**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

**(Mark One)**

** **

| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15  (d) OF THE**  |
|------------|----------------------------------------------------------------|
| ** ** | **SECURITIES EXCHANGE ACT OF 1934**                            |
| ** ** | **For the  Quarterly period ended September 30, 2004**         |
| ** ** | ** **                                                     |
| ** ** | **OR**                                                         |
| ** ** | ** **                                                     |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15  (d) OF THE** |
| ** ** | **SECURITIES EXCHANGE ACT OF 1934**                            |

**For thetransition period from                                                    to                                                    **

 

**Commission file number 0-9032**

 

**SONESTA INTERNATIONAL HOTELSCORPORATION**

(Exact name of registrant as specified in its charter)

 

| **NEW  YORK**                      | ** ** | **13-5648107**      |
|------------------------------------|------------|---------------------|
| (State or other  jurisdiction      |       | (I.R.S. Employer    |
| or incorporation or  organization) |       | Identification No.) |

 

| **116  Huntington Avenue, Boston, MA 02116** |
|----------------------------------------------|
| (Address of principal  executive offices)    |
| (Zip Code)                                   |
| ** **                                   |

** **

**617-421-5400**

(Registrant’s telephonenumber, including area code)

 

 

(Former name, formeraddress and former fiscal year,

if changed since lastreport)

 

 

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

 

 

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

 

APPLICABLE ONLY TOCORPORATE ISSUERS:

 

Number of Shares of CommonStock Outstanding

As of November 5, 2004 – $.80par value,

Class A – 3,698,230

 

----

 

**INDEX**

 

**SONESTA INTERNATIONAL HOTELSCORPORATION**

 
| Part  I. Financial Information | ** **                                                                                                            |
|--------------------------------|-----------------------------------------------------------------------------------------------------------------------|
|                           |                                                                                                                  |   |
| Item 1.                        | Financial  Statements (Unaudited)                                                                                     |   |
|                           |                                                                                                                  |   |
|                           | Condensed  consolidated balance sheets— September 30, 2004 and December 31, 2003                                 |   |
|                           |                                                                                                                  |   |
|                           | Condensed  consolidated statements of operations—Three and nine month periods ended  September 30, 2004 and 2003 |   |
|                           |                                                                                                                  |   |
|                           | Condensed  consolidated statements of cash flows—Nine month periods ended September 30,  2004 and 2003           |   |
|                           |                                                                                                                  |   |
|                           | Notes  to condensed consolidated financial statements—September 30, 2004 and 2003                                |   |
|                           |                                                                                                                  |   |
| Item 2.                        | Management’s  Discussion and Analysis of Results of Operations and Financial  Condition—September 30, 2004  |   |
|                           |                                                                                                                  |   |
| Item 3.                        | Quantitative  and Qualitative Disclosure of Market Risk                                                               |   |
|                           |                                                                                                                  |   |
| Item 4.                        | Internal  Controls and Procedures                                                                                     |   |
|                           |                                                                                                                  |   |
| Part II. Other Information     |                                                                                                                  |
|                           |                                                                                                                  |   |
|                           | Signature  page                                                                                                       |   |
|                           |                                                                                                                  |   |
| Exhibits 31.1, 31.2, 31.3      | Certifications by the Company’s Chief Executive  Officers and Vice President and Treasurer                       |   |
|                           |                                                                                                                  |   |
| Exhibit 32                     | 18 U.S.C. Section 1350 Certification by Company  Officers                                                             |   |

 

2

----

 

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

 

**SONESTA INTERNATIONAL HOTELSCORPORATION**

**CONDENSED CONSOLIDATED BALANCESHEETS**

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

 
| ** **                                                                       | ** ** | **(in thousands)** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                       | ** ** | **September 30**   | ** ** | **December 31** | ** ** |
| ** **                                                                       | ** ** | **2004**           | ** ** | **2003** | ** ** |
| ASSETS                                                                           |       |               |       |   |   |
| Current assets:                                                                  |       |               |       |   |   |
| Cash and cash  equivalents                                                       |       | $                  | 5,321      |   | $ | 4,327 |   |
| Restricted cash                                                                  |       | 2,037              |       | — |   |
| Accounts and  notes receivable:                                                  |       |               |       |   |   |
| Trade, less  allowance of $249 ($221 at December 31, 2003) for doubtful accounts |       | 6,187              |       | 7,844 |   |
| Other, including  current portion of long-term receivables and advances          |       | 610                |       | 494 |   |
| Total accounts  and notes receivable                                             |       | 6,797              |       | 8,338 |   |
| Inventories                                                                      |       | 1,073              |       | 1,108 |   |
| Prepaid expenses  and other                                                      |       | 2,253              |       | 2,509 |   |
|                                                                             |       |               |       |   |   |
| Total current  assets                                                            |       | 17,481             |       | 16,282 |   |
|                                                                             |       |               |       |   |   |
| Long-term  receivables and advances                                              |       | 9,643              |       | 10,031 |   |
|                                                                             |       |               |       |   |   |
| Property and  equipment, at cost:                                                |       |               |       |   |   |
| Land and land  improvements                                                      |       | 9,102              |       | 9,102 |   |
| Buildings                                                                        |       | 60,542             |       | 60,521 |   |
| Furniture and  equipment                                                         |       | 45,334             |       | 42,428 |   |
| Leasehold  improvements                                                          |       | 7,533              |       | 7,201 |   |
| Projects in  progress                                                            |       | —             |       | 60 |   |
|                                                                             |       | 122,511            |       | 119,312 |   |
|                                                                             |       |               |       |   |   |
| Less:  accumulated depreciation and amortization                                 |       | 44,639             |       | 38,463 |   |
| Net property and  equipment                                                      |       | 77,872             |       | 80,849 |   |
|                                                                             |       |               |       |   |   |
| Other long-term  assets                                                          |       | 2,727              |       | 2,957 |   |
|                                                                             |       | $                  | 107,723    |   | $ | 110,119 |   |

 

 

*See accompanying notes to condensed consolidatedfinancial statements.*

 

