**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

**(MarkOne)**

 
| **x** | ** ** | **Quarterly Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|-------|------------|--------------------------------------------------------------------------------------------------------|

 

**For the quarterly periodended June 30, 2009**

 

**or**

 
| **o** | ** ** | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------------|

 

**Forthe transition period from               to               **

 

**Commission filenumber 1-16017**

 

**ORIENT-EXPRESS HOTELS LTD.**

(Exact name of registrant asspecified 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 ofprincipal executive offices) (Zip Code)

 

**441–295–2244**

(Registrant’stelephone number, including area code)

 

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

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate website, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files). Yes  ̈No  ̈

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany.  (See definitions of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act).

 
| Large Accelerated Filer x    |   | Accelerated Filer  ̈         |
|-----------------------------------|--------|---------------------------------------|
| Non-Accelerated Filer  ̈ |   | Smaller Reporting Company  ̈ |

 

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

 

As of August 3, 2009, 76,835,202 Class Acommon shares and 18,044,478 Class B common shares of Orient-ExpressHotels Ltd. were outstanding. All of the Class B shares are owned by asubsidiary of Orient-Express Hotels Ltd.

 

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**PART I –FINANCIAL INFORMATION**

 

**ITEM 1.  FinancialStatements**

 

**Orient-Express Hotels Ltd. and Subsidiaries**

 

**Condensed Consolidated Balance Sheets (unaudited)**

 
| ** **                                                                                     | ** ** | **June 30,********2009** | ** ** | **December 31,********2008** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                     | ** ** | **(Dollars in thousands)**    | ** ** |
| **Assets**                                                                                     |       |                          |       |                              |       |
| Cash and cash equivalents                                                                      |       | $                             | 143,553    |                              | $          | 64,768 |   |
| Restricted cash                                                                                |       | 13,097                        |       | 13,224                            |       |
| Accounts receivable, net of allowances of  $599and  $681                                       |       | 64,522                        |       | 45,582                            |       |
| Due from related parties                                                                       |       | 13,060                        |       | 9,985                             |       |
| Prepaid expenses and other                                                                     |       | 23,176                        |       | 19,404                            |       |
| Inventories                                                                                    |       | 44,328                        |       | 43,512                            |       |
| Assets of discontinued operations held for  sale                                               |       | 76,882                        |       | 152,241                           |       |
| Real estate assets                                                                             |       | 102,094                       |       | 83,983                            |       |
| Total current assets                                                                           |       | 480,712                       |       | 432,699                           |       |
|                                                                                           |       |                          |       |                              |       |
| Property, plant and equipment, net of  accumulated depreciation  of $237,994 and $213,282 |       | 1,400,977                     |       | 1,356,089                         |       |
| Investments                                                                                    |       | 68,787                        |       | 67,464                            |       |
| Goodwill                                                                                       |       | 146,923                       |       | 154,054                           |       |
| Other intangible assets                                                                        |       | 20,504                        |       | 20,255                            |       |
| Other assets                                                                                   |       | 40,066                        |       | 38,572                            |       |
|                                                                                           |       | $                             | 2,157,969  |                              | $          | 2,069,133 |   |
|                                                                                           |       |                          |       |                              |       |
| **Liabilities and Equity**                                                                     |       |                          |       |                              |       |
| Working capital facilities                                                                     |       | $                             | 31,851     |                              | $          | 54,179 |   |
| Accounts payable                                                                               |       | 28,846                        |       | 23,547                            |       |
| Accrued liabilities                                                                            |       | 86,755                        |       | 72,404                            |       |
| Deferred revenue                                                                               |       | 66,269                        |       | 55,988                            |       |
| Liabilities of discontinued operations held  for sale                                          |       | 42,767                        |       | 78,406                            |       |
| Current portion of long-term debt and  capital leases                                          |       | 172,822                       |       | 138,813                           |       |
| Total current liabilities                                                                      |       | 429,310                       |       | 423,337                           |       |
|                                                                                           |       |                          |       |                              |       |
| Long-term debt and obligations under capital  leases                                           |       | 635,921                       |       | 657,952                           |       |
| Liability for pension benefit                                                                  |       | 8,274                         |       | 7,421                             |       |
| Other liabilities                                                                              |       | 19,402                        |       | 22,562                            |       |
| Deferred income taxes                                                                          |       | 161,454                       |       | 162,199                           |       |
| Liability for uncertain tax positions                                                          |       | 7,034                         |       | 11,493                            |       |
|                                                                                           |       | 1,261,395                     |       | 1,284,964                         |       |
| Commitments and contingencies                                                                  |       |                          |       |                              |       |
|                                                                                           |       |                          |       |                              |       |
| Equity                                                                                         |       |                          |       |                              |       |
| Shareholders’ equity:                                                                     |       |                          |       |                              |       |
| Preferred shares $0.01 par value (30,000,000  sharesauthorized,  issued nil)                   |       | —                        |       | —                            |       |
| Class A common shares $0.01 par value  (120,000,000shares authorized):                    |       |                          |       |                              |       |
| Issued – 76,835,202                                                                       |       | 769                           |       | 510                               |       |
| Class B common shares $0.01 par value  (120,000,000shares authorized):                    |       |                          |       |                              |       |
| Issued – 18,044,478                                                                       |       | 181                           |       | 181                               |       |
| Additional paid-in capital                                                                     |       | 713,517                       |       | 570,727                           |       |
| Retained earnings                                                                              |       | 232,619                       |       | 271,571                           |       |
| Accumulated other comprehensive income                                                         |       | (51,958                       | )          | (60,210                           | )          |
| Less: reduction due to class B common shares  owned by a  subsidiary – 18,044,478    |       | (181                          | )          | (181                              | )          |
| Total shareholders’ equity                                                                |       | 894,947                       |       | 782,598                           |       |
| Non-controlling interests                                                                      |       | 1,627                         |       | 1,571                             |       |
| Total equity                                                                                   |       | 896,574                       |       | 784,169                           |       |
|                                                                                           |       | $                             | 2,157,969  |                              | $          | 2,069,133 |   |

 

See notes to condensed consolidated financialstatements.

 

1

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Statementsof Condensed Consolidated Operations (unaudited)**

 
| **Three months ended  June 30,**                                    | ** ** | **2009**                                                | ** ** | **2008** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|----------|------------|
| ** **                                                               | ** ** | **(Dollars  in thousands,   except per share amounts)** | ** ** |
| ** **                                                               |       |                                                    |       |     |       |
| Revenue                                                                  |       | $                                                       | 129,218    |     | $          | 170,190 |   |
|                                                                     |       |                                                    |       |     |       |
| Expenses:                                                                |       |                                                    |       |     |       |
| Depreciation and amortization                                            |       | 9,717                                                   |       | 9,351    |       |
| Operating                                                                |       | 63,797                                                  |       | 80,398   |       |
| Selling, general and administrative                                      |       | 42,129                                                  |       | 47,217   |       |
| Total expenses                                                           |       | 115,643                                                 |       | 136,966  |       |
|                                                                     |       |                                                    |       |     |       |
| Earnings from operations                                                 |       | 13,575                                                  |       | 33,224   |       |
|                                                                     |       |                                                    |       |     |       |
| Interest expense, net                                                    |       | (7,574                                                  | )          | (10,645  | )          |
| Foreign currency, net                                                    |       | (400                                                    | )          | 2,617    |       |
| Net finance costs                                                        |       | (7,974                                                  | )          | (8,028   | )          |
|                                                                     |       |                                                    |       |     |       |
| Earnings before income taxes and earnings from unconsolidated  companies |       | 5,601                                                   |       | 25,196   |       |
|                                                                     |       |                                                    |       |     |       |
| Provision for income taxes                                               |       | (10,296                                                 | )          | (9,722   | )          |
|                                                                     |       |                                                    |       |     |       |
| (Losses)/earnings before earnings from unconsolidated companies          |       | (4,695                                                  | )          | 15,474   |       |
|                                                                     |       |                                                    |       |     |       |
| Earnings from unconsolidated companies, net of tax of $750 and $1,439    |       | 2,049                                                   |       | 5,838    |       |
|                                                                     |       |                                                    |       |     |       |
| Net (losses)/earnings from continuing operations                         |       | (2,646                                                  | )          | 21,312   |       |
|                                                                     |       |                                                    |       |     |       |
| Losses from discontinued operations, net of tax                          |       | (21,667                                                 | )          | (1,848   | )          |
|                                                                     |       |                                                    |       |     |       |
| Net (losses)/earnings                                                    |       | $                                                       | (24,313    | )        | $          | 19,464 |   |
|                                                                     |       |                                                    |       |     |       |
| Basic net  earnings per share:                                           |       |                                                    |       |     |       |
| Net (losses)/earnings from continuing operations                         |       | $                                                       | (0.04      | )        | $          | 0.50 |   |
| Net losses from discontinued operations                                  |       | (0.32                                                   | )          | (0.04    | )          |
| Net(losses)/earnings                                                     |       | $                                                       | (0.36      | )        | $          | 0.46 |   |
|                                                                     |       |                                                    |       |     |       |
| Diluted net earnings per share:                                          |       |                                                    |       |     |       |
| Net (losses)/earnings from continuing operations                         |       | $                                                       | (0.04      | )        | $          | 0.50 |   |
| Net losses from discontinued operations                                  |       | (0.32                                                   | )          | (0.04    | )          |
| Net (losses)/earnings                                                    |       | $                                                       | (0.36      | )        | $          | 0.46 |   |
|                                                                     |       |                                                    |       |     |       |
| Dividends per share                                                      |       | $                                                       | —     |     | $          | 0.025 |   |

 

See notes tocondensed consolidated financial statements.

 

2

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Statementsof Condensed Consolidated Operations (unaudited)**

 
| **Six months ended  June 30,**                                               | ** ** | **2009**                                               | ** ** | **2008** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|----------|------------|
| ** **                                                                        | ** ** | **(Dollars in thousands,   except per share amounts)** | ** ** |
| ** **                                                                        |       |                                                   |       |     |       |
| Revenue                                                                           |       | $                                                      | 210,881    |     | $          | 275,404 |   |
|                                                                              |       |                                                   |       |     |       |
| Expenses:                                                                         |       |                                                   |       |     |       |
| Depreciation and amortization                                                     |       | 18,995                                                 |       | 18,735   |       |
| Operating                                                                         |       | 104,693                                                |       | 134,913  |       |
| Selling, general and administrative                                               |       | 76,505                                                 |       | 87,654   |       |
| Impairment of goodwill                                                            |       | 7,048                                                  |       | —   |       |
| Total expenses                                                                    |       | 207,241                                                |       | 241,302  |       |
|                                                                              |       |                                                   |       |     |       |
| Earnings from operations                                                          |       | 3,640                                                  |       | 34,102   |       |
|                                                                              |       |                                                   |       |     |       |
| Interest expense, net                                                             |       | (16,807                                                | )          | (22,690  | )          |
| Foreign currency, net                                                             |       | (4,238                                                 | )          | 4,662    |       |
| Net finance costs                                                                 |       | (21,045                                                | )          | (18,028  | )          |
|                                                                              |       |                                                   |       |     |       |
| (Losses)/earnings before income taxes and earnings from  unconsolidated companies |       | (17,405                                                | )          | 16,074   |       |
|                                                                              |       |                                                   |       |     |       |
| Provision from income taxes                                                       |       | (919                                                   | )          | (6,165   | )          |
|                                                                              |       |                                                   |       |     |       |
| (Losses)/earnings before earnings from unconsolidated companies                   |       | (18,324                                                | )          | 9,909    |       |
|                                                                              |       |                                                   |       |     |       |
| Earnings from unconsolidated companies, net of tax of $1,182 and  $2,620          |       | 3,168                                                  |       | 9,905    |       |
|                                                                              |       |                                                   |       |     |       |
| Net (losses)/earnings from continuing operations                                  |       | (15,156                                                | )          | 19,814   |       |
|                                                                              |       |                                                   |       |     |       |
| Losses from discontinued operations, net of tax                                   |       | (23,796                                                | )          | (4,688   | )          |
|                                                                              |       |                                                   |       |     |       |
| Net (losses)/earnings                                                             |       | $                                                      | (38,952    | )        | $          | 15,126 |   |
|                                                                              |       |                                                   |       |     |       |
| Basic net earnings per share:                                                     |       |                                                   |       |     |       |
| Net (losses)/earnings from continuing operations                                  |       | $                                                      | (0.26      | )        | $          | 0.47 |   |
| Net losses from discontinued operations                                           |       | (0.40                                                  | )          | (0.11    | )          |
| Net (losses)/earnings                                                             |       | $                                                      | (0.66      | )        | $          | 0.36 |   |
|                                                                              |       |                                                   |       |     |       |
| Diluted net losses per share:                                                     |       |                                                   |       |     |       |
| Net (losses)/earnings from continuing operations                                  |       | $                                                      | (0.26      | )        | $          | 0.46 |   |
| Net losses from discontinued operations                                           |       | (0.40                                                  | )          | (0.11    | )          |
| Net (losses)/earnings                                                             |       | $                                                      | (0.66      | )        | $          | 0.35 |   |
|                                                                              |       |                                                   |       |     |       |
| Dividends per share                                                               |       | $                                                      | —     |     | $          | 0.05 |   |

 

See notes tocondensed consolidated financial statements.

 

3

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Statementsof Condensed Consolidated Cash Flows (unaudited)**

 
| **Six months ended  June 30,**                                                           | ** ** | **2009**                   | ** ** | **2008** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                                                                    | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                          |       |                       |       |     |       |
| Cash flows from operating activities:                                                         |       |                       |       |     |       |
| Net (losses)/earnings from continuing operations                                              |       | $                          | (15,156    | )        | $          | 19,814 |   |
| Adjustments to reconcile net (losses)/earnings to net cash provided  by operating activities: |       |                       |       |     |       |
| Depreciation and amortization                                                                 |       | 18,995                     |       | 18,735   |       |
| Amortization and write-off of finance costs                                                   |       | 1,550                      |       | 1,669    |       |
| Impairment losses                                                                             |       | 7,048                      |       | —   |       |
| Undistributed earnings of affiliates                                                          |       | (4,729                     | )          | (6,521   | )          |
| Stock-based compensation                                                                      |       | 2,109                      |       | 1,531    |       |
| Change in deferred tax                                                                        |       | (2,215                     | )          | 1,072    |       |
| Losses from disposals of fixed assets                                                         |       | 493                        |       | 140      |       |
| Unrealized foreign exchange loss/(gain)                                                       |       | 5,824                      |       | (2,771   | )          |
| FIN 48 movements                                                                              |       | (4,383                     | )          | 808      |       |
| Other non-cash items                                                                          |       | (425                       | )          | 272      |       |
| Change in assets and liabilities net of effects from acquisition of  subsidiaries:            |       |                       |       |     |       |
| Increase in receivables, prepaid expenses and other                                           |       | (7,831                     | )          | (19,120  | )          |
| Decrease/(increase)in inventories                                                             |       | 724                        |       | (4,902   | )          |
| Increase in real estate assets held for sale                                                  |       | (18,111                    | )          | (20,282  | )          |
| Increase in payables, accrued liabilities and deferred revenue                                |       | 19,984                     |       | 29,796   |       |
| Dividends received from unconsolidated companies                                              |       | 1,064                      |       | 3,780    |       |
|                                                                                          |       |                       |       |     |       |
| Total adjustments                                                                             |       | 20,097                     |       | 4,207    |       |
|                                                                                          |       |                       |       |     |       |
| Net cash provided by operating activities from continuing operations                          |       | 4,941                      |       | 24,021   |       |
| Net cash used in operating activities from discontinued operations                            |       | (3,083                     | )          | (1,769   | )          |
|                                                                                          |       |                       |       |     |       |
| Net cash provided by operating activities                                                     |       | 1,858                      |       | 22,252   |       |
|                                                                                          |       |                       |       |     |       |
| Cash flows from investing activities:                                                         |       |                       |       |     |       |
| Capital expenditures                                                                          |       | (40,909                    | )          | (48,874  | )          |
| Acquisitions and investments, net of cash acquired                                            |       | (136                       | )          | (3,316   | )          |
| Decrease/(increase) in restricted cash                                                        |       | 127                        |       | (3,694   | )          |
| Proceeds from sale of subsidiaries and fixed assets                                           |       | 24,302                     |       | 158      |       |
|                                                                                          |       |                       |       |     |       |
| Net cash used in investing activities from continuing operations                              |       | (16,616                    | )          | (55,726  | )          |
| Net cash used in investing activities from discontinued operations                            |       | (683                       | )          | (2,404   | )          |
|                                                                                          |       |                       |       |     |       |
| Net cash used in investing activities                                                         |       | (17,299                    | )          | (58,130  | )          |
|                                                                                               |            |                            |            |          |            |  |  |

 

4

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Statementsof Condensed Consolidated Cash Flows (unaudited) (continued)**

 
| **Six months ended  June 30,**                                                                                       | ** ** | **2009**                   | ** ** | **2008** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                                                                                                | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                                                      |       |                       |       |     |       |
| Cash flows from financing activities:                                                                                     |       |                       |       |     |       |
| Net proceeds from working capital facilities and redrawable loans                                                         |       | (17,200                    | )          | 28,324   |       |
| Issuance of common shares                                                                                                 |       | 140,940                    |       | —   |       |
| Stock options exercised                                                                                                   |       | —                     |       | 193      |       |
| Issuance of long-term debt                                                                                                |       | 11,117                     |       | 3,015    |       |
| Principal payments under long-term debt                                                                                   |       | (16,109                    | )          | (17,728  | )          |
| Payment of common share dividends                                                                                         |       | —                     |       | (2,123   | )          |
|                                                                                                                      |       |                       |       |     |       |
| Net cash provided by financing activities from continuing operations                                                      |       | 118,748                    |       | 11,681   |       |
| Net cash used in financing activities from discontinued operations                                                        |       | (25,849                    | )          | (808     | )          |
|                                                                                                                      |       |                       |       |     |       |
| Net cash provided by financing activities                                                                                 |       | 92,899                     |       | 10,873   |       |
|                                                                                                                      |       |                       |       |     |       |
| Effect of exchange rate changes on cash and cash equivalents                                                              |       | 1,182                      |       | 178      |       |
|                                                                                                                      |       |                       |       |     |       |
| Net increase/(decrease) in cash and cash equivalents                                                                      |       | 78,640                     |       | (24,827  | )          |
|                                                                                                                      |       |                       |       |     |       |
| Cash and cash equivalents at beginning of period (includes $1,116  (2009), $3,629 (2008) of discontinued operations cash) |       | 65,884                     |       | 90,925   |       |
|                                                                                                                      |       |                       |       |     |       |
| Cash and cash equivalents at end of period (includes $971 (2009),  $2,495 (2008) of discontinued operations cash)         |       | $                          | 144,524    |     | $          | 66,098 |   |
|                                                                                                                           |            |                            |            |          |            |  |  |

 

See notes to condensed consolidated financialstatements.

