**FORM 10-Q**

 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

| **(Mark One)**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
| ý                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **For the Quarterly period ended September  30, 2003**                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **OR**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **o**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **For the transition period  from                                            to                               ** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **Commission file number 0-9032**                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

**SONESTA INTERNATIONAL HOTELS CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

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

 

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by section 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filing requirementsfor the past 90 days.

 
| Yes   ý |   | No   o |
|-----------------------------|--------|-----------------------|

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Number of Shares of Common Stock Outstanding

As of November 5, 2003 — $.80 par value,

Class A – 3,698,230

 

 

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**INDEX**

 

**SONESTA INTERNATIONAL HOTESL CORPORATION**

 

 
| **Part  I.**  | Financial Information                                     |
|---------------|-----------------------------------------------------------|
|          |
|          | Item 1.                                                   | Financial Statements (Unaudited) |
|          |                                                      |   |
|          |                                                      |   |
|          |                                                      | Condensed consolidated balance  sheets—September 30, 2003 and December 31, 2002 |
|          |                                                      |   |
|          |                                                      | Condensed consolidated statements of  operations—Three month and nine month periods ended September 30, 2003 and  2002 |
|          |                                                      |   |
|          |                                                      | Condensed consolidated statements of cash flows—Nine month periods  ended September 30, 2003 and 2002 |
|          |                                                      |   |
|          |                                                      | Notes to condensed consolidated financial  statements—September 30, 2003 and 2002 |
|          |                                                      |   |
|          | Item  2.                                                  | Management’s Discussion and Analysis of  Results of Operations and Financial Condition—September 30, 2003 |
|          |                                                      |   |
|          |                                                      |   |
|          | Item  3.                                                  | Quantitative and Qualitative Disclosure of Market Risk |
|          |                                                      |   |
|          |                                                      |   |
|          | Item 4.                                                   | Internal Controls and Procedures |
|          |
| **Part  II.** | Other  Information                                        |
|          |
|          |
|          |                                                      | Signature page |
|          |                                                      |   |
|          |                                                      | Certifications by the Company’s Chief  Executive Officer, Chief Financial Officer, and Vice President and Treasurer |
|          |
| Exhibit 99.1  | 18 U.S.C. Section 1350 Certification by  Company Officers |
|               |                                                           |  |  |

 

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**PartI - Item 1.   Financial Information**

 

**SONESTAINTERNATIONAL HOTELS CORPORATION****CONDENSEDCONSOLIDATED BALANCE SHEETS**September 30, 2003 (unaudited) and December 31, 2002
|                                                                             |   | **(in thousands)**     |    |
|----------------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                             |   | **September 30  2003** |    | **December 31  2002** |   |
|                                                                             |   |                   |    |
| ASSETS                                                                           |   |                   |    |   |   |
| Current assets:                                                                  |   |                   |    |   |   |
| Cash and cash equivalents                                                        |   | $                      | 1,939   |   | $ | 12,675 |   |
| Accounts and notes receivable:                                                   |   |                   |    |   |   |
| Trade, less allowance of $270 ($241 at December  31, 2002) for doubtful accounts |   | 7,064                  |    | 6,920 |   |
| Other, including current portion of  long-term receivables and advances          |   | 526                    |    | 443 |   |
| Total accounts and notes receivable                                              |   | 7,590                  |    | 7,363 |   |
| Refundable income taxes                                                          |   | 1,600                  |    | 1,600 |   |
| Current portion of deferred taxes                                                |   | 325                    |    | 311 |   |
| Inventories                                                                      |   | 935                    |    | 1,109 |   |
| Prepaid expenses and other                                                       |   | 2,698                  |    | 3,294 |   |
|                                                                             |   |                   |    |   |   |
| Total current assets                                                             |   | 15,087                 |    | 26,352 |   |
|                                                                             |   |                   |    |   |   |
| Long-term receivables and advances                                               |   | 9,443                  |    | 7,147 |   |
|                                                                             |   |                   |    |   |   |
| Property and equipment, at cost:                                                 |   |                   |    |   |   |
| Land and land improvements                                                       |   | 9,202                  |    | 9,202 |   |
| Buildings                                                                        |   | 64,956                 |    | 64,361 |   |
| Furniture and equipment                                                          |   | 45,031                 |    | 41,168 |   |
| Leasehold improvements                                                           |   | 7,421                  |    | 6,069 |   |
| Projects in progress                                                             |   | 66                     |    | 367 |   |
|                                                                             |   | 126,676                |    | 121,167 |   |
|                                                                             |   |                   |    |   |   |
| Less accumulated depreciation and  amortization                                  |   | 44,306                 |    | 37,996 |   |
| Net property and equipment                                                       |   | 82,370                 |    | 83,171 |   |
|                                                                             |   |                   |    |   |   |
| Other long-term assets                                                           |   | 2,811                  |    | 1,780 |   |
|                                                                             |   | $                      | 109,711 |   | $ | 118,450 |   |

 

*See accompanyingnotes to condensed consolidated financial statements.*

 

1

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**SONESTA INTERNATIONALHOTELS CORPORATION****CONDENSEDCONSOLIDATED BALANCE SHEETS**September 30, 2003 (unaudited) and December 31, 2002
|                                                                                                 |   | **(in thousands)**     |    |
|------------------------------------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                                                 |   | **September 30  2003** |    | **December 31  2002** |   |
|                                                                                                 |   |                   |    |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                            |   |                   |    |   |   |
| Current liabilities:                                                                                 |   |                   |    |   |   |
| Notes payable                                                                                        |   | $                      | 350     |   | $ | — |   |
| Current portion of long-term debt                                                                    |   | 992                    |    | 946 |   |
| Accounts payable                                                                                     |   | 3,238                  |    | 4,199 |   |
| Advance deposits                                                                                     |   | 2,504                  |    | 3,352 |   |
| Federal, foreign and state income taxes                                                              |   | 1,001                  |    | 848 |   |
| Accrued liabilities:                                                                                 |   |                   |    |   |   |
| Salaries and wages                                                                                   |   | 1,665                  |    | 1,860 |   |
| Rentals                                                                                              |   | 3,304                  |    | 5,000 |   |
| Interest                                                                                             |   | 508                    |    | 543 |   |
| Pension and other employee benefits                                                                  |   | 187                    |    | 1,418 |   |
| Other                                                                                                |   | 1,570                  |    | 1,117 |   |
|                                                                                                 |   |                   |    |   |   |
| Total accrued liabilities                                                                            |   | 7,234                  |    | 9,938 |   |
|                                                                                                 |   |                   |    |   |   |
| Total current liabilities                                                                            |   | 15,319                 |    | 19,283 |   |
|                                                                                                 |   |                   |    |   |   |
| Long-term debt                                                                                       |   | 68,353                 |    | 69,097 |   |
|                                                                                                 |   |                   |    |   |   |
| Deferred federal and state income taxes                                                              |   | 3,638                  |    | 5,275 |   |
|                                                                                                 |   |                   |    |   |   |
| Other non-current liabilities                                                                        |   | 3,520                  |    | 2,313 |   |
|                                                                                                 |   |                   |    |   |   |
| Commitments and contingencies                                                                        |   |                   |    |   |   |
|                                                                                                 |   |                   |    |   |   |
| 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                                                                                    |   | 26,052                 |    | 29,653 |   |
| Treasury shares—2,404, at cost                                                                  |   | (12,053                | )       | (12,053 | ) |
| Total stockholders’ equity                                                                      |   | 18,881                 |    | 22,482 |   |
|                                                                                                 |   | $                      | 109,711 |   | $ | 118,450 |   |

