FORM
10-Q
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
(Mark
One)
x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
the Quarterly period ended March 31, 2008
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
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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
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13-5648107
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(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)
617-421-5400
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(Registrant’s
telephone number, including area code)
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(Former
name, former address and former fiscal year,
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if
changed since last report)
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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.
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
o
Accelerated
Filer
o
Non-Accelerated
Filer
o
Smaller
Reporting Company
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Number of
Shares of Common Stock Outstanding
As of May
5, 2008 -- $.80 par value,
Class A –
3,698,230
INDEX
SONESTA
INTERNATIONAL HOTELS CORPORATION
Part
I. Financial Information
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Page
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Part
II. Other Information
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Certifications
by the Company’s Chief Executive Officers and Vice President and
Treasurer, as required by Rule 13a-14(a)/15d-14(a) of the Securities
Exchange Act of 1934, as amended.
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Part
I
- Item 1. Financial
Information
SONESTA
INTERNATIONAL HOTELS CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
March 31, 2008 (unaudited)
and December 31, 2007
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(in thousands)
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March 31, 2008
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December 31, 2007
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ASSETS
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Current
assets:
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Cash and cash
equivalents
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$
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24,896
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$
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32,620
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Restricted cash
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1,500
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1,700
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Accounts and notes
receivable:
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Trade, less allowance of $69 ($66
at December 31, 2007) for doubtful accounts
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7,084
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7,676
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Other, including current
portion of long-term receivables and advances
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1,247
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1,151
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Total accounts and notes
receivable
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8,331
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8,827
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Inventories
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570
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607
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Current deferred tax
assets
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521
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578
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Prepaid expenses and other
current assets
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2,398
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1,915
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Total current
assets
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38,216
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46,247
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Long-term
receivables and advances
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4,615
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3,776
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Deferred
tax assets
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7,221
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7,242
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Investment
in development partnership
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33,666
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33,791
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Property
and equipment, at cost:
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Land and land
improvements
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2,102
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2,102
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Buildings
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25,850
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26,190
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Furniture and
equipment
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31,855
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31,413
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Leasehold
improvements
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8,489
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8,450
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Projects in
progress
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295
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246
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68,591
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68,401
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Less accumulated depreciation and
amortization
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32,272
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31,098
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Net property and
equipment
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36,319
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37,303
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Other
long-term assets
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1,127
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1,232
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$
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121,164
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$
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129,591
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See
accompanying notes to condensed consolidated financial
statements.
SONESTA
INTERNATIONAL HOTELS CORPORATION
CONDENSED
CONSOLIDATED
BALANCE
SHEETS
March 31, 2008 (unaudited)
and December 31, 2007
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(in thousands)
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March 31, 2008
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December 31, 2007
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Current
liabilities:
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Current portion of long-term
debt
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$
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1,090
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$
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1,059
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Accounts payable
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2,726
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4,494
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Advance deposits
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2,743
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2,936
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Accrued income
taxes
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433
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306
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Accrued
liabilities:
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Salaries and
wages
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1,100
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2,000
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Rentals
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1,897
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3,575
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Interest
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250
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252
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Pension and other employee
benefits
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2,152
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2,341
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Other
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959
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839
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6,358
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9,007
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Total current
liabilities
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13,350
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17,802
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Long-term
debt
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32,712
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33,002
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Deferred
gain
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64,481
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64,481
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Pension
liability, non-current
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4,510
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4,553
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Other
non-current liabilities
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1,172
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1,206
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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, $.80 par
value
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Authorized--10,000
shares
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Issued – 6,102 shares at stated
value
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4,882
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4,882
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Retained
earnings
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11,460
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15,068
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Treasury shares – 2,404, at
cost
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(12,053
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(12,053
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Accumulated other comprehensive
income
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650
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650
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Total
stockholders’ equity
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4,939
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8,547
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$
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121,164
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$
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129,591
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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)
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Three Months Ended
March 31
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2008
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2007
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Revenues:
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Rooms
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$
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9,203
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$
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8,485
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Food
and beverage
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4,368
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3,922
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Management,
license and service fees
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3,060
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1,768
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Parking,
telephone and other
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1,167
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1,208
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17,798
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15,383
