**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

**(MarkOne)**

 

**ý****                                                                                ****Quarterly Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934**

 

**For the quarterly period ended September 30,2005, or**

 

**o****                                                                                ****Transition Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934**

 

**For the transition period from                           to                           **

 

**Commission file number   1-16017**

 

**ORIENT-EXPRESSHOTELS LTD.**

(Exact name of registrant as specified inits charter)

 
| **Bermuda**                                                                                                                 | ** ** | **98-0223493**      |
|-----------------------------------------------------------------------------------------------------------------------------|------------|---------------------|
| (State or other jurisdiction                                                                                                |       | (I.R.S. Employer    |
| of incorporation or                                                                                                         |       | Identification No.) |
| organization)                                                                                                               |       |                |
|                                                                                                                        |       |                |
| **22 Victoria Street**                                                                                                      |
| **P.O. Box HM 1179**                                                                                                   |
| **Hamilton HMEX, Bermuda**                                                                                                  |
| (Address of principal executive offices)            (Zip  Code) |
|                                                                                                                        |       |                |
| **441-295-2244**                                                                                                            |
| (Registrant’s telephone number, including  area code)                                                                  |

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes  ý  No  o

 

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

 

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

 

As of October 31, 2005, 39,389,750 Class A common shares and 18,044,478Class B common shares of Orient-Express Hotels Ltd. were outstanding,including 18,044,478 Class B shares owned by a subsidiary ofOrient-Express Hotels Ltd. and 9,903,300 Class A shares owned by SeaContainers Ltd.

 

 

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**PART I – FINANCIAL INFORMATION**

 

**ITEM 1.  Financial Statements**

 

**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**CondensedConsolidated Balance Sheets (unaudited)**

 
| ** **                                                                               | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                               | ** ** | **(Dollars in thousands)**   | ** ** |
| ** **                                                                               |       |                         |       |                        |       |
| **Assets**                                                                               |       |                         |       |                        |       |
| Cash  and cash equivalents                                                               |       | $                            | 54,070     |                        | $          | 85,610 |   |
| Accounts  receivable, net of allowances of $976 and $1,027                               |       | 48,788                       |       | 34,984                      |       |
| Due  from related parties                                                                |       | 17,929                       |       | 14,718                      |       |
| Prepaid  expenses and other                                                              |       | 14,760                       |       | 11,914                      |       |
| Inventories                                                                              |       | 31,317                       |       | 28,965                      |       |
| Total  current assets                                                                    |       | 166,864                      |       | 176,191                     |       |
|                                                                                     |       |                         |       |                        |       |
| Property, plant and equipment, net of  accumulated depreciation of $166,736 and $155,582 |       | 1,022,989                    |       | 916,811                     |       |
| Investments                                                                              |       | 126,716                      |       | 123,599                     |       |
| Goodwill                                                                                 |       | 64,136                       |       | 29,529                      |       |
| Other  assets                                                                            |       | 22,677                       |       | 19,461                      |       |
|                                                                                     |       | $                            | 1,403,382  |                        | $          | 1,265,591 |   |
| ** **                                                                               |       |                         |       |                        |       |
| **Liabilities and Shareholders’ Equity**                                            |       |                         |       |                        |       |
| Working  capital facilities                                                              |       | $                            | 38,936     |                        | $          | 42,920 |   |
| Accounts  payable                                                                        |       | 24,724                       |       | 23,839                      |       |
| Due  to related parties                                                                  |       | 6,669                        |       | 5,453                       |       |
| Accrued  liabilities                                                                     |       | 59,205                       |       | 37,288                      |       |
| Deferred  revenue                                                                        |       | 22,078                       |       | 20,493                      |       |
| Current  portion of long-term debt and capital leases                                    |       | 57,799                       |       | 46,245                      |       |
| Total  current liabilities                                                               |       | 209,411                      |       | 176,238                     |       |
|                                                                                     |       |                         |       |                        |       |
| Long-term  debt and obligations under capital leases                                     |       | 495,969                      |       | 537,461                     |       |
| Deferred  income taxes                                                                   |       | 16,496                       |       | 2,710                       |       |
|                                                                                     |       | 721,876                      |       | 716,409                     |       |
| Minority  interest                                                                       |       | 4,574                        |       | 4,192                       |       |
|                                                                                     |       |                         |       |                        |       |
| 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-36,887,851 (2004 - 31,790,601)                                                    |       | 368                          |       | 318                         |       |
| Class B common shares $0.01 par  value (120,000,000 shares authorized):             |       |                         |       |                        |       |
| Issued-20,503,877                                                                        |       | 205                          |       | 205                         |       |
| Additional  paid-in capital                                                              |       | 404,038                      |       | 280,212                     |       |
| Retained  earnings                                                                       |       | 310,841                      |       | 277,281                     |       |
| Accumulated  other comprehensive loss                                                    |       | (38,339                      | )          | (12,845                     | )          |
| Less:  reduction due to Class B common shares owned by a subsidiary -  18,044,478   |       | (181                         | )          | (181                        | )          |
| Total  shareholders’ equity                                                         |       | 676,932                      |       | 544,990                     |       |
| Commitments  and contingencies                                                           |       | —                       |       | —                      |       |
|                                                                                     |       | $                            | 1,403,382  |                        | $          | 1,265,591 |   |

 

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 September 30,**               | ** ** | **2005**                                              | ** ** | **2004** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------|------------|----------|------------|
| ** **                                              | ** ** | **(Dollars in thousands,  except per share amounts)** | ** ** |
|                                                    |       |                                                  |       |     |       |
| Revenue                                                 |       | $                                                     | 127,733    |     | $          | 100,025 |   |
|                                                    |       |                                                  |       |     |       |
| Expenses:                                               |       |                                                  |       |     |       |
| Depreciation and amortization                           |       | 8,598                                                 |       | 7,182    |       |
| Operating                                               |       | 58,146                                                |       | 47,800   |       |
| Selling, general and administrative                     |       | 34,761                                                |       | 29,236   |       |
| Total  expenses                                         |       | 101,505                                               |       | 84,218   |       |
|                                                    |       |                                                  |       |     |       |
| Earnings  from operations before net finance costs      |       | 26,228                                                |       | 15,807   |       |
|                                                    |       |                                                  |       |     |       |
| Interest  expense, net                                  |       | (7,896                                                | )          | (4,826   | )          |
| Interest  and related income                            |       | 77                                                    |       | 75       |       |
| Net  finance costs                                      |       | (7,819                                                | )          | (4,751   | )          |
|                                                    |       |                                                  |       |     |       |
| Earnings  before income taxes                           |       | 18,409                                                |       | 11,056   |       |
|                                                    |       |                                                  |       |     |       |
| Provision  for income taxes                             |       | 3,025                                                 |       | 2,504    |       |
|                                                    |       |                                                  |       |     |       |
| Earnings  before earnings from unconsolidated companies |       | 15,384                                                |       | 8,552    |       |
|                                                    |       |                                                  |       |     |       |
| Earnings  from unconsolidated companies, net of tax     |       | 4,099                                                 |       | 2,943    |       |
|                                                    |       |                                                  |       |     |       |
| Net  earnings on class A and class B common shares      |       | $                                                     | 19,483     |     | $          | 11,495 |   |
|                                                    |       |                                                  |       |     |       |
| Net  earnings per class A and class B common share:     |       |                                                  |       |     |       |
| Basic                                                   |       | $                                                     | 0.50       |     | $          | 0.34 |   |
| Diluted                                                 |       | $                                                     | 0.49       |     | $          | 0.34 |   |
|                                                    |       |                                                  |       |     |       |
| 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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| **Nine months ended September 30,**                | ** ** | **2005**                                              | ** ** | **2004** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------|------------|----------|------------|
| ** **                                              | ** ** | **(Dollars in thousands,  except per share amounts)** | ** ** |
|                                                    |       |                                                  |       |     |       |
| Revenue                                                 |       | $                                                     | 334,474    |     | $          | 264,395 |   |
|                                                    |       |                                                  |       |     |       |
| Expenses:                                               |       |                                                  |       |     |       |
| Depreciation and amortization                           |       | 25,048                                                |       | 21,151   |       |
| Operating                                               |       | 157,826                                               |       | 129,559  |       |
| Selling, general and administrative                     |       | 101,159                                               |       | 84,282   |       |
| Total  expenses                                         |       | 284,033                                               |       | 234,992  |       |
|                                                    |       |                                                  |       |     |       |
| Earnings  from operations before net finance costs      |       | 50,441                                                |       | 29,403   |       |
|                                                    |       |                                                  |       |     |       |
| Interest  expense, net                                  |       | (21,701                                               | )          | (14,776  | )          |
| Interest  and related income                            |       | 4,152                                                 |       | 169      |       |
| Net  finance costs                                      |       | (17,549                                               | )          | (14,607  | )          |
|                                                    |       |                                                  |       |     |       |
| Earnings  before income taxes                           |       | 32,892                                                |       | 14,796   |       |
|                                                    |       |                                                  |       |     |       |
| Provision  for income taxes                             |       | 6,147                                                 |       | 3,867    |       |
|                                                    |       |                                                  |       |     |       |
| Earnings  before earnings from unconsolidated companies |       | 26,745                                                |       | 10,929   |       |
|                                                    |       |                                                  |       |     |       |
| Earnings  from unconsolidated companies, net of tax     |       | 9,638                                                 |       | 8,871    |       |
|                                                    |       |                                                  |       |     |       |
| Net  earnings on class A and class B common shares      |       | $                                                     | 36,383     |     | $          | 19,800 |   |
|                                                    |       |                                                  |       |     |       |
| Net  earnings per class A and class B common share:     |       |                                                  |       |     |       |
| Basic                                                   |       | $                                                     | 0.96       |     | $          | 0.58 |   |
| Diluted                                                 |       | $                                                     | 0.95       |     | $          | 0.58 |   |
|                                                    |       |                                                  |       |     |       |
| Dividends  per class A and class B Common share         |       | $                                                     | 0.075      |     | $          | 0.075 |   |

 

See notes to condensed consolidated financial statements.

