**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 September 30, 2002**                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                |                                                                                           |
| **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 HOTELS CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **NEW  YORK**                                                                        |   | **13-5648107**                        |
|--------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction  or incorporation or organization)                     |   | (I.R.S. Employer  Identification No.) |
|                                                                                 |   |                                  |
| **116  Huntington Avenue, Boston, MA 02116**                                         |
| (Address of principal  executive offices)  (Zip Code)                                |
|                                                                                 |
| **617-421-5400**                                                                     |
| (Registrant’s telephone  number, including area code)                           |
|                                                                                 |   |                                  |
| (Former name, former  address and former fiscal year,  if changed since last report) |

 

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

 

Yes  ý   No  o

 

APPLICABLE ONLY TOCORPORATE ISSUERS:

 

Number of Shares ofCommon Stock Outstanding

As of November 11, 2002 —$.80 par value,

Class A — 3,698,230

 

 

----

 

**INDEX**

 

**SONESTA INTERNATIONAL HOTELS CORPORATION**

 
| Part I.      Financial Information |
|-------------------------------------------------------------|
|                                                        |   |
| Item 1.                                                     | Financial  Statements (Unaudited) |
|                                                        |   |
|                                                        | Condensed  consolidated balance sheets— September 30, 2002 and December 31, 2001 |
|                                                        |   |
|                                                        | Condensed  consolidated statements of operations—Three month and nine month periods  ended September 30, 2002 and 2001 |
|                                                        |   |
|                                                        | Condensed  consolidated statements of cash flows—Nine month periods ended September 30,  2002 and 2001 |
|                                                        |   |
|                                                        | Notes  to condensed consolidated financial statements—September 30, 2002 and 2001 |
|                                                        |   |
| Item 2.                                                     | Management’s  Discussion and Analysis of Results of Operations and Financial  Condition—September 30, 2002 |
|                                                        |   |
| Item 3.                                                     | Quantitative  and Qualitative Disclosure of Market Risk |
|                                                        |   |
| Item 4.                                                     | Internal Controls and  Procedures |
|                                                        |   |
| Part II.    Other Information                |
|                                                        |
|                                                        |  Signature page |
|                                                        |   |
|                                                        | Certifications  by the Company’s Chief Executive Officer, Chief Financial Officer and Vice  President and Treasurer |
|                                                        |   |
| Exhibit 99.1                                                | 18 U.S.C. Section 1350 Certification by Company  Officers |

 

----

 

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

 

**SONESTA INTERNATIONAL HOTELS CORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

September 30, 2002(unaudited)  and  December 31, 2001

 
|                                                                             |   | **September  30  2002** |    | **December  31  2001** |   |
|----------------------------------------------------------------------------------|--------|-------------------------|---------|------------------------|--------|
|                                                                             |   | **(in  thousands)**     |    |
| ASSETS                                                                           |   |                    |    |                   |   |
| Current assets:                                                                  |   |                    |    |                   |   |
| Cash and cash  equivalents                                                       |   | $                       | 4,534   |                   | $      | 14,256 |   |
| Accounts and  notes receivable:                                                  |   |                    |    |                   |   |
| Trade, less  allowance of $293 ($260 at December 31, 2001) for doubtful accounts |   | 5,424                   |    | 6,190                  |   |
| Current portion  of long-term receivables and advances                           |   | 8,476                   |    | 199                    |   |
| Other                                                                            |   | 425                     |    | 554                    |   |
| Total accounts  and notes receivable                                             |   | 14,325                  |    | 6,943                  |   |
| Refundable  income taxes                                                         |   | 2,913                   |    | 1,499                  |   |
| Current portion  of deferred taxes                                               |   | 367                     |    | 391                    |   |
| Inventories                                                                      |   | 978                     |    | 1,413                  |   |
| Prepaid expenses  and other                                                      |   | 5,070                   |    | 3,964                  |   |
|                                                                             |   |                    |    |                   |   |
| Total current  assets                                                            |   | 28,187                  |    | 28,466                 |   |
|                                                                             |   |                    |    |                   |   |
| Long-term  receivables and advances                                              |   | 5,785                   |    | 3,690                  |   |
|                                                                             |   |                    |    |                   |   |
| Property and  equipment, at cost:                                                |   |                    |    |                   |   |
| Land and land  improvements                                                      |   | 9,201                   |    | 9,940                  |   |
| Buildings                                                                        |   | 63,643                  |    | 73,418                 |   |
| Furniture and  equipment                                                         |   | 43,720                  |    | 42,878                 |   |
| Leasehold  improvements                                                          |   | 5,730                   |    | 4,605                  |   |
| Projects in  progress                                                            |   | 886                     |    | 706                    |   |
|                                                                             |   | 123,180                 |    | 131,547                |   |
| Less accumulated  depreciation and amortization                                  |   | 39,146                  |    | 36,418                 |   |
| Net property and  equipment                                                      |   | 84,034                  |    | 95,129                 |   |
|                                                                             |   |                    |    |                   |   |
| Other long-term  assets                                                          |   | 1,454                   |    | 1,532                  |   |
|                                                                             |   | $                       | 119,460 |                   | $      | 128,817 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

1

----

 

**SONESTA INTERNATIONAL HOTELS CORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

September 30, 2002(unaudited)  and  December 31, 2001

 
|                                                                                                              |   | **September  30  2002** |    | **December 31  2001** |   |
|-------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|-----------------------|--------|
|                                                                                                              |   | **(in thousands)**           |    |
| LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY                                                                  |   |                         |    |                  |   |
| Current  liabilities:                                                                                             |   |                         |    |                  |   |
| Current portion  of long-term debt                                                                                |   | $                            | 926     |                  | $      | 1,139 |   |
| Accounts payable                                                                                                  |   | 3,329                        |    | 3,955                 |   |
| Advance deposits                                                                                                  |   | 3,704                        |    | 4,576                 |   |
| Federal, foreign  and state income taxes                                                                          |   | 827                          |    | 969                   |   |
| Accrued  liabilities:                                                                                             |   |                         |    |                  |   |
| Salaries and wages                                                                                                |   | 1,515                        |    | 1,577                 |   |
| Rentals                                                                                                           |   | 3,814                        |    | 5,827                 |   |
| Interest                                                                                                          |   | 520                          |    | 527                   |   |
| Other                                                                                                             |   | 2,082                        |    | 1,645                 |   |
|                                                                                                              |   |                         |    |                  |   |
| Total accrued  liabilities                                                                                        |   | 7,931                        |    | 9,576                 |   |
|                                                                                                              |   |                         |    |                  |   |
| Total current  liabilities                                                                                        |   | 16,717                       |    | 20,215                |   |
|                                                                                                              |   |                         |    |                  |   |
| Long-term debt                                                                                                    |   | 69,345                       |    | 74,123                |   |
|                                                                                                              |   |                         |    |                  |   |
| Deferred federal  and state income taxes                                                                          |   | 6,113                        |    | 5,324                 |   |
|                                                                                                              |   |                         |    |                  |   |
| Other  non-current liabilities                                                                                    |   | 3,075                        |    | 1,937                 |   |
|                                                                                                              |   |                         |    |                  |   |
| Commitments and  contingencies                                                                                    |   |                         |    |                  |   |
|                                                                                                              |   |                         |    |                  |   |
| Common  stockholders’ equity:                                                                                |   |                         |    |                  |   |
| Common stock:  Class A, $.80 par value: Authorized – 10,000 shares Issued–6,102 shares at  stated value |   | 4,882                        |    | 4,882                 |   |
| Retained  earnings                                                                                                |   | 31,381                       |    | 34,389                |   |
| Treasury  shares–2,404, at cost                                                                              |   | (12,053                      | )       | (12,053               | )      |
| Total common stockholders’  equity                                                                           |   | 24,210                       |    | 27,218                |   |
|                                                                                                              |   | $                            | 119,460 |                  | $      | 128,817 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

