----

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**FORM 10-Q**

**SECURITIES AND EXCHANGECOMMISSION**Washington, D.C. 20549

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

******For theQuarterly period ended June 30, 2001**

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

** **

**For the transition period from ____ to ____**

**Commission file number 0-9032**

| **SONESTA INTERNATIONAL HOTELS CORPORATION**               |
|------------------------------------------------------------|
| ****                                                       |
| (Exact  name of registrant as specified in its charter)    |
|                                                       |   |
| **NEW YORK**                                               | **13-5648107** |
|                                                            |  |
| (State  or other jurisdiction                              | (I.R.S.  Employer |
| or  incorporation or organization)                         | Identification  No.) |
| **200 Clarendon Street, Boston, MA 02116**                 |
|                                                            |
| (Address  of principal executive offices)                  |
| (Zip  Code)                                                |
|                                                       |
| **617-421-5400**                                           |
|                                                            |
| (Registrant’s  telephone number, including area code) |
|                                                       |
|                                                            |
| (Former  name, former address and former fiscal year,      |
| if  changed since last report)                             |
|                                                       |   |

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

Yes  ý No  o

APPLICABLEONLY TO CORPORATE ISSUERS:

Numberof Shares of Common Stock OutstandingAs of August 8, 2001 — $.80 par value,Class A – 3,698,230

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**INDEX**

**SONESTA INTERNATIONAL HOTELSCORPORATION**

 

| Part I.   Financial Information |                                                                                                                  |                                                                                                                                                             |
|--------------------------------------|-----------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                 |                                                                                                                  |
|                                 | Item 1                                                                                                                | Financial Statements  (Unaudited)                                                                                                                                |   |
|                                 | Condensed  consolidated balance sheets—June 30, 2001 and December 31, 2000                                  |                                                                                                                                                             |
|                                 | Condensed  consolidated statements of operations—Three month and six month periods ended  June 30, 2001 and 2000 |                                                                                                                                                             |
|                                 | Condensed  consolidated statements of cash flows—Six month periods ended June 30, 2001  and 2000                 |                                                                                                                                                             |
|                                 | Notes  to condensed consolidated financial statements—June 30, 2001 and 2000                                     |                                                                                                                                                             |
|                                 |                                                                                                                  |                                                                                                                                                             |
|                                 | Item 2.                                                                                                               | Management’s  Discussion and Analysis of Results of Operations and Financial  Condition—Three month and six month periods ended June 30, 2001 and 2000 |   |
|                                 |                                                                                                                  |                                                                                                                                                             |
|                                 | Item 3.                                                                                                               | Quantitative  and Qualitative Disclosure of Market Risk                                                                                                          |   |
|                                 |                                                                                                                  |                                                                                                                                                             |
| Part II. Other  Information          |                                                                                                                  |
|                                 |                                                                                                                  |
|                                 | Item 4                                                                                                                | Submission  of matters to vote of security holders                                                                                                               |   |
|                                      |                                                                                                                       |                                                                                                                                                                  |  |  |

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

**SONESTAINTERNATIONAL HOTELS CORPORATIONCONDENSED CONSOLIDATED BALANCESHEETS**June  30, 2001 (unaudited)  and December 31, 2000

|                                            | (in  thousands)                                                                  |
|-------------------------------------------------|----------------------------------------------------------------------------------|
|                                            |                                                                                  |  |  |
|                                            | June  30   2001                                                                  |   | December  31   2000 |
|                                            |                                                                                  |   |  |
| ASSETS                                          |                                                                             |   |   |
| Current assets:                                 |                                                                             |   |   |
|                                            | Cash and cash  equivalents                                                       | $ | 27,160 |   | $ | 23,850 |
|                                            | Investments in  government debt securities                                       | -- |   | 10,313 |
|                                            | Accounts and notes  receivable:                                                  |   |   |   |
|                                            | Trade, less allowance  of $279 ($270 at December 31, 2000) for doubtful accounts | 7,243 |   | 6,829 |
|                                            | Other, including  current portion of long-term receivables and advances          | 603 |   | 918 |
|                                            |                                                                             |  |   |  |
|                                            | Total accounts and  notes receivable                                             | 7,846 |   | 7,747 |
| Current portion of  deferred taxes              | 536                                                                              |   | 630 |
| Inventories                                     | 1,475                                                                            |   | 1,618 |
| Prepaid expenses and  other                     | 3,056                                                                            |   | 1,791 |
|                                            |                                                                                  |   |  |
|                                            | Total current assets                                                             | 40,073 |   | 45,949 |
|                                            |                                                                             |   |   |
| Long-term receivables  and advances             | 2,588                                                                            |   | 1,008 |
|                                            |                                                                             |   |   |
| Property and equipment,  at cost:               |                                                                             |   |   |
|                                            | Land and land  improvements                                                      | 9,940 |   | 9,940 |
|                                            | Buildings                                                                        | 72,641 |   | 70,469 |
|                                            | Furniture and  equipment                                                         | 42,422 |   | 36,969 |
|                                            | Leasehold improvements                                                           | 3,031 |   | 2,855 |
|                                            | Projects in progress                                                             | 1,600 |   | 2,246 |
|                                            |                                                                                  |   |  |
|                                            | 129,634                                                                          |   | 122,479 |
|                                            |                                                                             |   |   |
| Less accumulated  depreciation and amortization | 37,043                                                                           |   | 32,688 |
|                                            |                                                                                  |   |  |
|                                            | Net property and  equipment                                                      | 92,591 |   | 89,791 |
|                                            |                                                                             |   |   |
| Other long-term assets                          | 1,568                                                                            |   | 1,565 |
|                                            |                                                                                  |   |  |
|                                            | $                                                                                | 136,820 |   | $ | 138,313 |
|                                            |                                                                                  |   |  |
|                                                 |                                                                                  |  |  |  |  |  |  |  |  |

