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10-K - SONESTA INTERNATIONAL HOTELS CORPORATION 10K 12-31-2009 - SONESTA INTERNATIONAL HOTELS CORPform10k.htm
EX-21 - EXHIBIT 21 - SONESTA INTERNATIONAL HOTELS CORPex21.htm
EX-23 - EXHIBIT 23 - SONESTA INTERNATIONAL HOTELS CORPex23.htm
EX-32 - EXHIBIT 32 - SONESTA INTERNATIONAL HOTELS CORPex32.htm
EX-31.B - EXHIBIT 31(B) - SONESTA INTERNATIONAL HOTELS CORPex31_b.htm
EX-31.A - EXHIBIT 31(A) - SONESTA INTERNATIONAL HOTELS CORPex31_a.htm
EX-31.C - EXHIBIT 31(C) - SONESTA INTERNATIONAL HOTELS CORPex31_c.htm
EX-10.33 - EXHIBIT 10.33 - SONESTA INTERNATIONAL HOTELS CORPex10_33.htm
EX-10.31 - EXHIBIT 10.31 - SONESTA INTERNATIONAL HOTELS CORPex10_31.htm
EX-10.34 - EXHIBIT 10.34 - SONESTA INTERNATIONAL HOTELS CORPex10_34.htm
EX-10.11 - EXHIBIT 10.11 - SONESTA INTERNATIONAL HOTELS CORPex10_11.htm
EX-10.35 - EXHIBIT 10.35 - SONESTA INTERNATIONAL HOTELS CORPex10_35.htm
EX-10.32 - EXHIBIT 10.32 - SONESTA INTERNATIONAL HOTELS CORPex10_32.htm
 



 





EXHIBIT 13




SONESTA INTERNATIONAL HOTELS CORPORATION

ANNUAL REPORT 2009


























 
 

 

TO OUR SHAREHOLDERS:

2009 was a challenging year for the hotel industry and for Sonesta.  Due to the decisions we made and the actions we took, however, the Company is well-positioned for the future.
 
Revenue losses at our three (3) hotels in Boston, Miami and New Orleans in 2009 compared to 2008 ranged from 3% to 30%.  Average daily rates plummeted an average of 13% at these three properties.  Hardest hit was the group business segment which suffered from the double whammy of the distressed economy and “the AIG effect”:  the reticence of companies to book luxury hotels lest they be criticized for enjoying junkets at shareholder (or taxpayer) expense.  In our three domestic hotels, group business was off an average of 32%.
 
At Royal Sonesta Hotel Boston, occupancy for 2009 dropped only three (3) percentage points from 2008, but the average daily rate plunged 20%.  The Hotel relies on corporate group business and the fall-off in demand from this segment resulted in discounting rates.  Overall, revenues were down 21% in 2009 compared to 2008.
 
While city-wide conventions in New Orleans were marked by low attendance earlier in 2009, convention attendance appeared to rebound by the end of the year – a positive sign for the Crescent City.  Revenues at Royal Sonesta Hotel New Orleans totaled $31,679,000, down only 3% from 2008, helped by a strong 2009 fourth quarter.  Contributing to the Hotel’s revenues in a tough year was the opening last March of Irvin Mayfield’s Jazz Playhouse just off the Hotel’s lobby.  The Hotel’s association with Mr. Mayfield, who won a Grammy at this year’s awards celebration in Los Angeles, has been a great success for the Hotel.
 
Of our domestic hotels, Sonesta Bayfront Coconut Grove suffered the most business-wise from the economic downturn.  Occupancy for the year dropped to 59% from 71% in 2008, and the Hotel’s ADR fell 18% from 2008.  Total revenues fell 30% from 2008’s total.  During 2009, we redesigned the Hotel’s pool deck, creating an exciting venue where guests can relax and where the Hotel can host social and business events.
 
As announced in September 2009, the Company and its partner, Fortune International, sold the project we owned together in Key Biscayne, Florida.  The project had stalled due to a combination of lack of financing as the result of the recession and the glut of unsold condominiums in South Florida.  We agreed with Fortune to test the market in the spring of last year and, in September, sold the project for $78 million.  After paying off existing debt and sale-related costs, the Company received approximately $12 million, including reimbursement of $2.7 million we advanced for project-related costs in 2009 and $9.3 million of net sale proceeds.  All told, the Company effectively sold the Sonesta Beach Resort property for $71 million:  the $60 million we received from Fortune in April 2005, plus approximately $2 million of additional sale proceeds over the next 18 months under the terms of our deal, and the $9 million of sale proceeds we received in September.  Included in our 2009 income is a $42 million pre-tax gain on this transaction.
 
During 2009, we successfully launched our U.S.-focused franchising program.  Although highly competitive, we believe there are opportunities to offer the Sonesta brand and marketing system to owners and operators of hotels that meet our brand criteria and are prepared to implement our service and operational standards.  In January 2010, we introduced our first franchised property under this program:  Sonesta Hotel Orlando Downtown is a 341-room hotel in Orlando that was formerly flagged as a Sheraton.  We are proud to welcome this hotel into the Sonesta Collection and expect to add other franchised hotels during 2010.
 
We were also pleased to maintain our two franchised properties in St. Maarten in the Collection.  Our contracts for Sonesta Maho Beach Resort & Casino and Sonesta Great Bay Resort & Casino have been extended for at least five (5) years.  Additionally, both properties will be upgraded, and the Company is providing a loan of $1,000,000 for this purpose.
 
In addition to the franchises in Orlando and St. Maarten, our franchise program in South America grew by five hotels, from eight properties to thirteen, during 2009 and early 2010.  The new properties are located in Valledupar, Colombia; Cusco, Peru; and Concepcion, Calama, and Osorno, Chile.  The Sonesta hotels in Chile, Colombia and Peru are operated by GHL Hoteles, which is based in Colombia.  The hotels in Brazil are operated by SuperClubs.  (We are pleased to report that the recent earthquake in Chile resulted in no loss of life at the Sonesta properties there, although Sonesta Hotel Concepcion suffered some damage.)
 
Although 2009 proved a particularly challenging year to access hotel opportunities in the U.S., we did not sit still.  In addition to launching our franchising program and introducing our first franchised hotel, we positioned the Company to exploit appropriate opportunities.  We continue to explore any opportunities that will add value to our brand and our Company, including franchises, management opportunities, and acquisitions.
 
In February 2010, we completed the refinancing of our Royal Sonesta Hotel Boston.  The existing loan was due to mature in July 2010, but we were able to lock in a lower interest rate for five (5) years with a Boston-based bank that will result in interest savings of approximately $700,000 per year.  The Company has provided a $5 million guaranty on the $32 million loan; in addition, we have deposited $5 million in a cash collateral account with the bank which will be released over a two-year period provided debt service coverage ratios reach stipulated targets.
 
If you would like additional information about Sonesta hotels, resorts, or cruises please visit our website at Sonesta.com
 
We appreciate the continued interest and support of our hotel owners, guests, partners, employees, and of you, our shareholders.
 

/s/ Peter J. Sonnabend                
Peter J. Sonnabend
Executive Chairman of the Board
 

/s/ Stephanie Sonnabend           
Stephanie Sonnabend
Chief Executive Officer and President


March 22, 2010


 
1

 


SONESTA INTERNATIONAL HOTELS CORPORATION
5-YEAR SELECTED FINANCIAL DATA


(In thousands except for per share data)
                               
   
2009
   
2008
   
2007
   
2006
   
__2005
 
Revenues
  $ 60,458     $ 71,552     $ 67,938     $ 77,595     $ 88,125  
Other revenues from managed and affiliated
                                       
      properties
    4,361       8,965       18,747       21,237       14,543  
Total revenues
    64,819       80,517       86,685       98,832       102,668  
Operating income (loss)
    (951 )     6,671       2,228       (3,829 )     (1,905 )
Net interest expense
    (2,463 )     (1,788 )     (1,292 )     (1,441 )     (2,836 )
Other income(1)
    41,859       574       250    
_49
   
_4,054
 
Income (loss) before income taxes
    38,445       5,457       1,186       (5,221 )     (687 )
Income tax provision (benefit)
    13,168       1,377       (151 )     (1,698 )     (5,355 )
Net income (loss)
  $ 25,277     $ 4,080     $ 1,337     $ (3,523 )   $ 4,668  
                                         
Basic and diluted net income (loss) pershare of common stock
  $ 6.84     $ 1.10     $ 0.36     $ (0.95 )   $ 1.26  
                                         
Cash dividends declared
  $ 1.00     $ 1.35     $ 0.20     $ 0.20     $ 1.10  
                                         
Net property and equipment
  $ 34,270     $ 35,031     $ 37,303     $ 38,400     $ 72,799  
Total assets
    80,731       127,040       129,591       126,428       130,619  
Long-term debt including currently payable
portion
    31,839       33,002       34,061       34,061       34,061  
Common stockholders' equity
    26,653       4,126       8,547       7,371       11,865  
Common stockholders' equity
per share
    7.21       1.12       2.31       1.99       3.21  
Common shares outstanding at
end of year
    3,698       3,698       3,698       3,698       3,698  

(1) Includes pre-tax gain of $41,843,000 from the dissolution of a development partnership (see Note 3).



Market price data for the Company’s common stock showing high and low prices by quarter for each of the last two years is as follows:

   
NASDAQ Quotations
 
   
2009
   
2008
 
   
High
   
Low
   
High
   
Low
 
First
  $ 14.40     $ 6.48     $ 35.99     $ 18.93  
Second
    10.25       5.75       30.61       22.92  
Third
    12.69       8.00       27.97       18.78  
Fourth
    15.70       8.02       20.79       7.85  

The Company’s common stock trades on the NASDAQ Stock Market under the symbol SNSTA.  As of February 16, 2010 there were 307 holders of record of the Company’s common stock.

A copy of the Company’s Form 10-K Report, which is filed annually with the Securities and Exchange Commission, is available to stockholders.  Requests should be sent to the Office of the Secretary at the Company’s Executive Office.  In addition, this report may be accessed through the link to the SEC’s website on sonesta.com.  


 
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Performance Graph


The following graph compares the annual percentage change in the cumulative total stockholder return on the Company’s Common Stock against the cumulative total return of the NASDAQ Stock Market (US Companies) and the NASDAQ Hotels and Motels Stocks (SIC 7010-7019) for the five-year period commencing December 31, 2004 and ending December 31, 2009.


 
 
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The Company's consolidated financial statements include the revenues, expenses, assets and liabilities of Royal Sonesta Hotel Boston, Royal Sonesta Hotel New Orleans and the Company’s investment in a partnership which owned the site of the former Sonesta Beach Resort Key Biscayne. The Boston property is owned by the Company, and the New Orleans hotel is operated under a long-term lease. The financial statements also include the Company’s revenues and expenses from the management of properties in the United States and Egypt, and license fee income from properties in New Orleans, Louisiana (until October 2008); St. Maarten, Brazil, Chile, Colombia and Peru.

