UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly Report Pursuant to Section 13 or 15(d) of the
	Securities Exchange Act of 1934
For the quarterly period ended September 30, 2006 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    1-16017

ORIENT-EXPRESS HOTELS LTD.

(Exact name of registrant as specified in its charter)

 

441–295–2244

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  (See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act).

Large Accelerated Filer x Accelerated Filer o Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

As of October 31, 2006, 42,148,350 Class A common shares and 18,044,478 Class B common shares of Orient-Express Hotels Ltd. were outstanding. All of the Class B shares are owned by a subsidiary of Orient-Express Hotels Ltd.

PART I – FINANCIAL INFORMATION

ITEM 1.  Financial Statements

Orient-Express Hotels Ltd. and Subsidiaries

Condensed Consolidated Balance Sheets (unaudited)

		September 30, 2006			December 31, 2005
		(Dollars in thousands)
Assets
Cash and cash equivalents		$	105,692		$	38,397
Accounts receivable, net of allowances of $1,344 and $980		67,581			59,061
Due from related parties		19,157			17,549
Prepaid expenses and other		20,234			13,061
Inventories		33,298			29,636
Real estate assets		22,366			12,149
Total current assets		268,328			169,853
Property, plant and equipment, net of accumulated depreciation of $196,181 and $164,814		1,138,391			1,017,175
Investments		127,330			129,681
Goodwill and other intangible assets		102,368			62,867
Other assets		38,795			35,986
		$	1,675,212		$	1,415,562
Liabilities and Shareholders’ Equity
Working capital facilities		$	28,987		$	47,108
Accounts payable		26,184			22,680
Due to related parties		3,296			7,374
Accrued liabilities		65,698			43,545
Deferred revenue		29,413			19,339
Current portion of long-term debt and capital leases		100,394			72,151
Total current liabilities		253,972			212,197
Long-term debt and obligations under capital leases		554,992			496,156
Other liabilities		3,331			—
Deferred income taxes		39,820			29,656
		852,115			738,009
Minority interest		1,774			4,153
Shareholders’ equity:
Preferred shares $0.01 par value (30,000,000 shares authorized, issued nil)		—			—
Class A common shares $0.01 par value (120,000,000 shares authorized):
Issued–42,147,350 (2005–39,399,750)		418			393
Class B common shares $0.01 par value (120,000,000 shares authorized):
Issued–18,044,478 (2005–18,044,478)		181			181
Additional paid-in capital		508,630			404,923
Retained earnings		343,667			314,207
Accumulated other comprehensive loss		(31,392		)	(46,123		)
Less: reduction due to Class B common shares owned by a subsidiary – 18,044,478		(181		)	(181		)
Total shareholders’ equity		821,323			673,400
Commitments and contingencies
		$	1,675,212		$	1,415,562

 

See notes to condensed consolidated financial statements.

2

---

Orient-Express Hotels Ltd. and Subsidiaries

Statements of Condensed Consolidated Operations (unaudited)

Three months ended September 30,		2006			2005
(Dollars in thousands, except per share amounts)
Revenue		$	144,764		$	127,733
Expenses:
Depreciation and amortization		8,960			8,598
Operating		62,657			58,146
Selling, general and administrative		38,367			34,761
Total expenses		109,984			101,505
Earnings from operations before net finance costs		34,780			26,228
Interest expense, net		(12,117		)	(7,896		)
Foreign currency, net		(2,752		)	77
Net finance costs		(14,869		)	(7,819		)
Earnings before income taxes		19,911			18,409
Provision for income taxes		3,615			3,025
Earnings before earnings from unconsolidated companies		16,296			15,384
Earnings from unconsolidated companies, net of tax		3,925			4,099
Net earnings on class A and class B common shares		$	20,221		$	19,483
Net earnings per class A and class B common share:
Basic		$	0.49		$	0.50
Diluted		$	0.48		$	0.49
Dividends per class A and class B common share		$	0.025		$	0.025

 

See notes to condensed consolidated financial statements.