2

----

 

**SONESTAINTERNATIONAL HOTELS CORPORATION**

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

(in thousands except forper share data)

 
|                                                                   |   | **Three  Months Ended  September 30** |   | **Nine  Months Ended  September 30** |   |
|------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                                   |   | **2002**                              |   | **2001**                             |   | **2002** |   | **2001** |   |
| Revenues:                                                              |   |                                  |   |                                 |   |   |   |   |   |
| Rooms                                                                  |   | $                                     | 10,409 |                                 | $      | 10,203 |   | $ | 40,090 |   | $ | 44,220 |   |
| Food and  beverage                                                     |   | 4,838                                 |   | 4,638                                |   | 18,085 |   | 18,682 |   |
| Management,  license and service fees                                  |   | 834                                   |   | 575                                  |   | 3,140 |   | 3,246 |   |
| Parking,  telephone and other                                          |   | 1,791                                 |   | 1,890                                |   | 6,347 |   | 6,495 |   |
|                                                                   |   | 17,872                                |   | 17,306                               |   | 67,662 |   | 72,643 |   |
| Costs and  expenses:                                                   |   |                                  |   |                                 |   |   |   |   |   |
| Costs and  operating expenses                                          |   | 9,257                                 |   | 9,637                                |   | 29,905 |   | 31,969 |   |
| Advertising and  promotion                                             |   | 1,868                                 |   | 1,901                                |   | 5,572 |   | 5,914 |   |
| Administrative  and general                                            |   | 3,692                                 |   | 3,292                                |   | 10,775 |   | 11,838 |   |
| Human resources                                                        |   | 455                                   |   | 467                                  |   | 1,355 |   | 1,537 |   |
| Maintenance                                                            |   | 1,549                                 |   | 1,644                                |   | 4,594 |   | 5,338 |   |
| Rentals                                                                |   | 25                                    |   | 284                                  |   | 4,477 |   | 4,774 |   |
| Property taxes                                                         |   | 615                                   |   | 648                                  |   | 2,016 |   | 1,949 |   |
| Depreciation and  amortization                                         |   | 2,065                                 |   | 1,988                                |   | 6,205 |   | 6,018 |   |
|                                                                   |   | 19,526                                |   | 19,861                               |   | 64,899 |   | 69,337 |   |
| Operating income  (loss)                                               |   | (1,654                                | )      | (2,555                               | )      | 2,763 |   | 3,306 |   |
|                                                                   |   |                                  |   |                                 |   |   |   |   |   |
| Other income  (deductions):                                            |   |                                  |   |                                 |   |   |   |   |   |
| Interest expense                                                       |   | (1,577                                | )      | (1,597                               | )      | (4,687 | ) | (4,820 | ) |
| Interest income                                                        |   | 102                                   |   | 253                                  |   | 345 |   | 1,134 |   |
| Foreign exchange  gain (loss)                                          |   | 4                                     |   | 8                                    |   | 8 |   | (38 | ) |
| Gain on sales of  assets                                               |   | —                                |   | 35                                   |   | — |   | 56 |   |
|                                                                   |   | (1,471                                | )      | (1,301                               | )      | (4,334 | ) | (3,668 | ) |
| Loss from  continuing operations before income tax provision (benefit) |   | (3,125                                | )      | (3,856                               | )      | (1,571 | ) | (362 | ) |
| Income tax  provision (benefit)                                        |   | (930                                  | )      | (1,192                               | )      | (167 | ) | 214 |   |
| Net loss from  continuing operations                                   |   | (2,195                                | )      | (2,664                               | )      | (1,404 | ) | (576 | ) |
| Discontinued  operations (Note 9):                                     |   |                                  |   |                                 |   |   |   |   |   |
| Profit (loss)  from operations and sale of discontinued hotel          |   | (1,700                                | )      | (603                                 | )      | (1,928 | ) | 64 |   |
| Income tax  provision (benefit)                                        |   | (616                                  | )      | (206                                 | )      | (694 | ) | 22 |   |
| Profit (loss) on  discontinued operations                              |   | (1,084                                | )      | (397                                 | )      | (1,234 | ) | 42 |   |
| Net loss                                                               |   | (3,279                                | )      | (3,061                               | )      | (2,638 | ) | (534 | ) |
| Retained  earnings at beginning of period                              |   | 34,660                                |   | 39,183                               |   | 34,389 |   | 37,033 |   |
| Cash dividends  on common stock                                        |   | —                                |   | —                               |   | (370 | ) | (377 | ) |
| Retained  earnings at end of period                                    |   | $                                     | 31,381 |                                 | $      | 36,122 |   | $ | 31,381 |   | $ | 36,122 |   |
| Basic and  diluted loss per share from:                                |   |                                  |   |                                 |   |   |   |   |   |
| Continuing  operations                                                 |   | $                                     | (0.59  | )                                    | $      | (0.72 | ) | $ | (0.38 | ) | $ | (0.16 | ) |
| Discontinued  operations                                               |   | (0.29                                 | )      | (0.11                                | )      | (0.33 | ) | 0.01 |   |
| Net loss per  share of common stock                                    |   | $                                     | (0.88  | )                                    | $      | (0.83 | ) | $ | (0.71 | ) | $ | (0.15 | ) |
| Weighted average  number of shares outstanding                         |   | 3,698                                 |   | 3,698                                |   | 3,698 |   | 3,701 |   |

 

*Seeaccompanying notes to consolidated financial statements.*

 

3

----

 

