FORM 10-Q

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SONESTA INTERNATIONAL HOTELS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

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

 

Yes   ý

No   o

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Number of Shares of Common Stock Outstanding

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

Class A – 3,698,230

 

 

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

 

 

Part I - Item 1.   Financial Information

 

SONESTA INTERNATIONAL HOTELS CORPORATION
CONDENSED CONSOLIDATED 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 accompanying notes to condensed consolidated financial statements.

 

1

 

SONESTA INTERNATIONAL HOTELS CORPORATION
CONDENSED CONSOLIDATED 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 accompanying notes to condensed consolidated financial statements.

 

2

 

SONESTA INTERNATIONAL HOTELS CORPORATION
CONDENSED CONSOLIDATED 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 accompanying notes to condensed consolidated financial statements.

 

3

 

SONESTA INTERNATIONAL HOTELS CORPORATION
CONDENSED 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 accompanying notes to condensed consolidated financial statements.

 

4

 

Supplemental Information of Interest and Income Taxes Paid

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

 

See accompanying notes to condensed consolidated financial statements.

 

5

 

SONESTA INTERNATIONAL HOTELS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1.                                      Basis of Presentation

 

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

 

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

 

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

 

 

2.                                      Long-Term Receivables 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

 

(a)                              This loan, in the original amount of $1,000,000, was made in 1996 and 1997 to the owner of the Sonesta Beach Resort, Sharm El Sheikh.  The loan bears interest at the prime rate and is adjusted semi-annually.  The interest rate charged at September 30, 2003 was 4%.  This loan is being repaid in 42 monthly installments, starting in January 2003.

 

(b)                             This loan is made to the owner of the Sonesta Hotel & Suites Coconut Grove, Miami, which opened in April 2002.  The Company has loaned $4,000,000 to fund construction and furniture, fixtures and equipment (“FF&E”) costs, and, in addition, has loaned $1,000,000 for pre-opening costs and working capital.  The loan for construction and FF&E costs bears interest at the prime rate (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 for pre-opening costs first, out of future profits that would otherwise be available for distribution to the owner of the hotel.

 

6

 

(c)                                  This amount represents advances made to the owner of Trump International Sonesta Beach 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 Resort from the opening in April 2003 through September 30, 2003 ($915,000).  No interest will be charged on these advances, which will be repaid out of future available profits generated by the hotel.

 

3.                                      Borrowing Arrangements

 

Credit Lines

 

The Company has a $2,000,000 line of credit, which expired on September 28, 2003, but has been extended through January 31, 2004. This line of credit bears interest at the prime rate (4% at September 30, 2003).  The terms of the line require a certain minimum net worth, a minimum amount of unrestricted cash or available credit lines during part of each calendar year, and approval for additional borrowings by the Company.  No amounts were outstanding under this line of credit at September 30, 2003.

 

A subsidiary of the Company has a $5,000,000 line of credit, which expires on March 31, 2005.  The line of credit is secured by a mortgage on the Company’s leasehold interest in the Royal Sonesta Hotel New Orleans, and by a parent Company guaranty.  The terms require certain minimum levels of income for Royal Sonesta Hotel New Orleans, and specify a maximum defined debt to net worth ratio.  The terms also require 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% at September 30, 2003), and the commitment fee on the unused portion of the line is 0.65% per annum.  There was $350,000 outstanding 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

 

 

(a)                                  This loan is secured by a first mortgage on the Royal Sonesta Hotel Boston (Cambridge) property.  This property is included in fixed assets at a net book value of $22,242,000 at September 30, 2003.  The interest rate on this loan is 8.6% for the term of the loan, and amortization of the principal balance is based on a 25 year schedule.  Monthly payments of principal and interest are $332,911.  The mortgage loan matures in July 2010, and prepayment of this loan is subject to early payment penalties, based on prevailing interest rates at the time of the prepayment.  This mortgage loan, and the mortgage loan on Sonesta Beach Resort Key Biscayne (see (b), below) are provided by the same lender, and are cross-collateralized.

 

7

 

(b)                                 This loan is secured by a first mortgage on the Sonesta Beach Resort Key Biscayne property.  The property is included in fixed assets at a net book value of $42,690,000 at September 30, 2003.  The interest rate on this loan is 8.6% for the term of the loan, and amortization of the principal balance is based on a 25 year schedule.  Monthly payments of principal and interest are $251,713.  The mortgage loan matures in July 2010, and prepayment of this loan is subject to early payment penalties, based on prevailing interest rates at the time of the prepayment.  This mortgage loan, and the mortgage loan on Royal Sonesta Hotel Boston (Cambridge) (see (a), above) are provided by the same lender, and are cross-collateralized.

 

4.                                      Hotel Costs and Operating Expenses

 

Hotel costs and operating expenses in the accompanying condensed Consolidated 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 payroll burden, the cost of food and beverage consumed and other departmental costs.

