**FORM 10-Q**

 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**(Mark One)**

 

| **ý**                          | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE** |
|-------------------------------------|---------------------------------------------------------------|
| **SECURITIES EXCHANGE ACT OF 1934** |

 

**For theQuarterly period ended June 30, 2002**

 

**OR**

 

| **o**                               | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE** |
|-------------------------------------|----------------------------------------------------------------|
| **SECURITIES EXCHANGE ACT OF 1934** |

** **

**For thetransition period from**                          **to                      **

** **

**Commissionfile number 0-9032**

 

**SONESTA INTERNATIONAL HOTELS CORPORATION**

(Exact name of registrant as specified in its charter)

 

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

 

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

 

Yes  ý           No  o

 

APPLICABLE ONLY TOCORPORATE ISSUERS:

 

Number of Shares ofCommon Stock Outstanding

As of August 8, 2002 –$.80 par value,

Class A – 3,698,230

 

 

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**INDEX**

 

**SONESTA INTERNATIONAL HOTELS CORPORATION**

 
|                                                               |                                                                                                                  | **Page** |
|--------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------|----------|
|                                                               |                                                                                                                  |     |
| Part I.       Financial  Information |                                                                                                                  |
|                                                               |                                                                                                                  |     |
| Item 1.                                                            | Financial  Statements (Unaudited)                                                                                     |     |
|                                                               |                                                                                                                  |     |
|                                                               | Condensed consolidated  balance sheets—June 30, 2002 and December 31, 2001                                  | 1        |
|                                                               |                                                                                                                  |     |
|                                                               | Condensed  consolidated statements of operations—Three month and six month periods ended  June 30, 2002 and 2001 | 3        |
|                                                               |                                                                                                                  |     |
|                                                               | Condensed  consolidated statements of cash flows—Six month periods ended June 30, 2002  and 2001                 | 4        |
|                                                               |                                                                                                                  |     |
|                                                               | Notes  to condensed consolidated financial statements—June 30, 2002 and 2001                                     | 6        |
|                                                               |                                                                                                                  |     |
| Item 2.                                                            | Management’s  Discussion and Analysis of Results of Operations and Financial Condition—June  30, 2002       | 12       |
|                                                               |                                                                                                                  |     |
| Item  3.                                                      | Quantitative  and Qualitative Disclosure of Market Risk                                                               | 17       |
|                                                               |                                                                                                                  |     |
| Part II.      Other Information           |                                                                                                                  |     |
|                                                               |                                                                                                                  |     |
| Item  4.                                                           | Submission  of Matters to a Vote of Security Holders                                                                  | 18       |
|                                                               |                                                                                                                  |     |
| Exhibit                                                            | 18 U.S.C.  Section 1350 Certificate by Company Officers                                                               |     |

 

 

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FORM 10Q

 

###### **Part I** –  Item 1.     FinancialInformation

 

**SONESTA INTERNATIONAL HOTELS CORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

 
|                                                                              |   | **June 30  2002**   |       | **December 31  2001** |   |
|-----------------------------------------------------------------------------------|--------|---------------------|------------|-----------------------|--------|
|                                                                              |   | **(in  thousands)** | ** ** |
| ASSETS                                                                            |   |                |       |                  |   |
| Current assets:                                                                   |   |                |       |                  |   |
| Cash and cash  equivalents                                                        |   | $                   | 10,894     |                  | $      | 14,256 |   |
| Accounts and  notes receivable:                                                   |   |                |       |                  |   |
| Trade, less allowance  of $282  ($260 at December 31, 2001) for doubtful accounts |   | 6,111               |       | 6,190                 |   |
| Other, including  current portion of long-term receivables and advances           |   | 536                 |       | 753                   |   |
| Total accounts  and notes receivable                                              |   | 6,647               |       | 6,943                 |   |
| Refundable  income taxes                                                          |   | 1,218               |       | 1,499                 |   |
| Current portion  of deferred taxes                                                |   | 387                 |       | 391                   |   |
| Inventories                                                                       |   | 1,142               |       | 1,413                 |   |
| Prepaid expenses  and other                                                       |   | 4,600               |       | 3,964                 |   |
|                                                                              |   |                |       |                  |   |
| Total current  assets                                                             |   | 24,888              |       | 28,466                |   |
|                                                                              |   |                |       |                  |   |
| Long-term  receivables and advances                                               |   | 5,254               |       | 3,690                 |   |
|                                                                              |   |                |       |                  |   |
| Property and  equipment, at cost:                                                 |   |                |       |                  |   |
| Land and land  improvements                                                       |   | 9,940               |       | 9,940                 |   |
| Buildings                                                                         |   | 75,089              |       | 73,418                |   |
| Furniture and  equipment                                                          |   | 45,252              |       | 42,878                |   |
| Leasehold  improvements                                                           |   | 4,566               |       | 4,605                 |   |
| Projects in  progress                                                             |   | 796                 |       | 706                   |   |
|                                                                              |   | 135,643             |       | 131,547               |   |
|                                                                              |   |                |       |                  |   |
| Less accumulated  depreciation and amortization                                   |   | 40,794              |       | 36,418                |   |
| Net property and  equipment                                                       |   | 94,849              |       | 95,129                |   |
|                                                                              |   |                |       |                  |   |
| Other long-term  assets                                                           |   | 1,412               |       | 1,532                 |   |
|                                                                              |   | $                   | 126,403    |                  | $      | 128,817 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

