** **

**FORM 10-Q**

** **

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

**(MarkOne)**

** **

**ý****                                ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934**

**For the Quarterly period ended June 30, 2003**

** **

**OR**

** **

**o****                                ****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934**

**Forthe transition period from                                         to**

** **

**Commission file number 0-9032**

** **

**SONESTA INTERNATIONAL HOTELS CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **NEW YORK**                                                      |   | **13-5648107**                         |
|-------------------------------------------------------------------|--------|----------------------------------------|
| (State or  other jurisdiction  |or incorporation or organization) |   | (I.R.S.  Employer  Identification No.) |
|                                                              |   |                                   |
| **116 Huntington Avenue, Boston, MA 02116**                       |
| (Address of  principal executive offices)                         |
| (Zip Code)                                                        |
|                                                              |   |                                   |
| **617-421-5400**                                                  |
| (Registrant’s  telephone number, including area code)        |

 

 

(Former name, former addressand former fiscal year,if changed since last report)

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by section 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes     ý                No     o

 

APPLICABLE ONLY TO CORPORATEISSUERS:

 

Number of Shares of CommonStock Outstanding

As of August 6, 2003 — $.80 parvalue,

Class A – 3,698,230

 

----

 

**INDEX**

 

**SONESTA INTERNATIONAL HOTELS CORPORATION**

 
| Part  I.    Financial Information |
|-------------------------------------------------------|
|                                                  |   |
| Item 1.                                               | Financial  Statements (Unaudited) |
|                                                  |   |
|                                                  | Condensed consolidated balance sheets— June  30, 2003 and December 31, 2002 |
|                                                  |   |
|                                                  | Condensed  consolidated statements of operations—Three month and six month periods ended  June 30, 2003 and 2002 |
|                                                  |   |
|                                                  | Condensed consolidated statements of cash  flows—Six month periods ended June 30, 2003 and 2002 |
|                                                  |   |
|                                                  | Notes to condensed consolidated financial statements—June 30, 2003  and 2002 |
|                                                  |   |
| Item 2.                                               | Management’s Discussion and Analysis of  Results of Operations and Financial Condition—June 30, 2003 |
|                                                  |   |
| Item 3.                                               | Quantitative and Qualitative Disclosure of  Market Risk |
|                                                  |   |
| Item  4.                                              | Internal Controls and Procedures |
|                                                  |   |
| Part  II.    Other Information    |
|                                                  |   |
| Item 4.                                               | Submission of Matters to a Vote of  Security  Holders |
|                                                  |   |
|                                                  | Signature page |
|                                                  |   |
|                                                  | Certifications  by the Company’s Chief Executive Officer, Chief Financial Officer and Vice  President and Treasurer |
|                                                  |   |
| Exhibit 99.1                                          | 18 U.S.C.  Section 1350 Certification by Company Officers |

 

----

 

###### **Part I** -  Item 1.  Financial Information

 

**SONESTA INTERNATIONAL HOTELS CORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

June  30, 2003 (unaudited)  and December 31, 2002

 
|                                                                             |   | **(in thousands)**      |    |
|----------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                             |   | **June  30  2003** |    | **December 31  2002** |   |
|                                                                             |   |                    |    |   |   |
| ASSETS                                                                           |   |                    |    |   |   |
| Current  assets:                                                                 |   |                    |    |   |   |
| Cash and  cash equivalents                                                       |   | $                       | 4,292   |   | $ | 12,675 |   |
| Accounts and  notes receivable:                                                  |   |                    |    |   |   |
| Trade, less  allowance of $268 ($241 at December 31, 2002) for doubtful accounts |   | 6,868                   |    | 6,920 |   |
| Other,  including current portion of long-term receivables and advances          |   | 568                     |    | 443 |   |
| Total  accounts and notes receivable                                             |   | 7,436                   |    | 7,363 |   |
| Refundable  income taxes                                                         |   | 1,590                   |    | 1,600 |   |
| Current  portion of deferred taxes                                               |   | 323                     |    | 311 |   |
| Inventories                                                                      |   | 968                     |    | 1,109 |   |
| Prepaid  expenses and other                                                      |   | 2,810                   |    | 3,294 |   |
|                                                                             |   |                    |    |   |   |
| Total  current assets                                                            |   | 17,419                  |    | 26,352 |   |
|                                                                             |   |                    |    |   |   |
| Long-term  receivables and advances                                              |   | 9,284                   |    | 7,147 |   |
|                                                                             |   |                    |    |   |   |
| Property and  equipment, at cost:                                                |   |                    |    |   |   |
| Land and  land improvements                                                      |   | 9,202                   |    | 9,202 |   |
| Buildings                                                                        |   | 64,850                  |    | 64,361 |   |
| Furniture  and equipment                                                         |   | 43,392                  |    | 41,168 |   |
| Leasehold  improvements                                                          |   | 6,500                   |    | 6,069 |   |
| Projects in  progress                                                            |   | 176                     |    | 367 |   |
|                                                                             |   | 124,120                 |    | 121,167 |   |
|                                                                             |   |                    |    |   |   |
| Less  accumulated depreciation and amortization                                  |   | 42,192                  |    | 37,996 |   |
| Net property  and equipment                                                      |   | 81,928                  |    | 83,171 |   |
|                                                                             |   |                    |    |   |   |
| Other  long-term assets                                                          |   | 2,902                   |    | 1,780 |   |
|                                                                             |   | $                       | 111,533 |   | $ | 118,450 |   |

 

*See accompanying notes to condensed consolidated financial statements.*

 

1

----

 

**SONESTA INTERNATIONALHOTELS CORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

June 30, 2003(unaudited) and December 31, 2002

 
|                                                                      |   | **(in thousands)**      |    |
|---------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                      |   | **June  30  2003** |    | **December 31  2002** |   |
|                                                                      |   |                    |    |   |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                |   |                    |    |   |   |
| Current  liabilities:                                                     |   |                    |    |   |   |
| Current  portion of long-term debt                                        |   | $                       | 971     |   | $ | 946 |   |
| Accounts  payable                                                         |   | 3,080                   |    | 4,199 |   |
| Advance  deposits                                                         |   | 2,344                   |    | 3,352 |   |
| Federal,  foreign and state income taxes                                  |   | 908                     |    | 848 |   |
| Accrued  liabilities:                                                     |   |                    |    |   |   |
| Salaries and  wages                                                       |   | 1,596                   |    | 1,860 |   |
| Rentals                                                                   |   | 3,220                   |    | 5,000 |   |
| Interest                                                                  |   | 507                     |    | 543 |   |
| Pension and  other employee benefits                                      |   | 177                     |    | 1,418 |   |
| Other                                                                     |   | 1,665                   |    | 1,117 |   |
|                                                                      |   |                    |    |   |   |
| Total  accrued liabilities                                                |   | 7,165                   |    | 9,938 |   |
|                                                                      |   |                    |    |   |   |
| Total  current liabilities                                                |   | 14,468                  |    | 19,283 |   |
|                                                                      |   |                    |    |   |   |
| Long-term  debt                                                           |   | 68,601                  |    | 69,097 |   |
|                                                                      |   |                    |    |   |   |
| Deferred  federal and state income taxes                                  |   | 4,560                   |    | 5,275 |   |
|                                                                      |   |                    |    |   |   |
| Other  non-current liabilities                                            |   | 3,219                   |    | 2,313 |   |
|                                                                      |   |                    |    |   |   |
| Commitments  and contingencies                                            |   |                    |    |   |   |
|                                                                      |   |                    |    |   |   |
| Stockholders’  equity:                                               |   |                    |    |   |   |
| Common  stock:                                                            |   |                    |    |   |   |
| Class A,  $0.80 par value:                                                |   |                    |    |   |   |
| Authorized –  10,000 shares Issued—6,102 shares at stated value |   | 4,882                   |    | 4,882 |   |
| Retained  earnings                                                        |   | 27,856                  |    | 29,653 |   |
| Treasury  shares—2,404, at cost                                      |   | (12,053                 | )       | (12,053 | ) |
| Total  stockholders’ equity                                          |   | 20,685                  |    | 22,482 |   |
|                                                                      |   | $                       | 111,533 |   | $ | 118,450 |   |