 

|                                                            | (in  thousands)                                                   |
|-----------------------------------------------------------------|-------------------------------------------------------------------|
|                                                            |                                                                   |
|                                                            | June  30   2001                                                   |   | December  31   2000 |
|                                                            |                                                                   |   |  |
| LIABILITIES AND COMMON  STOCKHOLDERS’ EQUITY               |                                                              |   |   |
| Current liabilities:                                            |                                                              |   |   |
|                                                            | Current portion of  long-term debt                                | $ | 1,718 |   | $ | 6,246 |
|                                                            | Accounts payable                                                  | 4,457 |   | 5,295 |
|                                                            | Advance deposits                                                  | 3,042 |   | 4,181 |
|                                                            | Federal, foreign and  state income taxes                          | 1,498 |   | 405 |
|                                                            | Accrued liabilities:                                              |   |   |   |
|                                                            | Salaries and wages                                                | 2,122 |   | 2,949 |
|                                                            | Rentals                                                           | 3,897 |   | 6,628 |
|                                                            | Interest                                                          | 518 |   | 526 |
|                                                            | Pension and other  employee benefits                              | 3,818 |   | 3,777 |
|                                                            | Other                                                             | 2,257 |   | 1,198 |
|                                                            |                                                                   |   |  |
|                                                            | Total accrued  liabilities                                        | 12,612 |   | 15,078 |
|                                                            |                                                              |  |   |  |
|                                                            | Total current  liabilities                                        | 23,327 |   | 31,205 |
|                                                            |                                                              |   |   |
| Long-term debt                                                  | 74,693                                                            |   | 70,764 |
|                                                            |                                                              |   |   |
| Deferred federal and  state income taxes                        | 5,396                                                             |   | 5,524 |
|                                                            |                                                              |   |   |
| Other non-current  liabilities                                  | 1,097                                                             |   | 599 |
|                                                            |                                                              |   |   |
| Redeemable preferred  stock, $25 par value, at redemption value | 294                                                               |   | 294 |
|                                                            |                                                              |   |   |
| Commitments and  contingencies                                  |                                                              |   |   |
|                                                            |                                                              |   |   |
| Common stockholders’  equity:                              |                                                              |   |   |
|                                                            | Common stock:                                                     |   |   |   |
|                                                            | Class A, $.80 par  value:                                         |   |   |   |
|                                                            | Authorized – 10,000  shares                                  |   |   |   |
|                                                            | Issued—6,102 shares at  stated value                         | 4,882 |   | 4,882 |
|                                                            | Retained earnings                                                 | 39,183 |   | 37,033 |
|                                                            | Treasury shares—2,404  (2,397 at December 31, 2000), at cost | (12,052 | ) | (11,988 |
|                                                            |                                                                   |   |  |
|                                                            | Total common  stockholders’ equity                           | 32,013 |   | 29,927 |
|                                                            |                                                                   |   |  |
|                                                            | $                                                                 | 136,820 |   | $ | 138,313 |
|                                                            |                                                                   |   |  |
|                                                                 |                                                                   |  |  |  |  |  |  |  |  |  |

*See accompanying notes to condensed consolidated financialstatements.*

**SONESTA INTERNATIONAL HOTELSCORPORATIONCONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS (unaudited)**(in thousands except for per share data)

 

|                                                     | Three  Months Ended                   |   | Six  Months Ended |   |
|----------------------------------------------------------|---------------------------------------|--------|-------------------|--------|
|                                                     | June  30                              |   | June  30          |   |
|                                                     |                                       |   |                   |   |
|                                                     | 2001                                  |   | 2000              |   | 2001 |   | 2000 |   |
|                                                     |                                       |   |                   |   |  |   |  |   |
| Revenues:                                                |                                  |   |              |   |   |   |   |   |
|                                                     | Rooms                                 | $      | 17,184            |   | $ | 17,067 |   | $ | 36,162 |   | $ | 34,914 |   |
|                                                     | Food and beverage                     | 7,544  |              | 7,497  |   | 14,518 |   | 14,407 |   |
|                                                     | Management, license  and service fees | 1,305  |              | 1,303  |   | 2,671 |   | 2,521 |   |
|                                                     | Parking, telephone and  other         | 2,599  |              | 2,813  |   | 5,117 |   | 5,080 |   |
|                                                     |                                       |   |                   |   |  |   |  |   |
|                                                     | 28,632                                |   | 28,680            |   | 58,468 |   | 56,922 |   |
|                                                     |                                       |   |                   |   |  |   |  |   |
| Costs and expenses:                                      |                                  |   |              |   |   |   |   |   |
|                                                     | Costs and operating  expenses         | 11,969 |              | 11,346 |   | 23,886 |   | 22,532 |   |
|                                                     | Advertising and  promotion            | 2,215  |              | 2,187  |   | 4,379 |   | 4,230 |   |
|                                                     | Administrative and  general           | 4,318  |              | 4,017  |   | 8,986 |   | 8,122 |   |
|                                                     | Human resources                       | 556    |              | 522    |   | 1,111 |   | 1,040 |   |
|                                                     | Maintenance                           | 1,932  |              | 1,747  |   | 3,960 |   | 3,576 |   |
|                                                     | Rentals                               | 2,150  |              | 1,839  |   | 4,519 |   | 4,379 |   |
|                                                     | Property taxes                        | 649    |              | 624    |   | 1,302 |   | 1,249 |   |
|                                                     | Depreciation and  amortization        | 2,205  |              | 2,043  |   | 4,424 |   | 4,099 |   |
|                                                     |                                       |   |                   |   |  |   |  |   |
|                                                     | 25,994                                |   | 24,325            |   | 52,567 |   | 49,227 |   |
|                                                     |                                       |   |                   |   |  |   |  |   |
| Operating income                                         | 2,638                                 |   | 4,355             |   | 5,901 |   | 7,695 |   |
|                                                     |                                  |   |              |   |   |   |   |   |
| Other income  (deductions):                              |                                  |   |              |   |   |   |   |   |
|                                                     | Interest expense                      | (1,666 | )                 | (1,342 | ) | (3,407 | ) | (2,476 | ) |
|                                                     | Interest income                       | 370    |              | 262    |   | 890 |   | 393 |   |
|                                                     | Foreign exchange loss                 | (9     | )                 | (1     | ) | (46 | ) | (6 | ) |
|                                                     | Gain on sales of  assets              | 16     |              | 6      |   | 21 |   | 10 |   |
|                                                     | Gain  from casualty                   | — |              | 450    |   | 801 |   | 950 |   |
|                                                     |                                       |   |                   |   |  |   |  |   |
|                                                     | (1,289                                | )      | (625              | )      | (1,741 | ) | (1,129 | ) |
| Income before income  taxes                              | 1,349                                 |   | 3,730             |   | 4,160 |   | 6,566 |   |
| Federal, foreign and  state income tax provision         | 608                                   |   | 1,454             |   | 1,633 |   | 2,519 |   |
|                                                     |                                       |   |                   |   |  |   |  |   |
| Income before  extraordinary loss on refinancing of debt | 741                                   |   | 2,276             |   | 2,527 |   | 4,047 |   |
| Extraordinary loss on  refinancing of debt (net of tax)  | —                                |   | (274              | )      | — |   | (274 | ) |
| Net income                                               | 741                                   |   | 2,002             |   | 2,527 |   | 3,773 |   |
| Retained earnings at  beginning of period                | 38,816                                |   | 34,882            |   | 37,033 |   | 33,114 |   |
| Cash dividends on  preferred stock                       | (3                                    | )      | (3                | )      | (6 | ) | (6 | ) |
| Cash dividends on  common stock                          | (371                                  | )      | (371              | )      | (371 | ) | (371 | ) |
|                                                     |                                       |   |                   |   |  |   |  |   |
| Retained earnings at  end of period                      | $                                     | 39,183 |              | $      | 36,510 |   | $ | 39,183 |   | $ | 36,510 |   |
|                                                     |                                       |   |                   |   |  |   |  |   |
| Basic and diluted  earnings per share of common stock    | $                                     | 0.20   |              | $      | 0.54 |   | $ | 0.68 |   | $ | 1.01 |   |
|                                                     |                                       |   |                   |   |  |   |  |   |
| Weighted average  number of shares outstanding           | 3,700                                 |   | 3,707             |   | 3,703 |   | 3,711 |   |
|                                                     |                                       |   |                   |   |  |   |  |   |

