**FORM 10-Q**

 

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**(MarkOne)**

 
| **ý**                                             | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
|                                                   |       |                                                                                                     |
| **For the Quarterly period ended June 30,  2005** |
|                                                   |       |                                                                                                     |
| **OR**                                                 |
|                                                   |       |                                                                                                     |
| **o**                                                  | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition period from                                              to                                              **

 

**Commission file number 0-9032**

 

**SONESTA INTERNATIONAL HOTELSCORPORATION**

(Exact name of registrant as specified in its charter)

 
| **NEW YORK**                                                    | ** ** | **13-5648107**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction  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)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by section 13 or 15 (d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

 

Yes   ý         No o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-02)

 

Yes   o         No ý

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Number of Shares of Common Stock Outstanding

As of August 10, 2005 — $.80 par value,

Class A – 3,698,230

 

 

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** **

**INDEX**

 

**SONESTA INTERNATIONAL HOTELSCORPORATION**

 
| ** **                          | ** ** | ** **                                                                                      | **Page**                                                                                                                         |
|-------------------------------------|------------|-------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------|
|                                |       |                                                                                            |                                                                                                                             |
| Part I. Financial  Information |       |                                                                                            |                                                                                                                             |
|                                |       |                                                                                            |                                                                                                                             |   |
|                                | Item 1.    |                                                                                            | Financial Statements  (unaudited)                                                                                                |   |
|                                |       |                                                                                            |                                                                                                                             |   |
|                                |       |                                                                                            | Condensed  consolidated balance sheets— June 30, 2005 (unaudited) and  December 31, 2004                          | 1 |
|                                |       |                                                                                            |                                                                                                                             |   |
|                                |       |                                                                                            | Condensed  consolidated statements of operations—Three and six-month periods ended  June 30, 2005 and 2004 (unaudited) | 3 |
|                                |       |                                                                                            |                                                                                                                             |   |
|                                |       |                                                                                            | Condensed  consolidated statements of cash flows—Six—month periods ended June 30,  2005 and 2004 (unaudited)      | 4 |
|                                |       |                                                                                            |                                                                                                                             |   |
|                                |       |                                                                                            | Notes  to condensed consolidated financial statements-June 30, 2005 and 2004                                                | 6 |
|                                |       |                                                                                            |                                                                                                                             |   |
|                                | Item  2.   |                                                                                            | Management’s  Discussion and Analysis of Results of Operations and Financial Condition—June 30,  2005             | 14 |
|                                |       |                                                                                            |                                                                                                                             |   |
|                                | Item  3.   |                                                                                            | Quantitative  and Qualitative Disclosure of Market Risk                                                                          | 19 |
|                                |       |                                                                                            |                                                                                                                             |   |
|                                | Item  4.   |                                                                                            | Internal  Controls and Procedures                                                                                                | 20 |
|                                |       |                                                                                            |                                                                                                                             |   |
| Part II. Other  Information    |       |                                                                                            |                                                                                                                             |
|                                |       |                                                                                            |                                                                                                                             |
|                                | Item 5.    |                                                                                            | Submission of Matters to  a Vote of Security Holders                                                                             | 21 |
|                                |       |                                                                                            |                                                                                                                             |   |
|                                |       |                                                                                            | Signature  page                                                                                                                  | 22 |
|                                |       |                                                                                            |                                                                                                                             |   |
| Exhibits 31.1, 31.2, 31.3           |       | Certifications by the Company’s Chief Executive Officers and Vice  President and Treasurer |                                                                                                                             |
|                                |       |                                                                                            |                                                                                                                             |
| Exhibit 99.1                   |       | 18 U.S.C. Section 1350 Certification by Company Officers                                   |                                                                                                                             |

 

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

###### ** **

**SONESTA INTERNATIONAL HOTELS CORPORATION**

**CONDENSED CONSOLIDATED BALANCESHEETS**

June 30, 2005 (unaudited) and December 31,2004

 
| ** **                                                                            | ** ** | **(in thousands)**     | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------|------------|
|                                                                                  | ** ** | **June 30  2005** | ** ** | **December 31  2004** | ** ** |
|                                                                                  | ** ** | ** **             | ** ** | ** ** | ** ** |
| ASSETS                                                                                | ** ** | ** **             | ** ** | ** ** | ** ** |
| Current assets:                                                                       |       |                   |       |   |   |
| Cash and cash  equivalents                                                            |       | $                      | 31,543     |   | $ | 7,950 |   |
| Restricted cash                                                                       |       | 910                    |       | 927 |   |
| Accounts and  notes receivable:                                                       |       |                   |       |   |   |
| Trade, less  allowance of $231 ($212 at December 31, 2004) for doubtful accounts |       | 7,201                  |       | 6,960 |   |
| Other, including  current portion of long-term receivables and advances               |       | 1,727                  |       | 1,601 |   |
| Total accounts  and notes receivable                                                  |       | 8,928                  |       | 8,561 |   |
| Inventories                                                                           |       | 1,125                  |       | 1,215 |   |
| Current deferred  tax assets                                                          |       | 359                    |       | — |   |
| Prepaid expenses  and other                                                           |       | 1,951                  |       | 2,455 |   |
|                                                                                  |       |                   |       |   |   |
| Total current  assets                                                                 |       | 44,816                 |       | 21,108 |   |
|                                                                                  |       |                   |       |   |   |
| Long-term  receivables and advances                                                   |       | 8,907                  |       | 9,066 |   |
|                                                                                  |       |                   |       |   |   |
| Deferred tax  assets                                                                  |       | 4,977                  |       | — |   |
|                                                                                  |       |                   |       |   |   |
| Property and  equipment, at cost:                                                     |       |                   |       |   |   |
| Land and land  improvements                                                           |       | 9,102                  |       | 9,102 |   |
| Buildings                                                                             |       | 57,483                 |       | 57,861 |   |
| Furniture and  equipment                                                              |       | 43,080                 |       | 41,050 |   |
| Leasehold  improvements                                                               |       | 7,661                  |       | 7,527 |   |
| Projects in  progress                                                                 |       | —                 |       | 148 |   |
|                                                                                  |       | 117,326                |       | 115,688 |   |
|                                                                                  |       |                   |       |   |   |
| Less: accumulated  depreciation and amortization                                      |       | 42,753                 |       | 39,050 |   |
| Net property and  equipment                                                           |       | 74,573                 |       | 76,638 |   |
|                                                                                  |       |                   |       |   |   |
| Other long-term  assets                                                               |       | 2,765                  |       | 2,725 |   |
|                                                                                  |       | $                      | 136,038    |   | $ | 109,537 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

1

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**SONESTA INTERNATIONAL HOTELS CORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

