Item 1. Business
(a) General Development of Business: The Company is engaged in the operation of hotels that it owns or leases in Boston (Cambridge), Massachusetts; Key Biscayne, Florida; New Orleans, Louisiana; and Anguilla, B.W.I. It also operates, under management agreements, hotels in Southampton, Bermuda; Curacao, Netherlands Antilles; New Orleans, Louisiana; and Cairo, Luxor, El Gouna, Port Said and Sharm el Sheikh, Egypt; and two Nile River cruise vessels. The Company has paid $2 million for a 22% ownership interest in the hotel and casino it operates under a management contract in Curacao, Netherlands Antilles. The Company has entered into management agreements to operate new hotels being created in Miami Beach; Taba and Nuweiba, Egypt; and Manama, Bahrain; these projects are scheduled to open in 1999 or 2000. The Company also licenses the use of the Sonesta name to two hotels in Aruba, and a hotel in Lima, Peru. The Company terminated contracts under which it operated two properties in Hurghada, Egypt, effective in early January 1998; and a license agreement for a hotel in Santiago, Chile was terminated effective at the end of February 1998. In May 1998, the Company elected not to fund a performance threshold deficit and the owner of Sonesta Beach Resort & Casino, in Curacao, exercised its right to terminate the Company's management contract. While the Company is cooperating in the transition to new management at that property, it continues to operate it under the Sonesta flag. In July 1998, the Company acquired ownership of Sonesta Beach Resort, in Key Biscayne, Florida, a property it has operated for many years. In February 1999, the owner of the hotel in El Gouna, Egypt that the Company has both operated and licensed notified the Company that it was terminating its relationship with the Company for that property, effective in May 1999. In November 1995, the Company acquired the 100-room Casablanca resort in Anguilla, B.W.I., which at that time was closed due to damage from Hurricane Luis, in September 1995 (for details of this transaction, reference is made to Note 2-Operations, on pages 14 through 16 of the 1998 Annual Report to Shareholders.) In December 1994, the Company entered into two partnerships: one involving an 82-room hotel in SoHo, New York; the other to create a 320-room resort in Costa Rica. In July, 1996, the Company liquidated its investment in the SoHo project, and in March 1997 the Company notified its partner in the Costa Rica project that it was terminating its participation in that project. Through a foreclosure procedure the Company now owns the resort site in Costa Rica.
(b) Not applicable.
(c) Narrative Description of Business: The Company's business is to a great extent dependent upon a high level of economic activity. The hotel business is highly competitive. The facilities of competitors are often affiliated with national or regional
Item 1. Business
(c) (Cont'd)
chains having more room accommodations and greater financial resources than the Company. The Company follows the practice of refurnishing and redecorating the hotels which it operates in order to keep the properties attractive and competitive with new hotel properties, and this requires the Company to make substantial capital expenditures. During the two years ended December 31, 1998, the Company made capital expenditures for its hotels totaling approximately $14,200,000.
The Company endeavors to create individual and distinctive features for each hotel property while utilizing common corporate identification in order to obtain the benefits of chain operation. The Company is using the name "Sonesta" for all of its hotels.
The Company has approximately 1,900 employees. Approximately 300 of these employees are covered by a collective bargaining agreement. The Company considers its relations with its employees to be satisfactory.
While the business of the Company's individual hotels is seasonal, the diverse locations of the four owned or leased properties tend to mitigate the impact of this factor. Traditionally, the second and fourth quarters have produced greater revenues and operating income than the first and third quarters, although these seasonal fluctuations do not materially affect the Company's business activities.
The following table reflects total revenues, annual occupancy percentages, average room rates and revenues per available room ("REVPAR") for the Company's owned and leased properties for the years 1998, 1997, and 1996. REVPAR is calculated by dividing annual room revenue by the total number of rooms available during the year. Sonesta Beach Resort Anguilla was acquired by the Company in November 1995 and opened on January 18, 1996. Sonesta Beach Resort Key Biscayne was acquired by the Company on July 1, 1998. Revenue and room statistics for Sonesta Beach Resort Key Biscayne are for the period July 1 to December 31, 1998.
(c) (Cont'd)
The Company has established and maintains trademark protection for certain service marks it uses in conducting its business, including the service marks "Sonesta", "Sonesta Beach", "Just Us Kids", and the Company's stylized "S" logo. Trademarks are maintained in numerous countries, besides the United States. Each mark is generally protected for several years, subject to periodic renewal.