*See accompanying notes to consolidated financial statements.*

**SONESTAINTERNATIONAL HOTELS CORPORATION****CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS (unaudited)**Increase (Decrease) in Cash

|                                              | (in  thousands)                                          |   |
|---------------------------------------------------|----------------------------------------------------------|--------|
|                                              |                                                          |   |
|                                              | Six  Months Ended June 30                                |   |
|                                              | 2001                                                     |   | 2000 |   |
| Cash provided (used)  by operating activities     |                                                          |   |  |   |
| Net income                                        | $                                                        | 2,527  |   | $ | 3,773 |   |
| Items not (providing)  requiring cash             |                                                     |   |   |   |
|                                              | Pension expense                                          | 567    |   | 543 |   |
|                                              | Depreciation and  amortization of property and equipment | 4,424  |   | 4,099 |   |
|                                              | Other amortization                                       | 50     |   | (320 | ) |
|                                              | Deferred federal and  state income tax benefit           | (34    | ) | (58 | ) |
|                                              | Gain on sales of  assets                                 | (21    | ) | (10 | ) |
|                                              | Deferred interest  income                                | (34    | ) | — |   |
|                                              | Extraordinary loss on  debt refinancing                  | — |   | 431 |   |
| Changes in assets and  liabilities                |                                                     |   |   |   |
|                                              | Accounts and notes  receivable                           | (384   | ) | 1,837 |   |
|                                              | Inventories                                              | 143    |   | 11 |   |
|                                              | Prepaid expenses and  other                              | (1,270 | ) | (834 | ) |
|                                              | Accounts payable                                         | (838   | ) | (2,666 | ) |
|                                              | Advance deposits                                         | (1,139 | ) | (1,689 | ) |
|                                              | Federal, foreign and  state income taxes                 | 1,093  |   | 1,551 |   |
|                                              | Accrued liabilities                                      | (2,518 | ) | (3,411 | ) |
|                                              |                                                          |   |  |   |
|                                              | Cash provided by  operating activities                   | 2,566  |   | 3,257 |   |
|                                              |                                                     |   |   |   |
|                                              |                                                     |   |   |   |
| Cash provided (used)  by investing activities     |                                                     |   |   |   |
|                                              | Proceeds from sales of  assets                           | 24     |   | 27 |   |
|                                              | Proceeds from  maturities of government debt securities  | 10,313 |   | — |   |
|                                              | Expenditures for  property and equipment                 | (7,222 | ) | (5,060 | ) |
|                                              | Payments received on  long-term receivables and advances | 410    |   | 352 |   |
|                                              | New loans and advances                                   | (1,723 | ) | — |   |
|                                              |                                                          |   |  |   |
|                                              | Cash provided (used)  by investing activities            | 1,802  |   | (4,681 | ) |
|                                              |                                                     |   |   |   |
| Cash provided (used)  by financing activities     |                                                     |   |   |   |
|                                              | Scheduled payments on  long-term debt                    | (617   | ) | (551 | ) |
|                                              | Proceeds from issuance  of long-term debt                | — |   | 72,000 |   |
|                                              | Cost of financing                                        | — |   | (1,379 | ) |
|                                              | Payments on  refinancing of long-term debt               | — |   | (43,566 | ) |
|                                              | Cash dividends paid                                      | (377   | ) | (378 | ) |
|                                              | Purchase of treasury  stock                              | (64    | ) | (80 | ) |
|                                              |                                                          |   |  |   |
|                                              | Cash provided (used)  by financing activities            | (1,058 | ) | 26,046 |   |
|                                              |                                                          |   |  |   |
| Net increase in cash                              | 3,310                                                    |   | 24,622 |   |
| Cash and cash  equivalents at beginning of period | 23,850                                                   |   | 7,876 |   |
|                                              |                                                          |   |  |   |
| Cash and cash  equivalents at end of period       | $                                                        | 27,160 |   | $ | 32,498 |   |
|                                              |                                                          |   |  |   |
|                                                   |                                                          |        |  |  |  |  |  |  |

SupplementalSchedule of Interest and Income Taxes PaidCash paid for interest in the 2001 six month and the 2000 six month period wasapproximately $3,415,000 and $2,870,000, respectively.     Cash paid for income taxes in the 2001six month and the 2000 six month period was approximately $574,000 and$868,000, respectively.

*See accompanying notes to consolidated financial statements.*

**SONESTAINTERNATIONAL HOTELS CORPORATION****NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

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

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial information and with the instructions toForm 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by accounting principles generally accepted in the United States forcomplete financial statements.  In theopinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included.  Operating results for the six month periodended June 30, 2001 are not necessarily indicative of the results that may beexpected for the year ended December 31, 2001.

Thebalance sheet at December 31, 2000 has been derived from the audited financialstatements at that date but does not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates for complete financial statements.

Forfurther information, refer to the consolidated financial statements andfootnotes thereto included in the Company’s annual report on Form 10-K for theyear ended December 31, 2000.

 

**2.**          **Long-Term Receivables and Advances**

|                                                         | (in  thousands)             |   |
|--------------------------------------------------------------|-----------------------------|--------|
|                                                         |                             |   |
|                                                         | June 30, 2001               |   | December 31,   2000 |   |
|                                                         |                             |   |  |   |
| Sharm El Sheikh, Egypt (a)                                   | $                           | 699    |   | $ | 781 |   |
| Cairo, Egypt (b)                                             | 140                         |   | 140 |   |
| Sonesta Hotel & Suites Coconut Grove, Miami, Florida (c) | 1,758                       |   | — |   |
| Other                                                        | 315                         |   | 621 |   |
|                                                         |                             |   |  |   |
|                                                         | Total long-term receivables | 2,912  |   | 1,542 |   |
|                                                         | Less:  current portion | 324    |   | 534 |   |
|                                                         |                        |        |   |  |   |
|                                                         | Net long-term  receivables  | $      | 2,588 |   | $ | 1,008 |   |
|                                                         |                             |   |  |   |