3

---

Orient-Express Hotels Ltd. and Subsidiaries

Statements of Condensed Consolidated Operations (unaudited)

Nine months ended September 30,		2006			2005
(Dollars in thousands, except per share amounts)
Revenue		$	358,720		$	334,474
Expenses:
Depreciation and amortization		26,268			25,048
Operating		165,658			157,826
Selling, general and administrative		107,180			101,159
Total expenses		299,106			284,033
Earnings from operations before net finance costs		59,614			50,441
Gain on sale of investment		6,619			—
Interest expense, net		(32,462		)	(21,701		)
Foreign currency, net		(5,548		)	4,152
Net finance costs		(38,010		)	(17,549		)
Earnings before income taxes		28,223			32,892
Provision for income taxes		4,818			6,147
Earnings before earnings from unconsolidated companies		23,405			26,745
Earnings from unconsolidated companies, net of tax		9,077			9,638
Net earnings on class A and class B common shares		$	32,482		$	36,383
Net earnings per class A and class B common share:
Basic		$	0.81		$	0.96
Diluted		$	0.80		$	0.95
Dividends per class A and class B common share		$	0.075		$	0.075

 

See notes to condensed consolidated financial statements.

4

---

Orient-Express Hotels Ltd. and Subsidiaries

Statements of Condensed Consolidated Cash Flows (unaudited)

 

Nine months ended September 30,		2006			2005
		(Dollars in thousands)
Cash flows from operating activities:
Net earnings		$	32,482		$	36,383
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		26,268			22,827
Amortization and write-off of finance costs		3,839			2,221
Undistributed earnings of affiliates		(5,366		)	(2,537		)
Stock-based compensation		660			1,080
Change in deferred tax		(2,184		)	1,020
Gain from sale of investments and fixed assets		(6,619		)	(3,499		)
Other non-cash items		7,123			41
Change in assets and liabilities net of effects from acquisition of subsidiaries:
Increase in receivables, prepaid expenses and other		(8,618		)	(23,205		)
Increase in inventories		(2,617		)	(4,081		)
Increase in real estate assets held for sale		(4,217		)	—
Increase in payables, accrued liabilities and deferred revenue		18,708			26,709
Dividends received from affiliates		—			624
Total adjustments		26,977			21,200
Net cash provided by operating activities		59,459			57,583
Cash flows from investing activities:
Capital expenditures		(83,489		)	(102,831		)
Acquisitions and investments, net of cash acquired		(42,908		)	(99,713		)
Proceeds from sale of fixed assets and other		9,499			3,613
Net cash used in investing activities		(116,898		)	(198,931		)
Cash flows from financing activities:
Net repayment of working capital facilities and redrawable loans		(19,824		)	(96,605		)
Issuance of common shares		99,350			121,898
Stock options exercised		3,722			898
Issuance of long-term debt		360,159			116,834
Principal payments under long-term debt		(316,106		)	(28,796		)
Payment of common share dividends		(3,022		)	(2,823		)
Net cash provided by financing activities		124,279			111,406
Effect of exchange rate changes on cash and cash equivalents		455			(1,598		)
Net increase/(decrease) in cash and cash equivalents		67,295			(31,540		)
Cash and cash equivalents at beginning of period		38,397			85,610
Cash and cash equivalents at end of period		$	105,692		$	54,070

 

See notes to condensed consolidated financial statements.

5

---

Orient-Express Hotels Ltd. and Subsidiaries

Statements of Condensed Consolidated Shareholders’ Equity (unaudited)

 

