**FORM 10-Q**

 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

| **(Mark One)**                                                                                                                                                                                     |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                               |   |
| **ý**                                                                                                                                                                                         | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                               |   |
| **For  the Quarterly period ended March 31, 2003**                                                                                                                                                 |
|                                                                                                                                                                                               |   |
| **OR**                                                                                                                                                                                             |
|                                                                                                                                                                                               |   |
| **o**                                                                                                                                                                                              | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                               |   |
| **For  the transition period  from             to             ** |
|                                                                                                                                                                                               |   |
| **Commission  file number 0-9032**                                                                                                                                                                 |

 

**SONESTA INTERNATIONAL HOTELSCORPORATION**

(Exactname 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  address and former fiscal year,  if changed since last report) |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

 

Yes   ý        No   o

 

APPLICABLE ONLY TOCORPORATE ISSUERS:

 

Number of Shares ofCommon Stock Outstanding

As of May 7, 2003 — $.80par value,

Class A – 3,698,230

 

 

----

 

**INDEX**

 

**SONESTA INTERNATIONAL HOTELS CORPORATION**

 
| Part  I.    Financial Information |
|-------------------------------------------------------|
|                                                  |   |
| Item 1.                                               | Financial  Statements (Unaudited) |
|                                                  |   |
|                                                  | Condensed  consolidated balance sheets—March 31, 2003 and December 31, 2002 |
|                                                  |   |
|                                                  | Condensed  consolidated statements of operations—Three month periods ended March 31,  2003 and 2002 |
|                                                  |   |
|                                                  | Condensed  consolidated statements of cash flows—Three month periods ended March 31,  2003 and 2002 |
|                                                  |   |
|                                                  | Notes  to condensed consolidated financial statements—March 31, 2003 and 2002 |
|                                                  |   |
| Item 2.                                               | Management’s Discussion and Analysis of Results  of Operations and Financial Condition—March 31, 2003 |
|                                                  |   |
| Item  3.                                         | Quantitative  and Qualitative Disclosure of Market Risk |
|                                                  |   |
| Item  4.                                         | Internal  Controls and Procedures |
|                                                  |   |
| Part  II.    Other Information    |
|                                                  |   |
|                                                  | 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**

March  31, 2003 (unaudited)  and December 31, 2002

 
|                                                                             |   | **(in  thousands)** |    |
|----------------------------------------------------------------------------------|--------|---------------------|---------|
|                                                                             |   | **March 31  2003**  |    | **December  31  2002** |   |
|                                                                             |   |                |    |   |   |
| ASSETS                                                                           |   |                |    |   |   |
| Current assets:                                                                  |   |                |    |   |   |
| Cash and cash  equivalents                                                       |   | $                   | 7,020   |   | $ | 12,675 |   |
| Accounts and  notes receivable:                                                  |   |                |    |   |   |
| Trade, less  allowance of $254 ($241 at December 31, 2002) for doubtful accounts |   | 6,950               |    | 6,920 |   |
| Other, including  current portion of long-term receivables and advances          |   | 564                 |    | 443 |   |
| Total accounts  and notes receivable                                             |   | 7,514               |    | 7,363 |   |
| Refundable  income taxes                                                         |   | 1,579               |    | 1,600 |   |
| Current portion  of deferred taxes                                               |   | 321                 |    | 311 |   |
| Inventories                                                                      |   | 1,053               |    | 1,109 |   |
| Prepaid expenses  and other                                                      |   | 3,490               |    | 3,294 |   |
|                                                                             |   |                |    |   |   |
| Total current  assets                                                            |   | 20,977              |    | 26,352 |   |
|                                                                             |   |                |    |   |   |
| Long-term  receivables and advances                                              |   | 8,282               |    | 7,147 |   |
|                                                                             |   |                |    |   |   |
| Property and  equipment, at cost:                                                |   |                |    |   |   |
| Land and land  improvements                                                      |   | 9,202               |    | 9,202 |   |
| Buildings                                                                        |   | 64,380              |    | 64,361 |   |
| Furniture and  equipment                                                         |   | 41,825              |    | 41,168 |   |
| Leasehold  improvements                                                          |   | 6,352               |    | 6,069 |   |
| Projects in  progress                                                            |   | 676                 |    | 367 |   |
|                                                                             |   | 122,435             |    | 121,167 |   |
|                                                                             |   |                |    |   |   |
| Less accumulated  depreciation and amortization                                  |   | 40,080              |    | 37,996 |   |
| Net property and  equipment                                                      |   | 82,355              |    | 83,171 |   |
|                                                                             |   |                |    |   |   |
| Other long-term  assets                                                          |   | 2,967               |    | 1,780 |   |
|                                                                             |   | $                   | 114,581 |   | $ | 118,450 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