 

*See accompanyingnotes to condensed consolidated financial statements.*

 

2

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**SONESTAINTERNATIONAL HOTELS CORPORATION****CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS(unaudited)**(in thousands except for per share data)
|                                                       |   | **Three Months Ended  September 30** |   | **Nine Months Ended  September 30** |   |
|------------------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                                       |   | **2003**                             |   | **2002**                            |   | **2003** |   | **2002** |   |
|                                                       |   |                                 |   |                                |   |   |   |   |   |
| Revenues:                                                  |   |                                 |   |                                |   |   |   |   |   |
| Rooms                                                      |   | $                                    | 9,640  |                                | $      | 10,409 |   | $ | 36,023 |   | $ | 40,090 |   |
| Food and beverage                                          |   | 5,249                                |   | 4,838                               |   | 18,269 |   | 18,085 |   |
| Management, license and service fees                       |   | 807                                  |   | 834                                 |   | 2,472 |   | 3,140 |   |
| Parking, telephone and other                               |   | 1,959                                |   | 1,791                               |   | 6,330 |   | 6,347 |   |
|                                                       |   | 17,655                               |   | 17,872                              |   | 63,094 |   | 67,662 |   |
| Costs and expenses:                                        |   |                                 |   |                                |   |   |   |   |   |
| Costs and operating expenses                               |   | 9,296                                |   | 9,336                               |   | 29,472 |   | 30,260 |   |
| Advertising and promotion                                  |   | 1,633                                |   | 1,868                               |   | 5,339 |   | 5,572 |   |
| Administrative and general                                 |   | 3,443                                |   | 3,673                               |   | 11,397 |   | 10,658 |   |
| Human resources                                            |   | 347                                  |   | 395                                 |   | 1,118 |   | 1,117 |   |
| Maintenance                                                |   | 1,435                                |   | 1,549                               |   | 4,532 |   | 4,594 |   |
| Rentals                                                    |   | 273                                  |   | 25                                  |   | 3,875 |   | 4,477 |   |
| Property taxes                                             |   | 219                                  |   | 615                                 |   | 1,377 |   | 2,016 |   |
| Depreciation and amortization                              |   | 2,143                                |   | 2,065                               |   | 6,365 |   | 6,205 |   |
|                                                       |   | 18,789                               |   | 19,526                              |   | 63,475 |   | 64,899 |   |
| Operating income (loss)                                    |   | (1,134                               | )      | (1,654                              | )      | (381 | ) | 2,763 |   |
|                                                       |   |                                 |   |                                |   |   |   |   |   |
| Other income (deductions):                                 |   |                                 |   |                                |   |   |   |   |   |
| Interest expense                                           |   | (1,563                               | )      | (1,577                              | )      | (4,641 | ) | (4,687 | ) |
| Interest income                                            |   | 73                                   |   | 102                                 |   | 278 |   | 345 |   |
| Foreign exchange gain (loss)                               |   | (6                                   | )      | 4                                   |   | (24 | ) | 8 |   |
| Gain on sales of assets                                    |   | 6                                    |   | —                              |   | 17 |   | — |   |
|                                                       |   | (1,490                               | )      | (1,471                              | )      | (4,370 | ) | (4,334 | ) |
| Loss from continuing operations before  income tax benefit |   | (2,624                               | )      | (3,125                              | )      | (4,751 | ) | (1,571 | ) |
| Income tax benefit                                         |   | (820                                 | )      | (930                                | )      | (1,335 | ) | (167 | ) |
| Net loss from continuing operations                        |   | (1,804                               | )      | (2,195                              | )      | (3,416 | ) | (1,404 | ) |
| Discontinued operations (Note 9):                          |   |                                 |   |                                |   |   |   |   |   |
| Loss from operations and sale of  discontinued hotel       |   | —                               |   | (1,700                              | )      | — |   | (1,928 | ) |
| Income tax benefit                                         |   | —                               |   | (616                                | )      | — |   | (694 | ) |
| Loss from discontinued operations                          |   | —                               |   | (1,084                              | )      | — |   | (1,234 | ) |
| Net loss                                                   |   | (1,804                               | )      | (3,279                              | )      | (3,416 | ) | (2,638 | ) |
| Retained earnings at beginning of period                   |   | 27,856                               |   | 34,660                              |   | 29,653 |   | 34,389 |   |
| Cash dividends on common stock                             |   | —                               |   | —                              |   | (185 | ) | (370 | ) |
| Retained earnings at end of period                         |   | $                                    | 26,052 |                                | $      | 31,381 |   | $ | 26,052 |   | $ | 31,381 |   |
| Basic and diluted loss per share from:                     |   |                                 |   |                                |   |   |   |   |   |
| Continuing operations                                      |   | $                                    | (0.48  | )                                   | $      | (0.59 | ) | $ | (0.92 | ) | $ | (0.38 | ) |
| Discontinued operations                                    |   | —                               |   | (0.29                               | )      | — |   | (0.33 | ) |
| Net loss per share of common stock                         |   | $                                    | (0.48  | )                                   | $      | (0.88 | ) | $ | (0.92 | ) | $ | (0.71 | ) |
| Weighted average number of shares  outstanding             |   | 3,698                                |   | 3,698                               |   | 3,698 |   | 3,698 |   |