For revenues by class of service for the three years ended December 31, 1998, reference is made to the Consolidated Statements of Operations which appears on page 8 of the 1998 Annual Report to Shareholders.
(d) Financial Information about Foreign and Domestic Operations: This information is incorporated by reference to Note 2 on pages 14 through 16 of the 1998 Annual Report to Shareholders.
Item 2.
Item 2. Properties
The Company's hotels are primarily metropolitan and resort hotels in popular vacation areas which emphasize luxury accommodations and personal service.
The Company has fee ownership in three hotels: Royal Sonesta Hotel, Boston (Cambridge), Massachusetts, Sonesta Beach Resort, Key Biscayne, Florida, and Sonesta Beach Resort Anguilla, B.W.I. Reference is made to Note 5 of the Notes to the Consolidated Financial Statements of the registrant which appears on pages 17 and 18 of the Company's 1998 Annual Report to Shareholders for details of the mortgage liens on the Boston (Cambridge), Massachusetts property, the Key Biscayne, Florida property, and the Anguilla property.
The Company operates the Royal Sonesta Hotel, New Orleans, Louisiana under a long-term lease which expires on September 30, 2024, provided the Company exercises its two remaining ten-year extension options.
The Company also operates under management agreements hotels in Southampton, Bermuda; Curacao, Netherlands Antilles; New Orleans, Louisiana; and Cairo, Luxor, El Gouna, Port Said and Sharm el Sheikh (2), Egypt; and two Nile River cruise vessels. The Company's hotel and casino on the island of Curacao is operated under a management contract, and the Company has invested $2 million for a 22% ownership interest in that property. As previously discussed, ownership of the Curacao property has exercised its right to terminate the Company's management contract for that property. Before the termination becomes effective, the Company is entitled to receive a termination fee of $1,875,073, which is based on the investment the Company made in the hotel of $2,000,000, less incentive fees earned during 1998 of $124,927. As previously mentioned, the Company's involvement with the El Gouna, Egypt property will terminate in May 1999. The Company has granted licenses for the use of its name to two hotels in Aruba and a hotel in Lima, Peru.
In December 1994, the Company entered into two partnerships: one of the partnerships was formed to acquire and develop as a hotel, including retail space, a building in the SoHo district of New York; the other partnership was formed to acquire a beachfront hotel site in Guanacaste, Costa Rica on which the partnership intended to develop a 320-room resort and casino. The Company liquidated its investment in the SoHo project in July 1996. The Company notified its development partner that it did not intend to proceed with the Costa Rica project, in which a Company subsidiary was a 50% partner, triggering the repayment of certain funds advanced by the Company and secured by a mortgage. Those funds were not repaid and the Company foreclosed on the mortgage and now holds fee ownership of the development site in Costa Rica.
In addition to the properties listed above, the Company leases space for its executive offices at 200 Clarendon Street, Boston, Massachusetts 02116.
Item 3.
Item 3. Legal Proceedings
A wholly-owned subsidiary of the Company, Sonesta Hotels of Anguilla Limited ("SHAL"), and two executive officers of the Company were named as defendants in a lawsuit filed in October, 1997, in Anguilla, B.W.I., by the former owner of the resort hotel in Anguilla which the subsidiary purchased in November 1995 (the "Resort"), and the principals of that
entity. The Statement of Claim in this lawsuit, which was substantially amended in January 1998, alleges, inter alia, that the defendants have not complied with certain "implied terms" of the agreements between them and with the terms of an alleged oral agreement. The plaintiffs in this action are seeking relief from their contractual obligations, entitlement to certain financial benefits, and certain equitable relief. In late February 1998 defendants filed a "Defense and Counterclaim" to plaintiffs' "Amended Statement of Claim". As part of its Counterclaim SHAL is seeking offsets against amounts otherwise owed to the former owner, specifically a loan of $1,000,000 that matured in November 1998. In light of its numerous claims against the former owner, SHAL has made no payments on account of that loan since 1996. The parties have engaged in settlement discussions which to date have not been fruitful. In the absence of a settlement SHAL intends to vigorously defend against this action, and to vigorously prosecute its counterclaims, and expects a favorable outcome.