Results of Operations
During 2009, the Company recorded net income of $25,277,000, or $6.84 per share, compared to net income of $4,080,000, or $1.10 per share, during 2008.  A reconciliation of the $21,197,000 increase in earnings follows (in thousands):

Gain from dissolution of development partnership
  $ 41,843  
Decrease in operating income Royal Sonesta Boston
    (3,566 )
Increase in operating income Royal Sonesta New Orleans
    605  
Decrease in income from Management Agreement settlement during 2008
    (3,279 )
Increase in operating loss from management activities
    (1,382 )
Decrease in interest income
    (780 )
Other changes
    (453 )
Increase in pre-tax income
    32,988  
Increase in tax expense
    (11,791 )
Increase in net income 2009 compared to 2008
  $ 21,197  

·  
In 2009, the Company recorded a pre-tax of gain of $41,843,000, following the sale of assets by a development partnership in which the Company was a 50% owner (see Note 3, Investment in Development Partnership).
 
·  
Royal Sonesta Hotel Boston experienced a difficult year, during which revenues declined in excess of $6 million, or 21%, in a very competitive Boston hotel market.  The primary reason for the decline was a decrease in group and convention business.
 
·  
Revenues at Royal Sonesta Hotel New Orleans decreased by a modest 3% during the 2009 recession year due to a strong 2009 fourth quarter compared to the same period a year ago.  Operating income increased due to lower costs and operating expenses and lower rent expense.
 
·  
During the 2008 third quarter, the Company recorded pre-tax income of $3,279,000 related to the settlement of a dispute with the owner of Trump International Sonesta Beach Resort Sunny Isles (see Note 2).  The Company terminated the management agreement for this property effective April 1, 2008.
 
·  
Income from management activities decreased primarily as a result of lower income from the Company’s managed properties in Egypt and lower income from Sonesta Bayfront Hotel Coconut Grove.  The Company had no income from Trump International Sonesta Beach Resort Sunny Isles during 2009 (see Note 2 – Operations).
 
·  
Interest income declined due to lower investment returns on the Company’s cash balances.
 
A detailed analysis of the revenues and expenses 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
   
2009
   
2008
   
2007
 
                         
Royal Sonesta Hotel Boston
    400     $ 24,462     $ 30,778     $ 29,377  
Royal Sonesta Hotel New Orleans
    500       31,679       32,795       31,888  
Management and service fees
            4,317       7,979       6,673  
Total revenues, excluding other revenues from
                               
   managed and affiliated properties
          $ 60,458     $ 71,552     $ 67,938  


2009 versus 2008:  Total revenues, excluding other revenues from managed and affiliated properties, were $60,458,000 in 2009 compared to $71,552,000 in 2008, a decrease of $11,094,000.  Revenues at Royal Sonesta Hotel Boston decreased by $6,316,000 in 2009 compared to 2008, representing a 21% decrease.  The Boston hotel market was severely impacted by the economic recession in 2009.  Revenues at Royal Sonesta Hotel New Orleans declined by a modest 3%, despite the poor economic conditions.  During the 2009 fourth quarter, revenues increased compared to a year ago, as demand improved in the City of New Orleans.  Revenues from management activities decreased from $7,979,000 in 2008 to $4,317,000 in 2009.  This was primarily the result of decreased fee income from the Company’s managed operations in Egypt, and lower fee income from Sonesta Bayfront Hotel Coconut Grove, as well as no fee income from Trump International Sonesta Beach Resort Sunny Isles, which the Company stopped operating as of April 1, 2008.  In addition, the Company experienced a decline in  income from hotels to which it licenses the use of its name as well as other corporate activities including purchasing, training and reservation services.  A more detailed analysis of the revenues by hotel, and of our management income, follows.

Royal Sonesta Hotel Boston reported revenues of $24,462,000 during 2009, compared to $30,778,000 in 2008, representing a $6,316,000, or 21%, decrease.  Room revenues decreased by $4,702,000, due to a 23% decrease in room revenues per available room (“REVPAR”).  The hotel’s occupancy levels were down by three percentage points compared to 2008, but the majority of the decline in revenues was due to a reduction in average daily room rates achieved.  The decline in room revenues was due primarily to a decrease in revenue generated from the group and convention market segment.  Business from this market segment depends heavily on high levels of corporate spending, which was severely impacted by the economic recession.  The decrease in group and convention business also effected the hotel’s competitors, which resulted in increased competition for available transient business.  Room nights sold in the transient market segment actually increased in 2009 compared to 2008, but the hotel had to discount its rates substantially to capture this additional transient business.  Revenues from other sources, which are primarily from food and beverage sales, decreased by $1,614,000, or 16%, in 2009 compared to 2008.  Banquet revenues, which depend heavily on group and convention business at the hotel, decreased substantially, but this

 
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decrease was partially offset by an increase in revenue from the hotel’s ArtBar restaurant, which was renovated during 2008.

Royal Sonesta Hotel New Orleans reported a decrease in revenues of $1,116,000, or 3%, to $31,679,000 in 2009.  This decrease was entirely due to a $1,135,000 decrease in room revenues.  The hotel’s REVPAR in 2009 decreased by 5%, primarily as a result of a decrease in group and convention business.  Room nights sold to the transient market segment during 2009 equaled those sold in 2008.  Revenues from other sources increased by $19,000 in 2009 compared to 2008.  Decreases in banquet revenues due to the reduced group and convention business was partially offset by increased revenues from the hotel’s Desire restaurant as well as increased beverage revenues.  The beverage revenue increase was mainly due to the transformation of the hotel’s main lounge into Irvin Mayfield’s Jazz Playhouse during early 2009.

Revenues from management activities decreased from $7,979,000 in 2008 to $4,317,000 in 2009.  Management income from the Company’s collection of managed hotels and cruise ships in Egypt decreased by $1,077,000 in the 2009 period compared to last year, primarily due to the fact that it did not achieve stipulated profit levels in two of its resorts which it needs to achieve in order to earn incentive fees.  In general, business levels in Egypt declined only moderately.  Management income from Sonesta Bayfront Hotel Coconut Grove decreased by $853,000 due to the sharp decline in net operating income in 2009.  The Company is committed to an annual minimum return payment to the hotel’s owner, and the Company eliminates fees from its income to the extent net operating income is insufficient to pay this minimum return.  Management income during 2008 included $840,000 from Trump International Sonesta Beach Resort Sunny Isles.  The management agreement for this resort was terminated by the Company effective April 1, 2008.  The remaining decrease in management fee income was primarily from lower income from two hotels in St. Maarten to which the Company has licensed the use of its name, and lower income earned from Corporate services, including purchasing, training and reservation services.

2008 versus 2007:  Total revenues, excluding other revenues from managed and affiliated properties, were $71,552,000 in 2008 compared to $67,938,000 in 2007, an increase of $3,614,000.  Revenues at Royal Sonesta Hotel Boston increased by $1,401,000 in 2008 compared to 2007, representing a 5% increase.  Demand in the Boston hotel market was strong in 2008 through the month of October.  Revenues declined during the last two months of 2008.  Revenues at Royal Sonesta Hotel New Orleans in 2008 increased by a modest 3%.  Business during the first eight months of the year was strong, but September 2008 revenues were impacted by Hurricane Gustav.  Revenues during the fourth quarter decreased compared to 2007, due to worsening economic conditions.  Revenues from management activities increased from $6,673,000 during 2007 to $7,979,000 during 2008, primarily due to an increase in management income from the Company’s collection of hotels and cruise ships in Egypt.  A more detailed analysis of the revenues by hotel, and of our management income, follows.

Royal Sonesta Hotel Boston recorded revenues of $30,778,000 during 2008 compared to $29,377,000 in 2007, representing an increase of $1,401,000, or 5%.  This increase was mainly due to an increase of $1,160,000 in room revenues.  Room revenues per available room (“REVPAR”) increased by 6% in 2008 compared to 2007, mainly due to an increase in occupancy levels.  Demand in Boston was strong through October 2008, which benefitted the Hotel.  The increase in occupancy was entirely from increased transient rooms business.  The increase in non-rooms revenue of $241,000 was mainly due to increased food and beverage revenues, which included higher revenues from the hotel’s newly renovated ArtBar.

Revenues at Royal Sonesta Hotel New Orleans during 2008 totaled $32,795,000 compared to $31,888,000 during 2007, representing an increase of $907,000, or 3%.  In general, hotel business in New Orleans continued to improve during the first eight months of 2008 from the downturn in business following Hurricane Katrina in 2005.  September revenues, however, were impacted by Hurricanes Gustav and Ike, and fourth quarter 2008 revenues were affected by decreased business volumes resulting from worsened economic conditions.  Room revenues increased by $771,000 in 2008 due to a 4% REVPAR increase which was entirely due to higher average room rates achieved.  Revenues other than rooms increased by $215,000 due to increased banquet revenues.  Revenues from the hotel’s laundry, which also services third party hotels, decreased by $79,000 in 2008 compared to 2007 due to the loss of revenues from Chateau Sonesta Hotel New Orleans, which was operated by the Company under a management agreement until October 2007.

Revenues from management activities increased from $6,673,000 during 2007 to $7,979,000 during 2008, representing an increase of $1,306,000.  Of this increase, $1,146,000 resulted from improved fee income from the Company’s collection of hotels and Nile River cruise ships in Egypt.  Business in Egypt in 2008 continued to improve, and management income also included fee income from Sonesta Pharaoh Beach Resort Hurghada, which was added under management effective January 1, 2008.  The remaining increase resulted from higher income from hotels to which the Company licenses the use of its name in St. Maarten and South America, partially offset by decreased fee income from Chateau Sonesta Hotel New Orleans, which the Company stopped operating in October, 2007, and decreased income from Trump International Sonesta Beach Resort following the termination by the Company of the management agreement for this hotel effective April 1, 2008 (see Note 2).

Operating Income

       
   
OPERATING INCOME/(LOSS)
(in thousands)
 
   
2009
   
2008
   
2007
 
                   
Royal Sonesta Hotel Boston
  $ 1,898     $ 5,464     $ 4,926  
Royal Sonesta Hotel New Orleans
    749       144       885  
Operating income from hotels after
management and service fees
    2,647       5,608       5,811  
Management activities and other income
    (3,598 )     (2,216 )     (3,583 )
Subtotal
    (951 )     3,392       2,228  
Income from Management Agreement
    settlement, net
    --       3,279       --  
Operating income (loss)
  $ (951 )   $ 6,671     $ 2,228  

2009 versus 2008:  The Company recorded an operating loss of $951,000 in 2009 compared to operating income of $6,671,000 in 2008, a decrease of $7,622,000.  During the 2008 third quarter, the Company recorded pre-tax income of $3,279,000 related to the settlement of a dispute with the owner of Trump International Sonesta Beach Resort Sunny Isles.  The Company terminated the management agreement for this property effective April 1, 2008.  Operating income at Royal Sonesta Hotel Boston decreased by $3,566,000, primarily due to a 21% decrease in revenues.  Operating income at Royal Sonesta New Orleans increased by $605,000, as decreased expenses,

 
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including rent expense, more than offset the modest decrease in revenues during 2009.  Operating losses from management activities increased from $2,216,000 in 2008 to $3,598,000 in 2009, primarily due to lower fee income from the Company’s managed hotels and cruise ships in Egypt, and lower fee income from Sonesta Bayfront Hotel Coconut Grove and Trump International Sonesta Beach Resort Sunny Isles.  A more detailed discussion of the changes in operating income by location follows.

