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 | |
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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):
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| | 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 | |
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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 | |
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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 | |
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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 | |
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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 | |
| | | | | |
Rooms Sold (000’s) | | | | | |
Europe | | 65 | | 61 | |
North America | | 36 | | 30 | |
Rest of World | | 59 | | 47 | |
Worldwide | | 160 | | 138 | |
| | | | | |
RevPAR (in U.S. dollars) | | | | | |
Europe | | 478 | | 417 | |
North America | | 193 | | 183 | |
Rest of World | | 145 | | 148 | |
Worldwide | | 280 | | 267 | |
| | | | | | Change% | |
| | | | | | | | Local | |
| | | | | | Dollar | | Currency | |
Same Store RevPAR (in U.S. dollars) | | | | | | | | | |
Europe | | 463 | | 415 | | 12 | % | 11 | % |
North America | | 282 | | 259 | | 9 | % | 9 | % |
Rest of World | | 156 | | 148 | | 5 | % | 10 | % |
Worldwide | | 311 | | 283 | | 10 | % | 10 | % |
26
Average daily rate is the average amount achieved for the rooms sold. RevPAR is revenue per available room, that is the rooms revenue divided by the number of available rooms for each night of operation. Same store RevPAR is a comparison based on the operations of the same units in each period, such as by excluding the effect of any acquisitions or major refurbishments.
Overview
The net earnings for the period were $20.2 million ($0.48 per common share) on revenue of $144.8 million, compared with net earnings of $19.5 million ($0.50 per common share) on revenue of $127.7 million in the prior year third quarter.
Revenue
Total revenue increased by $17.1 million, or 13%, from $127.7 million in the three months ended September 30, 2005 to $144.8 million in the three months ended September 30, 2006. Hotels and restaurants revenue increased by $16.5 million, or 15%, from $109.6 million in the three months ended September 30, 2005 to $126.1 million in the three months ended September 30, 2006, and tourist trains and cruises increased by $0.6 million, or 3%, from $18.1 million for the three months ended September 30, 2005 to $18.7 million for the three months ended September 30, 2006.
The increase in total revenue was due primarily to the performance of the hotels portfolio, in particular the European properties which showed an increase in revenue of $9.6 million. The strong performance of the Rest of the World properties contributed a further $4.6 million.
The revenue from restaurants increased by $0.1 million, or 2%, from $3.4 million in the three months ended September 30, 2005 to $3.5 million in the three months ended September 30, 2006. The increase was due to revenues from ‘21’ Club.
For owned hotels overall, same store RevPAR in U.S. dollars increased by 10% in the three months ended September 30, 2006 compared to the three months ended September 30, 2005. Measured in local currencies this increase was 10%, of which 5% relates to higher achieved average daily rates.
The change in revenue at owned hotels is analyzed on a regional basis as follows:
Europe. Revenue increased by $9.6 million, or 15%, from $63.0 million for the three months ended September 30, 2005 to $72.6 million for the three months ended September 30, 2006. The improved results from the Hotel Caruso, opened in July 2005,
27
resulted in $1.6 million of incremental revenue for the three months ended September 30, 2006. Revenue at the Grand Hotel Europe increased by $2.4 million, or 23%, from $10.5 million in the three months ended September 30, 2005 to $12.9 million for the three months ended September 30, 2006. In Italy, the revenue for Hotel Splendido increased by $1.6 million, or 14%, from $11.3 million for the three months ended September 30, 2005 to $12.9 million for the three months ended September 30, 2006.
On a same store basis, RevPAR in local currency increased by 11%, but in U.S. dollars this translated into an increase of 12%.
North America. Revenue increased by $2.0 million, or 10%, from $19.5 million in the three months ended September 30, 2005 to $21.5 million in the three months ended September 30, 2006. Revenue at the Windsor Court and Maroma, both affected by accounting for insurance recoveries under SFAS No. 5, “Accounting for Contingencies”, increased by $4.2 million, or 63%, from $6.8 million in the three months ended September 30, 2005 to $11.0 million in the three months ended September 30, 2006. Revenues at the remaining North American properties decreased by $2.3 million, or 18%, from $12.8 million in the three months ended September 30, 2005 to $10.5 million in the three months ended September 30, 2006, primarily due to the closure of El Encanto, and reduced real estate sales at Keswick. Included in the 2006 revenues are $0.4 million relating to real estate sales at Keswick Hall compared with $2.5 million in the same period in 2005.
