**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

**(MarkOne)**

** **

**x****     ****Quarterly Report Pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934**

** **

**For the quarterly period ended March 31, 2010**

** **

**or**

** **

**o****        ****Transition Report Pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934**

** **

**Forthe transition periodfrom              to              **

** **

**Commissionfile number  1-16017**

 

**ORIENT-EXPRESS HOTELS LTD.**

(Exact name of registrant asspecified in its charter)

 

| **Bermuda**                                                                   | ** ** | **98-0223493**      |
|-------------------------------------------------------------------------------|------------|---------------------|
| (State or other jurisdiction                                                  |       | (I.R.S. Employer    |
| of incorporation or                                                           |       | Identification No.) |
| organization)                                                                 |       |                |
|                                                                          |       |                |
| **22 Victoria Street**

**P.O. Box HM 1179**

**Hamilton HMEX, Bermuda** |       |                |
| (Address of principal  executive offices)                                     |       | (Zip Code)          |

 

**441-295-2244**

(Registrant’s telephonenumber, including area code)

 

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

 

Indicate by check mark whetherthe registrant has submitted electronically and posted on its corporatewebsite, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12 months(or for such shorter period that the registrant was required to submit and postsuch files). Yes o No o

 

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

 

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

 

 

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

 

As of May 3, 2010, 90,797,225 Class Acommon shares and 18,044,478 Class B common shares of Orient-ExpressHotels Ltd. were outstanding. All of the Class B shares are owned by asubsidiary of Orient-Express Hotels Ltd.

 

 

 

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**PART I — FINANCIAL INFORMATION**

 

**ITEM 1.  Financial Statements**

 

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

 

**Condensed Consolidated Balance Sheets (unaudited)**

 
| ** **                                                                               | ** ** | **March 31,********2010** | ** ** | **December 31,********2009** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| ** **                                                                               | ** ** | **(Dollars in thousands)**     | ** ** |
| **Assets**                                                                               |       |                           |       |                              |       |
| Cash and cash equivalents                                                                |       | $                              | 150,600    |                              | $          | 72,151 |   |
| Restricted cash                                                                          |       | 17,896                         |       | 19,894                            |       |
| Accounts receivable, net of allowances of  $475and  $453                                 |       | 60,995                         |       | 59,905                            |       |
| Due from related parties                                                                 |       | 17,885                         |       | 19,385                            |       |
| Prepaid expenses and other                                                               |       | 27,285                         |       | 22,331                            |       |
| Inventories                                                                              |       | 43,171                         |       | 44,191                            |       |
| Assets of discontinued operations held for  sale                                         |       | 17,265                         |       | 41,770                            |       |
| Real estate assets                                                                       |       | 126,012                        |       | 120,288                           |       |
| Total current assets                                                                     |       | 461,109                        |       | 399,915                           |       |
|                                                                                     |       |                           |       |                              |       |
| Property, plant and equipment, net of  accumulated depreciation of $260,068 and $255,218 |       | 1,480,864                      |       | 1,403,773                         |       |
| Investments                                                                              |       | 56,332                         |       | 58,432                            |       |
| Goodwill                                                                                 |       | 184,013                        |       | 149,180                           |       |
| Other intangible assets                                                                  |       | 21,065                         |       | 20,982                            |       |
| Other assets                                                                             |       | 37,945                         |       | 40,408                            |       |
|                                                                                     |       | $                              | 2,241,328  |                              | $          | 2,072,690 |   |
|                                                                                     |       |                           |       |                              |       |
| **Liabilities and Equity**                                                               |       |                           |       |                              |       |
| Working capital facilities                                                               |       | $                              | 11,744     |                              | $          | 6,666 |   |
| Accounts payable                                                                         |       | 21,231                         |       | 23,575                            |       |
| Accrued liabilities                                                                      |       | 78,247                         |       | 74,569                            |       |
| Deferred revenue                                                                         |       | 77,783                         |       | 68,784                            |       |
| Due to related parties                                                                   |       | 482                            |       | —                            |       |
| Liabilities of discontinued operations held  for sale                                    |       | 3,586                          |       | 11,847                            |       |
| Current portion of long-term debt and obligations  under capital leases                  |       | 173,060                        |       | 173,223                           |       |
| Current portion of long-term debt of  consolidated variable interest entities            |       | 67,175                         |       | 165                               |       |
| Total current liabilities                                                                |       | 433,308                        |       | 358,829                           |       |
|                                                                                     |       |                           |       |                              |       |
| Long-term debt and obligations under capital  leases                                     |       | 602,074                        |       | 559,042                           |       |
| Long-term debt of consolidated variable  interest entities                          |       | 12,254                         |       | 79,304                            |       |
| Liability for pension benefit                                                            |       | 6,989                          |       | 7,402                             |       |
| Other liabilities                                                                        |       | 32,451                         |       | 19,742                            |       |
| Deferred income taxes                                                                    |       | 162,458                        |       | 160,742                           |       |
| Liability for uncertain tax positions                                                    |       | 7,509                          |       | 7,151                             |       |
|                                                                                     |       | 1,257,043                      |       | 1,192,212                         |       |
| Commitments and contingencies                                                            |       |                           |       |                              |       |
|                                                                                     |       |                           |       |                              |       |
| Equity                                                                                   |       |                           |       |                              |       |
| 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 - 90,797,225 (2009-76,843,053)                                                    |       | 907                            |       | 769                               |       |
| Class B common shares $0.01 par value  (120,000,000 shares authorized):             |       |                           |       |                              |       |
| Issued - 18,044,478 (2009-18,044,478)                                                    |       | 181                            |       | 181                               |       |
| Additional paid-in capital                                                               |       | 847,173                        |       | 714,980                           |       |
| Retained earnings                                                                        |       | 189,766                        |       | 202,774                           |       |
| Accumulated other comprehensive income                                                   |       | (55,505                        | )          | (39,814                           | )          |
| Less: reduction due to class B common shares  owned by a subsidiary - 18,044,478         |       | (181                           | )          | (181                              | )          |
| Total shareholders’ equity                                                          |       | 982,341                        |       | 878,709                           |       |
| Non-controlling interests                                                                |       | 1,944                          |       | 1,769                             |       |
| Total equity                                                                             |       | 984,285                        |       | 880,478                           |       |
|                                                                                     |       | $                              | 2,241,328  |                              | $          | 2,072,690 |   |

 

See notes to condensed consolidated financial statements.

 

1

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Statementsof Condensed Consolidated Operations (unaudited)**

 
| **Three months ended March 31,**                                           | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|----------|------------|
| ** **                                                                      | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| ** **                                                                      |       |                                                 |       |     |       |
| Revenue                                                                         |       | $                                                    | 92,533     |     | $          | 79,511 |   |
|                                                                            |       |                                                 |       |     |       |
| Expenses:                                                                       |       |                                                 |       |     |       |
| Depreciation and amortization                                                   |       | 11,317                                               |       | 9,123    |       |
| Operating                                                                       |       | 49,106                                               |       | 38,215   |       |
| Selling, general and administrative                                             |       | 44,157                                               |       | 34,813   |       |
| Impairment of goodwill and other intangible assets                              |       | —                                               |       | 6,500    |       |
| Total expenses                                                                  |       | 104,580                                              |       | 88,651   |       |
|                                                                            |       |                                                 |       |     |       |
| Losses from operations                                                          |       | (12,047                                              | )          | (9,140   | )          |
|                                                                            |       |                                                 |       |     |       |
| Interest expense, net                                                           |       | (6,757                                               | )          | (9,159   | )          |
| Foreign currency, net                                                           |       | 3,822                                                |       | (3,826   | )          |
| Net finance costs                                                               |       | (2,935                                               | )          | (12,985  | )          |
|                                                                            |       |                                                 |       |     |       |
| Losses before income taxes and earnings from unconsolidated companies           |       | (14,982                                              | )          | (22,125  | )          |
|                                                                            |       |                                                 |       |     |       |
| (Provision for)/benefit from income taxes                                       |       | (1,144                                               | )          | 9,377    |       |
|                                                                            |       |                                                 |       |     |       |
| Losses before earnings from unconsolidated companies                            |       | (16,126                                              | )          | (12,748  | )          |
|                                                                            |       |                                                 |       |     |       |
| (Losses)/earnings from unconsolidated companies, net of tax of $(806)  and $432 |       | (2,051                                               | )          | 1,119    |       |
|                                                                            |       |                                                 |       |     |       |
| Net losses from continuing operations                                           |       | (18,177                                              | )          | (11,629  | )          |
|                                                                            |       |                                                 |       |     |       |
| Earnings/(losses) from discontinued operations, net of tax                      |       | 5,169                                                |       | (3,010   | )          |
|                                                                            |       |                                                 |       |     |       |
| Net losses                                                                      |       | $                                                    | (13,008    | )        | $          | (14,639 | ) |
|                                                                            |       |                                                 |       |     |       |
| Basic net losses per share:                                                     |       |                                                 |       |     |       |
| Net losses from continuing operations                                           |       | $                                                    | (0.21      | )        | $          | (0.23 | ) |
| Net earnings/(losses) from discontinued operations                              |       | 0.06                                                 |       | (0.06    | )          |
| Net losses                                                                      |       | $                                                    | (0.15      | )        | $          | (0.29 | ) |
|                                                                            |       |                                                 |       |     |       |
| Diluted net losses per share:                                                   |       |                                                 |       |     |       |
| Net losses from continuing operations                                           |       | $                                                    | (0.21      | )        | $          | (0.23 | ) |
| Net earnings/(losses) from discontinued operations                              |       | 0.06                                                 |       | (0.06    | )          |
| Net losses                                                                      |       | $                                                    | (0.15      | )        | $          | (0.29 | ) |
|                                                                            |       |                                                 |       |     |       |
| Dividends per share                                                             |       | $                                                    | —     |     | $          | — |   |

 

See notes tocondensed consolidated financial statements.

 

2

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

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

 
| **Three months ended March 31,**                                              | ** ** | **2010**                   | ** ** | **2009** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                                                         | ** ** | **(Dollars in thousands)** | ** ** |
| ** **                                                                         | ** ** | ** **                 | ** ** |
| Cash flows from operating activities:                                              |       |                       |       |     |       |
| Net losses                                                                         |       | $                          | (13,008    | )        | $          | (14,639 | ) |
| Less: (earnings)/losses from discontinued operations, net of tax                   |       | (5,169                     | )          | 3,010    |       |
| Net losses from continuing operations                                              |       | (18,177                    | )          | (11,629  | )          |
| Adjustments to reconcile net losses to net cash used in operating  activities:     |       |                       |       |     |       |
| Depreciation and amortization                                                      |       | 11,317                     |       | 9,123    |       |
| Amortization and write-off of finance costs                                        |       | 890                        |       | 822      |       |
| Impairment losses                                                                  |       | —                     |       | 6,500    |       |
| Undistributed losses/(earnings) of affiliates                                      |       | 2,815                      |       | (1,551   | )          |
| Stock-based compensation                                                           |       | 1,487                      |       | 799      |       |
| Change in deferred tax                                                             |       | (3,378                     | )          | (12,311  | )          |
| (Gains)/losses from disposals of fixed assets                                      |       | (592                       | )          | 161      |       |
| Unrealized foreign exchange loss                                                   |       | 23                         |       | 4,169    |       |
| Increase in provision for uncertain tax positions                                  |       | 540                        |       | 131      |       |
| Other non-cash items                                                               |       | (131                       | )          | 839      |       |
| Change in assets and liabilities net of effects from acquisition of  subsidiaries: |       |                       |       |     |       |
| Increase in receivables, prepaid expenses and other                                |       | (3,992                     | )          | (5,021   | )          |
| Decrease in inventories                                                            |       | 2,109                      |       | 1,099    |       |
| Increase in real estate assets                                                     |       | (5,724                     | )          | (7,663   | )          |
| Increase in payables, accrued liabilities and deferred revenue                     |       | 5,143                      |       | 4,894    |       |
| Dividends received from unconsolidated companies                                   |       | —                     |       | 1,064    |       |
|                                                                               |       |                       |       |     |       |
| Total adjustments                                                                  |       | 10,507                     |       | 3,055    |       |
|                                                                               |       |                       |       |     |       |
| Net cash used in operating activities from continuing operations                   |       | (7,670                     | )          | (8,574   | )          |
| Net cash used in operating activities from discontinued operations                 |       | (5,261                     | )          | (2,119   | )          |
|                                                                               |       |                       |       |     |       |
| Net cash used in operating activities                                              |       | (12,931                    | )          | (10,693  | )          |
|                                                                               |       |                       |       |     |       |
| Cash flows from investing activities:                                              |       |                       |       |     |       |
| Capital expenditures                                                               |       | (11,847                    | )          | (21,774  | )          |
| Acquisitions and investments, net of cash acquired                                 |       | (46,285                    | )          | (28      | )          |
| Decrease/(increase) in restricted cash                                             |       | 1,998                      |       | (39      | )          |
| Proceeds from sale of subsidiaries and fixed assets                                |       | 18,022                     |       | —   |       |
|                                                                               |       |                       |       |     |       |
| Net cash used in investing activities from continuing operations                   |       | (38,112                    | )          | (21,841  | )          |
| Net cash used in investing activities from discontinued operations                 |       | —                     |       | (275     | )          |
|                                                                               |       |                       |       |     |       |
| Net cash used in investing activities                                              |       | (38,112                    | )          | (22,116  | )          |
|                                                                                    |            |                            |            |          |            |  |  |

