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 June 30, 2007 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)

 

 

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 ¨

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

Large Accelerated Filer x Accelerated Filer ¨ Non-Accelerated Filer ¨

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

As of July 31, 2007, 42,443,000 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)

 

		June 30, 2007			December 31, 2006
		(Dollars in thousands)
Assets
Cash and cash equivalents		$	86,805		$	79,318
Accounts receivable, net of allowances of $1,373 and $1,299		66,212			63,455
Due from related parties		25,247			19,939
Prepaid expenses		21,698			9,485
Inventories		40,416			35,789
Real estate assets		45,731			35,821
Total current assets		286,109			243,807
Property, plant and equipment, net of accumulated depreciation of $231,062 and $211,136		1,240,349			1,183,400
Investments		140,553			130,124
Goodwill		136,870			121,651
Other intangible assets		21,833			20,149
Other assets		54,095			52,532
		$	1,879,809		$	1,751,663
Liabilities and Shareholders’ Equity
Working capital facilities		$	83,379		$	46,590
Accounts payable		27,037			26,227
Due to related parties		—			1,249
Accrued liabilities		63,365			55,916
Deferred revenue		40,971			25,501
Current portion of long-term debt and capital leases		144,033			83,397
Total current liabilities		358,785			238,880
Long-term debt and obligations under capital leases		548,525			586,300
Liability for pension benefit		8,892			8,677
Other liabilities		2,330			2,330
Deferred income taxes		112,605			106,598
Liability for uncertain tax positions		30,174			—
		1,061,311			942,785
Commitments and contingencies
Minority interest		1,584			1,882
Shareholders’ equity:
Preferred shares $0.01 par value (30,000,000 shares authorized, issued nil)		—			—
Class A common shares $0.01 par value (120,000,000 shares authorized):
Issued – 42,436,000 (2006 – 42,196,350)		424			422
Class B common shares $0.01 par value (120,000,000 shares authorized):
Issued – 18,044,478 (2006 – 18,044,478)		181			181
Additional paid-in capital		514,350			509,762
Retained earnings		286,870			301,785
Accumulated other comprehensive income/(loss)		15,270			(4,973		)
Less: reduction due to class B common shares owned by a subsidiary – 18,044,478		(181		)	(181		)
Total shareholders’ equity		816,914			806,996
		$	1,879,809		$	1,751,663

 

See notes to condensed consolidated financial statements.

 

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Orient-Express Hotels Ltd. and Subsidiaries

 

Statements of Condensed Consolidated Operations (unaudited)

 

					2006
Three months ended June 30,		2007			(restated)
		(Dollars in thousands, except per share amounts)
Revenue		$	162,354		$	134,705
Expenses:
Depreciation and amortization		10,067			8,702
Operating		73,549			62,272
Selling, general and administrative		44,723			36,584
Total expenses		128,339			107,558
Earnings from operations before net finance costs and gain on sale of investment		34,015			27,147
Gain on sale of investment		—			6,619
Interest expense, net		(10,938		)	(10,575		)
Foreign currency, net		1,151			(3,478		)
Net finance costs		(9,787		)	(14,053		)
Earnings before income taxes and earnings from unconsolidated companies		24,228			19,713
Provision for income taxes		(8,759		)	(2,958		)
Earnings before earnings from unconsolidated companies		15,469			16,755
Earnings from unconsolidated companies, net of tax		4,234			3,326
Net earnings		$	19,703		$	20,081
Net earnings per share:
Basic		$	0.46		$	0.51
Diluted		$	0.46		0.51
Dividends per share		$	0.025		$	0.025

 

See notes to condensed consolidated financial statements.

 

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Orient-Express Hotels Ltd. and Subsidiaries

 

Statements of Condensed Consolidated Operations (unaudited)

 

Six months ended June 30,		2007			2006 (restated)
		(Dollars in thousands, except per share amounts)
Revenue		$	258,280		$	213,956
Expenses:
Depreciation and amortization		19,135			17,308
Operating		122,943			103,001
Selling, general and administrative		80,440			68,813
Total expenses		222,518			189,122
Earnings from operations before net finance costs and gain on sale of investment		35,762			24,834
Gain on sale of investment		—			6,619
Interest expense, net		(21,499		)	(20,345		)
Foreign currency, net		1,253			(2,796		)
Net finance costs		(20,246		)	(23,141		)
Earnings before income taxes and earnings from unconsolidated companies		15,516			8,312
Provision for income taxes		(6,031		)	(784		)
Earnings before earnings from unconsolidated companies		9,485			7,528
Earnings from unconsolidated companies, net of tax		6,537			5,152
Net earnings		$	16,022		$	12,680
Net earnings per share:
Basic		$	0.38		$	0.32
Diluted		$	0.38		$	0.32
Dividends per share		$	0.05		$	0.05

 

See notes to condensed consolidated financial statements.

