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 September 30, 1997
OR
[ ] 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
200 Clarendon Street, 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 No X (See Form 12b-25 filed June 30, 1997)
---- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ____ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of Shares of Common Stock Outstanding
as of November 5, 1997 -- $.80 par value,
Class A - 2,068,215
<PAGE>
FORM 10-Q
Part I - Item 1. Financial Information
SONESTA INTERNATIONAL HOTELS CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 1997 (Unaudited) and December 31, 1996
<TABLE>
<CAPTION>
(in thousands)
--------------------------------
September 30 December 31
1997 1996
---------------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,376 $ 3,692
Accounts and notes receivables:
Trade, less allowance of $96,000
($108,000 at December 31, 1996) for doubtful accounts 6,679 6,049
Interest receivable 292 140
Other 659 821
------- -------
Total accounts and notes receivable 7,630 7,010
Current portion of deferred taxes 273 317
Inventories 658 852
Prepaid expenses 1,461 1,040
------- -------
Total current assets 13,398 12,911
Long-term receivables and advances 15,085 13,567
Investments in hotels -- 563
Other long-term assets 1,576 --
Property and equipment, at cost:
Land 2,942 2,877
Buildings 40,098 37,792
Furniture and equipment 21,069 17,319
Leasehold improvements 3,235 3,140
Projects in progress -- 2,036
------- -------
67,344 63,164
Less accumulated depreciation and
amortization 24,730 21,234
------- -------
Net property and equipment 42,614 41,930
------- -------
$72,673 $68,971
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
1
<PAGE>
FORM 10-Q
SONESTA INTERNATIONAL HOTELS CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 1997 (Unaudited) and December 31, 1996
<TABLE>
<CAPTION>
(in thousands)
------------------------------
September 30 December 31
1997 1996
--------------- -----------
<S> <C> <C>
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and
capitalized lease obligations $ 964 $ 1,005
Accounts payable 2,694 5,484
Advance deposits 1,579 2,324
Federal, foreign and state income taxes 306 706
Accrued liabilities:
Salaries and wages 1,419 1,775
Rentals 4,145 5,031
Interest 215 23
Employee benefits 1,290 567
Other 1,950 1,007
-------- --------
Total accrued liabilities 9,019 8,403
-------- --------
Total current liabilities 14,562 17,922
Long-term debt 30,803 23,795
Deferred federal and state income taxes 2,571 2,282
Other non-current liabilities 786 1,526
Commitments and contingencies
Redeemable preferred stock, $25 par value, at
redemption value 294 294
Common stockholders' equity:
Common stock:
Class A, $.80 par value:
Authorized--10,000,000 shares
Issued--3,051,088 shares at stated value 3,488 3,488
Retained earnings 28,295 27,790
Treasury shares--982,873 at cost (8,126) (8,126)
-------- --------
Total common stockholders' equity 23,657 23,152
-------- --------
$ 72,673 $ 68,971
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
FORM 10-Q
SONESTA INTERNATIONAL HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands except for per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------- ------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Rooms $ 9,020 $ 8,702 $ 29,742 $ 26,756
Food and beverage 3,083 3,445 11,733 10,667
Management, license and
service fees 1,750 1,434 5,363 4,571
Other 1,441 1,265 4,032 3,788
-------- -------- -------- --------
15,294 14,846 50,870 45,782
-------- -------- -------- --------
Costs and expenses:
Costs and operating expenses 6,531 6,592 20,664 19,598
Advertising and promotion 1,386 1,422 4,216 4,178
Administrative and general 2,839 2,886 8,984 8,395
Human resources 424 404 1,232 1,109
Maintenance 1,167 1,139 3,673 3,500
Rentals 638 771 4,851 3,971
Property taxes 295 275 887 627
Depreciation and amortization 1,227 1,063 3,509 3,091