 

3

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

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

 
| **Three months ended March 31,**                                                                                   | ** ** | **2010**                   | ** ** | **2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                                                                                              | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                                                    |       |                       |       |     |       |
| Cash flows from financing activities:                                                                                   |       |                       |       |     |       |
| Net proceeds from working capital facilities and redrawable loans                                                       |       | 2,877                      |       | 16,550   |       |
| Issuance of common shares (net of issuance costs of $7,032)                                                             |       | 130,968                    |       | —   |       |
| Stock options exercised                                                                                                 |       | —                     |       | 35       |       |
| Issuance of long-term debt                                                                                              |       | 9,586                      |       | —   |       |
| Principal payments under long-term debt                                                                                 |       | (7,756                     | )          | (7,360   | )          |
|                                                                                                                    |       |                       |       |     |       |
| Net cash provided by financing activities from continuing operations                                                    |       | 135,675                    |       | 9,225    |       |
| Net cash used in financing activities from discontinued operations                                                      |       | (6,757                     | )          | —   |       |
|                                                                                                                    |       |                       |       |     |       |
| Net cash provided by financing activities                                                                               |       | 128,918                    |       | 9,225    |       |
|                                                                                                                    |       |                       |       |     |       |
| Effect of exchange rate changes on cash and cash equivalents                                                            |       | 50                         |       | (673     | )          |
|                                                                                                                    |       |                       |       |     |       |
| Net increase/(decrease) in cash and cash equivalents                                                                    |       | 77,925                     |       | (24,257  | )          |
|                                                                                                                    |       |                       |       |     |       |
| Cash and cash equivalents at beginning of period (includes $818  (2010), $1,676 (2009) of discontinued operations cash) |       | 72,969                     |       | 65,884   |       |
|                                                                                                                    |       |                       |       |     |       |
| Cash and cash equivalents at end of period (includes $294 (2010),  $1,340 (2009) of discontinued operations cash)       |       | $                          | 150,894    |     | $          | 41,627 |   |
|                                                                                                                         |            |                            |            |          |            |  |  |

 

See notes to condensed consolidated financial statements.

 

4

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

 

**Statementsof Condensed Consolidated Equity (unaudited)**

 
| **(Dollars in thousands)**                                                   | ** ** | **Preferred  Shares  At Par  Value** | ** ** | **Class A  Common  Shares  at Par  Value** | ** ** | **Class B  Common  Shares  at Par  Value** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income/(Loss)** | ** ** | **Common  Shares  Owned by  Subsidiary** | ** ** | **Total  Comprehensive  Income/  (Loss)** | ** ** | **Non-  controlling  Interests** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------|------------|------------------------|------------|------------------------------------------------------|------------|------------------------------------------|------------|-------------------------------------------|------------|----------------------------------|------------|
|                                                                         |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       |                                      |       |                             |       |
| Balance, January 1, 2009                                                |       | $                                    | —     |                                            | $          | 510                                             |       | $                                | 181        |                   | $          | 570,727                                              |       | $                                        | 271,571    |                                      | $          | (60,210                          | )          | $ | (181 | ) |   |   | $ | 1,571 |   |
| Stock-based compensation                                                     |       | —                               |       | —                                          |       | —                                          |       | 799                              |       | —                 |       | —                                               |       | —                                   |       |                                      |       | —                           |       |
| Comprehensive loss:                                                          |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       |                                      |       |                             |       |
| Net losses                                                                   |       | —                               |       | —                                          |       | —                                          |       | —                           |       | (14,639                | )          | —                                               |       | —                                   |       | $                                         | (14,639    | )                                | 151        |   |
| Other comprehensive loss                                                     |       | —                               |       | —                                          |       | —                                          |       | —                           |       | —                 |       | (23,400                                              | )          | —                                   |       | (23,400                                   | )          | 2                                |       |
|                                                                         |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       | $                                         | (38,039    | )                                |       |   |
| Balance, March 31, 2009                                                 |       | $                                    | —     |                                            | $          | 510                                             |       | $                                | 181        |                   | $          | 571,526                                              |       | $                                        | 256,932    |                                      | $          | (83,610                          | )          | $ | (181 | ) |   |   | $ | 1,724 |   |
|                                                                         |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       |                                      |       |                             |       |
| Balance, January 1, 2010                                                |       | $                                    | —     |                                            | $          | 769                                             |       | $                                | 181        |                   | $          | 714,980                                              |       | $                                        | 202,774    |                                      | $          | (39,814                          | )          | $ | (181 | ) |   |   | $ | 1,769 |   |
| Issuance of class A common shares in public offering, net of issuance  costs |       | —                               |       | 138                                             |       | —                                          |       | 130,830                          |       | —                 |       | —                                               |       | —                                   |       |                                      |       | —                           |       |
| Stock-based compensation                                                     |       | —                               |       | —                                          |       | —                                          |       | 1,363                            |       | —                 |       | —                                               |       | —                                   |       |                                      |       | —                           |       |
| Comprehensive loss:                                                          |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       |                                      |       |                             |       |
| Net losses                                                                   |       | —                               |       | —                                          |       | —                                          |       | —                           |       | (13,008                | )          | —                                               |       | —                                   |       | $                                         | (13,008    | )                                | 169        |   |
| Other comprehensive loss                                                     |       | —                               |       | —                                          |       | —                                          |       | —                           |       | —                 |       | (15,691                                              | )          | —                                   |       | (15,691                                   | )          | 6                                |       |
|                                                                         |       |                                 |       |                                            |       |                                            |       |                             |       |                   |       |                                                 |       |                                     |       | $                                         | (28,699    | )                                |       |   |
| Balance, March 31, 2010                                                 |       | $                                    | —     |                                            | $          | 907                                             |       | $                                | 181        |                   | $          | 847,173                                              |       | $                                        | 189,766    |                                      | $          | (55,505                          | )          | $ | (181 | ) |   |   | $ | 1,944 |   |

 

See notes to condensed consolidated financial statements.

 

5

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Notesto Condensed Consolidated Financial Statements**

 

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

 

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

 

“FASB” means Financial Accounting Standards Board, and “ASC” means theAccounting Standards Codification of the FASB.

 

*(a) **Accountingpolicies*

 

Theaccompanying condensed consolidated financial statements have been preparedpursuant to the rules and regulations of the U.S. Securities and ExchangeCommission for reporting on Form 10-Q. Accordingly, they do not include all of the information and footnotesrequired by U.S. generally accepted accounting principles for completefinancial statements.  In the opinion ofthe management of the Company, all adjustments (consisting of normal recurringadjustments) necessary for a fair presentation of financial position, operatingresults and cash flows have been included in the statements.  Interim results are not necessarilyindicative of results that may be expected for the year ending December 31,2010.  These financial statements shouldbe read in conjunction with the consolidated financial statements and footnotesthereto included in the Company’s periodic filings, including the Company’sAnnual Report on Form 10-K for the year ended December 31, 2009.  See Note 1 to the consolidated financialstatements in the 2009 Form 10-K for additional information regardingsignificant accounting policies.

 

The accountingpolicies used in preparing these financial statements are the same as thoseapplied in the prior year, except for the changes made to ASC-codified items asdescribed below.

 

In January 2010, theFASB issued an amendment to the accounting for fair value measurements anddisclosures requiring a gross presentation of changes within Level 3 valuationsperiod to period as a rollforward, and adds a new requirement to disclosetransfers in and out of Level 1 and Level 2 measurements. The new disclosuresapply to all entities that report recurring and nonrecurring fair valuemeasurements. This amendment is effective in the first interim reporting periodbeginning after December 15, 2009, with an exception for the grosspresentation of Level 3 rollforward information, which is required for annualreporting periods beginning after 

 

6

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December 15, 2010, andfor interim reporting periods within those years. The adoption of the provisionsof this amendment required in the first interim period after December 15,2009 did not have a material impact on the Company’s financial statementdisclosures. In addition, the adoption of the provisions of this amendmentrequired for periods beginning after December 15, 2010 is not expected tohave a material impact on the Company’s financial statement disclosures.

 

In June 2009, the FASBissued authoritative guidance that amends the evaluation criteria to identifythe primary beneficiary of a variable interest entity and requires ongoingassessment of whether an enterprise is the primary beneficiary of the variableinterest entity. The determination of whether a reporting entity is required toconsolidate another entity is based on, among other things, the other entity’spurpose and design and the reporting entity’s ability to direct the activitiesthat most significantly impact the other entity’s economic performance. TheCompany adopted the provisions of this guidance during the quarter ended March 31,2010. There was no impact on the Company’s consolidated results of operationsand financial position, other than the modification of certain disclosuresrelated to the Company’s involvement in variable interest entities.

 

In June 2009, the FASBissued an amendment to the accounting and disclosure requirements for transfersof financial assets, modifying the derecognition guidance and eliminating theexemption from consolidation for qualifying special-purpose entities. TheCompany adopted the provisions of the amendment during the quarter ended March 31,2010 and there was no impact on the Company’s consolidated results ofoperations and financial position.

 

In addition,OEH is considering the guidance issued by the FASB in October 2009 thatamends the accounting for revenue recognition on multiple-deliverable revenuearrangements. Specifically, the guidance addresses the unit of accounting forarrangements involving multiple deliverables. It also addresses how arrangementconsideration should be allocated to the separate units of accounting, whenapplicable. The adoption of the provisions of this amendmentis required for fiscal years beginning on or after June 15, 2010 and isnot expected to have a material impact on OEH’s financial statements.

 

*(b) Netlosses per share*

 

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

 
| **Three months ended March 31,** | ** ** | **2010** | ** ** | **2009** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |
| Basic                                 |       | 87,826   |       | 50,960   |       |
| Effect of dilution                    |       | —   |       | —   |       |
| Diluted                               |       | 87,826   |       | 50,960   |       |

 

7

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For thethree months ended March 31, 2010 and 2009, all stock options andshare-based awards were excluded from the calculation of the diluted weightedaverage number of shares because OEH made a net loss in both periods and theeffect of their inclusion would be anti-dilative.

 

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

 
| **Three months ended March 31,** | ** ** | **2010**  | ** ** | **2009**  | ** ** |
|---------------------------------------|------------|-----------|------------|-----------|------------|
|                                  |       |      |       |      |       |
| Stock options                         |       | 1,763,774 |       | 995,950   |       |
| Share-based awards                    |       | 569,951   |       | 500,000   |       |
|                                  |       | 2,333,725 |       | 1,495,950 |       |

 

The number ofstock options and share-based awards at March 31, 2010 were 2,315,174 (December 31,2009 - 2,350,422).

 

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

 

****(a)********                                 *********Lilianfels Blue Mountains*****

 

****On January 29,2010, OEH completed the sale of the property and operations of Lilianfels BlueMountains in Katoomba, Australia for a cash consideration of $18,667,000. Thehotel was a part of OEH’s hotels and restaurant segment. The disposal resultedin a gain of $6,676,000 which is reported within profits from discontinuedoperations.****

 

****The following is asummary of the net assets sold and gain on sale (dollars in thousands):****

**** ****
| ** **                                    | ** ** | **January 29,  2010** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|
|                                          |       |                       |       |
| Property, plant and equipment, net            |       | $                          | 18,582     |   |
| Net working capital surplus                   |       | 66                         |       |
| Other assets                                  |       | 158                        |       |
| Deferred taxation                             |       | (730                       | )          |
| Net assets                                    |       | 18,076                     |       |
| Reversal of foreign currency translation gain |       | (6,730                     | )          |
|                                          |       | 11,346                     |       |
| Consideration:                                |       |                       |       |
| Cash                                          |       | 18,667                     |       |
| Less: costs to sell                           |       | (645                       | )          |
|                                          |       | 18,022                     |       |
|                                          |       |                       |       |
| Gain on sale                                  |       | $                          | 6,676      |   |

 

8

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Results of discontinued operations of Lilianfels Blue Mountains were asfollows (dollars in thousands):

 
| **Three months ended March 31,**        | ** ** | **2010** | ** ** | **2009** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
|                                         |       |     |       |     |       |
| Revenue                                      |       | $        | 840        |     | $          | 1,771 |   |
| Loss before tax and gain on sale             |       | $        | (83        | )        | $          | (657 | ) |
| Gain on sale                                 |       | 6,676    |       | —   |       |
| Income before tax                            |       | 6,593    |       | (657     | )          |
| Tax                                          |       | —   |       | —   |       |
| Net gain/(loss) from discontinued operations |       | $        | 6,593      |     | $          | (657 | ) |

 

*(b)**                              **Assets held for sale: Bora Bora Lagoon Resort and La Cabana*

 

During the fourth quarter of 2007, OEH decided to sell its investmentin Bora Bora Lagoon Resort. The property sustained damage as a result of acyclone in the first three months of 2010 and is currently closed.  The property is being actively marketed, butdisposal is partly dependent on the resolution of insurance claims made by OEHand any refurbishments to the property that may be required.  OEH expects the investment to be disposed ofwithin a year.