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Orient-Express Hotels Ltd. and Subsidiaries

 

Statements of Condensed Consolidated Cash Flows (unaudited)

 

Six months ended June 30,		2007			2006 (restated)
		(Dollars in thousands)
Cash flows from operating activities:
Net earnings		$	16,022		$	12,680
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization		19,135			17,347
Amortization and write-off of finance costs		1,630			1,333
Undistributed earnings of affiliates		(3,371		)	(2,395		)
Stock-based compensation		779			428
Change in deferred tax		674			(6,135		)
Gains from disposals of fixed assets and investments		(322		)	(6,619		)
Other non-cash items		(607		)	4,389
Change in assets and liabilities net of effects from acquisition of subsidiaries:
Increase in receivables, prepaid expenses and other		(19,948		)	(8,514		)
Increase in inventories		(3,074		)	(2,374		)
Increase in real estate assets held for sale		(9,910		)	(2,935		)
Increase in payables, accrued liabilities and deferred revenue		24,393			28,571
Total adjustments		9,379			23,096
Net cash provided by operating activities		25,401			35,776
Cash flows from investing activities:
Capital expenditures		(46,608		)	(60,895		)
Acquisitions and investments, net of cash acquired		(20,339		)	(20,377		)
Proceeds from sale of fixed assets		1,227			9,499
Net cash provided by investing activities		(65,720		)	(71,773		)
Cash flows from financing activities:
Net proceeds from working capital facilities and redrawable loans		46,715			(508		)
Stock options exercised		3,811			1,618
Issuance of long-term debt		12,170			84,754
Principal payments under long-term debt		(13,241		)	(30,926		)
Payment of common share dividends		(2,116		)	(1,971		)
Net cash provided by financing activities		47,339			52,967
Effect of exchange rate changes on cash and cash equivalents		467			570
Net increase in cash and cash equivalents		7,487			17,540
Cash and cash equivalents at beginning of period		79,318			38,397
Cash and cash equivalents at end of period		$	86,805		$	55,937

 

See notes to condensed consolidated financial statements.

 

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Orient-Express Hotels Ltd. and Subsidiaries

Statements of Condensed Consolidated Shareholders’ Equity (unaudited)

(Dollars in thousands)		Preferred Shares At Par Value			Class A  Common  Shares  at Par Value			Class B  Common  Shares  at Par  Value			Additional Paid-In Capital			Retained  Earnings (restated)			Accumulated Other Comprehensive Income/(Loss)			Common Shares  Owned by Subsidiary			Total Comprehensive Income (restated)
Balance, January 1, 2006		$	—		$	393		$	181		$	404,923		$	314,207		$	(46,123	)	$	(181	)
Stock-based compensation		—			—			—			428			—			—			—
Stock options exercised		—			—			—			1,608			—			—			—
Dividends on common shares		—			—			—			—			(1,971		)	—			—
Comprehensive income:
Net earnings		—			—			—			—			12,680			—			—			$	12,680
Other comprehensive income		—			—			—			—			—			7,901			—			7,901
																							$	20,581
Balance, June 30, 2006		$	—		$	393		$	181		$	406,969		$	324,916		$	(38,222	)	$	(181	)
Balance, January 1, 2007		$	—		$	422		$	181		$	509,762		$	301,785		$	(4,973	)	$	(181	)
FIN48 liabilities		—			—			—			—			(28,820		)	—			—
Stock-based compensation		—			—			—			779			—			—			—
Stock options exercised		—			2			—			3,809			—			—			—
Dividends on common shares		—			—			—			—			(2,117		)	—			—
Comprehensive income:
Net earnings		—			—			—			—			16,022			—			—			$	16,022
Other comprehensive income		—			—			—			—			—			20,243			—			20,243
																							$	36,265
Balance, June 30, 2007		$	—		$	424		$	181		$	514,350		$	286,870		$	15,270		$	(181	)

 

See notes to condensed consolidated financial statements.

