FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE | |
SECURITIES EXCHANGE ACT OF 1934 | ||
For the Quarterly period ended March 31, 2007 | ||
OR |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE | |
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from | to | ||
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) | (I.R.S. Employer Identification No.) |
116 Huntington Avenue, Boston, MA 02116
(Address of principal executive offices)
(Zip Code)
617-421-5400 |
(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 x | No o |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Exchange Act Rule 12b-02)
Indicate by check mark whether the registrant is a shell company.
Yes o | No x |
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of Shares of Common Stock Outstanding
As of May 4, 2007 -- $.80 par value,
Class A - 3,698,230
INDEX
SONESTA INTERNATIONAL HOTELS CORPORATION
Part I. Financial Information | Page | |
Item 1. | Financial Statements (unaudited) | |
Condensed consolidated balance sheets — March 31, 2007 (unaudited) and December 31, 2006 | 1 | |
Condensed consolidated statements of operations — Three-month periods ended March 31, 2007 and 2006 (unaudited) | 3 | |
Condensed consolidated statements of cash flows — Three-month periods ended March 31, 2007 and 2006 (unaudited) | 4 | |
Notes to condensed consolidated financial statements — March 31, 2007 and 2006 | 5 | |
Item 2. | Management’s Discussion and Analysis of Results of Operations and Financial Condition — March 31, 2007 | 12 |
Item 3. | Quantitative and Qualitative Disclosure of Market Risk | 15 |
Item 4. | Internal Controls and Procedures | 16 |
Part II. Other Information | ||
Signature page | 18 | |
Exhibits 31.1, 31.2, 31.3 | Certifications by the Company’s Chief Executive Officers and Vice President and Treasurer | |
Exhibit 99.1 | 18 U.S.C. Section 1350 Certification by Company Officers |
Part I - Item 1. Financial Information
SONESTA INTERNATIONAL HOTELS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2007 (unaudited) and December 31, 2006
(in thousands) | |||||||
March 31, 2007 | December 31, 2006 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 20,889 | $ | 24,888 | |||
Restricted cash | 442 | -- | |||||
Accounts and notes receivable: | |||||||
Trade, less allowance of $86 ($87 at December 31, 2006) for doubtful accounts | 7,640 | 6,928 | |||||
Other, including current portion of long-term receivables and advances | 1,579 | 1,551 | |||||
Total accounts and notes receivable | 9,219 | 8,479 | |||||
Inventories | 593 | 532 | |||||
Current deferred tax assets | 353 | 353 | |||||
Refundable income taxes | 25 | 89 | |||||
Prepaid expenses and other current assets | 2,193 | 1,275 | |||||
Total current assets | 33,714 | 35,616 | |||||
Long-term receivables and advances | 6,430 | 6,879 | |||||
Deferred tax assets | 8,056 | 7,873 | |||||
Investment in development partnership | 34,916 | 35,291 | |||||
Property and equipment, at cost: | |||||||
Land | 2,102 | 2,102 | |||||
Buildings | 26,175 | 25,984 | |||||
Furniture and equipment | 32,322 | 30,730 | |||||
Leasehold improvements | 8,134 | 8,076 | |||||
Projects in progress | 14 | 560 | |||||
68,747 | 67,452 | ||||||
Less: accumulated depreciation and amortization | 30,367 | 29,052 | |||||
Net property and equipment | 38,380 | 38,400 | |||||
Other long-term assets | 2,243 | 2,369 | |||||
$ | 123,739 | $ | 126,428 |
See accompanying notes to condensed consolidated financial statements.