Royal Sonesta Hotel Boston reported operating income of $1,898,000 during 2009 compared to $5,464,000 during 2008, a decrease of $3,566,000.  A decrease in revenues of $6,316,000 was partially offset by a decrease of $2,750,000, or 11%, in expenses.  Costs and operating expenses decreased by $1,764,000, primarily due to lower payroll costs.  During 2009, the hotel reduced staffing levels in all operating departments, and in addition eliminated certain management positions.  Employee benefit costs also decreased due to the suspension of matching contributions to the Company’s 401(k) plan, and the fact that no bonuses were paid to hotel management for the year 2009.  The remaining decrease in expenses was primarily from lower administrative and general costs, including credit card commissions, and lower advertising, human resources and maintenance expenses.

Operating income at Royal Sonesta Hotel New Orleans increased from $144,000 during 2008 to $749,000 in 2009.  Decreases in revenues of $1,116,000 in 2009 were more than offset by a decrease in expenses of $1,721,000.  The decrease in expenses was mainly due to lower costs and operating expenses and rent expense.  Costs and operating expenses decreased by $650,000, or 4%, mainly due to lower payroll and benefits costs and lower utility costs.  Rent expense decreased by $959,000.  The Company operates Royal Sonesta Hotel New Orleans under a lease, under which rent payable to the landlord equals 75% of net cash flow.  The savings in rent was due to lower operating profits, as well as an increase in capital expenditures in 2009 compared to 2008.  Capital expenditures are deducted from cash flow for rent purposes.

The Company’s loss from management activities, which is computed after giving effect to management and marketing fees from owned and leased hotels, increased from $2,216,000 in 2008 to $3,598,000 in 2009.  Revenues from management activities decreased by $3,662,000, which decrease was partially offset by a decrease in expenses related to these activities of $2,280,000.  Corporate office costs during 2009 decreased because of lower employee benefit costs due to the suspension of matching 401(k) plan contributions, and lower bonus expense.  Corporate salaries were frozen during 2009.  In addition, 2008 expenses included an amount of $720,000 related to an employment agreement with Roger Sonnabend, the Company’s former Executive Chairman of the Board, who passed away in December 2008.  Expenses in 2008 also included legal fees and other costs related to a hotel project in Miami.  The Company started to work on this project during the summer of 2008 but decided in February 2009 not to pursue this opportunity.  Lastly, the 2008 period included additional depreciation expense of $567,000 related to accelerated depreciation of an investment the Company made in Trump International Sonesta Beach Resort Sunny Isles, following the Company’s termination of the management agreement for this hotel effective April 1, 2008.

2008 versus 2007:  The Company recorded operating income in 2008 of $6,671,000, compared to operating income of $2,228,000 in 2007, an increase of $4,443,000. In the 2008 third quarter, the Company recorded pre-tax income of $3,279,000 related to the settlement of a dispute with the owner of Trump International Sonesta Beach Resort.  The Company terminated the management agreement for this property effective April 1, 2008 (see Note 2).  Operating income at Royal Sonesta Hotel Boston increased by $538,000 compared to 2007 due to a 5% increase in revenues at this property.  Operating income at Royal Sonesta Hotel New Orleans decreased by $741,000, mainly due to higher rent expense incurred under the lease under which the Company operates the hotel.  Operating losses from management activities decreased by $1,367,000 to $2,216,000 in 2008, primarily due to higher income achieved from the Company’s managed hotels and cruise ships in Egypt.  A more detailed discussion of the changes in operating income by location follows.

Royal Sonesta Hotel Boston increased operating income during 2008 by $538,000 to $5,464,000.  Revenues during 2008 increased by $1,401,000, but were partially offset by a 4% increase in expenses, totaling $863,000.  The expense increase was almost entirely due to a 5% increase in cost and operating expenses, totaling $624,000.  The hotel operated at a higher occupancy level in 2008 compared to 2007, resulting in increased payroll expenses.  In addition, the hotel incurred higher commissions and reservations costs, increases in linens and guest supplies expense, as well as increased employee benefit costs.  In December 2008, the hotel incurred severance expenses related to layoffs following the decline in business in late 2008.

Operating income from Royal Sonesta Hotel New Orleans decreased from $885,000 in 2007 to $144,000 in 2008.  Increases in revenues of $907,000 were more than offset by increased expenses of $1,648,000.  The hotel expensed $303,000 in 2008 for costs incurred during 2006, 2007 and 2008 related to the potential addition of a spa in the hotel, following its decision to postpone this project because of the high cost.  Rent expense increased by $1,185,000 in 2008 compared to 2007.  The Company operates the hotel under a lease, and rent is equal to 75% of net cash flow.  The rent increase was due in part to higher operating profits achieved in 2008 compared to 2007.  In addition, the hotel spent less on capital additions in 2008 compared to previous year.  Under the lease, capital expenditures are deducted from cash flow for rent purposes.  Excluding the rent increase and development cost write off, the hotel’s total expenses were virtually the same in 2008 as in 2007.  Costs and operating expenses, as well as advertising and repairs and maintenance costs, increased slightly, but this increase was offset by decreased real estate tax expense in 2008 due to a favorable abatement received from the City of New Orleans.  Operating profits from the hotel’s laundry, which also services third party hotels, decreased by $266,000 in 2008 compared to 2007.  This was in part due to the loss of revenues from Chateau Sonesta Hotel New Orleans, which was operated by the Company under a management agreement until October, 2007, as well as increased costs and operating expenses of the laundry, including utility costs.

The Company’s loss from management activities, which is computed after giving effect to management fees from owned and leased hotels, decreased by $1,367,000 to $2,216,000 in 2008.  Revenues increased by $1,306,000, primarily from increased fee income from the Company’s managed operations in Egypt.  Expenses related to these activities decreased by $61,000.  Corporate expenses in 2008 included $720,000 related to an employment agreement with Roger Sonnabend, the Company’s former Executive Chairman of the Board who passed away in December 2008.  The 2008 expenses also included approximately $250,000 in costs related to a hotel project in Miami.  The Company started to work on this project during the summer of 2008, but decided in February 2009 not to pursue this opportunity.  The Company also incurred higher legal costs related to the negotiation of management agreements for additional hotels, including the aforementioned project.  Expenses in 2007 included $691,000 based on an employment agreement following the retirement of a long term Company executive, Mr. Paul Sonnabend.  In addition, the Company spent approximately $265,000 in 2007 on legal and other costs in connection with a review of the Company’s strategic options to enhance

 
6

 

shareholder value.

Other Income and Deductions

Interest expense, which consists entirely of interest paid on the Company’s mortgage loan secured by Royal Sonesta Hotel Boston, decreased by $105,000 in 2009 compared to 2008 and by $42,000 in 2008 compared to 2007, due to principal payments made on the loan during these two years.

Interest income decreased from $1,720,000 in 2007 to $1,182,000 in 2008, and to $402,000 in 2009.  The decrease in 2009 was the result of lower income earned on the Company’s short-term cash investments, due to lower rates of return.  In addition, the 2008 period included interest earned on a loan to the owner of Sonesta Bayfront Hotel Coconut Grove, which was repaid during 2008.  The decrease in interest income was partially offset by interest earned on a new loan made to the owners of Sonesta Beach Resort and Sonesta Club, in Sharm El Sheikh.

During 2009 the Company reported a gain of $41,843,000 following the dissolution of a development partnership in which the Company owned a 50% limited interest.  The partnership sold the land and improvements formerly comprising Sonesta Beach Resort Key Biscayne during the 2009 third quarter (see Note 3, Investment in Development Partnership).  Also included in 2009 is a gain of approximately $34,000 on the sale of a condominium unit in Trump International Sonesta Beach Resort Sunny Isles, which the Company managed until April 1, 2008.  The $576,000 gain on sale of assets in 2008 resulted primarily from a $422,000 gain on the sale of a co-op unit the Company owned in New York City to the Company’s Executive Chairman.  The sale price was $700,000.  The Company’s Board of Directors approved this transaction.  In addition, the Company realized a gain on the sale of art in 2008.

Federal, State and Foreign Income Taxes

During 2009 the Company recorded a tax expense of $13,168,000 on pre-tax income of $38,445,000.  This tax expense is approximately the same as the statutory federal income tax rate.  State tax expense on income attributed to Louisiana, Florida and Massachusetts was partially offset by general business tax credits and an adjustment to the gain reported on the Key Biscayne transaction (see Note 3) which is not subject to tax.

In 2008, the Company recorded a net tax provision of $1,377,000 on its pre-tax income of $5,457,000.  The Company was able to take substantial credits for foreign taxes paid in 2008, and for foreign taxes paid in prior years which had been carrying forward.  In addition, the Company benefited from current and prior year’s general business credits, including work opportunity tax credits related to Hurricane Katrina.  The Company also recorded a state income tax benefit of $216,000 for Massachusetts taxes resulting from changes enacted in tax laws during 2008.  These changes include conforming to federal entity classification rules and adopting a unitary method of taxation.

Liquidity and Capital Resources

The Company had cash and cash equivalents of approximately $35 million at December 31, 2009.  As of that date, the majority of these funds were held in money market mutual funds and non-interest bearing bank accounts.

In September 2009 the Company received $12,076,000 in connection with the sale by a partnership, in which the Company owned a 50% limited partnership interest, of the land and improvements formerly comprising Sonesta Beach Resort Key Biscayne.  This payment included the repayment of advances made by the Company to the partnership during 2009 of $2,664,000 and, in addition, $9,412,000 for its share of the sale proceeds of the assets (see Note 3, Investment in Development Partnership).

During 2009, the Company paid dividends totaling $1.25 per share ($4,623,000).  In 2008, the Company paid dividends totaling $1.20 per share ($4,438,000).

The Company contributed $934,000 and $1,280,000 to its Pension Plan in 2009 and 2008, respectively.

In December 2009, the Company agreed to loan $1,000,000 to the owners of two hotels in St. Maarten, to which the Company licenses the use of its name.  The Company expects to fund this loan during 2010.