3

----

 

**SONESTA INTERNATIONAL HOTELSCORPORATION**

**CONDENSED CONSOLIDATED BALANCESHEETS**

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

 
| ** **                                                                                          | ** ** | **(in thousands)** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                          | ** ** | **September 30**   | ** ** | **December 31** | ** ** |
| ** **                                                                                          | ** ** | **2004**           | ** ** | **2003** | ** ** |
| LIABILITIES AND  COMMON STOCKHOLDERS’ EQUITY                                                   |       |               |       |   |   |
| Current  liabilities:                                                                               |       |               |       |   |   |
| Accounts payable                                                                                    |       | $                  | 2,859      |   | $ | 3,403 |   |
| Advance deposits                                                                                    |       | 2,744              |       | 2,972 |   |
| Federal, foreign  and state income taxes                                                            |       | 610                |       | 576 |   |
| Accrued  liabilities:                                                                               |       |               |       |   |   |
| Salaries and  wages                                                                                 |       | 1,576              |       | 1,629 |   |
| Rentals                                                                                             |       | 4,460              |       | 5,025 |   |
| Interest                                                                                            |       | 1,643              |       | 297 |   |
| Employee  benefits                                                                                  |       | 321                |       | 180 |   |
| Other                                                                                               |       | 1,338              |       | 1,851 |   |
| Total accrued  liabilities                                                                          |       | 9,338              |       | 8,982 |   |
|                                                                                                |       |               |       |   |   |
| Total current  liabilities                                                                          |       | 15,551             |       | 15,933 |   |
|                                                                                                |       |               |       |   |   |
| Long-term debt                                                                                      |       | 69,854             |       | 69,311 |   |
|                                                                                                |       |               |       |   |   |
| Deferred federal  and state income taxes                                                            |       | 5,091              |       | 5,091 |   |
|                                                                                                |       |               |       |   |   |
| Other  non-current liabilities                                                                      |       | 5,575              |       | 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                                                                                  |       | 18,823             |       | 23,037 |   |
| Treasury  shares—2,404, at cost                                                                |       | (12,053            | )          | (12,053 | ) |
| Total common  stockholders’ equity                                                             |       | 11,652             |       | 15,866 |   |
|                                                                                                |       | $                  | 107,723    |   | $ | 110,119 |   |

 

 

*See accompanying notes to condensed consolidated financialstatements.*

 

4

----

 

**SONESTA INTERNATIONAL HOTELSCORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OFOPERATIONS  (unaudited)**

(in thousands except for per share data)

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **September 30**       | ** ** | **September 30**      | ** ** |
| ** **                                     | ** ** | **2004**               | ** ** | **2003**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                      |       |                   |       |                  |       |   |   |   |   |
| Rooms                                          |       | $                      | 10,172     |                  | $          | 9,640 |   | $ | 38,321 |   | $ | 36,023 |   |
| Food and  beverage                             |       | 5,327                  |       | 5,249                 |       | 18,845 |   | 18,269 |   |
| Management,  license and service fees          |       | 830                    |       | 807                   |       | 3,036 |   | 2,472 |   |
| Parking,  telephone and other                  |       | 1,909                  |       | 1,959                 |       | 6,489 |   | 6,330 |   |
|                                           |       | 18,238                 |       | 17,655                |       | 66,691 |   | 63,094 |   |
| Costs and  expenses:                           |       |                   |       |                  |       |   |   |   |   |
| Costs and  operating expenses                  |       | 9,740                  |       | 9,296                 |       | 30,522 |   | 29,472 |   |
| Advertising and  promotion                     |       | 1,895                  |       | 1,633                 |       | 5,576 |   | 5,339 |   |
| Administrative  and general                    |       | 3,594                  |       | 3,443                 |       | 11,426 |   | 11,397 |   |
| Human resources                                |       | 412                    |       | 347                   |       | 1,145 |   | 1,118 |   |
| Maintenance                                    |       | 1,432                  |       | 1,435                 |       | 4,204 |   | 4,532 |   |
| Rentals                                        |       | 92                     |       | 273                   |       | 4,983 |   | 3,875 |   |
| Property taxes                                 |       | 871                    |       | 219                   |       | 2,089 |   | 1,377 |   |
| Depreciation and  amortization                 |       | 2,091                  |       | 2,143                 |       | 6,327 |   | 6,365 |   |
|                                           |       | 20,127                 |       | 18,789                |       | 66,272 |   | 63,475 |   |
| Operating income  (loss)                       |       | (1,889                 | )          | (1,134                | )          | 419 |   | (381 | ) |
|                                           |       |                   |       |                  |       |   |   |   |   |
| Other income  (deductions):                    |       |                   |       |                  |       |   |   |   |   |
| Interest expense                               |       | (1,547                 | )          | (1,563                | )          | (4,699 | ) | (4,641 | ) |
| Interest income                                |       | 100                    |       | 73                    |       | 264 |   | 278 |   |
| Foreign exchange  gain (loss)                  |       | 3                      |       | (6                    | )          | 1 |   | (24 | ) |
| Gain on sales of  assets                       |       | —                 |       | 6                     |       | 18 |   | 17 |   |
|                                           |       | (1,444                 | )          | (1,490                | )          | (4,416 | ) | (4,370 | ) |
|                                           |       |                   |       |                  |       |   |   |   |   |
| Loss before  income tax provision (benefit)    |       | (3,333                 | )          | (2,624                | )          | (3,997 | ) | (4,751 | ) |
| Income tax  provision (benefit)                |       | 38                     |       | (820                  | )          | 217 |   | (1,335 | ) |
| Net loss                                       |       | (3,371                 | )          | (1,804                | )          | (4,214 | ) | (3,416 | ) |
|                                           |       |                   |       |                  |       |   |   |   |   |
| Retained  earnings at beginning of period      |       | 22,194                 |       | 27,856                |       | 23,037 |   | 29,653 |   |
| Cash dividends                                 |       | —                 |       | —                |       | — |   | (185 | ) |
| Retained  earnings at end of period            |       | $                      | 18,823     |                  | $          | 26,052 |   | $ | 18,823 |   | $ | 26,052 |   |
|                                           |       |                   |       |                  |       |   |   |   |   |
| Net loss per  share                            |       | $                      | (0.91      | )                     | $          | (0.48 | ) | $ | (1.14 | ) | $ | (0.92 | ) |
| Weighted average  number of shares outstanding |       | 3,698                  |       | 3,698                 |       | 3,698 |   | 3,698 |   |
|                                                |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