1
SONESTA INTERNATIONAL HOTELS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2007 (unaudited) and December 31, 2006
(in thousands) | |||||||
March 31, 2007 | December 31, 2006 | ||||||
LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 3,135 | $ | 3,782 | |||
Advance deposits | 879 | 829 | |||||
Accrued income taxes | 214 | 449 | |||||
Accrued liabilities: | |||||||
Salaries and wages | 715 | 1,053 | |||||
Rentals | 1,652 | 3,127 | |||||
Interest | 252 | 252 | |||||
Pension and other employee benefits | 639 | 262 | |||||
Other | 1,531 | 1,320 | |||||
Total accrued liabilities | 4,789 | 6,014 | |||||
Total current liabilities | 9,017 | 11,074 | |||||
Long-term debt | 34,061 | 34,061 | |||||
Deferred gain | 64,481 | 64,481 | |||||
Other non-current liabilities | 9,932 | 9,441 | |||||
Commitments and contingencies | |||||||
Common stockholders’ equity: | |||||||
Common stock: | |||||||
Class A, $ 0.80 par value: | |||||||
Authorized - 10,000 shares | |||||||
Issued—6,102 shares at stated value | 4,882 | 4,882 | |||||
Retained earnings | 13,650 | 14,773 | |||||
Treasury shares—2,404, at cost | (12,053 | ) | (12,053 | ) | |||
Accumulated other comprehensive loss | (231 | ) | (231 | ) | |||
Total common stockholders’ equity | 6,248 | 7,371 | |||||
$ | 123,739 | $ | 126,428 |
See accompanying notes to condensed consolidated financial statements.
2
SONESTA INTERNATIONAL HOTELS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands except for per share data)
Three Months Ended March 31 | |||||||
2007 | 2006 | ||||||
Revenues: | |||||||
Rooms | $ | 8,485 | $ | 14,871 | |||
Food and beverage | 3,922 | 5,428 | |||||
Management, license and service fees | 1,768 | 1,397 | |||||
Parking, telephone and other | 1,208 | 2,242 | |||||
15,383 | 23,938 | ||||||
Other revenues from managed and affiliated properties | 4,900 | 4,312 | |||||
Total revenues | 20,283 | 28,250 | |||||
Costs and expenses: | |||||||
Costs and operating expenses | 6,960 | 10,434 | |||||
Advertising and promotion | 1,259 | 1,895 | |||||
Administrative and general | 3,206 | 3,691 | |||||
Human resources | 285 | 399 | |||||
Maintenance | 856 | 1,394 | |||||
Rentals | 1,775 | 2,350 | |||||
Property taxes | 408 | 675 | |||||
Depreciation and amortization | 1,371 | 2,509 | |||||
16,120 | 23,347 | ||||||
Other expenses from managed and affiliated properties | 4,900 | 4,312 | |||||
Total costs and expenses | 21,020 | 27,659 | |||||
Operating income (loss) | (737 | ) | 591 | ||||
Other income (deductions): | |||||||
Interest expense | (743 | ) | (743 | ) | |||
Interest income | 397 | 374 | |||||
Foreign exchange gain | 2 | 6 | |||||
Gain on sales of assets | -- | 4 | |||||
(344 | ) | (359 | ) | ||||
Income (loss) before income tax provision (benefit) | (1,081 | ) | 232 | ||||
Income tax provision (benefit) | (260 | ) | 222 | ||||
Net income (loss) | (821 | ) | 10 | ||||
Cumulative effect of change in an accounting principle (see note 10) | (302 | ) | -- | ||||
Retained earnings at beginning of period | 14,773 | 19,036 | |||||
Retained earnings at end of period | $ | 13,650 | $ | 19,046 | |||
Net income (loss) per share of common stock | $ | (0.22 | ) | $ | 0.003 | ||
Weighted average number of shares outstanding | 3,698 | 3,698 |
See accompanying notes to condensed consolidated financial statements.