 

5

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**Orient-Express Hotels Ltd.and Subsidiaries**

 

**Statementsof Condensed Consolidated 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  Income/(Loss)** | ** ** | **Common  Shares  Owned by  Subsidiary** | ** ** | **Total  Comprehensive  Income/  (Loss)** | ** ** | **Non-  controlling  Interests** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------|------------|------------------------|------------|------------------------------------------------------|------------|------------------------------------------|------------|-------------------------------------------|------------|----------------------------------|------------|
|                                                                              |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       |                                      |       |                             |       |   |   |   |   |   |   |   |   |
| Balance, January 1, 2008                                                     |       | $                                    | —     |                                            | $          | 424                                             |       | $                                | 181        |                   | $          | 515,307                                              |       | $                                        | 302,369    |                                      | $          | 30,431                           |       | $ | (181 | ) |   |   | $ | 1,780 |   |
| Stock-based compensation                                                          |       | —                               |       | —                                          |       | —                                          |       | 1,531                            |       | —                 |       | —                                               |       | —                                   |       |                                      |       | —                           |       |
| Stock options exercised                                                           |       | —                               |       | 1                                               |       | —                                          |       | 192                              |       | —                 |       | —                                               |       | —                                   |       |                                      |       | —                           |       |
| Dividends on common shares                                                        |       | —                               |       | —                                          |       | —                                          |       | —                           |       | (2,123                 | )          | —                                               |       | —                                   |       |                                      |       | —                           |       |
| Comprehensive income:                                                             |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       |                                      |       |                             |       |
| Net earnings                                                                      |       | —                               |       | —                                          |       | —                                          |       | —                           |       | 15,126                 |       | —                                               |       | —                                   |       | $                                         | 15,126     |                             | 196        |   |
| Other comprehensive income                                                        |       | —                               |       | —                                          |       | —                                          |       | —                           |       | —                 |       | 12,015                                               |       | —                                   |       | 12,015                                    |       | 1                                |       |
|                                                                              |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       | $                                         | 27,141     |                             |       |   |
| Balance, June 30, 2008                                                       |       | $                                    | —     |                                            | $          | 425                                             |       | $                                | 181        |                   | $          | 517,030                                              |       | $                                        | 315,372    |                                      | $          | 42,446                           |       | $ | (181 | ) |   |   | $ | 1,977 |   |
|                                                                              |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       |                                      |       |                             |       |
| Balance, January 1, 2009                                                     |       | $                                    | —     |                                            | $          | 510                                             |       | $                                | 181        |                   | $          | 570,727                                              |       | $                                        | 271,571    |                                      | $          | (60,210                          | )          | $ | (181 | ) |   |   | $ | 1,571 |   |
| Issuance of Class A common shares in public offering, net of  issuance costs |       | —                               |       | 259                                             |       | —                                          |       | 140,681                          |       | —                 |       | —                                               |       | —                                   |       |                                      |       | —                           |       |
| Stock-based compensation                                                          |       | —                               |       | —                                          |       | —                                          |       | 2,109                            |       | —                 |       | —                                               |       | —                                   |       |                                      |       | —                           |       |
| Comprehensive loss:                                                               |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       |                                      |       |                             |       |
| Net losses                                                                        |       | —                               |       | —                                          |       | —                                          |       | —                           |       | (38,952                | )          | —                                               |       | —                                   |       | $                                         | (38,952    | )                                | 50         |   |
| Other comprehensive income                                                        |       | —                               |       | —                                          |       | —                                          |       | —                           |       | —                 |       | 8,252                                                |       | —                                   |       | 8,252                                     |       | 6                                |       |
|                                                                              |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       | $                                         | (30,700    | )                                |       |   |
| Balance, June 30, 2009                                                       |       | $                                    | —     |                                            | $          | 769                                             |       | $                                | 181        |                   | $          | 713,517                                              |       | $                                        | 232,619    |                                      | $          | (51,958                          | )          | $ | (181 | ) |   |   | $ | 1,627 |   |

 

See notes to condensed consolidated financial statements.

 

6

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Notesto Condensed Consolidated Financial Statements**

 

**1.****                                     ****Basis offinancial statement presentation**

 

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

 

“FASB” meansFinancial Accounting Standards Board and “APB” means Accounting PrinciplesBoard, the FASB’s predecessor. “SFAS” means Statement of Financial AccountingStandards of the FASB, and “FIN,” “EITF” or “FSP” means an accountinginterpretation of the FASB*.*

 

*(a) **Accountingpolicies*

 

Theaccompanying condensed consolidated financial statements have been preparedpursuant 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 theinformation and footnotes required by U.S. generally accepted accountingprinciples for complete financial statements. In the opinion of the management of the Company, all adjustments(consisting of normal recurring adjustments) necessary for a fair presentationof financial position, operating results and cash flows have been included inthe statements.  Interim results are notnecessarily indicative of results that may be expected for the year ending December 31,2009.  These financial statements shouldbe read in conjunction with the consolidated financial statements and footnotesthereto included in the Company’s periodic filings, including the Company’sAnnual Report on Form 10-K for the year ended December 31, 2008.  See Note 1 to the consolidated financialstatements in the 2008 Form 10-K for additional information regardingsignificant accounting policies.

 

The accountingpolicies used in preparing these financial statements are the same as thoseapplied in the prior year, except for the implementation of SFAS No. 161,SFAS No. 160, SFAS No. 141(R), FSP FAS 142-3, and SFAS No. 157for nonfinancial assets and liabilities as deferred by FSP FAS 157-2, effectiveJanuary 1, 2009, and SFAS No. 165, FSP FAS 157-4, and FSP FAS 107-1and APB 28-1, effective June 15, 2009.

 

*SFAS No. 161*

 

SFAS No. 161, “Disclosures about DerivativeInstruments and Hedging Activities - an amendment of FASB Statement No. 133”,**amends and expands the disclosure requirements of SFAS No. 133

 

7

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with the intent to provide users of financialstatements with an enhanced understanding of: (a) how and why an entityuses derivative instruments, (b) how derivative instruments and relatedhedged items are accounted for under SFAS No. 133 and its relatedinterpretations, and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance, and cashflows. SFAS No. 161 requires qualitative disclosures about objectives andstrategies for using derivatives, quantitative disclosures about the fair valueof and gains and losses on derivative instruments, and disclosures aboutcredit-risk-related contingent features in derivative instruments. OEH hasimplemented the standard by adding the required disclosures.

 

As required by SFAS No. 133, OEH records allderivatives on the balance sheet at fair value. The accounting for changes inthe fair value of derivatives depends on the intended use of the derivative,whether OEH has elected to designate a derivative in a hedging relationship andapply hedge accounting and whether the hedging relationship has satisfied thecriteria necessary to apply hedge accounting. Derivatives designated and qualifyingas a hedge of the exposure to variability in expected future cash flows, orother types of forecast transactions, are considered cash flow hedges.Derivatives may also be designated as hedges of the foreign currency exposureof a net investment in a foreign operation. Hedge accounting generally providesfor the matching of the timing of gain or loss recognition on the hedginginstrument with the recognition of the changes in the fair value of the hedgedasset or liability that are attributable to the hedged forecast transactions ina cash flow hedge. OEH may enter into derivative contracts that are intended toeconomically hedge certain of its risks, even though hedge accounting does notapply or OEH elects not to apply hedge accounting under SFAS No. 133.

 

*SFAS No. 160*

 

Effective January 1,2009, OEH has implemented SFAS No. 160, “Non-Controlling Interests inConsolidated Financial Statements — an amendment of ARB No. 51”.Non-controlling interests have been classified as a component of equity for allperiods presented and the statements of consolidated equity have been amendedaccordingly. No further disclosures have been made as the impact on thestatements of consolidated operations from the non-controlling interests is notdeemed material.

 

*SFAS No. 165*

 

Effective June 15,2009, OEH has implemented SFAS No. 165, “Subsequent Events”. The datethrough which subsequent events have been evaluated has been disclosed (seeNote 19).

 

8

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*SFAS No. 141(R), FSP FAS 142-3 and SFAS No. 157 fornonfinancial assets and liabilities, FSP FAS 157-4, and FSP FAS 107-1 and APB28-1.*

 

Theimplementation of SFAS No. 141(R), “Business Combinations,” FSP FAS 142-3,“Determination of the Useful Life of Intangible Assets,” and SFAS No. 157,“Fair Value Measurements” for nonfinancial assets and liabilities, FSP FAS157-4, “Determining Fair Value When the Volume and Level of Activity for theAsset or Liability Have Significantly Decreased and Identifying TransactionsThat Are Not Orderly,” and FSP FAS 107-1 and APB 28-1 “Interim DisclosuresAbout Fair Value of Financial Instruments,” has not resulted in any materialimpact to the financial statements as of June 30, 2009 and for the sixmonths then ended.

 

*Recent accounting pronouncements*

 

In addition, OEH is considering SFAS No. 168,“The FASB Accounting Standards Codification and the Hierarchy of GenerallyAccepted Accounting Principles — A Replacement of SFAS No. 162”, which wasissued in June 2009. The statement establishes the codification as thesource of authoritative U.S. accounting and reporting standards recognized bythe FASB for use in the preparation of financial statements and revises theframework for selecting the accounting principles to be used. It is effectivefor interim and annual periods ending after September 15, 2009.

 

In June 2009, the FASB issued SFAS No. 167,“Amendments to FASB Interpretation No. 46(R),” which changes how areporting company determines when an entity that is insufficiently capitalizedor is not controlled through voting should be consolidated. The standard willrequire a number of new disclosures about a reporting company’s involvementwith variable interest entities, any significant changes in risk exposure dueto that involvement and how that involvement affects the reporting company’sfinancial statements. SFAS No. 167 is effective from January 1, 2010.OEH is in the process of determining the effects of the adaptation of thisstandard on its consolidated financial statements.

 

*(b) Netearnings per share*

 

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

 
| **Three months ended  June 30,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |
| Basic                                 |       | 67,167   |       | 42,470   |       |
| Effect of dilution                    |       | —   |       | 138      |       |
| Diluted                               |       | 67,167   |       | 42,608   |       |

 
| **Six months ended  June 30,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
|                                |       |     |       |     |       |
| Basic                               |       | 59,019   |       | 42,468   |       |
| Effect of dilution                  |       | —   |       | 150      |       |
| Diluted                             |       | 59,019   |       | 42,618   |       |

 

9

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For thethree months ended June 30, 2009 and the six months ended June 30,2009, all share options and share-based awards were excluded from thecalculation of the diluted weighted average number of shares because OEH made anet loss in both periods and the effect of their inclusion would beanti-dilutive. For the three months ended June 30, 2008 and the six monthsended June 30, 2008, the effect of anti-dilutive share options andshare-based awards has been excluded from the calculation of the dilutedweighted average number of shares.

 

Theaverage number of share options and share-based awards excluded was as follows:

 
| **Three months ended  June 30,** | ** ** | **2009**  | ** ** | **2008** | ** ** |
|---------------------------------------|------------|-----------|------------|----------|------------|
|                                  |       |      |       |     |       |
| Share options                         |       | 1,147,948 |       | 562,742  |       |
| Share-based awards                    |       | 504,709   |       | 59,365   |       |
|                                  |       | 1,652,657 |       | 622,107  |       |

 
| **Six months ended  June 30,** | ** ** | **2009**  | ** ** | **2008** | ** ** |
|-------------------------------------|------------|-----------|------------|----------|------------|
|                                |       |      |       |     |       |
| Share options                       |       | 1,072,369 |       | 564,820  |       |
| Share-based awards                  |       | 377,400   |       | 59,303   |       |
|                                |       | 1,449,769 |       | 624,123  |       |

 

The number of stock options and share-based awards atJune 30, 2009 was 2,145,411 (June 30, 2008 – 641,415).

 

*(c)  Earnings fromunconsolidated companies*

 

Earnings fromunconsolidated companies include OEH’s share of the net earnings of its equityinvestments as well as interest income related to loans and advances to theequity investees. This interest income amounted to $nil and $3,000,000 for thethree months ended June 30, 2009 and 2008, respectively, and $nil and$6,004,000 for the six months ended June 30, 2009 and 2008, respectively.See Note 3 regarding consolidation of Charleston Center LLC effective December 31,2008.

 

****2.********                                     ********Discontinuedoperations****

 

*(a) Lapa Palace Hotelsale*

 

On June 2,2009, OEH sold its shares in the Lapa Palace Hotel owning company in Lisbon,Portugal for a cash consideration of $41,983,000. Of that consideration$26,287,000 has been received in cash on the date of sale and remaining$15,696,000 has been deferred until 2010 and is secured by a Portuguese bankguarantee. The disposal resulted in a gain on sale of $5,043,000.

 

The followingis a summary of the net assets sold and gain on sale (dollars in thousands):

 

10

----

 
| **** ****                                | **** **** | ****June 2,**********2009****** | **** **** |
|-----------------------------------------------|----------------|--------------------------------------|----------------|
| **** ****                                | **** **** | **** ****                       | **** **** |
| ****Cash****                                  |           | $                                    | 1,303          |   |
| ****Property, plant and equipment,  net****   | **** **** | ****43,333****                       | **** **** |
| Net working capital deficit                   |           | (281                                 | )              |
| Loans                                         |           | (715                                 | )              |
| Deferred taxation                             |           | (965                                 | )              |
| Net assets                                    |           | 42,675                               |           |
| Reversal of foreign currency translation gain | **** **** | (6,719                               | )              |
|                                          |           | 35,956                               |           |
| Consideration:                                | **** **** | **** ****                       | **** **** |
| Cash                                          |           | 26,287                               |           |
| Deferred, discounted to present value         |           | 15,394                               |           |
| Less: costs to sell                           |           | (682                                 | )              |
| **** ****                                | **** **** | 40,999                               | **** **** |
| **** ****                                | **** **** |                                 | **** **** |
| Gain on sale                                  |           | $                                    | 5,043          |   |

 

****Results of discontinuedoperations of the Lapa Palace Hotel are as follows (dollars in thousands):****

 
| ****Three months ended June 30,****             | ** **     | ****2009****   | ** **     | ****2008****   | ** **     |
|------------------------------------------------------|----------------|----------------|----------------|----------------|----------------|
| **** ****                                       | **** **** | **** **** | **** **** | **** **** | **** **** |
| ****Revenue****                                      | **** **** | ****$****      | ****1,778****  | **** **** | ****$****      | ****4,435**** | **** **** |
| **** ****                                       | **** **** | **** **** | **** **** | **** **** | **** **** |
| ****Income before tax and gain on  sale****          | **** **** | ****$****      | ****275****    | **** **** | ****$****      | ****943**** | **** **** |
| ****Gain on sale****                                 | **** **** | ****5,043****  | **** **** | ****—**** | **** **** |
| ****Income before tax****                            | **** **** | ****5,318****  | **** **** | ****943****    | **** **** |
| ****Tax****                                          | **** **** | ****—**** | **** **** | ****—**** | **** **** |
| ****Net gain from discontinued********operations**** | **** **** | ****$****      | ****5,318****  | **** **** | ****$****      | ****943**** | **** **** |

 
| ****Six months ended June 30,****               | ** **     | ****2009****   | ** **     | ****2008****   | ** **     |
|------------------------------------------------------|----------------|----------------|----------------|----------------|----------------|
| **** ****                                       | **** **** | **** **** | **** **** | **** **** | **** **** |
| ****Revenue****                                      | **** **** | ****$****      | ****2,860****  | **** **** | ****$****      | ****6,830**** | **** **** |
| **** ****                                       | **** **** | **** **** | **** **** | **** **** | **** **** |
| ****(Loss)/income before tax and gain  on sale.****  | **** **** | ****$****      | ****(827****   | ****)****      | ****$****      | ****299**** | **** **** |
| ****Gain on sale****                                 | **** **** | ****5,043****  | **** **** | ****—**** | **** **** |
| ****Income before tax****                            | **** **** | ****4,216****  | **** **** | ****299****    | **** **** |
| ****Tax****                                          | **** **** | ****—**** | **** **** | ****—**** | **** **** |
| ****Net gain from discontinued********operations**** | **** **** | ****$****      | ****4,216****  | **** **** | ****$****      | ****299**** | **** **** |

 

11

----

 

*(b) Assets held forsale: Windsor Court Hotel and Bora Bora Lagoon Resort*

 

****During the fourthquarter of 2007, OEH decided to sell its investment in Bora Bora Lagoon Resort.The asset is being actively marketed and is expected to be disposed of within ayear. During the second quarter of 2009, OEH decided to sell Windsor CourtHotel and entered into a sale agreement in July 2009.****

 

****The hotels have beenclassified as held for sale and their results have been presented asdiscontinued operations for all the interim periods presented.****

 

****At June 30, 2009,an impairment loss of $21,549,000 was recognized on the re-measurement ofWindsor Court Hotel which reduced the carrying amount of the hotel assets tofair value less costs to sell,**** offset by a related tax credit of $7,146,000.****Also at June 30,2009, an additional impairment loss of $12,000,000 was recognized for Bora BoraLagoon Resort tangible assets to reflect the level of offers being received onthe hotel.****

 

****Summarized operatingresults of the hotels held for sale are as follows (dollars in thousands):****

**** ****
| ****Three months ended June 30,****             | ** **     | ****2009****    | ** **      | ****2008****   | ** **     |
|------------------------------------------------------|----------------|-----------------|-----------------|----------------|----------------|
| **** ****                                       | **** **** | **** ****  | **** ****  | **** **** | **** **** |
| ****Revenue****                                      | **** **** | ****$****       | ****7,864****   | **** **** | ****$****      | ****9,036**** | **** **** |
| **** ****                                       | **** **** | **** ****  | **** ****  | **** **** | **** **** |
| ****Loss before tax and impairment****               | **** **** | ****$****       | ****(582****    | ****)****      | ****$****      | ****(2,791**** | ****)**** |
| ****Impairment loss****                              | **** **** | ****(33,549**** | ****)****       | ****—**** | **** **** |
| ****Loss before tax****                              | **** **** | ****(34,131**** | ****)****       | ****(2,791**** | ****)****      |
| ****Tax****                                          | **** **** | ****7,146****   | **** ****  | ****—**** | **** **** |
| ****Net loss from discontinued********operations**** | **** **** | ****$****       | ****(26,985**** | ****)****      | ****$****      | ****(2,791**** | ****)**** |

 
| ****Six months ended June 30,****               | **** **** | ****2009****    | **** ****  | ****2008****   | **** **** |
|------------------------------------------------------|----------------|-----------------|-----------------|----------------|----------------|
| **** ****                                       | **** **** | **** ****  | **** ****  | **** **** | **** **** |
| ****Revenue****                                      | **** **** | ****$****       | ****15,232****  | **** **** | ****$****      | ****17,718**** | **** **** |
| **** ****                                       | **** **** | **** ****  | **** ****  | **** **** | **** **** |
| ****Loss before tax and impairment****               | **** **** | ****$****       | ****(1,609****  | ****)****      | ****$****      | ****(4,987**** | ****)**** |
| ****Impairment loss****                              | **** **** | ****(33,549**** | ****)****       | ****—**** | **** **** |
| ****Loss before tax****                              | **** **** | ****(35,158**** | ****)****       | ****(4,987**** | ****)****      |
| ****Tax****                                          | **** **** | ****7,146****   | **** ****  | ****—**** | **** **** |
| ****Net loss from discontinued********operations**** | **** **** | ****$****       | ****(28,012**** | ****)****      | ****$****      | ****(4,987**** | ****)**** |

 

12

----

 

****Assets and liabilitiesof the hotels that have been classified as held for sale consisted of thefollowing (dollars in thousands):****

**** ****
| ** **                                                          | ** **     | ****June 30,**********2009****** | ** **     | ****December 31,**********2008****** | ** **     |
|---------------------------------------------------------------------|----------------|---------------------------------------|----------------|-------------------------------------------|----------------|
| **** ****                                                      | **** **** | **** ****                        | **** **** | **** ****                            | **** **** |
| ****Current assets****                                              | **** **** | ****$****                             | ****8,504****  | **** ****                            | ****$****      | ****9,025**** | **** **** |
| ****Other assets****                                                | **** **** | ****3,256****                         | **** **** | ****1,531****                             | **** **** |
| ****Property, plant and equipment,  net********of  depreciation**** | **** **** | ****62,898****                        | **** **** | ****139,516****                           | **** **** |
| ****Goodwill****                                                    | **** **** | ****2,224****                         | **** **** | ****2,169****                             | **** **** |
| ****Total assets held for sale****                                  | **** **** | ****$****                             | ****76,882**** | **** ****                            | ****$****      | ****152,241**** | **** **** |
|                                                                |           |                                  |           |                                      |           |
| ****Liabilities held for sale****                                   | **** **** | ****$****                             | ****42,767**** | **** ****                            | ****$****      | ****78,406**** | **** **** |

 

Prior year comparatives included balances of LapaPalace Hotel, which was sold in June 2009: $1,547,000 of current assets,$1,016,000 of other assets, $42,761,000 of fixed assets and $19,921,000 ofliabilities.