 

*See accompanying notes to condensed consolidated financial statements.*

 

2

----

 

**SONESTA INTERNATIONALHOTELS CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS****  (unaudited)**

(in thousands except forper share data)

 
|                                                                            |   | **Three Months Ended  June 30** |   | **Six Months Ended  June 30** |   |
|---------------------------------------------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                                                            |   | **2003**                        |   | **2002**                      |   | **2003** |   | **2002** |   |
| Revenues:                                                                       |   |                            |   |                          |   |   |   |   |   |
| Rooms                                                                           |   | $                               | 12,347 |                          | $      | 14,354 |   | $ | 26,383 |   | $ | 29,681 |   |
| Food and  beverage                                                              |   | 6,479                           |   | 6,646                         |   | 13,020 |   | 13,246 |   |
| Management,  license and service fees                                           |   | 788                             |   | 1,163                         |   | 1,665 |   | 2,306 |   |
| Parking,  telephone and other                                                   |   | 2,141                           |   | 2,240                         |   | 4,371 |   | 4,557 |   |
|                                                                            |   | 21,755                          |   | 24,403                        |   | 45,439 |   | 49,790 |   |
| Costs and  expenses:                                                            |   |                            |   |                          |   |   |   |   |   |
| Costs and  operating expenses                                                   |   | 10,001                          |   | 10,401                        |   | 20,176 |   | 20,648 |   |
| Advertising  and promotion                                                      |   | 1,831                           |   | 1,774                         |   | 3,706 |   | 3,704 |   |
| Administrative  and general                                                     |   | 3,966                           |   | 3,464                         |   | 7,954 |   | 7,083 |   |
| Human  resources                                                                |   | 405                             |   | 473                           |   | 771 |   | 900 |   |
| Maintenance                                                                     |   | 1,523                           |   | 1,560                         |   | 3,097 |   | 3,045 |   |
| Rentals                                                                         |   | 1,579                           |   | 1,779                         |   | 3,602 |   | 4,451 |   |
| Property  taxes                                                                 |   | 581                             |   | 680                           |   | 1,158 |   | 1,400 |   |
| Depreciation  and amortization                                                  |   | 2,137                           |   | 2,094                         |   | 4,222 |   | 4,141 |   |
|                                                                            |   | 22,023                          |   | 22,225                        |   | 44,686 |   | 45,372 |   |
| Operating  income (loss)                                                        |   | (268                            | )      | 2,178                         |   | 753 |   | 4,418 |   |
|                                                                            |   |                            |   |                          |   |   |   |   |   |
| Other income  (deductions):                                                     |   |                            |   |                          |   |   |   |   |   |
| Interest  expense                                                               |   | (1,544                          | )      | (1,564                        | )      | (3,078 | ) | (3,110 | ) |
| Interest  income                                                                |   | 94                              |   | 116                           |   | 205 |   | 243 |   |
| Foreign  exchange gain (loss)                                                   |   | (16                             | )      | 5                             |   | (18 | ) | 4 |   |
| Gain (loss)  on sales of assets                                                 |   | (7                              | )      | —                        |   | 11 |   | — |   |
|                                                                            |   | (1,473                          | )      | (1,443                        | )      | (2,880 | ) | (2,863 | ) |
| Profit  (loss) from continuing operations before income tax (benefit) provision |   | (1,741                          | )      | 735                           |   | (2,127 | ) | 1,555 |   |
| Income tax  (benefit) provision                                                 |   | (474                            | )      | 375                           |   | (515 | ) | 763 |   |
| Net profit  (loss) from continuing operations                                   |   | (1,267                          | )      | 360                           |   | (1,612 | ) | 792 |   |
| Discontinued  operations (Note 9):                                              |   |                            |   |                          |   |   |   |   |   |
| Loss from  operations of discontinued hotel                                     |   | —                          |   | (404                          | )      | — |   | (229 | ) |
| Income tax  benefit                                                             |   | —                          |   | (137                          | )      | — |   | (78 | ) |
| Loss from  discontinued operations                                              |   | —                          |   | (267                          | )      | — |   | (151 | ) |
| Net profit  (loss)                                                              |   | (1,267                          | )      | 93                            |   | (1,612 | ) | 641 |   |
| Retained  earnings at beginning of period                                       |   | 29,308                          |   | 34,937                        |   | 29,653 |   | 34,389 |   |
| Cash  dividends on common stock                                                 |   | (185                            | )      | (370                          | )      | (185 | ) | (370 | ) |
| Retained  earnings at end of period                                             |   | $                               | 27,856 |                          | $      | 34,660 |   | $ | 27,856 |   | $ | 34,660 |   |
|                                                                            |   |                            |   |                          |   |   |   |   |   |
| Basic and  diluted profit (loss) per share from:                                |   |                            |   |                          |   |   |   |   |   |
| Continuing  operations                                                          |   | $                               | (0.35  | )                             | $      | 0.09 |   | $ | (0.44 | ) | $ | 0.21 |   |
| Discontinued  operations                                                        |   | —                          |   | (0.07                         | )      | — |   | (0.04 | ) |
| Net profit  (loss) per share                                                    |   | $                               | (0.35  | )                             | $      | 0.02 |   | $ | (0.44 | ) | $ | 0.17 |   |
| Weighted average  number of shares outstanding                                  |   | 3,698                           |   | 3,698                         |   | 3,698 |   | 3,698 |   |

 

*See accompanying notes to condensed consolidated financial statements.*

 

3

----

 