In early 1997, SHAL filed a lawsuit in The Court of First Instance, in Curacao, Netherlands Antilles, against the insurance company that was insuring the resort in Anguilla at the time of Hurricane Luis, in September 1995. In the suit, SHAL seeks to establish its entitlement to business interruption coverage for periods subsequent to the date SHAL acquired ownership of the Resort. The insurer, Ennia Caribe Schade N.V., has taken the position that (1) it has no obligation to fund business losses realized after the date of sale, and (2) the applicable policy does not recognize business losses incurred after the Resort was restored and reopened. The Company expects to vigorously pursue its claims against Ennia Caribe, but it is not able to predict with certainty how this lawsuit will be resolved. No amounts which may be recoverable in this lawsuit have been reflected in the Company's financial statements.
The Company is from time to time subject to routine litigation incidental to its business, and generally covered by insurance. The Company believes that the results of such litigation will not have a materially adverse effect on the Company's financial condition.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders of the Company in the fourth quarter of 1998.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
Common stock market prices and dividends and the number of shareholders of record are incorporated by reference to page 2 of the 1998 Annual Report to Shareholders.
A dividend of $ .15 per share was paid on the Company's common stock in July 1997 and a dividend of $ .15 per share was declared on the Company's common stock in December 1997, but was paid in January 1998. A dividend of $ .15 per share was paid on the Company's common stock in July 1998 and a dividend of $.15 per share was declared on the Company's common stock in December 1998, but was paid in January 1999. Other information required by this item is incorporated by reference to the Consolidated Statements of Stockholders' Equity which appears on page 11 of the 1998 Annual Report to Shareholders.
No dividends may be declared or paid on the Company's common stock nor may common stock be purchased or redeemed unless (a) preferred stock dividend and sinking fund requirements are met; and (b) the total of dividends paid does not exceed the maximum amount permitted by one of the Company's bank loan agreements.
Item 6.
Item 6. Selected Financial Data
Selected Financial Data, on page 2 of the 1998 Annual Report to Shareholders, is incorporated herein by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition
This information is incorporated by reference to pages 3 through 6 of the 1998 Annual Report to Shareholders.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates and foreign exchange rates. The Company uses fixed rate debt and debt with variable interest rates to finance the ownership of its properties.
The table that follows summarizes the Company's debt obligations outstanding as of December 31, 1998. This information should be read in conjunction with note 5 to the consolidated financial statements.
Short and Long Term Debt at December 31, 1998 (in thousands):
Item 8.
Item 8. Consolidated Financial Statements and Supplementary Data
The financial statements listed in the Index to Consolidated Financial Statements filed as part of this Annual Report on Form 10-K, together with the report of Ernst & Young LLP dated March 19, 1999, are incorporated herein by reference to the 1998 Annual Report to Shareholders.
Selected Quarterly Financial Data, on page 6 of the 1998 Annual Report to Shareholders, is incorporated by reference.
Item 9.
Item 9. Changes in and Disagreements with Auditors on Accounting and Financial Disclosure
There were no disagreements with auditors on accounting principles or practices or financial statement disclosures.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
A. Directors of the Company and Compliance with Section 16 (a)
The information required by this item is incorporated herein by reference to the proxy statement for the 1999 Annual Meeting of Stockholders.
B. The Executive Officers of the Company are as follows
Roger, Paul and Stephen Sonnabend are brothers. Stephanie Sonnabend and Jacqueline Sonnabend are the daughters of Roger Sonnabend. Peter J. Sonnabend is the son of Paul Sonnabend.
The Board of Directors elects officers of the Company on an annual basis.
Item 11.
Item 11. Executive Compensation
and
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
and
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information required by these items is incorporated by reference to the proxy statement for the 1999 Annual Meeting of Stockholders to be held on May 18, 1999.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements: The financial statements listed in the accompanying Index to Consolidated Financial Statements are filed as part of this Annual Report.
2. Financial Statement Schedules: The schedule listed in the accompanying Index to Consolidated Financial Statements is filed as part of this Annual Report.
3. Financial Statements of significant subsidiary, RIF Resort Hotel, N.V., if available, shall be provided by amendment to this Form 10-K by June 30, 1999, as allowed under Regulation S-X, Rule 3-09.
4. Exhibits: The exhibits listed on the accompanying Index to Exhibits are filed as part of this Annual Report.
(b) Reports on Form 8-K filed during the last quarter of 1998: None
SONESTA INTERNATIONAL HOTELS CORPORATION
Index to Consolidated Financial Statements and Financial Statement Schedules
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. - -------------------------------------------------------------------------------- *Incorporated by Reference
SONESTA INTERNATIONAL HOTELS CORPORATION SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
Note: The Company acquired Sonesta Beach Resort Key Biscayne on July 1, 1998. The Company released the seller from indebtedness owed to Company subsidiaries and reversed a valuation reserve against one of the loans owed to the Company prior to the acquisition. In connection with the acquisition the Company also acquired a $33,000 reserve for trade receivables.
