# **FORM 10-Q**

 

# **SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**(Mark One)**

 

**ý**                                 QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF1934

 

**For the Quarterly period ended March 31,2004**

 

**OR**

 

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF1934

 

### **For the transition period from                                to                                       **

 

**Commission file number 0-9032**

 

# **SONESTA INTERNATIONAL HOTELS CORPORATION**

(Exact name of registrant as specified in itscharter)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by section 13 or 15 (d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes  ý          No  o

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Number of Shares of Common Stock Outstanding

As of May 5, 2004 — $.80 par value,

Class A – 3,698,230

 

 

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**INDEX**

 

**SONESTA INTERNATIONAL HOTELS CORPORATION**

 
| Part I.   Financial Information |                                                                                                                  |
|--------------------------------------|-----------------------------------------------------------------------------------------------------------------------|
|                                 |                                                                                                                  |   |
| Item 1.                              | Financial Statements (Unaudited)                                                                                      |   |
|                                 |                                                                                                                  |   |
|                                 | Condensed consolidated balance  sheets—March 31, 2004 and December 31, 2003                            |   |
|                                 |                                                                                                                  |   |
|                                 | Condensed consolidated statements of  operations—Three month periods ended March 31, 2004 and 2003          |   |
|                                 |                                                                                                                  |   |
|                                 | Condensed consolidated statements of cash  flows—Three month periods ended March 31, 2004 and 2003          |   |
|                                 |                                                                                                                  |   |
|                                 | Notes to condensed consolidated financial  statements—March 31, 2004 and 2003                               |   |
|                                 |                                                                                                                  |   |
| Item 2.                              | Management’s  Discussion and Analysis of Results of Operations and Financial  Condition—March 31, 2004 |   |
|                                 |                                                                                                                  |   |
| 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 Officers and Vice  President and Treasurer                       |   |
|                                 |                                                                                                                  |   |
| Exhibit 99.1                         | 18 U.S.C. Section 1350 Certification by Company Officers                                                         |   |

 

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

 

**SONESTAINTERNATIONAL HOTELS CORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

March 31, 2004 (unaudited) andDecember 31, 2003

 
|                                                                                  |   | **(in  thousands)**     |    |
|---------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                  |   | **March 31  2004** |    | **December 31  2003** |   |
|                                                                                  |   |                    |    |   |   |
| ASSETS                                                                                |   |                    |    |   |   |
| Current assets:                                                                       |   |                    |    |   |   |
| Cash and cash equivalents                                                             |   | $                       | 2,034   |   | $ | 4,327 |   |
| Restricted cash                                                                       |   | 1,268                   |    | — |   |
| Accounts and notes receivable:                                                        |   |                    |    |   |   |
| Trade, less allowance of $231 ($221 at  December 31, 2003) for doubtful accounts |   | 7,787                   |    | 7,844 |   |
| Other, including current portion of  long-term receivables and advances               |   | 753                     |    | 494 |   |
| Total accounts and notes receivable                                                   |   | 8,540                   |    | 8,338 |   |
| Refundable income taxes                                                               |   | 38                      |    | 38 |   |
| Inventories                                                                           |   | 1,120                   |    | 1,108 |   |
| Prepaid expenses and other                                                            |   | 2,595                   |    | 2,471 |   |
|                                                                                  |   |                    |    |   |   |
| Total current assets                                                                  |   | 15,595                  |    | 16,282 |   |
|                                                                                  |   |                    |    |   |   |
| Long-term receivables and advances                                                    |   | 10,057                  |    | 10,031 |   |
|                                                                                  |   |                    |    |   |   |
| Property and equipment, at cost:                                                      |   |                    |    |   |   |
| Land and land improvements                                                            |   | 9,102                   |    | 9,102 |   |
| Buildings                                                                             |   | 60,521                  |    | 60,521 |   |
| Furniture and equipment                                                               |   | 43,218                  |    | 42,428 |   |
| Leasehold improvements                                                                |   | 7,270                   |    | 7,201 |   |
| Projects in progress                                                                  |   | 10                      |    | 60 |   |
|                                                                                  |   | 120,121                 |    | 119,312 |   |
|                                                                                  |   |                    |    |   |   |
| Less: accumulated depreciation and  amortization                                      |   | 40,525                  |    | 38,463 |   |
| Net property and equipment                                                            |   | 79,596                  |    | 80,849 |   |
|                                                                                  |   |                    |    |   |   |
| Other long-term assets                                                                |   | 2,976                   |    | 2,957 |   |
|                                                                                  |   | $                       | 108,224 |   | $ | 110,119 |   |

 

*See accompanyingnotes to condensed consolidated financial statements.*

 

1

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**SONESTAINTERNATIONAL HOTELS CORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