1

----

 

**SONESTA INTERNATIONAL HOTELS CORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

March  31, 2003 (unaudited)  and December 31, 2002

 
|                                                                                                |   | **(in  thousands)** |    |
|-----------------------------------------------------------------------------------------------------|--------|---------------------|---------|
|                                                                                                |   | **March 31  2003**  |    | **December  31  2002** |   |
|                                                                                                |   |                |    |   |   |
| LIABILITIES AND  COMMON STOCKHOLDERS’ EQUITY                                                   |   |                |    |   |   |
| Current  liabilities:                                                                               |   |                |    |   |   |
| Current portion  of long-term debt                                                                  |   | $                   | 950     |   | $ | 946 |   |
| Accounts payable                                                                                    |   | 4,158               |    | 4,199 |   |
| Advance deposits                                                                                    |   | 2,769               |    | 3,352 |   |
| Federal, foreign  and state income taxes                                                            |   | 853                 |    | 848 |   |
| Accrued  liabilities:                                                                               |   |                |    |   |   |
| Salaries and  wages                                                                                 |   | 1,608               |    | 1,860 |   |
| Rentals                                                                                             |   | 1,830               |    | 5,000 |   |
| Interest                                                                                            |   | 549                 |    | 543 |   |
| Pension and  other employee benefits                                                                |   | 1,388               |    | 1,418 |   |
| Other                                                                                               |   | 1,589               |    | 1,117 |   |
|                                                                                                |   |                |    |   |   |
| Total accrued  liabilities                                                                          |   | 6,964               |    | 9,938 |   |
|                                                                                                |   |                |    |   |   |
| Total current  liabilities                                                                          |   | 15,694              |    | 19,283 |   |
|                                                                                                |   |                |    |   |   |
| Long-term debt                                                                                      |   | 68,843              |    | 69,097 |   |
|                                                                                                |   |                |    |   |   |
| Deferred federal  and state income taxes                                                            |   | 5,141               |    | 5,275 |   |
|                                                                                                |   |                |    |   |   |
| Other  non-current liabilities                                                                      |   | 2,766               |    | 2,313 |   |
|                                                                                                |   |                |    |   |   |
| Commitments and  contingencies                                                                      |   |                |    |   |   |
|                                                                                                |   |                |    |   |   |
| Common  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                                                                                  |   | 29,308              |    | 29,653 |   |
| Treasury  shares—2,404, at cost                                                                |   | (12,053             | )       | (12,053 | ) |
| Total common  stockholders’ equity                                                             |   | 22,137              |    | 22,482 |   |
|                                                                                                |   | $                   | 114,581 |   | $ | 118,450 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

2

----

 

**SONESTAINTERNATIONAL HOTELS CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)**

(in thousands except forper share data)