In August 2009, the Company loaned a total of $1,363,000 to the owner of Sonesta St. George Hotel Luxor and Sonesta St. George I Cruise Ship, which are both managed by the Company.  The loan consisted of cash advances of $500,000 and a conversion of receivables for fees and expenses due to the Company from the hotel and the ship.  The proceeds of the loan helped fund improvements to the Luxor hotel, including additional rooms and meeting facilities.  The hotel’s owner also agreed to an extension of the management agreement by 5 years.

In February 2010, the Company refinanced the mortgage loan secured by Royal Sonesta Hotel Boston.  The existing loan in the principal amount of $31,645,000, which was to mature in July 2010, was replaced by a $32 million loan.  The Company paid a 1% fee at closing, and incurred legal and other costs related to the new loan.  The interest rate on the new, 5-year loan is 6.4%, compared to 8.6% on the loan which was refinanced.  The annual interest savings as a result of the lower interest rate is approximately $700,000.  As part of the security for the new loan, the Company agreed to fund a restricted cash collateral account in the amount of $5 million (see Note 5 – Borrowing Arrangements).

The Company operates Sonesta Bayfront Hotel Coconut Grove, in Miami, which is a condominium hotel that opened in April 2002.  Under its agreements, the Company is committed to fund net operating losses, and to provide the hotel’s owner with a minimum annual return ($419,000 during 2009), adjusted annually by increases in the Consumer Price Index (“CPI”).  The management agreement can be terminated by the hotel’s owner if the Company fails to cure shortfalls against a minimum target return ($978,000 during 2009), adjusted annually by increases in the CPI.  The hotel’s 2008 net operating profit was sufficient to cover the owner’s target return and the Company’s fees from the hotel of $1,039,000.  In 2009, the hotel’s net operating profit fell short of the target return but was sufficient to cover the minimum annual return and fees to the Company totaling $150,000.  The Company has decided not to fund the owner’s target return for 2009, and notified the owner of same in January 2010.  As a result, the owner had the right to terminate the management agreement provided it sent the Company a termination notice on or before March 3, 2010, but the hotel’s owner did not exercise this right.  (While the hotel’s owner has claimed that the notice deadline was extended beyond March 3, 2010, the Company has advised the owner of its position that the deadline has passed.)  In October 2008, the Company received $2,627,000 in connection with the repayment of a loan made to the owner of the hotel for initial furniture, fixtures and equipment and pre-opening expenses.

The Company made a loan of $500,000 to the owner of Sonesta Beach Resort Sharm El Sheikh in January 2010, to help finance the construction of additional hotel rooms and facilities.  In January 2008, the Company agreed to convert approximately $1.6 million of receivables for fees and expenses from the two hotels it manages in

 
7

 

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 was made by reducing outstanding receivables from Sonesta Club.

Company management believes that its present cash balances will be more than adequate to meet its cash requirements for 2010 and for the foreseeable future.

As of December 31, 2009, the Company’s fixed contractual obligations were as follows (in thousands):

   
YEAR
             
   
2010
   
2011
   
2012
   
2013
   
2014
   
Thereafter
   
Total
 
                                           
Long-Term Debt Obligations
  $ 2,725     $ 2,569     $ 2,569     $ 2,569     $ 2,569     $ 29,582     $ 42,583  
Operating Leases
    737       625       291       104       --       --       1,757  
Total
  $ 3,462     $ 3,194     $ 2,860     $ 2,673     $ 2,569     $ 29,582     $ 44,340  

The Company’s hotels also have certain purchase obligations, primarily for maintenance and service contracts.  These are not included in the contractual obligations since the amounts committed are not material, and because the majority of these contracts may be terminated on relatively short notice.


 
8

 

Economic Outlook
The economic recession affected the Company’s business during 2009.  Hotel business depends heavily on economic activity, and the Company’s U.S. hotels were impacted in 2009 both from lower consumer demand as well as diminished corporate spending.  The Company’s Boston and New Orleans hotels depend heavily on corporate groups and conventions, and reduced corporate spending has a significant negative impact on these market segments.  The expectation for 2010 is that revenues will show modest growth, at best, which in turn will mean that hotel profits will remain depressed.  During 2009, the Company froze salaries and cut employee benefits.  For 2010, only modest increases were awarded.  The refinancing of the mortgage loan secured by Royal Sonesta Hotel Boston will result in annual interest savings of approximately $700,000 starting in February 2010.

It is impossible to predict the extent of the impact of the continued poor economic conditions on the Company’s 2010 results.  The Company has adequate cash resources to continue operations, and meet its foreseeable needs.

Critical Accounting Policies and Estimates

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity.



· 
Revenue recognition – a substantial portion of our revenues result from the operations of our owned and leased hotels.  These revenues are recognized at the time that lodging and other hotel services are provided to our guests.   Certain revenues, principally those relating to groups using lodging and banquet facilities, are billed directly to the customers.   These revenues are subject to credit risk, which the Company manages by establishing allowances for uncollectible accounts.   If management establishes allowances for uncollectible accounts that are insufficient, it will overstate income, and this will result in increases in allowances for uncollectible accounts in future periods.
 
Management, license and service fees represents fee income from hotels operated under management agreements, and license fees from hotels to which the Company has licensed the use of the “Sonesta” name.  Management fees include base fees and marketing fees, which are generally based on a percentage of gross revenues, and incentive fees, which are generally based on the hotels’ profitability.  These fees are typically based on revenues and income achieved during each calendar year.  Incentive fees, and management fees of which the receipt is based on annual profits achieved, are recognized throughout the year on a quarterly basis based on profits achieved during the interim periods when our agreements provide for quarterly payments during the calendar years they are earned, and when such fees would be due if the management agreements were terminated.  As a result, during quarterly periods, fee income may not be indicative of eventual income recognized at the end of each calendar year due to changes in business conditions and profitability.  License fees are earned based on a percentage of room revenues of the hotels.
 
The Company records the reimbursement of certain expenses incurred on behalf of managed and affiliated properties, and the costs incurred on behalf of owners of managed properties on a “gross” basis in revenues and costs.  These costs relate primarily to payroll and benefit costs of managed properties in which the Company is the employer.
 

· 
Impairment of long lived assets – the Company monitors the carrying value of its owned properties and its investment in development property from the perspective of accounting rules relating to impairment.  A requirement to assess impairment would be triggered by so called “impairment indicators”.  For us, these might include low rates of occupancy, operating costs in excess of revenues, or maturing mortgages for which there were no suitable refinancing options.  Impairment also needs to be considered with respect to costs incurred for new hotel investments or development opportunities that are under study.  The Company monitors these costs on a quarterly basis and if a pending project is no longer considered to be viable, the cost is charged against income.  If the Company estimates incorrectly or misjudges the impairment indicators, it may result in the Company failing to record an impairment charge, or recording a charge which may be inaccurate.

· 
Pension Benefits – the Company maintains a defined benefit plan for eligible employees, which was frozen effective December 31, 2006.    Costs and liabilities are developed from actuarial valuations.  In these valuations are assumptions relating to discount rates, expected return on assets and employee turnover.  Differences between assumed amounts and actual performance will impact reported amounts for the Company’s pension expense, as well as the liability for future pension benefits.

· 
Sonesta Bayfront Hotel Coconut Grove – the Company operates a condominium hotel under a management agreement, under which it is committed to fund net operating losses, and provide the owner with minimum annual returns ($419,000 during 2009), adjusted annually by increases in the Consumer Price Index.  In addition, the management agreement may be subject to termination if the Company elects not to cure shortfalls against a minimum target return ($978,000 during 2009), adjusted annually by increases in the Consumer Price Index.  Under its agreements, the Company is entitled to management and marketing fees based on revenues, and incentive fees based on profits.  In case the aforementioned annual minimum returns and minimum target returns are not met, the Company’s policy is to eliminate management and marketing fees from its revenues.  If the amount of the shortfall exceeds the fee income, the Company will book the additional amount as an administrative and general expense.

· 
Trump International Sonesta Beach Resort  - until April 2008, the Company operated a condominium hotel in Sunny Isles Beach, Florida.  The hotel opened in April 2003.   Under the management agreement, the Company was entitled to management and marketing fees based on the hotel’s revenues, and incentive fees based on the hotel’s net operating income. The Company was obligated to advance funds for operating losses and to provide a minimum annual return of $800,000 to the hotel’s owner, starting as of November 1, 2004.   From the opening in April 2003 until November 1, 2004, the Company was obligated to advance 50% of any net operating losses.  Amounts advanced under these obligations were subject to repayment, without interest, out of future profits in excess of the aforementioned minimum return.  During the years the minimum returns were not earned, the Company eliminated the fee income earned from the property from its revenues.  If the amounts of the shortfalls exceeded the total fee income, the Company reflected such excess amounts either as long-term receivables and advances on its balance sheet, or recorded an expense equal to the amount advanced.  The Company exercised its right to terminate the management agreement effective April 1, 2008, and receive back advances it made under the agreement totaling $7,031,000.  In October 2008,

 
9

 


 
following the settlement of a dispute, the Company received $5,002,000 in connection with the termination of the management agreement, which included the repayment of advances and the payment of fees which were not previously recorded.  The Company had invested in the furniture, fixtures and equipment of the non-guestroom areas of the hotel, an amount of $2,268,000.  This was included in other long-term assets, and was being amortized over the 10-year initial term of the management agreement.  As a result of the decision to terminate the agreement, the Company accelerated the depreciation of the long-term asset during the 2007 fourth quarter.

· 
Accounting for 2005 Asset Transfer – in April 2005, the Company completed the transfer of the land and improvements of Sonesta Beach Key Biscayne to a development partnership, of which the Company was a 50% partner.  At that time, the Company received non-refundable proceeds of approximately $60 million, and was entitled to a priority return of an additional $60 million from the sale proceeds of residential condominium units to be constructed on the site.  Since the Company had a continuing involvement in the ownership of the development, the initial gain was being deferred.  In 2009, the development partnership sold its assets and the Company realized the previously deferred gain (see Note 3 – Investment in Development Partnership).
 


 
10

 

Quantitative and Qualitative Disclosure of Market Risk

The Company is exposed to market risk from changes in interest rates.  As of December 31, 2009 the Company used fixed rate debt to finance the ownership of Royal Sonesta Boston.  In February 2010, the loan was replaced with a new $32 million loan that has a variable interest rate based on LIBOR, but the Company has entered into an interest rate swap agreement that provides for a 6.4% fixed interest rate for the term of the loan.  The table that follows summarizes the Company’s fixed rate debt obligations, and presents the fair value of the debt based on current prevailing interest rates for similar financing. This information should be read in conjunction with Note 5 — Borrowing Arrangements.

Short and Long Term Debt (in thousands) maturing in:

   
YEAR
                   
   
2010
   
2011
   
2012
   
2013
   
2014
   
Thereafter
   
Total
   
Fair Value
 
Fixed rate
  $ 594     $ 563     $ 600     $ 639     $ 681     $ 29,118     $ 32,195     $ 32,195  
Average interest rate
    6.5 %     6.4 %     6.4 %     6.4 %     6.4 %     6.4 %                

Selected Quarterly Financial Data

Following are selected quarterly financial information for the years ended December 31, 2009 and 2008.