3
SONESTA INTERNATIONAL HOTELS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Increase (Decrease) in Cash
(in thousands) | |||||||
Three Months Ended March 31 | |||||||
2007 | 2006 | ||||||
Cash provided (used) by operating activities | |||||||
Net income (loss) | $ | (821 | ) | $ | 10 | ||
Adjustments to reconcile net income to net cash used by operating activities | |||||||
Depreciation and amortization of property and equipment | 1,371 | 2,509 | |||||
Other amortization | 10 | 10 | |||||
Deferred federal and state tax benefit | (26 | ) | (203 | ) | |||
Gain on sales of assets | -- | (4 | ) | ||||
Changes in assets and liabilities | |||||||
Restricted cash | (442 | ) | 267 | ||||
Accounts and notes receivable | (428 | ) | 156 | ||||
Inventories | (61 | ) | 89 | ||||
Prepaid expenses and other | (544 | ) | 183 | ||||
Accounts payable | (277 | ) | (1,124 | ) | |||
Advance deposits | 50 | (289 | ) | ||||
Federal, foreign and state income taxes | (251 | ) | 111 | ||||
Accrued liabilities | (1,487 | ) | (2,083 | ) | |||
Cash used by operating activities | (2,906 | ) | (368 | ) | |||
Cash provided (used) by investing activities | |||||||
Expenditures for property and equipment | (1,295 | ) | (2,946 | ) | |||
Payments received on long-term receivables and advances | 322 | 2,678 | |||||
Payments received from development partnership | 250 | -- | |||||
Proceeds from sales of assets | -- | 16 | |||||
New loans and advances | -- | (1,370 | ) | ||||
Cash used by investing activities | (723 | ) | (1,622 | ) | |||
Cash used by financing activities | |||||||
Cash dividends paid | (370 | ) | (370 | ) | |||
Cash used by financing activities | (370 | ) | (370 | ) | |||
Net decrease in cash | (3,999 | ) | (2,360 | ) | |||
Cash and cash equivalents at beginning of period | 24,888 | 24,941 | |||||
Cash and cash equivalents at end of period | $ | 20,889 | $ | 22,581 |
Supplemental Schedule of Interest and Income Taxes Paid
Cash paid for interest in the 2007 three-month period and the 2006 three-month period was approximately $732,000 and $426,000, respectively. Cash paid for income taxes in the first quarter of 2007 and 2006 was approximately $ 17,000 and $314,000, respectively.
See accompanying notes to condensed consolidated financial statements.
4
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, 2007 are not necessarily indicative of the results that may be expected for the year ended December 31, 2007.
In April 2005, the Company transferred the land and improvements of Sonesta Beach Resort Key Biscayne to a development partnership, in which the Company is a 50% owner. The new partnership intends to redevelop the hotel’s site. The hotel closed for operations on August 31, 2006. Since the Company has a continuing interest in the development partnership, the historical results of Sonesta Beach Resort Key Biscayne are not accounted for as a discounted operation.
The balance sheet at December 31, 2006 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.
Certain amounts in the 2006 financial statements have been reclassified to conform to the 2007 presentation.
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, 2006.
2. | Long-Term Receivables and Advances |
(in thousands) | |||||||
March 31,2007 | December 31,2006 | ||||||
Sharm El Sheikh, Egypt (a) | $ | 56 | $ | 126 | |||
Sonesta Hotel & Suites Coconut Grove (b) | 4,252 | 4,346 | |||||
Trump International Sonesta Beach Resort (c) | 1,135 | 1,135 | |||||
Chateau Sonesta Hotel New Orleans (d) | 1,895 | 1,895 | |||||
Other | 404 | 565 | |||||
Total long-term receivables | 7,742 | 8,067 | |||||
Less: current portion | 1,312 | 1,188 | |||||
Net long-term receivables | $ | 6,430 | $ | 6,879 | |||
(a) | This loan, in the original amount of $1,000,000, was made in 1996 and 1997 to the owner of the Sonesta Beach Resort, Sharm El Sheikh. The loan bears interest at the prime rate (8.25% at March 31, 2007) and is adjusted semi-annually. The loan is being repaid with monthly payments of $23,800. |
(b) | This loan was made to the owner of the Sonesta Hotel & Suites Coconut Grove, Miami, which opened in April 2002, to fund construction and furniture, fixtures and equipment costs. The interest rate is equal to the prime rate (8.25% at March 31, 2007), plus ¾%. The loan is secured by a mortgage on the hotel property, and is being repaid out of hotel profits that are available for distribution to the owner, and, to the extent the hotel’s earnings are insufficient to pay the owner certain minimum annual returns and minimum annual target returns due under the management agreement, out of shortfalls funded by the Company. |
5
SONESTA INTERNATIONAL HOTELS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(c) | This amount represents advances made to the owner of Trump International Sonesta Beach Resort Sunny Isles for the Company’s share of the losses of the resort from the opening on April 1, 2003 through October 31, 2004 ($1,391,000). This amount was due pursuant to the terms of the management agreement under which the Company operates the hotel. The advance was reduced by $256,000 received from the hotel in 2006. No interest is charged on this advance, which will be repaid out of future available profits generated by the hotel, after the payment of a minimum annual return to the hotel’s owner. |
(d) | Following Hurricane Katrina, which struck New Orleans in late August 2005, the Company advanced $1,895,000 to Chateau Sonesta Hotel New Orleans, which it operates under a long-term management agreement. These advances were used to cover operating expenses, and to pay for repairs necessary to reopen the hotel on December 1, 2005. Unless the Company acquires the hotel, the Company expects to recover these advances, together with interest, out of available income from the hotel. The interest rate on these advances ranges from prime (8.25% at March 31, 2007) plus one (1) to three (3) percentage points. The Company is in the process of acquiring the hotel (see Note 9 - Chateau Sonesta Hotel). |
Management continually monitors the collectability of its (long-term) receivables and advances and believes they are fully realizable.