*See accompanying notes to condensed consolidatedfinancial statements.*

 

5

----

 

**SONESTA INTERNATIONAL HOTELSCORPORATION**

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

Increase (Decrease) in Cash

 
| ** **                                               | ** ** | **(in thousands)**                 | ** ** |
|----------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                               | ** ** | **Nine Months Ended September 30** | ** ** |
| ** **                                               | ** ** | **2004**                           | ** ** | **2003** | ** ** |
| Cash provided  (used) by operating activities            |       |                               |       |   |   |
| Net loss                                                 |       | $                                  | (4,214     | ) | $ | (3,416 | ) |
| Items not  (providing) requiring cash                    |       |                               |       |   |   |
| Pension expense                                          |       | 1,682                              |       | 1,100 |   |
| Depreciation and  amortization of property and equipment |       | 6,327                              |       | 6,365 |   |
| Other  amortization                                      |       | 68                                 |       | 68 |   |
| Deferred federal  and state income tax benefit           |       | —                             |       | (1,651 | ) |
| Gain on sales of  assets                                 |       | (18                                | )          | (17 | ) |
| Deferred  interest income                                |       | (167                               | )          | (149 | ) |
| Deferred  interest expense                               |       | 1,893                              |       | — |   |
| Changes in  assets and liabilities                       |       |                               |       |   |   |
| Restricted cash                                          |       | (2,037                             | )          | — |   |
| Accounts and  notes receivable                           |       | 1,560                              |       | (90 | ) |
| Inventories                                              |       | 35                                 |       | 174 |   |
| Prepaid expenses  and other                              |       | 256                                |       | 596 |   |
| Accounts payable                                         |       | (516                               | )          | (775 | ) |
| Advance deposits                                         |       | (228                               | )          | (848 | ) |
| Federal, foreign  and state income taxes                 |       | 34                                 |       | 153 |   |
| Accrued  liabilities                                     |       | (1,019                             | )          | (2,598 | ) |
| Cash provided  (used) by operating activities            |       | 3,656                              |       | (1,088 | ) |
|                                                     |       |                               |       |   |   |
| Cash provided  (used) by investing activities            |       |                               |       |   |   |
| Net proceeds  from sales of assets                       |       | 18                                 |       | 81 |   |
| Expenditures for  property and equipment                 |       | (3,199                             | )          | (5,628 | ) |
| New loans and  advances                                  |       | (548                               | )          | (2,506 | ) |
| Payments  received on long-term receivables and advances |       | 1,094                              |       | 257 |   |
| Other  investments                                       |       | (27                                | )          | (1,135 | ) |
| Cash used by  investing activities                       |       | (2,662                             | )          | (8,931 | ) |
|                                                     |       |                               |       |   |   |
| Cash provided  (used) by financing activities            |       |                               |       |   |   |
| Net borrowings  under lines of credit                    |       | —                             |       | 350 |   |
| Scheduled  payments on long-term debt                    |       | —                             |       | (697 | ) |
| Cash dividends  paid                                     |       | —                             |       | (370 | ) |
| Cash used by  financing activities                       |       | —                             |       | (717 | ) |
|                                                     |       |                               |       |   |   |
| Net increase  (decrease) in cash                         |       | 994                                |       | (10,736 | ) |
| Cash and cash  equivalents at beginning of period        |       | 4,327                              |       | 12,675 |   |
| Cash and cash  equivalents at end of period              |       | $                                  | 5,321      |   | $ | 1,939 |   |
|                                                          |            |                                    |            |  |  |  |  |  |

 

Supplemental Information of Interest and Income TaxesPaid

Cash paid for interest in the 2004 and 2003 nine monthperiods was approximately $ 2,743,000 and $4,608,000, respectively.   Cash paid for income taxes for the firstnine months of 2004 and 2003 was approximately $ 201,000 and $163,000,respectively.

 

*See accompanying notes to condensed consolidatedfinancial statements.*

 

6

----

 

**SONESTA INTERNATIONAL HOTELS 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, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included. Operating results for the nine month period ended September 30, 2004 arenot necessarily indicative of the results that may be expected for the yearended December 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)**     | ** ** |
|-----------------------------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **September 30, 2004** | ** ** | **December 31, 2003** | ** ** |
| Sharm El Sheikh,  Egypt (a)                   |       | $                      | 710        |   | $ | 678 |   |
| Sonesta Hotel  & Suites Coconut Grove (b) |       | 5,274                  |       | 5,483 |   |
| Trump  International Sonesta Beach Resort (c) |       | 3,709                  |       | 3,900 |   |
| Other                                         |       | 278                    |       | 275 |   |
| Total long-term  receivables                  |       | 9,971                  |       | 10,336 |   |
| Less: current  portion                        |       | 328                    |       | 305 |   |
| Net long-term  receivables                    |       | $                      | 9,643      |   | $ | 10,031 |   |

 

----

(a)                                  This loan, in the original amount of$1,000,000, was made in 1996 and 1997 to the owner of the Sonesta Beach Resort,Sharm El Sheikh.  The loan bears interestat the prime rate (4.75% at September 30, 2004) and is adjusted semi-annually.The Company has agreed to loan the hotel’s owner an additional $300,000 in 2004to help finance the construction of additional hotel facilities, of which$225,000 was funded at September 30, 2004.  Currently, the loan is being repaid with monthly payments of$23,800.   The maturity date is October2007.

