**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 June 30,  2004**                                               |
|                                                                                                                                                  |                                                                                            |
| **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**

(Exact name ofregistrant 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) has filed all reportsrequired to be filed by section 13 or 15 (d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes  ý  No  o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Exchange Act Rule 12b-02)  Yes  o  No  ý

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Number of Shares of Common Stock Outstanding

As of August 4, 2004 — $.80 par value,

Class A – 3,698,230

 

 

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**INDEX**

 

**SONESTA INTERNATIONALHOTELS CORPORATION**

 
| Part I.      | Financial Information                                                                           |                                                                                                           |   |
|--------------|-------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------|--------|
|         |                                                                                            |                                                                                                           |
|         | Item 1.                                                                                         | Financial Statements (Unaudited)                                                                               |   |
|         |                                                                                            |                                                                                                           |   |
|         |                                                                                            | Condensed consolidated balance sheets— June  30, 2004 and December 31, 2003                               |   |
|         |                                                                                            |                                                                                                           |   |
|         |                                                                                            | Condensed consolidated statements of  operations—Three and six month periods ended June 30, 2004 and 2003 |   |
|         |                                                                                            |                                                                                                           |   |
|         |                                                                                            | Condensed consolidated statements of cash  flows—Six month periods ended June 30, 2004 and 2003           |   |
|         |                                                                                            |                                                                                                           |   |
|         |                                                                                            | Notes to condensed consolidated financial  statements—June 30, 2004 and 2003                              |   |
|         |                                                                                            |                                                                                                           |   |
|         | Item 2.                                                                                         | Management’s Discussion and Analysis of  Results of Operations and Financial Condition—June 30, 2004 |   |
|         |                                                                                            |                                                                                                           |   |
|         | Item 3.                                                                                         | Quantitative and Qualitative Disclosure of  Market Risk                                                        |   |
|         |                                                                                            |                                                                                                           |   |
|         | Item  4.                                                                                        | Internal Controls and Procedures                                                                               |   |
|         |                                                                                            |                                                                                                           |
| Part II.     | Other Information                                                                               |                                                                                                           |   |
|         |                                                                                            |                                                                                                           |
|         | Item 5.                                                                                         | Submission of Matters to a Vote of Security  Holders                                                           |   |
|         |                                                                                            |                                                                                                           |
|         | Signature page                                                                                  |                                                                                                           |
|         |                                                                                            |                                                                                                           |
|         | Certifications by the Company’s Chief  Executive Officers and Vice President and Treasurer |                                                                                                           |
|         |                                                                                            |                                                                                                           |
| Exhibit 99.1 | 18 U.S.C. Section 1350 Certification by  Company Officers                                       |                                                                                                           |
|              |                                                                                                 |                                                                                                                |        |  |

 

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

 

**SONESTAINTERNATIONAL HOTELS CORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

June 30, 2004 (unaudited) and December 31,2003

 
|                                                                             |   | **(in  thousands)** |    |
|----------------------------------------------------------------------------------|--------|---------------------|---------|
|                                                                             |   | **June 30  2004**   |    | **December  31  2003** |   |
| ASSETS                                                                           |   |                |    |   |   |
| Current assets:                                                                  |   |                |    |   |   |
| Cash and cash equivalents                                                        |   | $                   | 4,956   |   | $ | 4,327 |   |
| Restricted cash                                                                  |   | 2,581               |    | — |   |
| Accounts and notes receivable:                                                   |   |                |    |   |   |
| Trade, less allowance of $241 ($221 at  December 31, 2003) for doubtful accounts |   | 6,336               |    | 7,844 |   |
| Other, including current portion of  long-term receivables and advances          |   | 698                 |    | 494 |   |
| Total accounts and notes receivable                                              |   | 7,034               |    | 8,338 |   |
| Refundable income taxes                                                          |   | 54                  |    | 38 |   |
| Inventories                                                                      |   | 1,037               |    | 1,108 |   |
| Prepaid expenses and other                                                       |   | 2,797               |    | 2,471 |   |
|                                                                             |   |                |    |   |   |
| Total current assets                                                             |   | 18,459              |    | 16,282 |   |
|                                                                             |   |                |    |   |   |
| Long-term receivables and advances                                               |   | 10,259              |    | 10,031 |   |
|                                                                             |   |                |    |   |   |
| Property and equipment, at cost:                                                 |   |                |    |   |   |
| Land and land improvements                                                       |   | 9,102               |    | 9,102 |   |
| Buildings                                                                        |   | 60,532              |    | 60,521 |   |
| Furniture and equipment                                                          |   | 44,290              |    | 42,428 |   |
| Leasehold improvements                                                           |   | 7,286               |    | 7,201 |   |
| Projects in progress                                                             |   | —              |    | 60 |   |
|                                                                             |   | 121,210             |    | 119,312 |   |
|                                                                             |   |                |    |   |   |
| Less: accumulated depreciation and  amortization                                 |   | 42,599              |    | 38,463 |   |
| Net property and equipment                                                       |   | 78,611              |    | 80,849 |   |
|                                                                             |   |                |    |   |   |
| Other long-term assets                                                           |   | 2,858               |    | 2,957 |   |
|                                                                             |   | $                   | 110,187 |   | $ | 110,119 |   |

 

*See accompanyingnotes to condensed consolidated financial statements.*

 

1

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**SONESTAINTERNATIONAL HOTELS CORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