   
(in thousands except for per share data)
 
   
2009
 
   
1st
   
2nd
   
3rd
   
4th
 
Revenues
  $ 13,103     $ 16,497     $ 14,517     $ 16,341  
Other revenues from managed and
                               
affiliated properties
    1,221       1,082       1,045       1,013  
Total revenues
    14,324       17,579       15,562       17,354  
Operating income (loss)
    (2,400 )     363       148       938  
Net income (loss)
    (2,212 )     (109 )     27,379       219  
Net income (loss) per share
  $ (0.60 )   $ (0.03 )   $ 7.41     $ 0.06  


       
   
2008
 
   
1st
   
2nd
   
3rd
   
4th
 
Revenues
  $ 17,798     $ 20,422     $ 16,398     $ 16,934  
Other revenues from managed and
                               
affiliated properties
    5,117       1,346       1,286       1,216  
Total revenues
    22,915       21,768       17,684       18,150  
Operating income (loss)
    80       2,730       4,411       (550 )
Net income (loss)
    90       1,506       2,792       (308 )
Net  income (loss) per share
  $ 0.02     $ 0.41     $ 0.76     $ (0.09 )
       


 
11

 

Fourth Quarter Results

Revenues

       
   
                    TOTAL REVENUES
                    (in thousands)
 
   
NO. OF
             
   
ROOMS
   
2009
   
2008
 
                   
Royal Sonesta Hotel Boston
    400     $ 6,324     $ 7,344  
Royal Sonesta Hotel New Orleans
    500       8,685       7,884  
Management and service fees
            1,332       1,706  
Total revenues, excluding other revenues from
      managed and affiliated properties
          $ 16,341     $ 16,934  

Total revenues, excluding other revenues from managed and affiliated properties, during the fourth quarter of 2009 were $16,341,000 compared to $16,934,000 during the fourth quarter of 2008, a decrease of $593,000.

Royal Sonesta Hotel Boston reported fourth quarter 2009 revenues of $6,324,000 compared to $7,344,000 in the fourth quarter of 2008, representing a $1,020,000, or 14%, decrease.  Economic conditions continued to effect the demand for hotel rooms in the Boston market during the fourth quarter.  The decrease was almost entirely due to an $883,000 decrease in room revenues, resulting from an 18% decrease in room revenue per available room (“REVPAR”).  The hotel’s occupancy levels during the fourth quarter of 2009 were actually slightly higher compared to 2008, but the hotel’s average daily room rates declined substantially.  The hotel’s group and convention business continued to decline during the 2009 fourth quarter.  Lack of corporate group and convention business has created strong competition for transient business, which led to a decline in room rates from this market segment.  Revenues from other sources declined by $137,000 in the 2009 fourth quarter due to a decrease in banquet revenues, resulting from the decrease in group and convention business.

Royal Sonesta Hotel New Orleans reported 2009 fourth quarter revenues of $8,685,000, which represented an increase of $801,000 compared to 2008 fourth quarter revenues of $7,884,000.  Demand in New Orleans improved during the 2009 fourth quarter, resulting in a $486,000 increase in room revenues, due to a 10% REVPAR increase.  This increase was entirely due to higher occupancy levels.  Business from both the group and convention as well as the transient market segments were up during the 2009 fourth quarter.  Revenues from other sources increased by $315,000, which included increased banqueting and beverage sales.

Revenues from management activities decreased from $1,706,000 in the 2008 fourth quarter to $1,332,000 during the 2009 fourth quarter, a decrease of $374,000.  This was mainly due to a $250,000 decrease in fee income from the Company’s managed hotels in Egypt.  Profit levels at two of the Company’s resorts in Egypt fell short of thresholds which the hotels need to achieve in order for the Company to earn incentive fees.

Operating Income

       
   
OPERATING INCOME (LOSS)
(in thousands)
 
   
2009
   
2008
 
             
Royal Sonesta Hotel Boston
  $ 676     $ 1,257  
Royal Sonesta Hotel New Orleans
    388       (373 )
Operating income from hotels after
management and service fees
    1,064       884  
Management activities and other income
    (126 )     (1,434 )
Operating income (loss)
  $ 938     $ (550 )


The Company reported operating income of $938,000 during the fourth quarter of 2009, compared to an operating loss of $550,000 in the fourth quarter of 2008.

Operating income at Royal Sonesta Hotel Boston decreased from $1,257,000 in the fourth quarter of 2008 to $676,000 during the fourth quarter of 2009, a $581,000 decrease.  Revenues during the fourth quarter decreased by $1,020,000, which decrease was partially offset by a $439,000, or 7%, decrease in expenses.  Costs and operating expenses decreased by $188,000, due to a decrease in payroll and employee benefits costs.  In addition, expenses for administrative and general, sales and marketing, human resources, and depreciation decreased compared to last year.

Royal Sonesta Hotel New Orleans reported operating income of $388,000 in the 2009 fourth quarter, an improvement of $761,000 compared to the $373,000 operating loss in the fourth quarter of 2008.  Revenues increased by $801,000 in the 2009 period, which increase was partially offset by a very slight $40,000 increase in overall expenses.  Modest increases in costs and operating expenses, sales and marketing expense and maintenance costs were partially offset by decreases in administrative and general expenses.  During the 2008 fourth quarter, the hotel expensed $303,000 for costs incurred during 2006, 2007 and 2008 related to the potential addition of a spa in the hotel, following its decision to postpone this project indefinitely because of the high costs.

Operating loss from management activities, which is computed after giving effect to management and marketing fees from owned and leased hotels, decreased from $1,434,000 during the fourth quarter of 2008 to $126,000 during the 2009 fourth quarter.  Decreases in revenues from these activities of $374,000 were more than offset by a decrease in expenses of $1,682,000 during the 2009 fourth quarter.  The reduction in corporate costs was entirely due to a decrease in administrative and general expenses.  During the 2008 fourth quarter, administrative and general expense included an amount of $720,000 related to an employment agreement with Roger Sonnabend, the Company’s former Executive Chairman of the Board, who passed away in December 2008.  Expenses in 2008 also included legal fees and other costs related to a hotel project in Miami.  The Company incurred these costs during 2008 but decided in early 2009 not to pursue this opportunity.  During the 2009 fourth quarter, the Company reversed an expense totaling $376,000 related to Sonesta Bayfront Hotel Coconut Grove.  During the first nine months of 2009, the Company provided for the cost to cure a target return under the contract for this hotel.  In January 2010, the Company decided not to cure this target return for the 2009 calendar year (see also Note 2, Operations).  Administrative and general expenses in the 2009 quarter were also lower compared to 2008 due to decreases in employee benefits costs, following the suspension of matching 401(k) contributions starting in April 2009, and due to lower bonus expense.


 
12

 


SONESTA INTERNATIONAL HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS


For the years ended December 31, 2009 and 2008
(in thousands, except for per share data)

   
2009
   
2008
 
Revenues:
           
Rooms
  $ 35,215     $ 41,052  
Food and beverage
    16,209       17,519  
Management, license and service fees
    4,302       7,956  
Parking, telephone and other
    4,732       5,025  
      60,458       71,552  
Other revenues from managed and affiliated properties
    4,361       8,965  
Total revenues
    64,819       80,517  
                 
Costs and expenses:
               
Costs and operating expenses
    28,009       30,819  
Advertising and promotion
    5,688       5,608  
Administrative and general
    12,363       14,405  
Human resources
    904       1,191  
Maintenance
    3,395       3,549  
Rentals
    4,486       5,392  
Property taxes
    1,385       1,358  
Depreciation and amortization
    5,179       5,838  
      61,409       68,160  
Other expenses from managed and affiliated properties
    4,361       8,965  
Total costs and expenses
    65,770       77,125  
                 
Income from Management Agreement settlement, net
    --       3,279  
                 
Operating income (loss)
    (951 )     6,671  
                 
Other income (deductions):
               
Interest expense
    (2,865 )     (2,970 )
Interest income
    402       1,182  
Foreign exchange loss
    (16 )     (2 )
Gain on sales of assets and dissolution of development partnership
    41,875       576  
      39,396       (1,214 )
Income before income taxes
    38,445       5,457  
Income tax expense
    13,168       1,377  
Net income
  $ 25,277     $ 4,080  
                 
Basic and diluted income per share
  $ 6.84     $ 1.10  
                 
Dividends per share
  $ 1.00     $ 1.35  
Weighted average number of shares outstanding
    3,698       3,698  
                 
                 


See accompanying notes to consolidated financial statements.

 
13

 


SONESTA INTERNATIONAL HOTELS CORPORATION
CONSOLIDATED BALANCE SHEETS


December 31, 2009 and 2008
(in thousands, except for per share data)

   
2009
   
2008
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 35,557     $ 37,463  
Restricted cash
    --       175  
Accounts and notes receivable:
               
Trade, less allowance of $70 ($59 in 2008) for doubtful accounts
    5,092       5,407  
Other, including current portion of long-term receivables andadvances
    1,242       1,001  
Total accounts and notes receivable
    6,334       6,408  
Inventories
    623       628  
Current deferred tax assets
    476       462  
Prepaid expenses and other current assets
    1,242       2,163  
Total current assets
    44,232       47,299  
                 
Long-term receivables and advances
    1,354       992  
                 
                 
                 
Deferred tax assets
    --       9,049  
                 
Investment in development partnership (see Note 3)
    --       33,666  
                 
Property and equipment, at cost:
               
Land and land improvements
    2,102       2,102  
Buildings
    25,721       25,610  
Furniture and equipment
    30,859       30,150  
Leasehold improvements
    9,109       8,785  
Projects in progress
    64       472  
      67,855       67,119  
Less accumulated depreciation and amortization
    33,585       32,088  
Net property and equipment
    34,270       35,031  
                 
Other long-term assets
    875       1,003  
    $ 80,731     $ 127,040  
                 


See accompanying notes to consolidated financial statements.