 

4

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

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

 
| **Nine months ended September 30,**                                             | ** ** | **2005**                   | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                                                           | ** ** | **(Dollars in thousands)** | ** ** |
| Cash  flows from operating activities:                                               |       |                       |       |     |       |
| Net earnings                                                                         |       | $                          | 36,383     |     | $          | 19,800 |   |
| Adjustments to reconcile net earnings to  net cash provided by operating activities: |       |                       |       |     |       |
| Depreciation and amortization                                                        |       | 25,048                     |       | 21,151   |       |
| Undistributed earnings of affiliates                                                 |       | (2,537                     | )          | (2,822   | )          |
| Other non-cash items                                                                 |       | (2,438                     | )          | 1,695    |       |
| Change in assets and liabilities net of  effects from acquisition of subsidiaries:   |       |                       |       |     |       |
| Increase in receivables, prepaid expenses  and other                                 |       | (23,205                    | )          | (10,076  | )          |
| Increase in inventories                                                              |       | (4,081                     | )          | (887     | )          |
| Increase in payables, accrued liabilities  and deferred revenue                      |       | 26,709                     |       | 16,160   |       |
|                                                                                 |       |                       |       |     |       |
| Total adjustments                                                                    |       | 19,496                     |       | 25,221   |       |
|                                                                                 |       |                       |       |     |       |
| Net  cash provided by operating activities                                           |       | 55,879                     |       | 45,021   |       |
|                                                                                 |       |                       |       |     |       |
| Cash  flows from investing activities:                                               |       |                       |       |     |       |
| Capital expenditures                                                                 |       | (102,831                   | )          | (44,141  | )          |
| Acquisitions and investments, net of cash  acquired                                  |       | (99,713                    | )          | (14,809  | )          |
| Dividends received from affiliates                                                   |       | 624                        |       | —   |       |
| Proceeds from sale of fixed assets                                                   |       | 3,613                      |       | 211      |       |
|                                                                                 |       |                       |       |     |       |
| Net  cash used in investing activities                                               |       | (198,307                   | )          | (58,739  | )          |
|                                                                                 |       |                       |       |     |       |
| Cash  flows from financing activities:                                               |       |                       |       |     |       |
| Net (repayment of)/proceeds from working  capital facilities and redrawable loans    |       | (96,605                    | )          | 1,078    |       |
| Issuance of common shares                                                            |       | 123,876                    |       | —   |       |
| Issuance of long-term debt                                                           |       | 116,834                    |       | 20,666   |       |
| Principal payments under long-term debt                                              |       | (28,796                    | )          | (35,100  | )          |
| Payment of common share dividends                                                    |       | (2,823                     | )          | (2,569   | )          |
|                                                                                 |       |                       |       |     |       |
| Net  cash provided by/(used in) financing activities                                 |       | 112,486                    |       | (15,925  | )          |
|                                                                                 |       |                       |       |     |       |
| Effect  of exchange rate changes on cash and cash equivalents                        |       | (1,598                     | )          | 49       |       |
|                                                                                 |       |                       |       |     |       |
| Net  decrease in cash and cash equivalents                                           |       | (31,540                    | )          | (29,594  | )          |
|                                                                                 |       |                       |       |     |       |
| Cash and  cash equivalents at beginning of period                                    |       | 85,610                     |       | 81,347   |       |
|                                                                                 |       |                       |       |     |       |
| Cash  and cash equivalents at end of period                                          |       | $                          | 54,070     |     | $          | 51,753 |   |

 

See notes to condensed consolidated financial statements.

 

5

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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, 2005                                                     |       | $                                    | —     |                                            | $          | 318                                             |       | $                                | 205        |                   | $          | 280,212                                     |       | $                                        | 277,281    |                                    | $          | (12,845 | ) | $ | (181 | ) |   |   |
| Issuance of Class A common shares in  public offering, net of issuance costs |       | —                               |       | 50                                              |       | —                                          |       | 121,848                          |       | —                 |       | —                                      |       | —                                   |       |                                    |       |
| Stock-based compensation                                                          |       | —                               |       | —                                          |       | —                                          |       | 1,080                            |       | —                 |       | —                                      |       | —                                   |       |                                    |       |
| Stock options exercised                                                           |       | —                               |       | —                                          |       | —                                          |       | 898                              |       | —                 |       | —                                      |       | —                                   |       |                                    |       |
| Dividends on common shares                                                        |       | —                               |       | —                                          |       | —                                          |       | —                           |       | (2,823                 | )          | —                                      |       | —                                   |       |                                    |       |
| Comprehensive loss:                                                               |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                        |       |                                     |       |                                    |       |
| Net earnings on common shares for the  period                                     |       | —                               |       | —                                          |       | —                                          |       | —                           |       | 36,383                 |       | —                                      |       | —                                   |       | $                                       | 36,383     |   |
| Other comprehensive loss                                                          |       | —                               |       | —                                          |       | —                                          |       | —                           |       | —                 |       | (25,494                                     | )          | —                                   |       | (25,494                                 | )          |
|                                                                              |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                        |       |                                     |       | $                                       | (10,889    | )  |
| Balance, September 30, 2005                                                  |       | $                                    | —     |                                            | $          | 368                                             |       | $                                | 205        |                   | $          | 404,038                                     |       | $                                        | 310,841    |                                    | $          | (38,339 | ) | $ | (181 | ) |   |   |

 

See notes to condensed consolidated financial statements.

 

6

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Notesto Condensed Consolidated Financial Statements (unaudited)**

 

**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”.  At September 30, 2005, Sea ContainersLtd., a Bermuda company (“SCL”), owned 25% of the equity shares in the Company.

 

*(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 2004 Form 10-Kannual report.  As of September 30,2005, these significant accounting policies have not changed from December 31,2004, except as referred to in Note 1(c) below.  “SFAS” means Statement of FinancialAccounting Standards and “FIN” means an accounting interpretation, both of the U.S.Financial Accounting Standards Board.

 

The condensedconsolidated financial statements are unaudited and have been preparedfollowing the rules and regulations of the U.S. Securities and ExchangeCommission.

 

In the opinionof management, all adjustments necessary for a fair presentation of the resultsof operations for the three and nine months ended September 30, 2005 and2004, which are all of a normal recurring nature, have been reflected in theinformation provided.  Due to theseasonal nature of OEH’s business, operating results for the interim period arenot necessarily indicative of a full year’s operating results.

 

*(b) Netearnings per share*

 

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

 
| **Three months ended September 30,** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
|                                      |       |     |       |     |       |
| Basic                                     |       | 39,335   |       | 34,250   |       |
| Effect  of dilution                       |       | 390      |       | 99       |       |
| Diluted                                   |       | 39,725   |       | 34,349   |       |

 

7

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| **Nine months ended September 30,** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |
| Basic                                    |       | 37,819   |       | 30,800   |       |
| Effect  of dilution                      |       | 339      |       | 53       |       |
| Diluted                                  |       | 38,158   |       | 30,853   |       |

 

For the threemonths ended September 30, 2005 and 2004, the anti-dilutive effect ofstock options on nil and 54,649 class A common shares, respectively, wasexcluded from the computation of diluted earnings per share.  For the nine months ended September 30,2005 and 2004, the anti-dilutive effect of stock options on 2,553 and 40,381 classA common shares, respectively, was excluded from the computation of diluted earningsper share.

 

*(c) Stock-based compensation*

 

OEH hadpreviously accounted for stock-based compensation under the guidelines ofAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees”, and followed the disclosure-only provisions of SFAS No. 123,“Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accountingfor Stock-Based Compensation – Transition and Disclosure”.

 

With effectfrom January 1, 2005, the Company adopted SFAS No. 123R, “Stock-BasedPayment”, and chose the modified prospective application as its transitionmethod.  Prior to January 1, 2005,the Company has historically reflected the pro-forma impact to net income hadall previously issued stock-based compensation been expensed under theprovisions of SFAS No. 123.  Uponadoption of SFAS No. 123R, all previously issued stock-based compensationvesting during the three and nine months ended September 30, 2005 has beenreflected in the Company’s net earnings, as reported for each period.  This resulted in an expense in the three and ninemonths ended September 30, 2005 of $519,000 and $1,080,000, respectively.  The following tables illustrate the effect onincome attributable to common shares and earnings per share for the three and ninemonths ended September 30, 2004 had the fair-value based provisions ofSFAS No. 123R been applied (dollars in thousands except per shareamounts):

 

8

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| **Three months ended September 30,**                                                                     | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------|------------|
|                                                                                                          |       |     |       |   |
| Net earnings on common shares:                                                                                |       |     |       |   |
| As reported                                                                                                   |       | $        | 11,495     |   |
| Add:                                                                                                          |       |     |       |
| Stock-based compensation expense included  in reported net income, net of related tax effects                 |       | —   |       |
| Deduct:                                                                                                       |       |     |       |
| Total stock-based employee compensation  expense determined under fair value based method, net of related tax |       | (261     | )          |
| Pro-forma                                                                                                     |       | $        | 11,234     |   |
|                                                                                                          |       |     |       |
| Basic and diluted earnings per share:                                                                         |       |     |       |
| As reported:                                                                                                  |       |     |       |
| Basic and diluted                                                                                             |       | $        | 0.34       |   |
| Proforma:                                                                                                     |       |     |       |   |
| Basic and diluted                                                                                             |       | $        | 0.33       |   |

 
| **Nine months ended September 30,**                                                                      | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------|------------|
|                                                                                                          |       |     |       |   |
| Net earnings on common shares:                                                                                |       |     |       |   |
| As reported                                                                                                   |       | $        | 19,800     |   |
| Add:                                                                                                          |       |     |       |
| Stock-based compensation expense included  in reported net income, net of related tax effects                 |       | —   |       |
| Deduct:                                                                                                       |       |     |       |
| Total stock-based employee compensation  expense determined under fair value based method, net of related tax |       | (635     | )          |
| Pro-forma                                                                                                     |       | $        | 19,165     |   |
|                                                                                                          |       |     |       |
| Basic and diluted earnings per share:                                                                         |       |     |       |
| As reported:                                                                                                  |       |     |       |   |
| Basic and diluted                                                                                             |       | $        | 0.58       |   |
| Proforma:                                                                                                     |       |     |       |   |
| Basic and diluted                                                                                             |       | $        | 0.56       |   |

 

*(d) **Dividends*

 

On January 5,2005, the Company declared a dividend of $0.025 per common share payable February 4,2005 to shareholders of record January 20, 2005.  On April 5, 2005, the Company declared adividend of $0.025 per common share payable May 5, 2005 to shareholders ofrecord April 20, 2005.  On July 5,2005, the Company declared a dividend of $0.025 per common share payable August 5,2005 to shareholders of record July 20, 2005.