 

****3.********            ********Consolidationof variable interest entity — Charleston Place Hotel****

 

****OEH holds a 19.9% equityinvestment in Charleston Center LLC, owner of Charleston Place Hotel.  It has also made a number of loans to thehotel.  On evaluating its variousvariable interests in the hotel at December 31, 2008, OEH concluded thatthe hotel no longer qualified for certain scope exemptions under FIN 46(R), “Consolidationof Variable Interest Entities”****, because OEH’s share of loans provided tothe hotel had increased and OEH provided a majority of subordinated financialsupport.****  OEH further concluded that OEH is the primarybeneficiary of the variable interest entity as defined in FIN 46(R) ****becauseit is expected to absorb a majority of the entity’s residual gains or lossesbased on the current organizational structure. OEH has****consolidated the entity effective December 31, 2008. Previously the entityhad been accounted for under the equity method of accounting.****

 

****Theresults of operations of Charleston Place Hotel have been included in theconsolidated financial statements of OEH from January 1, 2009 and,accordingly, any intercompany transactions have been eliminated from that dateforward.****

 

****The assets andliabilities of Charleston Center LLC that were consolidated into the financialstatements at their fair value as at December 31, 2008 were as follows(dollars in thousands):****

 

13

----

 
| ** **                                                 | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------------------------|------------|-----------------------------|------------|
| Current assets                                             |       | $                           | 4,937      |   |
| Property, plant and equipment                              |       | 196,650                     |       |
| Other assets                                               |       | 1,824                       |       |
| Goodwill                                                   |       | 40,395                      |       |
| Total assets                                               |       | $                           | 243,806    |   |
|                                                       |       |                        |       |
| Current liabilities                                        |       | $                           | 5,373      |   |
| Third party debt                                           |       | 79,626                      |       |
| Deferred income taxes                                      |       | 64,100                      |       |
| Other liabilities                                          |       | 12,306                      |       |
| Total liabilities before amounts payable to OEH of $97,000 |       | $                           | 161,405    |   |

 

****Thethird-party debt of Charleston Center LLC is non-recourse to its members,including OEH, and the hotel’s separate assets and liabilities are notavailable to pay the debts of OEH and do not constitute obligations of OEH.****

 

**4.****            ****Property,plant and equipment**

 

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

 
| ** **                              | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Land and buildings                      |       | $                       | 1,245,887  |                        | $          | 1,200,909 |   |
| Machinery and equipment                 |       | 183,276                 |       | 185,565                     |       |
| Fixtures, fittings and office equipment |       | 196,554                 |       | 169,674                     |       |
| River cruiseship and canalboats         |       | 13,254                  |       | 13,223                      |       |
|                                    |       | 1,638,971               |       | 1,569,371                   |       |
| Less: accumulated depreciation          |       | (237,994                | )          | (213,282                    | )          |
|                                    |       | $                       | 1,400,977  |                        | $          | 1,356,089 |   |

 

The majorclasses of assets under capital leases included above are as follows (dollarsin thousands):

 

14

----

 
| ** **                                 | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Freehold and leased land****and  buildings |       | $                       | 15,408     |                        | $          | 15,535 |   |
| Machinery and equipment                    |       | 2,721                   |       | 2,189                       |       |
| Fixtures, fittings and officeequipment     |       | 3,080                   |       | 2,877                       |       |
|                                       |       | 21,209                  |       | 20,601                      |       |
| Less: accumulated depreciation             |       | (4,786                  | )          | (4,096                      | )          |
| ** **                                 |       | $                       | 16,423     |                        | $          | 16,505 |   |

 

**5.****            ****Goodwill**

 

Thechanges in the carrying amount of goodwill for the six months ended June 30,2009 are as follows (dollars in thousands):

 
| ** **                                       | ** ** | **Hotels &  Restaurants** | ** ** | **Trains &  Cruises** | ** ** | **Total**  | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|--------------------------------|------------|------------|------------|
| Balance as of January 1, 2009               |       | $                                  | 146,381    |                           | $          | 7,673      |       | $ | 154,054 |   |
| Goodwill impairment (from continuing operations) |       | (6,835                             | )          | —                         |       | (6,835     | )          |
| Foreign currency translation adjustment          |       | (643                               | )          | 347                            |       |  (296 | )          |
| Balance as at June 30, 2009                 |       | $                                  | 138,903    |                           | $          | 8,020      |       | $ | 146,923 |   |

 

OEH’s goodwillimpairment testing is performed in two steps, first, the determination ofimpairment based upon the fair value of each reporting unit as compared withits carrying value and, second, if there is an implied impairment, themeasurement of the amount of the impairment loss is determined by comparing theimplied fair value of goodwill with the carrying value of the goodwill. If the carrying value of the reporting unit’s goodwill exceeds its implied fairvalue, the goodwill is deemed to be impaired and is written down to the extentof the difference.

 

Thedetermination of impairment incorporates various assumptions and uncertaintiesthat OEH believes are reasonable and supportable considering all availableevidence, such as the future cash flows of the business, future growth rates andthe related discount rate. However, these assumptions and uncertainties are, bytheir very nature, highly judgmental.  If the assumptions are not met, OEHmay be required to recognize additional goodwill impairment losses.

 

During thefirst quarter of 2009, OEH completed  its 2008 impairment analysis andidentified a non-cash goodwill impairment charge of $6,835,000 in addition tothe estimated impairment loss included in its annual December 31, 2008results, as follows (dollars in thousands):

 

15

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| Miraflores Park          |   | $     | 3,208  |   |
|--------------------------|--------|-------|--------|--------|
| Casa de Sierra Nevada    |   | 2,805 |   |
| Observatory Hotel        |   | 274   |   |
| Lilianfels Blue Mountain |   | 548   |   |
|                     |   | $     | 6,835  |   |

 

In addition,an impairment charge of $213,000 was made in respect of tradenames owned by theCasa de Sierra Nevada, bringing the total impairment charge to $7,048,000 inthe three months ended March 31, 2009.

 

**6.****            ****Otherintangible assets**

(Dollars inthousands)

 
| ** **                    | ** ** | **June 30, 2009** | ** ** |
|-------------------------------|------------|------------------------|------------|
| ** **                    | ** ** | **Carrying  amount**   | ** ** | **Accumulated  amortization** | ** ** | **Net book  value** | ** ** |
|                          |       |                   |       |   |   |   |   |   |   |   |
| Amortized intangible assets   |       |                   |       |   |   |   |
| Favorable lease               |       | $                      | 12,398     |   | $ | 984 |   | $ | 11,414 |   |
| Internet sites                |       | 2,253                  |       | 263 |   | 1,990 |   |
| Total                         |       | $                      | 14,651     |   | $ | 1,247 |   | $ | 13,404 |   |
|                          |       |                   |       |   |   |   |   |
| Unamortized intangible assets |       |                   |       |   |   |   |   |
| Tradename                     |       |                   |       |   |   | $ | 7,100 |   |

 

Favorablelease intangible assets are amortized over the terms of the leases, which arebetween 19 and 60 years, and internet sites are amortized over ten years.

 

Amortization expense for the three monthsended June 30, 2009 was $95,000 (2008 — $84,000).  Amortization expense for the six months endedJune 30, 2009 was $170,000 (2008 — $170,000).  Estimated amortization expense for each ofthe years ended December 31, 2009 to December 31, 2013 is $340,000.

 

**7.****            ****Long-termdebt and obligations under capital lease**

 

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

 

16

----

 
| ** **                                                                                                                                                                                                 | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                                                                                                                                                                                       |       |                    |       |                        |       |
| Loans from banks collateralized by property, plant and equipment  payable over periods of 1 to 11 years, with a weighted average interest rate  of 3.75% and 5.05%, respectively, primarily based on LIBOR |       | $                       | 795,913    |                        | $          | 783,192 |   |
| Obligations under capital lease                                                                                                                                                                            |       | 12,830                  |       | 13,573                      |       |
|                                                                                                                                                                                                       |       | 808,743                 |       | 796,765                     |       |
| Less: current portion                                                                                                                                                                                      |       | (172,822                | )          | (138,813                    | )          |
|                                                                                                                                                                                                       |       | $                       | 635,921    |                        | $          | 657,952 |   |

 

Long-term debt at June 30, 2009 includes $79,549,000(December 31, 2008 - $79,600,000) of debt at Charleston Center LLC. Thisdebt is non-recourse to OEH, and the separate assets and liabilities ofCharleston Place Hotel are not available to pay the debts of OEH and do notconstitute obligations of OEH.

 

Of the currentportion of long-term debt $112,163,000 (December 31, 2008 - $105,373,000)related to revolving credit facilities which, although falling due within 12months, are available for re-borrowing throughout the period of the loanfacilities which are repayable in 2011 and 2012.

 

Certain creditagreements of OEH have restrictive covenants. At June 30, 2009, OEH was in compliance with all major covenantsthat applied to OEH, including a minimum consolidated net worth test and aminimum consolidated interest coverage test as defined under OEH’s largestbank-syndicated loan facility.  OEH doesnot currently have any covenants in its loan agreements which limit the paymentof dividends.

 

The following is a summary of the aggregate maturitiesof long-term debt, including obligations under capital lease, at June 30,2009 (dollars in thousands):

 
| **Year ending  December 31,** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|
|                               |       |       |       |
| 2010                               |       | $          | 15,055     |   |
| 2011                               |       | 449,257    |       |
| 2012                               |       | 92,672     |       |
| 2013                               |       | 16,223     |       |
| 2014 and thereafter                |       | 62,714     |       |
|                               |       | $          | 635,921    |   |

 

17

----

 

The fair value of the debt at June 30, 2009 has been estimated inthe amount of $683,745,000.

 

In April 2009,OEH closed a $30,000,000 secured construction loan for its Porto Cupecoyresidential mixed-use development project on the Dutch side of St Martin,French West Indies.  OEH has drawn$5,200,000 of this loan and has access to a further $12,700,000 immediately tofund future expenditure on the project, and may borrow additional amounts asadditional new unit sales at Porto Cupecoy are made.

 

**8.****            ****Otherliabilities**

 

Other liabilities are $1,491,000 of deferred consideration onacquisition of land next to Maroma Resort and Spa after discounting to presentvalue, $1,837,000 of deferred income relating to guarantees given by OEH inconnection with bank loans entered into by the Peruvian hotel joint natureoperation (see Note 18), $3,434,000 in respect of interest rate swaps (see Note17) and $12,640,000 of long-term accrued interest at Charleston Place Hotel.

 

**9.****            ****Incometaxes**

 

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

 

OEH recorded a tax provision for the three months ended June 30,2009 of $10,296,000, compared to a provision of $9,722,000 for thecorresponding period in 2008. OEH’s current tax charge for the three monthsended June 30, 2009 was $4,881,000, compared to a charge of $2,806,000 in2008. Cumulatively, OEH recorded a tax provision for the six months ended June 30,2009 of $919,000, compared to a provision of $6,165,000 for the correspondingperiod in 2008. OEH’s current tax charge for the six months ended June 30,2009 was $7,709,000, compared to a charge of $5,067,000 in 2008.

 

The June 30, 2009 provision for income taxes includes a currenttax charge of $2,249,000 and a deferred tax charge of $3,221,000 arising inItaly in connection with the closure of a tax audit in respect of the 2004,2005 and 2006 tax years. OEH had previously included a liability of $4,960,000within its provision under FIN 48, “Accounting for Uncertainty of Income Taxes”,in respect of these uncertain tax positions. The provision for income taxes inthe three months ended June 30, 2009 includes a tax credit in the amountof $4,960,000 to release this FIN 48 provision. The net charge to OEH taking 

 

18

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into account all of these entries is $510,000. The $2,249,000 currenttax liability is payable in 12 quarterly instalments of approximately $187,000each, commencing in July 2009.

 

OEH’s tax provision for the three months ended June 30, 2009included a net tax benefit of $4,514,000 (2008 - $522,000) in respect of areduction in the provision under FIN 48, of which $212,000 (2008 - $445,000)relates to interest and penalty costs associated with the uncertain taxpositions.  OEH’s tax provision for thesix months ended June 30, 2009 included a net tax benefit of $4,383,000(2008 - $808,000) in respect of a reduction in the FIN 48 provision, includinga charge of $271,000 (2008 - $698,000) that related to the potential interestand penalty costs. As described in the preceding paragraph, the FIN 48 taxbenefits for the three and six months ended June 30, 2009 include abenefit of $4,960,000 related to the Italian tax audits.

 

At June 30, 2009, OEH had recognized a $7,034,000 provision (December 31,2008 - $11,493,000) in respect of its uncertain tax positions.  OEH believes that it is reasonably possiblethat within the next 12 months the FIN 48 provision will decrease byapproximately $1,000,000 as a result of the resolution of tax positions incertain jurisdictions in which OEH operates.

 

Earnings fromunconsolidated companies are reported net of tax in the statements ofconsolidated operations.  The taxprovision applicable to these unconsolidated companies in the three monthsended June 30, 2009 is $750,000, compared to a provision of $1,439,000 inthe corresponding period in 2008. The cumulative tax provision applicable tounconsolidated subsidiaries in the six months ended June 30, 2009 was$1,182,000 compared to a provision of $2,620,000 in the six months ended June 30,2008.

 

**10.****         ****Pensions**

 

Components ofnet periodic pension benefit cost were as follows (dollars in thousands)

 
| **Three months ended  June 30,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |
| Service cost                          |       | $        | —     |     | $          | — |   |
| Interest cost                         |       | 247      |       | 310      |       |
| Expected return on plan assets        |       | (160     | )          | (295     | )          |
| Amortization of net loss              |       | 154      |       | 120      |       |
| Net periodic benefit cost             |       | $        | 241        |     | $          | 135 |   |

 

19

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| **Six months ended  June 30,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
|                                |       |     |       |     |       |
| Service cost                        |       | $        | —     |     | $          | — |   |
| Interest cost                       |       | 316      |       | 621      |       |
| Expected return on plan assets      |       | (205     | )          | (590     | )          |
| Amortization of net loss            |       | 198      |       | 239      |       |
| Net periodic benefit cost           |       | $        | 309        |     | $          | 270 |   |

 

As reported inNote 11 to the financial statements in the Company’s 2008 Form 10-K annualreport, OEH expected to contribute $1,097,000 to its defined benefit pensionplan in 2009.  As of June 30, 2009,$558,000 of contributions had been made. OEH anticipates contributing an additional $539,000 to fund its definedbenefit pension plan in 2009 for a total of $1,097,000.

 

**11.****         ****Supplementalcash flow information**

(Dollars in thousands)

 
| **Six months ended  June 30,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
|                                |       |     |       |     |       |
| Cash paid for:                      |       |     |       |     |       |
| Interest                            |       | $        | 19,272     |     | $          | 27,210 |   |
| Income taxes                        |       | $        | 5,512      |     | $          | 9,144 |   |

 

In conjunction with acquisitions in the six monthsended June 30, 2008, liabilities were assumed as follows (dollars inthousands):

 
| **Six months ended  June 30,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
|                                |       |     |       |     |       |
| Fair value of assets acquired       |       | $        | —     |     | $          | 3,316 |   |
| Cash paid                           |       | —   |       | (3,316   | )          |
| Liabilities assumed                 |       | $        | —     |     | $          | — |   |

 

*Restricted cash*

 

Restricted cash of $13,097,000 at June 30, 2009and $13,224,000 at December 31, 2008 consisted mainly of the Porto Cupecoyescrow account. Cash received for residential condominium purchases at PortoCupecoy is held in escrow and released to OEH when the next phase ofconstruction is completed. At June 30, 2009, the Porto Cupecoy escrowaccount balance amounted to $9,062,000 (December, 31 2008 — $8,168,000).

 

20

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**12.****         ****Accumulatedother comprehensive income**

 

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

 
| ** **                                         | ** ** | **June 30,********2009** | ** ** | **December 31,********2008** | ** ** |
|----------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
|                                               |       |                          |       |                              |       |
| Foreign currency translationadjustments            |       | $                             | (31,350    | )                                 | $          | (40,851 | ) |
| Derivative financial instruments                   |       | (9,899                        | )          | (8,633                            | )          |
| Pension liability, net of tax of$3,106 and  $3,106 |       | (10,709                       | )          | (10,726                           | )          |
|                                               |       | $                             | (51,958    | )                                 | $          | 60,210 |   |

 

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

 
| **Six months ended  June 30,**                              | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                             |       |     |       |     |       |
| Net (loss)/earnings on common shares                             |       | $        | (38,952    | )        | $          | 15,126 |   |
| Foreign currency translation adjustments                         |       | 16,220   |       | 8,846    |       |
| Foreign currency translation adjustments relating to Lapa Palace |       | (6,719   | )          | —   |       |
| Change in fair value of derivatives                              |       | (1,266   | )          | 3,169    |       |
| Change in pension liability, net of tax of $nil and $nil         |       | 17       |       | —   |       |
| Comprehensive loss                                               |       | $        | (30,700    | )        | $          | 27,141 |   |

 

**13.****         ****Equity-compensationplans**

 

On June 5,2009, the shareholders of the Company approved a new 2009 Share Award andIncentive Plan (the “2009 Plan”) which replaced the 2000 Stock Option Plan,2004 Stock Option Plan and 2007 Performance Share Plan (the “Pre-existing Plans”).A total of 1,084,550 class A common shares plus the number of class A commonshares subject to outstanding awards under the Pre-existing Plans which becomeavailable after June 5, 2009 as a result of expirations, cancellations,forfeitures or terminations, are reserved for issuance for awards under 2009Plan.

 

The 2009 Planpermits awards of stock options, stock appreciation rights, restricted shares,deferred shares, bonus shares and awards in lieu of obligations, dividendequivalents, other share-based awards, performance-based awards, or anycombination of the foregoing. Each type of award is granted and vests based onits own terms, as determined by the Compensation Committee of the Company’sBoard.

 

21

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On June 8,2009, OEH awarded under the 2009 Plan stock options on 631,900 class A commonshares at an exercise price of $8.38 per share vesting in June 2012 andexpiring in June 2018, deferred shares covering 21,265 class A commonshares vesting in February 2012 without performance criteria, and deferredshares covering 926 class A common shares vesting in March 2012 withperformance criteria related to total shareholder return and earnings beforetax.

 

OEH awardedunder the 2007 Performance Share Plan, on February 2, 2009, 158,046 classA common shares vesting in February 2010 without performance criteria and68,070 class A common shares vesting in February 2012 without performancecriteria and, on March 13, 2009, 210,519 class A common shares vesting in March 2012with performance criteria related to total shareholder return and earningsbefore tax.

 

The fair valueof grants issued in the six months ended June 30, 2009 was $4,416,000(2008-$1,486,000).

 

The fair valueof the stock options issued under the 2009 Plan on the grant date was $4.18 pershare.

 

Estimate ofthe fair value of stock options on the grant date using the Black-Scholesoption pricing model was based on the following assumptions:

 
| ** **                          | ** ** | **June 8,  2009** | ** ** |
|-------------------------------------|------------|------------------------|------------|
|                                |       |                   |       |
| Expected share price volatility     |       | 55                     | %          |
| Risk-free interest rate             |       | 2.95                   | %          |
| Expected annual dividends per share |       | $                      | 0          |   |
| Expected life of stock options      |       | 5 years                |       |
|                                     |            |                        |            |  |

 

Expectedvolatilities are based on historical volatility of the Company’s class A commonshare price and other factors.  Theexpected term of options granted is based on historical data and represents theperiod of time that options are expected to be outstanding.  The risk-free rate for periods within theexpected life of the option is based on the U.S. Treasury yield curve in effectat the time of grant.