March 31, 2004 (unaudited) andDecember 31, 2003

 
|                                             |   | **(in  thousands)**     |    |
|--------------------------------------------------|--------|-------------------------|---------|
|                                             |   | **March 31  2004** |    | **December 31  2003** |   |
|                                             |   |                    |    |   |   |
| LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY |   |                    |    |   |   |
| Current liabilities:                             |   |                    |    |   |   |
| Accounts payable                                 |   | $                       | 3,948   |   | $ | 3,403 |   |
| Advance deposits                                 |   | 2,613                   |    | 2,972 |   |
| Federal, foreign and state income taxes          |   | 633                     |    | 576 |   |
| Accrued liabilities:                             |   |                    |    |   |   |
| Salaries and wages                               |   | 1,725                   |    | 1,629 |   |
| Rentals                                          |   | 2,262                   |    | 5,025 |   |
| Interest                                         |   | 305                     |    | 297 |   |
| Employee benefits                                |   | 174                     |    | 180 |   |
| Other                                            |   | 1,657                   |    | 1,851 |   |
|                                             |   |                    |    |   |   |
| Total accrued liabilities                        |   | 6,123                   |    | 8,982 |   |
|                                             |   |                    |    |   |   |
| Total current liabilities                        |   | 13,317                  |    | 15,933 |   |
|                                             |   |                    |    |   |   |
| Long-term debt                                   |   | 69,940                  |    | 69,311 |   |
|                                             |   |                    |    |   |   |
| Deferred federal and state income taxes          |   | 5,091                   |    | 5,091 |   |
|                                             |   |                    |    |   |   |
| Other non-current liabilities                    |   | 4,329                   |    | 3,918 |   |
|                                             |   |                    |    |   |   |
| Commitments and contingencies                    |   |                    |    |   |   |
|                                             |   |                    |    |   |   |
| Common stockholders’ equity:                |   |                    |    |   |   |
| Common stock:                                    |   |                    |    |   |   |
| Class A, $0.80 par value:                        |   |                    |    |   |   |
| Authorized – 10,000 shares                  |   |                    |    |   |   |
| Issued—6,102 shares at stated value         |   | 4,882                   |    | 4,882 |   |
| Retained earnings                                |   | 22,718                  |    | 23,037 |   |
| Treasury shares—2,404, at cost              |   | (12,053                 | )       | (12,053 | ) |
| Total common stockholders’ equity           |   | 15,547                  |    | 15,866 |   |
|                                             |   | $                       | 108,224 |   | $ | 110,119 |   |

 

*See accompanyingnotes 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 March 31** |   |
|------------------------------------------------|--------|---------------------------------------|--------|
|                                           |   | **2004**                              |   | **2003** |   |
|                                           |   |                                  |   |   |   |
| Revenues:                                      |   |                                  |   |   |   |
| Rooms                                          |   | $                                     | 13,996 |   | $ | 14,036 |   |
| Food and beverage                              |   | 6,426                                 |   | 6,541 |   |
| Management, license and service fees           |   | 1,168                                 |   | 877 |   |
| Parking, telephone and other                   |   | 2,332                                 |   | 2,230 |   |
|                                           |   | 23,922                                |   | 23,684 |   |
|                                           |   |                                  |   |   |   |
| Costs and expenses:                            |   |                                  |   |   |   |
| Costs and operating expenses                   |   | 10,137                                |   | 10,175 |   |
| Advertising and promotion                      |   | 1,810                                 |   | 1,875 |   |
| Administrative and general                     |   | 3,768                                 |   | 3,988 |   |
| Human resources                                |   | 362                                   |   | 366 |   |
| Maintenance                                    |   | 1,354                                 |   | 1,574 |   |
| Rentals                                        |   | 2,449                                 |   | 2,023 |   |
| Property taxes                                 |   | 607                                   |   | 577 |   |
| Depreciation and amortization                  |   | 2,112                                 |   | 2,085 |   |
|                                           |   | 22,599                                |   | 22,663 |   |
| Operating income                               |   | 1,323                                 |   | 1,021 |   |
|                                           |   |                                  |   |   |   |
| Other income (deductions):                     |   |                                  |   |   |   |
| Interest expense                               |   | (1,623                                | )      | (1,534 | ) |
| Interest income                                |   | 84                                    |   | 111 |   |
| Foreign exchange loss                          |   | (2                                    | )      | (2 | ) |
| Gain on sales of assets                        |   | 13                                    |   | 18 |   |
|                                           |   | (1,528                                | )      | (1,407 | ) |
|                                           |   |                                  |   |   |   |
| Loss before income tax provision (benefit)     |   | (205                                  | )      | (386 | ) |
| Income tax provision (benefit)                 |   | 114                                   |   | (41 | ) |
| Net loss                                       |   | (319                                  | )      | (345 | ) |
|                                           |   |                                  |   |   |   |
| Retained earnings at beginning of period       |   | 23,037                                |   | 29,653 |   |
| Retained earnings at end of period             |   | $                                     | 22,718 |   | $ | 29,308 |   |
|                                           |   |                                  |   |   |   |
| Net loss per share of common stock             |   | $                                     | (0.09  | ) | $ | (0.09 | ) |
|                                           |   |                                  |   |   |   |
| Weighted average number of shares  outstanding |   | 3,698                                 |   | 3,698 |   |