----

| (a) | This  loan, in the original amount of $1,000,000, was made in 1996 and 1997 to the  owner of Sonesta Beach Resort, Sharm El Sheikh.    The loan agreement was amended in 1999.    The loan bears interest at the prime  rate and is adjusted semi-annually.     The interest rate charged at June 30, 2001 was 91⁄2%.  This loan is being repaid in 60 monthly  installments, commencing January 2000. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) | The  remaining balance of this loan, made in February 1997 to the owner of the  Sonesta Hotel Cairo, is scheduled to be repaid in 2001.                                                                                                                                                                                                                                                                                                                     |

 

| (c) | This  loan was made to the owner of the Sonesta Hotel & Suites Coconut Grove,  Miami.   This hotel is presently under  construction and is scheduled to open in the spring of 2002.    The Company will loan $4,000,000 to fund  construction and furniture, fixtures and equipment (“FF&E”) costs, and  $1,000,000 for pre-opening costs and working capital.  The construction and FF&E loan bears  interest at the prime rate (63⁄4% at June 30, 2001) plus 3⁄4%.   No interest will be charged on the  $1,000,000 pre-opening loan.  Following  the opening of the hotel, these loans will be repaid out of profits that  would otherwise be available for distribution to the owner of the hotel. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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

*Credit Line*

TheCompany has a $2,000,000 line of credit which expires on September 30,2001.      This line of credit bearsinterest at the prime rate (63⁄4% at June 30, 2001).    The terms of the line require a certain minimum net worth, aminimum amount of unrestricted cash or available credit lines during part ofeach calendar year, and approval for additional borrowings by the Company.   No amounts were outstanding under this lineof credit at June 30, 2001.

*Long-Term Debt*

|                                                                | (in thousands)          |       |
|---------------------------------------------------------------------|-------------------------|------------|
|                                                                |                         |       |
|                                                                | June 30,   2001         |       | December 31,2000 |   |
| Charterhouse of Cambridge Trust and Sonesta of Massachusetts  Inc.: | ****                    | ** ** | **** | ** ** |
|                                                                | First mortgage note (a) | $          | 40,606 |   | $ | 40,802 |   |
| Sonesta Beach Resort Limited Partnership:                           |                    |       |   |   |
|                                                                | First mortgage note (b) | 30,701     |   | 30,850 |   |
| Sonesta Hotels of Anguilla, Ltd:                                    |                    |       |   |   |
|                                                                | First mortgage note (c) | 4,624      |   | 4,896 |   |
| Other                                                               | 480                     |       | 462 |   |
|                                                                |                         |       |  |   |
|                                                                | 76,411                  |       | 77,010 |   |
| Less: current portion of long-term debt                             | 1,718                   |       | 6,246 |   |
|                                                                |                         |       |  |   |
| Total long-term debt                                                | $                       | 74,693     |   | $ | 70,764 |   |
|                                                                |                         |            |   |  |  |  |

----

| (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 $25,646,000 at June 30,  2001.    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. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|  (b) | This  loan is secured by a first mortgage on the Sonesta Beach Resort Key Biscayne  property.  This property is included  in fixed assets at a net book value of $43,375,000 at June 30, 2001.   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.                                                                                                                                                                                                                                                                                                                                                                                   |
|-----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (c)       | This  loan is secured by a first mortgage on the Sonesta Beach Resort Anguilla  property, and an assignment to the lender of the hotel’s furniture, fixtures  and equipment.  This property is  included in fixed assets at a net book value of $11,959,000 at June 30,  2001.   In addition, $1,900,000 is  secured by a Company guaranty.    During the second quarter of 2001, the maturity date of this loan was  extended by two years until December 31, 2003.   This loan requires minimum principal payments of $272,000  during the remainder of 2001, and $272,000 in each of the years 2002 and  2003.   In addition, principal  payments are required equal to 25% of the hotel’s annual excess cash flow, as  defined.    The balance of $3,808,000  is due on the revised maturity date of December 31, 2003.   The interest rate on the loan is LIBOR  plus 2.25%.   The interest rate at  June 30, 2001 was 6.3%. |

**4.**          **Hotel Costs and Operating Expenses**

Hotel costs andoperating expenses in the accompanying Consolidated Statements of Operationsare summarized below:

|                       | (in  thousands)             |   |
|----------------------------|-----------------------------|--------|
|                       |                             |   |
|                       | Three  Months Ended June 30 |   | Six  Months Ended June 30 |   |
|                       | 2001                        |   | 2000 |   | 2001 |   | 2000 |   |
|                       |                             |   |  |   |  |   |  |   |
| Direct departmental  costs |                        |   |   |   |   |   |   |   |
|                       | Rooms                       | $      | 4,072 |   | $ | 3,878 |   | $ | 8,036 |   | $ | 7,767 |   |
|                       | Food and beverage           | 5,634  |   | 5,496 |   | 11,239 |   | 10,878 |   |
|                       | Heat, light and power       | 993    |   | 793 |   | 2,052 |   | 1,562 |   |
|                       | Other                       | 1,270  |   | 1,179 |   | 2,559 |   | 2,325 |   |
|                       |                             |   |  |   |  |   |  |   |
|                       | $                           | 11,969 |   | $ | 11,346 |   | $ | 23,886 |   | $ | 22,532 |   |
|                       |                             |   |  |   |  |   |  |   |

Direct departmentalcosts include payroll expenses and related payroll burden, the cost of food andbeverage consumed and other departmental costs.

 

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

The provision for income taxes in theaccompanying Consolidated Statements of Operations is summarized below:

|                                  | (in  thousands)                                                                                  |   |
|---------------------------------------|--------------------------------------------------------------------------------------------------|--------|
|                                  |                                                                                                  |   |
|                                  | Six    Months    Ended    June    30 |   |
|                                  | 2001                                                                                             |   | 2000 |   |
|                                  |                                                                                                  |   |  |   |
| Deferred federal  income tax benefit  | $                                                                                                | (34    | ) | $ | (58 | ) |
| Current federal income  tax provision | 1,325                                                                                            |   | 1,912 |   |
| Current foreign income  tax provision | 129                                                                                              |   | 232 |   |
| Current state income  tax provision   | 213                                                                                              |   | 433 |   |
|                                  |                                                                                                  |   |  |   |
|                                  | $                                                                                                | 1,633  |   | $ | 2,519 |   |
|                                  |                                                                                                  |   |  |   |
|                                       |                                                                                                  |        |  |  |  |  |  |

**6.**          **Segment Information**

Segment information for the Company’s tworeportable segments, Owned & Leased Hotels and Management Activities, forthe three month and six month periods ending June 30, 2001 and 2000 follows:

 

| Three month period  ended June 30, 2001                               | (in  thousands)                 |   |
|-----------------------------------------------------------------------|---------------------------------|--------|
|                                                                  |                                 |   |
|                                                                  | Owned  & Leased Hotels      |   | Management  Activities |   | Consolidated |   |
|                                                                  |                                 |   |  |   |  |   |
| Revenues                                                              | $                               | 27,319 |   | $ | 1,313 |   | $ | 28,632 |   |
|                                                                  |                            |   |   |   |   |   |   |   |   |
| Operating income  (loss) before depreciation and amortization expense | 5,128                           |   | (285 | ) | 4,843 |   |
|                                                                  | Depreciation and  amortization  | (2,095 | ) | (110 | ) | (2,205 | ) |
|                                                                  | Interest income  (expense), net | (1,636 | ) | 340 |   | (1,296 | ) |
|                                                                  | Other income, net               | — |   | 7 |   | 7 |   |
|                                                                  |                                 |   |  |   |  |   |
| Segment pre-tax profit  (loss)                                        | 1,397                           |   | (48 | ) | 1,349 |   |
|                                                                  |                            |   |   |   |   |   |
| Segment assets                                                        | 103,579                         |   | 33,241 |   | 136,820 |   |
| Segment capital  additions                                            | 3,104                           |   | 134 |   | 3,238 |   |
|                                                                  |                            |   |
|                                                                  |                            |   |
| Six month period ended  June 30, 2001                                 | (in  thousands)                 |   |
|                                                                  |                                 |   |
|                                                                  | Owned  & Leased Hotels      |   | Management  Activities |   | Consolidated |   |
|                                                                  |                                 |   |  |   |  |   |
| Revenues                                                              | $                               | 55,755 |   | $ | 2,713 |   | $ | 58,468 |   |
|                                                                  |                            |   |   |   |   |   |   |   |   |
| Operating income  (loss) before depreciation and amortization expense | 11,094                          |   | (769 | ) | 10,325 |   |
|                                                                  | Depreciation and  amortization  | (4,204 | ) | (220 | ) | (4,424 | ) |
|                                                                  | Interest income  (expense), net | (3,356 | ) | 839 |   | (2,517 | ) |
|                                                                  | Other income  (deductions), net | 806    |   | (30 | ) | 776 |   |
|                                                                  |                            |        |   |  |   |  |   |
| Segment pre-tax profit  (loss)                                        | 4,340                           |   | (180 | ) | 4,160 |   |
|                                                                  |                            |   |   |   |   |   |
| Segment assets                                                        | 103,579                         |   | 33,241 |   | 136,820 |   |
| Segment capital  additions                                            | 6,925                           |   | 297 |   | 7,222 |   |
|                                                                       |                                 |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

| Three month period  ended June 30, 2000                        |                            |   |
|----------------------------------------------------------------|---------------------------------|--------|
|                                                           | (in  thousands)                 |   |
|                                                           |                                 |   |
|                                                           | Owned  & Leased Hotels      |   | Management  Activities |   | Consolidated |   |
|                                                           |                                 |   |  |   |  |   |
|                                                           |                            |   |   |   |   |   |
| Revenues                                                       | $                               | 27,122 |   | $ | 1,558 |   | $ | 28,680 |   |
|                                                           |                            |   |   |   |   |   |   |   |   |
| Operating income  before depreciation and amortization expense | 6,289                           |   | 109 |   | 6,398 |   |
|                                                           | Depreciation and  amortization  | (1,928 | ) | (115 | ) | (2,043 | ) |
|                                                           | Interest income  (expense), net | (1,219 | ) | 139 |   | (1,080 | ) |
|                                                           | Other income  (deductions), net | 456    |   | (1 | ) | 455 |   |
|                                                           |                            |        |   |  |   |  |   |
| Segment pre-tax profit                                         | 3,598                           |   | 132 |   | 3,730 |   |
|                                                           |                            |   |   |   |   |   |
| Segment assets                                                 | 114,018                         |   | 18,372 |   | 132,390 |   |
| Segment capital  additions                                     | 2,222                           |   | 187 |   | 2,409 |   |
|                                                           |                            |   |   |   |   |   |
|                                                           |                            |   |   |   |   |   |
| Six month period ended  June 30, 2000                          |                            |   |
|                                                           | (in  thousands)                 |   |
|                                                           |                                 |   |
|                                                           | Owned  & Leased Hotels      |   | Management  Activities |   | Consolidated |   |
|                                                           |                                 |   |  |   |  |   |
| Revenues                                                       | $                               | 54,139 |   | $ | 2,783 |   | $ | 56,922 |   |
|                                                           |                            |   |   |   |   |   |   |   |   |
| Operating income  before depreciation and amortization expense | 11,768                          |   | 26 |   | 11,794 |   |
|                                                           | Depreciation and  amortization  | (3,869 | ) | (230 | ) | (4,099 | ) |
|                                                           | Interest income  (expense), net | (2,340 | ) | 257 |   | (2,083 | ) |
|                                                           | Other income (deductions),  net | 956    |   | (2 | ) | 954 |   |
|                                                           |                                 |   |  |   |  |   |
| Segment pre-tax profit                                         | 6,515                           |   | 51 |   | 6,566 |   |
|                                                           |                            |   |   |   |   |   |
| Segment assets                                                 | 114,018                         |   | 18,372 |   | 132,390 |   |
| Segment capital  additions                                     | 4,773                           |   | 287 |   | 5,060 |   |
|                                                                |                                 |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**8.**          **Earnings per Share**

Asthe Company has no dilutive securities, there is no difference between basicand diluted earnings per share of common stock.  The following table sets forth the computation of basic earningsper share of common stock:

|                                | Three  months ended June 30                    |   | Six  months ended June 30 |   |
|-------------------------------------|------------------------------------------------|--------|---------------------------|--------|
|                                | 2001                                           |   | 2000                      |   | 2001 |   | 2000 |   |
|                                |                                                |   |                           |   |  |   |  |   |
| Numerator:                          |                                           |   |                      |   |   |   |   |   |
|                                | Net income                                     | $      | 741                       |   | $ | 2,002 |   | $ | 2,527 |   | $ | 3,773 |   |
|                                | Preferred stock  dividends                     | (3     | )                         | (3     | ) | (6 | ) | (6 | ) |
|                                |                                           |        |                      |        |   |  |   |  |   |
|                                |                                           |   |                      |   |   |   |   |   |
| Numerator for earnings  per share   | $                                              | 738    |                      | $      | 1,999 |   | $ | 2,521 |   | $ | 3,767 |   |
|                                |                                                |   |                           |   |  |   |  |   |
|                                |                                           |   |                      |   |   |   |   |   |
| Denominator:                        |                                           |   |                      |   |   |   |   |   |
|                                | Weighted average  number of shares outstanding | 3,700  |                      | 3,707  |   | 3,703 |   | 3,711 |   |
|                                |                                           |        |                      |        |   |  |   |  |   |
|                                |                                           |   |                      |   |   |   |   |   |
| Earnings per share of  common stock | $                                              | 0.20   |                      | $      | 0.54 |   | $ | 0.68 |   | $ | 1.01 |   |
|                                |                                                |   |                           |   |  |   |  |   |

 

**Part I– Item 2**

**MANAGEMENT’S DISCUSSION ANDANALYSIS****OFRESULTS OF OPERATIONS AND FINANCIAL CONDITION**

**FIRST SIX MONTHS 2001 COMPARED TO 2000**

Net income for the sixmonth period ending June 30, 2001 was $2,527,000, or $0.68 per common share,compared to $3,773,000, or $1.01 per common share, in the same period in 2000.The Company expects that its 2001 earnings will fall short of the profit levelsachieved in the year ending December 31, 2000. This is mainly due to lower earnings from the Boston (Cambridge) and KeyBiscayne properties, resulting from softening demand from both transient andgroup markets, coupled with increased operating expenses, in particular at theSonesta Beach Resort Key Biscayne.