 

(b)                                 This loan was made to the owner of theSonesta Hotel & Suites Coconut Grove, Miami, which opened in April2002.  The Company has loaned $4,000,000to fund construction and furniture, fixtures and equipment (“FF&E”) costs,and, in addition, has loaned $1,000,000 for pre-opening costs and workingcapital.  The loan for construction andFF&E costs bears interest at the prime rate plus 0.75% (5.50% at September30, 2004).  No interest is being chargedon the loan for pre-opening costs.  Theseloans are being repaid, the loan for pre-opening costs first, out of annualminimum return payments of $500,000 due to the owner of the hotel under themanagement agreement, and out of excess profits that would otherwise beavailable for distribution to the owner.

 

7

----

 

 

(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 September30, 2004 ($1,312,000).   No interest willbe charged on these advances, which will be repaid out of future availableprofits generated 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 (4.75% at September 30, 2004). The terms of the line require the bank’s approval for additionalborrowings by the Company, restrict dividends, and require that no amounts areoutstanding under the line during the two consecutive months of November andDecember.   No amounts were outstandingunder this line of credit at September 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 certainminimum level of income, a minimum net worth and a maximum defined debt to networth ratio for Royal Sonesta Hotel New Orleans.   The interest rate is LIBOR plus 3% (4.8% atSeptember 30, 2004), and the commitment fee on the unused portion of the lineis 0.65% per annum.  No amounts wereoutstanding under this line of credit at September 30, 2004.

 

## *Long-Term Debt*

 
| ** **                                                          | ** ** | **(in thousands)**     | ** ** |
|---------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                          | ** ** | **September 30, 2004** | ** ** | **December 31, 2003** | ** ** |
| Charterhouse of  Cambridge Trust and Sonesta of Massachusetts Inc.: | ** ** | ** **             | ** ** | ** ** | ** ** |
| First mortgage  note                                                |       | $                      | 40,547     |   | $ | 39,469 |   |
| Sonesta Beach  Resort Limited Partnership:                          |       |                   |       |   |   |
| First mortgage  note                                                |       | 30,657                 |       | 29,842 |   |
| Total long-term  debt                                               |       | 71,204                 |       | 69,311 |   |
| Less current  portion of accrued interest                           |       | 1,350                  |       | — |   |
| Net long-term  debt                                                 |       | $                      | 69,854     |   | $ | 69,311 |   |

 

The Company’s long-term debt is secured by first mortgages on the RoyalSonesta Hotel Boston (Cambridge) and Sonesta Beach Resort Key Biscayne properties,which are included in fixed assets at net book values of $20,711,000 and $39,780,000 at September 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.

 

8

----

 

Effective December 1, 2003, the Company and the lender restructured themortgage loans for a four year period, as follows: starting at January 1, 2004,and through December 1, 2006, the Company is required to make payments ofinterest 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 on December 1 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 September 30, 2004, the excess cash flow equaled $2,037,000, whichamount is included in Restricted Cash on the Company’s balance sheet.   The total debt balance of $71,204,000includes accrued interest in the amount of $2,107,000, of which the Companyexpects to pay $1,350,000 on December 1, 2004.

 

**4.**             **Hotel Costs and Operating Expenses**

 

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

 
| ** **                 | ** ** | **(in thousands)**                  | ** ** |
|----------------------------|------------|-------------------------------------|------------|
| ** **                 | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
| ** **                 | ** ** | **2004**                            | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Direct  departmental costs |       |                                |       |   |   |   |   |   |   |
| Rooms                      |       | $                                   | 3,147      |   | $ | 3,082 |   | $ | 9,727 |   | $ | 9,628 |   |
| Food and  beverage         |       | 4,692                               |       | 4,444 |   | 14,969 |   | 14,348 |   |
| Heat, light and  power     |       | 907                                 |       | 794 |   | 2,544 |   | 2,259 |   |
| Other                      |       | 994                                 |       | 976 |   | 3,282 |   | 3,237 |   |
|                       |       | $                                   | 9,740      |   | $ | 9,296 |   | $ | 30,522 |   | $ | 29,472 |   |

 

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

 

**5.             NewAccounting 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 management agreementswith Trump International Sonesta Beach Resort Sunny Isles and Sonesta Hotel andSuites Coconut Grove are variable interests.  The Company does not believe it bears the majority of the risk of loss fromthe variable interest entities’ activities nor is it entitled to receive themajority of the variable interest entities’ residual returns.   Accordingly, the adoption of Interpretation46 did not have a material impact on the Company’s overall financial positionand results of operations.

 

9

----

 

 

**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)**                 | ** ** |
|---------------------------------------|------------|------------------------------------|------------|
| ** **                            | ** ** | **Nine Months Ended Seotember 30** | ** ** |
| ** **                            | ** ** | **2004**                           | ** ** | **2003** | ** ** |
| Current federal  income tax benefit   |       | $                                  | —     |   | $ | — |   |
| Current foreign  income tax provision |       | 159                                |       | 126 |   |
| Current state  income tax provision   |       | 58                                 |       | 190 |   |
| Deferred federal  income tax benefit  |       | —                             |       | (1,651 | ) |
|                                  |       | $                                  | 217        |   | $ | (1,335 | ) |

 

**7.             SegmentInformation**

 

Segment information for the Company’s two reportable segments, Owned& Leased Hotels and Management Activities, for the three and nine monthperiods ending September 30, 2004 and 2003 follows:

 

Three month period ended September 30, 2004

 
| ** **                                                             | ** ** | **(in thousands)**             | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                             | ** ** | **Owned &  Leased Hotels** | ** ** | **Management Activities** | ** ** | **Consolidated** | ** ** |
| Revenues                                                               |       | $                              | 17,399     |   | $ | 839 |   | $ | 18,238 |   |
| Operating income  (loss) before depreciation and amortization  expense |       | 1,116                          |       | (914 | ) | 202 |   |
| Depreciation and  amortization                                         |       | (1,926                         | )          | (165 | ) | (2,091 | ) |
| Interest income  (expense), net                                        |       | (1,537                         | )          | 90 |   | (1,447 | ) |
| Other income                                                           |       | —                         |       | 3 |   | 3 |   |
| Segment pre-tax  loss                                                  |       | (2,347                         | )          | (986 | ) | (3,333 | ) |
|                                                                   |       |                           |       |   |   |   |   |
| Segment assets                                                         |       | 84,460                         |       | 23,263 |   | 107,723 |   |
| Segment capital  additions                                             |       | 1,268                          |       | 32 |   | 1,300 |   |
|                                                                        |            |                                |            |  |  |  |  |  |  |  |