June 30, 2005(unaudited) and December 31, 2004

 
| ** **                                                                | ** ** | **(in thousands)**     | ** ** |
|---------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                | ** ** | **June 30  2005** | ** ** | **December 31  2004** | ** ** |
| ** **                                                                | ** ** | ** **             | ** ** | ** ** | ** ** |
| LIABILITIES AND  COMMON STOCKHOLDERS’ EQUITY                         |       |                   |       |   |   |
| Current  liabilities:                                                     |       |                   |       |   |   |
| Accounts payable                                                          |       | $                      | 3,595      |   | $ | 3,383 |   |
| Advance deposits                                                          |       | 1,949                  |       | 2,861 |   |
| Federal, foreign  and state income taxes                                  |       | 7,277                  |       | 740 |   |
| Accrued  liabilities:                                                     |       |                   |       |   |   |
| Salaries and  wages                                                       |       | 2,042                  |       | 2,111 |   |
| Rentals                                                                   |       | 4,337                  |       | 6,417 |   |
| Interest                                                                  |       | 946                    |       | 305 |   |
| Pension and  other employee benefits                                      |       | 2,424                  |       | 751 |   |
| Other                                                                     |       | 1,734                  |       | 1,056 |   |
|                                                                      |       |                   |       |   |   |
| Total accrued  liabilities                                                |       | 11,483                 |       | 10,640 |   |
|                                                                      |       |                   |       |   |   |
| Total current  liabilities                                                |       | 24,304                 |       | 17,624 |   |
|                                                                      |       |                   |       |   |   |
| Long-term debt                                                            |       | 34,061                 |       | 69,816 |   |
|                                                                      |       |                   |       |   |   |
| Finance  obligation                                                       |       | 59,728                 |       | — |   |
|                                                                      |       |                   |       |   |   |
| Deferred tax  liabilities                                                 |       | —                 |       | 5,131 |   |
|                                                                      |       |                   |       |   |   |
| Other  non-current liabilities                                            |       | 5,383                  |       | 5,702 |   |
|                                                                      |       |                   |       |   |   |
| Commitments and  contingencies                                            |       |                   |       |   |   |
|                                                                      |       |                   |       |   |   |
| Common  stockholders’ equity:                                        |       |                   |       |   |   |
| Common stock:                                                             |       |                   |       |   |   |
| Class A,  $0.80 par value:                                           |       |                   |       |   |   |
| Authorized –  10,000 shares Issued—6,102 shares at stated value |       | 4,882                  |       | 4,882 |   |
| Retained  earnings                                                        |       | 19,733                 |       | 18,435 |   |
| Treasury shares—2,404,  at cost                                      |       | (12,053                | )          | (12,053 | ) |
| Total common  stockholders’ equity                                   |       | 12,562                 |       | 11,264 |   |
|                                                                      |       | $                      | 136,038    |   | $ | 109,537 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

2

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**SONESTA INTERNATIONAL HOTELS CORPORATION**

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

(in thousands except for per share data)

 
| ** **                                           | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                           | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                            |       |                                 |       |                               |       |   |   |   |   |
| Rooms                                                |       | $                                    | 14,409     |                               | $          | 14,153 |   | $ | 28,681 |   | $ | 28,149 |   |
| Food and  beverage                                   |       | 7,769                                |       | 7,092                              |       | 14,436 |   | 13,518 |   |
| Management,  license and service fees                |       | 1,372                                |       | 1,038                              |       | 3,087 |   | 2,206 |   |
| Parking,  telephone and other                        |       | 2,350                                |       | 2,248                              |       | 4,824 |   | 4,580 |   |
|                                                 |       | 25,900                               |       | 24,531                             |       | 51,028 |   | 48,453 |   |
| Costs and  expenses:                                 |       |                                 |       |                               |       |   |   |   |   |
| Costs and  operating expenses                        |       | 11,363                               |       | 10,645                             |       | 22,009 |   | 20,782 |   |
| Advertising and  promotion                           |       | 2,044                                |       | 1,871                              |       | 3,903 |   | 3,681 |   |
| Administrative  and general                          |       | 3,937                                |       | 4,064                              |       | 8,183 |   | 7,832 |   |
| Human resources                                      |       | 372                                  |       | 371                                |       | 774 |   | 733 |   |
| Maintenance                                          |       | 1,459                                |       | 1,418                              |       | 2,854 |   | 2,772 |   |
| Rentals                                              |       | 2,085                                |       | 2,442                              |       | 4,654 |   | 4,891 |   |
| Property taxes                                       |       | 678                                  |       | 611                                |       | 1,352 |   | 1,218 |   |
| Depreciation and  amortization                       |       | 1,913                                |       | 2,124                              |       | 3,901 |   | 4,236 |   |
|                                                 |       | 23,851                               |       | 23,546                             |       | 47,630 |   | 46,145 |   |
| Operating income                                     |       | 2,049                                |       | 985                                |       | 3,398 |   | 2,308 |   |
|                                                 |       |                                 |       |                               |       |   |   |   |   |
| Other income  (deductions):                          |       |                                 |       |                               |       |   |   |   |   |
| Interest expense                                     |       | (923                                 | )          | (1,529                             | )          | (2,447 | ) | (3,152 | ) |
| Interest income                                      |       | 273                                  |       | 80                                 |       | 411 |   | 164 |   |
| Foreign exchange  loss                               |       | —                               |       | —                             |       | (10 | ) | (2 | ) |
| Gain on sales of  assets                             |       | 125                                  |       | 5                                  |       | 125 |   | 18 |   |
|                                                 |       | (525)                                |       | (1,444                             | )          | (1,921 | ) | (2,972 | ) |
|                                                 |       |                                 |       |                               |       |   |   |   |   |
| Income (loss)  before income tax provision (benefit) |       | 1,524                                |       | (459                               | )          | 1,477 |   | (664 | ) |
| Income tax  provision (benefit)                      |       | 631                                  |       | 65                                 |       | (3,519 | ) | 179 |   |
| Net income  (loss)                                   |       | 893                                  |       | (524                               | )          | 4,996 |   | (843 | ) |
|                                                 |       |                                 |       |                               |       |   |   |   |   |
| Retained  earnings at beginning of period            |       | 22,538                               |       | 22,718                             |       | 18,435 |   | 23,037 |   |
| Cash dividends                                       |       | (3,698                               | )          | ——                       |       | (3,698 | ) | — |   |
| Retained  earnings at end of period                  |       | $                                    | 19,733     |                               | $          | 22,194 |   | $ | 19,733 |   | $ | 22,194 |   |
|                                                 |       |                                 |       |                               |       |   |   |   |   |
| Net income  (loss) per share                         |       | $                                    | 0.24       |                               | $          | (0.14 | ) | $ | 1.35 |   | $ | (0.23 | ) |
| Weighted average  number of shares outstanding       |       | 3,698                                |       | 3,698                              |       | 3.698 |   | 3,698 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

3

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**SONESTA INTERNATIONAL HOTELS CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)**

