UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

Commission file number 1-16017

ORIENT-EXPRESS HOTELS LTD.

(Exact name of registrant as specified in its charter)

 

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

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

Large Accelerated File  x Accelerated Filer  o  Non-Accelerated Filer  ¨

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 April 30, 2007, 42,391,500 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)

 

		March 31, 2007			December 31, 2006
		(Dollars in thousands)
Assets
Cash and cash equivalents		$	59,473		$	79,318
Accounts receivable, net of allowances of $1,327 and $1,299		76,203			74,327
Due from related parties		20,741			19,939
Prepaid expenses and other		15,929			9,485
Inventories		39,003			35,789
Real estate assets		39,696			35,821
Total current assets		251,045			254,679
Property, plant and equipment, net of accumulated depreciation of $218,167 and $211,136		1,204,357			1,183,400
Investments		131,916			130,124
Goodwill		122,143			121,651
Other intangible assets		20,390			20,149
Other assets		44,575			41,660
		$	1,774,426		$	1,751,663
Liabilities and Shareholders’ Equity
Working capital facilities		$	66,590		$	46,590
Accounts payable		25,449			26,227
Due to related parties		1,580			1,249
Accrued liabilities		53,195			55,916
Deferred revenue		36,214			25,501
Current portion of long-term debt and capital leases		82,028			83,397
Total current liabilities		265,056			238,880
Long-term debt and obligations under capital leases		585,861			586,300
Liability for pension benefit		8,677			8,677
Other liabilities		2,330			2,330
Deferred income taxes		105,367			106,598
Liability for uncertain tax positions		29,301			—
		996,592			942,785
Commitments and contingencies		—			—
Minority interest		1,702			1,882
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 - 42,313,600 (2006 - 42,196,350)		423			422
Class B common shares $0.01 par value (120,000,000 shares authorized):
Issued - 18,044,478 (2006 - 18,044,478)		181			181
Additional paid-in capital		511,902			509,762
Retained earnings		268,228			301,785
Accumulated other comprehensive loss		(4,421		)	(4,973		)
Less: reduction due to class B common shares owned by a subsidiary - 18,044,478		(181		)	(181		)
Total shareholders’ equity		776,132			806,996
		$	1,774,426		$	1,751,663

 

See notes to condensed consolidated financial statements.

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Orient-Express Hotels Ltd. and Subsidiaries

Statements of Condensed Consolidated Operations (unaudited)

Three months ended March 31,		2007			2006 (restated)
		(Dollars in thousands, except per share amounts)
Revenue		$	95,926		$	79,251
Expenses:
Depreciation and amortization		9,068			8,606
Operating		49,394			40,729
Selling, general and administrative		35,717			32,229
Total expenses		94,179			81,564
Earnings/(losses) from operations before net finance costs		1,747			(2,313		)
Interest expense, net		(10,561		)	(9,770		)
Foreign currency, net		102			682
Net finance costs		(10,459		)	(9,088		)
Losses before income taxes and earnings from unconsolidated companies		(8,712		)	(11,401		)
Benefit from income taxes		2,728			2,174
Losses before earnings from unconsolidated companies		(5,984		)	(9,227		)
Earnings from unconsolidated companies, net of tax		2,303			1,826
Net losses		$	(3,681	)	$	(7,401	)
Net losses per share:
Basic and diluted		$	(0.09	)	$	(0.19	)
Dividends per share		$	0.025		$	0.025

 

See notes to condensed consolidated financial statements.

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Orient-Express Hotels Ltd. and Subsidiaries

Statements of Condensed Consolidated Cash Flows (unaudited)