 

*See accompanyingnotes to condensed consolidated financial statements.*

 

3

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**SONESTAINTERNATIONAL HOTELS CORPORATION**

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

Increase (Decrease) inCash (in thousands)

 
|                                                     |   | **Three  Months Ended March 31** |   |
|----------------------------------------------------------|--------|---------------------------------------|--------|
|                                                     |   | **2004**                              |   | **2003** |   |
|                                                     |   |                                  |   |   |   |
| Cash provided (used) by operating  activities            |   |                                  |   |   |   |
| Net loss                                                 |   | $                                     | (319   | ) | $ | (345 | ) |
| Items not (providing) requiring cash                     |   |                                  |   |   |   |
| Pension expense                                          |   | 396                                   |   | 438 |   |
| Depreciation and amortization of property  and equipment |   | 2,112                                 |   | 2,085 |   |
| Other amortization                                       |   | 22                                    |   | 22 |   |
| Deferred federal and state income tax  benefit           |   | —                                |   | (144 | ) |
| Gain on sales of assets                                  |   | (13                                   | )      | (18 | ) |
| Deferred interest income                                 |   | (54                                   | )      | (50 | ) |
| Deferred interest expense                                |   | 629                                   |   | — |   |
|                                                     |   |                                  |   |   |   |
| Changes in assets and liabilities                        |   |                                  |   |   |   |
| Restricted cash                                          |   | (1,268                                | )      | — |   |
| Accounts and notes receivable                            |   | (45                                   | )      | (263 | ) |
| Refundable income taxes                                  |   | —                                |   | 21 |   |
| Inventories                                              |   | (12                                   | )      | 56 |   |
| Prepaid expenses and other                               |   | (124                                  | )      | (196 | ) |
| Accounts payable                                         |   | 573                                   |   | 329 |   |
| Advance deposits                                         |   | (359                                  | )      | (583 | ) |
| Federal, foreign and state income taxes                  |   | 57                                    |   | 5 |   |
| Accrued liabilities                                      |   | (2,844                                | )      | (2,960 | ) |
| Cash used by operating activities                        |   | (1,249                                | )      | (1,603 | ) |
|                                                     |   |                                  |   |   |   |
| Cash provided (used) by investing  activities            |   |                                  |   |   |   |
| Expenditures for property and equipment                  |   | (809                                  | )      | (1,268 | ) |
| Other investments                                        |   | (27                                   | )      | (1,115 | ) |
| Payments received on long-term receivables  and advances |   | 261                                   |   | 44 |   |
| Proceeds from sales of assets                            |   | 13                                    |   | 18 |   |
| New loans and advances                                   |   | (482                                  | )      | (1,111 | ) |
| Cash used by investing activities                        |   | (1,044                                | )      | (3,432 | ) |
|                                                     |   |                                  |   |   |   |
| Cash used by financing activities                        |   |                                  |   |   |   |
| Payments on long-term debt                               |   | —                                |   | (250 | ) |
| Cash dividends paid                                      |   | —                                |   | (370 | ) |
| Cash used by financing activities                        |   | —                                |   | (620 | ) |
|                                                     |   |                                  |   |   |   |
| Net decrease in cash                                     |   | (2,293                                | )      | (5,655 | ) |
| Cash and cash equivalents at beginning of  period        |   | 4,327                                 |   | 12,675 |   |
| Cash and cash equivalents at end of period               |   | $                                     | 2,034  |   | $ | 7,020 |   |

 

*See accompanyingnotes to condensed consolidated financial statements.*

 

4

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Supplemental Schedule of Interest and Income Taxes Paid

Cash paid for interest in the 2004 three-month period and the 2003three-month period was approximately $964,000 and $1,528,000,respectively.    Cash paid for incometaxes in the first quarter of 2004 and 2003 was approximately $57,000 and$77,000, respectively.

 

 

*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 theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary fora fair presentation have been included. Operating results for the three month period ended March 31, 2004are not necessarily indicative of the results that may be expected for the yearended December 31, 2004.

 

The balance sheet at December 31, 2003 has been derived from theaudited financial statements at that date but does not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.

 

For further information, refer to the consolidated financial statementsand footnotes thereto included in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2003.