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Other revenues from managed and
affiliated properties
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5,117
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4,900
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Total
revenues
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22,915
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20,283
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Costs
and expenses:
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Costs
and operating expenses
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7,557
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6,960
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Advertising
and promotion
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1,336
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1,259
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Administrative
and general
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3,299
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3,206
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Human
resources
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272
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285
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Maintenance
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927
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856
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Rentals
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2,019
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1,775
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Property
taxes
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370
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408
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Depreciation
and amortization
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1,938
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1,371
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17,718
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16,120
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Other expenses from managed and
affiliated properties
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5,117
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4,900
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Total
costs and expenses
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22,835
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21,020
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Operating
income (loss)
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80
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(737
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Other
income (deductions):
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Interest
expense
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(747
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)
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(743
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)
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Interest
income
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371
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397
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Foreign
exchange gain
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7
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2
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Gain
on sales of assets
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422
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--
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53
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(344
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)
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Income
(loss) before income tax provision (benefit)
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133
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(1,081
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)
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Income
tax provision (benefit)
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43
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(260
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)
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Net
income (loss)
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90
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(821
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)
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Cash
dividends
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(3,698
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)
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--
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Retained
earnings at beginning of period
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15,068
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14,471
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Retained
earnings at end of period
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$
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11,460
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$
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13,650
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Net
income (loss) per share of common stock
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$
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0.02
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$
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(0.22
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)
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Weighted
average number of shares outstanding
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3,698
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3,698
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See
accompanying notes to condensed consolidated financial
statements.
SONESTA
INTERNATIONAL HOTELS CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF
CASH
FLOWS (unaudited)
Increase
(Decrease) in Cash
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(in
thousands)
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Three
Months Ended March 31
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2008
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2007
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Cash
provided (used) by operating activities
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Net
income (loss)
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$
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90
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$
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(821
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)
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Adjustments
to reconcile net income (loss) to net cash used by operating
activities
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Depreciation
and amortization of property and equipment
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1,938
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1,371
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Other
amortization
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10
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10
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Deferred
federal and state tax provision (benefit)
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78
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(26
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)
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Gain
on sales of assets
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(422
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--
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Changes
in assets and liabilities
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Restricted
cash
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200
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(442
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)
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Accounts
and notes receivable
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(1,229
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)
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(428
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)
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Inventories
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37
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(61
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Prepaid
expenses and other
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(300
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)
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(544
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)
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Accounts
payable
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(1,398
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)
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(277
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)
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Advance
deposits
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(193
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)
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50
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Federal,
foreign and state income taxes
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(54
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)
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(251
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)
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Accrued
liabilities
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(2,726
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)
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(1,487
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)
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Cash
used for operating activities
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(3,969
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)
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(2,906
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)
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Cash
provided (used) by investing activities
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Expenditures
for property and equipment
|
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(556
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)
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(1,295
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)
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Payments
received on long-term receivables and advances
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410
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322
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Payments
received from development partnership
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125
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250
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Proceeds
from sales of assets
|
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|
656
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|
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|
--
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New
loans and advances
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(62
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)
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|
--
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Cash
provided by (used for) investing activities
|
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|
573
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|
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(723
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)
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Cash
used by financing activities
|
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|
|
|
|
|
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Repayments
of long term debt
|
|
|
(260
|
)
|
|
|
--
|
|
Cash
dividends paid
|
|
|
(4,068
|
)
|
|
|
(370
|
)
|
Cash used for financing
activities
|
|
|
(4,328
|
)
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash
|
|
|
(7,724
|
)
|
|
|
(3,999
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
32,620
|
|
|
|
24,888
|
|
Cash
and cash equivalents at end of period
|
|
$
|
24,896
|
|
|
$
|
20,889
|
|
Supplemental
Schedule of Interest and Income Taxes Paid
Cash paid
for interest in the 2008 three-month period and the 2007 three-month period was
approximately $739,000 and $732,000, respectively. Cash paid
for income taxes in the first quarter of 2008 and 2007 was approximately $30,000
and $17,000, respectively.