 

9

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*(e) 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 $2,482,000 and $2,100,000 for the three monthsended September 30, 2005 and 2004, respectively, and $7,150,000 and $6,049,000for the nine months ended September 30, 2005 and 2004, respectively.

 

*(f) Recent accounting pronouncements*

 

The Companyadopted SFAS No. 123R with effect from January 1, 2005 (see Note 1(c)).

 

*(g) Reclassifications*

 

Certain itemsin 2004 have been reclassified to conform to the 2005 presentation.

 

*(h) Other significant events*

 

Because of hurricaneKatrina, the Windsor Court Hotel in New Orleans suffered damage and remainedclosed throughout the period from August 29 to September 30, 2005.  OEH’s insurance covers property damage andloss of earnings under business interruption for 12 months after theevent.  The third quarter earnings fromoperations include within revenue an insurance recovery of $2,300,000 forbusiness interruption which covers net operating expenses recorded during theclosure period.  The initial propertydamage claim submitted at September 30, 2005, amounted to $1,250,000 and hasbeen recorded as an offset against the costs incurred.  The excess of the insurance recovery claimedover the losses recorded in the third quarter has not been recognized in the financialstatements because the excess represents a contingent gain and will only berecognized when the contingencies are resolved.

 

**2.  Acquisitions**

 

Effective February 8,2005, OEH purchased 100% of the issued equity of LLC Europe Hotel which owns a93.5% interest in the property operating as the Grand Hotel Europe, StPetersburg, Russia.  The remaininginterest in the property is owned by the City of St. Petersburg.  In addition, OEH acquired full management andoperational control of the hotel and acquired 100% of a Cyprus company whichhas agreements with the hotel to provide various management services.  The total purchase price, includingacquisition costs, was $95,000,000 paid in cash of which $57,500,000 wasfinanced by a syndicate of banks led by the International Finance Corporation.

 

The followingtable summarizes the initial estimated fair values of the assets acquired andliabilities assumed at the date of

 

10

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acquisition.  These initial purchase price allocations maybe adjusted within one year, given the time it takes to obtain pertinent valuationsto finalize the initial fair value estimates from the purchase date.  Accordingly, subsequent revisions to theestimates of the fair value of assets acquired and liabilities assumed as aresult of final appraisals may occur (dollars in thousands):

 
| ** **                                 | ** ** | **September 30,  2005** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|
| Current  assets                            |       | $                            | 2,740      |   |
| Property,  plant and fixtures and fittings |       | 71,752                       |       |
| Goodwill                                   |       | 37,000                       |       |
| Total  assets acquired                     |       | 111,492                      |       |
|                                       |       |                         |       |
| Current  liabilities                       |       | 3,992                        |       |
| Deferred  income taxes                     |       | 12,500                       |       |
| Total  liabilities assumed                 |       | 16,492                       |       |
| Net  assets acquired                       |       | $                            | 95,000     |   |

 

Goodwill of$37,000,000 has been recorded of which $ nil will be deductible for taxpurposes.  The initial estimated fairvalue of the building has been based on its estimated replacement cost.

 

Theacquisition of the Grand Hotel Europe has been accounted for as a purchase inaccordance with SFAS No. 141, “Business Combinations”.  The results of the operation have beenincluded in the condensed consolidated financial statements of OEH from February 8,2005.

 

**3.  Investments**

 

On April 29, 2005, OEH acquired 50% ofthe equity in the Great Scottish and Western Railway Co. Ltd., which currentlyoperates the Royal Scotsman luxury tourist train on a seasonal service largelywithin Scotland.  The initial investmentwas $2,700,000 of which $1,300,000 was paid in cash and the balance represents50% of the long-term debt within the company in which OEH has invested.  OEH has an option to acquire the remaining50% of the equity in two years time at an enterprise valuation based upon amultiple of the average EBITDA for the previous 36 months, as defined in thepurchase agreement.  This investment hasbeen accounted for under the equity method of accounting.

 

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 $8,000,000 in loans to the hotel holding companywhich are convertible after three years into approximately 25% of the holdingcompany’s shares.  As of September 30,2005, OEH had

 

11

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provided $8,000,000 (December 31, 2004-$4,625,000)in loans in Pansea which are recorded in other assets.  The conversion price of the loans isdetermined at a multiple of EBITDA less existing debt on the exercise date (asdefined in the investment agreement). OEH is not managing the hotels but is marketing them along with itsother properties.

 

Summarized financial data for OEH’sunconsolidated companies for the periods during which the investments were heldand accounted for under the equity method of accounting by OEH are as follows(dollars in thousands):

 
| ** **                                       | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                             |       |                         |       |                        |       |   |   |
| Current  assets                                  |       | $                            | 45,074     |                        | $          | 39,993 |   |
| Property,  plant and equipment, net              |       | 347,728                      |       | 357,949                     |       |
| Other  assets                                    |       | 5,831                        |       | 5,469                       |       |
| Total  assets                                    |       | $                            | 398,633    |                        | $          | 403,411 |   |
|                                             |       |                         |       |                        |       |
| Current  liabilities                             |       | $                            | 51,271     |                        | $          | 41,290 |   |
| Long-term  debt                                  |       | 208,415                      |       | 216,251                     |       |
| Other  liabilities                               |       | 83,260                       |       | 79,403                      |       |
| Total  shareholders’ equity                 |       | 55,687                       |       | 66,467                      |       |
| Total  liabilities and shareholders’ equity |       | $                            | 398,633    |                        | $          | 403,411 |   |

 
| **Three months ended September 30,**          | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
|                                               |       |     |       |     |       |
| Revenue                                            |       | $        | 41,205     |     | $          | 36,605 |   |
| Earnings  from operations before net finance costs |       | $        | 6,888      |     | $          | 7,322 |   |
| Net  losses                                        |       | $        | (83        | )        | $          | 1,126 |   |

 
| **Nine months ended September 30,**           | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
|                                               |       |     |       |     |       |
| Revenue                                            |       | $        | 118,519    |     | $          | 65,257 |   |
| Earnings  from operations before net finance costs |       | $        | 16,138     |     | $          | 9,610 |   |
| Net  losses                                        |       | $        | (2,866     | )        | $          | (741 | ) |

 

**4.  Property, plant and equipment**

 

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

 

12

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| ** **                               | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Freehold  and leased land and buildings  | ** ** | $                            | 863,680    |                        | $          | 769,951 |   |
| Machinery  and equipment                 |       | 163,288                      |       | 149,191                     |       |
| Fixtures,  fittings and office equipment |       | 144,431                      |       | 134,935                     |       |
| River  cruiseship and canalboats         |       | 18,326                       |       | 18,316                      |       |
|                                     |       | 1,189,725                    |       | 1,072,393                   |       |
| Less:  accumulated depreciation          |       | (166,736                     | )          | (155,582                    | )          |
|                                     |       | $                            | 1,022,989  |                        | $          | 916,811 |   |
|                                          |            |                              |            |                             |            |  |  |  |  |

 

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

 
| ** **                               | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Land  and buildings                      |       | $                            | 10,019     |                        | $          | 14,612 |   |
| Machinery  and equipment                 |       | 2,276                        |       | 2,410                       |       |
| Fixtures,  fittings and office equipment |       | 4,792                        |       | 4,886                       |       |
|                                     |       | 17,087                       |       | 21,908                      |       |
| Less:  accumulated depreciation          |       | (2,358                       | )          | (2,591                      | )          |
|                                     |       | $                            | 14,729     |                        | $          | 19,317 |   |
|                                          |            |                              |            |                             |            |  |  |  |  |

 

**5.  Goodwill**

 

OEH’s goodwillconsists of $750,000 related to the trains and cruises reporting segment and$63,386,000 related to the hotels and restaurants reporting segment, of which$37,000,000 relates to initial purchase price allocations for the acquisitionof the Grand Hotel Europe effective February 8, 2005 (see Note 2).

 

**6.  Long-term debt and obligations under capitallease**

 

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

 

13

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| ** **                                                                                                                                                                                                  | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Loans from banks collateralized by  property, plant and equipment payable over periods of 1 to 11 years, with a  weighted average interest rate of 5.37% and 4.18%, respectively, primarily  based on LIBOR |       | $                            | 540,869    |                        | $          | 567,012 |   |
| Obligations under capital lease                                                                                                                                                                             |       | 12,899                       |       | 16,694                      |       |
|                                                                                                                                                                                                        |       | 553,768                      |       | 583,706                     |       |
| Less: current portion                                                                                                                                                                                       |       | 57,799                       |       | 46,245                      |       |
|                                                                                                                                                                                                        |       | $                            | 495,969    |                        | $          | 537,461 |   |
|                                                                                                                                                                                                             |            |                              |            |                             |            |  |  |  |  |

 

Certain credit agreements of OEH haverestrictive covenants.  At September 30,2005, OEH was in compliance with these covenants, including a minimumconsolidated net worth test and a minimum consolidated interest coverage testas defined under a bank-syndicated $179,000,000 loan facility borrowed during2003 and secured by three of OEH’s Italian hotels. OEH does not currently haveany covenants in its loan agreements which limit the payment of dividends.