On a same store basis, RevPAR increased by 9% which was driven by approximately a 6% increase in occupancy.
Rest of the World. Revenue increased by $4.6 million, or 21%, from $21.7 million in the three months ended September 30, 2005 to $26.3 million in the three months ended September 30, 2006. Southern Africa revenues decreased by $0.2 million, or 2%, from $6.8 million in the three months ended September 30, 2005 to $6.6 million in the three months ended September 30, 2006. South America revenues increased by $1.3 million, or 20%, from $6.6 million in the three months ended September 30, 2005 to $7.9 million in the three months ended September 30, 2006. Revenues in Asia Pacific increased by $3.3 million, or 42%, from $8.3 million in the three months ended September 30, 2005 to $11.7 million in the three months ended September 30, 2006, of which an increase of $2.6 million was due to the acquisition of the Pansea Hotels group.
The RevPAR on a same store basis for the Rest of the World region increased by 10% in local currencies in the three months ended September 30, 2006 compared to the three months ended
28
September 30, 2005. This RevPAR increase in local currencies translated to a 5% increase when expressed in U.S. dollars.
Hotel Management and Part-Ownership Interests. Revenue increased by $0.1 million, or 5%, from $2.0 million in the three months ended September 30, 2005 to $2.1 million in the three months ended September 30, 2006, due to increased revenues at Charleston Place.
Restaurants. Revenues for the three months to September 30, 2006 were $3.5 million, up $0.1 million, or 2%, against the three months to September 30, 2005. This was primarily due to improved revenues at the ‘21’ Club.
Trains and Cruises. Revenue increased by $0.6 million, or 3%, from $18.1 million in the three months ended September 30, 2005 to $18.7 million in the three months ended September 30, 2006, due primarily to the performance of PeruRail and Venice Simplon-Orient-Express.
Depreciation and amortization
Depreciation and amortization increased by $0.4 million, or 5%, from $8.6 million in the three months ended September 30, 2005 to $9.0 million in the three months ended September 30, 2006. The increase includes $0.4 million relating to the recent Pansea Hotels acquisition.
Operating expenses
Operating expenses increased by $4.5 million, or 8%, from $58.1 million in the three months ended September 30, 2005 to $62.7 million in the three months ended September 30, 2006. The increase was lower than the proportionate revenue increases, with operating expenses being at 43% of revenue for the three months ended September 30, 2006, compared to 46% as for the three months ended September 30, 2005.
Selling, general and administrative expenses
Selling, general and administrative expenses increased by $3.7 million, or 10%, from $34.7 million in the three months ended September 30, 2005 to $38.4 million in the three months ended September 30, 2006. The increase was in line with inflation, with selling, general and administrative expenses being 27% of revenues for the three months to 2006, a 10% increase over the three months ended September 30, 2005.
29
Margins
Segment EBITDA margins (calculated as segment EBITDA as a percentage of revenue) for the three months ended September 30, 2006 for OEH were 34%, up from 31% for the three months ended September 30, 2005. The increase was due to increased margins in Europe and the Rest of the World. Margins in Europe increased from 43% in the three months ended September 30, 2005 to 45% in the three months ended September 30, 2006. Margins in the Rest of the World increased from 19% in the three months ended September 30, 2005 to 27% in the three months ended September 30, 2006, helped by the impact of the Pansea Hotels acquisition.
Earnings from operations before net finance costs
Earnings from operations increased by $8.6 million from earnings of $26.2 million in the three months ended September 30, 2005 to a profit of $34.8 million in the three months ended September 30, 2006, due to the factors described above.
Net finance costs
Net finance costs increased by $7.1 million, from $7.8 million for the three months ended September 30, 2005 to $14.9 million for the three months ended September 30, 2006. The three months ended September 30, 2006 included a foreign exchange loss of $2.8 million compared to a gain of $0.1 million in the three months ended September 30, 2005. The three months to September 30, 2006 also included a $2.5 million write-off of deferred finance costs. Excluding this foreign exchange loss and deferred finance write-off, net finance costs increased by $1.7 million, or 22%, from $7.9 million for the three months ended September 30, 2005 to $9.6 million for the three months ended September 30, 2006, due to the impact of financing of new investments and increases in interest rates.