 

Nine month period ended September 30, 2004

 
| ** **                                                             | ** ** | **(in thousands)**            | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                             | ** ** | **Owned & Leased Hotels** | ** ** | **Management Activities** | ** ** | **Consolidated** | ** ** |
| Revenues                                                               |       | $                             | 63,629     |   | $ | 3,062 |   | $ | 66,691 |   |
| Operating income  (loss) before depreciation and amortization  expense |       | 8,640                         |       | (1,894 | ) | 6,746 |   |
| Depreciation and  amortization                                         |       | (5,832                        | )          | (495 | ) | (6,327 | ) |
| Interest income  (expense), net                                        |       | (4,670                        | )          | 235 |   | (4,435 | ) |
| Other income                                                           |       | 7                             |       | 12 |   | 19 |   |
| Segment pre-tax  loss                                                  |       | (1,855                        | )          | (2,142 | ) | (3,997 | ) |
|                                                                   |       |                          |       |   |   |   |   |
| Segment assets                                                         |       | 84,460                        |       | 23,263 |   | 107,723 |   |
| Segment capital  additions                                             |       | 2,960                         |       | 239 |   | 3,199 |   |
|                                                                        |            |                               |            |  |  |  |  |  |  |  |

 

10

----

 

Three month period ended September 30, 2003

 
| ** **                                                            | ** ** | **(in thousands)** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                            | ** ** | **Owned &**    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | **Leased**         | ** ** | **Management** | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | **Hotels**         | ** ** | **Activities** | ** ** | **Consolidated** | ** ** |
| Revenues                                                              |       | $                  | 16,842     |   | $ | 813 |   | $ | 17,655 |   |
| Operating income  (loss) before depreciation and amortization expense |       | 1,702              |       | (693 | ) | 1,009 |   |
| Depreciation and  amortization                                        |       | (1,977             | )          | (166 | ) | (2,143 | ) |
| Interest income  (expense), net                                       |       | (1,545             | )          | 55 |   | (1,490 | ) |
| Other income  (deductions)                                            |       | (6                 | )          | 6 |   | — |   |
| Segment pre-tax  loss                                                 |       | (1,826             | )          | (798 | ) | (2,624 | ) |
|                                                                  |       |               |       |   |   |   |   |
| Segment assets                                                        |       | 88,331             |       | 21,380 |   | 109,711 |   |
| Segment capital  additions                                            |       | 2,503              |       | 106 |   | 2,609 |   |
|                                                                       |            |                    |            |  |  |  |  |  |  |  |

 

Nine month period ended September 30, 2003

 
| ** **                                                            | ** ** | **(in thousands)**             | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                            | ** ** | **Owned &  Leased Hotels** | ** ** | **Management  Activities** | ** ** | **Consolidated** | ** ** |
| Revenues                                                              |       | $                              | 60,597     |   | $ | 2,497 |   | $ | 63,094 |   |
| Operating income  (loss) before depreciation and amortization expense |       | 8,506                          |       | (2,522 | ) | 5,984 |   |
| Depreciation and  amortization                                        |       | (5,917                         | )          | (448 | ) | (6,365 | ) |
| Interest income  (expense), net                                       |       | (4,600                         | )          | 237 |   | (4,363 | ) |
| Other income  (deductions)                                            |       | 12                             |       | (19 | ) | (7 | ) |
| Segment pre-tax  loss                                                 |       | (1,999                         | )          | (2,752 | ) | (4,751 | ) |
|                                                                  |       |                           |       |   |   |   |   |
| Segment assets                                                        |       | 88,331                         |       | 21,380 |   | 109,711 |   |
| Segment capital  additions                                            |       | 5,362                          |       | 266 |   | 5,628 |   |
|                                                                       |            |                                |            |  |  |  |  |  |  |  |

 

**8.             Earningsper 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 September 30** | ** ** | **Nine months ended September 30** | ** ** |
|------------------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                                     | ** ** | **2004**                            | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Numerator:                                     |       |                                |       |                               |       |   |   |   |   |
| Loss from  operations                          |       | $                                   | (3,371     | )                                  | $          | (1,804 | ) | $ | (4,214 | ) | $ | (3,416 | ) |
|                                           |       |                                |       |                               |       |   |   |   |   |
| Denominator:                                   |       |                                |       |                               |       |   |   |   |   |
| Weighted average  number of shares outstanding |       | 3,698                               |       | 3,698                              |       | 3,698 |   | 3,698 |   |
|                                           |       |                                |       |                               |       |   |   |   |   |
| Net loss per  share of common stock            |       | $                                   | (0.91      | )                                  | $          | (0.48 | ) | $ | (1.14 | ) | $ | (0.92 | ) |
|                                                |            |                                     |            |                                    |            |  |  |  |  |  |  |  |  |  |

 

11

----

 

**9.       Pension Plan**

 

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

 
| ** **                                                                       | ** ** | **Nine months ended September 30** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                       | ** ** | **2004**                           | ** ** | **2003** | ** ** |
| Service cost                                                                     |       | $                                  | 1,214      |   | $ | 902 |   |
| Interest cost                                                                    |       | 1,399                              |       | 1,245 |   |
| Expected return  on assets                                                       |       | (1,194                             | )          | (1,160 | ) |
| Amortization of  prior service cost                                              |       | 67                                 |       | 66 |   |
| Amortization of  transition asset                                                |       | (66                                | )          | (66 | ) |
| Recognize  actuarial loss                                                        |       | 361                                |       | 164 |   |
| Total plan  benefit cost                                                         |       | 1,781                              |       | 1,151 |   |
| Less: amounts  charged to hotels operated under management agreements            |       | (99                                | )          | (51 | ) |
| Net periodic  benefit cost included in the consolidated statements of operations |       | $                                  | 1,682      |   | $ | 1.100 |   |

