SONESTA INTERNATIONAL HOTELS CORP - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________________ to _____________________

Commission file number 0-9032

SONESTA INTERNATIONAL HOTELS CORPORATION
----------------------------------------
(Exact name of registrant as specified in its charter)

NEW YORK 13-5648107
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

116 Huntington Avenue, Boston, Massachusetts 02116
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (617) 421-5400

Securities to be registered pursuant to Section 12(b) of the Act:

NONE
(Title of Class)

Securities to be registered pursuant to Section 12(g) of the Act:

Title of each class Name of each exchange on which registered

Class A Common Stock
$ .80 par value per share NASDAQ

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 /X/ No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes / / No /X/

The aggregate market value of the common stock held by non-affiliates of
the registrant as of the close of business on June 30, 2003 was $4,981,597.

The number of shares outstanding of the registrant's common stock as of the
close of business on March 15, 2004 was 3,698,230.

Documents incorporated by reference

1. Portions of the annual report to shareholders for the year ended
December 31, 2003 are incorporated by reference into Parts I and II.

2. Portions of the proxy statement for the 2003 annual meeting of
stockholders are incorporated by reference into Part III.

An Index to Exhibits appears on pages 14 through 19 of this Form 10-K.

1

PART I

ITEM 1. BUSINESS

(a) GENERAL DEVELOPMENT OF BUSINESS. The Company is engaged in the operation of
hotels that it owns or leases in Boston (Cambridge), Massachusetts; Key
Biscayne, Florida; and New Orleans, Louisiana. It also operates, under
management agreements, hotels in Southampton, Bermuda; New Orleans,
Louisiana; Coconut Grove, Florida; Sunny Isles Beach, Florida; and Cairo,
Luxor, Port Said and Sharm el Sheikh (2), Egypt; and three Nile River
cruise vessels. The Company has also entered into management agreements to
operate new hotels being created in Ras Sudr and Hurghada, Egypt. In
addition, the Company has master franchise agreements for hotels in Brazil,
Peru and Italy, and currently licenses seven (7) hotels in Peru, and four
(4) hotels, including a 10th century castle, in Tuscany, Italy. A licensed
property in Sao Paulo, Brazil, is expected to open in 2004. The Company's
business in 2003 continues to be negatively affected by lower demand and
reduced business travel, in particular. Intense competition for available
business has resulted in decreased revenues, in particular at the Company's
Royal Sonesta Hotel Boston (Cambridge) and Royal Sonesta Hotel New Orleans.

(b) FINANCIAL INFORMATION ABOUT SEGMENTS. This information is incorporated by
reference from Note 8 to the Company's consolidated financial statements
(pages 21 and 22 of the 2003 Annual Report to Shareholders) for information
concerning the segment(s) in which the Company operates.

(c) NARRATIVE DESCRIPTION OF BUSINESS. The Company's business is to a great
extent dependent upon a high level of economic activity. The hotel business
is highly competitive. The facilities of competitors are often affiliated
with national or regional chains having more room accommodations and
greater financial resources than the Company. The Company follows the
practice of refurnishing and redecorating the hotels which it operates in
order to keep the properties attractive and competitive with new hotel
properties, and this requires the Company to make substantial capital
expenditures. During the two years ended December 31, 2003, the Company
made such capital expenditures totaling approximately $14,607,000.

The Company endeavors to create individual and distinctive features for
each hotel property while utilizing common corporate identification in
order to obtain the benefits of chain operation. The Company is using the
name "Sonesta" for all of its hotels.

The Company has approximately 1,460 employees. The Company considers its
relations with its employees to be satisfactory.

2

Item 1 (c) (Cont'd)

While the business of the Company's individual hotels is seasonal, the
diverse locations of the Company's three owned or leased properties tend to
mitigate the impact of this factor. Traditionally, only the third quarter
has produced significantly less revenues and operating income than the
first, second and fourth quarters, although these seasonal fluctuations do
not materially affect the Company's business activities.

The following table reflects total revenues, annual occupancy percentages,
average room rates and revenues per available room ("REVPAR") for the
Company's owned and leased properties for the years 2003, 2002, and 2001.
REVPAR is calculated by dividing annual room revenue by the total number of
rooms available during the year.

The Company has established and maintains trademark protection for certain
service marks it uses in conducting its business, including the service
marks "Sonesta", "Sonesta Beach", "Just Us Kids", and the Company's
stylized "S" logo. Trademarks are maintained in numerous countries, besides
the United States. Each mark is generally protected for several years,
subject to periodic renewal.