 

The total compensation cost related to unvested awardsoutstanding at June 30, 2009, to be recognized over the period July 1, 2009 toJune 30, 2012, is $7,891,000.

 

**14.****         ****Fairvalues of financial instruments and non-financial assets**

 

*Fair values of financial instruments*

 

The followingmethods and assumptions were used to estimate the fair value of each class offinancial instruments for which it is practicable to estimate fair value.

 

The carryingamount of cash, cash equivalents and working capital facilities approximatesfair value because of the short maturity of those instruments.

 

The fair valueof OEH’s long-term debt is estimated based on the quoted market prices for thesame or similar issues or on the current rates offered to OEH for debt of thesame remaining maturities.

 

The estimated fair values of OEH’sfinancial instruments are as follows (dollars in thousands):

 

 

22

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| ** **                                                                                                                | ** **     | ****June 30, 2009**** | **** **** |
|---------------------------------------------------------------------------------------------------------------------------|----------------|----------------------------|----------------|
| **** ****                                                                                                            | **** **** | ****Carrying  amount****   | **** **** | ****Fair value**** | **** **** |
|                                                                                                                      |           |                       |           |   |   |
| ****Cash and cash equivalents****                                                                                         | **** **** | ****$****                  | 143,553        | **** **** | ****$**** | ****1****43,553 | **** **** |
| ****Working capital********facilities****                                                                                 | **** **** | ****$****                  | 31,851         | **** **** | ****$**** | ****31,851**** | **** **** |
| ****Long-term debt, including********current portion,********excluding obligations********under capital********leases**** | **** **** | ****$****                  | 795,913        | **** **** | ****$**** | ****683,745**** | **** **** |

 

*Fair values ofnon-financial assets measured on a non-recurring basis*

   (dollarsin thousands)

 
| ** **                                      | ** ** | ** **                | ** **    | **Fair value measurements using**                                      | ** ** | ** **                                            | ** ** |
|-------------------------------------------------|------------|---------------------------|---------------|------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                      | ** ** | **At June 30, 2009** | ** **    | **Quoted prices in  active markets  for identical  assets  (Level 1)** | ** ** | **Significant  other  observable  inputs  (Level 2)** | ** ** | **Significant  unobservable  inputs  (Level 3)** | ** ** | **Total losses for six   months ended June  30, 2009** | ** ** |
| Assets of discontinued operations held for sale |       | $                         |  76,882  |                                                                   | $          |  —                                          |       | $ |  76,882 |   | $ |  — |   | $ |  (26,403 | ) |
|                                            |       |                      |          |                                                                   |       |                                                  |       |   |   |   |   |
| Goodwill                                        |       | $                         |  146,923 |                                                                   | $          |  —                                          |       | $ |  — |   | $ |  146,923 |   | $ |  (6,835 | ) |
| Other intangible assets                         |       | $                         |  20,504  |                                                                   | $          |  —                                          |       | $ |  — |   | $ |  20,504 |   | $ |  (213 | ) |

 

In accordancewith the provisions of SFAS No. 144, assets of discontinued operationsheld for sale with a carrying amount of $103,285,000 were written down to theirfair value less cost to sell, resulting in a loss of $26,403,000 which wasincluded in losses from discontinued operations for the period (see Note 2).

 

In accordancewith the provisions of SFAS No. 142, goodwill with a carrying amount of$153,758,000 was written down to its implied fair value of $146,923,000,resulting in an impairment charge of $6,835,000 which was included in earningsfrom continuing operations for the period (see Note 5).

 

Also in accordance with the provisions of SFAS No. 142,other intangible assets with a carrying amount of $20,717,000 were written downto their fair value of $20,504,000, resulting in an impairment charge of$213,000 which was included in earnings from continuing operations for theperiod (see Note 5).

 

**15.****         ****Commitmentsand contingencies**

 

Outstanding contracts to purchase fixed assets wereapproximately $64,389,000 at June 30, 2009 (December 31, 2008 -$76,606,000), including $52,000,000 (December 31, 2008 - $53,000,000) inrespect of the New York Public Library contracts referred to in the nextparagraph. Additionally, outstanding contracts for project related costs on thePorto Cupecoy development were approximately $20,007,000 at June 30, 2009(December 31, 2008 - $31,960,000).

 

As reported in the Company’s 2008 Form 10-Kannual report, OEH entered into agreements in November 2007 with the NewYork Public Library to acquire its Donnell Library branch site adjacent to ‘21’Club and to construct a mixed use hotel and residential development in New YorkCity. In February 2009, in light of current and anticipated futureeconomic conditions, OEH 

 

23

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decided to suspend further payments under theagreements, as they had been amended in December 2008. On July 9,2009, OEH and the New York Public Library signedagreements to spread future payments on this purchase over the next 24 months.In addition to the $7,000,000 that OEH has already paid, OEH paid $9,000,000upon execution of the agreements, to be followed by 16 monthly payments of$500,000 each commencing in February 2010, and final payments of$6,000,000 and $29,000,000 respectively in June 2011.  In the event OEH elects not to close thetransaction, the final payment of $29,000,000 will not be due to theLibrary.  OEH has given the Librarysecurity on seven unencumbered villas at La Samanna to secure the payments.

 

**16.****         ****Informationconcerning financial reporting for segments and operations in differentgeographical areas**

 

As reported in the Company’s 2008 Form 10-Kannual report, OEH has three reporting segments, (i) hotels andrestaurants,  (ii) tourist trainsand cruises, and (iii) real estate and property development.  Segment performance is evaluated based uponsegment net earnings before interest, foreign currency, tax (including tax onearnings from unconsolidated companies), depreciation and amortization (“segmentEBITDA”).  Financial information regardingthese business segments is as follows, with net finance costs appearing net ofcapitalized interest and interest and related income (dollars in thousands):

 
| **Three months ended  June 30,**     | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Revenue:                                  |       |     |       |     |       |
| Hotels and restaurants                    |       |     |       |     |       |
| Owned hotels – Europe                |       | $        | 52,226     |     | $          | 81,239 |   |
| – North America                      |       | 26,825   |       | 16,989   |       |
| – Rest of world                      |       | 26,276   |       | 30,840   |       |
| Hotel management/part ownership interests |       | 1,249    |       | 3,324    |       |
| Restaurants                               |       | 3,561    |       | 5,288    |       |
|                                      |       | 110,137  |       | 137,680  |       |
| Tourist trains and cruises                |       | 19,081   |       | 28,067   |       |
| Real estate                               |       | —   |       | 4,443    |       |
|                                      |       | $        | 129,218    |     | $          | 170,190 |   |
|                                      |       |     |       |     |       |
| Depreciation and amortization:            |       |     |       |     |       |
| Hotels and restaurants                    |       |     |       |     |       |
| Owned hotels – Europe                |       | $        | 3,994      |     | $          | 4,506 |   |
| – North America                      |       | 2,624    |       | 1,413    |       |
| – Rest of world                      |       | 2,186    |       | 2,316    |       |
| Restaurants                               |       | 210      |       | 283      |       |
|                                      |       | 9,014    |       | 8,518    |       |
| Tourist trains and cruises                |       | 703      |       | 833      |       |
|                                      |       | $        | 9,717      |     | $          | 9,351 |   |

 

24

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| **Three months ended  June 30,**                           | ** ** | **2009**     | ** ** | **2008**     | ** ** |
|-----------------------------------------------------------------|------------|--------------|------------|--------------|------------|
| Segment EBITDA:                                                 |       |         |       |         |       |
| Owned hotels – Europe                                      |       | $            | 17,177     |         | $          | 32,846 |   |
| – North America                                            |       | 4,299        |       | 2,513        |       |
| – Rest of world                                            |       | 3,692        |       | 3,633        |       |
| Hotel management/part ownership interests                       |       | 1,223        |       | 7,736        |       |
| Restaurants                                                     |       | 153          |       | 920          |       |
| Tourist trains and cruises                                      |       | 6,854        |       | 9,826        |       |
| Real estate                                                     |       | (474         | )          | (463         | )          |
| Impairment of goodwill                                          |       | —       |       | —       |       |
| Central overheads                                               |       |  (6,833 | )          |  (7,159 | )          |
|                                                            |       | $            | 26,091     |         | $          | 49,852 |   |
|                                                            |       |         |       |         |       |
| Segment EBITDA/net  earnings reconciliation:                    |       |         |       |         |       |
| Segment EBITDA                                                  |       | $            | 26,091     |         | $          | 49,852 |   |
| Less:                                                           |       |         |       |         |       |
| Depreciation and amortization                                   |       | 9,717        |       | 9,351        |       |
| Interest expense, net                                           |       | 7,574        |       | 10,645       |       |
| Foreign currency, net                                           |       | 400          |       | (2,617       | )          |
| Provision for income taxes                                      |       | 10,296       |       | 9,722        |       |
| Share of provision for income taxes ofunconsolidated  companies |       | 750          |       | 1,439        |       |
| (Losses)/earnings fromcontinuing  operations                    |       | $            | (2,646     | )            | $          | 21,312 |   |
|                                                            |       |         |       |         |       |
| Earnings from unconsolidated companies,net of tax:              |       |         |       |         |       |
| Hotels and restaurants                                          |       |         |       |         |       |
| Hotel management/part ownership interests                       |       | $            | (23        | )            | $          | 3,326 |   |
| Tourist trains and cruises                                      |       | 2,072        |       | 2,512        |       |
|                                                            |       | $            | 2,049      |         | $          | 5,838 |   |
|                                                            |       |         |       |         |       |
| Capital expenditure:                                            |       |         |       |         |       |
| Owned hotels – Europe                                      |       | $            | 8,800      |         | $          | 13,748 |   |
| – North America                                            |       | 2,370        |       | 5,845        |       |
| – Rest of world                                            |       | 5,892        |       | 5,998        |       |
| Restaurants                                                     |       | 38           |       | 229          |       |
| Tourist trains and cruises                                      |       | 499          |       | 883          |       |
| Real estate                                                     |       | 1,337        |       | 2,707        |       |
|                                                            |       | $            | 18,936     |         | $          | 29,410 |   |

 

25

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| **Six months ended  June 30,**                             | ** ** | **2009** | ** ** | **2008**      | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|---------------|------------|
| Revenue:                                                        |       |     |       |          |       |
| Hotels and restaurants                                          |       |     |       |          |       |
| Owned hotels – Europe                                      |       | $        | 65,677     |          | $          | 105,983 |   |
| – North America                                            |       | 55,980   |       | 36,588        |       |
| – Rest of world                                            |       | 56,165   |       | 71,607        |       |
| Hotel management/part ownership interests                       |       | 2,268    |       | 5,825         |       |
| Restaurants                                                     |       | 7,233    |       | 10,154        |       |
|                                                            |       | 187,323  |       | 230,157       |       |
| Tourist trains and cruises                                      |       | 23,558   |       | 36,721        |       |
| Real estate                                                     |       | —   |       | 8,526         |       |
|                                                            |       | $        | 210,881    |          | $          | 275,404 |   |
|                                                            |       |     |       |          |       |
| Depreciation and amortization:                                  |       |     |       |          |       |
| Hotels and restaurants                                          |       |     |       |          |       |
| Owned hotels – Europe                                      |       | $        | 7,822      |          | $          | 8,822 |   |
| – North America                                            |       | 5,130    |       | 2,777         |       |
| – Rest of world                                            |       | 4,266    |       | 4,666         |       |
| Restaurants                                                     |       | 420      |       | 562           |       |
|                                                            |       | 17,638   |       | 16,827        |       |
| Tourist trains and cruises                                      |       | 1,357    |       | 1,908         |       |
|                                                            |       | $        | 18,995     |          | $          | 18,735 |   |
| Segment EBITDA:                                                 |       |     |       |          |       |
| Owned hotels – Europe                                      |       | $        | 11,762     |          | $          | 29,372 |   |
| – North America                                            |       | 12,025   |       | 8,636         |       |
| – Rest of world                                            |       | 12,549   |       | 16,380        |       |
| Hotel management/part ownership interests                       |       | 1,915    |       | 12,954        |       |
| Restaurants                                                     |       | 216      |       | 1,569         |       |
| Tourist trains and cruises                                      |       | 8,297    |       | 11,369        |       |
| Real estate                                                     |       | (793     | )          | (960          | )          |
| Impairment of goodwill                                          |       | (7,048   | )          | —        |       |
| Central overheads                                               |       | (11,938  | )          |  (13,958 | )          |
|                                                            |       | $        | 26,985     |          | $          | 65,362 |   |
|                                                            |       |     |       |          |       |
| Segment EBITDA/net  earnings reconciliation:                    |       |     |       |          |       |
| Segment EBITDA                                                  |       | $        | 26,985     |          | $          | 65,362 |   |
| Less:                                                           |       |     |       |          |       |
| Depreciation and amortization                                   |       | 18,995   |       | 18,735        |       |
| Interest expense, net                                           |       | 16,807   |       | 22,690        |       |
| Foreign currency, net                                           |       | 4,238    |       | (4,662        | )          |
| Provision for income taxes                                      |       | 919      |       | 6,165         |       |
| Share of provision for income taxes ofunconsolidated  companies |       | 1,182    |       | 2,620         |       |
| (Losses)/earnings fromcontinuing  operations                    |       | $        | (15,156    | )             | $          | 19,814 |   |
|                                                            |       |     |       |          |       |
| Earnings from unconsolidated companies,net of tax:              |       |     |       |          |       |
| Hotels and restaurants                                          |       |     |       |          |       |
| Hotel management/part ownership interests                       |       | $        | (258       | )             | $          | 6,060 |   |
| Tourist trains and cruises                                      |       | 3,426    |       | 3,845         |       |
|                                                            |       | $        | 3,168      |          | $          | 9,905 |   |

 

26

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| **Six months ended  June 30,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Capital expenditure:                |       |     |       |     |       |
| Owned hotels – Europe          |       | $        | 14,772     |     | $          | 23,615 |   |
| – North America                |       | 8,375    |       | 10,951   |       |
| – Rest of world                |       | 13,128   |       | 8,293    |       |
| Restaurants                         |       | 130      |       | 284      |       |
| Tourist trains and cruises          |       | 1,741    |       | 2,976    |       |
| Real estate                         |       | 2,763    |       | 4,081    |       |
|                                |       | $        | 40,909     |     | $          | 50,200 |   |

 

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

 
| **Three months ended  June 30,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |
| Revenue:                              |       |     |       |     |       |
| Europe                                |       | $        | 70,839     |     | $          | 108,399 |   |
| North America                         |       | 30,100   |       | 28,352   |       |
| Rest of world                         |       | 28,279   |       | 33,439   |       |
|                                  |       | $        | 129,218    |     | $          | 170,190 |   |

 
| **Six months ended June 30,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| Revenue:                           |       |     |       |     |       |
| Europe                             |       | $        | 88,227     |     | $          | 139,238 |   |
| North America                      |       | 62,546   |       | 57,972   |       |
| Rest of world                      |       | 60,108   |       | 78,194   |       |
|                               |       | $        | 210,881    |     | $          | 275,404 |   |

 

**17.****         ****Derivativesand hedging activities**

 

*Risk management objective of usingderivatives*

 

OEH enters into derivative financial instruments tomanage exposures that arise from business activities that result in the receiptor payment of future known and uncertain cash amounts, the value of which isdetermined by interest rates. OEH’s derivative financial instruments are usedto manage differences in the amount, timing and duration of OEH’s known orexpected cash receipts and payments principally related to its investments andborrowings.

 

*Cash flow hedges of interest rate risk*

 

OEH’s objective in using interest rate derivatives isto add certainty and stability to its interest expense and to manage itsexposure to interest rate movements. To accomplish this 

 

27

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objective, OEH primarily uses interest rate swaps aspart of its interest rate risk management strategy. Interest rate swapsdesignated as cash flow hedges involve the receipt of variable-rate amountsfrom a counterparty in exchange for OEH making fixed-rate payments over thelife of the agreements without the exchange of the underlying notional loanamount.

 

The effective portion of changes in the fair value ofderivatives designated and qualifying as cash flow hedges is recorded inaccumulated other comprehensive income and is subsequently reclassified intoearnings in the period that the hedged forecast transaction affects earnings.During the next 12 months, OEH estimates that an additional $6,969,000 will bereclassified as an increase to interest expense. During the six months ended June 30,2009, such derivatives were used to hedge the variable cash flows associatedwith existing variable interest rate debt. The ineffective portion of thechange in fair value of the derivatives is recognized directly in earnings.

 

As of June 30, 2009, OEH had the followingoutstanding interest rate derivatives that were designated as cash flow hedgesof interest rate risk:

 
| **Interest Rate  Derivatives** | ** ** | **Notional Amount** | ** **  |
|--------------------------------|------------|---------------------|-------------|
|                           |       |                |        |
| Interest Rate Swap             |       | €              | 165,000,000 |   |
| Interest Rate Swaps            |       | $                   | 181,250,000 |   |

 

*Non-designated hedges of interest rate risk*

 

Derivatives not designated as hedges are used tomanage OEH’s exposure to interest rate movements but do not meet the stricthedge accounting requirements of SFAS No. 133. As of June 30, 2009,OEH had one interest rate swap with a €24,700,000 notional amount that was anon-designated hedge of OEH’s exposure to interest rate risk.

 

The table below presents the fair value of OEH’sderivative financial instruments as well as their classification as of June 30,2009 (dollars in thousands).