Provision for income taxes
The provision for income taxes increased by $0.6 million, from a provision of $3.0 million in the three months ended September 30, 2005 to a provision of $3.6 million in the three months ended September 30, 2006. The provision includes deferred tax credits of $5.8 million that arose on the reduction of valuation allowances established in respect of tax losses in Portugal and Australia.
Earnings from unconsolidated companies
Earnings from unconsolidated companies decreased by $0.2 million, or 5%, from $4.1 million in the three months ended September 30, 2005 to $3.9 million in the three months ended September 30, 2006. This was mainly due to an increase in taxation on the Peruvian entities.
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Nine months ended September 30, 2006 compared to |
Nine months ended September 30, 2005 | |
OEH’s operating results for the nine months ended September 30, 2006 and 2005, expressed as a percentage of revenue, were as follows:
| | Nine months ended September 30, | |
| | 2006 | | 2005 | |
| | % | | % | |
Revenue: | | | | | |
Hotels and restaurants | | 87 | | 86 | |
Tourist trains and cruises | | 13 | | 14 | |
| | 100 | | 100 | |
Expenses: | | | | | |
Depreciation and amortization | | 7 | | 7 | |
Operating | | 46 | | 48 | |
Selling, general and administrative | | 30 | | 30 | |
Gain on sale of investment | | (2 | ) | — | |
Net finance costs | | 11 | | 5 | |
Earnings before income taxes | | 8 | | 10 | |
Provision for income taxes | | (1 | ) | (2 | ) |
Earnings from unconsolidated companies | | 3 | | 3 | |
Net earnings as a percentage of total revenue | | 10 | | 11 | |
Segment EBITDA of OEH’s operations for the nine months ended September 30, 2006 and 2005 are analyzed as follows (dollars in millions):
| | Nine months ended September 30, | |
| | 2006 | | 2005 | |
Segment EBITDA: | | | | | |
Owned hotels: | | | | | |
Europe | | $ | 49.6 | | $ | 44.8 | |
North America | | 14.8 | | 15.1 | |
Rest of the world | | 20.3 | | 14.2 | |
Hotel management interests | | 14.3 | | 12.5 | |
Restaurants | | 2.5 | | 2.5 | |
Tourist trains and cruises | | 12.5 | | 11.0 | |
Central overheads | | (14.9 | ) | (13.9 | ) |
Gain on sale of investment | | 6.6 | | — | |
Segment EBITDA | | $ | 105.7 | | $ | 86.2 | |
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The foregoing segment EBITDA reconciles to net earnings as follows (dollars in millions):
| | Nine months ended September 30, | |
| | 2006 | | 2005 | |
Net earnings | | $ | 32.5 | | $ | 36.4 | |
Add: | | | | | |
Depreciation and amortization | | 26.3 | | 25.0 | |
Interest expense, net | | 32.4 | | 21.7 | |
Foreign currency, net | | 5.5 | | (4.2 | ) |
Provision for income taxes | | 4.8 | | 6.1 | |
Share of provision for income taxes of unconsolidated companies | | 4.2 | | 1.2 | |
Segment EBITDA | | $ | 105.7 | | $ | 86.2 | |
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Operating information for OEH’s owned hotels for the nine months ended September 30, 2006 and 2005 is as follows:
| | Three months ended September 30 | |
| | 2006 | | 2005 | |
Average Daily Rate (in U.S. dollars) | | | | | |
Europe | | 611 | | 565 | |
North America | | 318 | | 330 | |
Rest of World | | 269 | | 270 | |
Worldwide | | 396 | | 392 | |
| | | | | |
Rooms Available (000’s) | | | | | |
Europe | | 225 | | 230 | |
North America | | 157 | | 165 | |
Rest of World | | 269 | | 248 | |
Worldwide | | 651 | | 643 | |
| | | | | |
Rooms Sold (000’s) | | | | | |
Europe | | 139 | | 140 | |
North America | | 113 | | 112 | |
Rest of World | | 166 | | 142 | |
Worldwide | | 418 | | 394 | |
| | | | | |
RevPAR (in U.S. dollars) | | | | | |
Europe | | 376 | | 343 | |
North America | | 228 | | 224 | |
Rest of World | | 166 | | 155 | |
Worldwide | | 254 | | 240 | |
| | | | | | Change% | |
| | | | | | Dollar | | Local currency | |
Same Store RevPAR (in U.S. dollars) | | | | | | | | | |
Europe | | 414 | | 383 | | 8 | % | 9 | % |
North America | | 319 | | 292 | | 9 | % | 9 | % |
Rest of World | | 170 | | 155 | | 10 | % | 14 | % |
Worldwide | | 278 | | 256 | | 9 | % | 11 | % |
Overview
The net earnings for the period were $32.5 million ($0.81 per common share) on revenue of $358.7 million, compared with net earnings of $36.4 million ($0.96 per common share) on revenue of $334.5 million in the prior year for the first nine months. This represents a decrease of 11% in net earnings in the period over the prior year period and a decrease of 16% in earnings per common share.