 

The following is a summary of the aggregatematurities of long-term debt, including obligations under capital lease, at September 30,2005 (dollars in thousands):

 
| **Year ending December 31,** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
|                              |       |       |       |   |
| 2006                              |       | $          | 70,831     |   |
| 2007                              |       | 120,395    |       |
| 2008                              |       | 129,834    |       |
| 2009                              |       | 53,782     |       |
| 2010  and thereafter              |       | 121,127    |       |
|                              |       | $          | 495,969    |   |

 

The interest rates on substantially all ofOEH’s long-term debt are adjusted regularly to reflect current marketrates.  Accordingly, the carrying amountsof OEH’s long-term debt also approximate fair value.

 

**7.  Income taxes**

 

Income taxes provided by OEH relatedprincipally to its foreign subsidiaries as pre-tax income is primarilyforeign.  The provision for income taxesconsisted of the following (dollars in thousands):

 

14

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| **Three months ended September 30, 2005** | ** ** | **Current** | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|-------------|------------|--------------|------------|-----------|------------|
|                                      |       |        |       |         |       |      |       |
| United  States                            |       | $           | (227       | )            | $          | (46       | )          | $ | (273 | ) |
| Other  foreign                            |       | 1,416       |       | 1,882        |       | 3,298     |       |
|                                      |       | $           | 1,189      |         | $          | 1,836     |       | $ | 3,025 |   |

 
| **Three months ended September 30, 2004** | ** ** | **Current** | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|-------------|------------|--------------|------------|-----------|------------|
|                                      |       |        |       |         |       |      |       |
| United  States                            |       | $           | (497       | )            | $          | 304       |       | $ | (193 | ) |
| Other  foreign                            |       | 504         |       | 2,193        |       | 2,697     |       |
|                                      |       | $           | 7          |         | $          | 2,497     |       | $ | 2,504 |   |

 
| **Nine months ended September 30, 2005** | ** ** | **Current** | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|-------------|------------|--------------|------------|-----------|------------|
|                                     |       |        |       |         |       |      |       |
| United  States                           |       | $           | 383        |         | $          | 1,111     |       | $ | 1,494 |   |
| Other  foreign                           |       | 4,744       |       | (91          | )          | 4,653     |       |
|                                     |       | $           | 5,127      |         | $          | 1,020     |       | $ | 6,147 |   |

 
| **Nine months ended September 30, 2004** | ** ** | **Current** | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|-------------|------------|--------------|------------|-----------|------------|
|                                     |       |        |       |         |       |      |       |
| United  States                           |       | $           | 93         |         | $          | 271       |       | $ | 364 |   |
| Other  foreign                           |       | 2,082       |       | 1,421        |       | 3,503     |       |
|                                     |       | $           | 2,175      |         | $          | 1,692     |       | $ | 3,867 |   |

 

The Company isincorporated in Bermuda, which does not impose an income tax.  OEH’s effective tax rate is entirely due tothe income taxes imposed by jurisdictions in which OEH conducts business otherthan Bermuda.

 

Deferred incometaxes reflect the net tax effects of temporary differences between the carryingamount of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes. The following represents OEH’s net deferred tax liabilities (dollars inthousands):

 

15

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| ** **                    | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                          |       |                         |       |                        |       |
| Gross  deferred tax assets    |       | $                            | 63,222     |                        | $          | 64,493 |   |
| Less:  Valuation allowance    |       | (31,741                      | )          | (31,996                     | )          |
| Net  deferred tax assets      |       | 31,481                       |       | 32,497                      |       |
| Deferred  tax liabilities     |       | (47,977                      | )          | (35,207                     | )          |
| Net  deferred tax liabilities |       | $                            | (16,496    | )                           | $          | (2,710 | ) |

 

The deferred tax assets consist primarily oftax loss carry forwards.  A valuationallowance had been provided against gross deferred tax assets where it isthought more likely than not that the benefits associated with these assetswill not be realized.

 

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

 

The deferred tax liabilities at September 30,2005 include a liability of $12,500,000 in respect of the Grand HotelEurope.  The liability is caused by thedifference between the tax basis and the fair value of the depreciable assetsat the acquisition date.

 

**8.  Pensions**

 

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

 
| **Three months ended September 30,** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
|                                      |       |     |       |     |       |   |   |
| Service  cost                             |       | $        | 216        |     | $          | 206 |   |
| Interest  cost                            |       | 171      |       | 96       |       |
| Expected  return on plan assets           |       | (129     | )          | (109     | )          |
| Amortization  of net loss                 |       | 61       |       | 34       |       |
| Net  periodic benefit cost                |       | $        | 319        |     | $          | 227 |   |

 
| **Nine months ended September 30,** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |   |   |
| Service  cost                            |       | $        | 670        |     | $          | 619 |   |
| Interest  cost                           |       | 531      |       | 288      |       |
| Expected  return on plan assets          |       | (400     | )          | (328     | )          |
| Amortization  of net loss                |       | 190      |       | 103      |       |
| Net  periodic benefit cost               |       | $        | 991        |     | $          | 682 |   |

 

As reported inNote 7 to the financial statements in the Company’s 2004 Form 10-K annualreport, OEH expected to

 

16

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contribute$833,000 to its pension plans in 2005. As of September 30, 2005, $711,000 of contributions were made.  OEH anticipates contributing an additional $122,000to fund its pension plans in 2005 for a total of $833,000.

 

**9.  Supplemental cash flow information**

     (Dollarsin thousands):

 
| **Nine months ended September 30,** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |
| Cash  paid for:                          |       |     |       |     |       |
| Interest                                 |       | $        | 21,488     |     | $          | 15,075 |   |
| Income  taxes                            |       | $        | 7,141      |     | $          | 2,988 |   |

 

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

 
| **Nine months ended September 30,** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |
| Fair  value of assets acquired           |       | $        | 111,492    |     | $          | 3,000 |   |
| Cash  paid                               |       | (95,000  | )          | (3,000   | )          |
| Liabilities  assumed                     |       | $        | 16,492     |     | $          | — |   |

 

**10.  Accumulated other comprehensive loss**

 

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

 
| ** **                                      | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Foreign  currency translation adjustments       |       | $                            | (38,211    | )                           | $          | (12,636 | ) |
| Net  change on derivative financial instruments |       | (128                         | )          | (209                        | )          |
|                                            |       | $                            | (38,339    | )                           | $          | (12,845 | ) |

 

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

 
| **Nine months ended September 30,**  | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
|                                      |       |     |       |     |       |
| Net  earnings on common shares            |       | $        | 36,383     |     | $          | 19,800 |   |
| Foreign  currency translation adjustments |       | (25,575  | )          | 544      |       |
| Change  in fair value of derivatives      |       | 81       |       | (157     | )          |
| Comprehensive  loss                       |       | $        | (10,889    | )        | $          | 20,187 |   |

 

17

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**11.  Commitments**

 

Outstanding contracts to purchase fixedassets were approximately $18,300,000 at September 30, 2005 (December 31,2004 - $27,200,000).

 

**12.  Information concerning financial reportingfor segments and operations in different geographical areas**

 

As reported in the Company’s 2004 Form 10-Kannual report, OEH has two reporting segments, (i) hotels and restaurantsand (ii) tourist trains and cruises.  Segment performance is evaluated based uponsegment net earnings before interest, tax (including tax on earnings fromunconsolidated companies), depreciation and amortization (“segment EBITDA”).  Financial information regarding thesebusiness segments is as follows, with net finance costs appearing net ofcapitalized interest and interest and related income (dollars in thousands):

 
| **Three months ended September 30,**                        | ** **       | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------|------------------|----------|------------|----------|------------|
| Revenue:                                                         |             |     |       |     |       |
| Hotels  and restaurants                                          |             |     |       |     |       |
| Owned hotels                                                     | -  Europe        |     | $          | 62,993   |       | $ | 46,912 |   |
|                                                             | -  North America |     | 19,541     |     | 13,973     |   |
|                                                             | -  Rest of world |     | 21,725     |     | 18,009     |   |
| Hotel management/part ownership interests                        |             | 1,974    |       | 1,409    |       |
| Restaurants                                                      |             | 3,430    |       | 3,136    |       |
|                                                             |             | 109,663  |       | 83,489   |       |
| Tourist  trains and cruises                                      |             | 18,070   |       | 16,586   |       |
|                                                             |             | $        | 127,733    |     | $          | 100,025 |   |
|                                                             |             |     |       |     |       |
| Segment  EBITDA:                                                 |             |     |       |     |       |
| Owned hotels                                                     | -  Europe        |     | $          | 26,878   |       | $ | 19,644 |   |
|                                                             | -  North America |     | 3,627      |     | 367        |   |
|                                                             | -  Rest of world |     | 4,185      |     | 3,052      |   |
| Hotel management/part ownership interests                        |             | 3,880    |       | 2,887    |       |
| Restaurants                                                      |             | (165     | )          | (436     | )          |
| Tourist trains and cruises                                       |             | 5,967    |       | 4,560    |       |
| Central overheads                                                |             | (4,856   | )          | (4,142   | )          |
|                                                             |             | $        | 39,516     |     | $          | 25,932 |   |
|                                                             |             |     |       |     |       |
| Segment  EBITDA/net earnings reconciliation:                     |             |     |       |     |       |
| Segment EBITDA                                                   |             | $        | 39,516     |     | $          | 25,932 |   |
| Less:                                                            |             |     |       |     |       |
| Depreciation and amortization                                    |             | 8,598    |       | 7,182    |       |
| Net finance costs                                                |             | 7,819    |       | 4,751    |       |
| Provision for income taxes                                       |             | 3,025    |       | 2,504    |       |
| Share of provision for income taxes of  unconsolidated companies |             | 591      |       | —   |       |
| Net earnings                                                     |             | $        | 19,483     |     | $          | 11,495 |   |

 