-------- -------- -------- --------
14,507 14,552 48,016 44,469
-------- -------- -------- --------
Operating income 787 294 2,854 1,313
Other income (deductions):
Interest expense (709) (518) (2,152) (1,586)
Interest income 276 316 765 900
Foreign exchange gain (loss) 1 2 (1) --
Equity in net loss of hotels -- (338) -- (89)
Gain on sales of assets 1 -- 7 209
-------- -------- -------- --------
(431) (538) (1,381) (566)
-------- -------- -------- --------
Income (loss) before income taxes 356 (244) 1,473 747
Federal, foreign and state income
tax provision (benefit) 141 (230) 648 658
-------- -------- -------- --------
Net income (loss) 215 (14) 825 89
Retained earnings at beginning
of period 28,084 28,022 27,790 28,235
Cash dividends on preferred stock (4) (4) (10) (10)
Cash dividends on common stock -- -- (310) (310)
-------- -------- -------- --------
Retained earnings at end of period $ 28,295 $ 28,004 $ 28,295 $ 28,004
======== ======== ======== ========
Earnings per share of common stock $ .10 $ (.01) $ .39 $ .04
======== ======== ======== ========
Weighted average number of shares
outstanding 2,068 2,070 2,068 2,070
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
FORM 10-Q
SONESTA INTERNATIONAL HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
(in thousands)
-----------------------------
Nine Months Ended Sept 30
1997 1996
---------- ---------
<S> <C> <C>
Cash provided (used) by operating activities
Net income $ 825 $ 89
Items not (providing) requiring cash
Foreign exchange loss 1 --
Pension expense 478 561
Depreciation and amortization 3,509 3,091
Deferred federal income taxes 333 22
Amortization of loan costs 61 --
Deferred interest income -- (412)
Net gain on sales of assets (7) (209)
Provision for doubtful accounts 29 28
Equity in net loss of hotels -- 89
Changes in assets and liabilities
Accounts and notes receivable (323) (994)
Inventories 194 (60)
Prepaid expenses (427) (825)
Advance deposits (745) 171
Accounts payable (2,480) (1,538)
Federal, foreign and state income taxes (400) 74
Accrued liabilities (556) (2,245)
------- -------
Cash provided (used) by operating activities 492 (2,158)
Cash provided (used) by investing activities
Proceeds from sales of assets 10 57
Expenditures for property and equipment (4,197) (3,580)
Cash in escrow (1,887) --
Cash reimbursed from escrow 840 --
Investments in hotels -- (103)
Proceeds from sale of investment in hotel -- 5,792
New loans and advances (2,283) (137)
Payments received on long-term receivables and advances 843 1,551
------- -------
Cash provided (used) by investing activities (6,674) 3,580
</TABLE>
4
<PAGE>
Form 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (continued)
<TABLE>
<CAPTION>
(in thousands)
------------------------------
Nine Months Ended Sept 30
1997 1996
------------------------------
<S> <C> <C>
Cash provided (used) by financing activities
Changes in notes payable -- (562)
Proceeds from issuance of long-term debt 24,580 --
Costs of financing (423) --
Payments on long-term debt (17,619) (962)
Payments on capitalized lease obligations (40) (61)
Purchase of common stock -- (22)
Cash dividends paid (631) (631)
-------- --------
Cash provided (used) by financing activities 5,867 (2,238)
Loss from effect of exchange rate changes on cash (1) --
-------- --------
Net decrease in cash (316) (816)
-------- --------
Cash and cash equivalents at beginning of period 3,692 3,370
-------- --------
Cash and cash equivalents at end of period $ 3,376 $ 2,554
======== ========
</TABLE>
Supplemental Schedule of Interest and Income Taxes Paid
-------------------------------------------------------
Cash paid for interest in the 1997 nine-month period and the 1996
nine-month period was approximately $1,960,000 and $1,598,000,
respectively. Cash paid for income taxes in the 1997 and 1996
nine-month periods was approximately $715,000 and $562,000,
respectively.
See accompanying notes to consolidated financial statements.