1

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** **

**SONESTA INTERNATIONAL HOTELS CORPORATION**

**CONDENSEDCONSOLIDATED****BALANCE SHEETS**

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

 
|                                                                       |   | **June 30  2002**   |       | **December  31  2001** |   |
|----------------------------------------------------------------------------|--------|---------------------|------------|------------------------|--------|
|                                                                       |   | **(in  thousands)** | ** ** |
| LIABILITIES AND  COMMON STOCKHOLDERS’ EQUITY                          |   |                |       |                   |   |
| Current  liabilities:                                                      |   |                |       |                   |   |
| Current portion  of long-term debt                                         |   | $                   | 1,177      |                   | $      | 1,139 |   |
| Accounts payable                                                           |   | 3,668               |       | 3,955                  |   |
| Advance deposits                                                           |   | 2,835               |       | 4,576                  |   |
| Federal, foreign  and state income taxes                                   |   | 1,018               |       | 969                    |   |
| Accrued  liabilities:                                                      |   |                |       |                   |   |
| Salaries and  wages                                                        |   | 1,607               |       | 1,577                  |   |
| Rentals                                                                    |   | 3,979               |       | 5,827                  |   |
| Interest                                                                   |   | 516                 |       | 527                    |   |
| Other                                                                      |   | 2,138               |       | 1,645                  |   |
|                                                                       |   |                |       |                   |   |
| Total accrued  liabilities                                                 |   | 8,240               |       | 9,576                  |   |
|                                                                       |   |                |       |                   |   |
| Total current  liabilities                                                 |   | 16,938              |       | 20,215                 |   |
|                                                                       |   |                |       |                   |   |
| Long-term debt                                                             |   | 73,516              |       | 74,123                 |   |
|                                                                       |   |                |       |                   |   |
| Deferred federal  and state income taxes                                   |   | 5,841               |       | 5,324                  |   |
|                                                                       |   |                |       |                   |   |
| Other  non-current liabilities                                             |   | 2,619               |       | 1,937                  |   |
|                                                                       |   |                |       |                   |   |
| Commitments and  contingencies                                             |   |                |       |                   |   |
|                                                                       |   |                |       |                   |   |
| Common  stockholders’ equity:                                         |   |                |       |                   |   |
| Common stock:                                                              |   |                |       |                   |   |
| Class A, $.80  par value:                                                  |   |                |       |                   |   |
| Authorized – 10,000  shares  Issued–6,102 shares at stated value |   | 4,882               |       | 4,882                  |   |
| Retained  earnings                                                         |   | 34,660              |       | 34,389                 |   |
| Treasury  shares–2,404, at cost                                       |   | (12,053             | )          | (12,053                | )      |
| Total common  stockholders’ equity                                    |   | 27,489              |       | 27,218                 |   |
|                                                                       |   | $                   | 126,403    |                   | $      | 128,817 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

2

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**SONESTA INTERNATIONAL HOTELS CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)**

(in thousands except for per share data)

 
|                                                  |   | **Three  Months Ended  June 30** |   | **Six Months  Ended  June 30** |   |
|-------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                  |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
| Revenues:                                             |   |                             |   |                           |   |   |   |   |   |
| Rooms                                                 |   | $                                | 14,787 |                           | $      | 17,184 |   | $ | 31,292 |   | $ | 36,162 |   |
| Food and  beverage                                    |   | 6,805                            |   | 7,544                          |   | 13,687 |   | 14,518 |   |
| Management,  license and service fees                 |   | 1,163                            |   | 1,305                          |   | 2,306 |   | 2,671 |   |
| Parking,  telephone and other                         |   | 2,361                            |   | 2,599                          |   | 4,861 |   | 5,117 |   |
|                                                  |   | 25,116                           |   | 28,632                         |   | 52,146 |   | 58,468 |   |
| Costs and  expenses:                                  |   |                             |   |                           |   |   |   |   |   |
| Costs and  operating expenses                         |   | 10,928                           |   | 11,969                         |   | 21,894 |   | 23,886 |   |
| Advertising and  promotion                            |   | 1,877                            |   | 2,215                          |   | 3,974 |   | 4,379 |   |
| Administrative  and general                           |   | 3,623                            |   | 4,318                          |   | 7,446 |   | 8,986 |   |
| Human resources                                       |   | 490                              |   | 556                            |   | 936 |   | 1,111 |   |
| Maintenance                                           |   | 1,630                            |   | 1,932                          |   | 3,220 |   | 3,960 |   |
| Rentals                                               |   | 1,793                            |   | 2,150                          |   | 4,480 |   | 4,519 |   |
| Property taxes                                        |   | 681                              |   | 649                            |   | 1,402 |   | 1,302 |   |
| Depreciation and  amortization                        |   | 2,278                            |   | 2,205                          |   | 4,517 |   | 4,424 |   |
|                                                  |   | 23,300                           |   | 25,994                         |   | 47,869 |   | 52,567 |   |
| Operating income                                      |   | 1,816                            |   | 2,638                          |   | 4,277 |   | 5,901 |   |
|                                                  |   |                             |   |                           |   |   |   |   |   |
| Other income  (deductions):                           |   |                             |   |                           |   |   |   |   |   |
| Interest  expense                                     |   | (1,608                           | )      | (1,666                         | )      | (3,201 | ) | (3,407 | ) |
| Interest income                                       |   | 118                              |   | 370                            |   | 246 |   | 890 |   |
| Foreign exchange  gain (loss)                         |   | 5                                |   | (9                             | )      | 4 |   | (46 | ) |
| Gain on sales of  assets                              |   | —                           |   | 16                             |   | — |   | 21 |   |
| Gain from  casualty                                   |   | —                           |   | —                         |   | — |   | 801 |   |
|                                                  |   | (1,485                           | )      | (1,289                         | )      | (2,951 | ) | (1,741 | ) |
| Income before  income taxes                           |   | 331                              |   | 1,349                          |   | 1,326 |   | 4,160 |   |
| Federal, foreign  and state income tax provision      |   | 238                              |   | 608                            |   | 685 |   | 1,633 |   |
| Net income                                            |   | 93                               |   | 741                            |   | 641 |   | 2,527 |   |
| Retained  earnings at beginning of period             |   | 34,937                           |   | 38,816                         |   | 34,389 |   | 37,033 |   |
| Cash dividends  on preferred stock                    |   | —                           |   | (3                             | )      | — |   | (6 | ) |
| Cash dividends  on common stock                       |   | (370                             | )      | (371                           | )      | (370 | ) | (371 | ) |
| Retained  earnings at end of period                   |   | $                                | 34,660 |                           | $      | 39,183 |   | $ | 34,660 |   | $ | 39,183 |   |
| Basic and  diluted earnings per share of common stock |   | $                                | 0.02   |                           | $      | 0.20 |   | $ | 0.17 |   | $ | 0.68 |   |
| Weighted average  number of shares outstanding        |   | 3,698                            |   | 3,700                          |   | 3,698 |   | 3,703 |   |

 

 

*Seeaccompanying notes to consolidated financial statements.*

 