 

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Orient-Express Hotels Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

1.     Basis of financial statement presentation

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

(a)  Accounting policies

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

The accounting policies used in preparing these financial statements are the same as those applied in the Company’s 2006 Form 10-K, except that the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, as of January 1, 2007, which is discussed in Note 9, and changed the functional currency of the Grand Hotel Europe from U.S. dollars to Russian rubles, as discussed in Note 1(g).

(b)  Net earnings per share

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

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Three months ended June 30,		2007		2006
Basic		42,400		39,475
Effect of dilution		207		383
Diluted		42,607		39,858

 

Six months ended June 30,		2007		2006
Basic		42,329		39,443
Effect of dilution		199		362
Diluted		42,528		39,805

 

For the three months ended June 30, 2007 and 2006, the anti-dilutive effect of stock options on nil and nil class A common shares, respectively, was excluded from the computation of diluted earnings per share.  For the six months ended June 30, 2007 and 2006, the anti-dilutive effect of stock options on 157 and nil class A common shares, respectively, was excluded from the computation of diluted earnings per share.

(c)  Dividends

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

On April 5, 2007, the Company declared a dividend of $0.025 per common share payable May 4, 2007 to shareholders of record April 20, 2007.

(d)  Earnings from unconsolidated companies

Earnings from unconsolidated companies include OEH’s share of the net earnings of its equity investments as well as interest income related to loans and advances to the equity investees amounting to $2,935,000 and $­­­2,752,000 for the three months ended June 30, 2007 and 2006, respectively, and $5,729,000 and $5,094,000 for the six months ended June 30, 2007 and 2006, respectively.

(e)  Reclassification

Certain items in 2006 have been reclassified to conform to the 2007 presentation.

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(f)  Restatement

As reported in the 2006 Form 10-K, subsequent to the issuance of the Company’s June 30, 2006 financial statements on Form 10-Q, the Company’s management determined that certain deferred tax liabilities, arising principally on the fair value adjustments made on the acquisition of subsidiaries between 1976 and 2002 as well as on other temporary differences in respect of land and buildings, were not recorded.  As a result, the provision for income taxes for the six months ended June 30, 2006 was overstated by $419,000 (for three months ended June 30, 2006 - $209,000), arising from the release of the deferred tax provision as the properties are depreciated.  The restatement adjustment did not impact OEH’s statement of condensed consolidated cash flows, except for increasing the net earnings and decreasing the change in deferred tax by $419,000.  Also the amortization of deferred finance costs amounting to $1,372,000 for the six months ended June 30, 2006 (for three months ended June 30, 2006 - $594,000) were reclassified from depreciation to interest expense.

The following tables present the impact of the restatement adjustment on OEH’s statement of condensed consolidated operations for the three and six months ended June 30, 2006 (dollars in thousands, except per share amounts):

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Three months ended June 30, 2006		As  previously  reported			Adjustments			Restated
Revenue		$	134,705		$	—		$	134,705
Expenses
Depreciation and amortization		9,296			(594		)	8,702
Operating		62,272			—			62,272
Selling, general and administrative		36,584			—			36,584
Total expenses		108,152			(594		)	107,558
Earnings from operations before net finance costs and gain on sale of investment		26,553			594			27,147
Gain on sale of investment		6,619			—			6,619
Interest expense, net		(9,981		)	(594		)	(10,575		)
Foreign currency, net		(3,478)			—			(3,478		)
Net finance costs		(13,459		)	(594		)	(14,053		)
Earnings before income taxes and earnings from unconsolidated companies		19,713			—			19,713
Provision for income taxes		(3,167		)	209			(2,958		)
Earnings before earnings from unconsolidated companies		16,546			209			16,755
Earnings from unconsolidated companies, net of tax		3,326			—			3,326
Net earnings		$	19,872		$	209		$	20,081
Net earnings per share:
Basic		$	0.50		$	0.01		$	0.51
Diluted		$	0.50		$	0.01		$	0.51

 