 

*See accompanyingnotes to condensed consolidated financial statements.*

 

3

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**SONESTA INTERNATIONALHOTELS CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)**Increase (Decrease) in Cash

 
|                                                       |   | **(in  thousands)**                 |   |
|------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                       |   | **Nine  Months Ended September 30** |   |
|                                                       |   | **2003**                            |   | **2002** |   |
|                                                       |   |                                |   |   |   |
| Cash provided (used) by operating  activities              |   |                                |   |   |   |
| Net loss                                                   |   | $                                   | (3,416 | ) | $ | (2,638 | ) |
| Items not (providing) requiring cash                       |   |                                |   |   |   |
| Pension expense                                            |   | 1,100                               |   | 1,247 |   |
| Depreciation and amortization of property  and equipment   |   | 6,365                               |   | 6,205 |   |
| Other amortization                                         |   | 68                                  |   | 68 |   |
| Deferred federal and state income tax  provision (benefit) |   | (1,651                              | )      | 813 |   |
| Gain on sales of assets                                    |   | (17                                 | )      | — |   |
| Net loss from discontinued operations                      |   | —                              |   | 1,234 |   |
| Deferred interest income                                   |   | (149                                | )      | (127 | ) |
| Changes in assets and liabilities                          |   |                                |   |   |   |
| Accounts and notes receivable                              |   | (90                                 | )      | 938 |   |
| Refundable income taxes                                    |   | —                              |   | (720 | ) |
| Inventories                                                |   | 174                                 |   | 435 |   |
| Prepaid expenses and other                                 |   | 596                                 |   | (1,106 | ) |
| Accounts payable                                           |   | (775                                | )      | (256 | ) |
| Advance deposits                                           |   | (848                                | )      | (872 | ) |
| Federal, foreign and state income taxes                    |   | 153                                 |   | (142 | ) |
| Accrued liabilities                                        |   | (2,598                              | )      | (1,731 | ) |
| Cash provided (used) by operating  activities              |   | (1,088                              | )      | 3,348 |   |
|                                                       |   |                                |   |   |   |
| Cash provided (used) by investing  activities              |   |                                |   |   |   |
| Net proceeds from sales of assets                          |   | 81                                  |   | 9,955 |   |
| Expenditures for property and equipment                    |   | (5,628                              | )      | (6,879 | ) |
| New loans and advances                                     |   | (2,506                              | )      | (10,559 | ) |
| Payments received on long-term receivables  and advances   |   | 257                                 |   | 281 |   |
| Net cash deficit from discontinued  operations             |   | —                              |   | (137 | ) |
| Other investments                                          |   | (1,135                              | )      | — |   |
| Cash used by investing activities                          |   | (8,931                              | )      | (7,339 | ) |
|                                                       |   |                                |   |   |   |
| Cash provided (used) by financing  activities              |   |                                |   |   |   |
| Net borrowings under lines of credit                       |   | 350                                 |   | — |   |
| Scheduled payments on long-term debt                       |   | (697                                | )      | (843 | ) |
| Payments on long-term debt following sale  of hotel        |   | —                              |   | (4,148 | ) |
| Cash dividends paid                                        |   | (370                                | )      | (740 | ) |
| Cash used by financing activities                          |   | (717                                | )      | (5,731 | ) |
|                                                       |   |                                |   |   |   |
| Net decrease in cash                                       |   | (10,736                             | )      | (9,722 | ) |
| Cash and cash equivalents at beginning of  period          |   | 12,675                              |   | 14,256 |   |
| Cash and cash equivalents at end of period                 |   | $                                   | 1,939  |   | $ | 4,534 |   |

 

*See accompanyingnotes to condensed consolidated financial statements.*

 

4

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Supplemental Information of Interest andIncome Taxes Paid

Cash paid for interest in the 2003 and 2002 nine month periods wasapproximately $4,608,000 and $4,817,000, respectively. Cash paid for incometaxes in the 2003 nine month period was approximately $163,000.  Cash refunded for income taxes during thefirst nine months of 2002 was approximately $118,000.

 

*See accompanyingnotes to condensed consolidated financial statements.*

 

5

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**SONESTA INTERNATIONALHOTELS CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

 

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

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the informationand footnotes required by accounting principles generally accepted in theUnited States for complete financial statements.  In the opinion of management, all adjustments (consisting ofnormal recurring accruals) considered necessary for a fair presentation havebeen included. Operating results for the nine month period ended September 30,2003 are not necessarily indicative of the results that may be expected for theyear ended December 31, 2003.

 

The balance sheet at December 31, 2002 has been derived from theaudited financial statements at that date but does not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.

 

For further information, refer to the consolidated financial statementsand footnotes thereto included in the Company’s annual report on Form 10-K forthe year ended December 31, 2002.

 

 

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

 
|                                                          |   | **(in  thousands)**      |   |
|---------------------------------------------------------------|--------|--------------------------|--------|
|                                                          |   | **September  30,  2003** |   | **December  31,  2002** |   |
| Sharm El Sheikh, Egypt (a)                                    |   | $                        | 742    |   | $ | 821 |   |
| Sonesta Hotel & Suites Coconut Grove,  Miami, Florida (b) |   | 5,434                    |   | 5,285 |   |
| Trump International Sonesta Beach Resort  (c)                 |   | 3,312                    |   | 1,003 |   |
| Other                                                         |   | 288                      |   | 283 |   |
| Total long-term receivables                                   |   | 9,776                    |   | 7,392 |   |
| Less:   current portion                                  |   | 333                      |   | 245 |   |
| Net long-term receivables                                     |   | $                        | 9,443  |   | $ | 7,147 |   |

 

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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 and is adjustedsemi-annually.  The interest ratecharged at September 30, 2003 was 4%. This loan is being repaid in 42 monthly installments, starting inJanuary 2003.

 

(b)                             Thisloan is made to the owner of the Sonesta Hotel & Suites Coconut Grove,Miami, which opened in April 2002.  TheCompany has loaned $4,000,000 to fund construction and furniture, fixtures andequipment (“FF&E”) costs, and, in addition, has loaned $1,000,000 forpre-opening costs and working capital. The loan for construction and FF&E costs bears interest at the primerate (4% at September 30, 2003) plus 0.75%. No interest is being charged on the loan for pre-opening costs.  These loans will be repaid, the loan forpre-opening costs first, out of future profits that would otherwise beavailable for distribution to the owner of the hotel.