 

In December 2009, OEH signed an agreement to sell La Cabanarestaurant in Buenos Aires for $2,700,000, with completion scheduled to takeplace by March 31, 2010. Subsequently, and after receiving a 10% non-refundable deposit, theagreement was renegotiated to allow the purchaser more time to complete thetransaction.  Completion is nowanticipated to occur no later than September 2010, with amountsoutstanding beyond March 31, 2010 bearing interest until the final paymentis made.

 

Bora Bora Lagoon Resort and La Cabana have been classified as held forsale and their results have been presented as discontinued operations for allthe periods presented.

 

9

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Summarized operating results of the hotel and restaurant held for saleare as follows (dollars in thousands):

 
| **Three months ended March 31,** | ** ** | **2010** | ** ** | **2009** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |
| Revenue                               |       | $        | 169        |     | $          | 2,853 |   |
| Loss before tax and impairment        |       | $        | (1,424     | )        | $          | (1,407 | ) |
| Impairment loss                       |       | —   |       | (548     | )          |
| Loss before tax                       |       | (1,424   | )          | (1,955   | )          |
| Tax                                   |       | —   |       | —   |       |
| Loss from discontinued operations     |       | $        | (1,424     | )        | $          | (1,955 | ) |

 

Assets and liabilities of the hotel and restaurant that have beenclassified as held for sale consisted of the following (dollars in thousands):

 
| ** **                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2010**           | ** ** | **2009**              | ** ** |
|                                               |       |               |       |                  |       |
| Current assets                                     |       | $                  | 3,725      |                  | $          | 5,701 |   |
| Other assets                                       |       | 9                  |       | 118                   |       |
| Property, plant and equipment, net of depreciation |       | 13,531             |       | 35,951                |       |
| Total assets held for sale                         |       | $                  | 17,265     |                  | $          | 41,770 |   |
| Liabilities held for sale                          |       | $                  | (3,586     | )                     | $          | (11,847 | ) |

 

Prior year comparatives include balances of Lilianfels Blue Mountainswhich was sold in January 2010 as follows: $1,293,000 of current assets,$109,000 of other assets, $28,725,000 of fixed assets and $9,999,000 ofliabilities.

 

****3.********                                     ********Variableinterest entities****

 

In accordancewith the guidance for the consolidation of a variable interest entity (“VIE”),OEH analyzes its variable interests, including loans, guarantees and equityinvestments, to determine if an entity is a VIE. OEH’s analysis includes bothquantitative and qualitative considerations. OEH based its quantitativeanalysis on the forecast cash flows of the entity, and its qualitative analysison a review of the design of the entity, organizational structure includingdecision-making ability, and relevant financial agreements. OEH also uses itsqualitative analysis to determine if OEH is the primary beneficiary of the VIE.

 

10

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*Charleston Place Hotel*

 

OEH holds a 19.9% equity investment in Charleston Center LLC, owner ofCharleston Place Hotel.  OEH has also made a number of loans to thehotel.  On evaluating its various variable interests in the hotel, OEHconcluded that effective December 31, 2008, the hotel no longer qualifiedfor certain scope exemptions under ASC 810-10 “Consolidation-Variable InterestEntities” because OEH’s share of loans provided to the hotel had increased andOEH provides a majority of subordinated financial support.  OEH furtherconcluded that OEH is the primary beneficiary of this VIE as defined in ASC810-10 because OEH is expected to absorb a majority of the entity’s residualgains or losses based on the current organizational structure.  OEH hasconsolidated the VIE effective December 31, 2008. The results of theoperation of Charleston Place Hotel were included in the consolidated financialstatements of OEH from January 1, 2009 and therefore any intercompanytransactions were eliminated from that date.

 

These conclusions have not changed as a result of subsequently issuedaccounting guidance which includes that an assessment of OEH’s ability to direct the activities that mostsignificantly impact the VIE’s economic performance.

 

The carryingamount of consolidated assets and liabilities of Charleston Center LLC includedwithin OEH’s condensed consolidated balance sheet as of March 31, 2010 aresummarized as follows (dollars in thousands):

 
| ** **                                          | ** ** | **March 31,  2010** | ** ** |
|-----------------------------------------------------|------------|--------------------------|------------|
|                                                |       |                     |       |
| Current assets                                      |       | $                        | 5,806      |   |
| Tangible fixed assets                               |       | 191,715                  |       |
| Other assets                                        |       | 42,051                   |       |
| Total assets                                        |       | 239,572                  |       |
|                                                |       |                     |       |
| Current liabilities                                 |       | (18,265                  | )          |
| Third-party debt, including $67,175 current portion |       | (79,429                  | )          |
| Deferred income taxes                               |       | (64,100                  | )          |
| Total liabilities                                   |       | (161,794                 | )          |
|                                                |       |                     |       |
| Net assets                                          |       | $                        | 77,778     |   |

 

11

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The third-party debt of Charleston Center LLC is secured by its netassets and is non-recourse to its members, including OEH. The hotel’s separateassets are not available to pay the debts of OEH and the hotel’s separateliabilities do not constitute obligations of OEH.  This non-recourse obligation is presentedseparately on the condensed consolidated balance sheet. This third-party debtwas reclassified on the balance sheet at December 31, 2009 due to theadoption of new disclosure requirements on variable interest entities.

 

****4.********                                     ********Acquisitions****

 

****OnJanuary 22, 2010, OEH acquired 100% of the share capital of two hotels inTaormina, Sicily (Italy) — the Grand Hotel Timeo and the Villa Sant’Andrea — ata purchase price of €41,791,000 ($59,045,000) comprised of an agreedconsideration of €81,429,000 ($115,048,000) less existing indebtedness assumedand includes an estimated contingent consideration.  OEH purchased the two hotels to enhance bothits presence in the Italian hotel market and its portfolio of leading luxuryhotels globally.  No intangible assetswere identified and all the goodwill arising from the acquisition consistslargely of profit growth opportunities these hotels are expected to generate.All of the goodwill was assigned to OEH’s hotels and restaurant segment. Noneof the goodwill recognized is expected to be deductible for income taxpurposes.****

 

****OEHperformed a preliminary fair value exercise to allocate the purchase price tothe acquired assets and liabilities as at January 22, 2010, which iscomplete with the exception of a final review of tax positions and workingcapital items with the vendor of the properties.  OEH expects to finalize the purchase priceallocation no later than the fourth quarter of 2010.  The following table summarizes theconsideration paid for the hotels and the preliminary fair values of the assetsacquired and liabilities assumed, converted to U.S. dollars at the exchangerate effective at the date of acquisition (dollars in thousands):****

 

12

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| ** **                                       | ** ** | **Fair value on  January 22, 2010** | ** ** |
|--------------------------------------------------|------------|------------------------------------------|------------|
| Consideration:                                   |       |                                     |       |
| ** **                                       |       |                                     |       |
| Total agreed consideration                       |       | $                                        | 115,048    |   |
| Less: Existing debt assumed                      |       | (61,654                                  | )          |
| Plus:  Contingent additional  consideration |       | 5,651                                    |       |
| Purchase price                                   |       | $                                        | 59,045     |   |
|                                             |       |                                     |       |
| Assets acquired and liabilities assumed:         |       |                                     |       |
|                                             |       |                                     |       |
| Cash and cash equivalents                        |       | $                                        | 45         |   |
| Property, plant and equipment                    |       | 101,173                                  |       |
| Inventories                                      |       | 215                                      |       |
| Prepaid expenses and other                       |       | 446                                      |       |
| Other assets                                     |       | 1,434                                    |       |
| Accrued liabilities                              |       | (8,648                                   | )          |
| Deferred income taxes                            |       | (10,541                                  | )          |
| Other liabilities                                |       | (313                                     | )          |
| Long-term debt                                   |       | (61,654                                  | )          |
| Goodwill                                         |       | 36,888                                   |       |
| Net assets acquired                              |       | $                                        | 59,045     |   |

 

Acquisition-relatedcosts which are included within selling, general and administrative expensesfor the year ended December 31, 2010 were $651,000. The purchase price of ****€41,791,000 ($59,045,000), net of contingentconsideration of €4,000,000 ($5,651,000) described below, was €37,791,000($53,394,000) which was funded by cash payments and new indebtedness totalling €32,760,000($46,285,000), vendor financing of €5,000,000 ($7,064,000) and cash acquired of€31,000 ($45,000).****

 

****Theacquisition of the two hotels has been accounted for using the purchase methodof accounting for business combinations. The results of operations of the hotels have been included in theconsolidated financial results since the date of acquisition.****

 

****OEHhas agreed to pay the vendor up to a further €5,000,000 (equivalent to $7,064,000at January 22, 2010) if, by 2015, additional rooms are constructed at GrandHotel Timeo and certain required permits are granted to expand and add aswimming pool to Villa Sant’Andrea.  Thefair****

 

13

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**** ****

****valueof the contingent additional consideration at January 22, 2010 was €4,000,000($5,651,000) determined (using an income approach) based on an analysis of thelikelihood of the conditions for payment being met.****

 

****Thepro forma effects of the acquisition of these two hotels on OEH’s consolidatedfinancial statements were not material.****

 

**5.             Investments**

 

Summarized financial data for OEH’s unconsolidatedcompanies for the periods during which the investments were held by OEH are asfollows (dollars in thousands):

 
| ** **                                      | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Current assets                                  |       | $                        | 51,402     |                        | $          | 64,040 |   |
| Property, plant and equipment, net              |       | 337,061                  |       | 347,198                     |       |
| Other assets                                    |       | 4,813                    |       | 5,050                       |       |
| Total assets                                    |       | $                        | 393,276    |                        | $          | 416,288 |   |
|                                            |       |                     |       |                        |       |
| Current liabilities                             |       | $                        | 40,801     |                        | $          | 45,581 |   |
| Long-term debt                                  |       | 166,983                  |       | 175,487                     |       |
| Other liabilities                               |       | 65,879                   |       | 71,271                      |       |
| Total shareholders’ equity                 |       | 119,613                  |       | 123,949                     |       |
| Total liabilities and shareholders’ equity |       | $                        | 393,276    |                        | $          | 416,288 |   |

** **
| **Three months ended March 31**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                       |       |     |       |     |       |
| Revenue                                                    |       | $        | 17,507     |     | $          | 28,450 |   |
| (Losses)/earnings from operations before net finance costs |       | $        | (2,944     | )        | $          | 6,004 |   |
| Net (losses)/earnings                                      |       | $        | (4,182     | )        | $          | 2,811 |   |

 

14

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**6.             Property,plant and equipment**

 

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

 
| ** **                              | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Land and buildings                      |       | $                        | 1,336,812  |                        | $          | 1,258,443 |   |
| Machinery and equipment                 |       | 184,832                  |       | 185,548                     |       |
| Fixtures, fittings and office equipment |       | 200,594                  |       | 196,264                     |       |
| River cruiseship and canalboats         |       | 18,694                   |       | 18,736                      |       |
|                                    |       | 1,740,932                |       | 1,658,991                   |       |
| Less: accumulated depreciation          |       | (260,068                 | )          | (255,218                    | )          |
|                                    |       | $                        | 1,480,864  |                        | $          | 1,403,773 |   |

 

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

 
| ** **                                 | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Freehold and leased land****and  buildings |       | $                        | 15,326     |                        | $          | 15,821 |   |
| Machinery and equipment                    |       | 2,521                    |       | 2,640                       |       |
| Fixtures, fittings and officeequipment     |       | 2,613                    |       | 2,746                       |       |
|                                       |       | 20,460                   |       | 21,207                      |       |
| Less: accumulated depreciation             |       | (4,693                   | )          | (4,782                      | )          |
| ** **                                 |       | $                        | 15,767     |                        | $          | 16,425 |   |

 

For the three months ended March 31, 2010,OEH capitalized interest in the amount of $2,016,000 in property, plant andequipment. For the year ended December 31, 2009, capitalized interest amountedto $5,275,000.

 

**7.             Goodwill**

 

Thechanges in the carrying amount of goodwill for the three months ended March 31,2010 are as follows (dollars in thousands):

 
| ** **                              | ** ** | **Hotels &  Restaurants** | ** ** | **Trains &  Cruises** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|------------------------------------|------------|--------------------------------|------------|-----------|------------|
| Balance as of January 1, 2010      |       | $                                  | 141,226    |                           | $          | 7,954     |       | $ | 149,180 |   |
| Goodwill arising                        |       | 36,888                             |       | —                         |       | 36,888    |       |
| Foreign currency translation adjustment |       | (1,906                             | )          | (149                           | )          | (2,055    | )          |
| Balance as at March 31, 2010       |       | $                                  | 176,208    |                           | $          | 7,805     |       | $ | 184,013 |   |

 

15

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The gross goodwill amount at January 1, 2010 was $161,103,000 and theaccumulated impairment at that date was $11,923,000. All impairments to thatdate related to hotel and restaurant operations.

 

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

 

Thedetermination of impairment incorporates various assumptions and uncertaintiesthat OEH believes are reasonable and supportable considering all availableevidence, such as the future cash flows of the business, future growth ratesand the related discount rate. However, these assumptions and uncertaintiesare, by their very nature, highly judgmental.  If the assumptions are notmet, OEH may be required to recognize additional goodwill impairment losses.

 

The goodwillimpairment charge in the three months ended March 31, 2009 was$6,287,000.  This charge arose as aresult of OEH finalizing its 2008 impairment analysis during the first quarterof 2009.  In addition, an impairmentcharge of $213,000 was made in respect of tradenames owned by the Casa deSierra Nevada, bringing the total impairment charge to $6,500,000 in the threemonths ended March 31, 2009.  Therewere no triggering events in the first quarter of 2010 that would have requiredOEH to assess the carrying value of goodwill.