**SONESTA INTERNATIONALHOTELS CORPORATION**

**CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS (unaudited)**

Increase (Decrease) inCash

 
|                                                       |   | **(in thousands)**           |   |
|------------------------------------------------------------|--------|------------------------------|--------|
|                                                       |   | **Six Months Ended June 30** |   |
|                                                       |   | **2003**                     |   | **2002** |   |
| Cash  provided (used) by operating activities              |   |                         |   |   |   |
| Net income  (loss)                                         |   | $                            | (1,612 | ) | $ | 641 |   |
| Items not  (providing) requiring cash                      |   |                         |   |   |   |
| Pension  expense                                           |   | 877                          |   | 820 |   |
| Depreciation  and amortization of property and equipment   |   | 4,222                        |   | 4,141 |   |
| Other  amortization                                        |   | 45                           |   | 45 |   |
| Deferred  federal and state income tax provision (benefit) |   | (727                         | )      | 521 |   |
| Gain on  sales of assets                                   |   | (11                          | )      | — |   |
| Loss from  discontinued operations                         |   | —                       |   | 229 |   |
| Deferred  interest income                                  |   | (100                         | )      | (78 | ) |
| Changes in  assets and liabilities                         |   |                         |   |   |   |
| Accounts and  notes receivable                             |   | (133                         | )      | 425 |   |
| Refundable  income taxes                                   |   | 10                           |   | 281 |   |
| Inventories                                                |   | 141                          |   | 271 |   |
| Prepaid  expenses and other                                |   | 484                          |   | (636 | ) |
| Accounts  payable                                          |   | (934                         | )      | (287 | ) |
| Advance  deposits                                          |   | (1,008                       | )      | (1,741 | ) |
| Federal,  foreign and state income taxes                   |   | 60                           |   | 49 |   |
| Accrued  liabilities                                       |   | (2,744                       | )      | (1,451 | ) |
| Cash  provided (used) by operating activities              |   | (1,430                       | )      | 3,230 |   |
|                                                       |   |                         |   |   |   |
| Cash used by  investing activities                         |   |                         |   |   |   |
| Proceeds  from sales of assets                             |   | 50                           |   | — |   |
| Expenditures  for property and equipment                   |   | (3,019                       | )      | (4,260 | ) |
| Other  investments                                         |   | (1,052                       | )      | — |   |
| Payments  received on long-term receivables and advances   |   | 167                          |   | 197 |   |
| New loans  and advances                                    |   | (2,258                       | )      | (1,737 | ) |
| Net cash  flow from discontinued operations                |   | —                       |   | 11 |   |
| Cash  provided (used) by investing activities              |   | (6,112                       | )      | (5,789 | ) |
|                                                       |   |                         |   |   |   |
| Cash used by  financing activities                         |   |                         |   |   |   |
| Payments on  long-term debt                                |   | (471                         | )      | (433 | ) |
| Cash dividends  paid                                       |   | (370                         | )      | (370 | ) |
| Cash used by  financing activities                         |   | (841                         | )      | (803 | ) |
| Net decrease  in cash                                      |   | (8,383                       | )      | (3,362 | ) |
| Cash and  cash equivalents at beginning of period          |   | 12,675                       |   | 14,256 |   |
| Cash and  cash equivalents at end of period                |   | $                            | 4,292  |   | $ | 10,894 |   |

 

*See accompanying notes to condensed consolidated financial statements.*

 

4

----

 

Supplemental Information of Interest and Income Taxes Paid

Cash paid for interest in the 2003 six-monthperiod and the 2002 six-month period was approximately $3,069,000 and  $3,167,000, respectively.  Cash paid for income taxes in the first sixmonths of 2003 was approximately $142,000, and cash refunded for income taxesin the first six months of 2002 was approximately $166,000.

 

*See accompanying notes to condensed consolidated financial statements.*

 

5

----

 

**SONESTAINTERNATIONAL HOTELS CORPORATION**

**NOTES TO CONDENSED****CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.**             **Basis of Presentation**

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary fora fair presentation have been included. Operating results for the six month period ended June 30, 2003 are notnecessarily indicative of the results that may be expected for the year endedDecember 31, 2003.

 

The balance sheet at December 31, 2002 has been derived from theaudited financial statements at that date but does not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States  for complete financialstatements.

 

For further information, refer to the consolidated financial statementsand footnotes thereto included in the Company’s annual report on Form 10-K forthe year ended December 31, 2002.

 

**2.****                                      Long-TermReceivables and Advances**

 
|                                                                |   | **(in thousands)** |   |
|---------------------------------------------------------------------|--------|--------------------|--------|
|                                                                |   | **June 30, 2003**  |   | **December 31, 2002** |   |
| Sharm El  Sheikh, Egypt (a)                                         |   | $                  | 806    |   | $ | 821 |   |
| Sonesta  Hotel & Suites Coconut Grove, Miami, Florida  (b) |   | 5,386              |   | 5,285 |   |
| Trump  International Sonesta Beach Resort (c)                       |   | 3,063              |   | 1,003 |   |
| Other                                                               |   | 376                |   | 283 |   |
| Total long-term  receivables                                        |   | 9,631              |   | 7,392 |   |
| Less:  current portion                                         |   | 347                |   | 245 |   |
| Net  long-term receivables                                          |   | $                  | 9,284  |   | $ | 7,147 |   |

 

----

(a)                                  Thisloan, in the original amount of $1,000,000, was made in 1996 and 1997 to theowner of the Sonesta Beach Resort, Sharm El Sheikh.  The loan bears interest at the prime rate and is adjustedsemi-annually.  The interest ratecharged at June 30, 2003 was 4.25%. This loan is being repaid in 42 monthly installments, starting inJanuary 2003.

 

(b)                                 Thisloan is made to the owner of the Sonesta Hotel & Suites Coconut Grove,Miami, which opened in April 2002.  TheCompany has loaned $4,000,000 to fund construction and furniture, fixtures andequipment (“FF&E”) costs, and, in addition, has loaned $1,000,000 forpre-opening costs and working capital. The loan for construction and FF&E costs bears interest at the primerate (4% at June 30, 2003) plus 0.75%. No interest is being charged on the loan for pre-opening costs.  These loans will be repaid, the loan forpre-opening costs first, out of future profits that would otherwise beavailable for distribution to the owner of the hotel.

 

6

----

 

(c)                                  Thisamount represents advances made to the owner of Trump International SonestaBeach Resort in Sunny Isles Beach, Florida for pre-opening costs ($2,361,000)and for working capital and the Company’s share of the losses of the Resortfrom the opening in April 2003 through June 30, 2003 ($702,000).  No interest will be charged on theseadvances, which will be repaid out of future available profits generated by thehotel.

 

**3.**             **Borrowing Arrangements**

 

*Credit Lines*

 

The Company has a $2,000,000 line of credit, which expires on September28, 2003.  This line of credit bearsinterest at the prime rate (4% at June 30, 2003).  The terms of the line require a certain minimum net worth, aminimum amount of unrestricted cash or available credit lines during part ofeach calendar year, and approval for additional borrowings by the Company.  No amounts were outstanding under this lineof credit at June 30, 2003.