The
Company recorded a non-cash transaction in connection with a loan made to the
owner of two managed hotels in Egypt (see Note 10).
See
accompanying notes to condensed consolidated financial
statements.
SONESTA
INTERNATIONAL HOTELS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, 2008 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2008.
The
balance sheet at December 31, 2007 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.
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, 2007.
2.
|
Long-Term Receivables
and Advances
|
|
|
(in
thousands)
|
|
|
|
March 31,2008
|
|
|
December 31,2007
|
|
Sharm
El Sheikh, Egypt (a)
|
|
$
|
1,410
|
|
|
$
|
--
|
|
Sonesta
Bayfront Hotel Coconut Grove (b)
|
|
|
3,049
|
|
|
|
3,397
|
|
Trump International Sonesta Beach
Resort (c)
|
|
|
1,135
|
|
|
|
1,135
|
|
Other
|
|
|
112
|
|
|
|
37
|
|
Total long-term
receivables
|
|
|
5,706
|
|
|
|
4,569
|
|
Less: current
portion
|
|
|
1,091
|
|
|
|
793
|
|
Net long-term
receivables
|
|
$
|
4,615
|
|
|
$
|
3,776
|
|
(a)
|
This
loan was made in January 2008 to the owner 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 interest rate is
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. See also Note 10.
|
(b)
|
This
loan was made to the owner of the Sonesta Bayfront Hotel 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 (5.25% at March 31, 2008), plus 0.75%. 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. Principal payments totaling $348,000 during the first
quarter of 2008 were entirely paid from hotel earnings, in addition to the
fees recognized by the Company.
|
SONESTA
INTERNATIONAL HOTELS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(c)
|
This
amount represents cash advances made to the owner of Trump International
Sonesta Beach Resort Sunny Isles for the Company’s share of losses of the
resort, which opened on April 1, 2003. This amount was advanced
pursuant to the terms of the management agreement under which the Company
operates the hotel. No interest is charged on this
advance. The repayment of this advance is included in a
termination payment which is due to the Company following the termination
of its management agreement effective April 1, 2008. The
termination payment is disputed by the resort’s owner (see Note
9).
|
Management
continually monitors the collectability of its (long-term) receivables and
advances and believes they are fully realizable.
3.
|
Investment in
Development Partnership
|
The
Company owns a 50% limited partnership interest in a development project in Key
Biscayne, Florida, which is recorded on its balance sheet at March 31, 2008 at a
value of $33,666,000. The partnership’s condensed balance sheet at
March 31, 2008 is as follows (unaudited, in thousands):
|
|
|
|
|
|
at
March 31, 2008
|
|
|
|
|
|
Total
assets, primarily land
|
|
$
|
152,106
|
|
Less
debt
|
|
|
(58,021
|
)
|
Partnership
equity
|
|
$
|
94,085
|
|
The debt
of the partnership is non-recourse to the Company. The difference
between 50% of the net equity of the partnership and the Company’s investment
account balance is primarily due to differences in the recorded bases of the
land.
The development partnership has not commenced operations.
The
Company operated Sonesta Beach Resort Key Biscayne, located on the development
site, until August 2006. Under the terms of the partnership agreement
the Company received monthly payments of $125,000 following the closure of the
hotel, which payments reduce the carrying value of the
investment. The partnership’s general partner suspended these
payments as of February 2008, in order to conserve cash for development
expenditures. Previously, the partnership deferred payments of a
monthly development fee to the general partner.
The
Company continues to monitor the carrying value of its investment in this
development project and believes the investment is fully
realizable.