Increase (Decrease) in Cash

 
| ** **                                                                                          | ** ** | **(in thousands)**                | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                          | ** ** | **Six Months Ended June 30** | ** ** |
| ** **                                                                                          | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Cash provided  (used) by operating activities                                                       |       |                              |       |   |   |
| Net income  (loss)                                                                                  |       | $                                 | 4,996      |   | $ | (843 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities |       |                              |       |   |   |
| Pension expense                                                                                     |       | —                            |       | 1,121 |   |
| Depreciation and  amortization of property and equipment                                            |       | 3,901                             |       | 4,236 |   |
| Other  amortization                                                                                 |       | 33                                |       | 45 |   |
| Income tax  benefit                                                                                 |       | (4,181                            | )          | — |   |
| Gain on sales of  assets                                                                            |       | (125                              | )          | (18 | ) |
| Deferred  interest income                                                                           |       | (151                              | )          | (108 | ) |
| Deferred  interest expense                                                                          |       | —                            |       | 1,258 |   |
| Changes in  assets and liabilities                                                                  |       |                              |       |   |   |
| Restricted cash                                                                                     |       | 17                                |       | (2,581 | ) |
| Accounts and  notes receivable                                                                      |       | (465                              | )          | 1,359 |   |
| Inventories                                                                                         |       | 90                                |       | 71 |   |
| Prepaid expenses  and other                                                                         |       | 438                               |       | (342 | ) |
| Accounts payable                                                                                    |       | 212                               |       | 5 |   |
| Advance deposits                                                                                    |       | (911                              | )          | (784 | ) |
| Federal, foreign  and state income taxes                                                            |       | 270                               |       | (8 | ) |
| Accrued  liabilities                                                                                |       | 307                               |       | (653 | ) |
| Cash provided by  operating activities                                                              |       | 4,431                             |       | 2,758 |   |
|                                                                                                |       |                              |       |   |   |
| Cash provided  (used) by investing activities                                                       |       |                              |       |   |   |
| Proceeds from  sales of assets                                                                      |       | 523                               |       | 18 |   |
| Proceeds from  finance obligation                                                                   |       | 59,978                            |       | — |   |
| Expenditures for  property and equipment                                                            |       | (2,112                            | )          | (1,898 | ) |
| Other  investments                                                                                  |       | —                            |       | (27 | ) |
| Payments received  on long-term receivables and advances                                            |       | 825                               |       | 597 |   |
| New loans and  advances                                                                             |       | (815                              | )          | (819 | ) |
| Cash provided  (used) by investing activities                                                       |       | 58,399                            |       | (2,129 | ) |
|                                                                                                |       |                              |       |   |   |
| Cash used by  financing activities                                                                  |       |                              |       |   |   |
| Repayment of  long-term debt                                                                        |       | (35,539                           | )          | — |   |
| Cash dividends  paid                                                                                |       | (3,698                            | )          | — |   |
| Cash used by  financing activities                                                                  |       | (39,237                           | )          | — |   |
| Net increase in  cash                                                                               |       | 23,593                            |       | 629 |   |
| Cash and cash  equivalents at beginning of period                                                   |       | 7,950                             |       | 4,327 |   |
| Cash and cash  equivalents at end of period                                                         |       | $31,543                           |       | $4,956 |   |
|                                                                                                     |            |                                   |            |  |  |  |  |

 

*See accompanyingnotes to condensed consolidated financial statements.*

 

4

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** **

SupplementalSchedule of Interest and Income Taxes Paid

Cashpaid for interest in the 2005 six-month period and the 2004 six-month periodwas approximately $1,989,000 and $1,854,000, respectively.   Cash paid for income taxes in the first sixmonths of 2005 and 2004 was approximately $370,000 and $203,000, respectively.

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

5

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**SONESTAINTERNATIONAL HOTELS CORPORATION**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

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

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by accounting principles generally accepted in the United States forcomplete financial statements.  In theopinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included.  Operating results for the six-month periodended June 30, 2005 are not necessarily indicative of the results that maybe expected for the year ended December 31, 2005.

 

The balance sheet at December 31,2004 has been derived from the audited financial statements at that date butdoes not include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements.

 

For further information,refer to the consolidated financial statements and footnotes thereto includedin the Company’s Annual Report on Form 10-K for the year ended December 31,2004.

 

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

 
| ** **                                         | ** ** | **(in thousands)**     | ** ** |
|----------------------------------------------------|------------|------------------------|------------|
| ** **                                         | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
| Sharm El Sheikh,  Egypt (a)                        |       | $                      | 519        |   | $ | 646 |   |
| Sonesta  Hotel & Suites Coconut Grove (b) |       | 5,056                  |       | 5,201 |   |
| Trump  International Sonesta Beach Resort (c)      |       | 3,715                  |       | 3,788 |   |
| Other                                              |       | 1,144                  |       | 741 |   |
| Total long-term  receivables                       |       | 10,434                 |       | 10,376 |   |
| Less: current  portion                             |       | 1,527                  |       | 1,310 |   |
| Net long-term  receivables                         |       | $                      | 8,907      |   | $ | 9,066 |   |

 

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(a)                            Thisloan, in the original amount of $1,000,000, was made in 1996 and 1997 to theowner of the Sonesta Beach Resort, Sharm El Sheikh.  The loan bears interest at the prime rate (6%at June 30, 2005) and is adjusted semi-annually.  Currently, the loan is being repaid withmonthly payments of $23,800.  The loan maturesin 2007.

 

(b)                             Thisloan was made to the owner of the Sonesta Hotel & Suites CoconutGrove, Miami, which opened in April 2002. The Company has loaned $4,000,000 to fund construction and furniture,fixtures and equipment (“FF&E”) costs, and, in addition, has loaned$1,000,000 for pre-opening costs and working capital.  The loan for construction and FF&E costsbears interest at the prime rate plus 0.75% (6.75% at June 30, 2005).  No interest is being charged on the loan forpre-opening costs.  These loans aresecured by a mortgage on the hotel property. These loans are being repaid, the loan for pre-opening costs first, outof hotel profits that would otherwise be available for distribution to theowner, and, to the extent the hotel’s earnings are insufficient to pay theowner a certain minimum annual owner’s return, out of the minimum returnsfunded by the Company.

 

6

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(c)                                  This amount represents advances made tothe owner of Trump International Sonesta Beach Resort Sunny Isles forpre-opening costs ($2,296,000), and advances for the Company’s share of thelosses of the resort from the opening on April 1, 2003 through October 31,2004 ($1,419,000).   No interest will becharged on these advances, which will be repaid out of future available profitsgenerated by the hotel, or will be settled when the Company closes on thepurchase option it has for the hotel (see Note 9 – Legal Proceedings).

 

**3.**             **BorrowingArrangements**

 

*CreditLines*

 

The Company has a$2,000,000 demand line of credit.  Thisline bears interest at the prime rate (6% at June 30, 2005).  Advances under this line require the bank’sapproval each time a request is made.  Noamounts were outstanding under this line of credit at June 30, 2005.

 

A subsidiary of theCompany had a $3,000,000 line of credit, which was cancelled by the Company in June 2005.

 

## *Long-Term Debt*

 
| ** **                                                          | ** ** | **(in thousands)**     | ** ** |
|---------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                          | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
| Charterhouse of  Cambridge Trust and Sonesta of Massachusetts Inc.: |       |                   | ** ** | ** ** | ** ** |
| First mortgage  note                                                |       | $                      | 34,061     |   | $ | 39,633 |   |
| Sonesta Beach  Resort Limited Partnership:                          |       |                   |       |   |   |
| First mortgage  note                                                |       | —                 |       | 29,967 |   |
| Accrued interest                                                    |       | 941                    |       | 216 |   |
|                                                                |       | 35,002                 |       | 69,816 |   |
| Less current  portion of accrued interest                           |       | (941                   | )          | — |   |
| Total long-term  debt                                               |       | $                      | 34,061     |   | $ | 69,816 |   |

 

The Company’s long-termdebt is secured by a first mortgage on the Royal Sonesta Hotel Boston(Cambridge) property, which is included in fixed assets at a net book value of$20,505,000 at June 30, 2005.  Theinterest rate is 8.6% for the term of the loan.

 

In April 2005, theCompany closed on a transaction to transfer the land and improvements of theSonesta Beach Resort, Key Biscayne (see Note 10 – Transfer of Assets).  As part of this transaction, the note securedby the Key Biscayne hotel was repaid.  Byagreement with the lender, the Company paid $5,572,000 to reduce the principalbalance of the Royal Sonesta Hotel Boston (Cambridge) loan to $34,061,000.  The $5,572,000 payment included $1,077,000 ofdeferred principal payments and an additional prepayment of $4,495,000 whichwas required by the lender because the Key Biscayne and Cambridge mortgageloans were cross-collateralized.

