ORIENT EXPRESS HOTELS LTD - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
ý	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2004, 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 (State or other jurisdiction of incorporation or organization)		98-0223493 (I.R.S. Employer Identification No.)
	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 ý No

Indicate by check mark whether the registrant is an accelerated filer (under Rule 12b-2 of the Exchange Act). Yes ý No

As of October 29, 2004, 31,790,601 Class A common shares and 20,503,877 Class B common shares of Orient-Express Hotels Ltd. were outstanding, including 18,044,478 Class B shares owned by a subsidiary of Orient-Express Hotels Ltd. and 11,943,901 Class A shares and 2,459,399 Class B shares owned by Sea Containers Ltd.

PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements

Orient-Express Hotels Ltd. and Subsidiaries

Consolidated Balance Sheets (unaudited)

			September 30, 2004			December 31, 2003
			(Dollars in thousands)
Assets
Cash and cash equivalents			$	51,753		$	81,347
Accounts receivable, net of allowances of $961 and $976				35,940			28,060
Due from related parties				15,020			10,737
Prepaid expenses and other				14,111			11,717
Inventories				26,972			26,115

Total current assets				143,796			157,976
Property, plant and equipment, net of accumulated depreciation of $150,431 and $127,772				844,542			822,257
Investments				120,419			146,495
Goodwill				29,529			29,529
Other assets				19,311			12,969

			$	1,157,597		$	1,169,226

Liabilities and Shareholders' Equity
Working capital facilities			$	20,071		$	19,165
Accounts payable				18,979			18,830
Due to related parties				5,859			4,924
Accrued liabilities				46,499			40,409
Deferred revenue				21,992			12,617
Current portion of long-term debt and capital leases				67,945			51,271

Total current liabilities				181,345			147,216
Long-term debt and obligations under capital leases				437,626			502,917
Deferred income taxes				4,479			2,846

				623,450			652,979

Minority interest				4,085			3,803

Shareholders' equity:
	Preferred shares $0.01 par value per share (30,000,000 shares authorized, issued nil)			—			—
	Class A common shares $0.01 par value per share (120,000,000 shares authorized):
		Issued—31,790,601		318			318
	Class B common shares $0.01 par value per share (120,000,000 shares authorized):
		Issued—20,503,877		205			205
Additional paid-in capital				278,821			278,821
Retained earnings				269,715			252,484
Accumulated other comprehensive loss, net of income taxes				(18,816	)		(19,203	)
Less: reduction due to Class B common shares owned by a subsidiary—18,044,478				(181	)		(181	)

Total shareholders' equity				530,062			512,444

Commitments and contingencies				—			—

			$	1,157,597		$	1,169,226

See notes to condensed consolidated financial statements.

Orient-Express Hotels Ltd. and Subsidiaries

Statements of Consolidated Operations (unaudited)

		Three months ended September 30,
		2004			2003
		(Dollars in thousands, except per share amounts)
Revenue		$	100,025		$	88,492

Expenses:
	Depreciation and amortization		7,182			6,736
	Operating		47,800			43,733
	Selling, general and administrative		29,236			26,326

Total expenses			84,218			76,795

Earnings from operations before net finance costs			15,807			11,697
Interest expense, net			(4,826	)		(5,460	)
Interest and related income			75			860

Net finance costs			(4,751	)		(4,600	)

Earnings before income taxes			11,056			7,097
Provision for income taxes			2,504			1,558

Earnings before earnings from unconsolidated companies			8,552			5,539
Earnings from unconsolidated companies net of tax			2,943			2,641

Net earnings on class A and class B common shares		$	11,495		$	8,180

Net earnings per class A and class B common share:
	Basic and diluted	$	0.34		$	0.27

Dividends per class A and class B common share		$	0.025		$	—

See notes to condensed consolidated financial statements, including Note 1(j) regarding reclassification of earnings from unconsolidated companies.

Orient-Express Hotels Ltd. and Subsidiaries

Statements of Consolidated Operations (unaudited)

		Nine months ended September 30,
		2004			2003
		(Dollars in thousands, except per share amounts)
Revenue		$	264,395		$	238,155

Expenses:
	Depreciation and amortization		21,151			18,679
	Operating		129,559			118,213
	Selling, general and administrative		84,282			75,571

Total expenses			234,992			212,463

Earnings from operations before net finance costs			29,403			25,692
Interest expense, net			(14,776	)		(15,267	)
Interest and related income			169			967

Net finance costs			(14,607	)		(14,300	)

Earnings before income taxes			14,796			11,392
Provision for income taxes			3,867			2,855

Earnings before earnings from unconsolidated companies			10,929			8,537
Earnings from unconsolidated companies net of tax			8,871			6,454

Net earnings on class A and class B common shares		$	19,800		$	14,991

Net earnings per class A and class B common share:
	Basic and diluted	$	0.58		$	0.49

Dividends per class A and class B common share		$	0.075		$	—

See notes to condensed consolidated financial statements, including Note 1(j) regarding reclassification of earnings from unconsolidated companies.