(Dollars in thousands)		Preferred Shares at Par Value			Class A  Common  Shares  at Par Value			Class B  Common  Shares  at Par  Value			Additional Paid-In Capital			Retained  Earnings			Accumulated Other Comprehensive Loss			Common Shares  Owned by Subsidiary			Total Comprehensive  Income/(Loss)
Balance, January 1, 2006		$	—		$	393		$	181		$	404,923		$	314,207		$	(46,123	)	$	(181	)
Stock-based compensation		—			—			—			660			—			—			—
Stock options exercised		—			—			—			3,722			—			—			—
Dividends on common shares		—			—			—			—			(3,022		)	—			—
Issuance of Class A common shares in public offering, net of issuance costs		—			25			—			99,325			—			—			—
Comprehensive loss:
Net earnings on common shares for the period		—			—			—			—			32,482			—			—			$	32,482
Other comprehensive income		—			—			—			—			—			14,731			—			14,731
																							$	47,213
Balance, September 30, 2006		$	—		$	418		$	181		$	508,630		$	343,667		$	(31,392	)	$	(181	)

 

Balance, January 1, 2005		$	—		$	318		$	205		$	280,212		$	277,281		$	(12,845	)	$	(181	)
Stock-based compensation		—			—			—			1,080			—			—			—
Stock options exercised		—			—			—			898			—			—			—
Dividends on common shares		—			—			—			—			(2,823		)	—			—
Issuance of Class A common shares in public offering, net of issuance costs		—			50			—			121,848			—			—			—
Comprehensive loss:
Net earnings on common shares for the period		—			—			—			—			36,383			—			—			$	36,383
Other comprehensive income		—			—			—			—			—			(25,494		)	—			(25,494		)
																							$	(10,889	)
Balance, September 30, 2005		$	—		$	368		$	205		$	404,038		$	310,841		$	(38,339	)	$	(181	)

 

See notes to condensed consolidated financial statements.

6

---

Orient-Express Hotels Ltd. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

1.             Basis of financial statement presentation

In this report Orient-Express Hotels Ltd. is referred to as the “Company”, and the Company and its subsidiaries are referred to collectively as “OEH”.

(a)       Accounting policies

For a description of significant accounting policies and basis of presentation, see Notes 1 and 15 to the consolidated financial statements in the Company’s 2005 Form 10-K annual report.  As of September 30, 2006, these significant accounting policies have not changed from December 31, 2005.

The condensed consolidated financial statements are unaudited  and have been prepared following the rules and regulations of the U.S. Securities and Exchange Commission.

In the opinion of management, all adjustments necessary for a fair statement of the results of operations for the three and nine months ended September 30, 2006 and 2005, which are all of a normal recurring nature, have been reflected in the information provided.  Due to the seasonal nature of OEH’s business, operating results for the interim period are not necessarily indicative of a full year’s operating results.

(b)       Net earnings per share

The number of shares used in computing basic and diluted earnings per share was as follows (in thousands):

Three months ended September 30,		2006		2005
Basic		41,688		39,335
Effect of dilution		279		390
Diluted		41,967		39,725

 

Nine months ended September 30,		2006		2005
Basic		40,200		37,819
Effect of dilution		284		339
Diluted		40,484		38,158

 

7

---

For the three months ended September 30, 2006 and 2005, the anti-dilutive effect of stock options on 1,154 and nil class A common shares, respectively, was excluded from the computation of diluted losses per share.  For the nine months ended September 30, 2006 and 2005, the anti-dilutive effect of stock options on 232 and 2,553 class A common shares, respectively, was excluded from the computation of diluted earnings per share.

(c)        Dividends

On January 5, 2006, the Company declared a dividend of $0.025 per common share payable February 4, 2006 to shareholders of record January 20, 2006.

On April 5, 2006, the Company declared a dividend of $0.025 per common share payable May 4, 2006 to shareholders of record April 20, 2006.

On July 5, 2006, the Company declared a dividend of $0.025 per common share payable August 4, 2006 to shareholders of record July  20, 2006.

(d)       Earnings from unconsolidated companies

Earnings from unconsolidated companies include OEH’s share of the net earnings of its equity investments as well as interest income related to loans and advances to the equity investees amounting to $2,777,000 and $2,482,000 for the three months ended September 30, 2006 and 2005, respectively, and $7,871,000 and $7,150,000 for the nine months ended September 30, 2006 and 2005, respectively.

(e)        Reclassifications

Certain items in 2005 have been reclassified to conform to the 2006 presentation.