 

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

 

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

 

**10.          LegalProceedings**

 

A subsidiary of the Company, Sonesta Louisiana Hotels Corporation (“SLHC”),which operates Chateau Sonesta Hotel, in New Orleans (the “Hotel”), has beeninvolved in an arbitration pursuant to the terms of the Amended and RestatedManagement Agreement between the owner of the hotel and SLHC (the “ManagementAgreement”).  The owner alleged that SLHChas failed to perform certain obligations under the Management Agreement,specifically its obligations to (A) “use all reasonable efforts to operate theHotel...in a manner that achieves a high level of guest satisfaction andprofitability”, and (B) exercise all reasonable efforts to assure that SonestaHotels’ corporate services “are billed to the Hotel and to the Royal SonestaHotel, New Orleans on a fair and equitable basis”. The position established byowner’s arbiter claimed damages of $2,952,000, whereas SLHC’s arbiter hadestablished that no more than $268,000 in damages should be awarded.  A decision was rendered by a third arbiterselected by the parties in favor of SLHC on May 11, 2004.  The Company had previously provided for thedamages of $268,000 in its statement of financial position (which were paidduring the 2004 second quarter), as well as for the legal and consulting feesrelated to this arbitration.

 

12

----

** **

**PartI – Item 2**

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS**

**OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION**

 

**FIRST NINE MONTHS 2004 COMPARED TO 2003**

 

During the first nine months of 2004, the Company recorded a lossbefore taxes of $3,997,000, compared to a loss before taxes of $4,751,000during the first nine months of 2003. Increases in income from Sonesta Beach Resort Key Biscayne, RoyalSonesta Hotel Boston (Cambridge), and from management activities, exceededdecreased income from Royal Sonesta Hotel New Orleans.   The decrease in income at Royal Sonesta NewOrleans was entirely due to higher rent expense due under the lease under whichthe Company operates the Hotel. Generally, business continued to improve.  A detailed analysis of revenues and income bylocation follows.

 

**REVENUES**

 
| ** **                                      | ** ** | **TOTAL REVENUES** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|
| ** **                                      | ** ** | **(in thousands)** | ** ** |
| ** **                                      | ** ** | **NO. OF  ROOMS**  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Sonesta Beach  Resort Key Biscayne              |       | 300                |       | $ | 21,380 |   | $ | 20,159 |   |
| Royal Sonesta  Hotel Boston (Cambridge)         |       | 400                |       | 17,269 |   | 15,876 |   |
| Royal Sonesta  Hotel New Orleans                |       | 500                |       | 24,981 |   | 24,562 |   |
| Management and  service fees and other revenues |       |               |       | 3,061 |   | 2,497 |   |
| Total revenues                                  |       |               |       | $ | 66,691 |   | $ | 63,094 |   |

 

Total revenues for the first nine months of 2004 were $66,691,000compared to $63,094,000 in 2003, an increase of approximately $3,597,000.

 

Sonesta Beach Resort Key Biscayne reported a 6% increase in revenuesduring the first nine months of 2004 compared to 2003.  Of the total revenue increase of $1,221,000,$635,000 was due to increased room revenues. The room revenue per available room (REVPAR) increased by 6%, due to anincrease in occupancy levels.  Revenuesfrom other sources, including food and beverage, increased by $586,000, due tothe higher occupancy during 2004. Increased demand from primarily the transient market segment contributedto the increase in revenues.  RoyalSonesta Hotel Boston (Cambridge) reported a $1,393,000 increase in revenues, or9%, during the first nine months of 2004 compared to the previous year.  This increase in revenues was almost entirelydue to improved results achieved during the third quarter of 2004.  Of the increase in revenues, $1,083,000 wasdue to increased room revenues, and $310,000 was due to increases in otherrevenues, primarily from food and beverage. During the first nine months of 2004, the hotel reported an 11% increasein REVPAR, due to both higher occupancies as well as higher average room ratesachieved.  Increases in business wereprimarily from the group and convention market segment.  Royal Sonesta Hotel New Orleans recordedrevenues of $24,981,000 during the first nine months of 2004, compared to$24,562,000 during the first nine months of 2003, an increase of $419,000.  The slight increase in revenues was entirelydue to an increase in room revenues because of a 4% increase in REVPAR.  Increases in average room rate achievedoffset a slight decrease in occupancy levels. Revenues from managementactivities increased from $2,497,000 in the first nine months of 2003 to$3,061,000 during the first nine months of 2004, an increase of $564,000.  This increase was entirely due to increasedmanagement income of $606,000 from the Company’s managed hotels in Egypt.  Leisure travel to Egypt, primarily fromEurope, continued to improve during 2004 compared to last year.  Decreased management income from SonestaBeach Hotel Bermuda, which management agreement terminated on June 1, 2004,were offset by increased income from Chateau Sonesta Hotel New Orleans.  The Company expects to receive an incentivefee from Chateau Sonesta during 2004, because of higher profit levels achievedby the hotel.

 

13

----

 

**OPERATING INCOME**

####  

| ** **                                                      | ** ** | **OPERATING INCOME (LOSS)** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                      | ** ** | **(in thousands)**          | ** ** |
|                                                            |       | **2004**                    | ** ** | **2003** |   |
| Sonesta Beach  Resort Key Biscayne                              |       | $                           | 968        |   | $ | 343 |   |
| Royal Sonesta  Hotel Boston (Cambridge)                         |       | 974                         |       | 54 |   |
| Royal Sonesta  Hotel New Orleans                                |       | 866                         |       | 2,192 |   |
| Operating income  from hotels after management and service fees |       | 2,808                       |       | 2,589 |   |
| Management  activities and other                                |       | (2,389                      | )          | (2,970 | ) |
| Operating income  (loss)                                        |       | $                           | 419        |   | $ | (381 | ) |

 

Operating income for the nine-month period endedSeptember 30, 2004 was $419,000, compared to an operating loss of $381,000 inthe same period in 2003, an increase of approximately $800,000.