Three months ended March 31,		2007			2006 (restated)
		(Dollars in thousands)
Cash flows from operating activities:
Net losses		$	(3,681	)	$	(7,401	)
Adjustments to reconcile net losses to net cash used in operating activities:
Depreciation and amortization		9,068			8,598
Amortization and write-off of finance costs		718			786
Undistributed (earnings)/losses of affiliates		(694		)	516
Stock-based compensation		372			215
Change in deferred tax		(5,143		)	(4,444		)
Losses from disposals of fixed assets		114			—
Other non-cash items		965			(688		)
Change in assets and liabilities net of effects from acquisition of subsidiaries:
Increase in receivables, prepaid expenses and other		(9,605		)	(3,089		)
Increase in inventories		(2,039		)	(1,466		)
Increase in real estate assets held for sale		(3,875		)	(6,672		)
Increase in payables, accrued liabilities and deferred revenue		11,203			12,390
Total adjustments		1,084			6,146
Net cash used in operating activities		(2,597		)	(1,255		)
Cash flows from investing activities:
Capital expenditures		(27,153		)	(21,308		)
Acquisitions and investments, net of cash acquired		(4,466		)	(9,456		)
Proceeds from sale of fixed assets		405			—
Net cash used in investing activities		(31,214		)	(30,764		)
Cash flows from financing activities:
Net proceeds from working capital facilities and redrawable loans		19,581			8,703
Stock options exercised		1,769			237
Issuance of long-term debt		123			42,296
Principal payments under long-term debt		(6,530		)	(17,402		)
Payment of common share dividends		(1,056		)	(985		)
Net cash provided by financing activities		13,887			32,849
Effect of exchange rate changes on cash and cash equivalents		79			(30		)
Net (decrease)/increase in cash and cash equivalents		(19,845		)	860
Cash and cash equivalents at beginning of period		79,318			38,397
Cash and cash equivalents at end of period		$	59,473		$	39,257

 

See notes to condensed consolidated financial statements.

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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 (restated)			Accumulated Other Comprehensive Loss			Common Shares  Owned by Subsidiary			Total Comprehensive  Income/(Loss) (restated)
Balance, January 1, 2006		$	—		$	393		$	181		$	404,923		$	266,093		$	(46,123	)	$	(181	)
Stock-based compensation		—			—			—			215			—			—			—
Stock options exercised		—			—			—			237			—			—			—
Dividends on common shares		—			—			—			—			(985		)	—			—
Comprehensive loss:
Net losses		—			—			—			—			(7,401		)	—			—			$	(7,401	)
Other comprehensive income		—			—			—			—			—			1,106			—			1,106
																							$	(6,295	)
Balance, March 31, 2006		$	—		$	393		$	181		$	405,375		$	257,707		$	(45,017	)	$	(181	)
Balance, January 1, 2007		$	—		$	422		$	181		$	509,762		$	301,785		$	(4,973	)	$	(181	)
FIN48 liabilities														(28,820		)
Stock-based compensation		—			—			—			372			—			—			—
Stock options exercised		—			1			—			1,768			—			—			—
Dividends on common shares		—			—			—			—			(1,056		)	—			—
Comprehensive loss:
Net losses		—			—			—			—			(3,681		)	—			—			$	(3,681	)
Other comprehensive income		—			—			—			—			—			552			—			552
																							$	(3,129	)
Balance, March 31, 2007		$	—		$	423		$	181		$	511,902		$	268,228		$	(4,421	)	$	(181	)

 

See notes to condensed consolidated financial statements.

 

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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

The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission for reporting on Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of the management of the Company, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of financial position, operating results and cash flows have been included in the statements. Interim results are not necessarily indicative of results that may be expected for the year ended December 31, 2007. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s periodic filings with the Commission, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. See Note 1 to the consolidated financial statements in the 2006 Form 10-K for additional information regarding significant accounting policies.

The accounting policies used in preparing these financial statements are the same as those applied in the prior year, except that the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, as of January 1, 2007, which is discussed in Note 9.

(b)                               Net losses per share

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

Three months ended March 31,		2007		2006
Basic		42,256		39,413
Effect of dilution		—		—
Diluted		42,256		39,413

 

For the three months ended March 31, 2007 and 2006, the anti-dilutive effect of stock options on 278,604 and 401,970 class A common shares, respectively, was excluded from the computation of diluted losses per share.

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(c)           Dividends

On January 5, 2007, the Company declared a dividend of $0.025 per common share payable February 5, 2007 to shareholders of record January 19, 2007.

(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 $2,794,000 and $2,342,000 for the three months ended March 31, 2007 and 2006, respectively.