 
14

 

SONESTA INTERNATIONAL HOTELS CORPORATION
CONSOLIDATED BALANCE SHEETS



   
2009
   
2008
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
           
Current liabilities:
           
Current portion of long-term debt
  $ 594     $ 1,163  
Accounts payable
    2,887       3,747  
Advance deposits
    1,103       1,281  
Accrued income taxes
    327       402  
Accrued liabilities:
               
Salaries and wages
    1,278       1,772  
Rentals
    3,741       4,787  
Interest
    236       244  
Pension and other employee benefits
    2,064       1,612  
Other
    1,028       862  
      8,347       9,277  
Total current liabilities
    13,258       15,870  
                 
Long-term debt
    31,245       31,839  
                 
Deferred gain (see Note 3)
    --       64,481  
                 
Pension liability, non-current
    6,554       9,338  
                 
Other non-current liabilities
    1,082       1,386  
                 
Deferred tax liabilities
    1,939       --  
                 
Commitments and contingencies (see Note 7)
               
                 
                 
                 
Stockholders’ equity:
               
Common stock:
               
Class A,  $.80 par value
               
Authorized--10,000 shares
               
Issued – 6,102 shares at stated value
    4,882       4,882  
Retained earnings
    35,734       14,155  
Treasury shares – 2,404, at cost
    (12,053 )     (12,053 )
Accumulated other comprehensive loss
    (1,910 )     (2,858 )
Total stockholders’ equity
    26,653       4,126  
    $ 80,731     $ 127,040  


 
15

 

SONESTA INTERNATIONAL HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 
For the years ended December 31, 2009 and 2008
 
(in thousands, except for per share data)


 
Common Shares Outstanding
   
Class A Common Stock
   
 
Treasury Shares at Cost
   
 
Retained
Earnings
   
Accumulated Other Comprehensive Income (Loss)
   
Total Stockholders’
Equity
 
                                 
3,698
Balance January 1, 2008
  $ 4,882     $ (12,053 )   $ 15,068     $ 650     $ 8,547  
--
Cash dividends declared on common stock ($1.35 per share)
    --       --       (4,993 )     --       (4,993 )
--
Net income
    --       --       4,080       --       4,080  
 
    --
Pension plan, actuarial loss recognized
     --        --       --       (3,508 )     (3,508 )
3,698
Balance December 31, 2008
    4,882       (12,053 )     14,155       (2,858 )     4,126  
--
Cash dividends declared on common stock ($1.00 per share)
    --       --       (3,698 )     --       (3,698 )
--
Net income
    --       --       25,277       --       25,277  
 
    --
Pension plan, actuarial gain recognized
    --       --       --       948       948  
3,698
Balance December 31, 2009
  $ 4,882     $ (12,053 )   $ 35,734     $ (1,910 )   $ 26,653  
                                           















SONESTA INTERNATIONAL HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 
For the years ended December 31, 2009 and 2008
 
(in thousands)

   
2009  
   
2008  
 
             
Net income
  $ 25,277     $ 4,080  
                 
Other comprehensive income (loss), net of tax:
               
Pension Plan, actuarial income (loss) recognized
    948       (3,508 )
                 
Comprehensive income
  $ 26,225     $ 572  























See accompanying notes to consolidated financial statements.

 
16

 

SONESTA INTERNATIONAL HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS



For the years ended December 31, 2009 and 2008
(in thousands)

   
2009
   
2008
 
Cash provided (used) by operating activities
           
Net income
  $ 25,277     $ 4,080  
Adjustments to reconcile net income to net cash
               
provided (used) by operating activities
               
Depreciation and amortization of property and equipment
    5,179       5,838  
Other amortization and non-cash expenses
    92       262  
Deferred federal and state income tax provision
    11,994       353  
Gain on sales of assets and dissolution of development
        partnership
    (41,875 )     (576 )
                 
Changes in assets and liabilities
               
Restricted cash
    175       1,526  
Accounts and notes receivable
    (44 )     (39 )
Inventories
    5       (21 )
Prepaid expenses and other
    (146 )     71  
Accounts payable
    64       (1,301 )
Advance deposits
    (178 )     (1,655 )
Income taxes
    953       (223 )
Accrued liabilities
    (2,474 )     (319 )
Cash provided (used) by operating activities
    (978 )     7,996  
                 
Cash provided by investing activities
               
Proceeds from sales of assets
    257       1,058  
Payments received from development partnership
    9,412       125  
Expenditures for property and equipment
    (4,612 )     (3,494 )
New loans and advances
    (3,224 )     (135 )
Payments received on long-term receivables and advances
    3,025       4,789  
Cash provided by investing activities
    4,858       2,343  
                 
Cash used in financing activities
               
Repayments of long-term debt
    (1,163 )     (1,058 )
Cash dividends paid
    (4,623 )     (4,438 )
Cash used in financing activities
    (5,786 )     (5,496 )
Net increase (decrease) in cash and cash equivalents
    (1,906 )     4,843  
Cash and cash equivalents at beginning of year
    37,463       32,620  
Cash and cash equivalents at end of year
  $ 35,557     $ 37,463  
                 
                 







See accompanying notes to consolidated financial statements.


 
17

 

SONESTA INTERNATIONAL HOTELS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  
Basis of Presentation and Significant Accounting Policies

Basis of Presentation:

Sonesta International Hotels Corporation (the Company) is engaged in the operation of hotels in Boston, Massachusetts and New Orleans, Louisiana.  The Company also operates, under management agreements, hotels in Coconut Grove, Florida, and Sunny Isles, Florida (until March 2008); and in Cairo, Sharm El Sheikh, Luxor, Taba, Hurghada and Port Said (until March 2009), Egypt.  The Company also manages five Nile River cruise ships in Egypt.  Sonesta has granted licenses, for which it receives fees, for the use of its name for hotels in St. Maarten, Brazil, Chile, Colombia and Peru.

Principles of Consolidation:

The consolidated financial statements include the results of operations of wholly-owned and leased properties, and fee income and certain revenues and costs from reimbursable expenses incurred at managed and affiliated properties.  All significant intercompany balances and transactions have been eliminated.  The Company has identified certain of its management agreements as variable interest entities.  However, the Company does not believe it bears the majority of the risk of loss from the variable interest entity’s activities, nor is it entitled to receive the majority of the variable interest entity’s residual returns.  As a result, these entities are not consolidated in the Company’s financial statements.

Foreign Currency Transactions:

Assets and liabilities denominated in foreign currency are converted at end of year rates, and income and expense items are converted at weighted average rates during the period.  The net result of such conversions is charged or credited to the statement of operations.

Inventories:

Inventories consist of merchandise and supplies, and are stated at the lower of cost (first-in/first-out method) or market.

Revenue Recognition:

The Company’s revenues are primarily derived from (1) owned and leased hotels, (2) management, license and service fees and (3) other revenues from managed and affiliated properties.

· 
Owned and leased hotels – The majority of the Company’s income is derived from  its owned and leased hotels from the rental of rooms, food and beverage sales as well as charges for parking, telephone and other incidental charges.  These revenues are recognized when rooms are occupied and services have been rendered.

· 
Management, license and service fees – Represents fee income from hotels operated under management agreements, and license fees from hotels to which the Company has licensed the use of the “Sonesta” name.  Management fees include base fees and marketing fees, which are generally based on a percentage of gross revenues, and incentive fees, which are generally based on the hotels’ profitability.  These fees are typically based on revenues and income achieved during each calendar year.  Incentive fees, and management and marketing fees of which the receipt is based on annual profits achieved, are recognized throughout the year on a quarterly basis based on profits achieved during the interim periods when our agreements provide for quarterly payments during the calendar years they are earned, and when such fees would be due if the management agreements were terminated.  As a result, during quarterly periods, fee income may not be indicative of eventual income recognized at the end of each calendar year due to changes in business conditions and profitability.  License fees are earned based on a percentage of room revenues of the hotels.  Revenues and expenses of hotels operated under management agreements are excluded from the Company’s consolidated statements of operations, except for certain costs described below.

· 
Other revenues from managed and affiliated properties – The reimbursements of certain expenses incurred on behalf of managed and affiliated properties, and the costs incurred on behalf of owners of managed properties are recorded on a “gross” basis in revenues and costs.  These costs relate primarily to payroll and related costs of managed properties in which the Company is the employer.  The revenue for these costs is included in Other revenue from managed and affiliated properties and the offsetting expense is included in Other expenses from managed and affiliated properties.

Advertising:

The cost of advertising is generally expensed as incurred.

Property and Equipment:

Property and equipment are stated at cost.  Depreciation and amortization of items of property and equipment are computed on the straight-line method based on the following estimated useful lives:

Buildings and building improvements:
 
 
Owned properties
10 to 40 years
   
Furniture and Equipment:
 
 
Located in owned properties
5 to 10 years
 
Located in leased properties
5 to 10 years or remaining lease terms
   
Leasehold improvements:
Remaining lease terms

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of:

The carrying values of long-lived assets, which include property and equipment and intangibles, are evaluated periodically for impairment when impairment indicators are present.  Future undiscounted cash flows of the underlying assets are compared to the assets’ carrying values.  Adjustments to fair value are made if the sum of expected future undiscounted cash flows are less than book value.  To date, no adjustments for impairment have been made.

Income Taxes:

We use the asset and liability method to account for income taxes.  Under this method, deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial statement and income tax purposes and tax carry forwards, as determined under enacted tax laws and rates.  The Company and its United States subsidiaries file a consolidated federal income tax return.  Federal and foreign income taxes are provided on earnings of foreign subsidiaries.

Fair Value of Financial Instruments:

The Company's financial instruments consist of cash and cash equivalents, accounts and notes receivable, accounts payable and long-term debt.  The Company believes that the carrying value of its financial instruments approximates their fair values.  The majority of the Company’s cash and cash equivalents at December 31, 2009 were held in money market mutual funds and non-interest bearing bank accounts.  The book balance at December 31, 2009 of the Company’s

 
18

 

long-term debt, which carries an interest rate of 8.6%, is $31,839,000, which approximates its fair value.

Fair Value Measurements:

Effective January 1, 2008, the Company adopted the new standard regarding fair value which establishes a new framework for measuring fair value and expands related disclosures.  Broadly, the framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.  The standard established a three-level valuation hierarchy based upon observable and non-observable inputs.

Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions.  Preference is given to observable inputs.  These two types of inputs create the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 – Significant inputs to the valuation model are unobservable.

The Company maintains policies and procedures to value instruments using the best and most relevant data available.

Impact of Recently Issued Accounting Standards:

The FSAB has issued ASU 2009-16 which amends FASB ASC 810, “Consolidation” (originally issued as SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements”).  ASU 2009-16 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 organization, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary.  This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  The adoption of ASU 2009-16 did not have a material impact on the Company’s financial statements

The FSAB has issued FASB ASC 805, “Business Combinations” (ASC 805) (originally issued as SFAS No.141R, “Business Combinations”).  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.  The provisions of ASC 805 will be applied to future business combinations that the Company enters into.

In March 2008, the FASB amended the guidance in FASB ASC 815, “Derivatives and Hedging” (ASC 815) (originally issued as SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”).  The amendment to ASC 815 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 ASC 815, 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.  Through December 31, 2009, the Company did not use any derivative instruments.  As a result the adoption of the amended ASC 815 guidance did not have an impact on the Company’s financial statements.

Use of Estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.

Subsequent Events:

The Company evaluated all events or transactions that occurred after December 31, 2009 through the date of this annual report.  The only significant subsequent event were the refinancing of a mortgage loan as further described in Note 5, Borrowing Arrangements and loans made to managed and licensed properties further described in Note 7.  Commitments and Contingencies.