 

A subsidiary of the Company has a $5,000,000 line of credit, whichexpires on March 31, 2005.  The line ofcredit is secured by a mortgage on the Company’s leasehold interest in theRoyal Sonesta Hotel New Orleans, and by a parent Company guaranty.  The terms require certain minimum levels ofincome for Royal Sonesta Hotel New Orleans, and specify a maximum defined debtto net worth ratio.  The terms alsorequire a minimum net worth, approval for additional borrowings by the Company,and limits on cash dividends and purchases of the Company’s stock.  The interest rate is LIBOR plus 3% (4% atJune 30, 2003), and the commitment fee on the unused portion of the line is0.65% per annum.  No amounts wereoutstanding under this line at June 30, 2003.

 

## *Long-TermDebt*

 
|                                                                |   | **(in thousands)** |   |
|---------------------------------------------------------------------|--------|--------------------|--------|
|                                                                |   | **June 30, 2003**  |   | **December 31, 2002** |   |
| Charterhouse  of Cambridge Trust and Sonesta of Massachusetts Inc.: |   |               |   |   |   |
| First  mortgage note (a)                                            |   | $                  | 39,617 |   | $ | 39,886 |   |
| Sonesta  Beach Resort Limited                                       |   |               |   |   |   |
| Partnership:                                                        |   |               |   |   |   |
| First  mortgage note (b)                                            |   | 29,955             |   | 30,157 |   |
|                                                                |   | 69,572             |   | 70,043 |   |
| Less:  current portion of long-term debt                            |   | 971                |   | 946 |   |
| Total  long-term debt                                               |   | $                  | 68,601 |   | $ | 69,097 |   |

 

----

(a)           This loan is secured by a firstmortgage on the Royal Sonesta Hotel Boston (Cambridge) property.  This property is included in fixed assets ata net book value of $22,710,000 at June 30, 2003.  The interest rate on this loan is 8.6% for the term of the loan,and amortization of the principal balance is based on a 25 year schedule.  Monthly payments of principal and interestare $332,911.  The mortgage loan maturesin July 2010, and prepayment of this loan is subject to early payment penalties,based on prevailing interest rates at the time of the prepayment.  This mortgage loan, and the mortgage loan onSonesta Beach Resort Key Biscayne (see (b), below) are provided by the samelender, and are cross-collateralized.

 

7

----

 

(b)           This loan is secured by a firstmortgage on the Sonesta Beach Resort Key Biscayne property.  The property is included in fixed assets ata net book value of $43,058,000 at June 30, 2003.  The interest rate on this loan is 8.6% for the term of the loan,and amortization of the principal balance is based on a 25 year schedule.  Monthly payments of principal and interestare $251,713.  The mortgage loan maturesin July 2010, and prepayment of this loan is subject to early paymentpenalties, based on prevailing interest rates at the time of the prepayment.  This mortgage loan, and the mortgage loan onRoyal Sonesta Hotel Boston (Cambridge) (see (a), above) are provided by thesame lender, and are cross-collateralized.

 

**4.**                                      **HotelCosts and Operating Expenses**

 

Hotel costs and operating expenses in the accompanying condensedConsolidated Statements of Operations are summarized below:

 
|                       |   | **(in thousands)**             |   |
|----------------------------|--------|--------------------------------|--------|
|                       |   | **Three Months Ended June 30** |   | **Six Months Ended June 30** |   |
|                       |   | **2003**                       |   | **2002** |   | **2003** |   | **2002** |   |
| Direct  departmental costs |   |                           |   |   |   |   |   |   |   |
| Rooms                      |   | $                              | 3,214  |   | $ | 3,646 |   | $ | 6,546 |   | $ | 7,201 |   |
| Food and  beverage         |   | 4,945                          |   | 4,993 |   | 9,904 |   | 9,999 |   |
| Heat, light  and power     |   | 732                            |   | 720 |   | 1,465 |   | 1,400 |   |
| Other                      |   | 1,110                          |   | 1,042 |   | 2,261 |   | 2,048 |   |
|                       |   | $                              | 10,001 |   | $ | 10,401 |   | $ | 20,176 |   | $ | 20,648 |   |

 

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

 

**5.             Commitments and Contingencies**

 

In 2002, the Company entered into anagreement to manage the Trump International Sonesta Beach Resort in Sunny IslesBeach, Florida.  This hotel opened inApril 2003.  Under its agreements, theCompany is obligated to advance funds for pre-opening costs and workingcapital.  In addition, the Companycontributes toward the cost of the hotel’s non-guestroom furniture, fixturesand equipment in excess of a certain limit. The Company has also agreed to purchase four condominium units in thehotel.  The Company estimates its totalcash commitment to be approximately $5,700,000, of which approximately$4,300,000 had been advanced at June 30, 2003. In addition, the Company guarantees a $1,000,000 equipment lease for thehotel.  Based on the managementagreement, the Company will receive management fees based on revenues, andincentive fees based on profits, as defined. Under the same agreements, the Company guarantees 50% of the netoperating losses during the period from the opening of the hotel until November1, 2004.  After November 1, 2004, theCompany is committed to provide the hotel’s owner an annual minimum return of$800,000.

 

The Company has operated the Sonesta Hotel& Suites Coconut Grove in the Coconut Grove area of Miami, Florida, sinceApril 2002.  Under its agreements, theCompany is committed to fund net operating losses and to provide the hotel’sowner with a minimum annual return of $500,000 starting April 1, 2003. TheCompany is also committed to provide working capital to the hotel.  The Company has advanced $1,983,000 as ofJune 30, 2003 to fund net operating losses and working capital.  The Company expects to recover part of theseadvances, with the exception of net operating losses of $1,350,000.

 

8

----

 

In January 2003, the FASB issuedInterpretation No. 46, “Consolidation of Variable Interest Entities” (FIN46).  The provisions of FIN 46 are to beapplied by the Company on July 1, 2003. A variable interest entity (VIE) is consolidated by its primarybeneficiary, which is the party that (i) holds a variable interest in a VIE and(ii) has a majority of the expected losses or a majority of the expectedresidual returns, or both.  The Companybelieves that it holds variable interests in the hotel operations of the TrumpInternational Sonesta Beach Resort and the Sonesta Hotel & Suites CoconutGrove under the terms of its agreements with the owners of these hotels.  The Company has not yet completed itsanalysis of the effects of the issuance of FIN 46 on its accounting for thesevariable interests, and whether the Company is the primary beneficiary.