 

7

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Effective December 1,2003, the Company and the lender restructured the mortgage loan.  Through December 1, 2006, the Company isrequired to make payments of interest only at 5% per annum, and starting January 1,2007 and continuing through December 1, 2007, the Company will be requiredto make payments of interest only at 8.6% per annum.   As of January 1, 2008, payments will bebased on interest and principal, calculated on the original 25-year amortizationschedule of the loan, taking into account the aforementioned prepaymentsof principal.  During the restructuringperiod, interest will continue to accrue at 8.6%, and unpaid interest can beadded to the principal balance of the loan at the end of each year.   During the remaining term of therestructuring, excess cash flow from the Cambridge hotel remaining afterpayment of interest is required to be paid into escrow, and may be used solelyfor the future payment of hotel expenses or capital expenditures, or to reducethe amount of the accrued and unpaid interest.  At June 30, 2005, the escrow balance equaled $910,000, which amountis included in Restricted Cash on the Company’s balance sheet.

 

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

 

Hotel costs and operatingexpenses in the accompanying condensed Consolidated Statements of Operationsare summarized below:

 
| ** **                 | ** ** | **(in thousands)**                  | ** ** |
|----------------------------|------------|-------------------------------------|------------|
| ** **                 | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
| ** **                 | ** ** | **2005**                            | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Direct  departmental costs |       |                                |       |   |   |   |   |   |   |
| Rooms                      |       | $                                   | 3,639      |   | $ | 3,336 |   | $ | 7,050 |   | $ | 6,580 |   |
| Food and  beverage         |       | 5,636                               |       | 5,305 |   | 10,902 |   | 10,277 |   |
| Heat, light and  power     |       | 905                                 |       | 860 |   | 1,705 |   | 1,637 |   |
| Other                      |       | 1,183                               |       | 1,144 |   | 2,352 |   | 2,288 |   |
|                       |       | $                                   | 11,363     |   | $ | 10,645 |   | $ | 22,009 |   | $ | 20,782 |   |

 

Direct departmental costsinclude payroll expenses and related payroll burden, the cost of food andbeverage consumed and other departmental costs.

 

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

 

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

 
| ** **                            | ** ** | **(in thousands)**                | ** ** |
|---------------------------------------|------------|-----------------------------------|------------|
| ** **                            | ** ** | **Six Months Ended June 30** | ** ** |
| ** **                            | ** ** | **2005**                          | ** ** | **2004** | ** ** |
|                                  |       |                              |       |   |   |
| Current federal  income tax provision |       | $                                 | 255        |   | $ | — |   |
| Current foreign  income tax provision |       | 201                               |       | 104 |   |
| Current state  income tax provision   |       | 206                               |       | 75 |   |
| Deferred state  income tax benefit    |       | (296                              | )          | — |   |
| Deferred federal  income tax benefit  |       | (3,885                            | )          | — |   |
|                                  |       | $                                 | (3,519)    |   | $ | 179 |   |

 

During 2003 and 2004, theCompany recorded valuation allowances totaling $3,862,000 against the federalincome tax benefits on its pretax losses of approximately $10.6 millionincurred during these two years, since it was uncertain if the Company couldrealize a future benefit for these losses. In addition, valuation allowances of $296,000 were recorded againstFlorida state tax loss carry forwards, for the same reason.  In April 2005, the Company completed thetransfer of the land and improvements of Sonesta Beach Resort Key Biscayne (seeNote 10 – Transfer of Assets).  Thistransaction resulted in significant taxable income, and in the first quarter of2005,

 

8

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the Company therefore reversedthe valuation allowances previously recorded, since it will receive a benefit in2005 for the prior years’ losses.

 

**6.             Segment Information**

 

Segment information forthe Company’s two reportable segments, Owned & Leased Hotels andManagement Activities, for the three and six month periods ending June 30,2005 and 2004 follows:

 

Three-month period ended June 30,2005

 
| ** **                                                            | ** ** | **(in thousands)**                  | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                            | ** ** | **Owned &  Leased Hotels** | ** ** | **Management  Activities** | ** ** | **Consolidated** | ** ** |
|                                                                  |       |                                |       |   |   |   |   |
| Revenues                                                              |       | $                                   | 24,518     |   | $ | 1,382 |   | $ | 25,900 |   |
| Operating income  (loss) before depreciation and amortization expense |       | 4,206                               |       | (244 | ) | 3,962 |   |
| Depreciation and  amortization                                        |       | (1,768                              | )          | (145 | ) | (1,913 | ) |
| Interest income  (expense), net                                       |       | (912                                | )          | 262 |   | (650 | ) |
| Other income                                                          |       | —                              |       | 125 |   | 125 |   |
| Segment pre-tax  income (loss)                                        |       | 1,526                               |       | (2 | ) | 1,524 |   |
|                                                                  |       |                                |       |   |   |   |   |
| Segment assets                                                        |       | 81,960                              |       | 54,078 |   | 136,038 |   |
| Segment capital  additions                                            |       | 848                                 |       | 133 |   | 981 |   |
|                                                                       |            |                                     |            |  |  |  |  |  |  |  |

 

Six-month period ended June 30,2005

 
| ** **                                                            | ** ** | **(in thousands)**                  | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                            | ** ** | **Owned &  Leased Hotels** | ** ** | **Management  Activities** | ** ** | **Consolidated** | ** ** |
|                                                                  |       |                                |       |   |   |   |   |
| Revenues                                                              |       | $                                   | 47,787     |   | $ | 3,241 |   | $ | 51,028 |   |
| Operating income  (loss) before depreciation and amortization expense |       | 7,554                               |       | (255 | ) | 7,299 |   |
| Depreciation and  amortization                                        |       | (3,593                              | )          | (308 | ) | (3,901 | ) |
| Interest income  (expense), net                                       |       | (2,423                              | )          | 387 |   | (2,036 | ) |
| Other income                                                          |       | —                              |       | 115 |   | 115 |   |
| Segment pre-tax  income (loss)                                        |       | 1,538                               |       | (61 | ) | 1,477 |   |
|                                                                  |       |                                |       |   |   |   |   |
| Segment assets                                                        |       | 81,960                              |       | 54,078 |   | 136,038 |   |
| Segment capital  additions                                            |       | 1,950                               |       | 162 |   | 2,112 |   |
|                                                                       |            |                                     |            |  |  |  |  |  |  |  |

 

9

----

 

Three-month period ended June 30,2004

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

 

Six-month period ended June 30,2004

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

 

**7.             Earnings per Share**

 

As the Company has nodilutive securities, there is no difference between basic and diluted earningsper share.   The following table setsforth the computation of basic income and losses per share (in thousands):

 
| ** **                                     | ** ** | **Three months ended June 30** | ** ** | **Six months ended June 30** | ** ** |
|------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                                     | ** ** | **2005**                            | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Numerator:                                     |       |                                |       |                              |       |   |   |   |   |
| Income (loss)  from operations                 |       | $                                   | 893        |                              | $          | (524 | ) | $ | 4,996 |   | $ | (843 | ) |
|                                           |       |                                |       |                              |       |   |   |   |   |
| Denominator:                                   |       |                                |       |                              |       |   |   |   |   |
| Weighted average  number of shares outstanding |       | 3,698                               |       | 3,698                             |       | 3,698 |   | 3,698 |   |
|                                           |       |                                |       |                              |       |   |   |   |   |
| Net income  (loss) per share of common stock   |       | $                                   | 0.24       |                              | $          | (0.14 | ) | $ | 1.35 |   | $ | (0.23 | ) |