3

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** **

**SONESTA INTERNATIONAL HOTELS CORPORATION**

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

Increase (Decrease) in Cash

 
|                                                       |   | **Six Months  Ended June 30** |   |
|------------------------------------------------------------|--------|-------------------------------|--------|
|                                                       |   | **2002**                      |   | **2001** |   |
|                                                       |   | **(in  thousands)**           |   |
| Cash provided  (used) by operating activities              |   |                          |   |   |   |
| Net  income                                                |   | $                             | 641    |   | $ | 2,527 |   |
| Items not  (providing) requiring cash                      |   |                          |   |   |   |
| Pension expense                                            |   | 820                           |   | 567 |   |
| Depreciation and  amortization of property and equipment   |   | 4,517                         |   | 4,424 |   |
| Other  amortization                                        |   | 45                            |   | 50 |   |
| Deferred federal  and state income tax provision (benefit) |   | 521                           |   | (34 | ) |
| Gain on sales of  assets                                   |   | —                        |   | (21 | ) |
| Deferred interest  income                                  |   | (78                           | )      | (34 | ) |
| Changes in  assets and liabilities                         |   |                          |   |   |   |
| Accounts and  notes receivable                             |   | 425                           |   | (384 | ) |
| Refundable  income taxes                                   |   | 281                           |   | — |   |
| Inventories                                                |   | 271                           |   | 143 |   |
| Prepaid expenses  and other                                |   | (636                          | )      | (1,270 | ) |
| Accounts payable                                           |   | (287                          | )      | (838 | ) |
| Advance deposits                                           |   | (1,741                        | )      | (1,139 | ) |
| Federal, foreign  and state income taxes                   |   | 49                            |   | 1,093 |   |
| Accrued  liabilities                                       |   | (1,451                        | )      | (2,518 | ) |
| Cash provided by  operating activities                     |   | 3,377                         |   | 2,566 |   |
|                                                       |   |                          |   |   |   |
| Cash provided  (used) by investing activities              |   |                          |   |   |   |
| Proceeds from  sales of assets                             |   | —                        |   | 24 |   |
| Proceeds from  maturities of government debt securities    |   | —                        |   | 10,313 |   |
| Expenditures for  property and equipment                   |   | (4,260                        | )      | (7,222 | ) |
| Payments  received on long-term receivables and advances   |   | 197                           |   | 410 |   |
| New loans and  advances                                    |   | (1,737                        | )      | (1,723 | ) |
| Cash  provided (used) by investing activities              |   | (5,800                        | )      | 1,802 |   |
|                                                       |   |                          |   |   |   |
| Cash used by  financing activities                         |   |                          |   |   |   |
| Payments on  long-term debt                                |   | (569                          | )      | (617 | ) |
| Cash dividends  paid                                       |   | (370                          | )      | (377 | ) |
| Purchase of  treasury stock                                |   | —                        |   | (64 | ) |
| Cash used by  financing activities                         |   | (939                          | )      | (1,058 | ) |
| Net  increase (decrease) in cash                           |   | (3,362                        | )      | 3,310 |   |
| Cash and cash  equivalents at beginning of period          |   | 14,256                        |   | 23,850 |   |
| Cash and cash  equivalents at end of period                |   | $                             | 10,894 |   | $ | 27,160 |   |

 

*Seeaccompanying notes to consolidated financial statements.*

** **

**4**

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** **

 

Supplemental Informationof Interest and Income Taxes Paid

Cash paid for interest in the 2002 six month and the2001 six month period was approximately $3,212,000 and $3,415,000,respectively.  Cash refunded for incometaxes in the 2002 six month period was approximately $166,000.  Cash paid for income taxes in the 2001 sixmonth period was approximately $574,000.

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

5

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**SONESTAINTERNATIONAL HOTELS CORPORATION**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.**             **Basis of Presentation**

 

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

 

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

 

For further information, refer to the consolidated financial statementsand footnotes thereto included in the Company’s annual report on Form 10-K forthe year ended December 31, 2001.

 

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

 
|                                                          |   | **June 30,  2002**  |   | **December  31, 2001** |   |
|---------------------------------------------------------------|--------|---------------------|--------|------------------------|--------|
|                                                          |   | **(in  thousands)** |   |
| Sharm El Sheikh,  Egypt(a)                                    |   | $                   | 513    |                   | $      | 609 |   |
| Sonesta Hotels  & Suites Coconut Grove, Miami, Florida(b) |   | 4,636               |   | 2,958                  |   |
| Other                                                         |   | 359                 |   | 322                    |   |
| Total long-term  receivables                                  |   | 5,508               |   | 3,889                  |   |
| Less:  current portion                                   |   | 254                 |   | 199                    |   |
| Net long-term  receivables                                    |   | $                   | 5,254  |                   | $      | 3,690 |   |

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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.  In July 2002, the Company agreed to loan an additional $500,000to the owner of the hotel, to assist with financing the construction ofadditional rooms and other hotel facilities. The loan bears interest at the prime rate and is adjustedsemi-annually.  The interest ratecharged at June 30, 2002 was 4.75%.  Thecurrent loan is being repaid in 60 monthly installments, commencing January2000.  From the date the additional$500,000 is fully funded, which will be upon completion of the new facilities,the loan will be repaid in 42 monthly installments.

 

(b)                             Thisloan is made to the owner of the Sonesta Hotel & Suites Coconut Grove,Miami, which opened in April 2002.  TheCompany will loan up to $4,000,000 to fund construction and furniture, fixturesand equipment (“FF&E”) costs, and in addition has loaned $1,000,000 forpre-opening costs and working capital. The construction and FF&E loan bears interest at the prime rate (43⁄4%at June 30, 2002) plus 3⁄4%.  No interestis being charged on the $1,000,000 pre-opening loan.  These loans will be repaid, the pre-opening loan first, out ofprofits that would otherwise be available for distribution to the owner of theHotel.

 

6

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

 

*CreditLines*

 

The Company has a $2,000,000 line of credit, which expires on September30, 2002.  This line of credit bearsinterest at the prime rate (4 3/4% at June 30, 2002).  The terms of the line require a certain minimum net worth, aminimum amount of unrestricted cash or available credit lines during part ofeach calendar year, and approval for additional borrowings by the Company.  No amounts were outstanding under this lineof credit at June 30, 2002.

 

A subsidiary of the Company has a $5,000,000 line of credit, whichexpires on March 31, 2005.  The loan issecured by a mortgage on the Company’s leasehold interest in the Royal SonestaHotel New Orleans, and by a parent Company guaranty.  The terms of the loan require certain minimum levels of incomefor Royal Sonesta Hotel New Orleans, and specify a maximum defined debt to networth ratio.  The terms also require aminimum net worth, approval for additional borrowings by the Company, andlimits on cash dividends and purchases of the Company’s stock.  The interest rate is LIBOR plus 3% (4.8% atJune 30, 2002), and the commitment fee on the unused portion of the line is0.65% per annum.  No amounts wereoutstanding under this line at June 30, 2002.