 

16

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| **8.** | **Other  intangible assets** |
|--------|------------------------------|
|   | (Dollars in thousands)       |

 
| ** **                              | ** ** | **Three months ended March 31, 2010** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|
| ** **                              | ** ** | **Favorable  lease assets**                | ** ** | **Internet  sites** | ** ** | **Tradename** | ** ** | **Total** | ** ** |
| Carrying amount:                        |       |                                       |       |   |   |   |   |   |   |
|                                    |       |                                       |       |   |   |   |   |   |   |
| Balance as of January 1, 2010      |       | $                                          | 13,046     |   | $ | 2,417 |   | $ | 7,100 |   | $ | 22,563 |   |
| Additions                               |       | —                                     |       | 101 |   | — |   | 101 |   |
| Foreign currency translation adjustment |       | 269                                        |       | (139 | ) | — |   | 130 |   |
| Balance as at March 31, 2010       |       | $                                          | 13,315     |   | $ | 2,379 |   | $ | 7,100 |   | $ | 22,794 |   |
|                                    |       |                                       |       |   |   |   |   |   |   |
| Accumulated amortization:               |       |                                       |       |   |   |   |   |   |   |
|                                    |       |                                       |       |   |   |   |   |   |   |
| Balance as of January 1, 2010      |       | $                                          | 1,211      |   | $ | 370 |   | $ | — |   | $ | 1,581 |   |
| Charge for the period                   |       | 86                                         |       | 59 |   | — |   | 145 |   |
| Foreign currency translation adjustment |       | 26                                         |       | (23 | ) | — |   | 3 |   |
| Balance as at March 31, 2010       |       | $                                          | 1,323      |   | $ | 406 |   | $ | — |   | $ | 1,729 |   |
|                                    |       |                                       |       |   |   |   |   |   |   |
| Net book value:                         |       |                                       |       |   |   |   |   |   |   |
|                                    |       |                                       |       |   |   |   |   |   |   |
| As at December 31, 2009            |       | $                                          | 11,835     |   | $ | 2,047 |   | $ | 7,100 |   | $ | 20,982 |   |
|                                    |       |                                       |       |   |   |   |   |   |   |
| As at March 31, 2010               |       | $                                          | 11,992     |   | $ | 1,973 |   | $ | 7,100 |   | $ | 21,065 |   |

 

Favorablelease intangible assets are amortized over the terms of the leases, which areup to 50 years, and internet sites are amortized over ten years.

 

Amortization expense for the three monthsended March 31, 2010 was $145,000 (2009 - $118,000).  Estimated amortization expense for each ofthe years ended December 31, 2010 to December 31, 2014 is $580,000.

 

17

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**9.             Long-term debt and obligations under capital lease**

 

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

 
| ** **                                                                                                                                                                                                                    | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Loans from banks and other parties collateralized  by property, plant and equipment payable over periods of 1 to 24 years, with  a weighted average interest rate of 3.69% and 3.33%, respectively, primarily  based on LIBOR |       | $                        | 763,946    |                        | $          | 720,197 |   |
| Obligations under capital lease                                                                                                                                                                                               |       | 11,188                   |       | 12,068                      |       |
|                                                                                                                                                                                                                          |       | 775,134                  |       | 732,265                     |       |
| Less: current portion                                                                                                                                                                                                         |       | 173,060                  |       | 173,223                     |       |
|                                                                                                                                                                                                                          |       | $                        | 602,074    |                        | $          | 559,042 |   |

 

Of the currentportion of long-term debt, $109,191,000   (December 31, 2009 - $114,083,000) related to revolving creditfacilities which, although falling due within 12 months, are available forre-borrowing throughout the period of the loan facilities which are repayablein 2011 and 2012.

 

Many of OEH’sfinancing arrangements contain covenants that limit the property-owningsubsidiary from raising additional debt or incurring liens and that imposefinancial tests such as an interest coverage ratio and debt service coverageratio. Some facilities guaranteed by the Company contain financial covenantswhich are tested on a consolidated basis such as consolidated tangible networth and consolidated interest coverage ratio. OEH was in full compliance withall major covenants that apply to it at March 31, 2010.

 

At March 31,2010, the unconsolidated company owning the Hotel Ritz Madrid, in which OEH hasa 50% interest, was out of compliance with a loan to value ratio and debtservice coverage ratio in its first mortgage loan facility amounting to $102,300,000,which is non-recourse to and not credit-supported by OEH or its joint venturepartner in that hotel. OEH and its partner are discussing with the lender howto bring the hotel back into compliance.

 

18

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Also at March 31,2010, the unconsolidated Peru hotels joint venture company, in which OEH has a50% interest, was out of compliance with financial covenants in a loan facilityof the joint venture amounting to $27,800,000. Discussions with the banks are ongoing. This loan is non-recourse to and not credit-supported by OEH while itremains a 50% owner of the joint venture.

 

The following is a summary of the aggregatematurities of long-term debt of the Company and its consolidated subsidiaries,including obligations under capital lease, at March 31, 2010 (dollars inthousands):

 

Year ending December 31,

 
| 2011                |   | $       | 370,165 |   |
|---------------------|--------|---------|---------|--------|
| 2012                |   | 108,833 |    |
| 2013                |   | 78,240  |    |
| 2014                |   | 11,346  |    |
| 2015 and thereafter |   | 33,490  |    |
|                |   | $       | 602,074 |   |

 

The debt of Charleston Center LLC, aconsolidated VIE, of $79,429,000 (December 31, 2009 - $79,469,000) isnon-recourse to OEH.  The separate assetsof the hotel are not available to pay the debts of OEH, and the separateliabilities of the hotel do not constitute obligations of OEH.

 

**10.          Other liabilities**

 

Other liabilities are $1,535,000 (December 31,2009 - $1,520,000) of deferred consideration on acquisition of land next toMaroma Resort and Spa after discounting to present value, $1,463,000 (December 31,2009 - $1,607,000) of deferred income relating to guarantees given by OEH inconnection with bank loans entered into by the Peruvian hotels joint ventureoperation (see Note 21), $10,724,000 (December 31, 2009 - $3,573,000) inrespect of interest rate swaps (see Note 19), $13,090,000 (December 31,2009 - $12,940,000) of long-term accrued interest at Charleston Place Hotel,$226,000 (December 31, 2009 - $102,000) due in respect of a cash-settledstock appreciation rights plan, and $5,413,000 due in respect of contingentconsideration associated with the acquisition of the Grand Hotel Timeo and theVilla Sant’Andrea.

 

19

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**11.          Incometaxes**

 

The Company is incorporated in Bermuda, which does not impose an incometax. OEH’s effective tax rate is entirely due to variations in the income taxrates imposed by jurisdictions in which OEH conducts business other thanBermuda, and the effect of losses in jurisdictions for which it is expectedthat OEH will require a valuation allowance at year-end.

 

OEH recorded a tax provision for the three months ended March 31,2010 of $1,144,000 compared to a benefit of $9,377,000 for the correspondingperiod in 2009. OEH’s current tax charge for the three months ended March 31,2010 was $3,646,000 compared to a charge of $2,828,000 in 2009. The provisionfor income taxes for the three months ended March 31, 2010 included a deferredtax provision of $2,000,000 in respect of valuation allowances due to a changein estimate concerning OEH’s ability to realize loss carryforwards in certainjurisdictions compared to $nil provision for valuation allowances in the threemonths ended March 31, 2009.

 

OEH’s tax charge for the three months ended March 31, 2010included a tax charge of $540,000 in respect of the provision foruncertainties, interest and penalties under ASC 740 for uncertain taxpositions, of which $291,000 related to potential interest and penaltycosts.  OEH’s tax benefit of $9,377,000for the three months ended March 31, 2009 included a tax charge of$131,000 in respect of the ASC 740 provision, including a charge of $59,000that related to potential interest and penalty costs.

 

At March 31, 2010, OEH had recognized a $7,509,000 (December 31,2009 - $7,151,000) provision in respect of its uncertain tax positions.  OEH believes that it is reasonably possiblethat within the next 12 months the ASC 740 provision will decrease by an amountbetween $500,000 and $1,000,000 as a result of the resolution of tax positionsin some jurisdictions in which OEH operates.

 

Earnings fromunconsolidated companies are reported net of tax in the statements of condensedconsolidated operations.  The tax benefitapplicable to these unconsolidated companies in the three months ended March 31,2010 was $806,000, compared to a tax charge of $432,000 in the correspondingperiod in 2009.

 

**12.          Pensions**

 

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

 
| **Three months ended March 31,** | ** ** | **2010** | ** ** | **2009** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |
| Service cost                          |       | $        | —     |     | $          | — |   |
| Interest cost                         |       | 270      |       | 228      |       |
| Expected return on plan assets        |       | (200     | )          | (148     | )          |
| Amortization of net loss              |       | 168      |       | 142      |       |
| Net periodic benefit cost             |       | $        | 238        |     | $          | 222 |   |

 

20

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As reported inNote 11 to the financial statements in the Company’s 2009 Form 10-K annualreport, OEH expects to contribute $1,755,000 to its defined benefit pensionplan in 2010.  As of March 31, 2010,$415,000 of contributions had been made. OEH anticipates contributing an additional $1,340,000 to fund itsdefined benefit pension plan in 2010 for a total of $1,755,000.

 

**13.          Supplemental cash flow information**

(Dollars in thousands)

 
| **Three months ended March 31,** | ** ** | **2010** | ** ** | **2009** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |
| Cash paid for:                        |       |     |       |     |       |
| Interest                              |       | $        | 5,725      |     | $          | 8,422 |   |
| Income taxes                          |       | $        | 3,646      |     | $          | 2,742 |   |

 

In conjunction with acquisitions in the three monthsended March 31, 2010 and 2009, liabilities were assumed as follows(dollars in thousands):

 
| **Three months ended March 31,**           | ** ** | **2010** | ** ** | **2009** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
|                                            |       |     |       |     |       |
| Fair value of assets acquired                   |       | $        | 115,048    |     | $          | — |   |
| Purchase price, net of contingent consideration |       | (53,394  | )          | —   |       |
| Existing debt assumed                           |       | $        | 61,654     |     | $          | — |   |

 

The purchase price, net of contingent consideration,of the two hotels in Sicily acquired in the three months ended March 31, 2010included vendor financing of ****€5,000,000($7,064,000) at the date of acquisition.****

 

*Restricted cash*

 

Restricted cash of $17,896,000 at March 31, 2010(December 31, 2009 - $19,894,000) consisted mainly of the Porto Cupecoyescrow account and cash deposits required under credit support arrangements.Cash received from residential condominium purchases at Porto Cupecoy is heldin escrow and released to OEH when a unit is delivered. At March 31, 2010,the Porto Cupecoy escrow account balance amounted to $8,110,000 (December 31,2009 - $9,397,000). Cash deposits for credit support amounted to $7,511,000 at March 31,2010 (December 31, 2009 - $3,290,000). Restricted cash relating to deposits for the purchase of two hotels inSicily was $nil at March 31, 2010 (December 31, 2009 - $2,869,000).

 

21

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**14.          Accumulatedother comprehensive loss**

 

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

 
| ** **                                         | ** ** | **March 31,********2010** | ** ** | **December 31,********2009** | ** ** |
|----------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
|                                               |       |                           |       |                              |       |
| Foreign currency translationadjustments            |       | $                              | (32,030    | )                                 | $          | (18,118 | ) |
| Derivative financial instruments                   |       | (13,054                        | )          | (11,275                           | )          |
| Pension liability, net of tax of$2,072 and  $2,072 |       | (10,421                        | )          | (10,421                           | )          |
|                                               |       | $                              | (55,505    | )                                 | $          | (39,814 | ) |

 

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

 
| **Three months ended March 31,**    | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |
| Net losses on common shares              |       | $        | (13,008    | )        | $          | (14,639 | ) |
| Foreign currency translation adjustments |       | (13,912  | )          | (22,743  | )          |
| Change in fair value of derivatives      |       | (1,779   | )          | (657     | )          |
| Comprehensive loss                       |       | $        | (28,699    | )        | $          | (38,039 | ) |

 

**15.          Share-based compensation plans**

 

On February 3,2010, OEH granted under the 2009 Share Award and Incentive Plan stock optionson 5,000 class A common shares at an exercise price of $9.93 per share vestingin February 2013.  It also awardeddeferred shares covering 91,270 class A common shares vesting in February 2011and 40,000 class A common shares vesting in August 2010. Both awards ofdeferred shares had no performance criteria attached. The stock price at thedate of the award of deferred shares was $9.93 per share.

 

The fair valueof share-based compensation awards issued in the three months ended March 31,2010 was $1,331,496 (2009 - $1,594,367).

 

Theweighted-average fair value of the stock options granted under the 2009 plan onthe grant date was $4.97 per share.