 

28

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| ** **                                                            | ** ** | **Liability Derivatives**   | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                            | ** ** | **Balance Sheet  Location** | ** ** | **Fair  Value as of  June 30, 2009** | ** ** | **Fair Value as of  December 31, 2008** | ** ** |
| Derivatives designated as hedging instruments under SFAS No. 133 |       |                        |       |   |   |   |   |
| Interest Rate Swaps                                                   |       | Accrued  liabilities        |       | $ |  7,538 |   | $ |  1,980 |   |
| Interest Rate Swaps                                                   |       | Other  liabilities          |       | 2,904 |   | 6,803 |   |
| Total                                                                 |       |                        |       | $ |  10,442 |   | $ |  8,783 |   |
|                                                                  |       |                        |       |   |   |   |   |
| Derivatives not designated as hedging instruments under SFAS No.133   |       |                        |       |   |   |   |   |
| Interest Rate Swap                                                    |       | Accrued  liabilities        |       | $ |  1,024 |   | $ |  1,670 |   |
| Interest Rate Swap                                                    |       | Other  liabilities          |       | 530 |   | 2,228 |   |
| Total                                                                 |       |                        |       | $ |  1,554 |   | $ |  3,898 |   |

 

The tables below (in which “OCI” means othercomprehensive income) presents the effect of OEH’s derivative financialinstruments on the statement of operations for the three and six months ended June 30,2009 and 2008 (dollars in thousands):

 
| **Three months ended  June 30,**                                             | ** ** | **2009**           | ** ** | **2008**           | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
|                                                                              |       |               |       |               |       |
| Derivatives in SFAS No. 133 cashflow hedging  relationship                   |       | Interestrate swaps |       | Interestrate swaps |       |
| Amount of (loss)/gain recognized in OCI(effective portion),  net of tax           |       | $                  | (2,015     | )                  | $          | 5,888 |   |
| Location of loss reclassifiedfrom  accumulated OCI into income(effective portion) |       | Interestexpense    |       | Interestexpense    |       |
| Amount of loss reclassified fromaccumulated OCI  into income(effective portion)   |       | $                  | (1,527     | )                  | $          | (109 | ) |
| Location of loss recognized inincome on  derivatives (ineffectiveportion)         |       | Interestexpense    |       | Interestexpense    |       |
| Amount of loss recognized inincome on  derivatives (ineffectiveportion)           |       | $                  | —     |               | $          | — |   |
|                                                                              |       |               |       |               |       |
| Derivatives not designated ashedging instruments  under SFAS No.133               |       | Interestrate swap  |       | Interestrate swap  |       |
| Location of (loss)/gain recognized inincome                                       |       | Interestexpense    |       | Interestexpense    |       |
| Amount of (loss)/gain recognized inincome                                         |       | $                  | (77        | )                  | $          | 996 |   |

 

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| **Six months ended  June 30,**                                                      | ** ** | **2009**           | ** ** | **2008**           | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                               | ** ** | ** **         | ** ** | ** **         | ** ** |
| Derivatives in SFAS No. 133 cashflow hedging  relationship                          |       | Interestrate swaps |       | Interestrate swaps |       |
| Amount of (loss)/gain recognized in OCI(effective  portion), net of tax                  |       | $                  | (3,678     | )                  | $          | 3,380 |   |
| Location of (loss)/gain reclassifiedfrom  accumulated OCI into income(effective portion) |       | Interestexpense    |       | Interestexpense    |       |
| Amount of (loss)/gain reclassifiedfrom  accumulated OCI into income(effective portion)   |       | $                  | (2,386     | )                  | $          | 211 |   |
| Location of loss recognized inincome on  derivatives (ineffectiveportion)                |       | Interestexpense    |       | Interestexpense    |       |
| Amount of loss recognized inincome on  derivatives (ineffectiveportion)                  |       | $                  | —     |               | $          | (132 | ) |
|                                                                                     |       |               |       |               |       |
| Derivatives not designated ashedging  instruments under SFAS No.133                      |       | Interestrate swap  |       | Interestrate swap  |       |
| Location of (loss)/gain recognized inincome                                              |       | Interestexpense    |       | Interestexpense    |       |
| Amount of (loss)/gain recognized inincome                                                |       | $                  | (676       | )                  | $          | 646 |   |

 

*Credit-risk-related contingent features*

 

OEH has agreements with each of its derivativecounterparties that contain a provision under which if OEH defaults on any ofits indebtedness, then OEH could also be declared in default in respect of itsderivative obligations.

 

As of June 30, 2009, the fair value ofderivatives in a net liability position, which includes accrued interest butexcludes any adjustment for non-performance risk, related to these agreementswas $13,049,000. As of June 30, 2009, OEH has posted cash collateral of$4,612,000 with certain of its derivative counterparties in respect of thesenet liability positions. If OEH breached any of these provisions, it would berequired to settle its obligations under the agreements at their terminationvalue of $13,049,000.

 

30

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*SFAS No. 157 disclosures*

 

The followingtable summarizes the valuation of OEH’s assets and liabilities by the SFAS No. 157fair value hierarchy at June 30, 2009 (dollars in thousands):

 
| ** **                       | ** ** | **June 30, 2009** | ** ** |
|----------------------------------|------------|------------------------|------------|
| ** **                       | ** ** | **Level 1**            | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets at fair value:            |       |                   |       |   |   |   |   |   |   |
| Derivative financial instruments |       | $                      | —     |   | $ | — |   | $ | — |   | $ | — |   |
| Total assets                     |       | $                      | —     |   | $ | — |   | $ | — |   | $ | — |   |
| Liabilities at fair value:       |       |                   |       |   |   |   |   |   |   |
| Derivative financial instruments |       | $                      | —     |   | $ | 11,996 |   | $ | — |   | $ | 11,996 |   |
| Total liabilities                |       | $                      | —     |   | $ | 11,996 |   | $ | — |   | $ | 11,996 |   |

 

The tablesbelow present a reconciliation of the beginning and ending balances ofliabilities having fair value measurements based on significant unobservableinputs (Level 3) during the three and six months ended June 30, 2009(dollars in thousands):

 
| ** **                      | ** ** | **Beginning********balance********at April********1, 2009** | ** ** | **Transfers********into********Level 3** | ** ** | **Realized  losses********included********in********earnings** | ** ** | **Unrealized********losses********included in********other********comprehensive********income** | ** ** | **Settle-********ments** | ** ** | **Ending  balance********at June********30, 2009** | ** ** |
|---------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------------------------------|------------|
| Liabilities at fair value:      |       |                                                        |       |                                     |       |                                                           |       |                                                                                            |       |                     |       |                                               |       |
| Derivative financialinstruments |       | $                                                           | 7,611      |                                     | $          | (8,128                                                         | )          | $                                                                                               | 1,057      |                     | $          | 413                                                |       | $ | (953 | ) | $ | — |   |
| Total liabilities               |       | $                                                           | 7,611      |                                     | $          | (8,128                                                         | )          | $                                                                                               | 1,057      |                     | $          | 413                                                |       | $ | (953 | ) | $ | — |   |

 
| ** **                              | ** ** | **Beginning********balance********at********January 1,  2009** | ** ** | **Transfers********into********Level 3** | ** ** | **Realized  losses********included********in********earnings** | ** ** | **Unrealized********gains********included in********other********comprehensive********income** | ** ** | **Settle-********ments** | ** ** | **Ending  balance********at June********30, 2009** | ** ** |
|-----------------------------------------|------------|---------------------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------------------------------|------------|
| Liabilities atfair value:               |       |                                                                |       |                                     |       |                                                           |       |                                                                                           |       |                     |       |                                               |       |
| Derivativefinancial instruments    |       | $                                                                   | 5,858      |                                     | $          | (5,202                                                         | )          | $                                                                                              | 1,405      |                     | $          | (671                                               | )          | $ | (1,390 | ) | $ | — |   |
| Totalliabilities                        |       | $                                                                   | 5,858      |                                     | $          | (5,202                                                         | )          | $                                                                                              | 1,405      |                     | $          | (671                                               | )          | $ | (1,390 | ) | $ | — |   |

 

The amount oftotal losses included in earnings that are attributable to the change inunrealized gains or losses relating to those liabilities still held at June 30,2009 was $104,000 for the three months ended June 30, 2009 and $15,000 forthe six months ended June 30, 2009.

 

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OEH reviewsits fair value hierarchy classifications quarterly.  Changes insignificant observable valuation inputs identified during these reviews maytrigger a reclassification of the fair value hierarchy levels of financialassets and liabilities.  These reclassifications are reported as transfersinto Level 3 at their fair values at the beginning of the period in which thechange occurs and the transfers out at their fair values at the end of theperiod.  During the three months ended June 30, 2009, OEH transferredcertain derivative instruments due to decreased significance of unobservableinputs used to estimate the fair value of these securities.

 

The fair valueof OEH’s derivative financial instruments is computed based on an incomeapproach using appropriate valuation techniques including discounting futurecash flows and other methods that are consistent with accepted economicmethodologies for pricing financial instruments.  Where credit valueadjustments exceeded 20% of the fair value of the derivatives, Level 3 inputsare assumed to have a significant impact on the fair value of the derivativesin their entirety and the valuation has been classified in the Level 3category.

 

*Non-derivative financialinstruments — net investment hedges*

 

OEH usescertain of its debt denominated in foreign currency to hedge portions of itsnet investments in foreign operations against adverse movements in exchangerates. These contracts are included in non-derivative hedging instruments. Thefair values of non-derivative hedging instruments were $84,163,000 at June 30,2009 and $83,403,000 at December 31, 2008, both liabilities. Amountsrecorded in other comprehensive income were $4,503,000 loss for the threemonths ended June 30, 2009 and $36,000 gain for the three months ended June 30,2008, and a $760,000 loss for the six months ended June 30, 2009 and$5,479,000 loss for the six months ended June 30, 2008.

 

**18. Related party transactions**

 

OEH guarantees a $3,000,000 bank loan to Eastern andOriental Express Ltd. in which OEH has a minority shareholder interest.  The amount due to OEH by Eastern and OrientalExpress Ltd. at June 30, 2009 was $1,313,000 (December 31, 2008 -$1,290,000).

 

OEH manages under long-term contracts the Hotel Monasterio, the MachuPicchu Sanctuary Lodge and Las Casitas del Colca owned by its 50/50 jointventure with local Peruvian interests, as well as the 50/50-owned PeruRailoperation, and provides loans, guarantees and other credit accommodation tothese joint ventures.  In the threemonths ended June 30, 2009, OEH earned 

 

32

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management and guarantee fees of $1,685,000 (2008 - $2,002,000) andloan interest of $nil (2008 - $15,000) which are recorded in revenue. For thesix months ended June 30, 2009, OEH earned management and guarantee feesof $3,155,000 (2008 - $3,714,000) and loan interest of $nil (2008 - $31,000)which are recorded in revenue. The amount due to OEH from its joint venturePeruvian operations at June 30, 2009 was $5,244,000 (December 31,2008 - $6,502,000).

 

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 equitymethod.  For the three months ended June 30,2009, OEH earned $329,000 (2008 - $502,000) in management fees, which areincluded in revenue. For the six months ended June 30, 2009, OEH earned$553,000 (2008 - $848,000) in management fees, which are included in revenue.The amount due to OEH from the Hotel Ritz, Madrid, at June 30, 2009 was$6,502,000 (December 31, 2008 - $1,883,000).

 

OEH hasgranted to James Sherwood, a director of the Company, a right of first refusalto purchase the Hotel Cipriani in Venice, Italy in the event OEH proposes tosell it.  The purchase price would be theoffered sale price in the case of a cash sale or the fair market value of thehotel, as determined by an independent valuer, in the case of a non-cashsale.  Mr. Sherwood has also beengranted an option to purchase the hotel at fair market value if a change incontrol of the Company occurs.  Mr. Sherwoodmay elect to pay 80% of the purchase price if he exercises his right of firstrefusal, or 100% of the purchase price if he exercises his purchase option, bya non-recourse promissory note secured by the hotel payable in ten equal annualinstalments with interest at LIBOR. These agreements relating to the Hotel Cipriani between Mr. Sherwoodand OEH and its predecessor companies have been in place since 1983 and werelast amended and restated in 2005.

 

**19.          Subsequent events**

 

OEHhas evaluated subsequent events up to August 7, 2009, the date thefinancial statements are issued.

 

On July 9,2009, OEH and the New York Public Library signedagreements to settle disputes relating to the purchase of the Donnell Librarybranch and redevelopment of the site (see Note 15).

 

On July 10, 2009, OEH agreed to sell the Windsor Court Hotel inNew Orleans. Completion of the sale is scheduled in September 2009.

 

33

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**ITEM 2.          Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Introduction**

 

OEH has threebusiness segments, namely (1) hotels and restaurants, (2) touristtrains and cruises and (3) real estate and property development. Hotelscurrently consist of 40 deluxe hotels. Thirty-six of these hotels are wholly ormajority owned (except Charleston Place Hotel), and are referred to in thisdiscussion as “owned hotels.” As explained in Note 3 to the financialstatements, OEH holds a 19.9% equity investment in Charleston Center LLC, ownerof Charleston Place Hotel, which OEH manages and has consolidated into itsfinancial statements effective December 31, 2008. The other four hotels,in which OEH has unconsolidated equity interests and operate under managementcontracts, are referred to in this discussion as “hotel management interests.”Of the owned hotels, 11 are located in Europe, eight in North America and 17 inthe rest of the world.

 

****OnJune 2, 2009, OEH sold the Lapa Palace Hotel in Lisbon, Portugal at aprice of $42.0 million, of which $15.7 million is deferred until 2010, whichresulted in a gain of $5.0 million (or $0.08 per share). The****operation of this hotel was not material to OEH’s consolidated financialstatements and, accordingly, pro forma data have not been presented. ****In June 2009, OEH decided to sell Windsor Court Hotel in NewOrleans. In December 2007, OEH decided to sell its investment in Bora BoraLagoon Resort.  The results of thesethree hotels have been presented as discontinued operations for all of theinterim periods presented.****

 

OEH currentlyowns and operates the restaurants ‘21’ Club in New York and La Cabana in BuenosAires.

 

OEH’s touristtrains and cruises segment operates six tourist trains — four of which areowned and operated by OEH, one in which OEH has an equity interest andexclusive management contracts, and one in which OEH has an equity investment —and a river cruiseship and five canalboats.

 

For adiscussion of OEH’s liquidity, see under the heading “Liquidity and CapitalResources” below. On May 4, 2009, the Company completed apublic offering through underwriters in the United States of 25,875,000 newlyissued class A common shares including 3,375,000 shares covered by theunderwriters’ over-allotment option in the offering which was exercised infull. OEH intends to use the net proceeds, approximately ****$140.9 million****,primarily for debtreduction and general corporate purposes.

 

34

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For a discussionof the impact of foreign exchange rate movements on OEH’s results of operationsand financial condition and the changeof application of accounting policy for Porto Cupecoy, see Item 7 —Management’s Discussion and Analysis in the Company’s 2008 Form 10-Kannual report.

 

**Resultsof Operations**

 

**Threemonths Ended June 30, 2009 compared to**

**Threemonths Ended June 30, 2008**

 

OEH’s operating results for the three months ended June 30,2009 and 2008, expressed as a percentage of revenue, were as follows:

 
| ** **                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| **Three months ended  June 30,**                | ** ** | **%**    | ** ** | **%**    | ** ** |
|                                                 |       |     |       |     |       |
| Revenue                                              |       |     |       |     |       |
| Hotels and restaurants                               |       | 85       |       | 81       |       |
| Tourist trains and cruises                           |       | 15       |       | 16       |       |
| Real estate                                          |       | —   |       | 3        |       |
|                                                 |       | 100      |       | 100      |       |
| Expenses                                             |       |     |       |     |       |
| Depreciation and amortization                        |       | 8        |       | 5        |       |
| Operating                                            |       | 49       |       | 47       |       |
| Selling, general and administrative                  |       | 33       |       | 28       |       |
| Net finance costs                                    |       | 6        |       | 5        |       |
| Earnings before income taxes                         |       | 4        |       | 15       |       |
| Provision for income taxes                           |       | (8       | )          | (6       | )          |
| Earnings from unconsolidated companies               |       | 2        |       | 3        |       |
| Net (losses)/earnings from continuing  operations    |       | (2       | )          | 12       |       |
| Net losses from discontinued operations,  net of tax |       | (17      | )          | (1       | )          |
| Net (losses)/earnings as a percentage of  revenue    |       | (19      | )          | 11       |       |

 

Segment net earnings before interest,foreign currency, tax (including tax on unconsolidated companies), depreciationand amortization (“segment EBITDA”) of OEH’s operations for the three monthsended June 30, 2009 and 2008 are analyzed as follows (dollars inmillions):

 

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| **Three months ended  June 30,** | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|
| ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Segment EBITDA:                       |       |       |       |       |       |
| Owned hotels:                         |       |       |       |       |       |
| Europe                                |       | $          | 17.2       |       | $          | 32.8 |   |
| North America                         |       | 4.3        |       | 2.5        |       |
| Rest of the World                     |       | 3.7        |       | 3.6        |       |
| Hotel management interests            |       | 1.2        |       | 7.8        |       |
| Restaurants                           |       | 0.1        |       | 0.9        |       |
| Tourist trains and cruises            |       | 6.9        |       | 9.8        |       |
| Real estate                           |       | (0.5       | )          | (0.4       | )          |
| Central overheads                     |       | (6.8       | )          | (7.2       | )          |
| Total segment EBITDA                  |       | $          | 26.1       |       | $          | 49.8 |   |

 

The foregoingsegment EBITDA reconciles to net (losses)/earnings as follows (dollars inmillions):

 
| **Three months ended  June 30,**                           | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net (losses)/earnings                                           |       | $          | (24.3      | )          | $          | 19.5 |   |
| Add:                                                            |       |       |       |       |       |
| Depreciation and amortization                                   |       | 9.7        |       | 9.4        |       |
| Net finance costs                                               |       | 8.0        |       | 8.0        |       |
| Provision for income taxes                                      |       | 10.3       |       | 9.7        |       |
| Loss from discontinued operations,net of tax                    |       | 21.6       |       | 1.8        |       |
| Share of provision for income taxesof  unconsolidated companies |       | 0.8        |       | 1.4        |       |
| Segment EBITDA                                                  |       | $          | 26.1       |       | $          | 49.8 |   |

 

Managementevaluates the operating performance of OEH’s segments on the basis of segmentEBITDA and believes that segment EBITDA is a useful measure of operatingperformance because segment EBITDA is not affected by non-operating factorssuch as leverage and the historic cost of assets.  EBITDA is a financial measure commonly usedin OEH’s industry.  OEH’s segment EBITDA,however, may not be comparable in all instances to EBITDA as disclosed by othercompanies.  Segment EBITDA should not beconsidered as an alternative to earnings from operations or net earnings (asdetermined in accordance with U.S. generally accepted accounting principles) asa measure of OEH’s operating performance, or as an alternative to net cashprovided by operating, investing and financing activities (as determined inaccordance with U.S. generally accepted accounting principles) as a measure ofOEH’s ability to meet cash needs.

 

36

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Operating information for OEH’s owned hotels for thethree months ended June 30, 2009 and 2008 is as follows:

 
| ** **                      | ** ** | **Three months  ended June 30,** | ** ** | ** ** | ** ** | ** **   | ** ** |
|---------------------------------|------------|---------------------------------------|------------|------------|------------|--------------|------------|
| ** **                      | ** ** | **2009**                              | ** ** | **2008**   | ** ** | ** **   | ** ** | ** ** | ** ** |
|                            |       |                                  |       |       |       |         |       |   |   |
| Average Daily Rate (in dollars) |       |                                  |       |       |       |         |       |   |   |
| Europe                          |       | 753                                   |       | 978        |       |         |       |   |   |
| North America                   |       | 331                                   |       | 374        |       |         |       |   |   |
| Rest of the world               |       | 266                                   |       | 264        |       |         |       |   |   |
| Worldwide                       |       | 429                                   |       | 520        |       |         |       |   |   |
|                            |       |                                  |       |       |       |         |       |   |   |
| Rooms Available (in thousands)  |       |                                  |       |       |       |         |       |   |   |
| Europe                          |       | 79                                    |       | 81         |       |         |       |   |   |
| North America                   |       | 69                                    |       | 68         |       |         |       |   |   |
| Rest of the world               |       | 119                                   |       | 110        |       |         |       |   |   |
| Worldwide                       |       | 267                                   |       | 259        |       |         |       |   |   |
|                            |       |                                  |       |       |       |         |       |   |   |
| Rooms Sold (in thousands)       |       |                                  |       |       |       |         |       |   |   |
| Europe                          |       | 39                                    |       | 50         |       |         |       |   |   |
| North America                   |       | 40                                    |       | 49         |       |         |       |   |   |
| Rest of the world               |       | 53                                    |       | 61         |       |         |       |   |   |
| Worldwide                       |       | 132                                   |       | 160        |       |         |       |   |   |
|                            |       |                                  |       |       |       |         |       |   |   |
| Occupancy (percentage)          |       |                                  |       |       |       |         |       |   |   |
| Europe                          |       | 49                                    |       | 62         |       |         |       |   |   |
| North America                   |       | 58                                    |       | 72         |       |         |       |   |   |
| Rest of the world               |       | 45                                    |       | 55         |       |         |       |   |   |
| Worldwide                       |       | 49                                    |       | 62         |       |         |       |   |   |
|                            |       |                                  |       |       |       |         |       |   |   |
| RevPAR (in dollars)             |       |                                  |       |       |       |         |       |   |   |
| Europe                          |       | 368                                   |       | 600        |       |         |       |   |   |
| North America                   |       | 190                                   |       | 267        |       |         |       |   |   |
| Rest of the world               |       | 119                                   |       | 148        |       |         |       |   |   |
| Worldwide                       |       | 211                                   |       | 321        |       |         |       |   |   |
|                            |       |                                  |       |       |       |         |       |   |   |
| ** **                      | ** ** | ** **                            | ** ** | ** ** | ** ** | **Change %** | ** ** |
| ** **                      | ** ** | ** **                            | ** ** | ** ** | ** ** | **Dollars**  | ** ** | **Local********Currency** | ** ** |
| Same Store RevPAR (in dollars)  |       |                                  |       |       |       |         |       |   |   |
| Europe                          |       | 368                                   |       | 600        |       | -39          | %          | -26 | % |
| North America                   |       | 241                                   |       | 345        |       | -30          | %          | -29 | % |
| Rest of the world               |       | 134                                   |       | 158        |       | -15          | %          | -11 | % |
| Worldwide                       |       | 239                                   |       | 359        |       | -33          | %          | -24 | % |

 

Average daily rate is the average amount achieved forthe rooms sold.  RevPAR is revenue peravailable room, that is the rooms revenue divided by the number of availablerooms for each night of operation. Occupancy is the number of rooms sold divided by

 

37

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the number of available rooms.  Same store RevPAR is a comparison based onthe operations of the same units in each period, such as by excluding theeffect of any acquisitions or major refurbishments.  The same store data excludes the followingoperations:

 
| Hotel das  Cataratas        |   | Charleston  Place Hotel        |
|-----------------------------|--------|--------------------------------|
| Lapa Palace                 |   | Windsor  Court                 |
| Bora Bora  Lagoon Resort    |   | The  Governor’s Residence |
| La  Residence D’Angkor |   |                           |

 

*Overview*

 

The net loss for the three months ended June 30,2009 was $24.3 million ($0.36 per common share) on revenue of $129.2 million,compared with net earnings of $19.5 million ($0.46 per common share) on revenueof $170.2 million in the second quarter of the prior year. OEH’s revenue in thecurrent quarter was adversely affected by the global economic downturn. Costscontinue to be under tight control.