4.
|
Borrowing
Arrangements
|
Credit
Line
The
Company has a $2,000,000 demand line of credit. This line bears
interest at the prime rate (5.25% at March 31, 2008). 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, 2008.
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. The
principal balance outstanding at March 31, 2008 and December 31, 2007 was
$33,802,000 and $34,061,000, respectively. 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 $20,446,000 at March 31,
2008.
SONESTA
INTERNATIONAL HOTELS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
interest rate is 8.6% for the term of the loan, and the loan matures in July
2010. Monthly payments of interest and principal are
$332,911. The current portion of the principal balance at March 31,
2008 equals $1,091,000.
5.
|
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
|
|
|
|
2008
|
|
|
2007
|
|
Direct
departmental costs
|
|
|
|
|
|
|
Rooms
|
|
$
|
2,463
|
|
|
$
|
2,325
|
|
Food
and beverage
|
|
|
3,604
|
|
|
|
3,253
|
|
Heat,
light and power
|
|
|
729
|
|
|
|
714
|
|
Other
|
|
|
761
|
|
|
|
668
|
|
|
|
$
|
7,557
|
|
|
$
|
6,960
|
|
Direct
departmental costs include payroll expenses and related payroll burden, the cost
of food and beverage consumed and other departmental costs.
Segment
information for the Company’s two reportable segments, Owned & Leased Hotels
and Management Activities, for the three-month periods ending March 31, 2008 and
2007 follows:
Quarter
ended March 31, 2008
|
|
(in
thousands)
|
|
|
|
Owned
&
Leased Hotels
|
|
|
Management
Activities
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
14,725
|
|
|
$
|
3,073
|
|
|
$
|
17,798
|
|
Other
revenues from managed and
|
|
|
|
|
|
|
|
|
|
|
|
|
affiliated
properties
|
|
|
--
|
|
|
|
5,117
|
|
|
|
5,117
|
|
Total
revenues
|
|
|
14,725
|
|
|
|
8,190
|
|
|
|
22,915
|
|
Operating
income before depreciation and amortization expense
|
|
|
1,087
|
|
|
|
931
|
|
|
|
2,018
|
|
Depreciation
and amortization
|
|
|
(1,242
|
)
|
|
|
(696
|
)
|
|
|
(1,938
|
)
|
Interest
income (expense), net
|
|
|
(746
|
)
|
|
|
370
|
|
|
|
(376
|
)
|
Other
income
|
|
|
--
|
|
|
|
429
|
|
|
|
429
|
|
Segment
pre-tax income (loss)
|
|
|
(901
|
)
|
|
|
1,034
|
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
assets
|
|
|
75,284
|
|
|
|
45,880
|
|
|
|
121,164
|
|
Segment
capital additions
|
|
|
542
|
|
|
|
14
|
|
|
|
556
|
|
SONESTA
INTERNATIONAL HOTELS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
|
|
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
|
|
|
|
2008
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
$
|
90
|
|
|
$
|
(821
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
3,698
|
|
|
|
3,698
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share of common stock
|
|
$
|
0.02
|
|
|
$
|
(0.22
|
)
|
The
components of the net periodic pension cost for the Company’s Pension Plan were
as follows:
|
|
(in
thousands)
|
|
|
|
Three
Months ended March 31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Interest
cost
|
|
$
|
420
|
|
|
$
|
434
|
|
Expected
return on assets
|
|
|
(459
|
)
|
|
|
(443
|
)
|
Recognized
actuarial (gain) loss
|
|
|
(4
|
)
|
|
|
9
|
|
Net
benefit included in the consolidated statements of
operations
|
|
$
|
(43
|
)
|
|
$
|
--
|
|
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 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 8 of the Company’s 2007 Annual Report filed on Form 10-K.
The
Company is not required to make a contribution to the Pension Plan during 2008,
however the Company expects to make contributions of approximately $1,500,000,
or which $1,047,000 was funded during the second quarter of
2008. Accordingly, the $1,500,000 has been classified as a current
liability.