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Six months ended June 30, 2006		As  previously  reported			Adjustments			Restated
Revenue		$	213,956		$	—		$	213,956
Expenses
Depreciation and amortization		18,680			(1,372		)	17,308
Operating		103,001			—			103,001
Selling, general and administrative		68,813			—			68,813
Total expenses		190,494			(1,372		)	189,122
Earnings from operations before net finance costs and gain on sale of investment		23,462			1,372			24,834
Gain on sale of investment		6,619			—			6,619
Interest expense, net		(18,973		)	(1,372		)	(20,345		)
Foreign currency, net		(2,796		)	—			(2,796		)
Net finance costs		(21,769		)	(1,372		)	(23,141		)
Earnings before income taxes and earnings from unconsolidated companies		8,312			—			8,312
Provision for income taxes		(1,203		)	419			(784		)
Earnings before earnings from unconsolidated companies		7,109			419			7,528
Earnings from unconsolidated companies, net of tax		5,152			—			5,152
Net earnings		$	12,261		$	419		$	12,680
Net earnings per share:
Basic		$	0.31		$	0.01		$	0.32
Diluted		$	0.31		$	0.01		$	0.32

 

(g)  Change of the functional currency of the Grand Hotel Europe

Due to the changes in the currency in which Grand Hotel Europe primarily expends and generates cash, OEH management has reconsidered the functional currency indicators described in SFAS No. 52, “Foreign Currency Translation” and has decided to change the functional currency of the hotel from U.S. dollars to Russian rubles.  The change was recorded with effect from January 1, 2007 and has resulted in revaluation of goodwill (increase of $2,501,000), fixed assets (increase of $7,480,000), and foreign exchange loss/gain recorded in the profit and loss account ($200,000 increase in net earnings for the three months ended June 30, 2007) with the corresponding revaluation gain

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being recorded within other comprehensive income accounts as at June 30, 2007.

2.     Acquisitions

Afloat in France acquisition

On April 12, 2007, OEH exercised its option to acquire the remaining 50% it did not own in the company operating the Afloat in France canal and river cruise business, for a cash consideration of $2,700,000, bringing OEH’s investment to 100% ownership.

The following table summarizes the estimated fair values of 50% of the assets acquired and liabilities assumed at the date of acquisition (dollars in thousands):

		April 12, 2007
Goodwill and other intangible assets		$	3,946
Total assets acquired		3,946
Current liabilities		(1,246		)
Total liabilities assumed		(1,246		)
Net assets acquired		$	2,700
Cash consideration		$	2,700

 

OEH’s combined investments in the Afloat in France business results in total goodwill as follows (dollars in thousands):

		April 12, 2007
Purchase price paid for the initial 50%, less accumulated losses		$	96
Purchase price of the second 50% interest		2,700
		2,796
Add:
Fair value of liabilities assumed		2,491
Less:
Fair value of assets acquired		—
Total goodwill		$	5,287

 

The canalboats operated by the acquired company had been purchased by OEH in 2004 and leased to the operating company.  Goodwill and other intangible assets of $5,287,000 has been recorded, of which $nil will be deductible as operating expenses for tax purposes.  This acquisition enabled OEH to

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take full control of the Afloat in France operation and to receive 100% of operating revenues that the business is expected to generate in future years, which contributed to the purchase price and resulted in goodwill.

The acquisition of Afloat in France 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 April 12, 2007.

The provisional fair values may be adjusted within one year of the acquisition date as the valuation of certain assets remains to be finalized.

The proforma results of operations data presented below assume that the Afloat in France acquisition had been made at the beginning of 2006.  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 2006 (dollars in thousands, except per share amounts):

Six months ended June 30,		2007			2006
Revenue		$	259,480		$	215,014
Net earnings		$	15,998		$	12,616
Earnings per share:
Basic		$	0.38		$	0.32
Diluted		$	0.38		$	0.32

 

Royal Scotsman acquisition

On April 25, 2007, OEH exercised its option to acquire the remaining 50% it did not own in the company owning and operating the Royal Scotsman tourist train, for a cash consideration of £1,375,000 (equivalent of $2,750,000), bringing OEH’s investment to 100% ownership.