June 30, 2004 (unaudited) and December 31,2003

 
|                                             |   | **(in  thousands)** |    |
|--------------------------------------------------|--------|---------------------|---------|
|                                             |   | **June 30  2004**   |    | **December  31  2003** |   |
| LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY |   |                |    |   |   |
| Current liabilities:                             |   |                |    |   |   |
| Accounts payable                                 |   | $                   | 3,380   |   | $ | 3,403 |   |
| Advance deposits                                 |   | 2,188               |    | 2,972 |   |
| Federal, foreign and state income taxes          |   | 568                 |    | 576 |   |
| Accrued liabilities:                             |   |                |    |   |   |
| Salaries and wages                               |   | 1,957               |    | 1,629 |   |
| Rentals                                          |   | 4,532               |    | 5,025 |   |
| Interest                                         |   | 293                 |    | 297 |   |
| Employee benefits                                |   | 168                 |    | 180 |   |
| Other                                            |   | 1,232               |    | 1,851 |   |
|                                             |   |                |    |   |   |
| Total accrued liabilities                        |   | 8,182               |    | 8,982 |   |
|                                             |   |                |    |   |   |
| Total current liabilities                        |   | 14,318              |    | 15,933 |   |
|                                             |   |                |    |   |   |
| Long-term debt                                   |   | 70,569              |    | 69,311 |   |
|                                             |   |                |    |   |   |
| Deferred federal and state income taxes          |   | 5,091               |    | 5,091 |   |
|                                             |   |                |    |   |   |
| Other non-current liabilities                    |   | 5,186               |    | 3,918 |   |
|                                             |   |                |    |   |   |
| 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                                |   | 22,194              |    | 23,037 |   |
| Treasury shares-2,404, at cost                   |   | (12,053             | )       | (12,053 | ) |
| Total common stockholders’ equity           |   | 15,023              |    | 15,866 |   |
|                                             |   | $                   | 110,187 |   | $ | 110,119 |   |

 

*See accompanyingnotes to condensed consolidated financial statements.*

 

2

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**SONESTAINTERNATIONAL HOTELS CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS** (unaudited)

(in thousandsexcept for per share data)

 
|                                           |   | **Three  Months Ended  June 30** |   | **Six Months  Ended  June 30** |   |
|------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                           |   | **2004**                         |   | **2003**                       |   | **2004** |   | **2003** |   |
| Revenues:                                      |   |                             |   |                           |   |   |   |   |   |
| Rooms                                          |   | $                                | 14,153 |                           | $      | 12,347 |   | $ | 28,149 |   | $ | 26,383 |   |
| Food and beverage                              |   | 7,092                            |   | 6,479                          |   | 13,518 |   | 13,020 |   |
| Management, license and service fees           |   | 1,038                            |   | 788                            |   | 2,206 |   | 1,665 |   |
| Parking, telephone and other                   |   | 2,248                            |   | 2,141                          |   | 4,580 |   | 4,371 |   |
|                                           |   | 24,531                           |   | 21,755                         |   | 48,453 |   | 45,439 |   |
| Costs and expenses:                            |   |                             |   |                           |   |   |   |   |   |
| Costs and operating expenses                   |   | 10,645                           |   | 10,001                         |   | 20,782 |   | 20,176 |   |
| Advertising and promotion                      |   | 1,871                            |   | 1,831                          |   | 3,681 |   | 3,706 |   |
| Administrative and general                     |   | 4,064                            |   | 3,966                          |   | 7,832 |   | 7,954 |   |
| Human resources                                |   | 371                              |   | 405                            |   | 733 |   | 771 |   |
| Maintenance                                    |   | 1,418                            |   | 1,523                          |   | 2,772 |   | 3,097 |   |
| Rentals                                        |   | 2,442                            |   | 1,579                          |   | 4,891 |   | 3,602 |   |
| Property taxes                                 |   | 611                              |   | 581                            |   | 1,218 |   | 1,158 |   |
| Depreciation and amortization                  |   | 2,124                            |   | 2,137                          |   | 4,236 |   | 4,222 |   |
|                                           |   | 23,546                           |   | 22,023                         |   | 46,145 |   | 44,686 |   |
| Operating income (loss)                        |   | 985                              |   | (268                           | )      | 2,308 |   | 753 |   |
|                                           |   |                             |   |                           |   |   |   |   |   |
| Other income (deductions):                     |   |                             |   |                           |   |   |   |   |   |
| Interest expense                               |   | (1,529                           | )      | (1,544                         | )      | (3,152 | ) | (3,078 | ) |
| Interest income                                |   | 80                               |   | 94                             |   | 164 |   | 205 |   |
| Foreign exchange loss                          |   | —                           |   | (16                            | )      | (2 | ) | (18 | ) |
| Gain (loss) on sales of assets                 |   | 5                                |   | (7                             | )      | 18 |   | 11 |   |
|                                           |   | (1,444                           | )      | (1,473                         | )      | (2,972 | ) | (2,880 | ) |
|                                           |   |                             |   |                           |   |   |   |   |   |
| Loss before income tax provision (benefit)     |   | (459                             | )      | (1,741                         | )      | (664 | ) | (2,127 | ) |
| Income tax provision (benefit)                 |   | 65                               |   | (474                           | )      | 179 |   | (515 | ) |
| Net loss                                       |   | (524                             | )      | (1,267                         | )      | (843 | ) | (1,612 | ) |
|                                           |   |                             |   |                           |   |   |   |   |   |
| Retained earnings at beginning of period       |   | 22,718                           |   | 29,308                         |   | 23,037 |   | 29,653 |   |
| Cash dividends                                 |   | —                           |   | (185                           | )      | — |   | (185 | ) |
| Retained earnings at end of period             |   | $                                | 22,194 |                           | $      | 27,856 |   | $ | 22,194 |   | $ | 27,856 |   |
|                                           |   |                             |   |                           |   |   |   |   |   |
| Net loss per share                             |   | $                                | (0.14  | )                              | $      | (0.35 | ) | $ | (0.23 | ) | $ | (0.44 | ) |
| Weighted average number of shares  outstanding |   | 3,698                            |   | 3,698                          |   | 3,698 |   | 3,698 |   |

 

*See accompanyingnotes to condensed consolidated financial statements.*

 