(e)           Restatement

As reported in the 2006 Form 10-K, subsequent to the issuance of the Company’s March 31, 2006 financial statements on Form 10-Q, the Company’s management determined that certain deferred tax liabilities, arising principally on the fair value adjustments made on the acquisition of subsidiaries between 1976 and 2002 as well as on other temporary differences in respect of land and buildings, were not recorded. As a result, the benefit from income taxes for the three months ended March 31, 2006 was understated by $210,000, arising from the release of the deferred tax provision as the properties are depreciated. The restatement adjustment did not impact OEH’s statement of condensed consolidated cash flows, except for reducing the net loss and increasing the change in deferred tax by $210,000. Also $778,000 of finance costs were reclassified from depreciation to interest expense.

The following table presents the impact of the restatement adjustment on OEH’s statement of condensed consolidated operations for the period ended March 31, 2006 (dollars in thousands, except per share amounts):

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		As  previously  reported			Adjustments			Restated
Revenue		$	79,251		$	—		$	79,251
Expenses
Depreciation and amortization		9,384			(778		)	8,606
Operating		40,729			—			40,729
Selling, general and administrative		32,229			—			32,229
Total expenses		82,342			(778		)	81,564
Losses from operations before net finance costs		(3,091		)	778			(2,313		)
Interest expense, net		(8,992		)	(778		)	(9,770		)
Foreign currency, net		682			—			682
Net finance costs		(8,310		)	(778		)	(9,088		)
Losses before income taxes and earnings from unconsolidated companies		(11,401		)	—			(11,401		)
Benefit from income taxes		1,964			210			2,174
Losses before earnings from unconsolidated companies		(9,437		)	—			(9,437		)
Earnings from unconsolidated companies, net of tax		1,826			—			1,826
Net losses		$	(7,611	)	$	210		$	(7,401	)
Net losses per share:
Basic		$	(0.19	)	$	0.00		$	(0.19	)
Diluted		$	(0.19	)	$	0.00		$	(0.19	)

 

2.             Acquisitions

La Résidence Phou Vao minority interests acquisition

Effective March 10, 2007, OEH purchased an additional 18% interest in La Résidence Phou Vao in Luang Prabang, Laos for a cash consideration of $376,000 bringing its interest to 69%. A deferred tax liability of $83,000 has been recorded on the acquisition arising mainly on the fair value adjustment to assets of $236,000. Goodwill has been reduced by $52,000 due to elimination of minority interest losses brought forward recorded in the goodwill on the original acquisition of the Pansea hotels group in Asia.

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Final retention payment relating to Grand Hotel Europe acquisition

In March 2007, a final retention payment of $2,850,000 plus accrued interest of $218,000 has been made in accordance with the original agreement for the acquisition of Grand Hotel Europe in St. Petersburg completed in February 2005.

3.             Investments

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):

		March 31, 2007			December 31, 2006
Current assets		$	46,876		$	50,782
Property, plant and equipment, net		346,937			347,772
Other assets		46,302			46,022
Total assets		$	440,115		$	444,576
Current liabilities		$	45,407		$	59,621
Long-term debt		236,550			224,477
Other liabilities		88,764			86,637
Total shareholders’ equity		69,394			70,841
Total liabilities and shareholders’ equity		$	440,115		$	444,576

 

Three months ended March 31,		2007			2006
Revenue		$	41,837		$	37,058
Earnings from operations before net finance costs		$	6,725		$	3,928
Net losses		$	(514	)	$	(3,138	)

 

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4.             Property, plant and equipment

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

		March 31, 2007			December 31, 2006
Land and buildings		$	1,016,631		$	998,227
Machinery and equipment		197,689			191,050
Fixtures, fittings and office equipment		189,016			186,075
River cruiseship and canalboats		19,188			19,184
		1,422,524			1,394,536
Less: accumulated depreciation		(218,167		)	(211,136		)
		$	1,204,357		$	1,183,400

 

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

		March 31, 2007			December 31, 2006
Freehold and leased land and buildings		$	16,084		$	16,006
Machinery and equipment		2,560			2,205
Fixtures, fittings and office equipment		1,350			1,678
		19,994			19,889
Less: accumulated depreciation		(2,333		)	(2,241		)
		$	17,661		$	17,648

 

5.             Goodwill

OEH’s goodwill consists of $1,383,000 related to the trains and cruises reporting segment and $120,760,000 related to the hotels and restaurants reporting segment.

