**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q**

 

| **(Mark One)**                                                                                                                                                                         |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                   |   |   |
| **ý**                                                                                                                                                                             |   | **Quarterly Report Pursuant to Section 13  or 15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                                                                                   |   |   |
| **For the quarterly period  ended March 31, 2006 or**                                                                                                                             |
|                                                                                                                                                                                   |   |   |
| **o**                                                                                                                                                                                  |   | **Transition Report Pursuant to Section 13  or 15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                                                                                   |   |   |
| **For the transition  period  from            to            ** |

 

**Commissionfile number****         ****1-16017**

 

**ORIENT-EXPRESS HOTELS LTD.**

(Exact name ofregistrant as specified in its charter)

 

| **Bermuda**                                                       |   | **98-0223493**                        |
|-------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction  of incorporation or  organization) |   | (I.R.S. Employer  Identification No.) |

 

**22Victoria Street**

**P.O. BoxHM 1179**

**HamiltonHMEX, Bermuda**

(Address of principal executive offices)     (ZipCode)

 

**441–295–2244**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities 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  ý    No  o

 

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

 
| Large Accelerated File ý |   | Accelerated Filer o |   | Non-Accelerated Filer o |
|------------------------------------|--------|--------------------------|--------|------------------------------|

 

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

 

As of April 30, 2006, 39,425,750 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. Financial Statements**

 

**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**CondensedConsolidated Balance Sheets (unaudited)**

 
| ** **                                                                                 | ** ** | **March 31,  2006**             | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                 | ** ** | **(Dollars in thousands)** | ** ** |
| **Assets**                                                                                 |       |                                 |       |                        |       |
| Cash and cash equivalents                                                                  |       | $                                    | 39,257     |                        | $          | 38,397 |   |
| Accounts receivable, net of allowances of  $1,020 and $980                                 |       | 59,455                               |       | 59,061                      |       |
| Due from related parties                                                                   |       | 18,360                               |       | 17,549                      |       |
| Prepaid expenses and other                                                                 |       | 15,402                               |       | 13,061                      |       |
| Inventories                                                                                |       | 31,375                               |       | 29,636                      |       |
| Real estate assets                                                                         |       | 18,821                               |       | 12,149                      |       |
| Total current assets                                                                       |       | 182,670                              |       | 169,853                     |       |
|                                                                                       |       |                                 |       |                        |       |
| Property, plant and equipment, net of  accumulated depreciation of $173,603 and $164,814   |       | 1,046,979                            |       | 1,017,175                   |       |
| Investments                                                                                |       | 124,780                              |       | 129,681                     |       |
| Goodwill and other intangible assets                                                       |       | 65,993                               |       | 62,867                      |       |
| Other assets                                                                               |       | 40,897                               |       | 35,986                      |       |
|                                                                                       |       | $                                    | 1,461,319  |                        | $          | 1,415,562 |   |
| **Liabilities and Shareholders’ Equity**                                              |       |                                 |       |                        |       |
| Working capital facilities                                                                 |       | $                                    | 56,259     |                        | $          | 47,108 |   |
| Accounts payable                                                                           |       | 29,651                               |       | 22,680                      |       |
| Due to related parties                                                                     |       | 51                                   |       | 7,374                       |       |
| Accrued liabilities                                                                        |       | 47,111                               |       | 43,545                      |       |
| Deferred revenue                                                                           |       | 28,745                               |       | 19,339                      |       |
| Current portion of long-term debt and  capital leases                                      |       | 64,144                               |       | 72,151                      |       |
| Total current liabilities                                                                  |       | 225,961                              |       | 212,197                     |       |
|                                                                                       |       |                                 |       |                        |       |
| Long-term debt and obligations under  capital leases                                       |       | 534,408                              |       | 496,156                     |       |
| Deferred income taxes                                                                      |       | 31,010                               |       | 29,656                      |       |
|                                                                                       |       | 791,379                              |       | 738,009                     |       |
| Minority interest                                                                          |       | 3,578                                |       | 4,153                       |       |
|                                                                                       |       |                                 |       |                        |       |
| Shareholders’ equity:                                                                 |       |                                 |       |                        |       |
| Preferred shares $0.01 par value  (30,000,000 shares authorized, issued nil)               |       | —                               |       | —                      |       |
| Class A common shares $0.01 par  value (120,000,000 shares authorized):               |       |                                 |       |                        |       |
| Issued-39,413,250 (2005 – 39,399,750)                                                 |       | 393                                  |       | 393                         |       |
| Class B common shares $0.01 par  value (120,000,000 shares authorized):               |       |                                 |       |                        |       |
| Issued–18,044,478 (2005-18,044,478)                                                   |       | 181                                  |       | 181                         |       |
| Additional paid-in capital                                                                 |       | 405,375                              |       | 404,923                     |       |
| Retained earnings                                                                          |       | 305,611                              |       | 314,207                     |       |
| Accumulated other comprehensive loss                                                       |       | (45,017                              | )          | (46,123                     | )          |
| Less: reduction due to Class B common  shares owned by a subsidiary – 18,044,478 |       | (181                                 | )          | (181                        | )          |
| Total shareholders’ equity                                                            |       | 666,362                              |       | 673,400                     |       |
| Commitments and contingencies                                                              |       |                                 |       |                        |       |
|                                                                                       |       | $                                    | 1,461,319  |                        | $          | 1,415,562 |   |

 

See notes to condensed consolidated financial statements.

 

2

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Statementsof Condensed Consolidated Operations (unaudited)**

 
| **Three months ended March 31,**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **(Dollars in thousands, except per share amounts)** | ** ** |
|                                                                               |       |     |       |     |       |
| Revenue                                                                            |       | $        | 79,251     |     | $          | 80,489 |   |
|                                                                               |       |     |       |     |       |
| Expenses:                                                                          |       |     |       |     |       |
| Depreciation and amortization                                                      |       | 9,384    |       | 7,818    |       |
| Operating                                                                          |       | 40,729   |       | 41,329   |       |
| Selling, general and administrative                                                |       | 32,229   |       | 31,423   |       |
| Total expenses                                                                     |       | 82,342   |       | 80,570   |       |
|                                                                               |       |     |       |     |       |
| Losses from operations before net finance  costs                                   |       | (3,091   | )          | (81      | )          |
|                                                                               |       |     |       |     |       |
| Interest expense, net                                                              |       | (8,992   | )          | (7,079   | )          |
| Foreign currency, net                                                              |       | 682      |       | 3,580    |       |
| Net finance costs                                                                  |       | (8,310   | )          | (3,499   | )          |
|                                                                               |       |     |       |     |       |
| Losses before income taxes                                                         |       | (11,401  | )          | (3,580   | )          |
|                                                                               |       |     |       |     |       |
| Benefit from income taxes                                                          |       | 1,964    |       | 298      |       |
|                                                                               |       |     |       |     |       |
| Losses before earnings from  unconsolidated companies                              |       | (9,437   | )          | (3,282   | )          |
|                                                                               |       |     |       |     |       |
| Earnings from unconsolidated companies,  net of tax .                              |       | 1,826    |       | 1,725    |       |
|                                                                               |       |     |       |     |       |
| Net losses on class A and class B  common shares                         |       | $        | (7,611     | )        | $          | (1,557 | ) |
|                                                                               |       |     |       |     |       |   |   |
| Net losses per class A and class B  common share:                        |       |     |       |     |       |
| Basic and diluted                                                                  |       | $        | (0.19      | )        | $          | (0.04 | ) |
|                                                                               |       |     |       |     |       |
| Dividends per class A and class B  common share                          |       | $        | 0.025      |     | $          | 0.025 |   |

 

See notes to condensed consolidated financial statements.

