow achieved. Capital expenditures are deducted
from net cash flow for rent purposes, and in 2010 the Company expects to
substantially increase capital expenditures compared to 2009, mainly due to the
planned addition of a signature restaurant to the hotel. The
increased capital expenditures will result in lower rent expense.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
The
Company’s operating loss from management activities, which is computed after
giving effect to management and marketing fees from owned and leased hotels,
decreased from $1,086,000 during the 2009 first quarter to $883,000 during the
2010 first quarter, a decrease of $203,000. Increases in management
income of $270,000 were partially offset by a $67,000 increase in expenses
related to these activities. Increases in corporate sales and
marketing expenses were partially offset by a decrease in administrative and
general expense. The decrease in administrative and general expense
was mainly due to a non-recurring $150,000 expense during the 2009 first quarter
related to costs incurred for a hotel project in Miami. The Company
started work on this project during 2008 but decided in February 2009 not to
pursue this opportunity.
OTHER INCOME
(DEDUCTIONS)
Interest
income decreased from $123,000 in the 2009 first quarter to $60,000 in the 2010
first quarter. The decrease was due to lower short-term
investment income earned on the Company’s cash balances, due to the lower rates
of return.
Interest
expense decreased from $716,000 in the 2009 quarter to $567,000 in the 2010
first quarter. This was the result of the refinancing in February
2010 of the mortgage loan secured by Royal Sonesta Hotel Boston. The
interest rate on the new loan is 6.4% compared to 8.6% on the loan which was
repaid (see Note 3 – Borrowing Arrangements).
FEDERAL, FOREIGN AND STATE
INCOME TAXES
During
the 2010 first quarter the Company recorded a tax benefit of $475,000 on its
pre-tax loss of $1,667,000. The tax benefit is lower than the
statutory rate due to state taxes provided on income from Royal Sonesta Hotel
New Orleans.
In the
2009 first quarter the Company recorded a tax benefit of $790,000 on its pre-tax
loss of $3,002,000. The tax benefit is lower than the statutory rate,
due to state taxes payable on the Company’s income from Royal Sonesta Hotel New
Orleans and due to foreign taxes provided on the Company’s income from its
hotels in Egypt and Peru.
The
Company recorded long-term deferred tax assets in the 2010 first quarter for the
future federal and state income tax benefits of the losses
incurred. The Company will monitor these tax assets, and provide for
valuation allowances if going forward it becomes uncertain whether it will
actually receive federal and state tax benefits for these losses.
LIQUIDITY AND CAPITAL
RESOURCES
The
Company had cash and cash equivalents of approximately $26.4 million at March
31, 2010. Company management believes these cash resources will be
adequate to meet its cash requirements for 2010 and beyond.
In
February 2010, the Company refinanced the mortgage loan on Royal Sonesta Hotel
Boston. A new $32,000,000 loan repaid the $31,644,000 outstanding
under the previous loan. Costs incurred in connection with the
refinancing totaled approximately $400,000, which included a 1% fee to the
lender. The interest rate on the new 5 year loan is a variable rate
based on LIBOR, but the Company has entered into an interest rate swap agreement
that provides for a 6.4% interest rate for the term of the loan. The
previous loan carried an 8.6% interest rate. Payments of interest and
principal on the new loan, based on a 25 year amortization period, will be
approximately $650,000 per quarter. The payments on the previous loan
totaled $999,000 per quarter. In addition to a first mortgage on the
Royal Sonesta Hotel Boston property and a $5,000,000 parent company guarantee,
the Company also provided a $5,000,000 cash collateral account as additional
security for the loan. This amount is included in restricted cash on
the Company’s balance sheet at March 31, 2010. The cash collateral
account will be released over a 2 year period provided the hotel achieves
certain debt service coverage ratios. The loan is subject to a
maximum loan to value ratio, and to minimum debt service coverage ratios, which
will be tested quarterly.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
In
connection with the extension of the license agreements for two hotels in St.
Maarten through December 2019 (subject to a mutual cancellation option beginning
in May 2015), the Company agreed to loan the owners of these hotels up to $1
million for improvements to the properties. The Company expects to
fund these amounts during 2010.
In
January 2010 the Company made a $500,000 loan to the owner of Sonesta Beach
Resort Sharm El Sheikh. The proceeds of this loan were used to
complete Le Royale Sharm El Sheikh, a Sonesta Collection luxury
resort. This 165 room boutique property was built adjacent to the
Sonesta Beach Resort property, and is managed by the Company.
QUANTITATIVE
AND QUALITATIVE DISCLOSURE OF MARKET RISK
The
Company is subject to the risk of loss associated with movements in market
interest rates. The Company manages this risk through the use of an
interest rate swap that hedges the Company’s $32,000,000 mortgage loan at a
fixed rate of 6.4%.
INTERNAL CONTROLS AND
PROCEDURES
As of
March 31, 2010, the Company’s management carried out an evaluation, under the
supervision and with the participation of the Company’s Chief Executive Officer
and President, Chief Executive Officer and Vice Chairman, and Vice President and
Treasurer, of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the
Securities Exchange Act of 1934. Based on that evaluation, the
Company’s Chief Executive Officer and President, Chief Executive Officer and
Vice Chairman, and Vice President and Treasurer concluded that the Company’s
disclosure controls and procedures are effective, as of March 31,
2010.
There
have been no significant changes in the Company’s internal controls regarding
financial reporting during the quarter ended March 31, 2010 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control regarding financial reporting, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Item Numbers 1, 2, 3, 4, 5
and 6
Not
applicable during the quarter ended March 31, 2010.
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.
|
SONESTA
INTERNATIONAL HOTELS CORPORATION
|
||
|
By:
|
/s/
Boy van Riel
|
|
|
Boy
van Riel
|
||
|
Vice
President and Treasurer
|
||
|
(Authorized
to sign on behalf of the Registrant as Principal Financial
Officer)
|
||
|
Date:
May 13, 2010
|
||
19