3. | Borrowing Arrangements |
Credit Line
The Company has a $2,000,000 demand line of credit. This line bears interest at the prime rate (8.25% at March 31, 2007). Advances under this line require the bank’s approval each time a request is made. No amounts were outstanding under this line of credit at March 31, 2007.
Long-Term Debt
The Company’s long-term debt consists of a first mortgage note held 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 (Cambridge). The principal balance outstanding at March 31, 2007 and December 31, 2006 was $34,061,000. The debt is secured by a first mortgage on the Royal Sonesta Hotel Boston (Cambridge) property, which is included in fixed assets at a net book value of $22,365,000 at March 31, 2007. The interest rate is 8.6% for the term of the loan, and the loan matures in July 2010.
Effective December 1, 2003, the Company and the lender restructured the mortgage loan. The Company was required to make payments of interest only at 5% per annum through December 1, 2006, and payments of interest only at 8.6% per annum are due from December 1, 2006 through December 1, 2007. As of January 1, 2008, payments will be based on interest and principal, calculated on the original 25-year amortization schedule of the loan. During the entire restructuring period, interest continued to accrue at 8.6%. Excess cash flow from the Royal Sonesta Hotel Boston (Cambridge) remaining after payment of interest is required to be paid into escrow, and may be used solely for the future payment of hotel expenses or capital expenditures, or to reduce the amount of the accrued and unpaid interest. At March 31, 2007 and December 31, 2006, no amount was required to be paid in escrow. This was mainly due to the fact that the hotel spent significant amounts on hotel refurbishments and improvements during 2006 and the 2007 first quarter. In addition, the first quarter traditionally is the slowest quarter of the year.
6
SONESTA INTERNATIONAL HOTELS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 | |||||||
20077 | 2006 | ||||||
Direct departmental costs | |||||||
Rooms | $ | 2,325 | $ | 3,200 | |||
Food and beverage | 3,253 | 4,756 | |||||
Heat, light and power | 714 | 1,246 | |||||
Other | 668 | 1,232 | |||||
$ | 6,960 | $ | 10,434 |
Direct departmental costs include payroll expenses and related payroll burden, the cost of food and beverage consumed and other departmental costs.
5. | Federal, Foreign and State Income Tax |
The provision (benefit) for income taxes in the accompanying condensed Consolidated Statements of Operations is summarized below:
(in thousands) | |||||||
Three Months Ended March 31 | |||||||
2007 | 2006 | ||||||
Current federal income tax provision (benefit) | $ | (355 | ) | $ | 273 | ||
Current foreign income tax provision | 101 | 103 | |||||
Current state income tax provision | 20 | 49 | |||||
Deferred state income tax provision | 9 | 24 | |||||
Deferred federal income tax benefit | (35 | ) | (227 | ) | |||
Income tax provision (benefit) | $ | (260 | ) | $ | 222 |
The tax benefit in the 2007 first quarter is lower than the statutory rate, and the tax provision in the 2006 first quarter is much higher than the statutory rate because of state taxes incurred on the Company’s income from Royal Sonesta Hotel New Orleans, and because of foreign taxes due, primarily on the Company’s income derived from its Egyptian operations.
Effective January 1, 2007, the Company has adopted the provisions of FIN 48 (see Note 10).