 

## *Long-Term Debt*

 
|                                                                |   | **June 30,  2002**  |       | **December  31, 2001** |       |
|---------------------------------------------------------------------|--------|---------------------|------------|------------------------|------------|
|                                                                |   | **(in  thousands)** |       |
| Charterhouse of  Cambridge Trust and Sonesta of Massachusetts Inc.: |   |                | ** ** |                   | ** ** |
| First mortgage  note(a)                                             |   | $                   | 40,133     |                   | $          | 40,379 |   |
| Sonesta Beach  Resort Limited Partnership:                          |   |                |       |                   |       |
| First mortgage  note(b)                                             |   | 30,344              |       | 30,531                 |       |
| Sonesta Hotels  of Anguilla, Ltd:                                   |   |                |       |                   |       |
| First mortgage  note(c)                                             |   | 4,216               |       | 4,352                  |       |
|                                                                |   | 74,693              |       | 75,262                 |       |
| Less current  portion of long-term debt                             |   | 1,177               |       | 1,139                  |       |
| Total long-term  debt                                               |   | $                   | 73,516     |                   | $          | 74,123 |   |

 

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(a)                                  This loan is secured by a first mortgageon the Royal Sonesta Hotel Boston (Cambridge) property.  This property is included in fixed assets ata net book value of $23,926,000 at June 30, 2002.  The interest rate on this loan is 8.6% for the term of the loan,and amortization of the principal balance is based on a 25 year schedule.  Monthly payments of principal and interestare $332,911.  The mortgage loan maturesin July 2010, and prepayment of this loan is subject to early paymentpenalties, based on prevailing interest rates at the time of theprepayment.  This mortgage loan, and themortgage loan on Sonesta Beach Resort Key Biscayne (see (b), below) areprovided by the same lender, and are cross-collateralized.

 

7

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(b)                                 This loan is secured by a first mortgageon the Sonesta Beach Resort Key Biscayne property.  The property is included in fixed assets at a net book value of$45,272,000 at June 30, 2002.  Theinterest rate on this loan is 8.6% for the term of the loan, and amortizationof the principal balance is based on a 25 year schedule.    Monthly payments of principal and interestare $251,713.  The mortgage loan maturesin July 2010, and prepayment of this loan is subject to early paymentpenalties, based on prevailing interest rates at the time of theprepayment.  This mortgage loan, and themortgage loan on Royal Sonesta Hotel Boston (Cambridge) (see (a), above) areprovided by the same lender, and are cross-collateralized.

 

(c)                                  This loan is secured by a first mortgageon the Sonesta Beach Resort Anguilla property, and an assignment to the lenderof the Hotel’s furniture, fixtures and equipment.  This property is included in fixed assets at a net book value of $11,416,000at June 30, 2002.  In addition, anamount of $1,900,000 is secured by a Company guaranty.  This loan requires minimum principalpayments of $136,000 during the remainder of 2002, and $272,000 in 2003.  In addition, principal payments are requiredequal to 25% of the Hotel’s annual excess cash flow, as defined.  The balance of $3,808,000 is due on December31, 2003.  The interest rate on the loanis LIBOR plus 2.25%.  The interest rateat June 30, 2002 was 4.1%.

 

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

 

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

 
|                       |   | **Three  Months Ended June 30** |   | **Six Months  Ended June 30** |   |
|----------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                       |   | **2002**                        |   | **2001**                      |   | **2002** |   | **2001** |   |
|                       |   | **(in  thousands)**             |   |
| Direct  departmental costs |   |                            |   |                          |   |   |   |   |   |
| Rooms                      |   | $                               | 3,774  |                          | $      | 4,072 |   | $ | 7,522 |   | $ | 8,036 |   |
| Food and  beverage         |   | 5,157                           |   | 5,634                         |   | 10,395 |   | 11,239 |   |
| Heat, light and  power     |   | 842                             |   | 993                           |   | 1,669 |   | 2,052 |   |
| Other                      |   | 1,155                           |   | 1,270                         |   | 2,308 |   | 2,559 |   |
|                       |   | $                               | 10,928 |                          | $      | 11,969 |   | $ | 21,894 |   | $ | 23,886 |   |

 

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

 

8

----

 

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

 

In July 2002 the Company signed an agreement to sellthe Sonesta Beach Resort Anguilla.  Theagreement is contingent on the buyer receiving approval from the Government ofAnguilla to obtain a license to own land in Anguilla.  If this approval is granted, parties intend to close on thistransaction in September 2002.  Underthe terms of the agreement, net proceeds after commissions and other expensesare estimated at approximately $10,000,000. Based on the book value of the Hotel’s assets, the Company expects toreport a pre-tax loss on the sale in 2002 of approximately $1,300,000 if thistransaction were to be completed in September.

 

In 2002, the Company entered into an agreement tomanage a condominium hotel in Sunny Isles, Florida.  This Hotel is currently under construction, and is expected toopen in the winter of 2002/2003.  Underits agreements, the Company will fund pre-opening costs and workingcapital.  In addition, the Company willfund costs for Hotel furniture, fixtures and equipment in excess of a certainlimit, and is also committed to purchase four condominium units in theHotel.  At this point, the Companyestimates its total commitment to be approximately $4.5 million, of whichapproximately $265,000 was advanced at June 30, 2002.   Based on the management agreement, the Company will receivemanagement fees based on revenues, and incentive fees based on profits, asdefined.  Under the same agreements, theCompany is committed to provide the Hotel’s owner with certain minimum returnseach year, subject to limits, following the opening of the Hotel.  In addition, the Company has an option to buythe Hotel, which option can be exercised after the Hotel opens.

 

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

 

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

 
|                                             |   | **Six Months  Ended June 30** |   |
|--------------------------------------------------|--------|-------------------------------|--------|
|                                             |   | **2002**                      |   | **2001** |   |
|                                             |   | **(in  thousands)**           |   |
| Current  federal income tax provision (benefit)  |   | $                             | (125   | ) | $ | 1,325 |   |
| Current foreign  income tax provision            |   | 80                            |   | 129 |   |
| Current state  income tax provision              |   | 209                           |   | 213 |   |
| Deferred  federal income tax provision (benefit) |   | 521                           |   | (34 | ) |
|                                             |   | $                             | 685    |   | $ | 1,633 |   |

 

9

----

 

**7.             Segment Information**

 

Segment information for the Company’s two reportable segments, Owned& Leased Hotels and Management Activities, for the three and six monthperiods ending June 30, 2002 and 2001 follows:

 