 

 

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

 
|                                          |   | **(in  thousands)**      |   |
|-----------------------------------------------|--------|--------------------------|--------|
|                                          |   | **March 31,  2004** |   | **December 31,  2003** |   |
| Sharm El Sheikh, Egypt (a)                    |   | $                        | 613    |   | $ | 678 |   |
| Sonesta Hotel & Suites Coconut Grove  (b) |   | 5,412                    |   | 5,483 |   |
| Trump International Sonesta Beach Resort  (c) |   | 4,082                    |   | 3,900 |   |
| Other                                         |   | 490                      |   | 275 |   |
| Total long-term receivables                   |   | 10,597                   |   | 10,336 |   |
| Less:   current portion                  |   | 540                      |   | 305 |   |
| Net long-term receivables                     |   | $                        | 10,057 |   | $ | 10,031 |   |

 

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(a)                                  This loan, in theoriginal amount of $1,000,000, was made in 1996 and 1997 to the owner of theSonesta Beach Resort, Sharm El Sheikh. The loan bears interest at the prime rate (4% at March 31, 2004)and is adjusted semi-annually. Currently this loan is being repaid in 42 monthly installments andmatures in June 2006.   The Companyhas agreed to loan the hotel’s owner an additional $300,000 in 2004 to helpfinance the construction of additional hotel facilities, and once these amountshave been funded, the maturity will be extended through October 2007.

 

(b)                                 This loan was made tothe owner of the Sonesta Hotel & Suites Coconut Grove, Miami, which openedin April 2002.  The Company hasloaned $4,000,000 to fund construction and furniture, fixtures and equipment(“FF&E”) costs, and, in addition, has loaned $1,000,000 for pre-openingcosts and working capital.  The loan forconstruction and FF&E costs bears interest at the prime rate plus 0.75%(4.75% at March 31, 2004).  Nointerest is being charged on the loan for pre-opening costs.  These loans are being repaid, the loan forpre-opening costs first, out of annual minimum return payments due to the ownerof the hotel under the management agreement, and out of excess profits thatwould otherwise be available for distribution to the owner.

 

6

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(c)                                  This amountrepresents advances made to the owner of Trump International Sonesta BeachResort Sunny Isles for pre-opening costs ($2,397,000) and for working capitaland the Company’s share of the losses of the resort from the opening onApril 1, 2003 through March 31, 2004 ($1,685,000).   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 expiresDecember 31, 2004.  This line bearsinterest at the prime rate (4% at March 31, 2004).  The terms of the line require the bank’sapproval for additional borrowings by the Company, restrict dividends, andrequire that no amounts are outstanding under the line during the twoconsecutive months of November and December.   No amounts were outstanding under this line of credit atMarch 31, 2004.

 

A subsidiary of the Company has a $3,000,000 line of credit, whichexpires on February 28, 2005.  Theline is secured by a mortgage on the Company’s leasehold interest in the RoyalSonesta Hotel New Orleans, and by a Company guaranty.   The terms of the line require a certain minimum level of income,a minimum net worth and a maximum defined debt to net worth ratio for RoyalSonesta Hotel New Orleans.   Theinterest rate is LIBOR plus 3% (4.1% at March 31, 2004), and thecommitment fee on the unused portion of the line is 0.65% per annum.  No amounts were outstanding under this lineof credit at March 31, 2004.

 

*Long-Term Debt*

 
|                                                                |   | **(in  thousands)**      |       |
|---------------------------------------------------------------------|--------|--------------------------|------------|
|                                                                |   | **March 31,  2004** |       | **December 31,  2003** |   |
| Charterhouse of Cambridge Trust and Sonesta  of Massachusetts Inc.: |   |                     | ** ** |   | ** ** |
| First mortgage note                                                 |   | $                        | 39,827     |   | $ | 39,469 |   |
| Sonesta Beach Resort Limited Partnership:                           |   |                     |       |   |   |
| First mortgage note                                                 |   | 30,113                   |       | 29,842 |   |
|                                                                |   |                     |       |   |   |
| Total long-term debt                                                |   | $                        | 69,940     |   | $ | 69,311 |   |

 

The Company’s long-term debt is secured by first mortgages on the RoyalSonesta Hotel Boston (Cambridge) and Sonesta Beach Resort Key Biscayneproperties, which are included in fixed assets at net book values of$21,366,000 and $40,930,000 at March 31, 2004, respectively.   Both loans are provided by the same lender,and are cross-collateralized.   Theinterest rate on the loans is 8.6% for the term of the loan, and both loansmature in July 2010.   Pre-paymentof these loans is subject to early payment penalties, based on prevailinginterest rates at the time of pre-payment. Combined monthly payments ofprincipal and interest on both loans were $584,624 untilDecember 2003,  based on a 25 yearamortization schedule of the principal balance.