2.              Acquisitions

Pansea Hotels Group

On February 2, 2004, OEH entered into an agreement with the Pansea Hotels group, the owner of interests in six deluxe hotels in Southeast Asia, including 50% of the Napasai Hotel in Koh Samui, Thailand.  Under this agreement, OEH was to provide a maximum of $8,000,000 in loans to the hotel holding company which would be convertible after three years into approximately 25% of the holding company’s shares.  OEH was not managing the hotels but was marketing them along with its other properties.

8

---

OEH decided to accelerate the acquisition of the Pansea Hotels group by acquiring the 50% of the Napasai hotel-owning company shares not owned by Pansea in June 2006 for $10,500,000 cash consideration.  The rest of the Pansea Hotels group was acquired on July 21, 2006 for a total cash consideration of $33,362,000 (including the original $8,000,000 loan) and assumption of sundry debts owed by the Pansea Hotels group to third parties of $15,524,000.

This strategic acquisition enables OEH to expand its position in the Southeast Asian market.

The acquisition of the Pansea Hotels group has been accounted for a purchase in accordance with SFAS No. 141, “Business Combinations”.  OEH allocated the purchase price for the acquisition based on fair value of assets acquired and liabilities assumed, which is defined as the amount at which an asset or liability could be exchanged in a current transaction  between knowledgeable, unrelated willing parties when neither party is acting under compulsion.  The following table summarizes the provisional estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (dollars in thousands):

		September 30, 2006
Current assets		$	15,082
Property, plant and equipment		29,501
Goodwill and other intangible assets		28,263
Total assets acquired		72,846
Current liabilities		(5,912		)
Liabilities to minority shareholders		(7,818		)
Third party debt		(6,115		)
Other long-term liabilities		(3,340		)
Deferred income taxes		(5,799		)
Total liabilities assumed		(28,984		)
Net assets acquired		$	43,862
Paid in July for the rest of Pansea		$	33,362
Paid in June for 50% of Napasai		10,500
Total cash consideration		$	43,862

 

The net assets of Pansea Hotels group have been fair valued based on the estimated market values of the freehold and leasehold properties.  After fair valuing all other assets and liabilities, goodwill of $11,070,000 has been recorded of which $nil will be deductible as operating expenses for tax purposes.  Included in the goodwill is a debit balance of

9

---

$2,230,000 for minority interest relating to losses carried forward as at the date of acquisition.  In the future periods, minority interest share of profits will be credited against goodwill to the extent of the previously recorded minority interest losses.  The provisional fair values may be adjusted within one year of the acquisition date of Pansea Hotels group, as the fair values of certain assets and liabilities remain to be finalized.

The results of the operation of Pansea Hotels group have been included in the consolidated financial statements of OEH from July 21, 2006.

The proforma results of operations data presented below assume that the Pansea Hotels group acquisition had been made at the beginning of 2005.  The proforma data are presented for informational purposes only and are not necessarily indicative of the results of future operations, nor of the actual results that would have been achieved had the acquisition taken place at the beginning of 2005 (dollars in thousands):

Nine months ended September 30,		2006			2005
		(Proforma unaudited)
Revenue		$	364,724		$	340,462
Net earnings		$	30,279		$	35,704
Earnings per share:
Basic		$	0.76		$	0.94
Diluted		$	0.75		$	0.93

 

Casa de Sierra Nevada

Effective February 8, 2006, OEH acquired a 75% interest in Casa de Sierra Nevada, a 33 room deluxe hotel in San Miguel de Allende, Mexico.   The total purchase price, including acquisition costs, was $8,800,000 paid in cash.  The acquisition included adjacent buildings and land.

In accordance with the shareholders’ agreement, OEH will purchase the remaining 25% interest as follows:  5% will be purchased in January 2007 for a cash consideration of $520,000; 5% will be purchased in January 2009 for a cash consideration equal to a proportion of ten times the previous 12 months net operating income of the hotel, less its outstanding debt; and the remaining 15% will be purchased in January 2010 for a cash consideration calculated on the same basis.