3

For revenues by types of services provided for the three years ended
December 31, 2003, reference is made to the Consolidated Statements of
Operations which appear on page 11 of the 2003 Annual Report to
Shareholders.

(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS. This
information is incorporated by reference from Note 8 on pages 21 and 22 of
the 2003 Annual Report to Shareholders.

(e) EXECUTIVE OFFICERS OF THE COMPANY.

4

ITEM 2. PROPERTIES

The Company's hotels are primarily metropolitan and resort hotels in popular
vacation areas which emphasize luxury accommodations and personal service.

The Company has fee ownership in two hotels: Royal Sonesta Hotel, Boston
(Cambridge), Massachusetts and Sonesta Beach Resort, Key Biscayne, Florida.
Reference is made to Note 4 of the Notes to the Consolidated Financial
Statements of the registrant which appears on pages 18 and 19 of the Company's
2003 Annual Report to Shareholders, for details of the mortgage liens on the
Boston (Cambridge), Massachusetts property and the Key Biscayne, Florida
property.

The Company operates the Royal Sonesta Hotel, New Orleans, Louisiana under a
long-term lease which expires on September 30, 2024, provided the Company
exercises its third remaining ten-year extension option. As of March 12, 2004,
The Company has exercised options through September 30, 2014.

The Company also operates under management agreements hotels in Southampton,
Bermuda; Coconut Grove (Miami), Florida; Sunny Isles Beach, Florida ; New
Orleans, Louisiana; and Cairo, Luxor, Port Said and Sharm el Sheikh (2), Egypt;
and three Nile River cruise vessels. The Company has granted licenses for the
use of its name to seven (7) hotels in Peru, and four (4) hotels, including a
10th century castle, in Tuscany, Italy. A licensed property is scheduled to open
in Sao Paulo, Brazil, in 2004.

In addition to the properties listed above, the Company leases space for its
executive offices at 116 Huntington Avenue, Boston, Massachusetts 02116. That
lease commenced May 1, 2002, and has a 10-year term.

ITEM 3. LEGAL PROCEEDINGS

In November 2003, the Company's subsidiary, Sonesta Louisiana Hotels Corporation
("SLHC"), which operates Chateau Sonesta Hotel, in New Orleans (the "Hotel"),
received notice from the owner of the Hotel ("Owner"), that it was initiating an
arbitration pursuant to the terms of the Amended and Restated Management
Agreement between Owner and SLHC (the "Management Agreement"). In its
arbitration demand, Owner alleges that SLHC has failed to perform certain
obligations under the Management Agreement, specifically its obligations to (A)
"use all reasonable efforts to operate the Hotel...in a manner that achieves a
high level of guest satisfaction and profitability", and (B) exercise all
reasonable efforts to assure that Sonesta Hotels' corporate services "are billed
to the Hotel and to the Royal Sonesta Hotel, New Orleans on a fair and equitable
basis". This arbitration will take place in New Orleans.

Consistent with the provisions of the Management Agreement, the parties have
designated their respective arbiters, who failed to resolve the parties'
dispute. Therefore, pursuant to the Management Agreement, they have engaged a
third arbiter who will decide the dispute by selecting the position of one
arbiter or the other, without compromise. The position established by Owner's
arbiter claims damages of $2,952,000, whereas SLHC's arbiter has established
that no more than $268,000 in damages should be awarded. Pending the completion
of the arbitration, and based on the Company's confidence that it will prevail
in the arbitration, the Company has provided for damages to be paid of $268,000
in its statement of financial position, in addition to an estimated $475,000 for
legal and consulting fees related to the arbitration. This is in addition to
$104,000 of expenses already incurred and paid in 2003.

5

In addition, the Company is from time to time subject to routine litigation
incidental to its business, and generally covered by insurance. The Company
believes that the results of such litigation will not have a materially adverse
effect on the Company's financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of shareholders of the Company in the fourth
quarter of 2003.

6

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Common stock market prices and dividends and the number of shareholders of
record are incorporated by reference from page 2 of the 2003 Annual Report to
Shareholders.

A dividend of $ .10 per share was paid in July 2002, and a dividend of $ .10 per
share was declared on the Company's stock in December 2002, but was paid in
January 2003. A dividend of $ .05 was paid in July 2003; no dividend has been
declared or paid on the Company's stock since July 2003. Other information
required by this item is incorporated by reference from the Consolidated
Statements of Stockholders' Equity which appears on page 12 of the 2003 Annual
Report to Shareholders.