Statement of Cash Flows:

Cash and cash equivalents consist of cash on hand and short-term, highly liquid investments with original maturities of less than 90 days, which are readily convertible into cash.

Cash paid for interest in 2009 and 2008 was approximately $2,832,000 and $2,936,000, respectively.  Cash paid for income taxes in 2009 and 2008 was approximately $236,000 and $1,350,000, respectively.

In August 2009, the Company made a loan of $1,363,000 to the owner of Sonesta St. George Hotel Luxor and Sonesta St. George I Cruise Ship, which are both managed by the Company.  The loan included the conversion of receivables for fees and expenses totaling $863,000, and as a result the Company recorded the following non-cash transaction (in thousands):

Increase in Long term receivables
  $ 863  
Decrease in Accounts Receivable
    (863 )

In January 2008, the Company agreed 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.  In addition, the Company paid the hotels’ owner $500,000 for an extension of the management agreement for one of the hotels, which payment was made by reducing outstanding receivables.  In connection with this transaction, the Company recorded the following non-cash transaction (in thousands):

Increase in Long term receivables
  $ 1,473  
Increase in Long term assets
    545  
Decrease in Accounts Receivable
    (2,018 )

2.  
Operations

The Company operates the Sonesta Bayfront Hotel Coconut Grove, in Miami, which is a condominium hotel that opened in April 2002.  Under its agreements, the Company is committed to fund net operating losses, and to provide the hotel’s owner with a minimum annual return ($419,000 during 2009), adjusted annually by increases in the Consumer Price Index (“CPI”).  The management agreement can be terminated by the hotel’s owner if the Company fails to cure shortfalls against a minimum target return ($978,000 during 2009), adjusted annually by increases in the CPI.  The hotel’s 2008 net operating profit was sufficient to cover the owner’s target return and the Company’s fees from the hotel of $1,039,000.  In 2009, the hotel’s net operating profit fell short of the target return but was sufficient to cover the

 
19

 

minimum annual return and fees to the Company totaling $150,000.  The Company has decided not to fund the owner’s target return for 2009, and notified the owner of same in January 2010.  As a result, the owner had the right to terminate the management agreement provided it sent the Company a termination notice on or before March 3, 2010, but the hotel’s owner did not exercise this right.  (While the hotel’s owner has claimed that the notice deadline was extended beyond March 3, 2010, the Company has advised the owner of its position that the deadline has passed.)  In October 2008, the Company received $2,627,000 in connection with the repayment of a loan made to the owner of the hotel for initial furniture, fixtures and equipment and pre-opening expenses.

In August 2009, the Company loaned a total of $1,363,000 to the owner of Sonesta St. George Hotel Luxor and Sonesta St. George I Cruise Ship, which are both managed by the Company.  The loan consisted of cash advances of $500,000 and a conversion of receivables for fees and expenses due to the Company from the hotel and the ship.  The proceeds of the loan helped fund improvements to the Luxor hotel, including additional rooms and meeting facilities.  The hotel’s owner also agreed to an extension of the management agreement by 5 years.

During 2009, the Company launched a franchise program, focused on adding additional Sonesta hotels in the United States.  A franchise agreement was signed in late 2009 for a hotel in Orlando, which was reflagged as Sonesta Hotel Orlando Downtown in January 2010.  Under its franchise agreements, the Company is entitled to receive fees based on gross room revenues of the hotel.

During 2009, the Company added 5 hotels in Valledupar, Colombia; Cusco, Peru; and Concepcion, Calama, and Osorno, Chile.  Under the franchise agreements for these hotels, the Company receives fees for the use of its name.  In December 2009, license agreements for two hotels in St. Maarten were extended by a minimum period of 5 years.  Completion of a resort in Jaco, Costa Rica has been delayed.  The Company has a management agreement to operate the hotel upon completion.

In January 2008, the Company agreed to pay $500,000 to the owners 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 (5.25%).  The Company accounted 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 extended term of the management agreement.

From April 2003 through March 2008, the Company operated Trump International Sonesta Beach Resort Sunny Isles, in Florida, under a management agreement.  The Company had a one-time right to cancel the management agreement, effective five years after the opening date, upon 6 months notice, and receive repayment of advances it was obligated to make for net operating losses and certain minimum returns due to the hotel’s owner.  The amount due upon termination, $7,031,000, was disputed by the hotel’s owner.  An arbitration procedure to resolve the dispute commenced in April 2008 and was settled in October 2008.  The Company received a total of $5,002,000, which included the amount of the settlement of $4,929,000, and its share of the interest earned on an escrow account in the amount of $73,000.  Of the settlement amount, $1,135,000 repaid the Company’s outstanding receivable.  After deducting $515,000 for legal and other costs in connection with the arbitration, the remaining amount of $3,279,000 was recorded as income in the 2008 third quarter.  This amount relates to fees due to the Company which were not previously recorded since the hotel’s profits were insufficient to pay them, and the collectability was uncertain.

Gross revenues for hotels operated by the Company under management contracts for third party owners, by geographic area, for the years ended December 31, 2009 and 2008, are summarized below:

   
(in thousands)
 
   
(unaudited)
 
   
2009
   
2008
 
             
United States(1)
  $ 9,376     $ 26,060  
Egypt
    64,376       73,569  
    $ 73,752     $ 99,629  

(1) Includes Trump International Sonesta Beach Resort Sunny Isles through March 2008.

Costs and operating expenses for owned and leased hotels for the years ended December 31, 2009 and 2008 are summarized below:

   
(in thousands)
 
   
2009
   
2008
 
Direct departmental costs:
           
Rooms
  $ 9,869     $ 10,760  
Food and beverage
    13,404       14,246  
Heat, light and power
    2,330       2,932  
Other
    2,406       2,881  
    $ 28,009     $ 30,819  

Direct departmental costs include payroll expense and related payroll burden, the cost of food and beverage consumed and other departmental costs.

3.  
Investment in Development Partnership

The Company was a 50% limited partner in a development partnership which owned the land and improvements formerly comprising the Sonesta Beach Resort Key Biscayne.  The Company contributed the land and improvements to the partnership in April 2005, and the hotel closed in August 2006.  The Company deferred the $64,481,000 gain on the transfer due to the Company’s continuing involvement in the partnership.

The intent of the partnership was to develop a new condominium resort on the site, but due to permitting issues and the deterioration of the real estate market in South Florida these plans did not materialize.  The partnership sold the Resort land and improvements in September 2009 for $78 million in cash.  In connection with this sale, the Company received $12,076,000 in September 2009, consisting of repayment of advances made to the partnership during 2009 of $2,664,000 and $9,412,000 for its share of the sale proceeds.

The sale ended the Company’s continuing involvement in the resort and resulted in the Company recognizing a pre-tax gain of $41,843,000 during the 2009 third quarter.  The gain consists of the $64,481,000 previously deferred gain, plus the $9,412,000 of sale proceeds received during the third quarter of 2009, less the Company’s carrying value of its investment in the partnership (see table below).  The carrying value of the investment was adjusted by $1,616,000 during the 2009 third quarter upon final reconciliation of the property’s book and tax basis.

 
20

 



       
   
Reconciliation of Gain (in thousands)
 
       
Deferred gain
  $ 64,481  
Additional proceeds
    9,412  
Less investment
    (32,050 )
Gain recognized
  $ 41,843  

4.  
Long-Term Receivables and Advances

   
(in thousands)
 
   
December 31,2009
   
December 31,2008
 
Sharm El Sheikh, Egypt (a)
  $ 940     $ 1,215  
Luxor, Egypt (b)
    1,311       --  
Other
    215       187  
Total long-term receivables and advances
    2,466       1,402  
Less:  current portion
    1,112       410  
Net long-term receivables and advances
  $ 1,354     $ 992  
                 


(a)
This loan was made in January 2008 to the owners of Sonesta Beach Hotel Sharm El Sheikh and Sonesta Club Sharm El Sheikh by converting receivables for fees and expenses into a five year loan, payable in monthly installments, starting in January 2008.  The Company is accounting for this loan using an effective interest rate of 6.5%.  Monthly payments of $28,820 on this loan are paid directly from the hotels and deducted from distributions of profits to the owners of these managed hotels.

(b)
These loans, in the original amount of $1,363,000, were made in August 2009 to the owner of Sonesta St. George Hotel Luxor and Sonesta St. George I Cruise Ship, which are both managed by the Company.  The loans consist of cash advances of $500,000, and the conversion of receivables for fees and expenses due to the Company totaling $863,000.  The Company made these loans to assist the owner with the financing of improvements to the Sonesta St. George Hotel Luxor, which included additional guest rooms and meeting/function space.  The interest rate is 5.25%, and payments of interest and principal commenced in November 2009.  The last payment is due October 2011.

Management continually monitors the collectability of its receivables and advances and believes they are fully realizable.

5.  
Borrowing Arrangements

Long-Term Debt

The Company’s long-term debt consists of a first mortgage note payable by Charterhouse of Cambridge Trust and Sonesta of Massachusetts, Inc., which are the Company’s subsidiaries that own and operate the Royal Sonesta Hotel Boston.  The principal balance outstanding at December 31, 2009 and December 31, 2008 was $31,839,000 and $33,002,000, respectively.  The debt is secured by a first mortgage on the Royal Sonesta Hotel Boston property, which is included in fixed assets at a net book value of $19,385,000 at December 31, 2009.  This loan, which was to mature in July 2010, carried an interest rate of 8.6%.  Monthly payments of principal and interest were $332,911.

On February 12, 2010, the Company refinanced the mortgage loan.  The existing non-recourse loan in the principal amount of $31,645,000 was paid off.  The loan was replaced with a new $32 million loan.  This loan, which will mature March 1, 2015, has a variable rate based on LIBOR, but the Company has entered into an interest swap agreement that provides for a 6.4% fixed interest rate for the term of the loan.  Payments of interest and principal, based on a 25 year amortization period, will be $642,213 per quarter.  The Company paid a 1% fee at closing, and is also responsible for legal and other costs related to the new loan.  The loan is secured by:

1.  
a first mortgage on the Royal Sonesta Hotel Boston property,
2.  
a parent company guaranty of $5 million, and
3.  
a restricted cash collateral account in the amount of $5 million.  This cash collateral account will be released over a two year period provided the Hotel achieves certain debt service coverage ratios.

The loan is subject to a maximum loan to value ratio, and to minimum debt service coverage ratios, which will be tested quarterly based on trailing twelve month earnings of the Hotel.