 

6

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(c)                                  Thisamount represents advances made to the owner of Trump International SonestaBeach Resort in Sunny Isles Beach, Florida for pre-opening costs ($2,397,000)and for working capital and the Company’s share of the losses of the Resortfrom the opening in April 2003 through September 30, 2003 ($915,000).  No interest will be charged on theseadvances, which will be repaid out of future available profits generated by thehotel.

 

**3.**                                      **BorrowingArrangements**

 

*Credit Lines*

 

The Company has a $2,000,000 line of credit, which expired on September28, 2003, but has been extended through January 31, 2004. This line of creditbears interest at the prime rate (4% at September 30, 2003).  The terms of the line require a certainminimum net worth, a minimum amount of unrestricted cash or available creditlines during part of each calendar year, and approval for additional borrowingsby the Company.  No amounts wereoutstanding under this line of credit at September 30, 2003.

 

A subsidiary of the Company has a $5,000,000 line of credit, whichexpires on March 31, 2005.  The line ofcredit is secured by a mortgage on the Company’s leasehold interest in theRoyal Sonesta Hotel New Orleans, and by a parent Company guaranty.  The terms require certain minimum levels ofincome for Royal Sonesta Hotel New Orleans, and specify a maximum defined debtto net worth ratio.  The terms alsorequire a minimum net worth, approval for additional borrowings by the Company,and limits on cash dividends and purchases of the Company’s stock.  The interest rate is LIBOR plus 3% (4.2% atSeptember 30, 2003), and the commitment fee on the unused portion of the lineis 0.65% per annum.  There was $350,000outstanding under this line at September 30, 2003.

 

## *Long-Term Debt*

 
|                                                                |   | **(in  thousands)**     |       |
|---------------------------------------------------------------------|--------|-------------------------|------------|
|                                                                |   | **September  30, 2003** |       | **December  31, 2002** |   |
| Charterhouse of Cambridge Trust and Sonesta  of Massachusetts Inc.: |   |                    | ** ** |   | ** ** |
| First mortgage note (a)                                             |   | $                       | 39,488     |   | $ | 39,886 |   |
| Sonesta Beach Resort Limited Partnership:                           |   |                    |       |   |   |
| First mortgage note (b)                                             |   | 29,857                  |       | 30,157 |   |
|                                                                |   | 69,345                  |       | 70,043 |   |
| Less: current portion of long-term debt                             |   | 992                     |       | 946 |   |
| Total long-term debt                                                |   | $                       | 68,353     |   | $ | 69,097 |   |

 

 

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(a)                                  Thisloan is secured by a first mortgage on the Royal Sonesta Hotel Boston(Cambridge) property.  This property isincluded in fixed assets at a net book value of $22,242,000 at September 30,2003.  The interest rate on this loan is8.6% for the term of the loan, and amortization of the principal balance is basedon a 25 year schedule.  Monthly paymentsof principal and interest are $332,911. The mortgage loan matures in July 2010, and prepayment of this loan issubject to early payment penalties, based on prevailing interest rates at thetime of the prepayment.  This mortgageloan, and the mortgage loan on Sonesta Beach Resort Key Biscayne (see (b),below) are provided by the same lender, and are cross-collateralized.

 

7

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(b)                                 Thisloan is secured by a first mortgage on the Sonesta Beach Resort Key Biscayneproperty.  The property is included infixed assets at a net book value of $42,690,000 at September 30, 2003.  The interest rate on this loan is 8.6% forthe term of the loan, and amortization of the principal balance is based on a25 year schedule.  Monthly payments ofprincipal and interest are $251,713. The mortgage loan matures in July 2010, and prepayment of this loan issubject to early payment penalties, based on prevailing interest rates at thetime of the prepayment.  This mortgageloan, and the mortgage loan on Royal Sonesta Hotel Boston (Cambridge) (see (a),above) are provided by the same lender, and are cross-collateralized.

 

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

 

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

 
|                      |   | **(in thousands)**                  |   |
|---------------------------|--------|-------------------------------------|--------|
|                      |   | **Three Months Ended September 30** |   | **Nine Months Ended September 30** |   |
|                      |   | **2003**                            |   | **2002** |   | **2003** |   | **2002** |   |
|                      |   |                                |   |   |   |   |   |   |   |
| Direct departmental costs |   |                                |   |   |   |   |   |   |   |
| Rooms                     |   | $                                   | 3,082  |   | $ | 3,248 |   | $ | 9,628 |   | $ | 10,449 |   |
| Food and beverage         |   | 4,444                               |   | 4,357 |   | 14,348 |   | 14,356 |   |
| Heat, light and power     |   | 794                                 |   | 729 |   | 2,259 |   | 2,129 |   |
| Other                     |   | 976                                 |   | 1,002 |   | 3,237 |   | 3,326 |   |
|                      |   | $                                   | 9,296  |   | $ | 9,336 |   | $ | 29,472 |   | $ | 30,260 |   |

 

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

 

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

 

In 2002, the Company entered into anagreement to manage the Trump International Sonesta Beach Resort in Sunny IslesBeach, Florida.  This hotel opened inApril 2003.  Under its agreements, theCompany is obligated to advance funds for pre-opening costs and workingcapital.  In addition, the Companycontributes toward the cost of the hotel’s non-guestroom furniture, fixturesand equipment in excess of a certain limit. The Company has also agreed to purchase four condominium units in thehotel.  The Company estimates its totalcash commitment to be approximately $5,700,000, of which approximately $4,500,000had been advanced at September 30, 2003. In addition, the Company guarantees a $1,000,000 equipment lease for thehotel.  Based on the managementagreement, the Company will receive management fees based on revenues, andincentive fees based on profits, as defined. Under the same agreements, the Company has agreed to fund 50% of the netoperating losses during the period from the opening of the hotel until November1, 2004.  After November 1, 2004, theCompany is committed to provide the hotel’s owner an annual minimum return of$800,000.