The following table summarizes the estimated fair values of 50% of the assets acquired and liabilities assumed at the date of acquisition (dollars in thousands):

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		April 25, 2007
Goodwill and other intangible assets		$	1,770
Property, plant and equipment		3,311
Current assets		47
Total assets acquired		5,128
Current liabilities		(746		)
Deferred tax liabilities		(610		)
Long-term debt		(1,022		)
Total liabilities assumed		(2,378		)
Net assets acquired		$	2,750
Cash consideration		$	2,750

 

OEH’s combined investments in the Royal Scotsman business results in total goodwill as follows (dollars in thousands):

		April 25, 2007
Purchase price paid for the initial 50%, plus accumulated profits		$	1,450
Purchase price of the second 50% interest		2,750
		4,200
Add:
Fair value of liabilities assumed		4,756
Less:
Fair value of assets acquired		(6,716		)
Total goodwill		$	2,240

 

Property, plant and equipment of the Royal Scotsman have been fair valued based on the estimated replacement cost of the train.  Goodwill of $2,240,000 has been recorded of which $nil will be deductible as operating expenses for tax purposes.  This acquisition enabled OEH to take full control of the Royal Scotsman operation and receive 100% of operating revenues that the business is expected to generate in future years, which contributed to the purchase price and resulted in goodwill.

The acquisition of the Royal Scotsman 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 April 25, 2007.

The provisional fair values may be adjusted within one year of the acquisition date as the valuation of certain assets remains to be finalized.

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The proforma results of operations data presented below assume that the Royal Scotsman acquisition had been made at the beginning of 2006.  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 2006 (dollars in thousands, except per share amounts):

Six months ended June 30,		2007			2006
Revenue		$	260,242		$	215,084
Net earnings		$	15,914		$	12,347
Earnings per share:
Basic		$	0.38		$	0.31
Diluted		$	0.38		$	0.31

 

La Résidence Phou Vao minority interests acquisition

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

Final retention payment relating to Grand Hotel Europe acquisition

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

3.     Investments

Buzios investment

On June 7, 2007, OEH acquired 50% of a company holding real estate in Buzios, Brazil, for a cash consideration of $5,000,000.  OEH intends to build a hotel and villas on the acquired land.  The remaining 50% of the property holding company is expected to be sold to OEH for a cash consideration of $5,000,000 when the building permits are obtained from the local authorities.  In accordance with the sale and purchase agreement with the owners of the other 50%,

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if permits are not received, the owners have an option to repurchase OEH’s 50% share for the amount of investment made to date, or if the owners do not exercise this option, OEH has an option to sell 100% of the company to a third party at the market price in order to realize its investment.

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):

		June 30, 2007			December 31, 2006
Current assets		$	55,967		$	50,782
Property, plant and equipment, net		340,818			347,772
Other assets		48,354			46,022
Total assets		$	445,139		$	444,576
Current liabilities		$	46,755		$	59,621
Long-term debt		234,941			224,477
Other liabilities		93,022			86,637
Total shareholders’ equity		70,421			70,841
Total liabilities and shareholders’ equity		$	445,139		$	444,576

 

Three months ended June 30,		2007			2006
Revenue		$	51,550		$	46,519
Earnings from operations before net finance costs		$	12,390		$	8,535
Net earnings		$	3,270		$	50

 

Six months ended June 30,		2007			2006
Revenue		$	93,387		$	83,577
Earnings from operations before net finance costs		$	19,115		$	12,463
Net earnings/(losses)		$	2,756		$	(3,088	)

 

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4.  Property, plant and equipment

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

		June 30, 2007			December 31, 2006
Land and buildings		$	1,042,784		$	998,227
Machinery and equipment		206,488			191,050
Fixtures, fittings and office equipment		202,944			186,075
River cruiseship and canalboats		19,195			19,184
		1,471,411			1,394,536
Less: accumulated depreciation		(231,062		)	(211,136		)
		$	1,240,349		$	1,183,400

 

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

		June 30, 2007			December 31, 2006
Freehold and leased land and buildings		$	16,671		$	16,006
Machinery and equipment		2,667			2,205
Fixtures, fittings and office equipment		1,335			1,678
		20,673			19,889
Less: accumulated depreciation		(2,519		)	(2,241		)
		$	18,154		$	17,648

 

5.     Goodwill

OEH’s goodwill consists of $9,046,000 related to the trains and cruises reporting segment and $127,824,000 related to the hotels and restaurants reporting segment.