 

Estimated fairvalue of stock options on the grant date using the Black-Scholes option pricingmodel was based on the following assumptions:

 

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| Expected share price volatility     |   | 55      | %      |
|-------------------------------------|--------|---------|--------|
| Risk-free interest rate             |   | 2.71    | %      |
| Expected annual dividends per share |   | $       | 0      |   |
| Expected life of stock options      |   | 5 years |   |
|                                     |        |         |        |  |

 

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

 

The totalcompensation related to unvested awards outstanding at March 31, 2010, tobe recognized over the period April 1, 2010 to March 31, 2013, was$6,600,000.

 

In addition tothe above, on December 3, 2009, OEH awarded 65,415 cash-settled stockappreciation rights (SARs) under its 2007 Stock Appreciation Rights Plan at aprice of $8.91 per SAR vesting in December 2012. These December 3,2009 awards together with previously awarded SARs of 65,415 have been recordedas liabilities with a fair value of $226,000 at March 31, 2010.

 

**16.          Fair values of financial instruments and non-financial assets**

 

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

 

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

 

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

 

23

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

 
| **** ****                                                                                                                          | **** **** | ****March 31, 2010**** | **** ****  |
|-----------------------------------------------------------------------------------------------------------------------------------------|----------------|-----------------------------|-----------------|
| **** ****                                                                                                                          | **** **** | ****Carrying  amount****    | **** ****  | ****Fair  value**** | **** **** |
| **** ****                                                                                                                          | **** **** | **** ****              | **** ****  | **** **** | **** **** |
| ****Cash and cash equivalents****                                                                                                       | **** **** | ****$****                   | ****168,496**** | **** **** | ****$**** | ****168,496**** | **** **** |
| ****Working capital facilities****                                                                                                      | **** **** | ****$****                   | 11,744          | **** **** | ****$**** | ****11,744**** | **** **** |
| ****Long-term debt, including current  portion and debt held by a consolidated VIE, but excluding obligations under  capital leases**** | **** **** | ****$****                   | 843,375         | **** **** | ****$**** | ****814,179**** | **** **** |

 

The carryingvalues of non-financial assets that are measured on a non-recurring basisapproximate their fair values.

 

**17.          Commitmentsand contingencies**

 

Outstanding contracts to purchase fixed assets wereapproximately $58,986,000 at March 31, 2010 (December 31, 2009 -$54,627,000), including $42,000,000 (December 31, 2009 - $43,000,000) inrespect of the New York Public Library contracts referred to below.Additionally, outstanding contracts for project-related costs on the PortoCupecoy development were approximately $7,431,000 at March 31, 2010 (December 31,2009 - $9,264,000).

 

****OEH has agreed to pay thevendor of Grand Hotel Timeo and Villa Sant’Andrea a further $6,766,000 if, by2015, additional rooms are constructed at Grand Hotel Timeo and certainrequired permits are granted to expand and add a swimming pool to Villa Sant’Andrea.  OEH has provided a $5,413,000 fair valueliability for this contingency.****

 

As reported in the Company’s 2009 Form 10-K annual report, OEHentered into agreements in November 2007 with the New York Public Libraryto acquire its Donnell branch site adjacent to ‘21’ Club and to construct amixed use hotel and residential development in New York City. In February 2009,in light of current and anticipated future economic conditions, OEH decided tosuspend further payments under the agreements, as they had been amended in December 2008.On July 9, 2009, OEH and the Library signed agreements to spread futurepayments on this purchase over the next 24 months. In addition to the$7,000,000 that OEH had already paid, OEH paid $9,000,000 upon execution of theagreements, to be followed by 16 monthly payments of $500,000 each commencingin February 2010, and final payments of $6,000,000 and $29,000,000 in June 2011. In 

 

24

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February and March 2010, OEH made its required payments underthe July 2009 agreements.  In the event OEH elects not to close thetransaction, the final payment of $29,000,000 will not be due to the Library,in which event OEH would write off its investment including its capitalizedcosts and associated fees.  OEH has given the Library security onunencumbered villas at La Samanna to secure the payments.

 

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

 

As reported in the Company’s 2009 Form 10-Kannual report, OEH has three reporting segments, (i) hotels andrestaurants,  (ii) tourist trainsand cruises, and (iii) real estate and property development.  Segment performance is evaluated based uponsegment net earnings before interest, foreign currency, tax (including tax onearnings from unconsolidated companies), depreciation and amortization (“segmentEBITDA”).  Financial informationregarding these business segments is as follows, with net finance costsappearing net of capitalized interest and interest and related income (dollarsin thousands):

 
| **Three months ended March 31,**     | ** **           | **2010** | ** ** | **2009** | ** ** |
|-------------------------------------------|----------------------|----------|------------|----------|------------|
|                                      |                 |     |       |     |       |
| Revenue:                                  |                 |     |       |     |       |
| Hotels and restaurants                    |                 |     |       |     |       |
| Owned hotels                         | – Europe        |     | $          | 13,455   |       | $ | 13,451 |   |
|                                      | – North America |     | 27,339     |     | 29,155     |   |
|                                      | – Rest of world |     | 38,410     |     | 28,118     |   |
| Hotel management/part ownership interests |                 | 562      |       | 1,019    |       |
| Restaurants                               |                 | 3,114    |       | 3,291    |       |
|                                      |                 | 82,880   |       | 75,034   |       |
| Tourist trains and cruises                |                 | 5,959    |       | 4,477    |       |
| Real estate                               |                 | 3,694    |       | —   |       |
|                                      |                 | $        | 92,533     |     | $          | 79,511 |   |
| Depreciation and amortization:            |                 |     |       |     |       |
| Hotels and restaurants                    |                 |     |       |     |       |
| Owned hotels                         | – Europe        |     | $          | 4,626    |       | $ | 3,827 |   |
|                                      | – North America |     | 2,949      |     | 2,506      |   |
|                                      | – Rest of world |     | 2,708      |     | 1,947      |   |
| Restaurants                               |                 | 185      |       | 188      |       |
|                                      |                 | 10,468   |       | 8,468    |       |
| Tourist trains and cruises                |                 | 849      |       | 654      |       |
|                                      |                 | $        | 11,317     |     | $          | 9,122 |   |

 

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| **Three months ended March 31,**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Segment EBITDA:                                                 |       |     |       |     |       |
| Owned hotels — Europe                                      |       | $        | (8,142     | )        | $          | (5,415 | ) |
| — North America                                            |       | 5,444    |       | 7,726    |       |
| — Rest of world                                            |       | 10,915   |       | 8,762    |       |
| Hotel management/part ownership interests                       |       | (1,308   | )          | 692      |       |
| Restaurants                                                     |       | 143      |       | 250      |       |
| Tourist trains and cruises                                      |       | (1,715   | )          | 1,443    |       |
| Real estate                                                     |       | (1,340   | )          | (319     | )          |
| Impairment of goodwill                                          |       | —   |       | (6,500   | )          |
| Central overheads                                               |       | (7,584   | )          | (5,105   | )          |
|                                                            |       | $        | (3,587     | )        | $          | 1,534 |   |
|                                                            |       |     |       |     |       |
| Segment EBITDA/net  losses reconciliation:                      |       |     |       |     |       |
| Segment EBITDA                                                  |       | $        | (3,587     | )        | $          | 1,534 |   |
| Less:                                                           |       |     |       |     |       |
| Depreciation and amortization                                   |       | 11,317   |       | 9,123    |       |
| Interest expense, net                                           |       | 6,757    |       | 9,159    |       |
| Foreign currency, net                                           |       | (3,822   | )          | 3,826    |       |
| Provision for/(benefit from) income taxes                       |       | 1,144    |       | (9,377   | )          |
| Share of provision for income taxes ofunconsolidated  companies |       | (806     | )          | 432      |       |
| Losses from continuing operations                               |       | $        | (18,177    | )        | $          | (11,629 | ) |
|                                                            |       |     |       |     |       |
| Earnings from unconsolidated companies,net of tax:              |       |     |       |     |       |
| Hotels and restaurants                                          |       |     |       |     |       |
| Hotel management/part ownership interests                       |       | $        | (1,347     | )        | $          | (235 | ) |
| Tourist trains and cruises                                      |       | (704     | )          | 1,354    |       |
|                                                            |       | $        | (2,051     | )        | $          | 1,119 |   |
|                                                            |       |     |       |     |       |
| Capital expenditure:                                            |       |     |       |     |       |
| Owned hotels — Europe                                      |       | $        | 5,000      |     | $          | 5,971 |   |
| — North America                                            |       | 2,184    |       | 5,845    |       |
| — Rest of world                                            |       | 2,227    |       | 7,198    |       |
| Restaurants                                                     |       | 41       |       | 92       |       |
| Tourist trains and cruises                                      |       | 1,363    |       | 1,242    |       |
| Real estate                                                     |       | 1,032    |       | 1,426    |       |
|                                                            |       | $        | 11,847     |     | $          | 21,774 |   |

 

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

 
| **Three months ended March 31,** | ** ** | **2010** | ** ** | **2009** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Revenue:                              |       |     |       |     |       |
| Europe                                |       | $        | 17,357     |     | $          | 17,388 |   |
| North America                         |       | 34,147   |       | 32,446   |       |
| Rest of world                         |       | 41,029   |       | 29,677   |       |
|                                  |       | $        | 92,533     |     | $          | 79,511 |   |

 

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**19.          Derivativesand hedging activities**

 

*Risk management objective of usingderivatives*

 

OEH enters into derivative financial instruments tomanage exposures that arise from financing activities that result in thereceipt or payment of future known and uncertain cash amounts, the value ofwhich is determined by interest rates.

 

*Cash flow hedges of interest rate risk*

 

OEH’s objective in using interest rate derivatives isto add certainty and stability to its interest expense and to manage itsexposure to interest rate movements. To accomplish this objective, OEHprimarily uses interest rate swaps as part of its interest rate risk managementstrategy. Interest rate swaps designated as cash flow hedges involve thereceipt of variable-rate amounts from a counterparty in exchange for OEH makingfixed-rate payments over the life of the agreements without the exchange of theunderlying notional loan amount.

 

The effective portion of changes in the fair value ofderivatives designated and qualifying as cash flow hedges is recorded inaccumulated other comprehensive income and is subsequently reclassified intoearnings in the period that the hedged forecast transaction affects earnings.During the next 12 months, OEH estimates that an additional $10,831,000 will bereclassified as an increase to interest expense. During the three months ended March 31,2010, these derivatives were used to hedge the variable cash flows associatedwith existing variable interest rate debt. The ineffective portion of thechange in fair value of the derivatives is recognized directly in earnings.

 

As of March 31, 2010, OEH had the followingoutstanding interest rate derivatives that were designated as cash flow hedgesof interest rate risk:

 
| **Interest Rate Derivatives** | ** ** | **Notional Amount** | ** **  |
|-------------------------------|------------|---------------------|-------------|
| Interest Rate Swap            |       | A$                  | 12,000,000  |   |
| Interest Rate Swaps           |       | €              | 213,000,000 |   |
| Interest Rate Swaps           |       | $                   | 290,000,000 |   |

 

This includes interest rate derivatives of €48,000,000notional amount that were acquired with the purchase of the Grand Hotel Timeoand Villa Sant’Andrea.

 

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*Non-designated hedges of interest rate risk*

 

Derivatives not designated as hedges are used tomanage OEH’s exposure to interest rate movements but do not meet the stricthedge accounting requirements of ASC 815. As of March 31, 2010, OEH hadtwo interest rate swaps (one of which was acquired with the purchase of theGrand Hotel Timeo and Villa Sant’Andrea) with a €31,000,000 notional amountthat were non-designated hedges of OEH’s exposure to interest rate risk.

 

The table below presents the fair value of OEH’sderivative financial instruments as well as their classification as of March 31,2010 (dollars in thousands).

 
| ** **                                                       | ** ** | **Liability Derivatives**   | ** ** |
|------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                       | ** ** | **Balance Sheet  Location** | ** ** | **Fair Value as  of March 31, 2010** | ** ** | **Fair Value as of  December 31, 2009** | ** ** |
| Derivatives designated as hedging instruments under ASC 815:     |       |                        |       |   |   |   |   |
| Interest Rate Swaps                                              |       | Other assets                |       | $ | 37 |   | $ | 37 |   |
| Interest Rate Swaps                                              |       | Accrued  liabilities        |       | (10,831 | ) | (8,886 | ) |
| Interest Rate Swaps                                              |       | Other  liabilities          |       | (9,809 | ) | (3,238 | ) |
| Total                                                            |       |                        |       | $ | (20,603 | ) | $ | (12,087 | ) |
|                                                             |       |                        |       |   |   |   |   |
| Derivatives not designated as hedging instruments under ASC 815: |       |                        |       |   |   |   |   |
| Interest Rate Swap                                               |       | Accrued  liabilities        |       | $ | (1,236 | ) | $ | (1,159 | ) |
| Interest Rate Swap                                               |       | Other  liabilities          |       | (915 | ) | (335 | ) |
| Total                                                            |       |                        |       | $ | (2,151 | ) | $ | (1,494 | ) |

 

The table below (in which “OCI” means othercomprehensive income) presents the effect of OEH’s derivative financial instrumentson the statements of condensed consolidated operations for the three monthsended March 31, 2010 and 2009 (dollars in thousands):

 

28

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| **Three months ended March 31,**                                                     | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest rate swaps which are designated as hedging instruments under  ASC 815:           |       |       |       |       |       |
| Amount of loss recognized in OCI(effective  portion)                                      |       | $          | (4,463     | )          | $          | (1,172 | ) |
| Amount of loss reclassified fromaccumulated OCI  into income (effective portion)     |       | $          | (2,684     | )          | $          | (859 | ) |
| Amount of (loss)/gain recognized ininterest  expense on derivatives (ineffective portion) |       | $          | (78        | )          | $          | 368 |   |
|                                                                                      |       |       |       |       |       |
| Interest rate swaps which are notdesignated as  hedginginstruments  under ASC 815:        |       |       |       |       |       |
| Amount of loss recognized inincome                                                        |       | $          | (690       | )          | $          | (599 | ) |

 

*Credit-risk-related contingent features*

 

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

 

As of March 31, 2010, the fair value ofderivatives in a net liability position, which includes accrued interest butexcludes any adjustment for non-performance risk, related to these agreementswas $22,791,000. As of March 31, 2010, OEH had posted cash collateral of$4,204,000 with certain of its derivative counterparties in respect of thesenet liability positions. If OEH breached any of these provisions, it would berequired to settle its obligations under the agreements at their terminationvalue of $23,377,000.