 

The Company has operated the Sonesta Hotel& Suites Coconut Grove in the Coconut Grove area of Miami, Florida, sinceApril 2002.  Under its agreements, theCompany is committed to fund net operating losses and to provide the hotel’sowner with a minimum annual return of $500,000 starting April 1, 2003. TheCompany is also committed to provide working capital to the hotel.  The Company has advanced $2,004,000 as ofSeptember 30, 2003 to fund net operating losses and working capital.  The Company expects to recover part of theseadvances, with the exception of net operating losses of $1,450,000.

 

8

----

 

In January 2003, the FASB issuedInterpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN46”).  The provisions of FIN 46 are tobe applied by the Company on December 31, 2003. A variable interest entity(“VIE”) is consolidated by its primary beneficiary, which is the party that (i)holds a variable interest in a VIE and (ii) has a majority of the expectedlosses or a majority of the expected residual returns, or both.  The Company believes that it holds variableinterests in the hotel operations of the Trump International Sonesta BeachResort and the Sonesta Hotel & Suites Coconut Grove under the terms of itsagreements with the owners of these hotels. The Company has not yet completed its analysis of the effects of theissuance of FIN 46 on its accounting for these variable interests, and whetherthe Company is the primary beneficiary.

 

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

 

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

 
|                                             |   | **(in  thousands)**                 |   |
|--------------------------------------------------|--------|-------------------------------------|--------|
|                                             |   | **Nine  Months Ended September 30** |   |
|                                             |   | **2003**                            |   | **2002** |   |
|                                             |   |                                |   |   |   |
| Current federal income tax benefit               |   | $                                   | — |   | $ | (1,348 | ) |
| Current foreign income tax provision             |   | 126                                 |   | 116 |   |
| Current state income tax provision               |   | 190                                 |   | 252 |   |
| Deferred federal income tax provision  (benefit) |   | (1,651                              | )      | 813 |   |
|                                             |   | $                                   | (1,335 | ) | $ | (167 | ) |

 

**7.****                                      SegmentInformation**

 

Segment information for the Company’s two reportable segments, Owned& Leased Hotels and Management Activities, for the three and nine monthperiods ending September 30, 2003 and 2002 follows:

 

Three month period ended September 30, 2003

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

 

9

----

 

Nine month period ended September 30, 2003

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

 

 

Three month period ended September 30, 2002

 
|                                                                  |   | **(in  thousands)**              |   |
|-----------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                  |   | **Owned  &  Leased  Hotels** |   | **Management  Activities** |   | **Consolidated** |   |
| Revenues                                                              |   | $                                | 17,032 |   | $ | 840 |   | $ | 17,872 |   |
| Operating income (loss) before depreciation  and amortization expense |   | 1,537                            |   | (1,126 | ) | 411 |   |
| Depreciation and amortization                                         |   | (1,956                           | )      | (109 | ) | (2,065 | ) |
| Interest income (expense), net                                        |   | (1,563                           | )      | 88 |   | (1,475 | ) |
| Other income, net                                                     |   | —                           |   | 4 |   | 4 |   |
| Segment pre-tax loss                                                  |   | (1,982                           | )      | (1,143 | ) | (3,125 | ) |
|                                                                  |   |                             |   |   |   |   |   |
| Segment assets                                                        |   | 90,157                           |   | 21,312 |   | 111,469 |   |
| Segment capital additions                                             |   | 2,499                            |   | 166 |   | 2,665 |   |
|                                                                       |        |                                  |        |  |  |  |  |  |  |  |

 

 

Nine month period ended September 30, 2002

 
|                                                                  |   | **(in  thousands)**              |   |
|-----------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                  |   | **Owned  &  Leased  Hotels** |   | **Management  Activities** |   | **Consolidated** |   |
| Revenues                                                              |   | $                                | 64,503 |   | $ | 3,159 |   | $ | 67,662 |   |
| Operating income (loss) before depreciation  and amortization expense |   | 10,463                           |   | (1,495 | ) | 8,968 |   |
| Depreciation and amortization                                         |   | (5,874                           | )      | (331 | ) | (6,205 | ) |
| Interest income (expense), net                                        |   | (4,650                           | )      | 308 |   | (4,342 | ) |
| Other income, net                                                     |   | —                           |   | 8 |   | 8 |   |
| Segment pre-tax loss                                                  |   | (61                              | )      | (1,510 | ) | (1,571 | ) |
|                                                                  |   |                             |   |   |   |   |   |
| Segment assets                                                        |   | 90,157                           |   | 21,312 |   | 111,469 |   |
| Segment capital additions                                             |   | 5,583                            |   | 1,296 |   | 6,879 |   |
|                                                                       |        |                                  |        |  |  |  |  |  |  |  |

 

10

----

 

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

 

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

 
|                                           |   | **Three  months ended September 30** |   | **Nine  months ended September 30** |   |
|------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                           |   | **2003**                             |   | **2002**                            |   | **2003** |   | **2002** |   |
| Numerator:                                     |   |                                 |   |                                |   |   |   |   |   |
| Loss from continuing operations                |   | $                                    | (1,804 | )                                   | $      | (2,195 | ) | $ | (3,416 | ) | $ | (1,404 | ) |
| Loss from discontinued operations              |   | —                               |   | (1,084                              | )      | — |   | (1,234 | ) |
| Numerator for earnings per share               |   | $                                    | (1,804 | )                                   | $      | (3,279 | ) | $ | (3,416 | ) | $ | (2,638 | ) |
|                                           |   |                                 |   |                                |   |   |   |   |   |
| Denominator:                                   |   |                                 |   |                                |   |   |   |   |   |
| Weighted average number of shares  outstanding |   | 3,698                                |   | 3,698                               |   | 3,698 |   | 3,698 |   |
|                                           |   |                                 |   |                                |   |   |   |   |   |
| Loss per share of common stock:                |   |                                 |   |                                |   |   |   |   |   |
| Continuing operations                          |   | $                                    | (0.48  | )                                   | $      | (0.59 | ) | $ | (0.92 | ) | $ | (0.38 | ) |
| Discontinued operations                        |   | —                               |   | (0.29                               | )      | — |   | (0.33 | ) |
| Net loss per share of common stock             |   | $                                    | (0.48  | )                                   | $      | (0.88 | ) | $ | (0.92 | ) | $ | (0.71 | ) |

 

 

**9.****                                      DiscontinuedOperations**

 