 

10

----

 

**8.             Pension Plan**

 

Thecomponents of the net periodic pension cost for the Company’s Pension Plan wereas follows (in thousands):

 
| ** **                                                                       | ** ** | **(in thousands)**                | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                       | ** ** | **Six Months ended June 30** | ** ** |
| ** **                                                                       | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Service cost                                                                     |       | $                                 | 941        |   | $ | 809 |   |
| Interest cost                                                                    |       | 1,015                             |       | 933 |   |
| Expected return  on assets                                                       |       | (853                              | )          | (796 | ) |
| Amortization of  prior service cost                                              |       | 45                                |       | 45 |   |
| Amortization of  transition asset                                                |       | (44                               | )          | (44 | ) |
| Recognized  actuarial loss                                                       |       | 341                               |       | 240 |   |
| Total plan  benefit cost                                                         |       | 1,445                             |       | 1,187 |   |
| Less: amounts  charged to hotels operated under management agreements            |       | (181                              | )          | (66 | ) |
| Net periodic  benefit cost included in the consolidated statements of operations |       | $                                 | 1,264      |   | $ | 1,121 |   |

 

The Company made acontribution to the Pension Plan of $2,188,000 in July 2005.

 

The Company does not haveany other post-retirement benefit plans.

 

**9.             Legal Proceedings**

 

Sonesta Hotels of Florida, Inc.(“SHF”), a wholly owned subsidiary of the Company, operates Trump InternationalSonesta Beach Resort, in Sunny Isles, Florida (the “Hotel”), under a ManagementAgreement with the Hotel’s owner, Sunny Isles Luxury Ventures L.C. (“SILV”).  The Hotel opened for business in April 2003.  The Hotel is a condominium hotel, and theguestrooms are owned by third party buyers and, to the extent condominium unitsremain unsold, by SILV.  The ManagementAgreement includes an option for SHF to purchase the Hotel’s non-guestroomareas (the “Hotel Lot”).  The purchaseprice is twenty million dollars ($20,000,000), which would be 100% financed bySILV by means of a non-recourse, 25-year loan secured by a mortgage on theHotel Lot.  SHF exercised its purchaseoption in September 2004, and the parties agreed that they would close thetransaction in early January 2005. Despite its earlier agreements, SILV has taken the position that it willnot close on this transaction.  TheCompany believes SILV has no basis to delay the closing date, and has filed alawsuit in the Circuit Court of the 11th Judicial Circuit inMiami-Dade County, Florida, to compel SILV to close the transaction.  Because of this, the closing date will bepostponed pending either a ruling compelling SILV to close or the partiesotherwise agreeing to close.  In themeantime, the Company continues management of the Hotel as usual.  Since payments on the mortgage loan followingthe closing are the same as the payments of minimum owner’s return andadditional owner’s return under the Management Agreement, there is no effect onthe Company’s cash flow from operations as a result of this delay in closingthe transaction.  The delay does postponethe repayment to the Company of the approximately $2,296,000 it advanced forthe Hotel’s pre-opening expenses.

 

Inaddition, SILV and the Company agreed to resolve in a binding arbitrationissues related to whether or not certain non-guestroom area furniture, fixturesand equipment (“FF&E”) falls within the Company’s obligation to fund “ExcessFF&E” under the Management Agreement, and SILV’s contention that Sonestahas spent excessive amounts on pre-opening expenses.  The arbitration proceedings were completedduring February 2005, and a decision was rendered by the arbiter on March 29,2005.  The Company’s position that thepre-opening expenses were appropriate and in

 

11

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linewith industry norms was upheld.  Afterdisallowing approximately $101,000, primarily spent on computer-relatedtraining, SILV was found responsible for $2,296,000 in pre-opening expenses, tobe repaid in accordance with the Management Agreement.  With regards to the FF&E issue, thedecision favored Sonesta’s position for the majority of the disputed items,especially construction-related items which SILV claimed were part of Sonesta’sfunding obligation.  The arbitrator didfind in favor of SILV on certain items, and the Company has increased itsinvestment, which it previously estimated at $2,000,000, to $2,100,000.

 

**10.          Transfer of Assets**

 

On April 19, 2005,Sonesta Beach Resort Limited Partnership (“SBRLP”), a wholly owned subsidiaryof Sonesta International Hotels Corporation (“Sonesta”), completed the transferof the land and improvements of Sonesta Beach Resort, in Key Biscayne, Floridato a partnership between SBRLP and affiliates of Fortune International, aMiami-based real estate development and brokerage firm (“Fortune”). SBRLP is a50% limited partner in the new partnership, and affiliates of Fortune are thegeneral partner and a limited partner, together owning a 50% interest in the partnership.

 

The new partnership,SBR-Fortune Associates, LLLP (“SBR-Fortune”), expects that the existing hotelwill remain in operation through July 2006, when it will be demolished andconstruction of a new 5-star resort is expected to begin.  It is anticipated that the new condominiumhotel will include 300-plus luxury hotel and residential condominium units,restaurants, meeting/function space, a spa and other facilities customary tothe finest resorts in South Florida.

 

On April 19, 2005,Sonesta transferred the land and improvements of Sonesta Beach Resort intoSBR-Fortune, which is valuing the land at $120 million.  Sonesta received $30,011,000 in cash at theclosing, and, in addition, an existing mortgage of $29,967,000 on the propertywas paid off by SBR-Fortune.  Sonestaalso received an equity position in SBR-Fortune valued at approximately $60million.  This value will be paid toSonesta out of the first available net proceeds of the sale of condominiumunits, after repayment of (construction) debt. Thereafter, Fortune will receive its initial $30 million equitycontribution, plus any additional equity contributions it was required to maketo develop the new resort.  Subsequent toFortune fully recovering its investment, profits will be split equally.  Sonesta is not required to fund anyadditional equity beyond the contribution of the land and improvements.  Fortune will have the sole responsibility forarranging financing and completing construction of the new resort.

 

As of April 19,2005, Sonesta will continue to operate the hotel under a token ($1 per year)lease with SBR-Fortune, until such time that SBR-Fortune is ready to commenceconstruction on the new resort, which the parties currently estimate to be in August 2006.  Sonesta will receive all operating profitsduring this period.  Sonesta does havethe right to cease operations of the existing hotel on 60 days notice, in caserevenues are insufficient to cover all expenses.

 

Once the new condominiumhotel is completed, the non-guestroom areas of the hotel, which includerestaurants, bars, meeting space, office and storage facilities, etc., (the “HotelLot”) will be transferred to a newly formed partnership, of which Sonesta is a70% partner and general partner, and Fortune is a 30% limited partner.  Sonesta will operate the Hotel Lot, and will offera rental program to the buyers of condo units that wish to make their unitsavailable for rental to the public.

 

The cost of closing theexisting hotel, including severance payments to employees, funding of vacationpay, pension obligations and other costs, will be paid by SBR-Fortune, up to amaximum of $4 million.  The Companybelieves this will be sufficient to cover these costs.

 

12

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The Company has accountedfor the transaction at June 30, 2005 as follows:

 

1.               Inaccordance with Statement of Financial Accounting Standards (SFAS) no. 66 “Accountingfor Sales of Real Estate”, the Company has deferred gain recognition on theproperty transfer due to its continuing involvement, and has recognized thecash received and the debt which was repaid as a financing obligation.  The timing of the future gain recognition onthis transaction is currently uncertain, and dependent on the exact nature ofthe Company’s continuing involvement in the operations of the new resort.