 

Sonesta Beach Resort Key Biscayne reported operatingincome during the first nine months of 2004 of $968,000 compared to $343,000 inthe same period last year, an increase of $625,000.  Revenues increased by $1,221,000, andexpenses increased by $596,000 compared to 2004, representing a 3% increase intotal operating expenses.  This increasewas primarily due to higher cost and operating expenses and real estate tax,partially offset by lower administrative and general, maintenance and depreciationexpense.  Operating income during thefirst nine months of 2004 at Royal Sonesta Hotel Boston (Cambridge) was$974,000, compared to operating income of $54,000 during the first nine monthsof 2003, an increase of $920,000.  Totalrevenues during the 2004 period increased by $1,393,000, and total expensesincreased by $473,000.  The $473,000increase in expenses, representing a 3% increase, was primarily due to highercost and operating expenses because of increased occupancy and increases in foodand beverage revenues.  Operating incomeat Royal Sonesta Hotel New Orleans decreased from $2,192,000 during the firstnine months of 2003 to $866,000 during the first nine months of 2004, despitean increase in revenues in 2004 of $419,000. Total expenses in 2004 increased by $1,745,000, which was for the mostpart due to an increase of $1,174,000 in rent expense.  Of this increase in rent, $1,158,000 is dueto the 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 hotel’s capital expenditures decrease.  The remaining increase in expenses of$571,000 compared to 2003 was primarily due to higher cost and operatingexpenses and real estate taxes. Operating loss from management activities, which is computed aftergiving effect to management and marketing fees from owned and leased hotels,decreased by $581,000, from $2,970,000 during the first nine months of 2003 to$2,389,000 during the first nine months of 2004.  Revenues from management activities increasedby $564,000, and expenses related to theses activities decreased by $17,000.

 

**OTHER INCOME (DEDUCTIONS)**

 

Interest expense increased by $58,000 in the first nine 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).

 

14

----

 

**THIRD QUARTER 2004 COMPARED TO2003**

 

The third quarter of 2004 saw a successful rebound inbusiness at Royal Sonesta Hotel Boston (Cambridge) compared to a year ago, asbusiness travel and group business continued to improve.  Third quarter revenues and profits at SonestaBeach Resort Key Biscayne and Royal Sonesta Hotel New Orleans declined comparedto 2003.  This was due to revenue lossesresulting from near misses by hurricanes in both Miami and New Orleans.  Even though the hotels did not suffer anydamages, revenues declined due to cancellations, and, in the case of Key Biscayne,due to a mandated closure of the hotel over Labor Day weekend.  A detailed review of revenues and expensesfollows.

 

**REVENUES**

 
| ** **                                      | ** ** | **TOTAL REVENUES** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|
| ** **                                      | ** ** | **(in thousands)** | ** ** |
| ** **                                      | ** ** | **NO. OF   ROOMS** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Sonesta Beach  Resort Key Biscayne              |       | 300                |       | $ | 4,569 |   | $ | 4,705 |   |
| Royal Sonesta  Hotel Boston (Cambridge)         |       | 400                |       | 7,050 |   | 5,782 |   |
| Royal Sonesta  Hotel New Orleans                |       | 500                |       | 5,781 |   | 6,355 |   |
| Management and  service fees and other revenues |       |               |       | 838 |   | 813 |   |
| Total revenues                                  |       |               |       |   | $ | 18,238 |   | $ | 17,655 |   |
|                                                 |            |                    |            |  |  |  |  |  |  |  |  |  |

 

Total revenues for the three month period endedSeptember 30, 2004 were $18,238,000 compared to $17,655,000 in 2003, anincrease of approximately $583,000.

 

Revenues during the third quarter of 2004 at SonestaBeach Resort Key Biscayne declined by $136,000 compared to the 2003 thirdquarter.  Increases in revenues duringthe months of July and August were offset by a revenue loss of approximately$400,000 during September 2004 as a result of a mandatory closure of the hotelover the Labor Day weekend due to imminent hurricane danger.  The hotel never suffered any physicaldamage.  Royal Sonesta Hotel Boston(Cambridge) had an excellent 2004 third quarter. Revenues increased from$5,782,000 during the third quarter of 2003 to $7,050,000 during the 2004 thirdquarter, an increase of $1,268,000, or 22%. Room revenues increased by $949,000 due to a 27% increase in the roomrevenue per available room (“REVPAR”). This resulted from an increase in occupancy during the third quarter of2004 of 10 percentage points compared to the 2003 quarter, and an increase inaverage rate of 11%.  Food and beveragerevenues and revenues from other sources increased by $319,000 compared to 2003due to the higher occupancy levels.  Theincrease in revenues in the third quarter of 2004 was entirely due to increasedgroup and convention business.   RoyalSonesta Hotel New Orleans had a disappointing third quarter, and saw revenuesdecline by $574,000 from $6,355,000 in the third quarter of 2003 to $5,781,000during the 2004 third quarter.  Roomrevenues declined by $335,000 due to an 8% decrease in the hotel’s REVPAR,resulting from lower occupancy levels. Food and beverage revenues and revenues from other sources decreased by$239,000.  Hurricane activity during themonth of September resulted in cancellation of a large citywide convention,which attributed approximately $350,000 toward the decline in revenues.  No damage was sustained at the hotel.  Revenues from management activities increasedslightly from $813,000 in the first nine months of 2003 to $838,000 in thefirst nine months of 2004.  Increases inmanagement income from the Company’s operations in Egypt were partially offsetby the loss of management income from Sonesta Beach Resort Bermuda, whichmanagement agreement terminated on June 1, 2004.