In September 2002, the Company sold the Sonesta Beach ResortAnguilla.  The financial statements forthe three month and nine month periods ended September 30, 2002 have beenreclassified to present the operations of the resort as a discontinuedoperation.  Following is a summary ofthe operating results for the three month and nine month periods endedSeptember 30, 2002:

 
|                                                          |   | **Three  months ended  September 30, 2002** |   | **Nine  months ended  September 30, 2002** |   |
|---------------------------------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|
| Sale price                                                    |   | $                                           | 10,450 |                                       | $      | 10,450 |   |
| Book value of assets sold                                     |   | (11,245                                     | )      | (11,245                                    | )      |
| Costs and expenses, including commission to  broker           |   | (495                                        | )      | (495                                       | )      |
| Loss on sale of property before income tax  benefit           |   | (1,290                                      | )      | (1,290                                     | )      |
|                                                          |   |                                        |   |                                       |   |
| Revenues from operations                                      |   | 190                                         |   | 2,545                                      |   |
| Expenses                                                      |   | (600                                        | )      | (3,183                                     | )      |
| Loss from operations before income tax  benefit               |   | (410                                        | )      | (638                                       | )      |
|                                                          |   |                                        |   |                                       |   |
| Loss from discontinued operations, before  income tax benefit |   | (1,700                                      | )      | (1,928                                     | )      |
| Income tax provision benefit                                  |   | (616                                        | )      | (694                                       | )      |
| Loss from discontinued operations                             |   | $                                           | (1,084 | )                                          | $      | (1,234 | ) |

 

11

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**Part I – Item 2**

 

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

 

In September 2002, the Company sold the Sonesta Beach Resort Anguilla(see Note 9—Discontinued Operations). The following revenues and results from operations for the 2002 periodshave been reclassified to present the operations of the resort as adiscontinued operation.

 

In the first nine months of 2003 the Company recorded a net loss fromcontinuing operations of $3,416,000, or $(0.92) per common share, compared to anet loss from continuing operations of $1,404,000, or $(0.38) per common share,in the first nine months of 2002.  TheCompany’s 2003 results continue to be affected by lower demand from both groupand transient market segments due to the economic recession, and by reducedbusiness and leisure travel.  Discountedroom rates due to fierce competition for available business have resulted indecreases in room revenue per available room (“REVPAR”) in most locations,resulting in lower revenues and operating profits during the first nine monthsof 2003 compared to 2002.  Most affectedby this was the Royal Sonesta Hotel Boston (Cambridge), which experienced adecrease in revenues of 16% during the first nine months of 2003 compared to2002.  The results for the 2003 thirdquarter did improve compared to the trend in the first six months of theyear.  Third quarter revenues in 2003only decreased by 1% compared to the third quarter of 2002, primarily due toincreased revenues at Sonesta Beach Resort Key Biscayne.

 

**FIRST NINE MONTHS2003 COMPARED TO 2002**

 

**REVENUES**

 
|                                            |   | **TOTAL  REVENUES  (in thousands)** |   |
|-------------------------------------------------|--------|-------------------------------------|--------|
|                                            |   | **NO. OF  ROOMS**                   |   | **2003** |   | **2002** |   |
| Sonesta Beach Resort Key Biscayne               |   | 300                                 |   | $ | 20,159 |   | $ | 19,288 |   |
| Royal Sonesta Hotel Boston (Cambridge)          |   | 400                                 |   | 15,876 |   | 18,918 |   |
| Royal Sonesta Hotel New Orleans                 |   | 500                                 |   | 24,562 |   | 26,297 |   |
| Management and service fees and other  revenues |   |                                |   | 2,497 |   | 3,159 |   |
| Total revenues                                  |   |                                |   | $ | 63,094 |   | $ | 67,662 |   |

 

Total revenues for the first nine months of 2003 were $63,094,000compared to $67,662,000 in 2002, a decrease of approximately $4,568,000.

 

Sonesta Beach Resort Key Biscayne reported a 5% increase in revenuesduring the first nine months of 2003 compared to 2002.  Room revenues per available room (“REVPAR”)increased by 3% in 2003 compared to last year, due to an increase inoccupancy.  Food and beverage revenues,and revenues from other sources increased by 7% compared to 2003, due to thehigher occupancy levels.  Revenuesduring the first nine months of 2003 at Royal Sonesta Hotel Boston (Cambridge)decreased by 16% compared to the same period in 2002, representing a loss inrevenues of $3,042,000.  Room revenuesdecreased by $2,644,000 due to a 22% decrease in REVPAR, due to both loweroccupancies and average rates achieved. Food and beverage revenues, and revenues from other sources such astelephone and parking decreased by $398,000, or 6%, due to the lower occupancylevels. Revenues at Royal Sonesta Hotel New Orleans, which held up very strongduring 2002, have started to decline due to fierce rate competition, and alower number of city-wide conventions in New Orleans.  Total revenues for the nine month period ending September 30,2003 decreased by $1,735,000 to $24,562,000, a 7% decline.  Room revenues decreased by $1,692,000 due toa 10% decrease in REVPAR, mainly due to lower average rates.  Revenues from other sources, including foodand beverage, remained virtually the same in 2003 compared to 2002, asoccupancy levels during the first nine months of 2003 were only slightly lowerthan during the same period in 2002. Income from management activities decreased by $662,000 during the firstnine months of 2003 compared to 2002. This decrease was primarily due to lowerlicense fees of $231,000  from Aruba dueto the expiration of the license agreement for

 

12

----

 

the hotel in 2002,  lower feeincome of $280,000 from Chateau Sonesta New Orleans, because the 2003 profitlevels of the hotel are insufficient for Sonesta to earn incentive fees whichare based on profits, and lower management income of $111,000 from SonestaBeach Resort Bermuda.

 

 

**OPERATING INCOME**

 
|                                                            |   | **OPERATING  INCOME (LOSS)  (in thousands)** |   |
|-----------------------------------------------------------------|--------|----------------------------------------------|--------|
|                                                            |   | **2003**                                     |   | **2002** |   |
| Sonesta Beach Resort Key Biscayne                               |   | $                                            | 343    |   | $ | (428 | ) |
| Royal Sonesta Hotel Boston (Cambridge)                          |   | 54                                           |   | 2,318 |   |
| Royal Sonesta Hotel New Orleans                                 |   | 2,192                                        |   | 2,699 |   |
| Operating income from hotels after  management and service fees |   | 2,589                                        |   | 4,589 |   |
| Management activities and other                                 |   | (2,970                                       | )      | (1,826 | ) |
| Operating income  (loss)                                   |   | $                                            | (381   | ) | $ | 2,763 |   |

 

 

Operating loss for the nine-month period ended September 30, 2003 was$381,000, compared to operating income of $2,763,000 in 2002, a decrease ofapproximately $3,144,000.