 

3

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

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

 
| **Three months ended March 31,**                               | ** ** | **2006**                   | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                                                         | ** ** | **(Dollars in thousands)** | ** ** |
| Cash flows from operating activities:                                              |       |                       |       |     |       |
| Net losses                                                                         |       | $                          | (7,611     | )        | $          | (1,557 | ) |
| Adjustments to reconcile net losses to  net cash provided by operating activities: |       |                       |       |     |       |
| Depreciation and amortization                                                      |       | 9,384                      |       | 7,818    |       |
| Undistributed earnings of affiliates                                               |       | 516                        |       | 463      |       |
| Stock–based compensation                                                      |       | 215                        |       | 261      |       |
| Change in deferred tax                                                             |       | (4,234                     | )          | (2,171   | )          |
| Other non-cash items                                                               |       | (688                       | )          | (613     | )          |
| Change in assets and liabilities net of  effects from acquisition of subsidiaries: |       |                       |       |     |       |
| Increase in receivables, prepaid expenses  and other                               |       | (3,089                     | )          | (13,285  | )          |
| Increase in inventories                                                            |       | (1,466                     | )          | (1,334   | )          |
| Increase in real estate assets held for  sale                                      |       | (6,672                     | )          | —   |       |
| Increase in payables, accrued liabilities  and deferred revenue                    |       | 12,390                     |       | 12,905   |       |
|                                                                               |       |                       |       |     |       |
| Total adjustments                                                                  |       | 6,356                      |       | 4,044    |       |
|                                                                               |       |                       |       |     |       |
| Net cash (used in) provided by operating  activities .                             |       | (1,255                     | )          | 2,487    |       |
|                                                                               |       |                       |       |     |       |
| Cash flows from investing activities:                                              |       |                       |       |     |       |
| Capital expenditures                                                               |       | (21,308                    | )          | (23,237  | )          |
| Acquisitions and investments, net of cash  acquired                                |       | (9,456                     | )          | (93,250  | )          |
| Proceeds from sale of fixed assets and  other                                      |       | —                     |       | 779      |       |
|                                                                               |       |                       |       |     |       |
| Net cash used in investing activities                                              |       | (30,764                    | )          | (115,708 | )          |
|                                                                               |       |                       |       |     |       |
| Cash flows from financing activities:                                              |       |                       |       |     |       |
| Net (repayment)/proceeds from working  capital facilities and redrawable loans     |       | 8,703                      |       | (89,370  | )          |
| Issuance of common shares                                                          |       | —                     |       | 121,927  |       |
| Stock options exercised                                                            |       | 237                        |       | —   |       |
| Issuance of long-term debt                                                         |       | 42,296                     |       | 74,721   |       |
| Principal payments under long-term debt                                            |       | (17,402                    | )          | (8,369   | )          |
| Payment of common share dividends                                                  |       | (985                       | )          | (856     | )          |
|                                                                               |       |                       |       |     |       |
| Net cash provided by financing activities                                          |       | 32,849                     |       | 98,053   |       |
|                                                                               |       |                       |       |     |       |
| Effect of exchange rate changes on cash  and cash equivalents                      |       | (30                        | )          | (1,072   | )          |
|                                                                               |       |                       |       |     |       |
| Net increase/(decrease) in cash and cash  equivalents                              |       | 860                        |       | (16,240  | )          |
|                                                                               |       |                       |       |     |       |
| Cash and cash equivalents at beginning of  period                                  |       | 38,397                     |       | 85,610   |       |
|                                                                               |       |                       |       |     |       |
| Cash and cash equivalents at end of  period                                        |       | $                          | 39,257     |     | $          | 69,370 |   |

 

See notes to condensed consolidated financial statements.

 

4

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Statementsof Condensed Consolidated Shareholders’ Equity (unaudited)**

 
| **(Dollars in thousands)**       | ** ** | **Preferred  Shares  At Par  Value** | ** ** | **Class A  Common  Shares  at Par  Value** | ** ** | **Class B  Common  Shares  at Par  Value** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Common  Shares  Owned by  Subsidiary** | ** ** | **Total  Comprehensive  Income/(Loss)** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------|------------|
|                                       |       |                                      |       |                                                 |       |                                                 |       |                             |       |                   |       |                                        |       |                                          |       |                                    |       |
| Balance, January 1, 2006              |       | $                                         | —     |                                                 | $          | 393                                                  |       | $                                | 181        |                   | $          | 404,923                                     |       | $                                             | 314,207    |                                    | $          | (46,123 | ) | $ | (181 | ) |   |   |
| Stock-based compensation                   |       | —                                    |       | —                                               |       | —                                               |       | 215                              |       | —                 |       | —                                      |       | —                                        |       |                                    |       |
| Stock options exercised                    |       | —                                    |       | —                                               |       | —                                               |       | 237                              |       | —                 |       | —                                      |       | —                                        |       |                                    |       |
| Dividends on common shares                 |       | —                                    |       | —                                               |       | —                                               |       | —                           |       | (985                   | )          | —                                      |       | —                                        |       |                                    |       |
| Comprehensive loss:                        |       |                                      |       |                                                 |       |                                                 |       |                             |       |                   |       |                                        |       |                                          |       |                                    |       |
| Net losses on common shares for the period |       | —                                    |       | —                                               |       | —                                               |       | —                           |       | (7,611                 | )          | —                                      |       | —                                        |       | $                                       | (7,611     | ) |
| Other comprehensive income                 |       | —                                    |       | —                                               |       | —                                               |       | —                           |       | —                 |       | 1,106                                       |       | —                                        |       | 1,106                                   |       |
|                                       |       |                                      |       |                                                 |       |                                                 |       |                             |       |                   |       |                                        |       |                                          |       | $                                       | (6,505)    |   |
| Balance, March 31, 2006               |       | $                                         | —     |                                                 | $          | 393                                                  |       | $                                | 181        |                   | $          | 405,375                                     |       | $                                             | 305,611    |                                    | $          | (45,017 | ) | $ | (181 | ) |   |   |

 

See notes to condensed consolidated financial statements.

 

5

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Notesto Condensed Consolidated Financial Statements**

 

**1.****                                      Basis of financial 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”.

 

*(a) **Accounting policies*

 

For adescription of significant accounting policies and basis of presentation, seeNotes 1 and 15 to the consolidated financial statements in the Company’s 2005 Form 10-Kannual report. As of March 31, 2006, these significant accounting policieshave not changed from December 31, 2005.

 

The condensedconsolidated financial statements are unaudited  and have been prepared following the rules andregulations of the U.S. Securities and Exchange Commission.

 

In the opinionof management, all adjustments necessary for a fair statement of the results ofoperations for the three months ended March 31, 2006 and 2005, which areall of a normal recurring nature, have been reflected in the informationprovided. Due to the seasonal nature of OEH’s business, operating results forthe interim period are not necessarily indicative of a full year’s operatingresults.

 

*(b) Netlosses per share*

 

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

 
| **Three months ended March 31,** | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                |       | 39,413     |       | 34,762     |       |
| Effect of dilution                                   |       | —     |       | —     |       |
| Diluted                                              |       | 39,413     |       | 34,762     |       |

 

For the threemonths ended March 31, 2006 and 2005, the anti-dilutive effect of stockoptions on 401,970 and 269,312 class A common shares, respectively, wasexcluded from the computation of diluted losses per share.