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Revenue
Total revenue increased by $24.2 million, or 7%, from $334.5 million in the nine months ended September 30, 2005 to $358.7 million in the nine months ended September 30, 2006. Hotels and restaurants revenue increased by $24.4 million, or 8%, from $288.9 million in the nine months ended September 30, 2005 to $313.3 million in the nine months ended September 30, 2006, and tourist trains and cruises decreased by $0.2 million, or 4%, from $45.6 million for the nine months ended September 30, 2005 to $45.4 million for the nine months ended September 30, 2006.
The increase for hotels and restaurants was mainly due to an increase at OEH’s owned hotels of $24.0 million, or 9%, from $268.1 million in the nine months ended September 30, 2005 to $292.1 million in the nine months ended September 30, 2006. The revenue from restaurants was unchanged at $14.4 million in the nine months ended September 30, 2006.
For owned hotels overall, same store RevPAR in U.S. dollars increased by 9% in the nine months ending September 30, 2006 compared to the nine months ending September 30, 2005.�� Measured in local currencies this increase was 11%, of which 8% was due to improved occupancy and 3% to higher achieved daily rate.
The change in revenue at owned hotels is analyzed on a regional basis as follows:
Europe. Revenue increased by $11.7 million, or 9%, from $134.5 million for the nine months ended September 30, 2005 to $146.1 million for the nine months ended September 30, 2006. This increase includes the revenue from the Hotel Caruso which opened in July 2005 and produced an increase in revenue of $5.4 million, and the Grand Hotel Europe, St Petersburg, which was acquired in February 2005, producing an increase of $5.3 million. The impact of the closure of Reids Palace Hotel in the first quarter and La Residencia accounted for a $4.1 million drop in revenue for the nine months ended September 30, 2005 compared with the nine months ended September 30, 2006.
On a same store basis, RevPAR in local currency increased by 9% (6% in higher average daily rate). In U.S. dollars this translated into an increase of 8%.
North America. Revenue increased by $1.0 million, or 1%, from $66.4 million in the nine months ended September 30, 2005 to $67.4 million in the nine months ended September 30, 2006. Included in the 2006 revenues are $4.5 million relating to real
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estate sales at Keswick Hall compared with $3.5 million in the same period in 2005.
On a same store basis, RevPAR increased by 9% which was driven by a 6% increase in occupancy and a 3% improvement in achieved average daily rate.
Rest of the World. Revenue increased by $11.3 million, or 17%, from $67.2 million in the nine months ended September 30, 2005 to $78.5 million in the nine months ended September 30, 2006.
The RevPAR on a same store basis for the Rest of the World region increased by 14% in local currencies in the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005. This translated to a 10% increase in U.S. dollar RevPAR.
Hotel Management and Part-Ownership Interests. Revenue increased by $0.5 million, or 8%, from $6.4 million in the nine months ended September 30, 2005 to $6.9 million in the nine months ended September 30, 2006, due to increased revenues at Charleston Place and the hotels in Peru.
Restaurants. Revenues for the nine months to September 30, 2006 were $14.6 million, the same as for the nine months to September 30, 2005.
Trains and Cruises. Revenue decreased by $0.2 million, or nil%, from $45.6 million in the nine months ended September 30, 2005 to $45.4 million in the nine months ended September 30, 2006, due primarily to the performance of the U.K. day trains, offset by growth in PeruRail and Venice Simplon-Orient-Express.