 

Sonesta Beach Resort Key Biscayne posted a $771,000 increase inoperating income during the first nine months of 2003 compared to 2002.  Revenue increases of $871,000 were partiallyoffset by a very slight increase in overall expenses of $100,000 (less than a1% increase).  This increase consistedprimarily of an increase in cost and operating expenses of $493,000, partiallyoffset by decreases in advertising expense and a decrease in real estate taxexpense of $349,000, due to a refund obtained for 2002 and a reduction in 2003taxes.  Royal Sonesta Hotel Boston(Cambridge) reported operating income of $54,000 during the nine-month periodending September 30, 2003, compared to operating income of $2,318,000 in the2002 period, a decrease of $2,264,000. Decreased revenues of $3,042,000 were partially offset by a 5% decreasein expenses of $778,000, mainly due to lower cost and operating expenses, realestate taxes and depreciation expense. Operating income at Royal Sonesta New Orleans decreased by $507,000,from $2,699,000 in the first nine months of 2002 to $2,192,000 in the sameperiod in 2003.  Decreases in revenuesof $1,735,000 were for a large part offset by decreased operating expenses of$1,228,000.  This decrease in expensesconsisted mainly of a decrease in cost and operating expenses of $636,000, anda decrease in rent expense of $516,000. Under the lease for the New Orleans hotel, rent is based on a percentageof profits, as defined.  Operatinglosses from management activities, which are computed after giving effect tomanagement, marketing and service fees to owned and leased hotels, increasedfrom $1,826,000 in the first nine months of 2002 to $2,970,000 in the firstnine months of 2003.  Revenues frommanagement activities decreased by $662,000 and fee income from owned andleased hotels decreased by $287,000. Expenses related to these activities increased by $195,000.  This increase includes a $500,000 chargeincluded in 2003 ($170,000 in the 2002 period) for the Company’s contributionto the first and second year losses of Sonesta Hotel & Suites CoconutGrove, for which hotel the Company has made certain operating loss guarantees,partially offset by decreased corporate costs, particularly in corporatemarketing overhead expenses.

 

13

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**OTHERINCOME (DEDUCTIONS)**

 

Interest expense decreased by $46,000 from $4,687,000 in the first ninemonths of 2002 to $4,641,000 in the same period in 2003, due to the lowerprincipal balance on the Cambridge and Key Biscayne mortgage loans (see Note3—Borrowing Arrangements).

 

Interest income in the first nine months of 2003 was $278,000 comparedto $345,000 in the first nine months of 2002, a decrease of $67,000.  This was primarily due to a decrease inshort-term investment income because of the Company’s lower cash balances.

 

 

**THIRDQUARTER 2003 COMPARED TO 2002**

 

**REVENUES**

 
|                                            |   | **TOTAL  REVENUES  (in thousands)** |   |
|-------------------------------------------------|--------|-------------------------------------|--------|
|                                            |   | **NO. OF  ROOMS**                   |   | **2003** |   | **2002** |   |
| Sonesta Beach Resort Key Biscayne               |   | 300                                 |   | $ | 4,705 |   | $ | 3,933 |   |
| Royal Sonesta Hotel Boston (Cambridge)          |   | 400                                 |   | 5,782 |   | 6,599 |   |
| Royal Sonesta Hotel New Orleans                 |   | 500                                 |   | 6,355 |   | 6,500 |   |
| Management and service fees and other  revenues |   |                                |   | 813 |   | 840 |   |
| Total revenues                                  |   |                                |   | $ | 17,655 |   | $ | 17,872 |   |

 

 

Total revenues for the three month period ended September 30, 2003 were$17,655,000 compared to $17,872,000 in 2002, a decrease of approximately$217,000.

 

Revenues during the third quarter of 2003 at Sonesta Beach Resort KeyBiscayne were $4,705,000, which represented an increase of $772,000 compared to2002 third quarter revenues of $3,933,000. Room revenues in the third quarter of 2003 increased by $278,000, due toa 15% increase in room revenues per available room (“REVPAR”), due to a sharpincrease in occupancy. Food and beverage and revenues from other sourcesincreased by $494,000 (a 24% increase) due to the increased occupancy.  The increase in occupancy was due toincreased group and convention business during the 2003 third quarter.  Royal Sonesta Hotel Boston (Cambridge)suffered a 12% revenue loss in the 2003 quarter compared to 2002, and totalrevenues decreased from $6,599,000 to $5,782,000.  Room revenues decreased by $833,000 due to a 19%  REVPAR decrease.  Both occupancy levels and average room rates fell due tocontinued reduced demand and fierce rate competition, especially during Julyand August.  Royal Sonesta Hotel NewOrleans reported third quarter 2003 revenues of $6,355,000 compared to$6,500,000 in the 2002 quarter, a 2% decrease. This decrease was entirely due to a decrease in room revenues.  The hotel’s REVPAR during the2003 third quarter decreased 5% compared to a year ago due to lower averagerates achieved.  Reduced conventionbusiness in New Orleans in general has made New Orleans a more competitivemarketplace, resulting in lower average rates.

 

14

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Income from management activities during the 2003 third quarter was$813,000 compared to $840,000 in the 2002 quarter, a decrease of $27,000.  This slight decrease was mainly due todecreased management income from Sonesta Beach Resort Bermuda, which closed onSeptember 4, 2003, due to damage sustained from Hurricane Fabian.  The hotel is expected to stay closed for theslow winter season, and plans to re-open May 1, 2004.  Management income from the Company’s Egyptian propertiesincreased by $72,000 in the 2003 third quarter compared to 2002, due toincreased business volumes.