Three month period ended June 30, 2002

 
|                                                                  |   | **Owned  &  Leased Hotels** |   | **Management  Activities** |   | **Consolidated** |   |
|-----------------------------------------------------------------------|--------|---------------------------------|--------|----------------------------|--------|------------------|--------|
|                                                                  |   | **(in  thousands)**             |   |
|                                                                  |   |                            |   |                       |   |             |   |
| Revenues                                                              |   | $                               | 23,943 |                       | $      | 1,173            |   | $ | 25,116 |   |
| Operating income  (loss) before depreciation and amortization expense |   | 4,241                           |   | (147                       | )      | 4,094            |   |
| Depreciation and  amortization                                        |   | (2,168                          | )      | (110                       | )      | (2,278           | )      |
| Interest income  (expense), net                                       |   | (1,591                          | )      | 101                        |   | (1,490           | )      |
| Other income,  net                                                    |   | —                          |   | 5                          |   | 5                |   |
| Segment  pre-tax profit (loss)                                        |   | 482                             |   | (151                       | )      | 331              |   |
|                                                                  |   |                            |   |                       |   |             |   |
| Segment assets                                                        |   | 102,161                         |   | 24,242                     |   | 126,403          |   |
| Segment capital  additions                                            |   | 1,796                           |   | 289                        |   | 2,085            |   |
|                                                                       |        |                                 |        |                            |        |                  |        |  |  |  |

 

Six month period ended June 30, 2002

 
|                                                                  |   | **Owned  &  Leased Hotels** |   | **Management  Activities** |   | **Consolidated** |   |
|-----------------------------------------------------------------------|--------|---------------------------------|--------|----------------------------|--------|------------------|--------|
|                                                                  |   | **(in thousands)**              |   |
|                                                                  |   |                            |   |                       |   |             |   |
| Revenues                                                              |   | $                               | 49,825 |                       | $      | 2,321            |   | $ | 52,146 |   |
| Operating income  (loss) before depreciation and amortization expense |   | 9,058                           |   | (264                       | )      | 8,794            |   |
| Depreciation and  amortization                                        |   | (4,297                          | )      | (220                       | )      | (4,517           | )      |
| Interest income  (expense), net                                       |   | (3,175                          | )      | 220                        |   | (2,955           | )      |
| Other income,  net                                                    |   | —                          |   | 4                          |   | 4                |   |
| Segment  pre-tax profit (loss)                                        |   | 1,586                           |   | (260                       | )      | 1,326            |   |
|                                                                  |   |                            |   |                       |   |             |   |
| Segment assets                                                        |   | 102,161                         |   | 24,242                     |   | 126,403          |   |
| Segment capital  additions                                            |   | 3,130                           |   | 1,130                      |   | 4,260            |   |
|                                                                       |        |                                 |        |                            |        |                  |        |  |  |  |

 

10

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Three month period ended June 30, 2001

 
|                                                                  |   | **Owned  &  Leased  Hotels** |   | **Management  Activities** |   | **Consolidated** |   |
|-----------------------------------------------------------------------|--------|----------------------------------|--------|----------------------------|--------|------------------|--------|
|                                                                  |   | **(in  thousands)**              |   |
| Revenues                                                              |   | $                                | 27,319 |                       | $      | 1,313            |   | $ | 28,632 |   |
| Operating income  (loss) before depreciation and amortization expense |   | 5,128                            |   | (285                       | )      | 4,843            |   |
| Depreciation and  amortization                                        |   | (2,095                           | )      | (110                       | )      | (2,205           | )      |
| Interest income  (expense), net                                       |   | (1,636                           | )      | 340                        |   | (1,296           | )      |
| Other income,  net                                                    |   | —                           |   | 7                          |   | 7                |   |
| Segment pre-tax  profit (loss)                                        |   | 1,397                            |   | (48                        | )      | 1,349            |   |
|                                                                  |   |                             |   |                       |   |             |   |
| Segment assets                                                        |   | 103,579                          |   | 33,241                     |   | 136,820          |   |
| Segment capital  additions                                            |   | 3,104                            |   | 134                        |   | 3,238            |   |
|                                                                       |        |                                  |        |                            |        |                  |        |  |  |  |

 

Six month period ended June 30, 2001

 
|                                                                  |   | **Owned  &  Leased  Hotels** |   | **Management  Activities** |   | **Consolidated** |   |
|-----------------------------------------------------------------------|--------|----------------------------------|--------|----------------------------|--------|------------------|--------|
|                                                                  |   | **(in  thousands)**              |   |
| Revenues                                                              |   | $                                | 55,755 |                       | $      | 2,713            |   | $ | 58,468 |   |
| Operating income  (loss) before depreciation and amortization expense |   | 11,094                           |   | (769                       | )      | 10,325           |   |
| Depreciation and  amortization                                        |   | (4,204                           | )      | (220                       | )      | (4,424           | )      |
| Interest income  (expense), net                                       |   | (3,356                           | )      | 839                        |   | (2,517           | )      |
| Other income  (deductions), net                                       |   | 806                              |   | (30                        | )      | 776              |   |
| Segment pre-tax profit  (loss)                                        |   | 4,340                            |   | (180                       | )      | 4,160            |   |
|                                                                  |   |                             |   |                       |   |             |   |
| Segment assets                                                        |   | 103,579                          |   | 33,241                     |   | 136,820          |   |
| Segment capital  additions                                            |   | 6,925                            |   | 297                        |   | 7,222            |   |
|                                                                       |        |                                  |        |                            |        |                  |        |  |  |  |

 

**8.             Earnings per Share**

 

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

 
|                                           |   | **Three  months ended June 30** |   | **Six months  ended June 30** |   |
|------------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                           |   | **2002**                        |   | **2001**                      |   | **2002** |   | **2001** |   |
| Numerator:                                     |   |                            |   |                          |   |   |   |   |   |
| Net income                                     |   | $                               | 93     |                          | $      | 741 |   | $ | 641 |   | $ | 2,527 |   |
| Preferred stock  dividends                     |   | —                          |   | (3                            | )      | — |   | (6 | ) |
|                                           |   |                            |   |                          |   |   |   |   |   |
| Numerator for  earnings per share              |   | $                               | 93     |                          | $      | 738 |   | $ | 641 |   | $ | 2,521 |   |
|                                           |   |                            |   |                          |   |   |   |   |   |
| Denominator:                                   |   |                            |   |                          |   |   |   |   |   |
| Weighted average  number of shares outstanding |   | 3,698                           |   | 3,700                         |   | 3,698 |   | 3,703 |   |
|                                           |   |                            |   |                          |   |   |   |   |   |
| Earnings per  share of common stock            |   | $                               | 0.02   |                          | $      | 0.20 |   | $ | 0.17 |   | $ | 0.68 |   |

** **

**11**

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**Part I — Item 2**

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS**

**OF RESULTS OF OPERATIONS AND FINANCIALCONDITION**

 

**FIRSTSIX MONTHS 2002 COMPARED TO 2001**

 

Net income for the six month period ending June 30, 2002 was $641,000,or $0.17 per common share, compared to $2,527,000, or $0.68 per common share,in the same period in 2001.  TheCompany’s results continue to be affected by lower demand, both from group andtransient markets, due to the reduction in travel following the events ofSeptember 11, 2001, and due to the economic recession.  Lower demand has fueled fierce competitionfor available business, resulting in discounted average room rates.  The resulting decreases in room revenue peravailable room (“REVPAR”) have resulted in lower revenues and operating profitsduring the first six months of 2002 compared to the same period last year.