 
|                                                                            |   | **Three  Months Ended March 31** |       |
|---------------------------------------------------------------------------------|--------|----------------------------------|------------|
|                                                                            |   | **2003**                         |       | **2002** |   |
|                                                                            |   |                             | ** ** |   | ** ** |
| Revenues:                                                                       |   |                             |       |   |   |
| Rooms                                                                           |   | $                                | 14,036     |   | $ | 15,327 |   |
| Food and  beverage                                                              |   | 6,541                            |       | 6,601 |   |
| Management,  license and service fees                                           |   | 877                              |       | 1,143 |   |
| Parking,  telephone and other                                                   |   | 2,230                            |       | 2,316 |   |
|                                                                            |   | 23,684                           |       | 25,387 |   |
|                                                                            |   |                             |       |   |   |
| Costs and  expenses:                                                            |   |                             |       |   |   |
| Costs and  operating expenses                                                   |   | 10,175                           |       | 10,247 |   |
| Advertising and  promotion                                                      |   | 1,875                            |       | 1,929 |   |
| Administrative  and general                                                     |   | 3,988                            |       | 3,619 |   |
| Human resources                                                                 |   | 366                              |       | 427 |   |
| Maintenance                                                                     |   | 1,574                            |       | 1,485 |   |
| Rentals                                                                         |   | 2,023                            |       | 2,673 |   |
| Property taxes                                                                  |   | 577                              |       | 720 |   |
| Depreciation and  amortization                                                  |   | 2,085                            |       | 2,047 |   |
|                                                                            |   | 22,663                           |       | 23,147 |   |
| Operating income                                                                |   | 1,021                            |       | 2,240 |   |
|                                                                            |   |                             |       |   |   |
| Other income  (deductions):                                                     |   |                             |       |   |   |
| Interest expense                                                                |   | (1,534                           | )          | (1,547 | ) |
| Interest income                                                                 |   | 111                              |       | 127 |   |
| Foreign exchange  loss                                                          |   | (2                               | )          | (1 | ) |
| Gain  on sales of assets                                                        |   | 18                               |       | — |   |
|                                                                            |   | (1,407                           | )          | (1,421 | ) |
| Profit (loss)  from continuing operations before income tax provision (benefit) |   | (386                             | )          | 819 |   |
| Income tax  provision (benefit)                                                 |   | (41                              | )          | 387 |   |
| Net profit  (loss) from continuing operations                                   |   | (345                             | )          | 432 |   |
| Discontinued  operations (Note 9):                                              |   |                             |       |   |   |
| Profit from  operations of discontinued hotel                                   |   | —                           |       | 175 |   |
| Income tax  provision                                                           |   | —                           |       | 59 |   |
| Profit from  discontinued operations                                            |   | —                           |       | 116 |   |
| Net profit (loss)                                                               |   | (345                             | )          | 548 |   |
| Retained  earnings at beginning of period                                       |   | 29,653                           |       | 34,389 |   |
| Retained  earnings at end of period                                             |   | $                                | 29,308     |   | $ | 34,937 |   |
|                                                                            |   |                             |       |   |   |
| Basic and  diluted profit (loss) per share from:                                |   |                             |       |   |   |
| Continued  operations                                                           |   | $                                | (0.09      | ) | $ | 0.12 |   |
| Discontinued  operations                                                        |   | —                           |       | 0.03 |   |
| Net profit  (loss) per share of common stock                                    |   | $                                | (0.09      | ) | $ | 0.15 |   |
| Weighted average  number of shares outstanding                                  |   | 3,698                            |       | 3,698 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

3

----

 

**SONESTA INTERNATIONAL HOTELS CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)**

Increase (Decrease) in Cash  (in thousands)

 
|                                                       |   | **Three  Months Ended March 31** |   |
|------------------------------------------------------------|--------|----------------------------------|--------|
|                                                       |   | **2003**                         |   | **2002** |   |
|                                                       |   |                             |   |   |   |
| Cash provided  (used) by operating activities              |   |                             |   |   |   |
| Net  income (loss)                                         |   | $                                | (345   | ) | $ | 548 |   |
| Items not  (providing) requiring cash                      |   | 438                              |   | 380 |   |
| Pension expense                                            |   |                             |   |   |   |
| Depreciation and  amortization of property and equipment   |   | 2,085                            |   | 2,047 |   |
| Other  amortization                                        |   | 22                               |   | 22 |   |
| Deferred federal  and state income tax provision (benefit) |   | (144                             | )      | 434 |   |
| Gain on sales of  assets                                   |   | (18                              | )      | — |   |
| Profit  from discontinued operations                       |   | —                           |   | (175 | ) |
| Deferred  interest income                                  |   | (50                              | )      | (35 | ) |
|                                                       |   |                             |   |   |   |
| Changes in  assets and liabilities                         |   |                             |   |   |   |
| Accounts and  notes receivable                             |   | (263                             | )      | (1,878 | ) |
| Refundable  income taxes                                   |   | 21                               |   | 338 |   |
| Inventories                                                |   | 56                               |   | 171 |   |
| Prepaid expenses  and other                                |   | (196                             | )      | (216 | ) |
| Accounts payable                                           |   | 329                              |   | 399 |   |
| Advance deposits                                           |   | (583                             | )      | (905 | ) |
| Federal, foreign  and state income taxes                   |   | 5                                |   | 138 |   |
| Accrued liabilities                                        |   | (2,960                           | )      | (2,642 | ) |
| Cash  used by operating activities                         |   | (1,603                           | )      | (1,374 | ) |
|                                                       |   |                             |   |   |   |
| Cash provided  (used) by investing activities              |   |                             |   |   |   |
| Expenditures for  property and equipment                   |   | (1,268                           | )      | (2,175 | ) |
| Other  investments                                         |   | (1,115                           | )      | — |   |
| Payments  received on long-term receivables and advances   |   | 44                               |   | 49 |   |
| Proceeds  from sales of assets                             |   | 18                               |   | — |   |
| New  loans and advances                                    |   | (1,111                           | )      | (1,107 | ) |
| Net  cash flow from discontinued operations                |   | —                           |   | 299 |   |
| Cash  used by investing activities                         |   | (3,432                           | )      | (2,934 | ) |
|                                                       |   |                             |   |   |   |
| Cash  used by financing activities                         |   |                             |   |   |   |
| Payments on  long-term debt                                |   | (250                             | )      | (230 | ) |
| Cash dividends  paid                                       |   | (370                             | )      | (370 | ) |
| Cash  used by financing activities                         |   | (620                             | )      | (600 | ) |
|                                                       |   |                             |   |   |   |
| Net decrease in  cash                                      |   | (5,655                           | )      | (4,908 | ) |
| Cash  and cash equivalents at beginning of period          |   | 12,675                           |   | 14,256 |   |
| Cash and cash  equivalents at end of period                |   | $                                | 7,020  |   | $ | 9,348 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