Orient-Express Hotels Ltd. and Subsidiaries

Statements of Consolidated Cash Flows (unaudited)

			Nine months ended September 30,
			2004			2003
			(Dollars in thousands)
Cash flows from operating activities:
	Net earnings		$	19,800		$	14,991

	Adjustments to reconcile net earnings to net cash provided by operating activities:
	Depreciation and amortization			21,151			18,679
	Undistributed earnings of affiliates			(2,822	)		(1,807	)
	Other non-cash items			1,695			387
	Change in assets and liabilities net of effects from acquisition of subsidiaries:
		Increase in receivables, prepaid expenses and other		(10,076	)		(7,930	)
		Increase in inventories		(887	)		(1,724	)
		Increase in payables, accrued liabilities, deferred revenue and minority interest		16,160			3,000

	Total adjustments			25,221			10,605

Net cash provided by operating activities				45,021			25,596

Cash flows from investing activities:
	Capital expenditures			(44,141	)		(44,361	)
	Acquisitions and investments, net of cash acquired			(14,809	)		(49,758	)
	Proceeds from sale of fixed assets and other			211			1,380

Net cash (used in) investing activities				(58,739	)		(92,739	)

Cash flows from financing activities:
	Net proceeds from working capital facilities and redrawable loans			1,078			7,705
	Issuance of long-term debt			20,666			104,095
	Principal payments under long-term debt			(35,100	)		(30,792	)
	Payment of common share dividends			(2,569	)		—

Net cash (used in)/provided by financing activities.				(15,925	)		81,008

Effect of exchange rate changes on cash and cash equivalents				49			1,727

Net (decrease)/increase in cash and cash equivalents				(29,594	)		15,592
Cash and cash equivalents at beginning of period				81,347			37,860

Cash and cash equivalents at end of period			$	51,753		$	53,452

See notes to condensed consolidated financial statements.

Orient-Express Hotels Ltd. and Subsidiaries

Statement of Changes in Consolidated Shareholders' Equity and Comprehensive Loss (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, 2004		$	—	$	318	$	205	$	278,821	$	252,484		$	(19,203	)	$	(181	)
Dividends on common shares			—		—		—		—		(2,569	)		—			—
Comprehensive income:
	Net earnings		—		—		—		—		19,800			—			—		$	19,800
	Foreign currency translation adjustments		—		—		—		—		—			544			—			544
	Change in fair value of derivative financial instruments		—		—		—		—		—			(157	)		—			(157	)

																			$	20,187

Balance, September 30, 2004		$	—	$	318	$	205	$	278,821	$	269,715		$	(18,816	)	$	(181	)

See notes to condensed consolidated financial statements.

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". At September 30, 2004, Sea Containers Ltd., a Bermuda company ("SCL"), owned 42% of the equity shares in the Company.

(a) Accounting policies

For a description of significant accounting policies and basis of presentation, see Notes 1, 4 and 15 to the consolidated financial statements in the Company's 2003 Form 10-K annual report. As of September 30, 2004, these significant accounting policies have not changed from December 2003. "SFAS" means Statement of Financial Accounting Standards and "FIN" means an accounting interpretation, both of the U.S. Financial Accounting Standards Board.

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, 2004 and 2003, 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 an interim period are not necessarily indicative of a full year's operating results.

(b) Earnings per share

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

	Nine months ended September 30,
	2004	2003
Basic	34,250	30,800
Effect of dilution	99	—

Diluted	34,349	30,800

	Three months ended September 30,
	2004	2003
Basic	34,250	30,800
Effect of dilution	78	53

Diluted	34,328	30,853

Stock options with exercise prices greater than the average market price of the common shares have been excluded from the computations of diluted weighted average shares outstanding. There were approximately 40,000 and 156,000 of these options for the nine months ended September 30, 2004 and 2003, respectively, and approximately 55,000 and 70,000 of these options for the three months ended September 30, 2004 and 2003, respectively.

(c) Derivative financial instruments

For the nine months ended September 30, 2004 and 2003, the change in the fair market value of derivative instruments resulted in a charge of $157,000 and $65,000, respectively, to other comprehensive loss.