 

6

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*(c) Dividends*

 

On January 5,2006, the Company declared a dividend of $0.025 per common share payable February 4,2006 to shareholders of record January 20, 2006.

 

*(d) Earnings from unconsolidated 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 amounting to $2,342,000 and $2,188,000 for the three monthsended March 31, 2006 and 2005, respectively.

 

*(e)**                                Reclassifications*

 

Certain itemsin 2005 have been reclassified to conform to the 2006 presentation.

 

**2.****                                      Acquisitions**

 

*Casade Sierra Nevada*

 

Effective February 8,2006, OEH acquired a 75% interest in Casa de Sierra Nevada, a 33 room deluxehotel in San Miguel de Allende, Mexico. The total purchase price, includingacquisition costs, was $8,670,000 paid in cash. The acquisition included adjacentbuildings and land.

 

In accordancewith the shareholders’ agreement, OEH will purchase the remaining 25% minorityinterest as follows:  5% will bepurchased in January 2007 for a cash consideration of $520,000; 5% will bepurchased in January 2009 for a cash consideration equal to ten times the previous12 months net operating income of the hotel, less its outstanding debt; and theremaining 15% will be purchased in January 2010 for a cash consideration calculatedon the same basis.

 

The followingtable summarizes the initial estimated fair values of the assets acquired andliabilities assumed at the date of acquisition. These initial purchase priceallocations may be adjusted within one year of the purchase date forchanges in estimates of the fair value of assets acquired and liabilitiesassumed as a result of final appraisals. OEH is in the process of obtainingthird-party valuations of certain intangibles and tangible assets; thus theallocation of the purchase price is subject to adjustment. (dollars inthousands):

 

7

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| ** **                       | ** ** | **March 31, 2006** | ** ** |
|----------------------------------|------------|------------------------------|------------|
|                             |       |                         |       |
| Property, plant and equipment    |       | $                            | 8,323      |   |
| Goodwill                         |       | 2,910                        |       |
| Total assets acquired            |       | 11,233                       |       |
|                             |       |                         |       |
| Current liabilities              |       | 200                          |       |
| Other long–term liabilities |       | 1,983                        |       |
| Deferred income taxes            |       | 380                          |       |
| Total liabilities assumed        |       | 2,563                        |       |
| Net assets acquired              |       | $                            | 8,670      |   |

 

The net assetsof Casa de Sierra Nevada have been provisionally fair valued based on theestimated replacement cost of the buildings. After fair valuing all otherassets and liabilities, goodwill of $2,720,000 has been recorded of which $ nilwill be deductible as operating expenses for tax purposes. The provisional fairvalues may be adjusted based on an appraisal of the property which hasbeen commissioned.

 

Theacquisition of Casa de Sierra Nevada has been accounted for as a purchase inaccordance with SFAS No. 141, “Business Combinations”. The results of theoperation have been included in the consolidated financial statements of OEHfrom February 8, 2006.

 

The proformaresults of operations data presented below assume that the Casa de SierraNevada acquisition had been made at the beginning of 2005. The proforma data arepresented for informational purposes only and are not necessarily indicative ofthe results of future operations nor of the actual results that would have beenachieved had the acquisition taken place at the beginning of 2005 (dollars inthousands):

 
| **Three months ended March 31,** | ** ** | **2006**                      | ** ** | **2005** | ** ** |
|------------------------------------------------------|------------|-------------------------------|------------|----------|------------|
| ** **                                           | ** ** | **(Proforma unaudited)** | ** ** |
| Revenue                                              |       | $                             | 79,474     |     | $          | 81,127 |   |
| Net loss                                             |       | $                             | (7,603     | )        | $          | (1,520 | ) |
| Losses per share:                                    |       |                          |       |     |       |
| Basic                                                |       | $                             | (0.19      | )        | $          | (0.04 | ) |
| Diluted                                              |       | $                             | (0.19      | )        | $          | (0.04 | ) |

 

*MaromaResort and Spa*

 

Effective January 1,2006 OEH purchased the remaining 25% interest in Maroma Resort and Spa for acash consideration of $5,400,000 bringing its interest to 100%. Fair values ofthe assets have been increased by $4,000,000 to reflect

 

8

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changes in thevalue of the acquired 25% interest. A deferred estimated tax liability of$1,100,000 has been recorded on the acquisition. No goodwill has beenrecognized on this acquisition.

 

**3.****                                      Investments**

 

On February 2, 2004, OEH entered intoan agreement with the Pansea Hotel group, the owner of six deluxe hotels inSoutheast Asia. Under this agreement, OEH is to provide a maximum of $8,000,000in loans to the hotel holding company which are convertible after three yearsinto approximately 25% of the holding company’s shares. As of March 31,2006, OEH had provided $8,000,000 (December 31, 2005-$8,000,000) in loansin Pansea which are recorded in other assets. The conversion price of the loansis determined at a multiple of EBITDA less existing debt on the exercise date(as defined in the investment agreement). OEH is not managing the hotels but ismarketing them along with its other properties.

 

Summarized financial data for OEH’sunconsolidated companies for the periods during which the investments were heldby OEH are as follows (dollars in thousands):

 
| ** **                                       | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Current assets                              |       | $                        | 45,455     |                        | $          | 45,390 |   |
| Property, plant and equipment, net               |       | 346,040                  |       | 344,475                     |       |
| Other assets                                     |       | 6,630                    |       | 5,726                       |       |
| Total assets                                     |       | $                        | 398,125    |                        | $          | 395,591 |   |
|                                             |       |                     |       |                        |       |
| Current liabilities                              |       | $                        | 52,916     |                        | $          | 50,150 |   |
| Long–term debt                              |       | 211,266                  |       | 203,520                     |       |
| Other liabilities                                |       | 83,522                   |       | 90,161                      |       |
| Total shareholders’ equity                  |       | 50,421                   |       | 51,760                      |       |
| Total liabilities and shareholders’  equity |       | $                        | 398,125    |                        | $          | 395,591 |   |

 
| **Three months ended March 31,** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |
| Revenue                                              |       | $        | 37,058     |     | $          | 33,814 |   |
| Earnings from operations before net  finance costs   |       | $        | 3,928      |     | $          | 2,320 |   |
| Net losses                                           |       | $        | (3,138     | )        | $          | (3,231 | ) |

 

9

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**4. Property, plant and equipment**

 

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

 
| ** **                              | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                    | ** ** |                     |       |                        |       |   |   |
| Freehold and leased land and buildings  | ** ** | $                        | 879,270    |                        | $          | 858,350 |   |
| Machinery and equipment                 |       | 165,729                  |       | 156,780                     |       |
| Fixtures, fittings and office equipment |       | 157,059                  |       | 148,346                     |       |
| River cruiseship and canalboats         |       | 18,524                   |       | 18,513                      |       |
|                                    |       | 1,220,582                |       | 1,181,989                   |       |
| Less: accumulated depreciation          |       | (173,603                 | )          | (164,814                    | )          |
|                                    |       |                     |       |                        |       |
|                                    |       | $                        | 1,046,979  |                        | $          | 1,017,175 |   |

 

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

 
| ** **                              | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                    |       |                     |       |                        |       |   |   |
| Land and buildings                      |       | $                        | 14,968     |                        | $          | 14,803 |   |
| Machinery and equipment                 |       | 2,182                    |       | 2,067                       |       |
| Fixtures, fittings and office equipment |       | 1,718                    |       | 1,817                       |       |
|                                    |       | 18,868                   |       | 18,687                      |       |
| Less: accumulated depreciation          |       | (1,980                   | )          | (1,892                      | )          |
|                                    |       | $                        | 16,888     |                        | $          | 16,795 |   |

 

**5. Goodwill and other intangible assets**

 

OEH’s goodwillconsists of $734,000 related to the trains and cruises reporting segment and $57,969,000related to the hotels and restaurants reporting segment, of which $28,812,000 relatesto the acquisition of the Grand Hotel Europe and $2,720,000 relates to theestimated purchase price allocation of Casa de Sierra Nevada. Other intangibleassets consist of the value of the Grand Hotel Europe tradename of $7,100,000and the estimated purchase price allocation of $190,000 for the Casa de SierraNevada tradename.