Sonesta International Hotels Corporation
Index to Exhibits
(1) Incorporated by reference to the Company's 1967 Report on Form 10-K. (2) Incorporated by reference to the Company's 1973 Report on Form 10-K. (3) Incorporated by reference to the Company's 1977 Report on Form 10-K. (4) Incorporated by reference to the Company's 1979 Report on Form 10-K. (5) Incorporated by reference to the Company's 1981 Report on Form 10-K. (6) Incorporated by reference to the Company's 1984 Report on Form 10-K. (7) Incorporated by reference to the Company's 1991 Report on Form 10-K. (8) Incorporated by reference to the Company's 1992 Report on Form 10-K. (9) Incorporated by reference to the Company's 1993 Report on Form 10-K. (10) Incorporated by reference to the Company's 1994 Report on Form 10-K. (11) Incorporated by reference to the Company's 1995 Report on Form 8-K. (12) Incorporated by reference to the Company's 1995 Report on Form 10-K. (13) Incorporated by reference to the Company's 1996 Report on Form 10-K. (14) Incorporated by reference to the Company's 1997 Report on Form 10-K. (15) Incorporated by reference to the Company's 1998 Report on Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SONESTA INTERNATIONAL HOTELS CORPORATION (Registrant)
AMENDMENT AND ALLONGE TO COMMERCIAL PROMISSORY NOTE
This Amendment and Allonge to Commercial Promissory Note (the "Allonge") is made as of September 30, 1998 by Sonesta International Hotels Corporation, a New York corporation ("Borrower"), and USTrust ("Bank").
WHEREAS, Borrower issued a Commercial Promissory Note dated September 30, 1995 in the face principal amount of $2,000,000 made payable to the order of Bank (as amended September 30, 1997, the "Note"); and
WHEREAS, Borrower has requested the Bank to amend the Note in accordance with the terms of this Allonge;
NOW, THEREFORE, in consideration of the premises and agreements set forth herein and for other good and valuable consideration, the parties hereto agree as follows:
1. The maturity date of the Note is hereby changed to September 30, 1999.
2. Exhibit B-1997 to the Commitment Letter dated September 30, 1997, which set forth certain terms and conditions of the line of credit, is replaced with Exhibit B-1998 attached hereto.
3. Capitalized terms used in this Allonge shall have the same meaning as in the Note except as otherwise specified herein. All references in the Note to the "Note" shall mean the Note as previously amended and as amended by this Allonge
4 This Allonge shall be attached to the Note, incorporated therein and made a part thereof.
5. This Allonge shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts.
Executed as an agreement under seal effective as of the day and year set forth above.
USTrust
By: /s/ By: /s/ Peter J. Sonnabend ------------------------------ ---------------------------- Its Its Vice President
I hereby acknowledge and affirm guaranty of the above-described facility by the principal domestic subsidiaries of Sonesta International Hotels Corporation as described in Exhibit A, in my capacity as authorized signer for said subsidiaries.
By: /s/ Peter J. Sonnabend -----------------------------
EXHIBIT A
Principal Domestic Subsidiaries of Sonesta International Hotels Corporation
EXHIBIT B-1998
SECOND AMENDMENT TO LOAN AGREEMENT
Reference is made to the Loan Agreement made as of the 18th day of December, 1996 in the City of Boston, Massachusetts, U.S.A. by and between SONESTA INTERNATIONAL HOTELS LIMITED (or its assignee) organized and existing under the laws of The Bahamas and having its principal place of business at 200 Clarendon Street, Boston, Massachusetts, U.S.A. and represented in the signature of this Agreement by PETER J. SONNABEND, VICE PRESIDENT (hereinafter referred to as the "Lender"), and MASTERS OR TOURISM organized and existing under the laws of The Arab Republic of Egypt and having its principal place of business at Salah Salem Avenue, El Abour Building, No. 13, Flat 84, Heliopolis, Cairo, Egypt and represented in the signature of this Agreement by MOHAMED HISHAM AHMED ALY, CHAIRMAN (hereinafter referred to as the "Borrower") ("Loan Agreement"), as amended by an "Amendment to Loan Agreement", dated April 29, 1997 (the "Amendment"). This agreement shall constitute the "Second Amendment" to the Loan Agreement.