Aggregate principal payments for the years subsequent to December 31, 2009, are as follows:

Year
 
(in thousands)
 
2010
  $ 594  
2011
    563  
2012
    600  
2013
    639  
2014
    681  
Thereafter
    29,118  

6.  
Stockholders’ Equity

Basic Income per Share

As the Company has no dilutive securities, there is no difference between basic and diluted earnings per share.  The following table sets forth the computation of basic income or loss per share (in thousands, except for per share data):

 
   2009
   2008
Numerator:
   
Net income
$25,277
$4,080
     
Denominator:
   
Weighted average number of shares outstanding
3,698
3,698
     
Net income per share
$6.84
$1.10


7.  
Commitments and Contingencies

The Company operates the Sonesta Bayfront Hotel Coconut Grove, Miami, which is a condominium hotel that opened in April 2002.  Under the management agreement for this hotel, the Company is committed to fund operating losses and a minimum annual return to the owner of the hotel.  During 2009 and 2008, the hotel’s earnings were sufficient to cover the minimum return.  Further information is provided in Note 2 – Operations.

In February 2010, the Company signed agreements to loan $1,000,000 to the owners of two hotels in St. Maarten, to which the Company licenses the use of its name.  The proceeds will be used to fund improvements at both of the properties.  At the same time, the license agreements for these properties were extended by a minimum of five years.

The Company operates Royal Sonesta Hotel New Orleans under a lease, under which rent payable to the landlord equals 75% of net cash flow.


 
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In January 2010, the Company made a loan of $500,000 to the owner of Sonesta Beach Resort Sharm El Sheikh, to help finance the development of additional hotel rooms and facilities.

Minimum fixed rentals under operating leases, principally on real estate, payable subsequent to December 31, 2009 (exclusive of real estate taxes, insurance and other occupancy costs) are as follows:


       
   
(in thousands)
 
Period
 
Operating leases
 
2010
  $
737
 
2011
    625  
2012
    291  
2013
    104  



Rentals charged to operations are as follows:

   
(in thousands)
 
   
2009
   
2008
 
Real Estate:
           
Fixed rentals
  $ 738     $ 661  
Percentage rentals based on defined operating profits
    3,748       4,731  
    $ 4,486     $ 5,392  

The Company has incentive compensation plans for management under which hotel profit bases, as established annually, must be achieved before any incentive compensation may be earned.  The incentive compensation charged to operations was $232,000 in 2009 and $865,000 in 2008.


8.  
Pension and Benefit Plans

Pension Plan

The Company maintains a non-contributory defined benefit pension plan (the Plan) for certain employees of Sonesta International Hotels Corporation and its subsidiaries.  Benefits are based on the employee’s years of service and the highest average monthly salary during any 60 consecutive months of employment.  The Company’s funding policy is to contribute annually at least the minimum contribution required by ERISA.   The Company does not offer any other post-retirement benefit plans.

Pension Plan Freeze

Effective December 31, 2006, the Company froze the Plan.  Participants in the Plan at December 31, 2006 continue to be eligible to receive a pension benefit, provided they meet the 5 years of service vesting requirement during their employment with the Company.  However, the amount of all pension benefits due under the Plan was frozen at the December 31, 2006 level.  Any additional service and/or compensation increases after January 1, 2007 will not increase the participants’ benefits.  In addition, employees hired after July 1, 2005 will not receive benefits under the Plan.

Obligations and Funded Status

The following table sets forth the funded status of the Plan at December 31, 2009 and 2008:

   
(in thousands)
 
   
2009
   
2008
 
Change in benefit obligation
           
Benefit obligation at beginning of year
  $ 27,807     $ 28,543  
Service cost
    82       --  
Interest cost
    1,596       1,650  
Actuarial gain
    (753 )     (505 )
Benefits paid
    (1,119 )     (1,881 )
Benefit obligation at end of year
    27,613       27,807  
                 
Change in plan assets
               
Fair value of plan assets at beginning of year
    17,767       22,490  
Actual return on plan assets
    2,521       (3,926 )
Employer contribution
    934       1,280  
Benefits paid
    (1,119 )     (1,881 )
Administrative expenses
    (215 )     (196 )
Fair value of plan assets at end of year
    19,888       17,767  
                 
Benefit obligation in excess of Plan assets
    7,725       10,040  
Unrecognized actuarial loss
    (3,023 )     (4,567 )
Additional loss charged to comprehensive loss
    3,023       4,567  
Accrued pension liability
  $ 7,725     $ 10,040  

The Company recognized accrued benefit costs of $7,725,000 and $10,040,000 in its balance sheet at December 31, 2009 and 2008, respectively.

Included in accumulated other comprehensive loss at December 31, 2009 are unrecognized actuarial losses of $3,023,000 ($1,910,000, net of tax) that have not yet been recognized in net periodic pension cost. The actuarial loss included in accumulated other comprehensive loss and expected to be recognized in net periodic pension cost during the year ended December 31, 2010 is $165,000 ($104,000, net of tax).

The following table presents the projected and accumulated benefit obligation compared to plan assets:

   
(in thousands)
 
   
December 31,
 
   
2009
   
2008
 
             
Projected benefit obligation
  $ 27,613     $ 27,807  
Accumulated benefit obligation
    27,613       27,807  
Fair value of plan assets
    19,888       17,767  


The components of the Company’s net periodic pension cost (credit) for the Plan were as follows:

   
(in thousands)
 
   
__2009
   
__2008
 
             
Service cost
  $ 82     $ --  
Interest cost
    1,596       1,650  
Expected return on plan assets
    (1,716 )     (1,887 )
Recognized actuarial (gain) loss
    202       (48 )
Net periodic benefit cost (credit)
  $ 164     $ (285 )


 
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Weighted-average assumption used to determine benefit obligations at the end of December 31, 2009 and 2008 were:

   
2009
   
2008
 
Discount rate
    6.00 %     6.00 %


Weighted-average assumptions used to determine net periodic pension costs for the years ended December 31, 2009 and 2008 were:

   
2009
   
2008
 
Discount rate
    6.00 %     6.00 %
Expected return on plan assets
    8.50 %     8.50 %

The assumed rate of return on plan assets has remained unchanged since 1988.    Management believes 8.50% is a realistic long-term rate of return.   The balanced retirement fund into which plan assets have been invested since 1987 has provided a composite average annual rate of return of 9.7% since 1987.

Plan Assets

The Plan’s assets are invested in the Boston Trust Balanced Retirement Fund (the “Fund”), which is managed by Boston Trust Investment Management Company.  The Fund’s weighted-average asset allocations at December 31, 2009 and 2008, by asset category, were as follows:

   
Plan assets at December 31,
 
   
2009
   
2008
 
             
Cash & money market investments
    1 %     9 %
Government debt securities
    31 %     38 %
Corporate debt securities
    4 %     4 %
Equity securities
    64 %     49 %
      100 %     100 %

The Plan’s assets have been invested in the Fund since 1987.   The investment objective of the Fund is to achieve capital growth over the long-term through a broadly diversified, actively managed blend of stocks, bonds and money market instruments.    In order to moderate the Fund’s risk and volatility, a mix of assets is selected for the Fund with the dual objective of providing the opportunity to participate in favorable economic environments, and also moderating downside risk in the event economic conditions deteriorate.   To further balance risk and return, individual investments are held across a wide range of economic sectors.   Specific equity selections focus on financially sound companies with strong competitive positions in their industry.   Bond holdings are primarily of higher quality issuers.

The following table presents the fair values of the Plan’s assets, by asset category, as of December 31, 2009:

   
(in thousand)
 
   
Quoted Prices in Active Markets for Identical Assets
   
Significant Observable Inputs
   
Significant Unobservable Inputs
       
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
                         
Boston Trust Balanced Retirement Fund
  $ --     $ 19,810     $ --     $ 19,810  
Boston Trust Daily Income Account
    78       --       --       78  
                                 
Investments as of December 31, 2008
  $ 78     $ 19,810     $ --     $ 19,888  

Balanced Retirement Fund:

The Boston Trust Balanced Retirement Fund is a public investment vehicle valued using the Net Asset Value (“NAV”) provided by the administrator of the fund.  The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding.  The NAV is classified within  level 2 of the valuation hierarchy because the NAV’s unit price is quoted on a private market that is not active; however, the unit price is based on the underlying investments which are traded on an active market.

Money Market Accounts

The Boston Trust Daily Income Account is a money market fund that is stated at cost, plus accrued interest, which approximates market.  Purchases and sales of securities are recorded on a trade-date basis.  Interest income is recorded on the accrual basis.  Dividends are recorded on the ex-dividend date.

Cash Flows

The Company expects to make contributions totaling $1,172,000 during 2010, and has classified this amount as a current liability in the accompanying balance sheet.

The following table sets forth estimated future benefit payments from the Plan.

   
(in thousands)
 
   
Estimated Pension Benefit Payments
 
       
2010
  $ 1,195  
2011
    1,190  
2012
    1,263  
2013
    1,319  
2014
    1,435  
2015 through 2019
    9,561  

Savings Plan

The Company has an employee savings plan (the Savings Plan) that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code.  Under the Savings Plan, participating U.S. employees may defer a portion of their pre-tax earnings up to the Internal Revenue Service annual contribution limit.  All U.S. employees of the Company are eligible to participate in the Savings Plan.  Participating employees may choose to invest their contributions in each one of twenty-seven mutual funds, which include equity funds, balanced funds and a money market fund.  The Company does bear the costs of administering the Plan, which were $13,000 in 2009 and $12,000 in 2008.

Effective January 1, 2007, following a freeze of the Pension Plan, the Company started providing matching contributions of up to 4% of earnings to employees who make contributions to their 401(k) savings accounts.  The Company matched the first 3% salary deferral of its employees, and 50% of the next 2%.  The Company suspended matching contributions on April 1, 2009 to reduce expenses.  The amount contributed by the Company and included in expenses in 2009 and 2008 totaled $165,000 and $644,000, respectively.  The Company will resume matching contributions on April 1, 2010, matching 50% of the employees’ salary deferral, up to a maximum of 2%.

9.  
Segment Information

The Company has two reportable segments:  Owned and Leased Hotels, and Management Activities.  The Owned and Leased Hotels segment consists of the operations of the Company’s hotels in Boston and New Orleans. Revenues for this segment are derived mainly from

 
23

 

rooms, food and beverage, parking and telephone receipts from hotel guests.  The Management Activities segment includes the operations of hotels and resorts under management agreements, and also includes fees from hotels to which the Company has granted licenses.  Revenues from this segment are derived mainly from management, marketing, license and service fees charged to the third party owners of these properties.  The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.  The segments’ operating income or losses and pretax profit or losses are after giving effect to management, marketing and service fees to the Company’s Boston and New Orleans hotels.  Segment data for the years ended December 31, 2009 and 2008 are as follows:

Year ended December 31, 2009
     
   
(in thousands)
 
   
Owned &
Leased Hotels
   
Management
Activities
   
Consolidated
 
 
Revenues
  $ 56,141     $ 4,317     $ 60,458  
Other revenues from managed
                       
and affiliated properties
    --       4,361       4,361  
Total revenues
    56,141       8,678       64,819  
Operating income (loss) before depreciation