 

**6. Long-term debt and obligationsunder capital lease**

 

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

 

10

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| ** **                                                                                                                                                                                                  | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                                                                                                                                                                                        |       |                     |       |                        |       |   |   |
| Loans from banks collateralized by  property, plant and equipment payable over periods of 1 to 11 years, with a  weighted average interest rate of 5.54% and 5.51%, respectively, primarily  based on LIBOR |       | $                        | 577,615    |                        | $          | 546,593 |   |
| Loan secured by river cruiseship, payable  over 3 years, with a weighted interest rate of 5.65% and 5.65% respectively,  based on LIBOR                                                                     |       | 4,000                    |       | 4,500                       |       |
| Obligations under capital lease                                                                                                                                                                             |       | 16,937                   |       | 17,214                      |       |
|                                                                                                                                                                                                        |       | 598,552                  |       | 568,307                     |       |
| Less: current portion                                                                                                                                                                                       |       | 64,144                   |       | 72,157                      |       |
|                                                                                                                                                                                                        |       | $                        | 534,408    |                        | $          | 496,156 |   |

 

Certain credit agreements of OEH haverestrictive covenants. At March 31, 2006, OEH was in compliance with thesecovenants, including a minimum consolidated net worth test and a minimumconsolidated interest coverage test as defined under a bank-syndicated$179,000,000 loan facility secured by three of OEH’s Italian hotels. OEH doesnot currently have any covenants in its loan agreements which limit the paymentof dividends.

 

The following is a summary of the aggregatematurities of long-term debt, including obligations under capital lease, at March 31,2006 (dollars in thousands):

 
| **Year ending December 31,** |   |    |    |
|-----------------------------------|--------|---------|---------|
|                              |   |    |    |   |
| 2007                              |   | $       | 119,387 |   |
| 2008                              |   | 206,028 |    |
| 2009                              |   | 67,915  |    |
| 2010                              |   | 51,619  |    |
| 2011 and thereafter               |   | 89,459  |    |
|                              |   | $       | 534,408 |   |

 

The interest rates on substantially all ofOEH’s long-term debt are adjusted regularly to reflect current market rates.

 

11

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Accordingly, the carrying amounts of OEH’slong-term debt also approximate fair value.

 

**7.****                                      Income taxes**

 

Income taxes provided by OEH relateprincipally to its foreign subsidiaries as pre-tax income is primarily foreign.The provision for income taxes consisted of the following (dollars inthousands):

 

Three months ended March 31, 2006

 
| ** **    | ** ** | **Current** | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|---------------|------------|-------------|------------|--------------|------------|-----------|------------|
|          |       |        |       |         |       |      |       |
| United States |       | $           | 551        |         | $          | (82       | )          | $ | 469 |   |
| Other foreign |       | 1,719       |       | (4,152       | )          | (2,433    | )          |
|          |       | $           | 2,270      |         | $          | (4,234    | )          | $ | (1,964 | ) |

 

Three months ended March 31, 2005

 
| ** **    | ** ** | **Current** | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|---------------|------------|-------------|------------|--------------|------------|-----------|------------|
|          |       |        |       |         |       |      |       |
| United States |       | $           | 321        |         | $          | 653       |       | $ | 974 |   |
| Other foreign |       | 1,552       |       | (2,824       | )          | (1,272    | )          |
|          |       | $           | 1,873      |         | $          | (2,171    |       | $ | (298 | ) |

 

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

 

Deferred income taxes reflect the net taxeffects of temporary differences between the carrying amount of assets andliabilities for financial reporting purposes and the amounts used for incometax purposes. The following represents OEH’s net deferred tax liabilities(dollars in thousands):

 
| ** **                   | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                         |       |                     |       |                        |       |
| Gross deferred tax assets    |       | $                        | 64,411     |                        | $          | 60,177 |   |
| Less: Valuation allowance    |       | (22,487                  | )          | (22,487                     | )          |
| Net deferred tax assets      |       | 41,924                   |       | 37,690                      |       |
| Deferred tax liabilities     |       | (53,626                  | )          | (53,007                     | )          |
| Net deferred tax liabilities |       | $                        | (11,702    | )                           | $          | (15,317 | ) |

 

The deferred tax assets consist of tax losscarry forwards. A valuation allowance has been provided against gross deferredtax assets where it is thought more likely than not that the benefitsassociated with these assets will not be realized.

 

12

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The deferred tax liabilities consistprimarily of differences between the tax basis of depreciable assets and theadjusted basis reflected in the financial statements.

 

**8.****                                      Pensions**

 

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

 
| **Three months ended March 31,** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |   |   |
| Service cost                                         |       | $        | 263        |     | $          | 229 |   |
| Interest cost                                        |       | 213      |       | 181      |       |
| Expected return on plan assets                       |       | (198     | )          | (138     | )          |
| Amortization of net loss                             |       | 115      |       | 66       |       |
| Net periodic benefit cost                            |       | $        | 393        |     | $          | 338 |   |

 

As reported inNote 7 to the financial statements in the Company’s 2005 Form 10-K annualreport, OEH expected to contribute $894,000 to its pension plans in 2006. As ofMarch 31, 2006, $234,000 of contributions had been made. OEH anticipatescontributing an additional $660,000 to fund its pension plans in 2006 for atotal of $894,000.

 

**9.****                                      Supplemental cash flow information**

(Dollars inthousands):

 
| **Three months ended March 31,** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |
| Cash paid for:                                       |       |     |       |     |       |
| Interest                                             |       | $        | 10,111     |     | $          | 7,217 |   |
| Income taxes                                         |       | $        | 1,319      |     | $          | 1,340 |   |

 

In conjunction with acquisitions (see Note2) liabilities were assumed as follows (dollars in thousands):

 
| **Three months ended March 31,** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |
| Fair value of assets acquired                        |       | $        | 15,233     |     | $          | 111,492 |   |
| Cash paid                                            |       | (14,070  | )          | (95,000  | )          |
| Liabilities assumed                                  |       | $        | 1,163      |     | $          | 16,492 |   |

 

**10.****                               Accumulated other comprehensive loss**

 

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

 

13

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| ** **                               | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                     |       |                     |       |                        |       |   |   |
| Foreign currency translation adjustments |       | $                        | (44,984    | )                           | $          | (46,055 | ) |
| Derivative financial instruments         |       | (33                      | )          | (68                         | )          |
|                                     |       | $                        | (45,017)   |                        | $          | (46,123 | ) |

 

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

 
| **Three months ended March 31,** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |
| Net losses on common shares                          |       | $        | (7,611     | )        | $          | (1,557 | ) |
| Foreign currency translation adjustments  .          |       | 1,071    |       | (15,035  | )          |
| Change in fair value of derivatives                  |       | 35       |       | (50      | )          |
| Comprehensive loss                                   |       | $        | (6,505     | )        | $          | (16,642 | ) |

 

**11.****                               Commitments**

 

Outstanding contracts to purchase fixedassets were approximately $18,682,000 at March 31, 2006 (December 31,2005 - $24,341,000).