 

**6.**             **Federal, Foreign and State Income Tax**

 

The provision (benefit) for income taxes in the accompanying condensedConsolidated Statements of Operations is summarized below:

 
|                                             |   | **(in thousands)**           |   |
|--------------------------------------------------|--------|------------------------------|--------|
|                                             |   | **Six Months Ended June 30** |   |
|                                             |   | **2003**                     |   | **2002** |   |
|                                             |   |                         |   |   |   |
| Current  federal income tax benefit              |   | $                            | (16    | ) | $ | (47 | ) |
| Current  foreign income tax provision            |   | 73                           |   | 80 |   |
| Current  state income tax provision              |   | 155                          |   | 209 |   |
| Deferred  federal income tax provision (benefit) |   | (727                         | )      | 521 |   |
|                                             |   | $                            | (515   | ) | $ | 763 |   |

 

**7.             Segment Information**

 

Segment information for the Company’s two reportable segments, Owned& Leased Hotels and Management Activities, for the three and six monthperiods ending June 30, 2003 and 2002 follows:

 

Three month period ended June 30, 2003

 
|                                                                  |   | **(in thousands)**             |   |
|-----------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                  |   | **Owned &  Leased Hotels** |   | **Management  Activities** |   | **Consolidated** |   |
|                                                                  |   |                           |   |   |   |   |   |
| Revenues                                                              |   | $                              | 20,959 |   | $ | 796 |   | $ | 21,755 |   |
| Operating  income (loss) before depreciation and amortization expense |   | 2,886                          |   | (1,017 | ) | 1,869 |   |
| Depreciation  and amortization                                        |   | (1,973                         | )      | (164 | ) | (2,137 | ) |
| Interest  income (expense), net                                       |   | (1,533                         | )      | 83 |   | (1,450 | ) |
| Other  deductions                                                     |   | —                         |   | (23 | ) | (23 | ) |
| Segment  pre-tax loss                                                 |   | (620                           | )      | (1,121 | ) | (1,741 | ) |
|                                                                  |   |                           |   |   |   |   |   |
| Segment  assets                                                       |   | 89,868                         |   | 21,665 |   | 111,533 |   |
| Segment  capital additions                                            |   | 1,609                          |   | 142 |   | 1,751 |   |
|                                                                       |        |                                |        |  |  |  |  |  |  |  |

 

9

----

 

Six month period ended June 30, 2003

 
|                                                                  |   | **(in thousands)**             |   |
|-----------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                  |   | **Owned &  Leased Hotels** |   | **Management  Activities** |   | **Consolidated** |   |
|                                                                  |   |                           |   |   |   |   |   |
| Revenues                                                              |   | $                              | 43,755 |   | $ | 1,684 |   | $ | 45,439 |   |
| Operating  income (loss) before depreciation and amortization expense |   | 6,804                          |   | (1,829 | ) | 4,975 |   |
| Depreciation  and amortization                                        |   | (3,940                         | )      | (282 | ) | (4,222 | ) |
| Interest  income (expense), net                                       |   | (3,055                         | )      | 182 |   | (2,873 | ) |
| Other income  (deductions)                                            |   | 18                             |   | (25 | ) | (7 | ) |
| Segment  pre-tax loss                                                 |   | (173                           | )      | (1,954 | ) | (2,127 | ) |
|                                                                  |   |                           |   |   |   |   |   |
| Segment assets                                                        |   | 89,868                         |   | 21,665 |   | 111,533 |   |
| Segment  capital additions                                            |   | 2,859                          |   | 160 |   | 3,019 |   |
|                                                                       |        |                                |        |  |  |  |  |  |  |  |

 

Three month period ended June 30, 2002

 
|                                                                  |   | **(in thousands)**             |   |
|-----------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                  |   | **Owned &  Leased Hotels** |   | **Management  Activities** |   | **Consolidated** |   |
|                                                                  |   |                           |   |   |   |   |   |
| Revenues                                                              |   | $                              | 23,231 |   | $ | 1,172 |   | $ | 24,403 |   |
| Operating  income (loss) before depreciation and amortization expense |   | 4,451                          |   | (179 | ) | 4,272 |   |
| Depreciation  and amortization                                        |   | (1,984                         | )      | (110 | ) | (2,094 | ) |
| Interest  income (expense), net                                       |   | (1,550                         | )      | 102 |   | (1,448 | ) |
| Other income                                                          |   | —                         |   | 5 |   | 5 |   |
| Segment pre-tax  profit (loss)                                        |   | 917                            |   | (182 | ) | 735 |   |
|                                                                  |   |                           |   |   |   |   |   |
| Segment  assets                                                       |   | 90,258                         |   | 24,242 |   | 114,500 |   |
| Segment  capital additions                                            |   | 1,800                          |   | 289 |   | 2,089 |   |
|                                                                       |        |                                |        |  |  |  |  |  |  |  |

 

Six month period ended June 30, 2002

 
|                                                                  |   | **(in thousands)**             |   |
|-----------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                  |   | **Owned &  Leased Hotels** |   | **Management  Activities** |   | **Consolidated** |   |
|                                                                  |   |                           |   |   |   |   |   |
| Revenues                                                              |   | $                              | 47,470 |   | $ | 2,320 |   | $ | 49,790 |   |
| Operating  income (loss) before depreciation and amortization expense |   | 8,929                          |   | (370 | ) | 8,559 |   |
| Depreciation  and amortization                                        |   | (3,921                         | )      | (220 | ) | (4,141 | ) |
| Interest  income (expense), net                                       |   | (3,088                         | )      | 221 |   | (2,867 | ) |
| Other income                                                          |   | —                         |   | 4 |   | 4 |   |
| Segment  pre-tax profit (loss)                                        |   | 1,920                          |   | (365 | ) | 1,555 |   |
|                                                                  |   |                           |   |   |   |   |   |
| Segment  assets                                                       |   | 90,258                         |   | 24,242 |   | 114,500 |   |
| Segment  capital additions                                            |   | 3,135                          |   | 1,130 |   | 4,265 |   |
|                                                                       |        |                                |        |  |  |  |  |  |  |  |

 

10

----

 

**8.             Earnings per Share**

 

As the Company has no dilutive securities, there is no differencebetween basic and diluted earnings per share of common stock.  The following table sets forth thecomputation of basic profits and losses per share of common stock:

 
|                                           |   | **Three months ended June 30** |   | **Six months ended June 30** |   |
|------------------------------------------------|--------|--------------------------------|--------|------------------------------|--------|
|                                           |   | **2003**                       |   | **2002**                     |   | **2003** |   | **2002** |   |
|                                           |   |                           |   |                         |   |   |   |   |   |
| Numerator:                                     |   |                           |   |                         |   |   |   |   |   |
|                                           |   |                           |   |                         |   |   |   |   |   |
| Profit  (loss) from continuing operations      |   | $                              | (1,267 | )                            | $      | 360 |   | $ | (1,612 | ) | $ | 792 |   |
| Loss from  discontinued operations             |   | —                         |   | (267                         | )      | — |   | (151 | ) |
| Numerator  for earnings per share              |   | $                              | (1,267 | )                            | $      | 93 |   | $ | (1,612 | ) | $ | 641 |   |
|                                           |   |                           |   |                         |   |   |   |   |   |
| Denominator:                                   |   |                           |   |                         |   |   |   |   |   |
| Weighted  average number of shares outstanding |   | 3,698                          |   | 3,698                        |   | 3,698 |   | 3,698 |   |
|                                           |   |                           |   |                         |   |   |   |   |   |
| Profit  (loss) per share:                      |   |                           |   |                         |   |   |   |   |   |
| Continuing  operations                         |   | $                              | (0.35  | )                            | $      | 0.09 |   | $ | (0.44 | ) | $ | 0.21 |   |
| Discontinued  operations                       |   | —                         |   | (0.07                        | )      | — |   | (0.04 | ) |
| Net profit  (loss) per share:                  |   | $                              | (0.35  | )                            | $      | 0.02 |   | $ | (0.44 | ) | $ | 0.17 |   |