 

2.               Sincethe Company continues to operate the existing Hotel, all the Hotel’s assets remainincluded in fixed assets (with a net book value at June 30, 2005 of $37,880,000)and continue to be depreciated.  Allrevenues and continuing expenses of the hotel operations are included in thestatement of operations.

 

3.               Forfederal and state income tax purposes, the Company will report a taxable gainin 2005 of approximately $29.7 million on this transaction, but will have thebenefit of loss carryforwards from 2003 and 2004 of approximately $10.6million.  Federal and state taxes due for2005 are included in the Company’s current tax liability at June 30, 2005 of$7,277,000.

 

13

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**Part I – Item2**

** **

**MANAGEMENT’S DISCUSSION AND ANALYSIS**

**OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION**

 

**FIRST SIXMONTHS 2005 COMPARED TO 2004**

 

During the first sixmonths of 2005, the Company recorded net income of $4,996,000, or $1.35 pershare, compared to a net loss of $843,000, or $(0.23) per share, during thefirst six months of 2004.  The increasein income was primarily a result of increased management income, a reduction ininterest expense, and a tax benefit recorded during the 2005 firstquarter.  A significant portion of theincrease in management income ($547,000) was from the Company’s managed hotelsin Sunny Isles and Coconut Grove, Florida. The reduction in interest expense resulted from the repayment of themortgage loan on Sonesta Beach Resort Key Biscayne in April 2005 (see Note10 – Transfer of Assets).  During thefirst quarter of 2005 the Company reversed the valuation allowances it had previouslyrecorded during 2003 and 2004 totalling $4,158,000 against the federal incometax benefits and state income tax benefits of the losses incurred during thesetwo years.  Because the Company realizedsignificant taxable income in April 2005 following the transfer of theland and improvements of Sonesta Beach Resort Key Biscayne (see Note 10 – Transferof Assets) the Company will realize a benefit of the prior year’s losses in2005.  A more detailed analysis of therevenues and income by location follows.

 

**REVENUES**

 
| ** **                                      | ** ** | **TOTAL REVENUES  (in thousands)** | ** ** |
|-------------------------------------------------|------------|------------------------------------|------------|
| ** **                                      | ** ** | **NO. OF  ROOMS**                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Sonesta Beach  Resort Key Biscayne              |       | 300                                |       | $ | 17,066 |   | $ | 16,811 |   |
| Royal Sonesta  Hotel Boston (Cambridge)         |       | 400                                |       | 10,996 |   | 10,219 |   |
| Royal Sonesta  Hotel New Orleans                |       | 500                                |       | 19,726 |   | 19,200 |   |
| Management and  service fees and other revenues |       |                               |       | 3,240 |   | 2,223 |   |
| Total revenues                                  |       |                               |       | $ | 51,028 |   | $ | 48,453 |   |

 

Total revenues for thefirst six months of 2005 were $51,028,000 compared to $48,453,000 in 2004, anincrease of approximately $2,575,000.

 

Revenues during the firstsix months of 2005 at Sonesta Beach Resort Key Biscayne increased by $255,000,or 2%, compared to the same period in 2004. This resulted primarily from a $207,000 increase in room revenue due to a3% increase in room revenue per available room (“REVPAR”).  Increases in average room rates offset aslight decrease in occupancy levels during the first six months of 2005.  Royal Sonesta Hotel Boston (Cambridge)increased revenues during the first six months of 2005 by $777,000, or 8%,compared to the first six months of 2004, mainly due to improvements inbusiness during the second quarter of 2005. Room revenues during the first six months of 2005 increased by$425,000, due to an 8% increase in REVPAR. This REVPAR increase, which was mainly due to increases in average roomrates achieved, was a result of improved business from the group and conventionmarket segment.  Increases in food andbeverage revenues due to improved banquet business accounted for most of the$352,000 increase in revenues other than rooms. Royal Sonesta Hotel New Orleans increased revenues by $526,000, from$19,200,000 during the first six months of 2004 to $19,726,000 during the firstsix months of 2005.  The hotel’s REVPAR in2005 remained virtually the same as in 2004. Occupancy did increase, but was offset by a decrease in average roomrates achieved.  Due to the increased occupancylevels, the hotel’s food and beverage revenues increased, which accountedalmost entirely for the overall increase in revenues.  Revenues from management activities increasedfrom $2,223,000 during the first six months of 2004 to $3,240,000 during thefirst six months of 2005, an increase of $1,017,000.  This increase was primarily due to increasesin management fee income from Trump International Sonesta Beach Resort, SunnyIsles ($339,000) and Sonesta Hotel and Suites, Coconut Grove ($276,000),license fee income from

 

14

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Sonesta Maho Beach, St.Maarten, which hotel was added during the summer of 2004 ($149,000), and fromthe receipt of a $133,000 bonus guaranty fee from Chateau Sonesta Hotel, NewOrleans (an additional $399,000 is still due and will be recorded as incomewhen collected).  For 2005, both theSunny Isles and Coconut Grove condominium hotels, which opened in 2003 and 2002respectively, are expected to produce sufficient income to provide the owners ofthese hotels with the minimum returns due under the management contracts.  Once these minimum returns are achieved, theCompany will receive management and marketing fees based on revenues, andincentive fees based on net operating income.

 

**OPERATINGINCOME**

 
| ** **                                                      | ** ** | **OPERATING INCOME (LOSS)** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                      | ** ** | **(in thousands)**          | ** ** |
| ** **                                                      | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| Sonesta Beach  Resort Key Biscayne                              |       | $                           | 2,727      |   | $ | 2,759 |   |
| Royal Sonesta  Hotel Boston (Cambridge)                         |       | (12                         | )          | (236 | ) |
| Royal Sonesta  Hotel New Orleans                                |       | 1,245                       |       | 1,095 |   |
| Operating income  from hotels after management and service fees |       | 3,960                       |       | 3,618 |   |
| Management  activities and other                                |       | (562                        | )          | (1,310 | ) |
| Operating income                                                |       | $                           | 3,398      |   | $ | 2,308 |   |

 

Operating income for thesix-month period ended June 30, 2005 was $3,398,000, compared to operatingincome of $2,308,000 in 2004, an increase of approximately $1,090,000.

 

Sonesta Beach Resort KeyBiscayne recorded operating income of $2,727,000 during the first six months of2005 compared to $2,759,000 during the first six months of 2004, a slight$32,000 decrease.  Revenues increased by$255,000 during the 2005 period compared to last year, and expenses increasedby $287,000, or 2%.  Increases in costand operating expenses and real estate taxes were offset by decreases in administrativeand general expense and depreciation expenses. Administrative and general expenses decreased because of lower insuranceexpense, since the obligation to insure the building has been assumed by the partnershipinto which the hotel assets were transferred in April 2005 (see Note 10).  The operating loss from Royal Sonesta HotelBoston (Cambridge) decreased from $236,000 during the first half of 2004 to$12,000 in the first half of 2005, an improvement of $224,000.  Increased revenues during 2005 of $777,000were partially offset by increased expenses of $553,000.  This 5% increase in expenses was primarilydue to a $516,000 increase in cost and operating expenses, which resulted fromincreased payroll and benefit costs, as well as increased expenses from theoperations of the food and beverage departments, which increased revenues by$308,000, or 9%, during the first six months of 2005 compared to 2004.  Royal Sonesta Hotel New Orleans recordedoperating income during the first half of 2005 of $1,245,000, a $150,000increase compared to the same period in 2004. Increases in revenues during the 2005 period of $526,000 were partiallyoffset by increased expenses of $376,000. The increase in expenses was mainly due to increased cost and operatingexpenses, partially offset by a decrease in rent expense.  The decrease in rent expense was due tohigher capital expenditures at the hotel in 2005 compared to 2004.  Since capital expenditures are deducted fromprofits for purposes of calculating rent due under the lease for the hotel,rent expense actually decreases when the hotel’s capital expendituresincrease.  The operating loss frommanagement activities, which is computed after giving effect to managementincome from the Company’s owned and leased hotels, decreased from $1,310,000during the first six months of 2004 to $562,000 in the same period in 2005, animprovement of $748,000.  Thisimprovement was due to increases in management and service fees of $1,017,000,which were partially offset by increased expenses related to these activitiesof $269,000.  This increase in expenses wasmainly due to an increase in administrative and general expenses resulting fromthe addition of a Vice President of Development to the corporate staff, andincreased costs of employee benefits, including healthcare and pensionbenefits.