**SONESTA INTERNATIONAL HOTELS CORPORATION**

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

Increase (Decrease) in Cash

##  

|                                                       |   | **Nine  Months Ended September 30** |   |
|------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                       |   | **2002**                            |   | **2001** |   |
|                                                       |   | **(in  thousands)**                 |   |
| Cash provided  (used) by operating activities              |   |                                |   |   |   |
| Net  loss                                                  |   | $                                   | (2,638 | ) | $ | (534 | ) |
| Items not  (providing) requiring cash                      |   |                                |   |   |   |
| Pension expense                                            |   | 1,247                               |   | 1,057 |   |
| Depreciation and  amortization of property and equipment   |   | 6,205                               |   | 6,018 |   |
| Other  amortization                                        |   | 68                                  |   | 74 |   |
| Deferred federal  and state income tax provision (benefit) |   | 813                                 |   | (190 | ) |
| Gain on sales of  assets                                   |   | —                              |   | (56 | ) |
| Net loss  (profit) from discontinued operations            |   | 1,234                               |   | (42 | ) |
| Deferred  interest income                                  |   | (127                                | )      | (71 | ) |
| Changes  in assets and liabilities                         |   |                                |   |   |   |
| Accounts and  notes receivable                             |   | 938                                 |   | 2,447 |   |
| Refundable  income taxes                                   |   | (720                                | )      | — |   |
| Inventories                                                |   | 435                                 |   | 223 |   |
| Prepaid expenses  and other                                |   | (1,106                              | )      | (2,965 | ) |
| Accounts payable                                           |   | (256                                | )      | (1,994 | ) |
| Advance deposits                                           |   | (872                                | )      | (630 | ) |
| Federal, foreign  and state income taxes                   |   | (142                                | )      | (171 | ) |
| Accrued  liabilities                                       |   | (1,731                              | )      | (6,883 | ) |
| Cash  provided (used) by operating activities              |   | 3,348                               |   | (3,717 | ) |
|                                                       |   |                                |   |   |   |
|                                                       |   |                                |   |   |   |
| Cash provided  (used) by investing activities              |   |                                |   |   |   |
| Net  proceeds from sales of assets                         |   | 9,955                               |   | 71 |   |
| Proceeds  from maturities of government debt securities    |   | —                              |   | 10,313 |   |
| Expenditures  for property and equipment                   |   | (6,879                              | )      | (11,725 | ) |
| New  loans and advances                                    |   | (10,559                             | )      | (2,480 | ) |
| Payments  received on long-term receivables and advances   |   | 281                                 |   | 441 |   |
| Net  cash flow (deficit) from discontinued operations      |   | (137                                | )      | 630 |   |
| Cash  used by investing activities                         |   | (7,339                              | )      | (2,750 | ) |
|                                                       |   |                                |   |   |   |
| Cash provided  (used) by financing activities              |   |                                |   |   |   |
| Scheduled  payments on long-term debt                      |   | (843                                | )      | (941 | ) |
| Payments  on long-term debt following sale of hotel        |   | (4,148                              | )      | — |   |
| Cash  dividends paid                                       |   | (740                                | )      | (748 | ) |
| Redemption  of preferred stock                             |   | —                              |   | (294 | ) |
| Purchase  of treasury stock                                |   | —                              |   | (64 | ) |
| Cash  used by financing activities                         |   | (5,731                              | )      | (2,047 | ) |
|                                                       |   |                                |   |   |   |
| Net  decrease in cash                                      |   | (9,722                              | )      | (8,514 | ) |
| Cash and cash  equivalents at beginning of period          |   | 14,256                              |   | 23,850 |   |
| Cash and cash  equivalents at end of period                |   | $                                   | 4,534  |   | $ | 15,336 |   |

 

*Seeaccompanying notes to consolidated financial statements.*

 

4

----

 

Supplemental Informationof Interest and Income Taxes Paid

Cash paid for interest in the 2002 and 2001 nine monthperiods was approximately $4,817,000 and $5,087,000, respectively.  Cash refunded for income taxes in the 2002nine month period was approximately $118,000. Cash paid for income taxes in the 2001 nine month period was approximately$597,000.

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

5

----

 

**SONESTAINTERNATIONAL HOTELS CORPORATION**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.**                                      **Basis ofPresentation**

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with generally accepted accounting principlesfor interim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals) considerednecessary for a fair presentation have been included.  Operating results for the nine month period ended September 30,2002 are not necessarily indicative of the results that may be expected for theyear ended December 31, 2002.

 

The balance sheet at December 31, 2001 has been derived from theaudited financial statements at that date but does not include all of theinformation and footnotes required by generally accepted accounting principlesfor 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, 2001.

 

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

 
|                                                         |   | **September  30, 2002** |   | **December  31, 2001** |   |
|--------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                                         |   | **(in thousands)**      |   |
| Sharm El Sheikh,  Egypt(a)                                   |   | $                       | 665    |                   | $      | 609 |   |
| Sonesta Hotel  & Suites Coconut Grove, Miami, Florida(b) |   | 4,694                   |   | 2,958                  |   |
| Sonesta Beach  Resort Anguilla(c)                            |   | 8,250                   |   | —                 |   |
| Trump  International Sonesta Beach Resort(d)                 |   | 362                     |   | —                 |   |
| Other                                                        |   | 290                     |   | 322                    |   |
| Total long-term  receivables                                 |   | 14,261                  |   | 3,889                  |   |
| Less:  current portion                                  |   | 8,476                   |   | 199                    |   |
| Net long-term  receivables                                   |   | $                       | 5,785  |                   | $      | 3,690 |   |

 

----

(a)                            Thisloan, in the original amount of $1,000,000, was made in 1996 and 1997 to theowner of the Sonesta Beach Resort, Sharm El Sheikh.  In July 2002, the Company agreed to increase the loan by$500,000, to assist with financing the construction of additional rooms andother hotel facilities.  The loan bearsinterest at the prime rate and is adjusted semi-annually.  The interest rate charged at September 30,2002 was 4.75%.  The original amount ofthe loan is being repaid in 60 monthly installments, commencing January2000.  From the date the additional$500,000 is fully funded, which will be upon completion of the new facilities,the loan will be repaid in 42 monthly installments.

 

(b)                             Thisloan is made to the owner of the Sonesta Hotel & Suites Coconut Grove,Miami, which opened in April 2002.  TheCompany will loan up to $4,000,000 to fund construction and furniture, fixturesand equipment (“FF&E”) costs, and, in addition, has loaned $1,000,000 forpre-opening costs and working capital. The construction and FF&E loan bears interest at the prime rate(4.75% at September 30, 2002) plus 0.75%. No interest is being charged on the $1,000,000 pre-opening loan.  These loans will be repaid, the pre-openingloan first, out of profits that would otherwise be available for distributionto the owner of the Hotel.

 

6

----

 

(c)                                  Thisnon-interest bearing loan was made to the purchaser of Sonesta Beach ResortAnguilla, which hotel was sold by the Company in September 2002.    The sale price was $10,450,000, of which$2,200,000 was paid at closing, and the remaining $8,250,000 is due on November25, 2002.   This loan is secured by afirst mortgage on the hotel property.

 

(d)                                 This amount represents advances made tothe owner of Trump International Sonesta Beach Resort in Sunny Isles Beach,Florida for pre-opening costs and working capital.  No interest will be charged on these advances, which will berepaid out of available profits generated by the hotel after it opens. Thehotel is expected to open in early 2003 (see also Note 5—Commitments &Contingencies).

 

**3.**                                      **BorrowingArrangements**

 

*CreditLines*

 

The Company has a $2,000,000 line of credit, which expires on September28, 2003.  This line of credit bearsinterest at the prime rate (4.75% at September 30, 2002).  The terms of the line require a certainminimum net worth, a minimum amount of unrestricted cash or available creditlines during part of each calendar year, and approval for additional borrowingsby the Company.  No amounts wereoutstanding under this line of credit at September 30, 2002.