10

---

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (dollars in thousands):

		September 30, 2006
Property, plant and equipment		$	8,600
Goodwill and other intangible assets		3,770
Total assets acquired		12,370
Current liabilities		(200		)
Other long-term liabilities (deferred consideration)		(2,850		)
Deferred income taxes		(520		)
Total liabilities assumed		(3,570		)
Net assets acquired		$	8,800

 

The net assets of Casa de Sierra Nevada have been fair valued based on the estimated market value of the buildings.  After fair valuing all other assets and liabilities, goodwill of $3,510,000 has been recorded of which $ nil will be deductible as operating expenses for tax purposes.  The provisional fair values may be adjusted within one year of the acquisition date of Casa de Sierra Nevada, as the valuation of certain forward contracts remains to be finalized.

The acquisition of Casa de Sierra Nevada has been accounted for as a purchase in accordance with SFAS No. 141, “Business Combinations”.  The results of the operation have been included in the consolidated financial statements of OEH from February 8, 2006.

Guidance in SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, and EITF 00-4, “Majority owner’s accounting for a transaction in the shares of a consolidated subsidiary and a derivative indexed to the minority interest in that subsidiary”, has been applied to account for the forward contracts for acquisition of the remaining 25% interest in subsequent years.  The liability has been recorded at the fair value of the deferred consideration and the minority interest has been reduced accordingly.

The proforma results of operations data presented below assume that the Casa de Sierra Nevada acquisition had been made at the beginning of 2005.  The proforma data are presented for informational purposes only and are not necessarily indicative of the results of future operations, nor of the actual results

11

that would have been achieved had the acquisition taken place at the beginning of 2005 (dollars in thousands):

Nine months ended September 30,		2006			2005
		(Proforma unaudited)
Revenue		$	358,943		$	336,195
Net earnings		$	32,490		$	36,330
Earnings per share:
Basic		$	0.81		$	0.96
Diluted		$	0.80		$	0.95

 

Maroma Resort and Spa

Effective January 1, 2006, OEH purchased the remaining 25% interest in Maroma Resort and Spa for a cash consideration of $5,400,000 bringing its interest to 100%.  A deferred tax liability of $1,853,000 has been recorded on the acquisition.  Goodwill of $4,728,000 has been recognized on this acquisition.

3.             Investments

Sale of Harry’s Bar

On June 12, 2006, OEH sold its 49% interest in Harry’s Bar in London, England, for a cash consideration of $9,499,000.  The sale of the investment resulted in a gain of $6,619,000, upon which a tax charge of $3,325,000 was recorded.

Unconsolidated companies

Summarized financial data for OEH’s unconsolidated companies for the periods during which the investments were held by OEH are as follows (dollars in thousands):

12

---

 

		September 30, 2006			December 31, 2005
Current assets		$	47,852		$	45,390
Property, plant and equipment, net		359,832			344,475
Other assets		6,561			5,726
Total assets		$	414,245		$	395,591
Current liabilities		$	55,722		$	50,150
Long-term debt		226,581			203,520
Other liabilities		82,399			90,161
Total shareholders’ equity		49,543			51,760
Total liabilities and shareholders’ equity		$	414,245		$	395,591

 

Three months ended September 30,		2006			2005
Revenue		$	43,702		$	43,500
Earnings from operations before net finance costs		$	8,760		$	6,930
Net earnings		$	5,090		$	448

 

Nine months ended September 30,		2006			2005
Revenue		$	127,279		$	77,314
Earnings from operations before net finance costs		$	21,223		$	9,250
Net earnings/(losses)		$	2,010		$	(2,783	)

 

4.             Property, plant and equipment

The major classes of property, plant and equipment are as follows (dollars in thousands):

		September 30, 2006			December 31, 2005
Freehold and leased land and buildings		$	967,783		$	858,350
Machinery and equipment		197,347			156,780
Fixtures, fittings and office equipment		170,501			148,346
River cruiseship and canalboats		18,644			18,513
		1,354,275			1,181,989
Less: accumulated depreciation		(215,884		)	(164,814		)
		$	1,138,391		$	1,017,175