The
Company does not have any other post-retirement benefit plans.
9.
|
Trump International
Sonesta Beach Resort Sunny
Isles
|
From
April 2003 through March 2008, the Company operated Trump International Sonesta
Beach Resort Sunny Isles, in Florida, under a management
agreement. In October 2007, the Company exercised a one-time right to
cancel the management agreement, upon 6 months notice, and receive repayment of
advances it was obligated to make for operating losses and certain minimum
returns due to the hotel’s owner. The amount due upon termination is
$7,031,000. The hotel’s owner has disputed the amount of the
termination payment, but has paid the entire amount into escrow, as required by
the agreement. An arbitration procedure is currently underway to
resolve the dispute. The aforementioned amount due of $7,031,000
includes cash advances recorded on the Company’s balance sheet at March 31, 2008
of $1,135,000 (see Note 2). The remaining amount of $5,896,000
relates to fees due to the Company which were not previously recorded since the
hotel’s profits were insufficient to pay them, and the collectibility was
uncertain. The Company will recognize this fee income when it is
collected. When the hotel opened, the Company made a non-refundable $2,268,000
investment in the hotel for furniture, fixtures and equipment, which was being
amortized over the initial 10-year term of the management
agreement. Following its decision to terminate the management
agreement during the fourth quarter of 2007 the Company accelerated the
amortization of this investment, which resulted in an additional expense of
$567,000 during the first quarter of 2008.
10.
|
Sonesta Hotels Sharm
El Sheikh
|
In
January 2008, the Company agreed to pay $500,000 to the owner of its two managed
hotels in Sharm El Sheikh, Egypt, in return for an extension until 2024 of the
management agreement for Sonesta Club, which otherwise would have expired in
2009. The payment was made by reducing receivables for fees and
expenses from this hotel. In addition, the Company agreed to convert
approximately $1.6 million of receivables from both hotels into a five year
loan, at an interest rate below market. The Company accounts for the
loan based on a market rate of 6.5%, and discounted the loans
accordingly. The discount of $45,000, in addition to the $500,000
payment, has been recorded as an other long term asset, and will be amortized
over the remaining term of the management agreement, including the
extension. The foregoing resulted in the following non-cash
transaction, recorded in January 2008 (in thousands);
Increase
in Long term Receivables
|
1,473
|
Increase
in Long term Assets
|
545
|
Decrease
in Accounts Receivable
|
(2,018)
|
SONESTA
INTERNATIONAL HOTELS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11.
|
Impact of Recently
Issued Accounting Standards
|
In
September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS
No. 157). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value under other accounting pronouncements that permit or
require fair value measurements, changes the methods used to measure fair value
and expands disclosures about fair value measurements. In particular,
disclosures are required to provide information on the extent to which fair
value is used to measure assets and liabilities, the inputs used to develop
measurements and the effect of certain of the measurements on earnings (or
changes in net assets). SFAS No. 157 also nullifies the specific guidance in
EITF Issue No. 02-3,
Issues
Involved in Accounting for Derivative Contracts Held for Trading Purposes and
Contracts Involved in Energy Trading and Risk Management Activities
which
prohibited the recognition of gains and losses at the inception of a derivative
transaction in the absence of observable market data. SFAS No. 157 eliminates
the use of a blockage factor for fair value measurements of financial
instruments trading in an active market. SFAS 157 does not require any new fair
value measurements but rather eliminates inconsistencies in guidance found in
various prior accounting pronouncements. In February 2008, the FASB
issued FSP FAS 157-2,
Effective Date of FASB Statement No.
157
, which defers the effective date of SFAS 157 for one year for all
nonfinancial assets and liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring
basis. The Company’s adoption of SFAS No. 157 on January 1, 2008
did not have a material impact on our consolidated financial position, results
of operations or cash flows.