 

A subsidiary of the Company has a $5,000,000 line of credit, whichexpires on March 31, 2005.  The loan issecured by a mortgage on the Company’s leasehold interest in the Royal SonestaHotel New Orleans, and by a parent Company guaranty.  The terms of the loan require certain minimum levels of incomefor Royal Sonesta Hotel New Orleans, and specify a maximum defined debt to networth ratio.  The terms also require aminimum net worth, approval for additional borrowings by the Company, andlimits on cash dividends and purchases of the Company’s stock.  The interest rate is LIBOR plus 3% (4.8% atSeptember 30, 2002), and the commitment fee on the unused portion of the lineis 0.65% per annum.  No amounts wereoutstanding under this line at September 30, 2002.

 

*Long-Term Debt*

 
|                                                                |   | **September  30, 2002** |       | **December 31,  2001** |       |
|---------------------------------------------------------------------|--------|-------------------------|------------|------------------------|------------|
|                                                                |   | **(in  thousands)**     |       |
| Charterhouse of  Cambridge Trust and Sonesta of Massachusetts Inc.: |   |                    | ** ** |                   | ** ** |
| First mortgage  note (a)                                            |   | $                       | 40,016     |                   | $          | 40,379 |   |
| Sonesta Beach  Resort Limited Partnership:                          |   |                    |       |                   |       |
| First mortgage  note (b)                                            |   | 30,255                  |       | 30,531                 |       |
| Sonesta Hotels  of Anguilla, Ltd:                                   |   |                    |       |                   |       |
| First mortgage  note (c)                                            |   | —                  |       | 4,352                  |       |
|                                                                |   | 70,271                  |       | 75,262                 |       |
| Less current  portion of long-term debt                             |   | 926                     |       | 1,139                  |       |
| Total long-term  debt                                               |   | $                       | 69,345     |                   | $          | 74,123 |   |

 

7

----

 

----

(a)                                  This loan is secured by a first mortgageon the Royal Sonesta Hotel Boston (Cambridge) property.  This property is included in fixed assets ata net book value of $23,347,000 at September 30, 2002.  The interest rate on this loan is 8.6% forthe term of the loan, and amortization of the principal balance is based on a25 year schedule.  Monthly payments ofprincipal and interest are $332,911. The mortgage loan matures in July 2010, and prepayment of this loan issubject to early payment penalties, based on prevailing interest rates at thetime of the prepayment.  This mortgageloan, and the mortgage loan on Sonesta Beach Resort Key Biscayne (see (b),below) are provided by the same lender, and are cross-collateralized.

 

(b)                                 This loan is secured by a first mortgage onthe Sonesta Beach Resort Key Biscayne property.  The property is included in fixed assets at a net book value of$44,907,000 at September 30, 2002.  Theinterest rate on this loan is 8.6% for the term of the loan, and amortizationof the principal balance is based on a 25 year schedule.    Monthly payments of principal and interestare $251,713.  The mortgage loan maturesin July 2010, and prepayment of this loan is subject to early paymentpenalties, based on prevailing interest rates at the time of theprepayment.  This mortgage loan, and themortgage loan on Royal Sonesta Hotel Boston (Cambridge) (see (a), above) areprovided by the same lender, and are cross-collateralized.

 

(c)                                  In connection with the sale of theSonesta Beach Resort Anguilla, this loan was repaid in September 2002.

 

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

 

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

 
|                       |   | **Three  Months Ended September 30** |   | **Nine  Months Ended September 30** |   |
|----------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                       |   | **2002**                             |   | **2001**                            |   | **2002** |   | **2001** |   |
|                       |   | **(in  thousands)**                  |   |
| Direct  departmental costs |   |                                 |   |                                |   |   |   |   |   |
| Rooms                      |   | $                                    | 3,248  |                                | $      | 3,307 |   | $ | 10,449 |   | $ | 10,964 |   |
| Food and  beverage         |   | 4,357                                |   | 4,490                               |   | 14,356 |   | 15,272 |   |
| Heat, light and  power     |   | 729                                  |   | 797                                 |   | 2,129 |   | 2,539 |   |
| Other                      |   | 923                                  |   | 1,043                               |   | 2,971 |   | 3,194 |   |
|                       |   | $                                    | 9,257  |                                | $      | 9,637 |   | $ | 29,905 |   | $ | 31,969 |   |

 

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

 

**5.****                                      Commitmentsand Contingencies**

 

In 2002, the Company entered into an agreement tomanage a condominium hotel in Sunny Isles, Florida.  This hotel is currently under construction, and is expected toopen in early 2003.  Under itsagreements, the Company will fund pre-opening costs and working capital.  In addition, the Company will fund costs forthe hotel’s non-guestroom furniture, fixtures and equipment in excess of acertain limit.  The Company has alsoagreed to purchase four condominium units in the hotel.  At this point, the Company estimates itstotal commitment to be approximately $4.5 million, of which approximately$613,000 was advanced at September 30, 2002.  Based on the management agreement, the Company will receive managementfees based on revenues, and incentive fees based on profits, as defined.  Under the same agreements, the Companyguarantees 50% of operating deficits during a period of approximately 18 monthsfollowing the opening of the hotel, and is committed to provide the hotel’sowner with certain minimum returns each year, subject to limits,thereafter.  In addition, the Companyhas an option to buy the hotel’s public (non-guestroom) spaces, which optioncan be exercised after the hotel opens.

 

8

----

 

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

 

The provision for incometaxes in the accompanying Consolidated Statements of Operations is summarizedbelow:

 
|                                             |   | **Nine  Months Ended September 30** |   |
|--------------------------------------------------|--------|-------------------------------------|--------|
|                                             |   | **2002**                            |   | **2001** |   |
|                                             |   | **(in  thousands)**                 |   |
| Deferred federal  income tax provision (benefit) |   | $                                   | 813    |   | $ | (190 | ) |
| Current  federal income tax provision (benefit)  |   | (1,348                              | )      | 5 |   |
| Current foreign  income tax provision            |   | 116                                 |   | 145 |   |
| Current state  income tax provision              |   | 252                                 |   | 254 |   |
|                                             |   | $                                   | (167   | ) | $ | 214 |   |

 

**7.****                                      SegmentInformation**

 

Segment information for the Company’s two reportablesegments, Owned & Leased Hotels and Management Activities, for the threemonth and nine month periods ending September 30, 2002 and 2001 follows:

 

Three month period ended September 30, 2002

 
|                                                                  |   | **Owned  &  Leased  Hotels** |   | **Management  Activities** |   | **Consolidated** |   |
|-----------------------------------------------------------------------|--------|----------------------------------|--------|----------------------------|--------|------------------|--------|
|                                                                  |   | **(in  thousands)**              |   |
| Revenues                                                              |   | $                                | 17,033 |                       | $      | 839              |   | $ | 17,872 |   |
| Operating income  (loss) before depreciation and amortization expense |   | 1,537                            |   | (1,126                     | )      | 411              |   |
| Depreciation and  amortization                                        |   | (1,955                           | )      | (110                       | )      | (2,065           | )      |
| Interest income  (expense), net                                       |   | (1,563                           | )      | 88                         |   | (1,475           | )      |
| Other income,  net                                                    |   | —                           |   | 4                          |   | 4                |   |
| Segment pre-tax  loss                                                 |   | (1,981                           | )      | (1,144                     | )      | (3,125           | )      |
|                                                                  |   |                             |   |                       |   |             |   |
| Segment assets                                                        |   | 90,157                           |   | 21,312                     |   | 111,469          |   |
| Segment capital  additions                                            |   | 2,499                            |   | 166                        |   | 2,665            |   |
|                                                                       |        |                                  |        |                            |        |                  |        |  |  |  |