 

Excluding discontinued operations, the net loss forthe three months ended June 30, 2009 was $2.6 million compared with netearnings of $21.3 million in the three months ended June 30, 2008.

 

*Revenue*

 
| **Three months ended  June 30,**    | ** ** | **2009**                   | ** ** | **2008** | ** ** |
|------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                               | ** ** | **(dollars in thousands)** | ** ** |
| Revenue:                                 |       |                       |       |     |       |
| Hotels and restaurants                   |       |                       |       |     |       |
| Owned hotels                             |       |                       |       |     |       |
| Europe                                   |       | $                          | 52,226     |     | $          | 81,239 |   |
| North America                            |       | 26,825                     |       | 16,989   |       |
| Rest of the world                        |       | 26,276                     |       | 30,840   |       |
| Hotel management/part ownershipinterests |       | 1,249                      |       | 3,324    |       |
| Restaurants                              |       | 3,561                      |       | 5,288    |       |
|                                     |       | 110,137                    |       | 137,680  |       |
| Tourist trains and cruises               |       | 19,081                     |       | 28,067   |       |
| Real estate                              |       | —                     |       | 4,443    |       |
|                                     |       | $                          | 129,218    |     | $          | 170,190 |   |

 

Total revenue decreased by $41.0 million, or 24%, from$170.2 million in the three months ended June 30, 2008 to $129.2 millionin the three months ended June 30, 2009. Revenue in the three months ended June 30, 2009 included $13.4million at Charleston Place Hotel, which is consolidated for the first time inthe current year. Excluding the Charleston Place revenue,

 

38

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hotels and restaurants revenue decreased by $41.0million, or 30% from $137.7 million in the three months ended June 30,2008 to $96.7 million in the three months ended June 30, 2009.  Tourist trains and cruises revenue decreasedby $9.0 million, or 32%, from $28.1 million for the three months ended June 30,2008 to $19.1 million for the three months ended June 30, 2009.

 

The decrease in hotel revenue was due primarily to thecombination of lower occupancy, particularly in Europe, and lower average ratesacross the group.

 

The revenue from restaurants decreased by $1.7million, or 33%, from $5.3 million in the three months ended June 30, 2008to $3.6 million for the three months ended June 30, 2009.

 

For owned hotels overall, same store RevPAR in U.S.dollars decreased by 33% in the three months ended June 30, 2009 comparedto the three months ended June 30, 2008. Measured in local currencies this decrease was 24%.

 

The change in revenue at owned hotels is analyzed on aregional basis as follows:

 

*Europe*

 

Revenue decreased by $29.0 million, or 36%, from $81.2million for the three months ended June 30, 2008 to $52.2 million for thethree months ended June 30, 2009. Difficult trading conditions acrossEurope caused average daily rates to fall by 23% from $978 in the three monthsended June 30, 2008 to $753 in the three months ended June 30, 2009,and occupancy to fall from 62% in the three months ended June 30, 2008 to49% in the three months ended June 30, 2009. On a same store basis, RevPARin local currency decreased by 26%, and in U.S. dollars this translated into adecrease of 39%.

 

Exchange rate movements caused revenue to fall by$10.6 million in the three months ended June 30, 2009 compared with thesame period in 2008.

 

*North America*

 

Revenue increased by $9.8 million, or 58%, from $17.0million in the three months ended June 30, 2008 to $26.8 million in thethree months ended June 30, 2009. The 2009 revenue included $13.4 million at Charleston Place Hotel, whichOEH consolidated from January 1, 2009 for the first time. ExcludingCharleston Place, revenue in the North America region fell by $3.6 million, or21%, in the three months ended June 30, 2009 to $13.4 million.

 

39

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Following the outbreak of H1N1 (swine flu) in Mexico,occupancy at Maroma Resort & Spa declined from 68% in the three monthsended June 30, 2008 to 35% in the same period in 2009. Revenue at thishotel fell by $2.5 million, or 54%, from $4.5 million in the three months endedJune 30, 2008 to $2.1 million in the three months ended June 30,2009.

 

On a same store basis, excluding Charleston PlaceHotel, RevPAR decreased by 29%.  Averageoccupancy across the North American properties was 58% compared to 72% in thesame period in 2008. Average daily rates fell by 11% from $374 in the threemonths ended June 30, 2008 to $331 in the three months ended June 30,2009.

 

*Rest of the World*

 

Revenue decreased by $4.5 million, or 15%, from $30.8million in the three months ended June 30, 2008 to $26.3 million in thethree months ended June 30, 2009. Exchange rate movements across the region were responsible for $4.4million of the revenue fall and a decline in average room rates and occupancycaused overall revenue to drop by $0.1 million.

 

Revenue at OEH’s hotels in South America collectivelydecreased by $1.5 million, or 12%, from $12.6 million in the three months endedJune 30, 2008 to $11.1 million in the three months ended June 30,2009. Had exchange rates in the first three months of 2009 been the same as inthe first three months of 2008, South American revenue would have been $0.8million higher than in the three months ended June 30, 2008.

 

Southern Africa revenue decreased by $1.6 million, or20%, from $8.2 million in the three months ended June 30, 2008 to $6.6million in the three months ended June 30, 2009. Of this revenue fall,$0.6 million was due to exchange rate movements on the translation of the SouthAfrican rand and Botswana pula to U.S. dollar. Revenue at OEH’s two Australianproperties decreased by $1.3 million, or 22%, to $4.8 million in the threemonths ended June 30, 2009; 92% of the change in revenue, or $1.2 million,was due to the devaluation of the Australian dollar against the U.S. dollar.

 

The RevPAR on a same store basis for the Rest of theWorld region decreased by 11% in local currencies in the three months ended June 30,2009 compared to the three months ended June 30, 2008.  This translates to a 15% decrease whenexpressed in U.S. dollars.

 

*Hotel Management and Part-OwnershipInterests: *Revenue decreased by $2.1million from $3.3 million in the three months ended June 30, 2008 to $1.2million in the three months ended

 

40

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June 30, 2009. The 2008 revenue included $1.7million in respect of Charleston Place Hotel, which is included within OEH’sconsolidated earnings with effect from January 1, 2009. Excluding thishotel from the prior year, revenue from hotel management and part ownershipinterests decreased by $0.4 million from $1.6 million in the three months endedJune 30, 2008 to $1.2 million in the three months ended June 30,2009.

 

*Restaurants: *Revenuedecreased by $1.7 million, or 33%, from $5.3 million in the three months ended June 30,2008 to $3.6 million in the three months ended June 30, 2009.

 

*Trains and Cruises: *Revenue decreased by $9.0 million, or 32%,from $28.1 million in the three months ended June 30, 2008 to $19.1million in the three months ended June 30, 2009.  Venice Simplon-Orient-Express revenuedecreased by $5.3 million from $12.4 million in the three months ended June 30,2008 to $7.1 million in the three months ended June 30, 2009. Fewer daytrain services were operated in the United Kingdom in the three months ended June 30,2009 than in the prior year, resulting in a revenue decrease of $0.9 millioncompared with the same period in the prior year.

 

*Real Estate: *Althoughfour condominiums at Porto Cupecoy were sold during the three months ended June 30,2009,**no revenue was recognized following OEH’sdecision to change the application ofits accounting policy in respect of the Porto Cupecoy development in thefourth quarter of 2008. Revenue of $4.4 million was recognized in the threemonths ended June 30, 2008 at Porto Cupecoy under the percentagecompletion method of accounting. There was no revenue at Keswick Hall in thethree months ended June 30, 2009 or in the three months ended June 30,2008.

 

*Depreciation and amortization*

 

Depreciation and amortization increased by $0.3million from $9.4 million in the three months ended June 30, 2008 to $9.7million in the three months ended June 30, 2009. The 2009 depreciationcharge includes an expense of $1.0 million in respect of Charleston Place.Excluding this charge, depreciation was $0.7 million lower in 2009 than in theprior period, $0.2 million of which was due to the change in exchange rates forthe three months ended June 30, 2009 compared with exchange rates in thesame period in 2008.

 

*Operating expenses*

 

Operating expenses decreased by $16.6 million from$80.4 million in the three months ended June 30, 2008 to $63.8 million inthe three months ended June 30, 2009. Operating expenses in 2009

 

41

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include a charge of $5.6 million in respect ofCharleston Place. Excluding this expenditure, operating expenses were $22.2million lower in 2009 than in the prior period, $1.6 million of which was dueto the change in exchange rates for the three months ended June 30, 2009compared with exchange rates in the same period in 2008. Operating expenseswere 47% of revenue in the three months ended June 30, 2008 and 49% ofrevenue in the three months ended June 30, 2009. Excluding CharlestonPlace Hotel’s revenue and expenses, operating expenses in 2009 increased by 1%to 50% of revenue.

 

*Selling, general and administrative expenses*

 

Selling, general and administrative expenses decreasedby $5.1 million from $47.2 million in the three months ended June 30, 2008to $42.1 million in the three months ended June 30, 2009. The 2009 costsinclude a charge of $3.5 million in respect of Charleston Place Hotel.Excluding these costs, selling, general and administrative expenses were $8.6million lower in 2009 than in the prior period, $2.3 million of which was dueto the change in exchange rates for the three months ended June 30, 2009compared with exchange rates in the same period in 2008. Selling, general andadministrative expenses were 28% of revenue in the three months ended June 30,2008 and 33% of revenue in the three months ended June 30, 2009. ExcludingCharleston Place Hotel’s revenue and expenses, selling, general andadministrative expenses in 2009 were 33% of revenue in 2009.

 

*Segment EBITDA*

 
| **Three months ended  June 30**      | ** ** | **2009**                   | ** ** | **2008** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                | ** ** | **(dollars in thousands)** | ** ** |
| ** **                                | ** ** | ** **                 | ** ** |
| Segment EBITDA:                           |       |                       |       |     |       |
| Hotels and restaurants                    |       |                       |       |     |       |
| Owned hotels                              |       |                       |       |     |       |
| Europe                                    |       | $                          | 17,177     |     | $          | 32,846 |   |
| North America                             |       | 4,299                      |       | 2,513    |       |
| Rest of the world                         |       | 3,692                      |       | 3,633    |       |
| Hotel management/part ownership interests |       | 1,223                      |       | 7,736    |       |
| Restaurants                               |       | 153                        |       | 920      |       |
|                                      |       | 26,544                     |       | 47,648   |       |
| Tourist trains and cruises                |       | 6,854                      |       | 9,826    |       |
| Real estate                               |       | (474                       | )          | (463     | )          |
| Central overheads                         |       | (6,833                     | )          | (7,159   | )          |
|                                      |       | $                          | 26,091     |     | $          | 49,852 |   |

 

42

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Segment EBITDA for the three months ended June 30,2009 decreased by 48% from $49.9 million in 2008 to $26.1 million in 2009.Segment EBITDA margins (calculated as segment EBITDA as a percentage ofrevenue) decreased by 9% from 29% for the three months ended June 30,2008, to 20% for the three months ended June 30, 2009.

 

The European hotels collectively reported a segmentEBITDA of $17.2 million in 2009 compared to $32.8 million in the same period in2008.  As a percentage of European hotelsrevenue, the European segment EBITDA margin fell from 40% in 2008 to 33% in2009.

 

With the inclusion of Charleston Place Hotel from January 1,2009, segment EBITDA in the North American hotel region increased by 71% from$2.5 million in the three months ended June 30, 2008, to $4.3 million inthe three months ended June 30, 2009. Excluding Charleston Place Hotel,segment EBITDA in the North American region decreased by $2.3 million, or 93%,from $2.5 million in the three months ended June 30, 2008, to $0.2 millionin the three months ended June 30, 2009.

 

Segment EBITDA in the Rest of the World hotel regionincreased by 2% from $3.6 million in the three months ended June 30, 2008to $3.7 million in the three months ended June 30, 2009.  The segment EBITDA margin for the threemonths ended June 30, 2009 was 14%, compared to a margin of 12% for thesame period in 2008.

 

*Earnings from operations before net financecosts*

 

Earnings from operations decreased by $19.6 millionfrom a profit of $33.2 million in the three months ended June 30, 2008 toa profit of $13.6 million in the three months ended June 30, 2009, due tothe factors described above.

 

*Net finance costs*

 

Net finance costs were $8.0 million for the threemonths ended June 30, 2008 and for the three months ended June 30,2009. The three months ended June 30, 2008 included a foreign exchangegain of $2.6 million compared to a foreign exchange loss of $0.4 million in thethree months ended June 30, 2009. Excluding these foreign exchange items,net interest expense decreased by $3.0 million, or 29%, from $10.6 million inthe three months ended June 30, 2008 to $7.6 million in the three monthsended June 30, 2009, primarily due to lower interest rates in the threemonths ended June 30, 2009 compared to the same period in the prior year.

 

43

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*Provision for income taxes*

 

The provision for income taxes increased by $0.6 million, from aprovision of $9.7 million in the three months ended June 30, 2008 to aprovision of $10.3 millionin the three months ended June 30, 2009.

 

The provision for income taxes for the three months ended June 30,2009 includes a current tax charge of $2.2 million and a deferred tax charge of$3.2 million arising in Italy in connection with the closure of a tax audit inrespect of the 2004, 2005 and 2006 tax years. OEH had previously included aliability of $4.9 million within its FIN 48 provision in respect of theseuncertain tax positions. The provision for income taxes in the three monthsended June 30, 2009 includes a tax credit in the amount of $4.9 million torelease this FIN 48 provision. The net cost to OEH taking into account all ofthese entries is $0.5 million. The $2.2 million current tax liability ispayable in 12 quarterly instalments of approximately $0.2 million each,commencing in July 2009.

 

The provision for income taxes for the three months ended June 30,2009 included a deferred tax charge of $2.7 million arising in respect ofBrazilian fixed asset timing differences, following movements in the exchangerate between the dollar and Brazilian real.

 

Excluding the FIN 48 tax credit related to the Italian uncertain taxposition, the provision for income taxes for the three months ended June 30,2009 included a tax provision of $0.4 million in respect of theFIN 48 liability, compared to a provision of $0.5 million in respect of the FIN48 liability in the three months ended June 30, 2008.

 

*Earnings from unconsolidated companies*

 

Earnings from unconsolidated companies net of taxdecreased by $3.8 million, from $5.8 million in the three months ended June 30,2008 to $2.0 million in the three months ended June 30, 2009.  The 2008 earnings included $2.4 million inrespect of Charleston Place Hotel, which is included within OEH’s consolidatedearnings with effect from January 1, 2009. Excluding this hotel from theprior year, earnings from unconsolidated companies net of tax decreased by $1.4million from $3.4 million in the three months ended June 30, 2008 to $2.0million in the three months ended June 30, 2009. The tax cost associatedwith earnings from unconsolidated companies, excluding Charleston Place Hotel,was $0.9 million in 2008 and $0.7 million in 2009.

 

44

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*Loss from discontinued operations*

 

The loss from discontinued operations consisted of thelosses arising from Bora Bora Lagoon Resort and the Windsor Court Hotel whichare being held for sale, and the earnings of the Lapa Palace Hotel, which wassold during the three months ended June 30, 2009, including the gainarising on the sale.

 

Bora Bora Lagoon Resort’s net loss increased from $2.3million for the three months ended June 30, 2008 to $12.5 million for thethree months ended June 30, 2009. The 2009 loss includes an impairmentcharge of $12.0 million in respect of this property.

 

The Windsor Court net loss increased from $0.5 millionfor the three months ended June 30, 2008 to $14.5 million for the threemonths ended June 30, 2009. The 2009 loss includes an impairment charge of$21.5 million in anticipation of the sale of this property, with a related taxcredit of $7.1 million in respect of the impairment write down.

 

TheLapa Palace Hotel net earnings increased from $0.9 million for the three monthsended June 30, 2008 to $5.3 million for the three months ended June 30,2009. The 2009 earnings included a gain of $5.0 million arising on the disposalof the hotel including a foreign currency translation adjustmentgain of $6.7 million.