 

**12.****                               Information concerning financial reporting for segments and operationsin different geographical areas**

 

As reported in the Company’s 2005 Form 10-Kannual report, OEH has two reporting segments, (i) hotels and restaurantsand (ii) tourist trains and cruises. Segment performance is evaluatedbased upon segment net earnings before interest, tax (including tax on earningsfrom unconsolidated companies), depreciation and amortization (“segment EBITDA”).Financial information regarding these business segments is as follows, with netfinance costs appearing net of capitalized interest and interest and relatedincome (dollars in thousands):

 

14

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| **Three months ended March 31,**             | ** **             | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------|------------------------|----------|------------|----------|------------|
| Revenue:                                                         |                   |     |       |     |       |
| Hotels and restaurants                                           |                   |     |       |     |       |
| Owned hotels                                                     |  - Europe         |     | $          | 12,385   |       | $ | 16,787 |   |
|                                                             |  -  North America |     | 22,905     |     | 23,493     |   |
|                                                             |  -  Rest of world |     | 29,828     |     | 25,201     |   |
| Hotel management/part ownership  interests                  |                   | 1,985    |       | 1,819    |       |
| Restaurants                                                      |                   | 5,319    |       | 5,189    |       |
|                                                             |                   | 72,422   |       | 72,489   |       |
| Tourist trains and cruises                                       |                   | 6,829    |       | 8,000    |       |
|                                                             |                   | $        | 79,251     |     | $          | 80,489 |   |
| Depreciation and amortization:                                   |                   |     |       |     |       |
| Hotels and restaurants                                           |                   |     |       |     |       |
| Owner hotels                                                     |  - Europe         |     | $          | 3,959    |       | $ | 2,930 |   |
|                                                             |  -  North America |     | 1,942      |     | 1,702      |   |
|                                                             |  -  Rest of world |     | 2,343      |     | 2,096      |   |
| Restaurants                                                      |                   | 223      |       | 220      |       |
|                                                             |                   | 8,467    |       | 6,948    |       |
| Tourist trains and cruises                                       |                   | 917      |       | 870      |       |
|                                                             |                   | $        | 9,384      |     | $          | 7,818 |   |
|                                                             |                   |     |       |     |       |
| Segment EBITDA:                                                  |                   |     |       |     |       |
| Owned hotels                                                     |  - Europe         |     | $          | (7,167   | )          | $ | (3,124 | ) |
|                                                             |  -  North America |     | 6,021      |     | 6,158      |   |
|                                                             |  -  Rest of world |     | 9,577      |     | 7,094      |   |
| Hotel management/part ownership  interests                  |                   | 3,370    |       | 2,927    |       |
| Restaurants                                                      |                   | 1,098    |       | 1,012    |       |
| Tourist trains and cruises                                       |                   | 166      |       | (108     | )          |
| Central overheads                                                |                   | (4,532   | )          | (4,497   | )          |
|                                                             |                   | $        | 8,533      |     | $          | 9,462 |   |
|                                                             |                   |     |       |     |       |
| Segment EBITDA/net losses reconciliation:                        |                   |     |       |     |       |
| Segment EBITDA                                                   |                   | $        | 8,533      |     | $          | 9,462 |   |
| Less:                                                            |                   |     |       |     |       |
| Depreciation and amortization                                    |                   | 9,384    |       | 7,818    |       |
| Interest expense, net                                            |                   | 8,992    |       | 7,079    |       |
| Foreign currency, net                                            |                   | (682     | )          | (3,580   | )          |
| Benefit from income taxes                                        |                   | (1,964   | )          | (298     | )          |
| Share of provision for income taxes of  unconsolidated companies |                   | 414      |       | —   |       |
| Net losses                                                       |                   | $        | (7,611     | )        | $          | (1,557 | ) |
|                                                             |                   |     |       |     |       |
| Earnings from unconsolidated companies, net  of tax:             |                   |     |       |     |       |
| Hotels and restaurants                                           |                   |     |       |     |       |
| Hotel management/part ownership  interests                  |                   | $        | 971        |     | $          | 1,108 |   |
| Restaurants                                                      |                   | 69       |       | 53       |       |
|                                                             |                   | 1,040    |       | 1,161    |       |
| Tourist trains and cruises                                       |                   | 786      |       | 564      |       |
|                                                             |                   | $        | 1,826      |     | $          | 1,725 |   |
|                                                             |                   |     |       |     |       |
| Capital expenditure:                                             |                   |     |       |     |       |
| Owned hotels                                                     |  - Europe         |     | $          | 13,561   |       | $ | 12,695 |   |
|                                                             |  -  North America |     | 2,968      |     | 5,717      |   |
|                                                             |  -  Rest of world |     | 2,802      |     | 3,624      |   |
| Hotel management/part ownership  interests .                |                   | —   |       | —   |       |
| Restaurants                                                      |                   | 62       |       | 162      |       |
| Tourist trains and cruises                                       |                   | 1,915    |       | 1,039    |       |
|                                                             |                   | $        | 21,308     |     | $          | 23,237 |   |
|                                                                  |                        |          |            |          |            |  |  |  |  |

 

15

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

 
| **Three months ended March 31,** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |
| Revenue:                                             |       |     |       |     |       |
| Europe                                               |       | $        | 17,154     |     | $          | 22,742 |   |
| North America                                        |       | 28,751   |       | 29,146   |       |
| Rest of world                                        |       | 33,346   |       | 28,601   |       |
|                                                 |       | $        | 79,251     |     | $          | 80,489 |   |

 

**13. Related party transactions**

 

For the three months ended March 31,2005, OEH paid subsidiaries of Sea Containers Ltd (“SCL”) $1,523,000 for theprovision of various services under a services agreement between OEH and SCL. Theseamounts have been settled in accordance with the services agreement and areincluded in selling, general and administrative expenses. As of March 31, 2006,SCL is no longer a related party of OEH.

 

OEH guarantees a $3,000,000 bank loan toEastern and Oriental Express Ltd. in which OEH has a minority shareholderinterest. This guarantee was in place before December 31, 2002.

 

OEH managesunder a long-term contract the Charleston Place Hotel (accounted for under theequity method) and has made loans to the hotel-owning company. For the threemonths ended March 31, 2006, OEH earned $1,074,000 (2005 - $936,000) inmanagement fees which are recorded in revenue, and $2,342,000 (2005 - $2,188,000)in interest income on partnership and other loans, which are recorded inearnings from unconsolidated companies.

 

OEH manages under long-termcontracts the Hotel Monasterio and the Machu Picchu Sanctuary Lodge owned byits 50/50 joint venture with local Peruvian interests, as well as the50/50-owned PeruRail operation, and provides loans, guarantees and other creditaccommodation to these joint ventures. In the three months ended March 31,2006, OEH earned management and guarantee fees of $1,074,000 (2005 - $894,000) whichare recorded in revenue, and loan interest of $32,000 (2005 - $29,000) which isrecorded in earnings from unconsolidated companies. At March 31, 2006,loans to the hotels aggregated $2,000,000, bear interest at a spread over LIBORand come due in 2006. At the same date, OEH had a $750,000 subordinated loan tothe PeruRail operation with an indefinite maturity date and interest also at aspread over LIBOR. All of the guarantees relating to the Company’s investmentsin Peru were in place prior to December 31, 2002.