7
SONESTA INTERNATIONAL HOTELS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. | 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, 2007 and 2006 follows:
Quarter ended March 31, 2007
(in thousands) | ||||||||||
Owned & Leased Hotels | Management Activities | Consolidated | ||||||||
Revenues | $ | 13,598 | $ | 1,785 | $ | 15,383 | ||||
Other revenues from managed and | ||||||||||
affiliated properties | -- | 4,900 | 4,900 | |||||||
Total revenues | 13,598 | 6,685 | 20,283 | |||||||
Operating income (loss) before depreciation and amortization expense | 898 | (264 | ) | 634 | ||||||
Depreciation and amortization | (1,248 | ) | (123 | ) | (1,371 | ) | ||||
Interest income (expense), net | (741 | ) | 395 | (346 | ) | |||||
Other income | -- | 2 | 2 | |||||||
Segment pre-tax income (loss) | (1,091 | ) | 10 | (1,081 | ) | |||||
Segment assets | 78,022 | 45,717 | 123,739 | |||||||
Segment capital additions | 1,288 | 7 | 1,295 |
Quarter ended March 31, 2006
(in thousands) | ||||||||||
Owned & Leased Hotels | Management Activities | Consolidated | ||||||||
Revenues | $ | 22,524 | $ | 1,414 | $ | 23,938 | ||||
Other revenues from managed and | ||||||||||
affiliated properties | -- | 4,312 | 4,312 | |||||||
Total revenues | 22,524 | 5,726 | 28,250 | |||||||
Operating income (loss) before depreciation and amortization expense | 3,523 | (423 | ) | 3,100 | ||||||
Depreciation and amortization | (2,385 | ) | (124 | ) | (2,509 | ) | ||||
Interest income (expense), net | (732 | ) | 363 | (369 | ) | |||||
Other deductions | -- | 10 | 10 | |||||||
Segment pre-tax income (loss) | 406 | (174 | ) | 232 | ||||||
Segment assets | 80,460 | 46,122 | 126,582 | |||||||
Segment capital additions | 2,827 | 119 | 2,946 |
8
SONESTA INTERNATIONAL HOTELS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. | Earnings 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 | |||||||
2007 | 2006 | ||||||
Numerator: | |||||||
Income (loss) from operations | $ | (821 | ) | $ | 10 | ||
Denominator: | |||||||
Weighted average number of shares outstanding | 3,698 | 3,698 | |||||
Net income (loss) per share of common stock | $ | (0.22 | ) | $ | .003 |
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 | |||||||
2007 | 2006 | ||||||
Service cost | $ | -- | $ | 449 | |||
Interest cost | 434 | 484 | |||||
Expected return on assets | (443 | ) | (419 | ) | |||
Amortization of prior service cost | -- | 22 | |||||
Amortization of transition asset | -- | (21 | ) | ||||
Recognized actuarial loss | 9 | 163 | |||||
Total plan benefit cost | -- | 678 | |||||
Less: amounts charged to hotels operated under management agreements | -- | (93 | ) | ||||
Net periodic benefit cost included in the consolidated statements of operations | $ | -- | $ | 585 |
The Company froze its Pension Plan effective December 31, 2006. Additional service and/or compensation increases after January 1, 2007 will not increase participant’s benefits and, in addition, newly hired employees will not receive benefits under the Plan. For additional information on the Pension Plan changes, and information on a matching benefit under the Company’s 401(k) savings plan, effective January 1, 2007, we refer to footnote 7 of the Company’s 2006 Annual Report filed on Form 10-K.
The Company is not required to make a contribution to the Pension Plan during 2007.
The Company does not have any other post-retirement benefit plans.
9. | Chateau Sonesta Hotel New Orleans |
In late February 2007, the Company signed agreements to acquire Chateau Sonesta Hotel, in New Orleans. The Company has operated this 250-room full service hotel, under a management agreement, since the opening in April 1995. Additional information regarding this transaction is included in the Company’s report filed on Form 8-K on March 29, 2007.
9
SONESTA INTERNATIONAL HOTELS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As part of the transaction, the Company will assume the existing first mortgage loan on the hotel. In March 2007, the Company paid into escrow amounts due to the lender totaling $442,000, which amount is included in Restricted Cash on the Company’s balance sheet at March 31, 2007.