Depreciation and amortization
Depreciation and amortization increased by $1.3 million, or 5%, from $25.0 million in the nine months ended September 30, 2005 to $26.3 million in the nine months ended September 30, 2006, primarily due to the effect of acquisitions and capital expenditures in 2005/6.
Operating expenses
Operating expenses increased by $7.8 million, or 5%, from $157.8 million in the nine months ended September 30, 2005 to $165.6 million in the nine months ended September 30, 2006, which was above inflation but lower in respect to revenue increases. As a percentage to revenue, operating expenses for the nine months ended September 30, 2006 46% compared to 48% for the nine months ended September 30, 2005.
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Selling, general and administrative expenses
Selling, general and administrative expenses increased by $6.0 million, or 6%, from $101.2 million in the nine months ended September 30, 2005 to $107.2 million in the nine months ended September 30, 2006. As a percentage to revenue, these expenses remained at 30% for the nine months ended September 30, 2006.
Margins
Segment EBITDA margins (calculated as segment EBITDA as a percentage of revenue before asset sales) for the nine months ended September 30, 2006 for OEH were 28%, an increase of 2% over the nine months ended September 30, 2005. Margins in Europe increased from 33% in the nine months ended September 30, 2005 to 34% in the nine months ended September 30, 2006. The increase was impacted by the closure of some European hotels in the three months to March 31, 2006. Margins in North America decreased from 23% to 22% for the nine months ended September 30, 2006. Margins in the Rest of the World increased from 21% in the nine months ended September 30, 2005 to 26% in the nine months ended September 30, 2006.
Earnings from operations before net finance costs
Earnings from operations increased by $9.2 million, or 18%, from earnings of $50.4 million in the nine months ended September 30, 2005 to earnings of $59.6 million in the nine months ended September 30, 2006, due to the factors described above.
Net finance costs
Net finance costs increased by $20.5 million, from $17.5 million for the nine months ended September 30, 2005 to $38.0 million for the nine months ended September 30, 2006, which included a foreign exchange loss of $5.5 million compared with a foreign exchange gain of $4.2 million in the nine months ended September 30, 2006. The nine months to September 30, 2006, also included a $3.8 million write-off of deferred finance costs. Excluding the foreign exchange amounts and the write-off of deferred finance costs, net finance costs increased by $7.0 million, or 32%, from $21.7 million for the nine months ended September 30, 2005 to $28.7 million for the nine months ended September 30, 2006, due to the impact of the financing of new investments and increases in interest rates.
Provision for income taxes
The provision for income taxes reduced by $1.3 million, from a provision of $6.1 million in the nine months ended September 30, 2005 to a provision of $4.8 million in the nine months ended September 30, 2006. This provision is inclusive of $3.3 million of tax due in respect of the gain arising on the sale of the Harry’s Bar investment, and deferred tax credits of $8.9 million that arose on the reduction of valuation allowances established in respect of tax losses in Portugal and Australia and at Bora Bora Lagoon Resort.
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Earnings from unconsolidated companies
Earnings from unconsolidated companies reduced by $0.5 million, or 5%, from $9.6 million in the nine months ended September 30, 2005 to $9.1 million in the nine months ended September 30, 2006. This was mainly due to increased tax provision in Peruvian investments.
Liquidity and Capital Resources
Working Capital
OEH had cash and cash equivalents of $105.7 million at September 30, 2006, $67.3 million more than the $38.4 million at December 31, 2005. At September 30, 2006, the undrawn amounts available to OEH under its short-term lines of credit were $28.5 million. In addition, at September 30, 2006, there were undrawn amounts committed under long-term facilities of $76.0 million. OEH’s total cash and availability at September 30, 2006 was, therefore, $210.2 million including the undrawn short-term lines.
Current assets less current liabilities, including the current portion of long-term debt, resulted in a working capital surplus of $14.3 million at September 30, 2006, an increase in the working capital of $56.6 million from a balance of $42.3 million deficit at December 31, 2005. The overall increase in working capital was comprised of the following:
· an increase in current assets of $98.4 million, of which $67.3 million was an increase in cash, accounts receivable of $8.5 million, amounts due from related parties of $1.6 million, prepaid expenses of $7.1 million, inventories of $3.7 million and real estate assets of $10.2 million; and
· an increase in current liabilities of $41.8 million, including the current portion of long-term debt, which was due to increases in accrued liabilities of $22.2 million, deferred revenue of $10.1 million, current portion of long-term debt of $28.2 million and accounts payable of $3.5 million, offset by decreases in working capital facilities of $18.1 million, and amounts due to related parties of $4.1 million.