6.             Other intangible assets

Other intangible assets consist of the value of the Grand Hotel Europe tradename of $7,100,000, the purchase price allocation of $260,000 for the Casa de Sierra Nevada tradename, and the favorable lease intangible assets acquired as part of the acquisition of the Pansea hotels group of $13,030,000. Amortization expense relating to a favorable Pansea lease was approximately $92,000 for the three months to March 31, 2007 (2006 - $nil).

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7.             Long-term debt and obligations under capital lease

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

		March 31, 2007			December 31, 2006
Loans from banks collateralized by property, plant and equipment payable over periods of 1 to 8 years, with a weighted average interest rate of 5.71% and 5.80%, respectively, primarily based on LIBOR		$	648,549		$	649,513
Loan secured by river cruiseship, payable over 3 years, with a weighted interest rate of 5.48% and 5.65% respectively, based on LIBOR		3,000			3,500
Obligations under capital lease		16,340			16,684
		667,889			669,697
Less: current portion		82,028			83,397
		$	585,861		$	586,300

 

The carrying value of the debt is equal to its fair value.

Certain credit agreements of OEH have restrictive covenants. At March 31, 2007, 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.

The following is a summary of the aggregate maturities of long-term debt, including obligations under capital lease, at March 31, 2007 (dollars in thousands):

Year ending December 31,
2008		$	72,244
2009		27,090
2010		47,109
2011		362,962
2012 and thereafter		76,456
		$	585,861

 

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8.             Other liabilities

Other liabilities consist of $2,330,000 of deferred consideration arising on the Casa de Sierra Nevada acquisition.

9.             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 benefit for the three months ended March 31, 2007 of $2,728,000, compared to a benefit of $2,174,000 for the corresponding period in 2006. OEH’s current tax cost for the three months ended March 31, 2007 is $2,479,000, compared to a cost of $2,270,000 in 2006.

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) on January 1, 2007, and recognized a $28,820,000 provision in respect of its uncertain tax positions which was accounted for as a decrease to the January 1, 2007 retained earnings. OEH recognizes accrued interest and penalties related to uncertain tax positions in income tax expense. The opening FIN 48 provision included an amount of $1,828,000 in respect of potential interest liabilities and a further $9,947,000 of potential fines and penalties.

OEH’s tax benefit of $2,728,000 for the three months ended March 31, 2007 includes a tax charge of $232,000 in respect of the FIN 48 provision, including a charge of $116,000 that relates to the potential interest and penalties costs associated with the uncertain tax positions.

At March 31, 2007, OEH recognized a $29,301,000 provision in respect of its uncertain tax positions. OEH believes that it is reasonably possible that within the next 12 months the FIN 48 provision will decrease by between $6,000,000 to $8,000,000 as a result of the resolution of tax positions in certain jurisdictions in which OEH operates.

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 March 31, 2007 is $1,186,000, compared to a provision of $414,000 in the corresponding period in 2006.

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10.          Pensions

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

Three months ended March 31,		2007			2006
Service cost		$	—		$	263
Interest cost		284			213
Expected return on plan assets		(262		)	(198		)
Amortization of net loss		137			115
Net periodic benefit cost		$	159		$	393

 

As reported in Note 10 to the financial statements in the Company’s 2006 Form 10-K annual report, OEH expected to contribute $940,000 to its defined benefit pension plan in 2007. As of March 31, 2007, $144,000 of contributions had been made. OEH anticipates contributing an additional $796,000 to fund its pension plans in 2007 for a total of $940,000.