Based on the terms of the agreements, the transaction is expected to close on or before May 21, 2007. Certain conditions, including approvals of ground lessors, have not been satisfied, and additional issues have been raised. The Company is diligently working on completing this transaction, but unless all conditions are satisfied, the closing of this purchase may be delayed or cancelled.
10. Impact of Recently Issued Accounting Standards
EITF Issue No. 06-2 - Accounting for Sabbatical Leaves and other Similar Benefits
The Company has adopted the provisions of EITF Issue No. 06-2 effective January 1, 2007. Under the provisions, the Company will accrue a liability for the cost of sabbatical leave benefits for its employees over the period required for the employees to earn the right to the sabbatical leave benefits. The Company has a policy under which management staff can take a six week sabbatical leave of which the Company sponsors four weeks. Eligible employees can take a sabbatical leave for the first time after ten years of service, and every five years thereafter. At March 31, 2007, the Company recorded a liability on its balance sheet of $503,000 for benefits accrued through this date. As allowed by the provisions of EITF Issue No. 06-2, the Company charged the cost of accrued benefits accumulated at January 1, 2007, in the amount of $302,000, net of taxes, directly to retained earnings on its balance sheet.
FIN 48 - Accounting for Uncertainty in Income Taxes
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109” (“FIN 48”). This statement clarifies the criteria than an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. FIN 48 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements.
Effective January 1, 2007, the Company has adopted the provisions of FIN 48. There was no impact on the Company’s results of operations or financial position as a result of the adoption of FIN 48.
As of January 1, 2007, the Company has provided a liability of $270,000 for unrecognized tax benefits related to various federal and state income tax matters. Of this amount, the amount that would impact the Company’s effective tax rate, if recognized, is $270,000.
The Company does not expect that the amounts of unrecognized tax benefits will change significantly within the next 12 months.
The Company is currently subject to audit by the Internal Revenue Service for the calendar years ended 2003, 2004, 2005, and 2006. The Company and its subsidiaries state income tax returns are subject to audit for the calendar years ended 2003, 2004, 2005, and 2006.
As of January 1, 2007, the Company has accrued $45,000 for interest and penalties related to uncertain tax positions. As of March 31, 2007, the total amount of accrued interest and penalties is $50,000. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal and state income taxes.
EITF Issue No. 06-3 - Presentation of Sales Taxes in Income Statements, Gross Versus Net
The majority of the Company’s revenues are subject to local sales taxes which are remitted to governmental authorities. It is the Company’s policy to treat all such taxes on a “net” basis, which means the charges for sales
10
SONESTA INTERNATIONAL HOTELS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
taxes to the Company’s customers are not included in revenues, and the remittance of such taxes is not presented as an expense.
11
Part I - Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FIRST QUARTER 2007 COMPARED TO 2006
In the first quarter of 2007 the Company recorded a net loss of $ 821,000, or $(0.22) per share, compared to net income of $10,000, or less than $0.01 per share, during the first quarter of 2006. The decrease in income in the 2007 quarter was entirely due to the fact that Sonesta Beach Resort Key Biscayne, which provided the Company with pre-tax income during the first quarter of 2006 of $1,773,000, closed for operations on August 31, 2006. In April 2005, the Company contributed the land and improvements of Sonesta Beach Resort Key Biscayne to a partnership in which the Company is a 50% limited partner, with the objective to redevelop the Hotel’s site. For complete information regarding this transaction we refer to the Company’s 2006 Annual Report filed on Form
10-K on March 26, 2007, and to the Company’s report filed on Form 8-K on April 19, 2007. Income from Royal Sonesta Hotel New Orleans decreased slightly compared to last year, but results from Royal Sonesta Hotel Boston (Cambridge) and from management activities improved during the 2007 first quarter compared to last year. A detailed analysis of the revenues and income by location follows.
REVENUES
During 2006, the Company started recording costs incurred on behalf of owners of managed properties, and expenses reimbursed from managed and affiliated properties on a “gross” basis, rather than a “net” basis, as previously presented. The revenues included and discussed in this Management’s Discussion and Analysis exclude the “Other Revenues and Expenses from Managed and Affiliated Properties” resulting from this restatement, which are included in the Company’s consolidated statements of operations for the three-month periods ending March 31, 2007 and 2006.