** **

**4**

----

** **

Supplemental Schedule ofInterest and Income Taxes Paid

Cash paid for interest in the 2003 three-month periodand the 2002 three-month period was approximately $1,528,000 and $1,592,000,respectively.  Cash paid for incometaxes in the first quarter of 2003 was approximately $77,000.   Cash refunded for income taxes in the firstquarter of 2002 was approximately $463,000.

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

5

----

 

**SONESTAINTERNATIONAL HOTELS CORPORATION**

**NOTESTO 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 three month period ended March 31, 2003 arenot necessarily indicative of the results that may be expected for the yearended December 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 completefinancial statements.

 

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)** |   |
|---------------------------------------------------------------|--------|---------------------|--------|
|                                                          |   | **March 31,  2003** |   | **December  31, 2002** |   |
| Sharm El Sheikh,  Egypt (a)                                   |   | $                   | 797    |   | $ | 821 |   |
| Sonesta Hotel  & Suites Coconut Grove, Miami, Florida (b) |   | 5,335               |   | 5,285 |   |
| Trump  International Sonesta Beach Resort (c)                 |   | 2,017               |   | 1,003 |   |
| Other                                                         |   | 407                 |   | 283 |   |
| Total long-term  receivables                                  |   | 8,556               |   | 7,392 |   |
| Less:  current portion                                   |   | 274                 |   | 245 |   |
| Net long-term  receivables                                    |   | $                   | 8,282  |   | $ | 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 March 31, 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 (4.25% at March 31, 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 and workingcapital.  No interest will be charged onthese advances, which will be repaid out of available profits generated by thehotel.  The hotel opened for business inApril 2003 (See also Note 5—Commitments and Contingencies).

 

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

 

*CreditLines*

 

The Company has a $2,000,000 line of credit, which expires on September28, 2003.  This line of credit bearsinterest at the prime rate (4.25% at March 31, 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 March 31, 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 also requirea minimum net worth, approval for additional borrowings by the Company, andlimits on cash dividends and purchases of the Company’s stock.  The interest rate is LIBOR plus 3% (4.3% atMarch 31, 2003), and the commitment fee on the unused portion of the line is0.65% per annum.  No amounts wereoutstanding under this line at March 31, 2003.

 

## *Long-TermDebt*

 
|                                                                |   | **(in  thousands)** |       |
|---------------------------------------------------------------------|--------|---------------------|------------|
|                                                                |   | **March 31,  2003** |       | **December  31, 2002** |   |
| Charterhouse of  Cambridge Trust and Sonesta of Massachusetts Inc.: |   |                | ** ** |   | ** ** |
| First mortgage note  (a)                                            |   | $                   | 39,743     |   | $ | 39,886 |   |
| Sonesta Beach  Resort Limited Partnership:                          |   |                |       |   |   |
| First mortgage  note (b)                                            |   | 30,050              |       | 30,157 |   |
|                                                                |   | 69,793              |       | 70,043 |   |
| Less current  portion of long-term debt                             |   | 950                 |       | 946 |   |
| Total long-term  debt                                               |   | $                   | 68,843     |   | $ | 69,097 |   |

 

----

(a)                                  This loan is secured by a first mortgageon the Royal Sonesta Hotel Boston (Cambridge) property.  This property is included in fixed assets ata net book value of $22,665,000 at March 31, 2003.  The interest rate on this loan is 8.6% for the term of the loan, andamortization 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 paymentpenalties, based on prevailing interest rates at the time of theprepayment.  This mortgage loan, and themortgage loan on Sonesta Beach Resort Key Biscayne (see (b), below) areprovided by the same lender, and are cross-collateralized.