5
<PAGE>
FORM 10-Q
SONESTA INTERNATIONAL HOTELS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Operations
The accompanying unaudited consolidated financial statements include the
accounts of the Company and all foreign and domestic subsidiaries. In the
opinion of management, these financial statements reflect all adjustments,
consisting of normal recurring items, necessary to present fairly the financial
position of the Company at September 30, 1997 and December 31, 1996, and the
results of its operations for the nine month periods ended September 30, 1997
and 1996 and its cash flows for the nine month periods ended September 30, 1997
and 1996, and should be read in conjunction with the 1996 Annual Report.
The results of operations for these periods are not necessarily indicative of
the results for the full years.
Certain amounts in the 1996 financial statements have been reclassified to
conform to the 1997 presentation.
The Sonesta St. George Hotel Luxor, Egypt, opened in October 1997. The 220 room
full-service hotel is operated by the Company under a long-term management
agreement, under which it will receive management fees based on revenues, and
incentive fees based on operating profits, as defined in the agreement. The
company is committed to loan $250,000 to the owner of the hotel for working
capital, as part of the agreements.
In January 1997, Company subsidiaries refinanced the mortgage loan on the Royal
Sonesta Hotel Boston (Cambridge) (see also Note 4--Long-term debt).
During the first quarter of 1997, the Company loaned $1,000,000 to the owner of
the Sonesta Hotel Cairo, Egypt, to partially finance improvements to the hotel
which include additional rooms. The owner of the hotel also agreed to extend the
management agreement until May 2012. The original agreement was to expire in
2002, and the owner had the right to convert the agreement to a license
agreement as of 1997, which would have reduced the Company's management fee
income.
In December 1994, Company subsidiaries entered into agreements to acquire a 50%
interest in a partnership to develop a 320-room beach resort and casino in
Guanacaste, Costa Rica. The Company has advanced $563,000, to acquire the hotel
site and for other project-related expenses, which is in part secured by a
mortgage on the hotel site. As permitted under the partnership agreements, in
March 1997 the Company notified its partner that it does not intend to proceed
with the project. The Company expects to fully recover its investment, which is
included in Long-term receivables and advances--other at September 30, 1997.
6
<PAGE>
FORM 10-Q
SONESTA INTERNATIONAL HOTELS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods if there is a
change to the previously reported amount. Statement 128 is not expected to have
any effect on the calculation of the Company's earnings per share.
2. Long-Term Receivables and Advances
<TABLE>
<CAPTION>
(in thousands)
------------------------------------
September 30, December 31,
1997 1996
------------- -----------------
<S> <C> <C>
The Sonesta Beach Resort,
Key Biscayne, Florida:
Second mortgage receivable,
14-1/2% interest (of which
11% is payable quarterly and
3-1/2% deferred until maturity)
due 12/31/97 (a) $5,000 $5,000
Deferred interest receivable (a) 2,306 2,306
$6,500,000 fourth mortgage
receivable, 10% simple
interest due 12/31/04, net of
$5,500,000 reserve (a) 1,000 1,000
Loans to owner (b) 3,254 4,007
Sharm El Sheikh (c) -- 10
Sharm El Sheikh (d) 1,000 500
Cairo, Egypt, net of discount (e) 851 --
Other 2,079 781
-------- --------
Total long-term receivables 15,490 13,604
Less: current portion 405 37
-------- --------
Net long-term receivables $15,085 $13,567
======== ========
</TABLE>
(a) The Company's mortgage notes receivables are subordinate to a first
mortgage of $22,431,000 at September 30, 1997. The maturity date of the
first mortgage loan is October 1, 2000. The Company has not recorded as
income the deferred portion of interest on the second mortgage since
July 1, 1992. The Company's total receivable recorded at September 30,
1997 was $ 11,560,000 (see also (b) below). Of these receivables, an
amount of $7,306,000 is due on December 31, 1997. The Company and the
owner are currently discussing the repayment of the loans due at
December 31, 1997. The alternative solutions being discussed include
repayment of the loans with new loan proceeds or sale proceeds,
acquisition of the resort by the Company, or an extension of the
current loan agreements. The Company believes that all amounts due from
the hotel will be realized based on its
7
<PAGE>
FORM 10-Q
SONESTA INTERNATIONAL HOTELS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assessment of the value of the hotel, which in its opinion exceeds the
amount of the first mortgage and the Company's total receivable
recorded at September 30, 1997, of $11,560,000. Management bases this
belief on its evaluation of sales of comparable hotel properties in the
recent past, and the cash flow generated by the resort.