**REVENUES**

 

|                                            | TOTAL  REVENUES (in thousands) |
|-------------------------------------------------|-------------------------------------|
|                                            |
|                                            |                                     |
|                                            | NO.  OF ROOMS                       |   | 2001 |   | 2000 |
|                                            |                                     |   |  |   |  |
| Sonesta Beach Resort  Anguilla, BWI             | 100                                 |   | $ | 3,130 |   | $ | 2,048 |
| Sonesta Beach Resort  Key Biscayne              | 300                                 |   | 17,571 |   | 17,106 |
| Royal Sonesta Hotel  Boston (Cambridge)         | 400                                 |   | 14,370 |   | 15,049 |
| Royal Sonesta Hotel  New Orleans                | 500                                 |   | 20,684 |   | 19,936 |
| Management and service  fees and other revenues |                                |   | 2,713 |   | 2,783 |
|                                            |                                |   |  |   |  |
|                                            | Total revenues                      |   |   | $ | 58,468 |   | $ | 56,922 |
|                                            |                                |   |   |  |   |  |
|                                                 |                                     |  |  |  |  |  |  |  |  |

 

Totalrevenues for the first six months of 2001 were $58,468,000 compared to  $56,922,000 in 2000, an increase ofapproximately $1,546,000.

Sonesta Beach Resort Anguilla was closedfrom November 17, 1999 until February 10, 2000 to repair damage sustained byHurricane Lenny, which accounts for the reduction in revenues during the firstsix months of 2000 of approximately $1,082,000, compared to the first half of2001.    Revenues at Sonesta BeachResort Key Biscayne during the six month period ending June 30, 2001 increasedby a modest $465,000 compared to the same period in 2000, mainly due toincreased banquet revenues from convention groups, and increased revenues fromthe hotel’s newly built Spa, which opened in April 2001.     Royal Sonesta Hotel Boston (Cambridge)had a decrease in revenues during the first six months of 2001 of $679,000compared to 2000.    Lower occupancylevels, caused by decreased demand from both the transient and the group marketsegment, resulted in a 5% decrease in room revenue per available room(“REVPAR”) compared to the first six months of 2000.   Despite the general slowdown in the hotel industry, RoyalSonesta New Orleans managed to increase revenues by 4% during the first sixmonths of 2001 compared to 2000.   Increased business levels, mainly from convention groups, resulted in a7% REVPAR increase.   Revenues frommanagement activities during the first six months of 2001 slightly decreased by$70,000 compared to the same period in 2000.   Decreased income from Corporate services was only partially offset byincreased management fee income, mainly from Chateau Sonesta Hotel New Orleans.

**OPERATING INCOME**

|                                                            | OPERATING  INCOME (in thousands) |   |
|-----------------------------------------------------------------|---------------------------------------|--------|
|                                                            |                                  |
|                                                            |                                       |   |
|                                                            | 2001                                  |   | 2000 |   |
|                                                            |                                       |   |  |   |
| Sonesta Beach Resort  Anguilla, BWI                             | $                                     | (101   | ) | $ | (1,139 | ) |
| Sonesta Beach Resort  Key Biscayne                              | 2,289                                 |   | 3,722 |   |
| Royal Sonesta Hotel  Boston (Cambridge)                         | 2,108                                 |   | 3,117 |   |
| Royal Sonesta Hotel  New Orleans                                | 2,595                                 |   | 2,199 |   |
|                                                            |                                       |   |  |   |
| Operating income from  hotels after management and service fees | 6,891                                 |   | 7,899 |   |
| Management activities  and other                                | (990                                  | )      | (204 | ) |
|                                                            |                                       |   |  |   |
|                                                            | Operating income                      | $      | 5,901 |   | $ | 7,695 |   |
|                                                            |                                       |   |  |   |
|                                                                 |                                       |        |  |  |  |  |  |

 

Operatingincome for the six-month period ended June 30, 2001 was $5,901,000, compared tooperating income of $7,695,000 in 2000, a decrease of approximately $1,794,000.

Sonesta Beach Resort Anguilla had anoperating loss of $101,000 during the first 6 months of 2001, compared to anoperating loss of $1,139,000 during the same period in 2000, when the hotel wasclosed until February 10, to repair damage sustained by Hurricane Lenny inNovember 1999.   Operating income atSonesta Beach Resort Key Biscayne decreased by $1,433,000 to $2,289,000 duringthe first half of 2001 compared to a year ago.    Revenues increased $465,000, but expenses increased $1,898,000compared to 2000, mainly due to increased cost and operating expenses of$786,000 due to higher labor costs and utility expenses, increased deprecationof $303,000 as a result of major refurbishments, increased property insuranceexpense, increased rental expense from the temporary rental of office space dueto renovations at the hotel, and increases in real estate taxes and maintenancecosts.    Royal Sonesta Hotel Boston(Cambridge) had a decrease in operating income during the first six months of2001 of $1,009,000 compared to 2000.    Revenues decreased by $679,000, and expenses rose by $330,000 (a 3%increase compared to 2000), as a result of increased cost and operatingexpenses due to higher labor costs and utility expenses, and the use of higherquality operating equipment and supplies.    Royal Sonesta Hotel New Orleans increased operating income during thefirst six months of 2001 compared to last year by $396,000 to $2,595,000.  Increased revenues of $748,000 werepartially offset by an increase in expenses of $352,000 (a 2% increase comparedto 2000).  Operating loss frommanagement activities, which is computed after giving effect to management,marketing and service fees to owned and leased hotels, increased by $786,000 to$990,000 during the first six months of 2001 compared to the same period a yearago.    Revenues decreased slightly by$70,000, and expenses increased by $716,000, mainly due to non-recurring costsincurred in 2001 associated with the restructuring of the Company’s designfunction (which has been out-sourced as of April 2001), and due to increasedcost of development activities, and increased corporate sales and marketing costs.