3

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**SONESTAINTERNATIONAL HOTELS CORPORATION**

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

Increase(Decrease) in Cash

 
|                                                     |   | **(in  thousands)**           |   |
|----------------------------------------------------------|--------|-------------------------------|--------|
|                                                     |   | **Six Months  Ended June 30** |   |
|                                                     |   | **2004**                      |   | **2003** |   |
| Cash provided (used) by operating  activities            |   |                          |   |   |   |
| Net loss                                                 |   | $                             | (843   | ) | $ | (1,612 | ) |
| Items not (providing) requiring cash                     |   |                          |   |   |   |
| Pension expense                                          |   | 1,121                         |   | 877 |   |
| Depreciation and amortization of property  and equipment |   | 4,236                         |   | 4,222 |   |
| Other amortization                                       |   | 45                            |   | 45 |   |
| Deferred federal and state income tax  benefit           |   | —                        |   | (727 | ) |
| Gain on sales of assets                                  |   | (18                           | )      | (11 | ) |
| Deferred interest income                                 |   | (108                          | )      | (100 | ) |
| Deferred interest expense                                |   | 1,258                         |   | — |   |
| Changes in assets and liabilities                        |   |                          |   |   |   |
| Restricted cash                                          |   | (2,581                        | )      | — |   |
| Accounts and notes receivable                            |   | 1,359                         |   | (133 | ) |
| Refundable income taxes                                  |   | (16                           | )      | 10 |   |
| Inventories                                              |   | 71                            |   | 141 |   |
| Prepaid expenses and other                               |   | (326                          | )      | 484 |   |
| Accounts payable                                         |   | 5                             |   | (934 | ) |
| Advance deposits                                         |   | (784                          | )      | (1,008 | ) |
| Federal, foreign and state income taxes                  |   | (8                            | )      | 60 |   |
| Accrued liabilities                                      |   | (653                          | )      | (2,744 | ) |
| Cash provided (used) by operating  activities            |   | 2,758                         |   | (1,430 | ) |
|                                                     |   |                          |   |   |   |
| Cash used by investing activities                        |   |                          |   |   |   |
| Proceeds from sales of assets                            |   | 18                            |   | 50 |   |
| Expenditures for property and equipment                  |   | (1,898                        | )      | (3,019 | ) |
| Other investments                                        |   | (27                           | )      | (1,052 | ) |
| Payments received on long-term receivables  and advances |   | 597                           |   | 167 |   |
| New loans and advances                                   |   | (819                          | )      | (2,258 | ) |
| Cash used by investing activities                        |   | (2,129                        | )      | (6,112 | ) |
|                                                     |   |                          |   |   |   |
| Cash used by financing activities                        |   |                          |   |   |   |
| Payments on long-term debt                               |   | —                        |   | (471 | ) |
| Cash dividends paid                                      |   | —                        |   | (370 | ) |
| Cash used by financing activities                        |   | —                        |   | (841 | ) |
| Net increase (decrease) in cash                          |   | 629                           |   | (8,383 | ) |
| Cash and cash equivalents at beginning of  period        |   | 4,327                         |   | 12,675 |   |
| Cash and cash equivalents at end of period               |   | $                             | 4,956  |   | $ | 4,292 |   |

 

*See accompanyingnotes to condensed consolidated financial statements.*

 

4

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Supplemental Schedule of Interest and IncomeTaxes Paid

Cash paid for interest in the 2004 six-month period and the 2003six-month period was approximately $1,854,000 and $3,069,000,respectively.  Cash paid for incometaxes in the first six months of 2004 was approximately $203,000, and cash paidfor income taxes in the first six months of 2003 was approximately $142,000.

 

*See accompanyingnotes to condensed consolidated financial statements.*

 

5

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**SONESTA INTERNATIONALHOTELS CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**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, 2004 are notnecessarily indicative of the results that may be expected for the year endedDecember 31, 2004.

 

The balance sheet at December 31, 2003 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 financial 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, 2003.

 

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

 
|                                          |   | **(in  thousands)** |   |
|-----------------------------------------------|--------|---------------------|--------|
|                                          |   | **June 30,  2004**  |   | **December  31, 2003** |   |
| Sharm El Sheikh, Egypt (a)                    |   | $                   | 774    |   | $ | 678 |   |
| Sonesta Hotel & Suites Coconut Grove  (b) |   | 5,340               |   | 5,483 |   |
| Trump International Sonesta Beach Resort  (c) |   | 4,191               |   | 3,900 |   |
| Other                                         |   | 376                 |   | 275 |   |
| Total long-term receivables                   |   | 10,681              |   | 10,336 |   |
| Less:   current portion                  |   | 422                 |   | 305 |   |
| Net long-term receivables                     |   | $                   | 10,259 |   | $ | 10,031 |   |

 

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(a)                            This loan, in the originalamount of $1,000,000, was made in 1996 and 1997 to the owner of the SonestaBeach Resort, Sharm El Sheikh.  The loanbears interest at the prime rate (4% at June 30, 2004) and is adjustedsemi-annually. The Company has agreed to loan the hotel’s owner an additional$300,000 in 2004 to help finance the construction of additional hotelfacilities, of which $225,000 was funded at June 30, 2004.  Currently, the loan is being repaid withmonthly payments of $23,800.  Thematurity date is October 2007.

 

(b)                           This loan was made to theowner of the Sonesta Hotel & Suites Coconut Grove, Miami, which opened inApril 2002.  The Company has loaned$4,000,000 to fund construction and furniture, fixtures and equipment(“FF&E”) costs, and, in addition, has loaned $1,000,000 for pre-openingcosts and working capital.  The loan forconstruction and FF&E costs bears interest at the prime rate plus 0.75%(4.75% at June 30, 2004).  No interestis being charged on the loan for pre-opening costs.  These loans are being repaid, the loan for pre-opening costsfirst, out of annual minimum return payments of $500,000 due to the owner ofthe hotel under the management agreement, and out of excess profits that wouldotherwise be available for distribution to the owner.

 

6

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(c)                            This amount represents advances made tothe owner of Trump International Sonesta Beach Resort Sunny Isles forpre-opening costs ($2,397,000), and for working capital and the Company’s shareof the losses of the resort from the opening on April 1, 2003 through June 30,2004 ($1,794,000).  No interest will becharged on these advances, which will be repaid out of future available profitsgenerated by the hotel.

 

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

 

*Credit Lines*

 

The Company has a $2,000,000 line of credit, which expires December 31,2004.  This line bears interest at theprime rate (4% at June 30, 2004).  Theterms of the line require the bank’s approval for additional borrowings by theCompany, restrict dividends, and require that no amounts are outstanding underthe line during the two consecutive months of November and December.  No amounts were outstanding under this lineof credit at June 30, 2004.