 

7

----

 

(b)                                 This loan is secured by a first mortgageon the Sonesta Beach Resort Key Biscayne property.  The property is included in fixed assets at a net book value of$43,810,000 at March 31, 2003.  Theinterest rate on this loan is 8.6% for the term of the loan, and amortizationof 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 theprepayment.  This mortgage loan, and themortgage loan on Royal Sonesta Hotel Boston (Cambridge) (see (a), above) areprovided by the same 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 March 31** |   |
|                       |   | **2003**                         |   | **2002** |   |
| Direct  departmental costs |   |                             |   |   |   |
| Rooms                      |   | $                                | 3,332  |   | $ | 3,555 |   |
| Food and  beverage         |   | 4,959                            |   | 5,006 |   |
| Heat, light and  power     |   | 733                              |   | 680 |   |
| Other                      |   | 1,151                            |   | 1,006 |   |
|                       |   | $                                | 10,175 |   | $ | 10,247 |   |

 

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

 

**5.             Commitments and Contingencies**

 

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 is obligated to advance funds forpre-opening costs and working capital. In addition, the Company contributes towards the cost for the hotel’snon-guestroom furniture, fixtures and equipment in excess of a certain limit.  The Company has also agreed to purchase fourcondominium units in the hotel.  TheCompany estimates its total cash commitment to be approximately $5,900,000, ofwhich approximately $3,900,000 had been advanced at March 31, 2003.  In addition, the Company will guaranty a $1million equipment lease for the hotel. Based on the management agreement, theCompany will receive management fees based on revenues, and incentive feesbased on profits, as defined.  Under thesame agreements, the Company guarantees 50% of net operating losses during theperiod from the opening of the hotel until November 1, 2004.

 

8

----

 

 

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

 

The provision (benefit)for income taxes in the accompanying condensed Consolidated Statements ofOperations is summarized below:

 
|                                             |   | **(in  thousands)**              |   |
|--------------------------------------------------|--------|----------------------------------|--------|
|                                             |   | **Three  Months Ended March 31** |   |
|                                             |   | **2003**                         |   | **2002** |   |
|                                             |   |                             |   |   |   |
| Current  federal income tax benefit              |   | $                                | (20    | ) | $ | (194 | ) |
| Current foreign  income tax provision            |   | 35                               |   | 47 |   |
| Current state  income tax provision              |   | 88                               |   | 100 |   |
| Deferred  federal income tax provision (benefit) |   | (144                             | )      | 434 |   |
|                                             |   | $                                | (41    | ) | $ | 387 |   |

 

**7.             Segment Information**

 

Segment information for the Company’s two reportable segments, Owned& Leased Hotels and Management Activities, for the three month periodsending March 31, 2003 and 2002 follows:

 

Period ended March 31, 2003

 
|                                                                  |   | **(in  thousands)**             |   |
|-----------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                  |   | **Owned  &  Leased Hotels** |   | **Management  Activities** |   | **Consolidated** |   |
|                                                                  |   |                            |   |   |   |   |   |
| Revenues                                                              |   | $                               | 22,796 |   | $ | 888 |   | $ | 23,684 |   |
| Operating income  (loss) before depreciation and amortization expense |   | 3,918                           |   | (812 | ) | 3,106 |   |
| Depreciation and  amortization                                        |   | (1,967                          | )      | (118 | ) | (2,085 | ) |
| Interest income  (expense), net                                       |   | (1,522                          | )      | 99 |   | (1,423 | ) |
| Other income  (deductions)                                            |   | 18                              |   | (2 | ) | 16 |   |
| Segment  pre-tax profit (loss)                                        |   | 447                             |   | (833 | ) | (386 | ) |
|                                                                  |   |                            |   |   |   |   |   |
| Segment assets                                                        |   | 91,496                          |   | 23,085 |   | 114,581 |   |
| Segment capital  additions                                            |   | 1,250                           |   | 18 |   | 1,268 |   |
|                                                                       |        |                                 |        |  |  |  |  |  |  |  |

 