18

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

 
| **Three months ended September 30,** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Revenue:                                  |       |     |       |     |       |
| Europe                                    |       | $        | 80,201     |     | $          | 62,748 |   |
| North America                             |       | 23,425   |       | 17,517   |       |
| Rest of world                             |       | 24,107   |       | 19,760   |       |
|                                      |       | $        | 127,733    |     | $          | 100,025 |   |

 
| **Nine months ended September 30,**                         | ** **       | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------|------------------|----------|------------|----------|------------|
|                                                             |             |     |       |     |       |
| Revenue:                                                         |             |     |       |     |       |
| Hotels  and restaurants                                          |             |     |       |     |       |
| Owned hotels                                                     | -  Europe        |     | $          | 134,468  |       | $ | 96,046 |   |
|                                                             | -  North America |     | 66,473     |     | 53,434     |   |
|                                                             | -  Rest of world |     | 67,155     |     | 55,512     |   |
| Hotel management/part ownership interests                        |             | 6,392    |       | 4,838    |       |
| Restaurants                                                      |             | 14,419   |       | 13,117   |       |
|                                                             |             | 288,907  |       | 222,947  |       |
| Tourist  trains and cruises                                      |             | 45,567   |       | 41,448   |       |
|                                                             |             | $        | 334,474    |     | $          | 264,395 |   |
|                                                             |             |     |       |     |       |
| Depreciation  and amortization:                                  |             |     |       |     |       |
| Hotels and restaurants                                           |             |     |       |     |       |
| Owner hotels                                                     | -  Europe        |     | $          | 9,895    |       | $ | 7,450 |   |
|                                                             | -  North America |     | 5,382      |     | 4,789      |   |
|                                                             | -  Rest of world |     | 6,263      |     | 5,869      |   |
| Restaurants                                                      |             | 642      |       | 577      |       |
|                                                             |             | 22,182   |       | 18,685   |       |
| Tourist  trains and cruises                                      |             | 2,866    |       | 2,466    |       |
|                                                             |             | $        | 25,048     |     | $          | 21,151 |   |
|                                                             |             |     |       |     |       |
| Segment  EBITDA:                                                 |             |     |       |     |       |
| Owned hotels                                                     | -  Europe        |     | $          | 44,836   |       | $ | 29,452 |   |
|                                                             | -  North America |     | 15,121     |     | 9,382      |   |
|                                                             | -  Rest of world |     | 14,223     |     | 11,141     |   |
| Hotel management/part ownership interests                        |             | 12,494   |       | 10,571   |       |
| Restaurants                                                      |             | 2,485    |       | 1,534    |       |
| Tourist trains and cruises                                       |             | 11,025   |       | 8,901    |       |
| Central overheads                                                |             | (14,007  | )          | (11,556  | )          |
|                                                             |             | $        | 86,177     |     | $          | 59,425 |   |
|                                                             |             |     |       |     |       |
| Segment  EBITDA/net earnings reconciliation:                     |             |     |       |     |       |
| Segment EBITDA                                                   |             | $        | 86,177     |     | $          | 59,425 |   |
| Less:                                                            |             |     |       |     |       |
| Depreciation and amortization                                    |             | 25,048   |       | 21,151   |       |
| Net finance costs                                                |             | 17,549   |       | 14,607   |       |
| Provision for income taxes                                       |             | 6,147    |       | 3,867    |       |
| Share of provision for income taxes of  unconsolidated companies |             | 1,050    |       | —   |       |
| Net earnings                                                     |             | $        | 36,383     |     | $          | 19,800 |   |
|                                                             |             |     |       |     |       |
| Earnings  from unconsolidated companies:                         |             |     |       |     |       |
| Hotels and restaurants                                           |             |     |       |     |       |
| Hotel management/part ownership interests                        |             | $        | 5,689      |     | $          | 5,733 |   |
| Restaurants                                                      |             | 152      |       | 78       |       |
|                                                             |             | 5,841    |       | 5,811    |       |
| Tourist trains and cruises                                       |             | 3,797    |       | 3,060    |       |
|                                                             |             | $        | 9,638      |     | $          | 8,871 |   |
|                                                             |             |     |       |     |       |
| Capital  expenditure:                                            |             |     |       |     |       |
| Owned hotels                                                     | -  Europe        |     | $          | 57,414   |       | $ | 22,744 |   |
|                                                             | -  North America |     | 21,775     |     | 8,557      |   |
|                                                             | -  Rest of world |     | 17,711     |     | 11,617     |   |
| Hotel management/part ownership interests                        |             | —   |       | —   |       |
| Restaurants                                                      |             | 899      |       | 510      |       |
| Tourist trains and cruises                                       |             | 5,032    |       | 713      |       |
|                                                             |             | $        | 102,831    |     | $          | 44,141 |   |

 

19

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

 
| **Nine months ended September 30,** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Revenue:                                 |       |     |       |     |       |
| Europe                                   |       | $        | 176,873    |     | $          | 134,987 |   |
| North America                            |       | 82,927   |       | 68,562   |       |
| Rest of world                            |       | 74,674   |       | 60,846   |       |
|                                     |       | $        | 334,474    |     | $          | 264,395 |   |

 

**13.  Related party transactions**

 

For the three months ended September 30,2005, OEH paid subsidiaries of SCL $1,429,000 (2004 - $1,333,000) for theprovision of various services under a services agreement between OEH andSCL.  For the nine months ended September 30,2005, OEH paid subsidiaries of SCL $4,408,000(2004 - $4,009,000) for theprovision of various services under the same agreement.  These amounts have been settled in accordancewith the services agreement and are included in selling, general andadministrative expenses.

 

OEH guarantees a $3,000,000 bank loan toEastern and Oriental Express Ltd. in which OEH has a minority shareholderinterest.  This guarantee was in placebefore 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 three months ended September 30,2005, OEH earned $870,000 (2004 - $700,000) in management fees which arerecorded in revenue, and $2,483,000 (2004 - $2,100,000)

 

20

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in interestincome on partnership and other loans, which is recorded in earnings fromunconsolidated companies.  For the ninemonths ended September 30, 2005, OEH earned $3,326,000 (2004 - $2,931,000)in management fees which are recorded in revenue, and $7,151,000 (2004 - $6,049,000)in interest income on partnership and other loans, which is 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 the 50/50-ownedPeruRail operation, and provides loans, guarantees and other creditaccommodation to these joint ventures. In the three months ended September 30, 2005, OEH earned managementand guarantee fees of $1,450,000 (2004 - $1,014,000) which are recorded inrevenue, and loan interest of $28,000 (2004 - $27,000) which is recorded in earningsfrom unconsolidated companies.  In the ninemonths ended September 30, 2005, OEH earned management and guarantee feesof $3,518,000 (2004 - $2,620,000) which are recorded in revenue, and loaninterest of $86,000 (2004 - $77,000) which is recorded in earnings fromunconsolidated companies.  At September 30,2005, loans to the hotels aggregated $2,000,000, bear interest at a spread overLIBOR and come due in 2005.  At the samedate, OEH had a $750,000 subordinated loan to the PeruRail operation with anindefinite maturity date and interest also at a spread over LIBOR.  All of the guarantees relating to the Company’sinvestments in Peru were in place prior to December 31, 2002.

 

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 months ended September 30,2005, OEH earned $256,000 (2004 - $216,000) in management fees, which areincluded in revenue.  For the nine monthsended September 30, 2005, OEH earned $825,000 (2004 - $664,000) inmanagement fees, which are included in revenue.

 

21

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# **ITEM 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

# ** **

**Results of Operations**

 

Three months ended September 30, 2005 compared to Three monthsended September 30, 2004

 

OEH’s operating results for the threemonths ended September 30, 2005 and 2004, expressed as a percentage ofrevenue, were as follows:

 
| ** **                                     | ** ** | **Three months  ended  September 30,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                     | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **                                     | ** ** | **%**                                       | ** ** | **%** | ** ** |
| Revenue:                                       |       |                                        |       |   |   |
| Hotels and restaurants                         |       | 86                                          |       | 83 |   |
| Tourist trains and cruises                     |       | 14                                          |       | 17 |   |
|                                           |       | 100                                         |       | 100 |   |
| Expenses:                                      |       |                                        |       |   |   |
| Depreciation and amortization                  |       | 7                                           |       | 7 |   |
| Operating                                      |       | 47                                          |       | 48 |   |
| Selling, general and administrative            |       | 26                                          |       | 29 |   |
| Net  finance costs                             |       | 6                                           |       | 5 |   |
| Earnings  before income taxes                  |       | 14                                          |       | 11 |   |
| Provision  from income taxes                   |       | (2                                          | )          | (3 | ) |
| Earnings  from unconsolidated companies        |       | 3                                           |       | 3 |   |
| Net  earnings as a percentage of total revenue |       | 15                                          |       | 11 |   |

 

Segment net earnings before interest, tax(including tax on unconsolidated companies), depreciation and amortization (“segmentEBITDA”) of OEH’s operations for the three months ended September 30, 2005and 2004 are analyzed as follows (dollars in millions):

 
| ** **                  | ** ** | **Three months ended  September 30,** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|
| ** **                  | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Segment  EBITDA:            |       |                                       |       |   |   |
| Owned  hotels               |       |                                       |       |   |   |
| Europe                      |       | $                                          | 26.9       |   | $ | 19.6 |   |
| North America               |       | 3.6                                        |       | 0.4 |   |
| Rest of the world           |       | 4.2                                        |       | 3.0 |   |
| Hotel  management interests |       | 3.9                                        |       | 2.9 |   |
| Restaurants                 |       | (0.2                                       | )          | (0.4 | ) |
| Tourist  trains and cruises |       | 6.0                                        |       | 4.6 |   |
| Central  overheads          |       | (4.9                                       | )          | (4.1 | ) |
| Segment  EBITDA             |       | $                                          | 39.5       |   | $ | 26.0 |   |

 

22

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

 
| ** **                                                       | ** ** | **Three months ended  September 30,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                       | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Segment  net earnings                                            |       | $                                          | 19.5       |   | $ | 11.5 |   |
| Add:                                                             |       |                                       |       |   |   |
| Depreciation  and amortization                                   |       | 8.6                                        |       | 7.2 |   |
| Net  finance costs                                               |       | 7.8                                        |       | 4.8 |   |
| Provision  for income taxes                                      |       | 3.0                                        |       | 2.5 |   |
| Share  of provision for income taxes of unconsolidated companies |       | 0.6                                        |       | — |   |
| Segment  EBITDA                                                  |       | $                                          | 39.5       |   | $ | 26.0 |   |

 

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 afinancial measure commonly used in OEH’s industry.  OEH’s segment EBITDA, however, may not becomparable in all instances to EBITDA as disclosed by other companies.  Segment EBITDA should not be considered as analternative to earnings from operations or net earnings (as determined inaccordance with U.S. generally accepted accounting principles) as a measure ofOEH’s operating performance, or as an alternative to net cash provided byoperating, investing and financing activities (as determined in accordance withU.S. generally accepted accounting principles) as a measure of OEH’s ability tomeet cash needs.