 

A subsidiary of the Company has a $3,000,000 line of credit, whichexpires on February 28, 2005.  The lineis secured by a mortgage on the Company’s leasehold interest in the RoyalSonesta Hotel New Orleans, and by a Company guaranty.  The terms of the line require a certain minimum level of income,a minimum net worth and a maximum defined debt to net worth ratio for RoyalSonesta Hotel New Orleans.  The interestrate is LIBOR plus 3% (4.4% at June 30, 2004), and the commitment fee on theunused portion of the line is 0.65% per annum. No amounts were outstanding under this line of credit at June 30, 2004.

 

## *Long-Term Debt*

 
|                                                                |   | **(in  thousands)** |       |
|---------------------------------------------------------------------|--------|---------------------|------------|
|                                                                |   | **June 30,  2004**  |       | **December  31, 2003** |   |
| Charterhouse of Cambridge Trust and Sonesta  of Massachusetts Inc.: |   |                | ** ** |   | ** ** |
| First mortgage note                                                 |   | $                   | 40,185     |   | $ | 39,469 |   |
| Sonesta Beach Resort Limited Partnership:                           |   |                |       |   |   |
| First mortgage note                                                 |   | 30,384              |       | 29,842 |   |
|                                                                |   |                |       |   |   |
| Total long-term debt                                                |   | $                   | 70,569     |   | $ | 69,311 |   |

 

The Company’s long-term debt is secured by first mortgages on the RoyalSonesta Hotel Boston (Cambridge) and Sonesta Beach Resort Key Biscayneproperties, which are included in fixed assets at net book values of$21,064,000 and $40,329,000 at June 30, 2004, respectively.  Both loans are provided by the same lender,and are cross-collateralized.  Theinterest rate on the loans is 8.6% for the term of the loan, and both loansmature in July 2010.  Pre-payment ofthese loans is subject to early payment penalties, based on prevailing interestrates at the time of pre-payment. Combined monthly payments of principal andinterest on both loans were $584,624 until December 2003, based on a 25 yearamortization schedule of the principal balance.

 

7

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Effective December 1, 2003, the Company and the lender restructured themortgage loans for a four year period, as follows:  starting at January1, 2004, and through December 1, 2006, the Company is required to make paymentsof interest only at 5% per annum, and starting on January 1, 2007 and throughDecember 1, 2007, the Company will be required to make payments of interestonly at 8.6% per annum.  Starting onJanuary 1, 2008, payments will resume at the original amounts.  During the restructuring period, interestwill continue to accrue at 8.6%, and unpaid interest will be added to theprincipal balance of the loans at the end of each year.  During each year of the restructuring,combined excess cash flow from the two hotels remaining after payment ofinterest is required to be paid into escrow, and may be used solely for thefuture payment of hotel expenses or capital expenditures, or to reduce theamount of the accrued and unpaid interest. At June 30, 2004, the excess cash flow equaled $2,581,000, which amount isincluded in Restricted Cash on the Company’s balance sheet.  The long-term debt balance of $70,569,000includes accrued interest in the amount of $1,472,000.

 

**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** |   |
|                      |   | **2004**                        |   | **2003** |   | **2004** |   | **2003** |   |
| Direct departmental costs |   |                            |   |   |   |   |   |   |   |
| Rooms                     |   | $                               | 3,336  |   | $ | 3,214 |   | $ | 6,580 |   | $ | 6,546 |   |
| Food and beverage         |   | 5,305                           |   | 4,945 |   | 10,277 |   | 9,904 |   |
| Heat, light and power     |   | 860                             |   | 732 |   | 1,637 |   | 1,465 |   |
| Other                     |   | 1,144                           |   | 1,110 |   | 2,288 |   | 2,261 |   |
|                      |   | $                               | 10,645 |   | $ | 10,001 |   | $ | 20,782 |   | $ | 20,176 |   |

 

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

 

**5.             New Accounting Announcement**

 

In the first quarter of 2004, the Company adopted Financial AccountingStandards Board (“FASB”) interpretation No. 46 (R), “Consolidation of VariableInterest Entities” (“Interpretation 46”) which clarified the conditions underwhich assets, liabilities and activities of another entity should beconsolidated into the financial statements of a company.  Interpretation 46 requires the consolidationof a variable interest entity by a company that bears the majority of the riskof loss from the variable interest entity’s activities, is entitled to receivea majority of the variable interest entity’s residual returns, or both.  Management believes the managementagreements with Trump International Sonesta Beach Resort Sunny Isles andSonesta Hotel and Suites Coconut Grove are variable interests.  The Company does not believe it bears themajority of the risk of loss from the variable interest entities’ activitiesnor is it entitled to receive the majority of the variable interest entities’residual returns.  Accordingly, theadoption of Interpretation 46 did not have a material impact on the Company’soverall financial position and results of operations.

 

8

----

 

**6.             Federal, Foreign and StateIncome Tax**

 

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

 
|                                 |   | **(in  thousands)**           |   |
|--------------------------------------|--------|-------------------------------|--------|
|                                 |   | **Six Months  Ended June 30** |   |
|                                 |   | **2004**                      |   | **2003** |   |
|                                 |   |                          |   |   |   |
| Current federal income tax benefit   |   | $                             | — |   | $ | (16 | ) |
| Current foreign income tax provision |   | 104                           |   | 73 |   |
| Current state income tax provision   |   | 75                            |   | 155 |   |
| Deferred federal income tax benefit  |   | —                        |   | (727 | ) |
|                                 |   | $                             | 179    |   | $ | (515 | ) |

 

**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, 2004 and 2003 follows:

 