(b) Under five separate agreements, a subsidiary of the Company loaned
$5,475,000 to the resorts owner during 1993 and 1994. These loans earn
interest at rates ranging from the prime rate (8 1/2% at September 30,
1997) to 14 1/2%. Of these loans, an amount of $2,684,000, and interest
thereon, is secured by second and third mortgages on the hotel
property. Principal and interest are payable out of hotel cash flow
remaining after payment of first and second mortgage loan interest, and
a payment to the resort owner equal to 3/4 of 1% of revenues of the
resort.
(c) A subsidiary of the Company loaned $800,000 to the owner of the Sonesta
Beach Resort, Sharm El Sheikh which opened in May 1994. The principal
balance of this loan has been repaid in full.
(d) The Company has agreed to loan $1,500,000 to the owner of the Sonesta
Beach Resort, Sharm El Sheikh, to finance certain improvements to the
resort, including construction of 160 additional guestrooms, conference
and other hotel facilities. The loan bears interest at the prime rate
(8 1/2% at September 30, 1997) with repayment in eight annual
installments of $187,500, together with interest, commencing January 1,
1998. At September 30, 1997, the Company has advanced $1,000,000, and
the remaining $500,000 will be advanced once the improvements are
substantially completed.
(e) This loan, made in February 1997 to the owner of the Sonesta Hotel
Cairo, will be repaid with two payments of $330,000 each on March 1,
1998 and 1999, and a final payment of $340,000 on March 1, 2000. There
is no interest due during the term of the loan.
3. Borrowing Arrangements
The Company has a $2,000,000 line of credit which expires on September 30, 1998.
This line of credit bears interest at the prime rate (8 1/2% at September 30,
1997). The terms of the line require a certain minimum net worth, a minimum
amount of unrestricted cash or available credit lines during part of each
calendar year, and approval for additional borrowings by the Company. No amount
was outstanding under this line at September 30, 1997.
A subsidiary of the Company has a $5,000,000 line of credit which will expire
December 31, 1997. The terms of the loan require certain minimum levels of
earnings and net worth, limit cash dividends and purchases of the Company's
stock, and specify a maximum defined debt to net worth ratio. The loan is
secured by the Company's leasehold interest in the Royal Sonesta Hotel, New
Orleans, and by a Company guaranty. The interest rate is prime (8 1/2% at
September 30, 1997) less one-eighth percent, and the commitment fee on the
unused portion of the line is .65% per annum. No amount
8
<PAGE>
FORM 10-Q
SONESTA INTERNATIONAL HOTELS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
was outstanding under this line at September 30, 1997. The Company expects this
line to be renewed.
A foreign subsidiary had an operating line of credit of $500,000, which the
Company cancelled in August 1997.
4. Long-Term Debt
<TABLE>
<CAPTION>
(in thousands)
-----------------------------------
September 30, December 31,
1997 1996
-------------------- --------------------
<S> <C> <C>
Charterhouse of Cambridge Trust:
First mortgage notes (a) $22,529 $17,068
Sonesta Hotels of Anguilla, Ltd:
First mortgage notes (b) 6,190 4,690
Note from Seller (c) 800 800
Sonesta Curacao Hotel Corporation, N.V.:
Bank term loan (d) 2,000 2,000
Other 188 188
-------- --------
31,707 24,746
Less current portion of long-term debt 904 951
-------- --------
Total long-term debt $30,803 $23,795
======== ========
</TABLE>
(a) The mortgage loan on the Royal Sonesta Hotel Boston (Cambridge) was
refinanced in January 1997. The new loan is secured by a first mortgage
on the Royal Sonesta Hotel Boston (Cambridge) property. This property
is included in fixed assets at a net book value of approximately
$22,053,000 at September 30, 1997. The interest rate on the new loan is
8.86% for the term of the loan, and monthly payments for interest and
principal are $203,802. The mortgage loan matures in December 2003, and
no prepayments are allowed during the first three years of the loan.