 

 

**OPERATING INCOME**

####  

|                                                          |   | **OPERATING  INCOME (LOSS)  (in thousands)** |   |
|---------------------------------------------------------------|--------|----------------------------------------------|--------|
|                                                          |   | **2003**                                     |   | **2002** |   |
| Sonesta Beach Resort Key Biscayne                             |   | $                                            | (1,152 | ) | $ | (1,893 | ) |
| Royal Sonesta Hotel Boston (Cambridge)                        |   | 483                                          |   | 1,054 |   |
| Royal Sonesta Hotel New Orleans                               |   | 394                                          |   | 420 |   |
| Operating loss from hotels after management  and service fees |   | (275                                         | )      | (419 | ) |
| Management activities and other                               |   | (859                                         | )      | (1,235 | ) |
| Operating loss                                                |   | $                                            | (1,134 | ) | $ | (1,654 | ) |

 

 

Operating loss for the third quarter of 2003 was $1,134,000, comparedto an operating loss of $1,654,000 in 2002, a decrease of approximately$520,000.

 

Sonesta Beach Resort Key Biscayne reported a decrease in operating lossesfrom $1,893,000 during the 2002 third quarter to $1,152,000 during the 2003third quarter.  Revenues increased$772,000 during the 2003 quarter, and expenses increased by a marginal $31,000,as increased cost and operating and maintenance expenses were offset bydecreased real estate tax expense, due to a refund obtained for 2002 taxes, andbecause of lower 2003 tax expense. Royal Sonesta Hotel Boston (Cambridge) had a disappointing thirdquarter. Operating income dropped by $571,000 from $1,054,000 during the thirdquarter of 2002 to $483,000 during the same period in 2003.  Revenues decreased by $817,000, and expensesdecreased by $246,000, or 4%, in the 2003 quarter compared to last year.  The decrease in expenses related to lowercost and operating expenses as well as overhead expenses.  Royal Sonesta Hotel New Orleans reportedthird quarter 2003 operating income of $394,000, slightly less than operatingincome achieved of $420,000 in the 2002 third quarter. Revenue decreases of$145,000 were partially offset by lower expenses of $119,000, primarily due tolower rent expense of $247,000.  Therent expense under the lease for the New Orleans hotel is based on a percentageof profits, as defined.  Operatinglosses from management activities decreased from $1,235,000 in the 2002 thirdquarter to $859,000 in the 2003 third quarter. These losses are computed after giving effect to management, marketingand service fees to owned and leased hotels. Revenues from management activities decreased by $27,000.  Expenses related to management activitiesdecreased by $403,000 during the 2003 quarter compared to last year, primarilydue to decreased corporate marketing costs and lower expenses in corporatefacilities and purchasing departments.

 

15

----

 

**OTHERINCOME (DEDUCTIONS)**

 

Interest expense decreased by $14,000 in the third quarter of 2003compared to the same period in 2002, because of the lower principal balance onthe Cambridge and Key Biscayne mortgage loans (see Note 3—BorrowingArrangements).

 

Interest income in the third quarter of 2003 was $73,000 compared to$102,000 in the 2002 third quarter, a decrease of $29,000, due to lowershort-term investment income because of the Company’s lower cash balances.

 

 

**FEDERAL,FOREIGN AND STATE INCOME TAXES**

 

The income tax benefit in the first nine months of 2003 and 2002 islower than the statutory rate, primarily due to state taxes payable on theCompany’s income from Royal Sonesta Hotel New Orleans, and because of foreigntaxes due on the Company’s income from its Egyptian operations and its licensefees from Peru.

 

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

The Company had cash and cash equivalents of approximately $1,939,000at September 30, 2003.  In addition, theCompany had  $6,650,000 available undertwo credit lines at September 30, 2003.

 

The Company operates the Trump International Sonesta Beach Resort, acondominium hotel in Sunny Isles Beach, Florida.  This hotel opened in April 2003. Under its agreements, the Company advances funds for pre-opening costsand working capital.  In addition, theCompany contributes to the total cost for the hotel’s non-guestroom furniture,fixtures and equipment in excess of a certain limit.  The Company has also agreed to purchase four condominium units inthe hotel.  The Company estimates itstotal cash commitment to be approximately $5,700,000, of which $4,500,000 hadbeen advanced at September 30, 2003.

 

The Company believes that its present cash balances and availablecredit lines will be adequate to meet its cash requirements for 2003 and 2004.

 

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**PARTI – Item 3**

 

 

**QUANTITATIV**E AND QUALITATIVE DISCLOSURE OF MARKETRISK

 

The Company is exposed to market risk from changes in interest ratesand foreign exchange rates.  The Companyuses fixed rate debt to finance the ownership of its properties.  The table that follows summarizes theCompany’s fixed rate debt obligations outstanding at September 30, 2003. Thisinformation should be read in conjunction with Note 3—Borrowing Arrangements.

 

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

 

 
|                  |   | **YEAR** |   |     |   |     |   |     |   |
|-----------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                  |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   | **Total** |   | **Fair Value** |   |
| Fixed rate            |   | $        | 248    |     | $      | 1,013    |   | $        | 1,124  |   | $ | 1,226 |   | $ | 1,337 |   | $ | 64,397 |   | $ | 69,345 |   | $ | 72,552 |   |
| Average interest rate |   | 8.6      | %      | 8.6      | %      | 8.6      | %      | 8.6      | %      | 8.6 | % | 8.6 | % |   |   |   |   |
|                       |        |          |        |          |        |          |        |          |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**PARTI – Item 4**

 

 

**INTERNAL****CONTROLSAND PROCEDURES**

 

As of September 30, 2003, an evaluation was performed under the supervisionand with the participation of the Company’s management, including the CEO, CFOand Vice President and Treasurer of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures.  Based on that evaluation, the Company’smanagement, including the CEO, CFO and Vice President and Treasurer concludedthat the Company’s disclosure controls and procedures were effective as ofSeptember 30, 2003.  There have been nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect internal controls subsequent to September 30, 2003.

 

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**PART II – OtherInformation**

 

**Item Numbers 1, 2, 3,4, 5 and 6**

 

Not applicable during the quarter ended September 30, 2003.

 

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**SIGNATURE**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the Registrant has duly caused this Reportto be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   | **SONESTA  INTERNATIONAL HOTELS CORPORATION** |
|--------|-----------------------------------------------|
|   |                                          |
|   |                                          |
|   | By:                                           | /S/ Boy A.J. van Riel |
|   |                                          | Boy A.J. van Riel |
|   |                                          | Vice President and Treasurer |
|   |                                          |   |
|   |                                          | (Authorized to sign on behalf of the Registrant as  Principal Financial Officer) |
|   |                                          |
|   | Date:  November 10, 2003                 |

 

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