 

16

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OEH manages under along-term contract the Hotel Ritz in Madrid, Spain, in which OEH owns a 50%interest and is accounted for under the equity method. For the three monthsended March 31, 2006, OEH earned $246,000 (2005 - $241,000) in managementfees, which are included in revenue.

 

17

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# **ITEM 2.**                                                         Management’s Discussion and Analysis of Financial Condition andResults of Operations

# ** **

**Results of Operations**

 

OEH’s operating results for the threemonths ended March 31, 2006 and 2005, expressed as a percentage ofrevenue, were as follows:

 
| ** **                                   | ** ** | **Three months  ended March 31** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **%**                                           | ** ** | **%** | ** ** |
| Revenue:                                     |       |                                            |       |   |   |
| Hotels and restaurants                       |       | 91                                              |       | 90 |   |
| Tourist trains and cruises                   |       | 9                                               |       | 10 |   |
|                                         |       | 100                                             |       | 100 |   |
| Expenses:                                    |       |                                            |       |   |   |
| Depreciation and amortization                |       | 12                                              |       | 10 |   |
| Operating                                    |       | 51                                              |       | 51 |   |
| Selling, general and administrative          |       | 41                                              |       | 39 |   |
| Net finance costs                            |       | 10                                              |       | 4 |   |
| Losses before income taxes                   |       | (14                                             | )          | (4 | ) |
| Benefit from income taxes                    |       | 2                                               |       | — |   |
| Earnings from unconsolidated companies       |       | 2                                               |       | 2 |   |
| Net losses as a percentage of total  revenue |       | (10                                             | )          | (2 | ) |

 

Segment net earnings before interest, tax(including tax on unconsolidated companies), depreciation and amortization (“segmentEBITDA”) of OEH’s operations for the three months ended March 31, 2006 and2005 are analyzed as follows (dollars in millions):

 
| ** **                 | ** ** | **Three months ended  March 31** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| Segment EBITDA:            |       |                                            |       |   |   |
| Owned hotels:              |       |                                            |       |   |   |
| Europe                     |       | $                                               | (7.2       | ) | $ | (3.1 | ) |
| North America              |       | 6.0                                             |       | 6.2 |   |
| Rest of the world          |       | 9.5                                             |       | 7.1 |   |
| Hotel management interests |       | 3.4                                             |       | 2.9 |   |
| Restaurants                |       | 1.1                                             |       | 1.0 |   |
| Tourist trains and cruises |       | 0.1                                             |       | (0.1 | ) |
| Central overheads          |       | (4.5                                            | )          | (4.5 | ) |
| Total segment EBITDA       |       | $                                               | 8.5        |   | $ | 9.5 |   |

 

The foregoing segmentEBITDA reconciles to net losses as follows (dollars in millions):

 

18

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| ** **                                                       | ** ** | **Three months ended  March 31** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                       | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| Segment net losses                                               |       | $                                               | (7.6       | ) | $ | (1.6 | ) |
| Add: Depreciation and amortization                               |       | 9.4                                             |       | 7.9 |   |
| Net finance costs                                                |       | 8.3                                             |       | 3.5 |   |
| Benefit from income taxes                                        |       | (2.0                                            | )          | (0.3 | ) |
| Share of provision for income taxes of  unconsolidated companies |       | 0.4                                             |       | — |   |
| Segment EBITDA                                                   |       | $                                               | 8.5        |   | $ | 9.5 |   |

 

Management evaluatesthe operating performance of OEH’s segments on the basis of segment EBITDA and believesthat segment EBITDA is a useful measure of operating performance becausesegment EBITDA is not affected by non-operating factors such as leverage andthe historic cost of assets. EBITDA is a financial measure commonly used in OEH’sindustry. OEH’s segment EBITDA, however, may not be comparable in allinstances to EBITDA as disclosed by other companies. Segment EBITDA should notbe considered 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.

 

Operating information for OEH’s ownedhotels for the three months ended March 31, 2006 and 2005 is as follows:

 

19

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| ** **                      | ** ** | **Three months  ended  March 31** | ** ** |
|---------------------------------|------------|---------------------------------------------|------------|
| ** **                      | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
|                            |       |                                        |       |   |   |
| Average Daily Rate (in dollars) |       |                                        |       |   |   |
| Europe                          |       | 314                                         |       | 365 |   |
| North America                   |       | 347                                         |       | 386 |   |
| Rest of the world               |       | 310                                         |       | 305 |   |
| Worldwide                       |       | 323                                         |       | 346 |   |
|                            |       |                                        |       |   |   |
| Rooms Sold (in thousands)       |       |                                        |       |   |   |
| Europe                          |       | 16                                          |       | 23 |   |
| North America                   |       | 38                                          |       | 39 |   |
| Rest of the world               |       | 58                                          |       | 50 |   |
| Worldwide                       |       | 112                                         |       | 112 |   |
|                            |       |                                        |       |   |   |
| RevPAR (in dollars)             |       |                                        |       |   |   |
| Europe                          |       | 108                                         |       | 162 |   |
| North America                   |       | 266                                         |       | 254 |   |
| Rest of the world               |       | 210                                         |       | 187 |   |
| Worldwide                       |       | 199                                         |       | 201 |   |

 
|                           |   |   |   |   |   | **Change%** |   |
|--------------------------------|--------|--------|--------|--------|--------|-------------|--------|
|                           |   |   |   |   |   | **Dollars** |   | **Local  Currency** |   |
| Same Store RevPAR (in dollars) |   |   |   |   |   |        |   |   |   |
| Europe                         |   | 103    |   | 108    |   | -4          | %      | 5 | % |
| North America                  |   | 369    |   | 347    |   | 6           | %      | 6 | % |
| Rest of the world              |   | 216    |   | 191    |   | 13          | %      | 16 | % |
| Worldwide                      |   | 234    |   | 212    |   | 10          | %      | 12 | % |

 

Average daily rate is the average amountachieved for the rooms sold. RevPAR is revenue per available room, that is the roomsrevenue divided by the number of available rooms for each night of operation. Samestore RevPAR is a comparison based on the operations of the same units in eachperiod, such as by excluding the effect of any acquisitions or majorrefurbishments.

 

Three Months Ended March 31, 2006Compared To

Three Months Ended March 31, 2005                     

 

*Overview*

 

The net loss for the period was $7.6million ($0.19 per common share) on revenue of $81.5 million, compared with anet loss of $1.6 million ($0.4 per common share) on revenue of $82.2 million inthe prior year first quarter. The first quarter is a traditional loss-makingperiod because a number of OEH’s properties are closed for the winter, theVenice Simplon-Orient-

 

20

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Express train does not operate and touristarrivals are low in locations with poor winter weather. In addition, in thisyear’s first quarter La Residencia in Mallorca, Spain and the Reids PalaceHotel, Madeira, were closed for major renovation. The Hotel Caruso, whichopened in July 2005, added to the seasonality of the European region, asit was closed during the first quarter and accordingly incurred losses.

 

*Revenue*

 

Total revenue decreased by $1.2 million, or1%, from $80.5 million in the three months ended March 31, 2005 to $79.3million in the three months ended March 31, 2006. Hotels and restaurantsrevenue decreased by $0.1 million from $72.5 million in the three months ended March 31,2005 to $72.4 million in the three months ended March 31, 2006, andtourist trains and cruises decreased by $1.2 million, or 15%, from $8.0 millionfor the three months ended March 31, 2005 to $6.8 million for the threemonths ended March 31, 2006.