(b) The loan is secured by a first mortgage on the Sonesta Beach Resort
Anguilla property, and an assignment to the lender of the hotel's
furniture, fixtures and equipment. The property is included in fixed
assets at a book value of $13,457,000 at September 30, 1997. In
addition, an amount of $1,900,000 is secured by a Company guaranty. The
loan was increased by $1,700,000 in March 1997 to partially finance
improvements to the resort made during the winter of 1996/97. Principal
payments for 1997 and 1998 were reduced by $500,000, after the Company
in August 1997 agreed to cancel the operating line of credit it had
with the same lender (see Note 3 - Borrowing Arrangements). The loan
requires minimum principal payments of $400,000, $725,000, $3,965,000,
and $1,100,000 in the years 1998, 1999, 2000 and 2001, respectively. In
addition, principal payments are required equal to 25% of the hotel's
annual excess cash flow, as defined. The interest rate on the loan is
LIBOR plus 2 1/4 percentage points. The interest rate at September 30,
1997 was 7.9%.
9
<PAGE>
FORM 10-Q
SONESTA INTERNATIONAL HOTELS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(c) This loan from the Seller of the Sonesta Beach Resort Anguilla is for a
three year period ending November 28, 1998. The interest rate is 8% per
annum. The Company has reduced this loan by $200,000 to which it is
entitled under the agreements with the Seller.
(d) This loan matures June 30, 1998. No principal payments are required
during the term. The interest rate was 9 3/4% at September 30, 1997,
and is subject to periodic review by the bank. This loan may be prepaid
on 60 days notice. The loan is secured by a Company guaranty, and by an
assignment of the right to receive fees under the management agreement
for the Sonesta Beach Resort & Casino, Curacao.
5. Hotel Costs and Operating Expenses
Hotel costs and operating expenses in the accompanying Consolidated Statements
of Operations are summarized below:
<TABLE>
<CAPTION>
(in thousands)
----------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Direct departmental costs
Rooms $2,356 $2,354 $7,157 $6,753
Food and beverage 2,803 2,938 9,363 8,962
Heat, light and power 594 595 1,803 1,718
Other 778 705 2,341 2,165
------- ------- --------- --------
$6,531 $6,592 $20,664 $19,598
======= ======= ========= ========
</TABLE>
Direct departmental costs include payroll expenses and related payroll burden,
the cost of food and beverage consumed and other departmental costs.
6. Federal, Foreign and State Income Tax
The provision for income taxes in the accompanying Consolidated Statements of
Operations is summarized below:
(in thousands)
---------------------------------
Nine Months Ended September 30
1997 1996
------------ -----------
Deferred federal income tax $ 333 $ 22
Current federal income tax 125 330
Current foreign income tax 59 119
Current state income tax 131 187
----- -----
$ 648 $ 658
===== =====
10
<PAGE>
FORM 10-Q
Part I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
FIRST NINE MONTHS 1997 COMPARED TO 1996
REVENUES
Total revenues for the nine month period ended September 30, 1997 were
$50,870,000 compared to $45,782,000 in 1996, an increase of approximately
$5,088,000.
The Company's Sonesta Beach Resort Anguilla, which opened January 18, 1996, had
an increase in revenues of $1,398,000 during the nine month period ending
September 30, 1997 compared to the same period in 1996. In the first nine months
of 1997, its second year of operations, the hotel increased occupancy levels by
16% and average room rates by 33%. The Company's Boston (Cambridge) hotel had
increased revenues in the 1997 period of approximately $1,653,000, primarily
because of an 12% increase in average room rates and increased food and beverage
revenues. The Company's New Orleans hotel had increased revenues of $1,137,000
in the nine month period ended September 30, 1997 compared to 1996, primarily
due to a 6% increase in average room rates and increased food and beverage
revenues. The remaining revenue increase of $900,000 was primarily from
increases in management and service fee income, in particular from the Company's
management activities in Egypt.