 

13

---

The major classes of assets under capital leases included above are as follows (dollars in thousands):

		September 30, 2006			December 31, 2005
Land and buildings		$	15,554		$	14,803
Machinery and equipment		2,072			2,067
Fixtures, fittings and office equipment		1,778			1,817
		19,404			18,687
Less: accumulated depreciation		(2,072		)	(1,892		)
		$	17,332		$	16,795

 

5.                                      Goodwill and other intangible assets

OEH’s goodwill consists of $788,000 related to the trains and cruises reporting segment and $78,027,000 related to the hotels and restaurants reporting segment, of which $28,812,000 relates to the acquisition of the Grand Hotel Europe, $3,510,000 relates to the estimated purchase price allocation of Casa de Sierra Nevada, $6,822,000 relates to goodwill arising on the acquisition of Maroma, and $11,070,000 relates to the estimated purchase price allocation of the Pansea Hotels group.  Other intangible assets consist of the value of the Grand Hotel Europe tradename of $7,100,000, the estimated purchase price allocation of $260,000 for the Casa de Sierra Nevada tradename, and a lease intangible asset acquired as part of the acquisition of the Pansea Hotels group of $17,193,000.

14

---

6.                                      Long-term debt and obligations under capital lease

Long-term debt consists of the following (dollars in thousands):

		September 30, 2006			December 31, 2005
Loans from banks collateralized by property, plant and equipment payable over periods of 1 to 11 years, with a weighted average interest rate of 5.66% and 5.51%, respectively, primarily based on LIBOR		$	635,165		$	546,593
Loan secured by river cruiseship, payable over 3 years, with a weighted interest rate of 6.54% and 5.65%, respectively, based on LIBOR		3,500			4,500
Obligations under capital lease		16,721			17,214
		655,386			568,307
Less: current portion		100,394			72,151
		$	554,992		$	496,156

 

Certain credit agreements of OEH have restrictive covenants.  At September 30, 2006, OEH was in compliance with these covenants, including a minimum consolidated net worth test and a minimum consolidated interest coverage test as defined under a bank-syndicated $241,000,000 loan facility. OEH does not currently have any covenants in its loan agreements which limit the payment of dividends.

On July 20, 2006, OEH borrowed $241,000,000 (€190,000,000) under a bank-syndicated loan facility totalling $317,000,000 (€250,000,000) secured by four of OEH’s Italian hotels, its two Portuguese hotels, and its properties in the UK and France. The initial drawdown was used to refinance an existing $254,000,000 (€201,000,000) loan facility. On repayment of this existing loan facility outstanding deferred finance costs amounting to $1,300,000 were written off.

The following is a summary of the aggregate maturities of long-term debt, including obligations under capital lease, at September 30, 2006 (dollars in thousands):

Year ending December 31,
2007		$	9,798
2008		89,115
2009		42,668
2010		50,376
2011 and thereafter		363,035
		$	554,992

 

15

---

7.             Other liabilities

Other liabilities consists of $2,500,000 assumed in the Pansea Hotels group acquisition, and $831,000 being the estimated liability on the interest rate swap agreement entered into with banks as part of the refinancing discussed in Note 14.

8.             Income taxes

The Company is incorporated in Bermuda, which does not impose an income tax.  OEH’s effective tax rate is entirely due to the income taxes imposed by jurisdictions in which OEH conducts business other than Bermuda.

OEH recorded a tax provision for the three months ended September 30, 2006 of $3,615,000, compared to a provision of $3,025,000 for the corresponding period in 2005.  The 2006 provision includes deferred tax benefits totalling $5,829,000 that arose on the reduction of valuation allowances established in respect of tax losses in Portugal and Australia, after OEH concluded that it was more likely than not that these tax losses would be utilized in the future.

Cumulatively, OEH recorded a tax provision for the nine months ended September 30, 2006 of $4,818,000, compared to a provision of $6,147,000 for the corresponding nine months in 2005.