 

45

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**Sixmonths Ended June 30, 2009 compared to**

**Sixmonths Ended June 30, 2008**

 

OEH’s operating results for the six months ended June 30,2009 and 2008, expressed as a percentage of revenue, were as follows:

 
| ** **                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| **Six months ended  June 30,**                  | ** ** | **%**    | ** ** | **%**    | ** ** |
|                                                 |       |     |       |     |       |
| Revenue                                              |       |     |       |     |       |
| Hotels and restaurants                               |       | 89       |       | 84       |       |
| Tourist trains and cruises                           |       | 11       |       | 13       |       |
| Real estate                                          |       | —   |       | 3        |       |
|                                                 |       | 100      |       | 100      |       |
| Expenses                                             |       |     |       |     |       |
| Depreciation and amortization                        |       | 9        |       | 7        |       |
| Operating                                            |       | 50       |       | 49       |       |
| Selling, general and administrative                  |       | 36       |       | 32       |       |
| Impairment of goodwill                               |       | 3        |       | —   |       |
| Net finance costs                                    |       | 10       |       | 7        |       |
| (Losses)/earnings before income taxes                |       | (8       | )          | 5        |       |
| Provison for income taxes                            |       | (1       | )          | (2       | )          |
| Earnings from unconsolidated companies               |       | 2        |       | 4        |       |
| Net (losses)/earnings from continuing  operations    |       | (7       | )          | 7        |       |
| Net losses from discontinued operations,  net of tax |       | (12      | )          | (2       | )          |
| Net (losses)/earnings as a percentage of  revenue    |       | (19      | )          | 5        |       |

 

Segment EBITDA of OEH’s operations for thesix months ended June 30, 2009 and 2008 are analyzed as follows (dollarsin millions):

 
| **Six months ended June 30,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| Segment EBITDA:                    |       |     |       |     |       |
| Owned hotels:                      |       |     |       |     |       |
| Europe                             |       | $        | 11.8       |     | $          | 29.4 |   |
| North America                      |       | 12.0     |       | 8.6      |       |
| Rest of the World                  |       | 12.5     |       | 16.4     |       |
| Hotel management interests         |       | 1.9      |       | 13.0     |       |
| Restaurants                        |       | 0.2      |       | 1.6      |       |
| Tourist trains and cruises         |       | 8.3      |       | 11.4     |       |
| Real estate                        |       | (0.8     | )          | (1.0     | )          |
| Impairment of goodwill             |       | (7.0     | )          | —   |       |
| Central overheads                  |       | (11.9    | )          | (14.0    | )          |
| Total segment EBITDA               |       | $        | 27.0       |     | $          | 65.4 |   |

 

The foregoingsegment EBITDA reconciles to net (losses)/earnings as follows (dollars inmillions):

 

46

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| **Six months ended  June 30,**                             | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                            |       |     |       |     |       |
| Net (losses)/earnings                                           |       | $        | (39.0      | )        | $          | 15.1 |   |
| Add:                                                            |       |     |       |     |       |
| Depreciation and amortization                                   |       | 19.0     |       | 18.7     |       |
| Net finance costs                                               |       | 21.1     |       | 18.1     |       |
| Provision for income taxes                                      |       | 0.9      |       | 6.2      |       |
| Loss from discontinued operations,net of tax                    |       | 23.8     |       | 4.7      |       |
| Share of provision for income taxesof  unconsolidated companies |       | 1.2      |       | 2.6      |       |
| Segment EBITDA                                                  |       | $        | 27.0       |     | $          | 65.4 |   |

 

Operating information for OEH’s owned hotels for thesix months ended June 30, 2009 and 2008 is as follows:

 
| ** **                      | ** ** | **Six months ended  June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------|------------|-------------------------------------|------------|------------|------------|------------|------------|
| ** **                      | ** ** | **2009**                            | ** ** | **2008**   | ** ** | ** ** | ** ** | ** ** | ** ** |
|                            |       |                                |       |       |       |       |       |   |   |
| Average Daily Rate (in dollars) |       |                                |       |       |       |       |       |   |   |
| Europe                          |       | 645                                 |       | 818        |       |       |       |   |   |
| North America                   |       | 423                                 |       | 467        |       |       |       |   |   |
| Rest of the world               |       | 274                                 |       | 283        |       |       |       |   |   |
| Worldwide                       |       | 398                                 |       | 465        |       |       |       |   |   |
|                            |       |                                |       |       |       |       |       |   |   |
| Rooms Available (in thousands)  |       |                                |       |       |       |       |       |   |   |
| Europe                          |       | 131                                 |       | 135        |       |       |       |   |   |
| North America                   |       | 97                                  |       | 96         |       |       |       |   |   |
| Rest of the world               |       | 234                                 |       | 233        |       |       |       |   |   |
| Worldwide                       |       | 462                                 |       | 464        |       |       |       |   |   |
|                            |       |                                |       |       |       |       |       |   |   |
| Rooms Sold (in thousands)       |       |                                |       |       |       |       |       |   |   |
| Europe                          |       | 54                                  |       | 74         |       |       |       |   |   |
| North America                   |       | 56                                  |       | 67         |       |       |       |   |   |
| Rest of the world               |       | 119                                 |       | 144        |       |       |       |   |   |
| Worldwide                       |       | 229                                 |       | 285        |       |       |       |   |   |
|                            |       |                                |       |       |       |       |       |   |   |
| Occupancy (percentage)          |       |                                |       |       |       |       |       |   |   |
| Europe                          |       | 41                                  |       | 55         |       |       |       |   |   |
| North America                   |       | 58                                  |       | 70         |       |       |       |   |   |
| Rest of the world               |       | 51                                  |       | 62         |       |       |       |   |   |
| Worldwide                       |       | 50                                  |       | 61         |       |       |       |   |   |

 

47

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| ** **          | ** ** | **Six months ended  June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|-------------------------------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **2009**                            | ** ** | **2008**   | ** ** | ** ** | ** ** | ** ** | ** ** |
|                |       |                                |       |       |       |       |       |   |   |
| RevPAR (in dollars) |       |                                |       |       |       |       |       |   |   |
| Europe              |       | 266                                 |       | 446        |       |       |       |   |   |
| North America       |       | 245                                 |       | 326        |       |       |       |   |   |
| Rest of the world   |       | 139                                 |       | 174        |       |       |       |   |   |
| Worldwide           |       | 197                                 |       | 284        |       |       |       |   |   |

 
| ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Change %** | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|--------------|------------|
| ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Dollars**  | ** ** | **Local********Currency** | ** ** |
| Same Store RevPAR (in dollars) |       |       |       |       |       |         |       |   |   |
| Europe                         |       | 266        |       | 447        |       | -41          | %          | -28 | % |
| North America                  |       | 309        |       | 407        |       | -24          | %          | -23 | % |
| Rest of the world              |       | 150        |       | 186        |       | -20          | %          | -12 | % |
| Worldwide                      |       | 212        |       | 307        |       | -31          | %          | -22 | % |

 

The same store data excludes the following operations:

 
| Hotel  Cipriani             |   | Hotel  Splendido               |
|-----------------------------|--------|--------------------------------|
| Villa San  Michele          |   | Hotel Caruso  Belvedere        |
| Hotel das  Cataratas        |   | Charleston  Place Hotel        |
| Lapa Palace                 |   | Windsor  Court                 |
| Bora Bora  Lagoon Resort    |   | The  Governor’s Residence |
| La  Residence D’Angkor |   |                           |

 

*Overview*

 

The net loss for the six months ended June 30,2009 was $39.0 million ($0.66 per common share) on revenue of $210.9 million,compared with a net earnings of $15.1 million ($0.36 per common share) onrevenue of $275.4 million in the prior year period.

 

OEH’s revenue in the six months ended June 30,2009 was affected by the global economic downturn. Excluding impairment ofgoodwill in 2009 and discontinued operations, OEH’s net loss in the first sixmonths of 2009 was $8.2 million compared with earnings of $19.8 million in2008, a fall of $28.0 million, while revenue fell by $64.5 million, or 23%, inthe six months ended June 30, 2009 compared to the six months ended June 30,2008.

 

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*Revenue*

 
| **Six months ended  June 30,**      | ** ** | **2009**                   | ** ** | **2008** | ** ** |
|------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                               | ** ** | **(dollars in thousands)** | ** ** |
| Revenue:                                 |       |                       |       |     |       |
| Hotels and restaurants                   |       |                       |       |     |       |
| Owned hotels                             |       |                       |       |     |       |
| Europe                                   |       | $                          | 65,677     |     | $          | 105,983 |   |
| North America                            |       | 55,980                     |       | 36,588   |       |
| Rest of the world                        |       | 56,165                     |       | 71,607   |       |
| Hotel management/part ownershipinterests |       | 2,268                      |       | 5,825    |       |
| Restaurants                              |       | 7,233                      |       | 10,154   |       |
|                                     |       | 187,323                    |       | 230,157  |       |
| Tourist trains and cruises               |       | 23,558                     |       | 36,721   |       |
| Real estate                              |       | —                     |       | 8,526    |       |
|                                     |       | $                          | 210,881    |     | $          | 275,404 |   |

 

Total revenue decreased by $64.5 million, or 23%, from$275.4 million in the six months ended June 30, 2008 to $210.9 million inthe six months ended June 30, 2009. Revenue in the six months ended June 30, 2009 included $24.9million at Charleston Place Hotel, which is consolidated for the first time inthe current year. Excluding the Charleston Place revenue, hotels andrestaurants revenue decreased by $67.7 million, or 29%, from $230.2 million inthe six months ended June 30, 2008 to $162.5 million in the six monthsended June 30, 2009.  Tourist trainsand cruises revenue decreased by $13.2 million, or 36%, from $36.7 million forthe six months ended June 30, 2008 to $23.6 million for the six monthsended June 30, 2009.

 

The decrease in hotel revenue was due primarily to thecombination of lower occupancy, particularly in Europe, and lower average ratesacross the group.

 

The revenue from restaurants decreased by $3.0million, or 29%, from $10.2 million in the six months ended June 30, 2008to $7.2 million for the six months ended June 30, 2009.

 

For owned hotels overall, same store RevPAR in U.S.dollars decreased by 31% in the six months ended June 30, 2009 compared tothe three months ended June 30, 2008. Measured in local currencies this decrease was 22%.

 

The change in revenue at owned hotels is analyzed on aregional basis as follows:

 

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*Europe*

 

Revenue decreased by $40.3 million, or 38%, from$106.0 million for the six months ended June 30, 2008 to $65.7 million forthe six months ended June 30, 2009. Difficult trading conditions acrossEurope caused average daily rates to fall by 21% from $818 in the six monthsended June 30, 2008 to $645 in the six months ended June 30, 2009,and occupancy to fall from 54% in the six months ended June 30, 2008 to41% in the six months ended June 30, 2009. On a same store basis, RevPARin local currency decreased by 28%, and in U.S. dollars this translated into adecrease of 41%.

 

Exchange rate movements caused revenue to fall by$14.9 million in the six months ended June 30, 2009 compared with the sameperiod in 2008.

 

*North America*

 

Revenue increased by $19.4 million, or 53%, from $36.6million in the six months ended June 30, 2008 to $56.0 million in the sixmonths ended June 30, 2009.  The2009 revenue included $24.9 million at Charleston Place Hotel, which OEHconsolidated from January 1, 2009 for the first time. Excluding CharlestonPlace, revenue in the North America region fell by $5.5 million, or 15%, in thesix months ended June 30, 2009 to $31.1 million.

 

Following the outbreak of swine flu in Mexico, revenueat Maroma Resort & Spa fell $3.3 million, or 31%, from $10.7 millionin the six months ended June 30, 2008 to $7.4 million in the six monthsended June 30, 2009.

 

On a same store basis, excluding Charleston PlaceHotel, RevPAR decreased by 24%.  Averageoccupancy across the North American properties was 58% compared to 70% in thesame period in 2008. Average daily rates fell by 9% from $467 in the six monthsended June 30, 2008 to $423 in the six months ended June 30, 2009

 

*Rest of the World*

 

Revenue decreased by $15.4 million, or 22%, from $71.6million in the six months ended June 30, 2008 to $56.2 million in the sixmonths ended June 30, 2009. Exchange rate movements across the region were responsible for $12.0million of the revenue fall and a decline in average room rates and occupancycaused overall revenue to drop by an additional $3.4 million.

 

Revenue at OEH’s hotels in South America collectivelydecreased by $5.2 million, or 17%, from $30.2 million in the six months ended June 30,2008 to $25.0 million in the six months ended June 30, 2009. Had exchangerates in the first six months of

 

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2009 been the same as in the first six months of 2008,South American revenue would have been $0.6 million higher than in the sixmonths ended June 30, 2008.

 

Revenue at OEH’s six Asian hotels collectivelydecreased by $1.2 million, or 13%, to $8.1 million in the six months ended June 30,2009. The political unrest in Thailand in the first three months of 2009 was amajor factor in revenue at the Napasai falling by $1.1 million, or 43%.Occupancy at this hotel declined from 64% in the six months ended June 30,2008 to 37% in the same period in 2009.

 

Southern Africa revenue decreased by $5.8 million, or29%, of which $2.7 million was due to exchange rate movements on thetranslation of the South African rand and Botswana pula to U.S. dollar. Revenueat OEH’s two Australian properties decreased by $3.3 million, or 27%, to $9.0million in the six months ended June 30, 2009; 83% of the change inrevenue, or $2.7 million, was due to the devaluation of the Australian dollaragainst the U.S. dollar.

 

The RevPAR on a same store basis for the Rest of theWorld region decreased by 12% in local currencies in the six months ended June 30,2009 compared to the six months ended June 30, 2008.  This translates to a 20% decrease whenexpressed in U.S. dollars.

 

*Hotel Management and Part-OwnershipInterests: *Revenue decreased by $3.6million from $5.8 million in the six months ended June 30, 2008 to $2.2million in the six months ended June 30, 2009. The 2008 revenue included$2.9 million in respect of Charleston Place Hotel, which is included within OEH’sconsolidated earnings with effect from January 1, 2009. Excluding thishotel from the prior year, revenue from hotel management and part ownershipinterests decreased by $0.7 million from $2.9 million in the six months ended June 30,2008 to $2.2 million in the six months ended June 30, 2009. Revenue fromHotel Ritz, Madrid fell by $1.0 million in the first half of 2009 compared tosame period in the prior year.

 

*Restaurants: *Revenuedecreased by $2.9 million, or 29%, from $10.1 million in the six months ended June 30,2008 to $7.2 million in the six months ended June 30, 2009.

 

*Trains and Cruises: *Revenue decreased by $13.1 million, or 28%,from $36.7 million in the six months ended June 30, 2008 to $23.6 millionin the six months ended June 30, 2009. Venice Simplon-Orient-Express revenue decreased by $6.4 million from$14.2 million in the six months ended June 30, 2008 to $7.8 million in thesix months ended June 30, 2009, principally as a result of running twofewer services in the current year. Fewer 

 

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day train services were operated in the United Kingdomin the six months ended June 30, 2009 than in the prior year, resulting ina revenue decrease of $1.2 million compared with the same period in the prioryear.

 

*Real Estate: *Although13 condominiums at Porto Cupecoy were sold during the six months ended June 30,2009,**no revenue was recognized following OEH’sdecision to change the application ofits accounting policy in respect of the Porto Cupecoy development in thefourth quarter of 2008. Revenue of $8.2 million was recognized in the sixmonths ended June 30, 2008 at Porto Cupecoy under the percentagecompletion method of accounting. There was no revenue at Keswick Hall in thesix months ended June 30, 2009 compared to revenue of $0.3 million inrespect of the one lot sold in the six months ended June 30, 2008.

 

*Depreciation and amortization*

 

Depreciation and amortization increased by $0.3million from $18.7 million in the six months ended June 30, 2008 to $19.0million in the six months ended June 30, 2009. The 2009 depreciationcharge includes an expense of $2.0 million in respect of Charleston Place.Excluding this charge, depreciation was $1.7 million lower in 2009 than in theprior period, $1.1 million of which was due to the change in exchange rates forthe six months ended June 30, 2009 compared with exchange rates in thesame period in 2008.

 

*Operating expenses*

 

Operating expenses decreased by $30.2 million from$134.9 million in the six months ended June 30, 2008 to $104.7 million inthe six months ended June 30, 2009. Operating expenses in 2009 include acharge of $10.6 million in respect of Charleston Place. Excluding thisexpenditure, operating expenses were $40.8 million lower in 2009 than in theprior period, $3.6 million of which was due to the change in exchange rates forthe six months ended June 30, 2009 compared with exchange rates in thesame period in 2008. Operating expenses were 49% of revenue in the six monthsended June 30, 2008 and 50% of revenue in the six months ended June 30,2009. Excluding Charleston Place Hotel’s revenue and expenses, operatingexpenses in 2009 increased by 2% to 51% of revenue.

 

*Selling, general and administrative expenses*

 

Selling, general and administrative expenses decreasedby $11.1 million from $87.6 million in the six months ended June 30, 2008to $76.5 million in the six months ended June 30, 2009. The 2009 costsinclude a charge of $6.9 million in respect of Charleston 

 

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Place Hotel. Excluding these costs, selling, generaland administrative expenses were $18.4 million lower in 2009 than in the priorperiod, $4.9 million of which was due to the change in exchange rates for thesix months ended June 30, 2009 compared with exchange rates in the sameperiod in 2008. Selling, general and administrative expenses were 32% ofrevenue in the six months ended June 30, 2008 and 36% of revenue in thesix months ended June 30, 2009. Excluding Charleston Place Hotel’s revenueand expenses, selling, general and administrative expenses in 2009 were 37% ofrevenue in 2009.

 

*Impairment of goodwill*

 

During thethree months ended March 31, 2009, OEH completed its 2008 impairmentanalysis and identified the following non-cash goodwill and tradenameimpairments within its continuing operations, considering discounted futurecash flows prepared as of the December 31, 2008 balance sheet date(dollars in millions):

 
| Miraflores Park          |   | $   | 3.2    |   |
|--------------------------|--------|-----|--------|--------|
| Casa de Sierra Nevada    |   | 3.0 |   |
| Lilianfels Blue Mountain |   | 0.5 |   |
| Observatory Hotel        |   | 0.3 |   |
|                     |   | $   | 7.0    |   |

 

Theseimpairments have no cash effect on OEH and arose primarily because of expectedreductions in future cash flows.

 

*Segment EBITDA*

* *
| **Six months ended  June 30**        | ** ** | **2009**                   | ** ** | **2008** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                | ** ** | **(dollars in thousands)** | ** ** |
| ** **                                | ** ** | ** **                 | ** ** |
| Segment EBITDA:                           |       |                       |       |     |       |
| Hotels and restaurants                    |       |                       |       |     |       |
| Owned hotels                              |       |                       |       |     |       |
| Europe                                    |       | $                          | 11,762     |     | $          | 29,372 |   |
| North America                             |       | 12,025                     |       | 8,636    |       |
| Rest of the world                         |       | 12,549                     |       | 16,380   |       |
| Hotel management/part ownership interests |       | 1,915                      |       | 12,954   |       |
| Restaurants                               |       | 216                        |       | 1,569    |       |
|                                      |       | 38,467                     |       | 68,911   |       |
| Tourist trains and cruises                |       | 8,297                      |       | 11,369   |       |
| Real estate                               |       | (793                       | )          | (960     | )          |
| Impairment of goodwill                    |       | (7,048                     | )          | —   |       |
| Central overheads                         |       | (11,938                    | )          | (13,958  | )          |
|                                      |       |                       |       |     |       |
|                                      |       | $                          | 26,985     |     | $          | 65,362 |   |

 

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Segment EBITDA for the six months ended June 30,2009 decreased by 59% from $65.4 million in 2008 to $27.0 million in 2009.Segment EBITDA margins (calculated as segment EBITDA as a percentage ofrevenue) decreased by 11% from 24% for the six months ended June 30, 2008,to 13% for the six months ended June 30, 2009. Excluding impairment ofgoodwill in the six months ended June 30, 2009, segment EBITDA decreasedby 8%, or $31.4 million, to $34.0 million. The segment EBITDA margin in the sixmonths ended June 30, 2009, excluding the impact of the impairment ofgoodwill, was 16%.

 

The European hotels collectively reported a segmentEBITDA of $11.8 million in 2009 compared to $29.4 million in the same period in2008.  As a percentage of European hotelsrevenue, the European segment EBITDA margin fell from 28% in 2008 to 18% in2009.

 

With the inclusion of Charleston Place Hotel from January 1,2009, segment EBITDA in the North American hotel region increased by 39% from$8.6 million in the six months ended June 30, 2008, to $12.0 million inthe six months ended June 30, 2009. Excluding Charleston Place Hotel,segment EBITDA in the North American region decreased by $3.5 million, or 41%,to $5.1 million in the six months ended June 30, 2009.

 

Segment EBITDA in the Rest of the World hotel regiondecreased by 21% from $16.4 million in the six months ended June 30, 2008to $12.5 million in the six months ended June 30, 2009.  The segment EBITDA margin for the six monthsended June 30, 2009 was 22%, compared to a margin of 23% for the sameperiod in 2008.

 

*Earnings from operations before net financecosts*

 

Earnings from operations decreased by $30.5 millionfrom a profit of $34.1 million in the six months ended June 30, 2008 to aprofit of $3.6 million in the six months ended June 30, 2009, due to thefactors described above.