 

*ASC 820-10 disclosures*

 

OEH reviewsits fair value hierarchy classifications quarterly.  Changes insignificant observable valuation inputs identified during these reviews maytrigger a reclassification of the fair value hierarchy levels of financialassets and liabilities.  These reclassifications are reported as transfersin Level 3 at their fair values at the beginning of the period in which thechange occurs and the transfers out at their fair values at the end of theperiod.  During the three months ended March 31, 2010, there were nomovements in Level 3 derivatives and there were no derivatives classified asLevel 3 derivatives as at March 31, 2010.

 

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

 

*Non-derivative financialinstruments — net investment hedges*

 

OEH usescertain of its debt denominated in foreign currency to hedge portions of itsnet investments in foreign operations against adverse movements in exchangerates. These contracts are included in non-derivative hedging instruments.  The fair values of non-derivative hedginginstruments were $81,191,000 at March 31, 2010 and $86,083,000 at December 31,2009, both liabilities.

 

**20.          Shareholders’ equity**

 

On January 19, 2010,the Company issued and sold through underwriters 13,800,000 class A commonshares in a public offering registered in the United States.  Net proceedsamounted to $130,968,000.

 

**21.          Relatedparty transactions**

 

OEH guarantees a $3,000,000 working capital facilityof Eastern and Oriental Express Ltd. in which OEH has a minority shareholderinterest.  The amount due by OEH toEastern and Oriental Express Ltd. at March 31, 2010 was $482,000.  The amount due to OEH by Eastern and OrientalExpress Ltd. at December 31, 2009 was $647,000.

 

OEH manages under long-term contracts the Hotel Monasterio, the MachuPicchu Sanctuary Lodge, Las Casitas del Colca and Hotel Rio Sagrado within its50/50 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 March 31, 2010, OEH earned management andguarantee fees of $792,000 (2009 - $1,470,000). The amount due to OEH from itsjoint venture Peruvian operations at March 31, 2010 was $6,232,000 (December 31,2009 - $7,931,000).

 

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OEH manages under a long-term contract the Hotel Ritz in Madrid, Spain,in which OEH owns a 50% interest and is accounted for under the equitymethod.  For the three months ended March 31,2010, OEH earned $205,000 (2009 - $224,000) in management fees, which areincluded in revenue.  The amount due toOEH from the Hotel Ritz Madrid at March 31, 2010 was $11,651,000 (December 31,2009 - $10,807,000).

 

OEH hasgranted to James Sherwood, a director of the Company, a right of first refusalto purchase the Hotel Cipriani in Venice, Italy in the event OEH proposes tosell it.  The purchase price would be the offered sale price in the caseof a cash sale or the fair market value of the hotel, as determined by anindependent valuer, in the case of a non-cash sale.  Mr. Sherwood hasalso been granted an option to purchase the hotel at fair market value if achange in control of the Company occurs.  Mr. Sherwood may elect topay 80% of the purchase price if he exercises his right of first refusal, or100% of the purchase price if he exercises his purchase option, by anon-recourse promissory note secured by the hotel payable in ten equal annualinstalments with interest at LIBOR.  These agreements relating to theHotel Cipriani between Mr. Sherwood and OEH and its predecessor companieshave been in place since 1983 and were last amended and restated in 2005.

 

31

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

 

**Introduction**

 

OEH has threebusiness segments, namely (1) hotels and restaurants, (2) touristtrains and cruises and (3) real estate and property development. Hotelscurrently consist of 41 deluxe hotels. Thirty-six of these hotels are eitherwholly or majority owned or, in the case of Charleston Place Hotel, owned by aconsolidated variable interest entity. The other five hotels, in which OEH hasunconsolidated equity interests and operate under management contracts, arereferred to in this discussion as “hotel management interests.” Of the ownedhotels, 13 are located in Europe, seven in North America and 16 in the rest ofthe world.

 

In December 2007,Bora Bora Lagoon Resort was designated as held for sale, and, accordingly, theresults of the hotel have been reflected as discontinued operations.

 

Also, OEHcurrently owns and operates the ‘21’ Club restaurant in New York. In December 2009,OEH signed an agreement to sell its La Cabana restaurant in Buenos Aires for$2.7 million, to be paid on or before the end of March 2010, andaccordingly La Cabana was designated as held for sale at December 31,2009. The terms of the sale have been renegotiated after receiving a 10%non-refundable deposit, and the sale is expected to be concluded no later thanthe third quarter of 2010.

 

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

 

For adiscussion of OEH’s liquidity, see under the heading “Liquidity and CapitalResources” below. In January 2010, the Company completed a public offeringthrough underwriters in the United States of 13,800,000 newly-issued class Acommon shares at $10.00 each. This included 1,800,000 shares covered by theunderwriters’ over-allotment option which was exercised in full. Total proceeds(net of fees) received were $130,968,000. Part of the proceeds of thissale were used to pay the cash portion of the purchase price of two hotelproperties located in Taormina, Sicily, and the remainder is being used forinitial capital improvements to the hotels and for OEH’s debt reduction andgeneral corporate purposes.

 

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For adiscussion of the impact of foreign exchange rate movements on OEH’s results ofoperations and financial condition and the change of application of accounting policy for Porto Cupecoy, see Item7 — Management’s Discussion and Analysis in the Company’s 2009 Form 10-Kannual report

 

**Resultsof Operations**

 

**Threemonths Ended March 31, 2010 compared to Three months Ended March 31,2009**

 

OEH’s operating results for the three months ended March 31,2010 and 2009, expressed as a percentage of revenue, were as follows:

 
| **Three months ended March 31,**                          | ** ** | **2010** | ** ** | **2009** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                     | ** ** | **%**    | ** ** | **%**    | ** ** |
| Revenue                                                        |       |     |       |     |       |
| Hotels and restaurants                                         |       | 90       |       | 94       |       |
| Tourist trains and cruises                                     |       | 6        |       | 6        |       |
| Real estate                                                    |       | 4        |       | —   |       |
|                                                           |       | 100      |       | 100      |       |
| Expenses                                                       |       |     |       |     |       |
| Depreciation and amortization                                  |       | 12       |       | 11       |       |
| Operating                                                      |       | 53       |       | 48       |       |
| Selling, general and administrative                            |       | 48       |       | 44       |       |
| Impairment                                                     |       | —   |       | 8        |       |
| Net finance costs                                              |       | 3        |       | 16       |       |
| Losses before income taxes                                     |       | (16      | )          | (27      | )          |
| Provision for income taxes                                     |       | (1       | )          | 12       |       |
| (Losses)/earnings from unconsolidated  companies               |       | (2       | )          | 1        |       |
|                                                           |       |     |       |     |       |
| Net losses from continuing operations                          |       | (19      | )          | (14      | )          |
| Net earnings/(losses) from discontinuedoperations, net  of tax |       | 6        |       | (4       | )          |
| Net losses as a percentage of revenue                          |       | (13      | )          | (18      | )          |

 

Segment net earnings before interest,foreign currency, tax (including tax on unconsolidated companies), depreciationand amortization (“segment EBITDA”) of OEH’s operations for the three monthsended March 31, 2010 and 2009 are analyzed as follows (dollars inmillions):

 

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| **Three months ended March 31,** | ** ** | **2010** | ** ** | **2009** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Segment EBITDA:                       |       |     |       |     |       |
| Owned hotels:                         |       |     |       |     |       |
| Europe                                |       | $        | (8.1       | )        | $          | (5.4 | ) |
| North America                         |       | 5.4      |       | 7.7      |       |
| Rest of the World                     |       | 10.9     |       | 8.8      |       |
| Hotel management interests            |       | (1.3     | )          | 0.7      |       |
| Restaurants                           |       | 0.1      |       | 0.3      |       |
| Tourist trains and cruises            |       | (1.7     | )          | 1.4      |       |
| Real estate                           |       | (1.3     | )          | (0.3     | )          |
| Impairment                            |       | —   |       | (6.5     | )          |
| Central overheads                     |       | (7.6     | )          | (5.1     | )          |
| Total segment EBITDA                  |       | $        | (3.6       | )        | $          | 1.6 |   |

 

The foregoingsegment EBITDA reconciles to net losses as follows (dollars in millions):

 
| **Three months ended March 31,**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net losses                                                      |       | $        | (13.0      | )        | $          | (14.6 | ) |
| Add:                                                            |       |     |       |     |       |
| Depreciation and amortization                                   |       | 11.3     |       | 9.1      |       |
| Net finance costs                                               |       | 3.0      |       | 13.0     |       |
| Provision for income taxes                                      |       | 1.1      |       | (9.3     | )          |
| (Earnings)/losses from discontinued  operations, net of tax     |       | (5.2     | )          | 3.0      |       |
| Share of provision for income taxesof  unconsolidated companies |       | (0.8     | )          | 0.4      |       |
| Segment EBITDA                                                  |       | $        | (3.6       | )        | $          | 1.6 |   |

 

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

 

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Operating information for OEH’s owned hotels for thethree months ended March 31, 2010 and 2009 is as follows:

 
|                            |   | **Three months  ended March 31,** | ** ** |     |       |   |   |
|---------------------------------|--------|----------------------------------------|------------|----------|------------|--------|--------|
|                            |   | **2010**                               | ** ** | **2009** | ** ** |   |   |   |   |
|                            |   |                                   |       |     |       |   |   |   |   |
| Average Daily Rate (in dollars) |   |                                   |       |     |       |   |   |   |   |
| Europe                          |   | 375                                    |       | 366      |       |   |   |   |   |
| North America                   |   | 376                                    |       | 412      |       |   |   |   |   |
| Rest of the world               |   | 327                                    |       | 285      |       |   |   |   |   |
| Worldwide                       |   | 348                                    |       | 338      |       |   |   |   |   |
|                            |   |                                   |       |     |       |   |   |   |   |
| Rooms Available (in thousands)  |   |                                   |       |     |       |   |   |   |   |
| Europe                          |   | 50                                     |       | 51       |       |   |   |   |   |
| North America                   |   | 67                                     |       | 68       |       |   |   |   |   |
| Rest of the world               |   | 116                                    |       | 108      |       |   |   |   |   |
| Worldwide                       |   | 233                                    |       | 227      |       |   |   |   |   |
|                            |   |                                   |       |     |       |   |   |   |   |
| Rooms Sold (in thousands)       |   |                                   |       |     |       |   |   |   |   |
| Europe                          |   | 14                                     |       | 15       |       |   |   |   |   |
| North America                   |   | 41                                     |       | 38       |       |   |   |   |   |
| Rest of the world               |   | 71                                     |       | 61       |       |   |   |   |   |
| Worldwide                       |   | 126                                    |       | 114      |       |   |   |   |   |
|                            |   |                                   |       |     |       |   |   |   |   |
| Occupancy (percentage)          |   |                                   |       |     |       |   |   |   |   |
| Europe                          |   | 28                                     |       | 29       |       |   |   |   |   |
| North America                   |   | 61                                     |       | 56       |       |   |   |   |   |
| Rest of the world               |   | 61                                     |       | 56       |       |   |   |   |   |
| Worldwide                       |   | 54                                     |       | 50       |       |   |   |   |   |
|                            |   |                                   |       |     |       |   |   |   |   |
| RevPAR (in dollars)             |   |                                   |       |     |       |   |   |   |   |
| Europe                          |   | 104                                    |       | 107      |       |   |   |   |   |
| North America                   |   | 227                                    |       | 230      |       |   |   |   |   |
| Rest of the world               |   | 201                                    |       | 163      |       |   |   |   |   |
| Worldwide                       |   | 187                                    |       | 170      |       |   |   |   |   |

 
| ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Change %** | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|--------------|------------|
| ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Dollars**  | ** ** | **Local********Currency** | ** ** |
| Same Store RevPAR (in dollars) |       |       |       |       |       |         |       |   |   |
| Europe                         |       | 88         |       | 94         |       | (7           | )%         | (14 | )% |
| North America                  |       | 227        |       | 230        |       | (1           | )%         | (2 | )% |
| Rest of the world              |       | 223        |       | 171        |       | 30           | %          | 16 | % |
| Worldwide                      |       | 194        |       | 174        |       | 12           | %          | 5 | % |

 

Average daily rate is the average amount achieved forthe rooms sold.  RevPAR is revenue peravailable room, which is the rooms’ revenue divided by the number of availablerooms.  Occupancy is the number of roomssold divided by the number of available 

 

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rooms.  Samestore RevPAR is a comparison based on the operations of the same units in eachperiod, by excluding the effect of any acquisitions, dispositions (includingdiscontinued operations) or major refurbishments.  The same store data excludes the followingoperations:

 
| Le Manoir  aux Quat’Saisons |   | La  Residencia          |
|----------------------------------|--------|-------------------------|
| Hotel das  Cataratas             |   | Jimbaran  Puri Bali     |
| La Résidence d’Angkor  |   | Bora Bora Lagoon Resort |
| Lilianfels  Blue Mountains       |   |                    |

 

*Overview*

 

The net loss for the three months ended March 31,2010 was $13.0 million ($0.15 per common share) on revenue of $92.5 million,compared with a net loss of $14.6 million ($0.29 per common share) on revenueof $79.5 million in the prior year first quarter.