ITEM 6. SELECTED FINANCIAL DATA

Selected Financial Data, which appears on page 2 of the 2003 Annual Report to
Shareholders, is incorporated herein by reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

The remainder of the information required by Item 7 is incorporated by reference
from pages 3 through 9 of the 2003 Annual Report to Shareholders.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This information is incorporated by reference from page 8 of the 2003 Annual
Report to Shareholders.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements listed in the Index to Consolidated Financial
Statements filed as part of this Annual Report on Form 10-K, together with the
report of Ernst & Young LLP dated March 12, 2004 are incorporated herein by
reference from the 2003 Annual Report to Shareholders.

Selected Quarterly Financial Data, on page 9 of the 2003 Annual Report to
Shareholders, is incorporated by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There were no disagreements with auditors on accounting principles or practices
or financial statement disclosures in 2003.

7

ITEM 9A. CONTROLS AND PROCEDURES

As of December 31, 2003, the Company's management carried out an evaluation,
under the supervision and with the participation 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 and
operation of the Company's disclosure controls and procedures pursuant to
Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934. Based on that
evaluation, the Company's Chief Executive Officer and President, Chief
Executive Officer and Vice Chairman, and Vice President and Treasurer
concluded that the Company's disclosure controls and procedures are
effective, as of December 31, 2003.

There have been no significant changes in the Company's internal controls
regarding financial reporting during the quarter ended December 31, 2003 that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control regarding financial reporting, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

8

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

A. DIRECTORS OF THE COMPANY AND COMPLIANCE WITH SECTION 16 (A)

The information required by this item is incorporated herein by reference from
the proxy statement for the 2004 Annual Meeting of Stockholders, which will be
held on May 10, 2004.

CODE OF ETHICS FOR SENIOR FINANCIAL EXECUTIVES AND DIRECTORS. The Company, for
many years, has had in place a written Code of Ethics covering, among other
subjects, ethical behavior, compliance with laws, and conflicts of interest.
This Code of Ethics was adopted by the Company's Board of Directors and is
applicable to all Company employees, including Senior Financial Officers and
Directors. Each year, Company Directors, officers, and management, supervisory,
and administrative employees are required to acknowledge, in writing, that they
have read and understood the Company's Code of Ethics.

A copy of the Company's Code of Ethics is posted on its web site at
www.sonesta.com.

AUDIT COMMITTEE CHARTER. The Company's Audit Committee Charter, which is an
appendix to the Company's Proxy Statement, outlines the Committee's purpose,
responsibilities, and authorities, and is reviewed and reassessed by the Audit
Committee on an annual basis.

AUDIT COMMITTEE MEMBERS AND FINANCIAL EXPERT. The Company's Board of Directors
has an Audit Committee consisting of Messrs. George S. Abrams, Vernon R. Alden,
Joseph L. Bower and Charles J. Clark. All the members of the Audit Committee are
financially literate and independent. Mr. Clark, who the Company considers a
financial expert, as defined by NASDAQ rules, serves as Chairman of the Audit
Committee. Mr. Clark has 35 years of experience as a commercial banker, 25 years
of which were spent managing a commercial lending department, and 2 years as
head of a commercial credit department. Mr. Clark has vast experience in
reviewing and evaluating financial statements.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item 11 is incorporated herein by reference
from the Company's proxy statement for the 2004 Annual Meeting of Stockholders,
which will be held on May 10, 2004.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The remainder of the information required by this Item 12 is incorporated by
reference from the Company's proxy statement for the 2004 Annual Meeting of
Stockholders, which will be held on May 10, 2004.

The Company has no equity compensation plans for which disclosure under Item
201(d) of Regulation S-K is required.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference from the
Company's Proxy Statement for the 2004 Annual Meeting of Stockholders, which
will be held on May 10, 2004.

9

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

AUDITORS. Ernst & Young LLP have been the Company's independent auditors for
2003, as determined by a shareholders' vote during the 2003 Annual Meeting of
Shareholders. A representative of Ernst & Young LLP is expected to be present at
our annual meeting, with the opportunity to make a statement if he or she
desires to do so. This representative will be available to respond to
appropriate questions from shareholders who are present at our annual meeting.

The fees for services provided by Ernst & Young LLP to us in the last two fiscal
years were as follows:

The Company's Audit Committee has established policies and procedures which are
intended to control the services provided by the Company's auditors and to
monitor their continuing independence. Under these policies, no services may be
undertaken by the Company's auditors unless the engagement is specifically
approved by the Company's Audit Committee or the services are included within a
category which has been pre-approved by the Audit Committee. The maximum charge
for services is established by the audit committee when the specific engagement
or the category of services is approved or pre-approved. In certain
circumstances, management is required to notify the Audit Committee when
pre-approved services are undertaken and the Committee or its Chairman may
approve amendments or modifications of the engagement or the maximum fees.