OEH’s business does not require the maintenance of significant inventories or receivables and, therefore, working capital is not regarded as the most appropriate measure of liquidity.
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Cash Flow
Operating Activities. Net cash flow from operating activities increased by $1.9 million from $57.6 million cash surplus for the nine months ended September 30, 2005 to $59.5 million for the nine months ended September 30, 2006. The increase was primarily due to improvements in segment EBITDA and the favorable movements in working capital balances (accounts receivable and accounts payable).
Investing Activities. Cash used in investing activities decreased by $82.0 million to $116.9 million for the nine months ended September 30, 2006, compared to $198.9 million for the nine months ended September 30, 2005. Current year acquisitions of $42.9 million included the acquisition of Casa de Sierra Nevada, the remaining 25% interest in Maroma and the Pansea Hotels group. The 2005 amount was mainly due to the acquisition of the Grand Hotel Europe in February 2005.
Capital expenditure of $83.5 million included $16.3 million for refurbishment of the Italian hotels, $6.2 million spent on Reids Palace Hotel, $9.5 million for refurbishment of the Grand Hotel Europe, $7.3 million for post-hurricane construction at Maroma, and $5.8 million spent on acquisition of wheelsets for Venice Simplon-Orient-Express.
The cash used in capital expenditures and acquisitions was offset by $9.5 million proceeds from the sale of the Harry’s Bar investment in June 2006.
Financing Activities. Cash provided by financing activities for the nine months ended September 30, 2006 was $124.3 million compared to $111.4 million for the nine months ended September 30, 2005, an increase of $12.9 million. In the nine months ended September 30, 2006, OEH had proceeds from borrowings under long-term debt of $360.2 million, compared to proceeds of $116.8 million for the nine months ended September 30, 2005. The borrowings made for the nine months to September 30, 2006 included the new European hotels facility of $240.7 million. 2005 included $58.5 million of finance on the Grand Hotel Europe acquisition. In the nine months ended September 30, 2006, OEH had net proceeds from the issuance of common shares of $99.4 million, which were primarily used to acquire the Pansea Hotels group, and to pay down short term debt. In the nine months ended September 30, 2005, OEH had net proceeds from the issuance of common shares of $121.9 million. In 2006, OEH used most of the balance of long-term debt proceeds for general corporate purposes including acquisitions and investments.
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Capital Commitments. There were $22.6 million of capital commitments outstanding as of September 30, 2006 mainly on investments in owned hotels.
Indebtedness
At September 30, 2006, OEH had $655.4 million of long-term debt secured by assets ($549.7 million net of cash), including the current portion, which is repayable over periods of 1 to 11 years with a weighted average interest rate of 5.66%. See Note 6 to the financial statements regarding the maturity of long-term debt.
Approximately 48% of the outstanding principal was drawn in European euros and the balance primarily in U.S. dollars. At September 30, 2006, 79% of borrowings of OEH were in floating interest rates.
Liquidity
OEH expects to have available cash from operations and appropriate debt finance sufficient to fund its working capital requirements, capital expenditures, acquisitions and debt service for the foreseeable future.
Recent Accounting Pronouncements
As of September 30, 2006, the Company’s significant accounting policies and estimates, which are described in Notes 1 and 15 to the financial statements in the Company’s 2005 Form 10-K annual report, have not changed from December 31, 2005.
FIN 48
In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, an interpretation of SFAS No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. The evaluation of a tax position under FIN 48 is a two-step process. The first step is recognition, under which tax positions taken or expected to be taken in a tax return should be recognized only if those positions are more likely than not of being sustained upon examination, based on the technical merits of the position. In evaluating whether a tax position has met the more likely than not recognition threshold, it should be presumed that the position will be examined by the relevant taxing authority that would have full knowledge of all relevant information. The second step is measurement, under which tax positions that meet the recognition criteria are measured at the largest amount of benefit that is greater than 50 percent likely of being recognized upon ultimate settlement.