 

The first quarter is a traditional loss-making periodbecause a number of OEH’s properties are closed for the winter, the VeniceSimplon-Orient-Express train does not operate for most of the quarter andtourist arrivals are low in locations with poor winter weather.

 

OEH’s revenue in the three months ended March 31,2010 was affected by the continuing weak economy in many parts of the world,although revenue improved compared to the three months ended March 31, 2009.During the period management continued to focus on controlling expenditure. OEH’snet earnings in the current quarter were $6.6 million lower than in the prioryear — an $18.2 million loss from continuing operations in 2010 compared with aloss of $11.6 million from continuing operations in 2009 — whereas revenueincreased by $13.0 million in the three months ended March 31, 2010compared to the three months ended March 31, 2009. Total expenses wereimpacted by $8.6 million due to the change in currency movements from period toperiod. Porto Cupecoy expenses relating to delivery of purchased units were$3.6 million in the three months ended March 31, 2010, compared to $nil in theprior year first quarter.

 

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*Revenue*

** **
| **Three months ended March 31,**    | ** ** | **2010**                   | ** ** | **2009** | ** ** |
|------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                               | ** ** | **(dollars in thousands)** | ** ** |
| Revenue:                                 |       |                       |       |     |       |
| Hotels and restaurants                   |       |                       |       |     |       |
| Owned hotels                             |       |                       |       |     |       |
| Europe                                   |       | $                          | 13,455     |     | $          | 13,451 |   |
| North America                            |       | 27,339                     |       | 29,155   |       |
| Rest of the world                        |       | 38,410                     |       | 28,118   |       |
| Hotel management/part ownershipinterests |       | 562                        |       | 1,019    |       |
| Restaurants                              |       | 3,114                      |       | 3,291    |       |
|                                     |       | 82,880                     |       | 75,034   |       |
| Tourist trains and cruises               |       | 5,959                      |       | 4,477    |       |
| Real estate                              |       | 3,694                      |       | —   |       |
|                                     |       | $                          | 92,533     |     | $          | 79,511 |   |

 

Total revenue increased by $13.0 million, or 16%, from$79.5 million in the three months ended March 31, 2009 to $92.5 million inthe three months ended March 31, 2010. Of the increase, $8.5 million wasfrom owned hotels and $3.7 million was from Real Estate revenue recognized at PortoCupecoy as units were delivered to purchasers.

 

The increase in hotel revenue of $8.0 million was dueto improved trading of $0.8 million and exchange rate movements of $7.2million.

 

For owned hotels overall, same store RevPAR in U.S.dollars increased by 12% in the three months ended March 31, 2010 comparedto the three months ended March 31, 2009. Measured in local currencies this increase was 5%.

 

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

 

*Europe*

 

Revenue was flat for the three months ended March 31,2010, compared to the three months ended March 31, 2009. Average dailyrate increased by 2% from $366 in the three months ended March, 31, 2009 to$375 in the three months ended March, 31, 2010. Occupancy fell 1% from 29% inthe three months ended March 31, 2009 to 28% in the three months ended March 31,2010. On a same store basis, RevPAR in local currency decreased by 14%, and inU.S. dollars this translated into a decrease of 7%.

 

Exchange rate movements caused revenue to increase by$1.2 million in the three months ended March 31, 2010 compared with the sameperiod in 2009. OEH’s eight Italian hotels were closed throughout the threemonths ended March 31, 2010. Excluding the 

 

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effect of exchange rate movements, the revenue atReids Palace Hotel fell by $1.0 million in the three months ended March 31,2010, primarily due to the impact of heavy rains and flooding experienced inMadeira in February 2010.

 

*North America*

 

Revenue decreased by $1.9 million, or 6%, from $29.2million in the three months ended March 31, 2009 to $27.3 million in thethree months ended March 31, 2010.

 

On a same store basis, RevPAR decreased by 1%.  Average occupancy across the North Americanproperties was 61% compared to 56% in the same period in 2009. Average dailyrate fell by 9% from $412 in the three months ended March 31, 2009 to $376in the three months ended March 31, 2010.

 

*Rest of the World*

 

Revenue increased by $10.3 million, or 37%, from $28.1million in the three months ended March 31, 2009 to $38.4 million in thethree months ended March 31, 2010. Exchange rate movements across the region were responsible for $6.0million of the revenue increase. Occupancy increased 5% from 56% in the threemonths ended March, 31, 2009 to 61% in the three months ended March, 31, 2010. Averagedaily rate increased by 15% from $285 in the three month ended March, 31, 2009to $327 in the three months ended March, 31, 2010.

 

Revenue at OEH’s hotels in Brazil collectivelyincreased by $6.2 million, or 51%, from $12.0 million in the three months endedMarch 31, 2009 to $18.2 million in the three months ended March 31,2010, mainly as a result of increased domestic demand and the refurbishment of Hoteldas Cataratas. Had exchange rates in the first three months of 2010 been thesame as in the first three months of 2009, revenue from the Brazil propertieswould have been $3.8 million higher than in the three months ended March 31,2009.

 

Revenue at OEH’s six Asian hotels collectivelyincreased by $1.6 million, or 37%, to $5.9 million in the three months ended March 31,2010. Had exchange rates in the first three months of 2010 been the same as inthe first three months of 2009, revenue from the Asian properties would havebeen $1.2 million higher than in the three months ended March 31, 2009.

 

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Southern Africa revenue increased by $1.3 million, or18%, of which $2.1 million was due to exchange rate movements on thetranslation of the South African rand and Botswana pula to U.S. dollars.Revenue at OEH’s remaining Australian property increased by $1.3 million, or53%, to $3.7 million in the three months ended March 31, 2010; 76% of thechange in revenue, or $1.0 million, was due to the weakening of the U.S. dollaragainst the Australian dollar.

 

The RevPAR on a same store basis for the Rest of theWorld region increased by 16% in local currencies in the three months ended March 31,2010 compared to the three months ended March 31, 2009.  This translates to a 30% increase whenexpressed in U.S. dollars.

 

*Hotel Management and Part-OwnershipInterests: *Revenue decreased by $0.4million from $1.0 million in the three months ended March 31, 2009 to $0.6million in the three months ended March 31, 2010, in part due to theimpact of poor weather on the joint venture hotels in Peru.

 

*Restaurants: *Revenuedecreased by $0.2 million, or 6%, from $3.3 million in the three months ended March 31,2009 to $3.1 million in the three months ended March 31, 2010.

 

*Trains and Cruises: *Revenue increased by $1.5 million, or 33%,from $4.5 million in the three months ended March 31, 2009 to $6.0 millionin the three months ended March 31, 2010. This increase was primarily dueto the Road to Mandalay river cruiseship returning to operation followingrepairs due to damage from a cyclone in Burma in May 2008 when the ship wastaken out of service. Management fee revenue from PeruRail decreased by $0.3million, or 36%, from $0.7 million in the three months ended March 31,2009 to $0.4 million in the three months ended March 31, 2010. This wasprimarily as a result of the floods in January 2010, which caused damageto the rail tracks and disrupted rail services for most of the quarter.

 

*Real Estate: *Eightcondominiums were delivered at Porto Cupecoy generating revenue of $3.7 millionfor the three months ended March 31, 2010. Sales contracts were signed ona further three units in the three months ended March 31, 2010. There wasno real estate revenue at Keswick Hall, Virginia, USA or Napasai, Koh Samui,Thailand in the three months ended March 31, 2010 or in the same period inthe previous year.

 

*Depreciation and amortization*

 

Depreciation and amortization increased by $2.2million from $9.1 million in the three months ended March 31, 2009 to$11.3 million in the three months ended March 31, 2010, of which $0.9million was due to the change in exchange rates for the three months ended March 31,2010 compared with exchange rates in the same period in 2009.

 

39

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*Operating expenses*

 

Operating expenses increased by $10.9 million from$38.2 million in the three months ended March 31, 2009 to $49.1 million inthe three months ended March 31, 2010, of which $4.3 million was due tothe change in exchange rates for the three months ended March 31, 2010compared with exchange rates in the same period in 2009, and $3.6 million wasdue to Porto Cupecoy costs recognized as a result of units being delivered topurchasers. Operating expenses were 48% of revenue in the three months ended March 31,2009 and 53% of revenue in the three months ended March 31, 2010.Excluding the impact of foreign currency and Porto Cupecoy, operating expenseswere 45% of revenue in the 2010 quarter.

 

*Selling, general and administrative expenses*

 

Selling, general and administrative expenses increasedby $9.4 million from $34.8 million in the three months ended March 31,2009 to $44.2 million in the three months ended March 31, 2010, of which $3.4million was due to the change in exchange rates for the three months ended March 31,2010 compared with exchange rates in the same period in 2009. Selling, generaland administrative expenses were 44% of revenue in the three months ended March 31,2009 and 48% of revenue in the three months ended March 31, 2010. These expenseswere 44% of revenue in the 2010 quarter excluding the impact of foreigncurrency.

 

*Segment EBITDA*

 
| **Three months ended March 31**      | ** ** | **2010**                   | ** ** | **2009** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                | ** ** | **(dollars in thousands)** | ** ** |
| Segment EBITDA:                           |       |                       |       |     |       |
| Hotels and restaurants                    |       |                       |       |     |       |
| Owned hotels                              |       |                       |       |     |       |
| Europe                                    |       | $                          | (8,142     | )        | $          | (5,415 | ) |
| North America                             |       | 5,444                      |       | 7,726    |       |
| Rest of the world                         |       | 10,915                     |       | 8,762    |       |
| Hotel management/part ownership interests |       | (1,308                     | )          | 692      |       |
| Restaurants                               |       | 143                        |       | 250      |       |
|                                      |       | 7,052                      |       | 12,015   |       |
| Tourist trains and cruises                |       | (1,715                     | )          | 1,443    |       |
| Real estate                               |       | (1,340                     | )          | (319     | )          |
| Impairment                                |       | —                     |       | (6,500   | )          |
| Central overheads                         |       | (7,584                     | )          | (5,105   | )          |
|                                      |       | $                          | (3,587     | )        | $          | 1,534 |   |

 

40

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The European hotels collectively reported a segmentEBITDA loss of $8.1 million in 2010 compared to a loss of $5.4 million in thesame period in 2009.  As a percentage ofEuropean hotels revenue, the European segment EBITDA margin fell from negative40% in 2009 to negative 61% in 2010. The loss in 2010 included costs from thetwo recently acquired properties in Sicily of $1.5 million.

 

Segment EBITDA in the North American hotels regiondecreased by 30% from $7.7 million in the three months ended March 31,2009, to $5.4 million in the three months ended March 31, 2010. As apercentage of North American hotels revenue, the North American segment EBITDAmargin fell from 26% in 2009 to 20% in 2010.

 

Segment EBITDA in the Rest of the World hotels regionincreased by 24% from $8.8 million in the three months ended March 31,2009 to $10.9 million in the three months ended March 31, 2010.  The segment EBITDA margin for the threemonths ended March 31, 2010 was 28%, compared to a margin of 31% for thesame period in 2009.

 

*Earnings from operations before net financecosts*

 

Earnings from operations decreased by $2.9 millionfrom a loss of $9.1 million in the three months ended March 31, 2009 to aloss of $12.0 million in the three months ended March 31, 2010, due to thefactors described above.

 

*Net finance costs*

 

Net finance costs decreased by $10.0 million, or 77%,from $13.0 million for the three months ended March 31, 2009 to $3.0million for the three months ended March 31, 2010.  The three months ended March 31, 2009included a foreign exchange loss of $3.8 million compared to a foreign exchangegain of $3.8 million in the three months ended March 31, 2010. Excludingthese foreign exchange items, net interest expense decreased by $2.4 million,or 26%, from $9.2 million in the three months ended March 31, 2009 to $6.8million in the three months ended March 31, 2010.

 

41

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*Provision for income taxes*

 

The provision for income taxes increased by $10.5 million, from abenefit of $9.4 million in the three months ended March 31, 2009 to acharge of $1.1million in the three months ended March 31, 2010.

 

The provision for income taxes for the three months ended March 31,2010 included a deferred tax provision of $2.0 million in respectof valuation allowances due to a change in estimate concerning OEH’s ability torealize loss carryforwards in certain jurisdictions, compared to $nil provisionfor valuation allowances in the three months ended March 31, 2009.