 

7

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Effective December 1, 2003, the Company and the Lenderrestructured the mortgage loans for a four year period,  as follows: starting at January 1, 2004, and through December 1, 2006, theCompany is required to make payments of interest only at 5% per annum, and startingon January 1, 2007 and through December 1, 2007, the Company will berequired to make payments of interest only at 8.6% per annum.   Starting on January 1, 2008, paymentswill resume at the original amounts.  During the restructuring period, interest will continue to accrue at8.6%, and unpaid interest will be added to the principal balance of the loansat the end of each year.   During eachyear of the restructuring, combined excess cash flow from the two hotelsremaining after payment of interest is required to be paid into escrow, and maybe used solely for the future payment of hotel expenses or capitalexpenditures, or to reduce the amount of the accrued and unpaid interest.   At March 31, 2004, the excess cashflow equaled $1,268,000, which amount is included in Restricted Cash on theCompany’s balance sheet.   The long-termdebt balance of $69,940,000 includes accrued interest in the amount of$843,000.

 

**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 March 31** |   |
|                      |   | **2004**                              |   | **2003** |   |
| Direct departmental costs |   |                                  |   |   |   |
| Rooms                     |   | $                                     | 3,244  |   | $ | 3,332 |   |
| Food and beverage         |   | 4,972                                 |   | 4,959 |   |
| Heat, light and power     |   | 777                                   |   | 733 |   |
| Other                     |   | 1,144                                 |   | 1,151 |   |
|                      |   | $                                     | 10,137 |   | $ | 10,175 |   |

 

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

 

**5.****                                      NewAccounting Announcement**

 

In the first quarter of 2004, the Company adopted Financial AccountingStandards Board (“FASB”) interpretation No. 46 (R), “Consolidation of VariableInterest Entities” (“Interpretation 46”) which clarified the conditions underwhich assets, liabilities and activities of another entity should beconsolidated into the financial statements of a company.   Interpretation 46 requires theconsolidation of a variable interest entity by a company that bears themajority of the risk of loss from the variable interest entity’s activities, isentitled to receive a majority of the variable interest entity’s residualreturns, or both.  Management believesthe management agreements with Trump International Sonesta Beach Resort SunnyIsles and Sonesta Hotel and Suites Coconut Grove are variable interests.   The Company does not believe it bears themajority of the risk of loss from the variable interest entities’ activitiesnor is entitled to receive the majority of the variable interest entities’residual returns.   Accordingly, theadoption of Interpretation 46 did not have a material impact on the Company’soverall financial position and results of operations.

 

8

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**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)**                   |   |
|--------------------------------------|--------|---------------------------------------|--------|
|                                 |   | **Three  Months Ended March 31** |   |
|                                 |   | **2004**                              |   | **2003** |   |
|                                 |   |                                  |   |   |   |
| Current federal income tax benefit   |   | $                                     | — |   | $ | (20 | ) |
| Current foreign income tax provision |   | 67                                    |   | 35 |   |
| Current state income tax provision   |   | 47                                    |   | 88 |   |
| Deferred federal income tax benefit  |   | —                                |   | (144 | ) |
|                                 |   | $                                     | 114    |   | $ | (41 | ) |

 

**7.****                                      SegmentInformation**

 

Segment information for the Company’s two reportable segments, Owned& Leased Hotels and Management Activities, for the three month periodsending March 31, 2004 and 2003 follows:

 

Quarter ended March 31, 2004

 

 
|                                                                  |   | **(in  thousands)**             |   |
|-----------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                  |   | **Owned  &  Leased Hotels** |   | **Management  Activities** |   | **Consolidated** |   |
|                                                                  |   |                            |   |   |   |   |   |
| Revenues                                                              |   | $                               | 22,743 |   | $ | 1,179 |   | $ | 23,922 |   |
| Operating income (loss) before depreciation  and amortization expense |   | 3,688                           |   | (253 | ) | 3,435 |   |
| Depreciation and amortization                                         |   | (1,947                          | )      | (165 | ) | (2,112 | ) |
| Interest income (expense), net                                        |   | (1,611                          | )      | 72 |   | (1,539 | ) |
| Other income                                                          |   | 7                               |   | 4 |   | 11 |   |
| Segment pre-tax profit (loss)                                         |   | 137                             |   | (342 | ) | (205 | ) |
|                                                                  |   |                            |   |   |   |   |   |
| Segment assets                                                        |   | 88,109                          |   | 20,115 |   | 108,224 |   |
| Segment capital additions                                             |   | 648                             |   | 161 |   | 809 |   |
|                                                                       |        |                                 |        |  |  |  |  |  |  |  |

 