In
February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial
Assets and Financial Liabilities”
(SFAS No. 159). SFAS No. 159
permits entities to choose to measure at fair value many financial instruments
and certain other items that are not currently required to be measured at fair
value. Subsequent changes in fair value for designated items will be
required to be reported in earnings in the current period. SFAS No.
159 also establishes presentation and disclosure requirements for similar types
of assets and liabilities measured at fair
value. SFAS No. 159 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. The
Company’s adoption of SFAS No. 159 on January 1, 2008 did not have a
material impact on our consolidated financial position, results of operations or
cash flows.
In
December 2007, the FASB issued SFAS No. 160, “
Noncontrolling Interests in
Consolidated Financial Statements
” (SFAS No. 160). SFAS No.
160 addresses consolidation rules for noncontrolling interests. The
objective is to improve the relevance, comparability, and transparency of the
financial information that a reporting entity provides in its consolidated
financial statements by establishing accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It applies to all entities that prepare consolidated
financial statements, except for not-for-profit organizations, but will affect
only those entities that have an outstanding noncontrolling interest in one or
more subsidiaries or that deconsolidate a subsidiary. This Statement
is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Early adoption is
prohibited. Management is currently evaluating SFAS No. 160 to
determine if it will have a material impact on the Company’s future financial
statements.
In
December 2007, the FASB issued SFAS No. 141R, “
Business Combinations
” (SFAS
No. 141R). SFAS No. 141R addresses financial accounting and reporting
for business combinations, and supersedes APB Opinion No. 16,
Business Combinations
and
FASB Statement No. 38,
Accounting for Preacquisition
Contingencies of Purchased Enterprises
. The objective is to
provide consistency to the accounting and financial reporting of business
combinations by using only one method, the purchase method. This
Statement is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Early adoption is
prohibited. Management is currently evaluating SFAS No. 141R to
determine if it will have a material impact on the Company’s future financial
statements.
SONESTA
INTERNATIONAL HOTELS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In March
2008, the FASB issued SFAS No. 161, “
Disclosures about Derivative
Instruments and Hedging Activities
” (SFAS No. 161). SFAS No.
161 enhances the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities
, and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance and cash flows. This
Statement is effective for fiscal years, and interim periods within those fiscal
years, beginning after November 15, 2008. This Statement encourages,
but does not require, comparative disclosures for earlier periods at initial
adoption. Early adoption is encouraged. Management is
currently evaluating SFAS No. 161 to determine if it will have a material
impact on the Company’s future financial
statements.
Part
I – Item 2
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FIRST QUARTER 2008 COMPARED
TO 2007
In the
first quarter of 2008 the Company recorded net income of $90,000, or $0.02 per
share, compared to a net loss of $821,000, or $(0.22) per share, during the
first quarter of 2007. The increase in income was primary from
increased earnings of Royal Sonesta Hotel Boston, and from increased income from
the Company’s management activities. Management income benefited from
increased fees earned from Trump International Sonesta Beach Resort Sunny Isles
and from the Company’s managed operations in Egypt. In addition, the
Company recorded a gain on the sale of an asset. A detailed analysis
if 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
|
|
|
2008
|
|
|
2007
|
|
Royal
Sonesta Hotel Boston
|
|
|
400
|
|
|
$
|
4,838
|
|
|
$
|
4,396
|
|
Royal
Sonesta Hotel New Orleans
|
|
|
500
|
|
|
|
9,887
|
|
|
|
9,202
|
|
Management
and service fees and other revenues
|
|
|
|
|
|
|
3,073
|
|
|
|
1,785
|
|
Total
revenues, excluding other revenues from managed and affiliated
properties
|
|
|
|
|
|
$
|
17,798
|
|
|
$
|
15,383
|
|
Total
revenues for the quarter ended March 31, 2008 were $17,798,000 compared to
$15,383,000 in 2007, an increase of approximately $2,415,000.