 

**REVENUES**

 
|                                            |   | **TOTAL  REVENUES** |   |
|-------------------------------------------------|--------|---------------------|--------|
|                                            |   | **NO. OF  ROOMS**   |   | **2002** |   | **2001** |   |
|                                            |   | **(in  thousands)** |   |
| Sonesta Beach  Resort Anguilla, BWI             |   | 100                 |   | $ | 2,354 |   | $ | 3,130 |   |
| Sonesta Beach  Resort Key Biscayne              |   | 300                 |   | 15,355 |   | 17,571 |   |
| Royal Sonesta  Hotel Boston (Cambridge)         |   | 400                 |   | 12,319 |   | 14,370 |   |
| Royal Sonesta  Hotel New Orleans                |   | 500                 |   | 19,797 |   | 20,684 |   |
| Management and  service fees and other revenues |   |                |   | 2,321 |   | 2,713 |   |
| Total  revenues                                 |   |                |   | $ | 52,146 |   | $ | 58,468 |   |

 

Total revenues for the first six months of 2002 were $52,146,000compared to $58,468,000 in 2001, a decrease of approximately $6,322,000.

 

Revenues during the first six months of 2002 at Sonesta Beach ResortAnguilla were $2,354,000, compared to $3,130,000 in the same period in2001.  The 25% decrease in revenues wasprimarily due to a 27% decrease in room revenue per available room (“REVPAR”),mainly because of lower occupancy. Sonesta Beach Resort Key Biscayne reported revenues of $15,355,000during the six month period ending June 30, 2002, compared to $17,571,000 in2001.  The Resort’s REVPAR decreased 19%compared to a year ago, due to both lower occupancies and average room rates,especially during the second quarter.  Asimilar decrease in REVPAR of 15% at Royal Sonesta Hotel Boston (Cambridge)caused its revenues to decrease from $14,370,000 in the first six months of2001 to $12,319,000 in 2002.  A 14%decrease in food and beverage revenues further contributed to the decrease inrevenues.  Royal Sonesta Hotel NewOrleans performed better than her sister hotels above, with a 6% decrease inREVPAR.  Total revenues declined by$887,000, from $20,684,000 in the six month period ending June 30, 2001 to$19,797,000 in the same period in 2002. Income from management and service fees, which are mainly from thehotels that the Company operates under management agreements, decreased from$2,713,000 in the first six months of 2001 to $2,321,000 in the first sixmonths of 2002.  This decrease of$392,000 was primarily due to lower income of $412,000 from the Company’smanaged properties in Egypt.  Thecontinued unrest in the Middle East has had a negative impact on business inEgypt.

 

12

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**OPERATINGINCOME**

 
|                                                            |   | **OPERATING  INCOME** |   |
|-----------------------------------------------------------------|--------|-----------------------|--------|
|                                                            |   | **2002**              |   | **2001** |   |
|                                                            |   | **(in  thousands)**   |   |
| Sonesta Beach  Resort Anguilla, BWI                             |   | $                     | (247   | ) | $ | (101 | ) |
| Sonesta Beach  Resort Key Biscayne                              |   | 1,465                 |   | 2,289 |   |
| Royal Sonesta  Hotel Boston (Cambridge)                         |   | 1,264                 |   | 2,108 |   |
| Royal Sonesta  Hotel New Orleans                                |   | 2,279                 |   | 2,595 |   |
| Operating income  from hotels after management and service fees |   | 4,761                 |   | 6,891 |   |
| Management  activities and other                                |   | (484                  | )      | (990 | ) |
| Operating income                                                |   | $                     | 4,277  |   | $ | 5,901 |   |

 

Operating income for the six-month period ended June30, 2002 was $4,277,000, compared to operating income of $5,901,000 in 2001, adecrease of approximately $1,624,000.

 

Operating loss at Sonesta Beach Resort Anguilla was $247,000 in the sixmonth period ending June 30, 2002, compared to a loss of $101,000 in 2001.  Revenues declined by $776,000, but expensesdecreased by $630,000, which decrease was due to both lower cost and operatingexpenses, and lower overhead expenses. Operating income at Sonesta Beach Resort Key Biscayne declined by$824,000 from $2,289,000 in the first six months of 2001 to $1,465,000 in the2002 period.  Revenue decreases of$2,216,000 were partially offset by a decrease of $1,392,000 in operatingexpenses.  This 9% decrease in expenseswas due to lower cost and operating, administrative and general, maintenanceand rent expense.  Royal Sonesta HotelBoston (Cambridge) recorded operating income of $1,264,000 in the first sixmonths of 2002 compared to $2,108,000 in the same period a year ago, a decreaseof $844,000.  Decreased revenues of$2,051,000 were partially offset by a $1,207,000, or 10%, decrease in expensesin 2002 compared to 2001.  This decreasein expenses was mainly due to lower cost and operating, administrative andgeneral and maintenance expenses. Operating income at Royal Sonesta Hotel New Orleans was $2,279,000 inthe first six months of 2002, compared to $2,595,000 in the same period in2001, a decrease of $316,000.  Revenuesdecreased by $887,000 in the 2002 period, and expenses decreased $571,000, dueto lower cost and operating, administrative and general and maintenanceexpense.  The Company’s loss frommanagement activities, which is computed after giving effect to management,marketing and service fees to owned and leased hotels, decreased from $990,000in the first six months of 2001 to an operating loss of $484,000 in the firstsix months of 2002.  Decreased revenuesfrom management of $392,000 were more than offset by decreases in expensesrelated to these activities of $898,000, mainly due to lower corporate overheadcosts, and savings related to the relocation of the corporate office.  In addition, expenses in 2001 includednon-recurring severance cost related to the outsourcing of the company’s designfunction.

 

13

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**OTHER INCOME (DEDUCTIONS)**

 

Interest expense decreased by $206,000 from $3,407,000in the first six months of 2001 to $3,201,000 in the same period in 2002, dueto lower interest on the Company’s mortgage loans, because of a lower interestrate on the Anguilla loan, and a lower principal balance on the Cambridge andKey Biscayne loans (see Note 3—Borrowing Arrangements).

 

Interest income in the first six months of 2002 was$246,000 compared to $890,000 in the first six months of 2001, a decrease of$644,000.  This decrease was due tolower short-term investment income because of much lower rates of return duringthe first half of 2002 compared to 2001, and because of the Company’s lowercash balances.