Quarter ended March 31, 2003

 
|                                                                  |   | **(in  thousands)**             |   |
|-----------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                  |   | **Owned  &  Leased Hotels** |   | **Management  Activities** |   | **Consolidated** |   |
|                                                                  |   |                            |   |   |   |   |   |
| Revenues                                                              |   | $                               | 22,796 |   | $ | 888 |   | $ | 23,684 |   |
| Operating income (loss) before depreciation  and amortization expense |   | 3,918                           |   | (812 | ) | 3,106 |   |
| Depreciation and amortization                                         |   | (1,967                          | )      | (118 | ) | (2,085 | ) |
| Interest income (expense), net                                        |   | (1,522                          | )      | 99 |   | (1,423 | ) |
| Other income (deductions)                                             |   | 18                              |   | (2 | ) | 16 |   |
| Segment pre-tax profit (loss)                                         |   | 447                             |   | (833 | ) | (386 | ) |
|                                                                  |   |                            |   |   |   |   |   |
| Segment assets                                                        |   | 91,496                          |   | 23,085 |   | 114,581 |   |
| Segment capital additions                                             |   | 1,250                           |   | 18 |   | 1,268 |   |
|                                                                       |        |                                 |        |  |  |  |  |  |  |  |

 

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

 

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

 
|                                           |   | **Three  months ended March 31** |   |
|------------------------------------------------|--------|---------------------------------------|--------|
|                                           |   | **2004**                              |   | **2003** |   |
| Numerator:                                     |   |                                  |   |   |   |
| Loss from operations                           |   | $                                     | (319   | ) | $ | (345 | ) |
|                                           |   |                                  |   |   |   |
| Denominator:                                   |   |                                  |   |   |   |
| Weighted average number of shares  outstanding |   | 3,698                                 |   | 3,698 |   |
|                                           |   |                                  |   |   |   |
| Net loss per share of common stock             |   | $                                     | (0.09  | ) | $ | (0.09 | ) |

 

**9.****                      PensionPlan**

 

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

 
|                                                                             |   | **Three  months ended March 31** |   |
|----------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                             |   | **2004**                              |   | **2003** |   |
|                                                                             |   |                                  |   |   |   |
| Service cost                                                                     |   | $                                     | 326    |   | $ | 353 |   |
| Interest cost                                                                    |   | 451                                   |   | 487 |   |
| Expected return on assets                                                        |   | (420                                  | )      | (454 | ) |
| Amortization of prior service cost                                               |   | 24                                    |   | 26 |   |
| Amortization of transition asset                                                 |   | (24                                   | )      | (26 | ) |
| Recognize actuarial loss                                                         |   | 59                                    |   | 64 |   |
| Total plan benefit cost                                                          |   | 416                                   |   | 450 |   |
| Less:   amounts charged to hotels operated under management agreements      |   | (20                                   | )      | (12 | ) |
| Net periodic benefit cost included in the  consolidated statements of operations |   | $                                     | 396    |   | $ | 438 |   |

 

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

 

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

 

**10.****                               LegalProceedings**

 

A subsidiary of the Company, Sonesta Louisiana Hotels Corporation(“SLHC”), which operates Chateau Sonesta Hotel, in New Orleans (the “Hotel”),has been involved in an arbitration pursuant to the terms of the Amended andRestated Management Agreement between the owner of the hotel and SLHC (the“Management Agreement”).  The owneralleged that SLHC has failed to perform certain obligations under theManagement Agreement, specifically its obligations to (A) “use all reasonableefforts to operate the Hotel...in a manner that achieves a high level of guestsatisfaction and profitability”, and (B) exercise all reasonable efforts toassure that Sonesta Hotels’ corporate services “are billed to the Hotel and tothe Royal Sonesta Hotel, New Orleans on a fair and equitable basis”.

 

10

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The position established by Owner’s arbiter claimed damages of$2,952,000, whereas SLHC’s arbiter had established that no more than $268,000in damages should be awarded.    Adecision was rendered by a third arbiter selected by the parties in favor ofSLHC on May 11, 2004.  At March 31,2004, the Company had provided for the damages to be paid of $268,000 in itsstatement of financial position, as well as for the legal and consulting feesrelated to this arbitration.

 

11

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**PartI – Item 2**

 

**MANAGEMENT’SDISCUSSION AND ANALYSISOF RESULTS OF OPERATIONS AND FINANCIAL CONDITION**

 

**FIRST QUARTER 2004COMPARED TO 2003**

 

In the first quarter of 2004 the Company recorded a net loss of$319,000, or $(0.09) per share, compared to a net loss of $345,000, or $(0.09)per share, in the first quarter of 2003.  Increases in income from Sonesta Beach Resort Key Biscayne, and frommanagement activities, exceeded decreases in operating results at Royal SonestaHotel Boston (Cambridge) and Royal Sonesta Hotel New Orleans.    A detailed analysis of the revenues andincome by location follows.