 

5.                                      Commitments and Contingencies

 

In 2002, the Company entered into an agreement to manage the Trump International Sonesta Beach Resort in Sunny Isles Beach, Florida.  This hotel opened in April 2003.  Under its agreements, the Company is obligated to advance funds for pre-opening costs and working capital.  In addition, the Company contributes toward the cost of 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 in the hotel.  The Company estimates its total cash commitment to be approximately $5,700,000, of which approximately $4,500,000 had been advanced at September 30, 2003.  In addition, the Company guarantees a $1,000,000 equipment lease for the hotel.  Based on the management agreement, the Company will receive management fees based on revenues, and incentive fees based on profits, as defined.  Under the same agreements, the Company has agreed to fund 50% of the net operating losses during the period from the opening of the hotel until November 1, 2004.  After November 1, 2004, the Company 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, since April 2002.  Under its agreements, the Company is committed to fund net operating losses and to provide the hotel’s owner with a minimum annual return of $500,000 starting April 1, 2003. The Company is also committed to provide working capital to the hotel.  The Company has advanced $2,004,000 as of September 30, 2003 to fund net operating losses and working capital.  The Company expects to recover part of these advances, with the exception of net operating losses of $1,450,000.

 

8

 

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”).  The provisions of FIN 46 are to be 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 expected losses or a majority of the expected residual returns, or both.  The Company believes that it holds variable interests in the hotel operations of the Trump International Sonesta Beach Resort and the Sonesta Hotel & Suites Coconut Grove under the terms of its agreements with the owners of these hotels.  The Company has not yet completed its analysis of the effects of the issuance of FIN 46 on its accounting for these variable interests, and whether the Company is the primary beneficiary.

 

6.                                      Federal, Foreign and State Income Tax

 

The provision (benefit) for income taxes in the accompanying condensed Consolidated 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.                                      Segment Information

 

Segment information for the Company’s two reportable segments, Owned & Leased Hotels and Management Activities, for the three and nine month periods 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.                                      Earnings per Share

 

As the Company has no dilutive securities, there is no difference between basic and diluted earnings per share of common stock.  The following table sets forth the computation of 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.                                      Discontinued Operations

 

In September 2002, the Company sold the Sonesta Beach Resort Anguilla.  The financial statements for the three month and nine month periods ended September 30, 2002 have been reclassified to present the operations of the resort as a discontinued operation.  Following is a summary of the operating results for the three month and nine month periods ended September 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

 

Part I – Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF 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 periods have been reclassified to present the operations of the resort as a discontinued operation.

 

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

 

FIRST NINE MONTHS 2003 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 $63,094,000 compared to $67,662,000 in 2002, a decrease of approximately $4,568,000.

 

Sonesta Beach Resort Key Biscayne reported a 5% increase in revenues during 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 in occupancy.  Food and beverage revenues, and revenues from other sources increased by 7% compared to 2003, due to the higher occupancy levels.  Revenues during 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 in revenues of $3,042,000.  Room revenues decreased by $2,644,000 due to a 22% decrease in REVPAR, due to both lower occupancies and average rates achieved.  Food and beverage revenues, and revenues from other sources such as telephone and parking decreased by $398,000, or 6%, due to the lower occupancy levels. Revenues at Royal Sonesta Hotel New Orleans, which held up very strong during 2002, have started to decline due to fierce rate competition, and a lower 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 to a 10% decrease in REVPAR, mainly due to lower average rates.  Revenues from other sources, including food and beverage, remained virtually the same in 2003 compared to 2002, as occupancy levels during the first nine months of 2003 were only slightly lower than during the same period in 2002.  Income from management activities decreased by $662,000 during the first nine months of 2003 compared to 2002. This decrease was primarily due to lower license fees of $231,000  from Aruba due to the expiration of the license agreement for

 

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the hotel in 2002,  lower fee income of $280,000 from Chateau Sonesta New Orleans, because the 2003 profit levels of the hotel are insufficient for Sonesta to earn incentive fees which are based on profits, and lower management income of $111,000 from Sonesta Beach 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 of approximately $3,144,000.

 

Sonesta Beach Resort Key Biscayne posted a $771,000 increase in operating income during the first nine months of 2003 compared to 2002.  Revenue increases of $871,000 were partially offset by a very slight increase in overall expenses of $100,000 (less than a 1% increase).  This increase consisted primarily of an increase in cost and operating expenses of $493,000, partially offset by decreases in advertising expense and a decrease in real estate tax expense of $349,000, due to a refund obtained for 2002 and a reduction in 2003 taxes.  Royal Sonesta Hotel Boston (Cambridge) reported operating income of $54,000 during the nine-month period ending September 30, 2003, compared to operating income of $2,318,000 in the 2002 period, a decrease of $2,264,000.  Decreased revenues of $3,042,000 were partially offset by a 5% decrease in expenses of $778,000, mainly due to lower cost and operating expenses, real estate 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 same period in 2003.  Decreases in revenues of $1,735,000 were for a large part offset by decreased operating expenses of $1,228,000.  This decrease in expenses consisted mainly of a decrease in cost and operating expenses of $636,000, and a decrease in rent expense of $516,000.  Under the lease for the New Orleans hotel, rent is based on a percentage of profits, as defined.  Operating losses from management activities, which are computed after giving effect to management, marketing and service fees to owned and leased hotels, increased from $1,826,000 in the first nine months of 2002 to $2,970,000 in the first nine months of 2003.  Revenues from management activities decreased by $662,000 and fee income from owned and leased hotels decreased by $287,000.  Expenses related to these activities increased by $195,000.  This increase includes a $500,000 charge included in 2003 ($170,000 in the 2002 period) for the Company’s contribution to the first and second year losses of Sonesta Hotel & Suites Coconut Grove, for which hotel the Company has made certain operating loss guarantees, partially offset by decreased corporate costs, particularly in corporate marketing overhead expenses.