 

15

----

 

**OPERATING INCOME**

####  

| ** **                                                    | ** ** | **OPERATING INCOME (LOSS)** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **(in thousands)**          | ** ** |
|                                                          |       | **2004**                    | ** ** | **2003** |   |
| Sonesta Beach  Resort Key Biscayne                            |       | $                           | (1,791     | ) | $ | (1,152 | ) |
| Royal Sonesta  Hotel Boston (Cambridge)                       |       | 1,210                       |       | 483 |   |
| Royal Sonesta  Hotel New Orleans                              |       | (229                        | )          | 394 |   |
| Operating loss  from hotels after management and service fees |       | (810                        | )          | (275 | ) |
| Management  activities and other                              |       | (1,079                      | )          | (859 | ) |
| Operating loss                                                |       | $                           | (1,889     | ) | $ | (1,134 | ) |

 

Operating loss for the three-month period endedSeptember 30, 2004 was $1,889,000, compared to an operating loss of $1,134,000in the three-month period ended September 30, 2003, an increase ofapproximately $755,000.

 

Sonesta Beach Resort Key Biscayne reported a operatingloss of $1,791,000 during the 2004 third quarter, compared to operating lossesof $1,152,000 during the 2003 third quarter, an increase of $639,000.  Revenues decreased by $136,000 during the2004 quarter, and expenses increased by $503,000 compared to 2003.  This expense increase was primarily due toincreased real estate tax expense. During the 2004 third quarter, the Company agreed on a valuation forboth 2003 and 2004, which resulted in a higher tax expense than amountsprovided for previously.  In addition,the hotel recorded a credit for a refund received for the year 2002 during the2003 third quarter.  Royal Sonesta HotelBoston (Cambridge) increased its third quarter operating income from $483,000in 2003 to $1,210,000 in the 2004 third quarter.  Revenue increases of $1,268,000 werepartially offset by increases in expenses of $541,000.  The majority of the expense increase relatedto increased cost and operating expenses due to higher occupancies and higherfood and beverage revenues achieved during the 2004 third quarter, and due tohigher advertising and other overhead expenses. Operating losses at Royal Sonesta Hotel New Orleans during the 2004third quarter were $229,000, compared to operating income during the 2003 thirdquarter of $394,000, a $623,000 decrease. Revenues decreased by $574,000 during the 2004 third quarter compared tolast year, and expenses increased by $49,000. Operating losses from management activities increased from $859,000 inthe 2003 third quarter to $1,079,000 during the 2004 third quarter, an increaseof $220,000.  A slight revenue increaseof $25,000 was offset by increased expenses of $245,000.  Corporate costs during the 2004 third quarterincreased primarily due to increased pension and health benefit costs, and anincrease in corporate sales expenses.

 

**FEDERAL, FOREIGN AND STATE INCOMETAXES**

 

The Company recorded a tax expense of $217,000 duringthe first nine months of 2004 despite the $3,997,000 pre-tax loss, primarilybecause of foreign taxes provided on the Company’s management income fromEgypt, and because of state taxes provided on the Company’s income from RoyalSonesta Hotel New Orleans.    A valuationallowance was recorded against the 2004 federal income tax benefit because itis uncertain when the Company will realize future benefit for the losses incurredduring 2004.  During the first ninemonths of 2003, the Company did record a federal income tax benefit of$1,651,000 because of losses incurred during the same period however, avaluation allowance was recorded during the fourth quarter of 2003, because ofthe uncertainty when the Company will realize future benefits of these 2003losses.

 

16

----

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company had cash and cash equivalents ofapproximately $5,321,000 at September 30, 2004.   In addition, the Company has $5,000,000available under two credit lines. Despite the losses incurred during the first nine months of 2004, whichare in large part due to high depreciation expenses, the Company reported apositive cash flow, which it expects to continue for the remainder of 2004 andinto 2005.  Company management thereforebelieves these cash resources, and the available credit lines, will be adequateto meet its cash requirements for 2004 and for the foreseeable future.

 

In September 2004, the Company exercised its option topurchase the Trump International Sonesta Beach Resort in Sunny Isles,Florida.  Currently, this hotel isoperated under a management agreement. Under the terms of its purchase option, the Seller will finance 100% ofthe purchase price by means of a non-recourse mortgage loan.  Details concerning this transaction,including a copy of the option agreement, were filed by the Company onSeptember 27, 2004 on Form 8-K.  Eventhough the option agreement provides for a closing of this transaction within60 days, the Company and the Seller have agreed to postpone the closing dateuntil January 2004.

 

17

----

 

**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 September 30, 2004.  This information should be read in conjunction with Note 3—BorrowingArrangements.

 

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

 
| ** **             | ** ** | **YEAR** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------|------------|----------|------------|------------|------------|------------|------------|------------|------------|
| ** **             | ** ** | **2004** | ** ** | **2005**   | ** ** | **2006**   | ** ** | **2007**   | ** ** | **2008** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Fair Value** | ** ** |
| Fixed rate             |       | $        | 1,350      |       | $          | —     |       | $          | —     |   | $ | — |   | $ | 1,449 |   | $ | 68,405 |   | $ | 71,204 |   | $ | 73,903 |   |
| Average interest  rate |       | 8.6      | %          | 8.6        | %          | 8.6        | %          | 8.6        | %          | 8.6 | % | 8.6 | % |   |   |   |   |
|                        |            |          |            |            |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

18

----

 

**PART I – Item 4**

 

 

**INTERNAL CONTROLS AND PROCEDURES**

 

As of September 30, 2004, the Company’smanagement carried out an evaluation, under the supervision and with theparticipation of the Company’s Chief Executive Officer and President, ChiefExecutive Officer and Vice Chairman, and Vice President and Treasurer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures pursuant to Rules 13a-15 and 15d-15 of the Securities ExchangeAct of 1934.   Based on that evaluation,the Company’s Chief Executive Officer and President, Chief Executive Officerand Vice Chairman, and Vice President and Treasurer concluded that the Company’sdisclosure controls and procedures are effective, as of September 30, 2004.

 

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

 

19

----

 

**SIGNATURE**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this Report to be signed on its behalf by the undersignedthereunto duly authorized.

 
| **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: November 11, 2004 |
|                                              |  |  |

 

20

----