OEH’s current tax cost for the nine months ended September 30, 2006 was $8,245,000, compared to a cost of $5,127,000 in 2005.  The 2006 cost includes a current tax cost of $2,213,000 arising on the sale of the Harry’s Bar investment.

Earnings from unconsolidated subsidiaries are reported net of tax in the Statements of Condensed Consolidated Operations.  The tax provision applicable to these unconsolidated subsidiaries in the three months ended September 30, 2006 was $1,827,000, compared to a provision of $590,000 in the corresponding period in 2005.  The cumulative tax provision applicable to unconsolidated subsidiaries in the nine months ended September 30, 2006 was $4,164,000 compared to a provision of $1,050,000 in the corresponding period in 2005.

16

---

9.             Pensions

Components of net periodic pension benefit cost were as follows (dollars in thousands):

Three months ended September 30,		2006			2005
Service cost		$	295		$	216
Interest cost		238			171
Expected return on plan assets		(222		)	(129		)
Amortization of net loss		130			61
Net periodic benefit cost		$	441		$	319

 

Nine months ended September 30,		2006			2005
Service cost		$	842		$	670
Interest cost		681			531
Expected return on plan assets		(635		)	(400		)
Amortization of net loss		370			190
Net periodic benefit cost		$	1,258		$	991

 

The Orient-Express Hotels 2003 Pension Scheme has been closed for future accruals.  As of September 30, 2006, $601,500 of contributions had been made to this plan.  OEH anticipates contributing an additional $218,500 to fund this pension plan in 2006 for a total of $820,000.

10.          Supplemental cash flow information

(Dollars in thousands):

Nine months ended September 30,		2006			2005
Cash paid for:
Interest		$	29,789		$	21,488
Income taxes		$	6,949		$	7,141

 

In conjunction with acquisitions (see Note 2) liabilities were assumed as follows (dollars in thousands):

Nine months ended September 30,		2006			2005
Fair value of assets acquired		$	72,846		$	111,492
Cash paid		(43,862		)	(95,000		)
Liabilities assumed		$	28,984		$	16,492

 

17

---

11.          Accumulated other comprehensive loss

The accumulated balances for each component of other comprehensive loss are as follows (dollars in thousands):

		September 30, 2006			December 31, 2005
Foreign currency translation adjustments		$	(31,392	)	$	(46,055	)
Derivative financial instruments		—			(68		)
		$	(31,392	)	$	(46,123	)

 

The components of comprehensive earnings/(loss) are as follows (dollars in thousands):

Nine months ended September 30,		2006			2005
Net earnings on common shares		$	32,482		$	36,383
Foreign currency translation adjustments		14,663			(25,575		)
Change in fair value of derivatives		68			81
Comprehensive earnings/(loss)		$	47,213		$	(10,889	)

 

12.          Commitments

Outstanding contracts to purchase fixed assets were approximately $22,645,000 at September 30, 2006 (December 31, 2005 - $24,341,000).

13.          Information concerning financial reporting for segments and operations in different geographical areas

As reported in the Company’s 2005 Form 10-K annual report, OEH has two reporting segments, (i) hotels and restaurants and (ii) tourist trains and cruises.  Segment performance is evaluated based upon segment net earnings before interest, tax (including tax on earnings from unconsolidated companies), depreciation and amortization (“segment EBITDA”).  Financial information regarding these business segments is as follows, with net finance costs appearing net of capitalized interest and interest and related income (dollars in thousands):

18

---

 