 

Included in gain from casualty in 2001 was $801,000from the final settlement of a business interruption claim related to HurricaneLenny, which damaged the Sonesta Beach Resort Anguilla in November 1999.

 

**SECONDQUARTER 2002 COMPARED TO 2001**

 

**REVENUES**

 
|                                            |   | **TOTAL  REVENUES** |   |
|-------------------------------------------------|--------|---------------------|--------|
|                                            |   | **NO. OF  ROOMS**   |   | **2002** |   | **2001** |   |
|                                            |   | **(in  thousands)** |   |
| Sonesta Beach  Resort Anguilla, BWI             |   | 100                 |   | $ | 712 |   | $ | 1,119 |   |
| Sonesta Beach  Resort Key Biscayne              |   | 300                 |   | 6,362 |   | 7,848 |   |
| Royal Sonesta  Hotel Boston (Cambridge)         |   | 400                 |   | 7,640 |   | 8,445 |   |
| Royal Sonesta  Hotel New Orleans                |   | 500                 |   | 9,229 |   | 9,907 |   |
| Management and  service fees and other revenues |   |                |   | 1,173 |   | 1,313 |   |
| Total revenues                                  |   |                |   | $ | 25,116 |   | $ | 28,632 |   |

 

Total revenues for thethree month period ended June 30, 2002 were $25,116,000 compared to $28,632,000in 2001, a decrease of approximately $3,516,000.

 

Second quarter 2002 revenues at Sonesta Beach ResortAnguilla decreased by $407,000 compared to 2001.  Room revenues decreased by $281,000 due to a 41% decrease in roomrevenue per available room (“REVPAR”), mainly because of lower occupanciesachieved in the 2002 second quarter. Sonesta Beach Resort Key Biscayne reported 2002 second quarter revenuesof $6,362,000 compared to $7,848,000 in the 2001 period, a decrease ofapproximately $1,486,000.  Bothdecreased average room rates as well as lower occupancies during the 2002second quarter resulted in a 24% REVPAR decrease.  Second quarter 2002 revenues at Royal Sonesta Hotel Boston(Cambridge) were $7,640,000, compared to $8,445,000 in the 2001 second quarter,a decrease of $805,000.  This wasprimarily due to a 10% decrease in REVPAR due to lower average room ratesachieved.  Royal Sonesta Hotel NewOrleans reported revenues during the 2002 second quarter of $9,229,000 comparedto $9,907,000 in 2001, a decrease of $678,000. REVPAR decreased by 7% only, mainly due to lower room rates.  Royal Sonesta New Orleans continues to dorelatively well in this very competitive environment, due to its excellentreputation and location.  Revenues frommanagement activities decreased by $140,000, from $1,313,000 during the secondquarter of 2001 to $1,173,000 during the 2002 second quarter, mainly due to adecrease of $128,000 in income earned from the Company managed properties inEgypt, where business continues to be affected by the unrest in the Middle Eastregion.

 

14

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**OPERATINGINCOME**

 
|                                                            |   | **OPERATING  INCOME** |   |
|-----------------------------------------------------------------|--------|-----------------------|--------|
|                                                            |   | **2002**              |   | **2001** |   |
|                                                            |   | **(in  thousands)**   |   |
| Sonesta Beach  Resort Anguilla, BWI                             |   | $                     | (395   | ) | $ | (391 | ) |
| Sonesta Beach  Resort Key Biscayne                              |   | (423                  | )      | 19 |   |
| Royal Sonesta  Hotel Boston (Cambridge)                         |   | 1,730                 |   | 2,145 |   |
| Royal Sonesta  Hotel New Orleans                                |   | 1,161                 |   | 1,261 |   |
| Operating  income from hotels after management and service fees |   | 2,073                 |   | 3,034 |   |
| Management  activities and other                                |   | (257                  | )      | (396 | ) |
| Operating income                                                |   | $                     | 1,816  |   | $ | 2,638 |   |

 

Operating income for the second quarter was$1,816,000, compared to operating income of $2,638,000 in 2001, a decrease ofapproximately $822,000.

 

Operating loss at Sonesta Beach Resort Anguilla duringthe second quarter of 2002 declined by only $4,000 compared to the same quarterin 2001, despite a decrease in revenues of $407,000.  Expenses decreased by $403,000, which was mainly attributable todecreased cost and operating, administrative and general, marketing andmaintenance expense.  Sonesta BeachResort Key Biscayne reported a 2002 second quarter operating loss of $423,000compared to 2001 second quarter operating income of $19,000, a decrease ofapproximately $442,000.  Decreasedrevenues of $1,486,000 were partially offset by decreases in expenses of$1,044,000.  This 13% decrease in operatingexpenses resulted primarily from reduced cost and operating and administrativeand general expenses.  Operating incomeat Royal Sonesta Hotel Boston (Cambridge) was $1,730,000 during the 2002 secondquarter, compared to $2,145,000 in the same quarter a year ago, a decrease of$415,000.  Revenues decreased $805,000during the historically strong second quarter, but operating expenses decreasedby $390,000, primarily due to lower cost and operating, administrative andgeneral and maintenance expenses.  RoyalSonesta Hotel New Orleans reported operating income of $1,161,000 in the 2002second quarter, compared to $1,261,000 in the 2001 second quarter.  Decreased revenues of $678,000 were almostentirely offset by a $578,000 decrease in expenses, primarily in cost andoperating, administrative and general, maintenance and rent expense.  Second quarter 2002 operating loss frommanagement activities, which is computed after giving effect to management,marketing and service fees to owned and leased hotels, was $257,000, comparedto a loss of $396,000 in the 2001 second quarter, a $139,000 decrease.  Corporate overhead costs, including thoserelated to office rent and training costs, decreased by $279,000, which morethan offset the decrease in income of $140,000.

 

**OTHER INCOME (DEDUCTIONS)**

 

Interest expense decreased by $58,000 from $1,666,000in the second quarter of 2001 to $1,608,000 in the same period in 2002, becauseof a lower interest rate on the Anguilla mortgage loan, and a lower principalbalance on the Cambridge and Key Biscayne mortgage loans (see also Note3—Borrowing Arrangements).

 

Interest income in the second quarter of 2002 was$118,000 compared to $370,000 in the 2001 second quarter, a decrease of$252,000.  This decrease was due tolower short-term investment income because of much lower rates of return in2002 compared to 2001, and because of the Company’s lower cash balances.  This decrease in short term investmentincome more than offset interest earned on the Company’s loans to the owner ofthe new Sonesta Hotel & Suites Coconut Grove (see Note 2 — Long TermReceivables and Advances).