 

The decline in total revenue was dueprimarily to the closures of some European properties. This was offset by thestrong performance of the Rest of the World properties, particularly SouthernAfrica and South America.

 

The revenue from restaurants increased by$0.1 million, or 2%, from $5.2 million in the three months ended March 31,2005 to $5.3 million in the three months ended March 31, 2006 which wasmainly due to the ‘21’ Club in New York which has seen further improvements inits banqueting business following increased corporate entertainment activity.

 

For owned hotels overall, same store RevPARin U.S. dollars increased by 10% in the three months ended March 31, 2006compared to the three months ended March 31, 2005. Measured in localcurrencies this increase was 12%, of which around 9% was due to improvedoccupancy and 1% to higher achieved daily rate.

 

The change in revenue at owned hotels isanalyzed on a regional basis as follows:

 

*Europe*. Revenue decreased by $4.4 million, or 26%, from $16.8 million forthe three months ended March 31, 2005 to $12.4 million for the threemonths ended March 31, 2006. The impact of the closure of La Residenciaand Reids Palace Hotel saw revenues at the two properties decrease by $5.2 million,from $6.2 million for the three months ended March 31, 2005 to $1.0 millionfor the three months ended March 31, 2006. The revenue impact of ownershipof the Grand Hotel Europe for the full quarter was an increase in revenues of$1.8 million from $3.2

 

21

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million for the three months March 31,2005 to $5.0 million for the three months March 31, 2006.

 

On a same store basis, excluding the above,RevPAR in local currency increased by 5%, but in U.S. dollars this translatedinto a decrease of 4%.

 

*North America*. Revenue decreased by $0.6 million, or 3%, from $23.5 million inthe three months ended March 31, 2005 to $22.9 million in the three monthsended March 31, 2006. Revenue at the Windsor Court and Maroma, bothaffected by accounting for insurance recoveries under SFAS No. 5, “Accountingfor Contingencies”, decreased by $3.1 million, or 26%, from $11.9 million forthe three months ended March 31, 2005 to $8.8 million in the three months endedMarch 31, 2006. Revenues at the remaining U.S. properties increased by$2.5 million, or 22%, from $11.6 million in the three months ended March 31,2005 to $14.1 million in the three months ended March 31, 2006, with keyperformers being Keswick Hall, Casa de Sierra Nevada and La Samanna. Includedin the 2006 revenues are $2.2 million relating to real estate sales at KeswickHall compared with $0.6 million in the same period in 2005.

 

On a same store basis, RevPAR increased by 6%which was driven by approximately a 14% increase in occupancy.

 

*Rest of the World*. Revenue increased by $4.6 million, or 18%, from $25.2 million inthe three months ended March 31, 2005 to $29.8 million in the three monthsended March 31, 2006. Southern Africa revenues increased by $1.4 million,or 15%, from $9.2 million in the three months ended March 31, 2005 to $10.6million in the three months ended March 31, 2006. South America revenuesincreased by $2.8 million, or 30%, from $9.2 million in the three months ended March 31,2005 to $12.0 million in the three months ended March 31, 2006.

 

The RevPAR on a same store basis for theRest of the World region increased by 16% in local currencies in the threemonths ended March 31, 2006 compared to the three months ended March 31,2005. Approximately 8% of this increase was due to increased occupancies at thehotels with 7% due to a higher achieved average daily rate. This RevPARincrease in local currencies translated to a 13% increase when expressed inU.S. dollars.

 

*Hotel Management and Part-OwnershipInterests.*Revenue increased by $0.1million, or 6%, from $1.8 million in the three months ended March 31, 2005to $1.98 million in the three months ended March 31, 2006, due to increasedrevenues at Charleston Place and the hotels in Peru.

 

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*Trains and Cruises.*Revenue decreased by $1.2 million, or 15%, from $8.0 million in thethree months ended March 31, 2005 to $6.8 million in the three monthsended March 31, 2006, due primarily to the performance of the U.K. daytrains. To maximize profitability, the operator ran less trips in the lowseason.

 

*Depreciation and amortization*

 

Depreciation and amortization increased by$1.6 million, or 21%, from $7.8 million in the three months ended March 31,2005 to $9.4 million in the three months ended March 31, 2006, primarilydue to the effect of acquisitions of the Grand Hotel Europe, St Petersburg, theeffect of the opening of the Hotel Caruso, Ravello, and capital expendituresduring 2005, including the refurbishment of the Miraflores Park Hotel in Lima,Peru.

 

*Operating expenses*

 

Operating expenses decreased by $0.6million, or 1%, from $41.3 million in the three months ended March 31, 2005to $40.7 million in the three months ended March 31, 2006. The reductionwas in line with revenue reductions, with operating expenses remaining at 51%of revenue for the three months ended March 31, 2006, the same level asfor the three months ended March 31, 2005.

 

*Selling, general andadministrative expenses*

 

Selling, general and administrativeexpenses increased by $0.8 million, or 3%, from $31.4 million in the threemonths ended March 31, 2005 to $32.2 million in the three months ended March 31,2006. The increase was in line with inflation.

 

*Margins*

 

EBITDA margins (calculated as EBITDA as apercentage of revenue) for the three months ended March 31, 2006 for OEHwere 10% down, from 12% for the three months ended March 31, 2005. Thedrop was primarily due to the closure of some European hotels. Margins inEurope declined from -19% in the three months ended March 31 2005 to -58%in the three months ended March 31, 2006. Margins in North America wereflat at 26% for the three months ended March 31, 2006. Margins in the Restof the World increased from 28% in the three months ended March 31, 2005to 32% in the three months ended March 31, 2006.

 

*Earnings (losses) from operationsbefore net finance costs*

 

Losses from operations increased by $3.0million from losses of $0.1 million in the three months ended March 31,2005 to a loss

 

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of $3.1 million in the three months ended March 31,2006, due to the factors described in the overview above.

 

*Net finance costs*

 

Net finance costs increased by $4.8million, or 37%, from $3.5 million for the three months ended March 31,2005 to $8.3 million for the three months ended March 31, 2006. The threemonths ended March 31, 2005 included a foreign exchange gain of $3.6 millioncompared to $.07 million in the three months ended March 31, 2006. Excludingthis gain, net finance costs increased by $1.2 million, or 17%, from $7.1million for the three months ended March 31, 2005 to $8.3 million for thethree months ended March 31, 2006, due to the impact of financing of newinvestments and increases in U.S. interest rates.

 

*Benefit from income taxes*

 

The benefit from income taxes increased by$1.3 million, from a benefit of $0.3 million in the three months ended March 31,2005 to a benefit of $1.6 million in the three months ended March 31, 2006.The Company is incorporated in Bermuda, which does not impose an income tax. Accordingly,the entire income tax benefit was attributable to income tax credits incurredby subsidiaries operating in jurisdictions that impose an income tax.

 

*Earnings from unconsolidatedcompanies*

 

Earnings from unconsolidated companies increasedby $0.1 million, or 6%, from $1.7 million in the three months ended March 31,2005 to $1.8 million in the three months ended March 31, 2006. This wasmainly due to increased earnings from OEH’s investments in Peru and Charleston.

 

**Liquidity and Capital Resources**

 

*Working Capital*

 

OEH had cash and cash equivalents of $39.3million at March 31, 2006, $0.9 million more than the $38.4 million at December 31,2005. At March 31, 2006, the undrawn amounts available to OEH under itsshort-term lines of credit were $6.0 million. In addition, at March 31,2006 there were undrawn amounts committed under long-term facilities of $18.0million. OEH’s total cash and availability at March 31, 2006 was,therefore, $63.3 million including the undrawn short-term lines.