Three month period ended June 30, 2004

 
|                                                                  |   | **(in  thousands)**             |   |
|-----------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                  |   | **Owned  &  Leased Hotels** |   | **Management  Activities** |   | **Consolidated** |   |
|                                                                  |   |                            |   |   |   |   |   |
| Revenues                                                              |   | $                               | 23,487 |   | $ | 1,044 |   | $ | 24,531 |   |
| Operating income (loss) before depreciation  and amortization expense |   | 3,836                           |   | (727 | ) | 3,109 |   |
| Depreciation and amortization                                         |   | (1,959                          | )      | (165 | ) | (2,124 | ) |
| Interest income (expense), net                                        |   | (1,522                          | )      | 73 |   | (1,449 | ) |
| Other income                                                          |   | —                          |   | 5 |   | 5 |   |
| Segment pre-tax income (loss)                                         |   | 355                             |   | (814 | ) | (459 | ) |
|                                                                  |   |                            |   |   |   |   |   |
| Segment assets                                                        |   | 86,622                          |   | 23,565 |   | 110,187 |   |
| Segment capital additions                                             |   | 1,044                           |   | 46 |   | 1,090 |   |
|                                                                       |        |                                 |        |  |  |  |  |  |  |  |

 

Six month period ended June 30, 2004

 
|                                                                  |   | **(in  thousands)**             |   |
|-----------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                  |   | **Owned  &  Leased Hotels** |   | **Management  Activities** |   | **Consolidated** |   |
|                                                                  |   |                            |   |   |   |   |   |
| Revenues                                                              |   | $                               | 46,230 |   | $ | 2,223 |   | $ | 48,453 |   |
| Operating income (loss) before depreciation  and amortization expense |   | 7,524                           |   | (980 | ) | 6,544 |   |
| Depreciation and amortization                                         |   | (3,906                          | )      | (330 | ) | (4,236 | ) |
| Interest income (expense), net                                        |   | (3,133                          | )      | 145 |   | (2,988 | ) |
| Other income                                                          |   | 7                               |   | 9 |   | 16 |   |
| Segment pre-tax income (loss)                                         |   | 492                             |   | (1,156 | ) | (664 | ) |
|                                                                  |   |                            |   |   |   |   |   |
| Segment assets                                                        |   | 86,622                          |   | 23,565 |   | 110,187 |   |
| Segment capital additions                                             |   | 1,691                           |   | 207 |   | 1,898 |   |
|                                                                       |        |                                 |        |  |  |  |  |  |  |  |

 

9

----

** **

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 |   |
|                                                                       |        |                                 |        |  |  |  |  |  |  |  |

 

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 |   |
|                                                                       |        |                                 |        |  |  |  |  |  |  |  |

 

**8.             Earnings per Share**

** **

As the Company has no dilutive securities, there is no differencebetween basic and diluted earnings per share. The following table sets forth the computation of basic losses per share(in thousands):

 
|                                          |   | **Three months  ended June 30** |   | **Six months  ended June 30** |   |
|-----------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                          |   | **2004**                        |   | **2003**                      |   | **2004** |   | **2003** |   |
|                                          |   |                            |   |                          |   |   |   |   |   |
| Numerator:                                    |   |                            |   |                          |   |   |   |   |   |
| Loss from operations                          |   | $                               | (524   | )                             | $      | (1,267 | ) | $ | (843 | ) | $ | (1,612 | ) |
|                                          |   |                            |   |                          |   |   |   |   |   |
| Denominator:                                  |   |                            |   |                          |   |   |   |   |   |
| Weighted average number of shares outstanding |   | 3,698                           |   | 3,698                         |   | 3,698 |   | 3,698 |   |
|                                          |   |                            |   |                          |   |   |   |   |   |
| Net loss per share of common stock            |   | $                               | (0.14  | )                             | $      | (0.35 | ) | $ | (0.23 | ) | $ | (0.44 | ) |

 

10

----

 

**9.             Pension Plan**

 

The components of the Company’s net periodic pension cost for theCompany’s Pension Plan were as follows (in thousands):

 
|                                                                             |   | **Six months  ended June 30** |   |
|----------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                             |   | **2004**                      |   | **2003** |   |
|                                                                             |   |                          |   |   |   |
| Service cost                                                                     |   | $                             | 809    |   | $ | 714 |   |
| Interest cost                                                                    |   | 933                           |   | 987 |   |
| Expected return on assets                                                        |   | (796                          | )      | (919 | ) |
| Amortization of prior service cost                                               |   | 45                            |   | 52 |   |
| Amortization of transition asset                                                 |   | (44                           | )      | (52 | ) |
| Recognize actuarial loss                                                         |   | 240                           |   | 130 |   |
| Total plan benefit cost                                                          |   | 1,187                         |   | 912 |   |
| Less:   amounts charged to hotels operated under management agreements      |   | (66                           | )      | (35 | ) |
| Net periodic benefit cost included in the  consolidated statements of operations |   | $                             | 1,121  |   | $ | 877 |   |

 

The Company will not make a contribution to the Pension Plan during2004.

 

The Company does not have any other post-retirement benefit plans.

 

**10.          Legal Proceedings**

 

A subsidiary of the Company, Sonesta Louisiana Hotels Corporation(“SLHC”), which operates Chateau Sonesta Hotel, in New Orleans (the “Hotel”),has been involved in an arbitration pursuant to the terms of the Amended andRestated Management Agreement between the owner of the hotel and SLHC (the“Management Agreement”).  The owneralleged that SLHC has failed to perform certain obligations under theManagement Agreement, specifically its obligations to (A) “use all reasonableefforts to operate the Hotel...in a manner that achieves a high level of guestsatisfaction and profitability”, and (B) exercise all reasonable efforts toassure that Sonesta Hotels’ corporate services “are billed to the Hotel and tothe Royal Sonesta Hotel, New Orleans on a fair and equitable basis”. The positionestablished by Owner’s arbiter claimed damages of $2,952,000, whereas SLHC’sarbiter had established that no more than $268,000 in damages should beawarded.  A decision was rendered by athird arbiter selected by the parties in favor of SLHC on May 11, 2004.  At June 30, 2004, the Company had providedfor the damages paid of $268,000 in its statement of financial position, aswell as for the legal and consulting fees related to this arbitration.