 

**REVENUES**

 
|                                            |   | **TOTAL REVENUES**  |   |
|-------------------------------------------------|--------|---------------------|--------|
|                                            |   | **(in  thousands)** |   |
|                                            |   | **NO. OF  ROOMS**   |   | **2004** |   | **2003** |   |
|                                            |   |                |   |   |   |   |   |
| Sonesta Beach Resort Key Biscayne               |   | 300                 |   | $ | 9,676 |   | $ | 9,111 |   |
| Royal Sonesta Hotel Boston (Cambridge)          |   | 400                 |   | 3,425 |   | 4,132 |   |
| Royal Sonesta Hotel New Orleans                 |   | 500                 |   | 9,642 |   | 9,553 |   |
| Management and service fees and other  revenues |   |                |   | 1,179 |   | 888 |   |
| Total revenues                                  |   |                |   | $ | 23,922 |   | $ | 23,684 |   |

 

Total revenues for the quarter ended March 31, 2004 were$23,922,000 compared to $23,684,000 in 2003, an increase of approximately$238,000.

 

Sonesta Beach Resort Key Biscayne reported a 6% increase in revenuesduring the first quarter of 2004 compared to 2003.   Of the total revenue increase of $565,000, an amount of $359,000was due to increased room revenues.  This resulted from a 6% increase in room revenue per available room(“REVPAR”), because of an increase in occupancy levels during the 2004 firstquarter.    Increased demand from bothgroup and conventions as well as transient market segments contributed to theincreased revenues. Revenues at Royal Sonesta Hotel Boston (Cambridge) in the2004 first quarter decreased by $707,000, or 17%, to $3,425,000 in 2004.   This was primarily due to decreased roomrevenues of $512,000 resulting from a 21% REVPAR decrease.    Both lower occupancies and average ratescontributed to the poor results.  Decreased group and convention business, and increased competition froma new hotel which opened nearby in 2003, were the main reasons for the decreasein room revenues.   The Company does notexpect this trend to continue during the second quarter of 2004.   First quarter 2004 revenues at RoyalSonesta Hotel New Orleans were $9,642,000, virtually the same as 2003 firstquarter revenues of $9,553,000.  Increases in average room rate achieved offset a slight decrease inoccupancy.   Revenues from managementactivities increased from $888,000 during the 2003 first quarter to $1,179,000in the 2004 first quarter, an increase of $291,000.   This was primarily a result from increases in management incomefrom the Company’s operations in Egypt, due to substantial increases inbusiness volumes during the 2004 first quarter compared to last year.

 

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**OPERATING INCOME**

####  

|                                                            |   | **OPERATING  INCOME (LOSS)** |   |
|-----------------------------------------------------------------|--------|------------------------------|--------|
|                                                            |   | **(in  thousands)**          |   |
|                                                            |   | **2004**                     |   | **2003** | ** ** |
| Sonesta Beach Resort Key Biscayne                               |   | $                            | 2,481  |   | $ | 1,840 |   |
| Royal Sonesta Hotel Boston (Cambridge)                          |   | (1,267                       | )      | (858 | ) |
| Royal Sonesta Hotel New Orleans                                 |   | 528                          |   | 969 |   |
| Operating income from hotels after  management and service fees |   | 1,742                        |   | 1,951 |   |
| Management activities and other                                 |   | (419                         | )      | (930 | ) |
| Operating income                                                |   | $                            | 1,323  |   | $ | 1,021 |   |

 

Operating income for the three-month period ended March 31, 2004was $1,323,000, compared to operating income of $1,021,000 in the three-monthperiod ended March 31, 2003, an increase of approximately $302,000.

 

Sonesta Beach Resort Key Biscayne reported operating income during the2004 first quarter of $2,481,000 compared to $1,840,000 in the same period lastyear, an increase of $641,000.  Revenues during the first quarter increased by $565,000, and totalexpenses decreased by $76,000, primarily due to a slight decrease indepreciation expense.    The hotelmanaged to keep cost and operating and other overhead expenses at the 2003level, despite an increase in occupancy.  First quarter 2004 operating loss at Royal Sonesta Hotel Boston(Cambridge) increased by $409,000 to $1,267,000 compared to last year. Totalrevenues decreased by $707,000, and expenses decreased by $298,000, or 6%,primarily due to decreased cost and operating and maintenance expense.     Operating income at Royal Sonesta NewOrleans decreased from $969,000 during the first quarter of 2003 to $528,000during the 2004 first quarter, despite a slight increase in revenues in 2004 of$89,000.  Total expenses in the 2004first quarter increased by $530,000, which was almost entirely due to a$440,000 increase in rent expense.   This rent increase is due to the fact that the hotel’s 2004 capitalexpenditures will be sharply lower compared to expenditures in 2003, as thehotel has completed the majority of its renovation programs.   Since capital expenditures are deductedfrom profits for purposes of calculating rent due under the lease for thehotel, rent expense actually increased in 2004 compared to 2003.   Operating loss from management activities,which is computed after giving effect to management and marketing fees fromowned and leased hotels, decreased by $511,000, from $930,000 in the 2003 firstquarter to $419,000 in the 2004 first quarter.   Revenues from management activities increased by $291,000, andexpenses related to these activities decreased by $220,000, primarily due todecreased corporate sales and marketing and purchasing department costs.