 

Current assets less current liabilities,including the current portion of long-term debt, resulted in a working capitaldeficit of $43.3 million at March 31, 2006, a decrease in the working

 

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capital of $1.0 million from a balance of $42.3million deficit at December 31, 2005. The overall decrease in working capitalwas comprised of the following:

 

•                  an increase in current assets of $12.8 million, of which $0.9million was an increase in cash, which was due to an increase in accountsreceivable of $0.3 million, amounts due from related parties of $0.8 million,prepaid expenses $2.3 million, inventories $1.8 million and real estate assetsof $6.7 million; and

 

•                  an increase in current liabilities of $13.8 million, including thecurrent portion of long-term debt, which was due to increases in workingcapital facilities of $9.2 million, accounts payable of $7.0 million, accruedliabilities of $3.6 million, deferred revenue of $9.4 million, partly offset bydecrease in amounts due to related parties of $7.3 million and the currentportion of long-term debt of $8.1 million.

 

OEH’s business does not require themaintenance of significant inventories or receivables and, therefore, workingcapital is not regarded as the most appropriate measure of liquidity.

 

*Cash Flow*

 

*Operating Activities*. Net cash flow from operating activities decreased by $3.8 millionfrom $2.5 million cash surplus for the three months ended March 31, 2005to $1.3 million deficit for the three months ended March 31, 2006.

 

*Investing Activities*. Cash used in investing activities decreased by $84.9 million to $30.8million for the three months ended March 31, 2006, compared to $115.7million for the three months ended March 31, 2005. This was mainly due tothe acquisition of the Grand Hotel Europe on February 8, 2005.

 

*Financing Activities*. Cash provided by financing activities for the three months ended March 31,2006 was $32.8 million compared to $98.1 million for the three months ended March 31,2005, a decrease of $65.3 million. In the three months ended March 31, 2006,OEH had proceeds from borrowings under long-term debt of $42.3 million,compared to proceeds of $74.7 million for the three months ended March 31,2005 which included $58.5 million of finance on the Grand Hotel Europeacquisition. In the three months ended March 31, 2005, OEH had netproceeds from the issuance of common shares of $122.0 million, which were primarilyused to pay down a revolving credit facility secured on OEH’s Italian hotels ($91.0million) with the balance going to cash to be used for general corporatepurposes including acquisitions and investments.

 

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*Capital Commitments*. There were $18.7 million of capital commitments outstanding as of March 31,2006 mainly on investments in owned hotels.

 

*Indebtedness*

 

At March 31, 2006, OEH had $598.6million of long-term debt secured by assets ($559.3 million net of cash),including the current portion, which is repayable over periods of 1 to 11 yearswith a weighted average interest rate of 5.54**%.**SeeNote 6 to the financial statements regarding the maturity of long-term debt.

 

Approximately 42% of the outstandingprincipal was drawn in European euros and the balance primarily in U.S. dollars.At March 31, 2006, 98% of borrowings of OEH were in floating interest rates.

 

*Liquidity*

 

OEH expects to have available cash fromoperations and appropriate debt finance sufficient to fund its working capitalrequirements, capital expenditures, acquisitions and debt service for theforeseeable future.

**** ****

****26****

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**** ****

**RecentAccounting Pronouncements**

** **

As of March 31,2006, the Company’s significant accounting policies and estimates, which aredescribed in Notes 1 and 15 to the financial statements in the Company’s 2005 Form 10-Kannual report, have not changed from December 31, 2005.

 

## **CriticalAccounting Policies**

## ** **

For adiscussion of these, see under the heading “Critical Accounting Policies” inItem 7 — Management’s Discussion and Analysis in the Company’s 2005 Form 10-Kannual report.

 

**ITEM 3.****                                                     Quantitative and Qualitative Disclosures about Market Risk**

 

OEH is exposed to market risk from changesin interest rates and foreign currency exchange rates. These exposures aremonitored and managed as part of OEH’s overall risk management program,which recognizes the unpredictability of financial markets and seeks tomitigate material adverse effects on consolidated earnings and cash flows. OEHdoes not hold market rate sensitive financial instruments for trading purposes.

 

The market risk relating to interest ratesarises mainly from the financing activities of OEH. Earnings are affected bychanges in interest rates on borrowings, principally based on U.S. dollar LIBORand EURIBOR, and on short-term cash investments. If interest rates increased by10%, with all other variables held constant, annual net finance costs of OEHwould have increased by approximately $3,200,000 on an annual basis based onborrowings at March 31, 2006. The interest rates on substantially all ofOEH’s long-term debt are adjusted regularly

 

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to reflect current market rates. Accordingly,the carrying amounts approximate fair value.

 

The market risk relating to foreigncurrencies and its effects have not changed materially during the first threemonths of 2006 from those described in the Company’s 2005 Form 10-K annualreport.

 

**ITEM 4.****     Controls and Procedures**

 

The Company’s chief executive and financialofficers have evaluated the effectiveness of the Company’s disclosure controlsand procedures (as defined in SEC Rule 13a-15(e)), as of March 31, 2006and, based on that evaluation, believe those disclosure controls and proceduresare effective as of that date. There have been no changes in the Company’sinternal control over financial reporting (as defined in SEC Rule 13a-15(f))during the first quarter of 2006 that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

It should be noted that any system ofcontrols, however well designed and operated, can provide only reasonable, andnot absolute, assurance that the objectives of the system are met such asprevention and detection of mis-statement. In addition, the design of anycontrol system is based in part upon certain assumptions about the likelihoodof future events. Controls may become inadequate because of changes inconditions, or the degree of compliance with policies or procedures may deteriorate,for example. Because of these and other inherent limitations of controlsystems, there can be no assurance that any design will succeed in achievingits stated goals under all potential future conditions.

 

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**PART II - OTHER INFORMATION**

** **

# **ITEM 6. Exhibits**

# ** **

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

 

**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|   | ORIENT-EXPRESS  HOTELS LTD. |
|--------|-----------------------------|
|   |                        |   |
|   |                        |   |
|   | By:                         | /s/ P. M. White |   |
|   |                        | Paul M. White |   |
|   |                        | Vice President - Finance |   |
|   |                        | and Chief Financial Officer |   |
|   |                        | (Principal Accounting Officer) |   |

 

Dated: May 10,2006

 

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# **EXHIBIT INDEX**

# ** **

| 3.1                                                                                                                                                |   | -      |   | Memorandum of Association and Certificate  of Incorporation of the Company, filed as Exhibit 3.1 to Amendment           |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------|
| No. 2 to the Company’s Registration  Statement on Form S-1 (Registration No. 333-12030) and incorporated  herein by reference. |
|                                                                                                                                               |   |   |   |                                                                                                                         |
| 3.2                                                                                                                                                |   | -      |   | Bye-Laws  of the Company, filed as Exhibit 3.2 to Amendment No. 4 to the  Company’s Registration Statement on |
| Form S-1  (Registration No. 333-12030) and incorporated herein by reference.                                                             |
|                                                                                                                                               |   |   |   |                                                                                                                         |
| 31                                                                                                                                                 |   | -      |   | Rule 13a-14(a)/15d-14(a) Certifications.                                                                           |
|                                                                                                                                               |   |   |   |                                                                                                                         |
| 32                                                                                                                                                 |   | -      |   | Section 1350  Certification.                                                                                            |

 

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