WHEREAS the purpose of the Loan Agreement was to provide U.S. $1,000,000 to the Borrower as a loan to finance the expansion and improvement of Sonesta Beach Resort, Sharm El Sheikh (the "Hotel"), as described in the Loan Agreement; and
WHEREAS the purpose of the Amendment was to provide an additional U.S. $500,000 to the Borrower as a loan in connection with the further expansion of the Hotel; and
WHEREAS the Borrower has informed the Lender that the additional U.S. $500,000, described in the Amendment, is no longer required by the Borrower in order to complete the expansion and improvement of the Hotel, and the further expansion of the Hotel -- such expansion and improvements being referred to as "Improvements" under the Loan Agreement, as amended by the Amendment;
NOW THEREFORE, for consideration the receipt and sufficiency of which is hereby acknowledged, the parties agree to amend the terms of the Loan Agreement, as amended by the Amendment, as follows:
1. Amendment. The Lender shall have no further obligation to advance funds to the Borrower under the Amendment.
2. Repayment of Loan. The parties acknowledge that, pursuant to Section 5 of the Amendment, Borrower owed Lender U.S. $187,500, on January 1, 1998, representing the first installment of the repayment of Loan principal, but that said payment was not made. The parties now agree that Loan principal shall be repaid in seven (7) annual installments of U.S. $142,857, with the first payment due January 1, 1999. Other Loan terms, including without limitation the interest rate, shall remain unchanged.
3. Advance for Increased Water Capacity. The parties acknowledge that the "Improvements" described in Section 2.02 of the Loan Agreement included "increased water capacity" for the expanded and improved Hotel. Notwithstanding the provisions of Section 1, above, to the contrary, Borrower shall provide increased water-making capacity for the "Improvements" (as said term was amended by the Amendment), provided Lender, at its option, advances an additional U.S. $250,000 for this purpose, which amount Borrower has represented is the minimum cost of the increased water-making capacity. If Lender elects to advance the additional U.S. $250,000, it shall advance said amount in installments upon presentation by Borrower of invoices from third party contractors, satisfactory in form in content to Lender, in Lender's sole judgement. As portions of said additional U.S. $250,000 are advanced, they shall accrue interest and be repaid on the same basis as the Loan under the Loan Agreement. Even if it elects to advance the additional U.S. $250,000, Lender shall have no obligation to advance any portion of said until all of the "Improvements" (including the 80 guest rooms referenced in the Amendment) -- but excepting the "increased water-capacity" -- have been fully completed and are operational.
4. Default. The following is added to Section 8.01 of the Loan Agreement as subsection (E):
(E) In the event the "additional Hotel facilities" described in Section 2.02 of the Loan Agreement, as amended by the Amendment, has not commenced full business operations by January 1, 1999.
5. In all other, as amended, respects the Loan Agreement remains unchanged and in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective duly authorized signatories as of September __, 1998.
Witness: SONESTA INTERNATIONAL HOTELS LIMITED
_______________________ By: /s/ Peter J. Sonnabend -------------------------- Name: Peter J. Sonnabend Title: Vice President
Witness: MASTERS OF TOURISM
_______________________ By: /s/ Mohamed Hisham Ahmed Aly -------------------------- Name: Mohamed Hisham Ahmed Aly Title: Chairman
Mohamed Hisham Ahmed Aly hereby executes this Second Amendment to Loan Agreement in order to acknowledge and re-affirm his continuing personal guaranty under the Loan Agreement.
Witness:
_______________________ By: /s/ Mohamed Hisham Ahmed Aly -------------------------- Mohamed Hisham Ahmed Aly
December 21, 1998
Maduro & Curiel's Bank N.V. P.O. Box 305 Curacao, N.A. Attn: Kenneth Isidora
RE: Sonesta Curacao Hotel Corporation Loan
Dear Kenneth,
As you recall, we extended Sonesta's loan until December 31, 1998, hoping that by then Marriott Corporation would have taken over the management of the Resort. As it stands now, it does not look like that will happen, and I would like to request that you further extend Sonesta's loan until the earlier of the termination of our agreement to manage the Resort, or March 31, 1999.
I'd appreciate if you could send me a confirmation of your approval to fax number 617-421-5423.
I appreciate your help and wish you a happy holiday season.
Kindest regards,
/s/ Boy van Riel ---------------------- Boy van Riel
BVR/se