 

11

----

 

**Part I – Item 2**

 

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS**

**OFRESULTS OF OPERATIONS AND FINANCIAL CONDITION**

 

During the first six months of 2004, the Company recorded a net loss of$843,000, or ($0.23) per share, compared to a net loss of $1,612,000, or $(0.44)per share, during the first six months of 2003.  Increases in income from Sonesta Beach Resort Key Biscayne, andfrom management activities, exceeded decreased income from Royal Sonesta HotelNew Orleans.  The decrease in income atRoyal Sonesta New Orleans was entirely due to higher rent expense due under thelease under which the Company operates the Hotel.  Royal Sonesta Hotel Boston (Cambridge), which had a disappointing2004 first quarter, did much better during the second quarter of 2004,resulting in a slight decrease in operating loss during the first six months of2004 compared to the same period last year. A detailed analysis of the revenues and income by location follows.

 

**FIRST SIX MONTHS 2004COMPARED TO 2003**

 

**REVENUES**

 
|                                            |   | **TOTAL  REVENUES** |   |
|-------------------------------------------------|--------|---------------------|--------|
|                                            |   | **(in  thousands)** |   |
|                                            |   | **NO. OF  ROOMS**   |   | **2004** |   | **2003** |   |
| Sonesta Beach Resort Key Biscayne               |   | 300                 |   | $ | 16,811 |   | $ | 15,454 |   |
| Royal Sonesta Hotel Boston (Cambridge)          |   | 400                 |   | 10,219 |   | 10,094 |   |
| Royal Sonesta Hotel New Orleans                 |   | 500                 |   | 19,200 |   | 18,207 |   |
| Management and service fees and other  revenues |   |                |   | 2,223 |   | 1,684 |   |
| Total revenues                                  |   |                |   | $ | 48,453 |   | $ | 45,439 |   |

 

Total revenues for the first six months of 2004 were $48,453,000compared to $45,439,000 in 2003, an increase of approximately $3,014,000.

 

Sonesta Beach Resort Key Biscayne reported a 9% increase in revenuesduring the first six months compared to 2003. Of the total revenue increase of $1,357,000, an amount of $633,000 wasdue to increased room revenues.  Thisresulted from an 8% increase in room revenue per available room (“REVPAR”),because of an increase in occupancy levels during the first six months of2004.  Increased demand from both groupand conventions as well as transient market segments contributed to theincrease in revenues. The increase in occupancy resulted in a $724,000 increasein revenues from food and beverage and other sources.  Royal Sonesta Hotel Boston (Cambridge) had a very slight increasein revenues of $125,000 during the first half of 2004 compared to last year,due to a 2% REVPAR increase.  RoyalSonesta Hotel New Orleans recorded revenues of $19,200,000 during the first sixmonths of 2004, a $993,000 increase, or 6%, compared to the first six months of2003.  This increase in revenues, whichwas almost entirely achieved during the second quarter, was due to an 8% REVPARincrease, which increased room revenues by $998,000 during the first six monthsof 2004 compared to 2003.  The REVPARincrease was due to higher average rates achieved, primarily due to increaseddemand from the group and convention market segment.  Revenues from management activities increased from $1,684,000during the first six months of 2003 to $2,223,000 in the first six months of2004, an increase of $539,000.  This wasprimarily a result from increases in management income of $470,000 from theCompany’s operations in Egypt, due to substantial increases in business volumesduring the first two quarters of 2004 compared to last year.  The remaining increase was due to increasedfee income from Chateau Sonesta Hotel New Orleans, because of higher profitlevels achieved by the hotel, which was partially offset by decreased incomefrom Sonesta Beach Hotel Bermuda, which management agreement terminated on June1, 2004.

 

12

----

 

**OPERATINGINCOME**

 
|                                                            |   | **OPERATING  INCOME (LOSS)** |   |
|-----------------------------------------------------------------|--------|------------------------------|--------|
|                                                            |   | **(in  thousands)**          |   |
|                                                            |   | **2004**                     |   | **2003** |   |
| Sonesta Beach Resort Key Biscayne                               |   | $                            | 2,759  |   | $ | 1,495 |   |
| Royal Sonesta Hotel Boston (Cambridge)                          |   | (236                         | )      | (429 | ) |
| Royal Sonesta Hotel New Orleans                                 |   | 1,095                        |   | 1,798 |   |
| Operating income from hotels after  management and service fees |   | 3,618                        |   | 2,864 |   |
| Management activities and other                                 |   | (1,310                       | )      | (2,111 | ) |
| Operating income                                                |   | $                            | 2,308  |   | $ | 753 |   |

 

Operating income for the six-month period ended June 30, 2004 was$2,308,000, compared to operating income of $745,000 in 2003, an increase ofapproximately $1,555,000.

 

Sonesta Beach Resort Key Biscayne reported operating income during thefirst six months of 2004 of $2,759,000 compared to $1,495,000 in the sameperiod last year, an increase of $1,264,000. Revenues increased by $1,357,000, and total expenses increased by aslight $93,000, primarily due to a small increase in cost and operatingexpenses.  Overall expenses increased byless than 1%.  Operating loss during thefirst six months of 2004 at Royal Sonesta Hotel Boston (Cambridge) decreased by$193,000 to $236,000.  Total revenuesincreased by $125,000 and overall expenses decreased by $68,000.  Slight increases in cost and operatingexpense were offset by decreased maintenance and real estate tax expense.  Operating income at Royal Sonesta Hotel NewOrleans decreased from $1,798,000 during the first half of 2003 to $1,095,000during the 2004 first half, despite an increase in revenues in 2004 of$993,000.  Total expenses in 2004increased by $1,696,000, which was almost entirely due to a $1,325,000 increasein rent expense.  Of this rent increase,approximately $553,000 is due to increased operating profits.  The remaining $772,000 increase is due tothe fact that the hotel’s 2004 capital expenditures will be sharply lowercompared to capital expenditures in 2003, as the hotel has completed themajority of its renovation programs. Since capital expenditures are deducted from profits for purposes ofcalculating rent due under the lease for the hotel, rent expense actuallyincreases when the hotels capital expenditures decrease.  Operating loss from management activities,which is computed after giving effect to management and marketing fees fromowned and leased hotels, decreased by $801,000, from $2,111,000 in the firstsix months of 2003 to $1,310,000 in the first six months of 2004.  Revenues from management activitiesincreased by $539,000, and expenses related to these activities decreased by$262,000, primarily due to decreased corporate sales and marketing, purchasingand human resources expenses.