 

**9.****                      DiscontinuedOperations**

 

In September 2002, the Company sold the Sonesta Beach ResortAnguilla.  The financial statements forthe three month and six month periods ended June 30, 2002, have beenreclassified to present the operations of the resort as a discontinued operation.  Following is a summary of the operatingresults for the three month and six month periods ended June 30, 2002:

 
|                                            |   | **Three months ended  June 30, 2002** |   | **Six months ended  June 30, 2002** |   |
|-------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
| Revenues  from operations                       |   | $                                     | 712    |                                | $      | 2,355 |   |
| Expenses                                        |   | (1,116                                | )      | (2,584                              | )      |
| Loss from  operations before income tax benefit |   | (404                                  | )      | (229                                | )      |
| Income tax  benefit                             |   | (137                                  | )      | (78                                 | )      |
| Loss from  discontinued operations              |   | $                                     | (267   | )                                   | $      | (151 | ) |

 

11

----

 

**PartI – Item 2**

 

**MANAGEMENT’S DISCUSSION AND ANALYSISOF RESULTS OF OPERATIONS AND FINANCIAL CONDITION**

 

In September 2002, the Company sold the Sonesta Beach Resort Anguilla(see Note 9—Discontinued Operations). The following revenues and results from operations for the 2002 periodshave been reclassified to present the operations of the resort as adiscontinued operation.

 

In the first six months of 2003 the Company recorded a net loss fromcontinuing operations of $1,612,000, or $(0.44) per common share, compared tonet income from continuing operations of $792,000, or $0.21 per common share,in the first six months of 2002.  TheCompany’s results continue to be affected by lower demand from both group andtransient market segments due to the economic recession, and by reducedbusiness and leisure travel.  Discountedroom rates due to fierce competition for available business have resulted indecreases in room revenue per available room (“REVPAR”) in most locations,resulting in lower revenues and operating profits during the first six monthsof 2003 compared to 2002.  Most affectedby this was the Royal Sonesta Hotel Boston (Cambridge), which experienced adecrease in revenues of 18% during the first six months of 2003 compared to2002.

 

**FIRSTSIX MONTHS 2003 COMPARED TO 2002**

 

**REVENUES**

 
|                                            |   | **TOTAL REVENUES** |   |
|-------------------------------------------------|--------|--------------------|--------|
|                                            |   | **(in thousands)** |   |
|                                            |   | **NO. OF  ROOMS**  |   | **2003** |   | **2002** |   |
| Sonesta  Beach Resort Key Biscayne              |   | 300                |   | $ | 15,454 |   | $ | 15,354 |   |
| Royal  Sonesta Hotel Boston (Cambridge)         |   | 400                |   | 10,094 |   | 12,319 |   |
| Royal  Sonesta Hotel New Orleans                |   | 500                |   | 18,207 |   | 19,797 |   |
| Management  and service fees and other revenues |   |               |   | 1,684 |   | 2,320 |   |
| Total  revenues                                 |   |               |   | $ | 45,439 |   | $ | 49,790 |   |

 

Total revenues for the first six months of 2003 were $45,439,000compared to $49,790,000 in 2002, a decrease of approximately $4,351,000.

 

Sonesta Beach Resort Key Biscayne had a good first six months of 2003,reporting a slight increase in revenues of $100,000 compared to the first sixmonths of 2002.  Room revenues peravailable room (“REVPAR”) remained virtually the same in 2003 compared to lastyear, as a slight increase in average room rate achieved offset a slightdecrease in occupancy.  Food andbeverage revenues, and revenues from other sources increased slightly.  Revenues during the first six months of 2003at Royal Sonesta Hotel Boston (Cambridge) decreased by 18% compared to the sameperiod in 2002, representing a loss in revenues of $2,225,000.  Room revenues decreased by $1,810,000 due toa 23% decrease in REVPAR, due to both lower occupancies and average ratesachieved.  Food and beverage revenues,and revenues from other sources such as telephone and parking decreased by$415,000, or 9%, due to the lower occupancy levels.  Revenues at Royal Sonesta Hotel New Orleans, which held up verystrong during 2002, have started to decline due to fierce rate competition, anda lower number of city-wide conventions in New Orleans.  Total revenues for the six month periodending June 30, 2003 decreased by $1,590,000 to $18,207,000, an 8%decline.  Room revenues decreased by$1,478,000 due to an 11% decrease in REVPAR, mainly due to lower average rates.  Revenues from other sources, including foodand beverage, decreased by only $112,000, as occupancy levels during the firstsix months of 2003 were only slightly lower than during the same period in2002.  Income from management activitiesdecreased from $2,320,000 during the first six months of 2002 to $1,684,000during the first six months of 2003, a decrease of $636,000.  Major items that contributed to this loss ofincome were lower license fees of $231,000 from Aruba, due to the expiration ofthe license agreements in mid-

 

12

----

 

2002, and lower fee income of $266,000 from Chateau Sonesta Hotel NewOrleans, because the 2003 profit levels of the hotel are insufficient forSonesta to earn incentive fees which are based on profits.  The remaining $139,000 decrease was due tolower management income from Sonesta’s Egyptian operations, and lower incomefrom reservation services.

 

**OPERATINGINCOME**

####  

|                                                            |   | **OPERATING INCOME (LOSS)  (in thousands)** |   |
|-----------------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                            |   | **2003**                                    |   | **2002** | ** ** |
| Sonesta  Beach Resort Key Biscayne                              |   | $                                           | 1,495  |   | $ | 1,465 |   |
| Royal  Sonesta Hotel Boston (Cambridge)                         |   | (429                                        | )      | 1,264 |   |
| Royal  Sonesta Hotel New Orleans                                |   | 1,798                                       |   | 2,279 |   |
| Operating  income from hotels after management and service fees |   | 2,864                                       |   | 5,008 |   |
| Management  activities and other                                |   | (2,111                                      | )      | (590 | ) |
| Operating  income                                               |   | $                                           | 753    |   | $ | 4,418 |   |

 

Operating income for the six-month period ended June 30, 2003 was$753,000, compared to operating income of $4,418,000 in 2002, a decrease ofapproximately $3,665,000.