 

23

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Operating information for OEH’s ownedhotels for the three months ended September 30, 2005 and 2004 is asfollows:

 
| ** **                       | ** ** | **Three months  ended  September 30,** | ** ** | ** ** | ** ** | ** **   | ** ** |
|----------------------------------|------------|---------------------------------------------|------------|------------|------------|--------------|------------|
| ** **                       | ** ** | **2005**                                    | ** ** | **2004**   | ** ** | ** **   | ** ** | ** ** | ** ** |
|                             |       |                                        |       |       |       |         |       |   |   |
| Average  Daily Rate (in dollars) |       |                                        |       |       |       |         |       |   |   |
| Europe                           |       | 625                                         |       | 740        |       |         |       |   |   |
| North America                    |       | 278                                         |       | 260        |       |         |       |   |   |
| Rest of the world                |       | 262                                         |       | 235        |       |         |       |   |   |
| Worldwide                        |       | 427                                         |       | 414        |       |         |       |   |   |
|                             |       |                                        |       |       |       |         |       |   |   |
| Rooms  Sold (in thousands)       |       |                                        |       |       |       |         |       |   |   |
| Europe                           |       | 61                                          |       | 39         |       |         |       |   |   |
| North America                    |       | 30                                          |       | 31         |       |         |       |   |   |
| Rest of the world                |       | 47                                          |       | 43         |       |         |       |   |   |
| Worldwide                        |       | 138                                         |       | 113        |       |         |       |   |   |
|                             |       |                                        |       |       |       |         |       |   |   |
| RevPAR  (in dollars)             |       |                                        |       |       |       |         |       |   |   |
| Europe                           |       | 417                                         |       | 477        |       |         |       |   |   |
| North America                    |       | 183                                         |       | 156        |       |         |       |   |   |
| Rest of the world                |       | 148                                         |       | 122        |       |         |       |   |   |
| Worldwide                        |       | 267                                         |       | 240        |       |         |       |   |   |
| ** **                       | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** **   | ** ** |
| ** **                       | ** ** | ** **                                  | ** ** | ** ** | ** ** | **Change %** | ** ** |
| ** **                       | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** **   | ** ** | **Local** | ** ** |
| ** **                       | ** ** | ** **                                  | ** ** | ** ** | ** ** | **Dollars**  | ** ** | **Currency** | ** ** |
| Same Store RevPAR (in dollars)   |       |                                        |       |       |       |         |       |   |   |
| Europe                           |       | 506                                         |       | 477        |       | 6            | %          | 5 | % |
| North America                    |       | 206                                         |       | 178        |       | 16           | %          | 16 | % |
| Rest of the world                |       | 148                                         |       | 122        |       | 21           | %          | 22 | % |
| Worldwide                        |       | 284                                         |       | 256        |       | 11           | %          | 10 | % |

 

Average daily rate is the average amountachieved for the rooms sold.  RevPAR isrevenue per available room, that is rooms revenue divided by the number ofavailable rooms for each night of operation. Same store RevPAR is a comparison based on the operations of the sameunits in each period, such as by excluding the effect of any acquisitions ormajor refurbishments.

 

*Overview*

 

The net earnings for the period were $19.5million ($0.50 per common share) on revenue of $127.7 million, compared withnet earnings of $11.5 million ($0.34 per common share) on revenue of $100.0million in the prior year third quarter. The results for the quarter represent a 70% increase in net earnings overthe prior year quarter and a 47% increase in earnings per share.

 

This is largely due to improved tradingconditions in all businesses in which OEH operates and is the general trend inthe lodging and hospitality business worldwide as well as the acquisition ofthe Grand Hotel Europe.  With littleforecast growth in additional supply over the next few years in luxury

 

24

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hotel rooms combined with an increasingdemand for luxury travel experiences from a demographically ageing andwealthier population, the outlook for continuing improvements in tradingconditions is very positive.  OEH’soutlook for 2006 is very positive with same store bookings (excluding WindsorCourt and Maroma) up 16% over 2005.

 

Hurricane Katrina in August damagedthe Windsor Court Hotel which has now reopened. The lost earnings at the hotel as a result of the hurricane are coveredby property damage and business interruption insurance, subject to relevantdeductible amounts.  The impact of thehurricane on reported third quarter 2005 earnings was limited to the deductibleand lost net earnings which OEH expects to record when realized. There will bea similar accounting treatment of insurance claims made with respect to MaromaResort and Spa which was damaged by hurricane Wilma in the fourth quarter of2005.

 

*Revenue*

 

Total revenue increased by $27.7 million,or 28%, from $100.0 million in the three months ended September 30, 2004to $127.7 million in the three months ended September 30, 2005.  Hotels and restaurants revenue increased by $26.3million, or 32%, from $83.4 million in the three months ended September 30,2004 to $109.7 million in the three months ended September 30, 2005, andtourist trains and cruises increased by $1.4 million, or 8%, from $16.6 millionfor the three months ended September 30, 2004 to $18.0 million for thethree months ended September 30, 2005.

 

The increase for hotels and restaurants (includingmanagement fee income) was mainly due to an increase at OEH’s owned hotels of $26.0million, or 32%, from $80.3 million in the three months ended September 30,2004 to $106.3 million in the three months ended September 30, 2005.  The revenue from restaurants increased by $0.3million, or 10%, from $3.1 million in the three months ended September 30,2004 to $3.4 million in the three months ended September 30, 2005.

 

For owned hotels overall, same store RevPARin U.S. dollars increased by 11% in the three months ended September 30,2005 compared to the three months ended September 30, 2004.  Measured in local currencies this increasewas 10%, of which around 5% was due to improved occupancy and 5% to higherachieved daily rate.

 

25

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The changein revenue at owned hotels is analyzed on a regional basis as follows:

 

*Europe*.  Revenue increased by $16.1million, or 34%, from $46.9 million for the three months ended September 30,2004 to $63.0  million for the threemonths ended September 30, 2005.  Thisincrease included revenue of $10.5 million from the Grand Hotel Europe, StPetersburg, which was acquired on February 8, 2005, and $3.2 million fromthe Hotel Caruso which opened in July 2005.

 

On a same store basis, RevPAR in localcurrency increased by 5%, but in U.S. dollars this translated into an increaseof 6% as the euro was slightly stronger against the dollar in the third quarterof 2005 compared to the third quarter of 2004.  The RevPAR increase in local currency was principallydue to increased achieved average daily rate at the hotels.

 

*North America*.  Revenue increased by $5.6million, or 40%, from $13.9 million in the three months ended September 30,2004 to $19.5 million in the three months ended September 30, 2005.  This increase included revenue from ElEncanto which was acquired on November 1, 2004.  Revenue from land sales at Keswick Hall Hotelwas $2.5 million in the three months ended September 30, 2005, an increaseof $2.0 million on the three months ended September 30, 2004.  (Earnings from operations before net financecosts resulting from these land sales were $2.2 million in the 2005 quarter, anincrease of $1.8 million over the 2004 quarter.)

 

On a same store basis, RevPAR increased by 16%which was driven by an 8% increase in achieved daily rate with 8% related to occupancy.

 

*Rest of the World*.  Revenue increased by $3.7million, or 21%, from $18.0 million in the three months ended September 30,2004 to $21.7 million in the three months ended September 30, 2005.

 

The RevPAR on a same store basis for therest of the world region increased by 21% in local currencies in the threemonths ended September 30, 2005 compared to the three months ended September 30,2004.  Approximately 13% of this increasewas due to increased achieved daily rate at the hotels and the balance was dueto higher occupancies.  This RevPARincrease in local currencies was also 22% when expressed in U.S. dollars.

 

*Depreciation and amortization*

 

Depreciation and amortization increased by$1.4 million, or 19%, from $7.2 million in the three months ended September 30,2004 to $8.6 million in the three months ended September 30, 2005,primarily due to the effect of acquisitions and capital expenditures in 2004and 2005 as well as the effect of the weakness of the U.S. dollar againstcurrencies in which OEH records some of its assets.

 

26

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*Operating expenses*

 

Operating expenses increased by $11.8million, or 25%, from $47.8 million in the three months ended September 30,2004 to $59.6 million in the three months ended September 30, 2005, mainlydue to the effect of the Grand Hotel Europe acquisition and the Hotel Carusoopening as well as the effect of the weakness of the U.S. dollar againstcurrencies in which OEH records some of its expenses.

 

*Selling, general andadministrative expenses*

 

Selling, general and administrativeexpenses increased by $4.1 million, or 14%, from $29.2 million in the threemonths ended September 30, 2004 to $33.3 million in the three months endedSeptember 30, 2005, mainly due to the aforementioned acquisition andopening, as well as exchange rate movements due to weakening of the U.S. dollar.

 

*Earnings from operations beforenet finance costs*

 

Earnings from operations increased by $10.4million from earnings of $15.8 million in the three months ended September 30,2004 to earnings of $26.2 million in the three months ended September 30,2005, due to the factors described above.

 

*Net finance costs*

 

Net finance costs increased by $3.0million, or 63%, from $4.8 million for the three months ended September 30,2004 to $7.8 million for the three months ended September 30, 2005.  This was due to increased interest rates onU.S. dollar borrowings and the interest on the debt for the financing of acquisitionsmade in 2005.