 

**OTHER INCOME(DEDUCTIONS)**

 

Interest expense increased by $74,000 in the first six months of 2004compared to 2003 due to expenses incurred related to the restructuring of theCompany’s mortgage debt on Royal Sonesta Hotel Boston (Cambridge) and SonestaBeach Resort Key Biscayne (See also Note 3—Borrowing Arrangements).

 

Interest income decreased by $41,000 to $164,000 in the first sixmonths of 2004 compared to last year because of lower short-term investmentincome earned on the Company’s cash balances.

 

**SECOND QUARTER 2004COMPARED TO 2003**

 

The second quarter of 2004 saw a substantial rebound in businesscompared to the 2003 second quarter. During the 2003 second quarter, travel, including business travel wassluggish, in part due to the war in Iraq. A detailed review of revenues and expenses follows.

 

13

----

 

**REVENUES**

 
|                                            |   | **TOTAL  REVENUES** |   |
|-------------------------------------------------|--------|---------------------|--------|
|                                            |   | **(in  thousands)** |   |
|                                            |   | **NO. OF  ROOMS**   |   | **2004** |   | **2003** |   |
| Sonesta Beach Resort Key Biscayne               |   | 300                 |   | $ | 7,135 |   | $ | 6,343 |   |
| Royal Sonesta Hotel Boston (Cambridge)          |   | 400                 |   | 6,794 |   | 5,962 |   |
| Royal Sonesta Hotel New Orleans                 |   | 500                 |   | 9,558 |   | 8,654 |   |
| Management and service fees and other  revenues |   |                |   | 1,044 |   | 796 |   |
| Total revenues                                  |   |                |   | $ | 24,531 |   | $ | 21,755 |   |

 

Total revenues for the three month period ended June 30, 2004 were$24,531,000 compared to $21,755,000 in 2003, an increase of approximately$2,776,000.

 

Sonesta Beach Resort Key Biscayne reported a robust increase inrevenues during the second quarter of 2004 compared to 2003.  Of the total revenue increase of 12%, anamount of $275,000 was due to increased room revenues.  This resulted from a 9% increase in roomrevenue per available room (“REVPAR”), because of an increase in occupancylevels during the 2004 second quarter. Increased demand from the transient market segment contributed for themost part to the increase in occupancy. The higher occupancy during the 2004 quarter resulted in an increase infood and beverage revenues and revenues from other sources of $517,000, or 16%,compared to the 2003 quarter.  RoyalSonesta Hotel Boston (Cambridge) rebounded strongly during the second quarterof 2004.  Business at the hotel had beendepressed due to reduced business travel and increased, nearby, competitionduring 2003 and the first quarter of 2004. Due to much better group and convention business the hotel increasedrevenues in the 2004 second quarter by $832,000 to $6,794,000, a 14% increaseover the 2003 quarter.  REVPAR increasedby 19% due to higher occupancy and increased average room rates.  Revenues from other sources, including foodand beverage, increased by 7% during the 2003 second quarter compared toprevious year’s quarter.  Royal SonestaHotel New Orleans also had a solid 2004 second quarter, increasing revenues by10% from $8,654,000 in 2003 to $9,558,000. The increase in revenues was entirely due to a 16% increase in thehotel’s REVPAR, due to slightly higher occupancies and a substantial increasein average room rates achieved.  A shiftin occupancy from transient to much higher rated group business enabled thehotel to do much better.  Revenues frommanagement activities increased from $796,000 during the 2003 second quarter to$1,044,000 in the 2004 second quarter, an increase of $248,000.  This was primarily a result from increasesin management income from the Company’s operations in Egypt, due to substantialincreases in business volumes during the 2004 second quarter compared to the2003 second quarter, which saw a temporary slow down in business because of thewar in Iraq.

 

**OPERATING INCOME**

 
|                                                            |   | **OPERATING  INCOME (LOSS)** |   |
|-----------------------------------------------------------------|--------|------------------------------|--------|
|                                                            |   | **(in  thousands)**          |   |
|                                                            |   | **2004**                     |   | **2003** |   |
| Sonesta Beach Resort Key Biscayne                               |   | $                            | 278    |   | $ | (345 | ) |
| Royal Sonesta Hotel Boston (Cambridge)                          |   | 1,031                        |   | 429 |   |
| Royal Sonesta Hotel New Orleans                                 |   | 567                          |   | 829 |   |
| Operating income from hotels after  management and service fees |   | 1,876                        |   | 913 |   |
| Management activities and other                                 |   | (891                         | )      | (1,181 | ) |
| Operating income (loss)                                         |   | $                            | 985    |   | $ | (268 | ) |

 

14

----

 

Operating income for the three-month period ended June 30, 2004 was$985,000, compared to an operating loss of $268,000 in the three-month periodended June 30, 2003, an increase of approximately $1,253,000.

 

Sonesta Beach Resort Key Biscayne reported operating income during the2004 second quarter of $278,000 compared to an operating loss of $345,000 inthe same period last year, an increase of $623,000.  Revenues during the second quarter increased by $792,000, and wereonly partially offset by a slight increase in expenses of $169,000, or 3%. Thehotel managed to keep administrative and general and other overhead expenses atthe 2003 level, despite an increase in occupancy.  The 2004 second quarter operating income at Royal Sonesta HotelBoston (Cambridge) increased by $602,000 to $1,031,000.  Revenues increased by $832,000, and overallexpenses increased by a modest 4%, or $230,000.  This was mainly due to higher cost and operating expenses becauseof the higher occupancy achieved during the 2004 second quarter.  Operating income at Royal Sonesta NewOrleans decreased from $829,000 during the second quarter of 2003 to $567,000during the 2004 second quarter, despite increased revenues in 2004 of $904,000.  Total expenses in the 2004 second quarterincreased by $1,166,000, which was almost entirely due to an $885,000 increasein rent expense.  Rent expensed is basedon a percentage of operating profits, after deducting capital expenditures.  Of the $885,000 rent increase, approximately$500,000 was due to increased operating profits during the 2004 secondquarter.  The remaining $385,000increase is due to the fact that the hotel’s 2004 capital expenditures will besharply lower compared to expenditures in 2003, as the hotel has completed themajority of its renovation programs. Operating loss from management activities, which is computed aftergiving effect to management and marketing fees from owned and leased hotels,decreased by $290,000, from $1,181,000 in the 2003 second quarter to $891,000in the 2004 second quarter.  Revenuesfrom management activities increased by $248,000, and corporate expensesrelated to these activities decreased slightly by $42,000.