 

Sonesta Beach Resort Key Biscayne posted a small $30,000 increase inoperating income during the first six months of 2003 compared to 2002.  Revenues increases of $100,000 werepartially offset by a very slight increase in overall expenses of $70,000.  Royal Sonesta Hotel Boston (Cambridge)reported an operating loss of $429,000 during the six month period ending June30, 2003, compared to operating income of $1,264,000 in the 2002 period, adecrease of $1,693,000.  Decreased revenuesof $2,225,000 were partially offset by a 5% decrease in expenses of $532,000,mainly due to lower cost and operating expenses and real estate taxes.  Operating income at Royal Sonesta NewOrleans decreased  by $481,000, from$2,279,000 in the first half of 2002 to $1,798,000 in the first half of2003.  Decreases in revenues of$1,590,000 were for a large part offset by decreased operating expenses of$1,109,000.  This decrease in expensesconsisted mainly of a decrease in cost and operating expenses of $422,000, anda decrease in rent expense of $763,000. Under the lease for the New Orleans hotel, rent is based on a percentageof profits, as defined.  Operatinglosses from management activities, which are computed after giving effect tomanagement, marketing and service fees to owned and leased hotels, increasedfrom $590,000 in the first six months of 2002 to $2,111,000 in the first sixmonths of 2003.  Revenues frommanagement activities decreased by $636,000 and fee income from owned andleased hotels decreased by $157,000. Expenses related to these activitiesincreased by $728,000.  This increaseincludes a $400,000 charge included in 2003 for the Company’s contribution tothe first and second year losses of Sonesta Hotel & Suites Coconut Grove, forwhich hotel the Company has made certain operating loss guarantees.

 

**OTHERINCOME (DEDUCTIONS)**

 

Interest expense decreased slightly by $32,000 from $3,110,000 in thefirst six months of 2002 to $3,078,000 in the same period in 2003, due to thelower principal balance on the Cambridge and Key Biscayne loans (see Note3—Borrowing Arrangements).

 

Interest income in the first six months of 2003 was $205,000 comparedto $243,000 in the first six months of 2002, a decrease of $38,000.  This decrease was due to lower short-terminvestment income because of lower rates of return during the first half of2003 compared to 2002, and because of the Company’s lower cash balances.  This decrease was partially offset by anincrease in interest earned on the Company’s loans to the owner of SonestaHotel & Suites Coconut Grove.

 

13

----

 

**SECONDQUARTER 2003 COMPARED TO 2002**

 

**REVENUES**

 
|                                            |   | **TOTAL REVENUES** |   |
|-------------------------------------------------|--------|--------------------|--------|
|                                            |   | **(in thousands)** |   |
|                                            |   | **NO. OF  ROOMS**  |   | **2003** |   | **2002** |   |
| Sonesta  Beach Resort Key Biscayne              |   | 300                |   | $ | 6,343 |   | $ | 6,362 |   |
| Royal Sonesta  Hotel Boston (Cambridge)         |   | 400                |   | 5,962 |   | 7,639 |   |
| Royal  Sonesta Hotel New Orleans                |   | 500                |   | 8,654 |   | 9,229 |   |
| Management  and service fees and other revenues |   |               |   | 796 |   | 1,173 |   |
| Total  revenues                                 |   |               |   | $ | 21,755 |   | $ | 24,403 |   |

 

Total revenues for the three month period ended June 30, 2003 were$21,755,000 compared to $24,403,000 in 2002, a decrease of approximately$2,648,000.

 

Revenues during the second quarter of 2003 at Sonesta Beach Resort KeyBiscayne were $6,343,000, which represented a very slight decrease of $19,000compared to 2002 second quarter revenues of $6,362,000.  Room revenues per available room (“REVPAR”)was virtually the same in 2003 as compared to the 2002 second quarter.  Royal Sonesta Hotel Boston (Cambridge)suffered a 22% revenue loss in the 2003 quarter compared to the 2002 quarter,as total revenues decreased from $7,639,000 to $5,962,000.  Room revenues decreased by $1,407,000 due toa 29% REVPAR decrease.  Both occupancylevels and average room rates fell sharply due to reduced demand and fiercerate competition, including from a new hotel which opened during the 2003second quarter in the immediate vicinity of Royal Sonesta Boston(Cambridge).  Royal Sonesta Hotel NewOrleans reported second quarter 2003 revenues of $8,654,000 compared to $9,229,000in the 2002 quarter, a 6% decrease. This decrease in revenues was almost entirely due to a decrease of$569,000 in room revenues.  The hotel’sREVPAR during the 2003 second quarter decreased 9% compared to a year ago dueto lower average rates achieved. Reduced convention business in New Orleans in general has made NewOrleans more competitive, resulting in lower average rates.  Income from management activities during the2003 second quarter was $796,000 compared to $1,173,000 in the 2002 quarter, adecrease of $377,000.  This was mainlydue to decreased management income from Chateau Sonesta Hotel New Orleans of$174,000, because the hotel is not expected to achieve profit levels sufficientfor Sonesta to earn an incentive fee during 2003.  The remaining decrease was mainly due to lower license fees fromAruba due to the expiration of its license agreement in mid-2002, lowerreservations income, and lower management income from the Company’s Egyptianproperties.

 

**OPERATINGINCOME**

####  

|                                                            |   | **OPERATING INCOME (LOSS)** |   |
|-----------------------------------------------------------------|--------|-----------------------------|--------|
|                                                            |   | **(in thousands)**          |   |
|                                                            |   | **2003**                    |   | **2002** | ** ** |
| Sonesta  Beach Resort Key Biscayne                              |   | $                           | (345   | ) | $ | (423 | ) |
| Royal  Sonesta Hotel Boston (Cambridge)                         |   | 429                         |   | 1,729 |   |
| Royal  Sonesta Hotel New Orleans                                |   | 829                         |   | 1,161 |   |
| Operating  income from hotels after management and service fees |   | 913                         |   | 2,467 |   |
| Management  activities and other                                |   | (1,181                      | )      | (289 | ) |
| Operating  income (loss)                                        |   | $                           | (268   | ) | $ | 2,178 |   |

 

14

----

 

Operating losses during the 2003 second quarter were $268,000, comparedto operating income of $2,178,000 in the 2002 second quarter, a decrease ofapproximately $2,446,000.

 

Sonesta Beach Resort Key Biscayne reported a slight decrease inoperating losses from $423,000 during the 2002 second quarter to $345,000during the 2003 second quarter. Revenues decreased $19,000 during the 2003 quarter, but expensesdecreased by $97,000, mainly due to savings in maintenance expense and realestate taxes.  Royal Sonesta HotelBoston (Cambridge) had a very disappointing second quarter.  Operating income dropped by $1,300,000 from$1,729,000 during the second quarter of 2002 to $429,000 during the same periodin 2003.  Revenues decreased by$1,677,000, and expenses reduced by $377,000, or 6%, in the 2003 quartercompared to last year.  The decrease inexpenses related mainly to lower cost and operating expenses due to loweroccupancies in the 2003 quarter.  RoyalSonesta Hotel New Orleans reported second quarter 2003 operating income of$829,000, compared to $1,161,000 in the same period last year, a decrease of$332,000.  Revenue decreases of $575,000were only partially offset by lower expenses of $243,000, primarily due tolower rent expense of $187,000.  Therent expense under the lease for the New Orleans hotel is based on a percentageof profits, as defined.  Operatinglosses from management activities increased from $289,000 in the 2002 secondquarter to $1,181,000 in the 2003 second quarter.  These losses are computed after giving effect to management,marketing and service fees to owned and leased hotels.  Revenues from management activitiesdecreased by $377,000, and fee income from owned and leased hotels decreased by$98,000.  Expenses related to managementactivities increased by $417,000 during the 2003 quarter compared to last year,which was primarily due to a $300,000 charge during the 2003 second quarter forcontributions to operating losses of Sonesta Hotels & Suites Coconut Grovefor its second operating year.  Underits agreements, the Company has made certain operating loss guarantees.