Period ended March 31, 2002

 
|                                                                  |   | **(in  thousands)**             |   |
|-----------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                  |   | **Owned  &  Leased Hotels** |   | **Management  Activities** |   | **Consolidated** |   |
|                                                                  |   |                            |   |   |   |   |   |
| Revenues                                                              |   | $                               | 24,239 |   | $ | 1,148 |   | $ | 25,387 |   |
| Operating income  (loss) before depreciation and amortization expense |   | 4,478                           |   | (191 | ) | 4,287 |   |
| Depreciation and  amortization                                        |   | (1,937                          | )      | (110 | ) | (2,047 | ) |
| Interest income  (expense), net                                       |   | (1,539                          | )      | 119 |   | (1,420 | ) |
| Other deductions                                                      |   | —                          |   | (1 | ) | (1 | ) |
| Segment  pre-tax profit (loss)                                        |   | 1,002                           |   | (183 | ) | 819 |   |
|                                                                  |   |                            |   |   |   |   |   |
| Segment assets                                                        |   | 93,174                          |   | 20,705 |   | 113,879 |   |
| Segment capital  additions                                            |   | 1,333                           |   | 842 |   | 2,175 |   |
|                                                                       |        |                                 |        |  |  |  |  |  |  |  |

 

9

----

 

**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 March 31** |   |
|------------------------------------------------|--------|----------------------------------|--------|
|                                           |   | **2003**                         |   | **2002** |   |
| Numerator:                                     |   |                             |   |   |   |
|                                           |   |                             |   |   |   |
| Profit (loss)  from continuing operations      |   | $                                | (345   | ) | $ | 432 |   |
| Profit from  discontinued operations           |   | —                           |   | 116 |   |
| Numerator for  earnings per share              |   | $                                | (345   | ) | $ | 548 |   |
|                                           |   |                             |   |   |   |
| Denominator:                                   |   |                             |   |   |   |
| Weighted average  number of shares outstanding |   | 3,698                            |   | 3,698 |   |
|                                           |   |                             |   |   |   |
| Profit  (loss) per share of common stock:      |   |                             |   |   |   |
| Continuing  operations                         |   | $                                | (0.09  | ) | $ | 0.12 |   |
| Discontinued  operations                       |   | —                           |   | 0.03 |   |
| Net  profit (loss) per share of common stock   |   | $                                | (0.09  | ) | $ | 0.15 |   |

 

**9.****                      DiscontinuedOperations**

 

In September 2002, the Company sold the Sonesta Beach ResortAnguilla.    The financial statementsfor the three month period ended March 31, 2002, have been reclassified topresent the operations of the resort as a discontinued operation.    Following is a summary of the operatingresults for the three month period ended March 31, 2002:

 
|                                                |   | **Three  months ended  March 31, 2002** |   |
|-----------------------------------------------------|--------|-----------------------------------------|--------|
| Revenues from  operations                           |   | $                                       | 1,643  |   |
| Expenses                                            |   | (1,468                                  | )      |
| Profit  from operations before income tax provision |   | $                                       | 175    |   |
| Income tax  provision                               |   | (59                                     | )      |
| Profit from  discontinued operations                |   | $                                       | 116    |   |

 

10

----

 

**PartI – Item 2**

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS**

**OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION**

 

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

 

**FIRSTQUARTER 2003 COMPARED TO 2002**

 

In the first quarter of 2003 the Company recorded a net loss fromcontinuing operations of $345,000, or $(0.09) per common share, compared to netincome from continuing operations of $432,000, or $ 0.12 per common share, inthe first quarter 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 due to the war in Iraq.   Discounted room rates due to fierce competition for availablebusiness have resulted in decreases in revenue per available room (“REVPAR”) inmost locations, resulting in lower revenues and operating profits during thefirst quarter of 2003 compared to the same period in 2002.

 

**REVENUES**

 
|                                            |   | **TOTAL  REVENUES  (in thousands)** |   |
|-------------------------------------------------|--------|-------------------------------------|--------|
|                                            |   | **NO. OF  ROOMS**                   |   | **2003** |   | **2002** |   |
| Sonesta Beach  Resort Key Biscayne              |   | 300                                 |   | $ | 9,111 |   | $ | 8,993 |   |
| Royal Sonesta  Hotel Boston (Cambridge)         |   | 400                                 |   | 4,132 |   | 4,679 |   |
| Royal Sonesta  Hotel New Orleans                |   | 500                                 |   | 9,553 |   | 10,567 |   |
| Management and  service fees and other revenues |   |                                |   | 888 |   | 1,148 |   |
| Total revenues                                  |   |                                |   | $ | 23,684 |   | $ | 25,387 |   |

 

Total revenues for the quarter ended March 31, 2003 were $23,684,000compared to $25,387,000 in 2002, a decrease of approximately $1,703,000.