 

Nine month period ended September 30, 2002

 
|                                                                  |   | **Owned  &  Leased  Hotels** |   | **Management  Activities** |   | **Consolidated** |   |
|-----------------------------------------------------------------------|--------|----------------------------------|--------|----------------------------|--------|------------------|--------|
|                                                                  |   | **(in  thousands)**              |   |
| Revenues                                                              |   | $                                | 64,503 |                       | $      | 3,159            |   | $ | 67,662 |   |
| Operating income  (loss) before depreciation and amortization expense |   | 10,463                           |   | (1,495                     | )      | 8,968            |   |
| Depreciation and  amortization                                        |   | (5,875                           | )      | (330                       | )      | (6,205           | )      |
| Interest income  (expense), net                                       |   | (4,650                           | )      | 308                        |   | (4,342           | )      |
| Other income,  net                                                    |   | —                           |   | 8                          |   | 8                |   |
| Segment pre-tax  loss                                                 |   | (62                              | )      | (1,509                     | )      | (1,571           | )      |
|                                                                  |   |                             |   |                       |   |             |   |
| Segment assets                                                        |   | 90,157                           |   | 21,312                     |   | 111,469          |   |
| Segment capital  additions                                            |   | 5,634                            |   | 1,296                      |   | 6,930            |   |
|                                                                       |        |                                  |        |                            |        |                  |        |  |  |  |

 

9

----

 

Three month period ended September 30, 2001

 
|                                                                  |   | **Owned  &  Leased  Hotels** |   | **Management  Activities** |   | **Consolidated** |   |
|-----------------------------------------------------------------------|--------|----------------------------------|--------|----------------------------|--------|------------------|--------|
|                                                                  |   | **(in  thousands)**              |   |
| Revenues                                                              |   | $                                | 16,726 |                       | $      | 580              |   | $ | 17,306 |   |
| Operating income  (loss) before depreciation and amortization expense |   | 456                              |   | (1,023                     | )      | (567             | )      |
| Depreciation and  amortization                                        |   | (1,878                           | )      | (110                       | )      | (1,988           | )      |
| Interest income  (expense), net                                       |   | (1,588                           | )      | 244                        |   | (1,344           | )      |
| Other income,  net                                                    |   | —                           |   | 43                         |   | 43               |   |
| Segment pre-tax  loss                                                 |   | (3,010                           | )      | (846                       | )      | (3,856           | )      |
|                                                                  |   |                             |   |                       |   |             |   |
| Segment assets                                                        |   | 88,528                           |   | 23,612                     |   | 112,140          |   |
| Segment capital  additions                                            |   | 4,305                            |   | 63                         |   | 4,368            |   |
|                                                                       |        |                                  |        |                            |        |                  |        |  |  |  |

 

Nine month period ended September 30, 2001

 
|                                                                  |   | **Owned  &  Leased  Hotels** |   | **Management  Activities** |   | **Consolidated** |   |
|-----------------------------------------------------------------------|--------|----------------------------------|--------|----------------------------|--------|------------------|--------|
|                                                                  |   | **(in  thousands)**              |   |
| Revenues                                                              |   | $                                | 69,350 |                       | $      | 3,293            |   | $ | 72,643 |   |
| Operating income  (loss) before depreciation and amortization expense |   | 11,257                           |   | (1,933                     | )      | 9,324            |   |
| Depreciation and  amortization                                        |   | (5,688                           | )      | (330                       | )      | (6,018           | )      |
| Interest income  (expense), net                                       |   | (4,769                           | )      | 1,083                      |   | (3,686           | )      |
| Other income,  net                                                    |   | 5                                |   | 13                         |   | 18               |   |
| Segment pre-tax  profit (loss)                                        |   | 805                              |   | (1,167                     | )      | (362             | )      |
|                                                                  |   |                             |   |                       |   |             |   |
| Segment assets                                                        |   | 88,528                           |   | 23,612                     |   | 112,140          |   |
| Segment capital  additions                                            |   | 11,034                           |   | 361                        |   | 11,395           |   |
|                                                                       |        |                                  |        |                            |        |                  |        |  |  |  |

 

10

----

 

**8.****                                      Earningsper Share**

 

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

 
|                                           |   | **Three  months ended September 30** |   | **Nine  months ended September 30** |   |
|------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                           |   | **2002**                             |   | **2001**                            |   | **2002** |   | **2001** |   |
| Numerator:                                     |   |                                 |   |                                |   |   |   |   |   |
| Net loss from  continuing operations           |   | $                                    | (2,195 | )                                   | $      | (2,664 | ) | $ | (1,404 | ) | $ | (576 | ) |
| Preferred stock  dividends                     |   | —                               |   | (3                                  | )      | — |   | (6 | ) |
|                                           |   |                                 |   |                                |   |   |   |   |   |
| Loss from  continuing operations               |   | (2,195                               | )      | (2,667                              | )      | (1,404 | ) | (582 | ) |
|                                           |   |                                 |   |                                |   |   |   |   |   |
| Profit (loss)  from discontinued operations    |   | (1,084                               | )      | (397                                | )      | (1,234 | ) | 42 |   |
|                                           |   |                                 |   |                                |   |   |   |   |   |
| Numerator for  earnings per share              |   | $                                    | (3,279 | )                                   | $      | (3,064 | ) | $ | (2,638 | ) | $ | (540 | ) |
|                                           |   |                                 |   |                                |   |   |   |   |   |
| Denominator:                                   |   |                                 |   |                                |   |   |   |   |   |
| Weighted average  number of shares outstanding |   | 3,698                                |   | 3,698                               |   | 3,698 |   | 3,701 |   |
|                                           |   |                                 |   |                                |   |   |   |   |   |
| Loss  per share of common stock:               |   |                                 |   |                                |   |   |   |   |   |
| Continuing  operations                         |   | $                                    | (0.59  | )                                   | $      | (0.72 | ) | $ | (0.38 | ) | $ | (0.16 | ) |
| Discontinued  operations                       |   | (0.29                                | )      | (0.11                               | )      | (0.33 | ) | 0.01 |   |
| Net  loss per share of common stock            |   | $                                    | (0.88  | )                                   | $      | (0.83 | ) | $ | (0.71 | ) | $ | (0.15 | ) |

 

**9.****                                      DiscontinuedOperations**

 