 

*Net finance costs*

 

Net finance costs increased by $3.0 million, or 17%,from $18.0 million for the six months ended June 30, 2008 to $21.0 millionfor the six months ended June 30, 2009. The six months ended June 30, 2008 included a foreign exchange gainof $4.7 million compared to a foreign exchange loss of $4.2 million in the sixmonths ended June 30, 2009. Excluding these foreign exchange items, netinterest expense decreased by $5.9 million, or 26%, from $22.7 million in thesix months ended June 30, 2008 to $16.8 million in the six months ended June 30,2009, primarily as a result of lower interest rates in the six months ended June 30,2009 compared to the same period in the prior year.

 

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*Provision for income taxes*

 

The provision for income taxes decreased by $5.3 million, from aprovision of $6.2 million in the six months ended June 30, 2008 to aprovision of $0.9million in the six months ended June 30, 2009.

 

The provision for income taxes for the six months ended June 30,2009 includes a current tax charge of $2.2 million and a deferred tax charge of$3.2 million arising in Italy in connection with the closure of a tax audit inrespect of the 2004, 2005 and 2006 tax years. OEH had previously included aliability of $4.9 million within its FIN 48 provision in respect of theseuncertain tax positions. The provision for income taxes in the six months endedJune 30, 2009 includes a tax credit in the amount of $4.9 million torelease this FIN 48 provision. The net cost to OEH taking into account all ofthese entries is $0.5 million. The $2.2 million current tax liability ispayable in twelve quarterly instalments of approximately $0.2 million each,commencing in July 2009.

 

Excluding the FIN 48 tax credit related to the Italian uncertain taxposition, the provision from income taxes for the six months ended June 30,2009 included a tax charge of $0.6 million in respect of theFIN 48 liability, compared to a provision of $0.8 million in respect of the FIN48 liability in the six months ended June 30, 2008.

 

*Earnings from unconsolidated companies*

 

Earnings from unconsolidated companies net of taxdecreased by $6.7 million, from $9.9 million in the six months ended June 30,2008 to $3.2 million in the six months ended June 30, 2009.  The 2008 earnings included $4.3 million inrespect of Charleston Place Hotel, which is included within OEH’s consolidatedearnings with effect from January 1, 2009. Excluding this hotel from theprior year, earnings from unconsolidated companies net of tax decreased by $2.4million from $5.6 million in the six months ended June 30, 2008 to $3.2million in the six months ended June 30, 2009. The tax cost associatedwith earnings from unconsolidated companies, excluding Charleston Place Hotel,was $1.5 million in 2008 and $1.2 million in 2009.

 

*Loss from discontinued operations*

 

The loss from discontinued operations consisted of thelosses arising from Bora Bora Lagoon Resort and the Windsor Court Hotel whichare being held for sale, and the earnings of the Lapa Palace Hotel, which wassold during the three months ended June 30, 2009, including the gainarising on the sale.

 

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The Bora Bora Lagoon Resort’s net loss increased from$4.2 million for the six months ended June 30, 2008 to $13.6 million forthe six months ended June 30, 2009. The 2009 loss includes an impairmentcharge of $12.0 million in respect of this property.

 

The Windsor Court net loss increased from $0.8 millionfor the six months ended June 30, 2008 to $14.4 million for the six monthsended June 30, 2009. The 2009 loss includes an impairment charge of $21.5million in anticipation of the sale of this property, with a related tax creditof $7.1 million in respect of the impairment write down.

 

TheLapa Palace Hotel net earnings increased from $0.3 million for the six monthsended June 30, 2008 to $4.2 million for the six months ended June 30,2009. The 2009 earnings included a gain of $5.0 million arising on the disposalof the hotel, including a foreign currency translationadjustment gain of $6.7 million.

 

**Liquidity and Capital Resources**

 

*Working Capital*

 

OEH had cash and cash equivalents of $143.6 million atJune 30, 2009, $78.8 million more than the $64.8 million at December 31,2008. In addition, OEH had restricted cash of $13.1 million (December 31,2008 - $13.2 million) mainly related to the Porto Cupecoy project in St Martin,which will be released when the next 12.5% phase of construction is completed.  At June 30, 2009, there were undrawnamounts available to OEH under committed short-term lines of credit of $25.2million and undrawn amounts available to OEH under secured revolving creditfacilities of $32.0 million, bringing total cash availability at June 30,2009 to $213.9 million, including the restricted cash of $13.1 million.

 

Current assets less current liabilities, including thecurrent portion of long-term debt, resulted in a working capital surplus of$51.4 million at June 30, 2009, an increase of $42.0 million from asurplus of $9.4 million at December 31, 2008. The main factors thatcontributed to the increase in working capital were the increase in cash andcash equivalents offset by the impairments to the Windsor Court and Bora BoraLagoon Resort and by the increase in the current portion of long-term debt.

 

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*Cash Flow*

 

*Operating Activities.* Net cash provided byoperating activities decreased by $20.4 million from $22.3 million for the sixmonths ended June 30, 2008 to $1.9 million for the six months ended June 30,2009. The decrease was due to worse performance of the continuing hotels in thefirst six months of 2009.

 

*Investing Activities*.  Cash used in investing activities decreasedby $40.8 million to $17.3 million cash outflow for the six months ended June 30,2009, compared to $58.1 million cash outflow for the six months ended June 30,2008.

 

The $24.3 million disposals in the six months ended June 30,2009 consisted mainly of proceeds from the sale of Lapa Palace Hotel. The $3.3million acquisitions made during the first six months of 2008 included acquisitionsof the 20% minority interest in Casa de Sierra Nevada, and the La Samanna spaacquisition.  There were no acquisitionsin the first six months of 2009.

 

Restricted cash in the first six months of 2009decreased by $0.1 million compared to an increase in restricted cash of $3.7million in the same period in 2008. This mainly represented movements in PortoCupecoy escrow account.

 

Capital expenditure of $40.9 million included $6.5million of Hotel Cipriani refurbishment, $5.7 million of Hotel das Cataratascapital costs, $4.0 million of Copacabana Palace Hotel refurbishment, $4.9million of Grand Hotel Europe refurbishment, $2.8 million of El Encantoconstruction costs, and $2.8 million on construction of assets at Porto Cupecoyin St. Martin.

 

*Financing Activities*.  Cash provided by financing activities for thesix months ended June 30, 2009 was $92.9 million compared to $10.9 millionfor the six months ended June 30, 2008, an increase of $82.0 million. On May 4,2009, the Company completed a public offering of 25,875,000 class A commonshares with net proceeds of $140.9 million. This was offset by net debtrepayments of $48.0 million in the six months ended June 30, 2009,compared with net borrowings of $12.8 million in the six months ended June 30,2008. Of the repayments in 2009, $25.8 million related to discontinuedoperations of Hotel Lapa and Windsor Court.

 

*Capital Commitments*.  There were $64.4 million of capitalcommitments outstanding as of June 30, 2009 of which $12.4 million relatesto investments in owned hotels and $52.0 million to the purchase of land and abuilding adjoining ‘21’ Club, New York. OEH negotiated a deferral of thispurchase in early July 2009.

 

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*Indebtedness*

 

At June 30, 2009, OEH had $808.7 million oflong-term debt secured by assets, including the current portion, which isrepayable over periods of 1 to 11 years with a weighted average maturity of 2.8years and a weighted average interest rate of 3.75%**.**  See Note 7 to the financial statementsregarding the maturity of long-term debt. Additionally there was $36.8 millionof debt related to discontinued operations.

 

Approximately 50% of the outstanding principal wasdrawn in European euros and the balance primarily in U.S. dollars.  At June 30, 2009, 46% of borrowings ofOEH were in floating interest rates.

 

*Liquidity*

 

During the six months ending December 31, 2009,OEH has approximately $16.7 million of scheduled debt repayments, excludingamounts relating to revolving working capital facilities, which it expects tomeet through operating cash flow, other available committed facilities and the May 2009share sale proceeds, and excluding $3.0 million of debt at Keswick Hall whichcomes due when the relevant building lots are sold.  OEH expects to repaymortgage debt of $36.8 million on closing of the sale of Windsor Court Hotel inSeptember 2009. This debt is included within liabilities of discontinuedoperations held for sale.

 

OEH’s capital commitments amount to $64.4 million ofwhich $52.0 million relates to the purchase of land and a building adjoining ‘21’Club from the New York Public Library.  On July 9, 2009, OEHand the New York Public Library signed agreements to spread and secure futurepayments on this purchase over the next 24 months. In addition to the $7million that OEH has already paid, OEH paid $9 million upon execution of theagreements, to be followed by 16 monthly payments of $0.5 million eachcommencing in February 2010, and final payments of $6 million and $29million respectively in June 2011. In the event OEH elects not to close the transaction, the final paymentof $29 million will not be due to the Library. The balance of $12.4 million of capitalcommitments is currently covered by committed funding and projected operatingcash flows.  OEH expects to incur costs of a further $20.0 million tocomplete construction of its Porto Cupecoy development, which will be funded bya short-term loan agreed with a bank lender in April 2009 and from moniesreceived from buyers of sold units.

 

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On May 4, 2009, OEH completed a public offering throughunderwriters in the United States of 25,875,000 newly issued class A commonshares including 3,375,000 shares covered by the underwriters’ over-allotmentoption in the offering which was exercised in full. OEH intends to use the netproceeds from the offering, approximately $140.9 million, primarily for debtreduction and general corporate purposes. Accordingly, OEH expects to haveavailable cash to fund its working capital requirements, capital expenditureand debt service for the foreseeable future.

 

OEH recognizesthat, in the current economic climate, there is an enhanced risk of a financialcovenant breach in its existing loan facilities if weak trading conditions leadto a deterioration of OEH’s results and the costs of implementing remedialsteps reduce OEH’s earnings in any given period.  If current economicconditions, including the volatility recently experienced in foreign exchangeand global debt markets, continue or worsen, OEH believes there is heightenedrisk that it could breach certain financial covenants applicable to OEH during2009.

 

OEH’sliquidity would be adversely affected if a covenant breach occurred in amaterial loan facility and OEH were unable to agree with its bankers how theparticular financial covenant should be amended or how the breach could becured.  OEH expects to take pro-active steps to meet with its bankers toseek an amendment to any specific financial covenant if OEH believed that itwas likely that the covenant would be breached because of adverse tradingconditions or incurrence of additional costs.  OEH can give no assurancethat OEH’s loan facility lenders would agree to modify any affected covenant,which could impact OEH’s ability to fund its cash requirements for workingcapital, commitments and debt service and could cause an event of default underany affected loan facility.

 

As disclosedin the Company’s 2008 Form 10-K annual report, OEH was concerned that itcould violate a minimum $600 million tangible net worth covenant in twolong-term debt facilities at the end of its first quarter of 2009.Approximately $102.3 million had been borrowed under these facilities at March 31,2009 when tangible net worth calculated under the covenants was approximately$586 million.  In May 2009, OEH and the bank lenders agreed a waiverof these net worth covenants, and OEH repaid $9.7 million in June 2009 inconnection with the waiver.  One of theloans is the Windsor Court Hotel mortgage loan that OEH expects to repay in September 2009.

 

At June 30,2009, OEH was in compliance with all major covenants, except as noted below.

 

Also as disclosed in the Company’s Form 10-Kannual report, Hotel Ritz, Madrid, in which OEH has a 50% interest, was out ofcompliance with a debt service coverage ratio in its first mortgage loanfacility which is non-recourse to and not credit-supported by OEH or its jointventure partner in the hotel.  OEH andits partner continue to service the debt and to negotiate with the lender todetermine how to bring the hotel back into compliance. Noassurance can be given that these negotiations will be successful.

 

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**Recent Accounting Pronouncements**

 

As of June 30, 2009, OEH had adopted SFAS No. 160,SFAS No. 161, SFAS No. 141(R), FSP FAS 142-3, SFAS No. 157 fornonfinancial assets and liabilities, SFAS No. 165, FSP FAS 157-4, and FSPFAS 107-1 and APB 28-1, as reported in Note 1(a) to the financialstatements.

 

In addition, OEH is considering SFAS No. 168, “TheFASB Accounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles — A Replacement of SFAS No. 162”, which was issuedin June 2009. The statement establishes the codification as the source ofauthoritative U.S. accounting and reporting standards recognized by the FASBfor use in the preparation of financial statements and revises the frameworkfor selecting the accounting principles to be used. It is effective for interimand annual periods ending after September 15, 2009.

 

In June 2009, the FASB issued SFAS No. 167, “Amendmentsto FASB Interpretation No. 46(R),” which changes how a reporting companydetermines when an entity that is insufficiently capitalized or is notcontrolled through voting should be consolidated. The standard will require anumber of new disclosures about a reporting company’s involvement with variableinterest entities, any significant changes in risk exposure due to thatinvolvement and how that involvement affects the reporting company’s financialstatements. SFAS No. 167 is effective from January 1, 2010. OEH is inthe process of determining the effects of the adaptation of this standard onits consolidated financial statements.

 

## **Critical Accounting Policies**

## ** **

For adiscussion of these, see under the heading “Critical Accounting Policies” inItem 7 — Management’s Discussion and Analysis in the Company’s 2008 Form 10-Kannual report.

 

**ITEM3.****                            ****Quantitativeand Qualitative Disclosures about Market Risk**

 

OEH is exposed to market risk from changes in interestrates and foreign currency exchange rates. These exposures are monitored and managed as part of OEH’s overall riskmanagement program, which recognizes the unpredictability of financial marketsand seeks to mitigate material adverse effects on consolidated earnings andcash flows.  OEH does not hold marketrate sensitive financial instruments for trading purposes.

 

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The market risk relating to interest rates arisesmainly from the financing activities of OEH. Earnings are affected by changesin interest rates on borrowings, principally based on U.S. dollar LIBOR andEURIBOR, and on short-term cash investments. If interest rates increased by 10%, with all other variables heldconstant, annual net finance costs of OEH would have increased by approximately$1,900,000 on an annual basis based on borrowings at June 30, 2009. Theinterest rates on substantially all of OEH’s long-term debt are adjustedregularly to reflect current market rates. Accordingly, the carrying amounts approximate fair value.

 

The market risk relating to foreign currencies and itseffects have not changed materially during the first six months of 2009 fromthose described in the Company’s 2008 Form 10-K annual report.

 

**ITEM 4.****                            ****Controlsand Procedures**

 

The Company’s management, under the supervision and with theparticipation of its chief executive and financial officers, has evaluated theeffectiveness of the Company’s disclosure controls and procedures (as definedin SEC Rule 13a-15(e)) as of June 30, 2009 and, based on thatevaluation, believes those disclosure controls and procedures are effective asof that date.  There have been no changesin the Company’s internal control over financial reporting (as defined in SEC Rule 13a-15(f))during the second quarter of 2009 that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

It should be noted that any system of controls, however well designedand operated, can provide only reasonable, and notabsolute,assurance that the objectives of the system are met such as prevention anddetection of mis-statement.  In addition,the design of any control system is based in part upon certain assumptionsabout the likelihood of future events. Controls may become inadequate because of changes in conditions, or thedegree of compliance with policies or procedures may deteriorate, for example.  Because of these and other inherentlimitations of control systems, there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions.

 

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**PART II - OTHER INFORMATION**

 

**ITEM 1.  Legal Proceedings**

 

As previously reported in the Company’s 2008 Form 10-Kannual report, three hedge funds owning collectively about 6.1 million class Acommon shares in the Company filed a petition in the Supreme Court of Bermudaon January 12, 2009 challenging on various grounds the Company’s corporategovernance structure with dual class A and class B common shares outstandingand ownership of higher-voting class B common shares by a wholly-ownedsubsidiary of the Company.  The named respondents are the Company, itssubsidiary and seven of the current eight members of Company’s Board ofDirectors.

 

TheCompany continues to believe the petition is without merit and intends todefend the action vigorously.  The respondents filed points of defence tothe petition on May 11, 2009.  After the petitioners filed points ofreply on June 11, 2009 to the points of defence, the petitioners and therespondents filed with the Court on July 10 and 17, 2009 separatesummonses seeking, among other matters, a trial on preliminary issues relatingto the legality of the holding of class B common shares in the Company by thesubsidiary.  The respondents also filed a summons seeking to strike out(dismiss) the petition.  A hearing before the Court is likely to be heldduring August 2009 at which further proceedings on the production ofevidence and the substance of the summonses will be scheduled later in theyear.

 

**I****TEM4.  Submission of Matters to a Vote ofSecurity Holders**

 

The Companyconvened and held an annual general meeting of shareholders on June 5,2009.  The holders of class A and Bcommon shares, voting together, elected directors of the Company, approved theOrient-Express Hotels Ltd. 2009 Share Award and Incentive Plan, and appointedDeloitte LLP as the Company’s independent registered public accounting firm in2009.  A brief description of each matterand the number of votes on each matter are as follows:

 

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# **(1)**           Election ofeight directors, to constitute the entire Board of Directors, serving until the2010 annual general meeting:

 
| **Name**             | ** ** | **For**    | ** ** | **Authority  Withheld** | ** ** |
|----------------------|------------|------------|------------|-------------------------|------------|
|                 |       |       |       |                    |       |
| John D. Campbell     |       | 20,457,956 |       | 1,637,224               |       |
| Mitchell C. Hochberg |       | 20,486,329 |       | 1,608,851               |       |
| James B. Hurlock     |       | 20,487,817 |       | 1,607,362               |       |
| Prudence M. Leith    |       | 20,470,888 |       | 1,624,292               |       |
| J. Robert Lovejoy    |       | 20,487,987 |       | 1,607,193               |       |
| Georg R. Rafael      |       | 20,487,916 |       | 1,607,263               |       |
| James B. Sherwood    |       | 20,486,068 |       | 1,609,112               |       |
| Paul M. White        |       | 20,486,906 |       | 1,608,374               |       |

 

(2)           Approval of Orient-Express Hotels Ltd. 2009Share Award and Incentive Plan:  For20,575,383, Against 336,485, and Abstain 373.

 

# **(3)**           Appointmentof Deloitte LLP as the Company’s independent registered public accounting firmin 2009, and authorization of the Board’s Audit Committee to fix Deloitte’sremuneration:  For 21,802,069, Against5,846, and Abstain 287,265.

 

# **ITEM6.  Exhibits**

 

The index toexhibits appears below, on the page immediately following the signature page tothis report.

 

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|   | ORIENT-EXPRESS  HOTELS LTD. |
|--------|-----------------------------|
|   |                        |
|   |                        |
|   | By:                         | /s/  Martin O’Grady |
|   |                        | Martin  O’Grady |
|   |                        | Vice  President - Finance |
|   |                        | and  Chief Financial Officer |
|   |                        | (Principal Accounting Officer) |

 

 

Dated: August 7,2009

 

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# **EXHIBIT INDEX**

 

3.1      -          Memorandum of Association and Certificateof Incorporation of the Company, filed as Exhibit 3.1 to the Company’s Form 8-KCurrent Report on July 9, 2007 and incorporated herein by reference.

 

3.2      -          Bye-Laws of the Company, filed as Exhibit 3.2to the Company’s Form 8-K Current Report on June 15, 2007 andincorporated herein by reference.

 

3.3      -          Rights Agreement dated as of June 1,2000, and amended and restated as of April 12, 2007, between the Companyand Computershare Trust Company, N.A., as rights agent, filed as Exhibit 1to Amendment No. 1 to the Company’s Registration Statement on Form 8-Adated April 23, 2007, for the Company’s preferred share purchase rights,and incorporated herein by reference.

 

3.4      -          Amendment No. 1 dated December 10,2007 to amended and restated Rights Agreement (Exhibit 3.3), filed as Exhibit 4.2to the Company’s Form 8-K Current Report on December 10, 2007 andincorporated herein by reference

 

31       -          Rule 13a-14(a)/15d-14(a) Certifications.

 

32       -          Section 1350 Certification.

 

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