Royal
Sonesta Hotel Boston recorded first quarter 2008 revenues of $4,838,000 compared
to first quarter 2007 revenues of $4,396,000, representing an increase of
$442,000, or 10%. The increase was primarily due to an increase in
room revenues of $328,000, resulting from an 11% increase in room revenue per
available room (“REVPAR”). Both occupancy levels and average room
rates increased in the 2008 first quarter compared to last year, mainly as a
result of increased group and convention business.
Revenues
at Royal Sonesta Hotel New Orleans during the first quarter of 2008 were
$9,887,000 compared to $9,202,000 during the first quarter of 2007, representing
a 7% increase. Room revenues increased by $391,000 compared to last
year. The hotel’s REVPAR increased by 5%, mainly due to an increase
in average room rates achieved. Food and beverage revenues increased
by $333,000, or 13%, due to increased banqueting revenues. The Royal
Sonesta Hotel operates a laundry facility which also provides services to third
party clients. Revenues from third party clients were $64,000 less
than previous year due to the loss of two key accounts.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Revenues
from management activities increased by $1,288,000 to $3,073,000 in the 2008
first quarter. The majority of the increase was due to increased
income from Trump International Sonesta Beach Resort Sunny Isles and from the
Company’s managed hotels in Egypt. Management income from the Sunny
Isles hotel increased by $584,000 compared to the first quarter of
2007. The 2008 income included an incentive fee, which was not earned
in 2007. The Company terminated the management agreement for this
hotel effective April 1, 2008 (see Note 9). Management income from
the Company’s operations in Egypt increased from $547,000 in 2007 to $1,000,000
in 2008. Both corporate and leisure travel to Egypt continued the
upward trend which started in the fall of 2007. In addition, the
Company reported income in 2008 from Sonesta Pharaoh Resort Hurghada, which
hotel was added to the Company’s collection in Egypt effective January 1,
2008.
OPERATING
INCOME
|
|
OPERATING
INCOME (LOSS)
(in
thousands)
|
|
|
|
2008
|
|
|
2007
|
|
Royal
Sonesta Hotel Boston
|
|
$
|
(726
|
)
|
|
$
|
(902
|
)
|
Royal
Sonesta Hotel New Orleans
|
|
|
571
|
|
|
|
552
|
|
Operating
income (loss) from hotels after management and service
fees
|
|
|
(155
|
)
|
|
|
(350
|
)
|
Management
activities and other
|
|
|
235
|
|
|
|
(387
|
)
|
Operating
income (loss)
|
|
$
|
80
|
|
|
$
|
(737
|
)
|
Operating
income for the three-month period ended March 31, 2008 was $80,000, compared to
an operating loss of $737,000 in the three-month period ended March 31, 2007, an
increase of approximately $817,000.
Royal
Sonesta Hotel Boston decreased its operating loss during the first quarter of
2008 by $176,000 to $726,000. The first quarter is traditionally the
slowest quarter in the Boston hotel market. Revenues during the 2008
first quarter increased by $442,000 and overall expenses increased by $266,000,
or 5%. The increase in expenses was primarily a result of increased
costs and operating expenses due to the higher occupancy achieved in the 2008
quarter compared to last year.
Operating
income from Royal Sonesta Hotel New Orleans increased from $552,000 during the
2007 first quarter to $571,000 in the 2008 first quarter. Increased
revenues of $685,000 were almost entirely offset by increased expenses of
$666,000. Increased expenses included increased costs and operating
expenses, in part due to higher commission expenses, as well as increased
maintenance cost and sales and advertising expense. In addition, a
laundry facility operated by the hotel reported a decrease in income of $96,000
, primarily due to the loss of two third party clients.