 

Sonesta Beach Resort Key Biscayne had a fairly good first quarter of2003, reporting revenues of $9,111,000 compared to $8,993,000 in the firstquarter of 2002.    Room revenue peravailable room (“REVPAR”) increased by 1% in 2003 compared to last year, asslightly lower occupancy was more than offset by a 4% increase in average roomrate.   Food and beverage revenuesincreased by 5% in the 2003 first quarter compared to 2002, due to increasedbanquet business.    First quarter 2003revenues at Royal Sonesta Hotel Boston (Cambridge) decreased by $547,000 to$4,132,000 compared to the same period a year ago.   Demand from the transient market segment was much less than in2002, resulting in a 16% REVPAR decrease.  In addition, food and beverage revenues declined by 6%.    Royal Sonesta Hotel New Orleans reportedtotal revenues of $9,553,000 during the first quarter of 2003 compared to$10,567,000 in the 2002 first quarter, a decrease of $1,014,000, or 10%.   The 2002 first quarter was bolstered by a largernumber of city-wide conventions compared to 2003, as well as by the SuperBowl.   Increased competition foravailable business resulted in a decrease in the hotel’s REVPAR of 13% in thefirst quarter of 2003 compared to 2002, lowering room revenues by$909,000.  The remaining revenue decreaseof $105,000 was mainly due to slightly lower food and beverage revenues.  Income from management activities decreasedby $260,000 from $1,148,000 in the first quarter of 2002 to $888,000 in the2003 first quarter.   This decrease wascaused by lower license fee income due to the cancellation of the licenseagreement in the spring of 2002 for Aruba Sonesta Resort, lower management feeincome from Chateau Sonesta Hotel New Orleans due to lower revenues andprofits, and due to reduced income from reservations services.

 

11

----

 

**OPERATINGINCOME**

####  

|                                                            |   | **OPERATING  INCOME (LOSS)  (in thousands)** |   |
|-----------------------------------------------------------------|--------|----------------------------------------------|--------|
|                                                            |   | **2003**                                     |   | **2002** |   |
| Sonesta  Beach Resort Key Biscayne                              |   | $                                            | 1,840  |   | $ | 1,888 |   |
| Royal Sonesta  Hotel Boston (Cambridge)                         |   | (858                                         | )      | (466 | ) |
| Royal Sonesta  Hotel New Orleans                                |   | 969                                          |   | 1,119 |   |
| Operating  income from hotels after management and service fees |   | 1,951                                        |   | 2,541 |   |
| Management  activities and other                                |   | (930                                         | )      | (301 | ) |
| Operating  income                                               |   | $                                            | 1,021  |   | $ | 2,240 |   |

 

Operating income for the three-month period endedMarch 31, 2003 was $1,021,000, compared to operating income of $2,240,000 in2002, a decrease of approximately $1,219,000.

 

Operating income at Sonesta Beach Resort Key Biscaynedecreased slightly, from $1,888,000 in the first quarter of 2002 to $1,840,000in the first quarter of 2003.   Revenues rose by $118,000, and expenses increased by a modest $166,000,or 2%, mainly due an increase in costs and operating expenses.    Royal Sonesta Hotel Boston (Cambridge)reported an operating loss of $858,000 during the 2003 first quarter, anincrease of $392,000 compared to operating losses of $466,000 during the 2002first quarter.    Decreased revenues of$547,000 were partially offset by a decrease in expenses of $155,000, mainlydue to lower costs and operating expenses and property taxes.    Operating income at Royal Sonesta HotelNew Orleans during the first quarter of 2003 decreased by $150,000 to$969,000.   Revenues decreased by$1,014,000, but expenses decreased by $864,000, mainly due to decreased costsand operating expenses of $234,000, and lower rent expense of $575,000, becauseof lower operating profits achieved.  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 from owned and leased hotels, increasedfrom $301,000 in the 2002 first quarter to $930,000 in the 2003 firstquarter.  Revenues related to theseactivities decreased by $260,000, and expenses increased by $369,000.  The expense increase was caused by, amongstothers, severance expense related to corporate management staff reductions, acontribution to the first year losses of Sonesta Hotel & Suites CoconutGrove, for which hotel the Company has made certain operating loss guarantees,and an increase in the cost of providing management services.

 

**OTHER INCOME (DEDUCTIONS)**

 

Interest income in the first quarter of 2003 was$111,000 compared to $127,000 in the 2002 first quarter, a decrease of$16,000.   This decrease was due tolower short-term investment income because of the Company’s lower cashbalances.