 

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OTHER INCOME (DEDUCTIONS)

 

Interest expense decreased by $46,000 from $4,687,000 in the first nine months of 2002 to $4,641,000 in the same period in 2003, due to the lower principal balance on the Cambridge and Key Biscayne mortgage loans (see Note 3—Borrowing Arrangements).

 

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

 

 

THIRD QUARTER 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 Key Biscayne were $4,705,000, which represented an increase of $772,000 compared to 2002 third quarter revenues of $3,933,000.  Room revenues in the third quarter of 2003 increased by $278,000, due to a 15% increase in room revenues per available room (“REVPAR”), due to a sharp increase in occupancy. Food and beverage and revenues from other sources increased by $494,000 (a 24% increase) due to the increased occupancy.  The increase in occupancy was due to increased 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 total revenues 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 to continued reduced demand and fierce rate competition, especially during July and August.  Royal Sonesta Hotel New Orleans 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 the 2003 third quarter decreased 5% compared to a year ago due to lower average rates achieved.  Reduced convention business in New Orleans in general has made New Orleans a more competitive marketplace, resulting in lower average rates.

 

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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 to decreased management income from Sonesta Beach Resort Bermuda, which closed on September 4, 2003, due to damage sustained from Hurricane Fabian.  The hotel is expected to stay closed for the slow winter season, and plans to re-open May 1, 2004.  Management income from the Company’s Egyptian properties increased by $72,000 in the 2003 third quarter compared to 2002, due to increased 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, compared to 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 losses from $1,893,000 during the 2002 third quarter to $1,152,000 during the 2003 third 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 by decreased real estate tax expense, due to a refund obtained for 2002 taxes, and because of lower 2003 tax expense.  Royal Sonesta Hotel Boston (Cambridge) had a disappointing third quarter. Operating income dropped by $571,000 from $1,054,000 during the third quarter of 2002 to $483,000 during the same period in 2003.  Revenues decreased by $817,000, and expenses decreased by $246,000, or 4%, in the 2003 quarter compared to last year.  The decrease in expenses related to lower cost and operating expenses as well as overhead expenses.  Royal Sonesta Hotel New Orleans reported third quarter 2003 operating income of $394,000, slightly less than operating income 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 to lower rent expense of $247,000.  The rent expense under the lease for the New Orleans hotel is based on a percentage of profits, as defined.  Operating losses from management activities decreased from $1,235,000 in the 2002 third quarter to $859,000 in the 2003 third quarter.  These losses are computed after giving effect to management, marketing and service fees to owned and leased hotels.  Revenues from management activities decreased by $27,000.  Expenses related to management activities decreased by $403,000 during the 2003 quarter compared to last year, primarily due to decreased corporate marketing costs and lower expenses in corporate facilities and purchasing departments.

 

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OTHER INCOME (DEDUCTIONS)

 

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

 

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 lower short-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 is lower than the statutory rate, primarily due to state taxes payable on the Company’s income from Royal Sonesta Hotel New Orleans, and because of foreign taxes due on the Company’s income from its Egyptian operations and its license fees from Peru.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

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

 

The Company operates the Trump International Sonesta Beach Resort, a condominium hotel in Sunny Isles Beach, Florida.  This hotel opened in April 2003.  Under its agreements, the Company advances funds for pre-opening costs and working capital.  In addition, the Company 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 in the hotel.  The Company estimates its total cash commitment to be approximately $5,700,000, of which $4,500,000 had been advanced at September 30, 2003.

 

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

 

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PART I – Item 3

 

 

QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK

 

The Company is exposed to market risk from changes in interest rates and foreign exchange rates.  The Company uses fixed rate debt to finance the ownership of its properties.  The table that follows summarizes the Company’s fixed rate debt obligations outstanding at September 30, 2003. This information 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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PART I – Item 4

 

 

INTERNAL CONTROLS AND PROCEDURES

 

As of September 30, 2003, an evaluation was performed under the supervision and with the participation of the Company’s management, including the CEO, CFO and Vice President and Treasurer of the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  Based on that evaluation, the Company’s management, including the CEO, CFO and Vice President and Treasurer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2003.  There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to September 30, 2003.

 

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PART II – Other Information

 

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

 

 

	SONESTA INTERNATIONAL HOTELS CORPORATION
	By:	/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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