OPERATING INCOME
Operating income for the nine month period ended September 30, 1997 was
$2,854,000 compared to operating income of $1,313,000 in the same period in
1996, an increase of approximately $1,541,000.
The Company's Sonesta Beach Resort Anguilla, which opened on January 18, 1996,
had a decrease in its operating loss during the 1997 nine month period of
$844,000 compared to 1996. This was primarily due to increased revenues of
$1,398,000. The Royal Sonesta Boston (Cambridge) had an increase in its
operating income during the 1997 nine month period of $466,000 compared to 1996.
Increased revenues of $1,653,000 were partially offset by an increase in
operating expenses of $1,187,000. The Royal Sonesta New Orleans experienced a
decrease in operating income of $211,000 in 1997 compared to 1996. Increases in
expenses, primarily increased rent expense of $792,000 and increases in cost and
operating expenses of $428,000 were partially offset by revenue increases of
$1,137,000 during the nine month period. Operating loss from management and
other activities decreased by $442,000, because of increased revenues of
$900,000, which exceeded the $458,000 increase in expenses related to these
activities.
OTHER INCOME (DEDUCTIONS)
Interest expense increased by $566,000 in the first nine months of 1997 compared
to the 1996 period, primarily due to the additional indebtedness related to the
refinancing of the Royal Sonesta Hotel Boston (Cambridge) and the additional
loan for the Sonesta Beach Resort, Anguilla (see Note 4 -- Long-Term Debt).
11
<PAGE>
Form 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Interest income decreased by $135,000 in the nine period ending September 30,
1997, compared to the same period last year, primarily due to a $412,500
decrease in interest recorded on the Company's Key Biscayne notes receivable,
partially offset by higher interest income on the Company's cash balances, and
interest income from the loans to the owner of Sonesta Beach Resort, Sharm El
Sheikh (see Note 2 -- Long term Receivables and Advances).
Equity in net loss of hotels in the 1996 period of $89,000 included $617,000
income from a hotel project in New York City, partially offset by the Company's
share of the losses of $706,000 of Sonesta Beach Hotel and Casino, Curacao, in
which the Company has a 22% equity interest. The Company is not required to fund
its share of the losses in excess of its $2,000,000 equity investment.
In the first quarter of 1996 the Company recorded a gain on sale of $175,000
resulting from a reduction of accrued costs related to the sale in a prior year
of certain assets in Cambridge, Massachusetts.
THIRD QUARTER 1997 COMPARED TO 1996
Total revenues for the third quarter ended September 30, 1997 were $15,294,000
compared to $14,846,000 in 1996, an increase of approximately $448,000.
The Royal Sonesta Hotel Boston (Cambridge) had an increase in revenues of
$649,000 in the third quarter of 1997 compared to 1996 primarily due to a 15%
increase in average room rate. The Royal Sonesta Hotel New Orleans had a
decrease in revenues of $698,000 in the 1997 quarter compared to 1996, due to a
7% decrease in occupancy levels and a decrease in food and beverage revenues.
The Company's Sonesta Beach Resort Anguilla, which opened January 18, 1996, had
an increase in revenues of $176,000 in the 1997 quarter compared to the 1996
quarter. Revenues from management activities and other sources increased by
$321,000 in the 1997 period compared to 1996, primarily because of increases in
management and service fee income.
OPERATING INCOME
Operating income for the third quarter ended September 30, 1997, was $787,000,
compared to $294,000 in 1996, an increase of approximately $493,000.
The Royal Sonesta Boston (Cambridge) had an increase in its operating income
during the third quarter of $365,000 compared to 1996. Increases in revenues of
$649,000 were partially offset by increased expenses of $284,000. The Company's
Sonesta Beach Resort Anguilla, which opened on January 18, 1996, had a decrease
in its operating loss during the third quarter of $201,000 compared to 1996.