TOTAL REVENUES (in thousands) | ||||||||||
NO. OF ROOMS | 2007 | 2006 | ||||||||
Sonesta Beach Resort Key Biscayne | 300 | $ | -- | $ | 9,594 | |||||
Royal Sonesta Hotel Boston (Cambridge) | 400 | 4,396 | 3,902 | |||||||
Royal Sonesta Hotel New Orleans | 500 | 9,202 | 9,028 | |||||||
Management and service fees and other revenues | 1,785 | 1,414 | ||||||||
Total revenues, excluding revenues from managed and affiliated properties | $ | 15,383 | $ | 23,938 |
Total revenues for the quarter ended March 31, 2007 were $15,383,000 compared to $23,938,000 in 2006, a decrease of approximately $8,555,000.
Revenues at Sonesta Beach Resort Key Biscayne, which closed for operations on August 31, 2006, were $9,594,000 during the 2006 first quarter. The Company contributed the land and improvements of Sonesta Key Biscayne to a development partnership in which it is a 50% limited partner, with the objective to redevelop the Hotel’s site. For additional information regarding this transaction we refer to the Company’s 2006 Annual Report filed on Form
10-K on March 26, 2007 and to a report filed on Form 8-K on April 19, 2007.
Royal Sonesta Hotel Boston (Cambridge) recorded first quarter 2007 revenues of $4,396,000 compared to first quarter 2006 revenues of $3,902,000, representing a $494,000, or 13%, increase. The increase was primarily due to an increase in room revenues of $383,000, from a 17% increase in room revenue per available room (“REVPAR”). Occupancy during the first quarter of 2007 was virtually the same as a year ago, but the Hotel managed to increase its average room rates substantially.
12
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Revenues at Royal Sonesta Hotel New Orleans during the first three months of 2007 were $9,202,000 compared to $9,028,000 during the first quarter of 2006, representing a slight $174,000 increase. The Hotel’s room revenues during the 2007 first quarter decreased by $969,000, due to a 14% decrease in RevPAR, primarily from a decrease in occupancy levels. Since the Hotel suffered only minor damage from Hurricane Katrina in August 2005, it benefited from significant government business in the first quarter of 2006 related to the recovery efforts following the storm. Revenues from other sources, mainly food and beverage, increased by $1,143,000 in the 2007 first quarter compared to the same period in 2006. During the 2006 first quarter, the Hotel was primarily occupied by government relief workers, rather than the usual mix of transient and group and convention business, which accounts for the much higher food and beverage and banqueting business in the first quarter of 2007.
Revenues from management activities increased by $371,000 to $1,785,000 during the 2007 first quarter. This was primarily due to increased management income from Sonesta Hotel & Suites Coconut Grove and Trump International Sonesta Beach Resort Sunny Isles. Both these managed hotels improved results substantially during the first quarter of 2007 compared to last year.
OPERATING INCOME
OPERATING INCOME (LOSS) (in thousands) | |||||||
2007 | 2006 | ||||||
Sonesta Beach Resort Key Biscayne | $ | -- | $ | 1,773 | |||
Royal Sonesta Hotel Boston (Cambridge) | (902 | ) | (1,299 | ) | |||
Royal Sonesta Hotel New Orleans | 552 | 663 | |||||
Operating income (loss) from hotels after management and service fees | (350 | ) | 1,137 | ||||
Management activities and other | (387 | ) | (546 | ) | |||
Operating income (loss) | $ | (737 | ) | $ | 591 |
The operating loss for the three-month period ended March 31, 2007 was $737,000, compared to operating income of $591,000 in the three-month period ended March 31, 2006, a decrease of approximately $1,328,000.
Operating income at Sonesta Beach Resort Key Biscayne was $1,773,000 during the 2006 first quarter. The Hotel closed for operations on August 31, 2006. The first quarter traditionally was the best quarter of the year for the hotel. The Company contributed the land and improvements to a development partnership in which the Company is a 50% limited partner, with the objective to redevelop the Hotel’s site. Detailed information regarding this transaction is included in the Company’s 2006 Annual Report filed on Form 10-K on March 26, 2007, and in a report filed on Form 8-K on April 19, 2007.