 

**OTHERINCOME (DEDUCTIONS)**

 

Interest expense decreased by $20,000 from $1,564,000 in the secondquarter of 2002 to $1,544,000 in the same period in 2003, because of the lowerprincipal balance on the Cambridge and Key Biscayne mortgage loans (see Note3—Borrowing Arrangements).

 

Interest income in the second quarter of 2003 was $94,000 compared to$116,000 in the 2002 second quarter, a decrease of $22,000.  This decrease was due to lower short-terminvestment income in 2003 compared to 2002, because of the Company’s lower cash balances.

 

**FEDERAL,FOREIGN AND STATE INCOME TAXES**

 

The income tax benefit in the first six months of 2003 is lower thanthe statutory rate, and the provision for income taxes during the first sixmonths of 2002 was higher than the statutory rate, primarily due to state taxespayable on the Company’s income from Royal Sonesta Hotel New Orleans, andbecause of foreign taxes due on the Company’s income from its Egyptianoperations.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

The Company had cash and cash equivalents of approximately $4,292,000at June 30, 2003.  In addition, theCompany has $7,000,000 available under two credit lines.

 

15

----

 

The Company operates the Trump International Sonesta Beach Resort, acondominium hotel in Sunny Isles Beach, Florida.  This hotel opened in April 2003. Under its agreements, the Company advances funds for pre-opening costsand working capital.  In addition, theCompany contributes to the total cost for the hotel’s non-guestroom furniture,fixtures and equipment in excess of a certain limit.  The Company has also agreed to purchase four condominium units inthe hotel.  The Company estimates itstotal cash commitment to be approximately $5,700,000, of which $4,300,000 hadbeen advanced at June 30, 2003.

 

The Company believes that its present cash balances and availablecredit lines will be more than adequate to meet its cash requirements for 2003.

 

16

----

 

**PART I – Item 3**

 

**QUANTITATIVE ANDQUALITATIVE DISCLOSURE OF MARKET RISK**

 

The Company is exposed to market risk from changes in interest ratesand foreign exchange rates.  The Companyuses fixed rate debt to finance the ownership of its properties.  The table that follows summarizes theCompany’s fixed rate debt obligations outstanding at June 30, 2003. Thisinformation should be read in conjunction with Note 3—Borrowing Arrangements.

 

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

 
|                   |   | **YEAR** |   |     |   |     |   |     |   |
|------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                   |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   | **Total** |   | **Fair Value** |   |
| Fixed rate             |   | $        | 474    |     | $      | 1,013    |   | $        | 1,124  |   | $ | 1,226 |   | $ | 1,337 |   | $ | 64,398 |   | $ | 69,572 |   | $ | 72,887 |   |
| Average  interest rate |   | 8.6      | %      | 8.6      | %      | 8.6      | %      | 8.6      | %      | 8.6 | % | 8.6 | % |   |   |   |   |
|                        |        |          |        |          |        |          |        |          |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

17

----

 

**PART I – Item 4**

 

**INTERNALCONTROLS AND PROCEDURES**

 

As of June 30, 2003, an evaluation was performed under the supervisionand with the participation of the Company’s management, including the CEO, CFOand Vice President and Treasurer of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures.  Based on that evaluation, the Company’smanagement, including the CEO, CFO and Vice President and Treasurer concludedthat the Company’s disclosure controls and procedures were effective as of June30, 2003.  There have been nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect internal controls subsequent to June 30, 2003.

 

18

----

 

**PART II – Item 4**

 

**SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

## The Annual Meeting of Shareholders of Sonesta International HotelsCorporation was held on May 12, 2003. All nominees for directors were elected.  The results of the votes with regard to the appointment of theCompany’s independent auditors as well as the election of common stockdirectors are as follows:

##  

|                                                                                   |   | **VOTES CAST** |   |        |   |
|----------------------------------------------------------------------------------------|--------|----------------|--------|-------------|--------|
| **MANAGEMENT PROPOSAL**                                                                |   | **FOR**        |   | **AGAINST** |   | **ABSTAIN** |   |
|                                                                                   |   |           |   |        |   |   |   |
| Approval of the appointment of Ernst &  Young LLP as independent auditors for 2003 |   | 2,818,080      |   | 3,374       |   | 4,006 |   |

 

 

**ELECTIONOF COMMON STOCK DIRECTORS**

 
| **DIRECTOR**         |   | **VOTES RECEIVED** |   | **VOTES WITHHELD** |   |
|----------------------|--------|--------------------|--------|--------------------|--------|
|                 |   |               |   |               |   |
| George S.  Abrams    |   | 2,814,557          |   | 10,903             |   |
| Vernon R.  Alden     |   | 2,814,753          |   | 10,707             |   |
| Joseph L.  Bower     |   | 2,814,709          |   | 10,751             |   |
| Charles J.  Clark    |   | 2,813,585          |   | 11,875             |   |
| Paul  Sonnabend      |   | 2,813,845          |   | 11,615             |   |
| Peter J.  Sonnabend  |   | 2,813,693          |   | 11,767             |   |
| Roger P.  Sonnabend  |   | 2,813,693          |   | 11,767             |   |
| Stephanie  Sonnabend |   | 2,813,801          |   | 11,659             |   |
| Stephen  Sonnabend   |   | 2,813,757          |   | 11,703             |   |
| Jean C.  Tempel      |   | 2,814,753          |   | 10,707             |   |

 

**PART II****– OtherInformation**

 

**ItemNumbers 1, 2, 3, 5 and 6**

** **

Not applicable during the quarter ended June 30, 2003

 

19

----

 

**SIGNATURE**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this Report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|   | **SONESTA INTERNATIONAL HOTELS CORPORATION** |
|--------|----------------------------------------------|
|   |                                         |
|   | By:                                          | /S/ |   |
|   |                                         | Boy van Riel |
|   |                                         | Vice President and Treasurer |
|   |                                         |   |
|   |                                         | (Authorized to sign on behalf of the  Registrant as  Principal Financial Officer) |
|   |                                         |
|   | Date:   August 11, 2003                 |
|        |                                              |  |  |  |

 

20

----