 

**OTHER INCOME(DEDUCTIONS)**

 

Interest expense increased from $1,534,000 in the first quarter of 2003to $1,623,000 in the 2004 first quarter due to expenses incurred related to therestructuring of the Company’s mortgage debt on Royal Sonesta Hotel Boston(Cambridge) and Sonesta Beach Resort Key Biscayne (See also Note 3—BorrowingArrangements).

 

Interest income decreased by $27,000 to $84,000 in the first quarter of2004 compared to last year because of lower short-term investment income earnedon the Company’s cash balances.

 

**FEDERAL, FOREIGN ANDSTATE INCOME TAXES**

 

The Company recorded a tax expense of $114,000 during the 2004 firstquarter despite the $205,000 pre-tax loss because of foreign taxes provided onthe Company’s management income, primarily from Egypt, and because of statetaxes provided on the Company’s income from Royal Sonesta Hotel NewOrleans.   A valuation allowance wasrecorded against the 2004 federal income tax benefit because it is uncertainwhen the Company will realize a future benefit for the losses incurred in the2004 first quarter.

 

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**LIQUIDITY AND CAPITALRESOURCES**

 

The Company had cash and cash equivalents of approximately $2,034,000at March 31, 2004.   In addition,the Company has $5,000,000 available under two credit lines.   Company management believes these cashresources, and the available credit lines, will be adequate to meet its cashrequirements for 2004 and for the foreseeable future.

 

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**PART I – Item 3**

 

**QUANTITATIVEAND QUALITATIVE DISCLOSURE OF MARKET RISK**

 

The Company is exposed to market risk from changes in interestrates.    The Company uses fixed ratedebt to finance the ownership of its properties.   The table that follows summarizes the Company’s fixed rate debtobligations outstanding at March 31, 2004. This information should be readin conjunction with Note 3—Borrowing Arrangements.

 

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

 
|                  |   | **YEAR** |   |     |   |     |   |     |   |
|-----------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                  |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **2008** |   | **Thereafter** |   | **Total** |   | **Fair Value** |   |
| Fixed rate            |   | $        | — |     | $      | —   |   | $        | — |   | $ | — |   | $ | 1,442 |   | $ | 68,498 |   | $ | 69,940 |   | $ | 73,004 |   |
| Average interest rate |   | 8.6      | %      | 8.6      | %      | 8.6      | %      | 8.6      | %      | 8.6 | % | 8.6 | % |   |   |   |   |
|                       |        |          |        |          |        |          |        |          |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

15

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**PART I – Item 4**

 

**INTERNAL CONTROLS ANDPROCEDURES**

 

As of March 31, 2004, the Company’smanagement carried out an evaluation, under the supervision and with theparticipation of the Company’s Chief Executive Officer and President,  Chief Executive Officer and Vice Chairman,and Vice President and Treasurer, of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures pursuant to Rules13a-15 and 15d-15 of the Securities Exchange Act of 1934.   Based on that evaluation, the Company’sChief Executive Officer and President, Chief Executive Officer and ViceChairman, and Vice President and Treasurer concluded that the Company’sdisclosure controls and procedures are effective, as of March 31, 2004.

 

There have been no significant changes in theCompany’s internal controls regarding financial reporting during the quarterended March 31, 2004 that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control regarding financialreporting, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

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**PART II – Other Information**

 

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

 

Not applicable during the quarter ended March 31, 2004.

 

17

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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 theundersigned thereunto duly authorized.

 

 
|   | **SONESTA  INTERNATIONAL HOTELS CORPORATION** |                                                                             |
|--------|-----------------------------------------------|----------------------------------------------------------------------------------|
|   |                                          |                                                                             |   |
|   |                                          |                                                                             |   |
|   | By:                                           | /s/ Boy van Riel                                                                 |   |
|   |                                          | Boy van Riel                                                                     |   |
|   |                                          | Vice President and Treasurer                                                     |   |
|   |                                          |                                                                             |   |
|   |                                          | (Authorized to sign on behalf of the Registrant as  Principal Financial Officer) |   |
|   |                                          |                                                                             |   |
|   | Date:  May 11, 2004                      |                                                                             |
|        |                                               |                                                                                  |  |  |

 

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