 

*Provision for income taxes*

 

The provision for income taxes increased by$0.5 million, from a provision of $2.5 million in the three months ended September 30,2004 to a provision of $3.0 million in the three months ended September 30,2005. The Company is incorporated in Bermuda, which does not impose an incometax.  Accordingly, the entire income tax provisionwas attributable to income taxes incurred by subsidiaries operating injurisdictions that impose an income tax. The increased provision was due to the increased profitability of someof these subsidiaries.

 

*Earnings from unconsolidatedcompanies*

 

Earnings from unconsolidated companies increasedby $1.2 million, or 41%, from $2.9 million in the three months ended September 30,2004 to $4.1 million in the three months ended September 30, 2005.

 

27

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Nine months ended September 30, 2005compared to Nine months ended September 30, 2004

 

OEH’s operating results for the nine monthsended September 30, 2005 and 2004, expressed as a percentage of revenue,were as follows:

 
| ** **                                     | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                     | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **                                     | ** ** | **%**                                     | ** ** | **%** | ** ** |
| Revenue:                                       |       |                                      |       |   |   |
| Hotels and restaurants                         |       | 86                                        |       | 84 |   |
| Tourist trains and cruises                     |       | 14                                        |       | 16 |   |
|                                           |       | 100                                       |       | 100 |   |
| Expenses:                                      |       |                                      |       |   |   |
| Depreciation and amortization                  |       | 7                                         |       | 8 |   |
| Operating                                      |       | 48                                        |       | 49 |   |
| Selling, general and administrative            |       | 30                                        |       | 32 |   |
| Net  finance costs                             |       | 5                                         |       | 6 |   |
| Earnings  before income taxes                  |       | 10                                        |       | 5 |   |
| Provision  for income taxes                    |       | (2                                        | )          | (1 | ) |
| Earnings  from unconsolidated companies        |       | 3                                         |       | 3 |   |
| Net  earnings as a percentage of total revenue |       | 11                                        |       | 7 |   |

 

Segment EBITDA of OEH’s operations for the ninemonths ended September 30, 2005 and 2004 are analyzed as follows (dollarsin millions):

 
| ** **                  | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| Segment  EBITDA:            |       |                                      |       |   |   |
| Owned  hotels:              |       |                                      |       |   |   |
| Europe                      |       | $                                         | 44.8       |   | $ | 29.5 |   |
| North America               |       | 15.1                                      |       | 9.4 |   |
| Rest of the world           |       | 14.2                                      |       | 11.1 |   |
| Hotel  management interests |       | 12.5                                      |       | 10.6 |   |
| Restaurants                 |       | 2.5                                       |       | 1.5 |   |
| Tourist  trains and cruises |       | 11.0                                      |       | 8.9 |   |
| Central  overheads          |       | (13.9                                     | )          | (11.6 | ) |
| Segment  EBITDA             |       | $                                         | 86.2       |   | $ | 59.4 |   |

 

28

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The foregoing segment EBITDA reconciles to netearnings as follows (dollars in millions):

 
| ** **                                                       | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                       | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| Segment  net earnings                                            |       | $                                         | 36.4       |   | $ | 19.8 |   |
| Add:                                                             |       |                                      |       |   |   |
| Depreciation  and amortization                                   |       | 25.0                                      |       | 21.1 |   |
| Net  finance costs                                               |       | 17.5                                      |       | 14.6 |   |
| Provision  for income taxes                                      |       | 6.1                                       |       | 3.9 |   |
| Share  of provision for income taxes of unconsolidated companies |       | 1.2                                       |       | — |   |
| Segment  EBITDA                                                  |       | $                                         | 86.2       |   | $ | 59.4 |   |

 

Operating information for OEH’s ownedhotels for the nine months ended September 30, 2005 and 2004 is asfollows:

 
| ** **                       | ** ** | **Nine months  ended  September 30,** | ** ** | ** ** | ** ** | ** **   | ** ** |
|----------------------------------|------------|--------------------------------------------|------------|------------|------------|--------------|------------|
| ** **                       | ** ** | **2005**                                   | ** ** | **2004**   | ** ** | ** **   | ** ** | ** ** | ** ** |
|                             |       |                                       |       |       |       |         |       |   |   |
| Average  Daily Rate (in dollars) |       |                                       |       |       |       |         |       |   |   |
| Europe                           |       | 565                                        |       | 645        |       |         |       |   |   |
| North America                    |       | 330                                        |       | 321        |       |         |       |   |   |
| Rest of the world                |       | 270                                        |       | 235        |       |         |       |   |   |
| Worldwide                        |       | 392                                        |       | 373        |       |         |       |   |   |
|                             |       |                                       |       |       |       |         |       |   |   |
| Rooms  Sold (in thousands)       |       |                                       |       |       |       |         |       |   |   |
| Europe                           |       | 140                                        |       | 88         |       |         |       |   |   |
| North America                    |       | 112                                        |       | 104        |       |         |       |   |   |
| Rest of the world                |       | 142                                        |       | 134        |       |         |       |   |   |
| Worldwide                        |       | 394                                        |       | 326        |       |         |       |   |   |
|                             |       |                                       |       |       |       |         |       |   |   |
| RevPAR  (in dollars)             |       |                                       |       |       |       |         |       |   |   |
| Europe                           |       | 343                                        |       | 370        |       |         |       |   |   |
| North America                    |       | 224                                        |       | 210        |       |         |       |   |   |
| Rest of the world                |       | 155                                        |       | 127        |       |         |       |   |   |
| Worldwide                        |       | 240                                        |       | 217        |       |         |       |   |   |
|                             |       |                                       |       |       |       |         |       |   |   |
| ** **                       | ** ** | ** **                                 | ** ** | ** ** | ** ** | **Change %** | ** ** |
| ** **                       | ** ** | ** **                                 | ** ** | ** ** | ** ** | **Dollars**  | ** ** | **Local  Currency** | ** ** |
| Same Store RevPAR (in dollars)   |       |                                       |       |       |       |         |       |   |   |
| Europe                           |       | 409                                        |       | 376        |       | 9            | %          | 6 | % |
| North America                    |       | 245                                        |       | 225        |       | 9            | %          | 9 | % |
| Rest of the world                |       | 155                                        |       | 128        |       | 21           | %          | 18 | % |
| Worldwide                        |       | 249                                        |       | 223        |       | 12           | %          | 10 | % |

 

29

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*Overview*

 

The net earnings for the period were $36.4million ($0.96 per common share) on revenue of $334.5 million, compared with netearnings of $19.8 million ($0.58 per common share) on revenue of $264.4 millionin the prior year nine months.  Thisrepresents an increase of 84% in net earnings in the period over the prior yearperiod and an increase of 66% in earnings per common share.

 

*Revenue*

 

Total revenue increased by $70.1 million,or 27%, from $264.4 million in the nine months ended September 30, 2004 to$334.5 million in the nine months ended September 30, 2005.  Hotels and restaurants revenue increased by $66.0million, or 30%, from $222.9 million in the nine months ended September 30,2004 to $288.9 million in the nine months ended September 30, 2005, andtourist trains and cruises increased by $4.1 million, or 10%, from $41.5million for the nine months ended September 30, 2004 to $45.6 million forthe nine months ended September 30, 2005.

 

The increase for hotels and restaurants (includingmanagement fee income) was mainly due to an increase at OEH’s owned hotels of $63.1million, or 31%, from $209.8 million in the nine months ended September 30,2004 to $274.5 million in the nine months ended September 30, 2005.  The revenue from restaurants increased by$1.3 million, or 10%, from $13.1 million in the nine months ended September 30,2004 to $14.4 million in the nine months ended September 30, 2005 whichwas mainly due to the ‘21’ Club in New York which has seen improvements in itsbanqueting business following increased corporate entertainment activity.

 

For owned hotels overall, same store RevPARin U.S. dollars increased by 12% in the nine months ended September 30,2005 compared to the nine months ended September 30, 2004.  Measured in local currencies this increasewas 10%, of which 4% was due to improved occupancy and 6% to higher achieveddaily rate.

 

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

 

*Europe*.  Revenue increased by $38.5million, or 40%, from $96.0 million for the nine months ended September 30,2004 to $134.5 million for the nine months ended September 30, 2005.  This increase included revenue from the GrandHotel Europe, St Petersburg, which was acquired on February 8, 2005.  The revenue from the hotel between this dateand September 30, 2005 was $25.0 million.

 

On a same store basis, RevPAR in local currencyincreased by 6% (which was entirely related to daily rate), but in U.S. dollarsthis translated into an increase of 9% as the euro was stronger

 

30

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against the dollar in the third quarter of2005 compared to the third quarter of 2004.

 

*North America*.  Revenue increased by $13.1million, or 25%, from $53.4 million in the nine months ended September 30,2004 to $66.5 million in the nine months ended September 30, 2005.  This increase included revenue from ElEncanto Hotel which was acquired on November 1, 2004.  The revenue from this hotel in the ninemonths to September 30, 2005 was $5.5 million.  Excluding revenue from El Encanto, revenueincreased by $7.6 million, or 14%, from $53.4 million for the nine months endedSeptember 30, 2004 to $61.0 million for the nine months ended September 30,2005.  Revenue from land sales at KeswickHall Hotel was $3.5 million in the nine months ended September 30, 2005,an increase of $2.6 million on the nine months ended September 30, 2004.  (Earnings from operations before net financecosts resulting from these land sales were $2.8 million in the 2005 period, anincrease of $2.2 million over the 2004 period.)

 

On a same store basis, RevPAR increased by 9%which was driven by a 5% increase in occupancy and a 4% improvement in achieveddaily rate.

 

*Rest of the World*.  Revenue increased by $11.7million, or 21%, from $55.5 million in the nine months ended September 30,2004 to $67.2 million in the nine months ended September 30, 2005.