**OTHER INCOME (DEDUCTIONS)**

Interestexpense increased by $931,000 in the first six months of 2001 compared to 2000,due to the additional expense incurred following the refinancing in June 2000of the mortgage loans on the Royal Sonesta Hotel Boston (Cambridge) and SonestaBeach Resort Key Biscayne.   Theproceeds from this refinancing were approximately $27 million.   Interest income increased by $497,000 inthe first six months of 2001 compared to 2000, primarily due to the short terminvestment of the aforementioned refinancing proceeds.

Includedin gain from casualty in the first six months of 2001 is $801,000 from thefinal settlement of a business interruption insurance claim related tohurricane Lenny, which damaged the Sonesta Beach Resort Anguilla in November1999.    The resort was closed forrepairs from November 17, 1999 until February 10, 2000.  Included in the first six months of 2000 wasa gain from casualty of $950,000, which represented advance payments receivedlast year against the same business interruption claim.

**SECOND QUARTER 2001 COMPARED TO 2000**

**REVENUES**

|                                            | TOTAL  REVENUES   (in thousands) |
|-------------------------------------------------|----------------------------------|
|                                            |                                  |
|                                            | NO.  OF ROOMS                    |   | 2001 |   | 2000 |
|                                            |                                  |   |  |   |  |
| Sonesta Beach Resort  Anguilla, BWI             | 100                              |   | $ | 1,119 |   | $ | 1,125 |
| Sonesta Beach Resort  Key Biscayne              | 300                              |   | 7,848 |   | 7,635 |
| Royal Sonesta Hotel  Boston (Cambridge)         | 400                              |   | 8,445 |   | 9,100 |
| Royal Sonesta Hotel  New Orleans                | 500                              |   | 9,907 |   | 9,262 |
| Management and service  fees and other revenues |                             |   | 1,313 |   | 1,558 |
|                                            |                             |   |  |   |  |
|                                            | Total revenues                   |   |   | $ | 28,632 |   | $ | 28,680 |
|                                            |                             |   |   |  |   |  |
|                                                 |                                  |  |  |  |  |  |  |  |  |

Total revenues for thethree month period ended June 30, 2001 were $28,632,000 compared to $28,680,000in 2000, a decrease of approximately $48,000.

Second quarter revenues at Sonesta BeachResort Anguilla remained virtually the same.   A slight increase in rooms revenues due to a 4% increase in room revenueper available room (“REVPAR”) was offset by decreased food and beveragerevenues.    Sonesta Beach Resort KeyBiscayne reported a modest increase in revenues of $213,000 in the secondquarter compared to last year.   Roomsrevenues increased marginally due to a 2% increase in REVPAR, as higher roomrates achieved were only partially offset by lower occupancies.   In addition, the resort achieved higherrevenues from the newly built Spa, which opened in April 2001. Royal SonestaHotel Boston (Cambridge) experienced a 7% decrease in revenues in the 2001second quarter compared to last year.  Lower demand in Boston and Cambridge, primarily from corporate business,resulted in decreases in revenues  thisquarter.  At Royal Sonesta Boston(Cambridge), REVPAR decreased 8% compared to the 2000 quarter, almost entirelydue to lower occupancy.   The hotel alsoexperienced decreased telephone revenues, due to lower occupancies and due toincreased use of personal cell phones by hotel guests, which is a continuingtrend in our domestic hotels.   RoyalSonesta New Orleans had a favorable 2001 second quarter, and increased revenuesby 7% from $9,262,000 in the 2000 second quarter to $9,907,000 during the 2001quarter.    This was almost entirely dueto an 8% increase in REVPAR, both from increased occupancy levels as well as aslightly higher average room rate.    Inthe 2001 second quarter, this increase in rooms demand came mainly from thetransient market segment.   Revenuesfrom management activities decreased by $245,000 in the 2001 second quartercompared to a year ago, mainly due to the collection in the 2000 quarter ofunrecorded fees and expenses from an Orlando, Florida hotel, which the Companyoperated previously under a management agreement.

**OPERATING INCOME**

|                                                            | OPERATING  INCOME   (in thousands) |   |
|-----------------------------------------------------------------|------------------------------------|--------|
|                                                            |                                    |   |
|                                                            | 2001                               |   | 2000 |   |
|                                                            |                                    |   |  |   |
| Sonesta Beach Resort  Anguilla, BWI                             | $                                  | (391   | ) | $ | (409 | ) |
| Sonesta Beach Resort  Key Biscayne                              | 19                                 |   | 1,021 |   |
| Royal Sonesta Hotel  Boston (Cambridge)                         | 2,145                              |   | 2,771 |   |
| Royal Sonesta Hotel  New Orleans                                | 1,261                              |   | 978 |   |
|                                                            |                                    |   |  |   |
| Operating income from  hotels after management and service fees | 3,034                              |   | 4,361 |   |
| Management activities  and other                                | (396                               | )      | (6 | ) |
|                                                            |                                    |   |  |   |
| Operating income                                                | $                                  | 2,638  |   | $ | 4,355 |   |
|                                                            |                                    |   |  |   |

Operating income for the second quarterof 2001 was $2,638,000, compared to operating income of $4,355,000 in 2000, adecrease of approximately $1,717,000.

Operatingloss during the second quarter of 2001 at Sonesta Beach Resort Anguilla was$391,000, which was an $18,000 decrease compared to 2000     Sonesta Beach Resort Key Biscayneexperienced a decrease in operating income from $1,021,000 during the secondquarter of 2000 to $19,000 in the 2001 quarter.   Expenses increased by $1,215,000, which exceeded the modest increasein revenues of $213,000.  The expenseincrease resulted from increased cost and operating expense from higher laborand energy costs, higher property insurance and real estate tax expense,increased depreciation expense due to the major refurbishments at the resort,increased maintenance expenses, and a non-recurring increase in the cost ofrentals, as the hotel has leased temporary office space while renovating thehotel.   Royal Sonesta Hotel Boston(Cambridge) reported a decrease in operating income from $2,771,000 in thesecond quarter of 2000 to $2,145,000 during the second quarter of 2001.  Revenues during the second quarter of 2001decreased by $655,000, while expenses during the second quarter decreased by$29,000 compared to last year, which was caused by lower maintenance andworkers compensation insurance expense, which helped to offset increasedutility costs.   Second quarteroperating income at Royal Sonesta Hotel New Orleans increased by $283,000 to$1,261,000 in 2001.   Revenues in the2001 second quarter rose by $645,000, and expenses increased by $362,000 (a 4%increase compared to 2000), mainly due to increased cost and operating andmaintenance expense.   Operating lossfrom management activities, which is computed after giving effect tomanagement, marketing and service fees to owned and leased hotels, increasedfrom $6,000 in the second quarter of 2000 to $396,000 in the second quarter of2001.   Revenues decreased by $245,000during the second quarter, and expenses increased by $145,000, due to increasedcorporate sales and marketing costs, and higher costs related to the Company’sdevelopment activities.