6.     Other intangible assets

Other intangible assets consist of the value of the Grand Hotel Europe tradename of $7,100,000, the purchase price allocation of $260,000 for the Casa de Sierra Nevada tradename, the value attributed to certain internet sites acquired of $1,918,000, and the favorable lease intangible assets acquired as part of the acquisition of the Pansea hotels group of $12,555,000.  The  amortization expense relating to the favorable Pansea leases was approximately $146,000 for the three months ended June 30, 2007

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(2006 - $nil) and $238,000 for the six months ended June 30, 2007 (2006 - $nil).

7.     Long-term debt and obligations under capital lease                            

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

		June 30, 2007			December 31, 2006
Loans from banks collateralized by property, plant and equipment payable over periods of 1 to 8 years, with a weighted average interest rate of 5.77% and 5.80%, respectively, primarily based on LIBOR		$	673,545		$	649,513
Loan secured by river cruiseship, payable over 3 years, with a weighted interest rate of 7.48% and 5.65%, respectively, based on LIBOR		3,000			3,500
Obligations under capital lease		16,013			16,684
		692,558			669,697
Less: current portion		144,033			83,397
		$	548,525		$	586,300

 

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

Certain credit agreements of OEH have restrictive covenants.  At June 30, 2007, OEH was in compliance with these covenants, including a minimum consolidated net worth test and a minimum consolidated interest coverage test as defined under a bank-syndicated $241,000,000 loan facility.  OEH does not currently have any covenants in its loan agreements which limit the payment of dividends.

The following is a summary of the aggregate maturities of long-term debt, including obligations under capital lease, at June 30, 2007 (dollars in thousands):

Year ending December 31,
2008		$	18,002
2009		29,800
2010		50,539
2011		368,259
2012 and thereafter		81,925
		$	548,525

 

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8.     Other liabilities

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

9.     Income taxes

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

OEH recorded a tax provision for the three months ended June 30, 2007 of $8,759,000 compared to a provision of $2,958,000 for the corresponding period in 2006. OEH’s current tax cost for the three months ended June 30, 2007 is $3,171,000 compared to a cost of $5,179,000 in 2006.

Cumulatively, OEH recorded a tax provision for the six months ended June 30, 2006 of $6,031,000 compared to a provision of $784,000 for the corresponding six months in 2006. OEH’s current tax cost for the six months ended June 30, 2007 is $5,650,000 compared to a cost of $7,449,000 in 2006.

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

OEH’s tax provision of $6,031,000 for the six months ended June 30, 2007 includes a tax charge of $707,000 in respect of the FIN 48 provision, including a charge of $428,000 that relates to costs of potential interest and penalties associated with the uncertain tax positions.

At June 30, 2007, OEH recognized a $30,174,000 provision in respect of its uncertain tax positions, including foreign exchange movements. OEH believes that it is reasonably possible that within the next 12 months the FIN 48 provision will decrease by between $6,000,000 to $8,000,000 as a result of the resolution of tax positions in certain jurisdictions in which OEH operates.

Earnings from unconsolidated subsidiaries are reported net of tax in the statements of condensed consolidated operations.

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The applicable tax provision in the three months ended June 30, 2007 was $1,377,000 compared to a provision of $1,923,000 in the corresponding period in 2006. The cumulative tax provision applicable to unconsolidated subsidiaries in the six months ended June 30, 2007 was $2,563,000 compared to a provision of $2,337,000 in the corresponding period in 2006.

10.  Pensions

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

Three months ended June 30,		2007			2006
Service cost		$	—		$	284
Interest cost		290			229
Expected return on plan assets		(268		)	(214		)
Amortization of net loss		140			125
Net periodic benefit cost		$	162		$	424

 

Six months ended June 30,		2007			2006
Service cost		$	—		$	547
Interest cost		574			442
Expected return on plan assets		(530		)	(412		)
Amortization of net loss		277			240
Net periodic benefit cost		$	321		$	817

 

As reported in Note 10 to the financial statements in the Company’s 2006 Form 10-K annual report, OEH expected to contribute $940,000 to its defined benefit pension plan in 2007.  As of June 30, 2007, $445,000 of contributions had been made.  OEH anticipates contributing an additional $495,000 to fund its defined benefit pension plan in 2007 for a total of $940,000.