 

The RevPAR on a same store basis for therest of the world region increased by 18% in local currencies in the ninemonths ended September 30, 2005 compared to the nine months ended September 30,2004.  Approximately 7% of this increasewas due to increased occupancies at the hotels and the balance (11%) was due toa higher achieved daily rate.  ThisRevPAR increase in local currencies translated to a 21% increase when expressedin U.S. dollars primarily as the South African rand and Australian dollar werestronger against the U.S. dollar in the period over the comparable period of2004.

 

*Depreciation and amortization*

 

Depreciation and amortization increased by$3.8 million, or 18%, from $21.2 million in the nine months ended September 30,2004 to $25.0 million in the nine months ended September 30, 2005,primarily due to the effect of acquisitions and capital expenditures in 2004 and2005 as well as the effect of the weakness of the U.S. dollar againstcurrencies in which OEH records some of its assets.

 

*Operating expenses*

 

Operating expenses increased by $29.7million, or 23%, from $129.6 million in the nine months ended September 30,2004 to $159.3 million in the nine months ended September 30, 2005, mainlydue to the effect of the weakness of the U.S. dollar against currencies

 

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in which OEH incurs operating expenses,increased occupancies at the hotels and acquisition of additional hotels in2004 and 2005.

 

*Selling, general andadministrative expenses*

 

Selling, general and administrativeexpenses increased by $15.4 million, or 18%, from $84.3 million in the nine monthsended September 30, 2004 to $99.7 million in the nine months ended September 30,2005, mainly due to the effect of the weakness of the U.S. dollar againstcurrencies in which OEH incurs these expenses and acquisitions of additionalhotels in 2004 and 2005.

 

*Earnings from operations beforenet finance costs*

 

Earnings from operations increased by $21.0million, or 71%, from earnings of $29.4 million in the nine months ended September 30,2004 to earnings of $50.4 million in the nine months ended September 30,2005, due to the factors described in the overview above.

 

*Net finance costs*

 

Net finance costs increased by $2.9million, from $14.6 million for the nine months ended September 30, 2004 to$17.5 million for the nine months ended September 30, 2005, which includeda foreign exchange gain of $3.6 million. Excluding this gain, net finance costs increased by $6.5 million, or 45%,from $14.6 million for the nine months ended September 30, 2004 to $21.1million for the nine months ended September 30, 2005.

 

*Provision for income taxes*

 

The provision for income taxes increased by$2.2 million, from a provision of $3.9 million in the nine months ended September 30,2004 to a provision of $6.1 million in the nine months ended September 30,2005. The Company is incorporated in Bermuda, which does not impose an incometax.  Accordingly, the entire income tax provisionwas attributable to subsidiaries operating in jurisdictions that impose anincome tax.  The increased provision wasmainly due to the increased profitability of some of these subsidiaries.

 

*Earnings from unconsolidatedcompanies*

 

Earnings from unconsolidated companies increasedby $0.7 million, or 8%, from $8.9 million in the nine months ended September 30,2004 to $9.6 million in the nine months ended September 30, 2005.  This was mainly due to higher earnings fromOEH’s investment in the Charleston Place.

 

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**Liquidity and Capital Resources**

 

*Working Capital*

 

OEH had cash and cash equivalents of $54.1million at September 30, 2005, $31.5 million less than the $85.6 millionat December 31, 2004.  At September 30,2005, the undrawn amounts available to OEH under its short-term lines of creditwere $13.2 million.  In addition, at September 30,2005 there were undrawn amounts committed under long-term facilities of $84.0million.  OEH’s total cash andavailability at September 30, 2005 was, therefore, $151.3 millionincluding the undrawn short-term lines.

 

Current assets less current liabilities,including the current portion of long-term debt, resulted in a working capitaldeficit of $42.5 million at September 30, 2005, a decrease in the workingcapital of $42.5 million from a balance of zero at December 31, 2004.

 

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 provided byoperating activities increased by $10.9 million from $45.0 million for the ninemonths ended September 30, 2004 to $55.9 million for the nine months endedSeptember 30, 2005, mainly due to the increase in net earnings of $16.6 millionfor the period over the prior year period.

 

*Investing Activities*.  Cash used in investingactivities increased by $139.6 million to $198.3 million for the nine monthsended September 30, 2005, compared to $58.7 million for the nine monthsended September 30, 2004.  This wasmainly due to the acquisition of the Grand Hotel Europe on February 8,2005.

 

*Financing Activities*.  Cash provided by financingactivities for the nine months ended September 30, 2005 was an increase of$128.4 million from cash used in financing activities of $15.9 million in the ninemonths ended September 30, 2004.  Inthe nine months ended September 30, 2005, OEH had proceeds from borrowingsunder long-term debt of $116.8 million which included $57.5 million of financeon the Grand Hotel Europe acquisition, compared to proceeds of $20.7 millionfor the nine months ended September 30, 2004.  In the nine months ended September 30,2005, OEH had net proceeds from the issuance of common shares of $123.9 million,which were primarily used to pay down a revolving credit facility secured on threeof OEH’s Italian hotels ($95.0 million) which can be re-drawn at any time withthe balance going to cash to be used

 

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for general corporate purposes includingacquisitions and investments.

 

*Capital Commitments*.  There were $18.3 million ofcapital commitments outstanding as of September 30, 2005 mainly oninvestments in owned hotels.

 

*Indebtedness*

 

At September 30, 2005, OEH had $553.8million of long-term debt secured by assets ($499.7 million net of cash),including the current portion, which is repayable over periods of 1 to 11 yearswith a weighted average interest rate of 5.37%.  See Note 6 to the financial statementsregarding the maturity of long-term debt.

 

Approximately 34% of the outstandingprincipal was drawn in euros and the balance primarily in U.S. dollars.  At September 30, 2005, 99% of borrowingsof OEH were in floating interest rates.

 

*Liquidity*

 

OEH raised $122.0 million from the issueand sale of 5.05 million class A common shares during the first quarter of 2005as referred to above.

 

Including these proceeds from the issue andsale of shares, OEH expects to have available cash from operations andappropriate debt finance sufficient to fund its working capital requirements,capital expenditures, acquisitions and debt service for the foreseeable future.

 

**Recent Accounting Pronouncements**

 

The Company has adopted SFAS No. 123R,“Share-Based Payment”, effective January 1, 2005 and has chosen themodified prospective application as its transition method.  This resulted in an expense of $519,000 and $1,080,000in the three and nine months ended September 30, 2005, respectively,relating to the amortization of the fair value of options granted.  The expected expense in future periods on theoutstanding non-vested share options granted, prior to September 30, 2005 isas follows at September 30, 2005 (dollars in thousands):

 
| **Year ended December 31,** | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------|------------|
| Remainder  of 2005               |       | $          | 204        |   |
| 2006                             |       | 627        |       |
| 2007                             |       | 337        |       |
| 2008                             |       | 81         |       |
|                                  |            |            |            |  |

 

The Company made no modifications tooutstanding share options prior to the adoption of SFAS No. 123R and has appliedthe valuation methodology and assumptions previously used to calculate

 

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the pro-forma fair value of options grantedas required under SFAS No. 123, “Accounting for Stock-Based Compensation”,in adopting SFAS No. 123R.  Theseare set out in more detail in Note 11 to the financial statements in the Company’s2004 Form 10-K annual report.  The Companyexpects that these assumptions will continue to be appropriate in fair valuingoptions granted in the future.  Theexpected life of the options assumption may change over time.  Currently the earliest grants to be awardedwere made less than five years ago.  The Companyhas made no change to the quantity, types or terms of instruments used in itsshare-based payment programs.

 

As of September 30,2005, the Company’s significant accounting policies and estimates, which aredescribed in Notes 1 and 15 to the financial statements in the Company’s 2004 Form 10-Kannual report, have not changed from December 31, 2004 other than thechange described above.

 

## **CriticalAccounting Policies**

## ** **

For adiscussion of these, see under the heading “Critical Accounting Policies” inItem 7 – Management’s Discussion and Analysis in the Company’s 2004 Form 10-Kannual report.

 

**ITEM 3.  Quantitative and Qualitative Disclosures aboutMarket Risk**

 

OEH is exposed to market risk from changesin interest rates and foreign currency exchange rates.  These exposures are monitored and managed aspart of OEH’s overall risk management program, which recognizes theunpredictability of financial markets and seeks to mitigate material adverseeffects on consolidated earnings and cash flows.  OEH does not hold market rate sensitivefinancial 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 by 10%, with allother variables held constant, annual net finance costs of OEH would have increasedby approximately $2,900,000 on an annual basis based on borrowings at September 30,2005. The interest rates on substantially all of OEH’s long-term debt areadjusted regularly to reflect current market rates.  Accordingly, the carrying amounts approximatefair value.

 

The market risk relating to foreigncurrencies and its effects have not changed materially during the three and ninemonths ended September 30, 2005 from those described in the Company’s 2004Form 10-K annual report.

 

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**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 September 30,2005 and, based on that evaluation, believe those disclosure controls andprocedures are effective as of that date. There have been no changes in the Company’s internal control overfinancial reporting (as defined in SEC Rule 13a-15(f)) during the thirdquarter of 2005 that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.  During the third quarter of 2005, the Companyreplaced its chief financial officer, the former chief financial officer havingresigned, and employed additional legal, tax and accounting personnel includinga qualified accountant knowledgeable in U.S. generally accepted accountingprinciples.

 

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 misstatement. In addition, the design of any control system is based in part uponcertain assumptions about the likelihood of future events.  Controls may become inadequate because ofchanges in conditions, or the degree of compliance with policies or proceduresmay deteriorate, for example.  Because ofthese and other inherent limitations of control systems, there can be noassurance that any design will succeed in achieving its stated goals under allpotential 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.

 

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**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: November 8,2005

 

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# **EXHIBIT INDEX**

# ** **

3.1 - Memorandum of Association andCertificate of Incorporation of the Company, filed as Exhibit 3.1 toAmendment No. 2 to the Company’s Registration Statement on Form S-1(Registration No. 333-12030) and incorporated herein by reference.

 

3.2 - Bye-Lawsof the Company, filed as Exhibit 3.2 to Amendment No. 4 to theCompany’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 1350Certification.

 

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