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FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006 and is effective for the Company in the first quarter of the year beginning January 1, 2007. The Company is currently assessing FIN 48 and has not yet determined the impact that the adoption of this interpretation will have on its financial position or results of operations.
SAB 108
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). This provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for the Company’s fiscal year ending December 31, 2006, with early application encouraged. The Company is in the process of evaluating SAB 108 impact on its financial statements.
SFAS 157
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, “Fair Value Management” (“SFAS 157”). SFAS 157 addresses the need for increased consistency in fair value measurements, defining fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a framework for measuring fair value and expands disclosure requirements. SFAS 157 is effective for the Company’s fiscal year ending December 31, 2008. The Company is in the process of evaluating SFAS 157.
SFAS 158
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post-retirement Plans – an amendment of FASB Statements No. 87,
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88, 106, and 132(R)” (“SFAS 158”). This statement requires an employer to recognize the over-funded or under-funded status of defined benefit pension plans and post-retirement plans (other than a multi-employer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position and requires disclosure in the notes to financial statements of certain additional information related to net periodic benefit cost for the next fiscal year. SFAS 158 defines the funded status of a defined benefit plan as its assets less its projected benefit obligation and defines the funded status of a post-retirement plan as its assets less its accumulated post-retirement benefit obligation. Calendar year-end companies such as OEH, are required to adopt the recognition and disclosure provisions of SFAS 158 as of December 31, 2006. The measurement date provisions are not required to be adopted until 2008. The Company is currently assessing the impact that this statement will have on its financial statements and results of operations.
Critical Accounting Policies
For a discussion of these, see under the heading “Critical Accounting Policies” in Item 7 – Management’s Discussion and Analysis in the Company’s 2005 Form 10-K annual report.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
OEH is exposed to market risk from changes in interest rates and foreign currency exchange rates. These exposures are monitored and managed as part of OEH’s overall risk management program, which recognizes the unpredictability of financial markets and seeks to mitigate material adverse effects on consolidated earnings and cash flows. OEH does not hold market rate sensitive financial instruments for trading purposes.
The market risk relating to interest rates arises mainly from the financing activities of OEH. Earnings are affected by changes in interest rates on borrowings, principally based on U.S. dollar LIBOR and EURIBOR, and on short-term cash investments. If interest rates increased by 10%, with all other variables held constant, annual net finance costs of OEH would have increased by approximately $2,900,000 on an annual basis based on borrowings at September 30, 2006.
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The market risk relating to foreign currencies and its effects have not changed materially during the first nine months of 2006 from those described in the Company’s 2005 Form 10-K annual report.
ITEM 4. Controls and Procedures
The Company’s chief executive and financial officers have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in SEC Rule 13a-15(e)) as of September 30, 2006 and, based on that evaluation, have concluded those disclosure controls and procedures are effective as of that date. There have been no changes in the Company’s internal control over financial reporting (as defined in SEC Rule 13a-15(f)) during the third quarter of 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met such as prevention and detection of mis-statement. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate, for example. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
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PART II – OTHER INFORMATION
ITEM 5. Other Information
On November 1, 2006, the Company announced that Mr. Simon Sherwood, President of the Company, has been formally appointed by the Board of Directors as President and Chief Executive Officer. Mr. James Sherwood continues as Chairman of the Board of the Company. Accordingly, commencing with this report, Mr. James Sherwood will no longer sign certifications under Rule 13a-14(a) and Rule 13a-14(b).
ITEM 6. Exhibits
The index to exhibits appears below, on the page immediately following the signature page to this report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ORIENT-EXPRESS HOTELS LTD. |
| | |
| | |
| By: | | /s/ P. M. White | |
| Paul M. White | |
| Vice President - Finance | |
| and Chief Financial Officer | |
| (Principal Accounting Officer) | |
Dated: November 8, 2006
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EXHIBIT INDEX
3.1 – Memorandum of Association and Certificate of Incorporation of the Company, filed as Exhibit 3.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (Registration No. 333-12030) and incorporated herein by reference.
3.2 – Bye-Laws of the Company, filed as Exhibit 3 to the Company’s Form 8-K Current Report on July 6, 2006 and incorporated herein by reference.
31 – Rule 13a-14(a)/15d-14(a) Certifications.
32 – Section 1350 Certification.
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