(d) Goodwill

OEH's goodwill consists of $700,000 related to the tourist trains and cruises reporting segment and $28,829,000 related to the hotels and restaurants reporting segment. There were no changes in the carrying amount of goodwill for the nine month period ended September 30, 2004.

(e) Stock-based compensation

OEH's compensation cost for share options is accreted in accordance with the intrinsic value method under Accounting Principles Board Opinion No. 25. If compensation cost for the Company's stock option plans had been determined based on fair values as of the date of grant, OEH's net earnings and earnings per share would have been reported as follows (dollars in thousands, except per share amounts):

			Nine months ended September 30,
			2004			2003
Net earnings on Class A and Class B common shares:
	As reported		$	19,800		$	14,991
	Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related tax			(635	)		(757	)

	Pro forma		$	19,165		$	14,234

Basic and diluted earnings per share:
	As reported:
		Basic and diluted	$	0.58		$	0.49

	Pro forma:
		Basic and diluted	$	0.56		$	0.46

			Three months ended September 30,
			2004			2003
Net earnings on Class A and Class B common shares:
	As reported		$	11,495		$	8,180
	Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related tax			(261	)		(283	)

	Pro forma		$	11,234		$	7,897

Basic and diluted earnings per share:
	As reported:
		Basic and diluted	$	0.34		$	0.27

	Pro forma:
		Basic and diluted	$	0.33		$	0.26

The pro forma figures in the preceding tables may not be representative of pro forma amounts in future years.

(f) Dividends

On March 19, June 18 and September 20, 2004, the Company declared a quarterly dividend of $0.025 per common share.

(g) Pensions

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

	Nine months ended September 30,
	2004			2003
Service cost	$	619		$	383
Interest cost		288			260
Expected return on plan assets		(328	)		(202	)
Amortization of prior service cost		—			7
Amortization of net loss		103			60

Net periodic benefit cost	$	682		$	508

	Three months ended September 30,
	2004			2003
Service cost	$	206		$	128
Interest cost		96			87
Expected return on plan assets		(109	)		(67	)
Amortization of prior service cost		—			2
Amortization of net loss		34			20

Net periodic benefit cost	$	227		$	170

As reported in Note 7 to the financial statements in the Company's 2003 Form 10-K annual report, OEH expected to contribute $954,000 to its pension plans in 2004. As of September 30, 2004, $582,000 of contributions have been made. OEH anticipates contributing an additional $242,000 to fund its pension plans in 2004 for a total of $824,000.

(h) Earnings from unconsolidated companies

Earnings from unconsolidated companies are presented net of tax and 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 $6,049,000 and $4,647,000 for the nine months ended September 30, 2004 and 2003, respectively, and $2,100,000 and $1,593,000 for the three months ended September 30, 2004 and 2003, respectively.

(i) Recent accounting pronouncements

In January 2003, the Financial Accounting Standards Board issued FIN No. 46 "Consolidation of Variable Interest Entities", as amended by FIN No. 46R which applied immediately to variable interest entities created after January 31, 2003, and with respect to variable interest entities held before February 1, 2003, applied beginning with OEH's quarter ended March 31, 2004. OEH has evaluated all of its existing joint-venture agreements, and has determined that none of its joint ventures is within the scope of FIN No. 46R. The adoption of FIN No. 46R had no impact on OEH.

(j) Reclassifications

Certain items in 2003 have been reclassified to conform to the 2004 presentation. Earnings from unconsolidated companies are now presented below earnings from operations before net finance costs.

2. Acquisitions and investments

On May 25, 2004, OEH acquired a 50% interest in a luxury French canal and river cruise business called Afloat in France. As part of this investment OEH acquired the five canal boats operated in the business. The total investment was $3,000,000 paid in cash.

On February 2, 2004, OEH entered into an agreement with the Pansea Hotel group, the owner of six deluxe hotels in Southeast Asia. Under this agreement, OEH is to provide a maximum of $8,000,000 in loans to the hotel holding company which are convertible after three years into approximately 25% of the holding company's shares. As of September 30, 2004, OEH had provided $4,625,000 in loans to Pansea which is recorded in other assets. In addition, OEH paid $1,400,000 which is recorded in other assets for options exercisable after three to five years to acquire all of the holding company's shares, and the existing shareholders have the right to put their shares to OEH after five years. OEH is not managing the hotels but is marketing them along with its other properties.

On April 25, 2003, OEH acquired a 50% interest in the Hotel Ritz in Madrid, Spain through a 50/50 joint venture with a Spanish real estate investment company. The purchase price was $135,000,000, and each joint venture