Three months ended September 30,			2006			2005
Revenue:
Hotels and restaurants
Owned hotels	–   Europe		$	72,569		$	62,993
	–   North America		21,545			19,541
	–   Rest of world		26,308			21,725
Hotel management/part ownership interests			2,130			1,974
Restaurants			3,511			3,430
			126,063			109,663
Tourist trains and cruises			18,701			18,070
			$	144,764		$	127,733
Segment EBITDA:
Owned hotels	–   Europe		$	32,484		$	26,878
	–   North America		3,279			3,627
	–   Rest of world		7,201			4,185
Hotel management/part ownership interests			4,721			3,880
Restaurants			(128		)	(165		)
Tourist trains and cruises			7,001			5,967
Central overheads			(5,066		)	(4,856		)
			$	49,492		$	39,516
Segment EBITDA/net earnings reconciliation:
Segment EBITDA			$	49,492		$	39,516
Less:
Depreciation and amortization			8,960			8,598
Interest expense, net			12,117			7,896
Foreign currency, net			2,752			(77		)
Provision for income taxes			3,615			3,025
Share of provision for income taxes of unconsolidated companies			1,827			591
Net earnings			$	20,221		$	19,483

 

Financial information regarding geographic areas based on the location of properties is as follows (dollars in thousands):

Three months ended September 30		2006			2005
Revenue:
Europe		$	90,155		$	80,201
North America		25,628			23,425
Rest of world		28,981			24,107
		$	144,764		$	127,733

 

19

---

 

Nine months ended September 30,			2006			2005
Revenue:
Hotels and restaurants
Owned hotels	–   Europe		$	146,146		$	134,468
	–   North America		67,431			66,473
	–   Rest of world		78,519			67,155
Hotel management/part ownership interests			6,901			6,392
Restaurants			14,350			14,419
			313,347			288,907
Tourist trains and cruises			45,373			45,567
			$	358,720		$	334,474
Depreciation and amortization:
Hotels and restaurants
Owned hotels	–   Europe		$	10,631		$	9,895
	–   North America		5,315			5,382
	–   Rest of world		6,929			6,263
Restaurants			705			642
			23,580			22,182
Tourist trains and cruises			2,688			2,866
			$	26,268		$	25,048
Segment EBITDA:
Owned hotels	–   Europe		$	49,585		$	44,836
	–   North America		14,794			15,121
	–   Rest of world		20,342			14,223
Hotel management/part ownership interests			14,365			12,494
Restaurants			2,461			2,485
Tourist trains and cruises			12,529			11,025
Central overheads			(14,953		)	(14,007		)
Gain on sale of investment			6,619			—
			$	105,742		$	86,177
Segment EBITDA/net earnings reconciliation:
Segment EBITDA			$	105,742		$	86,177
Less:
Depreciation and amortization			26,268			25,048
Interest expense, net			32,462			21,701
Foreign currency, net			5,548			(4,152		)
Provision for income taxes			4,818			6,147
Share of provision for income taxes of unconsolidated companies			4,164			1,050
Net earnings			$	32,482		$	36,383
Earnings from unconsolidated companies, net of tax:
Hotels and restaurants
Hotel management/part ownership interests			$	5,116		$	5,689
Restaurants			191			152
			5,307			5,841
Tourist trains and cruises			3,770			3,797
			$	9,077		$	9,638

 

20

---

 

Nine months ended September 30,			2006			2005
Capital expenditure:
Owned hotels	–   Europe		$	44,813		$	57,414
	–   North America		19,132			21,775
	–   Rest of world		11,433			17,711
Restaurants			1,203			899
Tourist trains and cruises			6,903			5,032
			$	83,489		$	102,831

 

Financial information regarding geographic areas based on the location of properties is as follows (dollars in thousands):

Nine months ended September 30,		2006			2005
Revenue:
Europe		$	187,799		$	176,873
North America		84,157			82,927
Rest of world		86,764			74,674
		$	358,720		$	334,474

 

14.          Derivatives

OEH is exposed to interest rate risk on its floating rate debt, and in September 2006 it entered into interest rate swap agreements for the notional amounts of €75,000,000 ($95,000,000) and €24,700,000 ($31,300,000) that limit such exposure to a fixed rate level.  Although these interest rate swaps economically hedge the interest rate risk, these instruments have not been designated as hedging instruments.

At September 30, 2006 and December 31, 2005, the fair values of the outstanding interest rate swaps were accounted for as other long-term liabilities at $831,000 and $ nil, respectively.

21