Royal Sonesta Hotel Boston (Cambridge) reduced its operating loss during the first quarter of 2007 by $397,000 to $902,000 compared to the previous year. Revenues increased by $494,000 and expenses increased by $97,000, or 2%. The increase in revenues was primarily from an increase in average room rates achieved, and the Hotel held a tight control on its expenses during the traditionally slow first quarter of the year.
Operating income from Royal Sonesta Hotel New Orleans decreased from $663,000 in the 2006 first quarter to $552,000 in the 2007 first quarter. Revenues during the 2007 first quarter increased by $174,000 compared to 2006 but expenses increased by $285,000. The increase in expenses was primarily due to increases in cost and operating expenses. The revenue growth in 2007 was due to a substantial increase in food and beverage revenues. Room revenues actually decreased since the Hotel benefited from substantial government business during the 2006 first quarter related to the recovery after Hurricane Katrina. Since the profit margin on food and beverage is much lower than on rooms business, the Hotel’s overall cost and operating expenses increased in the 2007 first quarter compared to last year. In addition, the Hotel’s staffing levels during the 2006 first quarter were much lower, since many of its employees were unable to return to New Orleans in early 2006. The increase in cost and operating expenses was partially offset by a decrease in rent expense. Under the lease under which the Company operates the Hotel, rent is computed as a percentage of cash flow.
13
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
The Company’s loss from management activities, which is computed after giving effect to management and marketing fees from owned and leased hotels, decreased from $546,000 during the 2006 first quarter to $387,000 during the 2007 first quarter. Management revenues from third party hotels increased by $371,000 in 2007 compared to 2006, but management income from owned hotels decreased by $411,000, due to the closure of Sonesta Beach Resort Key Biscayne in August 2006. The net decrease in management income of $40,000 was more than offset by a decrease in corporate expenses, primarily as a result of lower corporate marketing costs following the restructuring of the Company’s regional sales offices at the end of 2006.
OTHER INCOME (DEDUCTIONS)
Interest income increased from $374,000 in the 2006 first quarter to $397,000 in the 2007 first quarter due to higher short-term investment income earned on the Company’s cash balances.
FEDERAL, FOREIGN AND STATE INCOME TAXES
The tax benefit in the 2007 first quarter is lower than the statutory rate, and the tax provision in the 2006 first quarter is higher than the statutory rate because of state taxes incurred on the Company’s income from Royal Sonesta Hotel New Orleans, and because of foreign taxes due primarily on the Company’s income derived from its Egyptian operations.
LIQUIDITY AND CAPITAL RESOURCES
Following the closure of Sonesta Beach Resort Key Biscayne in August 2006, the Company is entitled to monthly payments of $125,000 from the development partnership in which the Company is a 50% limited partner. These payments reduce the investment account in the development partnership on the Company’s balance sheet.
The Company had cash and cash equivalents of approximately $20.9 million at March 31, 2007. Company management believes these cash resources will be adequate to meet its cash requirements for 2007 and beyond.
14
PART I - Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The Company is exposed to market risk from changes in interest rates. The Company uses fixed rate debt to finance the ownership of one of its properties. The table that follows summarizes the Company’s fixed rate debt obligations outstanding at March 31, 2007. This information should be read in conjunction with Note 3—Borrowing Arrangements.
Short and Long Term Debt (in thousands) maturing in:
YEAR | ||||||||||||||||||||||
2007 | 2008 | 2009 | 2010 | Thereafter | Total | Fair Value | ||||||||||||||||
Fixed rate | $ | -- | $ | 602 | $ | 665 | $ | 32,794 | $ | -0- | $ | 34,061 | $ | 35,274 | ||||||||
Average interest rate | 8.6 | % | 8.6 | % | 8.6 | % | 8.6 | % | 8.6 | % |
15
PART I - Item 4
INTERNAL CONTROLS AND PROCEDURES
As of March 31, 2007, 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, 2007.
There have been no significant changes in the Company’s internal controls regarding financial reporting during the quarter ended March 31, 2007 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.
16
PART II - Other Information
Item Numbers 1, 2, 3, 4, 5 and 6
Not applicable during the quarter ended March 31, 2007.
17
SIGNATURE
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 11, 2007 |
18