 

15

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**OTHERINCOME (DEDUCTIONS)**

 

Interest expensedecreased by $705,000 during the first six month of 2005 compared to 2004.  This was due to the repayment of the mortgageloan on Sonesta Beach Resort Key Biscayne on April 19, 2005 (see Note 10 –Transfer of Assets).

 

Interest income increasedfrom $164,000 during the first six months of 2004 to $411,000 during the firstsix months of 2005, due to an increase in short term investment income on theCompany’s cash balances.  In April 2005,the Company received approximately $30,000,000 following the transfer of theland and improvements of Sonesta Beach Resort Key Biscayne to a partnership inwhich the Company is a 50% limited partner (see Note 10 – Transfer of Assets).

 

The 2005 gain on sale of$125,000 resulted primarily from the sale of a non-essential asset in Tuscany,Italy.

 

**SECONDQUARTER 2005 COMPARED TO 2004**

 

During the second quarterof 2005 the Company recorded net income of $893,000, or $0.24 per share,compared to a net loss during the second quarter of 2004 of $524,000, or $(0.14)per share.  The increase in earnings wasprimarily due to a reduction of interest expense because of the repayment ofthe mortgage loan on Sonesta Beach Resort Key Biscayne, as well as improvedoperating results from the Company’s hotels in Boston and Key Biscayne, andincreased income from the Company’s management activities.  A more detailed analysis of the revenues andincome by location follows.

 

**REVENUES**

 
| ** **                                      | ** ** | **TOTAL REVENUES** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|
| ** **                                      | ** ** | **(in thousands)** | ** ** |
| ** **                                      | ** ** | **NO. OF  ROOMS**  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Sonesta Beach  Resort Key Biscayne              |       | 300                |       | $ | 7,600 |   | $ | 7,135 |   |
| Royal Sonesta  Hotel Boston (Cambridge)         |       | 400                |       | 7,436 |   | 6,794 |   |
| Royal Sonesta  Hotel New Orleans                |       | 500                |       | 9,483 |   | 9,558 |   |
| Management and  service fees and other revenues |       |               |       | 1,381 |   | 1,044 |   |
| Total revenues                                  |       |               |       | $ | 25,900 |   | $ | 24,531 |   |
|                                                 |            |                    |            |  |  |  |  |  |  |  |  |

 

Total revenues for thethree-month period ended June 30, 2005 were $25,900,000 compared to $24,531,000in the same period in 2004, an increase of approximately $1,369,000.

 

Revenues during the 2005second quarter at Sonesta Beach Resort Key Biscayne increased by $465,000 to$7,600,000.  Due to an increase inbusiness from the group and convention market segment, room revenue peravailable room (“REVPAR”) grew 8% during the second quarter of 2005 compared tothe same period last year, resulting in a $273,000 increase in roomrevenues.  Due to a slight increase inoccupancy, revenues from food and beverage and other sources increased by$192,000 during the 2005 second quarter. Royal Sonesta Hotel Boston (Cambridge) had a good 2005 second quarter,increasing total revenues by $642,000, or 9%, compared to 2004.  Room revenues increased by $379,000, dueto a 9% REVPAR increase.  Thisimprovement was due to an increase in group and convention business compared tolast year’s second quarter.  Revenuesfrom other sources increased by $217,000, primarily due to an increase inbanquet business.  Due to increasedcompetition and less city-wide conventions, revenues during the second quarterof 2005 at Royal Sonesta Hotel New Orleans were slightly lower than last year,decreasing by $75,000 to $9,483,000.  Thehotel’s room nights sold from convention business declined by 12%, resulting ina decrease in rooms revenue of $394,000 compared to last year.  The hotel replaced this convention businessby transient business at lower rates, which resulted in a decrease in averagerates, but maintained the occupancy levels slightly above last year.  That actually resulted in an increase in foodand beverage sales and revenues from other sources, which replaced part of thelost room

 

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revenues.  Revenues from management activities increasedfrom $1,044,000 in the 2004 second quarter to $1,381,000 during the 2005 secondquarter, an increase of $337,000.  This wasmainly due to increased income from Trump International Sonesta Beach ResortSunny Isles and Sonesta Hotel and Suites Coconut Grove, and license fee incomefrom Sonesta Maho Beach St. Maarten, which hotel was added during the summer of2004.

 

**OPERATINGINCOME**

 
| ** **                                                      | ** ** | **OPERATING INCOME (LOSS)** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                      | ** ** | **(in thousands)**          | ** ** |
| ** **                                                      | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| Sonesta Beach  Resort Key Biscayne                              |       | $                           | 480        |   | $ | 278 |   |
| Royal Sonesta  Hotel Boston (Cambridge)                         |       | 1,401                       |       | 1,031 |   |
| Royal Sonesta  Hotel New Orleans                                |       | 557                         |       | 567 |   |
| Operating income  from hotels after management and service fees |       | 2,438                       |       | 1,876 |   |
| Management  activities and other                                |       | (389                        | )          | (891 | ) |
| Operating income                                                |       | $                           | 2,049      |   | $ | 985 |   |

 

Operating income for thethree-month period ended June 30, 2005 was $2,049,000, compared tooperating income of $985,000 in the three-month period ended June 30, 2004,an increase of approximately $1,064,000.

 

Sonesta Beach Resort KeyBiscayne reported an increase in operating income from $278,000 during thesecond quarter of 2004 to $480,000 during the 2005 second quarter.  Revenues increased by $465,000 during the2005 quarter, and expenses increased by $263,000.  Increases in cost and operating expenses,maintenance costs and advertising were partially offset by decreasedadministrative and general expenses and depreciation expense.  Administrative and general expense decreasedbecause of lower insurance expense, since the obligation to insure the buildinghas been assumed by the partnership into which the hotel assets weretransferred in April 2005 (see Note 10). Second quarter 2005 operating income at Royal Sonesta Hotel Boston(Cambridge) increased by $370,000 to $1,401,000.  Revenue increases of $642,000 were partiallyoffset by an increase in expenses of $272,000. This expense increase was mainly due to increased cost and operatingexpenses.  Royal Sonesta Hotel New Orleansexperienced a slight $10,000 decrease in operating income in the 2005 secondquarter compared to 2004.  Revenuesduring the 2005 second quarter declined by $75,000, and overall expensesdecreased by $65,000.  Increased cost andoperating expenses were offset by decreased rent expense.  This decrease in rent was due to slightly lowerincome during the 2005 second quarter, and due to an increase in capitaladditions and replacements, which are deducted from income for purposes of calculatingpercentage rent due under the lease under which the Company operates theHotel.  The loss from managementactivities, which is computed after giving effect to management and marketingfees from the Company’s owned and leased hotels, decreased from $891,000 in the2004 second quarter to $389,000 during the 2005 second quarter.  Revenues from these activities increased by$337,000, and expenses decreased by $165,000. The decrease in costs was mainly due to lower administrative and generalexpenses.  Last year’s expenses includedcosts to arbitrate a dispute with the owner of the Chateau Sonesta Hotel NewOrleans.