 

**OTHER INCOME (DEDUCTIONS)**

Interest expense increased by $324,000 inthe second quarter of 2001 compared to 2000, due to the additional interestexpense incurred following the refinancing in June 2000 of the mortgage loanson the Royal Sonesta Hotel Boston (Cambridge) and Sonesta Beach Resort KeyBiscayne.     Interest income increasedby $108,000 in the 2001 second quarter compared to last year, due to the shortterm investment of the refinancing proceeds, which were approximately $27million.

Included in the second quarter of 2000was a gain from casualty of $450,000, which represented advance paymentsreceived during the quarter against a business interruption claim related toHurricane Lenny, which damaged the Sonesta Beach Resort Anguilla in November1999.

**FEDERAL, FOREIGN AND STATE INCOME TAXES**

The provision for incometaxes during the first six months of 2001 was higher than the statutory ratedue to state taxes provided on the Company’s income from its operations inLouisiana and Florida.

**LIQUIDITY AND CAPITAL RESOURCES**

The Company had cash andcash equivalents of approximately $27,160,000 at June 30, 2001.

During the first sixmonths of 2001, the Company advanced $1,723,000 to the owner of the SonestaHotel & Suites Coconut Grove, Miami, which is a condo hotel that isexpected to open in the spring of 2002.   Under its agreements, the Company will loan $5,000,000 to the project tofund part of the construction and furniture, fixtures and equipment costs, andfor pre-opening costs and working capital.

The Company has decidedto redeem all of its outstanding preferred stock on August 15, 2001, at theredemption price of $27.50 per share.  The total amount required to retire this preferred stock will be$294,000.

In the second quarter of2001 the Company extended the maturity date of its mortgage loan on SonestaBeach Resort Anguilla by two years to December 31, 2003.     On the balance sheet at December 31,2000, this loan was reflected as a short-term liability, based on its originalmaturity date of December 31, 2001 (see also Note 3—Borrowing Arrangements).

The Company believesthat its present cash balances will be more than adequate to meet all of itsobligations.

**PART I– Item 3**

 

**QUANTITATIVE AND QUALITATIVEDISCLOSURE OF MARKET RISK**

The Company is exposed to market riskfrom changes in interest rates and foreign exchange rates.    The Company uses fixed rate debt and debtwith variable interest rates to finance the ownership of its properties.   The table that follows summarizes theCompany’s fixed and variable rate debt obligations outstanding at June 30,2001.    This information should be readin conjunction with Note 3—Borrowing Arrangements.

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

 

|                  | YEAR |   |   |   |   |   |   |
|-----------------------|------|--------|--------|--------|--------|--------|--------|
|                  |      |   |   |   |   |   |   |
|                  | 2001 |   | 2002   |   | 2003   |   | 2004   |   | 2005 |   | Thereafter |   | Total |   | Fair  Value |
|                  |      |   |        |   |        |   |        |   |  |   |  |   |  |   |  |
| Fixed rate            | $    | 878    |   | $      | 867    |   | $      | 946 |   | $ | 1,014 |   | $ | 1,124 |   | $ | 66,958 |   | $ | 71,787 |   | $ | 71,788 |
| Average interest rate | 8.6  | %      | 8.6    | %      | 8.6    | %      | 8.6    | % | 8.6 | % | 8.6 | % |   |   |   |
| Variable rate         | 272  |   | 272    |   | 4,080  |   | --     |   | -- |   | -- |   | 4,624 |   | 4,624 |
| Average interest rate | 6.3  | %      | 6.3    | %      | 6.3    | %      | --     |   | -- |   | -- |   |   |   |   |
|                       |      |        |        |        |        |        |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

**PART II – Item 4**

 

**SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

The Annual Meeting of Shareholders ofSonesta International Hotels Corporation was held on May 14, 2001.    All nominees for directors wereelected.   The results of the votes withregard to the appointment of the Company’s independent auditors as well as theelection of common stock and preferred stock directors are as follows:

|                                                          |      | **VOTES CAST** |
|---------------------------------------------------------------|-----------|----------------|
| **MANAGEMENT  PROPOSAL**                                      |      | **FOR**        | **AGAINST** | **ABSTAIN** |
| ****                                                          |      | ****           | **** | **** |
|                                                          |      |           |   |   |
| Approval  of the appointment of independent auditors for 2001 | 3,072,775 | 4,032          | 3,000 |

 

**ELECTION OF COMMON STOCK DIRECTORS**

 

| **DIRECTOR**        |      | **VOTES RECEIVED** |   | **VOTES WITHHELD** |
|---------------------|-----------|--------------------|--------|--------------------|
| ****                |      | ****               |   | ****               |
| George S. Abrams    | 3,066,695 |               |   | 13,112             |   |
| Vernon R. Alden     | 2,926,664 |               |   | 153,143            |   |
| Joseph L. Bower     | 3,065,527 |               |   | 14,280             |   |
| Peter J. Sonnabend  | 3,066,559 |               |   | 13,248             |   |
| Roger P. Sonnabend  | 3,050,983 |               |   | 28,824             |   |
| Stephanie Sonnabend | 3,066,515 |               |   | 13,292             |   |
| Jean C. Tempel      | 3,066,695 |               |   | 13,112             |   |

 

**ELECTION OF PREFERRED STOCK DIRECTORS**

 

| **DIRECTOR**       |   | **VOTES RECEIVED** |   | **VOTES WITHHELD** |
|--------------------|--------|--------------------|--------|--------------------|
| ****               |   | ****               |   | ****               |
| Paul  Sonnabend    |   | 7,744              |   | 220                |
| Stephen  Sonnabend |   | 7,744              |   | 220                |

 

**PART II – Other Information**

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

Not applicable during the quarter endedJune 30, 2001

 

**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 VAN RIEL                                                                |   |   |   |
|   |                                                                                                                                                                                        |                                           |                                                                             |   |   |
|   |                                                                                                                                                                                        |                                      | Boy  van Riel                                                                    |   |   |   |
|   |                                                                                                                                                                                        |                                      | Vice  President and Treasurer                                                    |   |   |   |
|   |                                                                                                                                                                                        |                                      |                                                                             |   |   |   |
|   |                                                                                                                                                                                        |                                      | (Authorized  to sign on behalf of the Registrant as Principal Financial Officer) |   |   |   |
|   |                                                                                                                                                                                        |                                      |                                                                             |   |   |
|   |                                                                                                                                                                                        | Date:  August 10, 2001               |                                                                             |   |   |
|        |                                                                                                                                                                                             |                                           |                                                                                  |  |  |  |  |  |  |