The
Company reported operating income from management activities of $235,000 during
the 2008 first quarter compared to an operating loss of $387,000 in 2007, an
increase of $622,000. Revenues from management activities increased
by $1,288,000, and expenses related to these activities increased by
$666,000. The increase in expenses was almost entirely due to a
$574,000 increase in depreciation and amortization expense related to
accelerated depreciation of an investment the Company made in Trump
International Sonesta Beach Resort Sunny Isles. The Company invested
$2,268,000 in the Hotel in 2003, which was being amortizing over the initial
10-year term of the management agreement. The Company exercised an
early termination option (see Note 10) and stopped managing this property
effective April 1, 2008. As a result, the Company accelerated
depreciation of the remaining investment.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
OTHER INCOME
(DEDUCTIONS)
Interest
income decreased from $397,000 in the 2007 first quarter to $371,000 in the 2008
first quarter primarily due to a decrease in interest earned on a loan to the
owner of Sonesta Bayfront Hotel Coconut Grove. This was a result of
the lower principal balance as well as lower interest rate on this loan, which
fluctuates with the prime rate. The decrease was partially offset by
interest earned from a new loan made to the owner of Sonesta Beach Resort and
Sonesta Club Sharm El Sheikh.
The gain
on sale of assets in the 2008 first quarter resulted from the sale of a coop
unit the Company owned in New York City to the Company’s Chief Executive Officer
and Vice Chairman. The Company’s Board of Directors approved the
transaction.
FEDERAL, FOREIGN AND STATE
INCOME TAXES
In the
2008 first quarter the Company recorded a tax expense of $43,000 on pretax
income of $133,000. The expense is lower than the statutory rate
because the Company expects to benefit from credits for foreign taxes paid in
previous years which have been carrying forward. These credits more
than offset the state income taxes, payable primarily on the Company’s income
from Royal Sonesta New Orleans. The tax benefit in the 2007 first
quarter was lower 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 incurred primarily on the Company’s income from Egypt.
LIQUIDITY AND CAPITAL
RESOURCES
The
Company had cash and cash equivalents of approximately $24.9 million at March
31, 2008. Company management believes these cash resources will be
adequate to meet its cash requirements for 2008 and beyond.
The
Company agreed in January 2008 to convert approximately $1.6 million of
receivables for fees and expenses from two hotels it manages in Sharm El Sheikh,
Egypt into a five year loan. This was part of a transaction which
also included the extension until 2024 of the management agreement for Sonesta
Club Sharm El Sheikh which otherwise would have expired at the end of
2009. In return, the Company agreed to pay $500,000, which payment
also reduced outstanding receivables from Sharm Club (see also Note
10).
Under the
terms of the partnership agreement for a development project in which the
Company is a 50% limited partner, the Company received monthly payments of
$125,000 since August 2006. These payments reduced the carrying value
of the Company’s investment. The partnership’s general partner
suspended these payments as of February 2008, in order to conserve cash for
development expenditures. Previously, the partnership deferred
payments of a monthly development fee to the general partner.
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,
2008. This information should be read in conjunction with Note
4—Borrowing Arrangements.
Short and
Long Term Debt (in thousands) maturing in:
|
|
YEAR
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Thereafter
|
|
|
Total
|
|
|
Fair Value
|
|
Fixed
rate
|
|
$
|
799
|
|
|
$
|
1,163
|
|
|
$
|
31,840
|
|
|
$
|
-0-
|
|
|
$
|
33,802
|
|
|
$
|
35,008
|
|
Average
interest rate
|
|
|
8.6
|
%
|
|
|
8.6
|
%
|
|
|
8.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
PART I – Item
4
INTERNAL
CONTROLS AND PROCEDURES
As of
March 31, 2008, 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,
2008.
There
have been no significant changes in the Company’s internal controls regarding
financial reporting during the quarter ended March 31, 2008 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.
PART II – Other
Information
Item Numbers 1, 2, 3, 4, 5
and 6
Not
applicable during the quarter ended March 31, 2008.
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:
|
|
|
|
Boy
van Riel
|
|
|
Vice
President and Treasurer
|
|
|
|
|
|
(Authorized
to sign on behalf of the Registrant as Principal Financial
Officer)
|
|
|
|
|
Date:
May 9, 2008
|
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