 

**FEDERAL, FOREIGN ANDSTATE INCOME TAXES**

 

The Company recorded a tax expense of $179,000 during the first sixmonths of 2004 despite the $664,000 pre-tax loss because of foreign taxesprovided on the Company’s management income, primarily from Egypt, and becauseof state taxes provided on the Company’s income from Royal Sonesta Hotel NewOrleans.  A valuation allowance wasrecorded against the 2004 federal income tax benefit because it is uncertainwhen the Company will realize future benefit for the losses incurred duing thefirst six months of 2004.

 

**LIQUIDITY AND CAPITALRESOURCES**

 

The Company had cash and cash equivalents of approximately $4,956,000at June 30, 2004.  In addition, theCompany has $5,000,000 available under two credit lines.  Company management believes these cashresources, and the available credit lines, will be adequate to meet its cashrequirements for 2004 and for the foreseeable future.

 

15

----

 

**PART I – Item 3**

** **

 

**QUANTITATIVE ANDQUALITATIVE DISCLOSURE OF MARKET RISK**

 

The Company is exposed to market risk from changes in interestrates.  The Company uses fixed rate debtto finance the ownership of its properties. The table that follows summarizes the Company’s fixed rate debtobligations outstanding at June 30, 2004. This information should be read in conjunction with Note 3—Borrowing Arrangements.

 

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

 
|                  |   | **YEAR** |   |     |   |     |   |     |   |
|-----------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                  |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **2008** |   | **Thereafter** |   | **Total** |   | **Fair Value** |   |
| Fixed rate            |   | $        | — |     | $      | —   |   | $        | — |   | $ | — |   | $ | 1,442 |   | $ | 69,127 |   | $ | 70,569 |   | $ | 71,759 |   |
| Average interest rate |   | 8.6      | %      | 8.6      | %      | 8.6      | %      | 8.6      | %      | 8.6 | % | 8.6 | % |   |   |   |   |
|                       |        |          |        |          |        |          |        |          |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

16

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**PART I – Item 4**

 

 

**INTERNAL CONTROLS ANDPROCEDURES**

 

As of June 30, 2004, the Company’s managementcarried out an evaluation, under the supervision and with the participation ofthe Company’s Chief Executive Officer and President,  Chief Executive Officer and Vice Chairman, and Vice President andTreasurer, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of theSecurities Exchange Act of 1934.  Basedon that evaluation, the Company’s Chief Executive Officer and President, ChiefExecutive Officer and Vice Chairman, and Vice President and Treasurer concludedthat the Company’s disclosure controls and procedures are effective, as of June30, 2004.

 

There have been no significant changes in theCompany’s internal controls regarding financial reporting during the quarterended June 30, 2004 that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control regarding financialreporting, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

17

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**PART II – Item 4**

 

 

**SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS**

##  

## The Annual Meetingof Shareholders of Sonesta International Hotels Corporation was held on May 10,2004.  All nominees for directors wereelected.  The results of the votes withregard to the appointment of the Company’s independent auditors as well as theelection of common stock directors are as follows:

 
|                                                                                    |   | **VOTES CAST** |   |        |   |
|-----------------------------------------------------------------------------------------|--------|----------------|--------|-------------|--------|
| **MANAGEMENT PROPOSAL**                                                                 |   | **FOR**        |   | **AGAINST** |   | **ABSTAIN** |   |
|                                                                                    |   |           |   |        |   |   |   |
| Approval of the appointment of Ernst &  Young LLP  as independent auditors for 2004 |   | 3,280,069      |   | 3,504       |   | 2,356 |   |

 

**ELECTION OF COMMONSTOCK DIRECTORS**

##  

| **DIRECTOR**         |   | **VOTES  RECEIVED** |   | **VOTES  WITHHELD** |   |
|----------------------|--------|---------------------|--------|---------------------|--------|
|                 |   |                |   |                |   |
| George S.  Abrams    |   | 3,268,491           |   | 17,438              |   |
| Vernon R.  Alden     |   | 3,268,579           |   | 17,350              |   |
| Joseph L.  Bower     |   | 3,267,411           |   | 18,518              |   |
| Charles J.  Clark    |   | 3,265,279           |   | 20,650              |   |
| Paul  Sonnabend      |   | 3,266,607           |   | 19,322              |   |
| Peter J.  Sonnabend  |   | 3,267,563           |   | 18,366              |   |
| Roger P.  Sonnabend  |   | 3,266,607           |   | 19,322              |   |
| Stephanie  Sonnabend |   | 3,268,463           |   | 17,466              |   |
| Jean C.  Tempel      |   | 3,267,547           |   | 18,382              |   |

 

 

**PART II – OtherInformation**

 

**Item Numbers 1, 2, 3, 5 and 6**

 

Not applicable during thequarter ended June 30, 2004

 

18

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**SIGNATURE**

 

 

## Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this Report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   | **SONESTA  INTERNATIONAL HOTELS CORPORATION** |                                                                             |
|--------|-----------------------------------------------|----------------------------------------------------------------------------------|
|   |                                          |                                                                             |   |
|   |                                          |                                                                             |   |
|   | By:                                           | /S/                                                                              | Boy van Riel |   |
|   |                                          | Boy van Riel                                                                     |   |
|   |                                          | Vice President  and Treasurer                                                    |   |
|   |                                          |                                                                             |   |
|   |                                          | (Authorized to sign on behalf of the Registrant as  Principal Financial Officer) |   |
|   |                                          |                                                                             |   |
|   | Date:  August 5, 2004                    |                                                                             |
|        |                                               |                                                                                  |  |  |  |  |

 

19

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