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Belmond Ltd. 10-Q 2006

Documents found in this filing:

  1. 10-Q
  2. Ex-31
  3. Ex-32
  4. Ex-32

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)

Bermuda

 

98-0223493

(State or other jurisdiction

 

(I.R.S. Employer

of incorporation or

 

Identification No.)

organization)

 

 

 

 

 

22 Victoria Street

P.O. Box HM 1179

Hamilton HMEX, Bermuda

(Address of principal executive offices)

 

(Zip Code)

 

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




15.          Related party transactions

For the three months ended September 30, 2005, OEH paid subsidiaries of Sea Containers Ltd (“SCL”) $1,429,000 for the provision of various services under a services agreement between OEH and SCL.  For the nine months ended September 30, 2005, OEH paid subsidiaries of SCL $4,408,000 under this agreement.  These amounts have been settled in accordance with the services agreement and are included in selling, general and administrative expenses.  As of September 30, 2006, SCL is no longer a related party of OEH.

OEH guarantees a $3,000,000 bank loan to Eastern and Oriental Express Ltd. in which OEH has a minority shareholder interest.  This guarantee was in place before December 31, 2002.

OEH manages under a long-term contract the Charleston Place Hotel (accounted for under the equity method) and has made loans to the hotel-owning company.  For the three months ended September 30, 2006, OEH earned $955,000 (2005 - $870,000) in management fees which are recorded in revenue, and $2,777,000 (2005 - $2,483,000) in interest income on partnership and other loans, which are recorded in earnings from unconsolidated companies.  For the nine months ended September 30, 2006, OEH earned $3,592,000 (2005 - $3,326,000) in management fees, and $7,871,000 (2005 - $7,151,000) in interest income on partnership and other loans.

OEH manages under long-term contracts the Hotel Monasterio and the Machu Picchu Sanctuary Lodge owned by its 50/50 joint venture with local Peruvian interests, as well as the 50/50-owned PeruRail operation, and provides loans, guarantees and other credit accommodation to these joint ventures.  In the three months ended September 30, 2006, OEH earned management and guarantee fees of $1,469,000 (2005 - $1,450,000) and loan interest of $15,000 (2005 - $28,000) which are recorded in revenue.  In the nine months ended September 30, 2006, OEH earned management and guarantee fees of $3,889,000 (2005 - $3,518,000) and loan interest of $71,000 (2005 - $86,000).  At September 30, 2006, OEH had a $750,000 subordinated loan to the PeruRail operation with an indefinite maturity date and interest at a spread over LIBOR.  All of the guarantees relating to the Company’s investments in Peru were in place prior to December 31, 2002.

OEH manages under a long-term contract the Hotel Ritz in Madrid, Spain, in which OEH owns a 50% interest and is accounted for under the equity method.  For the three months ended September 30, 2006, OEH earned $300,000 (2005 - $256,000) in management fees, which are included in revenue.  For the nine months ended

22




September 30, 2006, OEH earned $910,000 (2005 - $825,000) in management fees.

With the acquisition of the Pansea Hotels group, OEH has assumed $7,818,000 of liabilities payable to minority shareholders.

23




ITEM 2.                                                     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Three months ended September 30, 2006 compared to

Three months ended September 30, 2005

 

 

OEH’s operating results for the three months ended September 30, 2006 and 2005, expressed as a percentage of revenue, were as follows:

 

 

Three months
ended
September 30

 

 

 

2006

 

2005

 

 

 

%

 

%

 

Revenue:

 

 

 

 

 

Hotels and restaurants

 

87

 

86

 

Tourist trains and cruises

 

13

 

14

 

 

 

100

 

100

 

Expenses:

 

 

 

 

 

Depreciation and amortization

 

6

 

7

 

Operating

 

43

 

47

 

Selling, general and administrative

 

27

 

26

 

Net finance costs

 

10

 

6

 

Profit before income taxes

 

14

 

14

 

Benefit from (provision for) income taxes

 

(2

)

(2

)

Earnings from unconsolidated companies

 

3

 

3

 

Net earnings as a percentage of total revenue

 

15

 

15

 

 

Segment net earnings before interest, tax (including tax on unconsolidated companies), depreciation and amortization (“segment EBITDA”) of OEH’s operations for the three months ended September 30, 2006 and 2005 are analyzed as follows (dollars in millions):

24




 

 

 

Three months ended 
September 30

 

 

 

2006

 

2005

 

Segment EBITDA:

 

 

 

 

 

Owned hotels:

 

 

 

 

 

Europe

 

$

32.5

 

$

26.9

 

North America

 

3.3

 

3.6

 

Rest of the world

 

7.2

 

4.2

 

Hotel management interests

 

4.7

 

3.9

 

Restaurants

 

(0.1

)

(0.2

)

Tourist trains and cruises

 

7.0

 

6.0

 

Central overheads

 

(5.1

)

(4.9

)

Total segment EBITDA

 

$

49.5

 

$

39.5

 

 

The foregoing segment EBITDA reconciles to net earnings as follows (dollars in millions):

 

 

Three months ended
September 30

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Net earnings

 

$

20.2

 

$

19.5

 

Add:

 

 

 

 

 

Depreciation and amortization

 

9.0

 

8.6

 

Interest expense, net

 

12.1

 

7.8

 

Foreign currency, net

 

2.8

 

 

Provision for income taxes

 

3.6

 

3.0

 

Share of provision for income taxes of unconsolidated companies

 

1.8

 

0.6

 

Segment EBITDA

 

$

49.5

 

$

39.5

 

 

Management evaluates the operating performance of OEH’s segments on the basis of segment EBITDA and believes that segment EBITDA is a useful measure of operating performance because segment EBITDA is not affected by non-operating factors such as leverage and the historic cost of assets.  EBITDA is a financial measure commonly used in OEH’s industry.  OEH’s segment EBITDA, however, may not be comparable in all instances to EBITDA as disclosed by other companies.  Segment EBITDA should not be considered as an alternative to earnings from operations or net earnings (as determined in accordance with U.S. generally accepted accounting principles) as a measure of OEH’s operating performance, or as an alternative to net cash provided by operating, investing and financing activities (as determined in accordance with U.S. generally accepted accounting principles) as a measure of OEH’s ability to meet cash needs.

Operating information for OEH’s owned hotels for the three months ended September 30, 2006 and 2005 is as follows:

25




 

 

Three months ended

 

 

 

September 30

 

 

 

2006

 

2005

 

Average Daily Rate (in U.S. dollars)

 

 

 

 

 

Europe

 

670

 

625

 

North America

 

284

 

278

 

Rest of World

 

245

 

262

 

Worldwide

 

427

 

427

 

 

 

 

 

 

 

Rooms Available (000’s)

 

 

 

 

 

Europe

 

92

 

92

 

North America

 

53

 

45

 

Rest of World

 

100

 

83

 

Worldwide

 

245

 

220