 

**FEDERAL, FOREIGN AND STATE INCOME TAXES**

 

The income tax benefit in the first quarter of 2003 islower than the statutory rate, and the provision for income taxes during thefirst quarter of 2002 was higher than the statutory rate, primarily due tostate taxes payable on the Company’s income from Royal Sonesta Hotel NewOrleans.

 

12

----

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company had cash and cash equivalents ofapproximately $7,020,000 at March 31, 2003.  In addition, the Company has $7,000,000 available under two creditlines.

 

The Company operates the Trump International SonestaBeach Resort, a condominium hotel in Sunny Isles Beach, Florida.   This hotel opened in April 2003.   Under its agreements, the Company advancesfunds for pre-opening costs and working capital.      In addition, the Company contributes to the total cost forthe hotel’s non-guestroom furniture, fixtures and equipment in excess of acertain limit.   The Company has alsoagreed to purchase four condominium units in the hotel.   The Company estimates its total cashcommitment to be approximately $5,900,000, of which $3,900,000 had beenadvanced at March 31, 2003.

 

The Company believes that its present cash balancesand available credit lines will be more than adequate to meet its cashrequirements for 2003 and beyond.

 

13

----

 

**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.    TheCompany uses fixed rate debt to finance the ownership of its properties.   The table that follows summarizes theCompany’s fixed rate debt obligations outstanding at March 31, 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             |   | $        | 697    |     | $      | 1,014    |   | $        | 1,124  |   | $ | 1,225 |   | $ | 1,337 |   | $ | 64,396 |   | $ | 69,793 |   | $ | 73,106 |   |
| Average interest  rate |   | 8.6      | %      | 8.6      | %      | 8.6      | %      | 8.6      | %      | 8.6 | % | 8.6 | % |   |   |   |   |
|                        |        |          |        |          |        |          |        |          |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

14

----

 

**PART I – Item 4**

 

**INTERNALCONTROLS AND PROCEDURES**

 

As of March 31, 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 ofMarch 31, 2003.    There have been nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect internal controls subsequent to March 31, 2003.

 

15

----

 

**PARTII – Other Information**

 

**ItemNumbers 1, 2, 3, 4, 5 and 6**

 

Not applicable during the quarter ended March 31, 2003.

 

16

----

 

**SIGNATURE**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this Report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|   | **SONESTA  INTERNATIONAL HOTELS CORPORATION**                                    |
|--------|----------------------------------------------------------------------------------|
|   |                                                                             |
|   |                                                                             |
|   | By:                                                                              | /s/  Boy A. J. van Riel |   |
|   | Boy A. J. van Riel                                                               |
|   | Vice President and Treasurer                                                     |
|   |                                                                             |
|   | (Authorized to sign on behalf of the Registrant as  Principal Financial Officer) |
|   |                                                                             |
|   | Date:  May  12, 2003                                                        |
|        |                                                                                  |  |  |  |

 

17

----

 

I,Boy A. J. van Riel, certify that:

 

1.                                       Ihave reviewed the quarterly report on Form 10-Q for the period ending March 31,2003 of Sonesta International Hotels Corporation;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize and reportfinancial data and have identified for the registrant’s auditors any materialweaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date:     May 12, 2003 |   | /s/  Boy  A.J. van Riel |
|--------------------------------------------|--------|-----------------------------------|
|                                       |   |                              | Name: | Boy A.J. van Riel |
|                                       |   |                              | Title: | Vice President and Treasurer |

 

18

----

 

I, Roger P. Sonnabend,certify that:

 

1.                                       Ihave reviewed the quarterly report on Form 10-Q for the period ending March 31,2003 of Sonesta International Hotels Corporation;

 

2.                                       Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.                                 Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the “EvaluationDate”); and

 

c)  presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date:    May 12, 2003 |   | /s/    Roger P. Sonnabend |
|--------------------------------------|--------|-----------------------------------------------|
|                                 |   | Name:                                         | Roger P. Sonnabend |
|                                 |   | Title:                                        | Chairman of the Board and Chief Executive  Officer |

 

19

----

 

I, Paul Sonnabend,certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q for the period ending March31, 2003 of Sonesta International Hotels Corporation;

 

2.                                       Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.                                 Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)  presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date:    May 12, 2003 |   | /s/   Paul Sonnabend                              |
|--------------------------------------|--------|------------------------------------------------------------------|
|                                 | Name:  | Paul Sonnabend                                                   |
|                                 | Title: | Chairman of the Executive Committee  and Chief Financial Officer |
|                                      |        |                                                                  |  |  |

 

20

----