 

15

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**FEDERAL, FOREIGN AND STATE INCOME TAXES**

 

The provision for income taxes during the first sixmonths of 2002 was higher than the statutory rate primarily due to state taxesprovided on the Company’s income from Royal Sonesta Hotel New Orleans.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company had cash and cash equivalents ofapproximately $10,894,000 at June 30, 2002. In addition, the Company has $7,000,000 available under two credit lines.

 

In July 2002 the Company signed an agreement to sellthe Sonesta Beach Resort Anguilla.  Theagreement is contingent on the buyer receiving approval from the Government ofAnguilla to obtain a license to own land in Anguilla.  If this approval is granted, parties intend to close on thistransaction in September 2002.  Underthe terms of the agreement, net proceeds after commissions and other expensesare estimated at approximately $10,000,000. Based on the book value of the Hotel’s assets, the Company expects toreport a pre-tax loss on the sale in 2002 of approximately $1,300,000 if thistransaction were to be completed in September.

 

The Company agreed to loan an additional $500,000 tothe owner of Sonesta Beach Resort Sharm El Sheikh, to assist with the financingof the construction of additional rooms and other hotel facilities.  An amount of $200,000 was funded in July,and the remaining $300,000 will be funded as the improvements are beingcompleted.

 

During the first six months of 2002, the Companyadvanced $1,600,000 to the owner of the Sonesta Hotel & Suites CoconutGrove, Miami, which is a condominium hotel that opened in April 2002.   Under its agreements, the Company will loanup to $5,000,000 to the project to fund part of the project costs, and forpre-opening costs and working capital (see also Note 2 — Long Term Receivablesand Advances).  The Company expects tofund the remaining portion of this commitment, approximately $550,000, by theend of 2002.

 

In 2002, the Company entered into an agreement tomanage a condominium hotel in Sunny Isles, Florida.  This Hotel is currently under construction, and is expected toopen in the winter of 2002/2003.  Underits agreements, the Company will fund pre-opening costs and workingcapital.  In addition, the Company willfund costs for Hotel furniture, fixtures and equipment in excess of a certainlimit, and is also committed to purchase four condominium units in theHotel.  At this point, the Companyestimates its total commitment to be approximately $4.5 million, of whichapproximately $265,000 was advanced at June 30, 2002.   Based on the management agreement, the Company will receivemanagement fees based on revenues, and incentive fees based on profits, as defined.  Under the same agreements, the Company iscommitted to provide the Hotel’s owner with certain minimum returns each year,subject to limits, following the opening of the Hotel.  In addition, the Company has an option tobuy the Hotel, which option can be exercised after the Hotel opens.

 

The Company believes that its present cash balancesand other available credit lines will be more than adequate to meet its cashrequirements for 2002 and beyond.

 

16

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**PART I —Item 3**

 

**QUANTITATIVE AND QUALITATIVEDISCLOSURE OF MARKET RISK**

 

The Company is exposed to market risk from changes in interest ratesand foreign exchange rates.    TheCompany uses fixed rate debt and debt with variable interest rates to financethe ownership of its properties.   Thetable that follows summarizes the Company’s fixed and variable rate debtobligations outstanding at June 30, 2002.   This information should be read in conjunction with Note 3—BorrowingArrangements.

 

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

 
|                   |   | **YEAR** |   |     |   |     |   |     |   |
|------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                   |   | **2002** |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **Thereafter** |   | **Total** |   | **Fair Value** |   |
| Fixed rate             |   | $        | 434    |     | $      | 946      |   | $        | 1,013  |   | $ | 1,124 |   | $ | 1,226 |   | $ | 65,734 |   | $ | 70,477 |   | $ | 70,477 |   |
| Average interest  rate |   | 8.6      | %      | 8.6      | %      | 8.6      | %      | 8.6      | %      | 8.6 | % | 8.6 | % |   |   |   |   |
| Variable rate          |   | 136      |   | 4,080    |   | —   |   | —   |   | — |   | — |   | 4,216 |   | 4,216 |   |
| Average interest  rate |   | 4.1      | %      | 4.1      | %      | —   |   | —   |   | — |   | — |   |   |   |   |   |
|                        |        |          |        |          |        |          |        |          |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**PART II— Item 4**

 

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

 

## The Annual Meeting of Shareholders of SonestaInternational Hotels Corporation was held on May 6, 2002.    All nominees for directors wereelected.   The results of the votes withregard to the appointment of the Company’s independent auditors as well as theelection of common stock directors are as follows:

 

 
|                                                          |   | **VOTES CAST** |   |
|---------------------------------------------------------------|--------|----------------|--------|
| **MANAGEMENT PROPOSAL**                                       |   | **FOR**        |   | **AGAINST** |   | **ABSTAIN** |   |
|                                                          |   |           |   |   |   |   |   |
| Approval of the appointment of independent auditors  for 2002 |   | 2,592,787      |   | 2,008 |   | 3,660 |   |

 

**ELECTIONOF COMMON STOCK DIRECTORS**

 
| **DIRECTOR**         |   | **VOTES  RECEIVED** |   | **VOTES WITHHELD** |   |
|----------------------|--------|---------------------|--------|--------------------|--------|
| George S. Abrams     |   | 2,565,941           |   | 32,514             |   |
| Vernon R. Alden      |   | 2,565,941           |   | 32,514             |   |
| Joseph L. Bower      |   | 2,565,941           |   | 32,514             |   |
| Paul Sonnabend       |   | 2,565,941           |   | 32,514             |   |
| Peter J.  Sonnabend  |   | 2,565,941           |   | 32,514             |   |
| Roger P.  Sonnabend  |   | 2,565,941           |   | 32,514             |   |
| Stephanie  Sonnabend |   | 2,565,941           |   | 32,514             |   |
| Stephen  Sonnabend   |   | 2,565,941           |   | 32,514             |   |
| Jean C. Tempel       |   | 2,565,941           |   | 32,514             |   |

 

 

**PARTII — Other Information**

 

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

 

Not applicable during the quarter ended June 30, 2002

 

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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  undersigned thereunto duly authorized. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                        |   |
|   |                                                                                                                                                                                        |   |
|   |                                                                                                                                                                                        | **SONESTA  INTERNATIONAL HOTELS CORPORATION** |
|   |                                                                                                                                                                                        |   |
|   | By:                                                                                                                                                                                         |   |   |
|   |                                                                                                                                                                                        | Boy van Riel |
|   |                                                                                                                                                                                        | Vice President and Treasurer |
|   |                                                                                                                                                                                        |   |
|   |                                                                                                                                                                                        | (Authorized to sign on behalf of the Registrant as |
|   |                                                                                                                                                                                        | Principal Financial Officer) |
|   |                                                                                                                                                                                        |   |
|   | Date:                                                                                                                                                                                       | August 12, 2002 |

 

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