11.  Supplemental cash flow information

(Dollars in thousands):

Six months ended June 30,		2007			2006
Cash paid for:
Interest		$	23,984		$	10,111
Income taxes		$	5,650		$	1,319

 

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

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Six months ended June 30,		2007			2006
Fair value of assets acquired		$	9,533		$	15,233
Cash paid		(5,826		)	(14,070		)
Liabilities assumed		$	3,707		$	1,163

 

12.  Accumulated other comprehensive income

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

		June 30, 2007			December 31, 2006
Foreign currency translation adjustments		$	21,536		$	3,545
Derivative financial instruments		2,469			—
Additional minimum pension liability, net of tax		(8,735		)	(8,518		)
		$	15,270		$	(4,973	)

 

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

Six months ended June 30,		2007			2006 (restated)
Net earnings on common shares		$	16,022		$	12,680
Foreign currency translation adjustments		17,774			7,833
Change in fair value of derivatives		2,469			68
Comprehensive income		$	36,265		$	20,581

 

13.  Commitments

Outstanding contracts to purchase fixed assets were approximately $42,385,000 at June 30, 2007 (December 31, 2006 -$21,839,000).

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

As reported in the Company’s 2006 Form 10-K annual report, OEH has three reporting segments, (i) hotels and restaurants,  (ii) tourist trains and cruises, and (iii) real estate and property development.  Segment performance is evaluated based upon segment net earnings before interest, tax (including tax on earnings from unconsolidated companies), depreciation and amortization (“segment EBITDA”).  Financial information

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regarding these business segments is as follows, with net finance costs appearing net of capitalized interest and interest and related income (dollars in thousands):

Three months ended June 30,			2007			2006 (restated)
Revenue:
Hotels and restaurants
Owned hotels	–  Europe		$	76,999		$	61,192
	–  North America		21,986			21,026
	–  Rest of world		28,706			22,383
Hotel management/part ownership interests			2,924			2,786
Restaurants			5,643			5,520
			136,258			112,907
Tourist trains and cruises			25,249			19,843
Real estate			847			1,955
			$	162,354		$	134,705
Segment EBITDA:
Owned hotels	–  Europe		$	31,778		$	24,268
	–  North America		3,315			4,340
	–  Rest of world		4,930			3,564
Hotel management/part ownership interests			7,029			6,274
Restaurants			1,288			1,491
Tourist trains and cruises			8,712			5,362
Real estate			(24		)	1,154
Central overheads			(7,335		)	(5,355		)
Gain on sale of investment			—			6,619
			$	49,693		$	47,717
Segment EBITDA/net earnings reconciliation:
Segment EBITDA			$	49,693		$	47,717
Less:
Depreciation and amortization			10,067			8,702
Interest expense, net			10,938			10,575
Foreign currency, net			(1,151		)	3,478
Provision for income taxes			8,759			2,958
Share of provision for income taxes of unconsolidated companies			1,377			1,923
Net earnings			$	19,703		$	20,081

 

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

Three months ended June 30,		2007			2006
Revenue:
Europe		$	101,638		$	80,490
North America		29,691			29,778
Rest of world		31,025			24,437
		$	162,354		$	134,705

 

Six months ended June 30,			2007			2006 (restated)
Revenue:
Hotels and restaurants
Owned hotels	–  Europe		$	98,114		$	73,577
	–  North America		45,124			41,735
	–  Rest of world		63,351			52,211
Hotel management/part ownership interests			5,298			4,771
Restaurants			10,938			10,839
			222,825			183,133
Tourist trains and cruises			34,608			26,672
Real estate			847			4,151
			$	258,280		$	213,956
Depreciation and amortization:
Hotels and restaurants
Owned hotels	–  Europe		$	7,707		$	7,212
	–  North America		3,550			3,537
	–  Rest of world		5,335			4,355
Restaurants			461			439
			17,073			15,543
Tourist trains and cruises			2,062			1,765
			$	19,135		$	17,308
Segment EBITDA:
Owned hotels	–  Europe		$	28,223		$	17,101
	–  North America		9,435			9,642
	–  Rest of world		16,145			13,141
Hotel management/part ownership interests			11,676			9,644
Restaurants			2,156			2,589
Tourist trains and cruises			9,860			5,528
Real estate			(482		)	1,873
Central overheads			(13,016		)	(9,887		)
Gain on sale of investment			—			6,619
			$	63,997		$	56,250

 

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