After considering the disappointing operating results of the SonestaBeach Resort Anguilla, and taking into account the general downturn in thehotel business, and in the Caribbean in particular, the Company decided to sellthe hotel, which transaction was completed on September 5, 2002.   The sale price was $10,450,000 of which$2,200,000 was paid at closing, and a non-interest bearing loan was made to thepurchaser for the remaining $8,250,000, which note becomes due on November 25,2002.    The loan is secured by a firstmortgage lien on the hotel property.  The financial statements for all periods presented have beenreclassified to present the operations and sale of the resort as a discontinuedoperation.    Following is a summary ofthe loss reported on the sale of the hotel, as well as the operating resultsfor the three and nine month periods ending September 30, 2002 and 2001:

 

11

----

 
|                                                                      |   | **Three  months ended September 30** |   | **Nine  months ended September 30** |   |
|---------------------------------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                                                      |   | **2002**                             |   | **2001**                            |   | **2002** |   | **2001** |   |
| Sale price                                                                |   | $                                    | 10,450 |                                | $      | — |   | $ | 10,450 |   | $ | — |   |
| Book  value of assets sold                                                |   | (11,245                              | )      | —                              |   | (11,245 | ) | — |   |
| Costs  and expenses, including commission to broker                       |   | (495                                 | )      | —                              |   | (495 | ) | — |   |
| Loss  on sale of property before income tax benefit                       |   | (1,290                               | )      | —                              |   | (1,290 | ) | — |   |
|                                                                      |   |                                 |   |                                |   |   |   |   |   |
| Revenues  from operations                                                 |   | 190                                  |   | 554                                 |   | 2,545 |   | 3,685 |   |
| Expenses                                                                  |   | (600                                 | )      | (1,157                              | )      | (3,183 | ) | (4,422 | ) |
| Gain on casualty                                                          |   | —                               |   | —                              |   | — |   | 801 |   |
| Profit  (loss) from operations before income tax benefit                  |   | (410                                 | )      | (603                                | )      | (638 | ) | 64 |   |
|                                                                      |   |                                 |   |                                |   |   |   |   |   |
| Loss  from discontinued operations, before income tax provision (benefit) |   | (1,700                               | )      | (603                                | )      | (1,928 | ) | 64 |   |
| Income tax  provision (benefit)                                           |   | (616                                 | )      | (206                                | )      | (694 | ) | 22 |   |
| Loss from  discontinued operations                                        |   | $                                    | (1,084 | )                                   | $      | (397 | ) | $ | (1,234 | ) | $ | 42 |   |

 

12

----

 

**PartI – Item 2**

 

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

 

In September 2002, the Company sold the Sonesta Beach Resort Anguilla(see Note 9—Discontinued Operations).   The following revenues and results from operations for all periods havebeen reclassified to present the operations of the resort as a discontinuedoperation.

 

**FIRSTNINE MONTHS 2002 COMPARED TO 2001**

 

For the nine month period ending September 30, 2002the Company recorded a net loss of $1,404,000, or $(0.38) per common share,compared to a net loss of $576,000, or $(0.16) per common share, in the sameperiod in 2001.   The Company’s resultscontinue to be affected by lower demand from both group and transient business,which has resulted in lower revenues, primarily because of lower average roomrates.    Competition for availablebusiness has been fierce.    Roomrevenues per available room (“REVPAR”) decreased substantially compared to2001. The Company managed to offset a substantial portion of the lost revenuesby lowering both operating and overhead expenses.

 

**REVENUES**

 
|                                            |   | **TOTAL  REVENUES** |   |
|-------------------------------------------------|--------|---------------------|--------|
|                                            |   | **NO. OF  ROOMS**   |   | **2002** |   | **2001** |   |
|                                            |   | **(in  thousands)** |   |
| Sonesta Beach  Resort Key Biscayne              |   | 300                 |   | $ | 19,288 |   | 21,335 |   |
| Royal Sonesta  Hotel Boston (Cambridge)         |   | 400                 |   | 18,918 |   | 20,931 |   |
| Royal Sonesta  Hotel New Orleans                |   | 500                 |   | 26,297 |   | 27,084 |   |
| Management and  service fees and other revenues |   |                |   | 3,159 |   | 3,293 |   |
| Total revenues                                  |   |                |   | $ | 67,662 |   | $ | 72,643 |   |
|                                                 |        |                     |        |  |  |  |  |  |  |

 

Total revenues for the first nine months of 2002 were $67,662,000compared to $72,643,000 in 2001, a decrease of approximately $4,981,000.

 

Revenues at Sonesta Beach Resort Key Biscayne decreased from$21,335,000 in the first nine months of 2001 to $19,288,000 in the same periodin 2002.    This 10% decrease inrevenues was caused almost entirely by a 19% decrease in room revenue peravailable room (“REVPAR”), primarily due to lower average room ratesachieved.   Royal Sonesta Hotel Boston(Cambridge) reported a 10% decline in total revenues achieved during the ninemonth period ending September 30, 2002 compared to a year ago.    The total decrease in revenues of$2,013,000 was due to lower room revenues of $1,365,000 (entirely due to loweraverage room rates achieved), and lower food and beverage revenues because ofdecreases in banquet business.    Royal SonestaHotel New Orleans did better than its sister hotels, as total revenuesdecreased by only 3% during the first nine months of 2002 compared to2001.    REVPAR decreased by 3% toaccount for the decreased revenues.   Income from management and service fees, which are mainly from hotelsthat the Company operates under management agreements, decreased from$3,293,000 in the first nine months of 2001 to $3,159,000 in the same period in2002.    This was mainly due to lowerfee income from the Company’s managed hotels in Egypt.

 

13

----

 

**OPERATINGINCOME**

 
|                                                            |   | **OPERATING  INCOME (LOSS)** |   |
|-----------------------------------------------------------------|--------|------------------------------|--------|
|                                                            |   | **2002**                     |   | **2001** |   |
|                                                            |   | **(in  thousands)**          |   |
| Sonesta Beach  Resort Key Biscayne                              |   | $                            | (428   | ) | $ | (181 | ) |
| Royal Sonesta  Hotel Boston (Cambridge)                         |   | 2,318                        |   | 2,746 |   |
| Royal Sonesta  Hotel New Orleans                                |   | 2,699                        |   | 3,004 |   |
| Operating income  from hotels after management and service fees |   | 4,589                        |   | 5,569 |   |
| Management  activities and other                                |   | (1,826                       | )      | (2,263 | ) |
| Operating income                                                |   | $                            | 2,763  |   | $ | 3,306 |   |

 

Operating income for the nine-month period endedSeptember 30, 2002 was $2,763,000, compared to operating income of $3,306,000in 2001, a decrease of approximately $543,000.