11.          Supplemental cash flow information

(Dollars in thousands):

Three months ended March 31,		2007			2006
Cash paid for:
Interest		$	10,695		$	10,111
Income taxes		$	2,479		$	1,319

 

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

Three months ended March 31,		2007			2006
Fair value of assets acquired		$	459		$	15,233
Cash paid		(376		)	(14,070		)
Liabilities assumed		$	83		$	1,163

 

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12.          Accumulated other comprehensive loss

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

		March 31, 2007			December 31, 2006
Foreign currency translation adjustments		$	3,604		$	3,545
Derivative financial instruments		493			—
Additional minimum pension liability, net of tax		(8,518		)	(8,518		)
		$	(4,421	)	$	(4,973	)

 

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

Three months ended March 31,		2007			2006 (restated)
Net losses on common shares		$	(3,681	)	$	(7,401	)
Foreign currency translation adjustments		59			1,071
Change in fair value of derivatives		493			35
Comprehensive loss		$	(3,129	)	$	(6,295	)

 

13.          Commitments

Outstanding contracts to purchase fixed assets were approximately $48,868,000 at March 31, 2007 (December 31, 2006 -$21,839,000).

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

As reported in the Company’s 2006 Form 10-K annual report, OEH has three reporting segments, (i) hotels and restaurants, (ii) tourist trains and cruises, and (iii) real estate and property development. 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):

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Three months ended March 31,			2007			2006 (restated)
Revenue:
Hotels and restaurants
Owned hotels	–  Europe		$	21,115		$	12,385
	–  North America		23,138			20,709
	–  Rest of world		34,645			29,828
Hotel management/part ownership interests			2,374			1,985
Restaurants			5,295			5,319
			86,567			70,226
Tourist trains and cruises			9,359			6,829
Real estate			—			2,196
			$	95,926		$	79,251
Depreciation and amortization:
Hotels and restaurants
Owned hotels	–  Europe		$	3,719		$	3,530
	–  North America		1,743			1,772
	–  Rest of world		2,562			2,184
Restaurants			229			223
			8,253			7,709
Tourist trains and cruises			815			897
			$	9,068		$	8,606
Segment EBITDA:
Owned hotels	–  Europe		$	(3,555	)	$	(7,167	)
	–  North America		6,120			5,302
	–  Rest of world		11,215			9,577
Hotel management/part ownership interests			4,647			3,370
Restaurants			868			1,098
Tourist trains and cruises			1,148			166
Real estate			(458		)	719
Central overheads			(5,681		)	(4,532		)
			$	14,304		$	8,533
Segment EBITDA/net losses reconciliation:
Segment EBITDA			$	14,304		$	8,533
Less:
Depreciation and amortization			9,068			8,606
Interest expense, net			10,561			9,770
Foreign currency, net			(102		)	(682		)
Benefit from income taxes			(2,728		)	(2,174		)
Share of provision for income taxes of unconsolidated companies			1,186			414
Net losses			$	(3,681	)	$	(7,401	)
Earnings from unconsolidated companies, net of tax:
Hotels and restaurants
Hotel management/part ownership interests			$	1,500		$	971
Restaurants			—			69
			1,500			1,040
Tourist trains and cruises			803			786
			$	2,303		$	1,826

 

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Three months ended March 31,			2007			2006
Capital expenditure:
Owned hotels	–  Europe		$	10,815		$	13,561
	–  North America		9,133			2,968
	–  Rest of world		4,049			2,802
Hotel management/part ownership interests			—			—
Restaurants			152			62
Tourist trains and cruises			1,011			1,915
Real estate			1,993			—
			$	27,153		$	21,308

 

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

Three months ended March 31,		2007			2006
Revenue:
Europe		$	27,838		$	17,154
North America		29,388			28,751
Rest of world		38,700			33,346
		$	95,926		$	79,251

 

15.          Derivative financial instruments

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 ($31,000,000) that limit the exposure to a fixed rate level. Although the interest rate swap for €24,700,000 economically hedges the interest rate risk, it has not qualified as a cash flow hedge and, therefore, changes in the fair value of this swap were recorded to interest expense in earnings. The interest rate swap for €75,000,000 has been designated and has qualified as a cash flow hedge of the floating rate debt effective December 31, 2006. This swap is expected to be and has been highly effective and, therefore, only $49,000 ineffectiveness gain has been recognized in earnings with the rest of the movement in the fair value being recorded in comprehensive loss.

Of the existing gains at March 31, 2007, approximately $48,000 will be reclassified into earnings during the next 12 months, assuming no further changes in fair value of the contract.

At March 31, 2007 and December 31, 2006, the fair values of the outstanding interest rate swaps were accounted for as other non-current assets at $1,447,000 and $687,000, respectively.

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