 

The provision for income taxes for the three months ended March 31,2010 also included a tax provision of $0.5 million in respect of OEH’s liabilityfor uncertain tax positions under ASC 740, compared to aprovision of $0.1 million in respect of the liability in the three months endedMarch 31, 2009.

 

*Earnings from unconsolidated companies*

 

Earnings from unconsolidated companies net of taxdecreased by $3.2 million, from $1.1 million in the three months ended March 31,2009 to a loss of $2.1 million in the three months ended March 31, 2010.The tax cost associated with earnings from unconsolidated companies was acharge of $0.4 million in 2009 and a credit of $0.8 million in 2010.

 

*Losses from discontinued operations*

 

The earnings from discontinued operations for thethree months ended March 31, 2010 was $5.2 million compared with losses of$3.0 million for the three months ended March 31, 2009. A gain of $6.7million was due to the release of the cumulative translation adjustment uponthe sale of Lilianfels Blue Mountains in January 2010. Bora Bora LagoonResort’s net loss increased by $0.3 million to $1.4 million for the threemonths ended March 31, 2010, primarily due to closure of the hotel in February 2010after it was damaged by a cyclone. The loss from discontinued operations forthe three months ended March 31, 2009 consisted of losses arising fromBora Bora Lagoon Resort, Windsor Court Hotel, Lapa Palace Hotel, La Cabana andLilianfels Blue Mountains, whereas only Bora Bora Lagoon Resort and La Cabanawere reflected under discontinued operations for the three months ended March 31,2010.

 

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**Liquidity and Capital Resources**

 

*Working Capital*

 

OEH had cash and cash equivalents of $150.6 million atMarch 31, 2010, $78.4 million more than the $72.2 million at December 31,2009. In addition, OEH had restricted cash of $17.9 million (December 31,2009 - $19.9 million) of which $8.1 million (December 31, 2009 - $9.4million) related to the Porto Cupecoy project in St Martin, which will bereleased when completed units are delivered to purchasers.  At March 31, 2010, there were undrawnamounts available to OEH under committed short-term lines of credit of $20.6million (December 31, 2009 - $30.6 million) and undrawn amounts available toOEH under secured revolving credit facilities of $12.0 million (December 31,2009 - $12.0 million), bringing total cash availability at March 31, 2010to $201.1 million, including the restricted cash of $17.9 million.

 

Current assets less current liabilities, including thecurrent portion of long-term debt, resulted in a working capital balance of $27.8million at March 31, 2010, a decrease from $41.1 million at December 31,2009.  The main factor that contributedto the decrease in working capital was the cash used to purchase the GrandHotel Timeo and the Villa Sant’Andrea and the reclassification of the currentportion of third-party debt of consolidated variable interest entities,partially offset by the cash raised from the Company’s share offering completedin January 2010.

 

*Cash Flow*

 

*Operating Activities*.  Net cash used in operating activitiesincreased by $2.2 million from $10.7 million for the three months ended March 31,2009 to $12.9 million for the three months ended March 31, 2010. The increasewas due primarily to trading performance of the continuing hotels in the firstquarter of 2010.

 

*Investing Activities*.  Cash used in investing activities increasedby $16.0 million to $38.1 million for the three months ended March 31,2010, compared to $22.1 million for the three months ended March 31, 2009.

 

The 2010 first quarter included acquisitions of $46.3million, net of cash acquired in respect of the Grand Hotel Timeo and VillaSant’Andrea purchase.  There were noacquisitions in the first quarter of 2009.

 

There was a decrease in restricted cash in the firstquarter of 2010 of $2.0 million compared to no movement in the first quarter of2009. The movement in the first quarter of 2010 represents the release ofrestricted cash from the Porto Cupecoy escrow account as units were deliveredand the release of restricted cash relating to the deposits for the purchase ofthe Sicilian hotels, offset by further cash deposited for credit supportfacilities.

 

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Capital expenditure of $11.8 million included $2.6million of Hotel Cipriani refurbishment, $1.0 million of Hotel das Cataratascapital costs, $0.5 million of Copacabana Palace Hotel refurbishment, and $6.3million on construction of assets at Porto Cupecoy in St. Martin. In addition,$1.3 million was invested in European train operations.

 

*Financing Activities*.  Cash provided by financing activities for thethree months ended March 31, 2010 was $128.9 million compared to $9.2million for the three months ended March 31, 2009, an increase of $119.7million.  The main factor thatcontributed to this increase was an equity issue in January 2010 whichraised $131.0 million. Debt repaid during the first three months of 2010 was$7.8 million ($7.4 million in first quarter 2009). In addition, $9.6 million oflong-term debt was issued in relation to the purchase of the Sicilian hotels.Net proceeds from working capital facilities and redrawable loans reduced by$13.7 million in the first quarter of 2010 to $2.9 million ($16.6 million in2009)

 

*Capital Commitments*. There were $59.0 million ofcapital commitments outstanding as of March 31, 2010 of which $17.0million related to investments in owned hotels and $42.0 million to thepurchase of land and a building adjoining ‘21’ Club, New York. OEH is seekingco-investors to finance the development of the New York project. Additionally,outstanding contracts for project-related costs on the Porto Cupecoydevelopment amounted to $7.4 million at March 31, 2010.

 

****OEH has agreed to pay thevendor of the two Sicilian hotels a further $6.8 million if, by 2015,additional rooms are constructed at Grand Hotel Timeo and certain requiredpermits are granted to expand and add a swimming pool to Villa Sant’Andrea.  OEH has provided a $5.4 million expectedliability for this contingency.****

 

*Indebtedness*

 

At March 31, 2010, OEH had $854.6 million oflong-term debt secured by assets (including the current portion and the debt ofconsolidated variable interest entities) which is repayable over periods of 1to 24 years with a weighted average maturity of 2.2 years and a weightedaverage interest rate of 3.52%**.**  See Note 9 to the financial statementsregarding the maturity of long-term debt.

 

Approximately 53% of the outstanding principal was drawnin European euros and the balance primarily in U.S. dollars.  At March 31, 2010, 40% of borrowings ofOEH were in floating interest rates.

 

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*Liquidity*

 

During theremaining nine months ending on December 31, 2010, OEH has approximately$164.8 million of scheduled debt repayments. However, $109.2 million of thisamount relates to revolving facilities which, provided OEH complies with theterms of the facilities, are available for redrawing. Of the remaining $55.6million of debt repayments, $26.6 million is debt at Porto Cupecoy developmentwhich is repayable as units are sold. OEH expects to meet the other repaymentsthrough available cash, operating cash flow and other available committedfacilities.

 

Additionally,OEH’s capital commitments amount to $59.0 million, of which $42.0 millionrelates to the purchase of land and a building adjoining ‘21’ Club from the NewYork Public Library.  OEH proposes to build a mixed use hotel andresidential development on the site.  On July 9,2009, OEH and the Library signed agreements to spread future payments on thispurchase over the next 24 months. In addition to the $7.0 million that OEH hadalready paid, OEH paid $9.0 million upon execution of the agreements, to befollowed by 16 monthly payments of $500,000 each commencing in February 2010(of which $1.0 million was paid in first quarter 2010), and final payments of$6.0 million and $29.0 million in June 2011.   In the event OEH elects not to close the transaction,the final payment of $29.0 million will not be due to the Library, in whichevent OEH would write off its investment including its capitalized costs andassociated fees.  OEH has given the Library security on unencumberedvillas at La Samanna to secure the payments. OEH is seeking co-investors in this development project.

 

In January 2010,the Company completed a public offering through underwriters in the UnitedStates of 13,800,000 newly-issued class A common shares at $10.00 each. Thisincluded 1,800,000 shares covered by the underwriters’ over-allotment optionwhich was exercised in full. Total proceeds (net of fees) received were $131.0million. Part of the proceeds of this sale were used to pay the cashportion of the purchase price of two hotel properties located in Taormina,Sicily, and the remainder is being used for initial capital improvements to thetwo hotels and for OEH’s debt reduction and general corporate purposes.

 

OEH recognizesthat, in the current economic climate, there is an enhanced risk of a financialcovenant breach in its existing loan facilities if weak trading conditions leadto a deterioration of OEH’s results and the costs of implementing remedialsteps reduce OEH’s earnings in any given period.  If current economic conditions,including the volatility recently 

 

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experienced inforeign exchange and global debt markets, continue or worsen, OEH believesthere is heightened risk that it could breach certain financial covenantsapplicable to OEH during 2010.

 

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

 

At March 31,2010, OEH was in compliance with all major covenants contained in its facilityagreements that apply to it.

 

At March 31,2010, the unconsolidated company owning the Hotel Ritz Madrid, in which OEH hasa 50% interest, was out of compliance with a loan to value ratio and debtservice coverage ratio in its first mortgage loan facility amounting to $102.3 million,which is non-recourse to and not credit-supported by OEH or its joint venturepartner in that hotel. OEH and its partner are discussing with the lender howto bring the hotel back into compliance.

 

Also at March 31,2010, the unconsolidated Peru hotels joint venture company, in which OEH has a50% interest, was out of compliance with financial covenants in a loan facilityof the joint venture amounting to $27.8 million.  Discussions with the banks are ongoing.  This loan was non-recourse to and notcredit-supported by OEH while it remains a 50% owner of the joint venture.

 

**Recent Accounting Pronouncements**

 

As of March 31, 2010, OEH had adopted all therelevant standards that impacted the accounting for fair value measurements anddisclosures, variable interest entities, and accounting and disclosurerequirements for transfers of financial assets, as reported in Note 1(a) tothe financial statements.

 

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In addition,OEH is considering the guidance issued by the FASB in October 2009 thatamends the accounting for revenue recognition on multiple-deliverable revenuearrangements. Specifically, the guidance addresses the unit of accounting forarrangements involving multiple deliverables. It also addresses how arrangementconsideration should be allocated to the separate units of accounting, whenapplicable. The adoption of the provisions of this amendmentis required for fiscal years beginning on or after June 15, 2010 and isnot expected to have a material impact on OEH’s financial statements.

 

## **Critical Accounting Policies**

## ** **

For adiscussion of these, see under the heading “Critical Accounting Policies” inItem 7 — Management’s Discussion and Analysis in the Company’s 2009 Form 10-K annual report.

 

**ITEM3.  Quantitative and QualitativeDisclosures about Market Risk**

 

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

 

The market risk relating to interest rates arisesmainly from the financing activities of OEH. Earnings are affected by changesin interest rates on borrowings, principally based on U.S. dollar LIBOR andEURIBOR, and on short-term cash investments. If interest rates increased by 10%, with all other variables heldconstant, annual net finance costs of OEH would have increased by approximately$800,000 on an annual basis based on borrowings at March 31, 2010. Theinterest rates on substantially all of OEH’s long-term debt are adjustedregularly to reflect current market rates. Accordingly, the carrying amounts approximate fair value.

 

The market risk relating to foreign currencies and itseffects have not changed materially during the first three months of 2010 fromthose described in the Company’s 2009 Form 10-K annual report.

 

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**ITEM 4. Controls and Procedures**

 

The Company’s management, under the supervision and with theparticipation of its chief executive and financial officers, has evaluated theeffectiveness of the Company’s disclosure controls and procedures (as definedin SEC Rule 13a-15(e)) as of March 31, 2010 and, based on thatevaluation, believes those disclosure controls and procedures are effective asof that date.  There have been no changesin the Company’s internal control over financial reporting (as defined in SEC Rule 13a-15(f))during the first quarter of 2010 that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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

 

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**PART II - OTHER INFORMATION**

** **

**ITEM 1.  Legal Proceedings**

 

As previouslyreported, three hedge funds owning together approximately 6.1 million class Acommon shares in the Company filed a petition in the Supreme Court of Bermudaon January 12, 2009 challenging on various grounds the Company’s corporategovernance structure with dual class A and class B common shares outstandingand ownership of higher-voting class B common shares by a wholly-ownedsubsidiary of the Company.  The namedrespondents are the Company, its subsidiary and seven of the current eightmembers of Company’s Board of Directors.

 

The Companycontinues to believe the petition is without merit and intends to defend theaction vigorously.  The petitioners andthe respondents filed with the Court on July 10 and 17, 2009 separatesummonses seeking, among other matters, a hearing on preliminary issuesrelating to the legality of the holding of class B common shares in the Companyby the subsidiary.  The respondents alsofiled a summons seeking to strike out (dismiss) the petition.  A hearing before the Court was held on September 16,2009 at which a further hearing on the substance of the summonses wasscheduled.  That hearing began on April 26,2010 and concluded in early May, and a decision of the Court is awaited.

 

# **ITEM6.  Exhibits**

# ** **

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

 

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**SIGNATURES**

 

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

 

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

 

Dated: May 7,2010

 

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# ** **

# **EXHIBIT INDEX**

# ** **

3.1    —    Memorandumof Association and Certificate of Incorporation of the Company, filed as Exhibit 3.1to the Company’s Form 8-K Current Report on July 9, 2007 and incorporatedherein by reference.

 

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

 

3.3    —    Rights Agreement dated as of June 1, 2000, and amendedand restated as of April 12, 2007, between the Company and ComputershareTrust Company, N.A., as rights agent, filed as Exhibit 1 to Amendment No. 1to the Company’s Registration Statement on Form 8-A dated April 23,2007, for the Company’s preferred share purchase rights, and incorporatedherein by reference.

 

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

 

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

 

32    —    Section 1350 Certification.

 

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