 

The operating loss at Sonesta Beach Resort KeyBiscayne during the nine month period ending September 30, 2002 was $428,000, a$247,000 increase compared to the same period in 2001.   Decreased revenues of $2,047,000 werepartially offset by decreased expenses of $1,800,000 (8% lower compared to lastyear).   This decrease in expenses wasprimarily in cost and operating expenses, administrative and general,maintenance and rental expenses.  Operating income at Royal Sonesta Hotel Boston (Cambridge) decreasedfrom $2,746,000 in the first nine months of 2001 to $2,318,000 during the sameperiod in 2002.  Decreased revenues of$2,013,000 were partially offset by decreases in expenses of $1,585,000, mainlydue to lower cost and operating, administrative and general and maintenanceexpenses.  Lower payroll costscontributed substantially to the decreases in expenses in both the Boston andKey Biscayne hotels.  Royal SonestaHotel New Orleans reported operating income of $2,699,000 during the firstthree quarters of 2002, a decrease of $305,000 compared to the same period in2001.   Total revenues decreased by$787,000, and expenses decreased by $482,000, despite the fact that occupanciesin 2002 were virtually the same as those achieved in 2001.  The decrease in expenses in New Orleans wereprimarily in cost and operating and maintenance expenses.  The Company’s loss from managementactivities, which is computed after giving effect to management, marketing andservice fees to owned and leased hotels, decreased from $2,263,000 in the firstnine months of 2001 to $1,826,000 in the same period in 2002.  Decreased fee income of $134,000 was morethan offset by a decrease in expenses related to these activities of $571,000during the first nine months of 2002 compared to last year.  The decrease in expenses was mainly due tolower corporate overhead expenses and savings related to the relocation of thecorporate offices.    In addition,corporate expenses in 2001 included non-recurring severance costs related tothe   outsourcing of the Company’sdesign function.

 

**OTHERINCOME (DEDUCTIONS)**

 

Interest expense decreased by $133,000 from $4,820,000 in the first ninemonths of 2001 to $4,687,000 in the same period in 2002, due to the lowerprincipal balances on the Cambridge and Key Biscayne hotel mortgage loans (seeNote 3—Borrowing Arrangements).

 

Interest income in the first nine months of 2002 was $345,000 comparedto $1,134,000 in the first nine months of 2001, a decrease of $789,000.    This decrease was due to lower short-terminvestment income because of much lower rates of return during 2002 compared to2001, and because of the Company’s lower cash balances.

 

14

----

 

**THIRDQUARTER 2002 COMPARED TO 2001**

 

**REVENUES**

 
|                                            |   | **TOTAL  REVENUES** |   |
|-------------------------------------------------|--------|---------------------|--------|
|                                            |   | **NO. OF  ROOMS**   |   | **2002** |   | **2001** |   |
|                                            |   | **(in  thousands)** |   |
| Sonesta Beach  Resort Key Biscayne              |   | 300                 |   | $ | 3,933 |   | $ | 3,764 |   |
| Royal Sonesta  Hotel Boston (Cambridge)         |   | 400                 |   | 6,599 |   | 6,561 |   |
| Royal Sonesta  Hotel New Orleans                |   | 500                 |   | 6,500 |   | 6,400 |   |
| Management and  service fees and other revenues |   |                |   | 840 |   | 581 |   |
| Total revenues                                  |   |                |   | $ | 17,872 |   | $ | 17,306 |   |

 

Total revenues for thethree month period ended September 30, 2002 were $17,872,000 compared to$17,306,000 in the same period in 2001, an increase of approximately $566,000.

 

During the 2002 thirdquarter, Sonesta Beach Resort Key Biscayne increased revenues by a modest$169,000 compared to the 2001 third quarter.   This 4% increase in revenues was primarily from increased other income,since the hotels’ room revenue per available room (“REVPAR”) was the same inthe 2002 quarter compared to 2001.  Royal Sonesta Hotel Boston (Cambridge) reported virtually the samerevenues in the 2002 third quarter compared to last year.    The same applied to Royal Sonesta HotelNew Orleans.   Even though Septemberbusiness was better in 2002 compared to 2001, especially in Boston and KeyBiscayne, the revenue gains during that month barely offset the revenue lossesin the slow summer months of July and August.    Revenues from management activities were $840,000 during the2002 third quarter, compared to $581,000 in the 2001 third quarter.    The 2002 income includes incentive feeswhich the Company earned in 2002 from a managed hotel in New Orleans.    Because of the downturn in business afterSeptember 11, 2001, the Company did not earn the same fees in 2001.

 

**OPERATINGINCOME**

 
|                                                          |   | **OPERATING  INCOME (LOSS)** |   |
|---------------------------------------------------------------|--------|------------------------------|--------|
|                                                          |   | **2002**                     |   | **2001** |   |
|                                                          |   | **(in thousands)**           |   |
| Sonesta Beach  Resort Key Biscayne                            |   | $                            | (1,893 | ) | $ | (2,470 | ) |
| Royal Sonesta  Hotel Boston (Cambridge)                       |   | 1,054                        |   | 638 |   |
| Royal Sonesta  Hotel New Orleans                              |   | 420                          |   | 409 |   |
| Operating  loss from hotels after management and service fees |   | (419                         | )      | (1,423 | ) |
| Management  activities and other                              |   | (1,235                       | )      | (1,132 | ) |
| Operating loss                                                |   | $                            | (1,654 | ) | $ | (2,555 | ) |

 

Operating loss for the third quarter of 2002 was $1,654,000, comparedto an operating loss of $2,555,000 in 2001, a decrease of approximately$901,000.

 

15

----

 

Operating loss at Sonesta Beach Resort Key Biscayne decreased by$577,000 to $1,893,000 during the third quarter of 2002, compared to the 2001third quarter.    Revenues increased bya modest $169,000, and expenses during the third quarter decreased by $408,000 compared to last year, primarily dueto lower cost and operating and maintenance expense.   Royal Sonesta Hotel Boston (Cambridge) reported an increase inits operating income from $638,000 in the third quarter of 2001 to $1,054,000in 2002, which was almost entirely due to a decrease in expenses of$378,000.   The decrease was mainly dueto lower cost and operating and repairs and maintenance expenses.   Royal Sonesta Hotel New Orleans hadoperating income of $420,000 in the 2002 third quarter, slightly higher thanoperating income of $409,000 in the 2002 third quarter.   Revenues increased by $100,000, andexpenses increased by $89,000.   Lossfrom management activities, which is computed after giving effect to management,marketing and service fees to owned and leased hotels, increased by $103,000 to$1,235,000 in the third quarter of 2002, despite an increase in revenues of$259,000.    Expenses related to theseactivities increased by $362,000.   Thiswas mainly due to the fact that the Company in September 2001, following theSeptember 11 events and the subsequent drop-off in business, reversedprovisions it had set up previously for 2001 bonus payments.   In addition, the Company provided in the2002 third quarter for a $170,000 expense for an expected contribution towardsfirst year operating deficits at the Sonesta Hotel & Suites Coconut Grove,which opened in April 2002.   Under itsmanagement contract for the hotel, the Company agreed to fund deficits duringthe first year of operations, which period will end March 31, 2003.

 

**OTHERINCOME (DEDUCTIONS)**

 

Interest income in the third quarter of 2002 was $102,000 compared to$253,000 in the 2001 third quarter, mainly due to lower investment income onthe Company’s cash balances, partially offset by interest income on loans madeto the owner of Sonesta Hotel & Suites Coconut Grove.

 

**FEDERAL,FOREIGN AND STATE INCOME TAXES**

 

The income tax benefit on the Company’s losses during the first ninemonths of 2002 was less than what would be expected based on the statutory taxrates, which was due to the provision for state taxes on the Company’s incomefrom Royal Sonesta Hotel New Orleans, and the provision for foreign taxes onthe Company’s income from its managed hotels in Egypt.   At September 30, 2002 refundable incometaxes of $2,913,000 are included in current assets.   This consists primarily of federal income tax refunds for lossesincurred in 2001 and 2002.