 

**OTHERINCOME (DEDUCTIONS)**

 

Interest expensedecreased by $606,000 to $923,000 during the second quarter of 2005.  The mortgage loan secured by Sonesta BeachResort Key Biscayne was repaid on April 19, 2005 (see Note 10 – Transferof Assets).

 

Interest income increasedfrom $81,000 during the 2004 second quarter to $274,000 during the 2005 secondquarter.  This was primarily due toincreased short term investment income on the Company’s cash balances, which includedthe proceeds received following the transfer of the land and improvements ofSonesta Beach Resort Key Biscayne (see Note 10).

 

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The gain on sale reportedduring the second quarter of 2005 of $125,000 was primarily due to the sale of anon-essential asset in Tuscany, Italy.

 

**FEDERAL,FOREIGN AND STATE INCOME TAXES**

 

The Company recorded anet tax benefit of $3,519,000 during first six months of 2005.  This benefit resulted primarily from thereversal of previously recorded valuation allowances.  The Company recorded valuation allowances of$3,862,000 against the 2003 and 2004 federal income tax benefits because it wasuncertain if the Company would realize a future benefit for the losses incurredduring 2003 and 2004.  In addition,valuation allowances of $296,000 were recorded against Florida state tax losscarry-forwards.  In April 2005, theCompany realized significant taxable income from a transaction involving theredevelopment of the Sonesta Beach Resort Key Biscayne (see Note 10 – Transferof Assets).  The Company now expects torealize the benefit of the prior year losses, and the valuation allowances werereversed in the first quarter of 2005.

 

Included in the currenttax liability at June 30, 2005 of $7,277,000 are Florida state tax andfederal tax payments due for 2005 on the taxable income in connection with the transferof the land and improvements of Sonesta Beach Resort Key Biscayne in April 2005(see Note 10 – Transfer of Assets). Since the Company is accounting for this transaction using the financingmethod, it will defer recognizing the gain on the sale of assets, and the taxexpense is therefor included as a long-term deferred tax asset on the Company’sbalance sheet.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

The Company had cash andcash equivalents of approximately $31,543,000 at June 30, 2005.

 

In April 2005 theCompany received approximately $30,000,000 related to the transfer of the landand improvements of the Sonesta Beach Resort Key Biscayne to a partnership inwhich the Company is a 50% limited partner. In connection with the same transaction, the mortgage loan secured bythe assets of Sonesta Beach Resort Key Biscayne was repaid ($29,967,000), andthe Company paid $5,572,000 to reduce the principal balance of the RoyalSonesta Hotel Boston (Cambridge) loan, which reduced the balance to$34,061,000.  Federal and state taxes dueon this transaction for 2005 are included in the current tax liability of $7,277,000.

 

In June 2005 theCompany paid a dividend of $1.00 per share for a total amount of $3,698,000.

 

The Company contributed$2,188,000 to its Pension Plan in July 2005.

 

Company managementbelieves that the cash resources will be more than adequate to meet its cashrequirements for 2005 and beyond.

 

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**PART I– Item 3**

 

**QUANTITATIVE ANDQUALITATIVE DISCLOSURE OF MARKET RISK**

** **

The Company is exposed tomarket risk from changes in interest rates.  The Company uses fixed rate debt to finance the ownership of one of itsproperties.    The table that followssummarizes the Company’s fixed rate debt obligations outstanding at June 30,2005.   This information should be read inconjunction with Note 3—Borrowing Arrangements.

 

Long Term Debt (inthousands) maturing in:

 
| ** **             | ** ** | **YEAR** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |     |
|------------------------|------------|----------|------------|------------|------------|------------|------------|------------|------------|----------|
| ** **             | ** ** | **2005** | ** ** | **2006**   | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Fair Value** | ** ** |   |
| Fixed rate             |       | $        | —     |       | $          | —     |       | $          | —     |     | $ | 602 |   | $ | 665 |   | $ | 32,794 |   | $ | 34,061 |   | $ | 35,696 |   |
| Average interest  rate |       | 8.6      | %          | 8.6        | %          | 8.6        | %          | 8.6        | %          | 8.6      | % | 8.6 | % |   |   |   |   |   |
|                        |            |          |            |            |            |            |            |            |            |          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**PART I– Item 4**

 

**INTERNALCONTROLS AND PROCEDURES**

 

Asof June 30, 2005, the Company’s management carried out an evaluation,under the supervision and with the participation of the Company’s ChiefExecutive Officer and President, Chief Executive Officer and Vice Chairman, andVice President and Treasurer, of the effectiveness of the design and operationof the Company’s disclosure controls and procedures pursuant to Rules 13a-15and 15d-15 of the Securities Exchange Act of 1934.   Based on that evaluation, the Company’sChief Executive Officer and President, Chief Executive Officer and ViceChairman, and Vice President and Treasurer concluded that the Company’sdisclosure controls and procedures are effective, as of June 30, 2005.

 

Therehave been no significant changes in the Company’s internal controls regardingfinancial reporting during the quarter ended June 30, 2005 that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control regarding financial reporting, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

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**PART II – Item 4**

 

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

 

## The Annual Meeting of Shareholders of Sonesta International HotelsCorporation was held on May 16, 2005.   All nominees for directors were elected.   The results of the votes with regards to theelection of directors were as follows.

##  

**ELECTIONOF COMMON STOCK DIRECTORS**

 
| **DIRECTOR**         | ** ** | **VOTES RECEIVED** | ** ** | **VOTES WITHHELD** | ** ** |
|----------------------|------------|--------------------|------------|--------------------|------------|
| ** **           | ** ** | ** **         | ** ** | ** **         | ** ** |
| George S. Abrams     |       | 1,573,630          |       | 13,796             |       |
| Vernon R. Alden      |       | 1,573,570          |       | 13,856             |       |
| Joseph L. Bower      |       | 1,573,674          |       | 13,752             |       |
| Charles J. Clark     |       | 1,573,274          |       | 14,152             |       |
| Stephen  Sonnabend   |       | 1,557,238          |       | 30,188             |       |
| Peter J.  Sonnabend  |       | 1,557,238          |       | 30,188             |       |
| Roger P.  Sonnabend  |       | 1,557,178          |       | 30,248             |       |
| Stephanie  Sonnabend |       | 1,557,222          |       | 30,204             |       |
| Jean C. Tempel       |       | 1,573,630          |       | 13,796             |       |

 

**PART II– Other Information**

 

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

 

Notapplicable during the quarter ended June 30, 2005.

 

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**SIGNATURE**

 

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

 
|   | **SONESTA INTERNATIONAL HOTELS CORPORATION** |
|--------|----------------------------------------------|
|   |                                         |
|   |                                         |
|   | By:                                          | /S/ | Boy van Riel |   |
|   |                                         | Boy van Riel |
|   |                                         | Vice President and Treasurer |
|   |                                         |   |
|   |                                         | (Authorized to sign on behalf of the Registrant as |
|   |                                         | Principal Financial Officer) |
|   |                                         |   |
|   | Date: August 12, 2005                   |

 

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