This was primarily due to increased revenues of $176,000. The Royal Sonesta New
Orleans experienced a decrease in operating income of $217,000 in 1997 compared
to 1996 as revenue decreases of $698,000 during the quarter were offset by
decreases in expense of $481,000. This decrease in expense consisted primarily
of a decrease in rent expense of $170,000, and decreases in cost and operating
expenses of $147,000. Operating loss from management and other activities
decreased by $144,000, because of increased revenues of $321,000, which exceeded
the $177,000 increase in expenses related to these activities.
12
<PAGE>
Form 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
OTHER INCOME (DEDUCTIONS)
Interest expense increased by $191,000 in the third quarter of 1997 compared to
the third quarter of 1996, primarily due to the additional indebtedness related
to the refinancing of the Royal Sonesta Hotel Boston (Cambridge) and the
additional loan for Sonesta Beach Resort Anguilla (see Note 4 -- Long-term
Debt).
Interest income decreased by $40,000 in the three month period ending September
30, 1997, compared to the same period last year, primarily due to a $137,500
decrease in interest recorded on the Key Biscayne notes receivable partially
offset by higher interest income on the Company's cash balances and interest
income on the loans to the owner of Sonesta Beach Resort, Sharm El Sheikh (see
Note 2 -- Long-term Receivables and Advances).
In the third quarter of 1996 the Company recorded equity in net loss of hotels
of $338,000, which represented the Company's share of the losses of Sonesta
Beach Hotel & Casino, Curacao. The Company owns a 22% equity interest in the
Curacao hotel.
LIQUIDITY AND CAPITAL RESOURCES
In January 1997 the Company refinanced the mortgage loan on the Royal Sonesta
Hotel Boston (Cambridge). The net proceeds of this refinancing were
approximately $5,357,000, of which $1,040,000 is held in escrow by the lender at
September 30, 1997 for certain improvements to the hotel. These escrow funds are
included in Other long-term assets at September 30, 1997.
The Company increased the mortgage loan on the Sonesta Beach Resort Anguilla by
$1,700,000 in March 1997. These funds were used to partially finance
improvements to the resort made during the winter of 1996/97. Principal
repayments due on September 1, 1997 and March 1, 1998 under the mortgage loans
on Sonesta Anguilla (see Note 4 -- Long-term Debt) were reduced by $500,000 by
the Lender. To achieve this, the Company agreed to the cancellation of a
$500,000 line of credit it had with the same Lender.
The Company is committed to loan an additional amount of $500,000 to the owner
of the Sonesta Beach Resort, Sharm El Sheikh, Egypt, once certain improvements
to the resort are completed (See Note 2 (d) - Long-Term Receivables and
Advances).
The Company entered into agreements to operate a hotel in Miami Beach, Florida.
The Company is committed to loan up to $4,150,000 to the hotel, once the hotel
is substantially ready for opening, which is expected to be in late 1999.
The Company had a working capital deficit of $1,164,000 at September 30, 1997.
This was primarily caused by accrued percentage rent of $4,144,000 for the nine
month period ending September 30, 1997, related to the Royal Sonesta Hotel New
Orleans. This rent is payable in March 1998, and will be paid from cash
generated during the remainder of the year, available cash balances and
borrowings under its lines of credit, if necessary.
13
<PAGE>
Form 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The Company believes that its present cash balances, plus its available
borrowing capacity and the expected cash flow generated during the remainder of
the calendar year 1997, will be more than adequate to meet of all of its
obligations.
FEDERAL, FOREIGN AND STATE INCOME TAXES
The provision for income taxes for the 1996 nine month period was higher than
the statutory rate due to certain losses from the Company's foreign subsidiary
which operated the Sonesta Beach Resort Anguilla, B.W.I., which were not
deductible for U.S. income taxes.
PART II - Other Information
Item Numbers 1, 2, 3, 4, 5 and 6
Not applicable during the quarter ended September 30, 1997.
14
<PAGE>
FORM 10-Q
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: November 7, 1997
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