 

### **LIQUIDITYAND CAPITAL RESOURCES**

 

The Company had cash and cash equivalents of approximately $4,534,000at September 30, 2002.    In addition,the Company has $7,000,000 available under two credit lines.

 

The Company sold Sonesta Beach Resort Anguilla in September 2002.    Of the sale price of $10,450,000, $2,200,000was received at closing, and a loan was made to the purchaser for the balanceof $8,250,000, which will be due on November 25, 2002.    The remaining balance of $4,148,000 of themortgage loan which encumbered the resort was paid at closing.

 

In 2002, the Company entered into an agreement to manage a condominiumhotel in Sunny Isles, Florida. This Hotel is currently under construction, andis expected to open in early 2003.  Under its agreements, the Company will fund pre-opening costs andworking capital.  In addition, theCompany will fund costs for the hotel’s non-guestroom furniture, fixtures andequipment in excess of a certain limit.  The Company has also agreed to purchase four condominium units in theHotel.    At this point, the Companyestimates its total commitment to be approximately $4.5 million, of which$613,000 was advanced at September 30, 2002.      Based on the management agreement, the

 

16

----

 

Company will receive management fees based on revenues, and incentivefees based on profits, as defined.  Under the same agreements, the Company guarantees 50% of operatingdeficits during a period of approximately 18 months following the opening ofthe hotel, and is committed to provide the Hotel’s owner with certain minimumreturns each year, subject to limits, thereafter.   In addition, the Company has an option to buy the hotel’s public(non-guestroom) spaces, which option can be exercised after the Hotel opens.

 

The Company agreed to loan an additional $500,000 to the owner ofSonesta Beach Resort Sharm El Sheikh, to assist with the financing of theconstruction of additional rooms and other hotel facilities.    An amount of $200,000 was funded in Julyand an additional $200,000 was funded in October.    The remaining $100,000 will be funded as the improvements arebeing completed.

 

During the first nine months of 2002, the Company advanced $1,610,000to the owner of the Sonesta Hotel & Suites Coconut Grove, Miami, which is acondominium hotel that opened in April 2002.  Under its agreements, the Company is loaning up to $5,000,000 to theproject to fund part of the project costs, and for pre-opening costs andworking capital (see also Note 2—Long Term Receivables and Advances).    The Company funded the remaining portionof this commitment, approximately $500,000, in October 2002.    Under its agreements, the Company iscommitted to provide certain minimum returns to the hotel’s owner, and to fundoperating deficits during the first year, which will end on March 31,2003.    The Company advanced $1,066,000at September 30, 2002 for seasonal losses, and expects to recover theseadvances, with the exception of a projected deficit of $170,000 for the firstyear, during the winter season 2002/03. The amounts advanced, net of the $170,000 provision for the projecteddeficit, are included in prepaid and other current assets at September 30,2002.

 

The Company believes that its present cash balances and availablecredit lines will be more than adequate to meet its cash requirements for 2002and beyond.

 

17

----

 

**PART I – Item 3**

 

**QUANTITATIVE AND QUALITATIVEDISCLOSURE OF MARKET RISK**

 

The Company is exposed to market risk from changes in interest ratesand foreign exchange rates.    TheCompany uses fixed rate debt to finance the ownership of its properties.    The table that follows summarizes theCompany’s fixed rate debt obligations outstanding at September 30, 2002.    This information should be read in conjunctionwith Note 3—Borrowing Arrangements.

 

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

 
|                   |   | **YEAR** |   |     |   |     |   |     |   |
|------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                   |   | **2002** |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **Thereafter** |   | **Total** |   | **Fair Value** |   |
| Fixed rate             |   | $        | 228    |     | $      | 945      |   | $        | 1,014  |   | $ | 1,124 |   | $ | 1,225 |   | $ | 65,734 |   | $ | 70,270 |   | $ | 70,270 |   |
| Average interest  rate |   | 8.6      | %      | 8.6      | %      | 8.6      | %      | 8.6      | %      | 8.6 | % | 8.6 | % |   |   |   |   |
|                        |        |          |        |          |        |          |        |          |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

18

----

 

**PART I – Item 4**

 

**INTERNALCONTROLS AND PROCEDURES**

 

As of September 30, 2002, an evaluation was performed under thesupervision and with the participation of the Company’s management, includingthe CEO, CFO and Vice President and Treasurer of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures.   Based on that evaluation, the Company’smanagement, including the CEO, CFO and Vice President and Treasurer concludedthat the Company’s disclosure controls and procedures were effective as ofSeptember 30, 2002.    There have beenno significant changes in the Company’s internal controls or in other factorsthat could significantly affect internal controls subsequent to September 30,2002.

 

19

----

 

**PARTII – Other Information**

 

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

 

Not applicable during the quarter ended September 30,2002

 

20

----

 

**SIGNATURE**

 

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

 
|   | SONESTA  INTERNATIONAL HOTELS CORPORATION |                                                                             |   |
|--------|-------------------------------------------|----------------------------------------------------------------------------------|--------|
|   |                                      |                                                                             |   |   |
|   |                                      |                                                                             |   |   |
|   | By:  /s/                             | Boy A. J. van Riel                                                               |   |
|   |                                      | Boy A. J. van Riel                                                               |   |   |
|   |                                      | Vice President and Treasurer                                                     |   |   |
|   |                                      |                                                                             |   |   |
|   |                                      | (Authorized to sign on behalf of the Registrant as  Principal Financial Officer) |   |
|   |                                      |                                                                             |   |   |
|   | Date:                                     | November 12, 2002                                                                |   |   |
|        |                                           |                                                                                  |        |  |  |  |

 

21

----

 

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

 

1.                                       Ihave reviewed the quarterly report on Form 10-Q for the period ending September30, 2002 of Sonesta International Hotels Corporation;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 
| Date:  | November 12, 2002 | /s/ Boy A.J. van Riel |
|--------|-------------------|----------------------------|
|   |              | Name:                      | Boy A.J. van Riel |
|   |              | Title:                     | Vice President and Treasurer |

 

22

----

 

I, Roger P. Sonnabend,certify that:

 

1.                                       Ihave reviewed the quarterly report on Form 10-Q for the period ending September30, 2002 of Sonesta International Hotels Corporation;

 

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

 

3.                                       Basedon my knowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 
| Date:  | November 12, 2002 | /s/  Roger P. Sonnabend |
|--------|-------------------|-----------------------------------|
|   |              | Name:                             | Roger P. Sonnabend |
|   |              | Title:                            | Chairman of the Board and Chief Executive  Officer |

 

23

----

 

I, Paul Sonnabend, certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q for the period endingSeptember 30, 2002 of Sonesta International Hotels Corporation;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 
| Date:  | November 12, 2002 | /s/ Paul Sonnabend |
|--------|-------------------|-------------------------|
|   |              | Name:                   | Paul Sonnabend |
|   |              | Title:                  | Chairman of the Executive Committee  and Chief Financial Officer |

 

24

----