The Company's Audit Committee will not approve engagements of the Company's
auditors to perform non-audit services for the Company if doing so will cause
the auditors to cease to be independent within the meaning of applicable SEC or
NASDAQ rules. In other circumstances, the Audit Committee considers among other
things, whether the auditors are able to provide the required services in a more
or less effective and efficient manner than other available service providers.

Since May 6, 2003, the date when SEC rules relating to approval of services by
auditors became effective, all services for which the Company engaged the
auditors were approved by the Audit Committee. The total fees the Company paid
to Ernst & Young LLP for services in 2002 and 2003 are set forth above.

The Company's Audit Committee approved the engagement of Ernst & Young LLP to
provide these non-audit services because it determined that Ernst & Young LLP's
providing these services would not compromise its independence and that its
familiarity with the Company's record keeping and accounting systems would
permit it to provide these services with equal or higher quality, quicker and at
a lower cost than the Company could obtain these services from other providers.

10

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. Financial Statements: The financial statements listed in the
accompanying Index to Consolidated Financial Statements are
incorporated by reference from the 2003 Annual Report to Shareholders.

2. Financial Statement Schedules: The schedule listed in the accompanying
Index to Consolidated Financial Statements is incorporated by
reference from the 2003 Annual Report to Shareholders.

3. Exhibits: The exhibits listed on the accompanying Index to Exhibits
are incorporated by reference from the 2003 Annual Report to
Shareholders.

(b) Reports on Form 8-K filed during the last quarter of 2003: None

11

SONESTA INTERNATIONAL HOTELS CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

Item 15 (a) (1) and (2) References (Page)

All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.

- ----------
*Incorporated by Reference

12

SONESTA INTERNATIONAL HOTELS CORPORATION
SCHEDULE II
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 2003

13

SONESTA INTERNATIONAL HOTELS CORPORATION

INDEX TO EXHIBITS

(1) Incorporated by reference to the Company's 1967 Report on Form 10-K.
(2) Incorporated by reference to the Company's 1973 Report on Form 10-K.
(3) Incorporated by reference to the Company's 1977 Report on Form 10-K.
(4) Incorporated by reference to the Company's 1981 Report on Form 10-K.
(5) Incorporated by reference to the Company's 1992 Report on Form 10-K.
(6) Incorporated by reference to the Company's 1993 Report on Form 10-K.
(7) Incorporated by reference to the Company's 1995 Report on Form 10-K.
(8) Incorporated by reference to the Company's 1996 Report on Form 10-K.
(9) Incorporated by reference to the Company's 1997 Report on Form 10-K.
(10) Incorporated by reference to the Company's 1998 Report on Form 10-K.
(11) Incorporated by reference to the Company's 1999 Report on Form 10-K.
(12) Incorporated by reference to the Company's 2000 Report on Form 10-K.
(13) Incorporated by reference to the Company's 2001 Report on Form 10-K.
(14) Incorporated by reference to the Company's 2002 Report on Form 10-K.

19

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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
(Registrant)

By: /S/ Boy Van Riel Date: March 29, 2004
---------------------------------------
Boy van Riel
Vice President and Treasurer, Principal Financial
and Accounting Officer

Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.

By: /S/ Roger P. Sonnabend Date: March 29, 2004
---------------------------------------
Roger P. Sonnabend
Executive Chairman of the Board

By: /S/ Boy Van Riel Date: March 29, 2004
---------------------------------------
Boy van Riel
Vice President and Treasurer, Principal
Financial and Accounting Officer

By: /S/ Paul Sonnabend Date: March 29, 2004
---------------------------------------
Paul Sonnabend
Director

By: /S/ Peter J. Sonnabend Date: March 29, 2004
---------------------------------------
Peter J. Sonnabend
Director

By: /S/ Stephanie Sonnabend Date: March 29, 2004
---------------------------------------
Stephanie Sonnabend
Director

By: /S/ Stephen Sonnabend Date: March 29, 2004
---------------------------------------
Stephen Sonnabend
Director

20

By: /S/ George S. Abrams Date: March 29, 2004
---------------------------------------
George S. Abrams
Director

By: /S/ Vernon R. Alden Date: March 29, 2004
---------------------------------------
Vernon R. Alden
Director

By: /S/ Joseph L. Bower Date: March 29, 2004
---------------------------------------
Joseph L. Bower
Director

By: /S/ Charles J. Clark Date: March 29, 2004
---------------------------------------
Charles J. Clark
Director

By: /S/ Jean C. Tempel Date: March 29, 2004
---------------------------------------
Jean C. Tempel
Director